Infineon Technologies' CEO Discusses F1Q14 Results - Earnings Call Transcript

Jan.30.14 | About: Infineon Technologies (IFNNF)

Infineon Technologies AG(OTCQX:IFNNF) F1Q14 Earnings Call January 30, 2014 4:00 AM ET

Executives

Ulrich Pelzer – Head, IR

Reinhard Ploss – CEO

Dominik Asam – CFO

Arun Mittal – Head, Regions, Sales, Marketing, Strategy Development and Mergers & Acquisitions

Analysts

Janardan Menon – Liberum

Simon Schafer – Goldman Sachs

Kai Korschelt – Deutsche Bank

François Meunier – Morgan Stanley

Jérôme Ramel – Exane BNP Paribas

Amit Harchandani – Citigroup

Gareth Jenkins – UBS

Sandeep Deshpande – JPMorgan

Andrew Gardiner – Barclays

Lee Simpson – Jefferies

Didier Scemama – Merrill Lynch

Günther Hollfelder – Baader Bank

Bernd Laux – Kepler

Pierre Ferragu – Bernstein

Operator

For Analysts and Investors for Infineon Technologies’ 2014 Fiscal First 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 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 Reports 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 everyone on behalf of Infineon Technologies to our fiscal first quarter 2014 results conference call. Present on this call as ever is the entire Infineon management board, that’s; Reinhard Ploss, Dominik Asam and Arun Mittal. We have prepared a couple of introductory remarks by Reinhard and Dominik and then we will open up the call to Q&A. With that, over to you.

Reinhard Ploss

Thanks, Ulrich. Ladies and gentlemen, good morning, and welcome to our fiscal 2014 first quarter result conference call. I will start today’s call with introductory remarks on our Group and divisional results, market developments and our achievements during the quarter. Dominik will then comment on Group financials, before I conclude with the outlook for the quarter two and the rest of the fiscal year. We will then open up the call to questions.

Infineon recorded revenues of €984 million in the first quarter, down 7% quarter-on-quarter from €1.53 billion in the fourth quarter. This was in line with our expectations. Segment result also decreased sequentially by €32 million to €116 million equal to our segment result margin decline from 14.1% to 11.8%.

Segment result was better than original guidance, mainly due to better than expected gross margin as expected improvements in manufacturing productivity, materialized earlier than anticipated. In addition, we benefited from higher yields.

The book-to-bill ratio improved over the reported period rising from 1 in the September quarter to 1.1 in the December quarter predominantly due to a strong order intake from automotive customers.

Now, for the divisional results, starting with automotive. Automotive revenues came in at €452 million remaining steady versus revenues of €455 million in the prior quarter. As global automotive production remained strong and many German car manufacturers shortened their year-end shut downs. Segment result also remained relatively constant at €55 million in the first quarter versus €57 million in the fourth quarter.

Booking in the December quarter were robust with a book-to-bill ratio coming in at 1.2. Though the absolute booking volume is high, lead times remain more disabled for most products.

With regard to market forecast, market research firm IHS anticipates that global car production will increase year-on-year by 3.4% in 2014 on the basis of a recovery in Europe and continued growth in the Americas and Asia-Pacific regions. As for automotive semiconductors, market research firms strategic and analytics forecast year-on-year market growth of 7.5%.

Let me next address automotive highlights in December quarter. Business momentum for our AURIX, 32-bit microcontroller family remained strong as we warned the signs at major customers in Europe and Asia for power train trust and safety application. This highlights that we’re making our way from mainly power train application win to other application of the automotive area with our 32-bit architecture.

Additionally, Infineon was also recently awarded a design win for our RASIC radar sensor platform with a major Japanese customer. RASIC is a key component for safety applications such as autonomous emergency braking which will be required to achieve a Euro N-cap five star safety rating beginning in 2015.

Moving on to industrial power control. IPC revenues of the December quarter totaled €179 million down from €197 million in the September quarter, with industrial drives experiencing worse than normal seasonality. And solar experienced normal seasonality.

However, business in white goods went in attraction experienced better than normal seasonality. Compared to the €18 million decline in revenue, segment result declined quarter-on-quarter by only €6 million to €27 million powered by improvements in manufacturing productivity. As for book-to-bill, the ratio remained sequentially unchanged as one.

As far as we can see, inventory levels at our customers are lean, and our lead times remain within normal ranges.

Turning to power management and multi-market, PMM revenues for the fiscal first quarter came to €238 million down €33 million from the fourth quarter mainly due to typical new tips in their trends and game consoles, mobile devices as well as inventory corrections at customers for mobile devices and wireless infrastructure.

Segment result also declined sequentially by €20 million totally €29 million in the December quarter. However the book-to-bill ratio improved from 0.8 in the fourth quarter to 1 in the first quarter. Inventories at customers and lead times are normal.

Next, on the Chip Card & Security. CCS revenues amounted to €108 million, a quarter-on-quarter decrease of €21 million in line with normal seasonality. Segment result decreased sequentially by just €6 million due to improved manufacturing productivity and amounted to €6 million. The book-to-bill ratio for the first quarter came to 1 flat with previous quarter. Both lead times and inventories at our customers are in within normal ranges.

I’m pleased to announce that during the quarter we began sampling our new OPTIGA Trust Authentication Chip. When paired together because Infineon provided software OPTIGA Trust is a complete anti-counter fighting solution that can be integrated into headphones, cartridges and all sorts of other electronic replacement parts. According to ABI research the market for authentication chip is slated to grow from 600 million pieces in 2012 to over 1.5 billion pieces in 2018.

