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Edited Transcript of AIXA.DE earnings conference call or presentation 25-Apr-17 7:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Aixtron SE Earnings Call

Aachen Apr 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Aixtron SE earnings conference call or presentation Tuesday, April 25, 2017 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bernd Schulte

Aixtron SE - COO, EVP and Member of Executive Board

* Charles Russell

* Guido Pickert

Aixtron SE - Director of IR & Corporate Communications

* Kim Schindelhauer

Aixtron SE - Interim CEO and Interim CFO

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Conference Call Participants

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* Charles Lepetitpas

Natixis S.A., Research Division - Research Analyst

* David Terence Mulholland

UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware

* Guenther Hollfelder

Baader-Helvea Equity Research - Analyst

* Jürgen Wagner

MainFirst Bank AG, Research Division - Senior Analyst

* Thomas Becker

Commerzbank AG, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to AIXTRON's Q1 2017 Results Conference Call. Please note that today's call is being recorded.

Let me now hand you over to Mr. Guido Pickert, Director of Investor Relations and Corporate Communications at AIXTRON, for opening remarks and introductions.

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Guido Pickert, Aixtron SE - Director of IR & Corporate Communications [2]

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Thank you, operator. Let me start to welcome you all to AIXTRON's Q1 2017 results conference call. Thank you for attending today's call. I'd like to welcome our CEO, Kim Schindelhauer, as well as our Chief Accounting Officer, Charles Russell; and COO, Dr. Bernd Schulte. As the operator indicated, this call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be recorded or rebroadcast without expressed permission. Your participation in this call implies your consent to this recording. As with previous results conference calls, I trust that all participants have our results presentation slides, Page 2 of which contains the usual Safe Harbor statement. I would therefore not read it out aloud, but would like to point out that it applies throughout this conference call. You may also wish to have a look at our latest IR presentation, which includes additional information on AIXTRON's markets and its technologies, and is available on our website. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or a transcript on our website at some point after the call.

I would now like to hand you over to Kim Schindelhauer, AIXTRON's CEO for opening remarks. Kim?

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Kim Schindelhauer, Aixtron SE - Interim CEO and Interim CFO [3]

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Yes, Guido. Thank you very much. Ladies and gentlemen, on behalf of AIXTRON's Executive Board, let me welcome you to the presentation of our Q1 2017 results. My name is the Kim Schindelhauer. I am the CEO of AIXTRON's since March 1, this year. I am with the company since 25 years, initially as member of the Executive Board, and for the last 15 years, as Chairman of the Supervisory Board. It is a pleasure to be back on the board in an operational function now, and together with my colleague in the Executive Board, Dr. Bernd Schulte, we will guide AIXTRON into the next phase after the non-successful takeover by Fujian Grand Chip last year.

Bernd will give you an update on our technology portfolio and the expected developments for 2017. Also with us today is our Chief Accounting Officer, Charles Russell, who has been with the company for more than a decade. He is responsible for accounting, financial reporting within AIXTRON. Charles will go through the results with you and answer your related questions to them.

Before that, let me highlight some key results from Q1, what we look first on Slide 3. With an order intake of EUR 61.9 million in Q1, we had another strong quarter. We had booked revenues of EUR 53.6 million and an EBIT of minus EUR 12.7 million. Included in this number are extraordinary write-downs in the amount of EUR 6.6 million, which results in an adjusted EBIT prior extraordinary write-downs of minus EUR 6.1 million.

Longtime low inventory levels of EUR 49.9 million, as well as reduced operational and CapEx spending led to a free cash flow in the quarter of EUR 33.3 million. And to a group cash position of EUR 193.6 million. A significant improvement compared to prior quarters. Charles will go into more details on that and answer your questions on that.

I would like to share some additional important events with you which happened in Q1.

