Infineon Technologies AG

XETRA:IFX

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, everyone. Welcome to the conference call for analysts and investors for Infineon's 2019 fiscal second quarter results. Today's call will be hosted by Alexander Foltin, Corporate Vice President, Finance, Treasury and Investor Relations for Infineon Technologies.As a reminder, today's call is being recorded. This conference call may contain forward-looking statements based on current expectations or beliefs as well as a number of assumptions about future events. We caution you that statements that are not historical facts are subject to factors 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 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.

[Alexander Foltin, Head of Investor Relations]

Good morning, and welcome, ladies and gentlemen, to our quarterly earnings call number 77 in Infineon's history. Here with me present is almost the entire Management Board. Reinhard Ploss, CEO; Helmut Gassel, CMO, and for the first time today, Sven Schneider, our new CFO. Jochen Hanebeck is not able to join today's call. 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 again, Reinhard will update you on our guidance. We will, again, 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. [Operator Instructions] A recording of this conference call, including the aforementioned slides and a copy of our 2019 fiscal second quarter earnings press release as well as our Investor Relations presentation, are available on our website at Infineon.com. Reinhard, please go ahead.

[Reinhard Ploss]

Thank you, Alexander, and good morning, everyone. We have closed our second phase to the quarter much in line with what we had projected. Our revenues came in at EUR 1,983,000,000, an uptick of 1% quarter-over-quarter, which means flat if adjusted for the slight improvement of the U.S. dollar exchange rate by about 1%. Year-over-year, our revenues grew by 8% in euro terms and by 4% at a constant U.S. dollar exchange rate. The segment result for the March quarter amounted to EUR 332 million corresponding to a segment result margin of 16.7%, a bit ahead of our guidance. As we indicated our pre-announcement at the end of March, the current business environment is quite challenging, macro weakness and uncertainty around issues like U.S.-China trade talks weigh negatively across several application areas. The cautious overall system sentiment persist, the economic slowdown is continuing. Evidence of this is our book-to-bill ratio of 0.8 for the quarter having slipped to below 1 for the group for the first time in more than 6 years. As lead time is coming down and inventories in the channel stood at higher than normal levels, the ordering behavior of customers is becoming more opportunistic and short-term oriented. Against this background, we have reassessed our business outlook and in March, have revised our revenue growth and earnings guidance down for the 2019 fiscal year. I will comment more on this at the end of my introduction. But first, to the divisions. Automotive revenues were EUR 875 million in the March quarter, up 3% sequentially compared to Q2 of the prior fiscal year, the increase was 8% or assuming a constant U.S. dollar exchange rate, still a good 4%. This was driven by unabated momentum in electric drivetrain components as well as a continued ramp of our own rig's microcontroller at several tier 1s and OEMs, offsetting stagnating volumes in products for classic automotive applications. The segment result came in at EUR 112 million, resulting at a segment results margin of 12.8%. The decline by 1% point versus the prior quarter is principally due to annual price declines, which regular occur in the March quarter, certain inventory-related effects and some costs in connection with underutilization back-end capacities. The book-to-bill ratio for the March quarter stood at 0.8 reflecting the noticeable slowdown of end market demand. Car sales in the largest market, China, were down 7% year-on-year in March according to the China Association of Automobile Manufacturers. This marks the ninth consecutive month of year-on-year declines. Also, the first one since September that hasn't seen double-digit declines. Inventories at all levels of the supply chain continue to be at elevated levels. The auto demand picture in China remains inconclusive given EV subsidies cuts on the one hand, and seamless indications on the other. For global car production, most major market analysts are predicting a decline in calendar year 2019. In our projection for the 2019 fiscal year, we have now embedded a low to mid-single-digit car unit decline affecting our business with [ strategic ] automotive applications such as engine management or body and safety functions. In stark contrast, electric drivetrain and advanced driver assistance systems remains strong, structural drivers and provide attractive opportunities for our system solution, irrespective of the above-mentioned subsidy cuts in China. Not least due to these growth engines, we have been able to fortify our leading position in the automotive semiconductor market as #2 worldwide. According to recently released data from Strategy Analytics, Infineon gained 0.4 percentage points of market share in 2018, there is narrowing the gap to the #1 as well as widening the distance to the #3 in the market. Importantly, share gains were achieved across all 3 main product categories we are active in, namely power products, sensors and microcontrollers. From a regional perspective, the highest increase was in Japan where we grew our Automotive business by almost 25% in 2018, faster than any other of the top 10 automotive semiconductor suppliers in the strategically important country. A key pillar to our success is quality leadership. This is exemplified by the award, which Toyota honored Infineon for 5 years of 0 defect deliveries through its Hirose plant. Our outstanding technical and quality reputation in the Japanese market is also underlined by the recent selection of our IGBT modules by a major local tier 1 for its next generation main inverter in electric vehicles. As we continue to make significant inroads in assisted and partially automated driving, a major European tier 1 selected our RX second-gen microcontroller for its next-generation main front camera platform as safe and secure host controller. Additionally, a U.S.-based startup decided for our AURIX second-gen for its center fusion platform. 