Infineon Technologies AG (IFX) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the conference call of Infineon Technologies AG on the publication of its Q2 Fiscal 2023 Earnings Figures. [Operator Instructions] I'd now like to hand the floor to Bernd Hops.

Thank you very much, Mr. Konik. Good day, everyone. Welcome to our conference call on the earnings of the second quarter of fiscal 2023. Participating at this conference on behalf of the Board of Management of Infineon are Jochen Hanebeck, CEO and Sven Schneider, CFO. Dear participants, first of all, Mr. Hanebeck as usual will give you an overview of the business performance at Infineon, after which Mr. Hanebeck and Mr. Schneider will be happy to field any questions you may have. So, Mr. Hanebeck, the floor is now yours.

Thank you, Mr. Hops. Hello, and welcome. Listeners, half the fiscal year is behind us and Infineon is well underway. By the end of March, we raised our guidance for the second quarter and the fiscal year as a whole and the main reason for our growing confidence is the continued strength and resilience of our automotive industrial business especially in the sectors of electromobility and renewable energy. It fits in with this that the 2 divisions serving these markets achieved segment result margins of more than 30% in each case in the last quarter. Our clear focus on long-term structural opportunity of decarbonization and digitalization and the creation of customer benefits with system solutions have proven to be the right recipe for profitable growth. Semiconductors are essential in order to master the energy rated challenges of our day and to shape the digital transformation. We are making a major contribution for a future worth living in, the mood in our markets has not changed much since the last talk 3 months ago. And generally, volatile macroeconomic environment, automotive and industrial application tend to exhibit robust dynamism. Content that there's a cyclical weakness of demand in the application of the fields of consumer electronics and communications. The fact that Infineon is assuming its way successfully through these choppy waters is shown by the figures for the second quarter. Infineon achieved revenue of EUR 4.119 billion, despite the headwinds caused by the currency changes, though this is up by 4% compared to original expectations. The Automotive Industrial business has grown even more strongly, supported by the higher revenue, the segment results grew to [ EUR 1.108 ] billion and the segment result margin was 28.6%, following 28% in the previous quarter. Large unit numbers and positive mix from the product mixture and the sustainable pricing policy have contributed to increasing our profitability. Our order books composed of confirmed and unconfirmed orders fell in the second quarter as expected. Our customers' ordering behavior is becoming normal. As of end of March, order books were sort of EUR 36 billion, falling EUR 38 billion 3 months earlier. Putting that in perspective, that figure still corresponds to more than 2 years' revenue. The free cash flow increased from EUR 25 million in previous quarter to EUR 193 million. Some of the pros -- increase comes from the proceeds from our high reliability DC converter business, the sale to U.S. Micross component was completed in February. Now the results of the 4 divisions in the second quarter. The Automotive segment achieved revenue of EUR 2.080 billion and thus for the first time exceeded the EUR 2 billion mark in one quarter. This significantly increased by 11% compared to the previous quarter, was supported by all the product groups, in particular, microcontrollers, special memory chips and power semiconductors developed strongly. On a year-on-year basis, we see an increase of revenue by 40%. The current strength of automotive business reflects the fact that the automotive division achieved half the total revenue of Infineon in the second quarter. The segment result improved further to EUR 647 million and segment result margin was 31.1%, which is a new record following 28.4% in the previous quarter. Our customers acknowledge the value of our solutions and our reliability. That can be seen in the line that in the list of the globally leading automotive semiconductors in 2022, Infineon is again the #1. That's shown by the market data provided by TechInsights, formally Strategy Analytics. The 2 structural megatrends, electromobility and automated driving are supporting the resilience of business in a time when the delivery bottlenecks in standard automated components is gradually being overcome and the delivery times have become more normal. In the case of microcontrollers, the shortage is likely to continue this year. In passing rights for vehicle electrification, irrespective with these such chips made from silicon or silicon carbide, we expect that the shortage will continue to be in the long-term and there are 2 reasons for this. First of all, electro-vehicle became widespread and secondly, there's increasing demand in the field of renewable energies. In most product categories, the market will gradually transition from allocation to a more normal, stable supply and demand situation, where we see that higher inventory reaches especially in the field of microcontrollers and single-chip systems, reflecting the wish of industry to move beyond the just-in-time concept instead to have a more resilient value-added chain. We believe that a strong structural increase in the number of semiconductor in the car will continue on a constant growth for this business, even if the automotive market was simply to remain stable. As a leading provider of automotive semiconductors, we are in a good position to continue being successful, which has confirmed our latest design and innovation activities with strong partners. We have intensified our cooperation with continentally automotive supplier in developing electric and electronic vehicle architectures, the next generation. This can consider to 100 individual controllers. The [ EMV ] cooperation have an orderly and efficient architecture with central high-performance components and a small number of high-power zone control units. The use of these powerful zone controlling is the next decisive step to a software-defined vehicle. For it's zone control units platform, Continental is going to use our AURIX microcontrollers for the third generation. Thanks to the unique properties, it means that vehicle in functions can switch