We received a purchase order from a large Asian display manufacturer for OVPD deposition tool due to deliver -- to be delivered in Q4 2017. It is an important milestone in our OLED development program. Furthermore, we delisted from NASDAQ and the deregistration from the SEC was completed. As of March 20, AIXTRON was again included in the TecDAX share index, of which we were excluded in December for the first time, due to the lower free flow during the pending takeover transactions. In addition, the U.S. class action suit against AIXTRON was dismissed.

Turning now to Slide 4. Based on our Q1 results and an order intake, we reiterate our full-year 2017 guidance given in February 2017 with revenues and an order intake between EUR 180 million and EUR 210 million for the fiscal year 2017. We continue to expect an improvement of free cash flow in 2017, compared to '16 and to achieve a positive EBIT in 2018.

Let me now give you some background to the previously mentioned write-downs in Q1. To explain our position, I would like to ask you for a second of your time. AIXTRON has the right portfolio, as you know, of enabling technologies for highly diversified applications. Each application has a group of customers or a very large single customer. Each application is a completely separate market and is not competing with each other at all. With unique market position of AIXTRON to deliver equipment for complex material to position into different applications and/or markets by using the same core know-how provides unusual growth opportunities for the company. The negative side of this unique situation is that for each of these future applications, significant R&D funding is required. One solution would be to focus on less applications, and spend less R&D to make the company profitable rather quickly. It is unquestionable that the deposition of complex materials would be the future and AIXTRON will be the only company to focus its entire know-how towards that and to support the relevant customers and markets as their requirements.

We made the decision to continue our activities in this future market, but with a more focused approach. We will organize our portfolio of future technologies and transfer them into defined independent units. For each unit, we will select technology partners at an early stage of the development to provide the required resources. These partnerships which could be investments in R&D, as well as joint ventures, will focus on specific requirements needed.

This year, we will review all development programs and collect solutions in order to focus our R&D spending. This will lead to a sustainable profitability and growth of the group in the following years.

As the first step of focusing our R&D spending, we froze our product development for III-V materials for future generations' logic chips. They are called TFOS. This led to an extraordinary write-down of assets in the amount of EUR 6.6 million. We will not spend further R&D, until a firm timeline for the introduction of these materials application has been set and a partner was found to cover the requirement -- for the required development expenses. We are of course fully committed to support our customers to introduce TFOS materials to the market once this will happen.

That, I would like to be, this would be my explanations to the EUR 6.6 million and I'm more than happy to answer more questions later on.

At this point, now, I would like to hand it over to Charles, who will give you a detailed overview of the Q1 results. Charles please.

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Charles Russell, [4]

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Thanks, Kim, and good morning to you all. Turning to Slide 5. Let me start by saying that Q1 was, in many ways, a reasonable quarter, thanks largely to a very strong order intake at EUR 61.9 million, which was up 39% on a EUR 44.4 million we generated in the same quarter last year. This year-on-year growth means that we ended the first quarter with an increased order backlog totaling EUR 87.6 million. Despite a EUR 6.6 million write-down, we decided to make in the area of our TFOS activities, we also improved profitability, compared to the first quarter last year. Also on the positive side, we generated a free cash flow of EUR 33.3 million largely because of reductions in working capital. However, earnings remained negative in the first quarter with net income coming in at minus EUR 13.5 million.

Moving to the next slide. Let me take you through the income statement for Q1. Total revenues recorded during the first quarter of 2017 of EUR 53.6 million, were up from EUR 21.4 million in the same period last year. We improved our gross margin by 10 percentage points from 15% in Q1 last year to 25% in Q1 '17. And it would have been 27% had we not written down a EUR 1 million of TFOS inventory assets in the quarter. Operating expenses totaled EUR 26.4 million in Q1 '17, which was higher than Q1 '16, mainly due to higher R&D expenses, including a EUR 5.6 million write-down related to our TFOS activities. Otherwise, R&D spending should -- would have been at a normal level of EUR 14.1 million. EBIT for the first quarter came in at minus EUR 12.7 million, which was an improvement over the minus EUR 14.7 million of Q1 2016. If we exclude the EUR 6.6 million write-down, the improvement was more pronounced with an adjusted EBIT of minus EUR 6.1 million. The net result for Q1 2017 was minus EUR 13.5 million, a slight improvement over the minus EUR 15.5 million in the first quarter last year.

