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Edited Transcript of BESI.AS earnings conference call or presentation 20-Feb-19 3:00pm GMT

Q4 2018 BE Semiconductor Industries NV Earnings Call

Drunen Feb 22, 2019 (Thomson StreetEvents) -- Edited Transcript of BE Semiconductor Industries NV earnings conference call or presentation Wednesday, February 20, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* J. Cor te Hennepe

BE Semiconductor Industries N.V. - SVP of Finance

* Richard W. Blickman

BE Semiconductor Industries N.V. - Chairman of Management Board & CEO

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Conference Call Participants

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* Edwin de Jong

NIBC Bank N.V., Research Division - Analyst

* Marc Hesselink

ING Groep N.V., Research Division - Research Analyst

* Nigel Van Putten

Kempen & Co. N.V., Research Division - Analyst

* Peter Olofsen

Kepler Cheuvreux, Research Division - Analyst

* Robert Duncan Cobban Sanders

Deutsche Bank AG, Research Division - Director

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Presentation

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Operator [1]

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Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's quarterly conference call and audio webcast to discuss the company's 2018 fourth quarter and annual results. You can log into the audio webcast via Besi's website, www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer; and Mr. Cor te Hennepe, Senior Vice President, Finance. (Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced in whole or in part without written permission from the company. I would now like to turn the call over to Mr. Richard Blickman.

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [2]

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Thank you. Thank you all for joining us today. We will begin by making a few comments in connection with the press release we issued earlier today and then take your questions. I would like to remind you that some of the comments made during this call and some of the answers in response to your questions by management may contain forward-looking statements. Such statements may involve uncertainties and risks as described in the earnings release and other reports filed with the AFM. For today's call, we'd like to review the key highlights for our fourth quarter and year ended December 31 and also update you on the market, our strategy and the outlook.

First, some overall thoughts on the year and Q4 results. For the fourth quarter, revenue of EUR 92.5 million and a net income of EUR 22.7 million compared favorably to expectations. A higher than anticipated gross margin of 56.4% and a decrease in sequential operating expenses helped us exceed operating profit guidance despite a 20.7% revenue decrease versus the third quarter.

In addition, net cash continued to build and ended the year at EUR 199.4 million. There were a couple of items to note in the fourth quarter results. The 11% sequential operating expense decreased versus the third quarter last year. It was aided by a number of favorable onetime year-end recordings. Such recordings included reductions in the warranty provision due to favorable experience in recent years, the pension curtailment benefit related to headcount reductions and some favorable R&D grants received. As such, baseline operating expenses, which include all onetime items, variable compensation, restructuring and ForEx effects declined by 2.3% to EUR 25.7 million in Q4 versus Q3 2018.

In addition, we have a net tax benefit in Q4 due mainly to EUR 4.8 million in tax credits associated with the Innovation Box program of the Dutch government for the period 2015 to 2018.

This program is ongoing and related to R&D activities performed in the Netherlands. Besi's 2018 results reflected solid performance and strategic execution in the assembly equipment markets, significantly more challenging than 2017. Revenue in total of EUR 525.3 million and a net income of EUR 136.3 million declined by 11.4% and 21.3%, respectively versus 2017.

Our 2018 revenue development was primarily affected by a second quarter slowdown in high-end mobile demand followed by broad weakness in memory and other end-user markets starting in the third quarter of the year. Revenue development was also adversely affected by ForEx headwinds from a 4.5% average decrease in the value of the U.S. dollar versus the euro. In retrospect, it appears that the Besi's second quarter order weakness was an early indication of an industry downturn post an extended upward trajectory, which began in the second half of 2016.

In the current downturn, we rapidly aligned productions, supply chain and personnel in response to adverse market conditions. As a result, Besi was able to maintain clear leading metrics of profitability such as gross margin and net margin of 56.8% and 25.9% and a return on equity of 33.8%. In fact, gross margins exceeded 56% in each quarter of 2018, despite a revenue decline of 42.6% between the second and the fourth quarter of the year. Further, we successfully reduced cost in the face of decreased customer demand due to the ongoing execution of strategic initiatives, continued reductions of European fixed overhead and the realignment of temporary Asian production personnel to a changing market environment.

