Infineon Tech AG

Welcome to the conference call for analysts and investors for Infineon's 2024 fiscal second quarter results. Today's call will be hosted by Alexander Foltyn, Executive Vice President, Finance, Treasury, and Investor Relations at Infineon Technologies. As a reminder, the 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 assumptions and management expectations resting upon currently available information and present estimates. They are subject to a 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, it's my pleasure to turn the call over to Infineon. Please go ahead.

Ladies and gentlemen, good morning. It's springtime, and we thank you for joining our second quarterly earnings call in 2024. On this call, you have our CEO, Jochen Hanebeck, our CFO, Sven Schneider, and our CMO, Andreas Orschitz. Jochen and Sven will provide an overview on the market situation and divisional performance, key financials, and our outlook. After that, we will start our Q&A session. As usual, the illustrating slideshow, which is synchronized with a telephone audio signal, is available at infineon.com. One new thing. Starting this quarter, we will also provide a PDF with Jochen's and Sven's introductory remarks in the course of the conference call on our website, namely infineon.com slash investor. A recording of this conference call, including the aforementioned slides and a copy of our earnings press release, as well as our investor presentation, are also available on our website at infineon.com slash investor. And now, Jochen, over to you.

Thank you, Alexander, and good morning, everyone. The first half of our 2024 fiscal year is now behind us. It still very much looks like a transition year. Transition refers to a cyclical downswing in between the multi-year upturn following COVID and afterwards a return to structural growth. Cycles are typical of our industry, but each one has different characteristics. In the current one, demand and inventory dynamics are taking much longer to play out than in the past. Furthermore, in some application areas, the downturn is much softer than in others. The primary example is automotive, where secular content growth is continuing. Overall, the picture remains mixed, and Infineon is of course not immune to market forces. It turns out that the cut we made to our guidance at the beginning of the year was not deep enough. Therefore, we lower expectations for the remaining two quarters of our 2024 fiscal year, de-risking our guidance. I will comment more on this revision in my outlook section towards the end of the call. Broadly speaking, the so-called 3Cs, markets standing for consumer computing, communication and IoT, are bottoming, but not yet recovering. AI is the notable standout in computing. Industrial is showing typical late-cycle behavior with inventory digestion grinding on. Automotive is remaining the bright spot in relative terms, given secular trends and, in the case of Infineon, share gains, in particular in microcontrollers. That being said, slowing EV growth in Western markets and OEMs and Tier 1s reassessing inventory levels have become more pronounced issues. temporary headwinds, which we are recognizing for this fiscal year. We are managing the cycle in a robust way, as can be seen from our performance in the March quarter. Group revenues amounted to 3 billion 632 million euros in line with our expectations. The segment result came in slightly better than anticipated. 770 million euros corresponded to a segment result margin of 19.5%. The decrease compared to the previous quarter reflects the fall through from lower revenues, pricing adjustments typically occurring at the beginning of a new calendar year, as well as lower government funding receipts. Currency effects played only a minor role, as this quarter's US dollar-euro exchange rate of 1.09 came very close to the prior quarter's rate of 1.08. On a positive note, our order backlog has been stabilizing over the past couple of months. With around 24 billion euros, it stands at the same level as at the end of December. We view the backlog trending sideways as a clear indicator for troughing demand levels in our target markets. Now let's take a closer look at our divisions. Automotive. In the second quarter of the 2024 fiscal year automotive achieved revenues of 2 billion 78 million euros stable compared to the quarter before. Overall small volume gains compensated annual price resets and structural drivers offset the ongoing modus inventory correction affecting parts of classical applications. The segment result came in at 512 million euros, yielding a segment result margin of 24.6%, compared to 27.1% in the previous quarter. This is mirroring well-expected low single-digit pricing adjustment as well as some mixed effects. Infineon has a unique position in the global automotive semiconductor market. Latest research data for 2023 by Tech Insights is confirming this. While the market grew by 16.5%, we were able to