Renesas Electronics Corp

TSE:6723

Earnings Call Analysis

Moderate Growth Anticipated from DDR5 and AI

In the third quarter earnings call, executives discussed expectations for moderate growth fueled by DDR5 infrastructure and AI applications. While DDR4 sales adjustment might not cause significant year-over-year growth, DDR5 is anticipated to be a driving factor. The company plans a cautious rollout of power stage for AI, with growth not expected to be explosive but supportive, possibly becoming substantial if the customer base expands.

Operating Results and Cash Flow

The company reported a solid operating cash flow of JPY 111.1 billion for the third quarter, coupled with a healthy free cash flow of JPY 89.4 billion. It's important to note that these numbers were affected by the payment of corporate tax during the quarter, which was not a factor the previous quarter.

Upcoming Quarter's Forecast

The forecast for the fourth quarter is set at JPY 358 billion in revenue, reflecting a decline of 8.5% year-over-year and 5.6% quarter-over-quarter. Adjusting for foreign exchange impact, the decline is slightly steeper at 8.2% year-over-year and 6.8% quarter-over-quarter. This projected downturn is attributed to a deteriorating product mix, reductions in utilization rates due to production adjustments, and rising production costs. Gross margin is anticipated to be 56.0%, with the operating margin expected at 30.5%, down from the previous quarter by 1.9 percentage points and 4.4% respectively, as a result of increased operating expenses, particularly in research and development and general and administrative expenses.

Annual Forecast and Capital Expenditure

Looking at the full-year figures, the revenue forecast stands at JPY 1,465.8 billion with a gross margin of 56.9% and operating margin at 33.8%. The company also plans significant capital expenditures focused on R&D and IT, expected to reach high single-digit levels as a percentage of sales, which could lead to future growth, albeit with an impact on short-term cash flow.

Capacity Utilization and Inventory

The company's utilization rates will likely see a slight decline due to a completion of restocking 8-inch die banks, while a slight increase is expected in the utilization of 12-inch lines. Overall, the coming quarters could witness a modest dip in utilization; however, by the second half of 2024, there's an anticipation of increased production, propelled by expected demand. Such an uptick aligns with industry cycles and the company's operational adjustments.

Demand Outlook and Supply Chain Strategy

In response to an uncertain business environment where clients across various sectors are keeping inventories tight, the company is positioning itself to swiftly meet any upturn in demand. This is done by enhancing channel inventory in anticipation of short lead-time orders. The strategy reflects a cautious optimism as executives expect a positive shift in the overall macroeconomic outlook, particularly from the second quarter of the next year, which may lead to an increase in orders.

Product Challenges and Market Conditions

The company is preparing for a challenging Q4, predominantly within its power product segment, such as IGBTs, due to capacity constraints limiting expansion of sales. This temperance in expectations is set against a backdrop of market fluctuations such as labor strikes in the US automotive sector which, although not currently impactful, are being taken into account for the future demand pipeline. The company is exercising a conservative outlook, acknowledging short-term decreases in certain segments while positioning for potential future growth opportunities.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, everyone. Thank you very much for taking time out of your busy schedule to join us today for Q3 2023 Financial Results Briefing of Renesas Electronics Corporation. Simultaneous interpretation channel is available. [Operator Instructions]In attendance for today's briefing are: Mr. Hidetoshi Shibata, President and CEO; and Mr. Shuhei Shinkai, Senior Vice President and CFO, and other staff members. After the initial remarks by Mr. Shibata, Mr. Shinkai will give an overview of Q3 earnings results, followed by a question-and-answer session. The entire briefing is scheduled to last for approximately 60 minutes. The materials used in today's presentation are the same as those posted on the IR page of our website.Mr. Shibata, please unmute, and please start.

[Hidetoshi Shibata, executive]

