Renesas Electronics Corp

TSE:6723

Earnings Call Transcript 2022-Q1

[Operator]

Thank you for taking part in Renesas Electronics Corporation 2022 Q1 Earnings Call. Today, we have simultaneous interpreting available. [Operator Instructions]

The attendees today are Representative Director President and CEO, Hidetoshi Shibata; Senior Vice President and CFO, Shuhei Shinkai; Senior Vice President, General Manager of Automotive Solutions Business Unit, Takeshi Kataoka. We also are being attended by other IR members.

Our CEO, Mr. Shibata, will give an opening remark followed by overview of our first quarter results by our CFO, Mr. Shinkai. We then will open the floor for questions. The entire session is expected to last for 60 minutes. The presentation material we will use today can also be found in the IR page of our website.

With that, Mr. Shibata, please turn your mike on. The floor is yours.

[Hidetoshi Shibata, executive]

Ladies and gentlemen, hello, my name is Shibata. This time around for results, we have quite a lot of information to communicate. As much as possible, we would like to ensure that you correctly understand where we are standing. Q1 sales was exceeding -- exceeded our guidance. On the other hand, one of your concerns may be about inventory, whether it be in-house inventory or channel inventory, which have both gone up somewhat. But when you look at the actual details, of course, to a certain extent, volume has been going up, but there are other factors such as currency rates as well as price fluctuations and shipment debit.

Due to the way we do the transactions and the changes we've made, there are some impact from there. So in order to run you through the details, we have prepared a slide. So I hope I can give detailed explanations as much as possible. Another area of your interest may be utilization rates at our factories. And there was an earthquake in March this year, as you may remember, and because of that, we experienced blackouts.

The impact on production. There was an impact on production. And from the second half of March, we have inputted more wafers. Therefore, when it comes to utilization rates, they are extremely high on the surface. However, the losses associated with the earthquakes are not accounted for in the utilization rates. Therefore, it doesn't mean that the high utilization rates are going to directly translate into higher revenue going forward.

And we have also shown you a chart regarding the build of backlog. But this time around, we haven't included it in the presentation, reason being some analysts have been asking us about this before, but for the rest of the year as well as we head towards next year. Like last year, we have been engaging in an upgraded exercise like we've been doing from last year. So for this year's backlog, we would like to go through a refresh.

So the current numbers, if we show it to you, you'll basically see that it has built up. And we might give you expectations that may be in this meeting. That's why we have decided not to include that page in the presentation. With a backlog refresh as well as for next year's order intake, so far, as of the end of July, we would like to conclude this process, and we are working on that right now as we speak.

So if the timing works out well in the next results meeting, we will be able to provide more information. So apologies that we haven't include that slide this time around. And also from this time around, the -- as PPA of Dialog has been concluded, the GAAP numbers include these numbers now.

And for CapEx levels on Analyst Day, Mr. Shinkai, the CFO has explained about this. But when you look at the appendix, CapEx continues to be at high levels. Compared to sales, it's close to 10% of total sales. That's how high CapEx continues to be. So this is also noteworthy.

Finally, shares buyback have been announced, which is a considerable size, which we have announced for the first time.

So this concludes my opening comments. And the CFO, Mr. Shinkai will give you the details now. Over to you.

[Shuhei Shinkai, executive]

Thank you. This is Shinkai, CFO. So allow me to go over you -- go over with you the first quarter 2022 result using my presentation materials. So let us jump to Slide #3. So first of all is the disclaimer. And you did hear from Mr. Shibata, we are now going to be reflecting PPA of Dialog. And so that's exactly what you heard from Mr. Shibata.

So here, now we look at the first quarter results, and please look at the dark blue column. So revenue, that's JPY 346.7 billion, with a gross margin of 58.4%. Operating profit is JPY 135.5 billion with a margin of 39.1%. Profit attributable to owners of parent that’s 90.1% with EBITDA, JPY 155.2 billion. As for currency, you can see the rate here versus dollar, that JPY 115 and versus euro, that's JPY 130. Now if you look at the far right, you'd be able to see the change from the forecast. And this is something that I'd like to go over with you in the following page. So please bring us -- take us to Page 5 now.

So here, we look at the quarterly revenue trends. So in Q1, you can see the bar on the far right. So overall, that's year-on-year, 70.2% growth and Q-on-Q, that's 10.3% growth for the total revenue. Now excluding Dialog, it's 47.7% and for -- and on Q-on-Q that's 14.5%. For Automotive and Industrial, Infrastructure, IoT, you can see the details on the slide. But you can see that with the Dialog for Automotive year-on-year, that's 47.9% and Q-on-Q, that's 17.0%. And likewise, for IoT, year-on-year, that's 50.2% increase Q-on-Q, that's 12.5%.