from standby mode to active mode in a fraction of a second. This means the microcontrollers made a decisive contribution to improving efficiency, safety and comfort in future vehicle generations. In the field of vehicle architecture, in addition, we've been successful with Chinese automotive manufacturer, BYD, will supply not just microcontrollers, also smart power switches for the new zonal electronic architecture for BYD, which will make it possible to have a far smart and reliable power distribution in future vehicles. An example, we can see that this is a strong evidence of our approach from the product to the system. In the field of electromobility, we are expanding our long-term cooperation of Delta Electronics from industrial to automotive applications. Delta is a global leading company field of power and energy management. In a joint innovation opportunity, we are going to develop more efficient and more powerful solutions for the rapidly growing market of electric vehicles. The corporation is concerned with major components in vehicles such as voltage transformers and onboard charges. Mortgages for our Infineon in the field of electromobilities is this, we're intensifying our cooperation with a South Korean manufacturer, Hyundai. For the next generation of high-end car models, the Genesis brand, we should supply the silicon carbide chips, where the volume is going to be in the 3-figure million range. Our successful business relations at the Hyundai-Kia Motor Corporation is therefore being expanded further. Now our Industrial business. The Industrial Power Control division changed its name as of the 1st of April. It's now called Green Industrial Power. Traditionally, the focus of the division's revenue is on power semiconductors for efficient power supply to in the industrial sector. With this business, GIP is successful and we expect that it will continue to grow. Nevertheless, in future, the energy transition will be what is above-average growth in this division in future. It will be driven in particular by renewable energies and the expansion of the necessary energy infrastructure. Electrification, decompensation of the energy efficiency are important subject for us and our customers. With the new name, we are underscoring our contribution to this change. And it's with this existing name, the division achieved a record quarter at the end of March. Revenue was EUR 558 million, which is 12% more than in the December quarter. All fields of application contributed to this. The segment result increased to EUR 181 million, the segment result margin continued to grow and for the first time reached 32.4%. In the previous quarter, it was 28.8%. The outlook for Green Industrial Power remains positive, with a strong demand for application in connection with decarbonization, we can more than compensate the weaker demand in the field of domestic appliances and industrial drives. In the field of wind and solar power, we are in a leading position. Our power semiconductors set the standard for higher efficiency along the entire power conversion chain. In this connection, we are very happy to report a design win with a high-performance modules for offshore wind parks, built by a major European power company. This is a volume in a 3-figure million range. The continuing growth in energy efficiency, whether in industrial or automotive applications is supported by the increased use of silicon carbide technologies. In order to put our supply of silicon carbide basic materials for production on a more reliable basis, we are taking a decisive step and the most recent was seen in yesterday's press release we probably saw. SICC and TanKeBlue to Chinese silicon carbide suppliers have concluded longer-term supply agreements with us. They both supply competitive, high-quality [indiscernible] wafers and boules as starting materials for managing silicon carbide semiconductors. Both partners will provide a double-digit percentage share of our long-term forecast demand. The agreements are controlled based on materials with a 150-millimeter wafer diameter. Later on, with the transition 200-millimeter wafers, the suppliers will be providing it in with the material. We see that it is -- the market is developing as we expected with respect to silicon carbide raw materials. With these agreements, we have assumed a strategy of diversifying our supplier bases by procuring silicon carbide material from different suppliers in different countries, which increases the resilience for us and our silicon carbide customers. Currently, there's more than 3,600 of them. We are securing material from new competitive sources whose quality satisfy the highest standards on the market. Let's now turn to the Power & Sensor Systems segment. Revenue in the second quarter was EUR 925 million. That is a decline by the previous quarter by 11%, but this development is due to the market in view of consumer electronics, computing, communication, which I mentioned at the beginning. The decline in revenue also affected profitability of the division. The segment result was EUR 197 million, segment result margin was as 21.3%, following 28.9% in the previous quarter. Looking forward, we expect that applications connected with decarbonization will continue to run well. This include, for example, rooftop solar power systems and charging stations of electric vehicles. On the other hand, for both of the markets, we don't see an improvement for PSS. We shall continue to monitor inventories and adjust our capacity utilization accordingly. Even though the conditions are difficult in the short-term, the long-term trends remain strong, particularly the dynamic demand for the gallium nitride-based solutions. In some of our key applications, gallium nitride will be the preferred technology by 2030, especially in mobile chargers, power supplies for computer centers, rooftop solar systems, onboard chargers for electric fields. There gallium nitride will play a more and more important role. Development activities in the field of gallium nitride technologies is to be extended. That is why as we announced at the beginning of March, we are planning the takeover of GaN Systems. The technology company was found in 2008 and is based in Ottawa in Canada. And it is a world leading development gallium-nitride-based solutions for power conversion. It employs more than 200 employees and has development sites in Canada, the U.S.A., Taiwan and India. By joining forces, we can significantly