OSRAM Licht AG

Analyst Call on the Earnings Release for the 2nd quarter 2018

May 3, 2018 | 14:00 CEST

Speakers:

Andreas Spitzauer

Olaf Berlien

Ingo Bank

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

ladies and gentlemen. My name is Andreas Spitzauer, head of

investor relations of Osram and I want to welcome you to

Osram's conference call for our Q2 2018 results. As a reminder,

the conference call will be recorded and is available on our home

page, www.osram-group/investorrelations.com. You can find

today's presentation there as well. It is now my pleasure to turn

over the call to Dr Olaf Berlien, the CEO, Ingo Bank, the CFO

and Dr Stefan Kampmann, the CTO of Osram. Please go ahead,

Olaf.

Olaf Berlien Yes, thank you, Andreas. Ladies and gentlemen, welcome to our

conference call. As usual I would like to start by giving you a brief

overview. A look at the first half of our fiscal year shows that we

faced tougher markets and a more challenging environment. In

addition the foreign exchange development was not in our

favour. Nevertheless we are pushing ahead with our growth

strategy and continue to strengthen our market position as a

high-tech company.

I think we need to take into consideration that the technological

shift in our industry and in our company is an ongoing

transformation. The switch from traditional lighting to LED and

now to the digital technologies has some way to go.

In this context we have made an important strategic decision

with regard to the LSS segment. We have initiated the

divestment process of our service business in the United States.

This represents roughly 10% of the LSS sales but it was the

biggest loss-maker last year.

In Europe we are reducing complexity in production and logistic

networks within LS. By summer 2018 we are aiming for a

simplified structure. That means one plant, one warehouse, one

IT platform and one headquarter. However the strategic review

of the remaining part of LS is ongoing and, as I said in November,

is expected to be finalised in fall.

Ladies and gentlemen, let me now start with a look at the quarter

just ended on slide number four. In the period January to March

we generated a modest increase in revenue on a comparable

basis of almost 2%. Earnings from currency effects increased

since Q1. On an absolute basis foreign exchange lowered sales

by nearly 90 million. In the first half year currency headwinds

amounted to roughly 150 million with an EBITDA margin of over

15%. Our profitability stayed at a high level in Q2. Currency

effects of about 30 million were the main reason for the decrease

year over year; also ramp-up cost and higher research and

development impacted our profitability.

Capex and free cashflow developed as expected. Last week we

adjusted our guidance for the current fiscal year as a result of

weaker markets and currency burdens and that brings me to

slide number five.

With regard to global automotive production we are anticipating

an improvement in the second half of the year. Based on IHS

prediction this expectation should support our ambition of a

higher growth in the second half of 2018, especially as LED

penetration continues to grow. At the same time, you maybe

remember that the fiscal year 2017 we had to allocate production

output to our automotive customer base. This was due to the

extremely strong demand.

In some cases customers therefore had to qualify competitors

as additional sources. As a result some have now increased their

share of wallet with customers but let me stress however that we

did not lose customers. I am very confident that we are well-

positioned to fight back with innovative products and new

technologies.

In contrast, the construction industry in North America remains

challenging. Our customer has been suffering from these effects

for several quarters now. We do not expect that this situation will

improve and therefore do not anticipate much change in the

second half of the year. Additionally we experienced a disruption

in the utility support system of our plant for electronic ballast in

Bulgaria. Production had to be stopped for several days in

February. This negatively impacted our deliveries and reduced

revenue was close to €10 million. Thankfully we are now back

on track.

This takes me now to our OS business and to slide number six.

OS should move into a more normalised market situation in the

second half of the year. Our delivery times and our customers'

inventories are back to normal levels in the automotive segment.

As a result our Opto business target's to return to a double-digit

revenue growth in the second half of the year.

Currently we are ramping up our LED capacities. We have

started to ship product from our new facility in Kulim. First

customers were for example Opple Lighting from China or US-

based Kenall and let me share another positive message with

you today.

To have continuity in OS we have decided that our CTO, Dr

Stefan Kampmann, will take the role as an acting CEO of OS.

Aldo Kamper will say until August and he will support Stefan in

the whole time. Meanwhile a succession plan is running.

As you can see on slide seven, we are also stepping up our

activities in growth markets where digitalisation is the main

driver. As a result of the Osram/Continental joint venture for

example we will be among those shaping the future of mobility

and cutting-edge lighting solutions.

In the horticulture sector, as I showed you on page number

seven, we are an established player already today and we aim

to expand our leadership position. Horticulture presents big

market opportunities, particularly in light of growing organisation

and the growing population and thanks to VCSEL technology we

are able to expand our product portfolio. In short we are

successfully executing our strategy of profitable growth based

upon... of our three-pillar strategy.

Let me start with SP on slide eight. We announced that we were

looking to tap into the opportunities being presented by the

growing integration of light, electronics and sensors in modern

vehicles. To that end, Osram will provide intelligent lighting

solutions in partnership with Continental. The agreement to

create Osram Continental GmbH was signed in late March. We

expect anti-trust approval in late summer.

On page number nine you see that the joint venture will play a

key role with speciality lighting towards innovation and growth.

We are confident that this partnership will result in a strong

position within a growing market. In the medium term we expect

revenue could reach a level of around €1 billion. The target range

for the adjusted EBITDA margin is between 12 and 14%.

Let me continue with speciality lighting on slide number ten.

Today we also announced that we will expand our existing

horticulture portfolio through the acquisition of US-based

Fluence. Fluence is one of the world's leading providers of smart

lighting for horticulture. This acquisition and our horticulture tech

portfolio could open the door to a potential big future market that

is expected to grow with more than 25% year over year.

Given our strong position in the horticulture market today - what

I'll show you on slide number 11 - we target a double Fluence

revenue over the coming years. Fluence's profound knowledge

of the market and the applications combined with our expertise

in lighting, sensors and connectivity could make us a leading

system provider.

Turning to slide number 12, you will see that we are also

delivering on our strategic direction in our OS unit. So by

acquiring Vixar - and I am now with page number 12 - a company

in Minnesota, we have added a promising new building-block to

our technology portfolio. With the Vixar technology we have

acquired a substantial amount of potential that could elevate our

Opto semiconductor business further.

Page 13 shows you that to date we are all well-positioned in two-

dimensional sensing. Our infra-red components are already

designed in smartphones or tablets. Other than a password, a

fingerprint or even an iris scan, facial recognition is another

convenient method for identification. 3D sensing will open up

new areas of application for us and for our customers and it will

pave the way for ultra-compact 3D facial recognitions. The way

in which Vixar technology captures 3D environmental data has

a broad set of applications. It includes augmented reality or lidar

and autonomous driving.

