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Edited Transcript of AIXA.DE earnings conference call or presentation 26-Feb-19 2:00pm GMT

Full Year 2018 Aixtron SE Earnings Call

Aachen Mar 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Aixtron SE earnings conference call or presentation Tuesday, February 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bernd Schulte

AIXTRON SE - President & Member of the Executive Board

* Charles Russell

AIXTRON SE - CAO

* Felix J. Grawert

AIXTRON SE - President & Member of the Executive Board

* Guido Pickert

AIXTRON SE - VP of IR & Corporate Communication

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Conference Call Participants

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* Charlotte Friedrichs

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Malte Schaumann

Warburg Research GmbH - Equity Analyst

* Uwe Schupp

Deutsche Bank AG, Research Division - Small and Mid-Cap 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 2018 Annual Results Conference call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Pickert, VP of IR and Corporate Communications at AIXTRON, for opening remarks and introductions.

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Guido Pickert, AIXTRON SE - VP of IR & Corporate Communication [2]

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Thank you, operator. Good afternoon and good morning to all of you listening to our call. Let me start by welcoming you all to our presentation of the 2018 results. I'd also like to welcome our Executive Board, represented by Dr. Felix Grawert and Dr. Bernd Schulte as well as our VP of Finance and Administration, Charles Russell.

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 express permission. Your participation in this call implies your consent with this recording.

As with previous results conference calls, I trust that all participants have our result presentation slides, Page 2 of which contains the usual safe harbor statements. It applies throughout this conference call. You may also wish to have a look at our latest IR Master presentation, which includes additional information on AIXTRON's markets and its technology and is available on our website as well. 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 Dr. Bernd Schulte for opening remarks. Bernd?

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [3]

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Many thanks, Guido, and a warm welcome from my side as well. As usual, I will give you an overview of AIXTRON's key developments in 2018 before handing over to Charles Russell, who will go through the financials in more detail. This then will be followed by Felix Grawert for market development. I will then come back to you to wrap up and give you our 2019 guidance.

2018 has been a very successful year for AIXTRON in many aspects. Not only did we beat the original targets we set ourselves last year, but we also see that the business is in a much stronger position than it has been for many years. We ended this year with a strong order book and we have an exciting diversified technology portfolio, which provides us with a solid medium- to long-term outlook.

Let me remind us that in 2017 we decided to realign our company to focus on our core MOCVD as well as OVPD technology. This led us to cancel or freeze certain product lines and the corresponding R&D expenses. We sold a product line that we considered outside of this core focus. This realignment is now completed with achieving the important milestone in October of last year when our OLED deposition business, APEVA, signed a joint venture with a South Korean display industry supplier, IRUJA. As a result, APEVA will become a full OLED deposition system provider and we are hopeful that we will see an order for a production size chamber later this year for this business.

The success of this strategy is already reflected in our 2018 revenue and earnings numbers, which were largely driven by the sale of MOCVD equipment into optoelectronics mainly for lasers and LEDs. In these areas, customers use our systems to manufacture lasers for optical data transmission and 3D sensor technology, be that for facial recognition in smartphones or for the upcoming functionality of the LiDAR. In the area of LEDs, there are applications including the manufacture of the special LED such as red, orange and yellow LEDs for display applications, high-performance LEDs for automotive lighting or UV LEDs for the (inaudible) and environmentally-friendly disinfection of water. We see a strong growth potentially in microLEDs displays for which we hear about progress in their manufacturability.

Let me now give you an overview of our key financial highlights for 2018 in Slide 4. In 2018, revenue reached EUR 269 million, which was 40% higher than the comparable revenue in 2017. We also managed to increase our EBIT from EUR 5 million in 2017 to EUR 41 million in 2018 driven by strong gross margins of 44%, which are up from 32% the year before. This was the result of a better product mix, product cost reduction measures and the stronger U.S. dollar. Order intake was also the strongest in many years. At EUR 302 million, it was 34% ahead of the comparable figure of the previous year and leaves us with an order book of EUR 138 million, 27% higher than the same time last year, giving us good visibility into revenues for the first half of 2019.

In summary, not only have we achieved our guidance in our metrics, we have reached the upper ends of all our 2018 guidance items provided. With that, let me now hand you over to Charles for a more detailed overview of the 2018 financials.

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Charles Russell, AIXTRON SE - CAO [4]

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Thanks, Bernd, and hello to everyone.

