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Executives

Reinhard Ploss - CEO

Dominik Asam - CFO

Arunjai Mittal - Member of the Management Board, Regions, Sales, Marketing, Strategy Development and M&A

Ulrich Pelzer - Corporate Vice President, Finance, Treasury and Investor Relations

Analysts

Francois Meunier - Morgan Stanley

Simon Schafer - Goldman Sachs

Andrew Gardiner - Barclays Capital

Kai Korschelt - Deutsche Bank

Sandeep Deshpande - JPMorgan

Sumant Wahi – Redburn Partners

Didier Scemama - Bank of America Merrill Lynch

Gareth Jenkins - UBS

Amit Harchandani - Citigroup

Jerome Ramel - Exane BNP Paribas

Infineon Technologie (OTCPK:IFNNF) F3Q13 Earnings Conference Call July 30, 2013 4:00 AM ET

Operator

Good morning everyone. Welcome to the Infineon Technologies Fiscal Third Quarter Results. Today's call will be hosted by Mr. Ulrich Pelzer, Corporate Vice President, Finance, Treasury and Investor Relations of Infineon Technologies. As a reminder, today's call is being recorded.

This conference call may contain forward-looking statements based on current expectations or beliefs as well as a number of assumptions about future events. We caution you that statements that are not historical facts are subject to factors and uncertainties many of which are outside Infineon's control that could cause actual results to differ materially from those described or implied in such statements. Listeners are cautioned that Infineon's actual results could differ materially from the results anticipated or projected in any of these statements and they should not 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 report available on our website.

At this time, I would like to turn the call over to Infineon. Please go ahead.

Ulrich Pelzer

Thank you very much. Good morning and welcome to everyone on behalf of Infineon Technologies to our fiscal Q3 results conference call. Present here in the room is the entire Infineon management board, that would be Reinhard Ploss, our CEO; Dominik Asam, our CFO; and Arun Mittal, our Board member with responsibilities of strategy development and M&A, sales and marketing as well as our regions. We have prepared a couple of introductory remarks that will be done by Reinhard and Dominik and we will then open up the call for Q&A. With that, over to you.

Reinhard Ploss

Thank you, Ulrich. Ladies and gentlemen, welcome to our results conference call for the third quarter of the 2013 fiscal year. Following our usual routine, let me start by commenting on our Group and divisional results, market developments and achievements during the quarter. Dominik will then walk you through Group financials before I conclude with the outlook for the remainder of the fiscal year. We will then open up the call for your questions.

Infineon recorded revenues of €1,022 million in the third quarter, up 11% from the second quarter and up 20% from the first quarter. After five quarters of year-on-year declines, this quarter also marks a return to year on year growth with an increase of sales of 3% versus the year ago quarter. The strong revenue increases are consistent with our guidance from last November that business would improve considerably in the second half of the fiscal year. The improvement was actually slightly better than we had anticipated.

The increase in revenues was mainly a result of higher volumes and positive seasonality. Segment results increased sequentially by €49 million to €117 million and segment result margin has now returned to a level above 10% reaching 11.4% for the quarter. Within that, the IPC division returned to profitability with a 7.5% segment result margin, meaning all divisions are soundly profitable again.

Order intake in the June quarter continued to remain strong with Group level book to bill remaining at 1.1. In distribution, global end customer demand increased by 13% quarter on quarter with growth in all regions while inventory reach and turn remained in line with our target at approximately 10 weeks. Distribution book to bill was above 1, in line with the previous quarter with order levels in Asia-Pacific remaining strong and Europe stable.

Now, on to the individual divisions, starting with automotive. Revenues in ATV advanced by 8% quarter on quarter to €459 million, predominantly driven by seasonality strong car production. Segment result rose to €52 million from €37 million in the prior quarter. At 1.1, book to bill remained constant versus the second quarter. Lead times in inventory at customers and distributors remained broadly stable.

As for the overall automotive market, the news flow has generally been positive. Market research firm IHS has maintained the forecast of about 2% global car production growth in 2013 with continued strength in the North America, Chinese and other Asia-Pacific markets more than compensating for weak demand in Europe. According to IHS, European car sales are currently bottoming with a moderate recovery forecasted to begin in the second half of 2014. Meanwhile, many German and North American OEMs have announced that they will [indiscernible] and largely maintain production throughout July and August which gives us confidence in the business momentum in the current quarter.

Let's continue on to Industrial Power Control. IPC revenues in the June quarter totaled €173 million, up from €144 million in the prior quarter. Sales increased in all market segments. Most significantly in renewable for China, the demand was strong for IGBT stacks for wind and PrimePACK and EconoDUAL 4 modules for solar plants. These successes reflect our solid position with leading Chinese players in renewables such as Goldwind and Sungrow. Traction and home appliances also picked up nicely.

The increase in volumes returned IPC to profitability recording a segment result of €13 million, up from negative €3 million in the second quarter. As for order intake, the recovery trend has continued in the June quarter with a book to bill ratio remaining at 1.1 and with orders being placed predominantly for short-term delivery. In addition, inventory levels at our distributors have declined substantially over the last quarters.

