Infineon Technologies AG

XETRA:IFX

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, everyone, and welcome to the Conference Call for Analysts and Investors for Infineon's 2020 Fiscal Third Quarter Results. Today's call will be hosted by Alexander Foltin, Corporate Vice President, Finance, Treasury and Investor Relations of 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 that there should not be put undue reliance on them. For a detailed discussion of important factors that could cause actual results to differ materially from the statements made on this conference call, please refer to our quarterly and annual reports available on our website. At this time, I will turn the call over to Alexander Foltin. Please go ahead, sir.

[Alexander Foltin, Head of Investor Relations]

Thank you very much, and good morning, and welcome, ladies and gentlemen, to the summer edition of our earnings call. For our 2020 fiscal third quarter earnings, you have here with me present the entire management board of Infineon: Reinhard Ploss, CEO; Helmut Gassel, CMO; Jochen Hanebeck, COO; and Sven Schneider, CFO. Reinhard and Sven will provide, as usual, introductory remarks and explanations. The illustrating slide show, which is synchronized with a telephone audio signal is available at infineon.com/slides. After the introduction, we will be happy to take your questions. [Operator Instructions] A recording of this conference call, including the aforementioned slides and a copy of our 2020 fiscal third quarter earnings press release as well as our investor presentation are also available on our website at infineon.com.Now Reinhard, over to you.

[Reinhard Ploss]