6 microcontrollers provide the required computing power. Our microcontroller has been selected based on its performance and function and safety. Furthermore, Infineon and Schweizer developed a groundbreaking chip embedding technology that boosts the performance of 48-volt mild hybrid systems, while reducing complexity and costs. Continental will be the first tier 1 to adopt the technology using it for the to 48-volt startup generator. Industrial Power Control recorded revenues of EUR 347 million, a decrease of 1% compared to the previous quarter, whereas typical seasonality in the March quarter would be a sequential increase by a mid-single-digit percentage. Industrial drives, solar and home appliance sales experienced declines, whereas traction and wind held up well. Year-on-year revenue was up by 9% or 7% at a constant U.S. dollar exchange rate. The segment results for the second fiscal quarter was EUR 67 million, EUR 2 million lower than the previous quarter resulting in a segment result margin of 19.3%. From a product perspective, discrete and gate drivers saw very muted demand. Similarly, IGBT modules for low-power applications for orders are further softening and inventory reach is going up. Modules on the other hand, especially for high-power applications, proved quite resilient. This mixed pattern resulted in a book-to-bill ratio of 0.7 for the March quarter and an overall cautious sentiment, as evidenced, for example, by PMI levels consistently around 50. This GDP growth for 2019 are predicted by the IMF to be just under 3%. The IGBT market is at long-term trend line. Wind and solar power as well as traction remained pockets to the positive outlook. Here, our differentiated high-power modules address critical performance and quality requirements, like extreme ruggedness and reliability needed for offshore wind farms. With our PrimePACK module based on the IGBT5 and .XT technology, we secured an important design win at a major European wind turbine supplier. Also, for more customer-oriented products, we're encouraged by design wins at our customers like for our protected IGBT, especially designed for induction rice cookers. At a Chinese home appliance manufacturer, our intelligent power module, IPM in short, at a European household goods supplier. Now to Power Management & Multimarket. This segment recorded revenues of EUR 591 million, a sequential decrease of 4% over the prior quarter but up 9% year-on-year in euro terms or 2% assuming a constant U.S. dollar exchange rate. We experienced weakness across a large part of our business lines. Demand for low and mid-voltage MOSFETs remained subdued. Also, controller ICs and power stages for servers are witnessing an ongoing slowdown, in line with the sluggishness in this global server and data center market. General inventories kept rising in the March quarter from already high levels, particularly at Chinese distributors. For handset-related products, the typical seasonal decline was aggravated by a general weak market, especially for high-end phones. In the area of AC-DC power supplies, especially high-voltage MOSFETs, the picture is still brighter driven among others by on-board chargers for electric vehicles and 5G network preparation and build-outs. Here, allocation is coming to an end as lead times getting back to more normal levels. Overall, slow order momentum and a high level of cancellations resulted in a book-to-bill ratio of 0.7 for PMM in the March quarter. The segment result came in at EUR 132 million equal to a segment result margin of 22.3% after EUR 150 million and 25.1% in the previous quarter. Apart from lower revenues, some underutilization charges and inventory-related effects accounted for the decline. Going forward, market softening is likely to continue in near term. Inventories will have to be worked down before a recovery transpires to the supplier level, and there is currently low visibility as to when this will happen. Having said this, structural growth drivers remained strong and intact. One of them is artificial intelligence. Compared with CPUs in standard data centers, AI chip from machine learning applications have a higher complexity and hence, a higher peak and nominal power consumption. Our high-end 16-phase power stage controller has been selected by a Chinese IT hardware provider to power the latest generation of Alibaba's AI chips. Also, we are extending the voltage range for our silicon carbide MOSFET product portfolio. Some days ago, we have announced the first 650-volt products. In addition, we are making good progress with our gallium nitride devices where we achieved a design win at an Asian manufacturer for an ultra-compact and efficient power supply for super slim OLED TV. After telecom equipment, high-resolution premium OLED TVs are the second market having reached the tipping point for gallium nitride products. Now to Digital Security Solutions. The segment booked revenues of EUR 164 million, an increase of 10% compared to the previous quarter, flat year-on-year. 2 areas mainly contributed to this positive development. On the one hand, mobile security where we are leading the market for automotive eSIMs. And on the other, payment solutions more and more bundled with software. The book-to-bill ratio of 0.9 for the March quarter confirms our assessment that demand across the various application is stabilizing. The segment result came in at EUR 19 million, corresponding to a segment result margin of 11.6% compared to EUR 16 million and 10.7% a quarter earlier. The impact of higher revenues was partially offset by annual price declines and underutilization charges. DSS continues its transition to enhanced solution offerings, while the classical smartcard business is developing flattish with some signs of recovery. Gross momentum over the midterm is expected from the change towards contactless payment from further ease and penetration and from consumer authentication products -- projects. Regarding the latter, we achieved a key design win at a major Asian consumer electronics OEM. At the Hanover trade fair, in early April, Infineon presented the first Trusted Platform Module specifically for applications for industry. Our OPTIGA TPM project, the integrity and identity of industrial PCs servers, industrial controllers and edge gateways, and allows for a secured communication with a smart factory into the cloud. Now the importance of security, the automotive industry increases, especially in the areas of connectivity and ADAS, our security solutions are gaining momentum, evidenced by several important design wins at system suppliers and tier 1s for telematics and gateway applications. With this, I would like to warmly welcome Sven Schneider to this round. We are very happy to have him onboard, a successor to Dominik, and be able to benefit from his wealth of experience gained at Linde. Sven, the stage is yours.