As you can see, the fourth quarter of 2016 with around half of 2016 annual revenues, was extraordinary both in terms of revenues and earnings, and is therefore, difficult to compare.

Moving to Slide 7, which shows our cash flow statement for the first quarter. We had a particularly good quarter in terms of cash flows due to a strong positive operating cash flow of EUR 34.6 million, mainly resulting from collections of accounts receivables and an increase in advanced payments from customers for new orders. The overall result was that we generated a total cash flow of EUR 33.3 million in Q1 2017, as a consequence, our cash balances have increased from EUR 160.1 million at the end of last year to EUR 193.6 million at the end of Q1.

Turning to the next slide, our balance sheet. AIXTRON continues to have a healthy balance sheet with equity of EUR 356.7 million, cash of EUR 193.6 million and no debt. I want to highlight 2 things, inventories and customer advanced payments. Firstly, inventory at EUR 49.9 million is at its lowest level for 10 years and is a clear reflection of the improvements we've made in inventory managements. Secondly, advance payments from customers increased to EUR 30.5 million as of March 31, 2017, compared with EUR 26.1 million at the end of last year. Reflecting the continued strong order intake recorded in Q1 2017.

Now let me hand you over to Bernd, who will talk about our technology portfolio on Slide 9. Bernd?

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Bernd Schulte, Aixtron SE - COO, EVP and Member of Executive Board [5]

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Thank you, Charles, and a warm welcome to everybody. As mentioned before, we had a good quarter with strong orders, backlog and revenues. And we have reached an important milestone for our OVPD technology, for the deposition of organic material with the order we have secured.

In Q1, Gartner has confirmed what we have already anticipated. We have been the global #1 supplier for MOCVD equipment in 2016 with a 55% market share. In our last conference call, I mentioned that AIXTRON technologies are enablers for mega-tech trends, including the move to renewable energy and the electrification of transportation. Both of which require higher amounts of semiconductor components, and in many cases, new materials to make those components possible. To add to that, 5G mobile connectivity, autonomous driving and the Internet of Things, all of which require millions of sensors and other semiconductor products.

As I said before, our deposition technologies will be strong enablers for these future semiconductor products, which will represent a solid demand for us. In order to benefit from these mega-tech trends, we need to stay close to our customers, to be ready with our technology when our customers need them. As usual, in new and complex technologies, some of this timing is not fully clear yet. We are committed to supporting our customer once a firm timeline has been announced. However, in case of such technology roadmaps are not firming up, we have to be tough on ourselves on how to focus our internal resources. This is exactly the situation with TFOS. We are convinced these material will be required in the future, but we are not sure exactly when they will penetrate the markets. Against this background, we have made the decision to freeze our activities in this area with one-time costs this year and saving expected in 2018.

As soon as we see progress in this market side, we can intensify our efforts. However, only if the market pays for it. This is the first example how we want to focus our R&D spending going forward. In the next steps we are evaluating potential partnerships to strengthen the position of our market product portfolio, as Kim described. These activities are one of our major focus areas this year, and we will give you more information on our progress in future conference calls.

With that, I thank you for your attention, and we are now looking forward answering your questions.

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Guido Pickert, Aixtron SE - Director of IR & Corporate Communications [6]

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Thank you, Bernd, Charles and Kim. Operator, we'll now take the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first questioner is David Mulholland from UBS.