Good afternoon, everyone. This is Shibata. As for the earnings results from Q3 2023, it is, as you have seen, it was slightly better-than-expected. There are no surprises. On the other hand, as for our outlook for Q4, in comparison to the beginning of the year, it seems that the environment has somewhat changed, as I believe you have noticed. Automotive is more or less stable. Industrial for FA overall, it is stable, but there are some differences in -- or situation is a mixed picture depending on the region. And for PC and mobile, after bottoming in the second quarter, the overall trend is that of a recovery. However, it is a very slow recovery. And in Q4, we expect some seasonal decline.Consumer overall, regarding mass market overall, slightly later than other segments, it seems that inventory is being digested. So we expect a decline in Q4. So we -- overall, we expect a slight slowdown in Q4. That is our guidance.As for channel inventory, gradually, we plan to increase channel inventory. Order lead time has been reduced, and it has been some time after we executed this, but there are sustained uncertainties and there are short-term orders that have become more prominent. In order to capture those opportunities, in comparison to before, we are slightly increasing inventory, bringing it closer to the original target for inventory level. That is how things stand. And up to Q3, the performance was reasonably well, and we expect a slight decline in Q4, and we would like to continue to manage and operate things cautiously.The details of the earnings results from Q3 will be given from Mr. Shinkai. Over to you, Mr. Shinkai.

[Shuhei Shinkai, executive]

