Renesas Electronics Corporation (6723) Earnings Call Transcript & Summary

Hello, everyone. Thank you so much for joining us today. If you listen to this session in English [Operator Instructions] [Interpreted] Good afternoon, ladies and gentlemen. Thank you very much for joining us despite your busy schedule for the Renesas Electronics Second Quarter 2026 Earnings Call. With regards to the starting time of this earnings call, I would like to deeply apologize for making the change in short notice. We have simultaneous interpretation channel available. Please interpretation icon bottom screen to choose the language of your choice. And so please could I have the speakers on the videos, please. In today's earnings call, we have our CEO, Mr. Hidetoshi Shibata as well as our CFO, Mr. Shuhei Shinkai as well as our other staff attending this earnings call. First, we will have our CEO, Mr. Shibata, give you an opening remark, and then Mr. Shinkai will be explaining about the second quarter earnings, and that will be followed by Q&A. And we're planning to spend a total of 60 minutes for the earnings call. And the materials that are used in this earnings call are the same as the materials posted on our web page, IR site. Mr. Shibata, please turn on your mic.

[Interpreted] Hello. My name is Shibata. So as Mr. Sato mentioned earlier, very sorry about changing of the time on a short notice. And in regards to the earthquake, we've had to make some internal confirmation work. So very sorry, we had to change the time for this earnings call. And as for this earthquake, of course, there are some things that are not yet known. And -- but overall speaking, the impact to our earnings should be limited. And as for the Nishiki factory, the back-end factory, the full production has been resumed and the impact seems to be limited. And as for the Kawashiri, the front-end factory, this accounts for about 13% of the company-wide sales. And already the wafer testing has been resumed and in operation. And now for the pure water and water leakage, repairs and confirmation has been going on, and there has been some damages to the facilities, which we are trying to repair and resume. And we expect the production to resume on August 5. But as for the die bank and the inventory, fortunately speaking, we have secured those beforehand. So we think that these impacts on our performance should be limited. And as for the Kyushu area, OSAT partner has been impacted by the earthquake as well. And as of today, their outlook, we think it is going to be limited on the business as well. So all in all, the impact of the earthquake should be limited to our results. However, on the other hand, when it comes to our customers' situation, there are some cases that supply chain has been suspended. So we need to be very carefully monitoring them in the future. So that is about the earthquake. And in terms of the human safety and injuries, it is limited and it's nothing serious. And at the same time, as for the Takasaki site, the 6-inch, the power plant that is for the front end and also for the power analog R&D site is also at this site. And so from now on, we will take our time and gradually suspend and close our operations, which has been already announced. And please refer to that information. And looking back the second quarter versus our guidance for automotive and IoT, both has been very strong, and we have exceeded our expectation. And as for automobiles overall, there has been quite a strong demand, especially in Japan. The Gen4, our car has been going very well. And -- and from the first quarter, there has been some increase compared to the first quarter. And some of the customers, in some cases, the inventory were too decreased and then they have to increase it. And as for IoT versus guidance, overall, it is exceeding. And for industrial, that is about data center and in China has been very strong, and it's exceeding the guidance. And for infrastructure, up until now, the GPU customers have been a significant customer group. But when it comes to ASIC demand, it is also strong and which is exceeding our expectation. And as for the IoT area, there are some issues of memory shortage in some areas. But as for our customers, the memory shortage issue has been absorbed to a certain extent. And we have strong sales for those customers who have secured the memory beforehand. And for the first quarter, like it was mentioned earlier, the impact of the earthquake to our business itself should be limited. But for the supply chain and the automobile, especially, we need to carefully monitor moving forward. And so those are the unknown parts. But in terms of the automobile, overall speaking, versus last year, we are doing very well. In sequential, the end demand, we expect to be quite flat. And as for IoT, we expect things to be quite strong continuously, especially industrial and also in the infrastructure area. The strength from the second quarter should be continuing. And on the other hand, as for IoT, like I indicated earlier, the memory price hike and the memory shortage impact has been seen to a certain extent. And overall, we expect a slight increase. And like I mentioned earlier, for our main customers, I wouldn't say they were not impacted, but there are some customers who have been able to absorb their impact and which we would like to sell strongly. So that's why we expect a slight increase. And so from the second quarter to third quarter, we expect the strong demand to continue. And so that is our current situation and the outlook for the third quarter. That is my view. And from now on, we will move on to our presentation and the details of the numbers from the CFO, Shinkai-san. Shinkai-san, go ahead, please.

