Earnings Call: Q3 2019

Aug 1, 2019

Welcome to the conference call for analysts and investors for Infineon's 2019 Fiscal Third Quarter Results. Today's call will be hosted by Alexander Fulton, Corporate Vice President, Finance, Treasury and Investor Relations of Infineon Technologies. As a reminder, today's call is being recorded. This conference may contain forward looking statements based on current expectations or beliefs, as well as a number of assumptions about future events. We caution you that statements are not historical facts, are subject to factors and uncertainties, many of which are outside Infineon's control that could cause actual results to differ materially from those described or implied in such statements. Listeners are cautioned that Infineon's actual results could differ materially from the results anticipated or projected in any of these statements, and they should not put undue reliance on them. For a detailed discussion of important factors that could cause actual results to differ materially from the statements made on this conference call, please refer to our quarterly and annual reports available on our website. At this time, I would like to turn the conference over to Infineon. Please go ahead. Good morning, and welcome, ladies and gentlemen, to the summer edition of our quarterly earnings release. Here with me present is the entire Infineon Management Board. Reinhard Ploss, CEO Helmut Gassel, CMO Jochen Hanebeck, COO and Sven Schneider, CFO. Following our usual procedure, Reinhard will start with some remarks on group and division results, market developments and quarterly business highlights. Sven will then comment on key financials before Reinhard again will update you on our guidance. As practiced since the beginning of this fiscal year, we will illustrate our introductory remarks with some slides that are being shown live and in sync with this call 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 and a copy of our 2019 fiscal Q3 earnings press release as well as our investor presentation are available on our website atinfineon.com. Reinhard, please go ahead. Thank you, Alexander, and good morning, everyone. Quite a lot of what we are going to discuss today will sound reminiscent of our last quarterly announcement at the beginning of May. The market environment remains challenging, cyclical pressures are persisting and we continue to steer our course through what feels like the bottom of an ordinary semi sound cycle. We have closed our 3rd fiscal quarter much in line with what we had projected. Our revenues came across the quarterly €2,000,000,000 mark again and came in at €2,000,000,000 The increase of 2% quarter over quarter was supported a bit by the slightly stronger U. S. Dollar. At a constant exchange rate, we would have seen an uptick of 1%. All 4 of our divisions saw slightly increasing revenues. Year over year, our revenues grew by 4% in euro terms and by 1% at a constant U. S. Dollar exchange rate. The segment result for the June quarter amounted to €317,000,000 corresponding to a segment result margin of 15.7%, a bit ahead of our guidance. A major reason for the decline compared to the previous quarter's figure of 16.7% with a cost related to underutilized capacities. Our big to bill ratio of 0.7 for the quarter is clear evidence of the ongoing slowdown. US China trade talks produced some hopeful news, but a clear resolution for a stable global trade framework has yet to be found. Lead times across application have further contracted. For inventories, both our own as well as those at distributors, we had predicted a peak in summer, and we are indeed seeing first signs of that. At the same time, we see our assumption validated that broader recovery will be a theme for 2020 rather than for the second half of this year. I will comment more on this at the end of my introduction when I will also give you a short update of our planned acquisition of Cyprus. But let's first come to the divisions. Automotive revenues were €888,000,000 the June quarter, up 1% against the previous quarter. Compared to quarter 3 of last fiscal year, the increase was 6% or assuming a constant U. S. Dollar exchange rate, just under 4%. We continue to observe a bifurcation of demand, whereas classic automotive applications are declining, reflecting the lower number of cars produced, power components for the electric drivetrain and sensors and microcontrollers for ADAS are remaining on a growth trajectory. The segment result of ATV came in at €98,000,000 resulting in a segment result margin of 11% compared to €112,000,000 and a 12.8% of 1 quarter earlier. The decline is mainly due to underutilization charges. These result from our decision to lower production volumes in the light of elevated inventory levels throughout the supply chain. The book to bill ratio for the June quarter stood again at 0.8%, a reflection of weak car production and sales, especially in China as well as ongoing macro uncertainties. 2 weeks ago, the market researchers from IHS again lowered their prediction for global light vehicle production for calendar year 2019 to now a decline of 3.7%. We had already built a slightly more conservative number in our own projections affecting our business with additional automotive applications such as engine management or body and safety functions. Wholesale core sales in China were again significantly down year on year in the June quarter by around 13% according to the China Association of Automobile Manufacturers. Within this period, the monthly decline was lower in June than in April May. Retail sales even saw an increase in June. This was, however, likely driven by strong discounts on cars compliant with the China 5 emission standard before the introduction of China 6 in key cities as of 1st July 2019. There are no signs of a general recovery of the auto market in China for the time being. In contrast to this, the electrification of the drivetrain remains a strong structural driver in all major car markets, irrespectively of some short term fluctuations induced by the phasing in and out of regulations and subsidy schemes. Infineon continues to successfully address the secular trend. With our industry leading portfolio of power semiconductors, we can completely address customers' needs in terms of performance, quality and volume. 