Additionally, our technological leadership was again recognized with our SESAMES Award, this time for the best product in the identification and enhanced category for the world’s fastest e-Passport technology. With this technology, eight times faster contact plus lead times are possible, greatly reducing processes time plus application such as passport and identity cards.

Lastly, distribution point of sales revenues declined sequentially but only 1% as demand for automotive customers remained firm through the quarter. Inventory regions generally remains within our target range while distribution book-to-bill was again 1.2 due to automotive demand.

This concludes the divisional revenue. Let me now hand over to Dominik, who will comment in more detail on the first quarter financials.

Dominik Asam

Thank you, Reinhard. Good morning and a belated Happy New Year to everyone. Fiscal first quarter revenues were €984 million, a sequential decrease of €69 million or 6.6%. At constant foreign exchange rates compared to the previous quarter, sales would have been €50 million higher and the sequential decline would have been about 5%, which is very much in line with usual seasonality.

More impressive is the year-over-year comparison when adjusting for the weakness of both the dollar and the yen against the Euro. Compared to the last year’s December quarter, our revenue growth in constant currency terms was 19%. The sequential gross profit development surpassed our own expectations with a gross margin of 36.7%. It benefited from better yields and the previously mentioned improvements in manufacturing productivity.

Depreciation and amortization for the first quarter amounted to €120 million up €1 million from the previous quarter. At €133 million, research and development expenses declined quarter-on-quarter by €7 million due to lower tape of volumes at the end of the calendar year and the higher level of stabilized R&D expenses.

Selling, general and administrative expenses remained virtually unchanged versus the prior quarter at €114 million.

Segment result for the first quarter was €160 million and segment result margin was 11.8% compared to the fourth quarter segment result of €148 million and segment result margin of 14.1%.

Recall, that segment results of the fourth quarter had included certain positive non-recurring items within gross margin which if excluded would have resulted in a segment result margin of approximately 13%. So, despite a €69 million reduction revenues, margin compression excluding non-recurring items was wholly roughly 1 percentage points.

The financial results together with income from equity method investments came to negative €6 million, the financial results contains almost €1 million of charges relating to repurchases of our 2014 convertible bond, which will obviously not reoccur since the bond has by now been entirely converted, I’ll come to that a bit later.

Continuing with tax, we recorded an income tax expense of €17 million equivalent to a tax rate of 17%. Income from continuing operations was €85 million compared to €139 million in the prior quarter, while income from discontinued operations was €2 million, thus net income for the group was €87 million compared with €142 million in the prior quarter resulting in basic and diluted earnings per share of €0.08 for the first quarter down from €0.13 in the fourth quarter.

Free cash flow from continuing operations in the December quarter came to €30 million, down from €156 million in the September quarter. Cash flow from continuing operations was €158 million in the quarter, while investments totaled €129 million.

Let me now come to financing cash flow. As part of the capital returns program announced in November, we issued put options on 6 million shares with an average strike price of approximately €6 per share. We also repurchased convertible bonds with a nominal value of €11 million for €35 million in cash.

In addition, bond holders converted a total nominal value of €64 million. As the remaining nominal value of outstanding after repurchases and conversions fell below 20% of the original nominal value, we were entitled as for the terms and conditions of the bond to issue an early redemption notice.

Given that we whereby could avoid the dividend adjustment on the other lying shares, we have done so before Christmas i.e. just in time before the upcoming Annual General Meeting. By now, all remaining bonds have been converted, thereby raising our outstanding share-count to a total of approximately 1.127 million shares.

As for Infineon’s liquidity position, the company’s gross cash stood at €2.279 million as of 31, December 2013, slightly down from €2.286 million at the end of the September quarter.

On the other hand, our net cash position increased reaching €2.048 million at the end of the first quarter up from €1.983 million at the end of the fourth quarter, mainly due to conversions of our convertible bonds.

The net cash position as of the 31, December still included €38 million of current maturities of long-term debt related to the convertible bond which has disappeared after its full conversion.

Last but not least, let me address our after-tax return on capital employed or RoCE. It came in at 17% for the first quarter, down from 27% for the fourth quarter of the last year. The decline in RoCE can be attributed to lower profitability, higher tax expenses as well as a slight increase in capital employed to €2.194 million as of the 31, December up from €2.159 million at the end of the prior quarter.

Please note that our capital employed contains provisions related to the Qimonda insolvency proceedings and put options on our shares totaling €397 million. These reduced our capital employed but should be regarded as non-recurring and unrelated to our operating business.

Now, back to Reinhard.

Reinhard Ploss

Thanks, Dominik. Let me now discuss our outlook for the fiscal second quarter and the remainder of the 2014 fiscal year. Infineon anticipates that second quarter revenues will increase by a mid-single-digit percentage over the first quarter. The sequential increase will be mainly driven by automotive and CCS. Segment result margin is expected to be between 10% and 13% of sales as positive margin effects from higher revenue are offset by effects from the normal annual price reductions from many customers that became effective at the start of the calendar year.

For the 2014 fiscal year, assuming a Euro-Dollar exchange rate of 1.35 Infineon maintains the expectation of 7% to 11% year-over-year revenue increase with IPC expected to grow above the group average, PMM and CSS is expected to grow at the group average. And ATV expected to grow slightly below the group average.

Other operating segments is expected to remain at or slightly below the level achieved in fiscal 2013. We continue to expect segment result margin to be between 11% and 14% of sales. Also our investment budget of €650 million and expectation for depreciation and amortization of €500 million was slightly above remained unchanged.