Also wanted to inform you of a minor change to our supplemental information presented. We are opting to present only orders from now on instead of backlog, going forward, as the preferred means of viewing Besi's prospects in future periods. Backlog is now much less meaningful as an indicator than previously given the significant shortening of cycle times to customers, which most often are less than 3 months. Periodic revenue volatility is nothing new to our industry. In fact, periods of less robust growth let us further hone our strategy and financial potential to capitalize on the next major industry upturn.

As you can see in this next chart, we took action in Q2 2018 to scale back supply chain activities and temporary production personnel once we saw that market conditions were weakening. We realized our objective to reduce total headcount by approximately 16% by year-end. In addition, Besi continues to reduce European overhead and has reduced fixed headcount in certain Asian locations, post the large production ramp in 2017.

In this way, we aim to keep net margins and cash generation well above prior trough levels. From a longer-term perspective, we are on track to further reduce annualized structural costs and reach our savings target of EUR 15 million to EUR 20 million per year by 2021. Our liquidity position improved significantly this quarter with net cash increasing by EUR 39.3 million or 24.5% due to continued healthy profit generation and reduced working capital needs in the current downturn.

We ended the quarter with cash and deposits of EUR 475.5 million or EUR 5.68 per share equal to almost 31% of Besi's stock price of EUR 18.48 at year-end.

In this next slide, you can see how Besi's cash generation has improved over the past 5 years. Cash flow from operations has steadily improved from 19% of revenue in 2014 to 35% in 2018, even considering both industry upturns and downturns. It also underlines the enhanced flexibility and scalability of the business model in recent years.

The strong cash generation continues to support a shareholder-friendly capital allocation program. For all of 2018, we returned to shareholders EUR 209.5 million in the form of dividends and share repurchases. We will have returned to investors a total of EUR 608.4 million or EUR 6.57 per share from 2011 to 2018 assuming the proposed dividend and share repurchases to date.

During 2018, we also upped our quarterly share repurchases from approximately EUR 6 million to EUR 12 million per quarter. For the full year, EUR 35.5 million in share repurchases were made, an increase of 51% versus 2017. Share repurchases are continuing in 2019.

Given continued strong cash flow generation and our solid liquidity position, we've proposed to pay a cash dividend over the fiscal 2018 of EUR 1.67 per share for approval at our AGM April 2019. This represents a payout ratio of approximately 91% or an approximately 9% dividend yield relative to our year-end stock price.

Next, I'd like to speak a little bit about the current market environment. VLSI Research now estimates that the assembly equipment market was approximately USD 4.6 billion in 2018 and approximately flat with 2017. They also forecast that the market will decline by 12.4% in 2019, primarily related to slowing global economic growth, trade frictions, cautious customer order patterns and excess memory and smartphone capacity given the large build out in '16 and 2017. VLSI expects a rebound in 2020 of almost 10% as capacity utilization rates will increase and new products are introduced. Despite challenging market conditions currently, there are many reasons for optimism about the direction of the assembly equipment market and Besi's prospects. We have a leading position in the advanced packaging space whose outlook is bright and an important enabler of the digital society and the new applications, which will be generated along with it. The advent of the 5G capabilities, artificial intelligence and the ever-increasing amounts of advanced logic, memory capacity necessary for the buildout of cloud infrastructure should be strong drivers of innovation and growth in the next customer investment route.

The significant customer focus currently is in the development of die bonding and packaging solutions for ever smaller, highly complex and feature-packed 5G-compatible smartphones. 5G connectivity could accelerate advanced packaging adoption over the next 5 years in the mobile internet, and computing markets and in applications such as artificial intelligence, automotive electronics and the Internet of Things. Industry experts estimate that the initial 5G subscriptions will be available by 2020 and that by 2024, 55% of North American and 43% of North East Asian subscriptions, including China and Japan, will have migrated to 5G.

Now a few words about guidance. At present, the 2019 outlook for this assembly equipment market is hard to predict. There are many factors, which could influence the outlook and timing of any anticipated rebound this year, such as slowing global growth and trade frictions between the U.S. and China.

Looking specifically to the first quarter, we estimate that revenue will decline by approximately 15% versus the fourth quarter last year as difficult market conditions continue in what is traditionally our weakest quarter of the year. However, we expect that gross margins will remain in the 55% to 57% range as we further adjust the overhead levels to customer demand. Further, we anticipated that OpEx will increase by 25% to 30% versus the fourth quarter, given approximately EUR 3.5 million of incremental variable compensation expense and the absence of favorable onetime recordings from the fourth quarter.

