Infineon Technologies AG

XETRA:IFX

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Conference Call for Analysts and Investors for Infineon's 2023 Fiscal First Quarter Results. Today's call will be hosted by Alexander Foltin, Executive Vice President Finance, Treasurer and Investor Relations of Infineon Technologies. As a reminder, today's call is being recorded.

This conference call contains forward-looking statements and/or assessments of the business, financial condition, performance and strategy of the Infineon Group. These statements and/or assessments are based on assumptions and management expectations. They are based on currently available information and present estimates. They are subject to a multitude of uncertainties and risks, many of which are partially or entirely beyond Infineon's control. Infineon's actual business development, financial condition, performance and strategy may therefore differ materially from what is discussed in this conference call.

These disclosure requirements are stipulated by law. Infineon does not undertake any obligation to update forward-looking statements.

At this time, I'd like to turn the call over to Infineon. Please go ahead.

[Alexander Foltin, EVP, Finance, Treasury and IR]

Thank you, operator. Good morning, and welcome ladies and gentlemen, to our first earnings call in 2023, sitting in-between Fed and ECB interest rate announcements.

Starting today, our speaker panel for quarterly calls will narrow to our CEO, Jochen Hanebeck and CFO, Sven Schneider, who will occasionally be joined, as is the case today, by Andreas Urschitz, Chief Marketing Officer. Our procedure however remains unchanged. Jochen will open the call with remarks on the market situation and divisional performance followed by Sven commenting on our key financials. Jochen again will provide the outlook and highlight key messages.

The illustrating slideshow, which is synchronized with the telephone audio signal is available at infineon.com/slides. After the introduction, we will as always be happy to take your questions. Kindly asking you to restrict yourself to one question and one follow up. A recording of this conference call, including the aforementioned slides and a copy of our earnings press release, as well as our investor presentation are also available on our website @infineon.com.

At this point in time Jochen, over to you.

[Jochen Hanebeck, CEO]

Thank you, Alexander and good morning everyone. As we open the first chapters of a New Year's playbook, Infineon is consistently steering the course we charted and communicated a couple of months ago, with a clear focus on long term growth opportunities derived from decarbonization, digitalization. We foster our leadership in power systems and IoT.

In financial terms this needs to translate into profitability and resilience through the cycle. Our December quarter has clearly lived up to these expectations despite some external factors, looking quite familiar. Macroeconomic burdens and geopolitical uncertainties are causing a volatile and challenging environment. While some signs of less bad and fewer developments are appearing.

Semiconductor markets are bifurcating. Those driven by structural content like automotive and industrial applications show robust dynamics. Others driven more by cyclically fluctuating demands, like consumer computing and communications continue to be weak.

Let's take a closer look at our numbers. Revenues in the first quarter of our 2023 fiscal year came in at EUR3.951 million almost exactly hitting our guidance of EUR4 billion, which had been based on an assumed U.S. dollar exchange rate of 1.0. The actual average rate over the quarter was 1.02, and thus caused a slight headwind. Our profitability continued to progress favorably ahead of our original expectations, with a segment result of EUR1.107 billion. The Segment Result Margin came to 28% after 25.5% in the quarter before.

Our margin expansion was mainly driven by price progression, positive mix effects, as well as slight easing of cost pressures from the energy and material side. Meanwhile our backlog of confirmed and unconfirmed orders has gone down as expected. After EUR43 billion three months ago, it stood at EUR38 billion at the end of December. We attribute this to currency effects and some normalization in customer ordering patterns, reflecting generally better product availability as shortages are easing.

The picture is differentiated by type of product and application, and I will comment further on it in my divisional overview. Automotive recorded revenues of EUR1.872 billion, a slight sequential decline influenced by a less favorable U.S. dollar exchange rate. On an annual basis revenue was up by a staggering 35%. Here the U.S. dollar had a positive impact. But even assuming a constant exchange rate, year-over-year growth amounts to 26%, showing unabated strength of demand across our automotive product groups. In line with this, we were once again able to bring up our profitability.

The segment result for the December quarter improved to EUR532 million equivalent to a segment result margin of 28.4%, up by more than 200 basis points compared to the previous quarter. The increase was mainly driven by price and mix effects. Overall supply disruptions, material shortages, as well as macro uncertainties still weigh on automotive production volumes, but to a lesser extent. According to S&P Global the number of cars produced worldwide in 2022 was 82 million, still below pre-pandemic levels. For 2023, S&P is predicting around 85 million units, which we deemed somewhat optimistic as a part of pent-up demand might be affected by the lack of consumer confidence.

Having said this, structural content growth remains by far more important driver for our business than unit evolution. From current interactions with our customers we learned a couple of things. First, the two automotive megatrends, e-mobility and ADAS are intact and irreversible. Second, there is a clear willingness to increase visibility and predictability of buying behavior and to secure semiconductor supply by engaging into schemes like capacity reservation agreements or longer dated committed orders.

Third, there is a strong tendency for OEMs to source strategic parts such as xEV specific components and MCUs either directly or as so called directed buys, and to strive for higher stock -- targets stock levels. In this regard, our AURIX MCU remains a critical bottleneck part, or bolt and screw as demand continues to outstrip supply despite the fact that this year we are ramping our selling rate to close to 1 million pieces per day.

Infineon's automotive business is well positioned for continued success, which is fully confirmed by recent design-win and innovation activity. Since silicon carbide is so top of mind, let's start there. At our customer Hyundai Motor Corporation, we have been awarded a further triple digit million euro silicon carbide business for the traction inverter of the future platform for the Kia Hyundai and Genesis brands.

On the ADAS side, we are driving the transition of radar technology from silicon germanium to CMOS-based solutions. We are happy to report on the initial design win for our future 28 nanometer CMOS imaging radar sensor IC at a leading tier 1 with a low triple digit million euro volume. With a superior resolution it will be used to leverage for our platform.

