Earnings Call: Q1 2021

Feb 4, 2021

Thank you very much, and good morning. Welcome, ladies and gentlemen, to our 2021 fiscal 1st quarter earnings call. The entire management board of Infineon is again on the call: Reinhard Ploss, CEO Helmut Gassel, CMO Jochen Hanebeck, COO and Sven Schneider, CFO. New Year, different day of the week, same procedure. Reinhard will start with some remarks on group and division results, market developments and business highlights. Sven will then comment on key financials, followed by Reinhard again updating you on our guidance. The illustrating slideshow, which is synchronized with a telephone audio signal, is available at infineon.com/slides. After the introduction, we will be happy to take your questions, kindly asking that you restrict yourself to one question and one follow-up. A recording of this conference call, including the aforementioned slides A copy of our earnings press release as well as our investor presentation are also available on our website ataffineon.com. Reinhard, the virtual stage is yours. Thank you, Alexander, and good morning, everyone. Infineon has been off to a strong start into the 2021 fiscal year. Driven by rising demand across multiple end markets, We saw a pronounced sequential revenue increase in the December quarter, different from our typical seasonality. As we could serve the bulk of the additional demand from existing available capacities, the revenue uptick was accompanied by a notable margin expansion. The strength of these positive developments allowed us to more than offset the adverse U. S. Dollar movement. Broadly speaking, The current market environment is characterized on the demand side by both a cyclical recovery and continued structure momentum. On the supply side, by tightness affecting various parts of the value chain. The automotive market is rebound Regulatory tailwinds supporting EVs, industrial and also related IoT are slowly returning to growth. Work from home dynamics remain vibrant and digitization is accelerating, giving a push to communications infrastructure, smartphones, Data Centers in Certain Consumer Applications. As demand is outstripping supply in many subsegments and inventories are in some areas, Especially in the channel on the low side, confidence with respect to 2021 is improving. Once again, high levels of agility and flexibility are required of our workforce as we are moving rapidly from underutilization Into allocation in many areas. Of course, significant uncertainties continue to linger 1st and foremost from the coronavirus pandemic And from trade tensions, and we are not turning a blind eye on them. Having said this, we firmly believe in the underlying strength of our business and adjust our projections upwards, also moving faster on investments. I will get back on to this in my outlook section at the end. Let's first take a closer look at the quarter under report. In the December quarter, we printed revenues of €2,631,000,000 6% more Than in the previous quarter and ahead of the midpoint of our guidance. All segments contributed to this growth, in particular Automotive. The average U. S. Dollar euro exchange rate worsened quarter over quarter from 1.16 To 1.19. Assuming a constant exchange rate, sequential growth would have been 7%. A year on year comparison is not meaningful given the consolidation of Cyprus. The segment result amounted to €489,000,000 resulting in a segment result margin of 18.6%. The stronger than anticipated margin expansion was mainly driven by the fall through from a positive revenue development Meeting available manufacturing capacities. Consequently, quarterly underutilization charges went down Potentially benefiting especially automotive. Furthermore, we had a couple of positive nonrecurring effects. Sven will provide more details in his part. Our book to bill ratio at the end of the December quarter stood at 1.6, A reflection of strong demand but also of supply tightness. Now to our divisions. Starting with Automotive. In the December quarter, the segment posted revenues of €1,050,000,000 A 10% increase compared to the quarter before. Corn markets globally continued their rebound and showed another strong uplift in demand. As a consequence, all our product areas benefited with particular strength in components for electric vehicle. This positive momentum had a substantial impact on ATV's profitability. The segment result came in at €185,000,000 €85,000,000 equivalent to a segment result margin of 16.1% Compared to a 5.6% in the previous quarter. A strong margin improvement was driven by a significant reduction in underutilization charges In the wake of a considerably higher fab loading. The book to bill ratio for the December quarter increased to 1 0.5 percent caused by underlying demand, but to a certain extent also by orders higher Then actual demand and fuel of tight supply conditions. Semiconductor shortages are being felt in the overall automotive supply chain. The recovery is happening faster than expected last summer. Many products are in allocation and foundry capacity, Especially for microcontrollers is a limiting factor. It will take time to bring more capacity online. Regarding power semiconductor and sensors, we are well positioned regarding the situation due to our in house capacities. Infineon is committed to supporting its customers in the best way possible and act as a reliable partner. This Has been the case last year when we ran inventories at above normal level to minimize supply disruption, And this is the case now when we increase our capacity related investments further. Current supply constraints should not overshadow underlying trends. 2021 is shaping up to Be a strong year for automotive semiconductors as global light vehicle projection should grow in the mid Teens year over year and structural momentum is coming from ADAS and DV, where adoption and penetration appear to be Accelerating. In the December quarter, the share of battery electric and plug in hybrid vehicles of new car sales The top 5 West European carmakers was about 14%. Also in Mainland China, so called new energy vehicles Have resumed their growth path with more than 600,000 units being sold in the last calendar quarter of 2020, Representing a share of about 8%. In the U. S. Penetration, levels are still around The 3% marked. However, under the new administration, the regulatory framework and public infrastructure spending are expected To favor clean mobility. In other words, XCV inflection points occur at different Points in time in different regions. But overall, electromobility is taking off, and Infineon has an Unrivaled product portfolio to offer fully scalable solution for all types of vehicle