Renesas Electronics Corporation (RNECF) CEO Hidetoshi Shibata on Q1 2022 Results - Earnings Call Transcript
Call Start: 02:30 January 1, 0000 3:31 AM ET
Renesas Electronics Corporation (OTCPK:RNECF)
Q1 2022 Earnings Conference Call
April 27, 2022, 2:30 AM ET
Company Participants
Hidetoshi Shibata – President and Chief Executive Officer
Shuhei Shinkai – Senior Vice President and Chief Financial Officer
Takeshi Kataoka – Senior Vice President, General Manager of Automotive Solution Business Unit
Conference Call Participants
Toru Sugiura – Daiwa Securities
Takero Fujiwara – Citigroup
Mikio Hirakawa – BofA Securities
Daiki Takayama - Goldman Sachs
Kenji Yasui – UBS Securities LLC
Operator
Hello. If you'd like to hear this session in English, please click the globe icon on the bottom and select English Channel. [Interpreted] Thank you for taking part in Renesas Electronics Corporation 2022 Q1 Earnings Call. Today, we have simultaneous interpreting available. Please select your preferred language from the globe mark at the bottom of your screen. Please make sure that the speakers now turn your video on and they see you. Thank you very much. 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 Solution Business Unit, Takeshi Kataoka.
We also are being attended by other IR members. Our CEO, Mr. Shibata, will give an opening remark followed by an overview of our first quarter result 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
[Interpreted] Ladies and gentlemen. Hello, my name is Shibata. This time around for our 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 exceeded our guidance on the other hand. One of your concerns maybe 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 fluctuation and shipping debit. Due to the way we do the transactions and the changes we've made, there some impact from there. In order to run you through the details we have prepared a slide. 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've 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 loss is 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 built-up for our 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 with the rest of the year, as well as, as we head towards next year. Like last year, we have been engaging in our 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 number is if we show it to you, you'll basically see that has built up. And we might give you expectations that maybe misleading. That's why, we have decided not to include that page in the presentation. With the 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 included that slide this time around. And also, from this time around, at the -- as PPA of Dialog, has been concluded that 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. It's how high CapEx continues to be so this is also noteworthy. Finally, shares buybacks has 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
[Interpreted] Yes. Thank you. This is Shinkai CFO. So allow me to go over you -- go with you the first-quarter 2022 result using my presentation materials. Let us jump to slide number three. So first of all, as 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 even now, we look at the first quarter results, and please look at the dark blue column. So revenue, that's $346.7 billion with a gross margin of 58.4%. Operating profit is $135.5 billion with a margin of 39.1%. Profit of attributable owners of parent, that's 90.1 with EBITDA $155.2 billion. As for currency, you can see the rate here versus dollar, that's a 115 Yen and versus Euro, that's 130 Yen. 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 or take us to page five now.
So here, we look at quarterly revenue trends. So in Q1, you can see the bar on a far right. So overall, that's a 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 Q-on-Q that's 14.5. For automotive and industry infrastructure, IOT, you can see the details on the slide. But you can see that with Dialog for automotive year-on-year, that's 47.5 -- 49% and Q-on-Q that's 17.0%. And likewise where IOT year-on-year, that's 50.2% increase. Q-on-Q that's a 12.5%.
Please move on to the next slide, page 6. So here we look at the revenue and gross and operating margin for Q1. First, the total figure is something I would like to highlight so -- versus forecast. So you can see the details on the far right box. So first of all, as for the revenues, it has increased from -- by 3.2% versus forecast. That's $1 -- $10.7 billion. And of course, there is the currency impact, which is 40% of the total of the difference but then otherwise, be it automotive, industrial, infrastructure, IoT. For automotive it's at 20% and for industry that's about 40% improvement. Now what are the reasons behind the improvement? So we have been able to see 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 and because of the earthquake -- the result, it was very flattish. Operating profit declined by ¥3.7 billion. And so that is why we have ended with an increase by 4.6 percentage points. Now, we would also like to highlight the Q-on-Q transition, again for the revenue that's ¥37.2 billion increase. And out of that, 20% comes from currency, and otherwise, automotive would have 60% industry would have like 20% contribution each.
As for the gross margin, that's 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 highlight 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. First of all, let us look at the overall inventory. If you look at the far right, the company total, you can see the DOI figure. Q-on-Q 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 industry infrastructure IoT.