Ladies and gentlemen, even though our fiscal first quarter revenues declined relative to the previous quarter, our performance and results improved significantly on a year-on-year basis, particularly not worthy of the fact that sales rose 19% year-over-year on a constant currency basis.

In addition, our better than expected profitability demonstrates that we have improved our manufacturing productivity as well. This market indicators pointing towards the global economic recovery as we move into our seasonally stronger quarters, are confident that we can achieve our financial performance targets for this fiscal year has further improved.

Longer term, we will remain technological leaders in our target markets as demonstrated with the design wins our AURIX microcontrollers and RASIC radar sensors, as demonstrated by our OPTIGA Trust Authentication Chip, we are able to use our system understanding to deliver higher value solutions to our customers. Combining these competitive advantages, our efficient manufacturing and our solid balance sheet Infineon remains well positioned to achieve our goals of high-single digit long-term revenue growth and 15% segment result margin over the cycle while continuing to return cash to our investors.

This concludes our introductory remarks. My colleagues and I will now be happy to answer your questions. With this, back to Ulrich.

Ulrich Pelzer

Thank you very much. Theodore (ph), could you please pull for questions and then take yourself. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll take our first question from Janardan Menon of Liberum. Please go ahead. Your line is now open.

Janardan Menon – Liberum

Hi. Thanks for taking the question. I was just wondering, in the last three months you’ve sort of maintained your full year guidance. But I’m just trying to get a feel on how your confidence has changed, has it improved in meeting that guidance and do you see any potential for upside in any of those segments coming through during the course of this year?

In particular given that you did somewhat better than what you were expecting in the automotive segment – what is it that keeps you little bit more cautious about the second half of the year, especially given that this used to be strength continuing in the U.S. and Chinese markets and signs of Europe improving.

And also in the IPC segment, have you seen any signs at all of the industrial drives of the business coming back and if not what do you think we need to see happen before your customers aren’t getting a bit more confident on that segment?

Reinhard Ploss

So, thank you for the questions. As I said before, we are getting, I could say, our trust in achieving overall – the guidance we have given is for clearly due to the positive development we see currently. We got a lot of segment specific questions which Arun will be happy to answer.

Arun Mittal

Okay, Janardan, Arun here. So, our confidence is neither high nor low, I would say it’s the same. We predicted something in November and we stay with that same prediction as of now. Yes, there is very good traction in the automotive business, but you hit the point when you asked about IPC business where the drives aspect particularly of the IPC business remains cautiously optimistic.

We see some signs of consignment stock build-up at customers and the desire to build stock. On the other hand we know that the utilizations of factory automation is not that there where it should push the drives business back to the past levels. So, a combination of all of these factors makes us comfortable with our guidance.

Janardan Menon – Liberum

And on the automotive side, do you see anything which suggests that current momentum you saw from the German car manufacturers, may not continue into coming quarters?

Arun Mittal

Absolutely not. On the contrary, we have very good book-to-bills, Reinhard has mentioned that both in the distribution side as well as inside the automotive division. So we remain very confident there.

Janardan Menon – Liberum

Okay. Thank you very much.

Operator

Our next question comes from Simon Schafer of Goldman Sachs. Please go ahead. Your line is open.

Simon Schafer – Goldman Sachs

Yes, thanks so much. Just wanted to dig a little deeper on the automotive side, great to see that bookings have been sort of sustainably back above €0.5 billion a quarter to €1 million now. But I’ve seen this lot more broadly, production levels sort of move back to normalized medians. Just wondering how you felt about scope for the specifically European production levels to rise considerably further sort of North of €600 million to €700 million euros, is that – are we beginning to look at normalized medium term.

Reinhard Ploss

I think here, Reinhard Simon. What we can say, when you look back, we’re able to digest the European weakness quite well. And to a certain degree, due to the fact that cars sold in Southern Europe are typically with lower semi-conductor content. So, what we see that is such an increase but we do not expect that it will overly drive the revenue stream. I think it will support the further growth and we have to see much of it will end up in semi-conductor demand. So we see a positive or over, but it’s still to be confirmed to continue.

Simon Schafer – Goldman Sachs

Got it, thanks. And then, secondly to Dominik, just on CapEx of €650 million for investments this year. Do you think that’s a peak sort of cycle just because it obviously entails some of the – some of a catch on spend and some of the incremental ramp caused, of 300 millimeters. As a peak year, what’s the tale of after that?

Reinhard Ploss

Yes, Dominik will answer this question.

Dominik Asam

Simon, the honest answers, we don’t know yet. I mean, it really depends on the acceleration revenues if we have stronger revenue increase, it could accelerate even higher and otherwise if we have a moderate growth, then it should go down. It’s not really given on any guidance on that yet. What we have said is that we’re targeting about 15% of revenues in CapEx. And given slightly above that in the current fiscal year with the 650 we’ve guided, I think it’s not necessarily on the low end on this year’s number.

Simon Schafer – Goldman Sachs

Got it. So, basically if you wanted to see continued revenue growth in the single-digits in ‘15, your CapEx of sales would probably still be around 15%?

Dominik Asam

Yes.

Simon Schafer – Goldman Sachs

As from what you know today?

Dominik Asam

Yes.

Simon Schafer – Goldman Sachs

Okay. Thank you.

Operator

Our next question comes from Kai Korschelt of Deutsche Bank. Please go ahead.