2 recent developments testify to this. Volkswagen has chosen Infineon to become a partner in his strategic supplier network FAST, which stands for Future Automotive Supply Tracks and serves to intensify the cooperation with the most important suppliers. With this competence in electromobility in Fenium contributes significantly to Volkswagen's modulars electric drive platform. Furthermore, Hyundai has selected Infineon's silicon carbide products for the main inverter of their upcoming generation of electric cars. Our trench based device will help to increase power efficiency and therefore extract higher mileage from a given battery capacity. Also, our automotive microcontroller family, Oryx, continues to see good traction. A leading European Tier 1 selected an Oryx 2 gs for its next generation failed operational braking platform. Moreover, a major Japanese Tier 1 selected already the following 3rd RX generation for its future engine management and XCV inverter, thereby confirming the versatility and long term reliability roadmap of Infineon's automotive microcontrollers. Now to Industrial Power Control. The segment recorded revenues of €357,000,000 an increase of 3% compared to the previous quarter. Wind and solar remained growth engines, whereas home appliances showed weaker than typical cell seasonality and industrial drives were essentially flat. Year on year revenue was up by 2%, illustrating the slow momentum and cautious sentiment in many industrial applications. The segment result for the 3rd quarter was €55,000,000 resulting in a segment result margin of 15.4% after 19.3% in the previous quarter. The decline was mainly driven by lower fab loading and, to a lesser extent, charges related to new product ramps. A general demand pattern is consistent with previous quarters. High and medium power components are proving robust. Low power discretes as well as gate drivers remain soft. Overall, this resulted again in book to bill ratio of 0.7 for the June quarter, unchanged from 1 quarter earlier. Order entry is stabilizing. Inventories levels are showing early signs of coming down from the elevated levels caused in part by lower utilization rates in our production. The business momentum across most industrial application is weakening as evidenced by manufacturing related indicators. In this difficult environment, renewable energy is holding up very well. Wind and solar power remain on a significant growth path, uncertainty around China feed in tariffs notwithstanding. Our differentiated high power module addressed critical performance and quality requirements and here, we even continue to be in allocation. Now to Power Management and Multimarket. The segment revenues came in at €598,000,000 an uptick of 1% over the prior quarter, helped by demand for mobile phone components and the stronger U. S. Dollar. Compared to the June quarter of last year, This constitutes an increase of 3% in euro terms and a decline of 2% at a constant U. S. Dollar exchange rate. The segment result of PMM amounted to €145,000,000 equal to a segment result margin of 24.2 percent after €132,000,000 22.3 percent in the previous quarter. A favorable currency development and some inventory related effect drove the increase. In a challenging business environment, the market for most of our business lines is stabilizing on current level. Demand for MOSFET remains subdued, but shipments of components into the supply chain are currently below sell through. Controller ACs and power stages for servers are witnessing ongoing sluggishness in line with the global server and data center market. In an overall difficult environment, demand for onboard charges for electric vehicles and components for 5 gs remain resilient. The picture for handset related product is somewhat brighter, driven by seasonality, market share gains in silicon microphones, the ramp of radar and time of flight components as well as a growing accessories market. The book to bill ratio for PMM stood at 0 point 5 for the June quarter, but this needs to be put into perspective. Given that more capacity has become available throughout the industry, customers are cleaning up their orders. Cancellations are affecting mainly delivery dates that are further out in the future. And despite that, the backlog of PMM remains equivalent to about 1 year of sales. Going forward, markets are expected to remain in their soft stage in the near term. Structural demand drivers such as 5 gs, electric vehicles, battery powered applications or e scooters remain intact, but inventories will have to be worked down further before these lead to a stronger product pull at the supplier level. On the handset side, we see positive momentum for our innovative solutions going to both the smartphones as well as the accessories such as our sealed dual membrane silicon microphone with a superior signal to noise ratio. Let's now come to Digital Security Solution, where we recorded a 2% sequential revenue increase to €167,000,000 This was mainly driven by continued increasing demand for our payment solution, SecoraPay. Compared to the June quarter of last year, revenues declined by a rate of 5%. The book to bill ratio stood at 0.8, indicating an ongoing flattish business. The segment result came in at €19,000,000 corresponding to a segment result margin of 11.4 percent compared to 11.6 percent a quarter earlier. Going forward, our embedded security products experienced good traction with project win in both consumer and enterprise device markets. We continue to see strong momentum in the area of security solutions for contactless debit and credit cards, including the fitting software. With this, I would now like to hand over to Sven, who will provide comments on our key financial figures for the quarter and also give you an update on where we stand with respect to financing the planned acquisition of