Renesas Electronics Corporation (6723) Earnings Call Transcript & Summary

I'm Hidetoshi Shibata, CEO. I would like to thank you for joining us in spite of your very busy schedule. 2019, in July back here, I assumed this position. And thereafter, from 2020, I've conducted a progress update on the midterm plan. Every half year, there have been updates on both positive as well as negative news, and there have been many. And there has been a necessity to disclose the information at every half year intervals. But fortunately, we have not been overcome by as numerous news as we have experienced before. And therefore, we have decided to offer a progress update in a rather -- a shortened period. So as I have mentioned, there is not a lot to impart to you. I would like to briefly discuss the update on progress made. And as far as time allows, I would like to reflect on past developments. So that we are able to share the context of discussion that will allow you to understand the backdrop by which we are taking part in various activities. And where we are geared to achieve in the future. I do hope that this will present such an opportunity. And thank you for joining us. But then, I would like to use the presentation material as I move along. First of all, in the way of restructuring, 2013, as we have seen to the left, there's a consortium lead by INCJ of JPY 150 billion in the first several years. There have been restructuring activities that have unfolded 2016 in Kumamoto, the great earthquake occurred. Our sales have suffered. And at that juncture, there have been M&A opportunities overseas. It has allowed us to enhance our product portfolio. And also by changing the mix of talent, we've embarked on an effort to change the corporate culture that has begun 2016. In 2017, we have acquired Intersil. And from that point over, we have embarked on the first step on our journey to globalization. 2017, 2018, it has been in a period of trial and error. In 2019, IDT has been acquired and thereafter, we have been able to build on our strategy as well as acquire the tools for growth. I would not say that we are complete. However, maybe that we have been able to acquire the minimum that we need in the way to talk in 2019 onwards. In 2021, we have acquired Dialog. And today, we are in 2022, we are the second -- we are entering into the second half of the year. In 2019 onwards, as I have mentioned, COVID-19 has gripped the world, we've also acquired Dialog. And there have been the fire at our Naka plant. For good or bad, there have been an eventful period that we have experienced. But at the same time, in the sequence of events, I will say that we need -- I have come to strongly believe that we need to produce on outcomes in a very short period of time. And that has how I've handled management. The company overall has based an emphasis on speed so that we are able to deal with our results in a very limited period of time. And we have applied various measures. And as a result, as we look at our graph and to the right, we have various numbers in the way of revenue as well as operating margin and also market cap, which I have indicated the outcome, of course, in interim. Of course, there has been a tailwind in the semiconductor market. So I would not take credit for all these achievements. However, I would say that the management efforts have paid off and allowed us to register these numbers on the screen. And from this point onwards we believe that we have been able to produce results in a short period -- short term, but we also need to take a long-term perspective, apply the accelerate on investment so that we are able to conduct investment that sets the tone of the times. So it is -- we believe that we are at a crossroad. So when we talk about long-term perspective, how do we define this? I would like to take a look. The purpose of our company on various occasions, we have referred to our purpose, and that is to say for ourselves, for our clients. And therefore, the ultimate users of our products as well as services from the broadest sense. We need to deliver results that will make our lives easier, and that is what we are determined to do as a company. That is, of course, conceptual. You might say that, of course, that makes sense. In our strategic agenda, how does it tie in? And how are we progressing? I would like to dwell on this. And every opportunity I've attempted to refer to this question. And I would like to talk on this strategic agenda as indicated here. But on the next page and onwards, I would like to talk in more depth. And up above, we have the 3 items. These are pillars of our strategy. Very offensive in nature, and this will serve as an access by which we are determined to move ahead with our business. More than ever before, we are more strongly attentive to the need to grow. And for this to happen, we need to look at each and every device. That is what we have done in the past, but we need to shift gears so that we are now looking at solutions. And what's important is the -- how is the user experience. Because we cannot just depend on the so-called sophisticated users, but we need to look at a broad range of users, and we need to deliver to the end user with speed. And down below, we have these 4 items. And these are critical as a very foundation so that we can deliver on the items at the top, one of which was diversification. And I would like to dwell on this a bit later. And a fab line approach is also important as a foundation. And we have been working on our culture. We must upgrade our culture and ESG. Various efforts have been made thus far. So in recapping our emphasis on growth, we've been doing a lot of things, but especially at the beginning of this year, I think what we've been doing can be exemplified at what you find here. In other words, we want to look at some of the clients that we'd be able to have strong growth as well as long tail business. So maybe in the beginning, the business may start small, but there's a great potential for growth. And so that is what we wanted to make sure that we'd be able to complement in ourselves. We have tried to pursue organizational change for that. And because of that or not -- just because of that, but what we have been doing is what you exactly find on the bottom part of this slide. In other words, we