Infineon Technologies AG (OTCQX:IFNNY) Q2 2021 Earnings Conference Call May4, 20213:30 AM ET
Alexander Foltin - Head, IR
Reinhard Ploss - Chairman, CEO, Head, Research & Development and Labor Director
Sven Schneider - CFO
Jochen Hanebeck - COO
Helmut Gassel - CMO
Conference Call Participants
Alexander Duval - Goldman Sachs Group
David Mulholland - UBS
Matthew Ramsay - Cowen and Company
Didier Scemama - Bank of America Merrill Lynch
Aleksander Peterc - Societe Generale
Johannes Schaller - Deutsche Bank
Amit Harchandani - Citigroup
Jerome Ramel - Exane BNP Paribas
Everyone, welcome to the Conference Call for Analysts and Investors for Infineon's 2021 Fiscal Second Quarter Results. Today's call will be hosted by Alexander Foltin, Executive Vice President of 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 the current expectations or beliefs as well as a number of assumptions about future events. We caution you that the 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 these described or implied in such statements. Listeners are cautioned that Infineon's actual results could differ materially from the results anticipated or projected in any of these statements, and they should not be undue reliance on them.
For a detailed discussion of important factors that could cause actual results to differ materially from the statements discussed of important factors that could cause actual results to differ materially from the statements made on this conference call, please refer to our quarterly and annual reports available on our website.
At this time, I would like to turn the conference over to Infineon. Please go ahead.
Welcome, ladies and gentlemen, to our 2021 fiscal second quarter earnings call on, as fans know, Star Wars Day. The entire management Board of Infineon is on the call. Reinhard Ploss, CEO; Helmut Gassel, CMO; Jochen Hanebeck, COO; for the first time in our round, our new Board member and CDTO, Constanze Hufenbecher; and of course, Sven Schneider, our CFO.
Following our usual procedure, Reinhard will start today's call with some remarks on group and division results, market developments and business highlights. Sven will then comment on key financials, followed by Reinhard again updating you on our guidance. This time, Reinhard's summary will come after the Q&A. So please stay tuned until the end of the call.
The illustrating slide show, which is synchronized with the telephone audio signal is available at infineon.com/slides. After the introduction, we will be happy to take your questions, kindly asking you that you restrict yourself to 1 question and 1 follow-up. A recording of this conference call, including the aforementioned slides and a copy of our earnings press release as well as our investor presentation are also available on our website at infineon.com.
Now Reinhard, over to you.
Thank you, Alexander, and good morning, everyone. Before starting with my commentary, let me welcome Constanze Hufenbecher, who has rejoined Infineon a couple of weeks ago, and is now for the first time in this round as a Board member, taking responsibility for the digital transformation of Infineon going forward. Great to have you with us Constanze.
Now to our quarterly results. Starting with an outlook into the rear mirror. At the same time last year, the world, the semiconductor market and Infineon were in a quite different place. A new virus had quickly turned into a pandemic leading to an economic disruption at an unprecedented scale. Major end markets declined rapidly. Lockdown regulations caused severe supply chain uncertainties. Amid these challenging times, we had just closed the largest acquisition in our history with a lot of the refinancing and the integration lying ahead of us. 12 months later, the virus is still prevalent but also vaccines have been developed and are being rolled out, albeit at different speeds. Economic recovery is well underway.
Some market trends have even accelerated stretching supply chains and resulting in chip shortages. As a consequence of COVID, 2 secular themes have received a massive and irreversible push: one, the electrification; the other is a digitization. Both call for systemic thinking and holistic semiconductor solutions, and both can be comprehensively addressed by Infineon, especially of the Cypress acquisition. These structural tailwinds currently coincide with a strong cyclical backdrop.
Demand patterns remain strong across nearly every end market due to a persistence of work-from-home trends, coupled with an acceleration in broader economic activity. However, this environment also highlights the vulnerability in the global supply chain that arise from a combination of demand volatility, just-in-time ordering and in parts conservative inventory management. Unfortunately, weather incidents and other hazards affecting the semiconductor industry in the last quarter have made an already precarious supply situation worse.
In the situation -- in the case of Infineon, an unexpected winter storm hit our factory in Austin in mid-February and caused triple power outage of grid power, gas and diesel. Production was revamped swiftly by our operations team, but we expect it will be June until we reach pre-shutdown output levels.
Due to the tight market conditions and resulting fully loaded facility, the recovery of lost production volume will not be possible. In general, apart from the Austin incident, we expect the imbalance between supply and demand to persist for a couple of quarters with a risk to extend into 2022, given the strength and diversity of demand drivers, extended lead times and generally lead inventory levels. The picture looks brighter for product that we manufacture in-house. In the light of structural growth, our strategy to invest early and persistently into our capacities is playing out well.
Let's take a closer look at the quarter on the report. We recorded revenues of €2.7 billion in the March quarter, 3% more than in the previous quarter caused almost entirely by automotive. There was no significant movement in the average U.S. dollar exchange rate. And one more time, we have to state that a year-on-year comparison is not meaningful, given the consolidation of Cypress since 16th of April 2020.
Our segment result came in at €470 million, resulting in a segment result margin of 17.4%. Cost effects associated with the Austin shutdown had a negative impact of around 1 percentage point, which was partly offset by smaller positive one-off effects. Also, annual price declines that usually cause a margin dip in our March quarter were less pronounced this time. The combination of strong demand and tight supply resulted in a book-to-bill ratio at the end of the March quarter of 2.1, further up from the 1.6 at the end of December.