Finally, I would like to share a highlight from the forefront of innovation. We have sampled prototypes of a hydrogen sensor to around 20 potential customers. This sensor is based on our automotive qualified MEMS technology and can measure hydrogen concentration by means of thermal conductivity. Potential use cases are measuring lithium ion battery out gas to prevent battery failures in CVs; leaking detection for fuel cell and hydrogen combustion applications or pressure sensing for hydrogen infrastructure applications like storage, transport or fueling stations.

Early customer feedback on this highly innovative solution supporting decarbonization is very positive. Decarbonization is bringing us to industrial power control which has a significant part of its business built around the theme. Revenue of IPC in the December quarter amounted to EUR500 million, down from the record level of EUR542 million achieved in the previous quarter. Basically, all applications saw seasonal step downs with the exception of the electrification of commercial vehicles. Most affected were major home appliances, with the notable exception of heat pumps, where we are unable to fulfill buoyant demand.

Renewable energy and power infrastructure solutions in general are showing a robust momentum. Despite the decline in revenue IPC could increase its quarterly profitability, mainly through better mix and pricing. The segment result increased to EUR144 million, corresponding to a segment result margin of 28.8% after 25.1% in the prior quarter. Looking ahead, market dynamics show a differentiated picture.

For auto appliances we expect the current weakness to continue. In the field of general purpose drives, there are some first indications of softening demand. However, this is outweighed by a still high backlog and even more importantly, we are able to shift the respective manufacturing capacities to solutions for renewable energies and the related infrastructure, where the desire for green and independent energy supply and remains a very strong structural driver.

Overall, we expect our industrial business to remain highly resilient, supported by our leading position in silicon carbide for applications such as photovoltaic inverters, energy storage systems and the charging infrastructure for electric vehicles. In this regard, it's worth noting that we have taken another step to secure our supply of silicon carbide materials.

We have signed a multi-year supply and cooperation agreement with Resonac Cooperation to deepen the long term partnership regarding silicon carbide materials. The initial phase of the agreement focuses on six inch materials. At a later stage Resonac will also support our transition to 8 inch wafer diameters. In turn we will provide Resonac with intellectual property relating to silicon carbide material technologies. This agreement and further ones we are currently finalizing will underpin the significant expansion of silicon carbide manufacturing capacities that we are undertaking for our automotive and industrial business.

As you know with our new plant in Kulim, Malaysia which is scheduled to start production in autumn of next year we will increase such capacities tenfold by 2027 compared to last year.

Now coming power and sensor systems. In the first quarter of 2023 fiscal year, the segment's revenue declined sequentially by 11% to EUR1.043 billion. Softness in consumer computing and communications added to normal seasonality. A few bright spots where EV charging, residential solar and USB components where demand remains strong and the easing of capacity constraints allowed the addressing of some backlog. Despite lower revenues, the segment was able to maintain its high profitability level for the quarter.

With a segment result of EUR301 million PSS kept as segment result margin of 28.9% identical to the quarter before. Going forward we expect a majority of target applications addressed by PSS to enter a soft period. After almost two years of strong growth some of it's driven by pandemic era extra spending, micro and cyclical headwinds are clearly intensifying. Depressed consumer confidence is weighing on demand for items like smartphone, tablets, TVs, PCs or battery power tools.

On the data center side we are noticing a slowdown in enterprise servers and recently also decelerating hyperscaler CapEx. The delayed roll over from one server architecture to the next by a leading vendor is further restraining customer demand. In these areas, we are anticipating a prolonged period of inventory digestion ahead.

Conversely, we continue to see good traction for applications linked to decarbonization like solar installation by residential customers and automotive charging. In total, while the near term conditions are challenging, long term underlying trends remain strong, in particular, including vibrant demand for gallium nitride-based solutions.

Let's finalize the divisional overview with connected secure systems. On the back of easing supply limitations, CSS brought up revenue to a record level of EUR531 million, 8% more than a quarter earlier. In particularly security solutions for payment and government identifications increased strongly supported by higher foundry supply. Bluetooth parts which had been a blip in the previous quarter where again in high demand.

Segment result improved EUR125 million equivalent to segment result margin of 23.5% sharply up from 17.5% in the quarter before. Higher volumes and supported pricing were the main underlying drivers. Overall mid and long term growth opportunities for IoT applications are undiminished. However, they are not immune to current market uncertainties. Momentum for consumer and industrial IoT solutions is slowing absorbed to some extent by existing strong backlog.

On the other hand, the business with security ICs in which Infineon has a global number one position, continues to show high resilience driven by innovative trends like contactless payments and continued recovery in demand for e-passports. Design wins and product launches keep their high pace. We achieved a key design win at a major Asian automotive OEM for its next generation connected cockpit platform with our Wi-Fi, Wi-Fi-Bluetooth combo offering.

On the microcontroller side we launched the XMC7000 family for advanced industrial applications like industrial drives, EV charging or robotics. And we announced a new piece of family for the next generation human machine interface applications supporting our CAPSENSE touch sensors. Finally, we are the first ones to have introduced the SECORA T [ph] IC targeting high volume payment applications based on the future proofed 28 nanometer technology node.

Now over to Sven who will comment on our key financial figures.

[Sven Schneider, CFO]

Thank you, Jochen and good morning, everyone. We had a strong start into our 2023 fiscal year in financial terms. Revenue and segment results have been covered.

Let's look closer to gross margin. In the December quarter gross profit amounted to EUR1.866 billion, equal to a gross margin of 47.2%, up by 280 basis points from the previous quarter. Adjusted gross margin, which excludes non-segment result effects amounted to 49.2%. Key reasons for this very dynamic margin progression are pricing and mix effects in the top line as well as some positive contributions to our cost of goods sold from the development of energy and materials cost.

