Renesas Electronics Corporation (TSE: 6723), a premier supplier of advanced semiconductor solutions, reported its second quarter earnings for the fiscal year 2024, revealing robust automotive business performance but a cautious outlook for the upcoming quarters.
The company's CEO, Hidetoshi Shibata, and CFO, Shuhei Shinkai, presented a mixed picture of financial health and strategic adjustments in response to the current market environment.
Renesas announced revenues of 358.8 billion yen, a gross margin of 56.7%, and an operating profit of 110.6 billion yen for the second quarter, with a focus on continued investment in research and development despite the challenging market conditions.
Key Takeaways
- Renesas reported robust automotive business performance, with a revenue of 358.8 billion yen.
- Gross margin stood at 56.7%, while operating profit reached 110.6 billion yen.
- The company expects a tough third quarter with an anticipated recovery in the fourth.
- Renesas will maintain R&D investments, aiming for long-term market outperformance, focusing on AI and reducing market cycle impacts.
- The company has completed acquisitions of Transphorm and Altium, aiming for growth in digitalization and a total solution approach.
- Renesas anticipates a cautious outlook for industrial demand and a conservative stance in the automotive sector.
Company Outlook
- The third quarter is forecasted to see a revenue of 348 billion yen, with a gross margin of 55.5% and an operating margin of 27.5%.
- A decline in utilization rate is expected, leading to a 3.3 point decrease in operating margin.
- The company plans to control inventory levels significantly in response to market conditions.
- Renesas is committed to long-term growth through R&D investment, without cutting down on expenses in this area.
Bearish Highlights
- The industrial demand is adjusting for a longer period than expected, with a downward revision of outlook.
- The third quarter is expected to be tough, with a cautious approach to revenue growth and infrastructure-related projects.
- Renesas acknowledges a softening market situation and slow inventory consumption due to the COVID-19 pandemic.
Bullish Highlights
- The company completed acquisitions to strengthen its position in the market.
- Renesas expects a gradual recovery in the fourth quarter for automotive and non-automotive sectors.
- The focus on AI, particularly in the automotive sector, is expected to help mitigate market cyclicality.
Misses
- The second quarter witnessed a slowdown, with the company preparing for revenue sacrifice in the third quarter.
- Renesas expressed disappointment with the third-quarter guidance but aims for a renewed start in the fourth quarter.
Q&A Highlights
- The Q&A session covered topics such as free cash flow, adjusted forecasts for automotive and non-automotive sectors, and the impact of acquisitions.
- Renesas discussed its strategy for the China market, emphasizing leveraging strengths over increasing market share.
- The company plans to cut down on expenses if the topline does not grow, despite not expanding SG&A expenses in percentage terms.
Renesas Electronics Corporation's second quarter earnings call highlighted the resilience of its automotive business amidst a challenging global market. The company's focus on maintaining robust R&D investment and strategic acquisitions like Transphorm and Altium suggests a commitment to innovation and market leadership.
Still, the cautious outlook for the coming quarters, with planned inventory control and conservative revenue expectations, reflects the ongoing uncertainties in the global economic landscape. Renesas aims to navigate these challenges by leveraging its strengths in AI and digitalization to ensure long-term growth and market outperformance.
Full transcript - Renesas (RNECY) Q2 2024:
Operator: Thank you very much for attending the Renesas’ Second Quarter Earnings Report for Fiscal Year 2024 despite your busy schedule. Today, we offer simultaneous interpretation service. On the bottom of the screen, please click on the interpretation channel and select the language of your choice. Speakers, please turn on your video. Today’s presentation, we have the CEO and Representative, President, Mr. Hidetoshi Shibata; and CFO, Executive Officer, Mr. Shuhei Shinkai, and other members of the staff are present. Mr. Shibata, will give us a word of opening, and then, CFO Shinkai will talk about the earnings. And after that, we’ll have a Q&A session. Mr. Shibata, please.
Hidetoshi Shibata: Thank you very much. Good morning, everybody. I am Shibata. In today’s earnings, oh I think basically, it’s a, we have to reflect on our performance. In the second quarter numbers, putting that aside, the first quarter, at the first quarter financial results, I think maybe our outlook is a bit optimistic. The reason I say this is mainly, one, the automotive business, there has been, we had been anticipating sustainable growth, but we have been robust. But, I think we have been adjusting to a more cautious outlook. That’s the current status, number one. Number 2 is that so the industrial under a more wider sense of industrial demand, there has been adjustment. Compared to our initial expectations, it seems that this adjustment is continuing for longer and in-depth than our anticipation. Initially, we thought that the second quarter to third quarter, we’ll start to see a recovery. But currently, the third quarter seems to be, continues to be tough. From the fourth quarter onwards, at some timing, the recovery will be seen, but we’ll have to be very cautious about the outlook. And, we are thinking about controlling the inventory more significantly. In the third quarter, the channel inventory, so we can control that and to be able to manage that, the topline is going to go down. I think that is how we’re going to manage our business. But that said, sooner, rather than later, the market will recover. That’s our view. And going forward, our theme is more than ever growth. We are going to control the topline, the third quarter in terms of OpEx and R&D. In terms of investment, we will not put on the bricks and go forward. So, that means the operating margin it will decline a bit in the third quarter. But even so, we will continue investment in R&D so that we will continue to conduct initiatives towards our growth. So, in the second quarter, so unintentionally, we have increased the channel inventory in the third quarter, quickly we will we adjust that. On the other hand, towards growth we will continue to invest for R&A. So, that will be our outlook for the third quarter. So first, let’s go into the details of the second quarter. I’ll give you over to Mr. Shinkai about the financial results. Shinkai san, please.
