Osram Licht AG Analyst Call June 28th, 2018/media/Files/O/Osram/Investor Relati… · We are strengthening our product portfolio in the field of 3D sensing, the acqui-sition of Vixar

Osram Licht AG

Analyst Call

June 28th, 2018

Operator: Ladies and gentlemen, thank you for standing by. My name is Emma, your

call operator. Welcome, and thank you for joining the OSRAM Licht AG conference

call. Throughout the introductory statements from CEO Dr. Olaf Berlien and CFO Ingo

Bank, all participants will be in listen only mode. The speech of management will be

followed by Question and Answer session. If you would like to ask a question you may

press star followed but 1 on your touchtone telephone. I would now like to turn the

conference over to Andreas Spitzauer, please go ahead.

Andreas Spitzauer: Thank you, operator. Good afternoon, as well as good morning

ladies and gentlemen. My name Andreas Spitzauer, Head of Investor Relations of

OSRAM, and I want to welcome you to OSRAM's conference call after the ad-hoc

release today midday. It is now my pleasure to turn over the call to Dr. Olaf Berlien,

the CEO of OSRAM. Please go ahead.

Dr. Olaf Berlien: Thank you, Andreas. Ladies and gentlemen: good afternoon. Thank

you for dialing into our call on such short notice. As you have seen in our ad-hoc an-

nouncement, the markets have developed to our disadvantage in recent weeks. The

situation in the automotive market forced us to take action today. This is also influenced

by new admission procedures like WLTP. Just a quick reminder: OSRAM, we generate

around 50 percent of our sales and a large part of our earnings with customers from

the automotive industry. Initial indicators of this development emerged after individual

negative news flow from the supplier industry and from car manufacturers. This in-

cludes as well the feedback we directly get from our customers. Under these condi-

tions, which are characterized by growing uncertainty, it is important to us to be trans-

parent.

At the same time, we also want to send a clear signal to the capital markets, our long-

term drivers of increasing demand for our LED-based products in cars and in

smartphones are unchanged. Based on this, we stick to our growth strategy. This

means that we will continue to focus on innovation and long-term growth. We started

to review the process of our mid-term strategy and our positioning in different markets.

The results of this review and an update of the medium-term financial targets will be

presented at a Capital Market Day later this year.

J u n e 2 8 t h , 2 0 1 8 – A C – O s r a m L i c h t A G -

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Ladies and gentlemen, the current uncertainties of our customers also result in our

project delays in the field of consumer electronics and horticulture applications. But we

are confident that this will only involve delays into the next fiscal year of OSRAM, so it

is not a structural topic but a timing issue. Our future development is well supported by

our excellent technology position in many different segments. Let me give you an ex-

ample. We are strengthening our product portfolio in the field of 3D sensing, the acqui-

sition of Vixar will close in due course, we have many projects and design-ins for 2D

and 3D sensing applications like face recognition. The same is true for our intelligent

automotive lighting joint venture with Continental. This will be scheduled to go into

operation in some days, in July.

Ladies and gentlemen, let me summarize: In sum, we could not set off growing market

uncertainties in the automotive industry, also delays of projects and a slowdown in the

general lighting market. Therefore, it was important for us to provide clarity, and

quickly. We are sticking to our basic road strategy, and for this I would like, looking

forward, to get your questions.


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Q&A session

Operator: Ladies and gentlemen, at this time, we will start the Question and Answer

session. Anyone who wishes to answer a question may press star followed by 1. If you

wish to remove yourself from the question queue, press star followed by 2. If you are

using speak equipment today, please lift the handset before making this selection. One

moment for the first question, please. The first question comes from the line of Sven

Weier. Please go ahead.

Sven Weier (UBS): Yes, good afternoon. A couple of questions from my side. First of

all, I mean I guess we all understand, you know, the current uncertainties around tariffs

regarding WLTP testing, things like that, and we can obviously understand how that

could potentially impact your last quarter this year. But I'm more curious initially now

on the extra Q3 performance because that seems to have quite fallen short of your

original expectations already, and I was just wondering why things in horticulture and

mobile handset makers would be impacted by the current uncertainties that I've men-

tioned before, and why couldn't you see that at the beginning of May when we last

spoke? That would be the first one.

Dr. Olaf Berlien: Okay, so I will do. So, the horticulture project was in the pipeline and

the client moved it from Q3 to later on the year, that means it will definitely not in our

Q4; it will be in our new business year of 2018/19. This is a very profitable wrapped

LED with good margin, and for this reason we have an impact in Q3. The same is with

the mobile one, that we had the design-in, and we had the discussion with the client,

and the customer decided to move it in the new business year of OSRAM, so that was

the impact for Q3.

Ingo Bank: Plus, we have also seen on the traditional auto side also a slowdown, and

their customers are not cancelling orders or anything, but they are simply pushing out

deliveries at this point in time. The same we see a little bit with LED components more

into the fourth quarter, not so much third quarter. I think third quarter will be what we

said, positive on the LED auto component side, but we now also see there that cus-

tomers are shifting existing orders more into future months, so they don't cancel any-

thing, but they are more cautious in putting it forward, and the order intake in general

is more uneven than it was when we entered the third or the second half of the year.


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Dr. Olaf Berlien: Maybe, Sven, to make it clear: We said in May that we will have

double-digit growth in automotive light, and that will be happening in Q3. So, we stand

to this position, and what we said will come. What has changed is for Q4. So, as you

know, last Friday we had an announcement from some OEMs, we had this week an

announcement that they reduce capacity by building cars only four days instead of five

days and more, and this will impact the rest of the year. And for this reason, we have

to reduce Q4 for automotive lighting.

