Ulrich Pelzer - Head, IR Reinhard Ploss - CEO Dominik Asam - CFO Arun Mittal - Head, Regions, Sales, Marketing, Strategy Development and M&A

Sandeep Deshpande - JPMorgan Gareth Jenkins - UBS Adithya Metuku - BoA Merrill Lynch Achal Sultania - Credit Suisse Jerome Ramel - Exane BNP Paribas Andrew Gardiner - Arklow Janardan Menon - Liberum Francois Meunier - Morgan Stanley Johannes Schaller - Deutsche Bank Guenther Hollfelder - Baader Bank

[Call Starts Abruptly]. quarter and 2014 fiscal year 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 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 Reports available on our website. At this time, I would like to turn the call over to Infineon. Please go ahead.

Thank you very much. Good morning and welcome to everyone on the line on behalf of Infineon Technologies to our fiscal Q4 and full year 2014 results conference call. On this call as always is our entire management board that would be Reinhard Ploss, our CEO, Dominik Asam, our CFO and Arun Mittal, our Member of the Board responsible for sales, regions, strategy and M&A. As always we've prepared introductory remarks by Reinhard Ploss and Dominik Asam and we will after that open up the call to Q&A. Over to you.

Thank you, Ulrich. Also from my side good morning everyone and welcome to our fiscal 2014 fourth quarter results conference. As ever I will begin today’s call with a number of remarks on our group and division results on market developments and our achievements during the quarter. Dominik will then comment on financials before I conclude with the outlook. We will then open up the call to your questions. Let me begin with group performance in the quarter that just ended. Results were in line with our guidance as revenue rose 6% sequentially to 1.175 billion with segment result of 180 million and a margin of 16%. We had expected 3% to 7% revenue growth with 15% to 17% segment result margin. After very strong book-to-bill figures of 1.25 and 1.15 in our fiscal quarters two and three, and in light of the highest turnover of the year and our fiscal quarter four, the book-to-bill ratio moderated to just above 1 for the last quarter. Nonetheless order intake in absolute terms stood at a high figure of almost €1.19 billion. Now for the divisional review starting with automotive, automotive revenues came in at €518 million, a new all-time high for the division. Light vehicle sales growth remained robust during the quarter in China and the U.S. and German OEMs continued to exhibit strength. As a result our top-line for the quarter grew 2% sequentially and what is normally a seasonal down quarter given factory shutdowns over the summer months. Within ATV, Body Power products and Power MOSFETs experienced yet another quarter of solid growth. These products are important contributors to reducing CO2 emissions as an ever increasing number of functions in the car are using semiconductors to improve efficiency. Bookings too remained robust for the quarter with the book-to-bill ratio in automotive coming in at 1.1, nonetheless and despite the healthy demand trends we expect some normalization in bookings over the coming months. Our measures to add capacity in the areas of Body Power and Power MOSFETs are beginning to show results and lead times for those products are contracting. As a result customers can afford to return to shorter lead-time orders, which should make itself felt in the current quarter. Segment result was virtually flat at €69 million in the first quarter; it was a €70 million in the third quarter, this slight decline despite rising sales the result of a broad range of individual factors which makes slightly higher operating expenses in the net increase and provisions contributing most. As regards our market success, the last quarter brought some remarkable highlights, the success story of next generation microcontroller AURIX plus continues unabated with a major design win in powertrain and transmission applications at a major European Tier 1. In addition we landed a significant further design win for a single chip radar transceiver at a major European Tier 1 who also opted for our AURIX Plus microcontroller to perform the required control functions. This again demonstrates that our strategic initiative product to system increasingly drives also the ability to sell entire semiconductor systems for demanding applications. Last but not least we continue to generate momentum in Japan this various design wins for Power MOSFETs during the last quarter. The total life time revenue value of this entire bundle of business wins alone amounts to more than €500 million. Now turning to Industrial Power Control, IPC also generated all-time higher revenues of €219 million for the quarter, up €19 million, or 10%, for the preceding quarter. In particular, industrial drives and traction recorded strong growth. Sales to major home appliances benefited from the first full quarter of consolidation of our majority owned joint venture in Korea LSPS. Renewable energy applications by contrast experienced a decline during the quarter driven primarily by wind in China. The book-to-bill ratio for the quarter softened to 0.8 down from 1.1 and 1.3 in the previous two quarters. The lower ratio of bookings over billings is primarily the result of developments in China; for one, build outs of manufacturing capacity there have slowed; weighing on orders for drives products. In addition, ahead of next year’s new five year plan, there is a caution in solar orders as well. Our European customers for major industrial drive signal a stable development but not a major pickup in the industrial goods demand. Demand for high power modules by contrast remains high as the build out of China’s railway continues at brisk speed. Segment result increased quarter-on-quarter by €4 million to €44 million. Segment result margin therefore stood at 20% for the second quarter in a row. In terms of highlights, the traction market is growing nicely and we are increasing market share with multiple wins amongst others for locomotive project in Africa with a leading Chinese train company, as well as for several subway projects in the U.S. In addition to the traction dynamics, we also saw good momentum in major home appliances with a business win for our discrete IGBTs with a leading OEM in induction heating and with a multiyear design win for IPMs in washing machines at a leading global white goods OEM. Moving on to power management and multimarket, PMM revenues for the fiscal fourth quarter totaled €300 million, up €29 million, or 11%, from the third quarter. Some contribution to this growth came from Christmas seasonality in our low volt MOSFET business. The far bigger contribution however came from our mobile phone business. Here we experienced not only the seasonal lift ahead of Christmas but also the ramp of several design wins. We are well positioned with antenna switches, TVS diode and silicon microphones at major phone OEMs in the U.S., Korea and China, and a saw strong growth in these businesses. The segment book to bill ratio for the fiscal first quarter came in about 1 again after already higher ratings of 1.3 and 1.1 for the March and June quarters. The PMM segment result also jumped sequentially to €60 million, up from €46 million in the June quarter. Segment result margin therefore stood at 20%. In terms of market highlights, we are pleased to report that for the first time ever we have the number one spot in the market for discrete standard MOSFET in 2013. Our market share jumped to 13.6%, up from 12% in 2012. Moreover, in power, two design wins for our digital AC to DC conversion platform [Dot TP] [ph] have moved into volume at a large manufacturer of luminaries for LED lighting. In addition, we continue to see traction for the [Dot TP] [ph] platform at major TV and a major PC OEM. Design win activity was also robust during the quarter in our communications business. Most notably, we won back sockets at a large OEM for RF power amplifiers in the 1.8 gigahertz band and also one new socket at another large OEM for RF power amplifier in the 1.9 gigahertz band. Next, onto chip card and security, CCS revenues amounted to €142 million for the quarter, up €19 million, or an impressive 15%, from the prior quarter. Growth was strong across our businesses lines with a significant contribution yet again from our payment business and increases also in our government ID, Pay TV and trusted platform sales. The book to bill ratio moderated to 2.9 after extremely strong values of 1.3 and 1.2 for the March and the June quarters of 2014. The decline is driven on the one hand by the high turnover level on the other hand lower ratio is also reflective of a normalization in payment bookings which enjoyed extreme strengths in the past months. CCS segment result also developed nicely almost doubling sequentially to €20 million. Segment result margin came in at 14%. In terms of business and market highlights, we are pleased to report that we won contracts for government ID project in seven European as well as several Asian, African and Latin American countries in the last quarter. In addition, momentum in our payment products continued in the fourth quarter. Our estimate indicate that we are the leading supplier of payment ICs for the key U.S. market today. In addition, we are continuing to experience momentum in high value added security applications, they have been selected as a supplier for a major European automotive OEM’s upcoming emergency call also called eCall Solution which will become mandatory within the next years and in the Trusted Computing segment our new TPM 2.0 solution has been selected by a leading PC OEM. Ladies and gentlemen, this concludes the business review. Let me now hand over to Dominik, who will comment in more detail on fourth quarter financials.

