Earnings Call: Q3 2018

Aug 1, 2018

This call for analysts and investors for Infineon's 2018 Fiscal Third Quarter Results. Today's call will be hosted by Alexander Foulton, Corporate Vice President, Finance Treasury And Investor Relations of Infineon Technologies. As a reminder, today's call is being recorded. This conference may contain forward looking statements based on current expectations or beliefs as well as a number of assumptions about future events. We caution you that statements that are not historical facts are subject to factors and uncertainties many of which are outside Infineon's control that could cause actual results to differ materially from those described or implied in such statements. Listeners are cautioned that Infineon's actual results could differ materially from the results anticipated or projected in any of these statements and they should not put undue reliance on them for a detailed discussion of important factors that could cause actual results to differ materially from the statements made on this conference call, please refer to our quarterly and annual reports available on our website. At this time, I would now like turn the call over to Infineon. Please go ahead. Thank you. Good morning and welcome ladies and gentlemen. Also on behalf of the entire Management Board of Infineon. Reinhard Ploss, CEO Dominic Azim, CFO Hermut Gassel, Chief Marketing Officer and Johan Hanebeck, Chief Operations Officer. We will proceed as usual Reinhardt will start with some remarks on group and division results, market developments and quarterly business highlights. Dominic will then comment on key financials, followed by Reinhard again, updating you on our guidance. After that, we will be happy to take your questions. In order A recording of this conference call and a copy of our 2018 fiscal third quarter earnings press release and investor presentation are also available on our website at infineon.com. Reinhard, please go ahead. Thank you, Alexander and Good morning, everyone. In the June quarter, our group revenues were 1,941,000,000, up 6% both quarter over quarter as well as year over year. With this, we have solidly met our guidance taking into account is stronger than anticipated U. S. Dollar. Our underlying growth momentum remains strong. At a constant U. S. Dollar change rate, we would have grown by just over 10% year over year. A segment result for quarter 3 was 1,000,000, an increase quarter over quarter by 13% and year over year by 5%. The segment result margins stood at 18.3 percent, which was slightly ahead of our guidance, even when adjusted for currency effects. As in prior quarters, we saw strong order entry and other signs of positive business dynamics. Our continuous effort to ramp capacity allow us to better serve our customers and grow our revenue base. However, we could not fulfill demands in several product areas due to supply limitations. Thus, we see a growing order backlog leading to a book to bill ratio of 1.5 Let me put this into perspective. The power semiconductor market is currently in allocation. This typically leads customers to scramble for capacity and to aggressively place orders. Therefore, we are taking these numbers with a pinch of salt. Now to the divisions. Automotive revenues came in at 1,000,000 for the quarter. This represents a 3% quarter over quarter increase and a 9% increase year over year. At a constant exchange rate, we've had grown 13% year over year. The segment result increased to 1000000 from 1000000 in the previous quarter. Implying a segment result margin of 14.4 percent. Margin progression was limited, given that a meaningful share of the incremental revenue came from products for electric drivetrain, which has not reached average margins yet. Furthermore, Positive volume effects were dampened by increasing mainly ADAS related R and D efforts. In recent weeks, There have been several signs of macro uncertainties affecting worldwide vehicle sales, such as the threat of a tariff war or the introduction of a new certification procedure in the EU. Our Automotive business is driven substantially more by increasing content and per car. By unit growth, we are seeing unchanged momentum driven primarily by XUV and ADAS The exceptionally high book to bill ratio of across a broad range of our automotive target areas. With classic applications, we were awarded the next generation TPMS platform a major European Tier 1, the start of production in 2021 and a lifetime value in excess of 1,000,000. On the electric drivetrain side, a major North America Tier 1 selected an Infineon Chipset for the XUV inverter platform for one of the world's largest OEMs. The combination of an IGBT module with a driver an Oryx microcontroller and a power management IC is highlighting the strengths of our X EV system solution. The value of this design win is also more than 1,000,000. Thirdly, our offerings for ADAS applications saw good traction with customers. A large Japanese supplier choose our ORIX2T microcontroller for its domain platform enabling sensor fusion in Level 2 automated cars. Volumes will start to ramp next year with a low triple digit euro 1,000,000 lifetime value. As a first step into automotive time of flight applications, a major European OEM selected our 3 d sensor chip for both a guest chikamara and an in cabin camera for ambient sensing which can for example be used for occupant sensing. Let's come to industrial power control. We saw revenues of 1,000,000, an all time high quarterly figure compared to 1,000,000 in the March quarter. Quarter over quarter, this translates into a growth of 10%. The year over year increase was 9%. The constant exchange rate IPC would have grown 11% year over year, while almost all application fields contributed this development drives major home appliance, wind and industrial power supplies saw particularly strong growth. We are continuously adding capacity to serve demand, yet various product