Please move on to the next slide, Page 6. So here, we look at the revenue and growth in operating margin for Q1. First, the total figure is something I would like to highlight. So -- versus forecast, you can see that the details on the far right box. So first of all, as for the revenue, it has an increase by 3.2% versus forecast. That's JPY 10.7 billion. And of course, there is a currency impact, which is 40% of the total of the difference. But then otherwise, be it Automotive, Industrial, Infrastructure, IoT. For Automotive that’s a 20% and for industry, that's about 40% improvement. Now what are the reasons behind the improvement? So we have been able to see a shorter lead time for what we produce internally, and then also we have been able to do better in terms of the outsourcing as well.

Next, for the gross margin, we have been able to do better by 2.8 percentage points versus forecast. And out of that, the better product mix has been able to contribute 70% of this improvement. In other words, most comes from better product mix. As for the production recovery, it was a slight increase versus forecast, but then because there was a stoppage of production in -- because of the earthquake in the result, it was very flattish. Operating profit that’s declined by 37.4%, JPY 3.7 billion. And so -- that is why we have ended with an increase by 4.6 percentage points.

Now we -- I would also like to highlight the Q-on-Q transition. Again, for the revenue, that's JPY 37.2 billion increase. And out of that, 20% comes from currency. And otherwise, Automotive would have like 60%, industry would have like 20% contribution each. As for the gross margin that's a 4.2 percentage points or so improvement, but most of that comes again from the product mix.

As for the operating expense because of seasonal reasons, Q1, you can see the trend has gone down. And so that is why we have been able to see an improvement of 7.7 percentage points on Q-on-Q. Now for segment, you can see this more in the middle. But at this time, there is no highlights. And so I would like to just go further to Slide 7.

Here, we look at the inventory. First of all, starting with the in-house inventory. And of course, there's also the channel, sales channel inventory, but I'd like to talk about some of the trends as well as what kind of forecast we have.

So first of all, let us look at the overall inventory. So if you look at the far right, the company total, you can see the DOI figure. Q-on-Q, it has increased. And if you look at this per business unit, you can see the Automotive has gone a bit down, but it is increasing on Industrial, Infrastructure, IoT.

Moving on to Slide 8. Here, we look at the inventory for sales channel. And so again, from this time, we have included Dialog. And so for 2021, Q3 and onwards, you can see the figures including Dialog now. Like -- so again, total Q-on-Q has been increasing. And if you look at the Automotive or Industrial, Infrastructure, IoT, they're both increasing Q-on-Q basis.

Moving on to Slide 9. So when we try to look at the reasons of this change of in-house inventory and sales channel inventory, the summary is here. And we also do have some of our outlook from Q2 and onwards. So first of all, starting with the in-house inventory on the left. What is really common is around the inventory valuation. In other words, increase in costs as well as the ForEx impact currently, the yen is weaker. And so that is really accounting for half of the Q-on-Q change.

And so this inventory valuation is something that we expect to continue to happen from Q2 and onwards as well. As for the materials, the supply, especially some of the materials that is really short in supply, there is a lot of advanced order. And that is really accounting for 10% of this Q-on-Q transition, and this is something that we also expect to happen on Q2, especially because we are -- there is going to be this more advanced type of order making for some of the more supply tight type of materials.

Now also when it comes to the demand, it is basically something that we try to outsource. And also for the front, for the -- some of the chip nowadays, CVJ, substrate or testers that always becomes a bottleneck, which is something that is always becoming an issue. But then the impact from the earthquake, some of the work in progress as described. And so that amount of Q-on-Q change is accounted for 20%.

But then from Q2 and onwards, we still do have to make sure we'd be able to keep up with the increase demand at the same time. Especially for some of the production risks, we do expect that it is still going to continue. And especially for the post processing part.

And also for the finished products, there has been some impact from the Shanghai lockdown. And so that is why we have seen an increase in the finished goods, which is accounted for 20% of this increase in the finished goods. Now logistics risk is something that we expect to still linger in Q2. And so again, the finished goods, we expect that the level pretty much would be the same, will be kept the same from Q1 and into Q2 and onwards. But then also there's also some of the trends behind the sales channel inventory.

First, with the Industrial, Infrastructure, IoT. Now ever since Q4 to Q1, some of the increase Q-on-Q on an absolute value base and WOI, we are seeing some reasons behind that, which is -- which can be summarized into 3 bullet points. First is really about trying to keep with the increased demand. In other words, trying to make some advanced spending on shipment. And especially in Q4, there were some high demand seen in some of the key items, which we have -- are now seeing a decline now.

