Infineon Tech AG

Welcome to the conference call for analysts and investors for Infineon's 2024 fiscal first quarter results. Today's call will be hosted by Daniel Gyori, Senior Director, Investor Relations, who's stepping in for Alexander Fulton today. As a reminder, this call is being recorded. The conference call contains forward-looking statements and or assessments about the business, financial conditions, performance, and strategy of the Infineon Group. These statements and or assessments are based on the assumption and management expectations resting upon currently available information and present estimates. They are subject to multitude of uncertainties and risks, many of which are partially or entirely beyond Infineon's control. Infineon's actual business development, financial condition, performance, and strategy may therefore differ materially from what is discussed in this conference call. Beyond disclosure requirements stipulated by law, Infineon does not undertake any obligation to update forward-looking statements. At this time, I would like to turn the call over to Infineon. Please go ahead.

Good morning, ladies and gentlemen. Thank you for joining our first earnings call in 2024. On this call, you have our CEO, Jochen Hanenbeck, our CFO, Sven Schneider, and our CMO, Andreas Urschitz. Jochen and Sven will provide a comprehensive overview on the market situation and divisional performance, key financials, and our revised outlook. The illustrating slideshow, which is synchronized with the telephone audio signal, is available at infinient.com slash slides. After the introduction, we will be happy to take your questions, kindly asking you to restrict yourself to one question and one follow-up. A recording of this conference, our earnings press release and our investor presentation are also available on our website at infinian.com. And now, Jochen, over to you.