Thank you, Alexander, and good morning, everyone. At Infineon, we sometimes say that one thing we are particularly good at is the task force mode. The past quarter certainly provided a fair share of opportunities to test this statement. Protecting our employees and ensuring continuity of our business operations amid COVID-19 disruptions; grappling with rapidly and significantly reducing automotive volumes; taking initial steps to integrate Cypress without the chance to travel and meet in person; and refinancing a very meaningful part of the bank debt incurred for the acquisition. We have accomplished all this successfully through a combination of dedication, teamwork and operational excellence. 3 months ago, we talked about the unprecedented impact of the pandemic on economics across the globe. We also talked about the many unknowns about the need to think in scenarios, monitor KPIs constantly and adjust assumption as we go. Many of these assumptions we took have turned out to be reasonably accurate. Demand in areas outside automotive, like data centers, communication and certain industrial application proved fairly resilient. Auto saw the expected slump, but the hit was not amplified further by a negative inventory dynamic. We kept our factories up and running except for very short interruptions due to public regulations. We achieved reasonable loading levels, which allowed us to both serve demand and keep inventory levels under control. Infineon has been able to act and react in a fast, agile and comprehensive manner to obtain its operations. Additionally, we took responsibility as part of the societies which our companies directly interacts. Since the beginning of the outbreak, Infineon has initiated or joined more than 20 initiatives to mitigate consequences of the coronavirus pandemic and support people locally, ranging from providing technical and medical equipment to donations to support digital infrastructures at hospitals. So far, we have weathered the COVID-19 storm well, and our business has clearly shown its underlying strength. Besides the impact from the coronavirus pandemic, the June quarter saw the first time inclusion of the former Cypress business in our number. Due to this, a direct comparison of figures to the previous quarter, although the same quarter 1 year earlier is not meaningful, we finished the quarter with revenues of EUR 2.174 billion, former Cypress contributed a bit under EUR 400 million to our quarterly revenue. Please observe that this figure corresponds to just 10 weeks of sales as we consolidated Cypress only from mid of April onwards and not for the full 13 weeks of the quarter. The average U.S. dollar-euro exchange rate for the quarter was 1.1 as we had anticipated. The segment result came in at EUR 220 million, equivalent to a segment result margin of 10.1%. This was at the high end of our expectations, driven by the effect of slightly higher revenues as well as continued discipline with regards to operating expenses. Overall, Infineon demonstrated a solid level of margin resilience despite the burden of some additional charges due to the COVID-19 crisis for item such as freight or extra hygiene measures. Our book-to-bill ratio stood at 0.7 for the June quarter, clear evidence of a considerable degree of uncertainty in many of our end markets. Now to our divisional business overview. Overall, the Automotive segment recorded revenues of EUR 815 million for the June quarter after EUR 846 million for the previous quarter. The former Cypress business of automotive microcontrollers as well as Memory Solutions contributed nearly 1/4 of this quarter's figure. From this, you can deduce that the Automotive business of legacy Infineon experienced a quarter-over-quarter decline of a bit above 25%, pretty much in line with global car volumes as we had predicted. The severe contraction in car markets worldwide caused by the coronavirus pandemic impacted all our product areas, with only electric drive train components seeing a slight quarterly revenue uptick. Profitability for the segment was slightly negative. The segment result of ATV was minus EUR 24 million, equivalent to a segment result margin of minus 2.9%. The former Cypress business helped to offset some of the margin pressure resulting from high levels of underutilization and additional COVID-19-related charges. The book-to-bill ratio for the June quarter was 0.2, a very visible evidence of the continuously challenging market conditions ATV had -- is operating in. Having said this, the overall situation is improving. There are visible signs of near-term recovery, like rising short-term demand from direct customers and more importantly, structural long-term trends are confirmed, partially even strengthened. Global car production has seen a trough in the June quarter. Production levels are recovering with good factory loading rates in China and other Asian countries, improving momentum in the U.S. and more measured steps in Europe. Looking at car sales, the pattern is similar. Main markets passed the lowest points in April, recovery set in first in China and Korea, where selling rates in June even surpassed pre-COVID-19 numbers. Such a level has not been reached in the U.S. yet. But demand trends there are also clearly improving with some dealerships reporting inventory bottlenecks. In Europe, May and June have seen some improvement from very depressed levels. Demand in other major car markets like Japan remains sluggish. All in all, the picture does not show a smooth and steady recovery path or rebound, but all indicators show that the worst is behind us. To put things into perspective, the July light vehicle production forecast from IHS for the second half of the 2020 calendar year still stands at a minus 10.2% year-over-year. With respect to structural growth drivers, we continue to see an undiminished content opportunity, driven by rising EV and ADAS penetration going forward. Recent automotive stimulus programs favor electro-mobility in many cases. Concurrent with these incentives at consumer level, governments are increasing their efforts to expand and upgrade the charging infrastructure which are going to support the momentum midterm. Infineon has an unmatched portfolio of silicon and silicon carbide power components to serve applications both within the vehicle as well as on the infrastructure side. This includes discretes, modules and power ICs. One example aside inverter and charger is battery management. Besides the breadth of this -- its offering, Infineon is recognized for superior automotive quality. We are proud to report that we have received the Honor Quality Award from Toyota, the first -- fourth time. Now to Industrial Power Control. The only of our segments without a direct allocation of revenue from former Cypress. IPC recorded revenues of EUR 366 million, 2% more compared to the previous quarter and also year-over-year. The segment showed the anticipated stability, thanks to its strong market position across a broad set of application areas. Crucially, this has not come at the expense of rising stock in the supply chain. On the contrary, inventories in the distribution channel are now almost 2 weeks lower than at the end of the March quarter. The segment result for the third fiscal quarter amounted to EUR 63 million with a segment result margin of 17.2%, practically the same as in the previous quarter. Book-to-bill stood at 0.7 at the end of the June quarter. The disruption caused by the coronavirus pandemic will lead to a recession in many world regions. Global GDP forecasts remain wide range, but most foresee a real decline of between 4.5% and 6%. Purchase manager indices recovered meaningful in June when the U.S. joined China in expansion territory. Developments in other regions, including Japan and Europe, are more subdued. Against this picture, we continue to expect our target application to follow different paths. For home applications, we expect a sharp but short lift deterioration. Other areas should see a less severe impact followed by a delayed recovery. Wind power is holding up well, whereas in traction, we expect some pushouts due to the lower passenger volumes. All in all, we anticipate that IPC will not see the seasonal upswing that would be typical for a September quarter. At the same time, we remain confident in the structural growth perspective encouraged by several important design wins in building automation, energy transmission, solar and home appliances. This includes continued uptake of our silicon carbide products. The strong value proposition of the material in terms of switching frequency, operating temperature, efficiency and weight reduction on system-level is becoming apparent in more and more applications. The recent example is an air compressor for fuel cells with usage target for trains and trucks. Turning to Power & Sensor Systems. The segment recorded revenues of EUR 681 million, less than 1/10 of which was contributed by the former Cypress business of USB Connectivity Solution. During the quarter, we faced some supply limitations due to the COVID-19 situation, specifically for DC-DC components. The segment result of PSS came in at EUR 143 million, equivalent to a very robust segment result margin of 21%. PSS is serving markets that benefit from digitalization, such as computing and communication. Stay-at-home orders provide a boost to lockdown technologies like remote working, online education, streaming e-commerce and others. Consequently, we see healthy demand for both AC-DC power supplies and DC-DC power stages for server as customers upgrade their data center and cloud IT spend is accelerating, the latter one especially in the area of high-performance machine-learning platforms. Another positive with the increasing speed with which 5G networks are getting ramped, partially supported by government stimulus programs. Opportunity for us arise both from network infrastructure components like power supply for base station as well as from new fields like edge computing. Not all application areas of PSS are showing such a high degree of resilience. Lighting and automotive are strongly negatively affected by the present. For smartphone and other consumer application, household budget uncertainties are depressing demand. Our MEMS microphone, however, continue to enjoy high takeup rates. So there are puts and takes, but all in all, we expect the positive momentum for PSS to continue in the near term, supported by a book-to-bill ratio of almost 1.2. Over the mid to long term, we continue to see several attractive growth opportunities, among others, in areas like battery-powered tools, EV charging or smart speakers. Increasingly, we will serve adjacent and new applications with system solutions. One such example is wireless charging. Together with the design partner, and based on strong cross-divisional collaboration, we are able to offer complete turnkey solution for the wireless charging of notebooks and smartphone. The reference design includes various hardware components such as MOSFETs driver, controller ICs, wireless and wired connectivity from former Cypress together with our OPTIGA Trust chip and additionally comprises software and design in support to enable fast time to market for customers. With efficiency rates of up to 95%, we can provide performance comparable to classical cord-based charging at much higher convenience. Now to Digital Security Solution. Our hitherto smallest segment is seeing the biggest relative impact from the Cypress integration. General-purpose microcontrollers and wireless connectivity have been put under one roof with security products. The aim is to further drive our product to systems approach and to successfully address high-growth markets influenced by the Internet of Things. To make it visible what the segment stands for, we are renaming it to Connected Secure Systems, or CSS for short. In this June quarter, the segment recorded revenues of EUR 307 million, with basically 1/2 coming from each of legacy Infineon and former Cypress. The segment result amounted to EUR 37 million. This corresponds then to a segment result margin of 12%, reflecting some underutilization and other COVID-19-related additional charges. The book-to-bill ratio stood at 0.8. The coronavirus pandemic is affecting our target markets in different ways. In the area of payments, there's an accelerated adoption of contact-less solution, driven by hygiene concerns. In contrast to this, international travel restriction weigh on the issuance of border control document like passports. Generally speaking, we witness a strongly increasing proliferation of connected devices both on the automotive and the industrial as well as on the consumer side. Our connectivity solution are seeing good design win traction across several application and leading OEMs. Among others, our Bluetooth and Bluetooth low energy chipset have been selected for the remote control of the next-generation of a leading TV streaming system. In WiFi, we have been chosen for a platform of connected home appliances. Also, we have won the socket for the next-generation of a recognized smartwatch family with one of our WiFi and Bluetooth combo chipset. Omnipresent connectivity drive the need for advanced security. For easy deployment of cellular IoT devices, Infineon has launched the OPTIGA connected -- embedded SIM solution, which offers pre-integrated network coverage in more than 200 countries and allow us to capture and manage IoT data seamlessly, reliably and securely. Before handing over to Sven, let me say a couple of things on the business integration of Cypress. We are one company since a bit more than 3 months now, and it's very encouraging to witness the eagerness of the various team to bring out the best of the combination. While preserving of the existing business has been the key priority, the opportunities created by digitalization have helped our people to start collaborating remotely, discuss and align development road maps, share product and application know-how, learn best go-to-market practices from each other. As a result, we are seeing early results of success in the marketplace from customer access and cross-selling. The Tier 1 automotive customer of former Infineon has decided on a NOR flash memory from former Cypress. Cypress PSoC 6 microcontroller has been introduced for factory automation applications. A maker of residential air-cons approached us in order to establish a second source for a set of microcontroller and power components from both legacy companies. Cases like these bode well for the reaping of revenue synergies. Also on the cost side, first reduction are materializing, group governance has been harmonized and public entity fees saved, top management has been streamlined, first synergies from aligning external services and harmonizing terms and condition become apparent. We will continue to follow a stringent integration script and a diligent and systematic approach with respect to synergy tracking, even in the current difficult circumstances. Now over to Sven, who will comment on our key financial figures and especially focused on the Cypress refinancing.

