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Executives

Reinhard Ploss – CEO

Infineon Technologies AG (OTCPK:IFNNF) Q3 2014 Earnings Conference Call July 30, 2014 5:30 AM ET

Unidentified Corporate Participant

Welcome to the press conference call on the results of third quarter of fiscal 2014 of Infineon Technologies. I will now like to hand over to Dr. Reinhard Ploss, Chairman of the Management Board of Infineon Technologies AG. He and Arunjai Mittal, his fellow Board Member will be available to field every questions you may have right after his speech. Dr. Ploss, the floor is now yours.

Reinhard Ploss

Well, thank you Mr. Walter. Ladies and gentlemen welcome to our conference call here today. Also behalf of Arunjai Mittal, Dominik Asam is prevented today from being here. First of all I like to start with giving you an overview on business performance and then my colleagues on the Board of Management and myself are happy to take your questions.

So ladies and gentlemen Infineon has managed to once again increase revenue, earnings and profitability. In the preceding quarter our business performed in such a way as we already forecasted three months ago. You may recall, at the end of April we had said, we are likely to see revenue growth anywhere between 4% to 8% quarter against the preceding quarter and an increase of the segment result margin by 14% to 16%. These expectations have materialized.

Group revenue increased on the preceding quarter by 6% to EUR1.110 billion, segment result went up by EUR 170 million which is a plus of EUR24 million. Segment result margin improved to 15.3% which brings me to the figures of our four segments.

And as usual, I’ll start with our biggest segment, the Automotive segment. Growth dynamism in the worldwide automotive market has been carried through by demand in United States, Western Europe and China. The three big German premium manufacturers Audi, BMW and Mercedes all increased about average and grew in part three times as quick as the market. Nonetheless we can also see that the mid-sized segment demand is buoyant and also especially demand for functions, functions that make driving safer, more convenient and more efficient which is good for semiconductor producers. It’s a market development that also benefited our business. In the preceding quarter our revenue for automotive chips increased to EUR 510 million which is a growth of 5% on the preceding quarter.

Segment result improved by 6% to EUR 70 million which is a segment result margin of 13.7%. Current market research findings do expect that the next few years the automotive segment is set to grow still further worldwide thus these are ideal preconditions for the development of our biggest business division. Just one highlight from the preceding quarter was that with the vehicle lighting we can see more and more LED technology being used. And the reason being that LEDs are not just more energy efficient but they also allow the OEMs to map out complete new light designs which are key of course to set the car or the brand apart, a USP.

Together with our partner Audi we have developed a solution for LED drivers that are now used in the wheel lights of the new Audi S1. Other OEMs are equally interested in this. Good example here is I say that how we developed for the product to the system solution which of course in the automobile engineering we have been able to make possible with our new steps. Equally gratifying is the development of revenue in industrial power control segment. Here growth drivers were [our] product and solutions for renewable energies and home appliances.

Revenue was EUR200 million which is an uptake of 8%. Segment result also leap forward from EUR 33 million to EUR40 million which is a staggering plus of 21% which means that the segment result margin was exactly 20%. This by comparison, year-on-year last year’s quarter only had a margin of 7.5%. Now an example for the increasing importance of renewable energies and energy efficient drivers comes from our neighbors in Holland.

As of 2018, the Dutch want to power their railways completely with wind power. Today, they are already covering about 50% of the required power with renewable energies. Now of course the Dutch railway pays a lot for electric power, which is substantial part of the operating cost. Demand for the Dutch railways is about 1.4 terawatt hours per year, which is roughly on par with the annual power consumption of the city of Amsterdam. So with more efficient drives – power – the operator of the railways can of course save lot of money. Good impulses for our business because we have the right products and solutions for all applications in this value chain, namely, power generation from wind, the loss free transportation of electric energy to the consumer and efficient drives with recuperation potentials for traction on trains which really brings me to our power management and multi-market segment.