Kai Korschelt – Deutsche Bank

Yes, good morning. Thank you for taking my question. I have two, please. The first one was of the margin exceeded your own expectations in the quarter. I’m just wondering your guidance for the March quarter in the context of what you delivered in the December quarter seems relative conservative.

So, I’m just wondering is there anything on phasing that makes you a little bit more conservative than sort of extrapolating what you’ve achieved in the December quarter into March, with the first one particularly around maybe OpEx, because I think three months ago you may have been indicating a slightly higher run-rate for OpEx than what we had in the December quarter?

And my second question was really in automotive, it seems that some of your larger European competitors are maybe doing a bit better in terms of revenues in the last quarter or two. I’m just wondering is there any sense that you’re maybe losing market share or is it more the regional mix that may help some of these players compare to you? Thank you.

Reinhard Ploss

Thank you Kai for your questions. First one will be taken by Dominik, the second Arun will answer.

Dominik Asam

I mean, on the margin side, let’s not forget that in tooth mix segments, especially namely automotive and chip card we have the annual price revisions effective 1, January. And these fall through straight through the bottom line. So if you take that out it’s pretty consistent development there. So it’s a little bit of growth of course but working against that compression due to reduced ASPs.

Regarding the OpEx development, when I was asked last time about the development I was more referring to the kind of entire fiscal year not to the specifics of the December quarter.

In December, we had a lower tape outs as I mentioned, end of the year and probably also the – due to the holiday season. And we also capitalized quite a bit of R&D which is simply the effect of what project is hitting a certain milestone at what point in time. So you should assume that December quarter was a little bit on the low end and that you will see R&D probably going up more towards what we’ve seen in the September quarter last year. And you’ll see also a slight increase in SG&A going forward.

Arun Mittal

Okay Kai, for the automotive part, I absolutely do not see us losing market share in the automotive business. Reinhard hinted at some trends particularly the other segment which is driving our business very nicely and with the regulation in Europe picking in 2015, I think we are in a very unique position to combine our expertise at the system level with sensors for radar, microcontrollers and other power devices.

And this is of course not limited to applications in Europe only but also worldwide where we have seen some – very good power train wins with trucks as well as transmission application. So, I’m not so sure why you have that impression that who we might be losing market share.

Kai Korschelt – Deutsche Bank

I was only asking because actually micro had slightly different sequential growth profile that’s all. Thank you.

Operator

Our next question comes from François Meunier of Morgan Stanley. Please go ahead. Your line is now open.

François Meunier – Morgan Stanley

Yes, thanks first of all for taking my question. I’ve got two questions I feel plenty about you’re talking about yields improving during the court maybe earlier than planned. So the question here is are the yields at the new base level which would mean that the gross margin could improve effective from here or is it kind of a one-off and you get to – you got a bit lucky on the yield. That’s my first question. Thank you.

Reinhard Ploss

We very simply said we have started a productivity improvement program that comprises more elements. And of course yield is one of the major targets which I think is very much within line with the overall productivity program. So that’s nothing which is special or only timely. And we are working through this year so we expect that this productivity improvements support our segment results throughout the quarters and even long term.

François Meunier – Morgan Stanley

Okay. Now you’ve been talking quite a lot about this authentication chip which I think the word is fixture element for smartphone. Do you like unfolded that already for this year or because you’ve been doing quite a lot so I was wondering?

Reinhard Ploss

I wonder, Arun, will you take the question.

Arun Mittal

Sure, I can. No authentication here is really unique methodology which we have generated and it’s in the OPTIGA platform, OPTIGA Trust platform discussed. It’s a combination of hardware and software so it’s not just hardware like in the case of NFC. NFC is a different ball-game and our belief is that authentication has a future which is pretty bright and as Reinhard indicated analysts are predicting in the range of 15% to 20% growth rate over the next years for the purposes of authentication.

And when we refer to authentication with our OPTIGA platform we are referring to a far easier approach to enabling authentication then that is achieved by NFC. And Reinhard just hinted to me that an example here, which will suffice is batteries for example and cameras and other applications to be authenticated that it’s coming from the right manufacturer as compared to NFC and mobile phones.

François Meunier – Morgan Stanley

Okay, thank you.

Operator

Our next question comes from Jérôme Ramel of Exane BNP Paribas. Please go ahead. Your line is open.

Jérôme Ramel – Exane BNP Paribas

Yes, good morning. Would it be possible to have a little bit more color on the dynamic in IPC between drive renewable traction on UPC, UPS I’m sorry and home appliances?

Reinhard Ploss

Yes, Jérôme, I think we can. I would say go a little bit more into detail on those. Arun will give you the insight.

Arun Mittal

Yes. Whenever it comes to colors it comes to me.

Reinhard Ploss

Yes, absolutely.

Arun Mittal

Yes. So I’m not really sure what exactly your question meant in terms of if you’re interested to know our business split then I can tell you 40% is roughly in drives. 20% renewables, 20% including traction, UPS and home appliances and then we have the rest for other applications. Would that suffice?

Jérôme Ramel – Exane BNP Paribas

Yes. And if you could explain us where you see the growth coming from in all these segments?

Arun Mittal

Yes. So, here drives, as I indicated earlier in the previous question, we are not there where we were in the past. So, we see some utilization challenges in the end applications still out there. We, nevertheless we see signs from customers which indicate that they’re preparing themselves for the next installation program which might be coming towards the second half of our fiscal year.

In renewables combination of solar and wind, we see a balanced picture with wind being higher in Europe particularly driven by offshore and solar decrease in Germany and Europe being compensated by the rise in China.