And this transition is accounted for 70% of the Q-on-Q change. But then also at the same time, we're also seeing some impact of adoption of shipment debit, which is also increasing value-wise of the inventory, which is accounted for 30% of the change. From Q2 and onwards, we still do expect that we will have to keep up with the continuous increase in demand. Within the channel, we have to make sure that we always be able to offer the optimal product mix. And so WOI, we expect there is continued decline.

As for the automotive space, again, there has been some advanced shipments due to increased demand and also decreased production of OEMs is also another factor that we are finding. And in Q-on-Q, we have been seeing an increase. For Q2 and onwards, we still expect that there is still going to be some continuous increase in demand. And just like in Industrial, Infrastructure, IoT, we always have to make sure that we'd be able to keep a good inventory product mix.

Moving on to Slide 10. So next is utilization rates. On a wafer input basis, we show the trends here. As Mr. Shibata explained at the beginning, on a wafer input basis, we show the trend. So this is not on an output basis. And also for Q1 numbers, for Yamaguchi and 6-inch lines, it has been taken out of the denominator and that is why it is higher. So on a wafer input basis, it was more than 85% utilization. For Q1, the number of operating days was less. So 8-inch Q-on-Q decline was seen. And for 12-inch lines, like mentioned earlier, we were inputting more for recovery purposes.

Next, please turn to Page 11, where we talked about EBITDA and cash flow. It was JPY 155.2 billion in Q1, and operating cash flow was JPY 89.6 billion. Free cash flow was JPY 64.4 billion for the first quarter. For operating cash flow in Q1 and Q-on-Q decline is due to seasonality. And also, the cash out for CapEx was JPY 25.2 billion in Q1 for this fiscal year we believe that the trends are going to be about the same throughout the year.

Please turn to page 12. Here is the Q2 forecast. If you look at the navy part in the middle, for revenue, the midpoint forecast is JPY 375 billion on a Q-on-Q basis. If you look 2 columns to the right, we're expecting plus 8.2%. For gross margin, we are expecting 57.5%, which will be minus 0.9 points on a Q-on-Q basis. For operating margins, our forecast is 36.5% or minus 2.6 points on a Q-on-Q basis.

For currency rates, we are expecting JPY 124 against the dollar and JPY 134 against the euro. Let me also simply briefly talk about the details for revenue. FX impact is accounted for quite considerably. If you exclude that, close to 2% Q-on-Q revenue growth is expected, for gross margins. For production, number of operating days as well as earthquake recovery is expected to be positive. But due to mix deterioration as well as raw material prices going up, we're expecting a net, net negative impact. For operating margins, for operating expenses due to seasonality, Q1 was low, but we're expecting a bounce back and higher OpEx. Therefore, we're expecting margins to decline.

Please turn to page 13. So on March 16, the earthquake occurred and here, we summarize the impact. In Q1 and 2, you could see the details of the impact on the slide in the chart.

So let's move on to page 14. So this is about share buybacks. First of all, for the summary, equipped about 8.65% of total number of issued shares or 168 million shares of common stock will be bought back. And we have also entered into the tender agreement with INCJ for the equivalent amount. We will be buying at JPY 1,190 a share, which is a 12.44% discount to the closing price of yesterday, April 26.

The maximum total acquisition price will be JPY 200 billion in total. So we will be able to improve the free float ratio as you can see on the right-hand side and also resolve the overhang concern. And non-GAAP EPS accretion is going to be 9.5% of the leverage ratio compared to end of March. We will see a deterioration of 0.4x.

So moving on to the appendix, I would like to pick up some slides. First of all, let me talk about Page 18, which is about the balance sheet. PPA impact related to Dialog has been retrospectively accounted for from this time around.

Next is Page 20. For PPA impact, we show the analysis here. So compared to the past 2 acquisitions, for Dialog's business and the product life cycle is relatively shorter. So the allocation to intangible assets is smaller and the amortization period is shorter. For the bridge, if you look at the right-hand side, due to the conclusion of the PPA in Q1, it was JPY 27.5 billion, which will be the run rate going forward.

Please turn to Page 22 next. Here's a CapEx trend. On a decided basis, about JPY 35 billion more or less will be the CapEx. The majority of it will be for production increases. But we will also be investing into offices as well as future investments will be made as well.

That concludes my presentation. Thank you very much for your kind attention.

[Operator]

So now we'd like to open the floor for questions. We are going to have Mr. Shibata and then Mr. Kataoka also join in. [Operator Instructions] From Daiwa Securities, Mr. Sugiura, please unmute yourself and you can ask your question.

