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Edited Transcript of AIXA.DE earnings conference call or presentation 23-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Aixtron SE Earnings Call

Aachen Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Aixtron SE earnings conference call or presentation Thursday, February 23, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Guido Pickert

AIXTRON SE - Director of IR & Corporate Communications

* Martin Goetzeler

AIXTRON SE - CEO

* Bernd Schulte

AIXTRON SE - COO

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Conference Call Participants

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* Thomas Becker

Commerzbank - Analyst

* Malte Schaumann

Warburg Research - Analyst

* Gunther Hollfelder

Baader Bank - Analyst

* Karsten Iltgen

Bankhaus Lampe - Analyst

* David Mulholland

UBS - Analyst

* Juergen Wagner

MainFirst Bank - Analyst

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Presentation

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Operator [1]

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Good morning and good afternoon, ladies and gentlemen and welcome to AIXTRON 2016 Annual 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 introduction.

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

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Thank you, operator. Let me start by welcoming you all to AIXTRON's Q4 and full year 2016 results conference call. Thank you for attending this call. I'd like to welcome our President and CEO, Martin Goetzeler as well as our 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 our Safe Harbor statement. I 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. Both presentations and further documents are 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 Martin Goetzeler, AIXTRON's President and CEO, for opening remarks. Martin?

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Martin Goetzeler, AIXTRON SE - CEO [3]

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Thank you, Guido. Ladies and gentlemen, good day to you all. Let me welcome you on behalf of AIXTRON's Executive Board to the presentation of our 2016 results.

Let me start by making some general comments before going into the numbers. I will then hand over to Bernd who will talk about his priorities for 2017 in and around our technology portfolio. I will close the presentation with a summary of the broader business issues we are addressing and give you a view about AIXTRON's business prospects in 2017 and beyond.

In February of last year, we gave guidance that revenues for the full year 2016 would be somewhere between EUR170 million and EUR200 million. We expected a significantly stronger revenue generation in the second half of 2016 compared to the first half of 2016. We also stated that we would reach an EBITDA, EBIT, net result and free cash flow slightly less compared to 2015, but to remain negative for the full year 2016. We reaffirmed this guidance in our Q2 conference call in August, and then in October. We narrowed the revenue guidance to EUR180 million to EUR200 million, also adding that order intake for the year would be somewhere between EUR200 million to EUR220 million. Revenues came in at EUR196.5 million for the year and our order intake at EUR225.1 million, which was the highest since 2011.

We also managed to improve profitability year on year and [inherently] Q4 was our best quarter in five years. But as expected and communicated, we remained unprofitable over the full year 2016 due to continued high research and development cost. We see signs of a stabilization in the LED market but more importantly we have seen a significant recovery in both revenues and orders for applications beyond LEDs. And according to our estimate, we have become the global leader in MOCVD equipment sales last year, which is a result of the successful diversification strategy, particularly in the various areas of advanced compound semiconductors. These semiconductors are key enablers for large technology trends such as electric vehicles, energy storage and renewables, not to mention autonomous driving, big data, cloud computing or 5G mobile networks. We believe that AIXTRON technology will position its customer to participate in the growth opportunities of this major technology trends by using RF, laser, IR sensor, or high frequency and high power device.

Let me now take you through our numbers for the full year 2016 starting with the slide [one], which gives an overview of revenues, equipment orders and order backlog. In 2016 we generated EUR196.5 million in the revenues, which was virtually unchanged compared to the previous year's EUR197.8 million. Net sales, equipment sales in 2016, at EUR155.7 million were higher than 2015 EUR151 million. The remainder of revenues mainly EUR40.8 million representing 21% of revenues were generated by the sales of spare parts and service. On a regional basis, the majority of total revenues of 65% were generated by sales to customers in Asia with Americas accounting for 19% and Europe with 16%.

In terms of product mix, optoelectronics excluding LEDs was the biggest business at EUR53.2 million representing 34% of equipment sales. This was higher compared to last year evidencing the strength in orders for our core non-LED product. In fact order intake [AIXTRON] totaled EUR225.1 million last year or 75% higher than in 2015. The total equipment order backlog of EUR78.1 million at December 31, 2016 was 67% higher than the opening backlog at January 1, 2016 of EUR46.7 million. This solid backlog will allow a better production utilization in the first half of 2017, compared to 2016. Please also note that we have not revalued this backlog in 2017 as we have assumed the same budget rate of 1.10 USD/EUR.

