Infineon Technologies AG

XETRA:IFX

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, everyone. Welcome to the conference call for analysts and investors for Infineon's 2018 fiscal fourth quarter and full year 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 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 of Infineon's control and 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 are not put -- not to 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'd like to turn the call over to Infineon. Please go ahead.

[Alexander Foltin, Head of Investor Relations]

Good morning also from my side, and welcome, ladies and gentlemen, also on behalf of the entire Management Board of Infineon: Reinhard Ploss, our CEO; Dominik Asam, CFO; Helmut Gassel, CMO; and Jochen Hanebeck, COO.This is the 75th quarterly earnings call in Infineon's history. Following our usual procedure, Reinhard will start with some remarks on group and division results, market developments and quarterly business highlights. Dominik will then comment on key financials, followed by Reinhard again, updating you on our guidance and also providing some color on the acquisition we announced this morning.As an additional service, as mentioned in our invitation, we will illustrate those introductory remarks with some slides that are being shown live and in sync with this call at infineon.com/slides. Again, the link is infineon.com/slides. After Reinhard's and Dominik's introduction, we will be happy to take your questions. [Operator Instructions] A recording of this conference call, including the aforementioned slides and the copy of our 2018 fiscal fourth quarter and fiscal year earnings press release as well as our investor presentation are also available at our website.Reinhard, please go ahead.

[Reinhard Ploss]