Moving onto slide 8. Here we look at the inventory for sales channel. And again from this time, we have included Dialog. And so for 2021 Q3 and onwards, you can see the figures including Dialog now. Again, our total Q-on-Q it 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. 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 about the inventory valuation. In other words, the increasing costs, as well as the force 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 there is going to be dissimilar events to type of order making for some of the more supply type of the materials. Now also, when it comes to the demand, it's basically something that we try to outsource. And also for some of the chip nowadays, FCVJ, substrate or testers that always that 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 has been scrapped, and so that amount of Q-on-Q changed, as 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 increased demand. At the same time, especially, for some of the production risks, we do expect that it is still going to continue. and as for -- especially for the post-processing parts. And then also for the finished products, now, there has been some impact from the Shanghai lock down. And so that is why we have seen an increase in the finished goods, which is accounting for 20% of this increase in finished goods.
Now, logistics risks are something that we expect to still linger in Q2. And so again, the finished goods we expect that the level pretty much will 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 WY, we are seeing some reasons behind that, which is -- which can be summarized into three bullet points. First is really about trying to keep with the increased demand. In other words, trying to make some advanced sending or shipment. And especially in Q4, there were some high demand, seeing in some of the key items, which we have -- are now seeing a decline now. And this transition is accounting for 70% of the Q-on-Q change.
But then also at the same time, we're also seeing some impact of adoption or shipping debit, which is also increasing value-wise of the inventory, which is accounting for 30% of the change. From Q2 and onwards, we still do expect that we will have to keep up with the continues increase in demand. Within the channel, we have to make sure that we'd be -- always be able to offer the optimal product mix. And so WOI, we expect there's going to be a 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're 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.
Next is utilization rates on a wafer input basis. We show the trends here. As Mr. Shibata explained at the beginning on our wafer input basis, we show the trend. So this is not on an output basis. And also for Q1 numbers, Yamaguchi and 6-inch lines has been taken out of the denominator, and that is why it is higher.
On our 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 line, 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 ¥155.2 billion in Q1 and operating cash flow was ¥89.6 billion, free cash flow was ¥64.4 billion for the first quarter. Our operating cash flow in Q1 and Q-on-Q decline is due to seasonality. And also the cash-out for CapEx was ¥25.2 billion in Q1 for this fiscal year. And we believe that the trends are going to be about the same throughout the year.
Please turn to page 12. Here's the Q2 forecast. If you look at the Navy part in the middle, for revenue, the midpoint forecast is ¥375 billion on a Q-on-Q basis. If you look two columns to the right, we are expecting +8.2%. For gross margin, we are expecting 57.5%, which will be a -0.9 points on a Q-on-Q basis. For operating margins, our forecast is 36.5% or -2.6 points on a Q-on-Q basis. For currency rates, we are expecting a ¥124 against the dollar and ¥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 earthquake recovery is expected to be positive, but due to mix deterioration as well as raw material prices going up, we're expecting net negative impact. For operating margins, for operating expenses due to seasonality, Q1 was low, but we're expecting a bounce-back and a higher Opex. Therefore, we're expecting margins to decline.
Please turn to page 13. So on March 16th, another earthquake occurred. And here we summarized the impact. In Q1 and Q2, you could see the details of the impact on the slide in the chart. Let's move on to Page 14. So this is about share buybacks. First of all, for the summary, 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 1,190 Yen a share, which is 12.44% discount to the closing price of yesterday, April the 26. The maximum total acquisition price will be ¥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 leveraged ratio compared to end of March. We will see deterioration of 0.4 times.
So moving onto 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 two acquisitions for Dialog's business and the product life cycle, it's relatively shorter. So the allocation to intangible assets is smaller and 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 ¥27.5 billion, which will be the run rate going forward. Please turn to page 22 next. Here is CapEx trends. On our decided basis, about ¥35 billion, more or less, will be the CapEx. The majority of it will be for production increases. But we will also be investing it to offices, as well as future investments will be made as well. That concludes my presentation. Thank you very much for your kind attention.
Question-and-Answer Session
Operator
[Interpreted] Thank you very much. Now we'd like to open the floor for questions. We're going to have Mr. Shibata and Mr. Kataoka also join in. Allow me to go over with you how you are to ask your question. The moderator will ask if you have any question, and if you do, please select that raise hand icon on your screen and we will select -- call your name and company name in the order for you to ask your question. And so when your name is called, then that is a cue for you to be able to speak up. So please make sure you unmute yourself in asking your question. Now, due to constraint, please make sure that you will ask a maximum of two questions each. So if you have any questions, please raise your hand.