increase the development of our gallium nitride solutions and expand our leading position in Power Systems. We are currently back on the necessary approval by the authorities. We expect to close this takeover in this fiscal year. And now Connected Secure Systems. In the second quarter, the division posted revenue of EUR 550 million, which is 4% more than previous quarter. The improved supply situation for our contract manufacturers had a positive effect, payment cards, microcontrollers and better security solutions. The segment result improved to EUR 155 million, which is an all-time record. The segment result margin jumped from 23.5% in previous quarter to the record 28.2%. With a pricing policy, which is beneficial for us and higher unit numbers, we're able to more than compensate for the negative events of the exchange rate developments. Even if demand in consumer goods market remains weak, the long-term opportunities for growth for applications in the Internet of Things, both in consumer and industrial sector remained strong, that's shown by the lasting design win dynamism. In the second quarter, microcontrollers and connectivity solutions were selected by major management in the field of domestic branches, smart home, automotive, industrial applications. We can also report a further success in the field of government documents in the U.S.A. The United States government publishing office signed a 10-year agreement with us for supplying security solution to the U.S. passports. And it's the third time that we've been selected as a supplier for this electronic document. We supply the chip, the software and the packaging. Another example of how with system solutions, we are creating added value and thus helping us to be successful with our customers. It's not least this that shows the technology capacity of Infineon, which is based among other things on our secure U.S.-based supply chain. With that, I come to the outlook. As I've already explained, we continue to see a bifurcation of the semiconductor markets. On the one hand, where there are strong structural trend supporting application in the automotive sector, especially electromobility and automated driving. The same horizon industrial sector, especially in the field of renewable energies. On the other hand, the market missions for consumer applications, computer centers and communications infrastructure remain challenging for the time being. The situation of supply in the meantime is improving and the customers are reacting with their order behavior to the shorter delivery times, but they are not overreacting. On the contrary, they see the importance of the availability of semiconductors, especially in the field of applications with strong structural growth. All in all, we are more than confident with the development in the second half of the fiscal year. Our outlook for the third quarter and the rest of fiscal '23 has been based on assumption of an exchange rate of USD 1.10 from USD 1.05 to now USD 1.10. We expect a stronger headwind because of the currency changes for our business. Nevertheless, in third quarter we expect revenue of about EUR 4 billion, in other words, a stable development of revenue. With the forecast revenue, the segment result margin were probably about 26%. That figure takes into account the weaker U.S. dollar. In addition, we're expecting cost increases, such as because of ramping up manufacturing. It's also the effect of the cycle management and the cost from certain underutilized capacity and the pro demand in the field of consumer electronics, communications, which will have effects on us and these effects will be felt. For fiscal 2023, we expect revenue of EUR 16.2 billion, plus or minus EUR 300 million. We are increasing our revenue expectations compared to the earlier guidance of EUR 15.5 billion. And that's what in the middle of the revenue range of around EUR 700 million and that despite the negative currency developments with a constant exchange rate of $1.05, the expected increase revenue would be almost EUR 1 billion. Compared to fiscal 2022, our forecast is an increase in growth by 14%. We're also expecting an improved segment result margin about 27%, following 25% previously. Decarbonization digitalization are progressing, both trends are driving the structured demand for semiconductors and in the years ahead, will create a growing demand for our products and solutions. Risks and opportunities for Infineon, we serve customers in the long-term is the reason why we're investing. We had the groundbreaking ceremony in Dresden on Tuesday for a new smart power fab, and we're very proud that we were able to achieve this important milestone after [indiscernible] last November. It is the biggest single investment history of our company, and we're expanding our manufacture capacity substantially and also speeding up for the green digital change in Europe and the world. The importance of the new fab goes far beyond Infineon. That is demonstrated by the presence of the presence of the present European Commission and the Federal Chancellor at the groundbreaking ceremony. It is an honor to welcome Ursula von der Leyen, Olaf Scholz and other leading political decision-makers at our site. We're very happy with the political support for the project. The new fab will make a major contribution to strengthening the position of Europe in the global semiconductor manufacturing industry. European Chips Act is an important step to establish a semiconductor ecosystem in Europe on a global level and to secure the value-add change in key industries. In less than 15 months, we have succeeded in creating a comprehensive framework for opening up new prospects for semiconductor companies with development sites in Europe. Our forecast for investment in capital goods, otherwise, other intangible assets and capitalized development costs is unchanged. We are expecting about EUR 3 billion this year still. For free cash flow, taking account additional revenue and increase profitability, we now expect a level of EUR 1.1 billion. Assuming unchanged expenditure on front-end lines amounted EUR 700 million, the adjusted free cash flow will probably be around EUR 1.8 billion. That would correspond to 11% of revenue. The planned takeover of GaN systems is not yet taken into account in the figures that I've announced. Listeners, that brings the end of my remarks. Together with Sven Schneider, I'm now available to answer any questions you might have.