Thank you. This is Shinkai, CFO. I would like to present the results of Q3 2023 based on the presentation materials posted on the IR website.Page 3, this is the disclaimer. There is nothing new on this page. However, in the past earnings announcement, we announced about the system integration. We plan to implement this in the first half of next year. And therefore, in the Q1 and Q2, there may be some impact on sales and inventory. Q3, Q4 -- up to Q3, Q4 this year, there is no impact from the system integration. Once we have a better visibility, we would like to update you.Page 4, please. Results from Q3 is shown in middle dark blue column. Revenue is JPY 379.4 billion. Gross margin was 57.9%. Operating profit was JPY 132.3 billion. Operating margin was 34.9%. Net profit, JPY 108.3 billion. Excluding foreign exchange impact, net profit was JPY 104.6 billion. EBITDA was JPY 152.6 billion. Exchange rate for the first half of the year is JPY 142 to the dollar, JPY 156 to the euro.Change from forecast is shown in the fourth column to the right. I will come back to this later. Results from the first 9 months -- correction, change from forecast is the third club to the right and results for the first 9 months are in the dark blue column. Revenue -- quarterly revenue trends Q3 results is the rightmost bar. Revenue overall year-on-year negative 2.1%, Q-on-Q, plus 2.9%. Excluding foreign exchange impact year-on-year, revenue declined 5.1%, Q-on-Q, it was an increase of 0.3%. As for the breakdown between automotive and industrial infrastructure, IoT are as noted on this page.Next slide, please. Q3 revenue, gross margin and operating margin are shown on this page. First, company total. On the right side, this is versus forecast. Operating margin was up 2.4 percentage points versus the forecast. Revenue was about -- the medium forecast by 2.5% and about 2/3 is foreign exchange impact and the remainder is non-foreign exchange impact. And mostly, the increase came from automotive. Next, gross margin higher than forecast by 1.4 percentage points. As for exchange rate, flat. Product mix, there was a slight deterioration. And as for production recovery, because of production adjustment, there was a slight deterioration.On the other hand, production costs, this includes lower production costs due to lower utilization and a decline in cost of starting Kofu than original expectation and decrease in inventory write-down and these reductions were larger than what we expected, and these were positive factors for production cost. As a result, 1.4% upside. Operating expenses declined slightly. And as I mentioned earlier, operating margin was up by 2.4%. Below that, Q-on-Q, operating margin is more or less flat. As for gross margin, exchange rate impact was flat. Product mix deteriorated slightly, automotive increased and IIoT also increased. As for production recovery, due to production adjustments, utilization was lower. So there was a slight decline. On the other hand, production cost improved. So overall, the results were flat. As for operating expenses, mainly R&D increased. And that was, therefore, offsetting factor for operating margin.By segment, please refer to the left side of the slide. For Q3, what is noteworthy is that, in automotive, operating margin was 0.9% Q-on-Q. Automotive, mainly from the second half of the year, we will be -- we are increasing R&D. Because of that, operating margin Q-on-Q is declining.Next page, please. So this is about inventory. So this will be all in-house inventory. Overall, DOI has declined Q-on-Q and it's 100 days. By segment, mainly has declined in automotive and industrial infrastructure and basically flat. And actual amount is basically flat quarter-over-quarter.Next slide, please. So this is sales channel inventory. In all of the segments, basically, in terms of the WOI has increased Q-on-Q. The auto slight increase. Industrial and infrastructure increased. In both segments, it was a little over 9 weeks. And overall, the inventory level is 9 weeks plus. In terms of industrial infrastructure, the inventory in yen terms has increased quarter-over-quarter. That is that sell-through decreased more than expected industrial and infrastructure segment to -- in terms of mass market sales.Next slide, please. So this is the inventory analysis of in-house and sales channel inventory. On the left, for in-house inventory, in terms of raw material, [ CASE ] has gone up -- raw material has gone up. And due to the increase of -- the decline of the wafer due to the production adjustment has gone up. The fourth quarter, it's going to go up as well. In terms of the work in process, in terms of the expansion of the die banks, for the 40-nano MCU including that at the end of third quarter, basically, we have ended what is necessary. Going forward, the mix of the die bank should be optimized. That is, we should consume the weaker demand die banks and if necessary, we have to increase that. By doing so, we want to improve the mix. In the fourth quarter, with the weaker demand products, the die bank should be consumed, at the same time, production adjustment is going to be conducted. So the work in progress is going to decline. On the other hand, with the 40-nano MCU die bank, we want to gradually increase that. But I think it'll take until maybe going into next fiscal year.In terms of the finished products, in the fourth quarter, we have been shipping depending on the demand and it has lower-than-expected. In the fourth quarter, advanced production, basically, this is preparing for the less operating days for back-end production in Q1, and we are forecasting a one-off increase.In terms of the sales channel inventory, the fourth quarter, automotive, industrial, infrastructure, so the -- has increased. In the fourth quarter, we -- the intention is to slightly increase the inventory. In terms of the yen terms inventory, so basically flat for -- also slightly down for industrial, infrastructure and IoT, automotive, basically flat.Next slide, please. So this is the front-end utilization rate on wafer input basis. The third quarter because it's less than 60%, it has been a little low due to production adjustment. For the fourth quarter, we are anticipating a slight decline from this level. In terms of the input utilization rate, we think that the rate will bottom in Q4.Next slide, please. This is gross profit and operating profit quarterly trends. Please refer it at your leisure.Next slide, please. This is EBITDA and free cash flow. On the right-hand side, in terms of the cash flow chart, in this, we have excluded the impact of deposits provider to Wolfspeed. Third quarter operating cash flow was JPY 111.1 billion. Free cash flow was JPY 89.4 billion. In terms of the difference between the second quarter is that, the payment of the corporate tax occurred in the third quarter.Next slide, please. So this will be the fourth quarter and full year forecast. In terms of the fourth quarter, this is in the middle dark blue column. In terms of revenue, the medium value of JPY 358 billion. Year-over-year, it's minus 8.5%, quarter-over-quarter, it's minus 5.6%. If we exclude foreign exchange impact, going below the line, it's minus 8.2% year-over-year and minus 6.8% quarter-over-quarter.In terms of gross margin, it's 56.0%. Operating profit -- operating margin, 30.5%. In terms of the gross margin, quarter-over-quarter, it's minus 1.9 percentage points. The major reason behind this is that, the worsening -- slight worsening of the product mix, the utilization declined -- rate declined through the production adjustment and the increase of the production costs. So in terms of the operating margin, it's minus 4.4% Q-on-Q. Through the concentration of OpEx that they determined. In terms of R&D, SG&A, it's going to increase in the fourth quarter.For the full year forecast, please refer to the 3 lines beyond that. In terms of the revenue, JPY 1,465.8 billion. Gross margin, 56.9%. Operating margin, 33.8%. That is our forecast.And going to the appendix and please go to Page 18. The third quarter GAAP and non-GAAP reconciliation, that is. One follow-up is that, in terms of the non-recurring items of the third line from the bottom, and from the -- this is about the mark-to-market valuation and deposit for the Wolfspeed in the quarter due to the increase of the U.S. interest rate, the bond value has gone down. So there is an unrealized loss. So this is a non-cash loss, unrealized loss. So this is excluded. So based on the direction of the U.S. interest rates, so it is a possibility that this will come up as non-recurring items.And going to Page 21. This is about the situation about the CapEx. So for the third quarter, [ as I see ] Takasaki factory mass production, second phase investment decision has been made. With the third quarter, so -- for the fourth quarter, R&D and IT-related investment, this means the high single-digit level of sales of investment is anticipated.That's all for me. Thank you.

[Operator]

[Operator Instructions] First, from Daiwa Securities, Sugiura-san, please.

[Toru Sugiura, analyst]

I am Sugiura from Daiwa Securities. I have 2 questions. First is about utilization ratio. According to the material, overall utilization is coming down, but 8-inch and 12-inch by different inch size, there are different movements. Could you give us more about the background?Mr. Shinkai said that you expect Q4 to be at the bottom for the moment. And beyond Q1 2024, what is your outlook in terms of utilization ratio?