[Sven Schneider, CFO & Member of Management Board]

Thank you, Reinhard, and good morning, everyone. It's a great pleasure for me to provide some comments on our key financial figures for the quarter. Let me start with some more details on the margin development in Q2. The gross profit was EUR 749 million, after EUR 779 million in the previous quarter. Given the slightly higher revenues, the gross margin decline from 39.5% to 37.8% driven mainly by typical seasonal price declines and underutilization costs. Excluding non-segment result effects, the adjusted gross margin stood at 38.5%. Research and development expenses and selling, general and administrative expenses came in at EUR 236 million and EUR 212 million, respectively. The net other operating income amounted to EUR 4 million. The non-segment result stood at minus EUR 27 million, predominantly related to amortization and other charges resulting from the International Rectifier acquisition. Of that amount, EUR 15 million hit our cost of goods sold, EUR 1 million R&D and EUR 11 million SG&A. Our investments into property, plant and equipment, intangible assets and capitalized development costs in the second quarter of the 2019 fiscal year amounted to EUR 349 million after EUR 408 million in the prior quarter. Depreciation and amortization, including non-segment result effects went up slightly from EUR 230 million to EUR 233 million. Included in these figures are EUR 26 million and EUR 21 million, respectively, 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 EUR 204 million to EUR 212 million. Income tax expense in the March quarter was EUR 46 million against EUR 56 million in the previous quarter. This results in an effective tax rate of around 16%. Our cash tax rate was 17%. Throughout the 2019 fiscal year, we continue to expect a rate of around 15%. With respect to discontinued operations, we recorded a loss of EUR 18 million in our second fiscal quarter, predominantly related to adjustments of provisions in connections with the ongoing Qimonda litigation. While there are no new substantive developments, we updated our assessment of the length of proceedings given that an out-of-court settlement on the basis of the preliminary report by the court-appointed expert could not be reached so far. As a result, we increased provisions by estimated legal and interest costs. Continuing with free cash flow from continuing operations, we recorded a net outflow of EUR 137 million in the March quarter after net outflow of EUR 221 million in the prior quarter, which had contained the cashout of net EUR 123 million for the acquisition of Siltectra in November. Our gross cash position as of March 31, 2019, amounted to EUR 1,882,000,000, net of financial debt of EUR 1,549,000,000. Our cash position stood at EUR 333 million. In February, we paid out the dividend at an amount of EUR 305 million. Our reported after-tax return on capital employed stood at 14.1% in the March 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%. So much for my side for today. After having started in my role as CFO here in Infineon last week, I hope to be able to meet many of you in person over the coming months. At this time, in addition, Alexander will support Reinhard in covering specific financial questions in today's Q&A with a potentially detailed background.

[Reinhard Ploss]