Starting on Slide 5, we had a good fourth quarter with an order intake of EUR 72 million, similar to the levels in previous quarters, and ended with an equipment backlog of EUR 138 million. Revenues in 2018 were 17% ahead of 2017, which is 40% ahead on a like-for-like basis for the continuing business. Improved product mix as well as the strong U.S. dollar particularly in the second half of 2018 produced a gross margin of 44%, 12 percentage points ahead of 2017's 32%. 2018 EBIT was EUR 41 million and net income EUR 46 million. Net income was higher than the EBIT because deferred tax assets, which were recognized in 2018.

Moving on to Slide 6, let me go into more depth on the income statement. Total revenues for 2018 were EUR 269 million compared with EUR 230 million in previous year. In the quarter, the revenues were EUR 88 million. Gross margin was 45% in the final quarter and 44% over the full year. The strong dollar added EUR 3.3 million to sales and margins in the quarter compared with our Q4 guidance, which was based on $1.20 to the euro. The margins also benefitted from increased sales volumes and better cost efficiencies. Gross margins in the same period last year were considerably lower at 32%.

Operating expense in the quarter was just under EUR 19 million, more or less in line with the average. Selling expenses of EUR 9 million in 2018 was slightly lower than the previous year and remained below 4% of revenues. G&A expense was EUR 5 million in Q4, in line with the previous quarters, and was EUR 18 million for the full year, 8% above 2017. Q4 R&D costs were more or less in line with previous quarters. On an annual basis, R&D expenses were EUR 52 million, 24% lower than the previous year. However, 2017 included discontinued product lines and restructuring expense. The R&D expenses for the OLED activities in 2018 were EUR 24 million compared to EUR 23 million in 2017.

Overall EBIT for 2018 EUR 41 million and net income EUR 46 million, both substantial improvements over 2017. Net income in Q4 was EUR 18 million, which was well ahead of the previous quarter and was a reflection of the product mix, high level of sales and strong dollar in that quarter.

Turning to the balance sheet on the next slide, the main changes compared to a year ago are a reflection of the increased business volume. Inventories and advanced payments from customers have increased because of increased backlog. Receivables have increased because of the higher sales, although they still represent only 36 days sales outstanding.

Moving to Slide 8, which shows our cash flow statement, free cash flow was EUR 4 million for the year compared with EUR 91 million in 2017. The free cash flow in 2018 is after payment of EUR 12 million related to the previous year's disposal of ALD/CVD. Total cash flow includes EUR 10.4 million for shares issued from APEVA to IRUJA, of which EUR 5.4 million was paid in 2018 and EUR 5 million is not payable until 2019. We finished the year with EUR 264 million in cash, up from EUR 246 million.

With that, let me hand you over to Felix.

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Felix J. Grawert, AIXTRON SE - President & Member of the Executive Board [5]

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Thank you, Charles. Most important for 2018 were lasers for 3D sensors, which were integrated for the first time in 2017 in the smartphone of the leading provider, Apple, in the iPhone X. The view from market research firms, such as Yole Developpement, is that this market is likely to grow from $2.1 billion to $18.5 billion in 2023, and we believe we are well positioned to provide a manufacturing solution for that market. We all read that the adoption of this functionality is currently accelerating to other cell phone products, which is the prerequisite for further growth in this space.

Beyond 3D sensing, lasers are also core components for optical data transmission. With the move to 5G mobile networks and massive increases in the data being transmitted by fiber optic cables, we see increasing demand for our leading manufacturing solution. And we see this market growing in size driven by end-user demand for Internet services, cloud computing, especially video-on-demand, and by the communication of connected devices via the Internet.

Another focus area of ours are specialty LED, of which we are concentrated on red, orange and yellow LEDs and the upcoming potential for microLEDs. ROY LED are used in applications such as large-format displays for sports stadiums, airports and shopping centers, but also increasingly from mini-LED backlight units and high-performance LCD screens. According to LEDinside, this market is expected to grow to $5.4 billion in size by 2023, up from $2.9 billion in 2018. And again, our positioning in this market is very strong.

Another exciting technology, which is in an early stage of development, are microLEDs, which are already used in small applications such as head-mounted displays for augmented and virtual reality. However, microLEDs could have wider applications in areas such as large TVs and smart watches. According to LEDinside, the market for microLEDs in 2018 was $0.6 million in size and they expect it to grow to $3.2 billion by 2022. The specifications for MOCVD performance for manufacture on microLEDs are expected to be extremely challenging in terms of the yield and also throughput at the same time. We believe that we are well-suited to address these challenges with our Planetary Reactor concept delivering the combined high uniformity with large batch size in the industry.