[Hidetoshi Shibata, executive]

I would like to ask Mr. Shinkai to address the question about utilization ratio in Q3.

[Shuhei Shinkai, executive]

There was inventory adjustment and there was also optimization of die bank inventory mix. And regarding 8-inch, at the end of Q3, die bank was in the shortfall, and we produced for that. And for 12-inch, die bank inventory restocking was finished. And therefore, there was a decline. So that is how the situation is different for different inch lines.And as for Q4 and beyond outlook for utilization, regarding Q4, similarly, we believe similar trends to continue. To be more specific, 8-inch die bank restocking will be more or less completed at the end of Q3. So there will be a slight decline. On the other hand, for 12-inch, mix improvement will progress, and there will be a slight increase. But overall, utilization will be slightly down. That is our expectation. And Q1 and beyond in 2024, next year, in Q2 and in the second half because of the demand expected, utilization or production may be increased. For one thing, 12-inch factory is dealing with 47 nano microcontroller, and there will be contribution from the increase in production of this. As a result, from the latter half of the second half of the year, utilization is expected to increase. And therefore, that will be pushing up overall utilization.

[Toru Sugiura, analyst]

The second question is similar to the first question. So you said that you're going to increase this channel inventory because there's some orders coming. So why are these more short lead time orders coming in? And based on that, next fiscal year, some sales, of course, as long as that's visible to you, what is your outlook? Can you give us a hint about your outlook?

[Hidetoshi Shibata, executive]

So it's not really related to a specific sector. So for the mass market, and we don't -- in the best market, we can't see the actual specific applications in terms of the automotive-related business, it's the same situation. I think in the wide range of sectors, I think a lot of clients think that the outlook is obscured. So they have tight inventory. So if the demand goes up, then it means that they will have to stock the inventory. That's happening at all types of inventory. So we want to catch all that type of demand. So that's the reason why we're doing taking this action.So how long will this continue? It's very difficult to say. Specifically, in terms of the Japanese customers, the March and -- they closed the books in the March end. So the first quarter -- until the first quarter of next fiscal year, I think they will try to focus on the control of the inventory. I think that will be quite prominent until then.On the other hand, so this is based on the macroeconomic situation. Currently, and from the second quarter of next year, I think the view is going to change a bit. Maybe we're going to see a more uptick in the situation. That is our assumption. But that said, let me repeat. So we will be trying to not miss the path that much. We will be very cautious. And gradually, will it be in-house or sales channel inventory, if necessary, we'll control that. For the time being, with the in-house inventory, we'll control that. And for the sales channel, we want to gradually increase that and by doing so we want to respond to the situation.

[Operator]

Next, from Goldman Sachs, Takayama-san, please.

[Daiki Takayama, analyst]

First of all, about October to December sales forecast, could you elaborate on that further with a more granularity, which is stronger, which is weaker and by region as well?And other than automotive, separating into the traditional 3 subcategories, can you discuss which is strong and which is weak? And is this due to actual demand or due to year-end December and inventory adjustments due to seasonal factor inclusive of that, if you could elaborate, please?

[Hidetoshi Shibata, executive]