From Daiwa Securities Mr. Sugiura. Please unmute yourself and you can ask your question.
Toru Sugiura
[Interpreted] Thank you very much. This is Sugiura from Daiwa Securities. Thank you very much for taking my question. 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 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 Q-on-Q basis, you expect that there is going to be at 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 will 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 this second-half? So that's my first question in regards to the revenue trend.
Hidetoshi Shibata
[Interpreted] Yes. So the announcement coming from TI, yes. I understand that what is happening in China. It is 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 congestion behind logistics. And at the same time it's okay, but when we look at our own plants, especially post-processing site, 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 the 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 are 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 customer, there has been a lot of support. And so we, through this geology or trinity, if you will, the impacts 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 good expense. So with all of 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. About especially, a smartphone, especially in China, it's weak. And film book has become weaker since last year, split laptop PCs, anything from the consumer space. Personally speaking, I'm 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 trend 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's still had 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 controlling the top line to some extent for that but we are trying to just make sure we'd be able to reduce control of 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 is -- hasn't really changed from what I mentioned in our previous session. But at the moment, what we're seeing at the moment seems to suggest a very good, healthy trend. But again, as you all know, lot of them just surprising change can always happen. And so I think that would like to make my comment -- stop my comment to that point.
Toru Sugiura
[Interpreted] So thank you very much. My second point is about the gross margin outlook that you would have. Within the second quarter guidance that you talked about the impacts of product mix, of some of the impacts coming from materials costs, 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 costs to 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. If you'd be able to share a little more on that?
Hidetoshi Shibata
[Interpreted] Yes, thank you very much. I think the Mr. Shinkai can answer your second question.
Shuhei Shinkai
[Interpreted] Yes, so let me try. Now, first of all, in terms of the worsening product mix, what's behind that? Now, compared to Q1, what is -- we're basically talking about 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 costs 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 +2% growth excluding that FX. And so I think we do believe -- we do believe everything is aligned in that sense.
Toru Sugiura
[Interpreted] Thank you very much. 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 to impact change from this quarter? Or are you talking about some of the raw material cost that you are seeing in internal factories?
Shuhei Shinkai
[Interpreted] Both, all. 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, is the fuel cost, the surcharge is all going to kick in from Q2 and onwards.
Toru Sugiura
[Interpreted] 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
[Interpreted] One thing is, first of all, I'll 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 a 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.
Toru Sugiura
[Interpreted] Thank you very much. Thank you for -- sorry for taking time. Thank you very much.
Hidetoshi Shibata
[Interpreted] I know gross margin; it's 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 costs. The raw material cost increase of the magnitude of that is really intensive. And perhaps, sometimes, so there will be some items that the prices just going to go up by ten times. So we're not going to be optimistic here, Dave. Thank you. Thank you very much.
Toru Sugiura
[Interpreted] Thank you.
Operator
The next question is from Citigroup Securities. Mr. Fujiwara, please unmute and ask your question.
Takero Fujiwara
[Interpreted] Hello, I'm Fujiwara from Citigroup. Can you hear me?
Hidetoshi Shibata
[Interpreted] Yes, we can.
Takero Fujiwara
[Interpreted] Thank you for taking my questions. I have two 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, YoY 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 customers' inventories are building up. Do you view it that way? And what do you think about the continuity of the current trends?
Hidetoshi Shibata
[Interpreted] Mr. Kataoka will take your question as he is here with us.
Takeshi Kataoka
[Interpreted] This is Kataoka speaking. As you rightly pointed out OEMS, originally we were planning an increase in production. However, they were 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 that 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 at a dangerous level yet. That's how we view it. And ballpark figure wise, one or two months’ worth is what we're assuming for Q1 that is. But of course, it's diversified products as well as by customer. But we are in the process of optimizing. So with the customers, we are closely communicating more products where inventory is building up we will not allocate it to that specific customer. We will give it to a customer that are asking for that product. So we are taking those types of actions.
And also we are not only optimizing just for automotive, but on a renaissance wide basis, for 47 Nano, we have it for automotive, and for 16-bit micro-computers, we have it for automotive. But if we think that it's growing for automotive, we will allocate it for laptops and we're trying to optimize overall by taking these types of actions. That's all from me.
Hidetoshi Shibata
[Interpreted] 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. As Mr. Kataoka explained, although it was a little bit vague, for which product 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. Overall, although there is build ups in partial areas, we don't think it's fishy overall. We do believe we are still in a firm situation.
