Juergen Rebel - Head of IR Reinhard Ploss - CEO Dominik Asam - CFO Arunjai Mittal - Member of the Management Board

Sandeep Deshpande - JPMorgan Janardan Menon - Liberum Capital Gareth Jenkins - UBS Achal Sultania - Credit Suisse Adithya Metuku - Bank of America/Merrill Lynch Johannes Schaller - Deutsche Bank Francois Meunier - Morgan Stanley Youssef Essaegh - Barclays Capital Guenther Hollfelder - Baader Helvea Equity Research

Good morning, ladies and gentlemen. Welcome to the Conference Call for Analysts and Investors for Infineon Technologies 2015 Fiscal Fourth Quarter and 2015 Fiscal Year Results. With us today, we have Reinhard Ploss, CEO, Dominik Asam, CFO, Arunjai Mittal, Member of the Management Board, representing regions, sales, marketing, strategy and M&A. We'll start with an introduction by Reinhard Ploss. Then, the entire Management Board will be happy to answer your questions. A recording of this conference call, and a copy of our 2015 fiscal fourth quarter results, and fiscal year results earnings press release, will also be available on our website at Infineon.com. Reinhard, please go ahead.

Thank you, Juergen. Good morning, everyone, and welcome to the telephone conference for our fourth quarter fiscal year 2015 results. I will begin today's call with some remarks on Group and division results, on market developments and on our achievements during the quarter. Dominik will then comment on financials, before I conclude with the outlook. We will then open up the call for your questions. Let me begin with Group performance in the quarter just ended. Revenues were in line with our guidance. They grew sequentially by 1% to €1.598 billion in a relatively challenging market environment. Segment result came in with €286 million. This translates into a segment result margin of 17.9%. International Rectifier contributed to this figure much stronger than initially expected. For this, I want to share an exciting highlight with you. International Rectifier's business was already in line with our corporate goal of achieving 15% segment result margin in the September quarter. This means we are able to pull in the milestone of bringing International Rectifier to our through-cycle average segment result margin target by more than one year, compared to the plan we had announced upon signing of the acquisition in August of last year. Of course, the integration of the IT systems and the previously announced measures in the manufacturing footprint continue to be implemented. The book-to-bill ratio for the fourth quarter came in at 1.1. The absolute bookings figure stood at a solid at €1.7 billion. Let us now take a look at the divisions, starting with automotive. Automotive revenues came in at €614 million for the quarter, a 1% sequential decline, as expected. Bookings strengthened during the quarter, with a book-to-bill ratio standing at 1.2. Please note that this includes longer-term orders supporting the typical seasonal pickup in the March quarter. The segment result increased by 31% to €93 million, from €71 million in the previous quarter. For this, the segment result margin came in at 15.1%. Reasons for the strong increase in segment results were a faster progress with integrating International Rectifier's automotive business, other productivity improvements, and currency effects. At the Frankfurt International Motor Show in September, our customer and collaboration partner, Kostal, presented a camera-based driver surveillance system. We are proud that this camera is based on our benchmark 3D image sensor chip called REAL3, which works even under changing light conditions or in the dark. The system detects whether the driver is showing signs of drowsiness or is distracted. It is another key technology on the way to semi-autonomous and fully automated driving, as the vehicle needs to know the state of the driver at all times. The system will be installed in cars starting from 2018 onwards. This image sensor strengthens our leading positions and aids us further. Furthermore, it is also finding its way into consumer applications like Google Tango project. Yet another example of how we can successfully leverage car technologies to adjacent markets. Let us take a look at industrial power control. IPC generated revenues of €271 million, essentially flat from €269 million in the previous quarter. In general, we saw healthy demand in all segments with some seasonal weaknesses in major home appliances. We start seeing some signs of a modest recovery in general drives for simple factory automation, driven by China's initiatives to establish manufacturing hubs in the western part of the country. We remain very bullish on the prospect of renewable energies as both the momentum in the U.S. continues and the indications are solidifying that China will mandate even higher installation targets in its forthcoming five-year plan. The book-to-bill ratio came in at 0.8, reflecting the typical seasonal downswing in the December quarter. The segment result improved significantly to €41 million compared to €32 million in the previous quarter. This translates into a segment result margin of 15.1%. The strong improvement in the operating margin was mainly driven by a better products mix, the faster progress in ramping and operational improvement of International Rectifier's intelligent power modules business and other productivity improvements. We were delighted to see the latest market share rankings in power semiconductors in September. According to HIS we are now the number one in the combined market of IGBT discretes and modules for the first time ever. This was not only due to the acquisition of IR but also due to our success in intelligent power modules from LSPS and organic growth of our additional -- traditional businesses. Besides, I would like to highlight a new product for electric, commercial and agricultural vehicles. Our new EconoDUAL module is specifically tailored for the requirement of this market. We are currently seeing a strong pull from Chinese electric bus makers. Electric buses are one element in China's effort to improve air quality and urban zones. Although it is still a small segment of the market today, we are confident that we will see rising demand. Now let me comment on power management and multimarket. Revenues of PMM increased by 3% and came in at €534 million. The increase by €17 million from €517 million in the previous quarter was essentially on the back of good seasonality. Main drivers were the continuing ramp in the server business with the VR12.5 platform as well as market share gains in our benchmark silicon microphones. The book-to-bill ratio improved to 1.1. The PMM segment result improved to €118 million, bringing the segment result margin up to a level of 22.1%. The improvement was mainly a consequence of the favorable seasonal product mix in the September quarter. During the quarter we could broaden our customer base with components for smartphones. We are also winning DC-DC conversion designs for next generation server platforms, solidifying the server business as one of the key pillars of PMM. With respect to our PMM sensor business, we have again gained some percentage points in market share in silicon microphones and held 34% in calendar year 2014 according to the latest market surveys. Let us move to chip card and security. Revenues increased by 5% to €181 million from €172 million in the June quarter. On a year-on-year basis, this amounts to a revenue growth of 27%. We saw a strong demand in payment-driven, mainly by the positive impact from the EMB upgrade cycle in the U.S. Government identification experienced stronger than expected demand from the market. As mentioned in our last call, we expected book-to-bill returning to normal levels. This happened, indeed, with the book-to-bill coming in at 1 during the September quarter. Segment result climbed to €37 million, up from €34 million. This equates to a segment result margin of 20.4%. We are delighted that our strong growth in CSS over the last 18 months has translated into a significant market share gains. According to the latest IHS report, Infineon were the only contender amongst the top four vendors who won market share in the calendar year of 2014. We gained 2.6 percentage point share in terms of revenue and smart card microcontroller ICs. We continue to see positive momentum in our CCS business. We not only won further business in payment with key wins in Asia but also scored another major design win in government identification. A particular success is winning a major e-transport ticketing project in Barcelona. It features our ticketing solution CIPURSE, the only open security standard for secure cost-effective and flexible fare collection solutions. We also broadened our footprint in IoT security and won further designs. Google just launched a router and smart home hub on Google OnHub. It uses Infineon's trusted platform module from the OPTIGA TPM family. Another major step to solidify our leading position in security solutions for the upcoming Internet of Things is the launch of the Infineon security partner network, in brief ISPN. This is about connection IoT security players with outstanding expertise in specific applications and markets. It can range from professional water filter systems to smart homes and industrial control. This is what we mean with being the leader in security solutions. With our partners in the ISPN we can provide customers with the implementation of security compared to the past where we primarily sold security chips. 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.