Thank you, Sven. We already talked about the challenging business environment in the beginning. Based on our reading of internal and external indicators, the deceleration will be more long-lived but at least the situation is not worsening. Visibility remains low, inventory correction will take time and while recent market data and leading indicators from China provide some glimmer of hope, there are no tangible signs for a snapback of demand in the near term. As macro uncertainties and sluggish demand in several end markets linger, recovery will at best be modest. This fairly bleak market picture we have factored into our revised projections. At the same time, the resilience of our core power business as well as some key product ramps will enable Infineon to show growth, even absent any broad-based market recovery. We continue to see good momentum for differentiated [ type ] power components for electric drivetrain and a number of industrial applications like traction and renewables. The year, we partly remain in allocation. Furthermore, demand for our radar products and AURIX microcontrollers stay healthy. Taken together, we see that the June and September quarters will be sub-seasonal but Infineon will be one of the very few among its peers showing year-on-year growth. Now specifically to our guidance. Assuming an exchange rate of 1.15 for the U.S. dollars against the euro, we expect revenues as currently running third quarter of our 2019 fiscal year to be up by 1% compared to the March quarter, plus or minus 2 percentage points. Breaking it down by divisions, ATV is expected to grow slightly above group average, whereas PMM should see a small sequential decline. IPC and DSS should be in line with the average for the group. At the midpoint of the guided revenue range, we expect a segment result margin of 15% of sales. This being a full reflection of OpEx discipline on the one hand, and underutilization charges due to low product volumes on the other. Given high inventory levels, both at us as well as in the channel, we will selectively reduce loadings at certain sites. For the full 2019 fiscal year, we are expecting revenues to come in at EUR 8 billion, plus or minus 2%, equivalent to an annual growth rate of a bit above 5%. As you will be quick to calculate, this implies a sequential growth rate of slightly more than 2% for the fourth fiscal quarter, assuming we hit the midpoint of our projection for the third quarter. Dissecting our expectation for annual revenue growth from a divisional perspective, ATV is expected to grow faster than the group average. IPC should see growth slightly above, and PMM below the average for the group. DSS revenues are expected to decline by a low to mid-single-digit percentage. At the predicted revenue level, we expect the segment result margin of 16% of sales for the 2019 fiscal year. We will act consistently to manage this cycle, both safeguarding profitability in the short term as well as continuing to lay the foundation for benefiting from mid- and long-term growth opportunities. Consequent cost management measures like a headcount freeze will somewhat offset a negative effects from lost margins and adverse product mix shift and underutilized capacities. Our guidance for investment, including capitalized development costs remains at a revised level of around EUR 1.5 billion for the current fiscal year. Likewise, unchanged is our prediction for depreciation and amortization to amount to around EUR 1 billion. Ladies and gentlemen, let me summarize the key points. Our March quarter has come in as we anticipated, even slightly better in terms of segment results. As already communicated in our revised business outlook, several end-products experienced a pronounced slump, and it currently looks more like stabilization and recovery. Any potential acceleration in the second half of the calendar year would only be a partial upside for our fiscal year. Our healthy core power business provides a kind of self-help growth through capacity expansion. Infineon, in all likelihood, will substantially outgrow the industry again, even with market demand showing a sub-seasonal pattern. Consequently, we are balancing cycle managed business with enabling sustainable growth. Ladies and gentlemen, this concludes our introductory remarks, and we are happy to take now your questions.

[Operator]

[Operator Instructions] We will now take our first question from Sandeep Deshpande from JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

My question is, you indicated a book to bill of 0.8 in just reported quarter. You're keeping guidance for the full year in terms of sales and margin. There is an implication in the margin that your margin is going to decline quite significantly in Q3 and Q4. Can you talk about those margin trends and why margin is declining so significantly from the 16.7% segment result that you reported in Q2 -- in Q3 and Q4? And then secondly, do you need the orders to come back 1 point -- over 1 point in the third quarter to be able to achieve the full year sales guidance? Or do you have enough sales on your backlog today to achieve full year guidance?

[Reinhard Ploss]

Thank you, Sandeep for your questions. Now, let's -- I will answer the margin decline. As we mentioned, we want to make sure that our inventory levels are coming down and, of course, this means that we have to decelerate production significantly. And this is a significant portion of why the segment result comes down, as you mentioned. We want to make sure that we are bringing back inventory levels quickly in order to be able to bring them to the markets. Another factor of this, lower loadings in our factories, we will be able to bring back factories to a higher speed, which was due to the high loading. Lower in the boom times in order to satisfy the now more volatile market demand quite quickly. The weak book-to-bill, Helmut will comment in more detail.

[Helmut Gassel]

Hello, Sandeep. Good morning, also from my side. As you rightfully, I think already guessed, yes, our order book is still sufficiently high to serve the third and fourth quarter guidance, the full year guidance. What we see right now is that the order horizon of the customers has come down as the lead times have also come down with us and within the industry. So what we currently see is that in particular long-term orders have been canceled. They are outside of the freeze fence, and therefore, cancelable orders and leads to a reduction in the book-to-bill below 1. This will likely remain for some time as we always have said, in allocation times there is double bookings in our order book, we see that those are being cleared right now.

[Operator]

Our next question comes from Andrew Gardiner from Barclays.

[Andrew Michael Gardiner, Director]

I'm just wondering if you could provide a little bit more detail on what within the division has changed since your announcement in late March? At the time, you spoke of rising inventories through the distribution channel particularly in the area of low and medium voltage MOSFETs. Could you give us any sort of further detail over the last few weeks as to any sign that those channel inventories are peaking or how close do you think we are to that?

[Reinhard Ploss]

Thank you, Andrew, for the question. The picture is a very mixed. In some areas, we already see some decline in inventories where the end of allocation has taken place quite some time ago. In the high-voltage segment where we just recently exited the tight supply situation, that is very normal to see that the inventories are rising up. But Helmut will give more details on that.