Already today Osram is a market and technology leader for laser

chips and lidar systems. On lidar we have now accumulated

more than 20 design-ins and wins. We're clearly the market

leader in the segment. We believe it's entirely possible that

revenue in this business could rise to between two and €300

million in the coming years.

So let's move to page number 15. On slide 15 I would like to take

a look at our third pillar, the business with lighting solutions and

systems. As I mentioned in my opening, Osram has repeatedly

indicated that we're working on improving the performance of our

Illuminate business. It is important to distinguish three business

segments within our LS business.

In Asia, particularly in China, trends such as city beautification

provide us with good growth opportunities going forward. Just

this week we won a city beautification project with dynamic

lighting at a value of over seven million in China.

In Europe, especially in the German-speaking countries, we

have initiated structural measures. I have mentioned them in the

beginning. And then the third segment, the service business in

the United States; we are now looking for a buyer for this

business. We are currently in the initial phase of exploring

interest in the market. As said, this is just a first step.

At the same time we believe that the second part of our reporting

segment, LSS, the business focused on smart components for

lighting controls, has the potential to benefit from the trend of

smart buildings, which is why we strengthened our business with

the acquisition of the Trilux subsidiary, BAG Electronics.

BAG specialise in electronic ballast and LED modules. Osram

Digital Systems won for example seven important awards.

Ladies and gentlemen, I move now to slide number six and as

you can see we are clearly shifting our focus to fast-growing,

high-tech markets. In parallel we still generate one-third of our

revenue with traditional products. Therefore we have to adjust

our cost base in line with the sales development in these

traditional product segments. For that reason we have initiated

several performance programmes in order to secure long-term

profitability so let me illustrate this with the two main measures.

Firstly on page number 16, as a result of a benchmark analysis

we run a Lean headquarter project to reduce our overhead costs

by 20%. Secondly, we will increase our manufacturing

productivity and it is the first step. Both measures should result

in gross savings up to 50 million per year.

So, ladies and gentleman, let me summarise and let me close

with a brief summary. Our strategy works and we will continue to

execute. That means we continue to strive towards technology

leadership and growth. Long-term global trends are working in

our favour, confirming that our strategy is the right one. As our

LED share grows rapidly we developed more and more into a

high-tech company. So far from my side, thanks for listening and

then I hand over to Ingo.

Ingo Bank Thank you, Olaf, and good afternoon. Thank you for joining us

today. Let me provide you with more details on the company's

financial results in the second quarter of fiscal year 2018 and I'm

moving to slide number 19 now.

In the second quarter of 18 substantial foreign exchange

headwinds and a less favourable market environment left their

imprints on the company's financials, both in terms of top and

bottom lines. Comparable growth came in at 1.8%. We saw good

growth in general lighting for Opto and the after-market business

in SP so destocking for auto LED components continued well

into the second quarter.

Unchanged from prior quarters, the market environment in the

US and in Europe did not improve. Adjusted EBITDA came in at

15.1%, negatively impacted by the strengthening euro,

accounting for 130 basis points' difference to prior year's quarter.

Higher R&D spend of around 130 basis points accounted for the

balance of the difference to fiscal year 2017.

Capex was €151 million in the quarter, reflecting the footprint-

related investments in Opto, not just for Kulim but also

Regensburg and Wuxi. As a result, free cashflow was negative

with €132 million, as expected. Reported EPS was at €0.46,

lower than prior year by €0.35. Approximately €0.19 of the

difference to Q2 fiscal year 17 are due to a stronger euro, €0.08

related to higher depreciation and €0.05 to special items.

Adjusted EPS was €0.63. Special items in the quarter amounted

to €19 million, in line with expectations.

Let's take a closer look at the revenue growth picture for the

second quarter of 18 on slide number 20. The weakening of the

US dollar against the euro continued to weigh heavily on our

nominal sales and nominal growth in the quarter of all of our

reporting segments, even more so than in our first quarter of the

current fiscal year. At group level the 15% year over year

appreciation of the euro versus the dollar had a substantial

negative impact of approximately €87 million, impacting normal

growth negatively with 830 basis points. The total benefits from

changes in our business portfolio contributed 280 basis points to

the year over year growth.

Looking at the geographies at the lower right of the chart we see

that EMEA growth turned negative in the second quarter. The

market environment for LSS continued to be very challenging,

particularly for our traditional ballast business. The decline in the

SP's OEM business for traditional light sources, especially

xenon, continued to be in the low double digits.

APAC growth was driven by Opto and LSS. In LSS we saw the

positive growth momentum in our dynamic lighting business

continue well into the second quarter. Opto's growth in APAC

was driven by general lighting, as well as industry and mobile

devices. Growth in the Americas was still positive but slowed

down compared to the first quarter of fiscal year 18. Growth was

good for our SP after-market business, in line with typical

seasonality. The overall OEM business for SB in the USA

declined, pointing still to a demanding overall auto market in that

region.

Moving on to profitability in Q2 on slide 21. At a margin of 15.1%

we delivered €153 million in absolute adjusted EBITDA. Osram

adjusted EBITDA margin for the quarter came in 230 basis points

lower compared to the same quarter a year ago. Foreign

exchange, higher R&D expense and ramp-up costs were the

main drivers for the difference to prior year's quarter.

As you can see in the bridge to the upper right of this slide,

foreign exchange had a substantial negative absolute impact of

€28 million net in the quarter, translating into a 130-basis-point

headwind in margin. R&D was higher with €13 million, driving

130 basis points of the year-on-year reduction in the adjusted

EBITDA margin. Ramp-up expenses continued to weigh on the

results of Opto and Osram.

Volume growth was able to offset only some of those headwinds.

Adjusted EBITDA in corporate items was negative with €17

million. Special items this quarter amounted to €19 million, in line

with expectations.

On slide number 22 you see summarised the performance for

our business units. Let me start with Opto. Opto's revenue

growth was driven by APAC and the Americas with a further

expansion of our general lighting business and good growth in

our industry and mobile devices business. Our overall Opto

business in EMEA did not grow in the second quarter when

compared to the same period a year ago as destocking for auto

LED components continued.

Opto's adjusted EBITDA profitability was impacted by the

stronger euro, increased R&D spend and higher ramp-up cost.

When adjusting for the impact of foreign exchange, Opto's

adjusted EBITDA margins would have been closer to 28%.

Opto expects an improvement of its automotive LED business in

the second half. Also based on the expectation, the growth rates

of global automotive production will become more favourable.

Olaf showed the latest IHS estimate in this regard earlier on slide

five.

SP; comparable growth turned slightly negative in the quarter.

Business in our OEM channel with traditional light sources,

particularly xenon, continued to decline at a low-double-digit clip.

Growth in LED components and modules was muted as

customers were still destocking. Therefore less components

have been sold between Opto and SD as well. The after-market

performance was strong and in line with seasonal expectations.