Starting with the second half of 2018, we are seeing increasing customer demand in the area of power semiconductors based on the wide bandgap materials, gallium nitride and silicon carbide. These materials allow for a significant reduction of energy conversion losses contributing to improved energy efficiency in applications ranging from smartphones to electric vehicles and solar power plants. According to a study by the market research company, IHS, the market for semiconductor-based silicon carbide and gallium nitride power devices was $600 million in 2018 and is expected to reach $2.1 billion by 2023. These wide bandgap materials, such as gallium nitride and silicon carbide, are complex to produce and call for a good balance between yield and throughput. In gallium nitride, we are well positioned with our G5-plus tool, which is the tool of record for this material system today. Our new fully automated silicon carbide tool is with selected customers for beta testing at the moment and we remain confident that we will secure additional silicon carbide power customers and thus additional revenue within the next 1 to 2 years.

Another focus area for AIXTRON is OLED, for which our subsidiary, APEVA, is in the process of qualifying the OVPD technology for OLED deposition with a major display producer. To date, OLED has been mainly used in high-end mobile phones and high-end TVs. Going forward, we expect OLEDs to be used much more widely as production cost is reduced. According to research from the investment bank, UBS, the market for OLEDs for TVs, for example, could grow from approximately $1.9 billion in 2018 to $20.5 billion in 2025. This is a substantial opportunity and, thanks to the formation of our OLED JV with IRUJA, we believe that APEVA is well positioned to become the deposition equipment supplier of choice in this market.

APEVA has made significant progress in recent months. Approval of the joint venture has been obtained from the authorities. The integration of the team of former AIXTRON and IRUJA people is going well and joint processes and IT systems are being established. The Gen2 OLED test system has achieved positive results such that our customer has agreed to the installation of the test system in his production facility. This installation has been completed. In the next step, the system will produce layers of OLED stacks, which will be thoroughly investigated by the customer. When these tests are successfully concluded, we expect to receive a customer order for a large area deposition chamber and production format later in 2019.

In addition to these MOCVD and OVPD production product lines, we also develop, for example, technology to produce graphene, carbon nanotubes and carbon nanowires. These materials promise very interesting potential in a variety of applications, be they in battery or in display applications, and give us a solid long-term growth opportunity.

With this, I will pass you back to Bernd, who will discuss our guidance for 2019. Bernd?

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [6]

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Thank you, Felix. Looking at the shorter term to 2019, on Slide 10, we have good visibilities on revenues, in particular for the first half of the year thanks to our strong backlog. However, on orders, we have limited visibility noting that there are headwinds around the general development of the global economy and we are sensing some reluctance to invest by some of our customers.

Consequently, we expect orders for 2019 to be below the 2018 order levels and in the range between EUR 220 million and EUR 260 million. We expect revenues to be in between EUR 260 million and EUR 290 million in 2019, which would be similar to or about 2018 levels. These ranges consider both the geopolitical and customers' specific uncertainties as well as the still unclear magnitude of a possible order in the OLED segments.

We also expect to achieve gross margins for 2019 in between 35% and 40% with lower margins in the first half of 2019 due to shipments of lower-margin LED products to China. We expect to achieve and EBIT of between 8% and 13%. This is mainly due to a different product mix and the fact that this guidance is based on a U.S. dollar-euro exchange rate of $1.20 to the euro versus a stronger actual U.S. dollar since second half of 2018. In addition, we expect to generate free cash flow of between EUR 15 million and EUR 25 million in 2019. Please note that these estimates also fully include the result in CapEx of APEVA and is based on the previously mentioned budget rate of the U.S. dollar versus the euro.

Let me say that after a successful 2018 and with a strong pipeline and good technology roadmap, we are very much looking forward to gaining from the growth opportunities we see in front of us. Finally, we would like to thank you, our shareholders, for your trust in our company. We are convinced that AIXTRON has the necessary operational strengths and the innovation power to remain a technology leader in the compound semiconductor industry in the future.

With that, I'll pass it back to Guido before we take your questions.

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Guido Pickert, AIXTRON SE - VP of IR & Corporate Communication [7]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Charlotte Friedrichs calling from Berenberg.

