Earnings Call: Q2 2018

May 3, 2018

Welcome to the conference call for analysts and investors for Infineon's 2018 fiscal 2nd quarter results. Today's call will be hosted by Alexander Fulton, Corporate Vice President, Finance Treasury And Investor Relations of Infineon Technology As a reminder, today's call is being recorded. This conference call 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 of 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 push 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 report available on our website. Good morning, and welcome, ladies and gentlemen, also on behalf of the entire Management Board of Infineon. Reinhard Ploss, CEO Dominic Azim, CFO, Helmut Gassel, CMO, and Jurgen Harneweck, member of the management board responsible for operations. Except for the host, everything else will be, as you know it. Reinhard will start with some remarks on group and division results, market developments, and achievements during the quarter. Dominic will then comment on some selected key financials followed by Reinhard again updating you on our guidance. After that, we will be happy to one question and one follow-up in the first round. A recording of this conference call and a copy of our 2018 fiscal second quarter earnings press release and investor presentation are also available on our website at infineon.com. Reinhardt, please go ahead. Thank you, Alexander, and good morning, everyone. Revenues in the March quarter came in at 1,836,000,000 for the group. A quarter over quarter increase of 3% and a year over year increase of 4%. Our underlying growth momentum remains strong. At our constant U. S. Dollar exchange rate, we have grown by about 12% year over year. Segment result increased quarter over quarter by 11% year over year by 6% to 1,000,000. The segment result margin stood at 17.1%. Order entry continued being strong during the March quarter and the book to bill ratio commit at 1.3%. Overall, we met our Q2 guidance for revenues and achieved a slightly better than guided segment result margin in a continuously positive environment sustained strong order intake is meeting supply limitations in several product areas. Therefore, We continue our efforts to ramp up capacity to fulfill our customers' demand. Now to the divisions Automotive revenues came in at 1,000,000 for the quarter. This represents a 4% year over year increase and a 5% increase quarter over quarter. At a constant exchange rate, we would have grown 10% year over year. The book to bill ratio of 1.3 is evidence of the unchanged growth momentum in automotive. A segment result increased 1,000,000 from 1,000,000 in the previous quarter, which had been negatively impacted by a production related one off charge. The segment result margin stood at 14.3%. As in prior years, we faced annual price declines from volume purchase agreements in the March quarter weighing on the margin. We continue to expect a gradual snapback of the ATV segment result margin in the next two quarters to the levels seen throughout the last fiscal year. Looking at the 2017 market share rankings by strategic analytics we strengthened our global number 2 position by gaining 0.1 percentage points. Also, the gap to the number 1 narrowed by 1.6 percentage points. Our overall market share of 10.8 percent is based on strong positions in power, sensors and microcontrollers addressing core functionalities outside infotainment. From a regional perspective, we became number 1 in Europe the world's largest market for the automotive Semiconductors. Our largest chair gain we saw in China where we strengthened our number 2 position. It is also in China, the world's most important market for electromobility, where we have established a back end manufacturing joint venture with SIC the largest local OEM. The entity will manufacture automotive frame based hybrid pack IGBT modules Enzal to Chinese Tier 1s and OEMs. Infineon will deliver IGBT Chips to the joint venture. The setup will enable us to share in this and save import tariffs. Pilot production has already started with volume production scheduled for the second half of this calendar year. Meanwhile, we are constantly winning new business across all areas of our automotive business. For example, a major Chinese Tier 1 choose an Infineon Chipset for the translation control unit. The solution includes an Infineon microcontroller and 2 application specific ICs. In industrial power control, we posted revenue of 1,000,000 compared to 1,000,000 in the December quarter. Quarter over quarter, this means a growth of 7% year over year, this marks an 8% increase. At a constant exchange rate, the segment would even have grown 13% year over year. We saw particularly strong growth in drive, traction and home appliances. Drivers saw their strongest quarterly revenue level since 2011 when the market was highly influenced by public infrastructure spending programs. Order entry remained very strong and the book to bill ratio came in at 1.3. Various product classes remain in allocation. The segment result came in at 1,000,000 markedly up from 1,000,000 in the prior quarter for a segment result margin of 19.6 percent. This improved profitability was caused by productivity gains and a favorable product mix with gate drivers seeing an all time high. Macro indicators remain solid and point to sustained market growth above long term trend. We see continuous momentum across applications be it automation drives, renewable energies, traction or home appliances. Coming to power management and multi market, revenues of PMM were 1,000,000, staying essentially flat quarter over quarter despite currency headwinds and the fact that the sale of parts of our RF power business for cellular infrastructure to CRE in early March reduced