Thank you, Alexander, and good morning, everyone. Infineon has closed its 2018 fiscal year with a strong September quarter. Our revenues crossed the EUR 2 billion mark and were EUR 2,047,000,000, up 5% quarter-over-quarter. But at constant U.S. dollar exchange rate, we would have grown by 4%. Year-over-year, currency adjusted growth was 12%, an acceleration compared to the June quarter. The segment result for Q4 was EUR 400 million, corresponding to a segment result margin of 19.5%, which was slightly ahead of our guidance even when taking the tailwind from the U.S. dollar appreciation into account.For the full 2018 fiscal year, group revenues came in at EUR 7,599,000,000, an 8% increase over the previous year. Assuming a constant U.S. dollar exchange rate, our annual growth rate would have been 12%, significantly in excess of our original expectation of 9%. The segment result for 2018 was EUR 1,353,000,000, equivalent to a 17.8% segment result margin.With this, we have increased revenues and profitability for the fifth year in a row and concluded a very successful year. We want our investors to participate in this development and will, therefore, propose a further 8% dividend increase to EUR 0.27 per share in the next shareholders' meeting. While we see certain smaller buckets of deceleration, the majority of our business, in particular most of our predominantly in-house-produced differentiating power and radar products, continued to enjoy healthy demand and remain in allocation. In these areas, customers continue to place orders with longer lead time. Therefore, our book-to-bill ratio remains at a very elevated level of 1.5 for the September quarter. This ratio contains the backlog of confirmed orders and external customer forecast, for example, for consignment stock with rolls. Not included are own confirmed orders. Please see also the appendix of the slide set shown. In order to capture market opportunities and to continue to benefit from structural growth, we keep our efforts to ramp capacity and to debottleneck certain supply limitations. At the same time, we are closely monitoring demand trends to modify our ramp plans if and when we see tangible signs of changing picture.Now to the divisions. Automotive revenues were EUR 867 million for the quarter. This represents a 4% quarter-over-quarter increase caused primarily by high-power products for electromobility. Year-over-year, we have grown at a staggering rate of 18%. Currency fluctuation will not play a major role in this comparison as the U.S. dollar exchange rate was almost the same in the September quarter 2017 and 2018. The segment result increased to EUR 127 million from EUR 120 million in the previous quarter. The segment result margin stood at 14.6%. Once again, the increasing relative share for electric drivetrain products weighed on margin development. Within this category, however, we see clear signs of improving profitability. The combination of macroeconomic uncertainties, global trade tension and industry-specific issues has created a stream of negative auto news in the recent months. Car unit growth appears to almost come to a halt worldwide with several key regions even seeing declines. While we are not unaffected by this, our Automotive business is driven to a much larger degree by increasing content per car, which is fueled by structural trends, xEV and ADAS. Products for both these 2 applications accounted for 15% of segment revenue in the fiscal year just ended and made about half of the growth of this segment.Take xEV in China as an illustration. In September, the total number of cars sold there declined by 10% compared to 2017. Over the same time, the number of so-called new energy vehicles grew by 55%. In Europe, a reduction of the existing CO2 emission targets by 35% until 2030 was proposed by the EU secretaries of the environment. Developments like these create ongoing demand for our products and solution, evidenced by a book-to-bill ratio of 1.5 at the end of the September quarter.Moreover, we could record important design wins. A major European Tier 1 selected an Infineon chipset for the onboard charge of a large European OEM's modular electric drivetrain platform. This award shows the strength of our system solution in different xEV-related application. It includes an IGBT, silicon carbide diode, several power MOSFETs, System Basis Chip and other small technical components. Also in more traditional applications, we see good traction, confirming the strengths of our system competence. A North American Tier 1 selected a full Infineon chipset consisting of an AURIX microcontroller, power MOSFETs, a DC-DC converter, driver IC and angle sensor for their main electronic power steering platform. Finally, in August, our joint venture in China with SAIC successfully started manufacturing and shipment of the first HybridPACK IGBT modules to the domestic automotive market, further strengthening our position in the world's largest EV market.Industrial Power Control recorded another all-time-high quarterly revenue of EUR 361 million, an increase of 3% over the previous quarter. Year-over-year growth was 10%. In particular, industrial drives, wind and traction contributed to this positive development whereas solar and home appliances remained flat quarter-over-quarter. While we steadily expand manufacturing capacity, several product classes continue to be in allocation.The book-to-bill ratio stood at 1.4, unchanged from the prior quarter. The segment result for the September quarter was EUR 73 million compared to EUR 71 million in the previous quarter, resulting in a segment result margin of 20.2%, virtually unchanged from the previous quarter's 20.3%. The additional margin contribution from higher revenues was offset by increases in operating expenses. Overall, the market sentiment with regard to industrial applications is clearly getting less optimistic. For our own business, we see a reversion to mean, which means towards long-term trend line growth. Our product portfolio addresses many different applications, and we benefit from several structural drivers. In home appliances, the ongoing inverterization increases the content per unit, providing some offset against an expected seasonal decline in units. In wind power, especially for offshore installations, we can leverage our expertise in high-power module manufacturing. The same applies to traction, in particular high-speed but also metropolitan trains. For industrial drives, on the other hand, we currently see a stabilization of demand cautiousness, leading to higher levels of inventory.Let's put a spotlight on China, which in total accounts for about half of this segment's revenue. Our exposure to a number of infrastructure-related initiatives with a long lead time horizon makes us confident about the resilience of our business in the now running fiscal year and beyond. Train networks are being expanded within and between cities. The Belt and Road Initiative calls for more and more electrified freight locomotives. The Made in China 2025 program leads to upgrades of factory automation. An increase of the official target for renewables in the overall energy mix from 20% to 35% by 2030 is in discussion. The deployment of e-buses will be a key measure to limit pollution in metropolitan areas.Let's come to Power Management & Multimarket. Revenues were EUR 651 million, a sequential increase of 12% over the prior quarter. A stronger U.S. dollar provided some tailwind. But even on a currency-adjusted basis, the quarterly growth rate was still a strong 10%. Compared to the same period last year, revenues grew by 13% at constant exchange rates. All product areas within the segment contributed to this strong dynamic. The power business benefited from additional manufacturing capacity. The handset-related business saw a typical strong seasonal demand.The segment result came in at EUR 181 million, yielding a segment result margin of 27.8% after 23.6% in the previous quarter. Apart from higher revenues, profitability was driven by a favorable U.S. dollar development. Also our pricing initiatives are bearing fruit. Order entry is currently stabilizing on a high level, resulting in a book-to-bill ratio of 1.7. Also in this segment, several power product categories will remain supply-constrained in the foreseeable future as we continue to see strong demand drivers across a multitude of application. For example, we observed significant growth in hyperscale data centers. Their high power levels lead to additional demand for power semiconductor components. Artificial intelligence and big data create ongoing demand for service optimized for machine learning algorithms. The rollover of Intel-based servers from VR12.5 to VR13 platforms provides a boost for our DC-DC power stages. Furthermore, wireless networks worldwide are being upgraded from 4G to 4.5G in preparation for the upcoming 5G standard. 5G will be a double positive for Infineon. On the one hand, it means much denser networks of base station, of which AC-DC power supplies are required. On the other hand, demand for low-voltage and mid-voltage MOSFETs per base station will go up as significantly more antennas need to be powered to enable massive MIMO and beamforming.Also our power IC business is progressing well. We recorded a business win at a major Asian handset OEM with our XDP digital controller. Each of their current flagship phones will be delivered with a 40-watt fast charger. On the other hand, there are some signs of market softening in areas such as low-voltage and medium-voltage MOSFET. However, we see unabated momentum for our more differentiated solutions and system bundles.Now to Digital Security Solutions. As of October 1, we have changed the name of the segment Chip Card & Security to Digital Security Solutions. The new name reflects what we do since a long time: securing the link between the real and the digital world, providing solutions across smartcard and embedded application. The name change has no effect on the organizational structure, the strategy or the business scope. In the September quarter, the segment recorded revenues of EUR 163 million, a decline of 7% compared to the previous quarter and minus 10% year-over-year. Demand for software in several business areas, including government ID, where we experienced project-specific fluctuations, classic SIM cards and contact-based payment, partly offset by growth in authentication and embedded SIM. The book-to-bill ratio stood at 0.9.The segment result came in at EUR 24 million. The segment result margin stood at 14.7%, driven by the decline in revenues. In general terms, the segment is navigating in a challenging market environment. Some smartcard applications are declining, for instance, classic SIM cards and contact-based payment. Some applications are becoming more price-sensitive. Others saw strongly fluctuating demand patterns. The transition to higher-value solution, where there is more complete offering, including software, is ongoing. But it will take time for the impacts to materialize.There are encouraging signs. Our recently launched security solution for payment applications, SECORA Pay, is gaining wider adoption by customers across different regions. Our IoT security solutions are gaining further ground with key design wins at leading OEMs in the automotive, infrastructure and ICT markets. For example, we recently introduced the first trusted platform module called OPTIGA TPM, especially for automotive application to the market to add cybersecurity to the connected car.With this, I would like to hand over to Dominik, who will lead you through our key financial figures.