Cypress. Thank you, Reinhard, and good morning, everyone. Let me start with some more details on the margin development in Q3. The gross profit was €735,000,000 after €749,000,000 in the previous quarter. The gross margin declined from 37.8 percent to 36.5 percent driven mainly by underutilization charges due to lower fab loading. Excluding non segment result effects, the adjusted gross margin stood at 37.2%. Research and development expenses and selling, general and administrative expenses came in at €243,000,000 2 €14,000,000 respectively. The net other operating income amounted to €5,000,000 The non segment results stood at minus €34,000,000 predominantly related to amortization and other charges resulting from the International Rectifier acquisition. Of that amount, €14,000,000 hit our cost of goods sold, €1,000,000 R and D €13,000,000 SG and A. A further €6,000,000 of other operating expenses are related to transaction expenses for the Cypress acquisition. Our investments into property, plant and equipment, intangible assets and capitalized development costs in the Q3 of the 2019 fiscal year amounted to €344,000,000 essentially flat against €349,000,000 in the prior quarter. Depreciation and amortization, including non segment results effects went up slightly from €233,000,000 to €238,000,000 Included in these figures are in each case €21,000,000 related to the amortization and depreciation of fair value step ups almost entirely from the purchase price allocation from International Rectifier. The portion of depreciation and amortization included in our segment result therefore moved from 2.12 to €217,000,000 Before commenting further on our financial result, cash flow and liquidity position, let me briefly jump to the Cypress financing. After announcing the transaction at the beginning of June, we've already completed the first important refinancing steps. At the time of the signing, we had a fully committed acquisition facility in place provided by 3 underwriting banks. As you will recall, we intend to ultimately finance around 30% of the transaction value of €9,000,000,000 with equity. The guiding principle behind this is our clear objective to remain an investment grade company. In the meantime, we have already raised more than half of the total envisaged equity amount. On June 18, we successfully placed 112,800,000 new shares by way of an accelerated book building and took in a little over €1,500,000,000 With this very important step, we achieved an early de risking and alleviated the overhang that had weighed on our stock. We are now in a position of greater flexibility with respect to timing and choice of instrument for the remaining equity needed. In any decision making, we will carefully consider the interests of our shareholders and assess the level of closing certainty of the Cyprus transaction. In addition to the share placement, we successfully syndicated the acquisition financing facility among a well balanced consortium of 20 national and international banks. In other words, from financing point of view, we are ready for Cyprus closing at any time. Coming back to the financial result. Our financial result for the June quarter was minus €31,000,000 after minus €9,000,000 in the preceding quarter. It contains an expense of €3,000,000 related to the aforementioned acquisition financing facility. Furthermore, it's burdened by €22,000,000 that were incurred from an economic hedge we had put in place to protect us against adverse capital market movements in connection with the potential share placement. Now that we have completed the accelerated book building, we have unwound those hedge instruments. A different type of risk related to the Cyprus financing is currency fluctuations as the majority of the funding will come from euro sources, but the purchase price will have to be paid in U. S. Dollars, we decided to effectively lock in the euro U. S. Dollar exchange rate for the acquisition with deal contingent instruments. These instruments qualify for hedge accounting, which means that the fair value changes are reflected directly in equity. In the quarter just ended, we recorded a negative €95,000,000 in other comprehensive income or OCI. Now to taxes. Income tax expense in the June quarter went down to €28,000,000 compared to €46,000,000 in the previous quarter. This results in an effective tax rate of around 11%. Our cash tax rate was 8%. Both rates were positively affected by a onetime true up related to the 2018 U. S. Tax reform. Throughout the 2019 fiscal year, we continue to expect a rate of around 15%. With respect to discontinued operations, we had recorded a loss of €18,000,000 in our 2nd fiscal quarter predominantly related to adjustments of provisions in connection with the ongoing Kimunda litigation. In the Q3, there were no new developments and the result from discontinued operations was 0. Continuing with free cash flow from continuing operations, it improved from an outflow of €137,000,000 in the March quarter to an inflow of €63,000,000 in the June quarter. This figure includes a negative amount of €12,000,000 related to the Cyprus acquisition and its financing. Our gross cash position as of June 30, 2019, amounted to €3,400,000,000 containing the proceeds from the equity raising. Considering financial debt of €1,500,000,000 our net cash position stood at €1,900,000,000 Our reported after tax return on capital employed stood at 12.4% in the June quarter, excluding acquisition related bookings, in particular goodwill, fair value step ups, amortization and deferred tax effects, the adjusted return on capital employed stood at around 19%. I will now pass back to Reinhard again who, as usual, will comment on our outlook. Thank you, Sven. In the beginning, we already talked about the challenging business environment and the stabilizing situation in our markets. The inventory correction has started, but given the absence of macro improvement, it will take more time until reach levels return to their long term averages. Visibility, therefore, is still limited. The decline of China Industrial and Automotive