Thanks, Reinhard, and good morning, everyone. Fourth quarter revenues were €1.598 billion, a sequential increase of €12 million or 1%. The average U.S. dollar/euro exchange rate for the quarter was about €1 to $1.11, only slightly above the rate of €1 to $1.10, underlying our guidance. So, the adverse effect of that variance on growth was less than 1 percentage point. Gross profit, research and development, and selling general and administrative expenses were still influenced by the effects of the consolidation and integration of International Rectifier. Gross profit climbed to €624 million from €552 million in the previous quarter. This represents a sequential increase by €72 million, resulting in a gross margin of 39.0%, R&D expenses decreased by €4 million to €197 million from €200 million in the previous quarter. SG&A expenses slightly increased by €5 million to €215 million, included in these numbers are about €83 million of non-segment result charges of that amount €69 million are acquisition related amortization and other charges. This amount splits as follows, within other expenses about €7 million are restructuring charges and impairments of equipment, primarily in conjunction with the intelligent power module business of International Rectifier within IPC, €27 million of the acquisition related cost hit our cost of goods sold, in R&D and SG&A, we booked acquisition related charges of €5 million and €30 million respectively. These predominantly include amortization of acquisition related intangibles, special retention plans during the integration phase and other integration expenses. Excluding acquisition related and other non-segment result effects the gross margin stood at 40.7%. We recorded a segment result of €286 million for the fourth quarter, an increase of 17% quarter-on-quarter. This represents a segment result margin of 17.9%. Overall, we benefited from a favorable product mix, the excellent progress in integrating International Rectifier and some favorable currency effects on the cost side. The operating income increased to €203 million from €119 million in the third quarter, a sequential increase of 71%. The non-segment result improved from a negative €126 million to a negative €83 million. The still significantly negative non-segment result was again, in essence, a result of the already mentioned acquisition related expenses of €69 million. Going forward, you should expect a non-segment result of roughly €50 million per quarter for this fiscal year. This includes continued expenses in conjunction with the acquisition of International Rectifier. Of that amount, about €35 million per quarter relate to the amortization and depreciation of fair value step-ups from the purchase price allocation. Now let me comment on depreciation and amortization. D&A slightly increased to €211 million, compared to €205 million in the previous quarter. Included in this figure are €36 million related to the purchase price allocation. The financial results continue to be driven by financing expenses for the acquisition of International Rectifier and showed a negative figure of €13 million. Continuing with tax, we recorded an income tax benefit of €131 million for the quarter after an expense of €5 million in the June quarter. This increase is due to a €209 million reversal of previously taken write-offs of deferred tax assets. These predominantly relate to our tax loss carry forwards. This is a consequence of our better forward-looking business case, due to the acquisition of International Rectifier and the generally favorable growth drivers of our business on a five years horizon. Simply put, we expect to consume our tax loss carry forwards faster than before, which is reflected by a tax benefit in the profit and loss statement. If you adjust income tax for the quarter for this reversal, you will see that there is income tax expense of €78 million left, significantly above what we normally expect as an effective tax rate. This includes income tax provisions for past periods, which we anticipate will not reoccur in coming quarters. For your modeling purposes, a cash tax rate of about 15% and an effective tax rate in our profit and loss statement of around 10% on a yearly basis, due to the non-cash PPA effects, should continue to be a reasonable assumption. Net income from continuing operations increased to €322 million, up by €217 million from €105 million in the quarter, June quarter. It must be noted that the net income is not only impacted by the acquisition related charges, but also by the deferred tax benefits, net of tax provisions for prior periods, that I just mentioned. The net income from discontinued operations was again negligible. Basic and diluted earnings per share came in at €0.29 for the fiscal fourth quarter, up from €0.10 in the fiscal third quarter. The adjusted earnings per share decreased by 11% to €0.16 for the fiscal fourth quarter, compared to €0.18 in the previous quarter. Taxes on income, adjusted for the reversal of write-offs of deferred tax assets, increased sharply from a negative €5 million in the June quarter, to a negative €78 million in the quarter ended September 30th. This includes the tax provisions for past periods, as just mentioned. Without these provisions, adjusted earnings per share would have been €0.05 higher, standing at €0.21. This would reflect the sequential increase that you would normally expect in view of our higher segment result. Free cash flow from continuing operations came in with a positive €177 million. Please note that the net cash provided by operating activities came in, essentially, unchanged at €429 million, compared to €432 million in the third quarter. At the end of the September quarter, the gross cash position stood at €2.013 billion, increasing from €1.842 billion at the end of the June quarter. Our net cash position increased to €220 million at the end of the September quarter after a net cash position of €49 million at the end of the June quarter. Finally, let me address our after-tax return on capital employed, or ROCE. It increased to 26% in the fiscal fourth quarter after 9% in the fiscal third quarter. The improvement is mainly driven by the growing net operating profit after taxes, or NOPAT, while capital employed has increased only slightly in the September quarter. Please note that the reversal of write-offs of deferred tax assets had a significant positive impact on NOPAT. Let me now hand over back to Reinhard, who will comment on our outlook.