Takero Fujiwara
[Interpreted] Thank you very much. My second question is the following. You announced a share buyback worth ¥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 be for share buybacks or for increased dividends?
Hidetoshi Shibata
[Interpreted] 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 from me.
Takero Fujiwara
[Interpreted] Thank you very much. That's all for me. Thank you.
Hidetoshi Shibata
[Interpreted] Thank you very much.
Operator
[Interpreted] Next, from BofA Securities. I'd like to ask Mr. Hirakawa so please unmute yourself.
Mikio Hirakawa
[Interpreted] This is Hirakawa from BofA Securities. Thank you very much for taking my question. My first question is again about inventory. 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 intentions behind this, but when do you think you'd be able to come back to the more optimal target level? Can you share that with us? That's my first question.
Hidetoshi Shibata
[Interpreted] Mr. Shinkai, would you go for the first question?
Shuhei Shinkai
[Interpreted] Yes. So for the IoT for Q1, I did mention that there is the FX impact and also the valuation difference, which is included. And that's what I said, which is in regards to the total company level. But then also from specific customers, there is just the business and there has been some, for example, some delays, the timing, and that did impact the DOI. In other words, at the end of Q1 there has 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 tried to live it down, you'd be able to find that it's back to that, we should be able to come to other more normalized level soon. That's my response.
In other words, from Q2, for example, in the industry infrastructure IoT, the DOI is jumping up. But then we can't expect that'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'll be able to say that, but then this tentative spike we're not that worried.
Mikio Hirakawa
[Interpreted] I see. So this is really going to be more or less the level that you're finding. There might be some ups and downs throughout this year. Is that the correct?
Shuhei Shinkai
[Interpreted] We're expecting -- basically; it is going to go below the spike that we just observed.
Mikio Hirakawa
[Interpreted] Thank you very much. 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
[Interpreted] Mr. Shinkai, please.
Shuhei Shinkai
[Interpreted] So you talked about the volume as well as the product mix and how that contributes to the revenue. Now, I believe that basically the contribution is coming from volume increase. I didn't mention the breakdown, but the gross margin -- 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. In other words, it's not really the price hike, it's the volume. That's correct.
Mikio Hirakawa
[Interpreted] Thank you very. Now, that's all for my question.
Operator
[Interpreted] Thank you. The next person is [Indiscernible] Mr. Eguchi (ph), please unmute and go ahead with your question.
Unidentified Analyst
[Interpreted] This is Eguchi from [Indiscernible]. Can you hear me?
Hidetoshi Shibata
[Interpreted] Yes, we can.
Unidentified Analyst
[Interpreted] Thank you for taking my question. Regarding the supply chain and upstream and 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 an 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 and the back-end process, there are some volume constraints due to some bottlenecks, I think you mentioned that earlier. For logistics and so forth, are there any risks that you will not be able to shift as much as you've expected downstream? So that's my question.
Hidetoshi Shibata
[Interpreted] For logistics and shipment risks, I think that's a constant. It's nothing new. For example, backend process in Malaysia last year due to COVID, was affected and there were some disruptions. We believe these kinds of trends are going to be ongoing. 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. Since that, the situation is going to be prolonged, then based off 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 foundry's or an industry wide basis, we're 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.
Unidentified Analyst
[Interpreted] Thank you. 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
[Interpreted] I do believe so, 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.
Unidentified Analyst
[Interpreted] Thank you. 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 IGBTs, 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
[Interpreted] And Mr. Kataoka, will take your question.
Takeshi Kataoka
[Interpreted] This is Kataoka speaking. For xEV, it is growing as you know so demand related to that, especially from China, where xEV is growing is -- continues to be strong. Even if we are able to ship, others semiconductor manufacturers are not able to supply in some cases. And that leads to a decline in demand as well. But we don't want to speak about other companies. So it happens on a case-by-case basis. Like I explained before for a new product, like [Indiscernible] and our RJ50 new products are currently ramping up. Therefore, demand is extremely strong in the space. And we haven't been able to shift sufficiently in that regard. That's where we are right now. Thank you.
Unidentified Analyst
[Interpreted] Thank you very much.
Operator
[Interpreted] Next, from Goldman Sachs, we'll ask Mr. Takayama. Please unmute yourself.
Daiki Takayama
[Interpreted] Thank you very much. Can you hear me?