[Helmut Gassel]

Yes, Andrew. As we have already said in March, we had expected inventories to reduce in March, which had actually not happened. So by the end of March, we had an elevated inventory level as compared to the December quarter. Right now, I would say there's is a little bit of a mixed picture, in particular, China is still sluggish in some areas. But overall, I'd say there's still some inventory in the channel that has to be reduced.

[Reinhard Ploss]

Andrew, nothing much has happened. May be they had [ order been ] by the distribution, a little bit higher, I would say, run rate expected, which proved to be not so strong as they hope. But nothing which is surprising us at the end or at the transition from extremely high demand, which cannot completely be fulfilled to the current situation. We expect this to be worked through in the next months.

[Operator]

Our next question comes from Janardan Menon from Liberum.

[Janardan Nedyam Menon, Technology Analyst]

Two short ones. One is in the sort of situation where demand is staying weak, do you typically see additional price pressure coming through, especially in the distribution channel at this stage? Or is that something that we should expect maybe a few quarters down the line? And have you seen any signs of that happening so far? Secondly, in your introductory remarks, you said that you've not seen any change in your EV demand situation, which remains very strong, even after the China subsidy cut. We've seen some comments from other companies that they have seen some change. Is your situation more because you are on allocation and so even if there are some small cuts here and there you would not -- it would not reflect on your revenue trends? Or is it that even in your China order book, you're not seeing any change at all?

[Reinhard Ploss]

Janardan, good question. We see, let's say, mixed picture let's call it like this. In automotive, we typically have yearly price negotiations, which had been settled through an extremely high level in the last year. So we do not expect that, at least, in this calendar year, we will see significant changes from the change in allocation, not forgetting that the allocation in automotive in quite some areas was not as tight as it had been in PMM and IPC products. The picture is mixed for our PMM and IPC. PMM, we have this multi-sourced products, which are highly commoditized where we definitely see that at the lower performance range, price declines coming in more strongly as competition tries to work down their inventory along these lines. We are very cautious on pushing the ready -- in these terms but, of course, we are able to adopt this. But this is a smaller portion. Helmut will add on this but let me just comment on IPC a little bit here. Definitely, we see a mixture, but also in IPC, significant portion of the revenue is covered by yearly price agreements with major customers. Of course, we will -- we expect to see effects in the distribution channel. But Helmut, maybe you can add some flavor to it.

[Helmut Gassel]

Yes, thank you. Yes, the first thing, more than 60% -- or roughly 60% of our businesses is with direct customers. Only 40% of our business is distribution channel. With direct customers, we predominantly have, at least, annual price fixed or price negotiations, purchasing agreements, with some of them even longer terms or multi-year price agreements. In the distribution channel, the commoditized products get under pressure, which is to be expected at this point in the cycle, but it's a relatively limited so far. And, of course, we expect all these commoditized products, stronger price pressure for the more differentiated products, the price pressure will, say, normalized above -- but will not be super high.

[Reinhard Ploss]

Just for your understanding, due to legal reasons, we cannot give clear indications on how we will act on pricing. But you may be assured that as Helmut said, we are on, at least, for this calendar year, on a very good position and we'll react to the markets as we have been done in the history.

[Janardan Nedyam Menon, Technology Analyst]

Understood. And on the China subsidy side, EV?

[Reinhard Ploss]

Well, no clear picture how the EV will react. We see that there are 2, I would say, elements supporting the EVs in China. One, of course, is that you only get a numberplate allowance when you have a new energy vehicle, which will push the EVs regardless of the subsidies, which has come down. But as the subsidies for the rest has come up only slightly and haven't had a significant effect, we do not expect, at least, for the time being, only -- we do not expect that the changes for the EV will be significant, and the credits has been, or are, at the OEM level. So we believe that the EV market will continue to be demanding, and still we are on allocation, while let's take one positive element, allocation in this market could be reduced a bit by shifting capacities from other divisions to there.

[Operator]

We'll now take our next question from David Mulholland with UBS.

[David Terence Mulholland, Director and Equity Research Analyst]

Just one quick clarification, just on the bookings commentary that you've given. Can you clarify if you're disclosing on a net basis, as in net, of any cancellations in the period or on a gross basis, so we can understand where we're now sitting in terms of backlog? And then secondly, on the inventory level. Obviously, underutilization through the year to work that down, but can you possibly comment on where you think inventory levels will be by -- your own inventory levels will be by the end of the year? And then just one final one in the longer term. As you look at the 48-volt ramp that we're going to be seeing over the next couple of years and some of the interesting technology solutions you're ramping, how do you feel about your win rates in terms of the designs and vehicles that are coming to market over the next couple of years for that technology?

[Reinhard Ploss]

David, these are several question but first, the order cancellation rate. We differentiate order cancellation and relate it to unconfirmed orders and unconfirmed forecast and orders which we already have confirmed. First of all, of course, the unconfirmed orders have been come down and cancellation rate was at a reasonably higher level. But in the recent time, we see that cancellation rate has gone down. Cancellation rate also has affected the committed orders. And here, I think, what we have to consider is that the overall orders on hand is still extremely high. And even if we see cancellations, there, we have to look into that. Helmut will go into this a little more in depth, because many of these cancellations are at the far end of the time horizon. Helmut, please go in details for that.