revenues by a mid single digit million euro amount compared to the same period in the prior year revenues increased by 4%. At a constant exchange rate, PMM would have grown 18% year over year. The PMM segment result came in at 1,000,000. The segment result margin stood at 9.9%. Some productivity gains and positive price developments more than compensated negative currency impacts. The power business remains very strong across all applications and products evidenced by high order entry leading to a book to bill ratio of 1.4%. In both ACDC and DCDC, we saw unabated customer demand with both areas continuing to be supply constrained. Our CoolMOS benefits from increasing pull coming from our customers in electromobility for onboard chargers and charging infrastructure. Beside that, demand for server power supplies and power stages remain strong. With our digital ACDC control IC, we are seeing good traction in a broad range of applications spending PCs and industrial power supplies, TV power supplies and lighting. During the second quarter, we closed the acquisition of Merus Audio in Denmark broadening our product portfolio in low power class D audio amplifiers and supporting our development of system solutions for the growing Scretes. Ericsson presented a massive MIMO radio platform with 5 times the number of MOSFETs going into the power stage where there's a current standard. Within the smartphone component business, we recorded a business win in cooperation with an Asian RF module supplier for a platform at a global handset leader. Now, a look at chip card and security. We posted revenue of 1,000,000 compared to 1000000 in the December quarter. This represents an increase of 1% quarter over quarter and a decrease of 3% year over year. At a constant exchange rate, revenues would have increased by about 5% year over year. We saw particularly solid growth in our business and government ID as well as embedded SIM used for cars and other applications. At the same time, headwinds in the market point 9. The segment results stood at 1,000,000, marking a segment result margin of 16.5% and meaning that the segment could retain its profitability level despite difficult market conditions due to a favorable product mix. In the second quarter, we won several project for government ID in South America countries as well as with our payment solution. We secured strategic project wins with our embedded security products at leading OEMs of industrial and ICT applications. To ensure easy integration of security and IoT or connected devices, we launched our turnkey solution Optiga Trust X. We note that Daimler builds on ESIMs from Infineon as automatic emergency calls saves lives. We also partnered with Juniper Network to further protect routers and network equipment. With this, I would like to hand over to Dominic who will comment in more detail on our key financial figures. As in the previous quarter, our underlying growth is somewhat masked by the adverse currency developments. Quarter over quarter, The euro strengthened noticeably against the U. S. Dollar from 1.18 in the December quarter to 1.23 in the March quarter. This caused a negative impact of about 1,000,000 on the top line. In a year over year comparison, the headwind from the euro dollar exchange rate is even more pronounced as the greenback depreciated by about 16% as compared to the average exchange rate of 1.06 in the March quarter of 2017. Note that this implies that Infineon has delivered growth of almost 21% for the quarter just This implies a gross margin of 37.1 percent after 36.4 percent in the December quarter. Research and development expenses and selling general and administrative expenses came in at 1,000,000 and 1,000,000, respectively. Included in these numbers are 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 R and D and 1,000,000 SG and A. Excluding acquisition related and all other non segment result effects, The adjusted gross margin stood at 38% compared with 37.4% in the December quarter. Depreciation and amortization, including non segment result effects, trended up slightly to 1000000, Included in this figure are 1,000,000 related to the amortization and depreciation of fair value step ups from the purchase price allocation from international rectifier. The combined effect on other operating income and expense from the sale of parts of the RF Power business to CRE, including the accounting gain on the disposal as well as impairments of related capitalized research and development expenses was a positive million which we recorded as part of expenses of 1,000,000 in non segment result. Total non segment results stood at positive 1000000. Continuing with tax, we booked an income tax expense of 1,000,000 in the March quarter, which included the tax on the gain from the sale of the RF Power business. The effective tax rate was 12%. Free cash flow from continuing operations came in at 1,000,000 after negative 1,000,000 in the previous quarter, proceeds from the sale of RF Power Business are reflected in free cash flow. Our after tax return on capital employed came in at 31.2% in the March quarter after 14.6% in the December quarter. The increase is essentially driven by the increase in net operating profit after taxes or notepad resulting from the gain on the sale of the RF Power business. Return on capital employed furthermore continues to be strongly affected by bookings related to the acquisition of International Rectifier in particular goodwill, fair value step ups in the context of purchase price allocation and the related depreciation and amortization. Excluding acquisition and divestiture related bookings, and deferred tax effects, the adjusted return on capital employed again was well in excess of 20%. Let me now hand back to Reinhard