Sven Weier (UBS): Yes, but there still seems to be quite a shortfall in Q3 already.

Because I think if I remember correctly you guided double-digit growth for Opto as a

whole and not just for the auto-related part, so I guess there's also a shortfall in Q3. In

terms of your new guidance, we haven't had a number for Q3 yet in terms of the

EBITDA, so, I'm not sure what kind of EBITDA it actually implies for the fourth quarter,

and Q4 is, obviously, seasonally a bit slower one. So, how do you, actually, currently

make the prediction for Q4 given all these uncertainties? I guess it's rather hard, yes?

Dr. Olaf Berlien: I know, but Ingo will come with this, and for this reason, I have said:

We need this call. It's good to have this question, and it’s excellent that we have the

chance to talk about that. And after we have talked, we can now talk. Ingo, maybe you

explain a little bit.

Ingo Bank: Hi, Sven. So, the quarter is officially still running, we haven't closed the

books, as we speak, so, please bear that in mind with what I say. So, I believe that,

possibly, the comparable sales growth for OSRAM in the third quarter is likely going to

be flat, maybe even slightly negative, and then on the adjusted EBITDA side I would

expect that to come in around 12 percent. That's currently the best estimate. Again,

we haven't closed the books. This is not a guidance, this is just an estimate, and then

if you take the rest into account I think you can work out what Q4 will possibly be. I

don't want to guide for quarters now, so, I will leave it at that.

Sven Weier (UBS): But that would imply, I mean you come out of the round 120, and

at the low end of the guidance you would have to be also at 120 in Q4 which is, nor-

mally, a seasonally slower quarter again, right? So, I'm just wondering how conserva-

tive that new guidance really is.


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Ingo Bank: Well, obviously what we've done, so, with all the information trickling in

end of last week, early this week, we accelerated our forecasting process to under-

stand what's going on. We talked to a lot of customers and insights, and on that basis,

we arrived at certain new assumptions, so, I believe that what we've done now is to

put our best insight as it stands right now in there. Of course, there is still uncertainty

in the market which we tried to factor in somewhat, but that's basically what we decided

to do now for fiscal year ‘18.

Dr. Olaf Berlien: And what we really did, Sven, is that we really ran customer by cus-

tomer with our worldwide sales force, you know, to find out what the uncertainty is, and

that's today our best guess. I hope that these customers are staying with the four days

instead of five days, and not reducing after the summertime more. So, it's an uncer-

tainty: At the end of the day, I really don't if they maybe extend their summertime, so,

that's a little bit our issue, and we don't want - we want to be open and clear on that.

Sven Weier (UBS): Hmmm, and then maybe two short follow-ups, if you, obviously,

that was something that is making the rounds on Samsung discontinuing the iris scan,

so, I was wondering if you had any comment on that and then, secondly, also on pric-

ing.

Dr. Olaf Berlien: I hope you understand that I never talk about a company name, a

customer name on a phone, so what I can say is that, in fact, the iris scan demand

moved down. Iris scan itself is only 1 percent of our turnover worldwide, so, it's not the

biggest turnover in part. But nevertheless, it is clear today we have over eight parts in

a mobile phone. Iris scan is one of them. It looks like, and you know what the reason

is, that we bought Vixar, that the face recognition will be more attractive for the mobile

companies and mobiles, so, in this case, it seems to be that from the technology point

of view, the iris scan is the most modern one, but from using apps, face recognition is

more convenient and for this reason it seems to be that maybe one of our clients mov-

ing from one product to another. I hope it helps you a little bit.

Sven Weier (UBS): That's 1 percent of Opto or 1 percent of your total revenue?


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Ingo Bank: Total.

Dr. Olaf Berlien: Of total.

Sven Weier (UBS): Okay.

Ingo Bank: And then maybe on pricing, Sven, so I guess you mean pricing in Auto-

motive, if you remember during the Q2 call, we said that there were some attempts to

get into some of the automotive customers with some price proposals from our existing

and well-known competitors here and there. I think that's not a broad-based assault or

something, that's something that we continue to see also in Q3 on the LED side but

also on the traditional side, but that's not so material, and that didn't drive the revision

of our guidance.

Sven Weier (UBS): So, the pricing pressure is still running at, I think, the high single-

digits that you always had?

Ingo Bank: That's correct.

Sven Weier (UBS): Okay, thank you, Olaf and Ingo.

Dr. Olaf Berlien: Thank you, Sven.

Operator: The next question comes from the line of James Moore of Redburn. Please

go ahead.

James Moore (Redburn): Yes, good afternoon, everyone. Thanks for the comments

on the trading environment of flat, organic or just slightly negative and the 12 percent

adjusted EBITDA margin in the third quarter. I wonder if you could help us a little by

expanding on both of those as to how the three businesses are moving, and where the


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biggest degree of negative surprise has come. It looks like there's more margin pres-

sure than top line pressure, and I wonder how that - well, let's come back to the issues

in Automotive. I wonder if you could first talk about the growth in margin trends in the

three businesses a bit, please?

Dr. Olaf Berlien: Hi, James.

James Moore (Redburn): Hi.

Ingo Bank: Hi. Again, the third quarter isn't finished yet, so, I don't really want to go

into the details, so, let me maybe try this: So, when we answered the second half, we

mentioned, for instance, also that the general lighting market was not doing that well.

That continued as well. It didn't get better, it actually got a little bit worse in terms of if

you look at also our earlier intake for general lighting. That reduced further in the run-

up of the third quarter.