[Dominik Asam, CFO, Executive VP & Member of Management Board]

Thank you, Reinhard, and good morning, everyone. Let me start by casting some additional light on our revenue dynamic. The average U.S. dollar exchange rate in the 2018 fiscal year was $1.19 compared to a rate of $1.11 over the prior year. As already commented by Reinhard, this implies an annual growth rate of almost 12% at constant currencies. In U.S. dollar terms, the currency most of our peers report in, it would have grown at almost 16%, which we believe compares very favorably to the market and our peer group.Gross profit in the fourth quarter increased to EUR 840 million for a gross margin of 39.8% after 38.2% in the June quarter. Excluding non-segment result effects, the adjusted gross margin stood at 40.6%. Research and development expenses and selling, general and administrative expenses came in at EUR 223 million and EUR 227 million, respectively. The net operating income amounted to EUR 6 million.The non-segment results amounted to minus EUR 30 million, almost entirely related to amortization and other charges resulting from the International Rectifier acquisition. As you can see on the chart, of that amount, EUR 18 million hit our cost of goods sold; EUR 2 million, R&D; and EUR 14 million, SG&A. Our strong revenue growth is enabled by continuous investment to expand and upgrade our manufacturing landscape. Our total investments into property, plant and equipment, intangible assets and capitalized development costs for 2018 amounted to EUR 1.25 billion. This is equal to an investment-to-sales ratio of 16.5%, in line with the updated formula we provided at our Capital Markets Day in June when compared to our revenue increase at constant currencies. Depreciation and amortization, including non-segment result effects, went up from EUR 219 million to EUR 226 million. Included in this figure are EUR 26 million and EUR 25 million, respectively, related to the amortization and depreciation of fair value step-ups from the purchase price allocation from International Rectifier. Hence, the portion of depreciation and amortization, which hits our segment result, has gone up from EUR 193 million to EUR 201 million, reflecting the upward trend in capital expenditures already referred to, which we expect to continue in the coming quarters.Continuing with tax. In the September quarter, we had an income tax expense of 40 -- EUR 54 million against EUR 49 million in the previous quarter. For the entire 2018 fiscal year, the income tax expense was EUR 193 million, implying an effective tax rate of around 14%. Our cash tax rate was 15%, a level we expect also for the 2019 fiscal year.In the fourth quarter, we recorded a loss from discontinued operations of EUR 159 million, which is related to adjustments of provisions in connection with the ongoing Qimonda litigation. In September, the court-appointed independent expert provided an interim report on the preliminary evaluation of the memory business that Infineon contributed to Qimonda in 2006. While we cannot disclose details about the report and the proceedings at present, there are 2 important messages. Firstly, as you can see from the provision we have taken, the results of the interim report on the preliminary evaluation is a fraction of the claim of EUR 3.35 billion made by the insolvency administrator. Secondly, in principle, we are open to an out-of-court settlement on reasonable terms. While we cannot ascertain at present if and at what terms such a settlement might be possible, we have accrued provisions based on a range of our best estimates as to the order of magnitude at which we believe we could potentially settle the case now that the interim report on the preliminary evaluation is available to both parties.Coming to free cash flow from continuing operations. It came in at EUR 227 million in the September quarter after EUR 192 million in the quarter before. For the entire fiscal year 2018, we recorded EUR 680 million, including the proceeds from the sale of the largest part of our RF power business to Cree. In September, we repaid our outstanding EUR 300 million bond, which we had issued in 2015 to refinance part of the International Rectifier acquisition. Following this, our gross cash position as of September 30, 2018, amounted to EUR 2.5 billion. Net of financial debt of EUR 1.5 billion, our cash position stood at EUR 1 billion. Our reported after-tax return on capital employed came in at 20.0% in the September quarter. For the entire year, the figure was 20.5%.Let me now hand back to Reinhard, who will comment on our outlook.