Traction is something we are also seeing a lot of excitement on. And here it’s coming from the big urbanization plans which the Chinese government is implementing on one hand as well as pockets of business wins in Europe too.

Jérôme Ramel – Exane BNP Paribas

And in wind, do you see a recovery in the U.S. or not yet?

Reinhard Ploss

No. Wind is actually we see much more traction in wind in Europe as I said with offshore. The U.K. for example has a target to implement 10 gigawatts of offshore wind power by 2020 versus only 3 gigawatt which is existing today. So, there we have we will also benefit from this trend.

Jérôme Ramel – Exane BNP Paribas

Thank you very much.

Reinhard Ploss

Welcome.

Operator

Our next question comes from Amit Harchandani of Citigroup. Please go ahead. Your line is open.

Amit Harchandani – Citigroup

Good morning, gentlemen. Amit Harchandani from Citigroup. Thanks for taking my question. But the first question I have is really going back to the full-year segment margin guidance. Now, you did better than expected in fiscal Q1 to some extent that you’ve been benefiting from a lower OpEx and capitalization of R&D. But you’ve kept your full year guidance unchanged. Is that an element of conservatism or do you see a reversal in profitability or increase in expenses coming through, I’m just trying to get a sense of if given was up by nearly €20 million odd, shouldn’t that go through for your full-year guidance. Thank you.

Reinhard Ploss

Yes, Dominik will take that question.

Dominik Asam

I think it’s more a question of material. Frankly if you think about kind of the slight improvement in one single quarter, I mentioned that there were some kind of low tape-outs in December which will fit, obviously will then happen later in the year. And if you then think about the kind of uncertainties inherent in the guidance so far, it’s really rounding up rough, so that’s why I don’t think you should kind of interpret too much into this.

Amit Harchandani – Citigroup

Okay. And secondly, could you maybe comment on the different puts and takes within your PMM division right now. You talked about some seasonal difference inventory correction but at the same time bookings went up, presumably maybe of a lower revenue base. But could you maybe give us a sense of how the segment evolved in terms of customer behavior across different applications during the first quarter? Thank you.’

Reinhard Ploss

Yes, Arun will take that.

Arun Mittal

Yes, thanks Reinhard. Yes, Amit, I think we’re coming off a very low book-to-bill end of Q4, where we were at 0.8. And therefore that was having a consequence in the first quarter numbers we have seen. Book-to-bill of one now makes us very confident that things will turn around. And this is a classical – seasonal business which we see in PMM, which is driven by end-applications like mobile devices as well as information and communication technology products.

Amit Harchandani – Citigroup

But did you see any change in terms of the sentiment around smartphones and mobile device?

Arun Mittal

Yes, clearly.

Amit Harchandani – Citigroup

During the quarter?

Arun Mittal

Yes, clearly on the fourth quarter they were lower than on the remaining of the year. And as I said this is seasonal. Going forward we think after the Chinese New Year, we will be in a much better position to predict how big the comeback will be.

Amit Harchandani – Citigroup

Thank you Arun. Thank you.

Arun Mittal

Welcome.

Operator

Our next question comes from Gareth Jenkins of UBS. Please go ahead. Your line is now open.

Gareth Jenkins – UBS

Yes, thanks. A couple if I could. I think you grew in auto 16% year-over-year, I think you’re competitor in the year grew 22%. You’ve historically given very good help in terms of the content growth versus vehicle growth, so roughly 4% to 5% each. Should we assume that the delta between 15% you reported revenues and back on the 9% underlying growth is restocking in the channel. And it’s not – and can you maybe walk us through what the content growth you thought was in the quarter?

And then secondly, I just wanted to see if you could give us a sense of utilization in this quarter and maybe for the next quarter, particularly around the 300 mil ramp – the 300 mil utilization? Thank you.

Reinhard Ploss

Gareth, the comparison year-on-year is pretty challenging this time because the quarter four last fiscal year was overlaid by a lot of special effects like inventory corrections and others. So, a very precise conclusion on the growth and comparing growth, this is not really effect on those. I think here we have to look at overall year average growth rates.

The utilization will be commented by Dominik.

Dominik Asam

By the way it’s 20% the year-on-year growth on automotive and this is in Euros cent, all competitive are I think are in dollars. If you adjust for that we are actually outperforming them. Second question was?

Reinhard Ploss

The loading.

Dominik Asam

Well, the loading, we have been producing pretty much through the quarter the outlook for the coming quarters is good and we want to be sufficiently equipped with inventory, you might have seen in the balance sheet that we have increased inventories by €45 million. This is by the way why the fall-through from revenues to segment results going forward is only 50% because as you recall, 50% is basically the variable margin. And then, given that we have fully utilized our capacity there almost basically no change in idle cost. So utilization is very high.

Gareth Jenkins – UBS

Great. Thank you.

Operator

Our next question comes from Sandeep Deshpande of JPMorgan. Please go ahead. Your line is open.

Sandeep Deshpande – JPMorgan

Thanks for letting me on. I have a first question on manufacturing. Can you talk about what percentage of your manufacturing at the moment is 300 millimeters? And what do you expect in terms of 300 millimeter manufacturing capacity by the end of 2015. And in terms of your – how you’re modeling at this point, you’re giving full year margin guidance.

But when you go back to previously good year at Infineon in 2015, or 2011 you had much higher margins. Can Infineon reach those margin targets again given the higher DNA? And I have a small follow-up.