Thank you, Dominik. Let me now come to the outlook for the first quarter of 2016 fiscal year. With the typical seasonal downswing, we expect revenues to decrease 6% sequentially, plus or minus 2 percentage points. This is based on a rate of 1.1 for the U.S. dollar against €1. We expect all divisions to be seasonally down compared to the September quarter. At the midpoint of the revenue guidance, the segment result margin should come in at 14%. For the full 2016 fiscal year, we expect a growth rate of about 13% plus or minus 2 percentage points, year-over-year, with a segment result margin of 16% of sales at the midpoint of that range. Just for clarification, the last fiscal year, only slightly less than three quarters of International Rectifier's business were consolidated. On a comparable basis, we still want to grow close to our trend line growth rate in this fiscal year. As you know, we define investments as the sum of outlays for property, plant and equipment and intangibles, as well as capitalization of R&D spending. For fiscal year 2016, our budget will be around €850 million, compliant with our 13% investment-to-sales target. We expect depreciation, amortization to be approximately €850 million for fiscal year 2016. Therein included are approximately €135 million related to the purchase price allocation. Let me comment on the integration of International Rectifier in some more detail. When we announced the acquisition to you in August 2014, we highlighted four areas of strategic rationale, adding to scope, adding to scale, adding to technology and adding market presence. With completing the integration on October 1st, we are proud of having achieved all these targets earlier than expected. International Rectifier is now completely absorbed in ATV, IPC and PMM. We reap the anticipated synergies in SG&A and purchasing ahead of our plans. This is evidenced by the contribution of 15% segment result margin on the incremental revenues of International Rectifier already in the September quarter. We also consolidated product portfolios and harmonized development project portfolios. Of course, the integration of IT systems and realization of manufacturing synergies will still take some time. I just want to remind you of our goal to phase out the manufacturing in Newport, Wales, by the end of calendar year 2017 with a partial transfer to our 300 millimeter facilities. All these points are examples of adding to scale. The combination with International Rectifier has made us also stronger in other areas. A very good example is the DC/DC power stage for next generation server platforms. This high performance power stage solution integrates Infineon's leading low voltage OptiMOS technology into an application-tailored package from International Rectifier. The customer feedback has been excellent and we will generate revenue from this product already in this fiscal year. By combining parts from International Rectifier with the sensors and an industrial microcontroller from Infineon, we are also giving the market a better system solution for electric bikes and electric power tools, which brings additional revenue this fiscal year. By combining our leading silicon transistors with package innovation from International Rectifier, we can also better serve some automotive customers with innovative solutions for 48-volt applications. These are examples of adding scope. The ramping of International Rectifier's intelligent power modules, which are completely -- which are complementary to ours, from LSPS at major home appliances customers, also contributes to incremental revenue this year. This is an example of adding technology. One of the strengths of International Rectifier is their fast and flexible approach in serving standard products to broader market. We were able to fully integrate this business model into the Infineon culture and will almost double the amount of available parts into this channel over time. This allows for tremendous growth potential. This is an example of adding market presence. In summary, we are extremely pleased with the success we have achieved in this acquisition. At this point, we are also happy to announce that the management and Supervisory Board of Infineon want our shareholders to participate in the profit and cash flow enhancement resulting from the acquisition, and our strong organic progress. We will propose to the shareholders an increase of the dividend per share from €0.18 to €0.20 in the next Annual General Shareholder meeting in February 2016. Our three pillars, system leader in automotive, number one in technology leader and power semiconductors and leader in security solutions, remained unchanged and are the foundation for our future success. We reiterate our 8% long-term revenue growth model, also reflected in our guidance for fiscal year '16. Why are we so confident? Firstly, we strongly invest in R&D in our manufacturing capacity to fuel the growth by innovation, and best-in-class manufacturing capabilities and domains where we can differentiate. Secondly, Infineon in its current format has demonstrated this high growth performance since its inception in 1999. Our average growth until last fiscal year, excluding the acquisition of International Rectifier and currency effects, was even 9%. Thirdly, International Rectifier puts us into an even stronger position to sustain growth and market share gains. All in all, we are therefore, really excited about the future of our business. Ladies and gentlemen, this concludes our introductory remarks. We want to open the call for your questions, back to Juergen.