indicators appears to moderate, but we think it is too early to read a snapback story on that. In the current deceleration, our core power business remains resilient with good momentum for differentiated high power components for electric drivetrain and a number of industrial applications like renewables. Now specifically to our guidance. We assume that September quarter will again be sub seasonal with quarter over quarter revenue growth of 1% plus or minus 2 percentage points based on an exchange rate of 1.15 for the U. S. Dollar against the euro. Breaking it down by divisions, PMM is expected to grow slightly above group average. ATV should develop in line with it. For IPC and DSS, we expect a small sequential decline. At the midpoint of the guided revenue range, we expect a segment result margin of 14.5% of sales, incorporating increasing underutilization charges due to the lower production volumes. With these predictions of our 4th fiscal quarter, we are simultaneously confirming our full 2019 fiscal year guidance. As a remainder, we are expecting revenues to come in at €8,000,000,000 equivalent to an annual growth rate of a bit above 5% with a segment result margin of 16%. Our guidance for investments, including capitalized development cost, remain unchanged at around €1,500,000,000 for the current fiscal year. Depreciation and upon dissension are expected to amount to around €1,000,000,000 Let me now update you on the status of our planned acquisition of Cypress. Sven has already talked about the financing. We continue to be fully convinced of this compelling strategic rationale of creating a leader in Power Systems Solutions, and we are pleased about the reception by the investment community improving even further. After the boards of both companies have approved the transaction, Cypress has now called for a shareholder vote by the end of August. In the meantime, we have begun to file for regulatory approvals. From our dialogue with the relevant authorities so far, we remain confident about a closing at the end of 2019 or the beginning of 2020. We are executing on closing the acquisition as planned and will keep you updated about any significant new development. Ladies and gentlemen, let me summarize the key points. Our June quarter has come in as we anticipated, even slightly better in terms of segment result. In a stabilizing market, we are confirming our full year guidance with another quarter of small positive revenue development ahead. We are balancing cycle management with enabling sustainable growth. By this, we will dampen negative margin impacts and safeguard profitability. We have successfully taken first important steps for the Cypress financing and continued to work towards its closing. Ladies and gentlemen, this concludes our introductory remarks, and we are happy to take your questions now. Thank you. Our question and answer session will be conducted electronically. We will take our first question from Sandeep Deshpande of JPMorgan. Please go ahead. Your line is open. Yes. Thank you for letting me on. Could you, Reinhard, comment on what trends you're seeing in particularly in the automotive customer base, given that we've seen these cuts in estimates for production from auto companies? And in particular, you mentioned that you're seeing not seeing the same trends in auto electrification and some of your ADAS segments. What you are seeing in those segments? Thank you. Yes. Good morning, Sandeep. Thank you for your questions. I think as we have been one of the companies pretty much ahead of the rest, guiding in a weaker guiding the weaker environment, we stand basically firm on what we have said. In general, automotive markets are down. I think it is quite in line with the latest communications you heard in the market. Here, we definitely see that our product base, which is more along the number of cars, is very much in line with this, while the XCV is still pretty strong. We even have not clearly seen major effects from the change of incentives in China, but this is always very difficult to resolve precisely as production volumes and sell out are a little bit diverging. Nevertheless, we see a pretty firm development there. Helmut may give some flavor later. ADAS is also unchanged. People are car companies are adding the features or or people are buying these as add ons at a very constant rate and we see continuous growth there. Of course, compared to the growth rates we have seen last years for EV, which was between 60 plus percent and ADAS not as same level. These continue to be strong. Nevertheless, let me mention already at that point, this marks a little bit the challenge for Automotive. We communicated that we are seeing the necessity to continue to work on the profitability on the XUV products and solution, which is ongoing and where we are pretty much in plan. Nevertheless, we see additional headwind due to the fact that the conventional business has come down due to the number of cars sold more strongly. And this will take some more time on the I would say, achieving the target profitability on ATV. All overall, I think Helmut, you may give some insights in detailed car numbers. Yes. Good morning, everybody. Good morning, Sandeep. When it comes to car unit sales, as we had predicted earlier, we still see a lowtomidsingledigit negative development overall, so something around minus 4% is what we're seeing. That being said, we do expect on a yearly basis, car sales in China to decline double digit, so beginning of double digit, of course. However, what we have seen and do see is continuous growth in XUV and ADAS. When you look at the total automotive revenue development in Infineon, it is actually, I'd say, almost exclusively driven out of these 2 structural growth drivers. Business in Classic Automotive is actually declining as compared to previous years. So that's also, as we reported earlier, a reason for the negative margin development as well. In June, we had a special effect in China simply because there was number 1, as Reinhard mentioned, the China VI standard coming into effect in 14 cities and