electrification. As evidence of this, a couple of weeks ago, we scored a triple digit €1,000,000 design win at a major car OEM established Outside Europe for main inverters with modules based on silicon carbide and IGBT technologies. On the ADA side, we continue to see accelerating adoptions of platforms that can be Caled up to level 2 plus which bodes well for our high popular suite of sensors and microcontrollers. Recently, a major Asian Tier 1 selected our 77 gigahertz solution for a short range radar application. Now to Industrial Power Control. IPC witnessed an unusual seasonal upswing in the December quarter And recorded revenues of €362,000,000 4% more compared to the previous quarter despite currency headwinds. By application area, the picture is a mixed one. Renewable Energy showed continuous growth in the past 100,000,000 Euro quarterly revenue mark for the first time. Also, Home Appliance was strong, driven by pent up demand and energy saving regulations. In contrast to this, industrial drives moves sideways and transportation continues to be hampered by low travel activities. The segment result came in at €61,000,000 after €69,000,000 in the quarter before. The segment result margin, correspondingly, declined to 16.9% from 19.8%, Reflecting adverse currency movements and unfavorable product mix. Book to bill improved to 1.4 At the end of the December quarter, in part, driven by customers putting in longer term orders. General inventories have come down further And are now at a very healthy level. The overall market sentiment for industrial is turning more optimistic As macro indicators and application specific forecasts point to a sustained recovery in 2021, We see Industrial Drives and Automation on a slow but steady recovery path with some near term volatility from the timing of CapEx projects. For Renewable Energies, we expect sustained growth. The generation of electricity from natural resources is a secular theme. The green deals in different geographics already provide significant policy and fiscal support. Any further regulation push would constitute upside potential. Also home appliances are on the productive trajectory Driven by energy efficiency regulations for domestic air conditioning in China. In contrast, Investments into train and also e buses are being pushed out due to COVID effects on public transportation. Recovery in these areas will be delayed, but the structural attractiveness is undiminished. As a product highlight, we have introduced the world's 1st molded 1200 volt IPM Our intelligent power modules with silicon carbide MOSFETs. This product is targeting industrial drives and aircon application, The next tipping points for silicon carbide in the industrial sector. Let's now turn to Power and Sensors Systems, Which recorded revenues of €779,000,000 3% more compared to the previous quarter. Whereas the server business was essentially flat at high levels, we noted several pockets of distinct strength. Low voltage switches, in particular for power tools, connectivity components for PCs and laptop and, once again, MEMS microphone for smartphones and accessories. The segment result of PSS came in at €197,000,000 resulting in a segment result margin of 25.3%, A little lower than in the previous quarter, which had seen some positive one off effects. In the last quarter, we saw strong ordering momentum, reflecting in a book to bill ratio of 1.6 at the end of the December quarter. At the same time, channel inventories are very low, with supply tightness being felt across several product categories. Our remote workforce and stay at home regulations affecting aspects of life such as Schooling and entertainment continue to provide a boost to demand in areas like battery powered do it yourself tools, PCs and laptops and gaming consoles. Beside these cyclical developments, structural trends are unabated As digitalization is irreversible, a key example are cloud data centers. Here we see sustained momentum for Server DCDC Controllers and Power Stages. The rollout of 5 gs Networks will enable and foster edge computing. On the handset side, 5 gs is expected to catalyze the growth of premium devices. With our Our portfolio combining power, sensing, radio frequency, control and connectivity, we are poised to benefit From this multitude of growth drivers, one critical success factor is innovation. A very recent example is our extensive pass CO2 sensors. Using photoacoustic spectroscopy, The sensor allows highly accurate measurement of CO2 concentration with an exceptionally small form factor. Use cases can be found in areas like ventilation control in buildings, smart appliances, Agriculture or in cabin air quality monitoring. In the current pandemic, the sensor can help to reduce the risk of airborne viral transmission in places like offices, conference or classrooms. It makes us proud that the facilities of the planned next Munich Security Conference will be equipped with it. Now to Connected Secure Systems, which recorded revenues of €335,000,000 a slight increase compared to the previous quarter Despite currency headwinds, there would have been room for higher sales figure as demand, Especially for general purpose microcontrollers and Wi Fi components is vibrant. However, CSS is affected by supply constraints On the foundry side, the segment result of CSS amounted to €45,000,000 equivalent to a segment result margin Of 13.4%, slightly ahead against the previous quarter. The book to bill ratio is a staggering 2.6. The figure being somewhat distorted by the fact that several large customers have put in annual orders. Having said this, underlying demand in practically all application areas outside identification documents And ticketing continues to be very strong. Once again, we are witnessing the confluence of cyclical and structural factors. COVID restrictions lead to increasing demand for applications like home health, home fitness, remote controls, gaming consoles And contactless payment. The proliferation of smart and connected device, be it on the industrial side, automotive or customer side, Drive the need for solutions combining connectivity, control, low power and security. Linked to this, We have seen good design win momentum across our Wi Fi Bluetooth and microcontroller offerings. Our Wi Fi Bluetooth combo chipset have been selected for a new infotainment platform by a major automotive Tier 1. We also have won key sockets at leading IP camera providers. In microcontrollers, we have achieved key design wins At leading OEMs in industrial, printer and consumer markets. On the product side, we have extended our Optiga Trust family With a dedicated solution for secure wireless charging, addressing charges