Germany CFO interview: Infineon stepped on the brakes early on

From IAFEI December 2020 Quarterly newsletter:

Dr Sven Schneider, CFO of Infineon Technologies AG, issues a warning about the negative effects of the trade dispute between the US and China on Europe – sanctions against Huawei hit the chip producer.

Mr Schneider, Infineon share price is presently trading above its level in February 2020, before the coronavirus pandemic. How do you explain this price recovery?

I see several key reasons for this recovery period for one, the coronavirus pandemic has accelerated trends that are having a reinforcing influence on our structural growth drivers. These include digitalization in the areas of streaming, cloud servers or 5G infrastructure. In addition, demand for electromobility is increasing, not least because of government subsidies. Another key reason is the huge pool of liquidity currently in capital markets. And, finally, our investor relations work on the takeover of Cypress was very successful.

What specifically do you mean with regard to Cypress?

We explained the rationale for the largest takeover in Infineon’s history to the financial community well. Investors understand why the acquisition will pay off. Another plus is that we have basically already concluded the refinancing of the €9 billion acquisition. This is an important factor for investors in terms of risk evaluation. We see tremendous support for the acquisition in our investor base.

Did you expect the share price to bounce back so quickly?

I always thought it would bounce back. It was the speed that surprised me a bit. At the end of February 2020, our share price was €22.It dropped to €10 in March 2020. In September it is about €24 – in spite of the diluting effect of the equity increase in May. This fits right into the target corridor set by analysts, a range that extends from more than €20 to €30 on occasion.

All in all, this is a development that reflects the strong trust that markets have in Infineon.

Did the two past capital increases cause any significant changes to your shareholders’ structure?

Shareholder structure has not changed significantly. Around 10% of our shareholders are private investors, and 90% are institutional investors. A total of 50% of our investors come from the US and the UK, followed by Germany, Norway and Switzerland. We have always had a strong Anglo Saxon base of shareholders. Are major shareholders have remained consistent overall: BlackRock holds a stake of more than 5%. The Norwegian sovereign fund Norges and Allianz each hold about 5%, while the DWS group owns almost 4%.

Why are you continuing to forego major restructuring projects, something that your major customers in the automobile industry have made big headlines with?

Infineon stepped on the brakes early on. We already saw the first signs of a light cooling off in individual markets back in the summer of 2019. We then took some strong cost-cutting measures in the fall of 2019 – we imposed a hiring freeze around the world, we put off salary increases where possible, we restricted business travel, and we cut our budget for external consultants. These steps were implemented very well throughout the company and stabilized our earnings. So far, we have managed the challenging situation caused by the global coronavirus pandemic quite well and are cautiously optimistic about how things will continue to progress. In addition, automated businesses bouncing back strongly after being hit especially hard by the pandemic.

What’s the situation regarding short time work?

We are continuing to use this option, but have reduced the number of employees affected. It currently covers around 2000 Infineon employees and temporary staff at the production sites in Warstein and Regensburg. We hit a peak of more than 3000 people at four locations in the spring. We have already stopped short time work at our plants in Dresden and Villach.

How has your investor relations work changed since you expanded in the US through the acquisition of Cypress?

the main change has been the increased number of physical conversations with the investors since completing the largest acquisition in the company’s history – before the pandemic hit. We sent out three teams at the same time to the main regions when we announced the deal, and we also boosted the number of roadshows.

What are your financial objectives after the acquisition?

For Infineon, we continue to expect somewhat stronger growth of more than 9% a year over the cycle. We have raised the target for the segment result margin from 17% to 19%. At the same time, we are reducing capital intensity, and we expect an investment quota of 13% instead of the previous level of 15%.

Where does Infineon stand with the margin compared with the competition?

Our major growth drivers, like electromobility, renewable energies, digitalization and the Internet of things, are intact. Over the past 20 years, Infineon has grown two to three percentage points above the market average. This requires us to invest more, but it also leads to less free cash flow. Regarding the margin, this means that we perform much stronger in growth phases. Our profitability is declining right now because we are unable to fully utilize our in-house production capacities. Compared with many other companies, however, we are in good shape. We also have some competitors that generate higher profitability as they employ a different strategy and focus on special products.

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