Reinhard Ploss

Sandeep, there is a lot of questions. I think the 300 millimeter question is I think difficult to answer. Of course we can give you some data on the loading but still we are very much in the ramp of the additional technologies. And we will see higher loadings throughout the year. Currently it is still on lower levels mainly serving PMM business.

Overall judgment regarding the earning situation will come from Dominik.

Dominik Asam

Yes. I think on the margin, let’s recall that these 20% you allude to have happened in a year where we had 50% plus and 20% plus growth in roles. If we had that kind of enormous growth, again I would not rule out but we could go back to 20% margin but that would then be a situation as last time with heavy allocation and done exceptionally strong recovery. And given that we’re not foreseeing that, we of course caution you to assume that type of margin in the near term. Yes, and it’s the question is also when that could happen?

Sandeep Deshpande – JPMorgan

No, I mean, Dominik, the question is not that it is happening this year. But are you saying that sort of margin occurs only in allocation and extreme levels of growth and it’s not possible in the normal course of things?

Dominik Asam

Yes, I mean, the question is really timing. If first of all, as what I mentioned we’ll be ramping 300 millimeter. We currently have a headwind of about 1.5 percentage points. And as we already said, if that reverts into neutral or into positive territory of course we get a significant contribution out of that.

And then, yes, there is always this math of valuable contribution margin and as the revenues go higher, it’s possible, yes. But we need a very significant recovery. And it’s obviously easier once 300 millimeter plays a more dominant role in our production portfolio.

Sandeep Deshpande – JPMorgan

Thank you.

Arun Mittal

Well, Sandeep, 300 millimeter, it didn’t give you the number. But we are believing as we agree, well in track with all the transfers that it can be a three-digit million revenue number out of 300 millimeter which should help to come back into the framework we had, regarding the earning.

Sandeep Deshpande – JPMorgan

So, this is in 2014 you’re going to have a 3-digit million?

Dominik Asam

No, no, no, 2015, you ask me about 2015?

Sandeep Deshpande – JPMorgan

Yes, yes, okay, that’s fine, yes.

Dominik Asam

That’s around there.

Sandeep Deshpande – JPMorgan

Okay, thank you. Thank you.

Operator

And your next question comes from Andrew Gardiner of Barclays. Please go ahead. Your line is open, sir.

Andrew Gardiner – Barclays

Good morning, thank you. I just had a question to follow-up on Dominik’s answer regarding utilization and loading levels. If the demand were to increase as we continue to move through the year, what’s your flexibility levels in terms of production and what point would you anticipate starting allocation for customers? Is that something that is potentially quite close given you full now or do you have some flexibility if CapEx orders, for equipment already allocated towards the potential for demand upside? Thank you.

Reinhard Ploss

Andrew, two answers on that. One, regarding the structural tightness and allocation situation. Arun, will give general loading perspective or capabilities, which the flexibilities are Dominik will answer.

Arun Mittal

Okay, Andrew, Arun here. We do have some allocations already in certain packages as far as automotive is concerned. I mentioned that already in my – in the last call, last quarter. And that has not changed. If you recall, we also talked about March quarter being the time when we would have invested enough to come out of ideally allocation in those packages.

As far as the rest of the packages or the company is concerned, loading is running very high. And but we are not there where we would like to say we are in allocation.

Andrew Gardiner – Barclays

Okay.

Dominik Asam

Regarding the kind of full revenue potential in the near term, I’d say there is some upside, yes, if everything turned out picture perfect, i.e. we would exceed some guidance for the March quarter, let’s say €1.50 plus and then the €1.1 billion something plus and then really crank it up to over €1.2 billion in the fourth quarter.

If that would be the perfect ramp for us, and the structure of the demand would ideally fit our production capacity. We could probably do about €4.4 billion this year. Yeah, but this is really a hypothetical, yes. And then this is already reflected in the invest.

And the reaction times regarding de-bottlenecking are too long that we would be able to kind of go beyond that. And I think frankly we don’t see any signs for that enormous upswing happening in the near-term.

Andrew Gardiner – Barclays

Understood, thanks very much.

Operator

And our next question comes from Lee Simpson of Jefferies. Please go ahead.

Lee Simpson – Jefferies

Hi, thanks for taking my question. Please, just, if we look again just as it relates to gross margin, you call that manufacturing productivity gains. But I wonder if there is any impact from or if you could give us at least an update on how the CMOS outsourcing is going. And maybe just underline again, where in fact that does coming through, is that all CCS or is that going to be a microcontroller’s play as well?

Dominik Asam

So, the outsourcing strategy is mainly focusing on CMOS technologies, which is Chip Card and microcontrollers. Due to the nature of our microcontroller business which is mainly focusing on automotive. It will take much longer until we have a significant share of automotive microcontrollers.

And being outsourced via chip card is moving much faster. So there is kind of event of a roll-over in our addressed and manufacturing plant where CMOS has manufactured – Chip Card is moving out and giving space for automotive. Definitely the next generation 65 nanometers is 100% outsourced.

And what we are growing currently, what we are increasing the outsourcing shares in 90 nanometers. 40 nanometers of course is extremely far away. We are also adding a power but due to the very specific technologies we have it is, electric technologies as well, only older technologies in order not to lose IP.

Lee Simpson – Jefferies

Perfect. And maybe just as a sort of quick follow-up question. Do you have any sense for how DNA behaves, maybe it’s through 2015 and 2016, at this point, they’re just giving out 15% CapEx. It looks as though DNA should move up over the next couple of years?

Reinhard Ploss

Yes, Dominik will answer to this?