from small personal electronic devices Like smartphones, earbuds, tablets, wireless or a health device with a charging power up to 15 watts. Additionally, we have launched 1 of the industry's only dedicated Wi Fi 4 solution to deliver the latest WPA3 secondurity standard targeting IoT applications. Now over to Sven will comment on our key financial figures. Thank you, Reinhard, and good morning, everyone. As usual, I begin my commenting on our margin development. In the Q1 of our 2021 fiscal year, Gross profit amounted to €985,000,000 resulting in a gross margin of 37.4%. Excluding non segment result effects, the adjusted gross margin came in at 40.3%, 370 basis points up from the 36.6% we had recorded in the previous quarter. The main reason for this steep increase was the reduction in idle costs. Utilization in our front end facilities Snapped back to mid-ninety percent level. Also, the back end sites saw loadings increase over the quarter. All in all, underutilization charges moved down from around €150,000,000 in the September quarter To around €70,000,000 in the December quarter. Research and development expenses went up to €333,000,000 From €308,000,000 in the previous quarter. Selling, general and administrative expenses amounted to €311,000,000 R and D expenses included €8,000,000 of non segment result charges. SG and A expenses, €60,000,000 The net other operating expense was €9,000,000, therein, €14,000,000 of non segment result charges. Besides the positive impact of strong business volumes that overcompensated the weakening of the U. S. Dollar, We had a couple of smaller benefits of a nonrecurring nature, such as unusually high billings For IP licensing or pulled in public funding, summing up to about 1 percentage point of segment result margin that can be characterized as one off. The non segment result for the quarter amounted To minus €157,000,000 after minus €197,000,000 in the preceding quarter, Around €125,000,000 of the non segment result in Q1 related to the Cypress acquisition, mostly depreciation and amortization from the purchase price allocation. The financial result for the December quarter was minus €26,000,000 after minus €28,000,000 In the previous quarter, income tax expense amounted to €49,000,000 for the Q1 of the current fiscal year, Equivalent to an effective tax rate of 16%. Also, cash taxes amounted to €49,000,000 Resulting in a cash tax rate adjusted for PPA effects of 12%. For the current fiscal year, we We expect to benefit from these tax loss carry forwards for about another 5 years. At the end of that horizon, Our investments into property, plant and equipment, other intangible assets and capitalized development costs in the December quarter We're €283,000,000 after €332,000,000 in the quarter before. Depreciation and amortization, Including also acquisition related non segment result effects amounted to €368,000,000 for the quarter, slightly down From the previous quarter's figure of €379,000,000 Free cash flow from continuing operations once again exceeded 10% of revenues and came in at €313,000,000 compared to €387,000,000 for the September quarter. A notable contribution came from a positive working capital effect. Cash collection on our receivables was Strong prior to the end of the calendar year, and our own inventories came down by around €100,000,000 quarter over quarter reducing the DIO to 107 days. Our reported after tax return on capital employed, OROSI, Stood at 7.8% for the Q1. As you are well aware, the impact of an acquisition on this indicator tends to be quite large. Excluding bookings related to the acquisition of Cyprus and International Rectifier, in particular goodwill, fair value Step ups in amortization as well as deferred tax effects, the adjusted ROCE was around 27%. With a look on liquidity and financing. Quarter over quarter, our net debt position improved by €437,000,000 Driven by strong free cash flow and, to some extent, a currency impact. Our gross debt went down quarter over quarter from €7,000,000,000 to €6,700,000,000 On the one hand, we made scheduled repayments of €174,000,000 Within the quarter, on the other hand, the weaker U. S. Dollar lowered the equivalent euro amount of our dollar denominated financial debt. Using illustrative 12 months figures for EBITDA, our net leverage comes out at 1.7 times and gross leverage It's 3.3 times, showing the good progress we are making on our deleveraging path. Our strong liquidity stands at €3,300,000,000 of gross cash. The pillars of our capital structure management remain unchanged, investment grade rating, strong liquidity position and a clear commitment to deleveraging. I will now pass back to Reinhard again, who will comment on our outlook. Thank you, Sven. 3 months ago, we characterized our outlook as cautiously optimistic. Meanwhile, we are getting more confident, witnessing the Current demand recovery across many end markets. We expect tailwinds to extend well into this year. The lingering COVID situation and geopolitical rifts are important caveats and supply chain limitations may well cap The upside. From a fundamental perspective, however, we expect our structural growth driver to continue to gather steam in 2021. This is a frame in which we adjust our outlook upwards despite moving the assumed U. S. Dollar euro Change rate from 1.15 to 1.20. For the running Q2 of our 2021 fiscal year, We anticipate revenues to slightly grow and to come in between €2,500,000,000 €2,800,000,000 For ATV and PSS segment, we expect a low single digit percent revenue increase quarter over quarter. IPC's revenue should stay flat, whereas CSS should see a low single digit percent decline because supply constraints will hinder us From shipping to end demand. At the midpoint of the guided revenue range, the segment result margin is expected to be around 16.5%. The sequential decline will be mainly driven by 2 factors. As you know, in the March quarter, typically prices in long term customer contracts are being reset. Secondly, with the change of the calendar year, we will convert the remuneration scheme of former Cyprus To Infineon Standard. While this will not lead to higher overall pay, the compensation of Cash and share based elements will change. This will burden the segment result margin due to a shift towards Relatively more cash based pay components. For the full 2021 fiscal year, We now expect revenues of around €10,800,000,000 plus or minus 5%. Incremental strength, more than offsetting the adverse currency development, is expected to come from ATB and PSS. The higher revenue level will lead to a corresponding uplift of the segment result margin, which we now expect to come in at around 17.5% at the guided revenue