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.

Thank you Jochen and good morning everyone. Our 24 fiscal years started with a quarter that was comparatively weak on revenue, but fairly robust on profitability. In particular, our gross margin stayed basically flat quarter over quarter, with 43.2% compared to 43.6%. Similarly, the adjusted gross margin, which excludes non-segment result effects, stood at 44.9% in the December quarter after 45.5% one quarter earlier. Stable pricing and a slightly favorable development of some input costs and government funding received almost compensated the fall-through of the lower revenues and the anticipated uptick in underutilization charges. On the OPEC side, research and development expenses remained essentially flat at 512 million euros from 518 million euros in the quarter before. The same applied to selling general and administrative expenses, which went from 399 to 395 million euros. Net other operating income was 10 million euros. The non-segment result amounted to minus 129 million euros. The financial result for the December quarter was a positive €25 million, positively influenced by the release of a tax provision in connection with the acquisition of Cyprus and the corresponding interest element thereon. Income tax expense amounted to €134 million for the first quarter of the current fiscal year, equivalent to an effective tax rate of 18%. Cash taxes for the quarter were €213 million, containing some temporary effects and therefore resulting in an unusually high cash tax rate of 29%. Generally, we expect both tax rates between 20% and 25% going forward Of course, without considering any future tax law changes. In the currently running fiscal year, the tax loss carry forwards should be fully utilized. Our investments into property, plant and equipment, other intangible assets and capitalized development costs totaled 653 million euros in the December quarter, the anticipated large sequential step down from 1 billion 57 million euros the quarter before. Depreciation and amortization, including acquisition-related non-segment result effects, amounted to 456 million euros in the first quarter of our new fiscal year after 450 million euros in the preceding quarter. As expected, our quarterly reported free cash flow from continuing operations was burdened by several special effects. The amount of minus 1.6 billion for the December quarter contains the payment for the acquisition of GAN systems of about 800 million euros. Also, we typically make the bulk of our annual success bonus payments in the month of December, this time based on the record fiscal year 2023. In addition, we recorded negative effects from working capital. Our payables went down noticeably, reflecting different quarterly payment patterns. Our inventories increased. Their reach climbed to 185 days, driven by the effects of lower revenues and higher stocks. As we mentioned last time, a part of our inventories is built for strategic reasons. For example, on behalf of and paid by customers, or to increase supply certainty in the light of geopolitical risk, or to buffer FAB transitions. Taken together, these should have a mid-triple-digit million-euro volume. Now to our liquidity and leverage figures. In order to fulfill our liquidity target of 1 billion euros plus at least 10% of revenues, even during a short period of temporarily subdued free cash flow generations for the reasons mentioned above, We drew down short-term loan facilities of €750 million in the last quarter. As a result, gross cash at the end of December stood at €2.7 billion compared to €3.6 billion at the end of September. Our gross debt increased to 5.4 billion euros with a gross leverage of one times. Net debt came in at 2.7 billion euros equivalent to a net leverage of 0.5 times. Finally, our after-tax reported return on capital employed for the December quarter declined to 10.9%. Now back to Jochen who will comment on our outlook.