Worldwide on the bubble led by China we can see that the expansion of the LTE mobile networks is being driven forward, which in preceding quarter meant there was a strong demand for our high frequency power transistors. Equally gratifying was the business with signal amplifiers where revenue grew by 44%. Against the preceding quarter revenue went up to EUR 271 million which is improvement of 8% with segment result actually going up by 24% and coming and closing out at EUR 46 million which means the segment result margin was 17%.

Mobile communication remains a key pillar for Infineon. For Samsung’s new flagship smartphone the Galaxy S5 we’re delivering a total of eight high frequency components. These are for example signal amplifiers with the LTE and GPS networks which accelerate data transmission but also switches which make these different radio frequencies for the smartphone possible and transmit them reliably to the intended recipient. We delighted to see that Samsung has picked our products with the Galaxy S5 proving that our partnership with Samsung is strong as we know and understand the products of the customers and the market with its high speed of innovation.

With our insight into the system we helped Samsung to develop highly competitive new smartphone in the shortest possible time. I think this is a good example for the strategic further development of Infineon both from product to system which I have already mentioned time and again in the preceding quarters. Which brings me to our chip card and securities segment because here we can also see the business has performed positively above all driven by mobile communications and authentication applications. Revenue went up about 2% to EUR 123 million with the segment result going up from EUR 8 million to EUR 10 million which means the segment result margin is 8.1% in the chip card and securities segment.

One highlight was that United States you can see that more and more credit cards coming where the magnetic strip being replaced with those – with safe chips and a large part of these chips are from Infineon. In the current fiscal year we already delivered about 60 million safety controllers which to our information are [inaudible] market. Now the market research company IHS expects that this year alone about 84 million safety chips will be delivered for payment applications United States which indicates the leading position Infineon has in this growing market.

So ladies and gentlemen that much from my side on the four segments but now let me also have a look on a few select KPI and the financial facts and figures as well as our overall situation as of reporting date 30th of June. CapEx in preceding quarter came to $144 million. In the preceding quarter there had been EUR154 million. Depreciation and amortization went up slightly from EUR 126 million to EUR 131 million. Free cash flow from continued operations improved once again growing up from EUR 51 million to EUR 78 million. Reason for that improvement was an uptake of cash provided by operating activities while we also saw cash used in investing activities go slightly down.

The gross cash position improved from EUR 2.198 billion to EUR 2.263 billion with a net cash position also growing up from EUR 2.010 billion to EUR 2.073 billion. So ladies and gentlemen I think the figures of the third quarter have clearly proven and shown our expectations with revenue earnings and margins once again up. All four segments participated and contributed toward this development.

It was the fifth quarter year-on-year that recorded growth. And for the first since the boom fiscal year 2011 our segment result margin in the preceding quarter once again outstripped the 50%. So our strategy is proving its worth and CapEx is paying off, which brings me to our outlook. The fourth quarter of this fiscal year 2014 we expect to see growth to continue and revenue to up go by anywhere between 3% to 7% over the preceding quarter. The segment result margin is likely to be anywhere between 15% to 17%.

Based on the figures of the first three quarters and the outlook we can see that the full fiscal year we will see revenue grow and segment result margins to be slightly above the forecast range. Revenue was 7% to 11% growth year-on-year and the segment result margin it was 11% to 14%. In our forecast we’re assuming that the exchange rate between the euro to United States will remain unchanged at 1.35. The revenue growth with Industrial Power Controls will likely to be significant both the Group average while in automotive segment we do expect to see a seasonally adjusted growth that is slightly below that Group average.

For the power management, multi-market and chip card security segments revenues are likely to be slightly below the average of the Group. So ladies and gentlemen I already mentioned it, that the innovation strategy of Infineon is proving its worth and it’s providing the basis for further growth. Today we’re taking the decisions that will secure our competitiveness tomorrow. We’re staying true to our successful track. Good example of this is our decision to extend our sight in Villach in Austria. By 2017 we want to have created around 200 new workplaces and are planning to invest in R&D to a tune about EUR 290 million.