Thank you. [Operator Instructions] And handing back to the operator for the first question.

Thank you. We will now take our first question from Sandeep Deshpande from JPMorgan. Your line is open. Please go ahead.

Great set of results, guys. Just a quick question on PMM guidance, you're saying that, going into 2016, PMM is going to do better than the Company average 13%. Can you talk through the business lines in PMM which are going to contribute to this growth? Secondly, through fiscal year '15 you've seen a substantial improvement in your margin in chip card and security can this margin be sustained, given that now you're outsourcing a lot more in this segment? And then finally on 300 millimeter fab is there still a negative impact to your margin guidance in fiscal year '16 from the ramp-up of your 300 millimeter fab? Thank you.

The PMM question will be answered by Arunjai, the 300 millimeter will be answered by Dominik, and I will comment on the CCS.

What you see is nothing extraordinary this is in line with our business as usual. You have the effect of power and RF which is 60:40. There is no change there, we see equal growth in both. Whereby we have seen also that, in the case of servers where we are very heavily active, both in the power supply field for AC/DC as well as DC/DC, there is very good growth projected. Having said that, we also have integration of IR, which is playing a role in these numbers, because this year we will have full-year effect and last year we had three-quarters.

On the 300millimeter effect, in the guidance you've seen there's basically no improvement reflected in the ramp-up costs. We mentioned it last year we had about 60 million of ramp-up costs. It will be again in that order of magnitude. The reason being that the ramp, the capacity increase is very back-end loaded within fiscal year '16, and it costs us a lot of money to make sure or ensure that, in 2017, we can get out of this situation. And that's why, in total, there is no improvement visible yet, but our confidence is still that we can make it happen in 2017.

Well, comment on CCS, yes, we will be able to maintain the margin in this range. What you see here is a many years effort in order to improve the situation on the chip card business, which started in 2007-2008 where the earning situation was difficult. We had accelerated significantly on the shrink pads, we have outsourced to foundries which gave us the manufacture on 300 millimeter definitely as a cost advantage. But one key element there was also we don't need to invest in basic technology development. But we also overhauled our product portfolio and now the success in banking and others is a result of our actual family of products based on the latest embedded flash technologies, which I think gives us a much better cost performance point than before. We also added in the go-to-market where I just highlighted in the remarks that we have established an environment of cooperation partner for IoT, we improved on this area of ticketing and others. So I think here you see the result of a number of measures. And as we continue to progress on the technology road for cost purposes we also will continue to develop our product roadmap. And we even expect that, while the strong growth of this year will definitely not -- or the last fiscal year will definitely not be continued, but with all our measures in go-to-market we see even a good potential for growth moving forward.

Thank you, Reinhard.

We will now take our next question Janardan Menon from Liberum Capital. Please go ahead your line is open.

Hi, thanks for taking the question, it’s Janardan from Liberum. Two questions from me. One is there are recurring reports of your interest in further M&A in recent weeks. I'm sure you can't comment on any specifics, but I was wondering whether, from a very top-down philosophical level, you could tell us what is your approach to further M&A? What would appeal to you, what would not appeal to you, and what would you try to gain from any further M&A if that is at all on your plans? Secondly, when I look at your results and guidance versus some of your immediate competitors, especially in areas like CCS, and the chip -card, there is a huge difference, which strongly suggests that there is market share gains for Infineon. I was just wondering, can you comment on the sustainability of that going forward? Are there design wins which will ensure that you will keep getting those design wins and those share gains into FY16 as well? You gave us numbers for the last year which support that. And also, the same true in the IPC division where you're talking more bullishly about industrial drive compared to most of your peer group. Would that also represent share gains for you at this point in time?