level. Compared to our last projection, we see puts and takes. The weaker U. S. Dollar will have a negative impact. And you know our rule of thumb, whereby each cent Has an impact of roughly €14,000,000 on our revenue and €4,000,000 on our segment result. At the same time, we expect the strong business momentum to help us overcompensate the currency burden. Linked to additional revenue, underutilization charges are anticipated to come down by around another €50,000,000 compared to the previous guidance to an annual value of around €200,000,000 reasonably close to their structural minimum. The overall positive business developments will lead to a higher variable compensation with a dampening effect on margin expansion. Going forward beyond 2021, we continue to see highly attractive growth opportunities, Some of them, like XCV, accelerating. The current market situation is underlying the importance of remaining On the front foot regarding capacity expansion. Therefore, we plan to increase investments in property, plant and equipment, Other tangible assets and capitalized development costs in the 2021 fiscal year to around €1,600,000,000 Dynamically adopting our investments to market developments. Among others, this will enable us to pull in the story Our new 300 millimeter facility in Fila by around a quarter to the Q4 of our 2021 fiscal year. The expectation for depreciation and amortization remains at between €1,500,000,000 and €1,600,000,000 Including amortization of around €500,000,000 resulting from the purchase price allocation for Cyprus And to a lesser extent, still related to International Rectifier. The supportive business momentum should Also benefit our free cash flow, which we now estimate to come in at more than €800,000,000 compared To more than €700,000,000 before. Before summarizing and opening the call for Q and A, it's my pleasure To announce that Infineon is planning to host a Capital Markets Day later on that year. Specifically, we are targeting the 4th 5th Capital Markets Day in London 2018 and about 1.5 years from the closing of Cypress acquisition. We plan to provide you a comprehensive update of our strategy and business model, growth drivers and the state of Cypress integration and Midterm financial targets. We cannot be sure about which format of the event the pandemic will allow by then, But we'll keep you informed about logistics and agenda as we go along. Now ladies and gentlemen, it's Time to summarize. Infineon had a strong start into the 2021 fiscal year. We concluded the December quarter successfully with a bit over €2,600,000,000 of revenue and 18.6 percent segment result margin and more than €300,000,000 of free cash flow. At present, Demand in several areas, most notably microcontrollers and IoT products, is outstripping supply. Here, effects of allocation are evident and inventories are on the lean side. The road to recovery We'll have speed bumps in the near term related to component shortage in several areas. COVID and trade tensions remain Significant uncertainties that might well cause volatilities. Having said this, we have Full confidence in the underlying strength of our business. Various of our structural growth drivers, especially those Related to sustainability and digitization are receiving a boost from accelerating adoption rates. Meanwhile, the Cypress integration is progressing as planned. We are preparing for a Structural upturn and adjust our outlook upwards despite a weaker U. S. Dollar. For the 2021 fiscal year, we expect revenues Of around €10,800,000,000 a segment result margin of about 17.5% And free cash flow of more than €800,000,000 We will consistently invest into both R and D and manufacturing capacity To capture growth opportunities and revenue synergies. Regarding manufacturing capacity, we plan to open fill up already in the last quarter Of current fiscal year. In any case, it will be essential to stay vigilant and quickly adapt to fast moving market developments, Something that Infineon has repeatedly proven to be capable of. Ladies and gentlemen, this concludes our introductory remarks, And we are now happy to take your questions. Thank you. Our question and answer session will be conducted electronically. And we'll take our first question. It comes from Sandeep Deshpande from JPMorgan. Please go ahead. Yes. Hi. Thanks for letting me on. I have two questions, if I may. My first question is on the EV market. Maybe, Ranad, you could help us understand how much in this €10,800,000,000 that you are guiding to That you see as your revenues directly from EVs. And when you when we look at the data coming out of Europe in terms of Volumes of EV sold in Q4, the volumes are extremely high. And this is well beyond the U. S. Automaker, that's really. So the question is, is Infineon seeing the benefit of this whole EV transition And that is helping your revenues? And the second question is on cost quickly, which is that your guidance on the margin in the March quarter is Sure. Is it mainly because of this change in compensation associated with Cyprus issue? Or there are other factors which are driving this? Thank you. Hi, Sandeep. Thank you for your questions. So regarding the EV, first of all, I I want to comment on many people associate our the EV drivers mainly around power, but we are seeing a very good Growth in the microcontrollers in the EV segment. Here, Helmut will go into more detail. And the second question then will be answered by Sven. Yes. Hello, Sandeep. Good morning. Yes, the EV market is strong extremely strongly. In 2020 alone, it has grown 36% versus 2019, and people are Expecting that to accelerate significantly into 2021, so more like double actually. We're strongly coming from Plug in hybrids but also from battery electric vehicles. So we, in our case, are expecting something like a 40% Growth in fiscal year 2020 as compared to previous year coming from electric vehicles. So about, I'd say, 2 thirds of the surplus growth that we at Infineon expect compared to the market value is driven by ADAS and EV again. So Very strong momentum as expected. Yes. Before handing over to Sven, Sandeep, don't forget the charging station. Here we see across the company in various divisions also quite a significant demand, which, of course, is driven by EV but not Right away, allocated to the EV segment. But now Sven? Yes. Sandeep, so your question With the reduction of the margin in Q2, there are a couple of factors I want to highlight. The first one is, as you rightly mentioned, We are changing that compensation scheme for Cyprus Legacy, which is a shift from NSR to SR, so non segment to segment result. The second one is, as mentioned in the script, typically, this is the