[Sven Schneider, CFO & Member of Management Board]

Thank you, Reinhard, and good morning, everyone. Normally, I would start the finance section with P&L related remarks. Today, I will first focus on the balance sheet, specifically the impact of the purchase price allocation and the refinancing of the Cypress acquisition. The finance teams have worked very hard over the last couple of months, among other things, on converting former Cypress figures from U.S. GAAP to IFRS and on coming up with a preliminary purchase price allocation, or PPA. Let me elaborate on some key points of the PPA, reminding you the changes to it might occur over the coming months. The point of departure is the total purchase consideration under IFRS, which amounts to USD 9 billion, including gains from currency hedging instruments. This amount is different from the enterprise value as it does not include the net debt of the target. Based on the purchase consideration, we identified fair value step-ups totaling USD 3.8 billion gross of deferred taxes. This is the amount which will be added to Cypress net tangible and intangible assets to bring them on to our consolidated balance sheet. The deferred tax liability on this comes to USD 0.8 billion. As a consequence, the resulting goodwill from the acquisition equals around USD 5.9 billion or EUR 5.5 billion. The goodwill will be allocated to our divisions as a function of revenues and synergies pertaining to them. Therefore, Automotive and CSS will see the lion's share. Future impairment testing will also occur at divisional level. With respect to refinancing the acquisition of Cypress, we can look back on to 2 very successful transactions in the past quarter. First, we completed the equity portion by raising EUR 1 billion via an accelerated book building at the end of May. We placed 55 million shares at a price of EUR 19.30, more than 90% above the low point of our share price seen in March. Taken together with the 2 equity steps we did in 2019, the total rating relevant equity we raised for refinancing the acquisition comes to EUR 3.1 billion. With this, we went slightly above our stated target to ultimately finance approximately 30% of the total transaction with equity. We solidified our balance sheet in times of heightened macro uncertainties and provided some extra support to our investment-grade rating. At the same time, given that one of the equity pieces is the nondilutive hybrid, we addressed shareholder interests. After the completion of equity, we right away turned to the debt side of the refinancing, established a so-called EMTN program, basically, a shelf prospectus, allowing us to flexibly tap into fixed income markets. And this is what we did in mid-June when we very successfully priced the bond issuance, raising EUR 2.9 billion across 4 different maturities, ranging from 3 to 12 years with coupons from 0.75% to 2%. In this way, we established a full interest curve for Infineon in the public bond market and considerably improved our maturity profile. With the proceeds from both transactions, the equity raise and the bond issuance, we could fully repay the entire remaining bridge facility of the original acquisition financing within just 2 months after closing. What is left now are the 3 term loans of USD 1.1 billion each, with maturities from 2022 to 2024. We, once more, walk the talk with respect to quick and decisive refinancing. In this way, we were able to benefit from the positive momentum in the financial markets. Both issuances were significantly oversubscribed, a clear evidence of the trust investors put into Infineon's attractive business potentials. Using illustrative figures for last 12 months EBITDA for the combined company, our net leverage is currently close to 2.2x. This is based on net debt of EUR 4.3 billion. When looking at gross debt to EBITDA, the ratio comes out at 3.6x. Here we are excluding about EUR 400 million of preexisting Cypress convertibles that are still outstanding and where the noteholders can determine the timing of conversion, potentially all the way until maturity in January 2022. These obligations are fully funded. You know that our stated target is for the gross debt-to-EBITDA ratio not to exceed 2x, and we have a clear goal to bring leverage back below that threshold over the midterm. Meanwhile, we are in full compliance with our second capital structure target, which addresses our liquidity position. Reported gross cash stands at EUR 3.5 billion, including the aforementioned around EUR 400 million earmarked for the redemption of Cypress convertible debt. This figure is materially above our minimum target level of EUR 1 billion plus 10% of revenues. Let's come back to business performance in the very demanding June quarter again. Our gross profit was EUR 587 million, corresponding to a gross margin of 27%, down from 34.5% in the previous quarter. Excluding nonsegment result effects, the adjusted gross margin stood at 35.9%. Once again, our available manufacturing capacities were not fully utilized, be it from intentionally lower loading due to lack of demand, be it from restrictions imposed by COVID-19-related safety and lockdown measures. This led to idle costs of around EUR 180 million for the quarter, bringing the total underutilization charges for the first 9 months of the fiscal year to around EUR 420 million. Research and development expenses amounted to EUR 321 million; selling, general and administrative expenses to EUR 316 million, in each case, reflecting the consolidation of Cypress for almost the full quarter. R&D expenses included EUR 8 million, SG&A expenses included EUR 79 million of nonsegment result charges. The net other operating expenses were minus EUR 43 million, containing expenses related to the acquisition of Cypress. The nonsegment result for the quarter standing at minus EUR 313 million is significantly impacted by effects from the acquisition of Cypress, in particular from the purchase price allocation. As part of the PPA, acquired inventories were stepped up to fair market values. The effect of such step-ups for those inventories that were sold during the quarter contributed about EUR 170 million to the negative nonsegment result. Amortization and depreciation on fair value step-ups, on tangible and intangible assets amounted to EUR 52 million for the June quarter, and further transaction-related expenses within the nonsegment result were EUR 32 million. Our investments into property, plant and equipment, intangible assets and capitalized development costs in the third quarter of the 2020 fiscal year were EUR 266 million. This compares to EUR 247 million in the prior quarter, the last one without Cypress. Depreciation and amortization, including nonsegment result effects, amounted to EUR 381 million, included therein, again, are the EUR 52 million previously mentioned related to the amortization of fair value step-ups from the Cypress PPA as well as EUR 78 million of running depreciation at Cypress legacy.The financial result for the June quarter was a negative EUR 79 million after a negative EUR 27 million in the March quarter. The increase is mainly due to a rise in interest expenses. On the one hand, the financing of the Cypress acquisition commenced. On the other hand, we started to consolidate Cypress pre-existing debt. Furthermore, and as you may recall, we had put in place interest rate hedges to lock in rates for Cypress-related refinancings. Several of these hedges have been unwound in the June quarter, their negative market values leading to cash payouts. For income statement purposes, the economic effect of these hedges will, to a large extent, be spread across the different tenors of the aforementioned Eurobond issuance. A further EUR 15 million of charges is burdening the financial result of our third fiscal quarter. We often get the question how to model interest expenses for Infineon going forward. For cash interest taking an average rate of 2% to 2.5% on our gross debt is a reasonable assumption. For P&L interest, please bear in mind that this contains also interest on pension and tax obligations and is, therefore, much harder to forecast. Another question that sometimes comes up is about the currency sensitivity post the Cypress acquisition. We estimate that for the combined company a $0.01 movement in the Euro-U.S. dollar exchange rate will lead to a change in quarterly revenue of approximately EUR 13 million with a segment result impact of around EUR 4 million.Now to taxes. Income tax expense is another item significantly affected by the first-time consolidation of Cypress. We recorded a gain of EUR 44 million caused by the release of deferred tax liabilities. In the second quarter, income tax expense had amounted to EUR 21 million. The effective tax rate in the June quarter adjusted for PPA effect was 6%. For the whole 2020 fiscal year, we expect an effective tax rate of around 15%. The cash tax rate should be somewhat lower in each case adjusted for PPA effects.Before coming to our free cash flow, allow me to spend a minute on inventories. As you can see in our balance sheet, our own inventories rose by about EUR 480 million quarter-over-quarter. Of this increase, about EUR 410 million are due to the first-time consolidation of Cypress. In other words, in a quarter where several end markets experienced strong and sudden declines, we applied a very tight inventory management. The commonly applied market definition of inventory reach, days of inventory or DIO, does not adequately capture this as it's a backward-looking indicator taking the significantly lower Q3 cost of goods sold as the base. In the distribution channel, inventories were most stable quarter-over-quarter in absolute terms. Automotive was an exception. Here, we saw channel inventories rising, driven by concerns around the stability of supply chains. However, looking at currently improving momentum, we remain confident that stock levels are manageable. Now to our reported free cash flow from continuing operations, which was minus EUR 7.1 billion, containing the purchase consideration for Cypress. Adjusting for it and related cash outs as well as cash acquired, the figure goes to plus EUR 439 million, showing that organic cash generation is quite resilient. Our reported after-tax return on capital employed, or RoCE, fell to minus 1.8% in the June quarter, excluding bookings related to the acquisition of Cypress and international rectifier, in particular goodwill, fair value step-ups and amortization as well as deferred tax effects, the adjusted RoCE stood at around 14%. I will now pass back to Reinhard again, who will comment on our outlook.