provinces. This has driven some additional sales of China 5 vehicles. The subsidies for electric vehicles have also declined quite substantially as of July, but as still the 6 biggest cities in China limit the licenses to non new energy vehicles, there's still good momentum overall also for electric vehicles in China. Thank you, Helmut. And to conclude on this topic, we even though we do not guide beyond the running quarter, we see the automotive market on the cautious side. Thank you. We will take our next question from David Mulholland of UBS. Please go ahead. Your line is open. Hi. Thanks. I just wondered if you could comment on the underutilization charges, how much that's actually been in the quarter and how much how that's been actually recognized by division, assuming it's mostly in automotive and IPC given margin trends, but it'd be really helpful if you can help us quantify that. And then just one quick follow-up on the Hyundai design win that you mentioned. And obviously, good to see a SiC converter win being named. But can you possibly comment on whether that's going to be used across all vehicles, just high end? And whether what the timing of that ramp will be and whether that changes your view on the pace of silicon carbide development given what you're now seeing? So David, thank you for your questions. Let's start with the Hyundai design win. I think, Helmut, can you please comment on the silicon carbide topic? Yes. So that's a design win of a specific new vehicle platform. We cannot comment on which platform and when it's actually starting to ramp. But yes, it is only one vehicle right now. So but of course, we expect it to broaden over the time. In general, the adoption of silicon carbide is a mixed bag. Definitely, we see companies continue to design in IGBTs as a very at a very high volume rate. And the silicon carbide is decided on, I would say, selectively, nevertheless, we see a certain ramp up of the adoption of silicon carbide, I would say, use cases in the car industry, but not with a very clear strategy behind if it is high end or if it is broad market. But we here, we have given a certain guidance some time ago that it will start the higher end cars. Maybe that is still true, but we believe that it is coming down and reaching the mid level a little bit earlier than assumed before. We continue to report on that as we move forward, but I think this is a topic which has to be watched out. Don't forget the current revenue and the majority of the revenue stream in the next years is IGBT based. Now to underutilization charges, Jochen will answer that question. Yes. Hi, David, also from my side. So the underutilization, of course, we always have some structural underutilization where the demand does not fit the capacity. But this year compared to last year, of course, the underutilization goes up significantly to a low triple digit €1,000,000 number. This is caused by the cycle. And here, we are running especially our factories in Kulim and Dresden at level of 70% to 80% utilization, whereas other fabs like Filler and Ringsburg are still filled up. And of course, we reduce our volumes, which we purchased at external subcontractors significantly. And can you comment on how that breaks down in terms of the impact by division? Is that more being felt in ATV and IPC versus PMM? Or how does it Yes, correct. So it's mainly ATV, IPC, where DSS is mainly outsourced. Anyway, the business is stable and PMM has a significantly higher outsourcing share. Yes, your assumption is correct. Okay. Thank you. We will take our next question from Jerome Rommel of Exane BNP Paribas. A quick question for PMM. What was the split between power and wireless for fiscal Q3? Thank you, Jerome. Harmod, do you have this number? I'm sorry, I don't have the precise number on top, but on top of my head, I'd say the split is roughly 75% power, 25% are the wireless RFS business. It is changing, Jerome, because moving forward, we announced that now wireless will be stronger. So we have I would say we have seasonal differences on this. So it can range to a number below that and up a little bit more, but I think that is somehow the range. Thank you. And maybe a follow-up question on silicon carbide. What is your view on the total market, let's say, by 20 24, 2025 in term of penetration of silicon carbide? So you say that you start to see maybe silicon carbide getting to the mid range of vehicles. Do you have a clear view of how big the market will be by, let's say, 2025? It's a difficult question. I can check if we have the number. This topic of that there is a trend to range down to the mid level is, I would say, many of these volumes will have a start up in this time frame. So it is not a, I would say, high volume run rate of these types of cars. And while here, if you look at IHS is expecting to have €2,500,000,000 in 2024, I'm extremely cautious because at the end of the day, electromobility will, especially in the mid and lower and the more compact cars, if forced by the regulators, are subject to car cost. And we have reported about being part of the VW platform, which is also spreading out beyond VW, at least this is what is to be heard in the press. And I think, Dave, based on that, overall picture, we believe that IGBT will significantly dominate. So the absolute numbers, I'm cautious, but you can say it's a clear double digit percentage of silicon carbide in the XCV drivetrain. But it's also adding that there is still a lot of other components with too much focus on the inverter only. You have to think about the chargers, the DC DC converters and the onboard charger, which is all in all predominantly conventional. Thank you very much. We will take our next question from Amit Harshandani of Citigroup. Amit Hachandani from Citi. Two questions, if I may. My first question relates to the trends on the top line, particularly around inventory situation that you see across different end markets. I think you referred to it in case of PMM. So if you could give us a sense for dynamics between inventory versus end unit demand across your end markets And