Moving on now to Power Management & Multimarket, PMM revenues for the third quarter totaled €266 million, a robust increase from the €227 million in the second quarter. The biggest contributions came from products used in smartphones and tablets, mainly silicon microphones, RF protection devices and power [indiscernible] charges, many of which are present in flagship models at top mobile device OEMs.

In addition, positive seasonality boosted sales of discretes for power supplies and ICs for gaming consoles. In contrast to previous quarters, the portion of sales attributed to turns business has decreased as improved customer confidence has led to earlier order placement and slightly longer lead times. Just as in ATV and IPC, the increase in revenue at PMM lifted its segment result to €46 million, up from the €27 million in the March quarter. While the book to bill ratio has moderated from 1.4 in the second quarter to 1 in the third quarter, absolute order intakes remains at a high level.

We have one important highlight this quarter from PMM. In March, we became the first semiconductor company to introduce an integrated driver in MOSFET half-bridge for DC/DC conversion applications based on chip embedding technology. The innovative system in package carries this main DrBlade and offers outstanding performance at competitive cost. I am happy to report that DrBlade in combination with our digital power management ICs has recorded multiple design wins for the power management of the next generation into server processor and memory known as [VR 12.5] (ph) as a leading server OEM.

Let me conclude with Chip Card & Security. CCS revenues came to €119 million, a sequential gain of €11 million due to primarily to higher demand from payment, mobile security and trusted platform module applications. Segment results increased to €10 million from €7 million in the prior quarter. Book to bill for the third quarter remained constant versus the second quarter at 1.1. This concludes the divisional review. Let me hand over to Dominik who will comment in more detail on Group financials for the third quarter.

Dominik Asam

Thank you, Reinhard, and good morning everyone. Revenues in the third quarter amounted to €1,022 million, a sequential increase of €104 million. On the gross profit level, higher volumes not only contributed to more incremental profit but also resulted in higher factory loading, decreasing the cost of underutilized capacity by approximately €20 million. All in all, gross margin rose more than 400 basis points over the second quarter to 35.8%.

Depreciation and amortization for the third quarter amounted to €115 million, basically flat versus the prior two quarters. The increases in compensation as well as one-time project relates expenses caused the research and development expenses to rise quarter on quarter by €17 million to €139 million, and selling, general and administrative expenses by €13 million to €115 million.

Segment results margin after two challenging quarters once again returned to double-digit levels in the third quarter coming in at 11.4%. In absolute terms, segment results was €117 million, a meaningful improvement over the second quarter's segment results of €68 million.

Moving on, the financial results together with income from equity method investments came to negative €7 million. Continuing with tax, we recorded an income tax expense of €5 million in the third quarter, corresponding to an income tax rate of 6%. Compared to previous quarters, the lower rate this quarter is mostly due to a tax incentive becoming available in a certain jurisdiction.

Income from continuing operations was €82 million compared to €36 million in the prior quarter. Income from discontinued operations was negative €5 million compared to negative €3 million in the March quarter. In sum, net income for the Group was €77 million compared with €33 million in the prior quarter, resulting in basic and diluted earnings per share of €0.07 for the third quarter, up from €0.03 in the second quarter.

Free cash flow from continuing operations in the June quarter amounted to €135 million, up from €73 million in the preceding quarter. Our investment activities remained at a moderate level totaling €71 million for the quarter, an increase of €6 million over the preceding quarter, while cash flow from operations jumped to €205 million from €137 million in the prior quarter. As for our financing cash flow, cash provided by financing activities came to negative $6 million due to the retirement of some long-term debt.

If we look at Infineon's liquidity position, the Company's gross cash stood at €2.137 billion as of the 30th of June, 2013, up from €2.016 billion at the end of the March quarter. Accordingly, our net cash position also increased reaching $1.832 billion at the end of the third quarter, up from €1.705 billion at the end of the second quarter.

Let me conclude by discussing our after-tax return on capital employed or RoCE. It came in at 16% for the third quarter, up from 7% in the second quarter. Improvement in RoCE can be attributed to improved profitability as well as a slight decline in capital employed to €2,260 million as of 30th of June 2013, down from €2,275 million at the end of the March quarter.

Please note that our capital employed currently contains provisions related to the Qimonda insolvency proceedings totaling €351 million. These reduced our capital employed but should be regarded as nonrecurring and unrelated to our operating business. Even adjusted for this item, RoCE was back to a level clearly above our cost of capital in the June quarter.

Now, back to Reinhard.

Reinhard Ploss

Thanks Dominik. Let me now discuss our outlook for the fourth quarter of the 2013 fiscal year. Infineon anticipates Group revenues in the fourth quarter will be approximately €1,050 million. With that, ATV sales should remain constant while growth is expected for all other divisions. Segment result margin is anticipated to be about 13% of sales. Given the result of quarter one to quarter three and the outlook for the last quarter, we expect revenues for the 2013 fiscal year to come in at about 1.5 percentage points below fiscal year 2012 and the full year segment result margin should be just under 10%. As for our investments in fiscal 2013, they are expected to come in slightly below our original guidance of €400 million. Our expectation for depreciation and amortization remains unchanged at approximately €470 million.