In contrast, we estimate first quarter '19 baseline OpEx will increase by only 5% to 10% versus the fourth quarter, primarily due to increased R&D spending. And finally, we estimate that our effective tax rate will range between 10% and 15% for 2019 and that CapEx will be approximately EUR 4 million.

That ends my prepared remarks. I would like to open the call now for some questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Mr. Peter Olofsen, Kepler Cheuvreux.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [2]

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Quite a few questions, but I will limit myself to some questions on the adoption of new technology and potential demand drivers. So maybe starting on the mobile side of the business and specifically fan-out. What are you seeing in terms of the adoption of fan-out wafer-level packaging? Do you see that broadening beyond the big OEM that drove the investments few years ago? And what are you seeing in terms of traction with the new 8800 Series for fan-out that you launched last year?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [3]

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Well, the answer is very simple. At this moment, we don't see any accelerated investments in fan-out. As we mentioned in previous calls, certain infrastructure has been installed. And that is apparently at this moment sufficient to support the demand.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [4]

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Okay. And in terms of panel-level packaging, any traction there? Or is that more for future years?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [5]

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That's more for future but some very interesting development programs where we are involved. And our platform, already installed in the world, is widely recognized as the most advanced in the industry. So for the future, we can expect very positive interest.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [6]

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Okay, and then maybe on the memory market where historically you were a little bit less exposed, it seems there is an emerging trend towards flip chip. Do you see that happening in a meaningful way this year? And is your positioning in flip chip for memory as strong as in some other flip chip segments?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [7]

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I would agree even stronger. No, we have launched -- well, I should say, yes. We have launched a new version flip chip machine, which is currently being qualified by several of the memory manufacturers and that machine is much faster than any other system on the market today. However, still, in memory, it is a very big cost battle. So any way to avoid flip chip will be used by the memory manufacturers. But at some point, they will be forced, whether that is this year or next year, more likely next generation in my view. But Besi is in an excellent position.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [8]

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Okay, that's helpful. And then maybe finally on the computing side. With your large U.S. IDM customer looking to ramp up 10-nanometer production this year, is that potentially going to drive investments in die attach and die sorting equipment this year?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [9]

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Yes. Answer is, yes. On the previous call, we mentioned that, yes, that transition is now, you could say, finally, underway. And we are very well involved in that. So if -- you could also argue, if that would not be the case, our numbers would look worse.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [10]

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So does that mean there was already some contribution in Q4 and also in Q1?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [11]

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Yes.

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Operator [12]

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The next question is from Mr. Nigel Van Putten, Kempen & Co.

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Nigel Van Putten, Kempen & Co. N.V., Research Division - Analyst [13]

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I have a question on the gross margin guidance. So it's quite remarkable that you're guiding for similar gross margin despite [having] revenue year-over-year. So -- and I understand that you don't guide beyond the current quarter. But would it make sense to say that the gross margin should -- already see a bottom in the first quarter 2019 and improve from then on? It sounds kind of weird, like 56% will be a low point, but you've consistently delivered on margins north of 56% for the last 8 quarters. And with revenue at least seasonally improving, I'm just asking that, yes, you see that as a likelihood or a possibility?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [14]

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Well, the factors influencing gross margin are in the first place product related. So it depends very much on the product mix going forward. And we have said in several calls that there is a difference between gross margins in the smartphone space, computer space and automotive space. And also, there's a margin delta in the higher end versus the medium end.

So you have to define a certain scenario. So -- and at the same time, there is ongoing cost reduction. We are improving our supply chain. We are improving our cost structure in operations.

So anticipating certain ongoing developments. Yes, it's very encouraging that we guided some time ago that the low end of the gross margin would be around the low 50s, and it appears to be somewhat higher, even taking into account the headwind from U.S. dollar. And still, a major part of our business, over 50%, over 60%, is U.S. dollar based. So also the dollar has an impact on that gross margin. So will the dollar slide that due to trade wars, et cetera? That will have a negative impact. So all these variations, Nigel, it's hard simply to say well, if this is the bottom, it's also the bottom of the gross margin. But yes, you can say, it looks very, very positive.