On the M&A, as you already mentioned, we cannot make any comments on any rumors in the market. But let me make some strategic comments. You have seen that Infineon has switched to become an active player in semi-conductor industry consolidation, and we have a very clear strategy which Arunjai will give you more insight in. And he also will explain on the share gains. But for me, moving forward, we definitely will consider M&A as part of the Infineon strategy in growth and strengthening our footprint.

Okay, thanks Reinhard. Janardan, thank you, you used the right word, philosophical answer, which I think Reinhard has given. Having said that, to the strategy what we follow is clear we look for strategic fit, whether it is portfolio, or whether it is markets. Then we consider post-merger integration very seriously. And finally, of course, it has to be financially accretive in various aspects. And these three are the major bullets which drive our decision making in that direction.

And do you think that because there's a lot of M&A going on in the market right now, which is companies on the market as it were, this is a time to strike, if not you will lose a window of opportunity? Is that part of your thinking as well?

Well, here a comment. I think here we move in the speed we believe is right for our Company, and we are not so desperate on that we may lose the one or other opportunity. Of course, since we started more than two years back in order to scan the market about potentials, and I think we have looked at many topics. But as Arunjai pointed out, the key element we even do, and we would not compromise these when we see opportunities are I would say drying up markets, we believe there will be other areas where we can do our moves. And on the other side, frankly speaking, we have proven a very strong organic growth over many years so we believe that we stand on the further development on two pillars. Arunjai, you comment further on chip card?

Okay. There was a chip question on chip card and IPC. So chip card we definitely see sustainable design wins, whether it is further in the payment area, there are still new markets for payment which are growing. For example, in India we see new tenders coming out for payment business, which we have very good wins in. We have also further wins in government ID. Please understand it is too premature at this stage to talk about which country and which application. And finally, the new IoT segment which Reinhard talked about is also giving us traction in chip card, so our confidence there remains high. In IPC, yes, you are right you see conflicting messages out there. Nevertheless, we see somewhat better demand in drives driven by factory build-up in the Western part of China, where general purpose drives seem to be the name of the game. Whereas on the Eastern, the move, as labor cost goes up to automation and robotics, is also giving us a pull. Finally, with IR integration we have a very solid presence in major home appliances. This is also driving the business of IPC. And I take the chance also to talk about renewables and traction briefly because here also we are seeing some nice wind, but not referring to the wind market only but renewables in general. Both are growing in U.S. as well as in China in particular.

We will now take our next question from Gareth Jenkins from UBS. Your line is open. Please go ahead.

A couple if I could. Firstly, just on margins at a higher level. You had a €12 million quarter-on-quarter increase in revenue but a €41 million drop through on EBIT. If I look at your forward quarter guidance, it looks like you've got 400 basis points reduction in your margins. Can you walk us through whether you're being prudent on the forward quarter, or whether there's anything that you see as non-structural from the last quarter? It sounds like productivity improvements and RF integration should stay with you. And how does that frame against your 15% through cycle margin target? Should we be thinking more 16%, 17%? What's the thought process there? Thank you. I've got a follow-up, if I could.

Gareth, this will be answered by Dominik.

So I think we can say that the margin in the fourth quarter was not distorted by any kind of one-offs in a major way. So I think the margin you see is, frankly, the margin we run-off, more or less. And the fall-through into the Q1 is very much driven by the revenue reduction. So if you do the math, we always said that if you have a sudden reduction in revenues, on every €1 of revenue lost, then about three quarters of that reduce the second result. If you do that math, you'll see that it's pretty much in line with that. So there is no conservatism, I'd say, on the margin guidance for the December quarter. Now how all that relates to the through cycle margin target, if you recall, the through cycle margin target was set at the euro/dollar exchange rate of about 1.30. And we would aspire to deliver that type of target, even if the U.S. dollar/euro exchange rate reverted back to that level. And this, I think, is the bridge you can use and this is why we're not changing it because we don't want to change our through cycle margin target. But we are obviously, aware that with the current very positive U.S. dollar/euro exchange rate and frankly also pretty good exchange rate on the Malaysian ringgit, that we should not kind of consume these benefits and then hike the target. But we want to be solid, even if these exchange rates would revert to the levels when we have set this guidance.

That's very helpful, thanks. And if I could just follow-up on Chinese autos, it seems like there is quite a mix going on towards the low-end vehicle market and away from the long wheelbase sedans. I just wondered whether you can comment on what you're seeing in China from what -- I think you called out slight weakness there, but nothing major. Just wondered if you could talk about that market specifically? Thank you.

So the Chinese market, we see the push from the smaller cars, due to the VAT cut. And this also we saw in our order entry for ATV, we see a pretty normal year all overall there. So I think we have to wait how the further development the Chinese auto market happens, but we do not see any I think un-normal or special activities.

We will now take our next question from Achal Sultania from Credit Suisse. Your line is open. Please go ahead.

Thanks. Just a clarification on a previous question about the impact from 300 millimeter, so you think 60 million of ramp-up cost which is going to be there most likely until the end of this year. So that would imply about one percentage points of gross margin headwind. Is that all that you're basically going to see and correct me if I'm wrong, and then what is the utilization level right now on your 300 millimeter factories, can you give us some sense around that as well?