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Charlotte Friedrichs, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2]

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My first one would be around your margin guidance. If you could maybe walk us through the different components here that made you end up with the ranges that you gave here. So how much is, do you think, FX? How much is mix? And how much do you expect on the operational costs? And the second question would be around the order intake. And if you can give us a little bit of an insight how that is split by end market, please.

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [3]

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Yes. Let me speak first about the order intake. I think it's quite obvious, and we've said this in the past, that in 2019 we do not expect a lot of orders coming from the LED field for the red-orange-yellow because 2018 was an extremely strong year in terms of order intake and we will see a lot of this capacity going into this market by shipments in 2019. We also expect that for the optoelectronic, mainly systems for 3D sensing, we think that this market in the short term will not pull so much demand due to the fact that also in last year we have installed a lot of capacity with the key customers in this area for the key products. However, we expect growth definitely in the range of the power electronics compared to 2019. So overall, we will see it's a reduced number coming mainly out of the LED field and somewhat the laser part. I should also say that the number that we're guiding also expecting some uptake of the laser order intake in the second half of the year.

Coming your question to the margins, I guess you mean 2019, 35% to 40%. And when you compare this with the number we achieved in 2018, which has been 44%, you can consider that about 2% has been -- was a benefit from the U.S. dollars and the difference, basically coming slightly below 40%, comes from the higher percentage of the LED tools we carry in our backlog and where we -- which we will ship, in the dominant part, in the first half of 2019. And so basically -- and the difference is pretty much the lack of visibility in terms of exact order and product mix in second half.

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Charlotte Friedrichs, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [4]

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Okay. And maybe one follow-up on APEVA. I think you mentioned it in your prepared remarks, but I didn't quite catch the number. How much was your -- how much in cost did you have for APEVA in 2018? And what do you roughly expect for 2019?

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Charles Russell, AIXTRON SE - CAO [5]

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What I said was that the R&D expense was around EUR 24 million and in 2019 we expect the overall effect of APEVA on the EBIT to be significantly less than in 2018.

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Operator [6]

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The next question comes from Uwe Schupp calling from Deutsche Bank.

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Uwe Schupp, Deutsche Bank AG, Research Division - Small and Mid-Cap Analyst [7]

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Two questions please. The first on OLED and the second one on the guidance. Yes, just on OLED, just to clarify that, I think about a year ago you basically were pretty vocal and said, "Yes, we are expecting an OLED tool order later in the year," and, as such, OLED revenue would be coming down or OLED R&D would be coming down starting this year. Which obviously is the case. But where do you stand exactly? What is the model visibility you can give us that you will be getting an OLED order by your elite customer? In other words, are you more or less confident compared to your Q3? Any clarity additionally would be obviously quite helpful.

And then secondly on the outlook, your backlog stands at just roughly EUR 140 million at the end of '18. If I revalue that at spot, I obviously come to something more in the area of above EUR 150 million. You have a EUR 50 million of service business, obviously, roughly speaking. So in order to come to the low end of the revenue guidance, it means you are guiding for EUR 30-or-so million of Q1 and Q2 orders. And I wonder if that is something that you wanted to imply or you're just again very cautious at this time of the year.

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [8]

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Yes. So let me comment first on your question regarding OLED. Yes, the status is, as mentioned before, that our tool has been installed on the factory and that we are now preparing process runs. And based on the outcome of those process runs, then at some point in the year 2019, we expect an order for the tool to be placed. With respect to the probability or the likelihood of that order coming, there's no change to what we said previously. We are confident that this is coming, but we need to remain patient until the project reaches the necessary maturity.

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Felix J. Grawert, AIXTRON SE - President & Member of the Executive Board [9]

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(inaudible)on the guidance, certainly please keep in mind and bear with us that the entire guidance is made on EUR 120 million so we cannot revalue different components of it at different rates. So when you make this math, which is straightforward, you have to use EUR 138 million for the backlog in order to achieve then the guidance for -- and I think we have this nice slide in the back of our presentation, which would mean that in the first half you need to achieve something like EUR 77 million to achieve the lower part and corresponding EUR 107 million for the higher part. And I think this is what it is.

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Operator [10]

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The next question comes from Malte Schaumann calling from Warburg Research.

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Malte Schaumann, Warburg Research GmbH - Equity Analyst [11]

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My first question is regarding the gross margin again. To what extent might that be negatively impacted by maybe initial shipments of tools for the carbides or even OLED? To what extent do they potentially contribute to the lower margin?