[Toru Sugiura, analyst]

My first question is about your forecast for your revenue. In Q2, you're expecting some of the negative factors, for example, some of the products that have been disposed, it's not going to be shipped because of the earthquake. And also, there was a TI comment. But then in China, there was the Shanghai lockdown. And so there is some expectation that there will -- you will have to suffer some impact. But then at the same time, at your place, on Q2 on a Q-on-Q basis, you expect that there is going to be a 10% increase in your revenue, internally.

And so now, how do you mean to offset some of the negative factors that I've mentioned. And if you'd be able to illustrate that from a per application, that would be helpful. Now we know that we are finding a lot of dampening economic sentiment. And so that could cause, for example, some demand trend. If you feel anything as such, can you also share that with us? And also, what do you expect to happen in the second half? So that's my first question in regards to the revenue trend.

[Hidetoshi Shibata, executive]

Yes. So the announcement coming from TI, yes, I understand that what is happening in China is the fact that it is difficult to foresee. But then I think there was someone who commented this in their report. Now compared to TI, I believe that we only have to suffer smaller impact from China due to our portfolio. So we don't expect such a large impact as TI would be expecting.

Now of course, places like airports, we know there's a lot of congestions behind logistics. And at the same time, it's okay, but when we look at our own plants, especially post processing side, what could be the future impact. That is something that we have to say that it's a fact that we really don't know how to foresee this clearly. And of course, we have less visibility in terms of demand in that sense. So I don't mean to deny risks. I don't mean to deny any chance of going behind our forecast. But I do believe the risk is still within the level that we'd be able to absorb elsewhere if something goes negatively against our expectation.

Now of course, there was an earthquake in March, and there was the blackout after that. We lost power, but that impact has all been included in the guidance that we're showing you today. Now of course, there was a certain impact from the earthquake. However, we do find capacity to make some internal recovery. And at the same time, our production partner that we've been working with since last year, they have been able to really take a deep step support. And even amongst our customers, there has been a lot of support. And so we -- through this trilogy or trinity, if you will, the impact from scraps, I think we have been able to control this pretty well.

Of course, it's not that we've been able to nullify all the impact. But still, I think we have been able to manage the impact to a good extent. So with all that, I think I can say that, yes, this guidance has already factored in all the risk factors that we foresee. Now of course, you said per application, which is not easy but especially for smartphone, especially in China, it's weak. And Chromebook has become weaker since last year.

But laptop, PCs, anything from the consumer space, honestly speaking, I am a bit doubtful. Now the numbers that we can see within our system and what information we hear from the customers, if we try to put the data points, we still are finding good trend, strong trends so far. However, I still do feel we have to be careful. I do have some doubts. Especially in these areas, there's always a mismatch of products. And it's something that we've been seeing since latter half of last year. And in Q1, there still have been some impact of that. And that is why we have been seeing an increase in channel inventory, sales channel inventory.

Now we are going to be optimizing that from Q2. So that means we will be sort of controlling the top line to some extent for that. But we are trying to just make sure we'd be able to reduce, control all the sales channel inventory. So excluding FX, it's going to be a growth of -- a moderate growth of close to 2%.

So, what we expect in the annual term hasn't really changed from what I mentioned in our previous session. But at the moment, what we are seeing at the moment seems to suggest a very good healthy trend. But again, as you all know, a lot of them just surprising change can always happen. And so I think I would like to make my comment -- stop my comments to that point.

[Toru Sugiura, analyst]

My second point is about the gross margin outlook that you would have. So within the second quarter guidance, you talked about the impacts of product mix, some of the impacts coming from materials cost. And so sequentially, you're expecting the gross margin to go down. On the other hand, when it comes to revenue, it is growing at this level. So I was feeling a bit confused. I felt like you perhaps are having quite a conservative view. But again, what kind of product mix do you expect to see? How much does that -- is that going to impact? And what is going to be the material cost change.

And for example, this product mix, is this going to be a tentative trend? In other words, from Q3, there's going to be a rebound. So if you'd be able to share a little more on that.

[Hidetoshi Shibata, executive]

I think Mr. Shinkai can answer your second question.

[Shuhei Shinkai, executive]

Yes. So let me try. Now first of all, in terms of the worsening product mix, what's behind that? Now compared to Q1 which is -- we're basically talking about in Automotive, where the shipment is going out, which is going to be relatively speaking, going to lower the mix. And depending on which quarter, of course, it is going to be a bit volatile, there will be some fluctuation.

Now when it comes to the raw material cost from Q2 and onwards, I do believe we are going to be seeing more effect from Q2. And it's probably going to stay at a relatively higher range or high cost. And at the same time, you mentioned about the revenue. And yes, I understand, it does seem to be high. But then it is just going to be like a plus 2% growth, excluding that FX. And so I think we do believe everything is aligned in that sense.