grow by 26.2%. All regions contributed to this impressive outgrowth, enabling us to expand our global leadership. We are the number one in Korea and China, number two in Europe and in Japan, and number three in North America. In automotive power, we retained the clear number one spot in automotive microcontrollers. We achieved the pole position for the first time, gaining almost five percentage points of market share. Now a short spotlight on China. Last year, the market there grew by 15.4%. Infineon achieved growth of 25%. Our business success is built on a very broad portfolio of over 300 automotive product families. In the last two years, the pace with which we were winning new designs in China has been clearly exceeding the market growth rate. With several billion euros in the bag, we are confident to keep growing our China auto business in the coming years. The Xiaomi design win is a case in point. I will comment more on it in a minute. From an extremely strong base, we will be able to grow our automotive business also in the adverse conditions of 2024. However, at a noticeably slower pace than anticipated so far, namely at a low to mid single digit as opposed to double digit growth rate. What factors are at play here? The estimates for the global car production are being nudged up to around 90 plus million units, stable in comparison to 2023. Inventories of automotive semiconductors are currently being adjusted downwards, reflecting a debate between OEMs and Tier 1s as to who should bear the burden of safety stocks. pricing as mentioned is resilient with low to very low year-over-year declines in terms of secular content drivers the xcv adoption is currently slowing in key western markets and negative headlines are dominating the narrative western oems are pushing out their electrification timelines and we have seen several of our customers reacting to this near term demand pattern pushing their orders out of this fiscal year. In China, in contrast, the proliferation of so-called new energy vehicles is continuing. In March, NEV sales penetration was 39% compared to 32% one year earlier, and the figure is rising further as numbers from early April are showing. A major highlight of the quarter was the recent launch of the Xiaomi SU7 family, where we will be providing our hybrid pack drive cool SICK modules for usage in models with an 800V drivetrain. This marks another significant design win for our technologically leading silicon carbide franchise. In addition, we are providing system solutions with over 60 different components to Xiaomi, including more than a dozen MCUs from our Aurix, Traveo and PSoC families. Overall, we are addressing more than 10 applications in the SU7. In total, global EV growth will slow down this year. We do, however, remain confident on the mid-term outlook for vehicle electrification, 2025 EU emission targets, re-accelerating momentum for plug-in hybrids, and launches of new, more affordable models are likely to drive XCV momentum in 2025 and beyond. Our microcontrollers are directly addressing the decade-plus trend of ADAS and software-defined vehicles. Here we continue to see healthy design wins, especially for the upcoming third-generation Aurics in the quarter, under report at leading German OEMs and Tier 1s, supporting our global number one position in automotive microcontrollers. Key criteria for the wins are the functional safe hardware concept, certified up to standard of ASIL-D in conjunction with outstanding performance and quality. Together with the complete software stacks of our customers along the value chain, this represents a strong competitive moat. Moving to green industrial power, which saw a further sequential revenue decline in the March quarter. Sales went down by 4% to 469 million euros, primarily driven by renewable energy generation. The continued revenue slowdown is leaving its mark on the segment's profitability. With a segment result of 89 million euros, the segment result margin declined to 19% after 26.7% in the quarter before. The main drivers of this margin deterioration are lower volumes, adverse mixed effects, increasing idle costs and unfavorable price changes. The business environment for our industrial activities remains challenging. The markets for drives and home appliances continue to be affected by weak corporate investing and lower consumer spending confidence. In addition, excess inventories are persisting. Expectations for a gradual recovery are moving too late in the 2024 calendar year, if not beyond. For renewable energy generation, high-channel and customer inventories are temporarily dampening the semiconductor demand. The underlying growth drivers remain strong. Market researchers predict growing annual installation levels of around 500 gigawatts for photovoltaic and of just over 100 gigawatts for wind power in 2024. This would constitute annual growth rates of 24% and 18% respectively. Let's take a look at our silicon carbide trajectory. We