Thank you, Daniel, and good morning, everyone. At the start of 2024, we are confronted with continuing headwinds from geopolitics and macro, from cyclical market dynamics and from negative currency developments. Against a lackluster economic environment and generally high inventory levels, the demand picture across applications remains mixed. We see continued strength in key parts of automotive and, on the other hand, inventory digestion in industrial as well as an extended sluggishness in consumer computing, communication and IoT. This, together with the weakening of the US dollar against the euro, leads us to a revision of our expectations for the current fiscal year. I will comment more on our adjusted outlook at the end of my introductory remarks. But broadly speaking, we are seeing a prolonged inventory digestion period and in a couple of our end markets, a recovery only in the second half of the calendar year, one quarter later than assumed back in November. At the same time, the strength and the resilience of the Infineon business becomes particularly evident in periods like these. As a case in point, we concluded a robust first quarter of our 2024 fiscal year. Group revenues in the December quarter came in at 3 billion 702 million euros. With minus 11%, the sequential step down was a bit more pronounced than expected, driven primarily by an adverse currency development amounting to a high double-digit million revenue reduction. As you will remember, we had used a US dollar euro exchange rate of 105 for our guidance, whereas the actual rate for the December quarter was 108. The segment result for the quarter was 831 million euros, reflecting the sequential contraction of our top line, leading to a segment result margin of 22.4%. slightly ahead of our expectations. Margin development differs considerably by segment, in line with their very different business dynamics. As expected, our backlog of confirmed and unconfirmed orders keeps normalizing and stood at 24 billion euros at the end of December, after 29 billion euros three months ago. In a situation of general supply availability, high inventory levels in several end markets and shortening lead times, customers typically clean up their orders, in particular towards calendar year end. Now let's take a closer look at our divisions, with automotive in the pole position. In the first quarter of the 2024 fiscal year, the automotive segment's revenue came in at 2 billion 85 million euros. The decrease of 4% compared to the previous record quarter was driven, as predicted, by short-term inventory management by customers towards calendar year end. The segment results stood at €564 million, leading to a segment result margin of 27.1% compared to 28.5% in the previous quarter and mirroring the negative revenue development. At this point in time, the key investor debate in our part of the sector appears to be on the near-term cyclical Perspective for automotive semiconductors. For the Infineon automotive business, we confirm what we have said in November. Content expansion on the back of the secular trends, e-mobility, AIDRs and innovative electronic architectures continue to provide growth. This applies even with a number of cars produced in 2024 expected to be flat or slightly down from the 90 million unit base achieved last year. and with inventory replenishments largely concluded. Capturing this growth requires a leading and broad product portfolio and trusted customer relationships, the main ingredients of our success story in the current market phase. Of course, Infineon is not immune against general market tendencies like, for instance, some further inventory adjustments for automotive standard applications. But we see several idiosyncratic factors in our favor. For one, there is our broad-based XEV exposure. Whereas sentiment is currently weak in Western countries, China, as the by far biggest market for electric vehicle, keeps powering ahead. In the December quarter, the production of battery electric vehicles hit a new record level of 2.3 million units, up 22% year over year. Generally speaking, the adoption of electric vehicles will not happen without bumps in the road. But we see several factors supporting the undisputed underlying growth trend also this year. the nearing of interim EU fleet emission targets in 2025, as well as the planned introduction of a new 10-year subsidy in Japan, the decline of some prices for battery raw materials, and most importantly, the launch of a wide variety of new models and more affordable cars, resulting in a broader portfolio in all car categories to address different and customer requirements. Furthermore, semi-content growth in cars continues to be driven by higher levels of ADAS and our wide range of products is allowing cars to become autonomous, more digital and more connected. Here the very successful trajectory of our automotive microcontroller stands out. With their real-time capability, highest automotive safety certification and customized software stack, in particular the AURIX family is helping us to gain market share. We see great traction across all regions and, for example, recently secured the first design win in Japan with our third AUREX generation at a local Tier 1 for ADAS platform of a large domestic oil. In order to secure stable deliveries for our customers and our business growth, we recently concluded a new multi-year supply agreement with global foundries for, among others, the production of AUREX microcontrollers at their Dresden facility. At the same time, as you might have seen a couple of days ago, we signed an MOU with Honda to build a strategic cooperation. Honda has selected Infineon as semiconductor partner to align future product and technology roadmaps covering power semiconductors, ADAS and EE architectures. As you can see, besides XCV and ADAS, also innovation around the so-called EE architecture is contributing to further content growth, as is our P2S approach. In the context of increasing proliferation of domain as well as mixed and zonal concepts, we will support a large Chinese OEM customer with a complete system solution covering two different types of RX MCUs, power components from drivers to MOSFETs as well as our PROFET smart switches acting as novel E-fuses. This is the future zonal architecture enabled by Infineon. Also, a few weeks ago, the globally largest EV player BYD has awarded us their Outstanding Partner Award 2023. It honors not only our operational excellence and reliability, but also our system competence, resulting in a deep and innovative cooperation and will for sure support our revenue growth with this customer nicely. Now to green industrial power, which in the December quarter saw its revenue decline by 16% from the previous quarter's all-time high to 487 million euros. All verticals were affected by the decrease, high inventory levels at customers surpassing typical seasonality. Despite the meaningful revenue decline, profitability remained at a high level. The segment result amounted to 130 million euros, equivalent to a segment result margin of 26.7%. Our industrial activities address a very diverse set of end markets with varying demand drivers. Core industrial applications like factory automation are closely correlated to overall economic health and are usually late cycle. Going forward, we therefore expect the demand for industrial drives to further weaken. Similarly, the market for home appliances and larger heating, ventilation and air-conditioned installation continues to be dampened by high interest rates and persisting weak consumer sentiment. In contrast, structural demand for applications related to decarbonization, energy storage systems, grid and charging infrastructure, as well as transportation remains strong, driven in part by government initiatives. That said, increased inventories in the photovoltaic value chain will temporarily slow down semiconductor demand for PV inverters, even in the face of continuous growth of installations. Meanwhile, our broad-based silicon carbide business with industrial as well as automotive applications is progressing very well, and we are happy to report the further extension of our well-diversified substrate supplier network. Following our multi-sourcing strategy, we signed a long-term supply agreement with SK Siltron of Korea, under which SK will provide Infineon with competitive and high-quality 150 mm silicon carbide wafers. In a subsequent phase, SK Siltron will play an important role in assisting our transition to 200 millimeter wafers. Furthermore, we extended our silicon carbide wafer supply agreement with Wolfspeed, including a multi-year capacity reservation agreement to further safeguard our base material access in the multi-sourcing approach across all regions. In terms of silicon carbide revenue development, we confirm our target of growing the 2023 achieved level of 500 million euros by around 50% in this fiscal year. Concurrently, the building activities related to the first phase of silicon carbide expansion at our front end site in Kulim, Malaysia are going according to plan and we shall reach the ready for production milestone in the second half of this calendar year. Now over to the power and sensor systems segment, which is severely affected by the protracted and well-flagged downswing in consumer computing and communications. Revenue declined sequentially by 16% to €665 million, mostly in the areas of MOSFETs for consumer-facing applications. Conversely, smartphone components saw a small uptick, indicating some light at the end of the tunnel. The overall magnitude of the current slowdown of the PSS business, however, is evidenced by the year-over-year revenue contraction of 27%. The significant revenue decline had a clear impact on the segment result. which amounted to 99 million euros for the first fiscal quarter, equivalent to a segment result margin of 12.9%. Besides a persistently weak macro environment, the majority of PSS end markets is burdened by a prolonged inventory digestion phase. Given high stock levels along the value chain, combined with only very few signs of demand inflection, it is no surprise to see some pricing pressures. In other words, we expect adverse impacts on our sales volumes and margins in the near term, while seeing scope for demand recovery in the later half of the calendar 2024. Such a recovery could be quite steep, especially in a high interest rate regime, assuming inventories will be depleted over the next couple of months. From a mid-term perspective, growth dynamics remain favorable, underpinned by structural trends such as artificial intelligence and the proliferation of gallium nitride-based devices. For example, in applications like chargers, adapters, server power supplies, solar inverters and onboard chargers. On the former, we are encouraged by seeing first screenshots from customer uptake of our leading AI power management solutions. Regarding the latter, we are happy to report that bringing together the teams of the recently acquired GaN systems and our own GaN-related activities in a dedicated business line is progressing very well. To close this part now to connected secure systems, which saw the steepest revenue decline of our segments, namely by almost 26 percent quarter over quarter to 364 million euros. Demand weakness was widespread across applications areas and product groups, aggravated by an ongoing inventory correction in the channel. In line with the revenue decline, the segment result moved down to 37 million euros, leading to a segment result margin of 10.2%. High inventory levels and the corresponding need for a depletion period will continue to characterize the consumer compute communication and IoT as well as security markets in the near term. Leaving these cyclical developments aside, we continue to see attractive structural growth opportunities from IoT adoption and will keep investing into innovation around these. In particular, artificial intelligence is moving to the edge, motivated by advantages in terms of latency, power consumption and data protection, and driving new industrial and consumer use cases. To further shape this trend, we have extended our microcontroller portfolio with a new PSOC Edge family of products, bringing high-performance and power-efficient machine learning to the edge. To complement this and provide comprehensive fast time to market solutions, our recently acquired subsidiary Imagimob has launched a suite of so-called ready models together with a new release of the studio machine learning tool suite. Ready models can be quickly deployed onto existing microcontroller hardware without the cost, time or expertise required for custom development. Now over to Sven who will illustrate our key financial figures.