Yes. Dominik.

Okay. So basically, if you look at the comparison of fiscal year ’15 into fiscal year ’16, there is basically no change from the 300 millimeter headwind. The headwind has been there in ’15, it will continue to be there, as I mentioned, because of the backend loaded ramp we see in the current fiscal year towards the target level where we can get to breakeven. And then for ’17, we're still targeting to reach the cost breakeven within the fiscal year ’17. So that's what I can say. What was your second question? Utilization, yes the utilization is kind of crossing teens, so low teens and should then ramp up significantly further. And as we already mentioned in prior calls next year 2017, we want to be at kind of around 20%, 25% loading to reach that breakeven level.

Just to add on to what Dominik said, this utilization is a clean room utilization, how much of the clean room is used. The utilization of equipment is different. So that is I think what we always say, but just to avoid any confusion.

All right, okay. Makes sense. And then maybe a follow-up on this quarter you haven't given the revenue contribution from International Rectifier. I guess now as we go through the integration, I guess you're going to avoid giving that disclosure. But can you give us some sense as to like whether that part of the business is growing in line with Infineon or is it slightly different in either direction? Thank you.

Yes, well, you're absolutely right, we do not disclose International Rectifier specific business any further. But due to the nature of the business, as it is very close to PMM power business, we can state that it is growing in line with PMM power business. Maybe a little bit softer here, but all overall, I think that is the guidance we can give.

Maybe you should also add that these kind of revenues are blurring over time now, because we have some revenues which have been shifted between Infineon and International Rectifier.

We will now take our next question from Adithya Metuku from Bank of America. Your line is open, please go ahead.

I have three questions. Firstly, could you comment a bit on the benefit on gross margins from the Malaysian ringgit in this quarter? How much was the sequential benefit relative to last quarter? Secondly, are there any -- with regards to the PMM business, are there any share gains you're seeing in the MEMS space at this point? And is that one of the drivers of growth, or am I reading too much into one of the news articles I've seen? And then, on distribution, if you could just give us some color on how that has trended over the last few weeks, especially given you account for distribution on a sell-in basis. And also, if you could comment on what you're factoring in, in terms of distribution trends going forward, that would be really helpful. Thank you.

So very briefly, the share gains in MEMS, we have two major types of MEMS businesses. There's the silicon microphones, it's definitely gaining share. The other is the pressure sensors in automotive, ranging from various types down to the tire pressure monitoring. Also here we see growth and a very good development all over all of our sensor business. So with this, I give the first question to Dominik and the distribution will be answered by Arunjai.

So on the Malaysian ringgit, we don't want to kind of break that out separately, because if you look at our U.S. dollar/euro kind of sensitivities we guide, there is a certain assumption of correlation between the dollar and the Malaysian ringgit. And if I then kind of dissect that further, it gets really too complicated and it will confuse you more than it helps you. What I can say is that there is not much of a difference, if you look at the current level of the Malaysian ringgit in the December quarter compared to what you've seen in the September quarter. So the point is that you can assume there's no major impact from that and the sequential bridge, so to speak, from September quarter into the December quarter. So there's nothing that should confuse you there coming out of the ringgit anymore, it's basically already in the September quarter numbers.

Okay. Moving on to distribution, nothing extraordinary there, we have integrated the distribution landscape of International Rectifier and Infineon. With that we are positioned very healthily in our POP and POS ranges. Inventory is within the eight to 10 weeks which we like to see for this business. And other than that, I can only say there are two or three customers where there is a certain build-up of inventory, but this is absolutely well understood in line with the demand for 2016 ramp-ups which have been mentioned earlier.

Just a couple of quick clarifications, Dominik, on the Malaysian ringgit, my question was more to do with September quarter versus June quarter. I don't know if you can give any color on that. And on distribution, Arunjai could you comment on how the demand trends have been, how they've changed in the last couple of weeks and what you're factoring into your expectation as in normal seasonality or whether you're going to -- you're being conservative, given you -- account for distribution revenues on a sell-in basis?

If you look at the comparison June quarter to September quarter, it should not surprise you that there was a certain benefit which I don't want to quantify, because there were also some hedges in place which distort the fall-through so to speak. What I wanted to say is that if you look at the current Malaysian -- euro/Malaysian ringgit exchange rate, and if you look at the comparison of the September quarter to the December quarter, it should not make a major difference. We are kind of now at a certain new level. The ringgit has weakened somewhat, yes, and this against a strengthening U.S. dollar, which is the benefit that we enjoy. But I've given them all the kind of sensitivities which are in there including hedging which has been still going on in the September quarter, I don't want to break it up further, but simply say if you assume that the ringgit stays where it is at the current level, you shouldn't have any major adjustment need either way.

On the distribution, apart from the fact that the clean-up of the landscape for distribution as we integrated IR led to some stock build-up here and there, if you ask for the seasonality, it is 100% in line with what we've seen in the last years and therefore, no surprises at all.

We shall now take our next question, Johannes Schaller from Deutsche Bank. Your line is open, please go ahead.