Now to our divisions beginning as usual with automotive. We saw a 6% sequential growth, driven by the continued rebound of global car markets and recorded revenues of €1.219 billion in the March quarter. Almost all our product areas contributed to this uplift, in particular, components for electric vehicles. The segment result amounted to €197 million, equivalent to a segment result margin of 16.2%, in essence, the same level as in the previous quarter.
The negative impact of the Austin power outage and the annual price adjustment were compensated by lower underutilization charges. The current automotive market situation is characterized by acute supply chain limitations across the industry. And we see the typical implications such as increased lead times, higher share of expedited orders, decreasing inventory levels in double ordering. As a consequence, our book-to-bill ratio stood at a staggering 2.3 for the March quarter.
Manufacturing capacities, in particular, at foundries and subcons, are limiting the speed of the automotive recovery. Generally speaking, this is a less severe issue in case of our in-house capacities, but incidents like the one in Austin could hardly have come at a worst moment. We are committed to supporting our customers in the best way possible and expect supply constraints to gradually ease in the second half of 2021, with the most of the ability to make up for lost volume now moving into 2022.
Apart from prolonged cyclical strength, the 2 main structural automotive trends, EV and ADAS, remain very robust. As discussed already in our last earnings call, the adoption of electric vehicle is on a strong trajectory overall, although, happening at different speeds in different regions.
The share of battery electric and plug-in hybrid vehicles of new car sales keeps increasing. Sales of battery electric and plug-in hybrid vehicles were up 147% in March quarter compared to last year. China and Europe continue to lead. The U.S. is so far a laggard in terms of EV penetration. However, the Biden administration's focus on decarbonization, combined with increased commitment by automakers will give vehicles and infrastructure electrification a boost.
Infineon is a key beneficiary of electromobility with an industry-leading portfolio of fully scalable solution. These comprise automotive silicon carbide components which we have started shipping and for which we are seeing volumes slightly ahead of our expectations. More on silicon carbide in the IPC section.
Before that, quickly to a good example of our system approach and cross-divisional collaboration. Three weeks ago, we launched the first MEMS microphone qualified for automotive application as part of our extensive sensor family. The microphone has an increased operating temperature range to enable various use cases in harsh automotive environment. It can be used both for in-cabin applications such as hands-free system, emergency calls and active noise cancellations as well as for exterior application as siren or road condition detection. These features enable the use of sound as a complementary sensor for advanced driver assistance systems and predictive maintenance.
Now moving to Industrial Power Control. IPC stayed at the level of its unusual strong December quarter and recorded basically flat revenues of €361 million. Another sequential decline in transportation was compensated by increases in practically all other application areas.
Of note, renewable energies again surpassed €100 million quarterly revenue mark. Stability was also seen in the segment result, which amounted to €59 million after €61 million in the quarter before. The segment result margin slightly declined to 16.3% from 16.9%.
Book-to-bill went up to 1.6 at the end of the March quarter, partly demand-driven, partly a reflection of tight supply as also evidenced by channel inventories moving gradually down by being at a healthy level overall.
Market conditions for industrial applications continue to brighten. Macro indicators point to a sustained recovery in 2021. Demand for industrial drives is getting more dynamic, in particular, in the Greater China region. Forecast for renewable energy installations in 2021 are continuously corrected upward underpinned by significant policy support as governments around the globe make net 0 commitments for the middle of the century. Also, energy storage system and EV charging infrastructure are related to the energy transition and electrification theme talked about in the beginning.
Home appliances benefit from pent-up demand and energy efficiency regulations. Investment into trains and e-buses will remain subdued, hampered by low travel activities. Overall, we are optimistic with respect to demand momentum and revenue development, and this is supported by a quite positive silicon carbide trajectory already alluded in the automotive section.
We now expect our silicon carbide business to double compared to the last fiscal year to a level of around €170 million, adjusting our previous assessment of around 70% year-over-year growth, upwards.
Our solutions are getting more and more customer traction in automotive as well as in industrial end applications. On Thursday, Peter Wawer, the Head of IPC division, will provide more detail in the speech at our IPC business update call complementing the PCIM Europe 2021 fair.
Moving on to Power & Sensor Systems. Defying its usual seasonality, the segment increased its revenue from €779 million in the first fiscal quarter to €787 million in the second. Further upside was kept by supply constraints. These related to external contract manufacturers as well as to our Austin fab and affected predominantly server power stages and USB controllers.
In contrast to this, we could further increase our in-house MOSFET manufacturing to serve strong demand from multiple end markets from power tools to telecom service, overcompensating the usual seasonality decline in smartphone components. The segment result of PSS came in at €184 million, resulting in a segment result margin of 23.4%. The decline compared to the previous quarter was due to impact from the Austin power outage and product mix effects.
Continued strong ordering momentum coupled with supply tightness and the very low channel inventories led to a book-to-bill ratio of 1.9 at the end of the March quarter. Currently, everything that is being built is getting shipped and sold to end customers.