Shuhei Shinkai: I’m Shinkai, the CFO. I would like to give a presentation about the second quarter of this fiscal year utilizing the presentation material. Please turn to the next slide. And, then to the next slide. On the very bottom bullet, on 20th of June, we have completed the acquisition of Transphorm. So, the balance sheet as of the end of June reflects the consolidation of Transphorm. After we complete the calculation of PPA, we will retrospectively conduct the revision, but this PPA is expected to finish by this, fourth quarter of this fiscal year. The third quarter forecast reflects the contribution of Transphorm. Next slide, please. This is the financial snapshot for the second quarter. In the middle, darker blue, column, please refer to that. In terms of revenue, it was 358.8 billion yen. Gross margin of 56.7%. Operating profit 110.6 billion yen, at margin it will be 30.8%. Net profit, 96.7 billion yen. EBITDA, a 132.8 billion yen. In terms of the Forex, 153 yen to the dollar and 165 yen to the euro. Against the forecast, if you want to make a comparison, it’s on the very right hand side, but I would like to refer to that later. Going to the next slide. This page is about the second quarter details. First of all, I’d compare to the forecast the company total and at the very right hand side, please look at the top box. In terms of the revenue, compared to the median range, we have slightly over outperformed. It’s a 1.1% outperformance. So, basically, this is due to the currency impact. Excluding, the currency impact, is flat against our forecast. The automotive has increased slightly, and the industrial infrastructure and IoT has decreased. But in total, it was inclined with expectations. In terms of the gross margin, it’s 1.2% up above our forecast. The impact of the foreign currency is basically flat. In terms of the product mix, the industrial infrastructure and IoT within the segment, the mix has worsened. But, in terms of manufacturing cost has gone down. So overall, we have been able to see a positive improvement. In terms of manufacturing cost, [its such] (ph) a decrease. The cost of the ramp up of the Kofu plant has gone down, and disposal and the ex-inventory relation losses has not shown up. These are the factors for this situation. Going to the operating margin is 0.3 percentage points increase for this quarter. In terms of the operating expenses compared to the forecast, it has increased. However, the impact is coming mainly from the currency. In terms of their calculation of the currency sensitivity, there has been an underestimation, so there has a big impact coming due to this Forex. To talk more in detail, in on the cost side to the non-major currencies has been impacted by the weaker yen, but we have underestimated this impact. So, that is the reason why we’re seeing this level of impact. For R&D, basically, it’s in-line with our forecast. And as a NRE adjustment has been, the transferred to that, so there has been some increase there. So, going to the quarter-on-quarter, comparison, in terms of revenue, it is increased by 7 billion yen. So, this is a 2% improvement. In terms of the gross margin, it has been basically flat. In terms of the operating margin, it is 1.5 percentage points, worsening. So, this is because the increase of the R&D. The first quarter, basically it has been at a low level. The second quarter, the R&D level has gone up compared to the first quarter. On the left hand side, the revised, the segment situation, I would like to give us some more color there. In terms of the gross margin, the automotive, due to the increase of utilization, it has improved. In terms of industrial, infrastructure and IoT, the product mix has worsened within the segment, and the gross margin quarter-on-quarter has gone down. In terms of the operating margin, automotive, because of the volume increase, the margin has improved. Industrial, infrastructure and IoT due to less volume and the margin has worsened quarter-on-quarter. Please go to the next slide. So, this is about the quarterly revenue trends. The second quarter is on the very right hand side. Overall, year-on-year is at 2.6%, and Q-on-Q it is 2.6% increase. Excluding forex for automotive, year-on-year, 11.5% growth and Q-on-Q, up 6.9%. And, as for IIoT, year-on-year, 24.5% decline in Q-on-Q, decline of 5.5%. And, going on to the next page, here we’re looking at the financial indicators. And down below, free cash flow in the second quarter has grown. This occurs in the first quarter. There has been inter-corporate tax paid and also first quarter bonus payment, which have had an impact. And here, we’re looking at the inventory levels. Q-on-Q, we are looking at the factors of inventory level change and outlook to the right. Now, DOI on a Q-on-Q basis has increased to 103 days. This is attributed to Die bank expansion which has pushed up work-in-progress. And, the same applies for the third quarter attributed to Die bank expansion. The 40 nano microcontroller will be the focus of the expansion. Now, for the channel inventory Q-on-Q, it is increasing to 11 weeks. As for automotive, as expected, we have seen a rise. However, the rise was minimal. Third quarter, in actuals as well as weeks of inventory, we have seen we’ve expect expected growth. However, attributed to the prospects, we believe the pace will be slower. As for IIoT, second quarter, we expected a decline. However, expectations are betrayed and we have seen a rise. And this is an impact of trade flow. Basically, a sell-through was weaker than expected, basically, around industry mass market as for individual factors, infrastructure related products, there has been a push out observed. And therefore, overall, we have seen accumulation of inventory, third quarter and beyond. For the actual and also WOI, we’re expecting a decline. We expect growth in sell-through, which will have an impact. And going on to the next page, here we’re looking at utilization. To the left, we have the front-end. On a wafer input basis, the second quarter is as expected. We have seen an increase. However, on the other hand, in the third quarter, because of the summer vacation, we have front-loaded production. And therefore, in this quarter as a reactionary trend, we expect utilization to drop Q-on-Q mid 10 percentage point range is expected. And to the right, we have the CapEx second quarter. We have seen the, EV purchase and also the integration of office, and we have decided on an investment. And next page, this is the forecast for the third quarter. And, please look at the dark shaded, area in the center. As for revenue, the midpoint forecast is 348 