Yes. The trend that is worth mentioning is by region for automotive in the U.S., the strike. People are on strike, and we are not seeing impact according to the data, but there should be a certain impact. So we have incorporated that. I believe there will be a decline somewhere. I don't know whether that will be Q4 or next year, but we are prepared to see some decline, and that is already included in Q4.As for Europe, in Europe, there are major Tier 1 customers concentrated in Europe, as you are aware of. And you expect them to tightly control inventory in Europe. Regarding automotive, we expect some decline, a significant decline, whereas for Japan and China, we do not anticipate a major increase, but we believe we expect a slight increase. Automotive workers are on strike in the U.S. And what we feel is that, we may be too cautious regarding automotive outlook, but we also do not want to suffer from a downside. So we would like to take a more cautious outlook for Q4 in terms of products.It is similar to the patterns that we see usually. SoC is fluctuating. So quarter-on-quarter basis, we shouldn't focus too much on increase or decrease. But over the short-term, power may decline slightly. That is what we anticipate. Our power products centering around IGBT, we have not fully expanded our sales yet due to our capacity conditions to -- up until the launch ramping up in 2025, we will be supplying to select customers in Europe and the U.S. And depending on the sales and competitiveness of these customers, there may be some fluctuation. In Q4, IGBT, we expect things to be somewhat more difficult. Otherwise, there is nothing worthy to mention regarding automotive in terms of products.Other than automotive, it may be somewhat repetitive to what I've mentioned earlier, but FA flat or slightly better than flat. We expect that slight growth to continue. On the other hand, mass market and home appliances, mainly consumers, double-digit, strong decline, including seasonality is expected. And other than automotive, we expect large growth from cloud-related area. We believe there will be double-digit strong growth. This is similar to what we discussed last time. The growth currently is driven by DDR5. The demand for DDR5. As for DDR4, I believe the customers are still digesting inventory maybe up to next quarter. But on our side, the shipment of DDR4 is quite limited already, and we do not expect much impact for us. And in Q1 next year or from Q2 next year for AI servers, we expect to see a ramp-up of power products. So for cloud data centers, we think growth will further pick up. And for PC, as I mentioned earlier, overall trend is that of a recovery. However, in Q4, because of seasonality, we expect a decline.

[Daiki Takayama, analyst]

My second question is, I think it's a kind of overall big picture question. So you have the -- what you're seeing for Q4? Europe and United States, automotive components inventory or the adjustment or the consumer goods inventory adjustment is going to impact. Going into the next fiscal year, Q1 is going to normalize. So the fourth quarter, is it -- basically fourth quarter, you have the adjustment. In the fourth quarter is going to be adjusted or maybe starting for the fourth quarter, you're going to see a stronger dip?

[Hidetoshi Shibata, executive]

Well, I think it's too early to talk about the first quarter of next fiscal year. But our assumption as of now is that, maybe better to have the same level of anticipation as the fourth quarter, I think that's safer, because in the inventory adjustment, mainly coming from the Japanese clients, I think it's going to impact the first quarter. So the calendar year fourth quarter, in terms of our regional exposure, so in Europe, mainly in Europe or -- excuse me, in terms of consumer electronics and for the mass market, this differ market by market, I think there will be the inventory adjustment because it's the year-end -- the calendar year. And the Japanese clients, they're looking at the end of their fiscal year end of March and they -- I think they moved to adjust their inventory. So maybe that will offset each other Q-on-Q. So the fourth quarter to the first quarter, we can't anticipate a strong increase. So once this is over and going to the second quarter, I think we go back to the run rate. That's the [ message ] we have right now.

[Operator]

Next, from Citigroup Securities, Fujiwara-san, please.

[藤原 毅郎, analyst]

I'm Fujiwara from Citigroup. Can you hear me?

[Hidetoshi Shibata, executive]

Yes, we can.

[藤原 毅郎, analyst]

About inventory adjustment, I also have question. Automotive from around the spring this year, you have been saying that customers are adjusting inventory. And in Europe, it will be mainly in Q4 and other customers in Q1 next year. As for Europe, after inventory adjustment in Q4, will that adjustment be completed? Is that your expectation? And as for Japanese customers, is it going to be only Q1 next year that there will be inventory adjustments and adjustment volume is such that you expect things to normalize in Q2?

[Hidetoshi Shibata, executive]

Well, it is difficult to say anything definitively. The impression we have is something similar to what you have mentioned. As I said before, I also feel that customers are very tightly managing inventory, perhaps excessively sold. And so, they are pressed with securing supply at the same time. This is a transitory, I believe. So there is a need to secure enough supply and also need to tightly control supply, and it may be somewhat excessive in some parts. So to be honest, I don't think current trends will continue.

[藤原 毅郎, analyst]

The next question would be -- in terms of the shareholder return, I would like to hear your thoughts about that. So conventionally, in terms of share buybacks, we have conducted that. So the INCJ is -- I think, basically bought it from the top shareholder INCJ from December onwards -- afterwards. So they have been releasing these shares into the market without you buying back from them. So I think basically, they asked you before they took this action. So what is the reason why they are not -- you are not buying back from them going forward? Or you will not buy from them or depending on the share prices, that's the reason why you didn't buy back from them? Depending on the share prices, is there still a possibility that you continue to buy from INCJ?