This concludes our introductory remarks and my colleagues and I will now be happy to answer your questions. Back to Ulrich.

Ulrich Pelzer

Martina, please go ahead and poll for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question for today is from Francois Meunier from Morgan Stanley. Please go ahead sir.

Francois Meunier - Morgan Stanley

Maybe first question about depreciation, I would like to know when you're going to start depreciating this 300-millimeter fab for IGBT, that would be very helpful, that's the first question. The second question is more a macro question. I would like to know if you've experienced any weakness in the Chinese end market either directly or indirectly through your customers like [Siemens] (ph)? My third question if I may is about your increased confidence for the next quarter and the fiscal year, is it right across the board or it's maybe slightly more about PMM than the rest? Thank you very much.

Reinhard Ploss

Let's start with depreciation with Dominik answering, the macroeconomics will be commented by Arun, and the confidence, very simple, I think it is across the board that all segments are pretty stable. So now please, Dominik.

Dominik Asam

Francois, we start depreciating our equipment. We do produce on 300-millimeter and we have already published on CoolMOS products, we already sell them to customers and we have indeed some very significant charge or cost in our accounts currently due to 300-millimeter. What we do is we compare the kind of normal 200-millimeter cost to 300-millimeter cost and there's about 1.5 percentage points of margin currently, and disappearing because of 300-millimeter which of course as productivity kicks in can be reversed.

Francois Meunier - Morgan Stanley

So 1.5% of total revenues?

Dominik Asam

Yes, yes.

Francois Meunier - Morgan Stanley

Okay, thank you.

Arunjai Mittal

So Arun Mittal here. To your question on the weakness in Chinese end market, direct or through customers, no I don't think we are seeing that significantly. On the other hand, in IPC, we have seen a growth in the areas of traction, wind and solar. So the general purpose capital goods space market which is of course soft and there our end customers and our customers who are shipping into China also have not come back to that level where we were in 2010 and so on, but there are pockets of growth where we see very clearly that we are benefiting from as I said wind, solar and traction.

Francois Meunier - Morgan Stanley

Okay, thank you, very helpful. Well done for the quarter.

Operator

Our next question comes from Simon Schafer from Goldman Sachs. Please go ahead sir.

Simon Schafer - Goldman Sachs

Also a question on costs if I could, I'm just trying to understand what sort of sequential improvements you're still seeing because of rising utilization rates. Dominik I think you called out a €20 million reduction in underutilization charges but is that mostly absorbed now, so I guess given some of these 300-millimeter expenses, what sort of potential improvement are you still seeing on the gross margin side as your loadings continue to come up?

Dominik Asam

With regards to the loading, the idle cost is more and more absorbed and we are actually running in front and relatively close to full capacity already and need to think about beefing up our capacity already. In the back end, there is still some more margin, but then the question is whether the structure is the right one. So even there we have to start debottlenecking our capacity. You should not expect any near-term improvement out of 300-millimeter because the volumes are still relatively moderate. So, we really need a significant increase in volumes to see that happening but overall, there is still some upside in our margin as we've guided for the next quarter with the incremental €30 million or so revenues, there is then also percentage points in margin coming on top of that or more than a percentage point in margin.

Simon Schafer - Goldman Sachs

Got it. And Dominik, how are you thinking about just your operating expense line now that you're sort of back to full loading and you've gone back to some more normal trends in the industry, you've begun to see some growth again, how are you thinking about additional expense requirements, particularly I'm thinking you had some temporary cost phase out, when is that coming into the mix, that would be helpful?

Dominik Asam

Indeed with the revenues picking up again, we will see some moderate increase also in operating expenses going forward. There are effects like the usual annual seller increases which we have to absorb. Yes, I mean we have already digested this in the second half of the current fiscal year, a certain increase in the numbers but there is another one then of course in the next year. On top of that, we do increase certain expenditures on the R&D and on the selling side. We would be pretty tight on general and administrative expenses of course, but as the revenues grows, you should see some increase in OpEx but not proportionately to the revenue expansion. Don't forget that the December quarter is from a sequential point of view probably a weaker one due to seasonality, also the March quarter. Our second half is always stronger than the first half, but overall, if you look at the full-year numbers, you will see a certain increase in OpEx but under proportional to revenue increase.

Operator

And from Barclays, we've got Andrew Gardiner on the line. Please go ahead sir.

Andrew Gardiner - Barclays Capital

Just if I could follow up on that last question around the OpEx, on R&D, you mentioned I think the way you drive that but you also highlighted some one-time project costs, is that something we can expect to then see that line item sort of come down a little bit, and even within what you said about overall OpEx gradually moving up because of the way you drive this or just more help around the R&D line would be useful?

Reinhard Ploss

So Andrew, generally speaking, we are basically back to normal business, means there are no special effects anymore from I would say underutilization savings. We've got to remain tight on increasing the OpEx cost, and for the next year, we have a very high level of cost control there. So there will not be any specific projects that would be expected next year but maybe Dominik can comment on this.