Profitability in SP was negatively impacted by foreign exchange,

driving 50% of the difference in adjusted EBITDA margin when

comparing to the same quarter a year ago.

Moving on to LSS, growth in LSS continued to be challenged by

a weak market in EMEA and an accelerated volume decline in

traditional ballasts, not just in Europe but also in the US. Our

service business continued to grow in the US as an improved

order book drove a good revenue growth in the quarter. In

addition - and as Olaf pointed out earlier - we encountered a

temporary shutdown in our Plovdiv facility in Bulgaria, leaving

sales short by almost €10 million. In the meantime production

performance has improved.

Underlying overall market exceptions in the US and in Europe

have not changed meaningfully. We do not expect a near-term

recovery, echoing also what customers and competitors have

stated publicly in the course of recent weeks. Overall lower

volumes and a stronger price competition, particularly for

traditional electronic ballasts, continued to put pressure on the

revenue and profitability of LSS. We recorded approximately €9

million special items for LSS in Q2 18, largely related to

restructuring and transformation charges to improve our cost

base.

Moving on to cashflow on slide 23, free cashflow in the quarter

came in as expected at a negative €132 million, largely driven

by our capital expenditure plans for Opto. Net working capital

increased due to higher inventory levels, which we expect to

come down to normalised levels in the course of the second half

of our fiscal year. Trade payables reduced in line with a lower

quarterly capex spending pattern.

Let me now turn to earnings per share and net liquidity on slide

24. Reported diluted EPS in Q2 18 was €0.46, down compared

to Q2 17, significantly impacted by foreign exchange, accounting

for approximately €0.19 of the difference. Adjusted EPS for the

quarter was €0.30 lower than in the same period of last year,

coming in at €0.63. Our corporate income tax rate was

unchanged at approximately 28%.

Our net liquidity reduced to €63 million at the end of the quarter

with the main drivers being our capex spend in the quarter and

the pay-out of our dividend for fiscal year 2017.

Let me now change perspective and look forward on slide 25. As

a result of ongoing headwinds from foreign exchange and a

rather muted sales performance in Q2 18 we adjusted our

outlook for fiscal year 2018 last week. We now expect to grow

between three and 5% for the year, reflecting an uneven market

situation on the one hand and the expectations of an improving

automotive business for LED components in the second half of

fiscal year 18 on the other hand. The three to 5% is on a

comparable basis.

Against this backdrop of a lower full fiscal year 2018, revenue

outlook and continued headwinds from foreign exchange, we

have adjusted our outlook for profitability accordingly last week.

We now expect adjusted EBITDA for fiscal year 18 to be at

around €640 million for the year. In line with this adjustment in

profitability and continued unfavourable foreign exchange we

now expect EPS to be between €1.90 and €2.10 for fiscal year

18.

Our original guidance for special items for fiscal year 18 was 70

to €80 million. It is unchanged and incorporated in the guidance.

Please note however that the communicated extraordinary

expense of between 60 to €70 million for performance

programmes is not yet reflected in the guidance, given the

related uncertainty around the duration of discussions between

the relevant stakeholders.

Thank you for your attention and Olaf and myself are now

looking forward to your questions.

Operator Ladies and gentlemen, at this time we will begin the question

and answer session. Anyone who wishes to ask a question may

press * followed by 1 on their touch-tone telephone. If you wish

to remove yourself from the question queue you may press *

followed by 2. If you are using speaker equipment today please

lift the handset before making your selection. Anyone who has a

question may press * followed by 1 at this time.

The first question is from the line of Sven Weier with UBS.

Please go ahead.

Sven Weier Yes, good afternoon, thanks for taking my questions. There

would be three. Maybe you can answer them one-by-one. The

first question is just on what you think in terms of your organic

growth rate for Opto beyond this year. I think you gave quite

some evidence for your expectation for the second half, to return

to double-digit and I know it's probably a bit early to talk next

year but what's your confidence in general in the Opto business

when we think a little bit further in terms of the achievable growth

rate that you see? That would be the first one. Thank you.

Olaf Berlien Okay, hi, Sven; here's Olaf. A valid question but, as you said, we

are still in the first phase of analysing 2019 but I still can confirm

that we expect a low double-digit growth rate.

Sven Weier Okay, thanks for that. The second question is on your acquisition

in the VCSEL space and I was just wondering; the company

you're buying there; are they focusing on a special segment of

the VCSEL market, focusing on consumer or any potential

specific strengths here and any design hints that they have

already?

Olaf Berlien I think that, as you know, the VCSEL technology, the face

recognition is mainly running in these days in mobile phones. It's

moving more and more to other consumer products like tablets

and PCs. I expect that the VCSEL technology will move as soon

as possible in more automotive applications so if you would take

a look on my chart on page - give me a second before I'm talking

- if you would take a look to page 30 you will see that we see that

the driver monitoring for autonomous driving, the lidar; we see

application and smart glasses.

So a lot of new applications will come up and Vixar; we are

working with Vixar a long time ago and together with Vixar we

are in design wins for new applications and of course Vixar

already had orders and design wins from customers in the

United States mainly. So I think it's a great market, I think it's a

booming market and overall I think Osram is now very well-

placed that we have 2D sensing, we have now 3D sensing, we

have the infrared, the iris scan, the fingerprint and now the facial

recognition.

Sven Weier And then in terms of - you know, this is obviously a fabulous

company at the moment. I mean, how quickly do you intend to

make these things internally then?

Olaf Berlien What do you mean with internally?

Sven Weier Because I think, you know, currently Vixar has outsourced the

production, yes, of the chips, right. It's a fabless company, I

guess. Would you also plan to make the VCSELs yourself then

at some point in the future?

Olaf Berlien I know that always my voice is recorded from my competition so

I'm carefully... what I'm saying. So Vixar today is producing in a

foundry so they are fabless. If we maybe would use the Vixar

chips in Kulim that could be possible.

Sven Weier Okay. And the other question I had; you were talking obviously

about, you know, the situation in Opto last year where you had

some potential share losses at you customers. I was wondering,

to what extent has this also been influenced by your decision on

the Conti JV; what feedback are you getting from your tier-one

customers; is that also leading to some losses or is it so far not

a big impact?

Olaf Berlien No, that's not a big impact. I think that what happened is really

what happened always if you have the situation that you cannot

deliver what your customer's asking for. So what you typically

do; you try to get second or third sources and that happened,

that we lost some share so we are talking really a small share

but that's openly - we lost some shares but as I said, we did not

lose one single customer and - but I'm quite confident that with

new products and new innovations I'm coming back to get the

old part of my share of wallet.

And to make it clear, I did not lose this share to any Chinese one.

Sven Weier And it's not that the Conti JV really has a negative side-effect on

[overtalking].