Turning to the next slide, in 2016 we generated a gross profit of EUR56.3 million, which was a considerable improvement on the EUR49.8 million from the previous year. This led to a 4 percentage point improvement of gross margin to 29%, which is a reflection of higher efficiencies in production and service. For the full year 2016, we managed to keep operating costs below our EUR80 million annual target. Operating cost for the full year at EUR77.7 million was slightly higher than the previous year's EUR76.5 million and that was slightly below 40% of revenue. The operating loss or EBIT for 2016 also still not positive at minus EUR21.4 million, improved over the minus EUR26.7 million loss we generated in 2015. That said, we did make a profit in Q4 which we generated positive EBIT of EUR7.9 million, which was driven by strong sales totaling EUR89.8 million and the gross margin of 33%. The net loss for 2016 was reduced and came in at a loss of EUR24 million compared to the EUR29.2 million loss we recorded in 2015.

With regards to cash flows, we did see an improvement in operating cash flow in 2016 from minus EUR45.7 million in 2015 to minus EUR37.7 million in 2016, which was mainly a reflection of the reduced losses within the business. The level of the negative cash flow was also impacted by the second installment of the agreed repayment of the previous year received deposits to our Chinese customer San'an in Q1 2016. Due to the high shipments and shipment levels at the end of 2016, our receivables increased and our inventories declined. A large part of this open goods was cleared this quarter, positively impacting cash flow and liquidity in Q1 2017. The inventory level now reflects much better our order backlog.

Turning to the next slide, AIXTRON continues to have a solid balance sheet with EUR160.1 million in cash and cash equivalents brought down to some EUR120.1 million in cash and EUR40 million on deposit with a maturity of more than 90 days. Cash levels were down from EUR209.4 million at the end of 2015, which is main reflection of the negative operating cash flow in 2016. AIXTRON has no financial debt and an equity ratio of 85%.

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

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Bernd Schulte, AIXTRON SE - COO [4]

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Thank you, Martin. Let me start by saying that the opportunities we see in front of us are manifold. Thanks to the years of investment we have made in technology and product development. There are large global trends, such as the move to renewable energy, big data and the electrification of automobiles, all of which require [25] semiconductor materials. Our product portfolio puts us in a very good position to benefit from these market developments which are supported by the stronger interest for our deposition solutions across a wide range of applications. However, some of our new technologies still require further upfront expenditures and investments for technology development and we are pursuing different options to reduce these upfront costs. Driving the decision and the execution of these options will be one of our major focuses for this year and could include measures such a joint venturing or other forms of partnering.

One area I'm particularly excited about is power electronics. We are seeing several of our customers now move from R&D and sampling to production. Of particular interest is the growing demand for so-called wide-band-gap materials such as gallium nitride and silicon carbide, which we believe will be increasingly used in everything from mobile phones to electric cars and wind turbines. We think this could be a growing opportunity for us.

Another area where we see an increasing potential is for lasers, including so-called pixels for 3D imaging, high speed data transfer and sensing.

Finally, bringing new products in a timely fashion to market is a core focus for me as it does not affect revenues but also costs. For this year, the goal is to achieve customer quantification of all OLED deposition and thin film encapsulation technology. We will also continue our efforts focusing on optimizing material costs as well as efficiencies across the whole business. With that, let me give you back to Martin.

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Martin Goetzeler, AIXTRON SE - CEO [5]

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Thanks Bernd. Over the last 12 months AIXTRON has been in the media spotlight due to the planned takeover of the Company by Fujian Grand Chip. We as a management team as well as our Supervisory Board thought this was a very good deal for not only shareholders but also the future of the Company. Following the withdrawal of the takeover offer on December 8, 2016 due to the inability of Fujian Grand Chip to obtain the necessary regulatory approvals, AIXTRON has been focusing its corporate strategy on ensuring that its technology portfolio is optimally structured and positioned. Consistent with this, AIXTRON is currently pursuing various options for reducing the upfront cost needed to develop to the Company's future technologies. These options include, as Bernd just mentioned, looking for suitable partners and intra-joint ventures and other alternatives. All these measures are intended to enable AIXTRON to sustainably return to profitability and to achieve positive operating result in 2018. This strategy was laid by the Supervisory Board.