Now to our OpEx numbers, which we are managing carefully to find the right balance between safeguarding our current profitability and enabling future growth. Research and Development expenses were EUR484 million, essentially flat quarter-over-quarter. Selling, general and administrative expenses went down from EUR452 million to EUR410 million in the December quarter. The net other operating income was minus EUR6 million.

The non-segment results totaled minus EUR141 million. Of this amount EUR76 million corresponded to cost of goods sold, EUR10 million to R&D expenses, and EUR53 million to SG&A expenses. Other operating expenses amounted to EUR2 million.

The financial results for the quarter under report was minus EUR24 million, up from minus EUR23 million before. Income tax expense amounted to EUR216 million for the first quarter of the current fiscal year, equivalent to an effective tax rate of 23%, and in line with our expectation of a range between 20% and 25% going forward. Cash taxes in the December quarter were EUR93 million, resulting in a cash tax rate of 10%. For the entire 2023 fiscal year we expect a cash tax rate of between 15% and 20%, as current prepayments will be trued up throughout the year.

The difference between the two tax rates, effective and cash stems from historic tax loss carryforwards. We expect to benefit from those for at least another two years. Our investments into property, plant and equipment, other intangible assets and capitalized development costs amounted to EUR605 million in December quarter, down from EUR866 million in the last quarter of our previous fiscal year following a typical seasonal pattern.

Depreciation and amortization, including acquisition-related non-segment results effects were EUR429 million in our fiscal first quarter after EUR443 million in the preceding quarter. The quarterly evolution of our free cash flow from continuing operations is worth commenting as the figure not unexpectedly went down steeply from EUR709 million to EUR25 million. There were three main effects at work here. First, the month of December is when the bulk of annual cash bonuses are being paid out.

Second, we recorded an increase in inventories, the reach of which went up sequentially from 120 to 140 days at the end of December. Herein reflected are the differences in business dynamics across the various end markets and applications that Jochen has touched on in the beginning and which he will pick up again in his outlook section. Thirdly, there was an intertemporal reduction of accounts payable quarter-over-quarter.

Now to our liquidity and leverage figures. Our gross cash at the end of December amounted EUR3.7 billion. Our gross debt stood at EUR5.5 billion, a bit down due to the slightly weaker U.S. dollar and corresponding to a gross leverage of 1.5 times. Net debt correspondingly decreased below the EUR2 billion mark to EUR1.8 billion, equivalent to a net leverage of 0.4 times.

To close the financial part, let's look at our after tax return on capital employed. This metric, of course, reflects the strength of our financial numbers and came in at 16.8% for Q1, a level that is clearly indicative of value creation.

Now back to Jochen who will comment on our outlook.

[Jochen Hanebeck, CEO]

Thank you Sven. Before going into our specific projections, let me provide some context. At the beginning of 2023, macro geopolitical and sector specific headwinds continued to cause heightened volatility. Some indicators like PMI readings point to upside to projected economic development, but it's still early stages. Semiconductors end markets keep following different pathways, both from a demand as well as from a supply side. On the one hand market conditions for automotive applications, especially e-mobility and ADAS, as well as industrial ones in particular, renewables, remain supportive. The underlying trends are strong.

On the other hand, there is weakness in consumer-related applications. Also corporate spending on IT infrastructure like data centers and communication networks is slowing down. From a supply perspective, the general situation is improving, with shortages becoming less pervasive and lead times contracting. However, there are still product categories that are scarce, while in others a certain supply overhang is becoming visible. Hence also the inventory situation is differentiated to one.

Overall channel inventories have only edged up slightly over the course of the December quarter to stand a bit above nine weeks. However, this averages hides the dispersion between items like standard MOSFETs, where stocks at distributors and downstream customers have been replenished, and others that are highly sought after such as MCUs, and particularly for automotive IGBTs for renewables, wide bandgap and analog mixed signal parts. We see a similar development for inventories on our own balance sheet and have started reducing uploading [ph] levels for those products for which a gestation period lies ahead.

In parallel, we are still on allocation for some categories, and will shift available production corridors to the extent technically and economically feasible. Pricing in this context is remaining resilient overall as customers value supply certainties throughout different cyclical phases. As stated in our last call already, the supply situation for power devices might well remain tighter for longer, as e-mobility and renewables are competing for the same type of capacities.

Let's translate this into numbers. For our Q2 and full year outlook we have changed our assumption for the US dollar exchange rate from previously parity to now 1.05 thus incorporating some headwinds. For the running March quarter we expect revenues of around EUR3.9 billion basically flat compared to the previous quarter, considering the adverse U.S. dollar assumption.

However, the revenue composition by division is likely to look different. For ATV and IPC, we expect a sequential revenue increase of a mid-single digit percentage. CSS should keep stable revenues. As PSS is confronted with market weakness across the majority of its target applications it should see a further significant revenue decline. This will also affect our group segment result margin for the second fiscal quarter which we anticipate to come in at a level of around 25%.

Sequential step down considers our expectation of a certain level of under utilization costs incurred on purpose to keep inventory levels for slower moving parts in check. Furthermore, we expect further wages increases to kick in.

For the full 2023 fiscal year, we continue to expect revenues of around EUr15.5 billion plus or minus EUR500 million. While this headline number is the same as before, implicitly we're adding close to EUR400 million from volume structure and pricing. This is due to our less advantageous currency assumptions of 1.05 instead of 1.0 for the U.S. dollar euro exchange rate for the three remaining quarters and using our updated rule of thumb, which estimates a quarterly revenue impact of EUR25 million for each cent movement.

We expect to be able to absorb the negative currency impact, as Infineon's key applications mostly still show robust dynamics. For example, automotive is fully booked for the 2023 fiscal year. Having said this, the consumer-related weakness should persist against on an uncertain macro backdrop. Also we envisaged some inventory digestion to occur throughout the year, for example, in the area of data centers. At the same time, our high existing backlog and other areas should help cushion some of the impact.