Thank you, Sven. Indeed, we are facing a challenging market environment characterized by multiple lingering geopolitical, macroeconomic and cyclical concerns. In this setup, our end markets experience different timings and severity of cycles. Broadly speaking, there are currently three categories of applications. Those with continued strong demand and a healthy inventory situation. Those where too high inventories are masking an otherwise intact end market and those where actual customer demand is lacking. For automotive, I have already talked about the unabated structural demand drivers. XCV growth continues, albeit a more tempered pace outside China. With our automotive MCUs, we keep gaining share, benefiting from ADAS proliferation and novel EE architectures. For more standard applications, we expect to see further normalization and some inventory adjustments, but overall a stable development given the recognition of the strategic value of sufficient supply levels. Taken together, we confirm our expectation to be able to grow our automotive revenues by a low double-digit percentage rate year over year, leaving aside currency and a strong segment result margin of 25 to 28 percent for the fiscal year. In contrast, the large majority of our non-automotive applications is facing a downbeat business situation, albeit for different reasons, as mentioned earlier. In the consumer-driven areas of our business, demand is mostly still lackluster and customers and distributors continue to work through elevated inventories. This applies also to core industrial applications. For applications like renewable energies or payment and government ID, underlying demand is there, but we are undershipping it as the inventory digestion runs its course. Lead times are generally contracting, inducing short-term ordering behavior and limiting visibility into the shape and timeframe of a cyclical recovery. On the flip side, given the current inventory digestion on the back of higher interest rates, there is scope for such an eventual recovery to be steeper than usual. But fiscal 2024 will be in any case a transition year. Now to our updated set of projections, which we have to factor in the weakening of the US dollar since our last capital markets update. Whereas we used the US dollar euro exchange rate assumption of 105 for our original annual guidance provided mid-November, we now adjust to 1.1. On a yearly basis and using our rule of thumb as well as the actual Q1, this has a negative impact on revenues of close to 500 million euros. With this and our updated estimate of a protracted inventory digestion in industrial and consumer-related recovery setting in one quarter later, we revise our revenue forecast for the 2024 fiscal year down to 16 billion euros plus or minus 500 million euros from formerly 17 billion at the midpoint. As mentioned already, development patterns are expected to differ significantly between segments. ATV's revenue should grow by a low double-digit rate without the currency impact. This will be in stark contrast to a mid-to-high single-digit annual decline for GIP and mid-to-high teens declines for PSS and CSS. A word on pricing. With annual contracts now concluded, we can state that automotive pricing is by a large firm with an assumed very low single-digit annual decline anticipated. For the other businesses, there's more pressure as a function of weak demand and too high inventory levels, which we have baked into our revenue and margin guidance. Consequently, for the adjusted gross margin, we now expect a level in the low to mid 40s after 45% before. Therein considered are expected annual underutilization charges of around 700 million euros up from the previously assumed close to 600 million euros. We are prepared to incur these charges to controlled inventory levels. We expect the segment result margin for our 2024 fiscal year to come in at a low to mid 20s figure, a robust level for a year with declining revenues and fully corresponding to our target operating model. Assuming a structural level of idle costs of around 150 million euros annually, the cyclical part is equivalent to around 350 basis points of margin, confirming an underlying value in line with our through the cycle target of around 25%. The mixed market picture will also be reflected in the divisional margin development. For ATV, we stand by our previously indicated corridor of between 25 and 28 percent. The profitability of GIP should come in somewhat below, but hold up reasonably well, whereas the segment result margins for PSS and CSS will be significantly weaker compared to last year. We are adjusting our investments down and now expect them to land at a level of around 2.9 billion euros compared to our original prediction of around 3.3 billion euros. This being said, we are clearly standing by our strategic projects, the analog mix signal FAB. We are building in Dresden the significant silicon carbide expansion in Kulim as well as capacity growth for wide band cap in Villach and related back-end sites. Following the reduced investment level, we now expect for depreciation and amortization a value of around 1.9 billion euros, including amortization of around 400 million euros resulting from purchase price allocations that will end up in our non-segment result. Our adjusted free cash flow net of the GaN systems acquisition as well as our investments into major front-end buildings is now expected to come in at around 1.8 billion euros, which would represent around 11% of sales. For the reported free cash flow, we now expect a level of around 200 million euros. For the currently running second quarter of our fiscal year, we expect the cyclical market weakness to persist and thus project revenues of around 3.6 billion euros. By division, we expect ATV, GIP and CSS revenues to stay practically flat and PSS to contract more noticeably. For clarity's sake, all projections are based on an assumed US dollar exchange rate of 1.1. For the segment result margin, we expect a level of around 18% for the March quarter as a result of the quarter-over-quarter revenue reduction and reflecting margin headwinds from non-recurring government funding, higher idle costs, price revisions kicking in at the beginning of the calendar year and expected negative currency development. Before coming to the summary and to Q&A, let me broaden the view quickly to our non-financial goals. In December, we announced our commitment to set a science-based target, further expanding our climate strategy. We are very well on track towards CO2 neutrality by 2030, relating to direct and indirect energy-related emissions, Scope 1 and 2. After having already reduced these emissions by about 57% to date versus the base year of 2019, Infineon will now be setting itself even more ambitious targets by involving the supply chain, meaning Scope 3, in our effort to push climate protection. Now, ladies and gentlemen, it's time to summarize. We started our fiscal year 2024 in a robust way with a resilient adjusted cross margin of just under 45% and the segment result margin of 22.4% on a revenue base that contracted by 11% to 3.7 billion euros. Geopolitical and macro factors are causing a persistently challenging market environment, in particular for consumer computing and communications, but also industrial, with inventory digestion dragging on. Supply availability and shorter lead times induce very short-term ordering patterns. Our automotive business is holding up well, driven by MCU share gains and broad XEV exposure compensating slowing dynamics for standard applications. Given our overall business mix, we continue to weather the cycle well, but are not immune against market and currency headwinds. Hence, we adjust and de-risk our outlook for the 2024 fiscal year, shifting the expected recovery of the consumer-related business by one quarter out to the second half of the calendar year. As a result, we now expect a transition year with resilient profitability, a litmus test for our target operating model. Structural growth drivers across our key applications, e-mobility, ADAS, renewable energy, IoT and data center AI remain fully intact and we keep investing into these opportunities for mid and long-term value creation.