who will comment on our outlook. Thank you, Dominic. For the 2018 fiscal year, We now expect revenues to $2.5 for the dollar against the euro for the remainder of the fiscal year. This guidance now reflects a deconsolidation of the parts of the RF business sold to which was previously still included with a mid double digit revenue number for the time after closing. You will notice that we have nevertheless slightly increased the midpoint of our guided revenue range by raising the lower bound by a percentage point. Somewhat. However, it will also impact our investments, which we now see at around 1,000,000,000. The relative growth expectation of the divisions are as follows. ATV will grow meaningfully above group average IPC should come in a round group average and PMM should come in below group average, but making up for the revenue loss due to the sale of RF Power. ChipCard might see a revenue decline. For the first half, of our fiscal year 2018 in the back and some ability to pass on cost increases, the segment result margin should come at 17% of sales at the midpoint of the guided revenue range. This proves the robustness of our business model to cope with adverse currency movements. Decrease seasonally by 3 percent plus or minus 2 percentage points. This also assumes a rate of 1.25 for the dollar against the euro for the remainder of the Ladies and gentlemen, let me summarize the key points for the 2nd fiscal quarter. 1st, business momentum remains strong with a very high order entry across a broad range of application For this, we are adjusting our guidance slightly upward. We expect that we will be able to compensate for the loss of Infineon can grow profitably. Productivity gains from 300 millimeter allow us to deliver a 17% segment result margin against a weaker U. S. Dollar 3rd, we want to address customer demand for power discretes in the best possible way and will continue the accelerated ramp to add new capacities. Our objective is to invest decisively order to fully capitalize on the Finally, let me remind you that we are going to host the Capital Markets Day in London for investors and analysts. On 12th June, My fellow board members and I together with the presidents of our 4 business segments will provide our view on the future course of Infineon. We are looking forward to seeing many of you there. Ladies and gentlemen, this concludes our introductory remarks and we electronically today. You will now take our first question from Jarenden from Liberum. Please go ahead. Yes, hi, good morning. Thanks for taking the question. I have 2 small ones, if I may. One is on the increase in capacity that you're doing right now in the quarter, which you announced that you're going to 1,200,000,000. I was wondering, can you give us an idea on how much of your capacity increases is sort of allocated to electric vehicle related technologies and how much would be the rest? Would the majority be catering to that or how could you break that up? Thanks. I have a brief follow-up. Jonathan, thank you for your question here. Here, we are growing across all the power applications where the major investment is going to. But as we communicated, the major growth will come from automotive, in the area of power discretes and power modules. So we do not have a concrete percentage range, how we what we are addressing there. Currently, we see a steady growth, the actual increased investment will kick in significantly later in, quarters as the buildup and the effectiveness will take 2 to 3 quarters. So here, we will see how the business is, but the, continuous growth of automotive will be very strong. 5 at this point. In the previous quarter, you'd said there was some sort of startup costs because you're going quite fast. Can we assume that that is now behind us? And in the June the December quarters, if everything is as expected today, the increasing utilization of that fab will be a positive on your margin? Jonathan, this will be answered by Jochen. Yes. Hello. So we stated that we achieved this cost crossover of, our new 300 a facility in Dresden by the turn of the year from 'seventeen to 'eighteen. However, as we are ramping up the capacity at full speed. We incur additional, ramp up costs. So, they overlay this picture, which you have just described correctly. Which means that the end of the day, as long as we are growing, so significant. Do you always have a certain amount of cost installing new equipment? Okay. So, that cost is sort of a continuous process as you keep adding capacity? Correct. Understood. Okay. Thank you very much. We will now take our next question from Andrew Gardiner from Barclays. Please go ahead. Good morning. Thanks for taking the question. I put another couple on the automotive side. Ryan Hart in the answer to the prior question, you alluded to the fact that the CapEx that you're putting to work today is sort of going to result in output to three quarters down the line. I'm just wondering if you can give us a bit more insight as to what you're thinking over that sort of medium term horizon for automotive clearly book to bill remains strong. We all know the sort of the structural drivers of the industry. Do you anticipate therefore automotive to continue growing at sort of a similar kind of rates currency adjusted into the next fiscal year? Well, Andrew, Hamilton will answer this question, but in general, we are not commenting on the overall revenue guidance for the next year, but, Helmut will give you some insights on that. Yes, I think based on, the order intake that we seen, and we will expect a continued growth of the Automotive Group above group average. So you can expect a double digit growth for the remainder of the fiscal year. And given the growth trends in electromobility and ADAS, it