billion yen and gross margin 55.5%, operating margin 27.5%, forex assumption $157 yen, euro 170 yen. As for gross margin, year-on-year, it’s a minus 3.8% Q-on-Q, minus 3.0%. Expect, eliminating currency year-on-year, minus 12.4% Q-on-Q, minus 3.9% is expected. In terms of, gross margin Q-on-Q minus 1.2% is expected. The earlier numbers were for revenue. And as for the factors attributed to the third quarter, we’re expecting a decline in utilization rate. And, as for operating margin, 27.5% on Q-on-Q, that will be a 3.3 point decline. This is attributed to utilization drop and also the size down on scale and other rise in expenses and also forex, working towards a weaker yen. These numbers are expected. As I mentioned, as for OpEx, we will remain R&D expenses. We do not expect to cut down on R&D investment. And, going on to the next page. Let’s turn to Page 14. And here, we are looking at the balance sheet end of June. We have conducted a refinancing. Working capital bullet, 260 billion yen committed commitment line, 150 billion yen has been increased to that number. And then, moving to Page 16, this is a non-GAAP reconciliation to the second, from the right, the non-recurring item. In the second quarter, 3 billion yen, this is basically attributed to non-cash mainly for expenses for re-organization of operating business structure. And, then looking at the highlight, at the outset, we have mentioned, we complete acquisition Transphorm and also for Altium closing July 1st. And with this, we would like to conclude the presentation. Thank you very much. So, let’s go to the Q&A session. Shibata san, would you please turn on your video?
Operator: First, I would like to give you some information about how to ask questions. For those who have questions, please, utilize the raise hand button. We will appoint you, in order of your raising hand, and then please, say your company name and name. So, would you unmute yourself and then ask your question after you are appointed. Due to the time constraint, one person, please limit yourself to two questions. First, UBS Securities, Kenji Yasui, would you please ask your question? Please unmute yourself and speak out.
Kenji Yasui: I am Yasui, from UBS. Thank you very much for taking my question. I have two questions. First, is about your free cash flow. So, according to your numbers, the first half is about 110 billion yen positive. This is on Page 7 of the presentation. On the other hand, if you look at the Tianjin, the free cash flow is minus [85.2] (ph) billion yen. So, there is about a 200 billion yen. So, I think the Transphorm acquisition was at 50 billion yen. But, it seems that the additional cash has been used for the acquisition through your subsidiary. The second, I’ve a question is about three quarter guidance. Shibata san, you said that there has been some forecast. In terms of forecast, you have to adjust. So I think, about automobile sector, I think it’s very difficult to have a precise forecast for the data centers. I mean, the major smartphone companies that we have missed the mark or you said that the share has declined. Can you give us a direction in terms of what you’re going to see going forward?
Hidetoshi Shibata: So, for your first question, Shinkai san, will answer the question. For the second question, I will take, will give you the answer.
Shuhei Shinkai: So in Page 7, so we have a note on the bottom of this page. So, the acquisition of a subsidiary of the shares of subsidiary and deposits provided to Wolfspeed (NYSE:WOLF). So, we have excluded that. And the impact, or the point I can give in, so this $1 billion worth and Transphorm acquisition, funds, is what, is a difference that you’re seeing between the two numbers you had just mentioned.
Hidetoshi Shibata: So, towards your second question. Well, so the industrial market, including the mass market, I think we have seen a major gap there. For instance, I give you an example, and I got, excuse me, Shinkai just gave me an example. It was a specific customer at the smartphone manufacturers. Is there a major change in your outlook? No. Basically, that matter is in-line with our expectations. In terms of the infrastructure business, we have the AI that’s growing strongly and this conventional data center business. So, these are two combined will be included in industrial segment. As of now, compared to the first quarter, we have reduced our outlook in this business. But on the other hand, I think you can more or less have an image. But, then the number of customer base is small in this industry. And so, there are some fluctuations due to a customer specific, market specific factors. So, in terms of our adjustment of our forecast, it’s not because the demand itself has weakened. So, the other companies, device what we and our partners use and the platform, demand is going down right now. So, that’s the reason why we’re seeing adjustment. So in this area, it’s not that there has been some substantial re-adjustment of the substantial, change in our fundamental outlook. So, I think we have seen the gap is that the industrial and the multimarket, mass market outlook. In terms of industrial, we have downgraded our outlook substantially. Specifically, it’s not a specific segment. If I’m pressed to say so, it’s so called, hard or factory automation. I think, basically we have to downgrade our outlook substantially in this area. But overall, industrial business more or less, we have reduced our outlook here for the mass market business. It’s not a great magnitude that we are adjusting our forecast, but overall it’s a bit weak. So, that’s the reason why, we have made a downward revision in terms of our forecast. In terms of the mass market business as I have mentioned, it’s not the case that a specific segment is, performing worse because there are small industries in here. But, if by dividing into categories, Japan seems to be weak. Well, in terms of geography, that is Japan seems to be weak. China, it’s rather, robust. It’s not that different from, the our initial outlook. So overall, for the mass market outlook, we have downgraded the outlook. Well, I have, talked on about this, but let me summarize what I have just said. In terms of the content, we have made a downward revision for the industrial business and the mass market business. That’s mainly where we have made an adjustment with the industrial business. Factory automation, it’s a major, I think that’s the major factor. But overall, the industrial market is weak. But the mass market, not as much as the industrial, but it’s still continuing adjustment. And Japan as a geography seems to be weak. So, that’s my view.