I think Olaf spoke about postponements, shifts on the mobile device area, for instance.

Also, I think that we didn't expect when we entered the second half around the last call.

The only thing maybe on Opto: I think the growth for Opto will be possibly, or is ex-

pected to be, somewhere below 5 percent in the third quarter. We still have to see how

that further develops but let me leave it by that.

James Moore (Redburn): And in terms of the Opto profitability, is that similarly worse

than the trends in the first quarter, the sort of 24, 25 percent? Is that the bigger area of

margin decline? Are we also seeing LSS or specialty lighting see comparable deterio-

ration in profitability?

Dr. Olaf Berlien: Well, basically if you look at it, obviously, Opto is a business with a

fairly high fixed-cost structure, so obviously, if you have a lower revenue base that will

impact your margins. For our traditional auto business of course, if you have somewhat

lower demand then your factories will not produce at full steam and hence you have

some lower digression benefits that you might have in a situation where you produce

more, and that of course puts some pressure on those margins. Again, that's - but then

that's in line then with how the top line is expected to develop.


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James Moore (Redburn): Thank you for that. That's very helpful, but if Opto is say 5,

mid-single, and you are talking about half of the business growing double-digits, Auto-

motive, I guess that means mathematically we are flat to down in the rest. Is it that

there's a particular deterioration - because I thought mobile was already quite tough,

given the iris comp last quarter in the industrial and General Lighting parts, or is it more

a Mobile issue?

Ingo Bank: So, I think the comps with iris are also in Q3 is also tough, and again in

any of the Opto businesses that we have, when we enter a quarter, or a second half,

we never have a full coverage on an order book. So, there's always a balance that has

to come in through orders in the quarter. That is true for Auto, that is true for the Mobile

and consumer device area, and that is certainly true for General Lighting because

General Lighting, in general, is the one that has the fastest turn around type of business

within a quarter. Therefore, what we also saw, what we are seeing right now is that

from a mobile device business, etc., the orders didn't come in as Olaf said and that

then, of course, also means that some of the margin pressure will be there because

the costs are there to produce the product, and we expected them, and they didn't take

the order or didn't deliver the order in that quarter.

So, that means Opto's margins will be a bit under pressure - because we continued

also to build out also our facility, we didn't stop because longer term we still believe in

the trends and everything. We took some measures of course on the cost, but we didn't

change the strategy in the short term for Opto because we strongly believe that it's a

valid and the right strategy. So hence, there's some costs that will not be covered by

revenue in the quarter including some ramp-up costs with Opto. You will see that in

the numbers.

James Moore (Redburn): Lastly, when you say you still believe in the strategy, I'm

just trying to think ahead to 1st August and the medium-term drivers. You talked about

double-digit growth next year in Opto. I know it's early, but do you think that that is now

not possible because of some of the things you know, or actually, is it even more in the

back because of the things that are delayed from 2018, or is it difficult to say?

Dr. Olaf Berlien: Let me say, if you take a trend from Opto in the last ten years, we

always had an average double-digit growth up to 10 percent. So, I'm still optimistic that


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this trend will happen with new applications coming up. So, on one hand we have the

penetration, moving from halogen to LED, front lighting and rear lighting, this will hap-

pen again in all the markets, in US, in Europe and in Asia. So, you have this growth

part, and of course, as I said, new applications are coming up as well. But as you said,

we were so - I think everybody is surprised about what is happening in the automotive

industry, starting last Thursday with one OEM with the profit warning, so, it is not really

easy to take a clear view what will happen in 2019.

So, in this case it is too early really to say what will happen in ‘19. Let's see what will

happen in this quarter 4. From my point of view, this WLTP is a temporary part for 90

days, and in this case it's not a structural issue, it's a timing issue, and for this reason

I'm optimistic, that the normal growth is coming back.

James Moore (Redburn): Thanks, and lastly, if I could, your capacity is constrained

in Regensburg this year, and you are at the start of Kulim. Has there been, do you

think, any impact on growth due to being capacity-constrained, or are the issues sep-

arate to that?

Dr. Olaf Berlien: So, to make it clear, Kulim is really not a problem. We are so happy

to have Kulim. Without the Kulim we couldn't make the growth for the next year as well,

so we need the capacity for Sapphire and for thin film, so, in this case we are putting

additional machines on Kulim, as well, to extend our capacity, so the Kulim part is great

to have, the same as with Regensburg. The demand for invisible chips is high and will

increase, as you know, and in Regensburg we will produce the red LEDs, and there is

a huge demand for all the invisible ones, the LiDAR, the lane protection, so, for all the

invisible lights you need these kind of chips, and again capacity is good to have and

happy to bring it online.

Ingo Bank: So, James, the idea behind Regensburg is absolutely valid still, and we

need to be careful that we don't read too much into one quarter because you are in a

project business, and sometimes projects come, sometimes they go, and as Olaf said

we are designing a number of projects, and we’ve always said that with infrared we

don't want to depend on just one customer in that space, we want to develop our cus-

tomer base, particularly, in China, and we have been successful with that, and there-

fore, we will need that capacity in Regensburg, and it’s going to be always driven by

the projects that we are in, how well the underlying phones will sell or not, but we have


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a good pipeline there, and I think there's no reason to doubt the capacity increasement

in Regensburg.

Dr. Olaf Berlien: To make it really clear, James, I think the long-term trends are abso-

lutely unchanged. The content per car and the content per smartphone is still increas-

ing, and there's no change in this trend that the content per car increase and the con-

tent per smartphone increase, and in this case the growth story is absolutely intact, as

Ingo said. I think it's a temporary thing this year in the quarter.