quarter for price resets. So there's also an element of that in the margin included. And lastly, if you look at the Q1, we mentioned that, give or take, 1 percentage And of the 18.6% is nonrecurring given the IP and also the public funding pull in. So if you take that into consideration, you see that The real differential is more the magnitude of 1 percentage point down and not 2 percentage points down. Thank you. Our next question Comes from Johannes Schaller of Deutsche Bank. Please go ahead. Yes, good morning and thanks for taking my question. Congratulations on the good results. So I mean, when we look at your full year guidance of the SEK 10,800,000,000 given you talked about adding capacity, you talked about the capacity Shortages and supply bottlenecks the industry is seeing. Is there if demand stays strong into the second half, is there any upside to that number really? Or are you More or less capacity limited, and that 10.8% is basically factoring in for operating full capacity utilization throughout the year. And then also given you're pulling filler forward and you're investing obviously in other fabs, how should we think about the capacity For the entire group or maybe say the potential revenues that Infineon could generate once we exit the fiscal year 2021? Thank you. So thank you, Mr. Schaller. Let's start with the capacity, and Jochen will answer it. I think it is a pretty Complex picture, so Yes, indeed, Reinhard. So Mr. Schaller, we entered this phase with Elevated inventories, which served us very well coming in now into the boom. We told you that we Finished the short time work already in September, and then we ramped up now the existing capacities at Infineon. Now to bring on more capacity, of course, we moderately only reduced our CapEx budget last Which implies that we also have certain capacity steps coming in on stream this year. But of course, at some point, we will be also limited. So there is The upside to the revenue you quoted is probably not that high. On the foundry side, I think It's a different story. I think we can read it everywhere. After this rebound, After the initial phase of COVID, where there was a strong demand in terms of communication, consumer, Infrastructure and political interventions on the global level, we got into this supply constraint situation across many nodes In the foundry world, so there I would say it's even more limited than on the internal side where we are the master of our Own decisions. For next year, of course, things then will line up very nicely as the new facility in Fylah We'll be ready to start production in late Q4, fiscal Q4 And then serving in terms of demand very nicely for 2022. That's very clear. I understand it's a complex topic. And maybe just a very quick follow-up. I mean, it looks like you're winning more on the silicon carbide side Again, I think this is an incremental design win you just mentioned. Can you give us just a bit of an update in terms of the road map? Because this is obviously a very critical period For design wins, as you alluded to in the past. Yes. Mr. Scheidel, here it's very clear. We still See that a lot of competition has a huge challenge to follow our technology road map. We are Very much ahead of many others introducing the trench based MOSFET, where many others say they still have to learn. So from a the technology capability, we are very well off. We are also having secured our Supply with long term contracts with various manufacturers on the wafer side. Also on the bull side, Jochen has reported about this last time where we see an advantage using our wafering technology On this, I would say, advanced cutting technology. And I think here, What you are seeing that we are more and more moving to a dominating overall technology portfolio. And what we also see that especially the ability to serve IGBT as well as Silicon carbide solutions kick in very strongly. So many people say, yes, I take IGBT module, Same footprint for the lower power and silicon carbide 1 with the same footprint For a higher power. So I think here we are progressing extremely well and adding capacity for silicon carbide in our Filler Factory. So I think not much else to be reported. It's interesting. We still believe that the majority of the XEB drive is to be seen the next time. And there are some special companies having a very specific drive that will come from IGBT and silicon demand. Jochen was talking about the capacity. I think here, we are in close discussion with the OEMs in Tier 1s in order to make Sure. They understand the challenge of the value chain for Xevic in the coming years, and we are preparing as a total industry for that. With this, to Sven. Yes. Mr. Schaller, just to add because you asked for the road map that's more mid- to long term, but also short term, I mean, we have already I stated that, that we expect a 70% growth in this fiscal year, where the majority of the growth is expected to come from Automotive. So it fits well Our next question comes from David Mullen of UBS. Please go ahead. Thanks, guys. Just wanted to touch on a different topic. You obviously talked about very strong demand and booking levels within CSS. And obviously, a lot of that seems to be related to some of the prior Cypress products. So I wonder if you can just give us an update on How the kind of demand levels and design wins that Cyprus had talked about before have then come through post acquisition? Is that in line what you expected or maybe even trending above given those strong bookings levels? And then just secondly, one quick follow-up. Can you just help Just clarify on that one off nonrecurring effect in the margin in Q1, how much of that was within the automotive margin? Because obviously, there's a very strong step up Picture, you do not see the potential which is popping up there and coming because here we reported in the various divisions To have a supply constraint from the foundry situation overlaid by execrate demand as well as geopolitical crunch. Jochen already highlighted this. I just want to add one point before I hand over to Helmut. Maybe there is a Certain upside during the year because we believe similar than in I can remember pretty well, 2000 'ninety nine, 2000, 2000 and 1, there was an overly exaggerated demand from the communication industry. If there is a normalization, Then we see upside potential. Otherwise, as Jochen pointed out, it may take longer. So now to Helmut and then to Sven. Yes. As Reinhard already pointed out, the CSS business obviously comprises of The former Cyprus business as well as the Infineon side. On the Infineon side, I think one thing that is also driving demand quite significantly is the contactless payment