Kenji Yasui: Thank you very much.
Operator: Thank you very much. Well then, from Goldman Sachs (NYSE:GS), Mr. Takayama, please present your question. Kindly unmute yourself.
Daiki Takayama: Thank you very much. Just following up on the current discussion, automotive and non-automotive, and also for other factors, the breakdown and also the growth is what I’d like to hear about. And, you are conducting an adjustment interest scenario, October and December. Are you going to raise the utilization rate, or will there be somewhat of a recovery? And therefore, for non-use app, non-auto applications, we would like to hear. And, as for auto application, will it remain brisk? Going, paying attention to the overseas market it appears to be somewhat weak. I would like to hear about your thoughts.
Hidetoshi Shibata: As you have mentioned, it is as you have said, as for automotive, while the variance is not that large, even while the market is strong, we are conducting a downward revision. And hence, what I have just mentioned is in reference to the end demand. It’s not about our revenue, but it’s about demand in the market. And, as we go into the third quarter as to what will happen, 2% to 3% or so, might see somewhat of a decline in that margin. In the fourth quarter, it’s very difficult to predict at this stage. However, as of now, we are taking a more cautious look than before. And hence for a third quarter and fourth quarter, we will continue to maintain a cautious approach for the automotive. But, for the mid-term to long-term, on a year-on-year basis, the currency on basis, you recognize that there is somewhat of a growth, and hence, the trend in terms of growth remains unchanged. And therefore, first quarter next year and beyond, we will put into shape the outlook based on which we will decide on the fourth quarter utilization rate. As of this point in time, I am not taking a pessimistic view. On non-automotive, on that point, as we have reiterated for industrial use, we have applied a rather substantial revision of the outlook. And as for the third quarter, from the second quarter, there will be a decline. The first quarter earnings, when we conduct a report, what we had envisioned was to, I do recall that I used the word UV, U-shaped recovery. However, more of a drop and then thereafter an upward trend. However, we are seeing somewhat of more of a mild U-curve. And that is what we expect to see up until the third quarter. In fourth quarter, we expect a recovery. However, we cannot maintain an overly optimistic view. And therefore, for the fourth quarter prospects, internally we will take a cautious approach in pursuing operations. Industrial in the third quarter not to a large extent but double-digit, compared to a double-digit expectations that we have indicated previously, we’re seeing somewhat a cautious approach in fourth quarter 20%. We will be reducing our outlook. But, that is how we will see the third quarter, and we expect there to be a gradual recovery into the fourth quarter. And, therefore, the fourth quarter, the expectations were that, we will see a quite a substantial growth. However, in the earlier earnings report, we have now changed our outlook to see a mild recovery into the fourth quarter. As a mass market, there’s not been a dramatic change. But, for the third quarter into the fourth quarter, we maintain the view that there will be a pickup. However, we are now shifting to a cautious approach as for infrastructure related. Of course, the outlook in terms of substance is remains unchanged. However, depending on particular customers, there are of course, ups and downs. But, the outlook remains basically unchanged. In terms of numbers, July and September, will you be able to quote? I’m sure you’ll be reading the numbers later. To reiterate, what I mentioned is end demand. In terms of the numbers overall, second quarter and third quarter, somewhat of a pickup is expected. And, in central market situation, we expect a recovery, and we do not expect to see a downfall in the market situation. However, as we mentioned in this current earnings report, of course, the reflection is that we had expected there’d be a strong recovery in the second quarter, and we have a major channel inventory numbers. However, we have seen somewhat of a slowdown, and therefore the channel inventory situation has changed. And, of course, this is where we will apply adjustment. And third quarter, this will mean that there will be somewhat of a sacrifice in terms of revenue for third growth.
Daiki Takayama: And for the second item, broadly speaking, in the half year, I’m sure that your operational excellence is very strong, and you’re conducting an adjustment earlier than the peers to register an out pour perform. And then in the long-term perspective, with acquisitions in place, you will grow more than the market trend. However, I would be led to believe that you’ll be impacted by the cycle. In the six months to a year or anywhere in between, the external impact could come into play. Are you going to be more or less trending on par with the market or due to individual factors against your peers, how are you going to grow your topline in order to outperform? Or will you be able to see that? Of course, I understand they would be very difficult to, of course, overshoot in a very short-term. However, six months into a year will you be surpassing the market? Is there something that you’ll be able to factor in? How do you see this?