[Reinhard Ploss]

Thank you, Dominik. Assuming an exchange rate of $1.15 for the U.S. dollar against the euro, we expect revenues to grow by 11% year-over-year, plus or minus 2 percentage points. Breaking it down by division. ATV growth will be -- exceed group average. For PMM, we are seeing growth at about the group's average rate whereas IPC should come in a bit below. For DSS, we project revenues to decline by a mid-single-digit percentage. At the midpoint of the guided revenue range, we expect a segment result margin of 18% of sales. Growing our business strongly goes hand-in-hand with consistently expanding our manufacturing capacities. For investment, which include also capitalized development cost, we expect an annual amount between EUR 1.6 billion and EUR 1.7 billion to exploit market opportunities also in the medium and long term. The implied investment-to-sales ratio will be about 19.5% but will be in line with our target value of 15% if adjusted for above trend line revenue growth. Investments into major buildings of EUR 200 million, including the new cleanroom in Villach as well as about EUR 100 million for incremental revenue opportunities and structural changes in the revenue mix. Our guidance for depreciation and amortization for the fiscal year 2019 is around EUR 1 billion, sequential increase being driven by growing investments.Now to the first quarter of the current fiscal year. We expect revenues to seasonally decline by 4%, plus or minus 2 percentage points, again assuming a U.S. dollar exchange rate of $1.15. For PMM and ATV, the expected decline is slightly less than group average. IPC and DSS revenues are expected to decline more than group average. At the midpoint of the guided revenue range, we expect the segment result margin of 17.5% of sales.Now a bit more color on the Siltectra acquisition. The company has developed a technology called Cold Split, which allows to cut silicon carbide crystals very precisely and efficiently, nearly without any losses especially compared to sawing. This technology can be used in 2 ways: one, for wafering, which means to cut the boule into wafers, yielding significantly more wafers than the conventional approach; the other use case is to lift off a very thin layer from the top of the wafer at the end of the chip manufacturing process and to use the remaining wafer once more. The thin layer, which contains the active device, is finished applying our special thin wafer technology know-how.This 2-out-of-1 concept is very important as wafer supply will be a limiting factor in the longer term, especially when silicon carbide will ramp in a larger scale in the field of electromobility. Siltectra is thus a perfect example of our acquisition strategy, combining strategic financial and cultural fit. We will work on industrializing Siltectra's technology in the coming years at their site in Dresden and at our fab in Villach. Over the time, further application for the Cold Split technology might emerge, such as boule splitting or the use for other materials than silicon carbide. To be clear, however, we have no intention to step into the manufacturing of raw wafers.Ladies and gentlemen, let me summarize the key points. Infineon has completed a very successful 2018 fiscal year. Our business grew above the historical trend line. And we could combine this momentum with increased profitability. Based on a careful assessment of all indicators available to us currently, we adopt to a cautiously optimistic stance. Looking forward to 2019. We reckon that we can deliver another year of double-digit growth. The demand situation in our core power business, while not as frothy as maybe a quarter ago, is still remarkably resilient at present. Infineon is not immune against market forces. Our activities are not decoupled from economic growth. Our predictions are predicated on the view that trade tension and geopolitical uncertainties will not lead to a significant deceleration of global economic growth.We continue to scrutinize order backlog, inventory levels, lead times and other indicators for signs of possible slowdown in order to adapt our plans in case of prolonged phase of slower dynamic oil downswing. We are not seeing such a scenario unfold at that time. Above all, we are confident as regard to the fundamentals of our business. We will keep executing along the pillars of our strategy founded on technology and quality leadership, strong manufacturing capabilities as well as application and system understanding.Ladies and gentlemen, this concludes our introductory remarks, and we are happy to take your questions.

[Operator]

[Operator Instructions] And we will now take our first question from Achal Sultania from Crédit Suisse.

[Achal Sultania, Director]

Just a question on the industrial business. You talked about some softness in certain areas. Can you provide us more color as to what you have seen in like recent changes in the last couple of months? Is it like industrial drives? Is it broad-based weakness across industrial? Or is it more about factory automation? Any color around that would be helpful. And then secondly, on the margins in PMM, obviously very strong margins partly helped by top line. But can you just talk about like how is pricing evolving in that PMM business? And usually, as we go into the March quarter, you basically have new pricing agreements or the pricing gets reset every year from what I understand. So can you talk about that, how we should think about that trend as we go into March quarter?

[Reinhard Ploss]

Achal, thank you for your question. The question about IPC will be taken by Helmut. Briefly, let me comment on the margin of PMM. We have adopted prices already being effective in the last quarters and in the current quarter mainly. In general, PMM, to a large degree, is following closely the market prices. Nevertheless, as we have a very strong portfolio and there is a lot of demand in the market, we have achieved a lot of agreements with customers on demand and pricing on the longer run. So we do not see any specifics for the March quarter, except the market would be turning significantly.

[Helmut Gassel]

Yes. Helmut Gassel here. As far as the industrial market is concerned, yes, you're right, there is a certain slowdown in the industrial drives business. We see a stabilization of demand. And that leads to slightly higher inventory levels in this sector. And overall, I would say that we see a reversion to mean, so meaning from a very high growth above long-term average, we're coming back to long-term average growth rate with a slight growth of our market share in this area. The industrial drives are mainly the reason.