[Helmut Gassel]

Yes. Our book-to-bill contains confirmed orders and confirmed customer forecast, and is netted off, as Reinhard mentioned, cancellations of such. So but of course, there is unconfirmed orders and cancellations of unconfirmed orders. And as you can imagine, the unconfirmed orders are first, canceled so the overall cancellations are higher than what you can see in the confirmed book-to-bill. Nevertheless, what you see and I think was most relevant to your potential projections of future business outlook is on the confirmed business side and our book-to-bill ratio. But as Reinhard said, current order book is more than sufficient to cover the business as we have projected and is still above long-term average order book to sales ratio.

[Reinhard Ploss]

The next question is the inventory position. Here, we only can comment on what we see. The behavior, the distribution and how they will react and how this will affect our inventory or our inventory at the distributors is somewhat more complex. What we are doing is we try to have a reasonable work down in the inventories but expect that they will peak in summer. And from the summer peak, we will go down. But at the end of the year, we still assume a high level of inventories compared to our target inventory level, which we will continue to, let's say, work down on the further months. So we will not take severe actions in production, tripping it back because here, we see that this significant swings in factory loading may cause quite some, I would say, challenges, especially when market would come back prior to our expectations. So we want to be in a position that when market picks up, which sooner or later will happen because our target operating model through the cycles still is on, so we have to be prepared for this. So the next is the 48-volt. The 48-volt is very interesting because it is a way how we run the power hungry applications in the car, that may be power steering, may be electric air-conditioning, maybe stabilization of chassis, and the rest. Here, the technology provides a much more compact design, which in the tight space in the car is valuable. It also on the long term provides cost reduction or a more important cost performance reduction. What we are doing, we are embedding power devices within the PCB. So the cooling of these devices can become much more effective. Reliability is also improving, and I would say, all this set up the wiring between the components is much easier for our customer. So I think here, a lot of elements. And, of course, this technology, which we do together with Schweizer requires of latest Infineon OptiMOS technology, which is being able to be embedded in a PCB. So we expect that this technology were to grab more and more applications due to its performance and cost ratio.

[Operator]

Our next question comes from Matt Ramsay from Cowen.

[Matthew D. Ramsay, MD & Senior Technology Analyst]

Two different topics from me, if you would indulge me. One, you have some controls that you may take on spending both on the capital spending and the operating spending here in the near term given the challenges, and it looks like those -- some of those actions shown through in the results here in the March quarter. Maybe you could talk a little bit about the different levers that you're pulling, keeping in mind, of course, the lead times on some of the capital that you need to invest for cleanroom, et cetera. And then the second topic, I was kind of quite interested to hear that your Japanese business in your auto group was up 20%. I think it's a number you gave in 2018. Maybe you could give a little context into the size of that business within ATV and what the trends might look like going forward?

[Reinhard Ploss]

Hello, Matt. Thank you for your questions. So the capital spending or the expenditure level. Typically, the capital spending for cleanroom has a lead time around 2 years. We expect the cleanroom and filler for the new 300-millimeter factory to be ready for equipment in the late 2020 time frame. And this will bring us into the situation that we will be able to serve the demand for -- which is expected to further ramp for EVs and many other applications in our time frame. Still, the equipment lead times for front-end is ranging between 6 months, which is a small portion, to 1 year. Considering the effectiveness to revenue, you have, depending on the product, at between a few months to half a year. So revenue effectiveness is even something other than only equipment lead times, and all of these is pretty far out the year. We are investing currently. We have decided not to delay, I mean, the building and filler. There are several reasons. It is also that we want to continue to improve our overall footprint in 200-millimeter but also be ready to -- for the time when the growth comes back, which will then be managed in 300- [ and 100-millimeter ] by large, and we also will at cleanroom for manufacturing the EV modules. The back-end, of course, equipment is not as long from the time we purchased to the time it becomes revenue effective, but it can range for modules between -- also up to 1 year. But for standard packages, it is much shorter. Not to forget, we are here also benefiting that at least for the high integration devices, we have a significantly higher outsourcing portion of our in-house capacity is not ramping as maybe a little bit adopting. So basically, we have only adopted the CapEx spending for the capacities, which we see for the next time, and we will be shifting out but not completely canceling. The decisions for further investments have to be made in next months, but these are affecting the next fiscal year, which, of course, we cannot give any guidance. Regarding the OpEx, there, we had not a significant effect on the headcount slow down yet in the last quarter, but we had effect on the general savings, which we initiated on the OpEx. In the last quarter, what we guided is that we will honor all contracts out for new hires until the end of the quarter. And from the next quarter on, we should accept those people we need for operations pretty flattish. Nevertheless, we will continue to go for our -- for instance, silicon carbide push programs and so on, but this is the measures we have taken. The next is the Japanese. Here, we are not only saying that we see a significant increase in Japan. We also can say that we had, in fiscal year '18, 11% of the revenue of ATV in Japan, which is quite substantial. Maybe Helmut would like to add flavor to it.