how do you see that shaping up? And what does that mean for your own days of inventory? And maybe you could comment on lead times over there as well? And secondly, if I may, on the margin side, could you maybe help us better understand pricing dynamics? There's obviously the annualized negotiations at the beginning of the year, and then I guess some commoditized portions have different puts and takes. If you could help us better understand how pricing was across segments in the June quarter? And how do you see that shaping up? Thank you. Amit, thank you for your questions. I think both go to Helmut. Yes. Good morning, Amit. Helmut Goetzle here. We had said earlier, actually last call, that we see a peak of inventory in the channel in the summertime, and we do see signs of that. Actually, the what we call weeks of sales in the channel have come down by roughly 1 week, a little bit more than 1 week. That was predominantly driven by an increase of sale out of that. If you look at that a little bit by region and or by business, one can say that Automotive is still, I'd say, on the weaker side, meaning inventories are still, say, 5 to 6 weeks higher than what we see as a target for that channel, whereas other businesses, in particular PMM, has really come down to an almost normal level. So that was predominantly driven by some strong sell through. So PMM is starting to pick up out of the channel. If you look at it from a regional perspective, yes, China is still high, but has come down quite significantly, again, predominantly driven by the PMM side of the house, whereas Americas and Japan are now actually increasing inventory to some degree simply because automotive has slowed down in those regions in the channel. But all in all, as we have said, we have seen a peak. The inventories are starting to come down. When you then look into the inventories beyond that, meaning at our customer side, that's when the picture becomes pretty blurry. But usually, when we see pickup in the channel, we can also expect that to come out there too. 2nd question as to the pricing dynamics, I'd say all in all, a quite normal development, meaning when the market is softer, pricing pressure increases, this first materializes in the multi source or exchange let's say, a more commoditized part of the business, whereas in the differentiated business, pricing holds strong. I think Thank you, gentlemen. Sorry? We can take the next question, please. Our next question comes from Jan Andren Mennen of Liberum. Please go ahead. Your line is open. Hi, good morning. Thanks for taking the question. I just want to follow-up on the PMM side, a few points. One is, you were sounding quite cautious on how demand from servers, PCs, etcetera, seems to be trending at this point on your order book. But some of the other companies like Intel, Samsung, etcetera seem to have to feel a little bit more positive on those end markets. I was just wondering where the sort of divergence there could be coming? Or are you actually seeing any signs of improvement in some of those markets, given especially how important servers are for you from the overall PMM division point of view? And also if you could give us a little bit more color on the smartphone sensor trends right now, both in terms of radar as well as time of flight 3 d sensing? What kind of design wins are you seeing there? And how do you see that trending through the second half of this year and into next year? That would be useful. Thanks. So Jonathan, thank you for your question. I think for us, the picture for the service is nothing where we can comment on Samsung's and Intel's view. We may have not the long term contracts a few on that side. So we are guided by the shorter derm demand we see from the manufacturing side over there. But here, I think we have a very reasonable inventory level. So clarity along the value chain should be given, I think and also the server business of PMM is not anymore so dominating PMM's revenue as before. It's just about 15%, while other application have gained a lot of share. So with this, we do would not see changes of service to be extremely significant, but of course, visible. The next topic is the smartphone. So two comments from my side and then Helmut will follow-up on the design wins. In general, what we see is after a long phase for radar and time of flight, where the people thought about the use cases, the topic of face recognition to un lock the phone and to add further capabilities of 3 d picturing and many other elements are kicking in and 3 time of light gains momentum in the industry. I would say a lot of people we have a lot of design wins, but this is overlaid by the success of the very phones, which is a little bit different, while radar is still more seems to be more uncertain compared to time of flight about the intended use case of even so we see also there that we are seeing design wins but on a significant lower level. Helmut, can you give more flavor on it? I think we always said this is more of a wildcard to Infineon. We have not fully included it in our business case. That is fundamentally still true, but we are a little bit more positive and optimistic as we see adoption of the use case, as Reinhard mentioned, in particular for the time of flight technology. As you know, we have won the LG ThinQ8 phone and that was launched with our time of flight camera at Mobile World Congress earlier this year. But like always, this is individual projects and depends on individual success of the phones. So it's a business that's more difficult to predict in particular when the number of phones is still rather small that is picking up on it. Yes, when it comes to radar, we can we're free to talk about that Google Pixel has actually the the market overall. That's, I think, what we still say. We take it as an upside. We like what is coming. It has good momentum, but specific numbers are tough. Yes. And to add a technical flavor, the people want to have a full display smartphone, which I would say is more difficult to have the radar, which is in the front in the user facing side to be