wanted to focus to the market segment that we'd be able to expect fast growth, and we've been able to pursue design in those areas. And so we have actually been able to execute growth there. Now on the right side, the mass market, this is scenario where within the data management within our site, we're not really able to keep track specifically of what the design in. And so the numbers here may seem small. But if we are able to more accurately track the record of this design in, we should be able to really show you a much higher number to show you what speed we are accelerating. But then even on this CAGR, we know that in total, we are able to execute growth by more than 20%. And this is because we have emphasized on growth. As we try to seek what would be able to go into the future areas where you would be interested and where we would be interested would be the progress in the design in. The gray bar on the left shows the actuals for last year. And versus that, there is the middle dark blue bar, which indicates targets for this year. And versus the actuals of last year, we're trying to set quite an aggressive target for both automotive and for industrial infrastructure and IOT and that's what I wanted to remind everyone. So it is quite an aggressive target that we've set for ourselves. How did we do for this first half? I think we have been able to make a pretty good progress so far. So automotive versus the initial target, we have been able to exceed 60% already. And even for industrial infrastructure and IoT, we have come a little more than half. So I would say, so far, so good. Now, we have a little more than a quarter to go till the end of this year. And of course, in the end, we will have to close all the numbers to see how much we've been able to do. But I do believe so far, we're making a good progress to the aggressive targets that we've set for ourselves. Moving on. Here, I'd like to talk about the second part of our offensive 3 pillars. This is about the focus to the solution. And of course, this is something that I have been reporting to you. It's about the progress on winning combo. Left-hand side, we look at the cumulative counts of the solution, the winning combo solutions. And also, on the right-hand side, we also look at the value of the design-in that we've been able to create so far. Again, from the left-hand side, from the 2 previous mentions, I do believe I have been talking about. It's not just about the number of the winning combo, it's about the quality of the winning combos we've been able to focus. I think this is something that I have been saying. In other words, the darker blue part, we believe are the more higher quality, full system type of solution that we'd be able to offer. And so as we look into the end of this year, we believe that there will be like more than 434 winning combos. And about 40%, a little over 170 would be the full system solution. In other words, the higher quality solutions. And as we look towards 2023, we're hoping that it's this dark blue parts that will be growing. So the overall winning combo solutions, it's not just about increasing the total figures, but it's really about increasing this dark blue full system part. So that's what we're trying to do. And of course, here, so far so good, and we have been doing our daily work diligently. And on the right-hand side, it also tells you that we're making very good progress in the design-in. And so for the total design-in for this year, we believe that approximately 30% comes from winning combo type of solution. And again, we did set a pretty aggressive target for ourselves. But because of these winning combos, we do believe that each of this design-in is giving us some additional value coming from each of the additional device. And that enables us to achieve, make a good progress even though we have set ourselves quite an aggressive target. Another thing about solutions. So I said it's the full system solutions, but what is this full system solutions? And I do believe I did discuss with -- this with you in the previous sessions, but I would also like to give you some examples. On the left-hand side, the blue shaded areas indicates the automotive solutions. And so the right hand, the more purplish colors would be the IoT. It does seem a bit different in nature. So the automotive side solutions. So of course, you have this good board. That's one message that I wanted to tell you. But in addition to that, on the right-hand side to the board, you also see these computers or amendment tools. So by expanding into these tools, we allow the customers to be able to see the entire function when they include these measurements for these tools. In other words, we'd be able to offer a model that would very much fit to some of the design that some of the, for example, third party would be suggesting. So it's not just about the board that we'd be able to offer, it's really about how this board could be adapted included in the entire solution is something that we're trying to show. Also on the right-hand side, here, again, this is from the IoT side. So again, there is the board level -- hardware level solutions. And here, we're saying that if you'd be able to fit this board with this item, you'd be able to start using this. And that's the type of solution that we're trying to pursue. I want a good example, for example, on the top or perhaps on the bottom, you see this white squared place. So that indicates our device in the board. And so there are many, as you can see. And for example, on the top right example, there's this object detection. So this is the board for object detection. And so the client be able to use this. And with some of the coating. And on the right-hand side is the demo equipment [indiscernible] not be exactly for you to tell what this is. But on this view, you have this little cars on and the camera is looking at this from the top. And this is something that we know it is going to be used in Europe. And so for example, in the plant, there will be the parking space. And it could be AGVs or automobiles. If there's anything that is moving around, it could be detected. And you'd be able to detect like how many vehicles are where. And for example, you can have easier control of the fleet or control the facility, and we know it is going to be used. In