[Helmut Gassel]

Yes. So as Reinhard mentioned, 11% in fiscal '18 of automotives business group business was in Japan. This is still the smallest of all our markets; however, it is the fastest growing. Growth is predominantly based on what we call classic automotive applications. And in addition, we had a very good growth based on our autonomous driving sensors. So yes, we expect that to be the fastest-growing region within the automotive group for the remainder of the fiscal year as well. And we significantly gained market share, and actually more than 1% as just recently reported as well.

[Operator]

Our next question comes from Jerome Ramel from Exane BNP Paribas.

[Jerome Andre Charles Ramel, Analyst of IT hardware and Semiconductor]

Yes. One quick question concerning your 300-millimeter strategy. We saw the news from ON Semi buying the 300-millimeter fab from GlobalFoundries. We heard about STMicro building up the 300-millimeter fab. So just wanted to understand if you changed anything on your long-term strategy in power. Have you been surprised by the move from your competitors? Were you expecting to see other power semi guys moving to a our 300-millimeter fab? Does it change your market share target, let's say, in 6, 7 years?

[Reinhard Ploss]

Jerome, thank you for the question. Well we are astonished that it took so long until they took action. When you think back, we had been asked at the beginning how many years we will be ahead of competition, and we said about 3 years. Now 7 years are over. This is not astonishing us at all. On the other side, we still have a significant, I would say, lead to them. Of course, we always consider the capability of our competitors. But in some cases where you have a high integration CMOS factory, the transition to power will take time and will need quite some invest. We know from the plans of ST investing in 300 are not new. I think here, they added some flavor to the discretes. So I think we definitely can state that we are not surprised and have expected this, especially as the power device market has been very attractive over the last years. We believe that it is our strategy of various large manufacturing sites, harvesting a significant economy of scale, also comparing to the mentioned competitors, we still be ahead of the curve and be able to maintain a competitive advantage. Also, the manufacturing capabilities, which I cannot go into detail, but we often talk about this in wafers, is something where we believe to have an edge ahead of competition. That things may become more challenging when the boom is over and the competition is restarting to invest is not astonishing. Market share targets, we do not adopt to due to that. And does it affect our strategy? Not really. We always said we go for the more differentiated technologies and managing the more commodity of products accordingly. We have done this quite clearly. Just not to forget our multisource products has come from a factory, which we have divested in Britain and will continue to phaseout in the due speeds, so all of these fits well together.

[Operator]

[Operator Instructions] We will now take our next question from Adithya Metuku from BofA.

[Adithya Satyanarayana Metuku, Associate]

So firstly, a quick clarification just on your target inventory level. You talked about the target inventory level for the end of this year. Can you give us some numbers on what exactly this level is? And my question is on the eSIM growth and clearly, you're seeing strong demand here. I just wanted to better understand how big as a proportion of DSS revenues is eSIMs currently? And how should we think about growth going forward in eSIMs?

[Reinhard Ploss]

So the eSIM push, I would say demand from the market, Helmut will answer, and I will go into some more details for the inventory level. But let us be short because we still have quite some questions lined up here, and we will try to take as much as possible. Helmut, please go on.

[Helmut Gassel]

Yes. The eSIM revenue as part of DSS is in the range of the mid-single-digit percentage of DSS total revenue.

[Reinhard Ploss]

For the inventory, we expect as a rough estimate, at the end of the fiscal year with all the ifs and buts we already mentioned, that it will be around EUR 2 billion. Gross -- sorry, gross EUR 2 billion in order to be specific on this.

[Operator]

Our next question now comes from Alex Peterc from Societe Generale.

[Aleksander Peterc, Equity Analyst]

I just like to get a little bit of color or maybe some numbers on your capacity utilization rate and used capacity charges, both in the quarter and how that will evolve in the third quarter and do you expect your capacity utilization rates to therefore bottom-out in the third quarter or slide further in the fourth quarter?

[Reinhard Ploss]

Aleksander, color on capacity utilization rate, it's a pretty mixed picture. We have more higher level of underutilization in the back-end as we reacted very quickly and hold the chips on the die bank, while only run from the die bank as required from there. Then in the front-end, we will continue to have full loading in filler, while we have adopted Dresden will continue ramp in the 300-millimeter Dresden due to the technology we have transferred there. Regensburg, we have managed down to a certain degree but still have a reasonable loading there due to the ADAS product. I think the decision will be made how we run this factory on the structure. We cannot give detail number of the underutilization cost, as we decide on this as we move forward. Nevertheless, of course, we have taken the measures, which is balancing the given number in inventory versus the revenue expectation. But please understand that we cannot predict the precise utilization for the moment.