Olaf Berlien No. I can tell you really, I was - ten days ago I was in Japan and

I had very good discussions with our customer, Koito and

Stanley, and they're definitely not afraid because I'm not in their

garden. You know, it's a new way that now in the past you had

the set-maker with the set and you had the light source and now

the new trend is that you have electronics, software and

components in both companies like Osram, like Conti, like

Stanley, like Koito, like Hella are moving in this new field so you

can come from both sides; they are in my garden or I am in their

garden.

So they're customers, they are clients and I did not lose any

share to these major clients in the automotive set-maker

business.

Sven Weier So the reason for the somewhat lower organic growth in the full

year is basically because the underlying car production hasn't

expanded as much as you would have sought but not because

you're not gaining back the market share as quickly as you

sought.

Ingo Bank Hi, Sven, this is Ingo. Yes, I mean, as Olaf explained, we had

higher hopes for the second quarter as far as Opto is concerned;

that didn't happen for the reason he just outlined. We are more

positive about the second half of the year based on both order

intake that we've seen as well as the IHS production forecast so

that gives us a bit more confidence moving into the second half.

Sven Weier Okay. Thank you both.

Ingo Bank Thanks, Sven.

Operator And the next question is from the line of Uwe Schupp with

Deutsche Bank. Please go ahead.

Uwe Schupp Yes, good afternoon, gentlemen; two questions, please. Firstly

just following up on Sven's question, you mentioned on the press

call that you already had some discussions with also leading

smartphone makers regarding the Vixar side for 3D sensing.

Just to - clarification really - is that already potentially for

launches, for smartphone launches of your customers in 2019 or

is that a bit too early and do you rather see this 2019 or rather

beyond, ie, in 2020?

And then secondly it sounds like the Opto growth also had some

impact also on the ramp overall of Kulim and so assuming that

would be the case and assuming that the second phase of Kulim

is now maybe planned a bit later than originally, my question

would be, is there, you know, potential for or a plan for a potential

new share buyback programme given, you know, the lower

share price and the fact that you did buy shares in here on the

last buyback one-and-a-half years ago? Thank you.

Ingo Bank Okay. Coming to my first question, usually - I should move it to

Stefan; he's the new CEO of Opto. But what I can say - and I will

- both of us - we will not talk about a customer. So what I can say

is that we are quite confident that this will happen in 19 and the

years after 19 so what we are designing in is something for 19.

The second question is, was... I don't see really the relation

between a share buyback and the Kulim phase two. What I can

say is - and that we are much more productive in Kulim phase

one. That means that we have - that we will run a machine

concept in this phase that we are - we need less space and for

this reason it looks like that we have a much higher productivity

in phase one than we originally expected and for this reason we

can save additional space.

But this doesn't mean that we are running with the new share

buyback programme so as you see, I think we would like to

spend the money in growth and that was the reason we

announced this morning really the company Vixar and the really

important VCSEL technology and the other one, Fluence, in the

horticulture as well. So we are spending the money in growth.

Uwe Schupp Just to follow up on your - on my - on the first question if I may;

you indicated in your prepared remarks that Vixar already had

some customers or one customer in the US. Is that the same

customer that you're having discussions with regarding a

potential 2019 launch or would that be coming more from your

end rather than from Vixar?

Olaf Berlien Not bad; trying to [overtalking]...

Ingo Bank Good try, Uwe.

Olaf Berlien Good try, Uwe. They don't have only one customer; they have

more than one customer but I said they had mainly US customer

so they definitely have more than one and they have more than

ten so I think it's a quite good company, I think it's a great move

and as I said, we are working with a huge customer for a new

product and for this reason I said I expect sales between 200

and 300 million.

Uwe Schupp And you would be confident in being able to ramp 2019 launch

of a volume smartphone by one of the leading makers.

Olaf Berlien Yes. But, Stefan, that's your homeground.

Stefan Kampmann Yes, but you have now answered Uwe's question. Uwe, I only

can confirm for 2019, yes.

Uwe Schupp Very clear; thank you very much.

Operator Next question is from the line of Charlotte Friedrich with

Berenberg. Please go ahead.

Charlotte Friedrich Hello, thank you for taking my question. First question is, can

you maybe quantify the amount of wallet that you lost in the

automotive area and how much of that you will be able to recover

in the second half? Then maybe can you also comment maybe

on the order book for Opto this year and then maybe a few

comments on the general lighting market; what are the price and

volume dynamics here? Thank you.

Olaf Berlien I'll hand over to Ingo.

Ingo Bank Thank you, yes. Well, obviously we cannot completely disclose

how much share we lost. I think you should think about a low-

single-digit percentage number in that sense and again, I think

it's important to also understand that at any given moment, if you

look at our order books, particularly for automotive as well,

there's always some float within the quarter. You don't open a

quarter with a fully covered order book for that business and then

therefore, as Olaf said, we're quite confident that over time we

will be able to recover as we've gained market share also back

in the past from others as well so I don't think that's a longer-

term issue for us probably.

I can't tell you and I won't tell you what the exact order book is

and you can imagine then when we said that we are looking to

the second half in a more positive way, that is certainly based on

some of the order book developments we've seen in the recent

months.

Charlotte Friedrich Okay, thank you. And the general lighting market and maybe

also an update on when you expect to have more news on the

rest of LS so the Asian city beautification business and the

European luminaires.

Ingo Bank Let me comment on general lighting and then hand it over to Olaf

on LS. So general lighting was a good growth driver for us in the

second quarter for Opto. As you said, we are focusing mainly on,

let's say, the professional segment in the general lighting space

and, as Olaf pointed out in his prepared remarks, we've had the

first shipments in the second quarter so - and the ramp in Kulim

is on track.

As we pointed out earlier, if you look at the ramp in the second

half, a lot of that ramp will be to insource what we previously

outsourced with third parties. Therefore we will fill Kulim but it will

not always be visible in our external revenue for that reason.

Overall you have seen also some comments from other bigger

lighting players that especially on auto lighting and street lighting

in the United States and Europe there's somewhat of a lower

outlook in the second half than previously so therefore we will

also see that somewhat in how we will load the Kulim factory.

But I think we had a very good start and we're very much looking

forward to continue the ramp and also replace what we

previously outsourced.

Olaf Berlien Coming to your second question of the LS and the city

beautification, that is clearly a market in Asia, mainly in China so

I think we have a good standing, a good market share, we are

clearly a leader in this area and we had in the LS segment in

Asia really a double-digit growth in our last quarter and as I said,

we've won now another project over seven million some days

ago so that's in the third quarter so I'm very optimistic that we

will be very successful for this area in Asia.

City beautification in Europe is not the case so mainly the

business of LS in Europe is street lighting...

Charlotte Friedrich I mean, yes, that's what I meant, yes.

Olaf Berlien It's luminaires and professional so city beautification is nothing

for Europe mainly.