Ladies and gentlemen, this concludes our introductory remarks and we are now opening the call for your questions. Operator, please start the Q&A session now.

Thank you. Our question and answer session will be conducted electronically. If you would like to ask a question, simply press the star key followed by the number one on your telephone. If you are joining us today using a speakerphone, please ensure that your mute function is turned off. One moment for the first question. And the first question comes from Francois Bouvinier from UBS. Please go ahead.

Thank you very much for the question. So my first one is on your outlook. I mean, every quarter seems similar in terms of question in a way. But if we look at your guidance, it implies 4% group revenues in H2. versus H1 of minus 9%, so you definitely have a strong recovery in H2. And what is more intriguing is the automotive specifically because, you know, in H1 it was up 6% year-over-year, and your guidance would imply at least a valid percentage growth in H2 year-over-year. And it seems, you know, at odds with all the comments that we see in automotive. We saw Mobileye, you know, significant inventory correction. we see the ev pipeline you know slowing down and if we look at the production h2 will be lower than h1 on the production of cars for the year so you know my question would be like what the visibility do you have and maybe the building blocks in the growth that you see in h2 that would imply you know really q2 is a bottom and you will see the recovery from here because You know, it's difficult to see much visibility of this strong recovery at this stage, so especially in auto, so just wanted to check on that one.

Our revenue in automotive is not in the first place dynamic of the end cars produced. First of all, the first half in terms of revenue for automotive is depressed by inventory digestion. and also the very small price decrease we had to give will be fully reflected in this quarter. The second half is then assuming that the inventory correction also in the standard applications is over and we resume growth and the growth is driven by our two secular growth drivers, meaning e-mobility, weaker outside China but still strong in China with very high bill of materials for us and our microcontroller success story which is clearly based on market shares.

So can you quantify the inventory correction impact in H1? And in other words, do you expect any inventory correction impact in the second half of the year?

No, the inventory correction is H1. But I cannot give you now the exact numbers of that. specific aspects. It's all baked into the numbers. But you're right, the second half for automotive we expect significantly higher revenues than half one and that is also by the way true for a business like PSS. And I guess you also asked in that direction and here as well we have quantitative and qualitative Maybe Andreas, you start with the qualitative signals, why we believe that second half for PSS is considerably better than first half this fiscal year.

We see early market indicators such as the smartphone market demand already increasing while we speak. So some short-term orders have been reaching us and backlog has turning towards the increasing path again. That's one example. The other example is the area of data centers and machine learning servers. So also here we see customers increasing their demands again, typically when such applications, smartphone consumer and also computing are showing upward trends. We consider that to be early indicators for later other turns to eventually come.

And to add on that from a quantitative point of view, we are looking at crawl charts, which is basically showing the build up of the order backlog for the quarters. And here I can tell you that the order backlog for Q3 and Q4 are at the same point in reference to the quarter higher than for the Q2. So we have a build up of order backlog for those two quarters, which is better than for the running quarter.

Thank you. And maybe my follow-up question is on the automotive side. Do you have any idea of the number of launches in EVs you will have in 2024 versus 2023? I mean, just an idea of new models coming to market. how many you will be launching versus last year. Do you have any sense of that?

What's a nice English word? Filoprita or something like that? I can't pronounce it. I'm not able to tell you. It's so many, we would really have to dig into the numbers, but a very high number covering all OEMs across the world.