COVID-induced working-from-home and stay-at-home started to benefit areas like notebooks, PCs, gaming consoles and battery-powered do-it-yourself tools about 1 year ago. Data point around these end markets remain persistently strong even as vaccine campaigns are progressing and offices and school are reopening in several countries. More fundamentally, digitization is increasingly affecting aspects of everyday life and is bringing disruptive innovation to industrial as well as consumer applications.
Smart and sensorified devices, edge computing, 5G networks and cloud data centers are key enablers and offer attractive growth opportunity. By way of example, in data centers, several underlying trends lead to increasing power semiconductor demand. Next-generation CPUs, ASICs and SOCs are more power hungry, driving increased DC-DC power conversion content.
AI accelerator modules, mainly used in hyperscale servers, are requiring best-in-class, high-density power solutions. AC/DC power supply is trending towards higher power classes and needs to meet higher levels of efficiency. At the same time, the processor landscape is rapidly diversifying from classic CPU vendors to GPU specialist, in-house developments by hyperscalers and AI start-ups. Our unrivaled offering of high-density, high-efficiency power flow architectures supports all processor requirements, including leading-edge AI empowering CPU solutions.
Now to Connected Secure System. The system most severely affected by supply constraints. As a consequence, CSS rescored a slightly -- a slight quarterly revenue decline from €335 million to €329 million as we were not in a position to fully cater to vibrant demand for general-purpose microcontrollers, WiFi and Bluetooth components due to scars foundry capacities. An increase in security solutions for areas like contactless payment and embedded solutions like eSIM and device authentication dampened the revenue decline.
The segment result of CSS amounted to €30 million, equivalent to a segment result margin of 9.1%, down from 13.4% in the quarter before. Factors leading to this decline were charges relating to the Austin weather incident and the conversion of the former Cypress remuneration scheme to Infineon standard.
As discussed in our last earnings call, this refers to adjusting the composition of cash and equity-based parts within an overall constant salary. Furthermore, CSS is prefunding the development of system solutions, combining connectivity, control, low power and security. Demand for such solution is currently hitting severely restricted supply capacities, resulting in a book-to-bill ratio of 2.6.
The power outage in our Austin fab is adding to the tightness of already highly limited foundry capacities. Meanwhile, the proliferation of smart and connected devices is leading to an ongoing design win momentum. Our WiFi, Bluetooth combo chips sets have been selected for a new connectivity platform of a major home appliance manufacturer.
Additionally, we have won key sockets at automotive infotainment and printer manufacturers. Our major variables OEM has selected our Bluetooth, Bluetooth Low Energy, module chip for a next-generation smart watch. In microcontrollers, we have achieved key design wins at leading OEMs in the industrial and home appliance sector, especially with our human machine interface offerings.
On the product side, we have expanded our suite of wireless connectivity offerings under the new AIROC brand, launching the first industry's WiFi 6/6E and Bluetooth 5.2 combo system-on-chip for IoT, multimedia and industrial applications, delivering robust performance and coverage, minimal latency, power savings and advanced security features. This makes them ideal for high-quality video and audio streaming application and those that require an instant response like security system and industrial automation.
Now over to Sven, who will comment on our key financial figures.
Thank you, Reinhard, and good morning, everyone. Let me start with our margin development. Gross profit in the second quarter of our 2021 fiscal year amounted to €972 million, resulting in a gross margin of 36%. Excluding nonsegment result effects, the adjusted gross margin came in at 39.3%, 100 basis points down from the previous quarter. Whereas underutilization charges sequentially declined once again, the impact of annual price resettings and the charges of just under €30 million related to the Austin power outage, mentioned by Reinhard already, had a contrary effect.
Research and development expenses went up to €341 million from €333 million in previous quarter. Selling, general and administrative increased to €328 million from €311 million. R&D expenses included €4 million of nonsegment result charges. SG&A expenses, €58 million. The net other operating income was €11 million containing a couple of smaller positive one-off items, included were also minus €5 million of nonsegment result charges. In total, the nonsegment result for the quarter amounted to minus €156 million, virtually flat compared to the preceding quarter. The bulk of the amount related to the Cypress acquisition, mostly depreciation and amortization from the purchase price allocation.
The financial results for the March quarter was minus €42 million, after minus €26 million in the previous quarter in which we had recorded nonrecurring positive effects. Income tax expense amounted to €62 million for the second quarter of the current fiscal year, equivalent to an effective tax rate of 23%. Contained therein are onetime effects related to the integration of former Cypress legal entities.
Cash taxes amounted to €47 million, resulting in a cash tax rate adjusted for PPA effects of again 12%. For the current fiscal year, we expect this rate to be around 15%, primarily as a result of existing German tax loss carryforwards.
Our investments into property, plant and equipment, other intangible assets and capitalized development costs in the March quarter increased to €332 million from €283 million in the quarter before. Quarterly depreciation and amortization, including also acquisition-related nonsegment result effects remained flat at €368 million.
Free cash flow from continuing operations increased noticeably and came in at €407 million compared to €313 million for the December quarter. Positive working capital effects contributed to this favorable development.
Our reported after-tax return on capital employed, or ROCE, stood at 6.3% for the second 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 was around 24%, clearly exceeding our cost of capital.