will continue to grow stronger than it's in average. So the structural growth drivers will remain intact. Okay. And then a quick follow-up, if I could, again, on auto, you mentioned during the prepared comments that sort of pressure you're seeing on the automotive margin at the moment. There was sort of there was a one off manufacturing impact in the December quarter. You've had annual price declines in the current quarter. When can you give us a bit more detail as to when you think you can get back to the 16%, 17% margins that you were achieving around a year ago? Is that sort of not this quarter, but perhaps the final fiscal quarter and into next year? Yes, Dominic, please. Yes, absolutely. You're absolutely right. This should happen kind of Q4 by Q4. I think we should see again kind of 16% plus segment result margin. That's at least what we're currently planning. And that's Q4, sorry, that's Q4 fiscal, to be clear on that. We will now take our next question from Sandeep Shabandi of JP Morgan. Please go ahead. Thanks for letting me on. My question is regarding the ITC business. I mean, you're you're showing considerable margin strength in ITC as well at this point. You know, has that been a change in product mix in ITC or uh-uh has there been any other change in ITC, which is which is driving the much better margin in ITC. And then, secondly, a smaller follow-up could you comment on how much of your revenue overall at this point is coming from the ADAS markets and also electrification markets? So, Sandeep, thank you for your question. Dominic will answer your First question and Helmut, the second one. On IPC, we see some strong performance from manufacturing as well as a good structural move And frankly, also a little bit better price decline outcome because of the strength in the market and compounding all these factors is what makes for the margin expansion there. And yes, Sandeep, as we have stated in the previous quarters, We always combine ADAS and XUV, and they combined, still account for high teens, high single digit percentage of automotive revenue today. We will now take our next question. Yes, hi, good morning and thank you for taking my question. Again, really on automotive margins, you mentioned in your full year outlook that in terms of OpEx R and D costs should grow faster than revenue and I would expect that is mostly going into automotive should I understand that that will be mostly over by Q3 and then Q4 back to normal? And maybe could you quantify that pressure on margins coming from this R and D hike? Thank you. Yes. So, Alexander, thank you for your question. Dominic will go into detail on that. Iva, I understand you correctly, you are again referring to the division ATV Automotive only. And as I commented, we think that we can bring up the margin to the kind of level we have seen in the second half fourth quarter prior year. So 16% should be reachable in by Q4. And that already digests basically the roll on of OpEx. We have been actually a little bit kind of behind the planned OpEx increases because simply at the current growth speed, it's tough to simply hire the people we require here. But of course, this is not something we want to defer forever from that perspective. There will still be some roll on of OpEx in the current fiscal year, but that is all included in the comments I made on the Q4 targets, so to speak. So just to be clear, so all of the OpEx hikes happening year and then nothing is carried over then into fiscal 2019? I mean, our general guidance, we don't give a guidance for next year, but we have a long term guidance on how we think about scaling OpEx, we always say that if we scale revenue by a certain percentage number, R and D will scale in line with that growth of the revenue of the top line. So that means no operating leverage, so to speak, from R and D. We grow R and D as we grow sales. On selling expenses, we try to be moderately below that number. So we say 90% of the growth will be increased in selling expenses. And obviously, in admin function, general administrative functions, we try to clearly be lower than revenue growth. So we say 60% or so. So that gives you some indication how we think about scaling our OpEx in the mid to long run. Thank you. From Amish Arshanti from Citigroup. Please go ahead. Good morning, everyone. Amitur Ginnani from My first question actually goes back to the sale of the RF Power business. You've shown clear discipline in making that move and prioritizing areas where you believe you can be a market leader. Now when I think about this and then I think about how your chip card business is moving in recent times and how potentially you're looking to use outsourcing, And I'm just trying to think, what are the strategic merit of being invested in the chip card business? Versus potentially exploring a strategic option for the same and reinvesting proceeds in some of your other businesses which are growing faster. So curious to know your thoughts on the synergies that you continue to see between chip card and the rest of the business. Thank you, Ahmed, for the question. So, tip guard, for us is a core competence which carries over into other segments. The IT security element becomes more and more relevant for automotive, and also in the IoT space where PMM is going into. As a company, we are moving more and more to selling solutions. We do not sell solutions as such, but we provide the customers with overall solution So here is a very good synergy and leverage from the chip card segment into others. Notably, the automotive microcontroller contain a security element designed and architecture by chip cards, which we would not have been able to do it in this performance without the chip card segment. So you do not see the chip cut capability 