other words, this solution by tweaking the software side, it could be immediately used for a specific application. And what you find on the bottom right, this is something that there is more potential for. This is something that could be used in the more potential -- high-potential growth countries. So this is a solar irrigation pump and if you'd be able to conduct this. There'll be the Board, if they be able to implement into the equipment, then the solar panel, as long as the solar panel will be able to capture the sunlight, then this system itself, this irrigation pump will start working. And so it's about just implementing the board. And if required, please arrange the software a little, and you'll be able to use this. So what we're trying to do in this industrial IoT side is a bit different in nature of the solutions that we're trying to offer in the automotive side, but we wanted to show what kind of full system solutions we'd be offering. So here we also talk about the user experience. And this is something that you may have heard already, but there are some areas that I would like to emphasize. And so again, on bottom left, we have this automotive side, virtual design environment that we're talking about here. Just so happens, we released a press release just yesterday. On the upper left-hand corner for each of these individual devices in a virtual environment, we have the models and simulation environment that we were able to offer. However, as indicated in the press release just yesterday, in this, we expanded our multi-device level and the macro processors will be also fitted onto the system, on to the personal computer, which will be assimilating the environment by which the clients will be using the system. And therefore, this is just an example how we have been able to enhance the user environment. The theme is the same as before. However, what I wanted to express here has evolved. This is an example of how we have worked to enhance the user experience. And due to time constraints, I would like to speed ahead and now down below is indicating the foundation of the strategic agenda. We have, firstly, diversification. We start from the upper left-hand corner. The diversification, first of all, the product side in upper right hand corner. The R&D locations in terms of geographic diversification will happen. In the bottom left-hand side, as we offer our solutions and products, here, we're looking at market segments. In bottom right-hand corner, we are looking at the talent composition. And this is also where diversification will occur. 2019 as is our point, to some extent, diversification has been achieved to some extent. But even then, as we see in the dark blue shaded area, you will find many are just about half or exceeding half of the entire pie. But as we fast forward to where we are today, currently, be it products and microcontrollers are now less than 40% of the total and geographic composition. Japan is now less than half. In bottom left-hand corner, we have better-balanced segment exposure. And when we look at the time and composition, Japan accounts for a large proportion -- or rather shall I say formerly Renesas' employees account for a large proportion. However, due to M&A and also new recruits, we are finding a greater diversification in terms of talent composition. As we move forward, of course, we will not continue along this track. But we will be able to depart from concentration to a specific segment and we are hoping to see a better-balanced pie chart in each of these areas. And now, the second part of the foundation piece, satellite. In 2018, you will look at the dark shaded area. This indicates our factory locations. 2022 in the first half of the year, we find that foundry offset and also outsourced to third-party manufacturers now exceed 50% of the total. And that is very clear from this pie chart. And as we move forward, we will continue investment in our owned plant operations. And we will look at foundry and also OSAT the proportion attributed to cooperation with these stakeholders will also increase. But at the same time, as we have done in the past and I'm just looking at the front end, the foundry partners and our own plants we have roles to be performed will need to be clarified. And that is what we are working on, and this is the direction ahead. And that is described in the right-hand corner. When we look at, of course, the advanced process that will be attributed to the foundry and the mid portion, the material process in terms of process node 40 nanos, or larger will be attributed to a hyper model that is composed of foundries and our own plants. And 300 millimeters Naka and also [indiscernible]. The MRAM products will increase and also the microcontroller products will also increase. And that is how we hope to be able to work on the characterization and positioning of the plants. And as for power discrete, in the Kofu K6 plant, we talked about resuming -- we issued a press release on resumption of activities and also Naka 200-millimeters and 6 inches Takasaki step by step for power discrete for these 3 plants, work will be aggregated. And as for the mature process, which are handling power discretes to some extent, this will be shifted away to concentrate analog mix and also microcontrollers, and that is what we are currently working on right now. And as for our own plants, the client's interest is very high on activities on ensuring resilience. And I would like to discuss this using a slide. And to the very left, we have anti-earthquake measures. And adjacent to that, measures to cope with power backdrops due to lightning as well as floods and also volcanic eruptions have been indicated side by side. And some have been completed above and on track and did for completion is at the center. And at the bottom, it is on over the horizon, we'll take some more time to complete. So this is how these efforts have been categorized. And at a look, you will be able to find for anti-earthquake measures, those are attributed to structural reinforcement measures have already been completed. And as a challenge, for equipment, for example, as I say and also I quote, great resistance measures have been taking and is on track, as indicated to the left. As for power backup, end of this calendar year to early next year, we will