[Hidetoshi Shibata, executive]

So our priority for our company, we want to restart or start paying dividends as early as possible. So from our point of view, the appetite towards share buybacks compared to the beginning of this year has diminished. This is from our point of view. I mean, talking about our point of view. So whether it be INCJ or from the market, depending on the share price level, we consider, of course, the shareholder return, including share buybacks. But at the beginning of the year, we have ended our run of share buybacks. Our focus is now more on paying dividends. That's all from me.

[Operator]

From, Nikkei Newspaper, Satoh-san, please.

[Ryohtaroh Satoh]

I'm Satoh from Nikkei Newspaper, English and Media, Nikkei Asia. I have a basic question -- 2 basic questions, if I may. First is about utilization. There was a question earlier. In Q3, it is declining or finished products. And in terms of product areas, in what areas are you lowering utilization and the recovery that you expect, where do you expect to see a recovery in utilization?

[Hidetoshi Shibata, executive]

Mr. Shinkai, could you take that question?

[Shuhei Shinkai, executive]

Yes. As for Q3, in terms of products, about microcontrollers, as I mentioned earlier, die bank was not sufficiently available, so we were producing. But other than that, there were some adjustments in Q3. As for Q4, more or less for all of the products, generally, we expect adjustments. In Q1, there are facilities that will be increasing production at factory producing 47-nano microcontroller. So there, we expect to see increase in utilization.

[Ryohtaroh Satoh]

So final -- finish the products on the part of the customers, say, from customers -- as for the market environment, what is the impact from the market environment? For example, microcontroller, for what application is improving, so you expect some change in Q4? Or am I mistaken?

[Shuhei Shinkai, executive]

Let me see, as for demand, Mr. Shibata explained our forecast for demand for Q4 and basically in line with our forecasted demand we are producing in a nutshell. And as for 47-nano MCU that I've been mentioning, there is a shortage and supplies are still tight in some areas, and these are mostly for automotive. And therefore, in the next quarter, Q4, the driver is microcomputers for automotive for most of the part.

[Ryohtaroh Satoh]

I see. Basically, automotive was declining in market in Q3 and you expect the recovery.

[Hidetoshi Shibata, executive]

That is not necessarily the case. Die bank concept, perhaps I should explain the concept of the die bank. From before, semi-finished products are kept at a certain inventory level. That is how we manage things from some time ago, and that is in order to reduce lead time for our customers once they place orders. And this is also for the purpose of ensuring business continuity, including natural disaster response. So we have been keeping some inventory level of semi-finished products. On the other hand, up until last year, end of last year, whatever we were selling -- whatever we are producing, we're selling very quickly. So we were not able to build out inventory much. But because market was somewhat weak -- slightly weak, we are now able to increase the level of die bank inventory. For some of the products, it was quicker, for some others, it took more time, especially for 8-inch wafer for microcontrollers with larger line widths, we were able to increase inventory. And for that purpose, we use a factory to put it differently.As for market environment, it is a market strong or weak. For the short-term, as I mentioned earlier, automotive is very stable. On the other hand, recently, we feel the weakening from consumers. And only for Q4, PC mobile will be declining substantially. So that is our forecast of the market environment. Automotive consumer, if we compare the 2, clearly, consumer demand is much weaker.

[Ryohtaroh Satoh]

So if possible, what will be the optimal utilization rate? Of course, it depends on the product. So I think right now 60% used to be 80%. So what is the optimal level?

[Shuhei Shinkai, executive]

Well, it's difficult to see what's optimal. So I think ideally, we want to have 100% utilization rate. So it goes up and down, but maybe 80%, 85%, we want -- maybe we want to target that level. But as you know, the semiconductor demand is quite volatile. So it's very difficult to actually control the utilization rate as we wish.

[Operator]

[Operator Instructions] From, Nomura Securities, Yamasaki-san.

[Masaya Yamasaki, analyst]

So Yamasaki from Nomura Securities. I have 2 questions. Number one is that, in terms of the trend of your product prices, I would like to hear your comment about that. So in the past 3 years, you have been increasing your prices. But when there seems to be more supply than demand going -- what's going to happen going forward? Is it going to kind of be a normal trend that the price will slightly decline or because there's a cost push? Are you still going to increase the prices? I would like to hear about the direction of your price strategy as much as possible?My second question is that, the Chinese market, so there is a dispute between the United States and China. For the mature node, I think there's a lot of focus on mature node. So the microcontrollers and power chips, I think, basically, this is where the competition become fiercer. So what is the competitive landscape in the Chinese market? Can you talk about that? So that will be my 2 questions.