[Interpreted] My name is Shinkai. I'm the CFO, and I will be explaining based on the presentation material. Next page, please. Next page, please. Well, this is the disclaimer, and please refer to number for the timing business. The transfer of the business was closed on July 1, 2026. And so with regards to the reporting segment for timing of business used to be categorized for auto and IoT, but it has been changed to others. And we are retroactively making changes for the comparison year up to 2025. And this is -- next is the overview of the earnings call. Please refer to the bottom blue column fourth from the left. Revenue is JPY 45.3 billion and gross margin is 58.1% and OP margin is JPY 132.7 billion and OP margin is 32.7%. EBITDA is JPY 154.3 billion. Profit attributable to owners of parent is JPY 113.3 billion and FX is JPY 159 to dollar and JPY 185 to the euro. And please refer to the shade 4 columns to the right for a cumulative results. And excluding the timing impact, the apple-to-apple basis comparison year-on-year as well as Q-on-Q is shown on the light blue column on the right-hand side. And on the next page, I would like to explain on the comparison against guidance as well as Q-on-Q. Next page, please. First, regarding the Q4 result against the expectation, which is shown on the right-hand side, I will explain. In terms of revenue, it was 4.5% against the forecast median, and it was an upside of 4.5%. And more than half was due to FX and the others were contribution from the increase in demand for automotive and IoT. And that was mentioned from the comments from Shibata-san, the auto and the end market demand was very strong. And also for IoT, in addition to data center, the industry IoT and the mass market were better than our expectation. And with regards to gross margin, which is the second line compared to the guidance, it was increased by 1.1 points and the factor was due to depreciation of the yen and also mix improvement and improvement accounted 1/3 each. And in terms of the manufacturing cost, there's an increase in labor cost and fuel cost and also maintenance cost increase were in line with the expectation, but inventory valuation that was considered more conservatively was contributing positive. And for OP, it was 32.7%. And compared to the median, it was plus 3.7 points. And so there was a significant upside. Revenue and gross profit margin improvement in addition to that, there is a decline in OpEx compared to the assumption and that accounts for more than half in terms of the amount of more than JPY 7 billion plus OpEx reduction. And there are 3 major factors. One is about 30% is regarding the investment that we're considering where the execution was pushed out or for example, like the hiring has been delayed or the arrangement with the partners has been delayed or the plan itself were revised and we might have pushed it to the next period. And because of that, the expenses are expected to be postponed. And around 20% or a little bit less than 20% are the ERP integration schedule was revised and was shifted to next year onwards. The company that was acquired, the ERP of the company were planned to be integrated and we're planning to execute that in the second quarter. But because of considering the recent supply situation, we realized that this is not the appropriate timing. So we have postponed that to next fiscal year onwards. And the cost related to that was expected to happen this quarter, but it did not occur. And the rest is the timing delay of projects and also between Q1 and Q2, we were expecting some seasonal factors that were conservatively considered, but they're not happening. And next is the Q-on-Q result. In terms of revenue, it was plus 9.8% -- and gross margin on a Q-on-Q basis was minus 1.0 points. And this is because of OpEx increase like fuel cost and labor cost increase and maintenance cost increase were the reasons for the decline. And OP margin on a Q-on-Q basis was 0.8 point decline. And the major factors are the increase in operating cost. Compared to the expectation, the OpEx were much lower. But on a Q-on-Q basis, it has gone up and half of that were the onetime cost increase in the first quarter, and there's a rebound from that and more than half are the increase in equipment, mostly the labor cost increase reflecting the bonus from Q1. And on the right-hand side, you see the segment results. There's not much to highlight, but the OP margin of auto has gone down 0.9 points on a Q-on-Q basis. And that was the rebound increase from the first quarter, and that has impacted the auto business. Next page, please. Next is the revenue trend on a Q-on-Q basis. I have explained this in the disclaimer. And for the timing business in -- from the first quarter of '26, it's been categorized into others, which is shown in white, and you see the dotted line, but anything beyond Q1 is explained in the same definition. And in the second quarter, the results are shown on the right-hand side at the top. And in total on a year-on-year basis, it's a 24.8% increase. And on a Q-on-Q basis, it's an increase of 8.8% and the segment breakdown is shown at the bottom. So please refer to what's written on the bottom. Next page, please. The next is about inventory. On the left-hand side, you see the in-house inventory in the second quarter. On the Q-on-Q basis, work in progress products has increased mainly on a Q-on-Q basis. And with the production capacity increase, the input has increased and also because of the seasonality of mobile, we have been working on more products and therefore there's more work in process. And for DOI because of the sales increase, the DOI has gone down. And for third quarter outlook, on a Q-on-Q basis, we're expecting inventory to increase, and we will continue to increase capacity. And because of that, the input will increase and also die bank will be enhanced. And based on that policy, we're planning to increase inventory. And on the right-hand side, you see the channel inventory. In the second quarter, on a Q-on-Q basis, the absolute channel inventory amount has increased, but WOI because sell-through has increased a lot, WOI has declined. And for auto and IoT, we are planning to increase inventory because of the demand, but we have not been able to increase our inventory in the second half -- second quarter. And in the third quarter, we will continue to increase inventory. But on the other hand, for WOI because the sell-through size will go up. So we're expecting WOI to decline. And on a second half basis, auto because of increase in demand, we will continue enhancing our inventory. And for IIoT, it will be the same. In general, we are planning to enhance inventory, but that's mainly around the data center segment, the sell-through demand continues to be strong. So WOI will look like it's going down. On a segment basis, there is some difference in color. Next page, please. Next is related to utilization and CapEx. On the left-hand side, you see the utilization rate. In the second quarter, the actuals were 58% and the input utilization has gone up compared to the forecast. And in the third quarter, we are expecting this to increase slightly. And for CapEx, as you see here, in the third quarter -- sorry, in the second quarter, R&D investment were the main CapEx. Next page, please. And for the third quarter forecast, as you can see on the left-hand side of the -- please refer to the dark blue center of the table, the revenue median, JPY 430 billion. The gross profit margin, 57.5% operating margin, 32.5%. And exchange rate assumption is JPY 159 to the dollar and JPY 184 to the euro. And for each of the items, let me give you the background. For the revenue median, JPY 430 billion year-on-year is up 28.7%, and it's up 6.1% Q-on-Q. As Shibata-san mentioned in the beginning, for automobile and the industrial infrastructure and IoT are expected to grow. And for automobile with China, mainly the new product, we expect to increase the 28 MCU and also Japan, the channel inventory should be building up in Europe -- excuse me, the industrial infrastructure with the data center growth, we expect increase. And also now the gross margin, 57.5%. So that is down 0.6% Q-on-Q. And as for -- with the -- there are some improvements from the increased utilization, but with the margin expected to decline Q-on-Q due to rising manufacturing costs. And as for the manufacturing cost, that is for the energy cost, maintenance cost, an increase from the summertime. And also, as for the OP margin, 32.5% Q-on-Q minus 0.2% slight decrease we expect. Q-on-Q, the OpEx should be increasing slightly. So as I mentioned about the second quarter results, those things that were not able to be used will also be shifted to the third quarter. And so as for the FX sensitivity, you can see here with the JPY 1 fluctuation, there is impact JPY 1 fluctuation of JPY 2 billion to the revenue and JPY 0.9 billion to the OP in the U.S. dollar and JPY 0.2 billion revenue and JPY 0.1 billion OP to the euro. And so for the Q3 forecast, based on the constant currency rate, the USD JPY 100 and the euro, JPY 120, operating profit margin will be 27%. And please look at Page 17, the GAAP overview, financial results of the GAAP. And so in the second quarter, the net profit was JPY 149.2 billion because the financial income from Wolfspeed related financial assets was recorded. And so that is a positive impact. And also, as for the timing, business transfer gain, what is not included in the second half, but it will be in the third quarter, excuse me, not in the second quarter, but it will be included in the third quarter. And this is about the update on the Takasaki site. And next page, please. So the impact of the Kumamoto earthquake on operations. This is the slide that's about the earthquake and that concludes my presentation.