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Nigel Van Putten, Kempen & Co. N.V., Research Division - Analyst [15]

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Yes, that's encouraging. And then maybe a follow-up on advanced packaging activity at the subcontractors. So I think, the largest OSAT has hinted that they might enter a period of what they call, disruptive investment, and then they point to, yes, various new introductions like fan-out, but also system and package. And my question is that do you see any sort of renewed -- because, it's -- I mean, it's not in your order book, but do you see renewed early activity already maybe building in the year from that side?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [16]

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I think it's more confirming a longer-term trend. At this moment, order activity across the board is as it is.

And that has to do with, as we said in the comments, the overall situation uncertainty, and once that uncertainty becomes less uncertain, you may see investments in directions as you are indicating, whether it will be really disruptive is always to be seen. Sometimes there's some wishful thinking. But experience tells us, this industry is not so fast in development where it's going from 14 to 10 nano or EUV or -- no, well, name many examples. So in our view, these new technology introductions will always go slowly.

But the key is that you have to be involved and in strong positions. So if it comes, it certainly will help us.

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Operator [17]

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The next question is from Mr. Rob Sanders, Deutsche Bank.

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Robert Duncan Cobban Sanders, Deutsche Bank AG, Research Division - Director [18]

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My first question is just if you could give an update on the tariff situation in China, and how that is affecting your business? Clearly, we've heard some stories about companies moving out of China into the Philippines and into Thailand. But I've also heard that some customers are actually even taking their tools and putting -- ferrying them out of China. So I'd love to get a sort of sense of where we are on that? And I've got a couple of follow-ups.

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [19]

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Well, we can only confirm what you have heard and not only from semiconductor, but I was sitting next to a person in an airplane from Chengdu to Taipei, and they were moving production of lawnmowers of China back to Taiwan for the U.S. market. But anyway -- so yes, that's happening. Also, our customers clearly are developing more plans for future productions expanding but also new products outside of China.

There is also clear evidence that the investments of China in semiconductor is slowing down. You would expect it to increase, but it's slowing down. So the -- part of the negative sentiment is due to that uncertainty.

Will that ignite a lot of CapEx outside of China? That depends enormously on GDP.

But sooner or later, you will have a different landscape, and we are excellently positioned for what's happening in both areas.

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Robert Duncan Cobban Sanders, Deutsche Bank AG, Research Division - Director [20]

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Got it. And when you think about the VLSI -- I know you don't tend to guide, but I mean when you think about this year, 2019, even if just at a high level, I mean, clearly, in the previous years when you've outgrown LSI -- VLSI growth, it's been driven usually by smartphone cycles. And in years where there hasn't been a major smartphone upgrade, you've tended to undergrow VLSI. So given that they are now putting a number out there, do you think this is a year more of a kind of transition year and 2020 is the big year for you guys? How are you thinking about it just at a high level?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [21]

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Well as a high level, if you follow the, let's say, information out of the high-end smartphone universe, it's pointing towards 2020 next generation, and that's not unrealistic because, if you look back in history, there's always a 2, 3 year lapse. And that would fit...

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Operator [22]

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The conference is being no longer being recorded.

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [23]

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Okay. Anyway so...

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Operator [24]

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Please wait while the recorder is connected.

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [25]

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Can you still hear me, Rob?

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Robert Duncan Cobban Sanders, Deutsche Bank AG, Research Division - Director [26]

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I can hear you, but I think the moderator wants to be able to record you.

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Operator [27]

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Go ahead, sir.

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [28]

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Well, recorded or not, doesn't make much difference. Anyway, so is '19 a transition year, it's always hard to tell. This industry is extremely, let's say, sensitive to GDP, et cetera. My biggest -- clearly guidance is more what's happening in the world. VLSI is always behind the facts. They record their observations, which is fine, but we're prepared. Whether we have a recovery soon, it would be excellent. And we have been able to ramp 60%, even 80% quarter-on-quarter. If it stays somewhat softer a quarter longer, you've seen our gross margins. You've seen our net margins. You've seen the guidance of the OpEx. That's also fine.

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Robert Duncan Cobban Sanders, Deutsche Bank AG, Research Division - Director [29]

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Got it. And then just last one on the OpEx. It looks like I wasn't forecasting that correctly. So you're guiding the headline OpEx up 25% to 30%, but that includes a EUR 3.5 million one-off.