At the end of my section, I very much like to address the successful continuation of the refinancing of the Cypress acquisition. We tapped the U.S. private placement market, as we have done already 2016 in connection with the International Rectifier acquisition and signed a USD 1.3 billion deal at the beginning of April. The transaction comprises 4 tranches with maturities of 6, 8, 10 and 12 years, helping us to smoothen and to extend our maturity profile. The placement was significantly oversubscribed, allowing us to achieve attractive conditions and diversify our financing sources. Funding will occur in June. The proceeds will be used to repay existing U.S. dollar bank term loans related to the acquisition of Cypress well ahead of maturity.
Talking a bit, our gross cash at the end of March stood at a bit above €3.4 billion, a slight quarterly increase given that the free cash flow exceeded our dividend payment. Our gross debt amounted to €6.9 billion, up against the previous quarter solely due to the change in the U.S. dollar exchange rate on the respective closing dates. As a consequence, net debt is currently €3.4 billion. Therefore, our net leverage stood at 1.5x and gross leverage at 3.1x.
I will now pass back to Reinhard again, who will comment on our outlook.
Thank you, Sven. As stated at the beginning, the current demand situation is strong, but supply is a limiting factor. The broad-based recovery is continuing. Cyclical tailwinds and structural growth drivers, both align in an upward direction. Debottlenecking supply shortages, however, will take time, and this is capping the near-term upside.
Following this line of thought, for the running third quarter of our 2021 fiscal year, we anticipate revenues to slightly grow and to come in between €2.6 billion and €2.9 billion. Embedded in this forecast is our updated assessment that the Austin power outage will lead to a mid-double-digit million euro revenue loss in the current quarter.
Because of this and other foundry-related constraints, we expect only a slightly positive revenue progression for the ATV and PSS segments and a slight decline for CSS despite healthy customer demand. IPC, with a comparatively high in-house manufacturing share and inventory level, should see high single-digit quarterly growth. At the midpoint of the guided revenue range, the segment result margin is expected to be around 18%, mainly driven by higher revenues. For the full 2021 fiscal year, we now expect slightly higher revenues of around €11 billion, plus or minus 3% more than compensating for the Austin effect.
At the second half of our fiscal year progresses, we expect most of our business to benefit from easing supply limitations and be better able to serve demand. Given this prediction and on the back of our results achieved in the first half of the fiscal year, we are again lifting our guidance for the segment result margin, which we now expect to come in at around 18% at the guided revenue level. But we do see strong business momentum, which might help bring annual annualization charges below the level of around €200 million anticipated so far. Margin expansion will be slowed by rising foundry prices in areas where we do not have long-term agreements.
Our protected investments in property, plant and equipment, other intangible assets and capitalized development costs in the 2021 fiscal year remained unchanged at around €1.6 billion. We are happy to confirm that we reached the important milestone ready for equipment at our new 300-millimeter fab in Villach. Since mid of March, we are bringing in the equipment to implement the initial manufacturing line with which we are confident to run by the last quarter of the fiscal year.
For depreciation and amortization, we continue to expect a value between €1.5 billion and €1.6 billion, including amortization of around €500 million resulting from the purchase price allocation for Cypress and to a lesser extent still related to International Rectifier. Strong operating performance will be reflected on our further increased free cash flow, for which we now estimate a value of more than €1.2 billion compared to more than €800 million before.
Before opening the Q&A, let me quickly remind you of our Capital Markets Day scheduled for the 4th and the 5th of October. Preferably, we would very much like to meet you all in London again. However, we have to keep the option for virtual format open.
Let's now come to our questions -- to your questions. Different from our usual procedure, I will summarize the key points when we close the call. Now back to Mr. Foltin.
Operator, please start the Q&A.
[Operator Instructions]. We will now take our first question from Alex Duval from Goldman Sachs.
One of your peers talked about a limitation on the amount that they can produce internally for the second half of the calendar year with demand being bigger than they're able to produce. And I was wondering to what extent you see a similar dynamic or not for Infineon? I'm wondering, for example, to what extent that could be there could be segments of your business where there could be some scope for internal production? Or whether it would be a homogenous situation across all the different bits of your business? How should we be looking at that?
So Alexander, thank you for your question. I'm not so sure we have completely understood it precisely. Therefore, I rephrase it. The question was how much we can insource. And here, I would give it to Jochen.
Yes. Thanks, Reinhard. So I understood it that you were asking about the in-house situation. And we think here, Reinhard made statements already that we are benefiting from our in-house manufacturing strategy and also the CapEx we spent already last year turning into revenue this year. So the supply situation on the in-house side is better, definitely better than on the foundry side.
If you asked about in-sourcing, there is very limited room as we have focused our in-house manufacturing, as you know, on power and sensors, whereas the shortage is mainly in microcontrollers and IoT products. I hope I covered your question with this.
We will now take our next question from David Mulholland from UBS.
I just wanted to follow up on the commentary you made around automotive because I think when we spoke about it last quarter, you said at this stage you thought -- or at that stage you thought you were shipping to a level greater than what was expected to be in automotive production for 2021. Given, obviously, if anything, it seems like production has been more difficult to ramp up, do you still think you're shipping above that level? Or can you help us get some qualification on where your shipment level is from an automotive volume perspective versus what production level is expected to be in the industry today?
David, thank you for your question. So Helmut will answer this question. And I think it is not only a matter of ramping up the production, it is rather that we see a lot of catch-up from the last calendar year. Helmut, what's going on?