In order to commercialize some of the technologies we are developing in a timely fashion we plan higher R&D expenses. The result is that based on the existing structure, we expect to achieve lower EBITDA, EBIT and net result for fiscal year 2017. However, as previously discussed, we are pursuing the various options in order to reduce upfront cost and to return to sustainable profitability. Depending on the execution of this above-mentioned strategy with its various alternatives and due to the uncertainty of its impact on profit management is currently not in the position to offer guidance on EBITDA, EBIT and net results for fiscal year 2017. Management will provide an update on the 2017 earnings outlook as plans materialize.

Regarding free cash flow, AIXTRON expects a further improvement of the figure in 2017. This development is influenced by the significant reimbursement of an advance payment in Q1 2016, which will not repeat. As to revenues and orders, based on the existing business structure and the assessment on AIXTRON's current order situation with the internal budget rate of 1.10 USD/EUR our guidance for both revenues and orders is in the range of EUR180 million to EUR210 million for the full year 2017.

We see growth opportunities this year and beyond for our MOCVD solutions for the production of wide-band-gap power devices. We also see continued strengths in photonics applications for laser and sensor application. In addition, we expect a solid contribution from memory and logic applications driven by demand for 3D NAND flash memory applications. We remain very much focused on costs, margin contributions and allocation of funds, as well as continuously reviewing the performance and prospects of AIXTRON's product portfolio. As in previous years, we expect that AIXTRON will not require any external bank debt financing in 2017.

Finally, as this is my last results conference call as CEO of AIXTRON, let me thank the shareholders and analysts for their support, employees and the management team for their contributions in the last years and the dedication despite the uncertainties we have gone through. I'm leaving AIXTRON confident that with the strategy it has adopted, the innovative products it can offer to numerous huge future markets, the processes it has put in place, not to mention the highly qualified group of employees and clear result focus, the Company is on the road towards sustainable profitability.

Ladies and gentlemen, this concludes our 2016 annual results presentation. Thank you and all the best to all of you. Bernd and I are available now to answer your questions.

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

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Thank you, Martin and Bernd. Operator, please open the line for questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Thomas Becker, Commerzbank.

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Thomas Becker, Commerzbank - Analyst [2]

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A couple of questions with respect to R&D spending this year. So could you please be a little bit more granular referring to in what part you want to step up R&D, again is this OLED, is this power electronics? Second question would be again also on the R&D budget. Can you quantify what percentage of the R&D budget you have spent in last year on the OLED project? That would be great. And with respect to restructuring, so what are the plans going forward? Will you restructure the Company, will you enter into a new restructuring program or is this left open until new management, new CEO arrives?

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Martin Goetzeler, AIXTRON SE - CEO [3]

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Thank you, Mr. Becker for the questions. First of all on the R&D, we don't show details on R&D cost for the past and for the future. But what we said in our annual report is that the share for the future technologies and that includes, for example, our organic activities, our power electronics, but also our 3.5 on silicon. Last year exceeded 60% of our R&D spending. That's the number which we communicated also in our annual report. Why would it go up this year or what is the reasoning behind, let me -- here I can only comment that in some areas, we are getting closer to the qualification stage and in order to do so we need to increase our efforts and this definitely on one side it's positive. On the other side, as you also I think implied, it's challenging and that creates this necessity to find solutions to lower the upfront expenses via partnering or JV or other alternatives and that's what we also communicated.

This is also not depending on the new or old management, as I said to you. This was agreed with the Supervisory Board. However, we are looking on various options here for partnering also for the structural approaches. But I would like to ask for your understanding that in this call we cannot go further into details on that.

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Thomas Becker, Commerzbank - Analyst [4]

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With respect to the restructuring to say of the Company, is there anything baked into the EBITDA loss for this year? You do not give a quantitative guidance but are there any one-offs included?

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Martin Goetzeler, AIXTRON SE - CEO [5]

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Are we talking now about last year or this year?

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Thomas Becker, Commerzbank - Analyst [6]

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This year going forward, basically the question is going forward are there any restructuring programs planned this year?

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Martin Goetzeler, AIXTRON SE - CEO [7]

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What I can reconfirm is that we are looking at these different options for partnering, for possible JVs, other alternatives and depending basically on the outcome this will basically -- then we will be able to communicate anything on changes in the Company. But in general, we are looking and this is what we also wrote in our communication, in our annual report, we are focusing as we said, to look for partners. We are looking for options, JVs, and other alternatives and that's the current status and I would ask you for your understanding that we cannot give more details on that.