classes remain in allocation. Order entry remained very strong, and the book to bill ratio came in at 1.4%. The segment result for the June quarter was 1,000,000 compared to 1,000,000 in the prior quarter, yielding a segment result margin of 3%. Increased operational expenses offset some of the margin contribution from additional revenues. We see unabated momentum across applications with particular strengths coming from an industrial automation and home appliances Also, renewable energy is holding up well. The cut in feed tariffs in China will certainly lead to a short term slowdown of photovoltaic installation there. However, some of that drop will be offset by demand from other regions and also wind power and energy saving applications are showing encouraging signs. From a regional perspective, we see significant business opportunities in Japan and are currently building a meaningful project funnel with customers there. In power management and multi market, we posted revenues of 1,000,000, 7% up quarter on quarter. Compared to the same period last year, revenues increased by 4%. At a constant exchange rate, PMM would have grown 11% year over year. Despite the revenues lost due to the divestiture of parts of the RF power business to create towards the end of the previous quarter. The PMM segment result came in at 1,000,000. The segment result margins stood at 23.6%. In the prior quarter, the segment result had amounted to 1000000 for a segment result margin of 19.9%. Certain nonrecurring effects related to provisions and inventories had a single digit million positive impact in this quarter. The power business is benefiting from additional production capacity coming online, yet remains supply constrained. Somewhat related to this, strong order increase leading to a book to bill ratio of 1.8. Strong demand drivers can be seen across a multitude of applications. China and Southeast Asia are witnessing a proliferation of e scooters and electric low speed vehicles. Big data calls for hyperscale data centers with power levels per server of 1600 watts and above. More and more power tools are becoming cordless and are moving to even higher power levels and larger batteries. While the charging of smartphones become a market standard. The growing human machine interface market we recorded business wins with our industry leader, so silicon microphones and class D audio amplifiers which will be delivered into voice controlled devices, like smart speakers of 2 major North American artificial intelligence heavyweight. Now, a look at chip card and security. The segment increased revenues by 7% from 1,000,000 in quarter 2, to 1000000 in quarter 3. Year over year, this represents a decrease of 5% or 2% down, assuming a constant U. S. Dollar exchange rate. All business areas including payment TPM and authentication contributed to the 6th sequential quarterly revenue growth. The book to bill ratio stood at 0.8 The segment results stood at 1000000, equivalent to a segment result margin of 16.6% slightly up from the prior quarter. While the market environment remains challenging for the foreseeable future, we could secure several project wins with midterm relevance. Among them, 1, at a major PC manufacturer with our OPTIGA TPM solution. Overall, chip card and security is currently doing about a quarter of its business with software enabled solution underscoring our system competence. Our IoT security solution continued to see traction with several project wins at various OEMs engaged in different verticals, including smart home, industrial and networking equipment. In order to help developing new approaches to high security and self driving cars, Infineon will lead the research alliance Secours security for connected autonomous cars of Fifty Street Industry And Academia Partners. With this, I would like to hand over to Dominique who will lead you through Our sequential revenue growth rate of The average euro dollar euro exchange rate declined from 1.23 in Q2 to 1.19 in the June quarter. You can still apply our usual rule of thumb of a $0.01 change in the exchange rate translating into a million revenue impact per quarter. However, year on year the U. S. Dollar continued to cause some headwind as it depreciated by about percent compared to the average exchange rate of 1.10 in the June quarter 2017. For sake of comparison with our competitors, This implies year over year growth of more than 14% for the 3rd quarter in US dollar terms. Please note that going forward, we expect to see mid to high single digit million amounts of revenue in other operating segments Reflecting certain services, we will render to CRE in the aftermath of the divestiture of parts of our RF Power business. Gross profit increased to 1,000,000 for gross margin of 38.2 percent after in the March quarter. Research and development expenses and selling, general and administrative expenses came in at 1,000,000 and million respectively. The net operating income amounted to 1,000,000. We incurred 1,000,000 of non segment result charges. Of that amount, 1,000,000 are international Rectifier acquisition related amortization and other charges. 