Thank you, Reinhard and good morning everyone. Fiscal fourth quarter revenues were €1.175 billion, a sequential increase of €65 million or 6%. Gross profit increased sequentially by €29 million to €459 million resulting in a gross margin of 39.1%. The strengths of the U.S. dollar against the euro drove an increase in sales of €18 million. That said, the positive earnings impact that we would normally see from a stronger U.S. dollar against the euro was offset by even stronger increases in the euro exchange rates of currencies in which we incur costs particularly the Malaysian ringgit. As such the increase in gross margin from 38.7% in the June quarter to 39.1% in the September quarter remained rather muted when compared to the revenue increase. Depreciation and amortization for the fourth quarter amounted to €137 million, up €6 million from the third quarter. Research and development expenses came to €140 million, down slightly from €141 million in the quarter before, while selling, general and administrative expenses totaled €138 million, up significantly from €122 million in the third quarter. Segment results for the fourth quarter was €188 million and segment result margin was 16.0% compared to the third quarter segment result of €170 million and a segment result margin of 15.3%. Operating income was €118 million for the fiscal fourth quarter, down from €165 million in the prior quarter. The decline is due to a worsening in our non-segment result from negative €5 million in the fiscal third quarter to negative €70 million in the fiscal fourth quarter. This deterioration was mainly brought about by a one-time charge of €83 million that we took as an other operating expense in the P&L reflecting the antitrust ruling of the European Commission against our CCS division. The financial result including income from equity method investments remained unchanged sequentially at positive €1 million. Going forward you should expect a slightly negative result in this category. Continuing with tax, we recorded an income tax benefit of €29 million for the quarter after an expense of €23 million in the preceding quarter. The benefit can be explained mainly by an increase in evaluation of our deferred tax assets as part of our year-end closing process. Our ongoing cash tax rate for the quarter was approximately in line with our usual guidance of about 15% and we continue to believe that about 15% remains the appropriate guidance for cash taxes going forward. Income from continuing operations was €148 million, up slightly from the previous quarters €143 million, as the aforementioned tax benefit compensated the antitrust related charges included in our non-segment result. Net income from discontinued operations showed an unusually high level of €33 million after a result of nil for the previous quarter. This income from discontinued operations should be regarded as a positive one-time effect and is mainly brought about by our settlement with Qimonda insolvency administrator. Resulting net income in the fourth quarter was €181 million, up from €143 million in the prior quarter. Basic and diluted EPS was €0.16 for the fourth quarter, up from €0.13 in the preceding third quarter. Free cash flow from continuing operations in the September quarter rose strongly to €158 million, up from €78 million in the preceding quarter. Net cash provided by operating activities from continuing operations was €399 million compared to €228 million in the prior quarter. This increase was more than offset -- this increase more than offset an increase in investments to €242 million, up from €144 million in the June quarter. Onto liquidity, Infineon’s gross cash position increase from €2.263 billion at the end of the June quarter to €2.418 billion at the end of the September quarter, our net cash position increased from €2.073 billion at the end of the third quarter to €2.232 billion at the end of the fourth quarter. Last but not least, let me address our after tax return on capital employed or ROCE. It came in at 24% for the fourth quarter, flat with 24% also in the third quarter. Capital employed stood at €2.452 billion as of the 30 of September, 2014 up from €2.327 billion at the end of the June quarter. please note that our capital employed contains provisions and liabilities related to the Qimonda insolvency proceedings, the EU antitrust ruling against our CCS division and put options on our own shares totaling €438 million. This reduced our capital employed but should be regarded as non-recurring and unrelated to our operating business. Even if adjusted for these items, ROCE amounted to 21% for the fourth quarter. Please bear in mind that the level of provisions and liabilities will drop substantially as of the 31st of December, 2014, given the payment of the antitrust fine of €83 million relating to our CCS division and the payment of €260 million for the settlement with the Qimonda insolvency administrated during the current quarter. Now back to Reinhard.