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Thomas Becker, Commerzbank - Analyst [8]

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Okay, understood. Last question from my side is with respect to the end market dynamics in 2017. Is it fair to assume that the LED business or the market momentum in the classic LED market that this has let's call it bottomed out, it's not saying that it will go up, but that it will not go down further, is it fair to assume?

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Martin Goetzeler, AIXTRON SE - CEO [9]

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Mr. Becker, Bernd will answer that question.

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Bernd Schulte, AIXTRON SE - COO [10]

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Hello, Mr. Becker it's Bernd Schulte. Yes I think it's a fair assumption that the LED business has bottomed out in 2016. I think what we're hearing from customers is they are running at very high utilization rate also the pricing has stabilized which are good indications that the market looks more positive than 2016 into this year. Nevertheless, we all, keep in mind that 2016 was very (inaudible).

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Thomas Becker, Commerzbank - Analyst [11]

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Additional one with respect to the atomic layer deposition business that you have, there is a second customer qualified that to my understanding will this customer, which is qualified also asked for volumes this year.

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Martin Goetzeler, AIXTRON SE - CEO [12]

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We do not expect really volume manufacturing -- a lot of volume from this customer this year.

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Operator [13]

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Malte Schaumann, Warburg Research.

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Malte Schaumann, Warburg Research - Analyst [14]

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Just a follow-up on your LED market comments, even in a growing maybe end market but do you really think that AIXTRON might be able to participate given that BQ was getting all the awesome stuff and Chinese competitors are increasingly penetrating the existing customers in China or should we rather look then for maybe, let's say, flat LED sales for you?

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Martin Goetzeler, AIXTRON SE - CEO [15]

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Yes, the LED market certainly you have to differentiate in the GaN LED market for blue LEDs and the red LED markets, for red, orange and yellow. Certainly you are right in your statement that the situation in China, particularly in China for blue LED has become extremely competitive for the equipment manufacturers also with the increasing level of qualification of Chinese competitors. And we will only participate in markets where we can get appropriate margins. So, if the markets continue to develop with a huge margin pressure, we will always consider whether we participate specific bids or not. Differently in the red-orange-yellow market, there we are seeing also a healthy growth which we have not seen for several years and we expect also this year for us a good opportunity here to participate for red-orange-yellow.

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Malte Schaumann, Warburg Research - Analyst [16]

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Okay. Specifically on the optoelectronics market that really came up with a very good sales volume in 2016 about EUR50 million. I recall that earlier in the year you were not really sure how that market will develop and would have been satisfied with, let's say, EUR20 million, EUR30 million in sales after the strong year 2015. So what is your current perspective going forward? Do you think that market might be able to deliver a good growth? Would you be satisfied with stable sales? Should we expect a decline in the high level? So what's your view on that area?

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Bernd Schulte, AIXTRON SE - COO [17]

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Certainly 2016 was, after many years of relatively low volumes, an extremely good year and a very strong increase. And that is of course, prudent not to assume continuing this business highs. However, we're hearing from the end markets very encouraging signals about introduction of photonics devices into end user product in the consumer electronics, namely cellphones, et cetera. And I think to answer your question directly, I think over the mid-term, I see a very sustainable business. How much that influence this year depends on the adoption of these new -- these two devices in the consumer electronic applications. So how fast will the consumer electronics companies ramp these new gadgets into their products.

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Malte Schaumann, Warburg Research - Analyst [18]

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Okay. And that would lead to potential growth in the future or would that just may not that tough, but justify the current sales level?

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Bernd Schulte, AIXTRON SE - COO [19]

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I think maintaining the current stature would be already good, but I think, I could even show some growth on the moderate level.

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Malte Schaumann, Warburg Research - Analyst [20]

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Yes, okay.

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Martin Goetzeler, AIXTRON SE - CEO [21]

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It really depends, as we said, on the pace of the adaption. But I also mentioned in my talk that this is one of the opportunities for this.

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Malte Schaumann, Warburg Research - Analyst [22]

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Yes, okay. And maybe your view on the power electronics market, how that is going to develop, it was not that strong in 2016. Is that trend about to turn around? Do you see customers moving to what kind of volume production?

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Martin Goetzeler, AIXTRON SE - CEO [23]

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While we've seen customers moving to volume production already. However, they do not do this buying 20, 30 systems at once. So they're renting step by step typically buying maybe two or three tools at once that's typically the volume order they place because we're growing from a very low level. And, again, here it is about the pace of the penetration of the gallium nitride and silicon carbide devices into the power market which currently is served by silicon devices. And it is all about the adoption in the end products. It is not a question of if it's just a question of when.