[Operator Instructions] [ Mirko Reipka ] from [ Platow Brief ]is going to ask the question.

I have one question. I would like to know your reaction to the criticism about the subsidies for such a profitable company as Infineon currently is, people are saying that, that would have been unnecessary and the money might have been better spent elsewhere. Perhaps you can make a statement on that also in light of what is happening in the United States. And what has been spent in the inflation program? Would Infineon potentially have erected the fab somewhere else if the subsidies haven't been available?

Yes, I understand that the billions of euros that are supporting the semiconductor industry also open up a bunch of questions. In an ideal world, I could well imagine there are not being any subsidies for factories at the global level. However, reality is different, a number of countries, a number of different regions have identified the strategic value of the semiconductor industry. It's an industry that has an extremely large networking factor compared to other industries, and it's essential in order to drive the digital and green transformation. Having said that, to a certain degree, we do need -- let me see how to put it, a level playing field between the regions, so that investments, the size of Dresden, can be made, of course, in addition to the very important support aspect in Dresden, there were other factors that played a role and spoke in favor of Dresden, the ecosystem being one, our very skilled labor being another one, and the third one being the economies of scale of the factory, which are substantial. Therefore, I believe that the whole story is quite convincing, not just for Germany, but also for Europe. Now the criticism has been that it was corresponding to EUR 1 million per job, but I must contradict that. There are more serious estimates by Silicon Saxony, for example, where the factor of jobs that are aside -- on top of the ones that we are creating range up to a factor of 8. So that puts that figure into perspective quite substantially, actually. Therefore, for us, as a company, but also for Germany and Europe, this is a very good move.

But Mr. Hanebeck, I have a follow-on question. If the subsidies had not been in the offing, what would Infineon have done? Would you have gone to United States? Would you have received subsidies there? Or would Dresden still have been worthwhile?

Well, as I said before, there were several reasons that played a role in our deciding on Dresden. I'm not going to give you a further breakdown. We have a factory in Texas and Austin, resulting from the Cypress acquisition. So we do have options to grow in all regions in which we're active. However, for the reasons I mentioned, we opted for Dresden.

Next up is a question from [indiscernible]. I'm going to read it out, because it's been submitted in writing. In Europe at present, there is a great effort to increase chip production domestically in order to be protected from shocks and bottlenecks, the type of which we've experienced in pandemics and in order to reduce dependency on Asian centers of production that can be susceptible to geopolitical tensions such as Taiwan and South Korea. The question is this, where does Infineon identify the biggest challenges in ramping up chip production in Europe? And are the funds of EUR 34 billion proposed under the European Chips Act sufficient to actually make a move?