[Toru Sugiura, analyst]

A follow-up question. So on the material costs, when you try to procure the raw material, you're going to be procuring from foundry and the cost is going to start impacting from this quarter? Or are you talking about some of the raw material costs that you're seeing in your internal fabs?

[Shuhei Shinkai, executive]

Both. All. So foundry OSAT and our internal factories, all materials, all the items, components that we need as well as electricity. And related to that, in other words, the fuel cost, the surcharge is all going to kick in from Q2 and more.

[Toru Sugiura, analyst]

And so what is going to be your strategy action for that, if I'd also be able to ask that from you?

[Shuhei Shinkai, executive]

Well, one thing is, first of all, try to work on cost reduction. So that -- and also to make sure we'd be able to work to reduce the raw material cost. But of course, in the short time period, we need to make sure we procure ourselves. So we're not going to expect the raw material costs to start dropping that immediately. But then also at the same time, we want to make sure we'd be able to transfer some to the price.

[Hidetoshi Shibata, executive]

I know gross margin is going to be a bit of a challenge anyway. So it's not that we expect that there's going to be a real healthy growth. So don't expect that because there's going to be the raw material cost. The raw material cost increase, the magnitude of that is really intensive. And perhaps, sometimes there will be some items that the price is just going to go up by 10x, so we're not going to be optimistic here. Thank you.

[Operator]

The next question is from Citigroup Securities, Mr. Fujiwara.

[藤原 毅郎, analyst]

I have 2 questions too. The first one is for in-house inventory and sales channel inventory, you gave us the details. But for the customer inventory, that's beyond sales channel inventory, how do you view it? Especially for Automotive, Y-o-Y revenue has gone up by 70%. But when you look at channel, we have been seeing a slight increase. So as Automotive is not fully recovered, you may think that customer inventories are building up, do you view it that way? And what do you think about the continuity of the current trends?

[Hidetoshi Shibata, executive]

So Mr. Kataoka will take your question as he is here us.

[Kataoka Takeshi, executive]

This is Kataoka speaking. As you rightly pointed out, OEMs originally, we're planning an increase in production. However, they are not able to secure sufficient materials and also there is an impact in China as well. And the impact for us is not that large, but we have the war happening in Ukraine as well. So for OEMs, against their existing plan, they are reducing production. So this is an impact that is coming through. But from our point of view, when you look at Tier 1 customers and their inventory levels, it has been increasing as a fact. However, it is not a dangerous level yet. That's how we view it.

And ballpark figure-wise, 1 or 2 months' worth is what we're assuming. For Tier 1, that is. But of course, it differs by product as well as by customer. But we are in the process of optimizing. So with the customers, we are closely communicating for products where inventory is building up, we will not allocate it to that specific customer. We will give it to customers that are asking for that product. So we are taking those types of actions.

And also, for -- we are not only optimizing just for Automotive, but on a Renesas wide basis, where for 47 nano, we have for automotive and for 16-bit microcomputers we have it for Automotive. But if we think that it's growing for Automotive, we will allocate it for note -- laptops, and we are trying to optimize overall by taking these types of actions. That's all from me.

[Hidetoshi Shibata, executive]

For key customers and our product inventory levels, actually, we have a good idea of the details because we share the information with our customers. So as Mr. Kataoka explained, although it was a little bit vague, for which products and how many are at the customer side and what kind of way it's being used. We are aware of how it's being used and how high the inventory levels are as we trace the inventory levels.

So overall, although there is buildups in partial areas, we don't think it's fishy overall. We do believe we are still in a firm situation.

[藤原 毅郎, analyst]

So my second question is the following. You announced a share buyback worth JPY 200 billion, which is quite considerable. So regarding your way of thinking for share buybacks, there -- regarding shareholder return, is it going to stop here? Or are you going to consider additional opportunities, whether it be for share buybacks or for increased dividends?

[Hidetoshi Shibata, executive]

Well, I can't really speak to the future, but at this point in time, for this year, I think this is enough when it comes to share buybacks. That's all for me.

[Operator]

Next from BofA Securities, I'd like to ask Mr. Hirakawa.

[Mikio Hirakawa, analyst]

This is Hirakawa from BofA Securities. My first question is again about inventory. So I know you've been able to give a lot of details behind the inventory, but then I was listening to that. But then non-auto versus IoT. So it is already exceeding your target. And whatever I hear, even at the end of Q2, it seems like that situation is not really going to change. That was my understanding so far. So, I know what your intention is behind this, but when do you think you'll be able to come back to the more optimal target level? And so can you share that with us? That's my first question.