Yes. I think the shipping level that we currently see is probably to something like mid-80 million vehicles per year. Demand from the channel is obviously higher as people are trying to rebuild inventory, et cetera. So I would say the analysts reported how many vehicles might not have been built in the first quarter and what is expected for the second quarter. So roughly 1.5 million not being built in the first quarter and about 1 million vehicles not being built in the second quarter. That's the best, I think, estimate that it currently exists. Requests are obviously substantially higher than this 85 million that I pointed out.
Just a follow-up on that. Just to be clear, though, what do you think in the revenue that you're generating and the products that you're actually able to ship out today? What kind of automotive production run rate do you think would be justified, given there is potentially a bit of catch-up in the channel going on from what you're shipping in your products?
Yes. I'd say it varies a little bit. As I said or Jochen earlier said, the constraint is mostly within the foundry products, meaning the microcontrollers and products alike. So there, we are probably at that run rate of mid-80s. In other products, we might be shipping slightly higher, but that eventually will anyway level.
Maybe just 1 addition to this, what we are currently facing, that the OEMs are adjusting their production schemes to the parts they can get. So it's very hard to read in detail, and this is shifting from day-to-day, which adds to the challenge in the supply chain.
We will now take our next question from Matt Ramsay from Cowen.
I guess I have two questions. The first one, you guys talked about, obviously, book-to-bill being above two for the whole company and chasing supply with demand being much more than supply. If you could maybe give some commentary as to how you see internal production ramping to meet what demand is versus your visibility on foundry capacity potentially ramping? And if there are any material differences in the two? And I guess the second question, Sven. Obviously, there's things moving around with gross margin with the challenges in Austin. But how do you feel the company is positioned to potentially pass on any price or I guess, cost of good increases with the tight supply? How are you guys positioned to pass that on to customers?
So I think here, I will share question with Jochen on the manufacturing side and Sven will answer the other one. So what we are seeing definitely the benefit of Infineon long-term strategy where we are investing in-house on a, I would say, along the expected market growth and try always to keep a certain headroom for flexibility by in the foundry space, we see that especially in the more mature node, the foundry have not invested enough in order to cope with the situation. Jochen, can you give more flavor to that?
Yes. I think this is publicly debated that these nodes between, let's say, 20 to 19 nanometers are currently rather short and the foundries are investing now, but the lead times to get this new capacity on board will be easily into 23. There is, of course, also a cyclical part in this shortage, but there's also a structural one that certain products, for example, CMOS imagers, which we encounter now more and more in every smartphone take up capacity in these buckets. With your question related to the book-to-bill, please keep in mind that the high book-to-bill, these are confirmed orders but over an unlimited horizon. So what we see currently coming in and what we can confirm and what you see in the book-to-bill are orders that have long reaches, which is a typical situation or typical behavior of the customers in an allocation period.
Yes, Matt, Sven speaking. Thanks for your question. So on the gross margin, let me give you two answers to that. The first one is, indeed, we are seeing rising input costs, and of course, there is the clear intention of us to pass that on to customers. But please do not forget that we always have a good mix of long-term agreements and short-term agreements. So the long-term agreements are not in scope, but the short-term ones, that's where we see that fall through from increased input costs. And on the gross margin per se, because I expect that question to come anyway in that forum. So we are now -- I'm talking about the clean gross margin, so adjusted for the NSR effects, we are at a 39% level. So for the full fiscal year, despite these rising input costs, we expect the gross margin to go up a bit towards the 40% level. So it gives you also a bit of confidence how we look at pass-through and the overall situation.
We will now take our next question from Didier Scemama from Bank of America.
I just had 2 or 3 very short questions. First, maybe if you could talk a little bit about the sort of -- it feels like you've got a fourth silicon carbide win on your slide deck. If you could just talk about that with an Asian OEM, briefly, if you could give us a bit of color on this?
Second, I just wonder -- I mean, it's a follow-up to the many questions that have been asked so far. I just wondered if you could give us your thoughts on this book-to-bill above 2 EG. As we move into fiscal year 2022 and as capacity comes online from your own factories, but also obviously, from foundries, how do you feel about the upside in top line and the downside in order intake as we've seen in previous cycles? And then my last question is for Sven on the free cash flow guidance upgrade, which is an interesting one in the sense that you're flagging effectively a cash conversion north of 80%. And I just -- I wondered if you could talk a little bit about the sustainability of that cash conversion or if it's really driven by one-off in terms of lower inventory levels on the balance sheet and types of working capital because of the situation, that would be very helpful.
Didier, thank you for your question. So I start with the general comment. Our upside on the top line is definitely limited by the capacity constraints we see in the foundry market why we might have upsides on the in-house manufacturing. Sven will give a little bit more flavor to that. The downside in orders, we see currently pretty limited. I think we have seen this type of market behavior very often, but each time it's slightly different. When you think about the Lehman crisis, you have seen a dip in demand. This time, we have not seen a dip in demand, but a dip in, I would say, the supply capability and all verticals coming together, and we believe that the majority of the growth drivers are strong enough in order to continue. Nevertheless, of course, when the supply to demand ratio becomes a little bit more healthy than today, we expect that our order book will, I would say, become softer. The silicon carbide, how much -- what about silicon carbide and then going to Sven?