1,000,000 of the non segment result charges hit our cost of goods sold, 1,000,000, and 1,000,000 SG and A. Excluding acquisition related and all other non segment result effects and the adjusted gross margin stood at 39.2% compared with 38.0% in the prior quarter. Depreciation and amortization, including non segment result effects, increased from 1000000 to 1000000, Therein 1000000 and 1000000, respectively, relate to amortization and depreciation of fair value step ups from the allocation the purchase price for international rectifier. So the portion of depreciation and amortization, which hits our segment result increased from 1000000 to 1000000, reflecting the increasing levels of investments in property plant and equipment we need to In the June quarter, we incurred an income tax expense of 1,000,000 as compared to 1000000 in the previous quarter which had included the tax on the gain sale of the RF Power business. The effective tax rate was 16%. For the entire fiscal year 2018, A cash tax rate of 15 percent remains a reasonable assumption. Free cash flow from continuing operations came in at 1,000,000 after million in the previous quarter, which included the proceeds from the sale of parts of the RFP our business. This sale is also reflected in a quarter over quarter comparison of our reported after tax return on capital employed which came in at 17 strongly affected by bookings related to the acquisition of international Rectifier, in particular goodwill, fair value step ups in the context of the purchase price allocation and the related depreciation and amortization. Excluding acquisition related bookings and effects and deferred tax effects, The adjusted return on capital employed stood at around 24%, again, significantly exceeding our cost of capital. For the last quarter of our fiscal year, we expect revenues to increase by 3% plus or minus 2 percentage points. This assumes a rate of $1.2 for the U. S. Dollar against the euro for the remainder of the quarter. The growth expected for ATV as well as for CCS revenues are expected to decline. The segment result margin for the 4th quarter for the 4th quarter should come in at 19% at the midpoint of the guided revenue range. As a consequence, Revenue for the entire 2018 fiscal year are now expected to grow by between 6.4 to 7.4% against the previous year. At the midpoint of the revenue range, we guide for the September quarter The full 2018 fiscal year segment result margin should come in at 17.5% of sales. Our guidance for annual investments remains unchanged at around depreciation and amortization we continue to see at around 1,000,000. Ladies and gentlemen, let me summarize the key points for the 3rd fiscal quarter. As in previous quarter, Infineon continues to see a very high strong fundamentals of our specific businesses. But as reflected in our guidance, we see unabated momentum. The direct impact of currently imposed and discussed tariffs on us is very moderate. A major effect would only result from a significant world GDP growth deceleration which we are currently not seeing. What we are seeing is that our business is getting geographically more diversified For example, with inroads into Japan that we are making in several segments. We are executing along the pillars of our strategy that we planned at our recent Capital Market Day, growing our core business on the basis of technology leadership and highest quality product, strengthening this core with adjacent fields based on our application and system understanding, leveraging our technology competent new application and markets consistently expanding manufacturing capacities, leveraging our unique 300 millimeter capabilities. Regarding the latter, our customer's reaction to our recently announced plan to invest into a new 300 millimeter fab at our filler site have been very positive. This encourages us to capitalize on the long of our target market. Ladies and gentlemen, this concludes our introductory remarks, and we are happy to take your questions. Thank you. Our question and answer We will take our first question from Janardan Mennan from Liberum. Please go ahead. Hi, good morning. Thank you very much for taking my question. I have a question on the comment you just made towards your closing remarks, which is that you expect PMM revenues to grow meaningfully above the group average. I'm just wondering what exactly is driving that are there any specific smartphone related ramps that you're seeing in the quarter, which is driving some of that? Or is it more the kind of business that you talked before, which is the e scooters and the servers, etcetera. And I have a brief follow-up. So, thank you, Jenna, for the question. I think Hammood will answer this. Yes, good morning. There is a regular, I would say, seasonal uptake coming up in PMM on the smartphone business, but generally it's driven predominantly out of the power business again. Understood. And then going back to the point you made about the tariffs that you're not seeing any signs of that. It's unabated demand that you're continuing to see. I was just wondering if you could give us a little bit more flavor on that Is it that? I mean, there seem to be carmakers who are saying that they are affected. They publicly said that and they've also announced price increases in China and things like that. Is it that on an overall basis that you're not seeing any effect, but at certain customers, you're seeing some effect, which is compensated by strength at other customers or is it that even among customers that you might have made statements in your own order book, you're not seeing any kind of effect whatsoever? Well, we have to differentiate between the various effects Our direct imports from China into U. S. Are very limited. So there, definitely, we see a little effect due to the low volume there. The other part is how much we see, in the automotive area. First of all, we do not see direct the effect on the OEMs because we have the business with the Tier 1s, which averages out the effects of the various OEMs. On the other side, as we mentioned, we are very strong on a global basis. In Asia, in U. S. And Europe. So we expect that a potential shift between the various OEMs might happen, but this might not affect us as strongly. We currently see a strong trend to SUVs, which is, in U. S. And other areas. So the net effects arriving at our company are pretty limited. And we expect that as long as the overall number of cars and the typical structure does not will not be effected, it will not be effected either only when the general sentiment of the seamable change and people will stop buying cars that we might see. But as said before, we currently do not expect that growth in automotive is influenced significantly by the