[Hidetoshi Shibata, executive]

So Mr. Shinkai, would you go over the first question.

[Shuhei Shinkai, executive]

Yes. So for the IoT for Q1. Now I did mention that there is the FX impact and also the valuation difference, which is included. And that is what I said, which is in regards to the total company level. But then also, from specific customers, there is just a business. And there's been some, for example, some delays of the timing, and that did impact the DOI.

In other words, at the end of Q1, there has been an increase in inventory, however, when it comes to sales, it's something that, for example, happened back in Q4. So if you look at Q-on-Q, that seems to have declined the revenue. And so if you try to do some division, it does make the figures seem to go down. But then if you try to level it down, you'll be able to find that I expect that we should be able to come to a more normalized level soon. That's my response.

In other words, from Q2 for example, in the Industrial, Infrastructure, IoT, the DOIs are jumping up. But then we can expect it's going to go behind that normal line level. Well, there's, of course, other factors. So it doesn't mean that it would clearly just go down below that range level. There are still some uncertainties before I'd be able to say that. But then this tentative spike, we're not that worried.

[Mikio Hirakawa, analyst]

So this is really going to be the more or less the level that you're finding. There might be some ups and downs throughout this year. Is that correct?

[Shuhei Shinkai, executive]

Well, we're expecting basically it's going to go below the spike that we just observed.

[Mikio Hirakawa, analyst]

And also for the revenue for Q2. For FX, excluding FX, you said that it is going to be increasing by approximately 2%. But on a volume base, and if you try to look at this per product, the product mix, what is going to be contributing to the revenue growth?

[Hidetoshi Shibata, executive]

Mr. Shinkai, please.

[Shuhei Shinkai, executive]

So you talked about the volume as well as the product mix and how that contributes to the revenue. Now I believe basically, the contribution is coming from volume increase. I did mention the breakdown, but the gross margin. I talked about -- when I talked about the gross margin, but mix is going to deteriorate Q-on-Q. In other words, what is going to contribute to the revenue is going to be the volume growth. But in other words, it's not really the price hike, it's the volume.

[Operator]

The next person is from Macquarie, Mr. Taguchi.

[Hiroshi Taguchi, analyst]

This is Taguchi from Macquarie. Regarding the supply chain and upstream in procuring materials and also for downstream regarding your products. First of all, for upstream and material prices increasing for gas procurement, apart from Ukraine, there has been impact from Belgium as well. So do you expect that pricing pressure is going to become stronger?

Secondly, for production volume, are you concerned about any supply constraints that may have a negative impact on production volume in upstream? For downstream in the back-end process, there are some volume constraints due to some bottlenecks. I think you mentioned that earlier. So for logistics and so forth, are there any risks that you are not -- you will not be able to ship as much as you've expected downstream? So that's my question.

[Hidetoshi Shibata, executive]

For logistics and shipment risks. I think that's a constant. It's nothing new. And you, for example, back end process in Malaysia last year due to COVID was affected, and there were some disruptions. So we believe these kind of trends are going to be ongoing. So it's a new normal that we're facing.

For upstream, I think it was in the previous results call or in the Analyst Day call, we think we're going to be okay for the time being. However, compared to the first half of March, the impact from Ukraine has been changing in nature, seems that the situation is going to be prolonged. And based on that assumption, we are conducting a review.

So just to repeat, this impact is not going to be specific to us. So whether it be foundries or on an industry-wide basis, we are having discussions around what kind of measures should be implemented, and we are starting to implement the measures where we can. So although there are uncertainties, we will be fine for the time being.

[Hiroshi Taguchi, analyst]

My follow-up question is for material prices and pricing pressure with the increase, do you think the pressure is going to grow stronger?

[Hidetoshi Shibata, executive]

I do believe though because inflation is still ongoing. And for energy, I believe that supply is going to become tighter. So pricing pressure is probably going to stay strong.

[Hiroshi Taguchi, analyst]

My second question is regarding Automotive. Compared to the first half of last year, it seems that the supply situation is becoming better. But for IGBT as well as power and microcomputers that you supply. When you look at it by product, is there any difference regarding demand and supply? And are you able to respond to all of the inquiries made. Are there any differences?

[Hidetoshi Shibata, executive]

Then Mr. Kataoka will take your question.

[Kataoka Takeshi, executive]

This is Kataoka speaking. For SPV, it is growing, as you know. So demand related to that, especially from China, where XEV is growing, it continues to be strong. Even if we're able to ship other semiconductor manufacturers are not able to supply in some cases. So -- and that leads to a decline in demand as well. So -- but we don't want to speak about other companies. So it happens on a case-by-case basis.