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [30]

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Correct.

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Robert Duncan Cobban Sanders, Deutsche Bank AG, Research Division - Director [31]

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So beyond that, it should go back to whatever you're guiding minus EUR 3.5 million, correct?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [32]

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Correct, yes. Yes, and the increase is due to some higher R&D spending compared to Q4.

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Operator [33]

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We have a question now from Mr. Marc Hesselink, ING.

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Marc Hesselink, ING Groep N.V., Research Division - Research Analyst [34]

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My first question would be on the application driving demand for the 5G and what you mentioned also in the press release. I can imagine that, that is more of the 2020 story, you talked before in the call. Could you explain, how it's going to drive demand for you? Is it purely that the industry's driving the replacements for the smartphone? Or is it also that the changed chipset in 5G is driving that demand for you?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [35]

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Well, the answer is, not only smartphone and, probably, the sequence will be other devices first, and smartphones, thereafter. So you first need a network, and that's now being rolled out in many countries, cities to start with. And first, you have the networks, 5G, and then you have the applications. and these modules, we're involved already since 4 years in the development. We've installed at several customers already equipment to build those modules. And there will be a whole envelope of these modules, big and small. But not a switch from one quarter to the next.

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Marc Hesselink, ING Groep N.V., Research Division - Research Analyst [36]

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So it's building up over time. Okay.

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [37]

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The transition period that we -- that you can expect in the next 5 years and the next 3 years a rollout, and that's how it typically happens.

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Marc Hesselink, ING Groep N.V., Research Division - Research Analyst [38]

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Okay. Then, the earlier comments you made on the increase in the R&D spend. Is that something particular that you have to -- testing or is that some requests from the clients or is it just the usual, you want to open up the new opportunities going forward?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [39]

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Well, all of our R&D programs are directly customer linked. So the number of programs and the size of the programs vary. In the last 3, 4 quarters, it has been relatively stable. And it's not because we are increasing for a certain application, but it also has to do with, let's say, the program execution. And for some of the -- 3 of the programs, they will become in a more critical phase to be launched. And then the costs simply increase. But that's a very natural -- and it could decrease again once certain programs come to an end.

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Marc Hesselink, ING Groep N.V., Research Division - Research Analyst [40]

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So you can see that your designs in -- more in a -- at this stage?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [41]

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Yes. But there's no structures. So my comment, it's a good question. It's not that our R&D is structurally increasing. It is increasing in first quarter versus the fourth quarter, but just because of the stages several programs are in. If it would increase structurally, I would certainly inform you that we will have a higher spend in the next quarters going forward to adjust your model, but your model should not change.

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Marc Hesselink, ING Groep N.V., Research Division - Research Analyst [42]

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Okay. And then on the revenue guidance of 15% sequential decline. And looking at the order intake, I guess most of the weakness is still done in smartphone offset by some strength in cloud applications. Is it fair to say that automotive is then somewhere in between those 2?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [43]

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Yes. Yes. But also, there is a seasonal aspect. The first quarter, as we mentioned, is always slower, and key is to see what happens in April or May. And that will determine, yes, very much what will happen in Q2. But that's too early to tell. And the biggest factor to repeat that again is how will this U.S.-China negotiation settle.

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Marc Hesselink, ING Groep N.V., Research Division - Research Analyst [44]

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Okay. And then final question on -- I still want to ask a bit about the M&A. I know in previous calls, you said that the valuations were not right yet. So you cannot -- I know that you cannot share anything likely imminent or anything. But just in general, what are you seeing on the side of potential seller?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [45]

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Well, I could answer maybe as follows: that we are still, as always, very much interested to expand our product offering to the leaders in this industry. So if an opportunity along those lines occur, then we are able to act. And that will determine then whether something will happen or not. It's not just because prices are interesting. And as you said, of course, if something will occur, we will timely share that. But what often happens in downturns, certainly, customers realign their strategies. Also, the suppliers like us look at their strengths and weaknesses but also the others. So in those downturns, sometimes opportunities arise.

But again, customer-driven because it has to in the end improve our product position, vis-à-vis our main customers. And at the same time, due to 100% integration, like KLM and Air France, that should reduce our cost.