Hidetoshi Shibata: As we have pointed out, of course, really turning to the focal question in the short-term. Of course, we believe that it would be aligned with the market. Shall I say, idiosyncratic in terms of growth factor that is not, of course, shaken by market trends. And, of course, we are looking, towards AI. And, we have mentioned in Capital Market Day, in terms of the proportion to the overall company revenue, it’s still very small. And, hence, it will continue to grow on a secular basis. But in terms of company, for cyclical, for say industrial and overall where there’s a volume, say automotive, of course, we will be pulled by trends in these areas. But for AEST EV in the automotive compared to the past, the proportion is growing now topping 20% of overall. And, with the growth vector against the overall revenue as it continues to grow, the issue of cyclicality can be somewhat subdued. But in terms of trend, we will be impacted by the market cycle trend, and this will likely continue. And internally, we are studying how we will be able to establish a growth vector that is not, and to operate so that we are not impacted by the market cycle. In the, Capital Market Day come next year, and I do hope that we will be able to speak about the mid-term prospects. As for the long-term, the major theme is about the broad-based market and how we will be able to grow on the digital platform. The market cycle, to begin with, of course, we are looking at the overall market. And hence, we will be looking at the margin that we can enjoy so that we will not be impacted by a certain sector in the market. For the time being, as we’ve seen in direction of the revenue, we will be impacted by the cycle. However, we hope to be able to reduce or mitigate the impact of the market cycle, and we hope to be able to tie that into growth.
Daiki Takayama: Thank you very much.
Operator: Next. BofA Securities, Hirakawa san, please. Please unmute yourself and ask a question.
Mikio Hirakawa: Thank you very much. I’m Hirakawa from BOA Securities. So, I have two questions. The first question is about the, China related business. For the FY ‘23, the sales of China ratio was 23%, and the previous year was about 28%. It has gone down year-over-year. So, currently you talked about the China situation is more or less, robust. But, in terms of the economic situation and a competition what is the situation of the China business? And, in the long-term, looking at the semiconductor policy or the strategy of China, what do you think about your Chinese strategy? So, that’s my first question.
Hidetoshi Shibata: So, if you look at the current situation, it’s a slight growth in China, within China, I think things are, kind of patchy. So, some customers that are growing, they are growing, smoothly and aggressively. So, we will focus on customers that has a potential to grow. So I think, basically, our growth in China compared to the market trend is slightly stronger. And going forward, we are anticipating is that going to be stronger than the market growth. So, I think in China, we’re going to grow, slightly, in the mid-term to long-term. It’s nothing new that we are doing. But going forward, the local suppliers’ competitiveness is going to become stronger. And, our customers in an applications, so in the short-term, they tend to have excess capacity and go into very aggressive price competition, and we are continuously seeing that trend. And, the pricing pressure coming from that situation is becoming stronger. And, I think going forward, it become stronger than ever. So, from our point of view, in the China market, rather than trying to increase our share, we would like to focus on the strength and go into fields that we can leverage the strength and then try to compete in other areas. And, in terms of the other topline, we want to grow steadily. In some cases, even if we lose some share to the local competitors, so we have to accept that. So, in terms of topline profit, that will be a focus in China. In terms of share in the China market, that will be our second priority. Specifically, about this view, there’s nothing new that we’re doing. So, for the time being, I think there will be our stance, in the China business. That’s all from me.
Mikio Hirakawa: Thank you. My second question is that under COVID, there has been some difficulty for procuring, semiconductors. And, there’s some I think, basically, some companies are arguing that, they are more competitive because they have enhanced capability to produce the semiconductors. But, is your stance, the China Plus One strategy, is that becoming a disadvantage? So, if that becomes a disadvantage, then how are we going to respond to that?
Hidetoshi Shibata: Well, basically, it’s not the case that we are at disadvantage in any area. I don’t think that we are in a disadvantage position. Of course, in the foundry partners, China Plus One strategy, they are strongly aware of that type of strategy, and they foundry partners are taking necessary initiatives. It’s not the case that, if we are in a disadvantage because we don’t have an in-house fab. But as you know, in during the pandemic, due to this situation, I think, basically, we have lost some position. That’s the mobile share losses. But, I think the situation has changed since then, and the foundries, instances against foundries has going forward. So, we are not worried. The fab-like strategy that we’re taking internally, do we have any concerns? No. Absolutely, not. We’d like to, I think we can go forward, with our strategy going forward as well. Thank you very much.
Operator: Thank you very much. Citigroup Securities, Mr. Fujiwara, please. Kindly unmute yourself and present your question.
Takero Fujiwara: Thank you very much. Citigroup Securities. My name is Fujiwara. I also have two questions. First of which is the following. This may be a repeat for industrial. I have a question, beyond expectations sell-through has declined, and therefore, logistics has supply has increased, and therefore, you have had to conduct a downward revision. With sell-through being weak, what is the backdrop? What is your analysis? I would like to inquire. Customers have their inventory, was it more than expected, or was it that the end demand was weak? In terms of supply and demand, the demand, is it just being pushed out or on FA-related demand the layers are also increasing. The share of the customer might be declining. Is that because the demand is declining? If this is also a factor, we would like to hear about that.