[Reinhard Ploss]

Thank you, Sven. For global economies and societies, the coronavirus pandemic presents a crisis of hitherto unseen proportions. We now have a full quarter of COVID-19 behind us, where supply chain disruption were met with demand shocks. Governments were applying a mix of lockdown measures and a comonomer stimuli to prevent the worst. And indeed, after a sharp falloff in March and early April, macro data points improved steadily over the course of the June quarter, including a rebound in global PMI levels and better than feared out to sales. Overall, supply chains, including our own proved value resilient and logistic challenges could mostly be met. An economic indicator suggests that we are currently seeing the bottom in key end markets, including Automotive. However, the pace of recovery will sharply diverge depending on geography and application. While visibility has got better, it remains to be seen what portion of sales improvement is driven by pent-up demand and how much is due to sustainable growth momentum. And clearly, there are risks and the most prominent of which are a global second wave on infection and a further escalation of U.S.-China trade tension in the U.S. election year. Looking through the crisis, it is encouraging that public spending and policy in all major region is targeted at mid- and long-term structural changes, such as clean energy generation, emission-free mobility or digitalization. The EU Green Deal is a case in point. Against this background, I would describe our sentiment to be at the optimistic side of caution. We will remain vigilant, check data points regularly to see if our scenario assumptions still hold and keep our organization agile and flexible. Regarding our manufacturing operations, while we are still underloading in some of our factories, we will gradually phase out short-term work schemes at other sites. In this way, we are balancing supply availability to our customers, underutilization charges and inventory levels. Now to our outlook for the fourth, final quarter of our 2020 fiscal year. We anticipate revenues of between EUR 2.3 billion and EUR 2.6 billion based on an assumed U.S. dollar exchange rate of $1.15 to the euro. Part of the sequential revenue increase will be driven by consolidating Cypress for the first time for a full 3-month period. Apart from this, we expect a meaningful improvement for our Automotive segment from its low in the June quarter. For Power & Sensor Systems as well as for Connected Secure Systems, we anticipate more measured revenue increases. And for Industrial Power Control, we expect a flat revenue development. At the midpoint of the guided revenue range for the segment result margin is expected to come in around 14%. Underutilization charges, included in this figure, are estimated to be around EUR 115 million, a slight reduction compared to the previous quarter, given the higher revenue levels. Another factor contributing to the sequential margin improvement will be the effect of some early synergies from the first phase of the Cypress integration. Based on the outlook for the fourth quarter and taking its midpoint, figures for the full 2020 fiscal year would look like as follows. On revenue about EUR 8.5 billion, we expect a segment result margin of around 13%. Achieving this solid profitability level in an unprecedented crisis clearly shows the resilience of Infineon's business. Through acting quickly and decisively, we regard -- with regard to business continuity and cost saving, we have been able to safeguard our margin. Certainly, we are not at our aspired level. And certainly, some of the cost-saving measures are temporary in nature. But with underutilization charges for the full year foreseeable amounting to close to EUR 600 million, of which up to EUR 415 million can be seen as cyclical. And with having the integration of Cypress in our hand, we are confident about our ability to grow profitable in improving market conditions. In order to do so, we will continue to invest into our structural growth opportunities. For the 2020 fiscal year, we will trim investments in property, plant and equipment, tangible assets and capitalized development cost to a level of around EUR 1.2 billion, including Cypress. Compared to our asset at the beginning of May, we have again taken this figure down slightly. Depreciation and amortization are now expected to be in the region of EUR 1.3 billion, including amortization resulting from the purchase price allocation for Cypress, as discussed by Sven. Our reported free cash flow will, of course, be negatively affected by the acquisition of Cypress and related transaction cost. Excluding these effects, we estimate the yearly figure to be above EUR 600 million. Ladies and gentlemen, let me summarize the key points. The last couple of months saw significant market disruption caused by the coronavirus pandemic. In these very challenging conditions, we successfully adopted a task force mode, not only delivering resilient result but also starting to integrate Cypress and executing 2 major refinancing transactions in the capital markets. In the third quarter of our 2020 fiscal year, our revenues with Cypress were just under EUR 2.2 billion, in all likelihood marking the trough. The segment result margin of 10% shows the robustness of our business even in dire times. Based on our ability to quickly adapt to changing conditions, we are keeping our operations running and continue to serve our customers. Cost containment measures offset some of the impact from underutilization charges. The first steps of integrating Cypress are very promising with respect to achieving strategic benefits as well as the ambitious synergies. Market conditions remain fluid but have become directionally positive. Some data points such as scope for upside and particularly for Automotive. Needless to say, risks remain, and the crisis is not over. For the currently running last quarter of our 2020 fiscal year, we expect a positive momentum for most of our business, in some cases from depressed level. Our organic free cash flow should come in above EUR 600 million. Our key growth drivers like electro-mobility, renewable energy, digitalization and IoT stay intact with government and society responses to the COVID-19 crisis even strengthening them. Therefore, we are very confident that our business is future-proof, especially together with Cypress. Ladies and gentlemen, this concludes our introductory remarks, and we are very happy to take your questions.