reinforce our backup capabilities. And also another plant for power line, protection will also proceed to ensure at a resilience against blackouts. Of course, to some extent, we have to naturally depend on utilities, and therefore, we have -- we'll have to work on encouraging utilities to work on this. It may take some time, but we will work on each and every one of these measures. As for floods and also volcanic eruption, as I discussed thus far, efforts have been completed. But as of late, we have come to believe that we also need to cope with dramatic scenarios. We need to work on this with local municipalities to take measures that are feasible. And overall, as we see down below, the buybacks, in terms of the economics and also in terms of the actual benefits, this will offer, of course, an important asset. And when you look at the market, we find that these are slowing down. And therefore, we need to optimize the capabilities of the plant operations and at the same time, work on the buybacks. And when we are able to complete work that is in progress for any disaster that is expected, we believe that we will be able to establish a structure that is highly resilient and oblivion to foundations or culture. And this is what we refer to as take transparent and -- beginning to transparent, there are 5 components that are expressed in the chart and [indiscernible] and Hitachi and a cultural survey has been conducted and we have discussed this in the past. And I'd like to provide a very compact explanation. And of course, we need to be very transparent in order to disclose information and we have been working on this. And this also needs to apply to our internal, of course, audience as well. And we have been met with rating -- high ratings on this point. And then this agile or global, this is an area where we do believe there's still a room for improvement. This is something that we'd be able to tell from the scores that we receive from our internal people. We have like 21,000 members globally. And 90% or there's actually more than 90% response from these 21,000 people. And we're also receiving many numbers of comments, more than 18,000. And of course, there are a lot of things that we still have to work on, but it does tell that there is quite high engagement from our employees, at least by looking at this number. And based on this, as you can see on the far right, we're trying to leverage the voice that we are hearing. In other words, we've been able to identify 2 areas where we really need to work on. First is about career opportunity. In other words, we have to show more career opportunities and that was one clear voice that we were hearing from our employees. And just like the tagging improvements required. So maybe here we have this leadership team that's working globally, but then on the working level, it's not exactly global. That was some of the voice that we were also hearing. So we wanted to make sure that we'd be able to pursue a true global collaboration amongst all levels. And we have actually identified some actions. And we are already executing some of the actions. And so one of the things that I wanted to introduce today is about the career opportunity and the global works. And we're trying to make sure that we'll be able to gain 2 benefits by this 1 action, but it's really about enhancing more mobility amongst our people. So on the left-hand side, here, we have our message. In other words, what are the message, what are the benefits? And so the employees and leaders, they're supposed to take this as a benefit. Please don't think that it means that you're being deprived of a good talent at your team, but it's actually something good because it is really going to flourish, invigorate the entire organization. And so it's really about the philosophy behind this internal mobility. And this is something that we are repeatedly telling to our people so that we'd be able to create this common ground. On the middle, this is something that you'd be able to see too. But this is about making more visible about where are the open posts are. And we want to introduce this to internal as well to external people. Now today, there is like several hundred open positions. And so we want to have our employees look at this. And if they find anything that thing is worth challenging, we want to encourage them to really challenge to that task regardless of where it is being offered. And at the same time, if you wanted to pursue global mobility, this is exactly an area where we still need to work on compensation plans, benefit plans. We want to know sure we'd be able to integrate this more next year. But we also -- by doing that, we want to enhance this global mobility program. So that's why we wrote here, working on it. Now each of these activities, be it the U.S. or Europe, some of the companies that's really multinational and working globally. I'm sure these are some of the activities that's obviously naturally taking place already. However, if we look at Japanese companies. As far as I know, I don't believe there'll be many Japanese companies that be really working seriously on these internal mobility. And Renesas had been one of those, the more general Japanese companies, but we want to be on par as other multinational real global companies. And so we want to foster more internal mobility, but then we want to more strategically think about deploying a lot of people in each of the global arena. And so that is why I wanted to tell you what progress we're trying to make in that part. The final part of the foundation is about ESG. I will be happy to answer any of your questions. But the message here is something that I did say at the footnote here. But we have, first of all, upgraded our target. We previously have been saying that our target is to be included in the 3 indexes. But at the moment, it's something that we've already been able to achieve. In other words, if you build -- look at the top right, in the dotted line, you can see that we've been able to be included in these 3 indexes. And so we have been able to complete that. So for example, now to have a AA rating for MSCI could be one of the near-term target. And so that was one of the thoughts in sorting this map. Now the second row is the in-progress area. And so MSCI, of course, we are already included