number of course, so we even see a more or less flat market. The total growth comes from content, and we continue that this content remains high. Just as a reminder, the book to bill in this quarter was 1.6, and we believe that the content effects will strongly dominate the way forward. Therefore, the net effect on our business is minor. Thank you. Our next question comes from Stephan Hori from auto Financial. Please go ahead. Yes, good morning. I have a question about the book to bill number that you have given because in your preliminary remarks, you've said that the customers, given the fact that some products are under allocation at the kind of unusual behavior. So looking at the PMM book to bill number of 1.8. What is the share according to you? Linked to this unusual behavior and what would be a more normal book to bill? Thank you. Stefan, thank you for the question, Helmut, what that question. Yes. I think, we've already stated a couple of times that is very unclear to us. It's simply not possible to clearly distinguish between what is due to double ordering and what is true demand going forward. As a matter of fact, the longer the allocation period is lasting, a normalization of order behavior is to be expected at some point in time. However, I don't think we're at this point. So we believe that there's still a significant portion, in a double ordering and we will only know once the market turns. So just as an added to your PMM's business in general is affected. So, we cannot differentiate between more and less business, as Helmut explained. Okay. And I know it's very early in the year to give an outlook on 2019, but is the face or how will 2019 looks according to you? Well, Dominique, please. Yes, I mean, on the Capital Markets Day, we recall we guided, for a 10% plus growth, based on a dollar exchange rate of 1.20 17% segment result margin plus a little bit from operating leverage from OpEx. Now we have raised the guidance for the current fiscal year by 0.5% given the strong dollar we had in the current fiscal year, of course, that bodes well for next year, but we don't want to go into specifics right now. And obviously, the strong book to bills, if anything, increase our confidence. Marine Marc here for general understanding our order books, even so, we will see some let's say, phase out indicates allocation will go back and business comes more to normal. We still believe that our order books will be strong enough in order to support this growth even in a more normal growth environment. Our next question comes from David Mulholland from UBS. Hi. I'm just following up on the last question on the book to bill. I think in prior calls, when you've made similar commentary, you've also said that you often take a bit of a haircut to what you see and I think you made in your remarks, you said you take some of the order numbers for the pinch of salt can you just clarify whether the kind of 1.5 book to bill number for the group or even specific within PMM, whether you have actually taken any haircut and kind of realistic view on what you think demand might be within what you're seeing in book to bill? And then secondly, I'm just thinking slightly longer term there's quite a few design wins that you've called out in terms of the automotive design wins for EV and on the sensor side and a few others. A lot of those aren't starting production until 2020. So given the success you're having, obviously you've already guided quite strongly for 'nineteen, but it feels like momentum is just building here. So can you give a comment on how you see how confident you feel beyond 'nineteen as well, given design wins? Well, the second question will answer it by Helmut, the first I take. The book to Bell is, we do not haircut, the book to bill, we report as it comes in. We haircut it when we put it in into the consideration of our future growth. Anyhow, our next year's growth will in significant portion of our business be limited to the ability to ramp capacity So, there is, of course, considering the reported book to bill a significant reduction, I would say haircut to our growth outlook. Yes. With respect to the automotive business, I think already in this quarter, we have stated that a significant portion of the automotive business growth has been related to XAV and that remains solid So momentum for XEV, I would say, is remaining on a very high level as to new business wins. I think one of the highlights that I not reported also was again on XEV. So, I think it's fair to say, as we have said before, that XUV and ADAS are good for at least 50% of our automotive group growth going forward. Thank you. Our next question comes from Johannes Schaller from Deutsche Bank. Yes. Thanks, 2, if I could. I mean, you've been very clear on what you see in the auto business right now and that you don't really see much of a slowdown, but just assuming we go into a scenario where there are less costs bought and you would actually see more of a unit slowdown than what we currently see? And let's assume actually the demand in your other segment stays pretty strong. Can you give us a bit of an idea of how quickly you could accommodate and maybe adjust production to sell more into the other segments if we go into a situation where we have some auto production cuts that are more severe than what we currently have? And then I have a second question. Thank you. Okay. This question will be answered by Jochen Anebeck Yes. Good morning also from my side. So, the ability to, for structural change in our many factoring sites is given to a good extent. However, there are some limitations when it comes to, high power or sensors, but in general, I would say we are, we'll be able to follow here the market in a pretty good manner. And another point, Mr. Shlara, of course, when we see a slowdown, I would say, a softer landing, let's call it a reduced growth in automotive because we still assume that even a reduction of numbers of carpet use will be, I would say, over, will be compensated more by the content. We will guide our investments, which are coming online in the right way that we are then shifting to the other Yes. And secondly, I mean, one of your peers in the U. S. Power integrations, they talked a bit about some very recent order push outs from distributors, particularly in the appliances and white goods market, talking about an impact from the tariff that we've seen on things like washing machines, I think. I mean, in your major home appliances business, it doesn't really look like you've seen anything, like that? Can you comment maybe a bit on the specific situation you see there? Well, the major home appliance, I think we see 2 effects. 