Taking all of this together we remain cautious for the second half of our fiscal year and have baked in a certain slowdown. By segment we expect ATV and IPC to grow above and CSS at the expected corporate average rate of 9% year-over-year. For PSS we now expect annual revenue to fall short of last year's level.

Now to our margin expectations for the 2023 fiscal year. With a strong first quarter already in the bag, the adjusted gross margin is expected to land at around 45%. For the segment result margin we now anticipate a level of around 25% after around 24% before. While the weaker US dollar is causing a certain burden, we expect this to be more than offset by positive contributions for higher volume pricing and less than high -- less than -- less higher than feared cost increases for materials and energy.

For investments in property, plant and equipment, other intangible assets and capitalized development costs we project an unchanged level of around EUR3 billion, including Kulim 3 and the planned new fab in Dresden, as we are convinced of the value of forward-looking investing, preparing ourselves for secular growth. For depreciation and amortization, we expect a value of around EUR1.9 billion including amortization of around EUR450 million resulting from purchase price allocations that will end up in our non-segment result.

For free cash flow we continue to expect a level of around EUR0.8 billion including some EUR700 million planned for the aforementioned major frontend buildings. Excluding those, our projected adjusted free cash flow would come in at around EUR1.5 billion representing around 10% of sales.

For summarizing and opening up for Q&A, I would like to highlight an initiative, the importance of which is much broader than economical. Infineon is supporting NGO Rainforest Connection with ultra modern sensor technology to protect one of the most vulnerable regions of our planet. At the heart of the Rainforest Connection work our guardian devices powered by solar electricity, transmitting live sound recording from rainforest. Artificial intelligence is used to analyze the data, detecting sounds of threats. To ensure that the devices can not only hear but also smell, our highly innovative CO2 sensor will be added to a number of them.

The goal is to considerably expand the database for recording biodiversity. In the future sound recordings can be linked with other information including temperature, humidity, ozone, and now CO2. Our technology can therefore be an important contribution to the protection of climate and biodiversity.

Now ladies and gentlemen, it is time to summarize. We had a strong start in our 2023 fiscal year in terms of profitability, even a very strong one. With EUR3.95 billion of revenue we printed a segment result margin of 28%. The bifurcation of semiconductor markets is continuing. Dynamics in key application areas like automotive renewables and also security remain robust. At the same time consumer facing markets are seeing demand weakness. Also corporate spending on IT infrastructure is sluggish.

A similar divergence can be observed with respect to supply and inventory. Depending on the product category overhang and scarcity are occurring in parallel. Vibrant design win activity is showing high customer interest in our value adding system solutions with silicon carbide and gallium nitride continuing to see very good traction. Navigating a challenging environment we remain vigilant and on our toes to react quickly when needed.

We are upgrading our annual outlook in terms of revenues and profitability by absorbing adverse currency impacts while keeping our caution regarding the outer quarters for now. The secular fundamentals for our business remains in place. Semiconductors are indispensable building blocks of decarbonization and digitalization.

[Alexander Foltin, EVP, Finance, Treasury and IR]

Ladies and gentlemen, this is the end of our introductory remarks, and we are close to opening our call for your questions. The queue today is quite impressive. Great to see such a high level of interest. In the interest of fairness therefore, please keep your question to one topic at a time. Much appreciated. Operator, please start the Q&A session now.

[Operator]

[Operator Instructions] Our first question comes from Alexander Duval from Goldman Sachs. Please go ahead.

[Alexander Duval, Goldman Sachs]

Yes, thank you very much for the question, and congratulations on the robust start to fiscal year. Your fiscal year '23 adjusted gross margin target of 45% implies a bit of a step down from the very robust 49%. Wondered if you could just decompose a bit the drivers there. One would expect some further pricing benefit to come through. But then also factoring in some level of supply chain constraints easing.

So can you help us think about the kind of trajectory we should think about through the rest of the year and are you expecting any change in pricing environment as you go through fiscal year '23. Many thanks.

[Jochen Hanebeck, CEO]

Yes, this question goes to Sven.

[Sven Schneider, CFO]

Happy to take it. Hi Alexander. So this is a very good starting question. Let me explain why we have given that guidance. So the 49% to 45% and also on the segment results you see the same trends, 28% was the actual number, now we are guiding from 25%, has four major reasons behind it.

The first one is -- excuse me -- that you see already we are guiding at a dollar exchange rate of 1.05. Nobody knows, at least, I don't know where the dollar will be. Today it's at 1.10. So there are already the first currency headwinds, which we have to at least anticipate. And if this would stay for a couple of quarters, our rule of thumb, that would be a headwind, number one.

Number two is, as we alluded in the intro, there is pronounced weakness in the consumer market, consumer communications and compute, which affects our PSS division. PSS division has a significant contribution to revenue and profitability. And we expect the division over the next quarters to come down on both, on the revenue and on the profitability level, which of course is negative for gross margin.

Thirdly, in order to have the right balance, and again we alluded to that a bit at the intro already on the inventory site where we have products still from hand to mouth and products, which have now replenished the levels, we have to steer the inventory carefully, which means we will reduce on the ones where we do not have hand in mouth. We will reduce the loading of the fabs, which means we will incur some additional under utilization costs. And lastly, as mentioned, we expect some further wage increases to kick in.

So this is all factored in. And that explains from our perspective, why we feel as of today, in line with what we did last quarter, that this would be a conservative and better approach.

[Alexander Duval, Goldman Sachs]

Thank you very much.

[Jochen Hanebeck, CEO]

And then I may add on the pricing environmental two sentences. So of course, in the PSS environment, there are pockets where we need to balance between market share and profitability. But the team has done that many times in the past. So I'm very confident that they handle it very professionally.

On the automotive side on the other end, we have concluded VPA starting first of January, which we're still under the headline of supply security meaning a favorable pricing.