[Operator]

[Operator Instructions] And we will take our first question from Sandeep Deshpande from JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

I have 2 short questions, if I may. You talked about your book-to-bill in Autos being very low in the quarter, but the guidance into the next quarter is pretty strong overall for Infineon. So maybe you can give us an understanding of whether the orders are coming in June, July that you are fulfilling in autos into the second quarter? And then maybe you can give us an understanding of how your gross margin and utilization is trending into the fourth quarter on the back of your revenue guidance?

[Reinhard Ploss]

Sandeep, thank you for your question. The first one for the book-to-bill of Auto, Helmut will answer and the gross margin will be taken by Sven.

[Helmut Gassel]

Yes. Helmut Gassel here. First, yes, in the second quarter, book-to-bill for Automotive was very low. As we said in April, it was rather extreme, I'd say. We did see a lot of push outs, which -- but also cancellations, which both lowered the book-to-bill ratio. Meanwhile, the worst is over. As Reinhard mentioned before, we do see solid orderings and no further pushouts or cancellations, especially from our direct customers at this point. So yes, we're coming back.

[Sandeep Sudhir Deshpande, Research Analyst]

So is the book-to-bill above 1 now?

[Helmut Gassel]

Sandeep, can you please repeat your second follow-up question to that? We didn't get it.

[Sandeep Sudhir Deshpande, Research Analyst]

Is the book-to-bill in Auto is above 1 now or close to 1 now?

[Helmut Gassel]

It is actually still below 1, but I think it's coming back now.

[Reinhard Ploss]

So Sandeep, maybe some elements here. We have a significant amount of order on hands which had not been canceled by the Automotive customers, which results as a net effect being with -- together with a low book-to-bill making our guidance possible. And with this, I hand over to Sven regarding the gross margin.

[Sven Schneider, CFO & Member of Management Board]

Yes, Sandeep, thanks for the question. So if I answer the question on gross profit margin, and I'm looking at the comparable gross profit margin. So excluding the special effect, so I would consider the margin at around the same level as in Q3 for Q4 going on.

[Operator]

We will now take our next question from David Mulholland from UBS.

[David Terence Mulholland, Director and Equity Research Analyst]

Just following on from the last question, just -- I'm not sure I caught the direct response to it. But in terms of your loading and utilization rates, where do you plan for things to be in fiscal Q4 and I know visibility is still limited, but in terms of your kind of plan today, how do you expect that to trend into fiscal year 2021? And then in terms of the follow-up, I just wondered if you could give us a quick update on how you see things in terms of your traction for silicon carbide? There was obviously a lot of trade shows in the quarter. Obviously, virtual, but I wondered if you could comment on how you feel about your design momentum? And whether there's any update on the kind of awarded revenue that you have so far?

[Reinhard Ploss]

Okay. Thank you, David. Jochen will take the loading and Helmut and I will comment on silicon carbide.

[Jochen Hanebeck, COO & Member of Management Board]

Yes. This is Jochen, David. So utilization was in the last quarter, about 70%, both in back end and front end. We established the short-term work in 4 sites in the middle of Europe, basically. Now we are phasing out the short-term work in Dresden and Phila, and I expect loading to increase gradually. We still incur significant underutilization charges this quarter but will gradually increase in terms of utilization going forward.

[Reinhard Ploss]

Regarding silicon carbide, we made a significant -- was there a question?

[David Terence Mulholland, Director and Equity Research Analyst]

I was just wondering just on how you see that utilization trending into fiscal '21, as in how quickly can we get back to more normal loading levels?

[Jochen Hanebeck, COO & Member of Management Board]

Yes, growing incrementally. I think there will be some underutilization charges for sure still in Q1. And the rest, we will then give more guidance in the November time frame.