Yes. A couple of things there. I think we reported another design win, triple-digit million this quarter again. The launch that I think you were referring to is with an Asian OEM that we have reported previously. So we're currently starting to ramp manufacturing of silicon carbide products going into main inverter for vehicles. As you rightfully stated, total growth of silicon carbide revenue this year is going to be about 100%. So we're essentially doubling our revenue with silicon carbide products, of course, both coming -- coming from both automotive as well as industrial, whereas automotive is relatively growing stronger.
So before switching to Sven, the question on visibility. Automotive, we typically have a very good visibility to the end markets and the cars part, the dealership. So here, we feel quite strong. And many other verticals, we have a less clear view and the area of servers and equipment for data, it's good, but everything which is around consumer, it is typically less. But overall, we feel very confident to have a very good understanding from our to the final end market and the demand at customer side. Now to Sven as promised.
Yes, Didier, follow-up to your question on the revenue top line upside for this fiscal year. I mean maybe let us step back a bit and as Reinhard did in his opening speech, we started the year with around 10.5. We increased after Q1 to 10.8. Now we increased to 11 despite having lost revenue from the Austin outage in a mid-double-digit volume. So that's the starting point. Now if you ask about how much more could you do, we have given you a range of plus or minus 3%. I would say, in a non-allocation situation with no foundry limitations, we could probably do more. It's really hard to give you a precise number, given that the allocation situation clouds the visibility and also the pull-ins into the fiscal year could also play a role. But I mean, if you ask me, I would say, 1 percentage point, maybe 2 of additional volumes could be possible, but it's a guesstimate.
Now to your second question on the free cash flow for the fiscal year. Indeed, that's a very positive development. We have stated repeatedly that after the Cypress acquisition based on a higher leverage, which is coming down quickly, but still on elevated levels, the free cash flow is an important element we need to focus on, and we have given clear deleveraging targets out to the market. So now this year, we increased from €800 million to more than €1.2 billion. The main reasons for that, Didier, the first one is we have now the first half year in our books already. If you add the numbers up, it's €700 million. The second is that there is higher revenues and higher operating profit to be expected in second half. Last -- thirdly, you mentioned already the inventory. We had a more conservative expectation of some inventory built-up during the course of the second half this will not materialize.
So there is a positive working capital effect. And lastly, also some of the increased lead times on the invest side, meaning that some of the CapEx and the cash out for CapEx is pushed into 2022. And that without now wanting to have a discussion on 2022 guidance, please, I just want to mention, you should not be too surprised if there is further CapEx to come in 2022. So maybe that's another point -- data point for your question regarding sustainability and cash conversion.
Could I have a very, very short follow-up on that?
No, I wondered, given the semiconductor shortages affecting the automotive sector, primarily in foundries, and you highlighted that there is far less issues when it comes to your internal production of power semiconductors, have you had any conversations with Tier 1s or even with -- directly with automotive OEMs to secure supply of IGBT modules or even silicon carbides in the coming quarters or in the coming years for fear of similar shortages?
Yes. Didier, we definitely are in contact. The OEMs have understood that they're up to now just-in-time delivery and order from the shaft doesn't work anymore. And of course, we cannot go into details. But I think here, everybody is seeking to understand better and seems that we are changing the scheme.
We will now take our next question from Aleksander Peterc from Societe Generale.
Just a little bit of expansion on your comments on CapEx, given the strong industry backdrop, obviously, and also higher flexibility in terms of free cash flow that you now have for the current year. I was a bit surprised to hear that some of the CapEx is pushed out into next year. So if you could give us the reasons around that? And why wouldn't you instead to rather accelerate your CapEx?
And then the second question I had is, like if you could remind us what the percentage of revenue that relies on external foundries currently? And how this differs by division of presumably CSS in Chrysler? What's the percentage of that?
Alexander, thank you for your question. I think here Jochen will answer. We do not push out. Jochen, maybe what is going on?
No, we definitely do not push out. So please remember, first of all, we kept our CapEx budget in the difficult year of 2020 rather on the high side, and we benefit from those -- this capacity coming on, namely by Villach coming online in last quarter of the fiscal year. Of course, we do see lead times increasing. This is industry standard. There might be some equipment coming into the new fiscal year. Remember, we have a fiscal year ending in September, but we do push for capacity expansion. And also, Sven highlighted already that probably next year's CapEx number will be higher than this year's. And therefore, we try to ease the situation as best as we can.
With respect to your question on outsourcing, the general outsourcing in front-end for foundries is around 30%. But of course, according to our manufacturing strategy, mainly in CMOS and CMOS-derivative technologies below 90 nanometers. In this regard, the outsourcing share is the highest for our CSS division, followed by the PSS division and automotive microcontrollers. And as Reinhard pointed out in the introduction already, IPC is heavily relying on the in-house side. I hope that answers your question.
Maybe a small add-on. We -- don't forget that we have started to invest ahead of the curve and even stayed along our strategy last fiscal year, which puts us in the in-house manufacturing in a different position compared to others who are just waking up now and try to order and order very high. So I think despite the ordering we do, we, of course, would like to accelerate even further, but we are in a good position as we follow a basic concept there.
We will now take our next question from Johannes Schaller from Deutsche Bank.
And sorry to come back to the foundry topic once again. But this -- on the back -- did I understand you correctly that you expect the tight situation on the foundry side to definitely extend into 2023? Or did I misunderstand that? And then also, can you maybe give us a bit of a feeling in terms of additional capacity from foundries, how we should be thinking about that maybe more as we talk about next year, given your discussions you're having currently? And if there is anything you can do to accelerate that or actually influence that decision given the conditions in the market?