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Marc Hesselink, ING Groep N.V., Research Division - Research Analyst [46]

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Okay. And the acquisition that Shinkawa did, was that something that would -- that could have been interesting for you? Or was -- because it's in the Japanese supply chain, it was not really something for you anyway?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [47]

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First of all, you have to ask the question, would that improve our position with our current customers and offer better positions with other customers? Well, the answer to that question is negative.

But then if you look at the entire transaction, where Shinkawa and Yamada have joined, I think for Japan, itself, it is a very good development. But for us, it's very far away.

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Operator [48]

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We have another question from Mr. Peter Olofsen, Kepler Cheuvreux.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [49]

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I had a few follow-ups. Maybe, first for Cor. Following the tax credit in Q4, does this affect the effective tax rate going forward?

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J. Cor te Hennepe, BE Semiconductor Industries N.V. - SVP of Finance [50]

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Yes, there will be a slight effect. Usually, we guide between 12% and 15%. Now we can say for the rest of the year between 10% and 15%.

Fluctuations are simply because of profits in jurisdictions and certain facilitations or arrangements. But it's between 10% and 15%, so there will be some effect of this credit.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [51]

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Okay. And then maybe a follow-up on one of the earlier questions on China. At the annual analyst meeting in June, you set out some ambitious targets to grow the revenue share of China. Can you disclose what proportion of revenues in 2018 did come from China?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [52]

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Well, you first -- China -- there are 3 different sets of customers in China: one is the China, China customers, Chinese companies; number 2 is joint ventures with outside China companies; and three is outside customers having factories in China like an ST, like an Intel.

And if you look at that landscape, clearly Chinese semiconductor industry will continue. And over time, we will gain certain market shares. The question is of course with the outside companies that situation has, I would say, changed in anticipation of whatever outcome. So that part will be affected. On the other hand, for us there is no difference whether these machines are installed in China or in Philippines or in Thailand or in Vietnam. We're happy to install anywhere.

So as a percentage, China will change, but as a total, probably not.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [53]

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Okay. And then maybe another question on your revenue exposure. In the past, you have disclosed your exposure to mobile, computing, automotive, et cetera. Is it already something you can disclose? Or are you still compiling those data?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [54]

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We're still compiling the data. By the way to your earlier question, China, what is very interesting, our revenue, with some exceptions, but on average, in China has been about 20%, 25% of revenue. Our main competitor and peers for over 50%. So bottom line, it can also have a very positive effect on us.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [55]

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Yes. So it's a big opportunity for you?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [56]

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Yes.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [57]

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Yes. Okay. So but on the end market, to their disclosure, that is something that will follow at a later stage then?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [58]

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My guess would be that smartphones -- high-end smartphone communication, which was 35% maybe is now around 30%. Computing is definitely 25%, and auto may have gone up from 17% to 20%. That's the different mix. Spare parts has gone up, and -- so

spare parts gone to 15%. But we will confirm that data once it is fully settled and in the annual report.

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Peter Olofsen, Kepler Cheuvreux, Research Division - Analyst [59]

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Okay. No, this is already...

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [60]

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[Decent multiples].

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Operator [61]

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Our next question is from Mr. Edwin de Jong in IBC.

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Edwin de Jong, NIBC Bank N.V., Research Division - Analyst [62]

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I have a few question left on the 3D sensing. Has there been any developments in the last quarters? Your Austrian client is, I think, saying that Android is also adopting this technology? And does that require equipment from your side? Or can you tell a little bit about that?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [63]

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Well, there is an ongoing development on the next generation in that 3D sensing, where we are certainly involved. And that is likely to be part of the next generation for 2020. So you will have some further testing in early '19 -- or late '19 models -- or model. And then a full rollout for the next generation in 2020. That's what we hear. But we are involved in many of the development programs.

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Edwin de Jong, NIBC Bank N.V., Research Division - Analyst [64]

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Okay. And then maybe, also for -- on working capital. You've had quite a large inflow in Q4, EUR 31 million in working capital. Of course, that's for a large part due to the decrease in revenue but is there also a seasonal effect in the -- in it? And if so, can you maybe give a little bit feeling how much that would be?