Congratulations on the good numbers. A few questions from my side, firstly, on automotive, you actually got up margins here quite nicely. Could you maybe just quickly run us through a little bit how much of that was currency, how much of that is just more scale and how much of that was maybe product to mix driven? That would be helpful to understand. And then also, on Rectifier, I understand you're not really talking about the business separately any more, but given you've now achieved the 15%, what should we expect from here? I mean should this not really be a kind of 20% plus margin business in the context of the wider Infineon Group over the next one or two years, or do you think we're kind of there at the 15% now? And then lastly, I mean one of your peers had a bit of an issue with inventories in the September quarter and then going forward into the December quarter. Just wanted to check, your inventories seem to have gone up a little bit more maybe than last year as well, just how confident you are you can work that down and how much visibility you have on the demand here? Thanks.

So the first two questions will be answered by Dominik and Arunjai will comment on the inventories.

So on automotive, there was certain benefits from the improvement in International Rectifier, so the margin has increased there, but also, as I mentioned, some of the Malaysian ringgit benefit in the June to September comparison was occurring in automotive. I think with these two, you have the bulk of it. I think there was no huge mix change. With regards to the beyond 15% International Rectifier margin story, what I can say is that we think that in the current fiscal year, International Rectifier should be neutral to the margin of Infineon. So, given that we've guided 16% that gives you some indication. Basically, all the quick stuff is done. OpEx reduction is all in the numbers now and in the December guidance already. The stuff that is now still giving you a little bit of upside is more on the Newport situation, which is something that you will see only in the coming years, not so much in 2016. And last but not least, there is some improvement needed on IT and this is, by the way, why you still see some integration costs. I mentioned there is 50 million of non-segment result in every quarter. In the current fiscal year, very roughly, of that, 35 million is really purchase price allocation, non-cash charges. On top of that then, you are left with about mid-teens charges per quarter and these relate very much to the integration in IT and integration on the manufacturing side, which will then yield further upside. So there's a little bit of margin upside beyond 2017 from Newport and then from harmonizing the MIT landscape, but this is not something that will add tremendous gross margin improvement in the current fiscal year because it takes longer to implement that.

On the inventory, clearly, we see two effects. One effect is all what is happening due to the restructuring in, for example, Newport, as well as the Singapore closure of the plant, so there is a pre-production which is reflected in inventory. But it's all under control and it's understood. The second one is on the distribution side. I talked about that. Also there, we went through the process of realigning our distribution partners and there, we see an effect due to that which is on short-term, we are very confident will disappear. And last but not least, there are some pockets of businesses where we had a very ramp-up, for example in chip card, where we see that okay, the inventory base has increased. But the prognosis which Reinhard gave clearly says that we don't estimate or anticipate a decrease in that business, so we are not so nervous about that either.

We will now take our next question from Francois Meunier from Morgan Stanley. Your line is open. Please go ahead.

Congratulations for the results as well. Sorry to come back to the inventories question again because it's quite puzzling to see this big increase year-on-year. I think it's about 40%, if you exclude the integration of International Rectifier. I can hear the explanations. What I wanted to know is more or less what's a normal level of inventories to sales for next year, or if you expect the inventory level to go down in an absolute number for next year as well.

So just that question, is that related now to our internal inventories I presume, not with these inventories, or both?

No, your own inventories, which are up like 60% including [indiscernible] excluding…

Yes. We have entered the year with very, very low inventories, so at the lower end of our target ranges, or even below that range, I must say yes, our inventories are currently I'd say at the higher end of our target ranges. But as Arunjai has already mentioned, operationally he feels very comfortable about that because we do see continued strength into the currently already running fiscal year. And as already mentioned too, we have a significant amount of inventory as a result of the Singapore shutdown, the distribution alignment and also, the plans we have in Newport. So, from that perspective, I can only reiterate that we are not nervous on that point. You should see some kind of inventory turns reduction very moderately over the year, but this is probably more related to the revenue run rates improving, which is the normal seasonality. You know that December quarter is normally down. So the 6% down we guided is very much in line with normal seasonality. And then you see the normal seasonality up. And as you see the normal seasonality going up, over the coming quarters you should see some improvement after another kind of deterioration in inventory turns in the December quarter. But it's not a key concern for us at present.

Okay, so a slight decrease in inventory turns. That's the guidance for next year.

So the current inventory level we see is at the high end of our target ranges would be very roughly average temperature of the hospital. But I must say it's very different in different segments. There are some segments which are a little bit high where we have to work on, and others which are even tight still.

Okay. Thank you very much.

We will now take our next question from Youssef Essaegh from Barclays. Your line is open. Please go ahead.

Most of my questions were asked but I have actually two more, one related to the tax revaluation that you did. The 209 million is significantly higher than the money that you'll be generating extra, thanks to bringing forward the International Rectifier completion of most of the quick fixes that you mentioned. So what I'm wondering now is if you see that the outlook is increasing so much that you need to revaluate by €209 million, couldn't that mean that maybe you should have also moved up your long-term guidance of 15% on average through the cycle? And then I have a quick follow-up, thank you.