Thank you very much. And, François, if I may add, Sven speaking, you said it also in the intro, it's not only the new launches, it's also more affordable products coming to the market. And it's, for example, here in Europe, brakes, which are very important, tourings, which are important, which are now coming for the first time to the market. So it's a broader portfolio and a more affordable portfolio, not only the number of new launches.

Great. Thank you very much.

And the next question comes from Sandeep Deshpande from JP Morgan. Please go ahead.

Yeah, hi. Thanks for letting me on. My question, I mean, starting off on autos, you've seen this weaker than expected market in various end markets now at this point in semiconductors. But why is it that you believe that autos will definitely hold up through the year and will not see the weakness given that we've seen this softening of EV demand and within this itself, what is your expectation of EV volume for this year implied in your guidance?

Yeah, thanks, Sandeep. I think I can only repeat myself what we have said also in October. Our automotive revenue is not driven by the cars and it's partially, of course, driven by the BOM growth, but it's particularly on top of that driven by the two areas where we have a very strong market position, e-mobility and microcontrollers. I think we discussed that one with your concrete questions on e-mobility. We are basing our revenue outlook not on a market number for cars, but on actual projects with our customers and orders for this year. For the subsequent years, we would build it up based on market models, but not for the running year.

Okay, understood. And my follow-up question. And my follow-up question is regarding your inventory. Your inventory has gone up again in the quarter. I mean, you say it's for strategic purposes. Maybe you can, you know, clarify, I mean, what is this strategy? Because, you know, I mean, if your customers are making you build the inventory, given what we've seen in other end markets, whether that this could cause you future margin problems because their inventories are so high at this point, And has your margin been benefited at this point from building this inventory because your utilization has been higher than expected?

So the inventories are elevated, no question, but there's a significant part of it. And Sven quantified by a mid triple digit million number based on inventories, which we are building up on the request and paid for by the customer. So in that sense, we have assurance. Another part in that is for geopolitical risks. That's mainly Taiwan. And thirdly, and that will grow further for FEP footprint optimizations. And here we have more news in the channel that we will optimize our manufacturing footprint, which is, I think, the right thing to do at this point of the cycle. And I'm happy to take inventories for that particular reason.

Sandeep for your margin question. Of course, generally you're right. If you do not reduce the fab loadings and you build inventories, that is positive for the margin. But please look at our numbers this year. We just explained that we are taking up our underutilization charges even further. So in this year, they now move from 600 to 700 million, which is direct bottom line. And in this transition year, as we call it, it's all about balancing it out. So having the right inventories on hand. but also having an, I would say, adequate loading. And this is what we are currently doing. And please also factor in, and this is something we mentioned in our intro script as well, we believe when the recovery comes, there is a real likelihood that the recovery may also be steeper. So their inventories are smart inventories and will help us to also generate additional revenues. Thank you very much.

And the next question comes from Alexander Patek from Societe Generale. Please go ahead.

Alexander Patek Yes, hi, thank you. Thanks for taking my question. I'd just like to come back very briefly on automotive. If you could explain to us why we wouldn't see a deeper inventory adjustment in this segment. We've seen the same play out with industrials. What makes you believe that there will be not a further downgrade in automotive at this stage? Is it far more than how far out are you booked for this year?

So, first of all, the vast majority of our order backlog of 24 billion is for automotive, so we have a much better visibility. Secondly, this market is much more established than maybe the solar market, which I will talk about in a minute. Thirdly, we are constantly exchanging here informations with our tier ones and we have a reasonable insight beyond our consignment stocks into their inventories. All of that gives us the confidence that the majority of the inventory correction should be done in the vast majority should be done in the first half of the calendar year. A very different market is industrial, even though now we have to separate or distinguish in the industrial market. There's the industrial drive market, which is also an established market. In the solar, residential solar market, not so established. Basically, we had several players striving to become the number one in terms of inverter systems and obviously that then does not work out and here we see a much higher inventory level even though the photovoltaic installation globally is growing but it will take some time to digest this inventory in the value chain so value chains the the mature the more mature they are the better typically the visibility is

Thank you very much. Just a quick follow-up. Some of your competitors have admitted that they spent more on CapEx than they would have liked last year due to the lack of flexibility of their suppliers. Was this the case for you guys as well? Thank you. could you repeat i didn't get it sorry you said capex and then yes some of your competitors said that they have spent more than who they would have liked last year because suppliers of equipment were not very flexible with terms okay did you overspend a little bit last year as well

No, I think if you look at our numbers, it's 2.9 billion both years. And I'm not such a big fan of playing yo-yo, pushing up one year and pushing down the other year. It normally creates inefficiencies. So we have reduced. It's also part of our proactive strategy. cycle management, but we reduced to a reasonable amount. And please remember that in the 2.9 billion, there is 1.1, 1.2 billion of that is in our buildings, which will prepare us for the future.