Dominik Asam

Indeed in the Q3, we had very high R&D expenses, and despite some resource increase, we will see a slight decrease actually in Q4, but still my comment is valid that over the longer term, if you don't look at quarter by quarter but really year-over-year, you will see some moderate increase.

Andrew Gardiner - Barclays Capital

That's understood. Thanks very much.

Operator

We will now take our next question from Kai Korschelt from Deutsche Bank.

Kai Korschelt - Deutsche Bank

The first one was on automotive, I think you indicated flat which I believe is still a bit better than the typical seasonality, but it is a slowing of momentum from the first two quarters, so I'm just wondering kind of if you could describe what trends you're seeing, basically the restocking cycle in automotive is done now and we should go back to more typical seasonal patterns? And my second question was really on CapEx, at sort of which revenue levels from here would that need to go up again as you may need to spend more on ramping this 300-millimeter or in fact because of the idle capacity in 300-millimeter is actually not a lot of high CapEx needed should the revenue and order book continue to pick up?

Arunjai Mittal

So Arun Mittal here for the first one on automotive. Seasonally, and you heard the point when you asked for seasonal response, August is a month where typically we are seeing low number of cars produced due to the summer holidays. What we see this yet is however many European carmakers as well as some in the U.S. have shortened the holidays. So a flat is a good number to expect in the coming quarter for the automotive business.

Dominik Asam

With regards to CapEx, indeed we need to reaccelerate here. I think we've guided the market that we will spend in the long run about 15% of revenues in the normal growth environment in CapEx and we have to really gear up to that type of run rate as we speak in the current quarter already because we have already started to see some limits in certain projects in the front-end. And also, yes, 300-millimeter is also starting to ramp in volume, so we bring first products into volumes, we have decided some increase, but again, given the size of the production, this is still minor and will not dramatically change our gross margin, but of course as that accumulates over several years, you will see a significant contribution.

Kai Korschelt - Deutsche Bank

Could I just follow up if you don't mind, so you're saying 15% of revenues, that's about €600 million in full year, right, so for 160 million run rate, that's still above DD&A run rate, so I mean would that imply that at some stage the D&A continues to trend upwards or [indiscernible]?

Dominik Asam

Yes, that will be the consequence but I have to caution you that precise development of the D&A is very much dependent on what we have done five years before, so there are some memories so to speak from the past as you know, in depreciation, you put in the asset at cost and then you depreciate it, and if you have a period five years before, we had a lot of assets that were taken on board, a lot of depreciation is going away. If it was a very tight budget situation five years back, then it will be different. So, yes, on average there will be some increase but it needs to be modelled quite precisely and by looking into the CapEx rates five years ago, you get some feeling for that.

Kai Korschelt - Deutsche Bank

Okay, thank you.

Dominik Asam

And by the way, 300-millimeter, we're depreciating given that this technology has a clearly longer life span still ahead of itself, over 10 years.

Operator

From JPMorgan, we take Sandeep Deshpande. Please go ahead.

Sandeep Deshpande - JPMorgan

I'd like to talk a little bit about inventory and the cycle itself that you're seeing in the industrial businesses, I mean you've seen all that improve through the quarter and indications look like the order to continue to improve, can you talk about how inventories look in the channel at this point as well as how you expect how orders have played in July and how they look in the third quarter?

Arunjai Mittal

This is Arun here. Inventory in channel, and I talk about here the channel which forms about 30%, 35% of our revenue, is flat as I think Reinhard indicated in his speech. We are having inventories in the range of 10 weeks and I think this is where we like it to be. So no change in spite of the higher billings or ship-outs from our channel partners in the inventory. It is recognized on a global basis. Now having said that, we have to also remember that again factory utilization rates in China are still below where they were in the past, so one could argue that it's a very stable situation with potential for improvement in terms of production rates in China particularly rising very quickly. The second question was specifically on July, is that correct?

Sandeep Deshpande - JPMorgan

Yes.

Arunjai Mittal

Yes, the order income continues to remain at a healthy level, the book to bill is not as high as end of Q2, end of Q3 but still it's more than 1, so we remain confident there.

Sandeep Deshpande - JPMorgan

Just one follow up on your utilization, can you make a comment on where you are in utilization, I mean with respect to on the initial capacity you added through the downturn, where are we on utilizing that capacity, and at what level can we get back to the kind of peak margins you had in the last cycle?

Dominik Asam

I guess the first question is the easier one which is the question about utilization as we speak, I mean if you put the front-end and the back-end together, it's around 90%. So there is some capacity margin left in back-end and close to nothing left in front-end. However again, the structure is very important and it makes a big difference whether we get exactly the demand we have available or other products where we still need to invest to satisfy the demand.

Now, the peak margin question is a more complicated one. It is a question about the precise structure. You are going to see the question about how much variation from a long-term trend line in growth, you see whether we see like an upturn, the last upturn which was reasonably strong where we enjoyed 61% and 21% growth sequentially, which we currently do not foresee frankly. So from that perspective, it's a very hard question to answer, but as you know, our key philosophy in terms of running the business is that we aim for this 15% margin over the cycle and a very strong upturn and that means you need definitely above this 15% margin to satisfy that model.