Charlotte Friedrich No, what I meant was when will you have an update on the

strategic evaluation of those two businesses so the Asian city

beautification and the European luminaires because you have

given us an update on the US services business.

Olaf Berlien I send absolutely what I said in my guidance and the - from

November 2017; I said we'll take our time and we will latest come

up with a final decision in fall 2018 so I think the first step is now

the service. That was the biggest pressure and I think it's good

that we start with the service business and with the luminaires

business we will make a final decision in fall.

Charlotte Friedrich Okay, perfect, thank you very much.

Operator Next question is from the line of Michael Hagmann with HSBC.

Please go ahead.

Michael Hagmann Thank you very much. Two questions if I may; one would be

about the pricing across Opto so I was wondering if you could -

maybe current pricing environment or the pricing trend or the

trajectory - put that into a historical context; are we seeing an

acceleration in the price decline across Opto? If you think it

makes more sense to look at price mix in that context I'd equally

be happy to take an answer on that one.

And then following on on the question about the remaining part

of LS or the remaining parts of LSS, if you could maybe outline

to us why you would want to keep those businesses, ie, what

would Osram as a group lose by not owning LSS in its entirety

or at least the LS part; thank you.

Olaf Berlien Okay, let me start with the first one, with LS and then Ingo will

talk about your question. So coming to LS, I think I clearly really

said since 2017 that we - 15 - that we have LS on our watchlist

and I think we - the best one from the shareholder point of view

is that we create value, that we make the restructuring on our

hand. If we would divert LS in the time when you have losses

you will have - there's nobody in a market who will buy it. I think

the best one is make your homework, bring it in the right direction

and then we can talk about...

And as I said, we reduced really the complexity, we put a lot of

workforce out of the Traunreut factory last year and this year. We

reduced complexity that we - instead of two factories we have

now one concentrated in Europe; we have now one warehouse

and we moved. In the past we had two headquarters, part of the

headquarter was in Munich and the other part was in Traunreut.

We will move the whole Munich one for LS to Traunreut so

reduce complexity, make it Leaner, work on your product

portfolio, bring it back to profitability and I think then that's the

best way to talk about it. Again if we would do it last year or this

year nobody will pay you really a high amount. And then

coming...

Michael Hagmann Excuse me, can I just interject here?

Olaf Berlien Yes.

Michael Hagmann I understand all of that. The question was really, what would you

lose, like what would Opto and SP lose by not being part of the

same group as LSS or LS.

Olaf Berlien Nothing. It wouldn't lose anything because they're really fully

independent. The luminaires business is a different business

than the semiconductor business or the automotive business so

it is a pillar in the group and for this reason we said, let's think

about a strategic option and I will come back in the next five to

four months - as I said, in fall we will have a final decision on

that.

Michael Hagmann Very clear, thank you.

Ingo Bank And then coming back to your position on pricing, we have not

really seen any significant changes in the pricing environment

for Opto. We've seen here and there some attempts to get into

some of the automotive customers with some price proposals

from some competitors but that's more here and there. That's not

a broad-based assault, if you like, from a pricing perspective so

there we don't see any major new dynamics that we haven't seen

before.

Michael Hagmann Thank you.

Operator And the next question is from the line of James Moore with

Redburn. Please go ahead.

James Moore Yes, hi, Olaf, Ingo; thanks for taking my questions. Maybe I'll go

one at a time as well. I wonder if we could talk about Vixar; why

Vixar and not another VCSEL player, what IP do they have that's

special and why do you think sales will double every year, is that

a faster growth rate than the market? That's the first question.

Olaf Berlien Okay. The answer is Vixar; as I said, we are working with Vixar

since a long time so Vixar is nothing new on our watchlist. We're

working together on a customer project and for this reason we

decided to put it in our portfolio so that was the reason. We are

partners since a long time and maybe, Stefan... I think they have

great IP rights, they have a great technology portfolio and I think

together we have good projects in the pipeline.

Stefan Kampmann I think, Olaf, as you said, we - due to this long-term co-operation

with Vixar we knew them very well. We know basically their

competencies, we know their technology portfolio, we know their

applications, we know their customers and future customers and

future projects and when the opportunity came up to basically

talk about an acquisition it was a perfect fit and the growth rate

which you mentioned; I think the positioning of that company with

the application Olaf mentioned before; it's a good foundation for

this growth which we are expecting and the numbers which Olaf

mentioned before are very rational.

Olaf Berlien And as the first question was from Sven, we have maybe the

capacity...

James Moore Thank you. And also on your savings programme I wondered if

you could help with the timing and the phasing of the savings

that you expect to get. I know there's some degree of uncertainty

on the charge but assuming you got the charge in at the end of

the year what sort of timetable are we talking about for the

savings?

Olaf Berlien That's good. Ingo will talk about... and I'm coming to the savings,

okay? Ingo?

Ingo Bank Yes, from a timing perspective, as we said, we didn't incorporate

into the guide because we don't have full certainty that the

discussions between stakeholders will finalise within the current

fiscal year.

I believe we're quite confident it will finish within the calendar

year and as we flagged the discussion... because we didn't want

to wait to have those discussions started. And obviously if you

look at savings - and Olaf'll tell you a little bit more about this -

the savings can only start when we've agreed and we've signed

an agreement with our colleagues from the employment front so

then once that is clear I think we will also communicate how the

savings will move in and they will definitely not just come in in a

single year and it will be different types of Osram so there will be

different plans for different locations over time. But I don't know

- it's a bit too early to now talk exactly about the phasing across

quarters, etc.

Olaf Berlien And so you know, what we try to do is, you know, that you have

lot of different ways to communicate it. You can do it with a big

bang and make a lot of noise. Our concept is working on this

concept, making not so much noise but being successful in the

implementation so we're working, as I said - and you see it on

the chart - on our worldwide footprint and the salesforce to make

it Leaner and more effective.

We reduce the headcount in our Lean headquarter and in our

headquarter. I think we benchmarked every single function and

I think we will come up with benchmark cost base. We worked

additionally - you see it in the third pillar; it's that we streamline

and make Leaner our business units and their overheads and

we worked on the transformation of our plants.

So a lot of different programmes, performance programmes and,

as Ingo said, really our culture is to talk first of all with the

workers' union, with the union and with the workforce and that's

what will happen now in the next 14 days.

James Moore Thanks, and the last question really revolves around the revenue

growth potential of the group over the next couple of years and

thank you for your earlier comment about low-double-digit in

Opto. But I wondered if we could circle back to your 2020 five on

five and can I ask where they now post a profit warning that

there's a redundant medium-term target and perhaps more

specifically you did put the green overlay of the pie chart - I don't

know - six months ago about the revenue potential for Kulim and

I understand the first year is in-sourcing the outsourced but could

you talk a little bit about what a rough picture for Kulim revenues

by the end of the decade looks like now?