Thank you very much.

And the next question comes from Johannes Schaller from Deutsche Bank. Please go ahead.

Yeah, good morning. Thanks for taking my question. I was wondering if you could maybe zoom in a little bit on your comment on automotive pricing. I think the low single-digit decline you talked about, that's very consistent with what you've always said. However, some of the Tier 1s, I think, recently suggested, one of them at least, that there are incremental pricing headwinds they're seeing from semis and components, which I guess is a bit of a surprise. So maybe help us with a bit of color on the different products and areas, and maybe where increases in your auto portfolio while some of the areas that are a bit bit weaker against that and just as a quick follow-up you now taking your investments down a little bit few hundred millions you clearly laid out where your spending priorities are maybe you can give us a bit of color in kind of the areas where you're slowing your investments and and how you prioritize that thank you

Yeah, so first of all, the average across automotive, I think I clearly said very low single digit number, but that of course is an average number and there are always some opportunities of increasing prices, but also other areas where you need to decrease price in order to either honor long-term contract or to adjust to a market situation where there is some let's say flexibility in the market, but we all know that this is a very small pocket in the automotive space. So it's some of it. There's not really a strong pattern, but of course, silicon carbide is still something where customers are happy to put prepayments on the table. Remember our story with our Coolim expansion, but it differs across the board. The second question you had, the investments, so I have to correct myself, the buildings, it's less than 1 billion out of the 2.9 billion. But again, those ones we push forward because we believe in our mid-term growth opportunities based on AMS, based on silicon carbide. We want to build the biggest silicon carbide FAB because it will be a competitive marketplace and their economy of scale matters more than anything else. Besides the building, it's again also wide bandgap equipment, also in Villach, also in the back end. The revenue growth we told you on silicon carbide up 50% compared to last fiscal year needs of course new capacities and there's of course always things like quality innovation sustaining and so on and so forth. So that's basically what I can share about this.

and johannes maybe two minor comments to the capex question the first one is in the 2.9 billion around 200 million are included from r d capitalization is as usual and as johan just said so we we are adjusting in certain silicon ramps the speed to the current macro environment that's uh the only other comment i would like to add understood thank you

And the next question comes from from Bank of America. Please go ahead.

Yeah, good morning, gentlemen. Thanks for taking my question. I'm going to ask the automotive question slightly differently. If you were to strip out silicon carbide and, you know, what you see generally speaking in automotive market share gains, would you say that your ICE business will decline in fiscal year 24 and if you could quantify that'd be great thank you and i've got a quick follow-up on sick thank you

That's a difficult one, because again, in the ICE business, that's what we call sometimes also standard applications, we see the inventory effect, right? So customers were ordering more the last two years than they really needed. So we would have to take that effect out to come to a natural rate. But don't forget the biggest growth driver you did not mention, and that's the automotive microcontroller part. which is even more than the silicon carbide part.

Okay, got it. Can you tell us in fiscal year 24 and fiscal year 23 how much of your SICK business will come from motors, or is that consistent with what you mentioned before?

Yes, I can take that one. The 23 number for silicon carbide DDA was give or take 500 million. Give or take half is industrial. The rest is then automotive and also some PSS business. Now, the 50% growth leads you then to whatever 750, and here again the majority is GIP, but the growth in automotive is higher than in GIP. So still GIP in the lead. Over time this will then, as we have said, towards the end of the decade go into a 50-50 split for both once all our big fabs are fully ramped.

Thank you. And so, Johan, I mean, you made the point of automotive market control market share gains. Would you care to share how much of fiscal year 24 revenue in ATV will be automotive MCUs?

We said it's more than $3 billion. Brilliant. Thank you.

And the next question comes from Stefano Uri from OdoBHF. Please go ahead.