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Bernd Schulte, AIXTRON SE - COO [24]

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If you look at the distribution quarter by quarter you saw AIXTRON post a good recovery in the second half.

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Malte Schaumann, Warburg Research - Analyst [25]

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That's right. And how would you answer the question then of when -- is there a point in time when you would really expect a surge in sales or is it really a very slowly developing market over the next two, three, four years?

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Martin Goetzeler, AIXTRON SE - CEO [26]

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It's different than we have seen it in the LED space. It is a conservative market with a healthy growth and you compete with a very strong competitor that's Silicon. I think it's probably the strongest competitor you can consider. And it really depends how fast industry can reduce costs and show the performance. As I said, it's a matter of adoption and how that translate in our true sales that basically the adoption end products will show. Nevertheless, it will be a growing area.

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Bernd Schulte, AIXTRON SE - COO [27]

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And Mr. Schaumann, that was also one of the items I mentioned in my talk really as an opportunity for growth.

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Malte Schaumann, Warburg Research - Analyst [28]

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Okay. Then two questions left. The first is regarding silicon, what does it take really to maybe increase sales there, maybe not in 2017 but then 2018, 2019, that in the (inaudible) that's sufficient really to see when customers move forward to see increasing demand for your systems or do you really need to penetrate additional application films for the systems?

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Martin Goetzeler, AIXTRON SE - CEO [29]

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Yes, first you have to (inaudible) your current accounts and your current films. That's important to stay competitive and keep your customers happy. And second then, as you say, you have to qualify your technology with new films and bringing those films you have qualified as one customer, those films to other customers. That's basically what we're doing. And yes, so for the short term, you have probably read about the strong demand in memory devices. We're seeing a very positive development.

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Malte Schaumann, Warburg Research - Analyst [30]

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Okay. And anything in the pipeline for new qualifications or why that -- (multiple speakers)?

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Martin Goetzeler, AIXTRON SE - CEO [31]

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Yes, there is a pipeline. And as I said, it is not necessarily a new product, a new equipment, but is taking equipment what you have and qualify different films.

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Malte Schaumann, Warburg Research - Analyst [32]

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Okay. Last question is on OLEDs. Once your customer qualifies, everything -- your deposition equipment, everything ready to move to volume production, pilot production whatever or what is the surrounding in terms of [masks]. Is your chamber then fully qualified at a larger area? So how far away then maybe the largest or most substantial revenue contributions from that way as the customer is able or not able then quickly move to larger production?

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Martin Goetzeler, AIXTRON SE - CEO [33]

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Yes, with OLED you have to go through several steps. First as you know, we have a different deposition technology than the established technology. And the first thing is to prove that feasibility at a customer site, which we are making where we have made last year extremely good progress. The second step is then going through a medium size, just to test this feasibility into a, let's say, semi production environment and then finally, to have a large area system and we are currently in the process of discussion with a leading customer on the second step I mentioned.

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Operator [34]

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Gunther Hollfelder, Baader Bank.

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Gunther Hollfelder, Baader Bank - Analyst [35]

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First question is a follow-up on the power semiconductor side, wide-band-gap. The sales in 2016, can you talk about the sale of gallium nitride versus silicon carbide? Is it like 50-50 or it's more silicon carbide?

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Bernd Schulte, AIXTRON SE - COO [36]

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I think it is much more on the gallium nitride. I would say 80% to 90% is gallium nitride.

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Gunther Hollfelder, Baader Bank - Analyst [37]

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Great. And on the LED business, I think you reported like 26% sales of your group sales related to LED. So I was just wondering out of the 26% how much is related to blue lights to mid-power blue light LEDs?

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Bernd Schulte, AIXTRON SE - COO [38]

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I think in the LED what we are reporting in LEDs, majority is gallium nitride LED. So you can rightly assume that this is blue LED.

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Gunther Hollfelder, Baader Bank - Analyst [39]

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Okay. And would you differentiate between mid-power and high-power then on the blue light side?

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Martin Goetzeler, AIXTRON SE - CEO [40]

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In our LED we have both. We have gallium nitride and gallium arsenide included. There is a misunderstanding, but what we also mentioned in our annual report, I think, is that gallium nitride, we have a significant portion of that sale was also related to our sell off of inventory. So going forward the focus definitely as Bernd explained is on margin business, again, but also on this red, orange, yellow and other specialty applications where we see good margin opportunities.