Hidetoshi Shibata: As for the last point that you made mention of, as for the share, this is not a matter of much concern. Of course, as of now, of course, the proportion of Japanese customers is very large, and that’s a fact. But not just restricted to the west, but in China, there are many clients that are globally competitive and their business is growing. And, just a little while ago, we have received quite a large design and order. And, hence, depending on the variance of the customer share, will this have an impact on the mid to long-term? That will not be the case. But, of course, in a short-term, say, on a quarter-to-quarter basis, that might be the case. However, for the mid-to-long-term basis, this is not a matter of concern. However, when we look at the short-term demand situation for a certain specified, rather than for a certain segment within industrial overall, demand continues to be weak, and that is how we see the situation. This might have been expected. However, when we look at the channel of partners and together with our partners, we may have overemphasized some bright signs, or we do not want that that to pass by. And, as we took a rather progressive stance, however, that bright signal dimmed as the days went by, and that is the situation. And hence, overall, the, market situation has continued to soften, and that will describe the situation. And subsequently, clients’ consumption of inventory has taken time. Under COVID, inventory has piled-up, and of course, we had expected that that would, of course, be consumed, and things will turn for the better. However, right now, we are finding that the demand is weakening and which has also, indicated that consuming inventory has taken more time than earlier expected. And you might, of course, wonder if this has, actually lacked to the future. Perhaps, that could be described as such shifting to the future. Some may have expired, they have been lost. Especially when we look at the market situation in China, it’s not really that bright. And hence, we understand that we need to take a cautious approach. And therefore, internally, we have applied, rather a large adjustment. I do hope that this will be a response to your question. Thank you very much.
Takero Fujiwara: And as for the second question, you have also pointed out this out at outset for the third quarter guidance. SG&A is quite high on a Q-on-Q basis. Of course, the absolute numbers are really increasing. So, what is your plan? In terms of percentage, also the scale or scope, will this continue in the days ahead? I would like to inquire.
Hidetoshi Shibata: Our CFO, Shinkai, will fill in on the details, but we do not expect to expand in terms of percentage. So, this is to increase the topline where the OpEx, has continued in this manner. If the topline does not grow, naturally, we will have to cut down on the OpEx in terms of the percentage. But right now, this is being done for the sake of increasing the topline. And, what is maintained in OpEx will somewhat taper down. And, now to you.
Shuhei Shinkai: As for OpEx, basically, will be maintained, because of maintain investment R&D. And on Q-on-Q, currency impact has raised the numbers. And as a result, in terms of ratio, it appears to be very large. However, the impact of the of course, the topline will also drive this number. And therefore, in terms of the number, we expect the numbers to decline.
Takero Fujiwara: Thank you very much.
Operator: Yes. Next question, Morgan Stanley (NYSE:MS) MUFG Securities, Yoshikawa san, please. Please unmute yourself and ask your question.
Kazuo Yoshikawa: I’m Yoshikawa from Morgan Stanley Securities. Thank you for taking my question. So, I think at the beginning, they so Altium acquisition is going to end in the third quarter, and of course, it is not reflected in your guidance, I understand that. In terms of Altium, do you have any new updates that you can give us? And my second question is, it is duplication to what has been asked by the previous person. But, the second quarter, SG&A is about 4 billion increase compared to the midpoint of your guidance numbers. So, at the beginning of the presentation besides the current situation that you explained, you have underestimated the impact of the yen besides the key currencies. Is it because it’s currency or there are other factors between I think, basically, the 7 billion increase of SG&A. But, is it due to the currency between the third quarter and fourth quarter?
Hidetoshi Shibata: Yes. So, I would like to give a quick answer for the quick question, and second question will be answered by Shinkai san. Well, as Shinkai has explained currently next week the transaction has been closed for Altium. And, if things go smoothly, at the August, September, these two months, will be consolidated into our financial results. But that said, in terms of the numbers, it’s not a big number. So, it won’t move the needle that much. But, in terms of gross margin and whether it’d be operating margin, this will be accretive, to our business. So that’s, true. So financially, there will be a positive impact. Not no negative impacts coming from this. So, the in terms of the substance of this acquisition, we will give you an update at in a timely manner. But, based on the discussions, the ARM length that we have initially anticipated, I think it has to be more, trying to do it together. I think that’s the direction they’re looking at. So, in terms of neutrality, it’ll be a 100% secured. But on top of that, in terms of organizational initiatives, we will be more working together. So, I think a more integrated management, will be brief conducted looking at digitalization. I think at the right timing, we’ll give you an updates. So, Shinkai san, please talk about the OpEx situation.
Shuhei Shinkai: The second quarter, forecast is about increase of 4 billion yen. I guess, the forecast, about 1 billion yen is coming from R&D, the timing difference of R&D spending. Rather than spending, it’s the incoming cash difference. The remaining 3 billion yen is half of that is coming from, so the minor currency sensitivity underestimation. And then, meaning half is that because of the weaker yen, R&D spending is become bigger. And for the third quarter, plus 4 billion yen and half is as per currency, half is as per non-currency factors. That’s our estimation. In terms of the incoming cash, this is not finalized. We are taking a conservative view and the Transphorm is going to be contributing in the third quarter. So, that’s reflected as well.