And then as a second question, it's maybe a bit philosophical at this stage. But when we look at the Biden stimulus plan, I guess, that mostly touches your power products in IPC and ATV. Do you already get any indications based on that from your customers that this will benefit your growth outlook? And also, do you actually believe you can meaningfully participate here, given you're not a U.S.-headquartered company, is that in any way an obstacle for you?
So Mr. Schaller, thank you for your question. I think here, the topic about foundries, Jochen Hanebeck explained this. I think just 1 comment. 2023 is pretty far out here we have to look at 2 effects. The first effect is, of course, additional capacity. And the other effect is how the major verticals are showing growth into 2023, which is pretty far out. The other point, before I hand over, is the question about our power. Look, we have always said that we position ourselves along the lines of a climate-friendly strategy and the demand from there will continue to increase over time.
Yes, we expect that there will be an additional push, but not only from the U.S. but global because in order to reduce the CO2 footprint, significant renewable installations are required. Battery backup or battery storage is a must-have and the electrification of many more of the industry has to come. So this, yes, of course, goes into our hand.
The other point is being in U.S. as a headquartered company, yes, of course, we see more interest there. But I think here, we always prefer not to be successful based on political positioning, but on competitiveness. And I think here, we are in an outstanding position with leading technologies providing very good performance at very competitive cost. And this is also very relevant, not only for the U.S., but also in Asia. Now Jochen, what's about capacities at foundries?
Yes. So regardless of whether it's foundry or in house, if you want to -- if you ramp a capacity within an existing clean room, you are somewhere in the range of 1 to 1.5 year to new capacity. If you need to need -- build a new module or a factory, then you're beyond the 2 years. So I was referring to the announcement of the various foundries, all extending their factory footprint, building new modules, and they will come on stream in '23. However, also these foundries have, of course, also some had some free clean room space, and they are equipping. And therefore, we will see increased output next year.
Of course, this is now overlaying completely with the demand picture, which has 2 elements: the cyclical part and an allocation, of course, everyone is asking for as much as possible; and there is the structural part, which, I think, the foundry industry is now catching up with in the sense that historically, the foundries did not invest into mature nodes, which maturity starts for foundry at 20 nanometers, everything above. Now recognizing there is structural growth drivers, like we mentioned, CMOS imagers, which demand more capacity in these nodes between 20 to 90 nanometers. So in a nutshell, the demand side is cyclical and structural. And on the capacity side, it's the normal picture that within existing clean room, there is a certain lead time building new clean rooms, factories, as you can see with our factory in Phila, takes more time.
So maybe Mr. Schaller, at an article -- the topic of U.S., we are definitely perceived in U.S. as a major player locally. We are well embedded in the various ministries and can participate in the new program. So we are not seeing, currently, any disadvantage not being headquartered there. Our strategy being strong in U.S. by acquiring Cypress is paying off in several ways, but for me, the most important one, that we can offer complete solution to local customers there.
That's very helpful and very clear. Maybe a very quick follow-up. When you say, you will see additional capacity in foundry next year, and I know demand is a different topic, but we just look at it from a capacity side, can you put any number to that? How much more capacity you think you can realistically get next year from your foundry partners?
We cannot comment on this. Sorry for that. We are still in discussion. And I think it is not a foundry asset. It's a total industry situation. And at least we see that for the automotive vertical, the foundries are willing to go as such an extra mile. So we have to see what we can get allocated there. And of course, we are fighting for each wafer. But how the capacity increase will come on board, I think we have to hear from the foundries.
We will now take our next question from Amit Harchandani from Citigroup.
Amit Harchandani from Citi. Two questions, if I may. My first question, rather, I would like to know your thoughts are on the topic of inventory management, please. Hello. May I continue?
Yes, Amit, we hear you.
No, I think I was asked to hold. So if I may just repeat it. My first question is on the topic of inventory management, if you could talk about how are you managing your inventory or the near-term between yourself and your distribution, what do you see in terms of inventory at distributors, at customers? Are you managing it more tightly to ensure you have better visibility on demand? So how are you doing it in the near term? And then structurally, do you think -- you talked about just-in-time being the thing of the past, maybe on the automotive side. But could you give us a sense for how do you think inventory management shapes up structurally in the longer-term as well?
And secondly, very quickly, if I may, on a separate topic, you talked about demand-supply balance earlier. Clearly, that seems to be a topic of debate. And you've given this all-time high probably book-to-bill ratio. Can you give us maybe some color on how much of these bookings might be coming up in the next 12 months? 18 months? But -- I guess you're all trying to figure out when does this all come into balance and what's the degree of confidence in the bookings number.
I give -- the first will be answered by Helmut. The in-house inventory topic, I think we have covered. But if you have additional question there, Jochen might answer. And then the lead time, I would say, the long-term ordering, Helmut?
Yes. I'd say inventory is in the channel. So meaning, so the distributors are very low as typical for this time of the cycle. Probably 30% to 40% below the targeted range as inventories, which is the most pronounced for the IoT products and then for the automotive parts as well. So that's where the shortage is the strongest.