[Interpreted] We would now like to move on to the Q&A session. Shibata-san, please turn our video on. [Operator Instructions] Now at first from Nekki BP, Kojima.

[Interpreted] This is Kojima from Nekki BP. Can you hear me?

[Interpreted] Yes, we can hear you.

[Interpreted] I would like to express my deepest condolences for the impact from the earthquake. And I would like to ask you the impact of the earthquake. This time, the impact on the performance is going to be limited is what you have explained. But the impact of the earthquake itself compared to 10 years ago, is it fair for us to believe that the impact was smaller than 10 years ago? And the second is that I'm sure you're taking different countermeasures. But the restart of the operation seems to be pretty fast. But is there any effective countermeasure you have taken?

[Interpreted] There are many things that are still under confirmation. But as of now, compared to 10 years ago, the impact from the earthquake is smaller. In the first place, the size of the shake in the factory, I talk about the level of the shake at the factory, I believe, was much smaller than the earthquake 10 years ago as a fact. And obviously, we had an experience from the earthquake 10 years ago, and we had been gradually taking countermeasures against the earthquake. And we -- in some cases, we have been placing the equipment on top of the anti-seismic facilities. And in some cases, we had BCP inventory that we used to call a little while ago. And by taking those different countermeasures, the itself was smaller. And with the combination of those countermeasures, we are able to restart the operations earlier than before, and that is our assumption at this point.

[Interpreted] Next, from Daiwa Securities, Mr. Okawa.

[Interpreted] This is Okawa from Daiwa Securities. I have 2 questions. One is that for the third quarter, the gross margin plan I want to ask about -- there are some energy costs you mentioned. And so when it comes to utilization and the revenue should be strong. So maybe I'm thinking that gross margin could be higher with a higher utilization. Like you have been mentioning about the data center complexity and that's limiting the earnings increase, we know. So how do you view the gross margin moving forward?