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [12]

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So on silicon carbides, we do not see an effect on the gross margin. What was the other question?

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Malte Schaumann, Warburg Research GmbH - Equity Analyst [13]

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Whether potential (inaudible) or OLED contributions might also weigh on the margin. Or is that purely related to the LED products?

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [14]

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This relates to the LED products, which I earlier discussed.

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Charles Russell, AIXTRON SE - CAO [15]

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The margin depends on what we actually agree with the customer, if we get an order in. That's totally up in the air at the moment. We don't know.

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Malte Schaumann, Warburg Research GmbH - Equity Analyst [16]

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Yes, okay. And with respect to the lower costs for OLED, that referred to a reduction on the R&D expenses? Or is that also costs offset by revenue contributions, which might then depend on the point of time when you receive the order?

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [17]

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Exactly as you say. We expect a significant contribution from the revenue coming in on this segment in order to achieve the reduction of impact on our bottom line.

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Malte Schaumann, Warburg Research GmbH - Equity Analyst [18]

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Okay. So you would need the order, let's say, by September, October at the latest, to book sales?

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [19]

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I think the order comes when it comes.

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Felix J. Grawert, AIXTRON SE - President & Member of the Executive Board [20]

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I think we can start to book sales using the percentage of completions once we start -- once we have the order and we can book the corresponding work against this order, against this project.

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Malte Schaumann, Warburg Research GmbH - Equity Analyst [21]

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Yes, okay. And on the U.S. dollar sensitivity, I mean you might have indicated that. But assuming that maybe the dollar stays where it is or close to $1.15, would that then imply that you would also again see kind of a 2 percentage point tailwind from the currency development this year on the margin level?

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Charles Russell, AIXTRON SE - CAO [22]

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We have about 65% to 75% of our sales denominated in dollars and any increase in the revenue generally falls mainly through to the bottom line. We don't have that much in terms of dollar costs anymore since we sold the ALD/CVD product line.

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Malte Schaumann, Warburg Research GmbH - Equity Analyst [23]

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Okay. So the 2 percentage points might not be too long?

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [24]

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Correct.

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Charles Russell, AIXTRON SE - CAO [25]

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Yes.

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Malte Schaumann, Warburg Research GmbH - Equity Analyst [26]

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Okay. Then my last question would be on the tax rate. For cash taxes we would probably assume kind of the minimum taxation in Germany based on the tax loss carry-forwards, and then towards the end of the year you could benefit again from new capitalization of taxes, deferred taxes?

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Charles Russell, AIXTRON SE - CAO [27]

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You're right. We could expect to see a tax rate of somewhere around 15% overall across the world. But I don't think we would be capitalizing any more deferred taxes at the end of the year unless we see a difference between the 2020 outlook compared to the 2019 outlook.

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Operator [28]

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(Operator Instructions) And we have a follow-up question from Uwe Schupp calling from Deutsche Bank.

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Uwe Schupp, Deutsche Bank AG, Research Division - Small and Mid-Cap Analyst [29]

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Yes. Just to clarify again, a follow-up on OLED, please. Is the -- in the OLED guidance, is the -- or in the order guidance, is an OLED order included and/or in the revenue? And if so, by how much would that be the case?

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [30]

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The OLED revenue is included in our range, yes, of course.

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Uwe Schupp, Deutsche Bank AG, Research Division - Small and Mid-Cap Analyst [31]

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And any potential range? I mean are we talking EUR 10 million? Are we talking EUR 20 million? Or is it higher than that?

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [32]

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It's certainly a certain lack of visibility of the exact size of the order and that's why you see our range is a bit wider than in the previous years. And this is also reflecting sort of lack of visibility of exact size of the order.

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Uwe Schupp, Deutsche Bank AG, Research Division - Small and Mid-Cap Analyst [33]

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Right. But we should read a fair amount of confidence that you indeed expect the order if you already put it into numbers, given your usual conservatism around giving guidance.

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Felix J. Grawert, AIXTRON SE - President & Member of the Executive Board [34]

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I think our probability, as mentioned earlier, has not changed. There's no new information, yes? But we have, of course, an idea what a potential order size could be, yes? And this order size has been included in the range.

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Bernd Schulte, AIXTRON SE - President & Member of the Executive Board [35]

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With this, we conclude our full year '18 results conference call. Thank you very much to all participants and see or hear you later. Bye-bye.