1 is the structural growth of those and our market share situation. Our current market share is still on a lower part, and that is an opportunity to increase this we have not seen significant or any push outs in this area. We are, I would say, still in a extremely high load and allocation situation. There's not really any effect seen on that. So on the other side, we have to concede and in allocation situation, you will not see the market as clearly, but as we have not seen any effect in the order books, it is obvious that on the power side for the drive, I would say, the drives the market is still on the stronger part, while I think the power supplies for major home appliances, maybe not specific to the inverterized home appliances and the percentage of inverterized home appliances may continue to rise even on a net effect increased despite the total number may decline. That's very helpful. Thank you. Our next question comes from Jerome Romal from Exane BNP Paribas Yes, good morning. Quick question on the allocation. Could you give us an idea of where the lead times are in term of weeks from MOSFETs and IGBTs. And also, we heard from your client that you increased prices, in some specific area namely the MOSFETs. So what kind of price increase have you going through and when do you think the situation will normalize from the pricing standpoint? Thank you. Yes. Thank you, Jerome. I think both questions will be answered by armored. Yes. In terms of lead time, we've already previously reported that in some product areas, lead times can exceed 26 weeks. Generally, we have an order confirmation window of maximum up to 52 weeks. And there is actually products that also are at that limit. So, yes, all the lead times have risen tremendously. And sorry, can you repeat the second question? Because I didn't fully understand it. This. Yes, but On pricing, we have some from some of your clients as you increase prices specifically from market in the June quarter. Can you elaborate a little bit on the pricing environment? Well, I would say, quite usual, when demand is very high, it also has an impact on price. And therefore, I think it's a direct relation to over demand situation is going to be going forward. Right now, as you just stated, the demand is still very strong. So just to be clear, should we continue to expect price increase going forward for your calendar Q4? Well, I think here you have to be considering that some of our price increases we put in place will become effective only in later time. The further development of prices will depend on the overall environment, which we cannot predict in detail because we do not know what competitors are adding capacity. Nevertheless, I think here, we will see that this effect on the prices will have a longer lasting effect. Yes. I just probably want to add to that point. The pricing, in some areas, we have firm agreements with our customer that are lasting for a certain period of time. So we certainly honor our contracts in our cases. And last but not least, our price increases have been a function also of some substantial material increases from our suppliers. And therefore, has been erection to those And of course, it's not possible for us to understand what those are going to be going forward. Our next question comes from Sandeep Deshpande from JP Morgan. Please go ahead. Thank you. Two questions, if I may. Firstly, on the automotive market, can we just talk about I mean, IGBT and I mean, the continuing design wins of your IGBTs into the auto electrification market? I mean, do you see that leading model? Because there are multiple car vendors where you've already been designed in, have you had any further wins with major customers and the longevity of these IGBT wins? And then secondly, regarding chip card. I mean, this business did not grow or is not guided to grow this year, but do you have projects that will start ramping up into 2019. That will help the business grow into 2019. So Sandeep, IGBT, we continue to win business IGBT on a very broad basis. The longevity of this business is very typical for automotive. So it is designed in the model and well from our point not be changed in the model lifetime. And our impression is all that the people are so busy with electrifying new morals and provide a bigger base of morals for hybrid or electric vehicle that redesigns are unlikely in the near term So we see this business as a pretty stable and a longer term business. Also, people are understanding increasingly well that the source of IGBT on planet is limited and that electrification of their drivetrain depends on reserving the capacity there. So I think here, the business win with IGBT will go on. Nevertheless, asset already stated, this is still a and this product segment with a margin, which we have to improve moving forward. TIP card, while I think here, we are winning business and in I would say in many areas, the, especially in government and other areas is pretty solid. The payment market is still under pressure. And I think here, it is not about the winning business as a problem, but the general price pressure in the market. So we expect that the development of the chip card revenue mains in a more, I would say, difficult