James Moore (Redburn): Thank you very much.

Operator: The next question comes from the line of Charlotte Friedrichs from Beren-

berg. Please go ahead.

Charlotte Friedrichs (Berenberg): Hello, thank you for taking my question. I was

wondering, as a first question, maybe you could help us understand a little bit more the

decomposition of your new guidance, so how much is due to projects in mobile devices

and horticulture being moved into next year, how much are due to your expectations

for a weaker automotive business, if we can do that one first, please.

Ingo Bank: Hi Charlotte. I don't think we want to go into too much detail because,

again, I haven't finished my third quarter even, so I want to be just conscientious of

that.

Charlotte Friedrichs (Berenberg): Round about, just sort of –

Ingo Bank: Yes, okay, I will try. So, I think what is clear, that on the revenue side, the

big part of the guidance revision was due to Opto, and again we have three things

happening to us right now. One is the Automotive uncertainty that we have. We have

still a weak General Lighting market, and we have the postponement of projects in

Mobile. Those are three, and if you accumulate those three it's very difficult to com-

pensate for all three at the same time. Obviously, with Opto and with also our SP divi-

sion which are both with Auto, you can imagine that a big part of what we had to guide


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down today is related to Automotive, and at the same time also not related - or let me

put it this way - not compensated by a pick-up in General Lighting demand in the sec-

ond half of the year. Olaf said that a big part of our earnings, so results, EBITDA if you

like, is related to Automotive, so you can imagine something similar is true on the

EBITDA side of the house.

And then maybe then on the EPS side, because we saw some other element in the

EPS that was not in our guidance in Q2, if you remember, we basically told you that

we started consultations with our labor unions and workers' councils on the future sit-

uation here in Germany on a number of performance programs. It is our expectation

that we will be able to finish those negotiations within the current fiscal year. In Q2, we

thought it might slip into the next fiscal year, still within the calendar year, but we are

able to accelerate the discussion, also the development of the markets around us who

are quite happy, so, that we can start possibly to execute some of the savings earlier

in the year.

Dr. Olaf Berlien: Yes.

Ingo Bank: And that in itself had an impact of around – so, if you look at special items

- of around 55 cents.

Charlotte Friedrichs (Berenberg): Fifty-five cents? Okay, and then in terms of special

items this year versus next year, so, the majority would be falling into - how much would

that be then in total, as a euro-million amount?

Ingo Bank: So, we in Q2, we guided for special items around 70 to 80 million for the

current fiscal year based on the inclusion now of what I just said around the perfor-

mance programs that we mentioned in Q2 but now have been able to move into the

fiscal year, we’re now looking at a total of 150 million special items for the year.

Charlotte Friedrichs (Berenberg): And next year: Do you have an outlook on that

one already or not?

Ingo Bank: No, I don't. No, I don't.


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Charlotte Friedrichs (Berenberg): Okay, then my next question would be around

your 2020 target, the 515. Is that one still valid, or given that this year is not so strong,

you will have a lot of uncertainty, do you still feel confident with that target?

Dr. Olaf Berlien: We remain committed to our long-term growth strategy, as I said with

the higher content per car and per smartphone base and especially on innovation. But

with the current situation in 2018 and the automotive market, we will review our mid-

term targets in line with an update of our strategy and the business set-up. This I will

present to the capital markets here in fall, in close combination of the date where it's

convenient for you. I know the October/November is usually busy for you, and we are

looking for the best possible date for you that you can participate, but from our point of

view we are ready to have a Capital Markets after the summertime, and in this case,

we will come up then with the new mid-term target and the new update on our strategy.

Charlotte Friedrichs (Berenberg): Okay, and then finally one question about Auto-

motive volumes. I know it's difficult for you to anticipate this given the current situation,

but what is sort of your base case assumption on - now that you've talked to your

customers, what would you be sort of expecting as a base case for this year and next

year, if you can say that already?

Dr. Olaf Berlien: I’m not sure. What you mean with base case. Do you mean turnover?

Ingo Bank: Let's not forget, what we see now is, simply, that some uncertainty has

been introduced into the market, and still people are trying to read between the lines,

and what we see in our business is simply, at this point in time, is that there's no can-

cellation of orders, and it's just that people are shifting out. The order intake is a bit

more uneven. It's a bit of an uneven trend, so, it's therefore not so easy to interpret

right now, and therefore, we have to see, and we will monitor this going forward. And

that's all we can say, but I think for me the most important thing is that we haven't seen

anybody cancel.

Dr. Olaf Berlien: No. Definitely.


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Ingo Bank: At all.

Dr. Olaf Berlien: But I think it's good to be looking carefully at what is happening in

the market day-by-day, and for this reason, we really decided to have an open com-

munication with our shareholders and the capital market. I think right now it's painful,

but I think it's better to have an open conversation about that.

Charlotte Friedrichs (Berenberg): Okay, and maybe one follow-up on the first ques-

tion, so, you cannot really give an idea of is, for instance, the delay of the mobile de-

vices and horticulture projects, is that, say, is that 10 million euro, is it 20, 50, etc.? Any

sort of idea of round about where we are here?

Ingo Bank: I don't want to comment on projects that we have with certain clients. I

guess you can imagine the fact that we are stating it means that it's not small, but I

would also not put too high of a number in there, so let me say it like this. I don't want

to give you a number.

Charlotte Friedrichs (Berenberg): Okay, good. Thank you very much.

Dr. Olaf Berlien: Thank you, Charlotte.

Operator: The next question comes from the line of Lucie Carrier with Morgan Stanley.