integrated. So let's see. We will stay tuned on this. But as Helmut said, it's an option and not the major, I would say, not yet planned growth driver for Infineon. So thank you. Understood. Thank you. We will take our next question from Aditha Metuku of Bank of America. Please go ahead. Your line is open. I had two questions as well. Firstly, just on this silicon carbide design win. I just wondered if you could give us some color on what's the dollar content? Would $1,000 per car be reasonable? Or would you think it could be higher than that? And secondly, on just the hyper state, I just wondered if you could give us a bit more color on how exactly you intend to finance the rest of the equity component and also just some color on which part of the semiconductor market do you think Cyprus' MCU portfolio would help you the most, I. E, in automotive, IoT? Any color here would be very helpful. Yes. Thank you for your questions. So please understand this is still being possible to, I would say, relate the answers to specific design wins. We are not in a position to go into detail when the design win base has become broader. We will be happy to comment on the comparison of silicon carbide design wins and IGBT design wins. So Helmut, you can add something to this. Yes. I just wanted to add that when it comes to the dollar content per vehicle that is coming with this silicon carbide inverter, same applies as we had said on before that you can roughly expect the current price of the IGBT, the silicon carbide module as compared to IGBT in the range of 2 to 3 times the value. So that's several $100 value per vehicle content when it comes to silicon carbide inverter. The financing, Sven will answer. Yes. Adi, hello, Sven here. So first of all, let me a very early stage, as I mentioned in my introductory remarks and have syndicated the credit facility to 20 banks with tenors up to 5 years. So now we have a lot of flexibility time wise to really look at first the development of the regulatory approval process, but we will also carefully take the investor feedback into consideration and watch markets. So we are under no hurry here. And as I have mentioned in previous calls, we have a huge universe of instruments on hand, which go from hybrid transactions, convertible transactions to full rights issues and we will take the decision at the appropriate moment in time. Maybe if I just take the Cypress question, where is Cypress MCU helping most? This is industrial and IoT to a smaller extent in automotive, which is also reflected in the composition of the revenue synergies. I think here, to add, there is a very clear focus for Infineon where we will gain a significant portion of the revenue stream. You know we are very good in drives for industrial applications, battery powered application and many of those, which is a significant revenue stream for Infineon, which we will complement and where we also will bring value in our application know how and synergizing with Cypress in order to have the right product, this right software support, Cypress today already has already a significant focus on automotive where we will have lower value in the synergies. Understood. Thank you. We Our next question today comes from Johan Schiele of Deutsche Bank. Please go ahead. Sorry, Johannes, we cannot hear you. You come in bits and pieces. So what we will do, we postpone you. Maybe you No. Say, please again. Unfortunately, not understandable. It's very small bits and pieces which we get. Yes. Johannes, your line is breaking up. Let's postpone it and have a call with the IR team in the afternoon, I suggest. Or he dials in late or you dial in again. Please move on. We will take our next question from Achal Sultania of Credit Suisse. Please go ahead. Hi, good morning, everyone. Can you talk about the pricing and margins in your EV business? I think my understanding was that EV has already been margin dilutive given significant investments. And now if we think about China cutting EV subsidy, like how are your talks progressing with the carmakers and the Tier 1 suppliers around how we should think about margins in the EV business going forward if there is going to be such a big subsidy cut, As in who takes the pain or the hit on margins in this scenario? Any color around that would be helpful. Well, Ejal, thank you for the question. But very clear, the topic of the subsidies is nothing which really affects our pricing. We have communicated that the pricing or the margins in the EV is not very strong, that we are working on improving this. There, we are well in plan. Nevertheless, still a way to go as we have indicated at the some quarters ago already. But I think here, we see a constant, I would say, fight of the industry to reduce the cost. But definitely, we here our solution is not to address this by pricing, but by innovative solution, which is able are able to cut the system cost of the EV, which is much stronger than having a 1 or 2 percentage points price discussion on the IGBT or silicon carbide modules. So for us, this is still a margin up strategy, and we will not compromise there just to get more business. Okay. And then maybe a follow-up on in general at the group level. I think if I look at the September quarter guidance, 14.5 percent EBIT margins, that will be almost 500 basis points down year on year. So is it fair to assume that like majority, probably like 75%, 80% of that headwind in margins is all underloading fab charges? And then maybe the rest, 15%, 20%, probably is about higher depreciation. Is that rough math? Is that ballpark right? So I think here, the underutilization, maybe Jochen can comment. Okay. Then I think Sven takes it. And the other point is don't forget, we already said for EV, for automotive that we have a structural issue from the, let's say, traditional products which have the target margin compared to the EV, which is off the target margin as just discussed. The other is managing the inventory. Maybe Sven can comment that. Yes. I think, Reinhard, you answered that already largely. So the structural component, especially in