Thank you, Dominik. Let me now come to the outlook. For the first quarter of the 2015 fiscal year, Infineon anticipates seasonal weakness to result in a revenue decline between 5% and 9% relative to the fourth quarter of the 2014 fiscal year. With regards to our divisional divisions, IPC and CSS will experience declines exceeding the group average reflecting the decline in turnover as about as slightly higher expenses. Segment result margin is expected to be between 10% and 13% of sales. Based on an assumed exchange rate of 1.30 for the U.S. dollar against the euro, Infineon expects sales in the 2015 fiscal year to exhibit growth in line with the historical average and the company’s target for the future at 8% year-over-year plus or minus 2% points. At the midpoint of the revenue guidance, we expect segment result margin to come in at approximately 15% of sales. This regards to investments defined as the sum of outlays for PP&E and intangible as well as capitalization of R&D spending, our budget stands at approximately €700 million. With that we expand our target rate of about 13% of sales on so-to-speak normal investment for intangibles and for equipment within our operating facilities. Furthermore, in light of the growth outlook for our automotive business in anticipation of the manufacturing requirements arising from the integration of International Rectifier, we are readying our second shell including Malaysia for mass production. This will require additional capital expenditures of between €60 million and €70 million, which are also included in the €700 million budget. Finally, an outlay of an additional €20 million for the purchase of certain intellectual property rights under the terms of the settlement reached with the Qimonda insolvency administrator is also included in the investment budget of approximately €700 million for a strategic investment. Not included in this budget is an amount of approximately €30 million for strategic investments comparable to the recent LSPS transaction or the purchase of a stake in Schweizer Electronics that we announced yesterday. This €30 million amount is not part of our budgeted investment, but will show up as part of our investing cash flows and therefore affect free cash flow. We expect depreciation and amortization for the 2015 fiscal year to come in at approximately €600 million, up from €540 million in the 2014 fiscal year. Ladies and gentlemen, we have performed ahead of our initial expectations for the 2014 fiscal year both in terms of growth and segment result. The current quarter will be the 7th consecutive quarter of year on year growth despite the sequential decline. Our fiscal year ‘15 revenue should grow about 8% year-over-year and we are aiming for solid profitability for the segment result margin of 14% of sales. Having shareholder participate in such success, the Supervisory Board and Management Board of Infineon are proposing to the upcoming AGM a dividend increase of 50% relative to the prior year to €0.18 per share. Thinking beyond the current fiscal year, our foundation is solid. We are uniquely positioned as the only manufacturer of power semiconductors with a 300 millimeter capability and the global market share and volume to effectively fill that capacity. The resulting economies of scale will drive cost benefit in the year to come. And our strategic initiative Product to System helps us to generate higher value added solution out of our unique portfolio of technologies and products. This should result in economies of scope in the years to come. And the acquisition of International Rectifier fits perfectly with these strategic cornerstones. The combination of our manufacturing volume with theirs will help us achieve certain cost milestone in 300 millimeter manufacturing earlier than would have been the case absent the acquisition driving further economies of scale. And the smart combination of their complementary processes, product technologies and go-to-market approach opens up room for additional scope economies. The assembly of shareholder of International Rectifier has approved the acquisition on 4th of November, 2014 with a remarkable 99.5% of votes present at the meeting. The approval processes with the regulatory bodies worldwide are progressing smoothly. We are excited at the prospect brought about by the combination of our capabilities with those of International Rectifier. Ladies and gentlemen this concludes our introductory remarks, and my colleagues and I will now be happy to answer your questions.