Dominik Asam

Yes, this summit is absolutely right. What DNA is obviously the current level of capital expenditures but also the capital expenditure development over the five prior years. Because in (inaudible) we depreciate over 5 years, you know 2009 was very light in invest. And then we had some heavy years later on so we basically have to look at the historical CapEx and then go five years through the depreciation and then you see also the role off of depreciation.

And you see that there is not too much rolling off, so that would be a slight increase in capital expenditures and depreciation going forward. Also, let’s not forget that we are also adding capitalized R&D, which then will also end up in the amortization part of DNA so there is a trend to the upside.

Lee Simpson – Jefferies

Great. And maybe just to clarify I think I heard you mention that idle cost were flat Q-on-Q?

Dominik Asam

Pretty much, yes, there is no major deviation in idle cost.

Lee Simpson – Jefferies

Okay. Thank you very much.

Operator

Our next question comes from Didier Scemama of Merrill Lynch. Please go ahead. Your line is open.

Didier Scemama –Merrill Lynch

Hi, good morning gentlemen, thanks for taking my question. I just squeezed in before the end. Sorry to be boring but I’m just going to go back to your guidance for the full year and so the fiscal Q2. So first on Q2, you’re essentially saying top-line of €50 million segment result flat so maybe just explain why there is no fall-through this time when you had a massive fall-through upside in the first quarter?

And then, when I look into your second half guidance, you said fall-through is about – I believe it is about 37.5%, which seems very low. So, can you talk about gross margin dynamics, OpEx, I think you said that’s negligible, doesn’t feel like it’s too negligible? Thanks.

Dominik Asam

So, with regards of the fall-through, first of all we have to understand that in the December quarter, basically there was no change in the idle side, meaning full utilization pretty much, which means that we have produced into inventory. And going forward, this kind of full utilization picture will hold up which means that if you think about the incremental fall-through, very simplistically it’s about 50%.

Then we have the price decline, 1 January, which is eating away a couple of percentage points which is quite naturally of ADV at 47% of revenues or so with the availability of Chip Card. And then you have a certain price decline, you have to imply through these revenues. I think that’s easy to Ploss we check.

There have a little bit of increase in the operating expenses looming because operating expenses for December quarter were unusually low I have to say. And if you add them altogether it’s a pretty clear picture I think for the Q2. And then, if you go into the second half of the fiscal year, you will still stick to that 50% fall-through because we’re not kind of putting out idle cost but we are really adding cost also to realize these.

We have started investing more so there is more depreciation coming. Hook-up cost and everything you need to ramp the capacity. And also OpEx there is a very moderate increase and if you add that together, you shouldn’t see any discontinuity in your excel spreadsheet.

Didier Scemama –Merrill Lynch

So, like your top-line would be then on therefore bit lower for 60% fall-through in the second half, but I’ll work on that. On the PMM side if I may, I have a quick follow-up. I mean, the profile of the business has changed somewhat over the course of around 15 months, where you’ve had a lot of success in mobile devices which my understanding carries very high operating margins.

And as we see empirically a slowdown in the high-end smartphone market, you absorb these volume slow-down with higher content as you’ve alluded to or actually all those higher content parts very much dear towards the higher end of the smartphone market?

Reinhard Ploss

Didier, you see a lot of overlay of effects there. A certain decline in PC was compensated by the growth in mobile. Growth in mobile was not only by the number it was also by our market share in the mobile. And we had really a strong win gain in microphones and RF. We believe that we can continue this. So, I think here the structure will not change much from our point of view.

Didier Scemama –Merrill Lynch

Okay. Thanks very much.

Operator

And our next question is from Günther Hollfelder of Baader Bank. Please go ahead, your line is open.

Günther Hollfelder – Baader Bank

Yes, thank you. First question, I would like to get back to IPC and your comments on wind power in the U.S. In the past weeks, we’ve seen Siemens booking record orders for wind projects in the U.S. in Iowa and also in Texas. And I was just wondering how you’re today proficient to benefit from these Siemens orders. I understand that there could be a change also in the supply at Siemens which could open some opportunities for you here in the U.S.?

And my second question would be on the financial income I know there is very volatile due to hatching but could you provide some guidance following the bond now? Thanks.

Reinhard Ploss

Well, I think it’s a question which we definitely would like to answer. But it’s not so easy because we are very hesitant to comment on where we are designing in these major platforms. What we want to say is we have excellent modules and the high voltage range 4.5 KV, 3.3 KV and 6.5 KV. And I think we are excellently positioned to take some of those business. But sorry to say we cannot go into details on future market share. Because, we do not want to put anything at risk.

Günther Hollfelder – Baader Bank

But there should be some opportunities for you also for growth in the U.S. in the wind business?

Reinhard Ploss

Yes, absolutely. Maybe Arun can go more into details on that.

Arun Mittal

Yes, sure. Please understand we talk about any specific customer names. But I was, in the beginning of the call already very clear about the offshore wind market and the opportunities we have in that. And that more or less answers your question that we remain optimistic in that segment.

Günther Hollfelder – Baader Bank

Okay.

Operator

Your next question is from Bernd Laux of Kepler. Please go ahead. Your line is open.

Bernd Laux – Kepler

Good morning gentlemen. Thanks for taking my question. The first one is related to manufacturing. Is it correct to understand that the efficiency gains that you’ve recorded have been related to the 200 millimeter wafer manufacturing sites and are not related to the 300 millimeter ramp up?

And the second question would be for Dominik on the balance sheet. I’ve recognized there is a reduction in your short-term provisions by over €60 million quarter-on-quarter. And can you explain where that comes from? Thank you.