Pride of place will be in expansion of our competence for production of the future, and R&D with a pilot area called Industry 4.0 in Villach. We’re developing a new concept and are networking our knowledge intensive production. With this we’re having new workplaces for R&D production and [meter] technology.

This pilot are Industry 4.0 is yet another step to realizing our vision. It I think is a shift of paradigms in the value chain and offers the European industry huge opportunities. With our investment we’re making a key contribution to strengthen the competitive edge of Europe.

So ladies and gentlemen I have come to the end of my statements. Thank you very much for your attention and now together with Arunjai Mittal, I am happy to take your questions. Thank you very much.

Question-and-Answer Session

Unidentified Corporate Participant

This brings us to your questions but before we do that we have some housekeeping remarks from the operator.

Operator

Thank you very much. (Operator Instructions). The first question has been asked by [inaudible] from Bloomberg.

Unidentified Analyst

Good day gentlemen. I have two questions. The first one is directed to the net cash position that continues to rise. In the past you said that you were on the lookout to verify whether acquisitions maybe feasible. Do you think that your cash flow is too high making you worried that you may be able to make efficient use of it and why are you keeping so much cash in reserve?

The second question regards Russia. I would like to know the extent to which Infineon’s business may be affected by the situation there and whether you may actually try to take some measures in this regard? Thank you.

Unidentified Corporate Participant

Thank you so much. The cash reserve is something that you have to look at from two different points of view. First of all you may remember that we have the Comondo issue and the account receivable is quite substantial and has to be managed by the insolvency manager. We have accrued some cash provisions for this but of course they do not relate to all of the receivables yet because it is impossible to predict them accurately. The rest of the cash reserve and we’ve emphasized this repeatedly in the past stems from crisis in ‘08-’09; 25% to 30% of revenue is being kept in reserve. That is our intention. The remainder of the cash will be used strategically.

We will spend less capital on our growth. Growth however will remain as a target and we will increase the dividend in order to raise more capital for growth. Our dividend strategy is very clear. Throughout the cycle we want to be in a position with the exception of unforeseen events to pay a good dividend. So a portion of our low capital intensity will be reflected in the dividend. We also have a capital repayment program where put options are in the mix to balance everything out.

We’re also taking a look at options in the field of mergers and acquisitions but I believe that we can be very happy with the cash position. It gives us a very firm footing. Should we not find any attractive M&A activities we will consider other capital repayment options but that is not imminent at present.

Now with respect to Russia, we are only very indirectly affected by the situation. Now we are suppliers to major customers including railways and we may also be affected to a limited extent in the automotive business but overall the crisis in Russia and Ukraine will affect us only moderately, a 3% or rather less than 3% is our risk exposure there. Thank you very much.

Unidentified Corporate Participant

Next question please?

Operator

(Operator Instructions). The next question is from Mr. [Max Boardman] Go ahead, sir.

Unidentified Analyst

Good day. I am afraid that my microphone isn’t working that well today. I hope that you can hear me nevertheless.

Unidentified Corporate Participant

Yes, that’s fine. We can hear you loud and clear.

Unidentified Analyst

Thank you. I have one follow-up question. Mr. Ploss, in the conference call earlier you said that in ATV 30% of revenue was in German cars. Does that relate to cars driving on German roads or cars manufactured by German producer?

Reinhard Ploss

It’s relative to the brands so from German manufacturers irrespective one of which roads they actually drive on?

Unidentified Corporate Participant

Next question please?

Operator

At present there are no further questions for the conference call. We just received a new question from Mr. [Stefan Kroner from Bergan Citom] Please go ahead.

Unidentified Analyst

Good day gentlemen. I just was in the Airbus conference call and I only just now logged into yours. I have a question with respective to your share and the reactions of the markets to your figures today. You raised your outlook recently Mr. Ploss and the figures for the quarter are quite refreshing, especially from your point of view. Nevertheless the share is under pressure. Do you have an explanation for this? I believe that in your company and your department Investor Relations, you are talking about this and discussing it internally, aren’t you?