Thank you. [Operator Instructions]. We will now take our first question from Sandeep Deshpande of JPMorgan. Please go ahead.

Thank you for having me on. My question is regarding the margin. If you look at the incremental revenue Infineon got in the current quarter versus the incremental revenue in previous quarters, the incremental gross margin Infineon got in this quarter is substantially less than the incremental gross margin it got in previous quarters. That's similar on the operating margin line as well, but we can see that the SG&A expenses have increased. And so can you also make a comment on why SG&A expenses increased so substantially in the current quarter? And I've one quick follow-up on the market conditions. In terms of the market conditions, do you see the end markets improving from a softer fourth quarter, or do you see current conditions continuing? Thank you.

Thank you Sandeep. Dominik will comment on the margins and Arun will comment on the market.

So on the lack of leverage so to speak in the expansion of the revenues and then the gross margin, I mentioned the negative Malaysian ringgit impact which was significant. You know that we have more employees actually by now in Malaysia than in Germany, so the ringgit plays a role there, and on top of that there was also some roll on of depreciation simply a timing issue when new investments have been made and there was a significant increase in depreciation. So these two factors really account for the bulk of it. The second question you asked was on SG&A, indeed increased significantly, I think that's two effects which have been compounding, one is that we really had pushed out a lot of activities and then the accumulated, so to speak in the fourth quarter and on top of that some activities, there was also a lot of activity on a legal side, with some very positive results which are partially not shown in the -- which had partially also flowing down to non-segment result. So there was an increase, and you should expect another strong increase in Q1 actually despite the merit hikes we're expecting foremost in that area, you should see more flattish if not slightly declining number there for Q1 fiscal year.

Dominik sorry, you didn't respond to -- is this gross margin flow-through going to continue, this weaker gross margin? Or is it a one-quarter phenomenon?

I mean it will not be huge -- I mean we are going down in the first quarter. So you have to think about now the contraction that fall through and there is nothing special I think in that number. You will see it very normal, so you can do our kind of rule of thumbs and you come to the right numbers there.

Thank you.

Sandeep, Arun here. On the market, well there are two ways to look at it, one way is to ask the analysts on the total semiconductor market and there we get a clear sign that they predict a growth in 2015, albeit that being a bit short of what we experienced in 2014. Then for Infineon specific if you look at the different markets in which we are active in, we see trends which are very solid like in the automotive area as well as in PMM and chip-card. And so there I have to go into the details of each segment to answer more specifically.

We will now take our next question from Gareth Jenkins of UBS. Please go ahead.

Two quick ones, if I could. Just wondered whether you could talk about inventory in the channel at the moment, what you see and how that's shaping up. And then just secondly, Dominik, I think you mentioned that provisions had increased within the automotive business. I just wondered if you could talk about why provisions have increased. Does this reflect a slightly riskier customer base in China, or what's the thought process there? Thank you.

Let me take that Gareth, Arun here. On the inventory in the channel we have very comfortably placed ourselves in the eight weeks to 10 weeks range, where in Europe, U.S. and Japan are towards the high-end of that range, whereas Asia is on the lower-end, and Asia forming more than 50% of the channel, we are pretty healthy there. Reinhard, thanks. Reinhard pointed out to comment on the automotive allocation which is coming to an end and we used to have lead-times of 26 weeks and now we are down to 14 weeks to 16 weeks. So, very healthy situation again.

So on your question, I mean we said about, there is no major -- I mean there was a slight impact in the Q4, in provisioning but there wasn’t I would say nothing out of the course, it was very ordinary just looking at your risks, I don’t see that there is fundamentally changes, simply that people look in to it more diligently I say at the end of the quarter and that’s about it, there is nothing you should see as a more long term effect there, that’s very normal behavior.