automotive, will continue. So the lower profitable still lower profitable growing quicker than the other part of the business and the rest of your assumption that the underloading cost will be a burden to Q4 is correct. Okay. Thanks. Thanks a lot, Sven. We will take our next question from Florian Treat, Commerzbank. Basically, follow-up when it comes to underutilization charges. So if I understand you correctly, Q4 underutilization charges will be higher than in Q3. Is it a fair assumption to assume that Q4 will be the low point or basically the peak of annual utilization charges? Or do you expect an increasing negative effect also going into H1 2020? And then there's one question on the PMM margin. You mentioned that there is a positive effect from FX and inventory as well as an inventory effect. Can you quantify these two effects? Thank you very much. Yes. Mr. Trais, thank you for your questions. The Jochen will comment the underutilization effect, but please understand that we cannot give guidance for the further quarters, but I think we can give you a flavor there, but commenting on 3 and 4Q. Yes. Hello. So you're right that Q4 is higher than Q3 in the underutilization charges. From today's perspective on inventory and end demand, I would expect that, that carries on at least into the Q1, and then we would reduce the underutilization charges. But that is then too early to say. Okay. So and don't forget, we announced that the peak will be in summer, so we still will have to watch and see. Peak on inventory. Peak on inventory. Thank you, Jochen. So let's move on. Our next question will come from Stephanie Hoare of ODDO BHF. I have a question about your CapEx plan for the remainder of the year. You haven't changed it. So could you start to guide us for the CapEx plan for 2020? And tell us more about the ramp of the 300 millimeter plant and how you do in the current environment not to create too much overcapacity given the underutilization that you've been just talking about? That's a Yes. Yes. Hello. So in terms of CapEx plan, we are committed to our target operating model, which we outlined at the Capital Markets Day last year in London. That means this year, we are overshooting this target operating model. But as said already last time, we will compensate for this in the following and next year. And therefore, we are compliant. From our point of view, this makes sense not to put the brakes on too much because still we will have the option then to increase revenue. But again, we are committed to our target operating model outlined there. With respect to filler, the building is progressing on plan, and we will finish the construction. When exactly we order then the equipment in order to get more capacity beyond Dresden as obviously the Dresden ramp up has been slowed down is a decision we do have to take only in the winter time frame. In terms of building, we go ahead. Okay. Quick follow-up, if I may. On the Page 11 of your press release, you show interesting revenue by geography. And we see that revenues from China are going up actually quite significantly on a sequential basis, but also on a year on year basis. So can you elaborate a bit on where is it coming from? Is it more automotive, industrial? And yes, more information would be helpful. Thank you. Yes. Hamil Karstel here. As I said before, it's predominantly driven out of the PMM business and from the channel. So it's not automotive and into the other businesses, so PMM and the channel in particular. Okay. Thank you very much. We will take our last question today from Sebastian Steboweks of Kepler Cheuvreux. Cheuvreux. One question on silicon carbide. What is now the total system benefit of the silicon carbide technology as compared to the IGBT when you include in the cost component of the 2 technology in the equation? And the second question is on Power Semi because it seems that Feet Micro seem to be a little bit more ambitious or successful in porosomes. Have you seen any change in the pricing competition in your market for IGBT specifically? So thank you for the question, Sebastian. It is very difficult to answer this generally about the silicon carbide. Instance, in renewables, when you think about solar inverters, the silicon carbide is significantly advantageous in overall system cost, and we see system cost reduction while the component cost goes up significantly. In the cars, it is a mixed bag. It is not as clear. We see a certain advantage due to the higher efficiency of silicon carbide. So many people have some estimations on additional, let's say, battery reach, about 3%. Of course, in the city, it may be more, but there the value is not so much in the system cost, but in the system performance. And standard drives, we see not very big adoption rates, but silicon carbide can also be beneficial in larger power supplies and many other areas. In general, silicon carbide as a device more I would say more expensive or significantly more expensive. They while and therefore, the advantage is in saving on the passive components. So regarding competitors, we, of course, never comment strategies from competitors. But I think here, the we see also continuous potential on the IGBT side. And we always stated we are strong in IGBTs MOSFETs, silicon carbide MOSFETs and diode. So we will always be able to choose the best solution for our customers. And we also can provide discrete components, bare dies and modules, which I think is a very good position in order to, I would say, fulfill the customers' wishes, which here is the major driver for making the choice. Thank you. That concludes today's question and answer session. I would now like to turn the conference back to Mr. Alexander Fulton for any additional or closing remarks. Thank you very much all for your questions. Conclusion will be quick. We are concluding our fiscal Q3 conference call here with further questions, please feel free to address them to us here in the IR team in Munich. Given that August has just started, we all wish you a fine summer break ahead. Concluding now, you may disconnect. Talk to you next time.