are very proud to report on the recent introduction of the second generation of our trench-based silicon carbide MOSFETs. Our Gen2 650V and 1.2kW components improve key performance figures such as switching losses by up to 20% compared to the previous generation. Customer interest is very strong. With highest levels of energy efficiency, our silicon carbide-based solutions remain a key enabler of decarbonization in automotive and industrial applications. Preparation for ramping silicon carbide capacity at our coolant sites are progressing as planned, including the expected 200 mm transition. This will put us in a great position for mid- and long-term profitable growth, as the space constraint related to our Austrian FAB does no longer exist. That being said, the demand environment is currently more cautious, making our REM curve less steep in the near term. For this fiscal year 2024, we are adjusting our expectation for silicon carbide revenue growth to about 20%. A cross-reference to significantly changing market growth rates we find premature at this point. However, we are confident to clearly defend our market share, if not more. Now over to the power and sensor. systems segment, which saw revenues coming down sequentially by 7% to 730 million euros. Similar to the previous quarters, components, MOSFETs and ICs for consumer-facing applications were under pressure, whereas products for smartphones and servers saw an uptick. As a result of the revenue decline, the segment result decreased to 64 million euros, equivalent to a segment result margin of 9% after 12.9% in the December quarter. PSS continues to be severely affected by the projected downswing in consumer computing communications. The segment has now seen six consecutive quarters of the downward trend in revenue, and it is almost 40% down from the peak achieved in the second quarter of 2022. This is the trough. The business is picking up in the currently running quarter. However, against a persistently weak macro backdrop and a prolonged inventory digestion period, the near-term recovery is likely going to be less steep than we had expected previously. From a mid-term perspective, growth dynamics remain favorable, underpinned by structural trends. In particular, the rapid proliferation of artificial intelligence is an extremely attractive opportunity for us. The power requirements of AI processors are orders of magnitude above those of classical enterprise CPUs. As a consequence, power systems with best-in-class energy efficiency bring tangible benefit in terms of cost of ownership, motherboard space, and CO2 footprint. At the same time, there is a notable uplift in the power semi-content per server rack. Infineon offers industry-leading solutions for the entire power flow from AC-DC grid power supply via DC-DC conversion all the way to the final power stage supplying the processor. Capabilities like digital power control, chip embedding, mastery of silicon-silicon carbide and gallium nitride power technologies and in particular the novel vertical power supply architecture give us a clear differentiation from others in the market. This has already translated into design wins across AI processor makers, notably with the three most important ones, as well as hyperscale data center players. With mid-double digit growth rates, we expect this business to reach a billion euros over the next couple of years, driven in particular by the transition to vertical backside mounted power supply with an inherently much higher bill of material for us. Lastly, a look at connected secure systems, where a bottoming is visible. After a steep decline in the previous quarters, revenue in the March quarter increased slightly to 371 million euros. Demand for consumer IoT and smart card products appears to stabilize at low levels. The pace of channel inventory correction is slowing down. In the area of Wi-Fi, we see some small restocking by distributors. The segment result of CSS came in at 42 million euros, corresponding to a segment result margin of 11.3%. In the near term, the inventory, digestion in IoT and security markets will progress. Looking at improving order entry, we expect a moderate demand recovery in the second half of this calendar year. In the meantime, we are getting positioned for the immense structural growth opportunity of edge AI. Our next generation PSoC edge family of microcontrollers is optimized for machine learning applications. They are all supported with comprehensive system design tools and software. Additionally, we are leveraging two of Infineon's core competencies, power management and embedded security. IoT Edge devices require low-power capabilities without compromising performance. Security is a vital aspect in IoT deployment, and our PSoC Edge family has been designed to meet the highest certification level provided by the PSA-certified program framework for embedded security. Now over to Sven, who will illustrate our key financial figures.