We will now take our next question from Adithya Metuku of BoA Merrill Lynch. Please go ahead.

Just a couple, firstly, International Rectifier recently missed their numbers, and we've seen a few downgrades from the top line for that company. Has this changed your views on the margin contribution that you expect from International Rectifier two years after the acquisition? And secondly, if you could comment a bit behind, based on the reasons behind the strong increase in depreciation into ‘15 and whether you see depreciation peaking in ‘15, or whether you think it will increase into ‘16? Thank you.

So, regarding International Rectifier, I wonder what kind of guidance that they should miss given that they’ve not given any guidance for the September quarter to my knowledge. So, if you make your own assumptions, that’s interesting. I think if you look at the operating result it has been about 10% which is if you make it kind of comparable to our segment result margin, of course, there is always this discussion about U.S. GAAP versus IFRS, which we have to look into in too much detail. I mean, if you look at our expectations what was a little bit weaker than expected was maybe everything else but high rail. And they have been able to nicely compensate that with a very-very strong high rail business. So, for the time being, there is nothing we are concerned about because we see the trends we have seen at them and their reporting a very similar to what you see in the overall market.

Okay, thanks. And the depreciation question please?

On the depreciation side, you will see still some significant roll on in the coming year, it will then kind of plateau I’d say in the year thereafter and actually in the years to come when the low depreciation years are starting to kick in and the high depreciation years are depreciated over five year period so to speak, you will see some improvement there. So we are currently going to a period of very strong headwind from there, which should ease as we move forward.

We will now take our next question from Achal Sultania of Credit Suisse. Please go ahead.

Thanks. Just looking at your guidance for next year on operating, on segment results, I'm just trying to understand. You're obviously guiding for a 6% to 10% top-line growth, but I'm surprised that you're actually not going to see any leverage if you look at your segment result guidance. Is it more -- I'm just trying to understand, is it more because of the IPC mix because, obviously, you've talked about lower growth in IPC where you actually make much higher margins. Or is it more a function of your higher OpEx base where you ended the year with? And then I've got a follow-up on powertrain in your auto business.

Yes, we will answer this question in two pieces. Of course, yes. The less -- or the lower growth of the high margin IPC business is having structural effects but we also see that the take-off point or starting point of quarter four is not as strong Dominik will comment on that.

I mean you see that OpEx has been a little bit backend loaded and this is the base to jump off, so to speak, if you extrapolate OpEx into next year you should start off Q4 maybe on SG&A it has been kind of a little bit too high. But on the other topics was quite normal. And then you have the merit hikes 1st of October so that will take a little bit of OpEx increases. And then we actually have increased resources in a quite moderate way. It’s basically a big basis effect and OpEx is one thing. And then we have already talked about the roll on of depreciation. So, if you think about the incremental revenues, the first thing you do is you deduct the roll off depreciation some very low invest years are kind of falling out of the depreciation schedules, the high ones are now kind of fully in there and they’re not starting to ease. And this trend is really making it difficult to achieve operating leverage. And don’t forget if you look at the 14.4% we still have this headwind from 300 millimeter ramp in there, so this is why we still are confident about our 15% margin cycle over the full cycle.

Okay. Thanks. And just on powertrain in your automotive business. Obviously, we've seen that the first like a lot of auto vendors have been able to meet the CO2 emission target. Now the next deadline is by the end of this decade. Should we actually see a meaningful ramp in powertrain in terms of contribution which comes from [truck] [ph] powertrain going into auto going forward as these car OEMs strive to meet those 2020 targets?

This is of course one of the major drivers for the semiconductors in the cars but we see the OEMs are taking different strategies from hybridization to electric vehicles. But a lot of the OEMs are thinking about increasing the efficiency mainly and even on the today’s combustion engine but I think the 48 was which I say very mild hybrid approach will be a large opportunity also for us in order to grow with these OEMS. Also our I would say share we took in Schweizer Electronic yesterday is one move where we start to see a construal of the high power items in the car leading to higher efficiency overall. So I would not say there is one big move, there are several moves to come.

We will now take our next question from Jerome Ramel of Exane BNP Paribas. Please go ahead.

Could you just help with an update on your 300 millimeter ramp up, where you're planning to have a capacity utilization rate? And with the integration of International Rectifier, you mentioned that you will ramp up faster, but could we have kind of an agenda to understand a little bit the impact on the margin? Because from my understanding, the 300 millimeter, it's probably still waiting by 150 basis on your margin. So when do you conceptually expect kind of breakeven? And second question is, what was the percentage of your automotive revenues in hybrid and electric cars? Thank you.