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Bernd Schulte, AIXTRON SE - COO [41]

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We do not differentiate in the chip sizes because with the same tool you can you can produce various chip sizes.

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Gunther Hollfelder, Baader Bank - Analyst [42]

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Okay. And you mentioned also VCSEL laser technology, potential of the opportunity with 3D sensing for example. I was just wondering about the technology -- manufacturing technology that's used, I mean it seems some of the VCSEL guys they are using MBE technologies or some MOCVD or is it the combination of both or how you see this developing over the next years?

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Bernd Schulte, AIXTRON SE - COO [43]

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I think the majority in the market for VCSEL is using MOCVD. And I think we have -- there are four, five different companies in the world who are providing the products and I think we have -- the good thing is we have a very strong position there. And what I mentioned is that the growth over the last three, four years was quite limited, but in particular, last year we saw a very, very strong demand and (technical default) potential use or the future use of those devices in consumer electronic applications.

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Gunther Hollfelder, Baader Bank - Analyst [44]

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Right. And then I had a follow-up on the silicon business, especially in particular about China (inaudible). So are you in a position or you already in talks with Chinese memory projects? So this might be more an opportunity maybe for CVD technology given the process nodes?

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Bernd Schulte, AIXTRON SE - COO [45]

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I think you are right. That could be an opportunity but we are in quite initial stage here because first you have to also qualify in their technology expansion.

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Gunther Hollfelder, Baader Bank - Analyst [46]

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And the last question on OLED, in particular OLED encapsulation, I mean you had this follow-up payment in 2016 but at the same time it seems that the sales performance disappointed. I don't know whether you have any intangible or goodwill on the balance sheet, but it seems you decided against an impairment or anything here?

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Martin Goetzeler, AIXTRON SE - CEO [47]

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This question was related to organic --?

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Gunther Hollfelder, Baader Bank - Analyst [48]

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To PlasmaSi.

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Martin Goetzeler, AIXTRON SE - CEO [49]

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To PlasmaSi. Definitely, you are right. We have goodwill on our books for PlasmaSi but this is a business which we are pursuing and we are following. We are actually also working closely with customers, particularly here we have installed a tool and we are also planning to install further ones over the next couple of quarters. So, it's not that we have huge quantities currently in our forecast, but we are pursuing this business and we want to bring it to market maturity. I'm surprised that there wasn't this perception that we did not follow and continue with our thin-film encapsulation business.

It's true that we didn't mention it in detail like for example, our OPD activities, but it's also on a smaller scale and it's actually also a little bit earlier than our OPD business.

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Operator [50]

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Karsten Iltgen, Bankhaus Lampe.

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Karsten Iltgen, Bankhaus Lampe - Analyst [51]

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One question concerning our R&D budget for this year again. Can you quantify by how much you're planning to increase?

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Martin Goetzeler, AIXTRON SE - CEO [52]

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Again, I think there is a little bit of misunderstanding. We have said that based on current structure, if everything continue as it is, that would come out. Important to understand we are pursuing alternative routes currently in order to find ways to manage and to reduce our upfront investment. And that's currently our focus here. Therefore, it's difficult currently for these scenarios which we don't know exactly which one will definitely at the end be executed to give you a hint on the potential level of, for example, R&D costs. So it's somehow also related to definitely to the scenarios or to the executed strategy at the end and there are options as you know. And nevertheless and this is I think the message which we gave today is there are some areas where we need to get closer to qualification, closer to production level as customers, then you have to increase your efforts. And that, I think, we mentioned a couple of times and therefore you can also see where these additional R&D costs may come from. Thank you.

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Karsten Iltgen, Bankhaus Lampe - Analyst [53]

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But just on a quarterly level, are we going to see R&D stepping up quarter by quarter until you have found a solution in terms of partnership or JV or anything like this?

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Martin Goetzeler, AIXTRON SE - CEO [54]

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I think I'm not sure how much you look also at our employees. We are really looking also -- definitely continue to look into our cost and we will manage projects very tightly. So if there are changes in the increases, it would be also for external cost. That's something which we are managing very tightly but it's currently difficult to predict in which quarters can have more. But from that perspective, I would again ask for understanding that we first work on the options and then come back with a clear indication of what that means for accounting.

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Karsten Iltgen, Bankhaus Lampe - Analyst [55]

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The main reason I was asking was because I was surprised by your guidance of declining EBIT this year and I think the only reason you mentioned is potentially increasing R&D. I think there is no other reason or is there why earnings may go down this year?