[Hidetoshi Shibata, executive]

So going to your first question, from our point of view, our current price level, we think that it's quite adequate considering various elements. So as much as possible, we want to maintain this level. I think that's optimal. As you have pointed out, the demand-supply balance, the demand has started to be a bit weaker. But on the other hand, the cost hasn't gone down that much. So we -- it's not in the situation that we can say that we're going to reduce the price right now.So to your second question, IGBT, well, in China, it's really a lot of competition, not only us. In China, there's a lot of up-and-coming players in IGBT. So I think it's very difficult to grow the IGBT business in China. So in terms of the future plans, we are not pretty much focused on China. So that is our assumptions for our future plans. I think it's difficult for that situation to change going forward.In terms of microcontrollers and analog semiconductors, currently, the -- it is not a situation that we started to see local competition coming up one after another, but I think it's just a matter of time -- maybe it's just a matter of time. So we have to focus more on high-performance, high reliability and not just selling devices, but we have to focus on selling solutions. We have been saying that from before. I think we'll have to patiently accelerate that trend. So rather than just trying to sell independent products, I have to -- we have to get away from the situation. So the analog semiconductor business, we have to have a more high added value product for power semiconductor stuff, microcontrollers. And I think basically, we can still compete. But with the microcontrollers and analog semiconductors, we can't expect the strong growth. I think the growth will be a more moderate one. That's all.

[Operator]

From, Nikkei, [indiscernible].

[Unknown Analyst]

I am [indiscernible] from Nikkei Newspaper. The other day, you've made announcement that that you will be reorganizing based on product. What is the intent for that? And why now?

[Hidetoshi Shibata, executive]

As we announced, we, as a company, are now in a different phase. That is the answer -- a common answer to both of your questions. Up to now, in the past, we focused more on achieving results over shorter term. And internally, we call this speedboat. But with more segment focus, I do not know whether this is the right way to put it, but we want to tolerate somewhat more consistency. We focused on speed, but I think we were able to achieve certain results based on that approach. So over medium- to long-term going forward, we would like to ensure growth. For that purpose, we would like to use various resources internally more efficiently. And for short-term measures and for medium- to long-term measures, we would like to implement both equally well. That is the main target. And why now in terms of timing, that is because we've judged that now is the time.

[Operator]

From, Kyodo News, [ Nakashima-san ], please.

[Unknown Analyst]

So this is Nakashima from Kyodo News. Can you hear me?

[Hidetoshi Shibata, executive]

Yes.

[Unknown Analyst]

So in terms of the exchange rate, the yen has appreciated a lot. So JPY 140 level of the yen to dollar, I think this is more or less established. So the current exchange rate level for you or your company or your business environment, what impact does it have? Is it comfortable? Or if it's -- this again, appreciation is a concern. And compared to a couple of years ago, I think the view of the exchange rate -- market has change, currency market has changed. So in terms of the -- your strategy, are you going to increase your production in the Japanese market? Are you going to change any CapEx assumptions based on this depreciation

[Hidetoshi Shibata, executive]

Shinkai will answer your question.

[Shuhei Shinkai, executive]

Yes, in terms of the level of the exchange rate, whether it is comfortable or not, to be frank, I don't know. That's my frank answer. From our point of view, so it's not very good that our performance will be volatile based on the exchange rates. So there are 2 initiatives. One is that, our target financial model is that, basically, we look at a flat, neutral, so JPY 100 against the dollar and JPY 120 against the euro, we basically use that for the planning. So the past couple of years, we have been doing that type of exercise.As a point is that, to be able to reduce the volatility due to the exchange rate, we are hedging. So we have been -- we are trying to hedge against the appreciation, meaning that the downside risk due to the depreciation of the yen, we protect that, and we want to try to -- we're moving away, we are disposing of the upside from the yen depreciation. But rather than the level of the exchange rate, I think the volatility, how much the volatility that is -- has a negative impact.In terms of direction of our investment, whether this will have an impact? For the -- not -- the exchange rate in itself, but in terms of the market, in terms of the areas that we conduct investment, we will look at the attributes whether the cost base is high or low, not only the exchange rate, this includes the inflation situation of each of the markets. And at the same time, the necessary resources, whether it exists in those local markets, so we will decide based on these conditions.

[Operator]

From, Morgan Stanley MUFG Securities, Yoshikawa-san, please.

