May 7, 2019 / 5:53 AM / 4 months ago

Germany's Infineon says inventory pile-up to keep pressure on margins

FRANKFURT (Reuters) - German chipmaker Infineon Technologies AG said on Tuesday that a slump in demand had led to an inventory pile-up that would only plateau this summer, keeping pressure on profit margins.

FILE PHOTO: A close-up of a the Infineon microcontroller kit XMC 4700 is pictured at an exhibition during the German semiconductor manufacturer Infineon's annual shareholder meeting in Munich, February 21, 2019. REUTERS/Andreas Gebert/File Photo

Infineon, which makes high-performance power chips used in everything from cars to server farms and smartphones, has been forced by a China-led slowdown to lower its revenue guidance twice already this year.

While declaring an industry boom over, CEO Reinhard Ploss stood by his view that sales would rise 5 percent to 8 billion euros ($8.96 billion) in the year to Sept. 30, as Infineon reported flat sequential sales in the second quarter and said margins had held up better than expected.

Ploss said he expected inventories to peak in the summer. “But at the end of the year, we still assume a high level of inventories compared to our target inventory level,” he told analysts on a conference call.

Automotive accounts for more than two-fifths of Infineon’s top line and here, weakness in China - the world’s largest car market - continued through the three months to March even if the pace of its contraction slowed.

Infineon is basing its forecasts for fiscal 2019 on an expected low- to mid-single-digit percentage decline in unit car production.

Semiconductor companies have scaled back their expectations of a rebound in demand, leaving market valuations looking stretched after a steep rally in technology stocks this year.

Infineon, whose shares declined 0.6 percent after Tuesday’s results, are still ahead by 16 percent in the current year to date.

CLEAN CARS DOING BETTER

Munich-based Infineon said demand for electric powertrains and assisted driving technology remained strong, despite reductions in Chinese subsidies for environmentally friendly battery-powered vehicles.

Infineon said it had won Germany’s Continental as the first customer for a more powerful, 48-volt automotive power systems, known as MOSFETs, that will enter production in 2021.

In the near term, pressure on margins will persist as Infineon slows production to work off gross inventories that rose to 2 billion euros in the quarter to March, Ploss said.

Infineon did meet the forecast it gave for second-quarter revenue on March 27 - four days before the end of the period - of flat revenue while the segment result margin of 16.7 percent was slightly better than it had flagged.

It forecast on Tuesday that third-quarter revenues would grow by 1 percent, sequentially, but segment margin - management’s preferred measure of operating profitability - would compress further to 15 percent.

Overall, segment margin should come in at 16 percent in the year as a whole, the company said. The company’s long-term goal is to grow the top line by 9 percent and a segment result margin of 17 percent.

Reporting by Douglas Busvine; editing by Rashmi Aich and Louise Heavens

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