Reinhard Ploss

Sandeep, let me remind you that we have invested quite in some projects in order to improve the margin longer-term which maybe other competitors might not be able to do with this 300-millimeter project and other major elements like this. Of course they will only kick in later, and as Dominik already hinted, this is due to 1.5 percentage points in segment result margin. So I think here we are still on the pass and odds of it. I think our initiative to go for higher integrated products and system integration approach, we also expect that this on a longer run will kick in on improved margin and gross margin levels.

Sandeep Deshpande - JPMorgan

Thank you very much.

Operator

Our next question comes from Sumant Wahi from Redburn Partners. Please go ahead.

Sumant Wahi – Redburn Partners

I have two. One actually has to do again back to the Japanese yen story which I know in the beginning of this year we were slightly more worried about and you had said that we're not seeing any immediate effect, when I look at the euro-yen rate or the dollar-yen rate, I mean it has remained at those levels, and while at that time you were saying that given the short-term factor, you're not seeing any sort of challenges on pricing, I'm just wondering has that changed at all, is the Japanese competition coming at all competitive on pricing where they are moving into the distribution channel? And then the follow-up question I have is actually going back to the CapEx, if I look at your CapEx guidance for the full year, let's say it's around 375, under 400, it still seems that it will be mostly last quarter loaded and just looking at the point you were making on kind of front end being 100%, close to 100% utilization, can I assume that you probably would be buying some 300-millimeter equipment and expanding on that on the production line space in the shell investment?

Arunjai Mittal

Sumant, Arun here. On the pricing of the or the weakness of the yen, certainly it is a welcome for our competitors in the sense who are dealing in the yen as their base currency, but I think they will go to use the advantage there to curb their looses and return to more solid position rather than influencing pricing. What we have seen is in our long-term – our contract discussions with customers, they tend to be long-term and not really contracts there on price but quality, and overall the people who deal with exchange rates or pricing also know that this pendulum can swing the other way. So I don't think we are seeing too much of an exploitation of the yen volatility in pricing.

Sumant Wahi – Redburn Partners

Maybe on that point then in a different manner, because they are being more profitable, do you think they could be able to catch up on your lead in investing in the 300-millimeter at this point because they have more cash?

Arunjai Mittal

Yes, what I learned in mathematics is from minus, you first come to zero, then you go to plus.

Sumant Wahi – Redburn Partners

Fair enough.

Dominik Asam

On the CapEx side, yes, you are absolutely right, we are going to have a backend loaded CapEx budget this year. I hinted to the type of levels we are probably seeing when I said about 15% of revenues. Yes, there is 300-millimeter investment in that CapEx already and the limiting factor probably is really how many technologies we develop to rent 300-millimeter. As an example, ATV products will take much longer, but as I mentioned in MOSFETs, we already start renting on 300-millimeter.

Operator

Next question comes from Didier Scemama from Merrill Lynch. Please go ahead sir.

Didier Scemama - Bank of America Merrill Lynch

I'm just trying to understand a bit which is again talking about CapEx and cost because I mean I'd like you to just give us your thoughts on the past, I mean if you look at every time the Company has increased CapEx and talked about we have full utilization, we need to spend more on OpEx, et cetera, and CapEx, et cetera, this has resulted in a pretty brutal decline in margins, clearly not the intended consequence, but what I'm trying to say is, why not sweating the asset a bit more, why not be a bit tighter on CapEx, and presumably [indiscernible] bring into background, I would have thought you would've gotten a bit more bang for your buck in terms of CapEx and returns, so I'm just trying to understand whether we are not on a slippery slope here?

Reinhard Ploss

So basically we have a mighty element strategy there. For going into seamless related products such as microcontrollers and chip card products, we have now set ourselves to a completely foundry-based business. So the whole growth which previously materialized now it is raised in factory, but in future takes place at the foundries. Regarding the CapEx in-house, we have very clearly, the 300-millimeters we expect even that in shorter term, we will have benefits from this 300-millimeter strategy. The next several 300-millimeter will be that we complement the pilot line to full production line which will yield in lower expense for the capacity increase in 300-millimeter. Therefore we expect that our strategy for CapEx related to revenue growth will become better than it had been.

And not to forget, in the years before, we had significant invest for our 300-millimeter start-up as well as for cooling factory and other basic elements where we had to provide clean room. So we definitely expect that relation to become better and maybe Dominik can give you some more comments on the details.

Dominik Asam

Yes, I mean if you think about the model and I think you guys are always interested in forecasting, I think that 15% of revenues ratios we give, that is exactly reflecting what Reinhard is saying that we can shed some capital intensity on advanced CMOS while maintaining of course the capital intensity and slightly reduce because of 300-millimeter but still we need to invest for growth, and if you assume that we are going to depreciate a little bit more the next year than this year, this year we said it's about €470 million, so say €0.5 billion plus a little bit, and you assume that in order to really ensure quality and maintain the asset at a certain level, you need to reinvest the depreciation to maintain the revenues and this is the experience we actually have.