Reinhard Ploss

Well, in fact this didn’t surprise us that much. We assumed that expectations maybe a little loftier with respect to our share. There is a certain degree of nervousness on the market relating to mobile communications and other part segments which I believe to have peaked but in all of the other segments the situation is normal and we expect that these effects together with an improved guidance led to the fact that our share came in under additional pressure.

Unidentified Analyst

Thank you.

Unidentified Corporate Participant

Next question, please?

Operator

The next question is from Mr. [Claude Shahina from Oliver Amazon Tag] Please go ahead.

Unidentified Analyst

Good day, Claude Shahina. I have a question with respect to your 300 millimeter production. Could you give us some information on the profitability of this business? Is manufacturing already profitable and if so what is its effect on the margin? In addition, which products do you plan to include in this manufacturing scheme?

Unidentified Corporate Participant

Well, specific profitability by production line is something that we don’t disclose. With respect to 300 millimeter compare to 200 millimeter we still have start-up costs which translates into 1 to 1.5 percentage points but you can see that as far as production volume is concerned several factors have been confirmed one being the goal of using less capital to grow. We need approximately 30% less capital than in the 200 millimeter process per square meter of silicon that’s manufactured. We assume that next year already we will be able to improve capacity utilization of the 300 millimeter line. The next challenge is to breakeven in 200 and I believe that we will have a positive effect on the bottom line.

All of this capital expenditure on the future will pay off. We believe that our other competitors either cannot take this step because of their size or we’re not be able to stomach it. So, it is still a financial burden but it is one that we can manage quite easily. Thank you.

Unidentified Analyst

Are you ahead of your budget?

Unidentified Corporate Participant

With respect to manufacturing and development of capacity utilization, well volumes are slightly behind the very historic plans that we set up a couple of years ago when we assumed that business might develop a little differently from what it has done now. Automotive has increased a little more than other businesses but overall our strategy has proven correct. The volume technologies of PMM and IPC are being expanded. The next step is IGBT chips where we can supply productively at lower voltages but we’re still waiting for production releases in other areas.

So, for structural and market related reasons we’re still a little behind schedule but we believe that this will all pan out in the future.

Operator

Thank you. (Operator Instructions). The next question is from [Yen Sak] from Reuters.

Unidentified Analyst

Good morning, gentlemen. I have a question. You have 15%, the 15% margin target which has been hit. Where are you in the cycle? It’s clear that it’s trending upwards but where do you see this cycle going?

Unidentified Corporate Participant

Well, this question is difficult to answer. Compared to our last cycle we can say that we have a much clearer view of the market. The last time around we were heavily impaired visually because of the allocation across all product lines. We had a special bottleneck situation in automotive and in other select product areas. By September however we will have overcome this.

With respect to book-to-build at the end of the day the order books will be very robust in the final quarter. Therefore unless we have substantial macroeconomic changes which we cannot foresee our growth will continue steadily. The guidance is 8% and this is something given the book-to-bill of 1.07 to 1.08 we can actually realize so in this respect we are faring quite well. We’re right on track and there are no signs in area of overheating. Quite to the contrary business appears to be normal.

From a pure technical point of view if we continue to grow positively we want to exceed 15% otherwise we wouldn’t expect 15% throughout the entire cycle. 300 millimeter costs are something that we have made some progress on but we do want to move even further in this respect. I am not going to say that we are in a boom phase but rather in a phase of robust growth. So we are coming close to the 15% target over the cycle.

Operator

Thank you. Thank you very much. I don’t see any further questions in the pipeline. Therefore I would like to ask Dr. Ploss to end the conference. Thank you, Mr. [inaudible].

Reinhard Ploss

Well, ladies and gentlemen Infineon has once again managed to grow revenue earnings and segment. Now it’s five quarter in a row with a plus in revenues shows we have really, clearly improved and demand from our market is increasing. With leading products and solutions for energy efficiency, mobility and security our company continues to remain on a sustainable profitable growth path. Thank you for you for your interest. I hope to hear and see you soon again. Thank you until the next conference.

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