[Alexander Duval, Goldman Sachs]

Very clear. Thank you.

[Operator]

Thank you. And our next question comes from Francois Bouvignies from UBS. Please go ahead.

[Francois Bouvignies, UBS]

Hi, thank you very much. So my question is a bit follow-up to Alex, not on the gross margin, but more on the top line. So you mentioned some weakness in the consumer PC. But when we look at your Q1 and fiscal Q2 guidance, with the growth of 20%, year-over-year and automotive growing at almost 30% more in the first half. To reach your guidance, I mean, you would need to have revenues down year-over-year. So will it be a significant step down from H1, and especially when we see the automotive growing so strongly, it's kind of difficult to imagine it would go down so quickly and significantly.

So I was wondering, is it something that you see already? Or is it just some conservatism you want to keep for the second half of the year? Because I mean, I guess you would need to imply an inventory correction or even pricing deterioration in the second half, to get this kind of decline, just some thoughts [ph] on that. Thank you.

[Jochen Hanebeck, CEO]

Yeah, thanks for the question. Indeed, we are a bit cautious about the second half of the year. The weakness on consumer, you mentioned. On automotive I've still have escalations in terms of allocations on my table. But in this very dynamic environment of inflation, interest rates and consumer confidence, we think that this is a good guidance. But of course, can be upside, can be downside as always.

[Francois Bouvignies, UBS]

Thank you.

[Sven Schneider, CFO]

And if I just may add to Jochen very quickly because I think it's very relevant in this situation. First our guidance last time was at 1, now we are guiding at 1.05. This translates into a headwind for the three coming quarters. I'm not talking now about the first of EUR400 million, if we just go from 1 to 1.05. If we would go from 1.05 to 1.10 there would be another headwind of EUR400 million. So please factor that in if you interpret our top line numbers. Thank you.

[Francois Bouvignies, UBS]

Thanks.

[Operator]

Our next question comes from Johannes Schaller from Deutsche Bank. Please go ahead.

[Johannes Schaller, Deutsche Bank]

Yeah, thanks for taking my question. I think I'm kind of coming to the same topic, but maybe from a slightly different perspective. Jochen, you mentioned the bifurcation in the supply demand situation, as allocation elevation on the one side, and then things getting weak on the other side. Can you maybe talk about this a little bit more from a production perspective? You said look, we're adjusting production, where we can. Maybe give us a few scenarios here, where can you actually adjust production and move things? Where is it more difficult? And maybe what does that mean for the utilization over the course of the -- also maybe considering things get worse in the second half from a macro perspective? Thank you.

[Jochen Hanebeck, CEO]

Yeah. Thanks, Johannes for the question. So of course, the foundry supply, we order what we need, of course, keeping our inventories in mind also, from a strategic point of view. In terms of in-house manufacturing, we anticipated some of this shift, some of this bifurcation, already in summer, and slowed down, for example, the 8 inch silicon capacity growth and relocated this CapEx, rather to those areas, for example, IGBTs, wide band gap for automotive and renewables. And that plays out now very nicely.

But of course, converting those capacities has its limitations. And it's, of course, limited now, in the sense that we cannot absorb some of the weakness we see, for example, in MOSFETs, for PSS end markets to the full extent and therefore, we will incur idle costs mainly in this fiscal quarter in order to get inventories for PSS into the target range.

So I think we are doing on a good track. But of course, consumer related end markets are definitely weak. We will continue to invest. The headline CapEx number will remain at EUR3 billion in order to fuel our growth in the aforementioned strong markets as well as into buildings, providing growth opportunities in the future.

[Johannes Schaller, Deutsche Bank]

Maybe a quick follow-up if I can, the MOSFET weakness in PSS, I mean, the server and consumer-related stuff, it sounds like that will continue for a while. Is there anything more you can do from a production perspective to convert that capacity to something else? Or do you kind of have to wait it out in effect.

[Jochen Hanebeck, CEO]

Yeah, you can convert it to automotive MOSFETs, and to a limited extent to other power devices.

[Johannes Schaller, Deutsche Bank]

Great, thank you.

[Operator]

Our next question comes from Didier Scemama from Bank of America. Please go ahead.

[Didier Scemama, Bank of America Merrill Lynch]

Thank you very much. And congratulations on the gross margins. Really great recovery from where you were a couple of quarters ago. Two quick questions, if I may. So number one, can you talk about the backlog, deconstruct that, the direction of backlog for HEV, IPC, PSS? It looks like the dynamics are quite different. And then related to that, do you have a feel for where the backlog might trough? Is it in Q1 or Q2 calendar? Or is it further out? If you have a number to share, that would be lovely. Thank you.

[Sven Schneider, CFO]

Didier maybe I take your questions, Sven speaking. So on the backlog it has decreased as we have communicated from EUR43 billion to EUR38 billion. We have said it multiple times that we could sleep very well with much lower levels given that this is not a normal pattern. If you have a backlog of 40 billion compared to EUR15.5 billion of revenues. So the gap or the delta between the EUR2 billion to EUR5 billion, I would say about half of the decline is currency. So that's something we just should take out.

The other half is a reduction of orders. Here we have some cancellations of long term orders but we see a healthy take in of new orders. Three quarters of the backlog consists of orders up to 12 months and the big majority is still in automotive. So and going up of course if you just forecast some weakness on the consumer side. I cannot give you now an indication when it will thrust but I would not be surprised if the backlog goes down further in the coming quarters.

[Didier Scemama, Bank of America Merrill Lynch]

Okay, brilliant. And maybe a quick follow-up. Then to your point, earlier you very kindly broke down the various components of gross margin guide for the full year. But you also said in your prepared remarks that material and energy costs went down. There was a surprise. I think they were lower than expected for Q1. So do you expect that to continue in the second half? Or do you expect energy and material cost that will increase?