Hidetoshi Shibata
[Interpreted] Yes.
Daiki Takayama
[Interpreted] As I was listening to all the discussion so far, and the margin management and top line management, I'd like to ask those two points. So at the moment, margin management so far, it seems like Q2, you are going to slip. But after that, of course, you've 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 area seems like the growth is going to dampen and there's also some discussions about cost increase pressure, including raw materials. Are you able to offset that with product mix or price hike? Do you think you'd be able to come back to that? For example, Q1 level for gross margin.
When you looked at Q1, you mentioned that we're not supposed to expect even a step higher level. And so I think, that you are saying that we should not be surprised if the numbers start 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
[Interpreted] 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 similarly 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 and 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 with that. And so, for example, like 58, 57, 56, of course, if we just keep on sliding down, it would not be good, but then it doesn't mean that just because we are now looking at 57%, do we now have to jump back again to 58 or 59. Do we have to push ourselves? I don't feel so.
Daiki Takayama
[Interpreted] Thank you. 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 older 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 will 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 advance 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? Thank you.
Hidetoshi Shibata
[Interpreted] 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? Is this really linked to the genuine and demand. I always feel a bit uncomfortable when I look at the trend. 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 always -- 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.
By doing that, we do believe we'll be able to sort of level up. 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 re-look at the order. If we look at the non - cancelable, non-returnable type of order, we have to discuss with the customers, is this really the amount that you really need? And we're starting that type of Dialog. And depending on the application or a sector, the level of visibility is pretty different. However, if it's an area of where you can have good visibility, of course, backlog, it's not always linked to everything, but then this cloud data center, or if it's for automotive, we can expect some strong momentum. That's the feelings that we can 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 three months or so that we'd be able to have better visibility of what numbers we'd able to expect.
Daiki Takayama
[Interpreted] To add, in the negotiations that you are having, I'm sure you'd be talking about the tight supply. And in other words, there is lot of discussions I'm sure you've had. For example, it's going to be tied to it 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
[Interpreted] 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 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 are finding that our clients are not able to suffice all their parts, we have to discuss how much we'd be able to provide, but we do believe we should 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's still is going, but every day, I mean, there was a day when we were just looking around, everyone just really surprised, and just the shouting about what kind of supplies they'd be able to secure. But I think that situation is becoming better now. Well, thank you very much for that comment.
Operator
[Interpreted] Thank you. So next from UBS Securities, Mr. Yasui please unmute and ask your question.
Kenji Yasui
[Interpreted] This is Yasui from UBS. Thank you for taking my question. The first question is regarding Page 8 in the presentation where you talked 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 is that contributing to sales channel increases? For example, up for industrial infrastructure IoT, it was up by two -- it was two weeks higher. So you could say that about 50% -- 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 20th until the end of May, why do you have a period when it's just with INCJ? Because it's not 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
[Interpreted] 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. Just a repeat, once again. This is not on the unit basis this is on a value amount basis, that you see on this slide. 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 non-automotive. That's the amount -- that's the amount of revenue that was for buildup of inventory. I do believe our automotive, it is leading to end demand, so we're not that concerned. But for industrial infrastructure IoT, I talked about earlier, mobile QC computing areas. In particular, our revenue that led to just a buildup of inventory like I was explaining earlier. Mr. Shinkai do you have anything to add?
Shuhei Shinkai
[Interpreted] 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. This is only about 60% of revenue. That's something you need to keep in mind when you look at these numbers. So next is about share buybacks. Yes.
Hidetoshi Shibata
[Interpreted] For our share buybacks, it's going to be the TOB 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, the 31st. That's all for me.
Kenji Yasui
[Interpreted] How about the next round of share buybacks? That was my other question. Is it going to be from INCJ?
Hidetoshi Shibata
[Interpreted] I thought to I didn't have to answer that question. 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 will 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.
Kenji Yasui
[Interpreted] Thank you very much.
Operator
[Interpreted] Thank you very much. Now, 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-and-A session. So with that, Mr. Shibata, would you like to make closing remarks, please?
Hidetoshi Shibata
[Interpreted] Yes. I think we have discussed all our points already. But again, there's 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's 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 then 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 base. And if there's anything funny going on especially -- well, for example, for our second quarter, like I mentioned, it is going to be around PC. We are going to be controlling, we are 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 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
[Interpreted] Yes, thank you very much. And so with that, we would like to end our FY '22 Q1 earnings result call. Thank you very much for your attendance.