Like I explained before, for the new products like R-Car, and RH850 your products are currently ramping up. Therefore, demand is extremely strong in this space, and we haven't been able to ship sufficiently in that regard. That's where we are right now.

[Operator]

Next, from Goldman Sachs, we will ask Mr. Takayama.

[Daiki Takayama, analyst]

Now I was listening to all the discussions so far and margin management and top line management, I'd like to ask those 2 points. So at the moment, margin management. So far, it seems like Q2 you're going to slip. But after that, of course, you started with a very high point. So what do you think is the optimal direction for you? Now listening to you, I hear a lot of things about, for example, some of the non-auto areas seems like the growth is going to dampen and there's also some discussions about cost increased pressure, including raw materials. Are you able to offset that with product mix or product price hike? Do you think you'd be able to come back to that, for example, Q1 level of gross margin?

So when you looked at Q1, you mentioned that we're not supposed to expect even a step higher level. So that -- I think that you're saying that we should not be surprised if the number starts to slide down. But then the margin level for Q3 and onwards, what is your view? That's what I wanted to hear a little more.

[Hidetoshi Shibata, executive]

Well, on a short-term perspective, especially on quarter-on-quarter -- quarter-by-quarter, there will be some ups and downs, of course. But I myself I don't want to just simply say, we're going to aim for 60%. I don't want to be that simple. But then if it's going to be on a small ups and downs, then if we'd be able to talk about our range, I would feel comfortable, for example, if we're in the range of like 55% to 60%. We will be making future investments. We want to accelerate growth. And so that's what I would like to use, for example, I would like to invest for that.

And so for example, like 58% or 57%, 56%, of course, if it just keeps on sliding down, it would not be good. But then it doesn't mean that just because we are now looking at 57%. We now have to jump back again to 58% or 59%. Do we have to pressure ourselves? I don't feel so.

[Daiki Takayama, analyst]

So what about the top line management? In 2023, I do believe it is quite difficult for you to speak on this. But then looking at the order backlog, if you'd be able to take revenues from that, and you're talking about trying to freshen the backlog. What is the action that you're taking at the moment? And what would be your further action? What kind of assumptions or discussions do you have inside the company? And if you want to generate revenue, what is your top focus at the moment?

I'm sure you'd be able to, for example, take advanced orders so that you'd be able to fix the type of numbers you'd be able to expect. But what kind of actions are you taking so that you'd be able to secure good revenue next year?

[Hidetoshi Shibata, executive]

So I think this is something that we did discuss in the previous discussions that we've had. But there's this concern that perhaps this trend that we're observing right now would turn otherwise. But then if you just try to trace the backlog, it seems like it's always growing steadily in our case. And we always have to ask ourselves, is this genuine? Are we -- is this really linked to the genuine end demand. I always feel a bit uncomfortable when I look at the trend.

So this exercise that we've had from -- been doing from last year, would this suffice as we try to look into next year. We have to think about that. But then at the same time, we have to look at this high order, but we also do have to discuss, do you need this much. And we actually are starting that type of discussion.

And honestly speaking, maybe the level of order may not have to be that high. If, for example, we'd be able to guarantee what we offer. So that's the type of discussions that we might be able to have in the end. So by doing that, we do believe we'd be able to sort of level off. So -- and that's how we expect for the backlog level to start to decline and to also have a more new fresh backlog for the next year. And that's what we're trying to do in starting this round of talks with our customers.

So we have to look at the order -- if we look at the non-cancelable, nonreturnable type of order, we have to discuss with the customers. Is this really the amount that you really need? And we are starting that type of dialogue. And depending on the application or sector, the level of visibility is pretty different. However, if it's an area where you can have good visibility. Well, of course, backlog, it's not always linked to everything, but then this cloud data center or if it's for Automotive we can't expect some strong momentum. And that's the feeling that we get.

And of course, that doesn't exactly link to what numbers we'd be able to expect. So we want to take the next 3 months or so, so that we'd be able to have better visibility on what numbers we'll be able to expect.

[Daiki Takayama, analyst]

If to add -- so in the negotiations that you're having, I'm sure you'd be talking about the supply -- the tight supply. And in other words, some discussions -- there are a lot of discussions I'm sure you've had. For example, it's going to be tied to throughout the year or perhaps things might be better from the latter half of this year. What is the negotiation discussion that you have?