Kazuo Yoshikawa: Thank you. And, Shibata san, you talked about to be able to grow the topline, you are going to use your OpEx. But for example, as an image for the next generation, are you going to increase the R-CAR?
Hidetoshi Shibata: So, well, as image, I think, yes, your image is correct.
Kazuo Yoshikawa: Thank you.
Operator: Thank you very much. For Nikkei newspaper, Mr. McConnell? Please unmute yourself and present your question.
Unidentified Analyst: Thank you. McConnell for Nikkei Newspaper. I also have two questions. The first of which is in reference to the acquisition of Altium. Semiconductor market is, of course, a weak and it comes at that timing. Once again, your expectations or any comments you that you might have. And as acquisition is completed, ultimately, will the situation improve more than what is visible today? And the second question is about China, is stepping up the investment into mature segments into mature notes, And, as we look at the future for a Renesas in the mid-to-long-term, is it going to be a risk? I would like to hear your thoughts.
Hidetoshi Shibata: I do not have much to add from what we have discussed today. Whereas for Altium, as we have mentioned, in terms of a financial impact its basically negligible. As whether it’s plus or minus, it will work to the positive. But, the scale is limited. It is, very negligible to that extent that you have to study very hard to find where that is. We hope to be able to accelerate our movement towards digital. And, of course, the momentum is building on both sides. The transaction has not yet been come to a close, and hence it is still early too early to say. And, therefore, I would like to refrain from speaking further. But after July, at the best timing, we will be able to update you, and you’ll be convinced that more than before, we are working on integration with for the introduction of a digital platform. And you will be able to see that we are working in that direction. There’ll be signs that will be visible, so please stay tuned. As for China, there is also not anything more to add. As of now, the Silicon IGBT will have the largest impact. From last year, the impact has already become visible. And hence, we’re looking at the revenue of IGBT in China. And, as for the outlook ahead, as to reiterate, we believe that it is very difficult. And that is what we have said from the end of last year and conduct the operations. Nothing really has changed, and we believe that we’re still in a very tough situation, a part discrete, what is going to happen to SiC and immature note, Micron (NASDAQ:MU), Analog. What is going to happen might be the question of your thoughts. As for Micron and also Analog, for the mid-to-long-term, that we are expecting a large impact. But, we believe that it is going to take time. And hence, we still have some time ahead. We will pursue digitalization so that we will be able to shift towards upstream in the value chain, and that is, of course, one of, of course, the motivation of the, or the theme of the acquisition. As for SiC, it’s very hard to say as for now because the situation is a mixed bag. Some will say that China SiC device quality is already up to par. Other will say that they’re still not there yet. A mixed view would be the right way of us referring to the situation, but the market overall will grow. And, we are also ready to participate in that market. And of course, as a solution, it’s important. And hence, we will commit. But as we have mentioned, to continue to invest our resources in order to really scale the size of the business, that is not the way forward. Of course, we hope to build our presence, but it will be a part of the total solution in our portfolio. So, nothing has changed. That is all.
Unidentified Analyst: Thank you very much.
Operator: Thank you very much. Next, from Daiwa Securities, Okawa san, please. Please unmute yourself and ask your question.
Junji Okawa: Thank you very much, for your presentation. I’m Okawa. I would like to two questions about the automotive sector. So, I would have said that, you have reduced your outlook in terms of demand. In terms of, is it about the sales volume or due to the component makers, common manufacturers? Is this change in how they hold the inventory? Can you give us more detail? The second question is that, you have outlook in terms of the demand. But in terms of your sales, on quarter-on-quarter basis, I think can we expect the quarter-on-quarter sales is going to increase? So, in our consolidated basis, the topline decline seems to be large into the quarter-on-quarter, sales. So, what is your outlook of your automotive business?
Hidetoshi Shibata: So, for our automotive business, in terms of the sales, we are trying to take a more conservative view. So, rather than trying to grow aggressively, we want to observe the market situation closely and control the inventory. Specifically, in the third quarter, we are going to reduce our outlook. In the fourth quarter, it’s still early to say. So, whether we’re going to take a more aggressive outlook, I think we’re taking a more cautious stance. So, the reason behind this is that as you had just pointed out. So there are two, factors that are playing. One, is that the third-party, says that the worldwide unit outlook has been downgraded. We have had that type of information. So, if that is the situation even the Tier-1 customers, I think, basically, we’ll have to be more cautious in terms of holding the inventory, and I think that’s natural. And, I think in terms of trend, I do not think that it has we have seen a major change in the trend. But, there are some customers that they are controlling the inventory to a level for very minor products or the minor customers. So, I feel that maybe if you just reduce the inventory too much, maybe if the demand goes up and there will be lacking this component. So, we do want to continue to confirm with the customers whether their inventory level is too low or not. But I think, basically from the customer point of view, I think there has some internal pressure to reduce the inventory, and they want to control the working capital. And I think, that’s a strong trend out there in the market. So, for the automotive business, so rather than us controlling the inventory, so I think, basically, I think the trend is that the inventory is going to increase gradually. But, rather than trying to aggressively increase inventory like before, I think our sense is that we were looking at, we’ll look at the situation closely and be cautious, rather than aggressively swinging from the positive and negative. We are decelerating and that’s the automotive for industrial. I think, basically, as we’re going from the positive to negative in a major manner. So, I think that’s the difference of the perspective that we have of these two markets.