in the ratings, but then it's not yet AA. And we're doing our own work so that we'll be able to get that rating in the end. But there are other activities behind the scenes. Many of them is already being executed. But for example, in the social, the supplier audit. From last year, we have tried to increase the number of the auditors. And so this is something that is in progress. And in the near future, we're hoping that whatever we have in this in-progress column would be upgraded to that good column. So when we have all these elements in this in-progress column be upgraded to good, then what we'll be focusing on would be some of the elements that we still have in the insight column. And at the same time, we'll be working on the more emerging topics that you find at the far bottom. You have 3 there. So the 2 bottom columns will be some of the elements areas that we'll be focusing more as we be able to fulfill our works in the current in-progress column. And eventually, we want to make sure that all these elements you find here would be included in the top good column. So now I'd like to just quickly go over some of the numbers. I am going to have Mr. Shinkai be able to tell you details of the numbers. So I'm just going to be very brief. But again, on the right, you can see that -- so here, we're trying to make sure that we want to grow the revenue a little over SAM, a gross margin, 50% to 55%; operating margin like 25%, 30%. And this comes from the midterm model that I introduced at the very end of last year. So it's just a recap slide. So where are we right now? Now after the first half, that's exactly what's indicated in the middle gray area. But then if you look at the total, the right, you can see that we've been able to put a checkmark to all the items versus our long-term target. And of course, there are some people who would say, so what is going to be your updated next target. But for the time being, we're just going to keep our current long-term target because right now, we're doing well, but we don't know how the market environment would evolve next year. I'm sure Mr. Shinkai would be able to tell you a little more later on, but we are making investments for the future. That means our gross margin, to some extent, would be pressured. And so that is why we're going to currently keep our long-term target. We want to make sure we'd be able to further solidify our foundation. And that's exactly the phase that we will be entering from now on. Now what goes from thereof, we want to be a little more aggressive. So here, I have illustrated this 2030 aspiration, which we share with external parties, and that is why I have decided to put the slide here as well. So first is about the embedded semiconductor solution supplier. And we want to be the real top 3 in terms of revenue. Now of course, we still have to be mindful about the FX, but we want to make sure that we would be well over that JPY 20 billion threshold. And market cap versus 2022, we want to have our market cap be 6x. Now we still have 8 years more, but we don't know what could happen. But I personally do want to make sure that our market cap would be 6x today by 2030. So that's the entire aspiration. And how do we do that in the near term? As I have been talking before. Before I had been really focusing on what near-term achievements we'd be able to make in the automotive and the industrial IoT side, but now we have decided to sort of change our gears. We want to think about cross-vehicle collaboration, that we'd be able to really create the pathway to this long-term aspiration. And the second thing, this is something that I did talk about on the UX part, but I do also want to really focus more on the digitalization work, again for the long-term aspiration. And that, I believe, would enable us to shift from just being a hardware seller to a solution offer, but this is something that today is just a concept. And it's not that I have concrete details that I'd be able to tell you, but it's just a part of the aspiration. So we want to make sure we'd be able to take time as we be able to make progress that we'd be able to share with you. As for near-term cross-BU collaboration, we had steady road map. And just to share this with you, we have already embarked on this. And for each of the BU products, we will aggressively sell to the customers on the other hand. The [indiscernible] of this point in time has been a focus of acquired companies. However, what we are looking at now is to pursue cross -- BU cross-sell. In external words, that would say, near term, we will add value. For example, BU excuse me, automotive products will be add on top of that to sell to the automotive customers. And even if it is in automotive products, there will be some changes that will offer a cost-conscious product and sell to the IIBU customers. And this is what we hope to be able to achieve in way of the IIBU cross-sell. And ultimately, in each of the BUs for the design phase for the definition of the product side, cross-BU efforts will begin so that the end product will be of added convenience to the end users on both sides. I have consumed considerable amount of time. I'd like to recap. As I mentioned upfront, 2013 onwards from -- at the very beginning, during the years of INCJ, we have pursued a trial and error. And finally, we are now back on the map of global semiconductor suppliers, and that is how we see it. And from this point onwards, when we look at the outlook for the years ahead, we will look on solid execution and that is the phase that we have entered into. And we are ready to look at the outlook for a long-term perspective and the outlook is right. And ultimately, up until this point in time, we have introduced various activities after the measures taken ultimately for the customers, for the engineers who use our products, we hope to be able to bring Renesas to the top of the mind. And ultimately, that will be -- allow us to achieve our purpose, that is to say to make our lives easier. And that is what we hope to be able to work on tenaciously. I know that I have gone beyond the time that has been provided to me. But with these comments, I would like to conclude my part and turn over to Mr. Shinkai. [Statements in English on this transcript were spoken by an interpreter present on the live call.]