So, I’ll go for the 300 millimeter and then I think you will go for the percentage of hybrid and the electric vehicles. So on 300 millimeter, you’ve seen our numbers that automotive is actually has grown very, very nicely and also if you look at the guidance automotive is still kind of strong and some other more commoditized products or not commoditized but more standard products I should say like in IPC or PMM in [CMOS] [ph], they are actually growing not as fast for the time being. So this makes our ramp in 300 millimeter a little bit more difficult. So, we’re still in a kind of low -- mid-single-digit percentage of volume range in our power technologies there and we will find it relatively difficult to ramp that quickly. However, we still stick to our target to bring that to breakeven 2017, certainly the integration of International Rectifier which have in their portfolio some standard products which might be suitable for that. We'll support this however also there I have to caution you it will take some time to develop these products on 300 millimeter. So while it solidifies our case in the mid-term it doesn’t give us an acceleration so to speak. So the timeline so to speak on breakeven has not shifted. From a market point of view I have to admit that it's not really helpful to have strong growth in automotive way. As you know we have less 300 millimeter and not so strong growth in IPC and PMM on the power management side in PMM as mentioned on RPD or RFS as it's called going forward the RFS side we are doing very well, but this is not on 300 millimeter.

So on the powertrain, electric powertrain hybrid, EV altogether, electrification of the powertrain we have quite a few design wins more than a dozen I would say globally, but in terms of revenue it was your question it is still low single-digit part of the automotive business. So very small at the moment, but ramping up very fast, if it helps I am seriously considering to buy one next year so, maybe it helps your model.

We will now take our next question from Andrew Gardiner of Arklow. Please go ahead.

Just perhaps a more conceptual one thinking forward in terms of the operating leverage. Historically, you have generated quite nice drop-through off the incremental revenue in the year you've just reported in particular, it's just north of 50%. Looking forwards, it's now 10% incremental sort of profit from the incremental revenue in ‘15 and I can understand what you're saying about some of the increased costs. But just if we look through this -- sort of perhaps some of the timing around these costs coming through at the end of this year and looking into the early part of next year, thinking out to 2016 and beyond, is there any reason why we shouldn't go back to a higher level of drop through? Or are you suggesting that it is just becoming harder and harder to add that incremental margin? Thank you.

Andrew, here Reinhard. I think we, of course are working to coming back to the higher fall through in the margin and Dominik will also comment on this. But the current situation is that we are facing structural changes in manufacturing where we had a stronger growth factor in IPC and PMM and are converting to a certain degree towards automotive. So I think here with all the methods which we will be taking in order to improve the manufacturing footprint and even the outsourcing this definitely should improve.

And adding on Reinhard’s comment is -- I think it's very -- the best way to look at this is really on a quarterly basis, to really roll the quarters and then look at the operating leverage. But there are some effects which longer-term should turn it a little bit around in a positive sense, I mentioned the high investment levels in 2010 and 2011 which will be basically depreciated than 2017 starting. This will definitely help and also of course as 300 millimeter ramps and the ramp up cost is eliminated overtime this will help. So we don’t see any basic reason why the drop through of revenues into gross margin should worsen. However, there is no idle capacity we can currently fill, so contrary to the period when we came out of underutilization, you don’t see that absorption of idle capacity which has given us huge operating leverage in prior quarter. So, what we say is a rule of thumb is that we think that we can have a fall through of about 50% in normal environment if we have to invest for growth, on the gross margin levels and there are some OpEx build of course which will reduce that and I think when we come to the 2017 type of timeframe with 300 millimeter and with the depreciation easing this should be feasible again.

We will now take our next question from Janardan Menon of Liberum. Please go ahead.

Hi. Thanks for taking the question. I was just wondering about your decision to ramp the second shell in Kulim and why you would want to do that when you have an under-utilized 300 millimeter fab at Dresden. Is that going back to the point that you raised just now that the automotive is growing faster and you need capacity sooner for that? But, if you were just going to start constructing this shell, it would probably take you a year to finish construction and then to move equipment, so what is the timescale to be moving some of the automotive products and the other products which are not yet qualified for 300 millimeter into the 300 millimeter? And is it worth the while to be ramping a 200 millimeter fab, given that situation? And also, just an affiliated question to that is, is your CapEx to sales is 13% excluding the Kulim. But going forward, would you expect that to be sort of all inclusive sort of all inclusive in the low teens, as you've guided before?