situation from the total boundary condition. Definitely, we are winning in the area of industrial IoT and TPM, products, but this is from the nature of the business take off much more slowly than banking and SIM card product. Are you participating in the Eastern market at all? The ESIM market, yes, of course, we are participating in the ESIM market, which I would say we put into the category ESIMs for automotive, where the ECall in Europe is driving the business quite strongly in a similar application, but E SIM is also an industrial IoT application, which moves quite nicely. But as I said before, it is not a jump start business But here, we definitely can make a point based on the quality, thinking in the company because these are products, which I have a lifetime of, I would say, typical automotive and industrial even longer. Thank you. Our next question comes from Avizya Metuku from Bank of America. Yes, good morning guys. I had two questions. So firstly, just on the revenue mix in the quarter, with trends in PMM and IBC, which helped your margins to the group level. I just wanted to understand given the situation currently in power products, was there an element of prioritizing higher margin and more profitable customers in these in the PMM and IPC businesses that led to the mix developing the way it did? And my second question is just on the margin forecast for this year. You're already raising your margin forecast for this year, only a month and a half after your CMD. So in terms of your outlook, medium term outlook for roughly 100 bps in segment result margin expansion, you feel that there is an element of conservatism in there and how should we think about that going forward? Thank you. So, Adi, thank you for the question. The first question will be answered by Halmot. The second I leave to Dominic. We have a limited degree of freedom in any given quarter to change product mix to a different customers and higher margin businesses. As we said before, some of these order lead times are 26 plus weeks. So if you have confirmed an order in 26 weeks from now, limited ability to adjust that. Nevertheless, whenever we do have an ability, of course, we're optimizing that. But in between, we have to honor commitments? Yeah. On the longer term margin development recall in the Capital Markets Day, the logic was basically the jump of certain margin that we currently run it. And then we add gradually the one percentage point or so, which is pretty much related to the economies of scale we gain in OpEx. These economies of scale in OpEx are of course still valid and yes, we are jumping off a slightly higher base in fiscal year 'eighteen. And as I said before, that bodes well for the kind of margin development going forward because it's simply giving us a better start, a higher pace to jump off, but it details as to how this will feed into 2019 I only want to give in November. Well, one general remark I want to add here, our strategy is not to optimize our business very short term. We also talk to the customers, and they understand that our long term partnership has a significant value. So our current strategy is to optimize to a certain degree our current segment result, but in a significant portion also to secure long term high value business for Infineon. And they are completely about knowing that this is the best way to go to Infineon for doing that. Our next question comes from Tamik Kee from Berenberg. Please go ahead. Hi, thank you for taking my question. So, I would like to discuss margin, Elizabeth, So automotive margin, for the 1st 3 quarters of the year, it has been below 15%. I'm just wondering what can bring it back to above 15% for such as drivers of more sophisticated business mix apart from FX movement? And also going forward, When you talk about autonomous driving and EV applications, are we seeing auto to be more sophisticated So therefore, we can see a margin uplift from there. And also in addition, when you move to silicon carbide, are we likely to see margin going down from there because the market is kind of more competitive than IGBT? Thank you. Well, thank you for the question. The Dominic, please Yes. We are in the margin that Q3 was a little bit of a rough spot for ATV in margin terms, and we think that already in the Q4, margins should see an improvement, which is stronger than the improvement we see on a group average. So bear with us for Q4. And then I think it's a clear view It is true though that, currently, we see our EDT business ramping fast, and it's still at relatively low volumes on the other hand, which means that the March is not so great. So I think it's wrong to extrapolate from that and thinking of layering EDT volumes on top of it diluting our March further from there to the contrary, we think that as we improve the margin, while the margin in EDT, as we stated before, is slightly lower, than in the rest, given that we improve the margin in EDT by virtue of higher economies of scale, we are actually seeing some progress. So this is a key driver And then obviously, there are some microcontroller design wins, which are going to feed into the margin over the next coming years. And this is why we are confident that over a kind of planning horizon we can gradually improve the margin from the current levels. I would say that this year, next year is kind of the trough level, so to speak. Well, I also want to comment on the EV side and the silicon carbide. Considering the situation, the automotive industry is in the hybridization and to a certain degree, all of the EVs are facing the expectation of the consumers to get this at a similar price level compared to today's combustion engines. And the situation here is that the price negotiations for the IGBT modules always had been very tough. So the competitiveness for Silicon Carbide is definitely not different. Even so, there are more people who raise their voice that they can become successful in silicon