Olaf Berlien Yes, I know and understand your question and of course it's valid

but I think we have a number of puts and takes and that's what

you said; changes in our portfolio, M&A announcement like

today, on the other hand, that we try to sell something; the joint

venture with Conti.

So our 2020 guidance is based on the positive long-term market

trends, our strong product portfolio and our strong market

position, all of which are still valid so in this case we stay to the

2020 targets with the whole team. I know it's more ambitious

than maybe in the past but, as I said, there are puts and takes

and that's the reason we think we will make it.

James Moore Thanks, and on the Kulim my sense was eight, 900 was a

number for the end of the decade when you discussed it last. Is

that broadly still the same picture?

Ingo Bank Well, I think we should first see how Kulim is ramping as we said

on a number of occasions that the ramp-up plan is completely in

line with what we said earlier. Olaf already also said that we're

looking at a plan right now; we can basically even better utilise

already our first building there to put more capacity in there

without the need to put in a second building and be more capex-

sales-effective, if you like, and also look at a more positive

cashflow picture over the next two years.

So those are the things that are ongoing right now and I think it's

premature now to call out a number or anything. The revenue

potential for Kulim is still valid, absolutely. I think the fact that

we've been able to sell products already in the second quarter

to clients that have not been our clients in the past is, I think,

very encouraging. I'm also looking forward to the second half so

from that perspective I don't think it makes a lot of sense now to

break it down in Kulim, etc, but overall the plans we have for

Kulim are still developing according to plan.

James Moore Thank you very much.

Operator Next question is from the line of Alok Katre with Societe

Generale. Please go ahead.

Alok Katre Hi. Thanks for taking my questions. I have three, if I may; one by

one. Firstly in terms of - you know, stepping back, in terms of

your overall sort of capacities, clearly you sort of struggled a little

bit with capacity in the later part of sort of last year and then we

had obviously your softer automotive sort of market, etc, and

then obviously smartphones; there're some question marks

around smartphone sales nowadays.

But I mean, if we look at all of your end market sort of demand

sort of environment, how confident are you about the capacity

expansion at Regensburg? And then also in that sort of same

breath, if you also talk a little bit about how we should think about

phase one ramp-up at Kulim and then phase two as well and so

what gives you the confidence behind some of these capacity

expansions; that was question one.

Olaf Berlien Yes. Hi, Katre. I think, to make really a quick answer, I'm very

confident about the Regensburg expansion. It is red so that

means red LEDs; they're moving. We have capacity issues; that

means we do not have enough capacity and I'm really looking

forward to get this capacity. And maybe to add on, if you would

think about this VCSEL technology, this is based on red so - and

this is not already in Regensburg. We do not want to produce it

in Regensburg but the red capacity is limited and I'm quite

confident.

Alok Katre Okay, fair enough. And on the auto side is - you know, are you

confident that you have enough design or platform wins that

would back up this capacity as well, potentially even at Kulim? I

think there's been obviously plans for auto LEDs.

Ingo Bank Hi. So I think we need to be careful that we don't mix up things

here. First of all the auto is right now in the process of

qualification in Kulim. That typically takes up to 12, 15 months;

you have to do it on a customer-by-customer base, for instance,

but we're very confident that we will be able to accomplish that

so the expectation is that starting with calendar year 19 we will

be able to probably start shipping automotive-related product out

of that facility in Kulim so that, I think, is the basis of - well, you

need to qualify first before you start production obviously.

As I said before, the order intake we saw in the second quarter

points to a betterment in the second half of this fiscal year. As

Olaf said, we visited a lot of customers in the recent couple of

weeks and we got still very, very positive feedback from our

automotive customers so from that perspective we are quite

confident that our automotive business will continue to grow well

in the future.

Alok Katre Okay. Fair enough. And then just in terms of the working capital

side of things, you know, you obviously - there's been an

inventory build-up and you're expecting, let's say, a roll-back of

that inventory build-up in the second half of the year as well. How

should we - I mean, just thinking in terms of... Obviously we -

you'd sort of probably seen customers destocking through the

quarter so how should we sort of then think in that background

of the inventory increase clearly in Opto in the second quarter?

Is it sort of, should we think about it as you're preparing for

second-half growth or, let's say, is it just to avoid any production

challenges in the future and what sort of working capital levels

should we be thinking about?

Ingo Bank So I think first of all the increase in inventory was partially Opto

but it was also in SP and in SP basically we have had two

reasons why we consciously increased inventory above what we

normally have. One was that, as you know, there are some

electronic simple components like transistors, capacitors, etc,

out there that are here and there in scarcity so we made sure

that we have enough in inventory so that we can ensure delivery

with our automotive customers. That was one reason.

The other reason was that we had quite a number of new product

introductions in the second half of the year planned, in alignment

with the product roadmaps of our customers and for that we also

needed to ramp a little bit ahead of shipments in the second half

so that was one reason.

And for Opto I think it is fair to say that because we saw

somewhat of a lower revenue base in the second quarter we

obviously continue to produce because you know that based on

the order intake we have we will believe in a better second half.

Having said that, we will still of course make sure that we

manage our cashflow for the year properly so I would expect that

Opto will come somewhat down to normalised inventory levels

by the end of our fiscal year.

Alok Katre Yes, I mean, so when you say normalised should we be thinking

more like closer to 2017, closer to 2016? You know, just to give

us a sense of what you would sort of think of normal working

capital and inventory levels.

Ingo Bank I don't think we've ever said anything or disclosed anything about

working capital specifically to a business unit. We also kept the

free cashflow guidance for the year intact, as you've seen,

despite somewhat of a lower revenue base so from that

perspective, you know, I expect what we were able to do in terms

of days outstanding overall - if you look at net working capital by

the end of last year, we will also closely be ending the year on

the same level for the company.

Alok Katre Yes, okay, great. And then my last bit was just on the, you know,

planned JV with Continental. If you could just... You know,

obviously the adjusted margin target is 12 to 14 for the whole JV

but could you just sort of give us a sense of what or where you

see the profits today especially for the, let's say, the Continental

part that you would expect to consolidate? And then should we

think about this JV as more just or restricted to high-end sort of

smart lighting like a Matrix beam or so on or do you see this, you

know, there's enough scope within the context of the JV to

extend the offering even to perhaps, you know, mid-range cars,

you know, with its C segment or so on?

Andreas Spitzauer Let me start off with the profit question. Then I'll hand it over to

Olaf and Stefan to talk about the market perspective for the joint

venture. So the business that we bring into both parties includes

also of course a revenue base and the JV is of course an

investment case for us initially because you need to integrate

two parts of a company; we need to integrate part of Conti, part

of Osram so that will mean that there are some initial expense

we expect for IT and other things that you typically would expect

for, let's say, a joint company.