Please go ahead.

Lucie Carrier (Morgan Stanley): Hi, good afternoon, gentlemen. Just a couple of fol-

low-ups on my side. First, starting with your initiatives on the saving side, so, I under-

stand the P&L charge this year is 150 million. How much of that is going to be, you

know, taken in terms of cash cost already this year, or could it be postponed into next

year, and how much savings are you expecting from those initiatives and under which

timeframe?


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Ingo Bank: So, hi, Lucie, so again, when we guided for the year after Q2, we said that

special items would be 70 to 80 million, and now we have on top of that the execution

of the program that we also mentioned during that call, so, it's not 150 million for that

program; it's somewhere between 55 to 60 million for that program, and again, there's

an expectation that - excuse me - that we will finish the discussions in the course of

this current fiscal year. How much of that will also be cash cost this year, I can't really

tell you because I don't have all the outcomes yet, but I'm happy to update you possibly

with the Q3 numbers or in the course of Q4. But right now, I don't want to give you an

estimate, that would just be wrong.

Dr. Olaf Berlien: And Lucie. Hi, it's Olaf. I had a really intensive conversation with the

workers' council and the union to speed up - we run a lean headquarter project, we run

overhead projects over all the group, we streamline the blue-collar people in the Ger-

man factories. So, I think we will be much faster than we expected, but as Ingo said,

give us a little bit of time, but I am quite sure that we will come up soon with the results,

and then really the facts and the figures what you are asking for.

Lucie Carrier (Morgan Stanley): Thank you, guys. I understand, of course, the un-

certainty as it's all being negotiated, but when you have been drafting, I guess, this

cost-saving plan, and you have already a number for the cost that it will be for you,

how much savings have you expected to gain out of that. I'm guessing there's an as-

sumption here?

Ingo Bank: Oh sure, if you look back at our Q2 presentation, we indicated that we

would expect targeted cost savings of around 40 to 50 million. That hasn't changed.

Now, of course, the question was asked: When do you expect those? The answer still

is: depends on when we finish the negotiations. Because, obviously, I cannot execute

on that, but as soon as we have finalized the conversations, we will execute, and then

we do that of course with the right speed because here this is involving people with the

right respect of the individuals involved, and then we see how fast we can move. Again,

don't forget, this is all related to here in Germany, and in Germany, we want to make

sure that we are very respectful with our stakeholders.

Lucie Carrier (Morgan Stanley): Sure.


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Dr. Olaf Berlien: And on top of that, Lucie, we started additional measures like a pur-

chasing program, more effective, what kind of R&D, so we run really through all the

costs of the group to measure against the markets. We want to stay in a high-profitable

two digits, and that's what we are doing.

Lucie Carrier (Morgan Stanley): Okay, thank you. - The second question is around

Kulim and the capacity addition. First of all, you were mentioning, you know, that pos-

itively you seem to be adding capacity and to deliver double-digit growth next year in

OS hopefully. How is the certification of Kulim going for the automotive business? Be-

cause it seemed to me it was still ongoing. Then, I guess, to fill up Kulim's current

capacity you probably also need general lighting to be picking up quite strongly, and

that seems to have been quite slow. So, I'm just, you know - - I understand maybe on

the very long-term the capacity increase is needed, but on the short- to medium-term,

do you have sufficient basis both in terms of demand in automotive and in general

lighting to push that quickly for so much capacity increase?

Dr. Olaf Berlien: As I said, Kulim is absolutely on track in time, in quality, in productivity

and in budget. And as I said, that we will extend, you know, regarding all the questions

if Kulim 2 is coming. We will expand Kulim, we are in the process of this, so we need

this capacity. Second question is about automotive parts. As I explained in the past, to

deliver to the automotive industry, you need the certification. First of all, you have your

ramp-up, you produce, and then you get certification from every single OEM. So, we

are now in the process to get the first certification for the product. And then in this case,

I have no negative information about that. That means, this is absolutely on track, and

we will extend in Kulim additional capacity.

Ingo Bank: Maybe let me add some more comments on Kulim in that regard. We have

done automotive qualifications before in Penang and we do this with a group of cus-

tomers first that are faster in the qualification, then group B will come and group C will

come, and that's on track. So, we expect to ship first chips out of Kulim for automotive

products in the first quarter of the calendar year 2019. We said that all along. That

hasn't really changed.

I think that the second thing is, yes, you are right, general lighting is important for Kulim,

and right now from a market perspective that is obviously a bit more difficult, which we


| 16

already said in the Q2 call; so that hasn't changed. I think it's also important to see that

we are in the process of finalizing the release of a number of new chips also in the mid-

power space that we believe will also help us drive growth in certain markets that so

far we have not addressed. I think that's positive overall for Kulim, because we always

get questions, of course, on cash flow. I think we have some good news on that front.

We have been able to look with the team for quite a while whether we can increase the

machine density in the existing building, and the outcome of that analysis was positive,

which means that we are not going to build building 2, at least not over the foreseeable

future right now based on how we see things. We will have the ability to still move more

equipment in the existing building, and we can do that in line with how the markets

develop; I think that's good news.

It also means that I expect that our cash flow will look better next year. Don't forget, if

you look at our free cash flow right now, there are three significant infrastructure in-

vestments included in the free cash flow. One is the building in Kulim, the other one is

the second wing in Wuxi, which is also a building, and then Regensburg is also a build-

ing. So, our capex right now is not a normal capex in view of just responding to capacity

needs, it's also building infrastructure. We will have the infrastructure more or less

completed by the end of this calendar year, which means that next year my investment

levels for Opto will be much lower than this year. I think that will, of course, also posi-

tively contribute to a better cash flow than the one that we've now guided for.