Junji Okawa: Thank you very much.
Operator: Thank you very much. The time to close is around near. The last question, [Semi Portal, Suda san] (ph).
Unidentified Analyst: [Semicon Portal, Suda] (ph) is my name. Thank you very much. I have two questions. The first is in reference to in a growth market, one, a components AI. And in AI, you have two, Edge AI, is one. I believe you acquired some company in that particular segment. And what has happened? And as our data center, Generative-AI, for example, the NVIDIA (NASDAQ:NVDA) chip, if we will look at their situation, not just so much to NVM, but HBM or there are also other, microprocessors that are around that. I’m sure that could be a potential target. What is the current situation for data centers? Acquire if a car IDT and the clock products I think would be viable for the data center. So, what are the circumstances for you? What steps are you taking? As for Generative-AI? In terms of value, we are expecting growth. However, in terms of volume, the unit price is very high. In terms of volume, it will not really that grow. Possibly, it might actually be lowered. And, what is implementation on our side? The volume time in terms of system is not going to grow, but the Generative-AI?
Hidetoshi Shibata: Now, how can we capture the demand for generative-AI from our business? I think that’s your question. For what is particular to generative-AI would be, GPM and HBM. For HBM, the increase will not really have a great advantage to us. This is not really positive, but the [GBA] (ph) growing and also considering the timing power we will also be in able to enjoy a tailwind in our power devices. Because the confidentiality, we are constrained from speaking further but the number of customers is limited in that space with a single platform due to various factors. Platform A, could go ahead, and Platform B, could be delayed or the reverse. And, that’s what we’re seeing right now. So, as to which platform and with whom we are aligned, in the short-term shift the situation. And as of now, we’re looking at the combination. And, are we seeing a great tailwind in our favor? That’s not the case, but we are seeing solid growth. In the fourth quarter, we have of course, reflections. And hence, I would like to refrain from make any domestic comments. But, as we look at the numbers within the company, fourth quarter and beyond, we can expect to see a good recovery, especially around GPU power products. As for the timing and also for the microprocessors, of course, that’s an advantage. But with generative-AI, it’s we do not expect to see a spike, and that is how we are seeing the situation. For HAI, this is something of that is coming in. The HAI in its truest form as to whether it’s going to really grow substantial. It’s about, of course, it’s indispensable. It’s sort of like similar to how we’ve viewed connectivity. It will gradually grow. And, we need to take necessary, of course, steps to prepare ahead thoroughly. At [SRPC-AI] (ph), in the short-term, there are specific set makers an application processor, vendors that are not really visible in the market yet. But, when they, their presence is there from [GDT5] (ph), there’ll be a push up, and, there’ll be a positive impact. And, so generative-AI, in short-term, there’ll be ups and downs. By the fourth quarter, end of the year, we are hoping to see a growth, especially around power. So, that’s one thing. And, before and after with client PC, there’s also tailwind while the not directly felt, the impact will be indirectly felt. As for Edge AI, we need to take a mid-to-long term, stance. It’s very difficult to capture specifically, but, I’m sure we believe that it will come to become, indispensable.
Unidentified Analyst: Thank you very much. That is very clear. And as for a second question, if you look at the Q2 performance, the overseas ratio, for instance, in terms of geography, Japan, United States, Europe, Asia, China, if you divide it by geography, roughly speaking, what is your breakdown by geography?
Hidetoshi Shibata: So overseas, of course, it is increasing. So, roughly speaking, less than 80% is about, overseas sales. Japan is about around 20%. Remaining would be, well, U.S. is stable about 10% plus. Europe, same as Japan, it’s a soft market, maybe 50%, Europe going down to about around 15%. And China, which is relatively strong, going up to 30%, and others. That’ll be the breakdown. But China, because they are strong and excuse me, China and the U.S., they are relatively strong. Japan and Europe is weak. And as a result, the overseas ratio has all in all increased a bit.
Unidentified Analyst: Understood. Thank you very much.
Operator: Thank you very much. With this, we would like to end the Q&A session. Lastly, Shibata san, would you like to say a word?
Hidetoshi Shibata: So, I think, this guidance of the third quarter about this earnings report, I think I may, everybody is disappointed, and this is the reflection I have. But, we will try to start-up once again upon the fourth quarter onwards. Specifically, the fiscal year, we would like to maintain a speed of growth. In terms of R&D, we will, put in efforts to invest there. And, even if we have to control our topline, we will adjust the inventory in the short-term. So, the third quarter, fourth quarter, we don’t know how this is going to trend, but I hope that we’ll be able to satisfy you in terms of our performance and continue to satisfy you. And, that is the reason why we have changed our tracks, at the current timing. Thank you very much for attending despite busy schedule. I thank you for your continued support.
Operator: With this, we’d like to end the Renesas Electronics Corporation Second Quarter 2024 Earnings Call. Thank you very much for your participation.
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