[Sven Schneider, CFO]

Yeah, good question, Didier, thank you. I mean, what we have all seen as is this significant increases in energy costs after the Ukraine war. It's material. But it's a lot around electricity. And we have seen that the electricity prices, especially for our front end chaps in Europe came down again over the last weeks and quarters. That was basically the main component for our comments.

I have not now forecasted any further deterioration or increase. We just took it at current levels and forecasted that for the rest of the year. Thank you.

[Operator]

Our next question comes from Jerome Ramel from Exane BNP Paribas. Please go ahead.

[Jerome Ramel, Exane BNP Paribas]

Yeah, good morning. It's a quick question. You mentioned short AV for NTU [ph] utility. Could you help us to understand which nodes are particularly short of capacity?

[Jochen Hanebeck, CEO]

Yeah, thanks for the question. We have our AURIX family ranging from 90 to 28 nanometers. 90 is trailing edge currently, high volume is 65 and 40, and ramp is 28. We still see or would like to take more wafers on in 65 and 40 nanometers for automotive microcontrollers.

[Jerome Ramel, Exane BNP Paribas]

Thank you. And maybe just a follow up on microcontrollers. And from a competitive standpoint, we hear your competitors talking about big design wins after five nanometer node for domain architecture and ADAS. What is your strategy for beyond L3 and System-on-Chip integration for the microcontroller? Thank you.

[Jochen Hanebeck, CEO]

Yeah, thanks for the question. So we are focusing on microcontrollers with embedded control. We are not into the regime of micro processors, which is a very different sort of products. We see we have a very strong position on the microcontroller side and we see continuous demand. And of course our high end devices of microcontrollers will continue to challenge the position of low end MPUs and we believe this is a very attractive market. And the AURIX family perfectly, is perfectly suitable also for domain architecture, software defined cars, zone controls and all of that. So the number of MPUs in a car will be very limited in our view.

[Jerome Ramel, Exane BNP Paribas]

Thank you.

[Operator]

Our next question comes from Andrew Gardiner from Citi. Please go ahead.

[Andrew Gardiner, Citi]

Thank you, gentleman for taking the question. I had a follow-up Sven, for you on the point you were making on the gross margin factors as we look to the rest of the year. The first thing you mentioned in those four factors was the foreign exchange move. As you say you've set your budget now, you said the guidance based on 1.05? You then said okay, there could be some further headwinds if it stays at 1.10, which I think, obviously, we can all work out mathematically.

But by listing that as your first factor for having the weaker guidance into the back half of the year for gross margin, are you suggesting that you've left yourself some wiggle room there if it does stay at 1.10? Some of that perhaps could be absorbed relative to the budget? Just I -- just trying to understand the dynamics that you're trying to highlight.

[Sven Schneider, CFO]

Andrew, thanks for the question. I mean, if you look at our Q1, you cannot now of course argue we have guided at 1 and I think the average rate was 1.02. And we have kept guidance, at least at the levels or even increased. So I would say your reading is quite accurate. We have this currency headwind, but we would not immediately walk away from our guidance if the dollar moves from 1.05 to whatever, 1.07, 1.08. But nobody knows. Let's wait until the central banks have made their decisions.

But also let's be clear, the reason that I mentioned currency, as number one does not mean that this has the biggest impact. I would say the biggest impact on the margin compression is from PSS and idle and not from currency. But just to be clear, we wanted to highlight that to you given that we would expect questions, why are you guiding at 1.05, if the dollar is already at 1.10? That was the main reason behind it. I hope that's clear.

[Andrew Gardiner, Citi]

Very clear. Thank you.

[Operator]

Thank you. Our next question comes from Adithya Metuku from Credit Suisse. Please go ahead.

[Adithya Metuku, Credit Suisse]

Yeah, good morning, guys. And congrats on the great results. So firstly, I just wanted to understand, what is driving the IPC upgrade? You were previously talking about IPC growing in line with the group average. And now you're talking about faster growth? And is it at least partly driven by better silicon carbide availability for IPC? Or is there something else that's driving it? Any color here would be very helpful. Thank you.

[Jochen Hanebeck, CEO]

Yeah, silicon carbide, of course, volume and output from the fabs is growing as planned. But we are also making still very solid and sizable business, growing business with silicon across the board. And the picture here is that we cannot produce enough for renewables these days. And so even if there is, what we detect a slight weakness in industrial drives in China, we are ready to switch the capacities, which is in this case doable towards more renewables and our market position in new renewables in wind and solar. And there's ample of growth, and we are also taking extra measures in production to bring up the output as much as possible here.

[Adithya Metuku, Credit Suisse]

Got it. So it's mainly renewables that's driving the upgrade. Would that be fair to say in IPC?

[Jochen Hanebeck, CEO]

Renewables but also power infrastructure for renewables. So not only solar winds, but power infrastructure? Big growth.

[Adithya Metuku, Credit Suisse]

Okay, got it. Thank you.

[Operator]

Our next question comes from Sandeep Deshpande from JPMorgan. Please go ahead. Sandy, please go ahead. Your line is open. And it's it seems that Sandeep has stepped away. We will now move to our next question from Lee Simpson from JPMorgan. Please go ahead.

[Lee Simpson, Morgan Stanley]

Morgan Stanley. Thanks for letting me on. Just going back to some of the commentary around allocation and the supply certainty that customers are looking for. Could you maybe just characterize that a little bit for us? Because the remark there about supply being tighter for longer suggests perhaps a quarter, maybe two quarters of extra build in the channel? Is that how we should look at that? And you mentioned also that idle costs were a big part of that gross margin impact in the guide. I wanted to give me the call out what you think the under utilization charges could be in the back half of the year. Thanks.

[Jochen Hanebeck, CEO]

Yeah, the under utilization charge I leave it for Sven. The first part, I am not sure whether I really understood, tighter for longer, I think refers to my statement that automotive and then meaning e-mobility and renewables are in competition for the same capacities. So there, this tighter situation can extend far beyond two quarters if that was your question. But please, let me know whether I answer correctly.