Yes, good morning. I think you answered to the questions of the reason why you think there will be a strong sequential increase in the second half in TSS. You have received some orders in the smartphone area, if I understand well. But looking at your guidance, there's also for TSS, you know, a requirement for a strong sequential increase in the second half. Can you maybe elaborate from which market it's coming? Thank you.

Yeah, I think... I mean, modeling Infineon, I think you can take the automotive strength into the second half and PSS. You have seen that on the CSS side, our expectations are not that... Our current market situation is not that great. I would rather... pinpoint the two automotive and PSS and PSS is not only RFS but I said the crawl charts for PSS as we say cross meaning for the total of PSS quarter on quarter we see a backlog increase and that I think is a good model for the Infineon.

Okay. And maybe an additional question about the Chinese competition, because if we look at the revenues and the orders at ASML, for instance, they are talking a lot about capacity building in China, which could become real competitors for you. So are you seeing them already? And what is your view on the evolution of the competition in China?

yeah of course we are very much on guard in that respect we always said we expect chinese competition to come up our response to that is a technological leadership in silicon in silicon carbide and gallium nitride plus the p2s approach which makes life for competition much more difficult because it's a lot more complex set up. Nevertheless, we see in silicon power discredits, we see more competition, but that is not, let's say, not completely new. We have seen that also in the past. We also see the massive buildup of capacity in China. But please remember, we are shipping based on 300 millimeter. Currently, the Chinese players are mainly on 8 inch. And we have, I think, a competitive setup due to economy of scale. Nevertheless, I'm with you, we will lose in certain areas market shares in China, but the ones that will suffer even more are the other non-Chinese players that are not having our economies of scale with 300 millimeter FAPs in the silicon. And here we had evidences already that Competitors of ours gave up business, which we are happily taking because it's a high margin for us. And other than that, of course, also don't forget if Chinese OEMs are coming to Europe, they very much like our quality. track record in order to make sure that the products are doing what the customer expects. So there is a threat in that, but there are also growth opportunities for us in this overall story. Okay, thank you very much.

And the next question comes from Joshua Buchalter from TD Cowen. Please go ahead.

Hey, guys. Thank you for taking my question in the morning. I wanted to follow up on a previous question about the automotive microcontroller business. Can you maybe spend a minute or so walking through some of the key drivers of what's been responsible for the meaningful share gains recently and their sustainability going forward? Is it an advanced geometry RX microcontroller? Is it auto-specific safety software, the better cost basis. I'd just be curious to hear what's driving such acute share gains in that auto MCU business. Thank you.

Yeah, that's a very long story because automotive microcosm are probably the stickiest products in our portfolio and also in the industry. So you have to go back five, seven years when, first of all, we focused on 32-bit only. We focused on powertrain and safety slash ADAS. Two American competitors at that point stepped out. Then we bought Cypress. Cypress focused on body and infotainment. And now we are having the perfect 32-bit microcontroller portfolio for all applications for computing at the edge, not covering of course MPU, but computing at the edge. we can for everything and yeah the elements of this success story i i just highlighted and it needs consistency in order to drive such a portfolio to success and of course we also took the um Foundry allocation situation where we were confronted with higher input costs also as an opportunity to get the fair value-based price in the market for our portfolio. So it's a long, long history behind that. Nothing to copy quickly.

Maybe better over beer, but for all the color. I want to ask about silicon carbide on the supply side also. You've done a lot of work to diversify your substrate suppliers. A couple of questions there. Just one, given the broad-based industrial weakness, Is your industrial-focused silicon carbide business still constrained by substrate supply? And I think previously you'd mentioned that SICC and Tonka Blue would double off of an initial 20 percent level in a few quarters. Is that still on track?

Thank you. Yes, it's on track and we are not limited by substrates as others expected. We are striving based on a multi-source strategy. And by the way, I would have expected as another question the 8-inch journey. I can tell you we have very excellent results on 8-inch. And we are planning for the first volume transition in 2025. And the substrate is going to be a commodity, as we have said now the last, I don't know, five, six years.

Thank you. And the next question comes from Alexander Duval from Goldman Sachs. Please go ahead.

Yes, hi there. Thanks so much for squeezing me in. Just a quick one. You also talked about the slope of improvement in some of the segments, but just want to talk holistically at group level. Obviously, you have this steep improvement both in top line margins into the second half. Just wondered if you could talk about the degree of visibility and what gives you the confidence there, which the areas where you're most confident. Many thanks.