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David Terence Mulholland, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware [2]

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Firstly, obviously, good to see some action on the cost side of the business but I wonder if you could just give us some guidance on -- now that you've paused the investment in TFOS, what should we expect in terms of R&D or even total OpEx for the full year? And then secondly, bookings trends continue to be quite strong in Q1. How do you see the pipeline through the rest of the year? Can we carry on at these levels or I guess how do you see the outlook for bookings in Q2, Q3?

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Kim Schindelhauer, Aixtron SE - Interim CEO and Interim CFO [3]

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Maybe I'd say something to the TFOS, it's Kim Schindelhauer, to the TFOS situation on the full year basis, we are planning with a saving of EUR 9 million to EUR 10 million. Bernd, maybe you can say something to the other part of the question?

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Bernd Schulte, Aixtron SE - COO, EVP and Member of Executive Board [4]

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Yes, sure. Hi, this is Bernd. Well, you know the ordering levels are quite solid right now and in short term, we are seeing this potentially continuing, however, you know, in our business, the possibilities to look far ahead than one quarter is quite difficult. So -- but in general, as Kim mentioned, we have confirmed our guidance, and with that, mathematically you can see that we are relatively positive going forward.

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David Terence Mulholland, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware [5]

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Great. And maybe one quick follow-up on the OLED side. Obviously, I know you probably can't specify who the customer is, but is it fair to assume that this is someone that's already active in OLED display? And could you possibly just give us a bit of background, had you gone through the full process with this customer at your own site last year that then led to this order? Maybe just a bit more color on the strength of the relationship with the Asian OLED display manufacturer?

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Bernd Schulte, Aixtron SE - COO, EVP and Member of Executive Board [6]

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Yes, let me answer that. Sure, you can be sure that is a customer who is already engaged in OLED manufacturing. And I think we have been mentioning in previous calls, that this program goes through 3 major stages. So this is the second stage where we with the customer together, wanted to prove the feasibility on high-volume manufacturing -- for high-volume manufacturing but on a smaller substrate size level. So this is -- the first step was showing the feasibility of the technology in general. Now we are at the second step. And of course the third step would be doing this all together on higher volume manufacturing size.

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Operator [7]

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The next questioner is Jürgen Wagner from MainFirst Bank.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Senior Analyst [8]

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Now post the R&D on the project freeze in TFOS, what would be a breakeven sales level in 2018? And the second question, what is your view on the gallium nitride LED market, particularly in China? There is some reports that the competitive pressure increased? Or do you see an improvement even?

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Kim Schindelhauer, Aixtron SE - Interim CEO and Interim CFO [9]

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Bernd, will you say something to Jurgen?

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Bernd Schulte, Aixtron SE - COO, EVP and Member of Executive Board [10]

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Sure. Yes, indeed, there is certain movements in the competitive situation in China. You probably have heard that Chinese MOCVD suppliers are in the process of getting qualified with Chinese customers, and what we are hearing from the market, that they may step forward and even receiving now orders on a significant order level and you can imagine that this changes the landscape quite significant in the market, in particular, when you consider that Chinese competitors have an even more aggressive pricing behavior than in the past. And so we are focusing our product portfolio in areas where we can play our unique selling points, and as such, we can achieve reasonable margins for our products. And as such, we definitely looking in particular in the area of LED in China, but also elsewhere, in particular on speciality LED application, where high yield performances are acknowledged, but also we are seeing a good opportunity and development in the area of red-orange-yellow LEDs in China.

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Charles Russell, [11]

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In terms of a breakeven, if you look at the quarter that we have just reported, we have an adjusted EBIT of EUR 6.1 million negative and a gross margin of 25%. So I think, in the Q1 period, we've had some low-margin sales, as we previously said in the Q4 conference call about R6. We have to get the remainder of those out of the pipeline, then the margin should improve slightly, so I would think a breakeven is somewhere around EUR 65 million every quarter.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Senior Analyst [12]

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Okay. And that is the level also for next year to look at?