[Interpreted] Yes. Shinkai-san can answer that.

[Interpreted] As for the third quarter, gross margin Q-on-Q, 0.6% decrease is what I mentioned. And when I break this down, the improvement from the utilization increase is 50 basis points plus and the increased production cost is 100 basis points minus and net-net wise, 0.6 percentage points. So the impact from the FX is not so much. And as for the mix is almost quite flat, plus/minus 0. And as a result, as you can see, the impact of the mix is not really likely. And moving forward, the outlook, when it comes to utilization, like I mentioned, for the third quarter and the fourth quarter, gradually will increase, and we will expect some contributions from those. And as for the manufacturing costs, -- so because there are some crude oil costs that will be linked to it and that -- there's not much certainty about that. And I think after summer, we will be peaking out.

[Interpreted] My second question is about the data center-related business. So this time, for ASIC, you said has significantly increased compared to plan. Is it about the share or the supply? I think last time in the call, you said that might be a bottleneck. And is it that the they turned out to be fine? And in the next -- well, digital power and memory, how do you compare them for the memory data center? Well, for the second quarter and the third quarter as well, for -- as you can see from the major MPU earnings, the MPU has been very strong. And as a result, our memory interface as well has been growing quite strongly and continuously. And when it comes to digital power as well is both strong. And as for digital power and memory interface, the difference could be that the customer base, the spread of the customer base. For power, we have the ASIC customers, the several and GPU customers as well. And we have multiple customers as such. And for each of them, for each of their products and depending on their generation, the share could be changing quite a lot.

[Interpreted] So I think I will be repeating myself from before. As of now, I think we are in a very good position. I'm confident about that. And in order to maintain our good position, we have to do a very strong execution that is very important. So if we can do that, I think we will be able to maintain our high share. And for the second quarter, what was very good is that because I think based on our assumption. I think as of now, we have demand for the customers that we have been supplying quite exclusively have been very strong, and they are coming to us for their business, and that's why things have been very strong. And when it comes to supply, the WOI numbers, you can see in those numbers as well that the -- we are seeing continuous tightness. And everywhere you look, everything seems very tight. And it's not like we had a breakthrough around that, but we have been trying to gradually increase supply. And from here on until to the end of the year and next year, the step function type of increase is something we are working on right now. And if that could happen, I think we will be able to increase revenue based on the supply capability increase. And so as of now, the incremental supply capacity increase is what we are working on and responding to the situation.

[Interpreted] So let me move on to Takaki-san from Sankei Newspaper.

[Interpreted] This is Takaki from Sankei Newspaper. Can you hear me?

[Interpreted] Yes, we can hear you.

[Interpreted] With regards to the earthquake, I'd like to understand how you're going to communicate the information from the CEO, you mentioned that the impact on the performance has been explained and you have changed the timing of the earnings call to confirm the status. But with regards to communicating the information, I'd like to understand how you think of the importance of communicating information. And I believe this is important there were other major plays like the Great East Japan earthquake and also you had experienced the earthquake in Kumamoto 10 years ago. And is there anything you were extra careful in communicating the information? This time, there was nothing particular that ever since I assumed the CEO position, I have been trying to be most transparent about communicating the information. I think there's confusion in the line, I can move onto -- can you mute yourself please.

[Interpreted] So therefore, we try to disclose as much information as possible. And of course, the situation can change. But at this point, for whatever information that we are aware of at this point, we have disclosed as much as we can at this point. That's all.

[Interpreted] One more question is that this time, the impact on the business performance is limited and also the damage was relatively limited too. But for the semi industry, the impact that's giving on the economy in general is increasing. And with regards to the overall recovery of the economy in Kumamoto, what is your intention or what is your idea around promoting the recovery in Kumamoto as a region?

[Interpreted] Well, as soon as possible, we want to bring the utilization back to full utilization. And of course, we need to do some catch-up production as well. And with that, we would like to try and recover the damage and hope to make our contribution as we can. And of course, the economy is important, too, but most important is ensuring the safety of the lives of the people. And we are not an industry that has a strong foundation. I mean compared to the other industries, there's a limit to what we can do. But even with that, we will do whatever we can and try and contribute as much as possible to have the situation recover.

[Interpreted] Next question from Mizuho Securities, Mr. Yamamoto.

[Interpreted] This is Yamamoto from Mizuho Securities. Do you hear me?

[Interpreted] Yes, we can.

[Interpreted] So I have a question about the semiconductor chip price. So the peers have been hiking their price, and we hear news like that. And as for Renesas for the automotive, IoT and micro and analog, maybe by usage or by product or you can tell us what's your view and what's happening with the pricing? Any comments you can give us about the pricing in the current situation?