in The payment market overall, so that is a significant contribution to that as well, not to forget about it. And it is still Significant portion, around 15% of the total division's revenue. Now on the Legacy Cyber side is really a relatively broad application base. We have smart home and industrial applications. We're seeing gaming, wearables, etcetera. So that is rather broad and coming from Wi Fi businesses as well as Bluetooth combo chipsets. I think we We're making continue to make good progress in winning new sockets there across the board globally. But of course, there is limitations on the supply side, as Reinhard mentioned already. Yes. But here, I have to add one element, which I'm very thrilled about, The software capability coming with Cyprus, and there we definitely see an accelerated and even higher Value than anticipated before. And it's a really great team we have on board. Sven, your turn. Yes. David, you asked about the Q1 onetime composition or nonrecurring composition. So it is IP licensing that is Automotive, and there is some funding pull in that is, I would say, mostly automotive. So in total, the bulk of both elements is attributable to Automotive. Our next question comes from Janardan Menon from Liberum. Please go ahead. Hi, good morning. Thanks for taking the question. My first question is actually on inventories. You said channel inventories are Quite low. Can you give us a comment on your customer inventories like your Tier 1 the Tier 1 levels? And specifically, what I'm trying to get at is also, if there's a shortage of microcontrollers, which is not your microcontrollers, but somebody else's Controllers, but you are able to deliver power semiconductor sensors and perhaps your own ORIX microcontrollers as required by the customer. Does that mean that your inventory levels at these customers will be rising faster right now than the industry? Or how do you see that inventory dynamic In the channel and the customers coming through over the next few quarters. And my second question is Actually, on your silicon carbide, just a clarification, to be honest. So is the new design win you have announced today, Am I correct in understanding that, that is your 3rd silicon carbide design win? And your first one Was, I think, to Hyundai where you're already shipping in volume silicon carbide for their The GMP platform, which they are launching their car soon. There's been a lot of noise on that platform in the news recently in the last 24, 48 hours. In these platforms, can one assume that once you are designed in or you are the supplier for either IGBT or silicon carbide, then any car which or any maker which uses that platform OEM which uses that platform We'll be typically using you as a supplier. So Jonathan, I hope I have understood the last Question correctly, and I will answer it. The rest will be, I would say, I hand over to Helmut. So it is very typical. When you are in a platform at an OEM you're in and Then the question, will it be used by others? I think, of course, it will not necessarily be used by other OEMs. But if you are in an OEM which has several brands, you might see a reuse of that. I hope I have Understood your question correctly. The question about this is Actually, my question sorry, my question was actually that Apple is widely rumored So you know our policy, we do not comment about customers In detail, but our intention is, of course, to have an outstanding footprint not only in The various, I would say, suppliers here, but I think we will see what happens when we Open the car. More I cannot comment on it. But I believe that our offering, and don't forget our offering in quality, It is not about that you throw in silicon carbide in a car and then have a regular replacement of it. It is something you put it there and can forget it. And I think here we are coming from the, I would say, maybe over performance side regarding The commitment in, I would say, electrical parameters and quality, but I do not want to elaborate on this more. But very quickly, on the inventory side, we can make it short. Helmut will do that. Yes. But before I get there, just one You may remember that we had a long lasting relationship with Hyundai. We even had a common innovation center. So You can trust that we are very well entrenched with Hyundai. On the inventory side, I think in particular to where the shortage If the car production is limited, you can assume that there is no inventory anywhere. So whatever is being made currently is Getting shipped immediately through the supply chain to the car OEMs. Fluctuations with One product being there, another one not, also very limited. Again, I think there is no substantial buildup at all and definitely not from our side Yes. So we will not chip into the channel. We will keep the channel healthy. Understood. Thank you very much. And the 3rd design win, just not to forget, yes, it is the 3rd major one. But I think I said it already, but it's nice to repeat it. And when will that start shipping? I think next year. Yes, 2022. 22. Got it. Thank you. Our next question comes from Dominik Olsavsky from Morgan Stanley. Please go ahead. Hi, good morning. So the book to bill date is obviously very useful, but perhaps a bit more color. If we look at your Q1 results, as you reported, and the outlook you provided, are you able to provide any sense of maybe quantifying how much Your revenues have been constrained by the shortages and bottlenecks that we've discussed earlier this morning. Obviously, some of that may reflect some overbooking. And then just the second question is, a few days ago, we've had reports around OEMs like VW looking at more direct relationships with chipmakers. So does that, for example, represent an opportunity for yourselves to sell more module based business? Or any other broad color? Thank you. Dominik, thank you for the question. We cannot answer this so easily. We have a very good insight in the automotive Segment, while the CSS and PSS area where the foundry also is limiting, It's not so one to 1 traceable to the end markets for us. But and I'm looking at Helmut, do we have some ideas on The how much it effects? I can add some color. The highest book to bill ratio we had in the last quarter was actually with CSS. And that definitely shows some clear signs of allocation, meaning there is Overbooking to be expected. Quantifying that is impossible, frankly speaking. The lowest book to bill was actually in automotive, But that is because our book to bill ratio is based also on what we actually can confirm. So it's confirmed orders compared To actual revenue. So more growth was not possible. But I think in general, the amount of unconfirmed orders is