Of course we want to make sure that the strong R&D backbone

that we marry with Conti side and our side will be able to develop

new products for our customer base and it also means we will

have to up the R&D investment of the combined entity above

what is already spent singularly by both shareholders so that will

be an initial investment we will take as well.

And then we expect over the mid term that we will achieve those

targeted EBITDA ranges that Olaf indicated earlier on but now

let me hand it maybe to Stefan or Olaf to talk about the potential

we see from a market perspective.

Stefan Kampmann I think it's clear that we have not only targeted the high-end

applications and, let's say, the premium cars. We want to be an

innovation player, that's clear, but we have also, from the set-up

of this joint venture, the clear target to enter the volume segment

and I think both companies have a heritage of being a volume

player and our people have also a clear understanding that you

need volumes and you need to have the volume segment to be

profitable and stable.

And in the premium segment you can launch innovations but

then you have to scale it up to be capable also from a cost basis,

to be attractive in your pricing of the volume segment and that's

a clear target and the clear setting of the R&D and also of the

roadmaps of the companies which we are forming.

Alok Katre Okay, great, thanks.

Olaf Berlien Thanks, Katre.

Operator Next question is from the line of Lucie Carrier with Morgan

Stanley. Please go ahead.

Lucie Carrier Hi. Thank you, gentlemen, for taking my question. I have three;

I will go one at a time. The first one; I wanted to go back please

on the guidance for this year to understand also a bit better how

you're assessing the year and the dynamics because if I kind of

back out your 640 with the 325 million adjusted EBITDA you've

done in the first half it means that you're assuming pretty much

the second half of the year adjusted EBITDA contribution to be

stable or maybe even slightly down.

And I had a bit of a hard time to understand that considering

you're signalling that you expect, you know, much stronger auto

business in the second half, which is typically very high-margin

for you, and also as the FX headwind - if we take spot-spot FX -

should be kind of easing actually for you also in the fourth

quarter. So can you maybe explain, you know, a bit the dynamics

here on the guidance?

Olaf Berlien Okay. Hi, Lucie; it's Olaf. Ingo will talk about that.

Ingo Bank Bonjour, hi, Lucie. Yes, so obviously, as you know, from a

profitability perspective our after-market business in SB is

extremely important and that typically has its biggest profit

contribution in the first two quarters of any fiscal year and

therefore that won't change in this year as well so the second

half; we will see a lower contribution from that business given

the summer season as well.

Of course that will somewhat be compensated by the expected

improvement in the auto business of, let's say, Opto but overall

on balance - and as we said, we still have some challenges in

some of the lighting markets, luminaires markets in Europe and

the US. We said that the 640 is probably a good number to look

at.

On the foreign exchange, when we updated the guidance last

week we were updating it on the basis of 122. If you look at our

hedging, obviously we are hedged now for a little bit so even if

the spot rate today is at 199 or 120 that doesn't mean that that

materially will change our outlook for the year.

Lucie Carrier Okay, but just to come back maybe on the point on the after-

market business, I mean, the seasonality has always been the

case but previously you were guiding for a stronger second half

versus the first half. I mean, you had said second half 18 would

be - or like 18 would be more back-end-loaded. So I'm just not

sure I understand why the seasonality in SP after-market, you

know, makes a difference here.

Ingo Bank Well, you were asking in terms of profitability and I tried to

explain...

Lucie Carrier Yes, absolutely.

Ingo Bank Yes, and I tried to explain that the profitability in our after-market

business is very strong and therefore if the after-market business

overall is not so strong as it is in the first half obviously that has

an impact on the overall profitability and as I said, on the

opposite, we expect therefore an improvement in our LED

components business for Opto and if that improves and you

count the gains for [?] the after-market business it could possibly

be awash.

Lucie Carrier So what you're saying is the improvement you're expecting in the

non-after-market part versus your previous expectation is

actually a bit lower than what you had expected earlier in the

year.

Ingo Bank No, I don't think that's what I'm saying. I'm saying that if you look

at the guidance that we gave on the EBITDA - and your question

was, why is the absolute EBITDA probably the same in the

second half as in the first - I was trying to explain those

dynamics. That's the only answer I gave.

Lucie Carrier Sorry. It's just - it's more - the reason maybe why I'm not

understanding well is when you had guided initially for 2018 you

had guided for a second half to be stronger than the first half of

the year so you had said 18 would be back-end-loaded. I'm

assuming it was already taking into account the after-market

traditional seasonality and so considering now that the second

half is not looking to be stronger than the first half I'm just trying

to understand what has moved here.

Ingo Bank Well, okay, let me try it again. So the second - so if you look at

Osram historically the full year is never two times the first half; I

mean, that would be - you'd probably not find a year where that

was the case and that - I don't expect that will be different this

year.

Secondly when we talked about an improvement, originally we

were, as you will recall, predominantly we were talking about the

impact that Kulim might make on the revenue base and we still

expect an impact from - positive impact from Kulim in the second

half but you can imagine that, given the ramps and also the start-

up of that business, that that business right now is not

contributing to the profitability of the company. We are ramping

up R&D, we're building up a salesforce so I don't have a profit

contribution from this business at this point and that hasn't

changed either.

So therefore what I said before and what I said initially when I

gave guidance for 18 is still valid.

Lucie Carrier Okay. I wanted to come back also to kind of follow up on James'

question on Vixar. I mean, there are already, you know, quite a

lot of players in the VCSEL kind of market, fairly large players so

maybe to go back to what James was asking, what is really

maybe the difference of Vixar technology versus those existing

players'?

And also from the KEGR you're kind of providing on your slide, I

mean, I think you're implying over 1,000% KEGR per year

between 18 and 2022. You know, maybe can you clarify within

that overall sales KEGR how much you're expecting for volume

and which assumption of price you are taking.

Olaf Berlien Okay, yes, thanks, Lucie. I think the difference is - maybe to other

VCSEL companies is the following; the VCSEL technology itself;

it's a long-time technology, it's nothing new so the first VCSEL

technology is based 20 years ago. Osram was already in this

technology. We stopped that because there were no

applications.

Now in the meantime the VCSEL chip technology - light can be

used for facial recognition. This is a new trend, a new application

and in this case the combination of the VCSEL technology and

these applications, especially in these days for mobile phones,

are very interesting.

So Vixar has good IPs and as I said, we have a long-term relation

to Vixar so it's nothing that we started last week and as you

maybe know, we have a long-term tradition to mobile phone

producers as well so Osram is since years supplier to mobile

phone companies so I think the combination is unique. We have

the go-to-market with the technology of Vixar and, as I said, we

are working together on concrete projects.