carbide, but I would say this is still something to come. And the cost situation for silicon carbide is way above the today's IGBT segment. So we do not expect that silicon Carbide will make the life more difficult in the EV than it is today. The ADAS development may be Helmut you comment on the margin development of ADAS. Yes. Generally, I think the power discretes business and probably including IGBT modules have been a tough spot tougher than most of the IC space. And in when you look at ADAS, the it's generally in our terms, it's an IC business. So therefore, average margins are higher in that ADAS space than they are in Next CV. Thank you. Our next question comes from Achal Sultana from Credit Suisse. Hi, good morning. Two questions. First, on the industrial business, obviously, you've seen, you basically raised guidance for fuel revenue growth this year a number of times. And this market is quite fragmented. So can you please help us understand what's in that industrial business, which part is actually done much better than your expectation? Is it factory automation? Is it renewables? Any color on that would be helpful. And then secondly, on the auto side, can you give us some sense as to what your exposure for EV and ADAS is, if you were to look at percentage of sales of ATV, Achal, thank you for the question. So the industrial business, we see nearly in all of these areas growth. First of all, the area for, drives in automation, there we are seeing a good growth momentum for a general positive development in the area of adding manufacturing capacity which is after a long time of pretty flat automation business there one positive momentum. The next is the area of the small drives being in home appliances and air conditioning there, we see 2 effects. First of all, the effect of the structural growth, that means more and more percentage of these systems are using inverterized drives. And the next is that we see that our offering compared to other players in the industry, where we have a slower market share is pretty positive, including the overall system offering means the controllers, the driver and the MOSFET. The area of renewables had been solid for quite some time and is considered to continue to be solid. We do not see significant increases there, but this is growing since solidly Then we also see in the high power area, which had been moving a little bit slower. That means area of trains and the rest also a good growth rate. So basically, we can say we do not really have one segment in IPC is, which is, I would say, showing any lower growth or weakness. Yes. With respect to the share of EV and ADAS business, we have reported that we had 13% of the joint businesses of the 80 business of fiscal year 'seventeen And as we report, they are growing nicely also off of that base, responsible for half of the growth of the ATV group. So they is still in the mid teens currently, but continuously creeping up in share. Yes, I mean, please recall on the Capital Markets Day, we've really broken out the 2017 revenue base precisely we even split, I think, into EDT and other separately, I think it was 7% of, because of the group revenues 4% or what was it, of total revenues, yes, XEV 4% of total revenues, which translates basically and others was 2%. So you get the split that and true is that that dovetails with the 13 percent of ATB revenues if you put it together. And then as Helmut commented, you are growing at kind of mid double digit percentages like 50% or so in the current fiscal year, but we're not going to split that every quarter and bear with us for the kind of full year results and then we give some precise data again. Thank you. Our next question comes from Alexander Parekh from Societe Generale. Yes, good morning and thank you for taking my question. I have a first question really on ATV. Which is a little bit behind our expectations. And I'm just wondering why we're not seeing the same top line beat in the growth and segment margin momentum as in PMM and in IPC in the quarter. I know you've mentioned some cost pressure in R&D in ATV? Is that going to go away as of Q4 already as you've hinted previously that Q4 ATV margin will improve And then secondly, just on gross margins, although we've seen some positive pricing trends to your end product in some areas, particularly in power, I'm wondering what's affecting that at the gross margin level, at group level? Is it high input costs or other areas that diluting this positive pricing effect? In power? The first question, I will take the second Dominic. The ATV, I think we highlighted that one major effect on the current segment result situation of ATV is the significant growth or portion of the XUV, IGBT modules, which we see a lower margin there. We will continue to improve this margin, but this is not done on a quarterly effect This will take longer time. So we do not expect an effect on this improvement in the next quarter. Yes, maybe on the overall margin, and that's not only the R and D. The R and D is going to stay high in ATG because we are really pushing ahead. We are charging ahead with our growth plans there. We do see a certain lift in ATV margins. As I commented, it will be an expansion margin we hope in the Q44 relative to Q3, which is higher than the group average. Now the longer term gross margin development You're absolutely right. I mean, all these puts and takes like wafer prices, copper prices, on the input side, also don't forget the roll on of depreciation we have because of the strong investment to follow our customers' demand. They weigh on the margin first, but then there is some offset on the price side. And all these puts and takes are currently leading to the guidance. It's all embedded in the guidance for Q4 you've received. And for next year, again, we'll comment in more detail in November as we always do. Our next question comes from Sebastiena Ettabowicz from Kepler. Yeah, hello, thanks for taking