[Operator]

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

[Janardan Nedyam Menon, Technology Analyst]

I just want to -- perhaps, Dominik, about the margin. You're seeing a strong growth in revenues, but your margin is going up slightly. If you could just break that from a headwind point of view between the increase in depreciation, probably a headwind from strong growth of EVs, which has got a lower margin, as well as perhaps any start-up costs that you may be taking on the fab, which may also be hitting your margins. Can you just give us some of the factors which are negatively hitting your margin in FY '19 versus the positive impact coming from the revenue strength? And I have a brief follow-up on Siltectra, if I can.

[Dominik Asam, CFO, Executive VP & Member of Management Board]

Okay. Janardan, so you have mentioned most of them, except for one, which is still continued wafer price increases. We will see a wafer price increase with a similar rate as we have witnessed in 2018. Otherwise, you've already mentioned the rolling of depreciation, which we have talked about a lot. We invest a much higher percent of revenues than our current depreciation is. That delta will continue to drive a certain uplift in depreciation. And these are the main factors we talk about. I think what we have to offset that is, of course, a certain assumption about the pricing. We already talked about PMM, which, by the way, is a division where the pricing tends to be more gradual over the year as opposed to 1st of January. There, we still see some opportunities. And in general, this is how we came up with the 18% guidance for the now running fiscal year '19.

[Janardan Nedyam Menon, Technology Analyst]

And is a fab startup? Because you obviously are accelerating the ramp of the fab quite aggressively. Is that a big part of that? And what is the effect on '17 -- in FY '18? Would the '19 hit from that be bigger or smaller?

[Dominik Asam, CFO, Executive VP & Member of Management Board]

Well, the ramp is continuing, of course, in Dresden. As we still are in allocation in several product categories, we try to do as much as we can there. But we are not having any ramp-up costs, for instance, of Villach, of course, because we have just started building. And then it will be kind of buildings under construction and no depreciation at that point in time. So you should not expect a discount, maybe mid-double-digit millions of ramp-up cost you have seen when we ramp Dresden anytime soon.

[Janardan Nedyam Menon, Technology Analyst]

And just a quick follow-up on Siltectra. When do you think that you will be able to industrialize this? And at that point in time, will that mean that you will have a cost advantage on silicon carbide versus your competitors?

[Reinhard Ploss]

I think here, the primary direction is to have the availability in material. And you can assume that when you can use a wafer 2 times, that, of course, saves money on the wafer cost. On the other side, of course, we have quite some extra processing steps required to do so. So please give us some time in order to industrialize the technology, which is today extremely manual in an earlier phase. Nevertheless, we will use it as soon as possible. But we can comment on this, I would say, sooner or later. But again, you may have seen that the supply is the biggest concern, which is generating the market, and this is our primary focus on. Nevertheless, we assume that there will be a productivity potential moving forward, which brings us into a good position in silicon carbide market.

[Operator]

We will now take our next question from Aleksander Peterc from Societe Generale.

[Aleksander Peterc, Equity Analyst]

Just a quick follow-up on the acquisition, Siltectra. Could you maybe share with us how long it will take for you to industrialize the solution so that we'll see in actual products you ship to your customers this innovation? What is the kind of ballpark we should expect in terms of productivity gains? Are you looking at maybe 20% to 30% competitive edge versus the rest of the market? And then secondly, just maybe briefly on the order intake, we still see very, very solid levels of book-to-bill across all areas. How's the linearity in this respect? Has it stayed very, very strong? Or has it slightly deteriorated, would you say, as in the previous quarter?

[Reinhard Ploss]

So Siltectra, well, let's talk about both of the options, the wafering and the 2-out-of-1 concept for the finished wafers separately. The cutting of boule into wafers can be done much quicker. But this is something where we today do not see a market of boules being available. This might change over time. We may consider to do here a certain service to the silicon carbide wafer manufacturers in order to industrialize this step. First, as said before, we're really close to getting it used on the other side. Even here, we expect that building a machine will take more than 1 year -- a year, 2 years, until it becomes productive. The other part, making 2-out-of-1, we will start up as soon as possible. But there, you have to, I would say, get to learn how to manage the rest of the process. We have tried this out. Prior to the acquisition, that works well. But nevertheless, also here, it takes time. Here, I would assume that a high-volume production will be within the next 3 to 5 years being done in our site in Dresden and Villach. Until then, we will ramp the manual production, which is already, I would say, an advantage. Longer terms, productivity gains, while difficult to say, you can assume that today, you lose on the boule -- 50% of the boule regarding sawing, but this is nothing which we would benefit directly from, we would most likely benefit indirectly from. This 2-out-of-1, I think here, we are hesitant to give today numbers. But we believe that is a range much -- maybe it's not in the high number you mentioned. But in the lower number, it can be an opportunity for the longer term. But again, give us the time in order to make the process in total running smoothly on industrial level. Yes, Helmut will answer the second question.

[Helmut Gassel]

Just to the book-to-bill ratio, for the September quarter with 1.5, the number is almost equal to the June quarter and both of them actually higher than any quarters before. So yes, it is standing at a high level still.