Lucie Carrier (Morgan Stanley): Thank you. - Just on that, actually, quite a lot of

follow-up, please. First, I understand that the ramp-up of Kulim might be on track, but

my question was rather related to demand, because you don't seem sure about the

demand you are facing right now in both automotive and general lighting. So, my ques-

tion was: Why is there the need immediately to expand Kulim? That was number one.

Secondly, on the capex investment. I remember that at some point you were saying a

lot of the capex related to Kulim was related to the machine, because, I think, for the

land and so on there has been some sort of agreement with the Malaysian Govern-

ment. So, if you are still adding machines into Kulim, why doesn't that translate into

capex. And because you are saying the capex could be much lower, can you guide us,

actually, on the investments for Kulim that you are now planning? Because back in the

days it was 1 billion.


| 17

Ingo Bank: Yes, Lucie, a lot of questions. Thank you for that. - So, for Kulim this year,

the majority of what we are spending is the building, and that is completed. We said

earlier - - or the whole year we said that we would move somewhere between 4 to 5k

(inaudible) start into the facility, and that is still the plan. We are not there yet, and

that's what Olaf means with (inaudible) expanding capacity, so we are moving that in,

because we are now expanding not just the Sapphire capacity but we are able to also

improve or add thin-film, which is more for high-power products or for premium prod-

ucts. So, the focus right now is to improve the mix. If the general lighting demand is

still slow, so that we can deliver our premium portfolio out of Kulim as well, which, of

course, then helps the margin for Opto.

As far as '19 is concerned, for Kulim, please let us do our homework and the planning

and then assess the situation, and then according to our market and revenue assump-

tions, we will then decide how much capacity we will move in. We are fairly flexible in

that regard. As I said, we have a building, we don't need to construct a new building,

and that gives us quite some capacity. And we are planning to introduce a few new

products for general lighting that help us also to generate revenue in a region that we

haven't been so much present. Overall, you were referring to the 1 billion kind of capex.

I think we need to look at the total investments for Opto.

Dr. Olaf Berlien: This was for Kulim 1, 2 and 3.

Ingo Bank: Yes, so we are extending Kulim 1. I told you that we don't expect to build

Kulim 2 in the foreseeable future so that gives you some idea that the capex need for

general lighting will be less than originally assumed.

Ingo Bank: But, Lucie, to be clear: We said the 1 billion is for Kulim 1, 2 and 3. We

built Kulim 1 for 372 million, as we always said. The advantage that we have, as Ingo

said, is that with the better layout concept and the new machine concept, we have with

a small extension of Kulim 1 - we call it Kulim half-two, one and a half - the same

capacity as in our original plan for Kulim 1 and 2. And with the different mix we are able

now to invest less. That's what Ingo said. And we have the same capacity. That brings

us the advantage and the cash flow and then less investment.


| 18

Lucie Carrier (Morgan Stanley): I understand that, that's very key, guys. What I'm

just trying to understand is, considering you still, of course, add machines to have the

same capacity of Kulim 2 but without building the actual building: How much do all

those machines cost versus the 370? Pretty much? Are we going from 1 billion to which

number here?

Ingo Bank: Again, Lucie, let's not get ahead of ourselves. I think the indication is that

we will spend less than we originally assumed. I think, it's a better mix that we foresee

in Kulim; that's the good news for the overall investment case that we have now with

Kulim. The ability to move more into an existing building gives us more flexibility as to

how fast we will move additional capacity. So, I think, overall, it's very good news for

everybody, on the cash flow front and also on the margin front. But let me do the home-

work for '19, and then we will tell you what the capex need will be.

Lucie Carrier (Morgan Stanley): Okay. My last question was around the dynamic in

automotive. I understand the uncertainty in the industry, some of the new emission

regulation, but it seems that the impact you are highlighting for yourself is quite much

more significant than what we are hearing actually from the auto OEMs or some of the

OEM suppliers. I'm just trying to understand, I remember you mentioned some market

share loss in the second quarter. Does that also come into play now? All your custom-

ers, are they under more pressure, trying to diversify more their supplier base? Could

that mean that the pricing trend could be as well impacted, as they are facing all of

those challenges?

Dr. Olaf Berlien: No, that's not the point. As I already explained - and I do it again -,

we have one OEM. He reduced 20 percent capacity between June and September.

That's my fourth quarter, so my growth, and that's my major customer, that's a big

customer. So, that means, if he reduced 20 percent, if this is 20 percent of the capacity,

I have a slowdown for my LED lighting as well. So, that's the reason. As I said, that's

the uncertainty in the fourth quarter. I think it's a delay. As the customer said, you are

right, I expect the same, it's only a delay in time, but it's a delay exact in my fourth

quarter. That means, as you know, it's June, July and September. And that's what the

customer said, till end of September, there is the four days of working.


| 19

Operator: In the interests of time we will move onto the next question which is from

William Mackie from Kepler Cheuvreux. Please, go ahead.

William Mackie (Kepler Cheuvreux): Thank you very much for taking the question.

Just to come back to the beginning of your change in guidance, if I could. Can you

perhaps for clarity break down the change that you've given in terms of the growth,

which is approximately 2 percentage points at the mid-level, 80 million? Is that all to

be laid into the fourth quarter or was there a miss against your expectations when you

communicated the Q2, about a miss in your expectations versus the Q3 numbers?