Reinhard Ploss

Both questions will be answered by Dominik.

Dominik Asam

So, let’s start with the second question first. The reduction – short-term provisions is predominantly related to the bonus accruals we have in there, when the fiscal year is ended. At the end of the fiscal year as a provision, and new fiscal year it’s either paid out in December quarter or ending up in the liability because and it’s a real liability as opposed to provision so that produces that position. And what was the manufacturing question?

Reinhard Ploss

The 300 millimeter.

Dominik Asam

All right. I mean, the 300 millimeter is still a negligible percentage of the mix. And from that perspective yes, efficiency gains came from 200 millimeter and of course from back-end.

Bernd Laux – Kepler

Thank you.

Operator

And our next question comes from (inaudible). Please go ahead. Your line is open.

Unidentified Analyst

Yes, thank you. Two questions if I may. The first one would be on – before I would like to understand if you are facing some headwinds coming from ForEx especially on the yen given the weakness and from a competitive standpoint? And the second question is on, if you could give us an update on what’s currently happening on this issue? Thank you.

Reinhard Ploss

Regarding the yen, very briefly we commented this in the last quarters that only a certain part of our business is exposed to the fact of yen exchange rate. Automotive is typically doing long-term contracts and the major overlap is in the region of the IPC where we – I think we’re quite competitive technically. The other questions will be answered by Dominik.

Dominik Asam

So, regarding Qimonda there is no real new news, I mean there are two major issues which are under discussion as you might recall. And the first one is IP that we had so far only positive developments, meaning that we have pretty much won the legal proceedings in the U.S. In Germany they are still ruling from the Supreme Court outstanding. So, now we have to think about how we proceed on that matter.

But as you might have seen, we have not really changed the way we have dealt with the issue in any meaningful way over the last quarters. So there is pretty much steadiness on the impairment of capital discussion basically opinions from all kinds of experts are flying around. And now this is in court too. There was a first hearing with the expert appointed by the court were both sides could present some major faults on the topic. But it will take a long time till all the expert opinions will be reviewed by that expert. And then that expert will give his views to the court and all of that will take a very long time.

So, you have to bear with us. But if anything on that peace side things have improved, and gradually on the impairment of capital discussion there is no real news to report on.

Unidentified Analyst

Okay. And can you just remind us how much, provisions do you have?

Dominik Asam

Yes, €361 million are on the balance sheet.

Unidentified Analyst

Okay. Thank you very much.

Operator

And our next question comes from Mr. Pierre Ferragu of Bernstein. Please go ahead. Your line is open.

Pierre Ferragu – Bernstein

Thank you. I have like, more of a long-term question on your automotive business. And I was wondering how you see evolving the rounds here in terms of Hybrid and actual. I saw that when I visited two or three years, the overall industry was more bullish on that segment than it was in the more recent past and the evolution – the recent evolution was a success in Tesla and German. Electric cars might actually change that – and my questions are around how it could impact you.

So, since you’ve evolved, I would like to understand your specifications on the matter. Do you see things evolving on the EV car front more positively than you would have expected a few quarters along with the year ago? And then, how big is that for you, if integrations were to grow two or three times faster than current consensus implied, how much would that imply your business?

And then lastly, is German manufacturers and Tesla take, the lead on the electric vehicle market? How well are you positioned for that – would that imply for you gain share – market share gains or you’re more mutual or even negative?

Reinhard Ploss

Yes, Pierre, Arun will walk you through the details.

Arun Mittal

Okay. So, EV and xEV, we tend to combine together and talk about xEV as a whole. And here of course our position is extremely strong. I have also mentioned it in the past that we have one of the few semiconductor suppliers which can offer complete system solutions in this area. I will avoid going into too many names as with the other call earlier because some of them are – many of them are our customers.

And here we have to be very careful. However, one example I would definitely bring forward, where we have a clear demonstration of our competence, whether it is system side or whether it is all components which go into automotive regarding xEV is the BMW i3 which was launched recently, wherein we have more than €300 worth of semiconductors. And that should give you a feeling for where we are positioned, how we are positioned as well as what it could mean depending on the number of cars that we had converted into xEV.

China was a hint here from Reinhard, which I should also mention. And yes indeed, it is correct. We have more than a dozen car models, which will be coming out over the next years globally. And a significant portion of those will also be from China.

Pierre Ferragu – Bernstein

Thank you.

Arun Mittal

Welcome.

Ulrich Pelzer

We have time for one final question, please.

Operator

We will take the final question from Mr. Amit Harchandani of Citigroup. Please go ahead. Your line is open, sir. Please ensure that the mute function on your telephone is switched off.

Amit Harchandani – Citigroup

Hello, can you hear me?

Arun Mittal

Yes, we can hear you now.

Amit Harchandani – Citigroup

Thank you. Thanks for taking a follow-up question. Just quickly on your free cash flow outlook for 2014 fiscal. I think last quarter you talked about free cash flow being more or less at a similar level to the 2013 fiscal year. Could you just confirm if that is still the case now?

Arun Mittal

Yes. There is no major change.

Amit Harchandani – Citigroup

Thank you.

Ulrich Pelzer

This takes us to the end of the time slot that we had set aside for this telephone conference. Thank you very much everyone for dialing in. Should any questions have remained open, please be in touch with the Investor Relations team in Munich. And we look forward to talking to all of you again after the end of the next quarter. Thank you. And bye-bye.

Operator

That concludes today’s conference.

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