Thank you very much. I'm going to respond in German, and I assume it's going to be interpreted. The semiconductor industry emerges from a situation of almost full globalization. Over the last decades, players have established themselves in the United States, in Europe, in Taiwan, in Japan, in Korea, who have established benchmarks in their sectors across the entire industry. And in so doing, have been successful. As a result of globalization, this system and the increasing strategic valuation of the semiconductor industry, system is basically facing a challenge. All major economies are making an attempt to grow the semiconductor industry in their -- in the territory, excuse me. This doesn't mean that any of the countries or regions will become fully independent. One-sided dependencies can be reduced to a certain degree, but it will be impossible to attain full autonomy. You also asked about the challenges we're facing in Europe. Well, if you were to start from the beginning, in basic research, we are positioned quite well. There are definitely some outstanding institutes such as Imec and Fraunhofer and LITEN. Of course, we have to strengthen them even further so that the ideas that are born from research can be industrialized better. Coming to industrial players, such as Infineon now, where of course, we have a great obligation to conduct good R&D. Skilled labor is, of course, one of the issues that takes center stage. We will have to make a big effort in this area at the university level. But for a factory in the -- in terms of maintenance and operation and apprenticeships, we have a good program in Saxony with 70,000 employees, who are already active in the ecosystem of the semiconductor industry. And by the way, that was another reason why we decided to go to Dresden. Going forward, what we need on top of that, of course, is further projects, the EU's goal of 20% regional production. And once again, this is not going to lead to autonomy, but it will reduce dependencies that are one-sided. We will require another few projects in order to make further headway in this direction.

[Operator Instructions] The next question comes from [indiscernible] from [ Manager Magazin. ]

Mr. Hanebeck, you just touched on this 20% regional production. One possibility would be to work together with a partner such as TSMC in building a fab. What's your take on that?

Well, yes, as a matter of principle, we welcome the further strengthening of the European ecosystem because this increases the sovereignty and resiliency of our supply chains, as I mentioned earlier today, Above all, we would welcome efforts in the area of chips for industrial applications, because these are the value-added change, which in Europe are the most important and the task at hand is to safeguard these.

The next question comes from Ilka Kopplin from the FAZ.

I have a question. Mr. Hanebeck, you told us in what areas semiconductors remain in demand, the auto sector being one of them. But if I understood you correctly, you also said that even if demand slumped in the auto sector, you could cushion that because the number of semiconductors in each car is increasing. Are there any signs of a potential dip in demand perhaps with respect to the automotive sector? And which may or may not have an impact on revenue, is there any tendency that has been witnessed already?

Well, the semiconductor industry is very dynamic. I'm sure that you've followed that sales in the first quarter in China weren't that high, but everyone expects this to accelerate in the second half of the year. So things are always moving in semiconductor land. First of all, a lot of people desire to have their own car. On the other side, we also have inflation, which plays a role and poses an obstacle of sorts. But to us, this isn't the key parameter. Of course, we sell more semiconductors if more cars are built. However, our business is much more dependent on what we call content growth, and that is the number of semiconductors in each car. And here, above all, electric mobility is the prime topic, in particular, in connection with issues such as silicon carbide, where the semiconductor share is increasing substantially. I can remember phases during which the global average was $300 per car. Now we're at $600 to $700 per car. And if you include a silicon carbide module and then move to higher levels of automation, Level 2 or Level 3, then you're easily moving in the EUR 1,000, EUR 2,000 to EUR 3,000 range, and this is what drives our business, not so much the number of cars that are sold worldwide.

We don't have any further requests for the floor. Therefore, I should like to bring the Q&A session to an end. As always, however, should you have any questions later on, the team of IR will be happy to hear from you, give us a call, send us an e-mail, and we'll deal with your question right away. Having closed the Q&A session, I would like to ask Mr. Hanebeck to make his final remarks.

Thank you, Mr. Hops. Listeners, Infineon is in a very good position. The second quarter of the fiscal year has been completely very successfully, and we exceeded original expectations. The dynamic market, an important automotive industrial application such as electromobility and renewable energies remains robust. Consumer markets and also expenditure by companies on IT infrastructure, on the other hand, is developing weekly. In these sectors, there's no sign of an improvement at present. For the current fiscal year, we are very confident overall, and we are increasing guidance for revenue and profitability and despite the current headwind from the development of exchange rates. Decarbonization, digitalization remains the foundation of our business. Our solutions are driving the green digital transformation forward. Thank you for your interest and goodbye until August.