[Hidetoshi Shibata, executive]

Well, the discussion really hasn't changed. And from the latter half of this year, there might be some level of normalization. That's my personal feeling. However, will we see strong end demand? Then from that particular sector, some people are wondering that they may not be able to procure enough parts. So we do need to separate what kind of discussions we're having. We're not saying that all -- we're not talking about all parts because that's too early to come to a conclusion. But then when it comes to the products that we're providing, if we're finding that our clients are not able to suffice other parts, we have to discuss how much we'd be able to provide. But we do believe we'd be able to strike the right balance of what we'd be able to offer on our front.

And for example, in the past, and it's something that still is going. But every day, I mean there was the day when we were just looking around, everyone was just really surprised and just shouting about what kind of supplies they'd be able to secure. But I think that situation is pretty becoming better now.

[Operator]

So next from UBS Securities, Mr. Yasui.

[Kenji Yasui, analyst]

This is Yasui from UBS. The first question is regarding Page 8 in the presentation, where you talk about sales channel inventory. The intention of my question is, when you think about the current shipment levels, how much of that is customer or sales channel inventory increases? What is your estimate? How much of it is contributing to sales channel increases? For example, for Industrial, Infrastructure, and IoT, it was up by -- it was 2 weeks higher. So you could say that about 15% is contributing to sales channel inventory increases. So can you give us your sense on that?

My second question is regarding share buybacks. This time around, it's from April 20 until the end of May. Is it -- why do you have a period when it's just with INCJ because it's not a share buyback from the market? And then when you think about your next share buyback, is it also going to be from INCJ? If you have any thoughts around that, please share that with us.

[Hidetoshi Shibata, executive]

So I will take the first question and if there's any comments that people would like to make on our side, Shinkai-san will take that question. And the second question will be responded to by Mr. Shinkai.

So just to repeat, once again, this is not on a unit basis. This is on a value amount basis that you see on this slide. So the base price has been changing, and that has had a large impact. So you need to understand that and take that into account when you look at the numbers. When you look at it on a volume or unit basis, we can only estimate because we don't have the exact number, but I don't think it's 15%. I think it's only about 2% for nonautomotive. That's the amount of revenue that was for buildup of inventory.

I do believe for Automotive, it is leading to end demand. So we're not that concerned. But for Industrial Infrastructure IoT, I talked about earlier mobile, PC computing areas, in particular, our revenue that led to just the buildup of inventory, like I was explaining earlier. Mr. Shinkai do you have anything to add?

[Shuhei Shinkai, executive]

Well, it's not something to add, but this page shows sales channel inventory, but our total revenue, we have revenue that we sell direct and revenue that we sell through channels. And for channel sales, it's about 60% of that. So this is only about 60% of revenue. That's something you need to keep in mind when you look at this number -- these numbers.

So next is about share buybacks. Yes. For share buybacks, it's going to be the TOP methodology. And for the tender offer period, it is the shortest period from a statutory basis. We have concluded a tender agreement. So based off that, we will be tendering the shares and because of the TOP, it is public basically until May 31. That's all for me.

[Kenji Yasui, analyst]

How about the next round of share buybacks? That was my other question. Is it going to be from INCJ?

[Hidetoshi Shibata, executive]

I thought I didn't have to answer that question. And I thought we were done with this question. I really don't know. We haven't thought about that yet. So it's a matter of doing this, this time around first. We'll look at the results. We'll look at the reaction from the market to think about next steps. That's our thought process right now.

[Operator]

I know there are a lot of other hands being raised, but it is now time to close. So we'd like to end the Q&A session. So with that, Mr. Shibata, would you like to make a closing remark, please?

[Hidetoshi Shibata, executive]

Yes. So I think we have discussed all our points already. But again, there is a lot of supply chain confusion, which is happening still on a daily basis. So we want to make sure we'd be able to cope with that, and that was exactly something that we had in mind in giving our results for Q1 and also giving our guidance. Now also in terms of the fundamentals, this is not just about supply chain, but there's also impacts from the inflation.

So what kind of impact would there be to the end demand? And how can we supplement if necessary? And what kind of action would we be able to take? It's going to be our focus from here. Especially when it comes to shipment, controlling the inventory, this is something that we have to think of. So internally, we're trying to control this on a unit volume base, not value based. And if there's anything funny going on, especially -- well, for example, for a second quarter, like I mentioned, it is going to be around PC. We're going to be controlling. We're going to be coordinating some of the inventory.

And also, perhaps at the point of first half results or perhaps later, we do want to address some of the data that, at the moment, we find a lot of noise. We want to make sure that we'd be able to have more clearer data we'd be able to show you by that time.

But thank you very much for joining our session in spite of your busy schedule. I hope for your further support. Thank you.

[Operator]

Yes. Thank you very much. And so with that, we'd like to end our FY '22 Q1 earnings results call. Thank you very much for your attendance.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]