Alex, Sven speaking. I take your question. So, first of all, you asked about the reasons why we believe into this margin improvement in second half. I mean, first of all, it's a function of no more currency headwinds, yeah, because everything is now based on 110, number one. Number two is it's, of course, given that If you just look at our numbers, we are expecting 7.3 billion revenues in the first six months and in order to come to 16, you then need 8.7 in the second half. That's the volume increase which we need and that has a positive fall through as always to gross margin and segment result margin. The third one is, as you know from Infineon, because you know the company very well, the majority of the moderate price declines is now in the books, so to say. It's in Q1 and Q2. There is no more incremental material price decline, which is expected. And of course, to finish up, The idle costs here, as we have said, 700 million. For your models, I would give you the guidance model more than half in the first half and less than half in the second half. That gives you the key ingredients why we believe there is room for the margins to go up. to levels which then bring us to the low to mid 20s. And from a divisional perspective, I think you have now the advantage this year that we are guiding for 50% of our divisions by telling you automotive will be between 25 and 28. But I want to reiterate, to avoid any surprises, that given what we have explained, the delayed recovery in the 3Cs and IoT, the PSS and CSS margins will be significantly below past and below our average numbers.

Many thanks.

And the next question comes from Sebastian Stavovic from Kepler Schifrin. Please go ahead.

Yeah, hello everyone and thanks for taking my question. In the industrial market, where do you see prices trending right now? You mentioned low single-digit in automotive. Could you specify a little bit the dynamic in the industrial market? And the second one is linked to your fab loading today. Could you help us understand where you are standing in terms of fab loading in your main fab today and where do you see the loading trending in the coming quarters? Thank you.

Andreas is speaking. Let me take the question on pricing in the industrial section. Let me explain as follows. So the majority of in-finance pricing that we did apply over the last two to three years is in principle based on value-based pricing. And that goes back into our capability, which we increased over time. to understand the value add of our offerings in the end customer systems, but also in our understanding on the competition's value proposition and the next best alternative. This together with understanding the value we create via supply security and that plays a very important game for medium and large size accounts obviously, we translate it into price points that are corresponding to what we call value-based pricing, which is pricing that has come to stay. So if you look at the current situation, we're there with. Also in the area of industrial, like in computing and consumer to a large degree, we do not see a so-called reversal to previous allocation times. We see prices to stay. Nevertheless, there's a bunch of product categories, and Jochen alluded to this, in the area of consumer communication, but also industrial, where we see more commoditization kicking in. And also here we are of course not blinded. We are confronted with price decreases in order to then also stay in competitive position in the marketplace. All in all, if we sum it up, Also in the area of industrial, coming back to your question, that translates over fiscal 24 into a very low single-digit price decrease that we are giving, and that is already baked into, to a vast majority, the figures that we have been publishing. So, i.e., in, so to say, the quarterly guidance of first half of this fiscal year.

And Sébastien, on the FAP loading, so front-end is in the mid-80s, back-end is in the mid-70s. Be careful to compare your numbers with competitors. We are able to load our FAPs up to 100%, particularly in the front-end. Others might give you much lower numbers, but then typically the real maximum loading is only 80%. uh we are continuously investing into our facilities and therefore the structure matches the demands and and therefore um yeah we are ready to load them at 100 okay thank you and the next question comes from jerome ramel from bnb paribas please go ahead

Yeah, good morning. Thanks for taking my question. First question, how much of your EV revenue is coming from China?

About a third, but I would like Daniel to double check and please follow up with him. But it's about a third. Yeah.

Okay, thank you. And the comment you made on the 8-inch wafer for silicon carbide, how many suppliers have you qualified so far for 8-inch?

We have one, two, three, four, five, six now on six inch and we have material from a handful of players on eight inch and the first material now at target yield already. is coming from a chinese source and again we are planning the aid in transition now starting in 2025 so we are very um yeah the the results we see the technical results signal that it's technically absolutely possible and we will start with a chinese supplier but of course all of them have an 8-inch roadmap and we will strive for a multi-sourcing landscape also in 8-inch and there is no reason at this point in time that we should not be able to achieve this. Thank you very much.

Time to wrap up. Thank you for all your questions. With that, we are concluding our fiscal first quarter conference call. For further questions, please feel free to contact the IR team here in Munich. Take care and have a good day.