Because at the Q2 you were talking about better order books and some visibility. So,

it seems the 80 million loss of revenue is all loaded into Q4 and perhaps - - I will try

again: Is it all to be loaded into OS or is some of that in SP? Then, specifically, again

coming back to the delta - it was originally 700 million at the beginning of the year -

from 640 to your 570. For the benefit of all of us, and for clarity, can you just again try

and break down where that 70 million splits? I mean, it's a massive loss of contribution

margin if we are just talking about the loss of revenue of 80 million or so. So how do

those 70 million split between perhaps SP and OS? Is it perhaps again all OS?

Ingo Bank: Hi! I think, when Sven asked the question about Q3, I tried to be forthcom-

ing and said: Look, the books aren't closed yet and that is my expectation. I cannot

and I don't want to now give a split between Q3 and Q4, because I don't want to start

to give quarterly guidance, and, therefore, I think it's important to understand that we

have a softness in the general lighting market that we knew about when we went into

the second half. That hasn't recovered and we expect it also not to recover.

We have seen recently quite some uncertainty being introduced in the automotive sec-

tor. And the automotive sector is well represented both in our Opto and in our SP busi-

ness. Then we've also seen the mobile device space being affected by postponements

of certain projects. And that is in Opto. From that type of comment, I think, you could

understand roughly where things are.

William Mackie (Kepler Cheuvreux): Okay. - Then a follow-up on Kulim because

when I look at the consensus expectations there's still a 15 percent growth in revenue

forecast '19 on '18 for OS and a lot of that is contingent on your Wuxi, Regensburg and

Kulim investments. But just with regard to Kulim, when you think about the competitive


| 20

situation and the ability to fill that facility, as you stand today, what are your assump-

tions today in terms of the type of loading on the machines? Will it mainly be around

general lighting loading, as I think you've intimated in the past that was the initial intent,

or are we still seeing a big shift towards the higher value chips, the thin-film and some

of the red-light chips, which obviously come with better margin and perhaps less com-

petition?

Dr. Olaf Berlien: The second recommendation, which you said, will happen. That

means, as I always said, we had and we have no interest to be in the general lighting

part with, as I call it, the Christmas tree lighting, so we are always looking for the pro-

fessional consumer in the general lighting market, and the professional consumers,

they are looking for mid-power Sapphire chips or they are using thin-film, we call it

UX:3-chips, high power. So, we will concentrate in Kulim on these two of product lines,

thin-film, UX:3 and mid-power high-end consumer chips. And in this case, Kulim will

have a better mixture as we expected and said before. That's the strategy part for '19.

Ingo Bank: And, please, I understand why you ask for '19, but let us finish '18. Let us

get through the quarters, and then we will tell you what we expect for '19 as well. As

Olaf said, the plans we had for the year are going to be delivered on Kulim as far as

the capacity ramp is concerned. The mix is the same that we guided before, which is

25 percent premium, and the remainder being general lighting. The plan is now to move

even more premium into Kulim over time. Again, we talked about that we started the

automotive qualification in Kulim, which is I think good news, and then let us see how

all of that develops. And then we will update you exactly how Kulim will evolve into next

year. Thank you for your understanding.

William Mackie (Kepler Cheuvreux): Thank you very much. - A very quick point of

follow-up for clarity for all of us. Opto auto related exposure which you flagged with

regard to changes in IHS forecasts, and a number of the big German OEMs talk about

lower production. Can you just remind us of the 50 to 55 percent of OS volume which

is auto-related, how that spreads geographically? Because if we look at global auto

production, it's pretty flat to up rather than changing significantly down. So, how should

we think about the exposure to Germany relative to perhaps China versus North Amer-

ica?


| 21

Dr. Olaf Berlien: It's a little bit too early to say. We have to analyze this, but if you take

a look to IHS, as you said, you see that they cut from 6 percent in May to 3 percent in

June; they halved it. But if you really think about what I think will happen in June, maybe

it is more; so, it's a little bit too early. Let's do it on our conference call in Q3. That

means again, we are still in the middle of the Q3 and not finished.

Operator: The next question comes from the line of Alok Katre of Société Générale.

Please, go ahead.

Alok Katre (Société Générale): Hi, thanks for taking my questions. Actually, I have a

couple. One was that you talked about some push-out of smartphone and horticulture

projects into FY19. What confidence do you have that those projects will actually come

through, given how far out they have been pushed already, six months or thereabouts?

Then, is there any implication for capitalized R&D or technology on that side? That was

my first.

Dr. Olaf Berlien: Hi Alok! I asked the same question to our management team and

sales force, how confident they are, and they gave me the following answer: Look,

Olaf, we had 19 design-ins for smartphones, so it's not a project, it's already a design-

ing. Of course, the order is coming later. So, they are very confident that they will move

from the design-ins to the order, and in this case I'm quite optimistic in that. Of course,

the order is the order. That's not a 100 percent guarantee but, usually, as you know,

before you get the order you need design-ins, you are qualified as a supplier. And in

this case, I am very optimistic. The smartphones business is running and will expand.

And as I said, there's an additional demand on that.

The same as with horticulture. That's a mega trend that's coming up. I am quite sure

that you will see that more horticulture and professional farming will come, so the meg-

atrend professional farming will come definitely, and in this case, I'm very optimistic

that horticulture will have a very important part in the years to come.

Ingo Bank: On the capitalization part, Alok, we hardly capitalize, so from that perspec-

tive I don't see a risk.


| 22

Alok Katre (Société Générale): Okay, (inaudible) that you had on your red-light chips

both for the smartphone or the horticulture side, you haven't, let's say, capitalized any

development costs related to - -

Ingo Bank: We have a very conservative accounting policy so far as that's concerned.