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Kim Schindelhauer, Aixtron SE - Interim CEO and Interim CFO [13]

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Well, that might change if we consider any further actions on our R&D spending.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Senior Analyst [14]

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But at the moment.

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Kim Schindelhauer, Aixtron SE - Interim CEO and Interim CFO [15]

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That is the current situation. Correct.

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Operator [16]

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At the moment, there seems to be no further questions. (Operator Instructions) And next up is Guenther Hollfelder from Baader Bank.

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Guenther Hollfelder, Baader-Helvea Equity Research - Analyst [17]

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First question on -- you mentioned the AIX R6 sales. So has the inventory sale down, has this now been completed with the first quarter or do you expect additional sales later this year?

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Charles Russell, [18]

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We still have additional sales to clear, during the remaining quarters of this year. And then I hope we should be done with the AIX R6 inventories. So you could expect that the margins in the subsequent quarters may still be rather depressed by that.

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Guenther Hollfelder, Baader-Helvea Equity Research - Analyst [19]

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Okay. And on the -- you mentioned the situation also in China, and you're focusing increasingly on, for example, red-orange-yellow LEDs. So given, let's say, less strategic importance for Thomas Swan and the Showerhead technology going forward, is there any potential here for to lower cost here from this perspective?

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Bernd Schulte, Aixtron SE - COO, EVP and Member of Executive Board [20]

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I think we raised the shower technology still as a very important part of our product portfolio. But in general, the shower technology in terms of manufacturing cost of the product is not much different to our planetary. So in general terms, what I tried to say is, we are looking really into areas where we can use our -- the strength of our products and there where the market acknowledged those strengths and simply say pays for it, and so that could include the planetary but the Showerhead as well.

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Guenther Hollfelder, Baader-Helvea Equity Research - Analyst [21]

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Okay. And then the last question on the memory CapEx environment. I mean, last year, your sales were mainly related to CVD systems and for the non-flash market, so we've recently seen a recovery also in DRAM related CapEx. So do you have any visibility or do you expect a recovery of your DRAM related like LED sales here this year?

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Bernd Schulte, Aixtron SE - COO, EVP and Member of Executive Board [22]

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We expect a slight improvement but not a big improvement in terms of QXP sales, but still, we are seeing, the good news is we're seeing still this very healthy momentum for the flash-memory to continue and we are seeing a very, very good request from our customer for the CVD tools to continue at least for the first half of the year.

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Guenther Hollfelder, Baader-Helvea Equity Research - Analyst [23]

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And business for your QXP tool, would this be triggered by a new process node or what would be a trigger to get more sales related to the QXP?

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Bernd Schulte, Aixtron SE - COO, EVP and Member of Executive Board [24]

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This would be triggered, number one, of course, being qualified with further films at various customers but certainly, also when our existing customers increases their investment into DRAM, and sooner or later, this is going to happen.

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Operator [25]

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Next up is Thomas Becker from Commerzbank.

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Thomas Becker, Commerzbank AG, Research Division - Analyst [26]

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Just a quick one with respect to the positive EBIT you are targeting for 2018. So is this based on the current, let's call it, restructuring measures [ IET ] force, or is this against the back of more to come? And the question is -- the next -- second question is with respect to cash. You had quite a healthy cash level and you mentioned in Q1 and you mentioned inventories are at a 10-year low level. So let's say, given the reversal in the next quarter so more normalization, I guess, what you think will be the cash level at the end of the year? What's your target there?

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Charles Russell, [27]

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In terms of the cash, I mean, the guidance we have given is that our free cash flow will be better than 2016, but given that 2016 was minus EUR 40 something million and we're plus EUR 34 million at the moment, I think we will be considerably better than last year. I wouldn't like to give a guidance to the cash balance at the end of the year because that depends on the timing of sales, timing of collections. The inventories that we still have for R6 should reduce over the next few quarters. So on the basis that other things stay the same and that may or may not be the case, then you would expect the inventory levels to stay roughly the same or perhaps, even improve slightly, but it depends on whether we get a large number of orders or whether we're making things in advance for customers perhaps for OLED, who knows. And ...