really, I would say accelerating significantly, and the effect Halmout has explained is true for all segments. So I think here our biggest Disappointment that we could report on many more synergy effects from the Cypress acquisition not having these limitations, but we do not quantify it as there is not a Thank you. And then just around your relationship directly with OEMs? We have a very good relationship. We have with Volkswagen Even a kind of a, Helmut, contractual one? Correct. These are based on innovations. We do not have we do not Shipped directly to the OEMs. We are actually the products go to the Tier 1s, to the suppliers of the automotive industry. But we do have a lot of, let's say, direct interaction with the OEMs based on future developments and innovations. Yes. So the OEM is more and more interesting to talk directly to us because it's not only about microcontrollers, It's about the whole architecture of the car, where even the power segment does not only is relevant for EV, the total supply of a driving computer with 100% reliability, let's say, power supply matters a lot. So we even assume that we are at least well connected as competitors, even not further on. Thank you. Very clear. Our next question Comes from Aditya Matuku from Bank of America. So two questions. Firstly, there's been a lot of news flow around price rises in the industry. I just wondered if you could talk a little bit about How we should think about your ability to raise prices and any impact on revenue growth through this fiscal year? And secondly, given the high book Bill, can you talk about how we should think about any risk of double ordering? And the last time book to bill was at these levels was in mid-twenty 18, Which, in hindsight, turned out to be a short term peak in terms of demand acceleration and share price. So any thoughts around that would be helpful. Thank you. Yes. Thank you, Adi. The price so a significant portion of our business is Quite successfully on, I would say, a moderate price decline. You see the effect currently. We are honoring our contracts. This is, I would say, a matter of fact for the values system we have. Of course, We debate with the customer about extra charges for foundries and other elements. But we here, we what we are definitely doing, especially when it comes to expediting volumes and spot volumes, We charge the customer accordingly. This has been done very successfully, and we see opportunities in some areas like CSS and the former Cyprus business, lesser on the automotive side. In some areas, we also have long term Contracts with the customer, securing supply, especially in the industrial range, where we also honor Our contracts because we expect that our customer does the same, which helps us in the downturn. So the other question was about inventory risk to double ordering book to bill. Yes, I can comment on that. Yes, in times like this, when there's a super steep rise in demand, There usually is double ordering in the books, as we have stated earlier. We do not quantify those numbers. From past experience, once the demand is met by supply, you can See a cancellation of those double bookings. The normal demand remains, meaning confirmed Our next question comes from Jerome Rennell of Exane BNP Paribas. Yes. Good morning. First question is, how much churn is currently outsourced? And specifically for the microcontroller, how much of your microcontroller business is out? So the question behind is Some of your Japanese peers or even your European peers have high proportion made internally. Could it be could it have an impact for you guys in terms of market share? And second question, I think the German economist, Peter Altmaier, Talk about Europe investing up to €50,000,000,000 for the silicon industry. So we'd like to understand what kind of implication it could have And specifically on your strategy on manufacturing to not go below 65 nanometer node, Could it change in the future? Could you revisit your mind on this one? Thank you. Yes. So Jochen is the expert on the capacity aspects. Jochen, please. Yes. Thank you, Reinhard. So big picture is manufacturing strategy, power sensors, Technology differentiates. We do it in house. We are well set up, and we have a low outsourcing share, basically Some parts and let's say more trailing edge. Whereas in microcontrollers, especially we know 90 nanometers, We have a high outsourcing share. Of course, combined with the outsourcing share of Cyprus, that's beyond 90 nanometers Or including 19 nanometers easily in the range of 70% to 80%. Here, we have distributed the volume across several Of the big global foundries, we have good relation, long term contracts. Of course, we suffer from supply constraints. But again, I think combined with our inventory situation, we are managing the situation Reasonably well, of course, having some hotspots. Yes. Very brief on Mr. Our next question comes from Amit Karchan Dhanani from Citigroup. Please go ahead. So very sorry. Thank you. Sorry, give me one second. I have not asked at all for so but you will have your turn in a second. I Forgot to switch my mic on. The we are in strongest, I would say, close discussion with the politics. There is a European scheme on Supporting the digitization, which is also benefiting the microelectronics, there had been a first scheme called important Project of common European interest 1 where we are benefiting with in Filach and Austria as well in Germany, there we are the dispute on the next one where we see that Further financing will come from the European Commission. They and we are a part of that. Regarding our manufacturing strategy, We will not return to deep submicron Manufacturing because that is a large scale business And we are much better off to cooperate with the foundries. And of course, if there is an opportunity in Europe, we will be supporting this now. Very sorry, and please go on. Good morning. Amit Harchandani from Citigroup. 