Operator: The next question comes from the line of Alexander Virgo with Bank of

America. Please, go ahead.

Alexander Virgo (Bank of America Merrill Lynch): Hi there, thanks. I guess just one

to follow up on the auto commentary. Given that WLTP has been something that has

been on the horizon for a while, I'm just wondering how much of calendar Q2 would

have been inflated by a pull forwards in production ahead of that, and whether or not -

- Obviously, you talked about or referenced a 20 percent reduction in one customer

already. I'm just wondering how that timing and phasing plays through because it feels

to me like Q2 probably inflated. Even though you've referenced the 5 percent in auto

that you talked about earlier on, I'm wondering how much of that has been artificially

inflated even then and how that plays forward into Q4 and, I guess, calendar Q4 as

well. Thank you.

Ingo Bank: Yes, well, if you remember, our second quarter was disappointing for au-

tomotive, so we didn't see any pull-ins of orders at all, so I would therefore say that

that was not a factor in the second quarter.

Alexander Virgo (Bank of America Merrill Lynch): I meant, sorry, calendar Q2.

Sorry. This quarter's just happening.

Ingo Bank: Oh, this quarter?

Alexander Virgo (Bank of America Merrill Lynch): Mmm.


| 23

Ingo Bank: Again, as I said, we have seen orders are coming in in a fairly uneven way,

some being pushed out. I've not seen many being pulled in, honestly, so from that

perspective what we see developing in our business right now is, as we speak, the

phenomenon that you might allude to. I can't see it in our stats.

Alexander Virgo (Bank of America Merrill Lynch): Okay, thank you.

Operator: Next question comes from the line of Sebastian Growe, Commerzbank.

Sebastian Growe (Commerzbank): Good afternoon, gentlemen, thanks for taking my

questions. One on the auto business, one on Opto, the impact that you experience in

the second quarter, calendar quarter. How much is volume and how much is price?

And can you also eventually comment at least on the direction that you have seen in

the Opto business as well as with the SP business? Is there anything striking to men-

tion between the LED versus (inaudible) parts or is there any subcategory which is

sending any alarm signs? And what do you eventually see structurally from here? And

is there anything also when we talk about SP in particular to mention in respect to the

after-market, this new sales mix, eventually, is there anything that would explain the

shortfall in expectations?

Then on Opto. You commented that the sequentially lower margin in quarter 3 was

mostly a function of uncovered costs. Is there anything else to mention in terms of the

mix and pricing effects, eventually something to mention here on increased competi-

tion? I do remember very well that with the quarter 2 warning you were alluding to the

fact you are definitely not competing on price but rather on specs and that you had

several new products in the pipeline. So, any update on that one would be very, very

helpful. Thank you.

Dr. Olaf Berlien: Hi, Sebastian! So, coming to SP, the after-market business is very

stable. As you know, we still have 1.3 billion cars on the road with halogen, so they

need from time to time replacement. So, there is no signal or alarm signal as you said.

It's a stable, continuous after-market business all over the globe, that means in Amer-

ica, in Europe, in Asia. What we have in SP is, of course, the slowdown in LED modules

for the OEM. That's what we see and what we have been talking about during the last


| 24

hour. And from this case, again, SP is very stable in their progress for Q3, and we

expect that for Q4 as well. So, maybe, Ingo, you talk about - -

Ingo Bank: Yes, what Olaf said is true. (inaudible) we said in the second quarter call

that we saw a decline in halogen and LED and that continues, that's still the case, so

it hasn't accelerated or anything, but it's still in decline, which is what was to be ex-

pected if you look at penetration of LED. On the one hand, obviously, one other has to

give, and that's still ongoing, that's a trend we've seen for many years and that's not

changed. On the pricing, again we said in the second quarter call that pricing came in

as a factor here and there from the well-known competitors that we have. It was not

broad-based here and there. There was (inaudible) also in traditional, but that hasn't

caused any concerns with us in terms of that there would not start a broad-based pric-

ing competition, and that was also the reason for the revision of our guidance.

Sebastian Growe (Commerzbank): And in terms of the Opto business and what you

can see in the LED components business, is there anything to mention in terms of

really short-term design-ins and then also eventually the question that I asked before

on price points particular to that product category?

Dr. Olaf Berlien: Nothing on the horizon. From my point of view, there is nothing, any

alarm signal in that. As I said, the alarm signal comes only from the demand of what

we are talking about in the automotive industry but not from price.

Sebastian Growe (Commerzbank): All right, and the last question. If I may quickly

ask on the design-ins that you alluded to before, Olaf, with regard to the mobile device

business: Is there anything to mention regarding that new series that is to be launched

from that particular customer that has decided to not continue with the iris scan?

Dr. Olaf Berlien: I cannot talk about that. At the end of the day it's the decision of the

specific client, what they decided to put in, and in this case I have not the order, so I

don't know if he is putting a fingerprint, an iris scan or face recognition in. So, let's see.

Sebastian Growe (Commerzbank): Okay, thank you.


| 25

Andreas Spitzauer: Okay, thank you very much for your participation. Any further

calls, we're happy to receive your calls. Have a nice afternoon!

Dr. Olaf Berlien: Yes, thank you for the time. I hope it was this time better that we

immediately tried to give you feedback on our ad hoc and that you have a chance to

ask questions as in the past as well. We are really still able to answer questions, be on

the phone if you have additional questions, so thank you very much for your time.

Operator: Ladies and gentlemen, the conference is now concluded and you may dis-

connect your telephones. Thank you for joining and have a pleasant day. Goodbye.

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