So, on the manufacturing strategies I’m commenced from my side. Yes, of course, the growth in automotive is a little bit distorting or manufacturing overall strategy moving to 300 millimeter, we have started to transfer the high volume technologies from PMM and IPC. They’re much stronger than expected growth in automotive which we really like, it has brought us especially in the European sides in Regensburg and Villach very much to the limits. And we are having the need in order to enhance this 200 millimeter capacity in Malaysia. The changeover to Malaysia from the European sides will not be a limiting factor, because we already started to quality products out of the European factories for Kulim 1, and Kulim 1 and Kulim 2 will be recognized by our customers as one factory. We already have a shell in Kulim -- the Kulim 2 shell is more or less ready, and we are equipping this with the infrastructure to ramp pretty quickly, which is very much ahead of time if you would build a new factory from scratch. For automotive, the do-only plan limited number of technologies to be transferred to 300 millimeter, because the product portfolio is very widespread. On the other side, our new products for power semiconductors even in automotive are developed right-away in 300 millimeter. So I think here, the strategy is still intact, but delayed and from the cost aspects, Dominik will answer.

Maybe I can add also the fact that, by International Rectifier increases of course incrementally the need of that 8-inch shell, because there are some products which we want to transfer, which are not planned to be on 300 millimeter. So there is an incremental volume for 300 millimeter, but there is also incremental volume for 200 millimeter and as you know our front-ends are actually pretty much full on 200 millimeter. So we need to do that also because of that reason. With regards to the cost base, there will be some incremental cost, but that will be mostly happening in the -- not in this fiscal year, but next fiscal year, so there’s little incremental -- there is a little bit incremental cost for some installations which are expense, but most of it is capitalized and then in the following year we start depreciating and then you will have a certain incremental cost, which is not huge but there is cost.

And can you just split the CapEx spending roughly between 200, 300 and back end, just since your depreciation schedules are different for the three?

It’s more balanced, I’d put it that way. I’d say it’s probably more an 8-inch actually because of the strong automotive growth, we have already invested heavily on 300 millimeter. And don’t forget, there’s also a lot of other things in our CapEx number which is for instance the capitalization of intangibles related to our development which is already accounting for couple of percentage points or so on a group level, so and back-end is of course significantly lower than front-end. But I don’t want to go into the precise details, but just give you these rough indications.

We will now take our next question from Francois Meunier of Morgan Stanley. Please go ahead.

In the top line guidance which is 8% plus or minus 2%, how much of the 8% is a positive effect from FX, please?

So, very good question. It’s about 2 percentage points.

We will now take our next question from Johannes Schaller of Deutsche Bank. Please go ahead.

Just following up on these 200 millimeter and 300 millimeter questions we had really, because I thought the idea was that a lot of the International Rectifier products could potentially be moved over to 300 millimeter, while now it looks like, you need quite a bit of 200 millimeter capacity as well. So, if you could maybe give us a bit of a sense I mean it’s -- I know it's early to talk about the company given the deal isn't closed, but give us a bit of a sense, how much of their product you can actually move to 300 millimeter thin wafer, that would be very helpful? And then also, if you could update us just then maybe by the end of next year in terms of revenue potential, where you will stand from a capacity perspective, just as an Infineon -- on a kind of Infineon standalone level, excluding Rectifier, that would also be quite helpful? Thank you.

So from the conceptual approach Infineon International Rectifier has started to outsource a lot of its front-end capacity. We will of course continue and look if this is more productive and cost effective than moving in it to our own factories. We assume that MOSFET business is very well suited to be moved into 300 millimeter and they were looking into very closely. On the other side there is a bucket of old products and IC products or IGBT drivers which we believe is difficult to transfer mainly not because our technology as such but from the portfolio breadth that we might consider to move to 200 millimeter Kulim. So it will not significantly drive 200 millimeter expenses, we really might harvest what is there and potentially even reuse equipment from IR, but this is still to be seen. And regarding the invested capacity Dominik will answer.

So, we look into this very precisely for the current fiscal year and it has not changed from what we have communicated, so far it’s about -- a little bit around very roughly 5 billion. It very much depends on the mix now. Coming into the next year we have to indeed invest in capacity for the following years, so whatever we invest this year will sustain the growth for the years there after. So as a rule of thumb without giving you too many details you should assume that we calibrate our CapEx in a way to sustain this kind of 8% target growth rate into the subsequent years. Whether all that capacity will then be available 1, October, probably not but this is kind of the goal that you then have enough capacity in the subsequent year which needs to be invested in this year to be able to sustain that type of growth into the future.

Thanks. But maybe just a very quick follow-up on the 300 millimeter and International Rectifier, if I may. As you mentioned there are some older products that you probably don't want to move over. And then there's also, I guess, some business like high reliability that will be difficult to move over also from a customer perspective. Could you give us a rough sense how much of the revenues of Rectifier you think you can potentially move to your 300 millimeter thin wafer process, or is it really a bit too early to tell? Thank you.

I think we are not in the position really to say how much we will move over to 300 millimeter, out of this which can be moved over. I would say that you see they have a significant part of MOSFET business in there, so we assume that a significant part has a potential to be moved over around 50% or something like this. But we will decide as we have a closer look to, when we can open the books more in detail. On the other side, within our plans in order to improve the overall margin of the combined business, synergies from manufacturing we have not planned in on a short-term basis.