[Reinhard Ploss]

Thank you, Jochen. Regarding silicon carbide, first of all, we had made huge progress in developing and progressing with our portfolio. Infineon typically starts development from the safe side. So we do not experiment cost quality when we go to market. And this is absolutely true for all the segments which we are addressing, ranging from Industrial to Automotive. Here, we have a broad set of technologies, and the specification which is Infineon putting to its silicon carbide devices has been adopted by several competitors showing that Infineon is here on the right path in order to provide the due quality. We have been extremely successful in many Industrial areas but also making inroads into the Automotive. We already had reported 2 successes there. Maybe Helmut can complement on this part.

[Helmut Gassel]

Yes, Reinhard. Of course, silicon carbon, as we had mentioned earlier, was very much growing in the photovoltaic area. Photovoltaic has also taken a hit this year from COVID-19. We do see, however, a quick -- or a much quicker recovery in photovoltaic as we expected for Automotive. So that is supporting our growth into -- in silicon carbide, which we do see, continue to see for the current year as compared to last year and do see even accelerating growth then once the pandemic is hopefully fully overcome. In Automotive, yes, we have created design win. So far, they haven't really ramped into production yet, but they will be ramping as of next year in Silicon Carbide in Automotive.

[Operator]

We will now take our next question from Matt Ramsay from Cowen and Company.

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

I wanted to ask the first question on the automotive market. I know with all the moving parts with COVID-19, it's a bit challenging to have you guys forecast the whole auto market. But if you look into 2021 in the electric vehicle segments, particularly in China and Europe, if you have any forecast for us just on visibility of your design wins and what they may mean for planned auto production in those 2 markets for EVs, that would be really helpful. And then as my follow-up, I've been following a lot the market for power supply for server and AI. You mentioned AI accelerators as well in the prepared remarks in PSS. I wanted to check and see the growth rates there, maybe anything you could do to help size that business would be really helpful.

[Reinhard Ploss]

Matt. So again, we will share the answer. The automotive market for 2021 is very difficult to predict. We do not believe in a V-shaped recovery. We expect a much slower recovery rate there despite the fact that Korea and China has already recovered quite significantly, but other countries on that world will, I would say, stay behind, also considering that the potential capability of the people to purchase cars will be limited on this side. Regarding the effects on the electric -- or say, a hybrid and full electric car, first of all, we expect that the majority of the cars designed today will ramp on silicon-based technology means IGBT, where we have a very solid design win position while silicon carbide is still significantly out there, and we believe that it will continue to be in parallel. What the China incentive schemes will be is very difficult to predict and the effects we cannot -- we can definitely not state, and you have seen some movements which have not completely been expected in China, what we definitely see is a very strong momentum in Europe and a continuation there. So we believe that the EV-related growth rates will be significant. But we also expect that there are limitation in the overall car production field and not -- I would say, we will not see the full potential in the near term until these capacities have ramped up just 1 number. The European xEV market share ramped up from 3% to 7%, with the expectation that this will continue as most of the incentives will stay for a longer time. Now Helmut, power supply, what is -- can you please comment on power supplies?

[Helmut Gassel]

Yes, the power supply demand, Reinhard mentioned the term lockdown technology. So a lot of I'd say investments have taken place in the power supplies for digitalization and data efforts, big data and communication efforts. That is on the AC-DC side, driving our demand as well as it is on the DC-DC. On AC-DC, we also see a strong interest in silicon carbide technologies as it's a potential new measure to reduce power consumption and increase energy efficiency. So there, demand might peak somewhere around this calendar year, but we rather see a continued stable investment to big data.

[Reinhard Ploss]

Yes. And maybe an add-on to this, the 5G and last communication equipment, or the newest communication equipment, requires a significant higher amount of power semiconductors. And here, we expect to see trends like cloud at the edge and others, which will further fuel the demand for, I would say, higher, medium but also lower power supply, especially for the communication market, I would say, it's all high-performance device where Infineon is well positioned.

[Operator]

Okay. We will now take our next question from Achal Sultania from Crédit Suisse.

[Achal Sultania, Director]

First, on the free cash flow side, obviously, you had a very strong free cash flow in this quarter. If I look at year-to-date, you probably already have done more than EUR 450 million of free cash flow, a lot of that came this quarter. So just wondering like what are the puts and takes when you guide for free cash flow of over EUR 600 million for the full year? It would imply a big decline sequentially going into September quarter. So just wondering if you can explain the puts and takes if something different is happening with working capital? And then secondly, on the power side, when you talk about these projects which are running at a high level in servers and AI, can you help us understand if these are all related to silicon only or -- and how do you see the advent of gallium nitride as a technology in some of these markets? And how are you positioned if power -- base stations for power supply is actually going to gallium nitride segment?

[Reinhard Ploss]

Yes. So thank you, Achal, for the question. So Sven will take care for the money. I take care of -- for the technology.

[Sven Schneider, CFO & Member of Management Board]

Yes. So on the free cash flow, I think you spotted that very well. So the quarter 3 -- the fiscal quarter 3 was a pretty resilient quarter in terms of free cash flow generation. There were a couple of elements included. We pushed out investments. As we said in the intro, there was a huge discipline on expenses. Of course, you can't travel, as you know. But there was also a pretty positive trade working capital effect in the quarter 3. Now looking at quarter 1, 2 and 3 together, the total stands now at, give or take, EUR 400 million. So now you're saying from EUR 400 million to above EUR 600 million, that's only EUR 200 million. I mean we have said more than EUR 600 million, firstly. And secondly, please do not forecast the same positive working capital effect into the next quarter.