1 to 1 in a chip cut only. Therefore, we believe that, chip card is an element which we like to retain. And regarding the, revenues and earnings, we are happy with chip card And we do not see a need to reprioritize or redirect Invest in R&D. Thank you. We will now take our next question from Alexander Duvern of Goldman Sachs. Please go ahead. Yes. Hi, everyone. Many thanks for the question. Just a couple of quick ones. First of all, I wondered if you could talk a little bit about inventory levels in auto and industrial segments. Can you give an update on what you're seeing in the broader market? And secondly, you've talked about bulging orders this quarter. Can you give a bit of color on the kind of linearity you saw last few months. May Yes, Alexander, thank you. We see a very healthy inventory level throughout the supply chain. The inventory to sales ratio continues to slightly decline, further indicating that there is no change in trend as compared to the past month. I'm not sure whether I fully understand your question on the bulging orders. I think basically there is a continuation of high order income, and the supply chain is hiking to keep up with the demand. As stated by Reinhard in the intro statement in Automotive as well as in Industrial, the book to bill ratio of last quarter was in the range of 1.3, clearly indicating that there's a very high demand going on. And last but not least, on a continued basis of coming in orders significantly higher than revenue potential. We also have a, meanwhile, triple digit million figures of unconfirmed orders, which simply we cannot say, set aside within a reasonable timeframe. So that continues to grow also. We will now take our next question from David Mulholland from UBS. Please go ahead. Hi. Just two quick questions on the financials for me. Firstly, on the depreciation and amortization guidance, it looks like it's come down a little bit in the quarter. For or your full year guidance comes on. Can you maybe comment a little bit on what's changed? And then secondly, just on the fiscal Q3 margin guidance since you're guiding to flat sequentially, I think normally the Q3 fiscal Q3 quarters whenever you're able to start doing a bit more on cost, after you faced the price downs in fiscal Q2 and historic trend has seen a much bigger step from fiscal Q2 to fiscal Q3. So can you maybe just mention or explain why we're not seeing that, normal seasonality in this year? Thank you, David. Dominik, please answer the question from David. Yes. So On the seasonality, what do you see this that we basically guided against 3% growth? There is a little bit of an implied currency headwind, but it's very minor because when we say 1.25, what we mean is really 1.25 for the remaining 5 months of the fiscal year. So that's from today basically, and that is kind of giving you a tiny headwind. And from a perspective, we see the Q3 guidance as very much in line with normal seasonality. So the kind of order of magnitude of about 4% up if adjusted for currency is very much in line with the long term normal seasonality. On the margin expansion side, I mentioned that we are basically running a little bit behind schedule, so to speak, in terms of beefing up our research and development and selling expenses because we want to continue to push growth aggressively. And given the constraints we had in terms of hiring, there was a little bit of a pent up demand, so to speak, which we have anticipated, coming in, in the second half of the year. Therefore, we've not guided a margin expansion, so to speak, in the Q3, if you look at the 17%, we've guided. So there was another question. First question was D and A. There's a little bit of RN Power RF Power, which has been eliminated, of course, by the divestiture. We mentioned that there's also some R and D capitalized R and D related to the RF Power stuff, which has disappeared from our balance sheet as a consequence in future amortization. And secondly, we had also a little bit of a timing shift while the investor sales number is increasing. It's kind of more back end loaded than initially planned. And that means that some depreciation, which was anticipated already hitting the current years, P and L is now coming early next fiscal year. Right. And maybe if I could just squeeze one quick one in. Last year, you gave us some good visibility on the progress you're making on longer term design wins towards the EV kind of EVs for 2019, 2020 and so on. I think you gave a figure of 1,000,000,000 for fiscal 2017. I wonder if you could update us now that we're halfway through the year on high growth in those longer term design wins is progressing this year. Yes. Well, Helmut will answer this in detail. On the other side, we what we expect or we DC is a certain uncertainty about, what will Europe have as an effect it in 2020 2021 with all the diesel discussions, all the design wins, which we are can mention is, something where we do not fully can correlate to the cars billed, but the number is pretty significant. Halmer, please comment on that. Yes. As you rightfully stated, for last two clear, the actual figure that we had reported was 1,000,000,000 worth of design wins. The cumulated XEV design wins over the last 3 years was 1,000,000,000. And I think the comment as to the current fiscal year, which is still rather young, I would say the momentum is unchanged and coming in nicely. So we continue to see, the strong growth in the XAV space. There's more and more programs, in globally coming in and the all IGBT based predominantly frame based power modules design wins. We will now take our next question from Michael Bottali from Credit Suisse. Please go ahead. Hi. Just on ATV, just trying to think about the second half of this year. It seems like based on the