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Bernd Schulte, AIXTRON SE - COO [56]

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Based on the current structure, that's the main reason, that's true.

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Karsten Iltgen, Bankhaus Lampe - Analyst [57]

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Okay. The way you just described it R&D at the end of the day may not go up this year because you manage it tightly and also you're seeking other options. (technical difficulty) at the end of the day if it is not going to decline this year?

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Bernd Schulte, AIXTRON SE - COO [58]

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Let me summarize again. See, what I said is, that the increase might come from external order or external performances of suppliers who work for us and do some R&D work. It will not come from significant increase of people or so, that's what I said. And that's definitely something which can impact quarter-by-quarter, but currently it's definitely -- it's too early to say how it will impact which quarter but we are planning something for the entire year and based on this, I would also ask you for your understanding that we don't go more into details now how this impacts different quarters.

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Karsten Iltgen, Bankhaus Lampe - Analyst [59]

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And on a different topic, do you have any visibility on order rate in Q1 any sense of where this is heading?

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Martin Goetzeler, AIXTRON SE - CEO [60]

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We definitely have a forecast for our own purposes. But this is not something which we are guiding or we are communicating. So I would ask you on this -- on my last call here not to change that.

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Karsten Iltgen, Bankhaus Lampe - Analyst [61]

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Okay. But the lower end of your guidance seems to imply an order rate of only EUR30 million in Q1, which seems low.

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Martin Goetzeler, AIXTRON SE - CEO [62]

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I think what we showed on the slide in the presentation is between EUR60 million and EUR90 million is the guided order intake for the rest of the year in order to fulfill this target. How this distributes over different quarters that's something to see. Your number comes up and this doesn't include definitely spares and services if we are at the lower end of this guidance. But it's always -- it's a calculated number from your side and therefore, I cannot confirm. And I will also not deny it. So as we said, this is our guidance and we stick to this.

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Karsten Iltgen, Bankhaus Lampe - Analyst [63]

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One last thing on power semis, again. The fact that Infineon and Wolfspeed walked away, is it a good or bad thing? And have you been supplying Wolfspeed with systems in the past? Thank you.

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Bernd Schulte, AIXTRON SE - COO [64]

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We certainly cannot comment on a particular customer we supply to, but all I can say that we supply to all the major power semiconductor manufacturers. Whether that has been good or bad for us, that's a very complex question. I can only say the future will tell us.

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Operator [65]

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Juergen Wagner, MainFirst Bank.

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Juergen Wagner, MainFirst Bank - Analyst [66]

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Thank you for taking my question. You mentioned in your prepared remarks that trade receivables more than doubled. Have they all converged to cash and you also mentioned for the full year you expect an improvement in free cash flow. Could it be that it might even be possible -- positive depending on the magnitude of the EBIT loss? And my last question would be, does your order guidance include any OLED business? Those are my questions. Thank you.

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Martin Goetzeler, AIXTRON SE - CEO [67]

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So obviously, receivables I will not go more into detail. But we said a large part of the receivable turned in and I will stick to that. So, it was clear and so it's a large part and you can identify what a large part is, but you also know our normal level of receivables over the quarters before and that I think could indicate how that might end up then in Q1 again, is related to (inaudible). So that's regarding the trade receivable.

The free cash flow, that's a good question. We have to see how the year develops and also how the year afterwards develops because that implies then how much do we have to do on inventory side. So we have besides those receivables which come in in the first quarter, we have to really see how the business, how the volumes develop and that's something which we have to bear in mind. And then we will see what the impact can be on our free cash flow, but it really is volume driven. Because if we see a similar situation like this last year and it has a different scenario then if we can also continue basically at a very solid and good level quarter by quarter, so that's definitely a different case in terms of cash. So besides this trade receivable impact, which we definitely also have to watch end of this year we have also the non-repeated payment to our customers. So, there you have definitely two impacts which you can consider.

I think on organic, it's really important to not forget what Bernd said. We have this for certain customers particularly in OVPD we have situation that they go to different cycles in order to qualify at the end for production. And depending on which area and which level we are the order intake will be very different because as long as we are in qualification and significant pre-production stage, also the levels of order intake will be significantly lower. So we have some plans also by the way for TFE in our order intake plans, however, not on a large scale.