So let me explain in a little bit more detail what these €209 million are. Basically every year at the end of the fiscal year we look into our plan, into our five-year plan, and then look at the ability of that five-year plan to absorb our tax loss carry forwards predominantly in Germany, where we have very significant tax loss carry forwards. And then, given that we have basically written off the deferred tax assets in prior times, you have to ask yourselves how much of that write-off has to be recovered. And by the way there is still very significant write-offs in our deferred tax assets. We only show a fraction of the deferred tax assets we could generate out of the tax loss carry forwards. The reasons why we don't step them up in one go is that there is a convention which is you only look at a five-year plan. So as you move the five-year plan one year ahead, there's a New Year rolling in there, which normally in the planning is higher at the end of the five years due to our target financial model than in the beginning. And last but not least the fact that International Rectifier is increasing our profit base and cash flow going forward, that has another incremental step. And this is not something new. It was relatively high this year compared to prior years. It has happened in the prior years in kind of lower amounts. And you might see that again if the market is evolving as expected. But from my perspective, it's a pure tax accounting stuff and has nothing to do with cash flow. And from that perspective I'm not sure how much it adds to your evaluation work. So it's accounting mechanics. And we try to be conservative on that one I can tell you. But every year you roll in with a higher margin, and you cannot deny it so to speak with the auditors. So that's why we have to take the charges of course. Then secondly the margin target, I mentioned that already. If you could promise to me that the ringgit stays where it is, and the dollar stays at $1 or $1.06 or whatever we have currently, for the next 20 years, I'm happy to consider it. But I want to have that promise from you first before I do that.

Well, that's not with me, but it's for my derivatives teams maybe to get in touch with you. On that front actually it's my second question. It's regarding the FX. Why did you take as an assumption 1.1, when it's already at 1.06, and the forwards are pointing to parity within the next three months? Do you have, for example, a new sort of forward hedging policy, which actually would make sense given that now we have a much diversified OpEx base with the acquisition of RF? Thank you.

First of all on the assumption, it simply was the kind of closest rounded to $0.05 range that we had when we defined the guidance. At that point in time we were very close of $1.10. And you have to understand that in a company like ours you have a whole forecasting process running around that. And there's a certain assumption and you can't change it every second. Of course I can give you sensitivities, if you want to toy around with it with different exchange rates we always say there is about €7 million to €8 million change on every cent in the euro/dollar exchange rate on the revenue side per quarter. And in a similar vein there's about €2 million to €3 million per quarter on segment results for $0.01 change. And with these numbers you can get very close to any assumption you might want to take. Hedging, we have not changed our policy with International Rectifier. You are right. We have now more dollar costs relatively. And we have also higher revenue share in dollars with International Rectifier. So that has gone up to about 50% of our revenues. But you have all that data already embedded in this kind of sensitivity guidance I gave you. And we have not changed our hedging. We have a rolling three month hedging strategy. So you see the fluctuations of the exchange rates within the relatively short period of time in our P&L.

So we have time for one more question from one participant.

We shall now take our final question from Guenther Hollfelder from Baader. Your line is open. Please go ahead.

One on M&A again, especially given the consolidation we are seeing in the power semiconductor market with ON Semiconductor and you guys as active players, do you think -- or are you concerned, is there a risk that one of the smaller players could get into the wrong hands, could this be a criteria for you to act and maybe as a second question on the margin leverage again, comparing in ’16 to ’17, you already highlighted your target to get to a cost crossover for 300 millimeter in ’17. Can you provide any indications after another increase in D&A in ’16 about the trend concerning D&A in ’17? Thanks.

Yes, M&A again we cannot say much more. But as I said before, we will not be driven by reactive activities in the M&A process. In the power we believe that we are extremely strong, having a technology portfolio which nobody can match. And even in special technology we don't see any company, even not the smaller ones, which are close to our capabilities. And when you add the ability of the 300 millimeter footprint, I think this is a very overall number of strengths we are resting on. So I don’t, just to give you our position of strength in this area, which I think indirectly answers the rest. The other part of the question will be answered by Dominik.

So on the 2017 we are obviously not going to provide an outlook on 2017. What we can say is, yes, there should be some improvement, or significant improvement, on the headwind we suffer currently on 300 millimeter because of the outlook of loading that factory to that breakeven level within the 2017 fiscal year. But don't forget a one percentage point change in price decline in any given year is kind of a similar order of magnitude. And we don't know what we want to think about the price decline in 2017. On D&A, you see that we had already 211 million in the fourth quarter of ’15. We've guided 850 million for the entire fiscal year ’16. So that tells you there is not much increase happening any more. It's kind of reaching a plateau in the second half of the fiscal year 2016. And as you rightly point out, that plateau might even yield in a slight reduction. And if and that's an if, in 2017 we would still sail along the kind of 8% trend-line growth, that would give us a certain leverage in the gross margin. That's absolutely right. But I want to guide on that only one-year down the road when we guide 2017.

Gentlemen, thank you so much for your questions. With this, we would actually like to conclude this conference call. And for any further questions, please feel free to contact our Investor Relations team here in Munich. Thank you very much.