guidance, it seems we should expect like reacceleration in growth even on constant currency basis like somewhere around low teens, maybe mid teens in the back half of the year. Just trying to understand how much of that is influenced by this China partnership that you announced with SAIC? And is the CapEx increase that you announced? Is that also driven by the China Partnership? Thank you. [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] That's, 2, one generic mark is that we are in many areas our capacity constrained in an increased way. So you do not see in all areas the full growth potential, which comes from the market. The e the growth in ATV, Helmut can comment very briefly, the ACAC CapEx is not consolidated. It's not in our numbers, and we do not see yet significant effect from there. SAC will start production only in second half of twenty eighteen. As moving forward, we will report on that. Yes, on E. B, I've basically already said that the momentum continues. I don't necessarily see a reacceleration because EV growth has already been strong in the first half already. And as Reinhard mentioned, there already is some capacity constraints also in the way we can grow our EV business. Overall, I would say outside of EV, the bond growth of automotive vehicles continues to be continues to to, accelerate or grow forward, partially driven by a higher SUV range as well as by a higher take rate of options in the mid class range as well. So it's not all about EV, but it's significant growth in all areas of automotive. Thanks, Helmut. Maybe if I have a brief follow-up on, I think, last quarter or was it quarter before you mentioned a launch EV launch from NEEO where you said that power content is almost as high as $900. I'm just trying to can you give us some color as to what has been the latest trend Like are we seeing a point like we understand EV is happening fast, but are we seeing a trend that the content in the newer EV models is increasing even faster than you expected? No, Atelder. This is dependent strongly on the type of the product. The neo is a top line SUV. Which is highly powered. So, here, we, communicated content of USD900 for power. And, this is very unique. In general, we don't see that there is, an acceleration on the power on the EV, coming. In general, we expect that and it depends on what the take rate will be on the EV versus the plug in hybrids and plug in hybrids maybe also a significant portion for Europe. China is something where I think here is different effects. What we see as a significant growth driver, the very mild hybrid, let's call it, a micro hybrid, which are the 48 volts, which helps to improve on the CO2 but it's only compensated for some of the diesel to gas movements in order to and it can be installed in the car at a much lower cost rate. So the picture becomes much broader with this from very high power as NIO to say, very cost effective, like a 48 volt, which is not even a module. Great. Thanks, Fernand. We will now take our next question from Johannes Steller from Deutsche Bank. Please go ahead. Yes. All right. Thanks for letting me on. 2 questions. The first one, just really on the capacity tightness that we're seeing across the industry and what that is doing to your margins right now. I mean, you were talking over the last few quarters about rising wafer costs and how that is a headwind. Now I think it's probably the first time you're officially talking about better pricing negotiations or better pricing in PMM and IPC. So where are we on those two developments? Are we kind of moving from capacity tightness being a headwind now to being a tailwind or is there more of a negative surprise maybe to come from wafer costs. And that is the second question. Just out of the billion investments, you're now guiding to Could you give us a sense, how much at Dresden 300 currently accounts for in that number? Thank you. So the first question. I want to answer more on a general, comment. The allocation hours something which is reducing the efficiency of production is dragging away the I would say, concentration or the efforts of marketing and sales in order to, do new business. So in general, do not appreciate at an allocation level as we have. And the book to bill ratio also We assume that there are some double ordering inside. Therefore, we appreciate, let's say, a relatively tight market with a good view to the market. The price increases here definitely be honor the long term contracts we have, and, we for the, I would say, new business, we are adopting prices, which we have communicated in the IPC and PMM way. So you can say in some areas, there is a benefit from the overall market tightness in power, but I would not say that there is a real change from a tail to from headwind to tailwind, nevertheless, the situation is a little bit more balanced. Yes. Hello, Mr. Shala. So, maybe to carry on on the first part, the wafer substrate pricing, we even further increases also next year. Of course, we observe the market here very carefully, in 300 as well 200 millimeter on the CapEx, of course, in such a timeframe, we we allocate most of our capital towards the capacity expansion, which mainly goes into Dresden and cooling at the same time in order to benefit here also from the 8 inches expansion. So if we want to get a rough sense, how much richness right now? And it's possible to give us a ballpark number or rather not a couple 100,000,000 goes into Dresden this year. Understood. Thank you very much. We will now take our next question from Jerome Rahman from Exane BNP Paribas. Please go ahead. Yes, good morning. Talking about the tightness and capacity. Could you give us a little bit detail on where are your lead time for, power modes and activities? And do you think