[Reinhard Ploss]

Now the -- it's interesting the question you have regarding the power supplies. So let's start with AC-DC. The expectation has been that gallium nitride will be the choice for high-performance, high-power power supplies there. What we see currently as a trend that silicon carbide is much stronger taking over there parallel to silicon. So silicon is here, by far, dominating, but we are taking a very good path with silicon carbide discretes into this area, reason is it is much easier to deploy for our customers. Gallium nitride is more strong in the area of the adopters up to 100 watts, which are going in the direction of USB-C based interfaces. And here also as a premium a gadget or device for being paid extra by customer and not being in-the-box most likely. Gallium nitride will make its way into the medium voltage range, especially where the extremely high switching frequency of gallium nitride will provided its advantage. The power supplies don't go for such very high switching frequency as passives are still lagging. Nevertheless, for servers and all the rest power supplies in the DC-DC area, it is the silicon the far dominating workhorse, and we still see 2 or 3 generations of silicon-based MOSFETs which are underdeveloping in order to drive the performance. And here, we also do not only see this moving forward, we also see that system solution, including the drivers and the controller, will make its way where we have an excellent position. So I think here, when you ask me, silicon -- dominating silicon carbide moving into gallium nitrate more on the tiptoe.

[Operator]

We will now take our next question from Jerome Ramel from Exane BNP Paribas.

[Jerome Ramel, Analyst of IT hardware and Semiconductor]

Coming back to the Automotive business, could you give us a little bit color on the different dynamics between ADAS, EV, microcontroller and the legacy business? And the follow-up is on gallium nitride, how you see gallium nitride for power in Automotive?

[Reinhard Ploss]

So Jerome, thank you. And the gallium nitride in automotive, we see reasonably limited application. Typically, it has its place in the onboard chargers, where in parallel, you also see silicon and silicon carbide, maybe some areas for DC-DC converters within the automotive range, but extremely limited. I think here, many developers have to go on in order to bring this into the range of cost performance where it's needed for the automotive segment. Helmut, please some comments on the market development.

[Helmut Gassel]

Yes, generally, of course, all growth figures have been impacted by the reduction of light vehicle production sales. However, xEV cars have been more resilient than ICE cars so far. So in term of Combustion Engine Cars. And China and U.S. are expected to be weaker, let's say, on xEV with a rather flattish percentage share of around 4% of electric cars in China, whereas Europe, as Reinhard already mentioned, has picked up significantly, and we expect it to continue to pick up into '21 as the regulation kicks in next year in Europe. On the ADAS side, Level 2 penetration is expected to continue to grow, and it has already -- or continued to grow. Anything beyond that is still, I'd say, at the verge to show. So Level 3 and Level 3 plus are certainly not in the short range, visible. We have continued to, let's say, exploit our very strong position on the radar ICs as well as in the microcontroller area in this case.

[Operator]

We will now take our next question from Adithya Metuku from Bank of America.

[Adithya Satyanarayana Metuku, Associate]

Yes. I had 2 questions, if I may. Firstly, just on the book-to-bill in the PMM or the PSS business. I just wondered if -- how do you see the risk of overbookings given how strong the book-to-bill was? And also, was there any effect from Cypress consolidation on this book-to-bill ratio? And secondly, just on the full year guidance of EUR 2.3 billion to EUR 2.6 billion -- sorry, for the September quarter, now obviously, book-to-bill is very low. So I just wondered, how did you price in the revenues from bookings in the September quarter? And how does this compare to how you would normally price in revenues from bookings? Any thoughts around that would be helpful.

[Reinhard Ploss]

So yes, let's go through. The effect from Cypress within PSS is pretty small, as it is a smaller part, the wired business, which goes there despite the fact that it has a big growth potential currently not yet major effect. The book-to-bill, Helmut, for PSS?

[Helmut Gassel]

Yes, the book-to-bill has been pretty strong, partially by a very hot market. Yet also, I think underlying growth -- structural growth driver, as mentioned already in the big data and communication part. So 5G also nicely picking up, as Reinhard mentioned before. So we don't see it to be in a, let's say, very allocated mode as lead times are still within reason and inventory levels are reasonable as well. So I expect that to continue our growth -- to drive our growth as we also predict for the current quarter.

[Reinhard Ploss]

And Sven, the guidance -- full year guidance, please?

[Sven Schneider, CFO & Member of Management Board]

Yes. I think it's important to always say, Adi, it's a combination. If you compare the revenue of quarter 4 to quarter 3. It's a combination of the effects just mentioned by Reinhard and Helmut, a recovery in automotive which is baked in plus this technical impact of the stop period where we now have a full quarter of Cypress revenues compared to 10 out of 13 weeks. This adds up to the EUR 2.3 billion to EUR 2.6 billion. Of course, currency wise, I have to admit, it's a bit difficult these times. We were at 1.10 for a long time, 1.12, 1.15, now 1.17. We didn't go further. So we left it at 1.15. And as I said in my introductory remarks, $0.01 now is EUR 13. On a quarterly revenue base. So there's also some kind of volatility included.

[Adithya Satyanarayana Metuku, Associate]

Understood. Just a quick clarification. Just my question on the last book-to-bill this has to do with whether you've assumed that bookings will recover from the very low levels you've seen when you applied it for the September quarter or whether you've assumed that they'll remain at the levels you -- at relatively depressed levels.

[Sven Schneider, CFO & Member of Management Board]

Yes. I think we've strongly started. I think the question earlier, also on Automotive, we have strongly started into this quarter, and we definitely expect the book-to-bill in Automotive to be much higher than last quarter, potentially even above 1 for this quarter.

[Operator]

We will now take our next question from Janardan Menon from Liberum.

[Janardan Nedyam Menon, Technology Analyst]

My first question is on the cost synergies at Cypress. You had said that your margin improvement in the fiscal Q4 includes some cost reduction on the Cypress side. Would you be able to quantify how much that is coming through? And of your total EUR 180 million that you expect to achieve by the end of 2022. Having now actually finished the acquisition, what are your thoughts on the linearity of that? How much of that is likely to come through in 2021? And what will be the final portion in '22? Is there also any scope for potentially to do more than that now that you actually know what you're dealing with? And then if you could -- as a follow-up, if you could just give us an update on how your design win momentum is going on the MEMS microphone business? You already have quite strong design wins on the earpod side. But at 1 customer would be on that, any new design wins, which we can expect to ramp over the next 12 months or so?

[Reinhard Ploss]

Yes, Janardan, thank you for your question. Sven, can you comment on the cost synergies, please?