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Operator [68]

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(inaudible)

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Unidentified Participant [69]

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Just a quick one on the restructuring assets, and just reading from the guidance in a statement talking about some options just including, just looking for partners or joint ventures. As shareholders of this Company, we were hoping a little bit more detail on this process. I mean we really understand the process is ongoing and there's so much you can share with the investor community here. But I mean the things I was just trying to understand is how long has this process being going on and are you -- I mean as the company just working like an advisory firm or some sort of investment bank and just -- in this process and when you talk about partners and joint ventures, what sort of parties are you approaching or you just approaching like, I don't know just investment funds or customers or I was just trying to understand who you've been approaching, just for your joint ventures and partnerships? Thank you.

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Martin Goetzeler, AIXTRON SE - CEO [70]

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Yes. Thank you, [Mr. Sanol] for your question. But please understand because to achieve the best desired output for our shareholders, we should be very careful what we announce to the public. Those processes are very, very sensitive and we are looking in all various opportunities and all what you mentioned could be possible in the discussions with you. But please understand that this is a sensitive process and we should not share more at this point in time.

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Operator [71]

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Gunther Hollfelder, Baader Bank.

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Gunther Hollfelder, Baader Bank - Analyst [72]

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I had a follow-up question on the gross margin. 2016 at the sales level, you had a gross much, I think, around 29%. I was just wondering with your focus on the LED side on margins and with an expected, let's say, flat sales volume in 2017, what is the underlying gross margin assumption you have for 2017?

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Bernd Schulte, AIXTRON SE - COO [73]

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I cannot share that with you Mr. Hollfelder. However, what I can say and what I would like to say is what I don't know if you remember the difference between Q1 and Q4 in our sales and shipment is enormous and that definitely on one side creates under absorption in one quarter and it definitely is not very, very efficient also if you basically add capacity in the other quarter. So we expect that because of this and more distributed loading that there are further opportunities in basically improving our under absorption and improving our production cost deterioration.

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Gunther Hollfelder, Baader Bank - Analyst [74]

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And is there an impact from the AIX R6 in 2017, a negative impact on the gross margin?

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Bernd Schulte, AIXTRON SE - COO [75]

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Yes, there is, but there will be also an impact in 2017.

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Martin Goetzeler, AIXTRON SE - CEO [76]

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I'm not sure if you -- just to clarify we have a contribution, but it's significantly under proportion. That's the right wording maybe.

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Gunther Hollfelder, Baader Bank - Analyst [77]

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So you would say there is less of a negative impact in 2017 compared to (multiple speakers)?

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Bernd Schulte, AIXTRON SE - COO [78]

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Not compared to the two years but from the sale of this this equipment.

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Operator [79]

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David Mulholland, UBS.

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David Mulholland, UBS - Analyst [80]

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I know there is not a lot what you can say around what you're planning, but can you at least talk about, is this something you're trying to partner with customers or is it something you might consider with in terms of peers and other equipment companies or are you open to all of that? And then secondly, obviously you've given a fairly clear commitment on the 2018 profitability. If it fair to interpret that to say that at some point in 2017 you'll draw a line under this if you haven't managed to get clear signs that revenue is coming through or some form of partnership, you will then cut cost, so that you can one way or the other achieve our profitability target?

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Martin Goetzeler, AIXTRON SE - CEO [81]

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I like your question. Unfortunately, I cannot answer more than Bernd already said in his answer and I already said to another question before. We really ask for your understanding. We believe that if we communicate anything here, it could have a negative impact on the activity. So we would appreciate if you can support this and ask for your understanding. On the other side, I can only reconfirm that, and that's true for me, but also for Bernd my successor here that the goal for going for a positive 2018 holds and is now our clear focus.

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Guido Pickert, AIXTRON SE - Director of IR & Corporate Communications [82]

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With this we would like to close today's call. Thank you for your question. And especially for your sustained interest in AIXTRON despite all ups and downs that we have gone through over the past years. Please let me direct some -- a few words to Martin who is leaving us very soon. I would personally like to thank you for very intense and trustful collaboration over the past four years. We wish you all the best whatever you will do and wherever it will take you. And I'm certain our paths will cross again sometime in the future. Thank you.

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Martin Goetzeler, AIXTRON SE - CEO [83]

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Thank you, Guido.

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Guido Pickert, AIXTRON SE - Director of IR & Corporate Communications [84]

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Operator?

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Operator [85]

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With this we have come to the end of today's conference call. Thank you very much for your attention. Good bye.