that the same situation for your competitor or you you might be losing market share because of the tightness? And second question for Dominik, how much of the R and D is now capitalized? Yes, thank you, Jerome, for the question. The lead time for IGBT, Amrut, please. Yes, So, as mentioned earlier, we are not able to confirm significant portion of the incoming orders which is a clear indication that those orders exceed or would exceed a delivery time 6 weeks to your question of, are we losing or gaining share given the fact that we are raising our capacity as quickly as possible and the fact that we are probably have the largest manufacturing base in front end today I think the math will tell that we are probably gaining market share in these days and capitalization I give to Dominic. Maybe one adder on the market check-in, if you recall what I said that we basically grew in dollar terms, which was currency. Everyone uses to look at market share grew by 21% in the March quarter. I'm really lacking the imagination how we cannot wind market share with such a growth rate because it's predominantly driven by the power discretes and modules. Now I've got distracted for the second question. No, the capitalization on R&D. Capitalization on R&D, as we stated, couple of percentage points. So 2 percentage points of our investor sales ratio are R and D, and we're currently even a tick lower than that, but the 2 percentage point ballpark is a good number. Of revenues that is. So two percentage points of revenues is in R&D. And then if you look at the R and D as it expands, you can add that if you want to have the gross R and D. And of course, there are some government grants on top of that. So our real gross R and D is significantly higher than the R and D expense and the P and L Thanks. We will now take our next question from Cynthia Patuco from Bank of America. Please go ahead. Yes. Good morning guys. So two questions from me. Firstly, you're guiding for an acceleration in organic growth. If I've done my math correctly, you're guiding for organic growth of about 11.5% up from 10%. You guided for last quarter. And so can you give us some color on the end markets where you're seeing, where your confidence has gone up in the quarter? And secondly, the last time you gave an update on the silicon carbide market was last year when you said that 15 Tier 1 OEMs are trialing your 6 solutions. Can you give us an update on the traction you're seeing with your 6 products for the automotive end market? Thank you, Harif. Your question, the, color on the end market. Of course, automotive is and will remain a strong growth driver, especially, in the power segment, and, the outperformance of the higher power segment with the MOSFET IGBT modules here. We, even, and as we give the guidance for the reminder of the year, automotive will be the strongest growth. But also the other, businesses, but I would say very clearly in dominated by power, shows structural strength in the area of a PMM's business we have seen that ACDC is getting stronger, of course, also on one side, driven by automotive verages in the area of charges, onboard and wall charges, but also in the DCDC area, just to mention one element, this is the battery operated tools, where we expect to see also a structural push many other areas, we, I would say, are benefiting from our technology strengths adding to what Dominic said that we believe that we are also gaining market share on this side. So I think here, the basic growth drivers as a general market are positive and the structured growth drivers, staying up. The next question, Silicon Carbide in auto We see the first adoption on the onboard charges. We it's a very different inverter topologies. The the introduction into the major drivetrain is still on a very low level. Okay, understood. Just a quick follow-up, if I could. You said in the press release, you remain very confident on your 2018 guidance. So can you give us some color on the level of conservatism you're priced into your guidance? Thank you. Well, it's very difficult to say, some of the numbers that Dominique can add but the orders on hand, while here, it is very clear that we do not see any risk from the market in near term from the financials, Dominic, please. I think we should also highlight that there is not much upside because it could be a capacity constraint. So the constraining factor for our growth in the current fiscal year is what we can produce. On the margin side, I alluded to this issue that basically we are a little bit behind the curve of hiring in some areas And we try to accelerate that, but if we may not be able to do that, then there would be some upside relative to what we said, but that would then spill over into next fiscal year, and that's why I would not kind of put too much emphasis on that, but really kind of stick to the guidance we've given here. Thanks. Thank you. We will now take our next question from Kepler. Please go ahead. Yes, hello. Question on auto. Have you seen any change in the long term outlook for your ADAS based business for the coming years notably following the Tesla and the other accidents at the end of March. And also what was the growth top line growth of your EV and ADAS business in Q2? One general remark from my side regarding Addis and, then Hammar goes more into the details. The majority drive of ADAS currently in driver assistance and not of automated cars. I think here, we will see a loan growth periods on, let's say, improved driver support while out fully automation will take a significant time and will not make a significant portion of the revenue stream related to ADAS. But Helmut, please go. Yeah. Building on what you said, Leonard, say, number 1, the fully automated vehicles are still some time to