[Sven Schneider, CFO & Member of Management Board]

Yes, of course, Janardan. So on the cost synergies, as we said previously, there is no change, EUR 180 million should be the run rate now. We say it's 3 years after the transaction has been closed. I would say, in all fairness, in the first weeks and months given the COVID restrictions, certain things are ramping up a bit slower than originally anticipated, but we are still confirming the, I would say, quite linear ramp of 1/3, 1/3, 1/3 in the given years. And so if you ask me now, there is a very low double-digit amount of synergies which is already booked in Q3 coming from, first, management changes coming from external costs from a formerly independent entity, which are no longer necessary. So this is all coming according to our plans. And there are a couple of back-loaded and front-loaded activities, a typical cost synergy which is more backloaded. For example, the IT integration, which will only happen 2 -- in year 2 or year 3. And last question you asked, can we do more? I mean please recall that's a scope transaction, not a scale transaction. We consider the EUR 180 million to be the right number and a challenging number for the 2 organizations going forward.

[Reinhard Ploss]

And Janardan, regarding the microphones, I think what we see here definitely is the broadening of the application more than the design win in specific phones. The -- all these, I would say, earplugs, earphones, headphones, all of these require high-performance microphones in order to, let's say, deliver a good communications quality. This is the biggest growth momentum and a growth momentum which we still see to continue quite significant. We are also seeing good potential to further broaden our base in the mobile area. We have not specific areas where we have a pretty large design which -- where we can talk about.

[Janardan Nedyam Menon, Technology Analyst]

And will you be close to the EUR 300 million level in that business in this fiscal year?

[Reinhard Ploss]

Yes. That should be around that number.

[Alexander Foltin, Head of Investor Relations]

We now have time for 2 more questions, please.

[Operator]

Perfect, sir. We will now take our next question from Andrew Gardiner from Barclays.

[Andrew Michael Gardiner, Director]

If I could just try the automotive one in another -- from another angle, your book-to-bill over the last few years has been sort of a bit more misleading of -- well, not misleading perhaps longer term in nature, given xEV and ADAS contract. But just in terms of the near-term business that you have for the current quarter, if I look at the guidance, let's say, about EUR 1 billion worth of revenue. Can you give us a sense as to how much of that you now have confirmed deliveries for and how much requires sort of turns business in the quarter?

[Reinhard Ploss]

So again, the book-to-bill situation, Automotive, I think we have talked about this. It has been in the last quarter pretty slow, but it recovered in this quarter. And as I said before, we have a significant order on hand. Maybe Helmut can go more into depth regarding this.

[Helmut Gassel]

Yes, there usually isn't much of a turns business per se. However, this managed inventory on our end, which the customers can pull short-term on. So you can never take the number that you have on hand into the bank immediately, but we do have, from our past experience a, let's say, high confidence that there will be there the predicted growth in this quarter.

[Operator]

We will now take our last question from Johannes Schaller from Deutsche Bank.

[Johannes Schaller, Research Analyst]

Just 2, mostly related to Cypress, really. You talked a little bit about the kind of cross-selling potential more on a product level, but I think there are some distributors, particularly in Japan at Cypress that Infineon hasn't really sold into and then there are also some distributors on an Infineon level that Cypress hasn't really used in the past. Can you give us a bit of an update kind of how that is progressing? If you're serving all respective distributors already or is this work-in-progress? And then secondly, just on the microcontroller market, more broadly, I think if we look at the Q2 data points from some of your peers, there seems to be a huge divergence. Maybe you can comment a little bit on kind of what your microcontroller business did in this quarter on a comparable basis? And then how you think you're performing relative to the market?

[Reinhard Ploss]

[Foreign Language] Many thanks for the question. So first of all, Cypress in Japan, the situation of Cypress in Japan is that having acquired the business from further to has been broader in Industrial and Automotive. While the portfolio in Industrial for us had been not so strong and has been kind of revamped in the last years, the major focus of the Japan organization is around cars and is doing quite well here. In general, Infineon is having a very strong footprint. Having improved on all this portfolio, we will, of course, refocus on the market of Industrial and Consumer Applications in Japan. But as typical, this takes time in Japan. For the numbers in the MCU market, here, we have to differentiate between Automotive, where our AURIX microcontroller has a very strong success. I would say, a story of success there was a lot of design wins outside the engine management moving into many applications and also covering, I would say, everything but the drive computer in the car, which we expect to support revenue growth in the future time. But definitely, it goes parallel to the car. Nevertheless, we have -- due to the strong design win base in Automotive seen MCU growth for Automotive beyond that market. For the Industrial portion, it is, of course, more complex. You know that we have been not very strong in this area. And now having put Cypress on board, maybe Helmut can comment on this additionally.

[Helmut Gassel]

Yes, I'd say, in the past years, we did have good momentum in Automotive as well as in Industrial. Automotive continues to do that despite of the relatively low, I would say, total Automotive production simply because of our gained share in Automotive. In Industrial, we were more going with the market in the current year. That, of course, is all legacy Infineon. Cypress did do rather well, I would say, throughout the crisis in the MCU base. They also continue to grow based on their latest product families. Of course, not as strongly as would have expected without COVID. But all in all, I would say, we continue to have good momentum in the MCU space. And I think once Automotive fully recovers, you will see more of that.

[Reinhard Ploss]

Yes. Maybe one additional comment to this. Microcontrollers is not anymore a product business, Mr. Schaller. We expect that the outstanding software portfolio of Cypress will give us a significant push and the overall application competence will drive the growth in this segment significantly more than we have seen up to date. And we have seen first successes in the area of synergies being, I would say, achieved in the combined business. So I think here, we can report more of business successes in the coming quarters.

[Alexander Foltin, Head of Investor Relations]

And with that, it's now time to wrap up today's quarterly call. Thank you very much all for your questions. Yes, it has been a quarter rich in events. And consequently, many questions, and we couldn't address all of them until now. Happy to take together with the Investor Relations team here in Munich your questions on a bilateral basis. Thanks again very much. Stay healthy and safe, especially when traveling. And have a great August. Bye-bye.