[Operator]

Our next question will come from Tammy Qiu from Berenberg.

[Tammy Qiu, Analyst]

So I only have one question, a high level. So you mentioned that there is no sign of demand is getting worse from here. Just want to know that what exactly are the signs for you to say that because it seems to be everything remains cautious and what's the chance of us seeing a deeper cycle downturn from here?

[Reinhard Ploss]

Thank you, Tammy, for your question. The question is why don't we see -- or what is the basis. Of course, we are monitoring very closely the cancellation rates we are seeing and the order entry, which we are facing. And many of the segments we have even good understanding of the end-markets like in Automotive where we can derive our revenue run rates from there. And we also look at a more detailed level of the inventories and in some areas, we still see some increase as said before, but in some areas, we also see that the inventories are coming to its peak levels and even working down. The very clear sign, as I said at the beginning, cancellations have stabilized on a level as we expected. So no indication that things may go worse on that side. From the macro, of course, we cannot figure out the current dispute between U.S. and China because we always have to, say, underline because the secondary effects of the 25%, which is now called by U.S. is something which we, of course, cannot figure in.

[Operator]

Our next question comes from Stephane Houri from ODDO.

[Stephane Houri, Research Analyst]

One question remaining on my side is about the margins of the Automotive division, which have come down. I understand that there were some price cuts, as usual, during this quarter. But given your guidance, it looks like your margin is going to go down again in the coming quarters given the low loading situation charges. Where do you see a chance for the Automotive margin to come back to a more normative level? Do you think it may happen any time next year? And what would be the driver for that?

[Reinhard Ploss]

Stephane, here, we have already communicated in the last quarter that the margins of ATV is also affected by the mix. The IGBT modules for EV, we communicated as still not on target margin level. And there, we're working through, which will take about some further quarters to be up and the products, which are more or less, let's call it, one-to-one to the current market and having better margins, more affected by the weakness in the Automotive. Therefore, we see despite the fact that Automotive is still facing good growth from structural elements that the mix has worked against us in respect to the margin. The ADAS margins are still quite okay, but the negative mixed effects have dominated. Regarding the EV, when it comes back, I already indicated to you. This, we have indicated also in the last quarters, so no big change. Of course, ATV is also affected by some underutilization effects from production.

[Operator]

Our next question will be taken from Sébastien Sztabowicz from Kepler Cheuvreux.

[Sébastien Sztabowicz, Head of Tech]

Two, please. Shall we have self-growth rate, you have recorded in Q2 in both HEVs and ADAS. And also what could we expect for the back half of the year? Are you expecting a gain of slowdown in these 2 segments?

[Reinhard Ploss]

Thank you, Sébastien. Helmut will answer this question.

[Helmut Gassel]

Yes. As I think stated earlier, EV and ADAS have been very healthy. As a matter of fact, EV in China has taken off strongly for the beginning of the year. We had 120,000 vehicles in March only, which is a steep ramp as compared to previous year. And yes, we expect that to remain healthy for the remainder of the year as there's more programs coming onboard.

[Sébastien Sztabowicz, Head of Tech]

And the growth rate of the business, what was the level in Q2?

[Helmut Gassel]

Still, as we reported earlier, in the mid-double-digit figures for growth rate going forward. IGBT is still in allocation.

[Operator]

We'll now take our next question from Harald Schnitzer, DZ Bank.

[Harald Schnitzer, Analyst]

I have a question on the Qimonda case. Could you give an update please. It seems that your originally hoped outside car solutions is no longer an issue and did you increase provision for this case? That's my question.

[Reinhard Ploss]

Yes. Mr. Schnitzer, thank you for that question. Qimonda case, basically, from our point of view, not a lot has changed. But due to the fact that the insolvency administrator is not open to, let's say, discuss on the basis of the assessment of the expert, which has been defined by the court, we have decided that it will take longer and therefore, we have, first of all, reallocated it from short- to long-term provisions. And of course, as we have legally, let's call it, defined interest rates, we have then along these longer-term considerations, which we have put in, I think it's now 2 years, which are in, we had to add the interest, which is adding there. So from our point, no change in the assessment. Only an addition in interest rate due to the longer term.

[Operator]

Ladies and gentlemen -- apologies, please go ahead, sir.

[Alexander Foltin, Head of Investor Relations]

I'm sorry, Simon. Alex here from Infineon. I would just like to conclude there with the call for our fiscal second quarter. Thanks to everybody's wonderful questions. I think it was a very comprehensive round today. Should there still be further questions, please reach out to the IR team here in Munich. Thank you very much, and have a good day, all.

[Operator]

Ladies and gentlemen, that concludes today's conference call. Thank you, everyone, for joining us today. You may now disconnect.