You see that for the growth we target which is where it might be in the long-term but high single-digit at least, you have a significant annual addition of revenues and you have price decline on top of that, so you need a lot more volume every year, and in light of that, if I say 15% of revenues, minus the depreciation, that delta is not so big anymore. So I'm a little bit surprised that you are surprised and you feel we could sweat the assets harder, but we of course will look into that and we look into every single investment we release whether it's really necessary but we cannot deny that type of capital intensity.

Reinhard Ploss

Wait a second, this is a good point to discuss, to comment one element of the strategy, you should not forget that over a long. Period, we were rallying the allocation and the period now having a certain [indiscernible], we are also going back in order to see that we can use our equipment much better and increase utilization there. So of course besides reducing CapEx on that side, we also expect that we will with this productivity push also increase the gross margin, but of course, that is a multistep strategy but it will kick in, in the next one or two years.

Didier Scemama - Bank of America Merrill Lynch

That's great color. So in essence what you are saying is that you're reasonably optimistic on the top line next year?

Reinhard Ploss

So we do.

Didier Scemama - Bank of America Merrill Lynch

Right, great. And then, the second question is on Qimonda, there have been a few headlines last week from some decisions being taken by the German courts. I also saw that, and correct me if I'm wrong, but it looks like your position has gone up from 338 million to 351 million, so I was just wondering whether you could give us an update as to where the different cases are and whether you're seeing that these provisions are sufficient at this point?

Reinhard Ploss

So, first of all, this ruling of the court, that we do not have the final details of, but there is very clearly a positive development for Infineon. There's this the second level court and of course we expect that the insolvency administrator will go to High Court in order to have a final ruling on the patents, but for us it is a confirmation that our standpoint regarding the patents is very firm, and so this is a positive development. On the total accruals which we have taken for Qimondo, Dominik will guide you through.

Dominik Asam

Yes, you have seen their spend now is risen to 351 million, there's a certain methodology behind this, and despite the first of this intermediate step, I would call it we have won a battle there but not the war yet, and we are cautious in terms of maintaining these provisions because our goal is still to settle with the insolvency administrator, and from that point of view, whether it will be sufficient in the end or not, I cannot tell you today, I can tell you that we have put into our balance sheet what we see as likely and reasonably quantifiable, where in the end we will come out in a settlement or in a ruling in the end is very hard to predict.

Reinhard Ploss

And the other comment on the Qimonda case of course, the numbers the insolvency administrator has communicated are extremely high. We see ourselves in a good position in order to defeat this but here we don't expect that this will be simple to settle because of what is at all communicated to the press. But I think here, as we showed before, we are not in a hurry in order to spend more than absolutely necessary on that case and there we will take the time it needs in court. But here of course, if the insolvency administrator is open for a reasonable settlement, we are too.

Didier Scemama - Bank of America Merrill Lynch

Yes, that's good color. And then the final question if I may, maybe two, if you can comment on that, on the PMM division, your book to bill as you mentioned went from 1.4 to 1, can you talk about the various bits and pieces? I think you said the orders were flat and revenues went up, can you talk about sort of the momentum going forward whether you see bookings accelerating as we move into Q4 or kind of end of Q4 or whether you see flat earnings from here, any color would be great, thanks?

Arunjai Mittal

So on PMM, yes, you are right regarding the bookings or the book to bill. However this is typical seasonal, we are going into the Christmas season and therefore we saw the big increase, 17% or so, in the billings last quarter and we are just normalizing that now going into the current quarter. So I'm not disturbed at all by that decrease and book to bill, it is very, very normal. And of course within PMM, the details one has to look at, and if you're interested, Ulrich can help you out later on power versus RF versus the other applications where the trends are, but overall, there is nothing standing out which I need to present now. Of course the rollover from PC to tablet is very successful and we are participating in that, but other than that, last quarter I mentioned here about increase in data transfers, this is also remaining. So it's very, very seasonal what we are experiencing right now.

Operator

From UBS, we've got now Gareth Jenkins on the line. Please go ahead sir.

Gareth Jenkins - UBS

Firstly, I just wondered you mentioned the lead times you're expecting, I wondered if you could help us quantify that and whether you are actually going on allocating any particular products? Secondly, just wondered whether the 300-millimeter benefits that you see, you obviously mentioned the margin uplift, but whether you intend to enjoy that margin uplift as your cost (inaudible) versus your peers increases, or whether you aim to use it to gain the market share in the market?

Reinhard Ploss

The first one, Arun will take it, and the second Dominik.

Arunjai Mittal

Yes, so lead times are rising in some places. In some specific products in automotive, we see an increase in lead time, in the high power area with all the orders from traction, wind, offshore wind coming in, we see also some bottlenecks there in the high power area, and in the PMM area too with the rise of smartphones and tablets, there are one of the other packages that we have seen some bottlenecks. So all in all, if I had to split it between front end and back end, I would say most of what we see as a location is in the back-end, and in front end, we are fully loaded. So, we have ability to move some way first here and there but I don't really call an allocation in the front end as of now.