my question. On the PMD Technologies, partnership on the 3 different source. It seems that the active television technology is gaining traction notably within the Android ecosystem. Do you have any strong technology IP with stereo vision? And do you see any opportunity in this specific technology and markets. And also coming back to Automotive, what do you see a short term demand in Europe because it seems that Volkswagen will reduce production volumes by close to 20% in the third quarter. Do you have anything to offset that? And also in China, in autos, we have seen a little bit the car inventories going up a little bit during the quarter. Could you make an update in the Chinese automotive market? So, thank you very much and for your question. Stereo vision is not an area where we are active in. We are focusing clearly and, let's say, recognizing the C3D picture by time of flight as well as radar as in an complement, stereo vision also would require to be engaged in the normal, pictures, I would say, camera sensors, which we do not do. We see it as a complement and a sense of fusion area, which we are engaged. The Chinese automotive market helmet will answer? Yes. Actually, car unit sales growth in this year in China so far has been higher than what we had anticipated. And therefore, a slowdown in the second half of the year is not going to change our guidance at all. And don't forget, last but not least, car unit sales has a lesser impact or much lesser impact on our revenue guidance than bump growth. So the one question we did not get, can you repeat your third question, please? It was on the European market and the short term demand in Europe because it seems that both again could reduce its production volumes by 20% in Q3. And looking at the size that bounced back in among European carmaker, it would have a big impact on European production volumes in the third quarter? Yes. Yaron will take that question. So, we see a stable order picture for automotive this quarter. Of course, there are the normal topics, like the summer breaks. In addition, this WLTP topic, but our order picture is stable In Europe? Yes. Thank you. Our next question comes from Hollfelder from Baader Helvea Bank. Please go ahead. Yes, many thanks. Just one question left on the financial side. Income from investments, you had a negative 1,000,000. I think in the past, we saw the positive contribution from the Siemens by polar joint venture here. Is there already an impact from the new China JV here on this line? What's the outlook here going forward? Yes, Mr. Alfelda, thank you for the question. Dominik is ready to answer. Great question. Thank you. Indeed, it was kind of some ramp up type of cost, but you should not expect a loss at that kind of height going forward. It will be lower. It will be negative very, very minor going forward as it ramps. And if it after ramping, of course, we'll enjoy the harvesting of that ramp in the later quarters. But yes, you're right, there was some kind of catch up for the prior quarters, which was negative on the equity pickup. And will you book also a positive contribution from the Siemens JV here in the fourth quarter or have you already booked something in Q3? I mean, frankly, I don't want to go into comments now on this joint venture, but it's a very marginal thing, anyhow. It was never a major contribution, anyhow. So I think you can kind of happily neglected. You. And our final question today comes from Douglas Smith from Agency Partners. Please go ahead. Yeah, I was wondering if you could spend a bit on your commentary on winning business in Japan. Japan is obviously the home market for some of your competitors. Are you winning there because of your capacity that you have or is it technology and products? Thank you for that question. We are winning in Japan because of several reasons. Both of what you mentioned are very good reasons. I think here in Automotive, we are winning in the ADAS segment quite well, which is, I think, technology based on the other side, It is also very clear that the Japanese automotive industries are looking outside Japan in order to touch base with the innovation capability of Infineon and most likely also other non Japanese vendors, And I think you, anyhow, it is very well known that the overall supply base in Japan has, I would say, shrunk to a certain degree and, focused on certain areas, but we are strong in ADAS and, in general, power over there. We also are growing nicely for the IPC business, which I think, again, a matter of availability of products and deliveries, and, I think here, all the understanding that the future growth requires a partner who can ramp capacity as well as technology. Just like Hemodias, just at one point, I think quality is a major differentiator in Japan. And I think We've been investing in improving our quality quite a time, and that has been now being recognized as well. And this is now clearly being seen And yes, we have received very positive feedback on our capacity expansion and long term investment. So, as the filler of 300 millimeter inverse has been highly recognized in Japan as well. As a quick follow-up on that, the capacity issue, is it the case then that many established competitors are not expanding at the rate you are? Well, we cannot comment on what the competitors are doing, but our impression is that the capacity coming online from others seem to be currently lower than what we can at. And long term, there is very clear that you need clean room space to put equipment in. And currently, we do not see a lot of announcement in building new clean rooms from the competition. All right. With that, we would like to conclude this quarterly conference call. Further questions, feel free to contact the IR team here in Munich. Thanks very much for listening for your questions. Have a pleasant and Thank you. That concludes today's conference call. Thank you everyone for joining us. You may now disconnect.