[Operator]

And we will now take our next question from Amit Harchandani from Citigroup.

[Amit B. Harchandani, Vice President and Analyst]

Amit Harchandani from Citi. Firstly, if I may, I just wanted to go back to the FY '19 outlook and understand it a bit better. My understanding was that you were so confident on delivering more than 10% growth at an FX rate -- assumed FX of 1.2. But that -- it will have needed a significant GDP slowdown to get you below that number. Here, we are at 11%, which probably adjusted for FX equals to 9% at midpoint. And you necessarily aren't expecting GDP growth to slow down dramatically. So I'm just trying to square those data points and again figure out, what has really changed in the last couple of months? Because your order book still seem quite solid. Do you expect greater element of double ordering in there? Or what's driving this increased caution in outlook versus the previous statements and versus what still looks like very healthy order book? And I have a follow-up.

[Reinhard Ploss]

Yes, Amit, Dominik will answer the question.

[Dominik Asam, CFO, Executive VP & Member of Management Board]

Yes, I mean, what has changed frankly since we discussed it is that we have now baked in a higher likelihood of a slowdown in our kind of probability-weighted revenue guidance. You mentioned the appreciation of the dollar. I think this is a little bit of a result also of the weaker outlook for economies outside U.S. The U.S. is still doing quite well in terms of GDP growth. So I would argue that these 2 are a little bit of communicating tubes and a little bit unfair to just take the kind of currency impact while completely neglecting the fact that there is a higher likelihood of a slowdown. And to some degree, we had to kind of probability weigh that. It's not one single scenario but a certain spread of scenarios in our guidance here. And we thought that if you guys in the capital markets have such a strong conviction that things will slow down, it would be not wise to take a certain haircut for that.

[Amit B. Harchandani, Vice President and Analyst]

Okay. And secondly, if I may, with respect to the part of the business that are looking to you at allocation at the moment, what is the degree of confidence in terms of lead times there? Because you've talked about lead times still stretching. Looking at the order books, it does seem like it's very strong, therefore, it is supported. Would it be fair to say that we shouldn't expect lead times for these businesses and allocation to come back anytime in the next fiscal year? Or put it differently, when do you expect the lead times for your overall business to normalize? What would be your best guess at this stage?

[Reinhard Ploss]

Well, Amit, I think that's a very difficult question because overall business we have today, and we even appreciate that in Automotive, a large portion of our business is normal, we are not in allocation for microcontrollers and provide some of the smartcard business while we are for MOSFETs and IGBT modules. In PMM, we expect that it will continue to stay up. It is very difficult to give an estimate on this. But we expect, we even hope that the capacity increase will help us to come back to more normal lead times, let's call it like this, in the time frame of the March to June quarter.

[Operator]

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

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

A quick question on Automotive. You are guiding for Q1 revenues to be -- the decline to be stronger than the rest of the group. But for the full year, you expect Automotive to grow faster than the other divisions. So could you help us to understand, why are you so confident to a very strong acceleration in the second half of 2019? Is it specifically due to some ramp-up of EV in Europe? Or if you could shed some light on these dynamics.

[Reinhard Ploss]

So Jerome, thank you for your question. The ATV will be answered by Helmut.

[Helmut Gassel]

Yes, Jerome. I think the decline in the first quarter for Automotive is pretty much in line with the group. So I'm not sure how you deduct that. It's going to be higher, nevertheless. It's a seasonal decline that we always have in the last quarter of the calendar year. That also is true for Automotive. On a year-to-year comparison, Automotive still shows significant growth in the first quarter of our fiscal year.

[Reinhard Ploss]

But on the other side, Jerome, we always see that in the year's end -- the Automotive at year-end, customers, let's say, closing their stores, and therefore stocks. And therefore, we expect that the number of revenue days in quarter 1 are not so many.

[Operator]

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

[Adithya Satyanarayana Metuku, Associate]

So two questions, if I could. Firstly, just on the Siltectra acquisition, can you talk a bit about how unique this technology is? Who else has this in the market? I just want to get a sense of, is this going to give you some kind of structural advantage? Or is this -- I just want to see how this changes your competitive position 3 to 5 years out. And secondly, I was just looking at ON Semi's recent slide decks. And it looks like they're also talking about 300-millimeter investments. I just wanted to hear your thoughts on what the thinking might be there. You've always said ON Semi doesn't have the capacity to invest in 300-millimeter. Any thoughts around that? And any thoughts around how -- what your competitors are doing on 300-millimeter would be super helpful.

[Reinhard Ploss]

So Adi, thank you for this question. Jochen will take the question on Semi.

[Jochen Hanebeck, COO & Member of Management Board]

Yes, this is Jochen Hanebeck. Yes, we do hear some announcements here and there, in China, 2, 3 groups talking about 300-millimeter. You quoted ON. As we cannot really comment on their plans, but we feel very confident that with our capacity and our capacity already available and planned, we are here in a clear lead situation. Thank you.