Dominik Asam

With regards to the question whether we want to use 300-millimeter to kind of gap lower prices and gain market share, no, this is not the intention. You know we have to cope with usual price declines year after year and of course 300-millimeter is a tool that enables us to follow that and it will make it very difficult for competitors to follow that usual price decline if they don't have it but our key goal is of course to boost productivity and improve our margin.

Reinhard Ploss

Maybe that gives me the chance to comment briefly on our strategy for how we could guide production capacity. You remember that the industry and especially Infineon has been on the heavy allocation, and this was a very ineffective time for us and our customers. What we are heading for is that we build up capacity with a certain small flexibility inside and not to get into a location or to have a much better feeling on the rear development of the markets.

The current allocation I would say, I don't know if I even want to call it allocation with tight delivery situation in some areas, we are decently full in the front end but I think here we decided to have a certain remaining flexibility in there. The major type situation comes from back-end capacities. We have a structural change since the last high season end of last year. So I think here it is very normal and especially in the back end, we can react much faster to add capacity like in the front end, and we're pretty sure that we can manage this reasonably and even taking the gross we see.

Now regarding the seasonality, anyhow we expect that quarter one and quarter two next fiscal year will experience a typical seasonality and maybe not significantly stronger but maybe stronger than the typical years we were expecting, but I think this we leave to November announcement, positive overall development into this coming fiscal year.

Gareth Jenkins - UBS

That's great. And then just one follow up on Qimondo if I may, the provisioning that you've made so far, can you just talk to how much of that is allocated to the patent dispute and the progression to the High Court, so if it is lost through the High Court, how much of that provision would actually be written back?

Reinhard Ploss

I mean we are not disclosing the precise composition of that reserve because in the end we will see a settlement or a decision in court and we want to keep some flexibility there, and by disclosing any details, we would of course enable the insolvency administrator to poke into these numbers and we are not willing for the sake of the Company to do that. On the other side, very briefly, we assume that it will take still quite some time until we have a High Court ruling on that case.

Operator

Our next question comes from Amit Harchandani from Citigroup. Please go ahead.

Amit Harchandani - Citigroup

A question and a follow-up, if I may. My first question is really around the drivers of your revenue growth that you've talked about in the press release today, for example you talked about renewable in China in case of IPC and you've talked about demands for servers and even in chip cards rising demand in payment and security. So my question is really in terms of these drivers, which of these do you think has really turned the corner and are sustainable, not just for the next quarter but going forward, and where do you still feel that it's a bit too early to call a turn in terms of the demand? That's my first question, and I have a follow-up, thank you.

Reinhard Ploss

I think what we have seen in the first two quarters that there are a lot of effects especially in the area of IPC which was a business dropping most where you had effects from the value chain which I think even the customer recognized or did not know how capacity grows in factory will take place. Renewables in Germany has been dropping significantly while renewables in Asia especially in China were growing to a great extent very solidly. So what we believe, this is not an extraordinary growth situation recovery from some specific effects. Automotive division has grown over the time very constantly and chip card was also pretty stable, there's a certain typical dip in the December quarter too.

So I think here all overall, the biggest changes to the market what we have seen was the rollover from PC to tablets and mobile phones in the PMM business, service have been continued growing I think grows continues most strongly, and as we offer new products and solutions, we can participate in this growth even more effectively. So we do not see that there is any specific special development which might return to us, that is for me very usual condition, but maybe Arun has some more detailed comments on it.

Arunjai Mittal

No I think, Reinhard, you put it very nicely, it's all sustainable Amit, whether it is servers due to the increase in the data traffic, whether it is renewables in APAC, be it in China or in other areas, wind and solar, these are all what we see as sustainable growth factors, or the last one is the chip card business with payment, I mean 85% of the world's transaction still seem to be done with cash or magnetic stripe application, so rise of chips for the purpose of this is expected to be there for a long time.

Reinhard Ploss

Maybe an additional comment on this is when you look into, many people talk about the reindustrialization of U.S., I think what we commented earlier before, the Chinese factories are not fully loaded and there is a lot of factory space there to be equipped. So we have to see how the trends will be there. On the other side, we expect that due to the continuous automotive growth, there will be a demand for additional production capacity as well for the reindustrialization of America or that might drive some demand mainly hitting the IPC group.

At least if you ask about what is out there in the market, we expect that the latest development for let's say the Internet of things, for instance in Europe or especially in Germany, the [indiscernible] industrial revolution is pushed, I think there are a lot of opportunities to come but it's much too early to say how the effects will be.

Amit Harchandani - Citigroup

That's very helpful color. And as a follow up if I may, given the improving outlook for growth, could you maybe share your latest thoughts in terms of the use of cash going forward in terms of inorganic opportunities and potentially an accelerated return to investors?

Reinhard Ploss

So it's an interesting question. Very clearly we have set priorities and as you know we have a strategy on differentiation which is now complemented by our strategy from product to system where we want to grow on say a higher level of say complementing our strengths and power discretes and other products by total systems solutions compressing of ICs. We are looking around which companies are able to support this strategy enhancement. Of course this is not a simple move because of our elements which I think many people find attractive, so we take the time and look out what the opportunities there are.