And the other hotspot in allocation for automotive is microcontrollers. And here I refer to my previous statement. We would still take more 65 and 40 nanometer capacity wafers in order to also replenish the supply chain downstream. Sven you want to comment on idle cost?

[Sven Schneider, CFO]

Happy to do so. So Lee the idle cost, which we have now taken into our forecast could be up to EUR500 million this year. Last quarter, we were indicating a EUR450 million number. So you see, it's trending up. But more importantly, if you compare that to last fiscal year, we have been at the so called level of structural idle, which was EUR150 million. So you see that is a significant contribution, negative to the profitability which we are compensating successfully with other measures.

So up to EUR500 million is the answer. And in Q1, we have incurred a high double digit number. So the rest is Q2 to Q4.

[Lee Simpson, Morgan Stanley]

Perfect, thanks.

[Operator]

Thank you. And our next question comes from Matt Ramsay from Cowen. Please go ahead.

[Matt Ramsay, Cowen]

Thank you very much, guys. Good morning. And two topics from my side, I guess the first one on the revenue picture for the company. I think at least my conversations with investors are a little bit different than the tone that you guys have taken, which is that the first half of the year, particularly the March quarter will be weak for a lot of end markets. And then there's some potential drivers. I mean, nobody knows on timing, but for things to improve in PCs, smartphones, kind of consumption, a lot of things through the year. And I'm just trying to understand if your outlook on the market is quite different than that.

So if automotive remain strong, it sounds like you're baking in some caution for the rest of the year when maybe investors are baking in some recovery and optimism. And the second topic just quickly Sven, just to -- you guys guided not just segment margin, but gross margin for the year, and that implies some volatility in OpEx as well. So if you could kind of talk through the drivers of operating expenses for the next few quarters, that'd be great. Thank you guys.

[Jochen Hanebeck, CEO]

So the second part of the question is when will take and the first part, I give it to Andreas because of course there are opportunities for the PSS end markets to recover. But Andreas, maybe you can shed some light on, let's say on upside opportunities, which we have not baked into our guidance yet.

[Andreas Urschitz, Chief Marketing Officer]

As it was said before, definitely we see strong momentum to continue in renewable e-mobility, EV charging, then also energy infrastructure, if you will. Nothing to add on this one. Then on point two with regards to more specifics on the offset side of things. Yeah, so we see on the consumer and computer side, still weak demand to happen, while we are speaking. Nevertheless, when you listen, so to say to channel partners, for instance, seems that the inventory levels of consumer devices here are already starting to normalize.

So having said that, there might be in the one or the other sub segment, a bit of an upside coming in the second half. But for reasons, as alluded by Jochen and then also Sven, we prefer to be cautious in this area of consumer, computer telecom infrastructure.

[Sven Schneider, CFO]

Okay, and then, Matt, I take your question on the OpEx development. So if you look at Q1 and I'm now referring to the gross margin, so the also the clean R&D and the clean SG&A excluding the non-segment result effects which we have shown you in the presentations, we are at around 21%, 22% OpEx level. I would expect that to stay in that ballpark broadly speaking. Of course, for us, it's always very important that we balance that in the right way. As I said in the intro, I would say there is probably a little bit more leeway to keep OpEx -- sorry, R&D on a good level in order to have the right innovation and product available and to be a bit tighter on the G&A and say the marketing expenses.

But broadly speaking 21%, 22% for the rest of the year, from my perspective would not be too wrong.

[Operator]

Thank you. We will now take our next question from Alexander Peterc from Societe Generale. Please go ahead.

[Alexander Peterc, SocGen]

Good morning, and thanks for taking the question. Congratulations for very strong results on the margin front for the quarter again. Now I'd just like to understand the EUR500 million in arbitration [ph] charges. Is that entirely going to weigh on the PSS division because you single that out has been the main driver of the sequential weakening of your margins for the remainder of the year? And a very quick follow up if you could reiterate your silicon carbide revenue, is it still EUR450 million [indiscernible]. Thanks.

[Jochen Hanebeck, CEO]

Sven, you take the two.

[Sven Schneider, CFO]

Yes, happy to do so. So Alex on the EUR500 million. So normally, a rule of thumb is that more than half of idle costs, given our manufacturing footprint go to automotive. So the current situation where automotive is so strong and PSS see some weaker quarters ahead, I would say there is more coming into the PSS then usually. So you are right. So more idle allocated to PSS and less than to automotive compared to historic patterns.

On the silicon carbide revenue numbers, we have given last time EUR450 million. I would say there may be some upside for that. It's a bit early in the year but EUR450 million to EUR500 million. That's the update I would give you. The majority of the revenue is still from our industrial division but you are aware that automotive it has a higher CAGR. So that will, of course change over time. And all my numbers were related to our fiscal '23.

[Alexander Peterc, SocGen]

Very, helpful. Thank you.

[Operator]

Thank you. And our next question comes from Janardan Menon from Jefferies. Please go ahead. Janardan, please go ahead. Your line is open. Please make sure the mute function on your phone…

[Janardan Menon, Jefferies]

Hello.

[Operator]

Hello. Yes. We can hear you. Please go ahead?

[Janardan Menon, Jefferies]

Yeah, good morning. Thanks for taking the question and squeezing me in. Just want to dive a little bit into your automotive business. Obviously the numbers you're reporting a very strong. Are you seeing any differences between the different parts of automotive? Or is it all quite uniformly strong? I'm saying different products like MOSFETs, microcontroller, sensors, IGBTs, et cetera as well as between ICE and EVs.