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Kim Schindelhauer, Aixtron SE - Interim CEO and Interim CFO [28]

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The EBIT question ...

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Charles Russell, [29]

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The EBIT for 2018, we don't expect to be in the same structural position in 2018 that we are now, so it's based on the assumption that in 2018, we have a different structure, but we're not entirely sure what that is at the moment because clearly we need partners and we need to agree those structures with the partners. And so we think on our best estimate that we will be breakeven or profitable next year, but we can't say definitively what the structure is.

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Thomas Becker, Commerzbank AG, Research Division - Analyst [30]

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Okay. So this means that what you have done to TFOS is not, let's say, the only thing which will happen then going forward. So your positive EBIT is also based on other measures to come to be announced?

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Bernd Schulte, Aixtron SE - COO, EVP and Member of Executive Board [31]

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I think this is what Kim Schindelhauer said, yes.

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Thomas Becker, Commerzbank AG, Research Division - Analyst [32]

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Okay. Last question from my side is, would you rule out that given the order you received for your OLED program, that the OLED program per se is still under evaluation? So would you, let's say, rule out that the same thing like which happened to TFOS could happen to OLED as well, or is this now in the safe zone, after you again received admittedly probably small order for OLED?

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Bernd Schulte, Aixtron SE - COO, EVP and Member of Executive Board [33]

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Generally, we always consider and watch our technologies, so we never rule anything out. But it has been an important step and if we can continue the pace and if we find the appropriate financial model to go forward, this is exactly what we are working here within the next month and we will keep you updated as soon as we can be more definitive in the actions we are going to play.

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Operator [34]

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The next questioner is Charles Lepetitpas from Natixis.

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Charles Lepetitpas, Natixis S.A., Research Division - Research Analyst [35]

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I had just one question. I understand that your 2018 guidance on EBIT value is based on finding new partners for your technology parts for you. I wonder whether you have already found one of several of these partners or not yet, and if you expect to find such partners during the next quarter?

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Kim Schindelhauer, Aixtron SE - Interim CEO and Interim CFO [36]

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Yes, this is Kim Schindelhauer. We are definitely are looking for partners. We do not have any concrete partners yet, but there are a lot of interesting scenarios and we will evaluate them as they come along. And then I think for 2018, when we will have more on structure than today. Because I think, as we all know from the P&L, the trouble is really the R&D spending and to give up future technologies, we don't want to do that as said before. And we have some interesting ideas and we will execute them as they come along.

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Operator [37]

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And next up is David Mulholland from UBS.

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David Terence Mulholland, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware [38]

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Just a quick follow-up. My apologies if I missed it, probably asked this earlier but. On the receivable side obviously, a very low level in Q1, sitting on the balance sheet and you mentioned part of that was due to work internally on managing the cash flow of the business, but is this a sustainable level? Have you, has something fundamentally changed on the kind of agreements you are doing with customers in payment terms? Or is this at a temporary level and things normalize in Q2?

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Charles Russell, [39]

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I think with MOCVD, I think, we do see the advanced payments from customers to -- with the order and that's different from most semiconductor equipment manufacturers. So AIXTRON has in the past always had relatively low receivables days, so I think it's around 50 at the end of March 2017 and that has been the sort of normal level over the past decade.

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David Terence Mulholland, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware [40]

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Okay. So to summarize, you would say it's still quite sustainable at this level?

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Charles Russell, [41]

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The receivables days, yes.

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Operator [42]

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There are no further questions.

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Guido Pickert, Aixtron SE - Director of IR & Corporate Communications [43]

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Well then, thank you very much to all. To all listeners and questioners -- questions asked us. Yes, thank you very much. Have a good day, and we will be still available for further questions, if you have any. Thank you.