[Reinhard Ploss]

So the Siltectra, how unique the Cold Split. I think Siltectra is the only approach where you can do the process at the end of the wafer process in the chip manufacturing. There are other ideas in the market and you can read a lot. We have tried out many -- or let's say, considered all of these prior to our acquisition. I think, here, this process is very advanced compared to any others. Maybe there is one which could be used for wafering. That's, I think, everything to be commented. Here, the advantage we believe is -- well, anyhow, you have to grind back a silicon carbide wafer at the end of the process. So this cutting it off saves a lot of money even potentially in the process. But again, it is adding quite some effort also. So we believe it will -- similar as in 300-millimeter, thin wafer technology at a significant competitive edge in the manufacturing capabilities. Performance-wise, I think you can achieve a good silicon carbide MOSFET in many ways. But here, we will have an advantage in material efficiency and device performance with thin layer.

[Adithya Satyanarayana Metuku, Associate]

Understood, very clear. Just one quick follow-up, if I could. Just on CapEx for 2019, you're saying CapEx will be EUR 100 million higher -- well, EUR 100 million of the EUR 300 million will be for revenue upside. So it feels a bit like you haven't given much color on the revenue upsides, but you are already factoring in higher CapEx and you're giving us color on that. So that seems a bit conservative. I just wondered if you could give some color on what the revenue upside could be, how we should think about that as we go through 2019.

[Reinhard Ploss]

Yes, Dominik, please.

[Dominik Asam, CFO, Executive VP & Member of Management Board]

Yes. You might recall in the Capital Markets Day, we basically had 3 buckets. We had the linear formula, which is, I think, well-known to everyone by now. We said there is a certain investment budget for major building investments. That includes front-end cleanrooms as well as major office buildings. And last but not least, we mentioned a low triple-digit million amount for exactly what you referred to in your comment. So what we basically do is we use sum of all these 3 buckets. We basically stick to that linear formula. We add then a couple hundred million for the building investment. And then -- and we also basically have to get ahead of the curve again and make sure we debottleneck. And yes, you're right, we never can plan exactly where our revenues come out. And it's very detrimental if we lose certain upside revenue opportunities. And this is why we always need to have a certain idea about creating some flexibility. And this is embedded here. But obviously, we cannot guide for that kind of upside scenario. But it's, of course, very much dependent on the macroeconomic environment.

[Operator]

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

[Johannes Schaller, Research Analyst]

You talked, I think, in the past about the amount of unconfirmed orders you had on top of your book-to-bill. Maybe I missed that, but can you just give us an update on that to give us a sense of how big the order intake could potentially really be? And now that you've actually talked about some customers canceling orders, can you talk us a little bit through how the process then worked to replace this with demand from other customers? Was that relatively smooth going from one customer to the other? Or did you actually then face a lot of other cancellations as you try to kind of allocate that capacity to other customers? Any kind of experience to get a bit of a feeling kind of how real the order book really is that would, I think, be quite helpful. And then as a second question, just on time-of-flight, I mean, we're nearing the beginning of next year, Mobile World Congress coming up. Could you give us any sense how you're thinking about design wins here in the Android camp for next year?

[Reinhard Ploss]

Mr. Schaller, thank you for your question. The topic of unconfirmed order, basically we -- in the total, we have not seen a significant change in the total amount of unconfirmed orders in the last time. So I think here, no big changes. I think we never comment on the total amount of the unconfirmed orders here. Regarding cancellations, I would say we have seen some cancellations in the last quarter. For us, it is a little bit difficult to differentiate between those who had been coming due to the price increases or those who may even have been affected by, I would say, the business -- changes in business environment. So we believe, currently, we do not see a significant cancellation. We see the typical ship-outs, which we have a pretty normal expecting those -- except in those areas which we mentioned for IPC regarding the automation area. What we definitely see is a very common picture on the year-end. This is -- and do not want to increase inventories, so we have a certain overlay by this very normal, I would say, behavior. The time-of-flight design wins will be commented by Helmut.

[Helmut Gassel]

Yes, I think we're very -- in a very early stage of time-of-flight. We always said it's somewhat of a wild card of our business and it remains like that. So while we are heavily working with some of the phone makers to define use cases and right products for it, it is still in an early stage of the development of this market.

[Reinhard Ploss]

Johannes, I think, to add one, just to add one. We are successful in getting in. But the question of the use case is something which we have to wait and see how well this is adopted by the end consumers. So it is not a matter of technology only.

[Johannes Schaller, Research Analyst]

That's clear. Just a question, maybe a follow-up on the cancellations. I mean, generally, do you find it easy in case where you actually have cancellations to allocate that capacity to another customer? I think that was my actual question.

[Reinhard Ploss]

Well, it depends. The structural changes in manufacturing are the limiting factor. And within the MOSFET camp, you can reallocate reasonably well. When we just talk about power, when you have IGBTs to MOSFET shifts, then this reallocation is significantly more challenging and order drives a certain level, the inverse that we can balance better with these shifts. Of course, the high integration part are not in the area of being exchangeable. But the majority of our very high integration part are anyhow outsourced. But within, I would say there is -- we are working on improving that ratio and the flexibility in the fabs.