2, if I may. Firstly, you touched upon how the relationship with the OEMs is shaping up In the automotive space, more broadly, could you comment on how is your relationship with end applications even beyond automotive? Do you see your customers getting increasingly involved and liaising with you as maybe the role of semiconductors shipped Across different applications given the structural trends we have seen. So that would be my first question. And my second question relates To the ongoing trade tensions, if you could firstly remind us what level of exposure do you have China and whether that's actually these trade tensions are forcing you to rethink how you're organizing your supply chains, your Sourcing decision, your customer planning. If you could give a sense for what do you feel the impact from trade wars has been for you right now and ask how it could shape up for you in the future? Thank you. Okay. Thank you very much for your question. I would say here, Regarding our customer base, in many areas, digital, mobile, we are talking to the, I would say kind of OEM, the one who is really making the device. And there, to a large degree, we are in very close contact With the relevant ones. The automotive segment has a slightly different concept where the Tier 1s Play a major role. And here, we balance the debate with the OEM on supply, I would say, In the due manner because we do not want to frustrate the Tier 1s by being too close to the OEMs. The only other segment where you see kind of an, I would say, more longer supply chain understanding the decision maker Yes. In the industrial scheme where, for instance, when you look at robotics, there is, I would say, a company who is Making the drives for the motor selling to the robotics, but here I think also we are in a reasonably Good content contact to all. Regarding China, there so here, I think automotive is still the one which is the most complex one. Regarding China, Helmut? Yes. We have about 40% or 37% in Greater China, where of 25% of the revenue is in Mainland China. 1st, I think very important is that a significant portion, people are guessing Half, at least, of that is then re exported again. So we have seen certain announcements that People are rearranging the supply chain, meaning our customers are starting to manufacture in other areas where we can simply follow And happy to follow them into other countries, Vietnam as being one prominent example. With respect to our own supply chain, I'm happy to hand over to Jochen. Yes. Thank you, Helmut. So let's separate the OSAT or assembly and test from foundry. Foundry in general, so front end services, we have very limited exposure to China. In back end, first of all, I think The interest of the various parties, countries, governments is mainly geared towards The front end technology side. This you can also read out of the fact that recently the tech space was changed To the silicon level and now longer to the package level for custom. And therefore, We feel okay with our assembly and test exposure to China where we make use of certain OSAT Partners and of course, we have here again also our own facility in Vushi where we do those things we Would like not to share with the broader base. Yes. Thank you, Jochen. I think here One comment from my side. In general, we decide on manufacturing strategy on, I would say, technology protection, Availability of resource and scale of economy, especially in the front end. Regarding our strategy Tapping markets, our Cypress acquisition was clearly a move to tap the U. S. Market where we had been underrepresented, Especially on the collaboration and the high-tech scheme, which definitely is moving on very nicely. Same with Japan, where we have been focusing on, especially the automotive side, since some while. So we are, I would say interesting to work together with all the major industries across the planet. This is turning out to be pretty successful. Thank you. If I could just clarify, please, on the China comment. So just To confirm, you haven't necessarily seen any potential sort of moves to use more indigenous Chinese semiconductors or go for local Components in response to these so called trade tensions. There's been no change in the dynamic on the ground in your supply chains going to domestic Chinese customers. Yes. So definitely we see effects like these. So we are not in a different world than the rest, But we see it very different by vertical. Some are more dynamic, some focus only on cost, where this is not only true. So here we expect and our growth expectations for the company already have considered that there will be and it's nothing new Further move to China local supply. But as figured out, as Helmut before, The we do should not only look into China local. We should China supplying the rest of world. And I think here, We are reasonably off. Infineon is still very much convinced that we can differentiate on performance and Technology Advancements and Systems Solution, we do not fight for the least cost products. Thank you very much. Our final question today Comes from Achal Sotania. Please go ahead. Hi, good morning, everyone. Just a quick one on The margins in your CSS business. So if I look at the margins there, you've been around in the low teens range Over the last few quarters, most of the business there is microcontrollers and connectivity, which typically are much Higher margins if you look at the industry average. So how should we think about the path To getting that low teens margins in CSS towards maybe high teens or 20% over time, Is it just about scale? Or you need to address new product areas where margins are typically higher? Yes. The profitability of this Cypress products is pretty good. But the total situation, Sven will give you some more insight. Yes, Achal. So I think the first one is that you are right. There is a positive contribution from Cyprus, so that's accretive to the CSS business, as you have also spotted. Secondly, we have mentioned some supply constraints, Which will be with us for, let's say, the next quarters. The third element, therefore, I would ask you Not to be too optimistic on the CSS profitability development in the next quarters is that, as mentioned, Especially on CSS, there is a significant contribution for the mid- to long term revenue synergies from P2S. And as we mentioned before, in order to harvest these revenues in some years for now, we need to invest Now into revenue, which comes later. So that will be something which will, of course, be, let's say, negative to the CSS margin in the short term. And lastly, as mentioned before in one of my answers to one of your colleagues, the change of the compensation From a non segment result to segment result affects all three divisions, Automotive, PSS and CSS. But given the size and the relative size, the biggest impact is visible on CSS. Thanks, Sven. And just one clarification on one of the questions earlier. What is the kind of ex EV growth That you were talking about for this year? I missed the numbers, sorry. Okay. It's in the range of 70% is what analysts predict, 21 versus 2020, fairly even share between battery and plug in hybrid vehicles. Market wise. Market growth. Yes, yes. Thank you. Thank you, All right. That is now time to wrap up. Thank you very much. The Question and answer session is now closing. We are wrapping up our 1st fiscal quarter conference call. For any further topics, please feel free to contact