go. In the meantime, there is a growing rapid penetration also supported by regulation like emergency breaks in Europe, etcetera. So in addition to the comment on Tesla, I think many other companies are really adding, lots of sensors on the radar side as well as potentially going forward in the LiDAR side. So sensors are really a major driver and they are already needed also on lower levels of automation. So I think on that, the growth rate is heavily increasing. But just a brief add on, please note that was not a comment about our business relation to Tesla. It was a general remark along with the strategy and the growth of EVs and ADAS in the last quarter? Mean, we do not comment specific growth rates there, but what we can tell you is we should not surprise you that if you look at the high book to bill in automotive, the book to bill in that area was even higher. So, Brian had already commented that the good order intake is continuing throughout the current fiscal year. We will now take our next question from Kevin Que from Berenberg. Please go ahead. Hi, thank you for taking my question. So, we have seen that auto demand being very strong over the past few quarters. Can you talk about Sue what kind of visibility from your design win perspective that you can see in the pipeline so that we can auto will remain strong over the next, let's say, 12 to 18 months? And also the second question is on the margin of PMM. This quarter I have seen that PMM margin is very strong compared to last quarter without revenue growth. So can you talk through what what's the fundamental driver there? And also, what's the likely trend in the next two quarters for that we'll be able to see a close to 20% segment margin in PMM this year? Thank you. Yes. Thank you for the question. The first one was the, the pipeline, the design wind pipeline, It is very simple to answer this. The design win pipeline is extremely strong. The dominated growth driver currently is the high power rain area as we already commented going into EV, but also being very broad as a 2nd biggest growth driver is ADAS, but please note that all the standard products in automotive are growing as we have commented over the years. So Assuming no significant changes in global situation, the base for continued strong grows due to design when is secured now, as we communicated, to match with capacity, which is currently our biggest challenge. So The next was PMM margin and product mix. Dominic, please. Yes. Indeed, the margin at PMM in the quarter was quite healthy, given there was limited increase in whether it reflect flat revenues, it was margin expansion, but I'd say the prior quarter was more of a kind of not representative quarter. I think that March quarter is a better indication. However, given the comments I made on the OpEx increases on the kind of cap capacity constraints in the near term, which will be potentially debottlenecked in Q4. The kind of snapback or the further increases in revenue, I'm a little bit back end loaded for PMM, But for the full fiscal year to answer that question, we should see 20% around 20% segment result margin. And by the way, you need that type of margin If you tie it back to the comments we made on the margin development in ATV, you have a bug of the Infineon revenues already. And then if you say you basically need about 20% margin for PMM to bring us to the 17% margin for the full group. And one add on comment in general, we as we report significant order entry and also comment that in some areas, we may have double ordering visibility in the automotive value chain is very good. So we have a pretty good understanding about what are the demands and how they really reach the market So, the view of the company on the in the automotive area I think we have a reasonable understanding there while PMM and IPC with the higher distribution and much broader customer base is a little bit more difficult to interpret. We will now take our next question. Yes, thank you for taking my question. Just one on the capacity constraints you mentioned. I mean, this seems to be a really a topic for you guys. And in the industry in general, despite the 300 millimeter fab you have increased, do you see down the road in 1, 2 years? Ramping a completely new fab in order to handle the growth you're seeing? Well, Basil, thank you for your question. A general remark, which was not meant given today, is think Infineon is in an excellent position regarding our manufacturing strategy for power and sensors to outgrow the rest of the market. Interesting. We have clean room available in Curum. We have clean room available, and, we follow a clear strategy, which can be given in more details by, Jochen, how we deal with a clean room and the capacity extension. Sorry, a brief, a really, a very brief follow-up on the IPC. This segment seems to, was historically with the margin pro low target 17%. Going forward, are we now at the group level of 17% for this segment or was that now an exception, what we have seen this quarter? So IPC had been when you look back in history, a longer time, had shown very good margins. In between, we had been facing in some areas in the portfolio, some challenges So we can, clearly state that with 19.9% in Q2, IPC is, better than the 17% target that we have given for Infineon And, we expect that, IPC can maintain, this level currently, we are the result communicated that due to favorable product mix for driver IC, we see a peaking there, but it will be at least at or slightly above group average. Okay. So, thank you all for your questions. With that, we would like to conclude the quarterly conference call. For further questions, please feel free to contact us in the IR team here in Munich. Thank you very much again, and have a pleasant day.