We will now take our next question from Guenther Hollfelder of Baader Bank. Please go ahead.

Many thanks. Two questions. The first one, coming to the capacity again and the sales level. I was just wondering how your outsourcing strategy, especially for the microcontroller business in automotive and security and chip card, is comparing here with these numbers. And if you could provide some more color how the percentage of microcontroller outsourcing is going forward over the next two years to your partners. And the second question. The increase of depreciation amortization in ’15 was higher than I had in my model. And also looking at fiscal year 2010 and now the investments in 2015, there seems to be a slight gap in my view. And I also thought that some of the investments are written off over 10 years now for 300 millimeter. I'm not sure how you're looking at the automotive 200 millimeter investments. If you could provide a little bit more color about this increase in depreciation. Thanks.

Regarding the outsourcing share, I think we made good progress. Chip card is of course much faster moving out than automotive. There we already have 40% of the revenue at the foundries. Automotive is ramping up slowly as the new platforms are kicking in. The other comments will come from Dominik.

So on the -- from your perspective high roll on so to speak in depreciation, first of all we do indeed depreciate all 200 millimeter equipment including automotive over five years which is certainly conservative but consistent we believe. And you are right yes, as for 300 millimeter equipment we have a longer depreciation period but there is relative little equipment so far. And in terms of how to model this going forward I think there is two important factors, first of all you really have to look at the different slices of invests starting from 2010 basically ’11, ’12 and look at how much that is and then assume a certain part of that to be depreciated over five years which is the bulk of it. And then you see that a certain pattern will arise which will give you still a pretty big roll on in 2015 but then yes, thereafter some easement so to speak. There is another thing which is happening. We have increased our R&D investments very substantially. We are forced under IFRS and I would be delighted if we could stop that but we are forced to do that to capitalize development cost. And it’s also so to speak a wage of capitalized development cost which is gradually increasing and the amortization on that one is also increasing and going forward. So, we’ve seen this amount over the last couple of years basically doubling. And if you take all of this into account, I think you will be able to probably check that these numbers fit together quite nicely actually.

Yes, but in a brief additional comment, the outsourcing share of chip card could be even higher but some of our customers are having a revival of very old products. So, I think when we continue to move successfully with our portfolio into 65 nanometers and 90 nanometers for chip card this will accelerate even more.

Maybe one follow-up on automotive. For example, by 2016, any indication how much of the microcontroller business will be outsourced in two years?

I would assume that while it very strongly depends on our [indiscernible] change over the ECU platforms, the majority of the platforms is engine management. Here even so the CO2 regulations might push it more strongly. So, a good guess would be around 20% of -- but a significantly higher number of the chip card. All the new design wins are which we are communicating for AURIX, AURIX-plus are 65 and 40 nanometer in the [indiscernible] foundry.

We will now take our last question from Adithya Metuku of BoA Merrill Lynch. Please go ahead.

Thanks for taking my question, just a follow-up. In response to a previous question, you said you had about 2 percentage points of next year's growth coming from FX. So essentially, it looks like you're quite cautious on underlying growth. Can you provide some color on how bookings have trended in the last couple of months? That would be useful. Thank you.

So what we can say is that actually the guidance for the now running December quarter is pretty much the same as we had last year in terms of sequential development with a midpoint of around 7% down. If you look at the very long term, it’s actually slightly marginally less. But then the question is, is that noise or is that something that’s meaningful. We have decided in our guidance to be kind of cautious as you said by assuming that this kind of sequential decline is then continuing in the normal seasonality, so to speak. And if you have a couple of percentage points less than what you had over last 10 years in Q1, and we say we have 8% for the year. So, given the tailwind from currency you’re absolutely right that we basically assumed there is no snapback from that Q1 but the normal seasonality in the rest of the year.

Okay. And if you can provide some color on how bookings have gone in the last couple of months, that would be useful. Thank you.

I mean, I don’t want to give any more than that. Obviously, we have a good support for our guidance for Q1. I mean now we are two month into the quarter, so we have a pretty high confidence level on that now. But there is always the tricky thing that in especially in automotive people are deciding last second or last minute how they deal with their consignment stocks especially in the auto side. And maybe Arun you want to give some color on that.

Sure Dominik, very good question because October was a month where we were pretty nervous. And I would say as we come towards end of November we are again very optimistic about the numbers which we have guided.

And there are further questions in the phone queue. I would like to turn the call back to the speaker for any additional or closing remarks.

Thank you very much. Thank you to all participants in this call for your interest and for your questions. Please do be in touch with the Investor Relations team here in Munich should any additional need for information arise. Thanks much again for dialing in and we look forward to speaking to you next quarter around. Bye-bye.