By the way, it's also where the lead time is the longest, so it's very, say, inverted to the lead times, the inventory in the channel. The channel inventory isn't ours to manage. We can ship into the channel and get the channel sell the product to the customers at their discretion. So the channel -- the inventory in the channel is more determined by the operational capability to handle the product and turn the product quickly within the channel rather than by what we can ship in there.
Of course, in such a situation, there is essentially no more inventory than what is needed to operationally manage. Everything -- this is -- except for very few products, most of the parts are turned immediately when they arrive. So in the midterm or in the longer term, and as we expect at least some, let's say, conclusions and learnings from the current situation, so that the overall inventory level, in particular for -- I hope -- can still hear me, please?
Yes, I can.
Okay. Wonderful. So in the midterm, we expect the inventory levels to be in the automotive channel, higher than what we have seen before. So another important thing on the book-to-bill. Book-to-bill is, for us, confirmed orders. Confirmed orders can, of course, reach into the future, meaning we are confirming orders with a longer lead time further out.
So if you look at our total order book, it has a reach that is almost a year in terms of value. So there is substantial long-term orders in the book already. It's also not untypical that in -- when the market turns, so when the peak is reached, you see some push-outs and cancellations of some of the orders that are in the book already.
So it's hard to say when the orders continue to come in, the orders will only be confirmed for, I would say, more than a year now, more or less. So I think here, it is very difficult to read in detail or conclude something on the near-term revenue.
We will now take our last question from Jerome Ramel from Exane BNB Paribas.
Two questions. First of all on gallium nitride. You've been very quiet on the gallium nitride in the acquisition of International Rectifier. Your competitors are being much more vocal, and we start to see major deployment both in consumer but also in automotive. So if you could share with us maybe an update view on your strategy?
And second question, maybe a more long-term question. Concerning automotive and you are very strong right now in microcontroller with your AURIX family for safety and/or powertrain for Level 2, Level 2+. But when we look at the road map of your customer for Level 3 and above, I see that everyone is moving to system on chip and wanted to understand the strategy of Infineon for the system-on-chip because it's probably something you are lacking compared to some of your peers such as NXP, Renesas and so on. So just like to understand the strategy on the system-on-chip for the domain and for the Level 3 and so on.
So Jerome, thank you for a technical question. So we are very well positioned for GaN. We have a technology where we believe it is from quality and stability superior, what you find in the market. It's not the typical way of Infineon to make a lot of noise about these things. But I think here, we are extremely well positioned especially also that we are considering to be the most comprehensive supplier of silicon, silicon carbide and gallium nitride suppliers.
We see gallium nitride in various applications like the server power supplies, to a certain degree in onboard charges, but not so strongly, and we see it in the highly compact adapters. And I think here, especially in the adapters, it's a matter of system integration. You will hear from us in this domain a lot.
But I believe various applications can have various solutions, and we see currently, in the high-power server supplies, that silicon carbide has struck and moved in. So we believe that we are not behind the curve. Some of these applications we will prioritize later. But our gallium nitrate capability is quite profound.
The next is -- and here, you will have, of course, much more in the Capital Markets Day because that will be a separate presentation on, I would say, the advanced technologies from, I would say, silicon carbide, gallium nitride.
So next question is on the AURIX. I think here, you see various strategies. But what we see that our AURIX is making inroad in all of the applications and the customer even is liking the architecture, and it is feasible for everything, but the -- let's call it, the brain of the autonomous driving computer. And therefore, we believe that this -- you will see a, let's call it, 3 domains: one, which is, by far, the largest demand for types of AURIX; then in the area of domain controllers and zone controllers, you may have seen some multi chip architectures, which also we consider moving forward.
And for the central computer, you, of course, see the typical players there, but I believe you will also see a lot of changes at this type of computers are much more -- much -- too much power consuming. So with this, I think we are extremely well positioned and continue our road map along the lines. And I believe you will see much more AURIX revenue to come in the next decade.
Okay. It's now time for us to summarize.
That concludes today's question...
Yes. Thank you. Thank you, operator, indeed. That was exactly what I was going to say. So it's time for us to summarize. So I would like Reinhard to read out our closing remarks.
So Alexander told me to be fast now with this. Now ladies and gentlemen, it's time to summarize. With its March quarter, Infineon concluded a strong first half of its 2021 fiscal year. We recorded €2.7 billion of revenue, a 17.4% segment result margin and €407 million of free cash flow. A bit more than a year after COVID turned into a pandemic, demand is outstripping supply in almost all semiconductor areas. Many products are on allocation and inventories are on the lean side. Infineon is managing the cycle successfully, I would say, even very successfully.
We see cyclical dynamics coinciding with a structural upturn driven by two secular themes: electrification and digitalization. We are ideally positioned to shape and benefit from both, especially with the Cypress part becoming a part of Infineon a year ago. We once again adjust our outlook upwards despite the offs impact and foundry supply shortages.
For the 2020 fiscal year, we now expect revenues around €11 billion, a segment result margin of around 18% and a free cash flow of more than €1.2 billion. Infineon is in an excellent health to continue its profitable journey. Let's -- and again, see you at the Capital Markets Day. Thank you, and bye-bye.
Thank you very much, Reinhard, for this, yes, very dynamic closing statement. Thank you, all, to the analysts for your questions. Time to wrap up our call on 4th of May. Any further additional question, please don't hesitate to contact the IR team here in Munich. Stay healthy and optimistic. See you next quarter. Bye, bye.