[Operator]

Ladies and gentlemen, this does conclude today's question-and-answer session. Now I'd like to hand back to our speakers for any additional or closing remarks.

[Alexander Foltin, Head of Investor Relations]

Okay. I think we have room for one more question. So I see there's a little queue, so please take on one more question, operator, please?

[Operator]

We'll now take our final question from Stephane Houri from ODDO.

[Stephane Houri, Research Analyst]

This is Stephane Houri from ODDO. So this is a question about Qimonda because you've booked a new provision. So I understand that you can't say a lot more on the story. But can you just remind us how much in cumulative you booked in terms of provision? And what are the next steps and the time line according to you?

[Dominik Asam, CFO, Executive VP & Member of Management Board]

So as I mentioned, we have basically taken a loss related to that of EUR 159 million in Q4. There were some provisions already on the balance sheet. And you will see it in the annual report that there was basically there will be about EUR 180-plus million in total. That includes all the related topics, which are not necessarily only related to that impairment of capital topic we are still battling with the insolvency administrator. So the reason why we changed, I might highlight that, is that really we changed our assumption from -- with regards to the likelihood of finding a settlement. Before, it was clear that there's a very significant -- a huge bid-ask spread between us and the insolvency administrator, which made it remotely likely that we could settle at some point in time. And basically, the reason why with the new expert opinion, we have now taken a different view is that, that expert opinion gives some indications to both sides they need to consider. So we're not kind of in that total vacuum of potential outcomes anymore. I have to say though that there are some points still open. The expert opinion does not cover all the points. So there will be discussions back and forth going forward. But for the time being, we felt it's prudent to assume that a settlement is more likely than not at a reasonable valuation.

[Stephane Houri, Research Analyst]

Okay. So just to make it clear, the EUR 180 million do not include the EUR 159 million?

[Dominik Asam, CFO, Executive VP & Member of Management Board]

They do. I just wanted to mention, there are some other topics related to Qimonda because there were different legal entities affected. For some, we've already settled. So this is why I don't want to go into more details about that.

[Operator]

And we do have time for one further question from Tammy Qiu from Berenberg.

[Tammy Qiu, Analyst]

So you mentioned that China's new energy car has been seeing strong demand from here. So I'm just wondering, what's your market share status in China? Because lots of internal rights has been working on some of the solution. And also at the same time, going forward, because Chinese economy is currently a little bit uncertain, so what's your view of that market demand going forward? Because government subsidy may happen at a very lumpy basis.

[Reinhard Ploss]

Thanks, Tammy. I hand over to Helmut with these questions on the market.

[Helmut Gassel]

Yes, thank you, Tammy. As to our share in the new energy vehicle market, I would say, generally, we have a very high share in the new energy market without going into very specifics there. So we are benefiting significantly from the high growth rate of that market. There's something like 55% growth in the September quarter again in the new energy market in China and we are strongly benefiting. What we have stated before is that 8 out of 10 large-volume platforms globally are based on our product. So that gives you a certain indication without going to details too much. With respect to China overall market, yes, there is a prediction of the GDP growth in China going down to some extent in the next year -- or has come down in the current year to 6.2%. It will come down to 6.2% in 2019 after 6.9% in 2017, so -- and definitely, China is a very important market for us as it consumes roughly 50%, 47% of the global market of semiconductors. Nevertheless, with respect to our very important applications like new energy vehicles or infrastructure projects, as also mentioned by Reinhard in his intro statement, we remain confident that China will be a good growth market for us.

[Reinhard Ploss]

And not to forget, Tammy, that a lot of the semiconductors are more or less exported again based on electronics worldwide. So I think there's a sort of 1:1 relation.

[Tammy Qiu, Analyst]

Okay. And the second one I would like to ask is from a silicon carbide perspective, today, you did this new acquisition. I'm just wondering what's your setting of the silicon carbide product portfolio. Do you need to do more M&A or partnership with the others to further improve the portfolio to be competitive enough, therefore, keeping your market share in power semi?

[Reinhard Ploss]

Well, we are pretty strong in the portfolio. We have been setting up running according the priority of applications. One is, of course, the Automotive segment, the other is the renewable energy. We believe that we have already a pretty profound portfolio there. We will extend it to higher voltage. But to be making it short, we don't need acquisitions to strengthen our silicon carbide portfolio. We have a very good expertise there in order to do this by ourselves.

[Operator]

And this does conclude today's question-and-answer session. I'd now like to hand the call back to Infineon for any additional or closing remarks. Thank you.

[Alexander Foltin, Head of Investor Relations]

So thank you very much to everybody for the questions. We do indeed conclude our fiscal year-end conference call with that. For further questions, please feel free to contact us in the IR team here in Munich. So once again, thank you very much, and have a good week ahead.

[Operator]

This concludes today's conference call. Thank you, everyone, for joining us. You may now disconnect.