And there's a small follow-up. On the microcontroller side, are you saying that you're already getting as many wafers from TSMC, Global Foundries and you're now building up that inventory? Or is it that you expect the shortage to ease and availability to improve? And following that you're saying you will continue to build up? I'm just referring to TSMC is common during their conference call and I think they supply you the 65 nanometer that they would expect the microcontroller shortage to finish reasonably quickly.

[Jochen Hanebeck, CEO]

Yeah, thanks for your question. So I said that we would like to take more wafers on in order to prepare for further ramp. AURIX is in full ramp mode. Now focus will shift slowly from 65 to 40 nanometers. We have gotten more wafers and therefore the -- let's say burning allocation will get better in the second half. But again, AURIX is ramping and therefore, we are securing capacities.

I think the 65 nanometer node at -- is still not really opening up to the extent we would like it to be. But I do expect customer escalations to ease for the microcontroller -- automotive microcontroller in the second half of '23. But we need more capacity to fuel the design wins we have achieved in the past. In general across the automotive business, of course, there is some hotspots in terms of strong demand being e-mobility, ADAS, also some analog mixed signal parts. Other parts are normalizing. And yeah, that's the way I would describe it.

[Janardan Menon, Jefferies]

Understood. Thanks very much.

[Operator]

Our next question comes from Rolf Bulk from New Street Research. Please go ahead.

[Rolf Bulk, New Street Research]

Yes, thank you for taking my question. I want to ask a question about your silicon carbide business. You highlighted around EUR3 billion of design wins in recent months. And it seems that your peers are also having a very strong design traction. One just announced new silicon carbide fab just yesterday. In that context, I wanted to ask how you think about your existing IGBT footprint. How do you think about growth in that business? And do you see a scenario in which you could refurbish one of your existing 200 mil silicon fab with silicon carbide fab, if the need arises in the coming years?

[Jochen Hanebeck, CEO]

Yeah. So first of all, I will not comment on individual competitor moves. But let me tell you, in general, our manufacturing strategy. So we think that for 300 millimeter, Europe is a good location, eight inch as you know, or 200 millimeter we are building up in Kulim. Here we have, of course, a lot of legacy business. But also growing sensors, products in that line. So there might be limited opportunity to convert Kulim 2 to 100 to silicon carbide, but there might be some, the majority will be by further expanding Kulim where we announced the first phase of Kulim 3 last year, and there's more room around that factory to go further if required.

Now IGBT, IGBT, as we showed on the capital markets day or at the annual press conference, we still see a huge market in IGBT. We are also seeing competitors no longer investing in these technologies. We see major applications, for example, industrial drives, but also big parts of wind staying on the IGBT side. And in addition, we of course have new growth technologies for our 300 millimeter factories. As you know, we are planning to build Dresden 4 for analog mixed signal technologies. And therefore the 300 millimeter factories will continue to grow and contribute to our gross margin development.

[Rolf Bulk, New Street Research]

Thank you. Very helpful.

[Operator]

Thank you, ladies and gentlemen. We have time for one last question today. Tammy Qiu from Berenberg. Please go ahead.

[Tammy Qiu, Berenberg]

Thank you for squeezing me in. So I have a question about China. So your profession [ph] used to be very strong in China. And over the past few years, China has been really aggressive. And recently they've been doing more in ultra industrial space, trying to be self sufficient. What's your take on that? And also, do you think your market share may be impacted because of their pushing into sort of domestic made products?

[Jochen Hanebeck, CEO]

Yeah, thanks for the question. I mean, the strategy in China is very clear. Wherever possible, China will try to achieve a higher degree of self sufficiency. It will never work completely as for any other region in this world, self sufficiency in terms of semiconductors will not be achievable. But that's basically a continuation of the past. We always said, let's say that -- let's say standard power devices will be something where we will see a commoditization driven by Chinese players. And at some point when it doesn't make sense we will back off. But our answer for many years on that one is P to S, product to system thinking in the sense that we are not only relying on technology leadership, meaning the best MOSFET, the best silicon carbide device but going into the system thinking -- combining the power switch with the analog mixed signal devices with a microcontroller, with software. And there we think we have quite a lead on competitors including those in China.

[Tammy Qiu, Berenberg]

Okay, amazing. Thank you. And just a quick follow up, regarding our pricing, would you say your strong pricing today is a result of the market or it is actually you changing your pricing method has been really successful?

[Jochen Hanebeck, CEO]

Yeah, Andreas. This is a perfect question for you, please.

[Andreas Urschitz, Chief Marketing Officer]

It's a mixture in between a couple of elements. First and foremost, I tend to say that the value that we are creating through very application specific products that come out of a better system understanding, Jochen spoke about P to S. Our ability to translate that value that we create for customers into pricing definitely has grown quite substantially. So if you will price up is a function of value based pricing, where Infineon simply moved ahead along the curve.

Other than this, we have structural effects out of our markets where in particular demand for power semiconductors, microcontrollers connectivity devices as a function of decarbonization digitalization is increasing. That in combination with availability of capacity, definitely also was part of positive impact on pricing overall. But simplifying things. So I believe customers are better and better seeing the value that we can create out of Infineon and are willing to share a fair of their pockets towards the benefit of Infineon [ph] as a company back into our P&L.

[Jochen Hanebeck, CEO]

And maybe let me add one thing. When I took over as CEO, I said that the strategy is perfectly fine. But we have to work on our behaviors. And I call this the -- we call this the spirit project or initiative, and this spirit initiative is focusing on three behaviors, setting ambitious targets, clear responsibilities and timely decision making. And you may also attribute some of what Andreas described to the first of the three targeted spirit behaviors.

[Tammy Qiu, Berenberg]

Okay, thank you.

[Alexander Foltin, EVP, Finance, Treasury and IR]

All right, time to wrap up the call. Thanks for all your questions. Fairly comprehensive as always. We are concluding now our first quarter's conference call. Any further question, any item that were left open, please feel free to contact us and the IR team here in Munich. Thank you very much. Take care and have a good day.