You know that we have done this three years ago with Primarion and this strategy turned out now to be successful with our successes in services and digital control which is done by for the [VR 12.5] (ph). So here please give us the time, we do not want to comment more in detail, but M&A is a very clear element of our day to day look around what can be done besides the organic growth.

Amit Harchandani - Citigroup

Thank you, and that's very clear and well done on a solid set of numbers.

Ulrich Pelzer

Apologies, but we will have time for one final question before we need to hand back over to Reinhard for closing remarks, one final question please.

Operator

Okay, our last question will come from Jerome Ramel from Exane BNP Paribas.

Jerome Ramel - Exane BNP Paribas

Just to go back to the 300-millimeter, I'd just like to understand right now is the revenue essentially coming from Villach, do you have a plan for Dresden, how it is split between the revenues, and if I look at Texas Instruments, they had a gross margin improvement of 300 basis point last quarter which was essentially due to the ramp up of that 300-millimeter fab, they haven't disclosed the capacity to additional rates there but we can easily understand it would still be over 50%. So I just want to get a sense of what kind of impact could we expect eventually on the gross margin of the Group coming from your 300-millimeter capacity and at what level in terms of capacity utilization rate should we see a meaningful impact on your gross margins?

Reinhard Ploss

So the 300-millimeter, the first question was how much is coming from Villach and Dresden, we consider 300-millimeter Villach and Dresden as to be one 300-millimeter clustered. Villach is mainly starting to transfer the technologies and have up to now of course a higher volume but plan to remain on the smaller scale than Dresden. You know Dresden is a 300-millimeter clean room fully automated, and after having started CoolMOS products, delivering productively from Villach, we are now ramping it in Dresden. So sooner or later, Dresden, and I think even sooner, take over the total deliveries to compare to Villach.

The next generation after CoolMOS, our low voltage MOSFET, OptiMOS this is first starting with PMM and later on newly developed technologies from ATV. The next big technology jump would be IGBTs which is expected to take place and technology release in next year. From that time on, we expect a stronger growth out of 300-millimeter. Dominik will walk you through the numbers.

Dominik Asam

With regards to the 300-millimeter productivity math so to speak, as we stated, we see productivity advantages of up to 30% once the capacity is fully ramped. So if you just for sake of illustrative calculations start with 68% cost of goods sold, you assume that more than half, a little bit more than half of that is in front end, you see that 30% will only apply to part of that because of course we will still have certain products for a very long time like in automotive on 200-millimeter.

So to put it into perspective, and it will take us another couple of years till we reach a point where the 1.5% headwind from 300-millimeter will actually go away, so that will not happen next fiscal year, so it will take longer, and then from that point to really reap the 30% on the entire 300-millimeter manufacturing capacity will take another three, four years. So this is the type of timeline we talk about. In the end, it all turns out to run well and 200-millimeter is full, the [indiscernible] in fact is full, and you should anticipate a kind of mid-teen percentage improvement in margin if you multiply all these numbers which is significant because our competitors will not be there by that time.

Reinhard Ploss

Maybe I'll take that as a chance to comment on our total growth strategy in 300-millimeter. Of course we know that we have to increase volume in 300-millimeter to benefit from it but we will not really go into war in the markets in order to doing so. Here we have I think the patience to use as it grows not to destroy prices and margins just to hit our 300-millimeter fab.

Jerome Ramel - Exane BNP Paribas

Okay, thank you very much.

Ulrich Pelzer

So thank you very much for your questions. A couple of closing remarks from Reinhard before we conclude the call.

Reinhard Ploss

Thank you, Ulrich. Ladies and gentlemen, all in all, the third quarter was a respectable one. Revenues have increased both sequentially and year-over-year signifying that the demand especially industrial markets is returning to more normalized levels. This confirms that our long-term growth drivers remain intact including increasing semiconductor content in cars and mobile devices and the strong position in power management applications. Operationally, we have managed the cycle well. During the downturn phase, we were able to quickly ramp down costs in our factories and deliver a respectable 5% segment result margin in the fourth quarter. Since then, we have been able to quickly and efficiently ramp our factories to generate a revenue increase of 20% within only six months. Financially, all divisions are once again soundly profitable and we are generating a solid free cash flow.

Looking forward, we are enjoying a very solid booking and demand environment at present. That said, though the global macroeconomic environment has improved somewhat recently, the overall growth outlook still remains relatively muted. If and when macro conditions improve and sustained top line growth materializes, we will be able to bring the potential of our competitive advantages including the cost-efficient 300-millimeter manufacturing to bear. This, coupled with the current margin levels, will put us on track to fulfil our margin objective of 15% over the cycle. Once again, thank you for participating in today's call.

Ulrich Pelzer

Yes, so indeed thanks to all of you for the interest that you've once again showed in our Company, thanks much for dialling in and for your questions. I do realize that a couple of people were still queuing for questions, please get in touch with the Investor Relations team here in Munich and then we hope to speak to you all again on the 12th of November when we report full-year results. Thanks much again for dialling in and for now bye-bye.

Operator

This concludes today's conference call. You may now disconnect.

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