[Kazuo Yoshikawa, analyst]

I'm Yoshikawa from Morgan Stanley. About infrastructure, I have a question. DDR5 is the driving force. As Mr. Shibata mentioned earlier, this year, sales from infrastructure, I believe there is an adjustment of DDR4. So overall, I suspect there is not a substantial increase from the past year. The DDR4 portion for [ AM ] is declining as a percentage. And next year, with the DDR5 memory content growth is expected. And can you expect a reasonable increase in revenue as a result? Is that how product mix is handled? And from Q1, PMICs for server will be starting, and how meaningful is that? What is the size that you expect?

[Hidetoshi Shibata, executive]

DDR5, I believe, will be driving growth at a reasonable pace. So whether yes or no, the answer would be yes. Is it going to be Q1 or Q2, it is difficult to say which quarter definitively, but PMIC or power stage for AI will be starting. Right now, as of now, when we look at the infrastructure business in comparison to how things stand currently, I don't expect it to be so large. Q-on-Q -- in any event, it will not be so substantially larger, but it will be also offering us a reasonable support. For AI, is it going to be a strong driver? And will AI business be increasing at 50%, 100% per annum? At the moment, that is not what we expect yet. But if customer base expands, then perhaps that might become a reality, but we will be starting customer-by-customer, and we believe that it will be offering us a supporting cushion.

[Operator]

Next, Nikkei BP, [ Kojima-san ], please.

[Unknown Analyst]

This is [ Kojima ] from Nikkei BP. So the 19 -- I just got one question. When we say that the customer orders has changed, inventory could be aggressively tightening. Can you perhaps share your thoughts on that? I believe over [indiscernible] outlook demand? And what is your...

[Hidetoshi Shibata, executive]

Could you wait for a moment? Could you wait for a moment?

[Operator]

Excuse me, there has been some technical issues.

[Unknown Analyst]

So you talked about the organizational change on the 19. So for the automotive microcontroller and what -- which product group will they be included?

[Hidetoshi Shibata, executive]

So I think basically it will be in the high computer.

[Unknown Analyst]

Yes. The second question is that, so the -- to be able to support the customer -- the people who will be able to support the customer, are they belong into the product group or are they belong in the software digitalization and other product group?

[Hidetoshi Shibata, executive]

So basically, they will be residing in the sales department. So we have these solution engineers, basically, they will be in the product group, and they will be salespeople.

[Operator]

Next from, Nikkei, Satoh-san, please.Are there any other questions? Mr. Satoh, if you have questions, please mute.

[Ryohtaroh Satoh]

I'm sorry, I was having trouble unmute the microphone. One question, if I may. Europe, about automotive in Europe, there is a tight management of inventory expected and a decline in Q4 is expected. Could you describe the background of this? Looking at the market from your perspective, European automotive in Q4 and beyond -- next year and beyond, what is your outlook?

[Hidetoshi Shibata, executive]

European automotive, that is not how I characterized in Europe. There are globally very large-scale Tier 1 customers, multiple Tier 1 customers. And mainly, these customers are trying to very tightly manage inventory. That is what I said.

[Ryohtaroh Satoh]

Tightly manage or reduce inventory, could you further elaborate on that?

[Hidetoshi Shibata, executive]

We have been discussing this on last -- previous -- on previous occasions. For Tier 1, we cannot casually say this because it's others, but they are quite tight in terms of cash flow, and they have to, therefore, manage cash flow very closely. And across the board, I think that is the tendency, and that has continued for the past several quarters. That is our view.

[Operator]

There is still some time, but there is no question. So with this, we would like to end the Q&A session. So finally, Shibata will give some words.

[Hidetoshi Shibata, executive]

So I think this is reflective of the -- not many questions. So maybe it's not much of a newsworthy earnings report that we have announced. In the first quarter and the second quarter, we have been going forward in a very cautious manner. And next year, there's certain timing. We're anticipating a recovery in the market and the cloud business growth, mainly in AI. That's what we're looking at about maybe a bit into the future, the 2025, the EV-related Kofu plant. And in terms of ADAS-related products, I think basically to 2025. So from 2024 the first half of 2025, we would like to maintain this growth and then move forward the business.Well, thank you very much for attending despite your busy schedule.

[Operator]

With this, we would like to end the third quarter earnings call for the third quarter 2023. Thank you very much for your participation.[Statements in English on this transcript were spoken by an interpreter present on the live call.]