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J. Cor te Hennepe, BE Semiconductor Industries N.V. - SVP of Finance [65]

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Usually, there is a seasonal effect, you see. We always look at -- and those numbers, you can calculate. If you look at the DSO net inventory turn in a rapid declining market, as we've seen it now. Inventory turn usually worsens a bit before it goes up when all inventory's worked out.

DSO usually stays flat or increases a bit when business is down. Customers tend to sit on their money somewhat longer. So there's a seasonal effect. When revenues goes down, your working capital will be less. But if you look at the metrics, they will go up a bit before they'll be back to normal once -- specifically looking at inventory, once the inventories are back on a normal level. But we are organized in a way that there's no risk for obsolete stock. There is no -- it's not a big topic. But we do see some -- relatively some higher revenue as compared to earlier days, but that will be back to normal in the course of 2019. And so if you look at the development of Besi's net cash, we always see 3 quarters of growth, then we pay out the dividend, of course, then the net cash is back to the levels where we would like it to and then it goes up. So there's nothing specific about that.

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Edwin de Jong, NIBC Bank N.V., Research Division - Analyst [66]

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Okay. Okay. And then maybe on the innovatiebox tax benefits. That there was one for a couple of years, I think, you said in the...

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J. Cor te Hennepe, BE Semiconductor Industries N.V. - SVP of Finance [67]

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(inaudible) that's a technicality, once you start to apply for an Innovation Box, you have to do that when your tax loss carryforwards are reducing, when you do the application, you can go back to the years that haven't been assessed, finally. Those years are always lagging behind, so reality's lagging behind the current filings. So we could go back to '15 because that was still not finally assessed. But that's normal. That's a normal term.

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Edwin de Jong, NIBC Bank N.V., Research Division - Analyst [68]

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Okay, and then that's also something that we can expect going forward?

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J. Cor te Hennepe, BE Semiconductor Industries N.V. - SVP of Finance [69]

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Yes, because it's, of course, as you can see, for '15, '16, '17, and '18. But going forward, we -- it will have, as we mentioned earlier, an effect on the ETR. So that's why we now say that the range that you can expect is a bit wider, but -- it's between 10% and 15%, and it's usually between 12% and 15%. So there is some effect, yes.

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Edwin de Jong, NIBC Bank N.V., Research Division - Analyst [70]

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Okay, and then finally one last. We talk regularly about the developments in solar. Is there anything -- news there?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [71]

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No. There is continued evaluation of our technology, yes, at those major solar companies.

There are some programs in a well-advanced stage. And it could be that they will materialize this year. So there's no adverse development. It's only -- it's market acceptance. It is cost. It is life cycle and lifetime guarantee, and that is the testing that takes very long. But the interest is still very positive.

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Edwin de Jong, NIBC Bank N.V., Research Division - Analyst [72]

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Yes, and that could be an issue for late this year for -- maybe?

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [73]

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Yes.

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Operator [74]

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And we have a question from Mr. Rob Sanders, Deutsche Bank.

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Robert Duncan Cobban Sanders, Deutsche Bank AG, Research Division - Director [75]

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Yes, thanks for my -- taking my follow-up. It's just a few housekeeping ones. One is on the dividend payout ratio. You're averaging, I think, 96% over the last 4 years of -- on your dividend payout ratio. So should I start modeling this going forward? Because I think you've said historically, it's 40% to 100% range. So just from a modeling purposes, that would be good. And the other question is just on if you can give me an update on your activities in silicon photonics. Are you doing anything there? I mean, your competitors are moving forward, so I would love to get an initial view on that.

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [76]

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Well, dividend, this is very much depending upon our continued performance. So if we continue to perform as we are doing, also in relative terms, there's no reason to change our allocation policy. So it may go up and down, our profitability, but the policy is as it stands.

On the second question, I already answered that. We're very much involved in photonics, also different photonics related to the 5G modules in a very good position, so a major installed base already. So yes, that's a very interesting segment of the market.

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Operator [77]

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Gentlemen, we've no further questions. Please continue.

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Richard W. Blickman, BE Semiconductor Industries N.V. - Chairman of Management Board & CEO [78]

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Well, then, I thank everyone taking their time to listen to this call and your questions. If there are any further questions, don't hesitate to contact us. Goodbye.

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Operator [79]

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Ladies and gentlemen, this concludes this event call. Thank you for attending. You may disconnect your line now.