I think that's different to the other VCSEL companies in the world

so in this case there's a concrete discussion with them and

concrete order and that makes me - of course if you have the

order you have it; if you don't have it you don't have it but I expect

that we get the design in and design win and for this reason I

expect a turnover up to 300 million.

Stefan Kampmann And, Lucie, I think the second aspect which makes us unique is,

as Olaf mentioned before, we see also applications in the future

in the automotive sector and as you know, it's a big barrier to

newcomers to go into an automotive market, not due to the basic

technology but due to the requirements of the application in

regards of quality, in regards of robustness. And I think Osram

with the experience in the automotive sector can really leverage,

take the technologies of Vixar and bring it into the automotive

market as a recognised supplier and a supplier with a big

heritage in automotive components.

Lucie Carrier I see, thank you. And the last one was just a follow-up also on

the share of wallet you had with some of your auto suppliers. You

did say that, you know, that share of wallet didn't go to Chinese

competitors but is that share of wallet - has it gone to your

historical, I would say, two other competitors in the market - ie,

Nishia or Lumiled - or has it gone to new competitors, maybe

other Japanese or South Korean one?

Olaf Berlien Usually I do not talk about my competitors by name in a

conference call so as you said, it seems to be that it moved to

one of them that you mentioned but no Chinese one.

Lucie Carrier Okay, thank you.

Operator Next question is from the line of Peter Olafson with Keppler

Chevreaux. Please go ahead.

Peter Olafson Good afternoon, gentlemen. Three questions from my side. The

first one is a follow-up on what you said on Kulim, on the

efficiency there. Back in January 2016 at the analyst day in

Munich you talked about the cost leadership of OS. To what

extent do you need to realise Kulim phase two to receive full-

scale effects and to achieve the targeted cost leadership or does

Kulim phase one on a stand-alone basis also have this cost

leadership structure already? And then I have two follow-ups

please.

Olaf Berlien As I said, really, always my competitor and competition is on the

line. What we have in Kulim is that we have a much more

productive machine concept that we original planned. With this

new machine concept we need less space in phase two for the

same number of wafer starts per week. That means in the

opposite, I can put - well, I will... able to produce more wafer

starts per week in phase one and with a little bit extension,

capacity extension - and that's not Kulim two, it will be, let me

call it, Kulim 1.5 - I will be able with less capex to produce the

same number of wafer starts per week as we proposed in 2016

so we would come to the number of wafer starts per week; as

we exposed, there's no change in our concept. The concept

change is that we need less space and have a higher

productivity in the space.

Peter Olafson Okay, that's helpful.

Olaf Berlien It's helpful? Thanks, Peter.

Peter Olafson Yes. Then second question relates to the same presentation

from January 2016 where you showed a slide with data from IHS

which suggested that the global supply/demand in the LED

industry would tighten in the coming years. However it seems

that a more recent forecast from IHS indicates that there will be

actually a situation where the oversupply might increase,

especially in 2019. So do you share that, the latest views by IHS

and to what extent would that affect your decision-making

around further expanding Kulim?

Olaf Berlien I'm not sure if I understood it correctly, Spitzauer, but it means...

Would you?

Andreas Spitzauer Yes, no, I think I understood it. So are you asking whether we

believe in the IHS numbers or not? I think what we've seen is,

you know, in the last couple of months or so a number of

announcements of players, some as we expected; others were

a bit of an interesting one. A lot of the announcements were not

just based on our technology but also moving into silicon

facilities so I think it's not fully clear yet how that will pan out.

I think some of the Chinese suppliers, even a couple of weeks

ago, postponed some MOCBD orders because they didn't see

the market developing so we're currently going through that.

Obviously our focus is right now on how we develop the market.

As Olaf said, we've found a way to probably increase the space

output, if you like, for our existing facility in Kulim and move more

equipment in there.

Compared to 16 we've said a number of times that we believe

that we can not just produce on the basis of sapphire-based

technology out of Kulim but we will also produce based on UH3,

delivering also into more premium segments. All of that is still the

case so from that perspective we haven't changed really our

plans right now.

And I think IHS is trying to make a sort of - sifting through all

these announcements and it's trying to make some predictions.

Obviously that's part of our normal business planning process,

that we will also look into this and see where this is going.

Olaf Berlien And I think we can clearly say, yes, we believe in the numbers of

IHF. We are watching carefully what is proposed for the future

but - and for this reason we are... carefully what we are doing

with our investment and as we said at the beginning, we watched

the demand and we saw that there's a huge demand on red and

for this reason we invested in Regensburg so in 2016 we thought

that maybe a higher demand - not we; IHS - a higher demand

maybe for sapphire. We said, okay, huge demand and UH3 and

for this reason again we invested in Regensburg and we will

come up with our factory in November 2018.

So overall, to make it clear, we still believe and we know that the

strategy and the investment in Kulim is right. We see that we are

ramping up, we have high utilisation and we put the right product

and utilisation in this factory to be effective and, as I said, we are

working on our machine concept, space concept, bring more

UH3, make it automotive, certified and so on and so on. So in

this case I hope really in the end we do not get so much

questions about Kulim in the future because I think this factory

is now online, we have the customer and that's the case.

Peter Olafson Okay, thank you. And then my third question relates to speciality

lighting, where you mentioned the shift from conventional to

LED-based headlamps. I assume that LED headlamps sell at

higher price points than xenon, for instance, so is it correct that

in the comparable sales growth of -0.8% in Q2 that there was

actually a positive ASP or mix effect in there?

Ingo Bank Well, generally speaking, LED-based front light solutions carry a

somewhat higher ASP; that is correct. But the reason for the

decline in the growth or slight decline of the growth of ASP in the

second quarter was that we saw a low-double-digit decline in our

traditional business so that's xenon as well as halogen and we

didn't see much growth in our LED components business

because of destocking.

Typically, you know, these are two sides of the same coin

because obviously if production growth continues you do see a

replacement from traditional into new technology, LED. Because

of the special destocking situation with us traditional continued

to see decline, as it did in previous quarters, and was not fully

compensated for growth. But I don't think it's anything to do with

real ASP changes or mix in that regard.

Peter Olafson No, okay, but there is a clear price difference between the

different technologies.

Ingo Bank Yes, there is a value difference indeed.

Peter Olafson Okay, thank you for that, thanks.

Operator So next question is from the line of Guenther Hollfelder with

Bader Helvia. Please go ahead.

Guenther Hollfelder Yes, thank you. Some follow-up questions; first one on the

impact of Kulim in the next fiscal year, especially - I mean, I

understand that you're replacing third-party LED dials going

forward so overall will you have a positive margin tailwind going

into the next year from this strategy?

Olaf Berlien It's for Ingo.

Ingo Bank So as I said, I think, when Lucie asked me earlier around general

lighting, that I do not expect at the end of this fiscal year that we

see our general lighting business coming out of Kulim in positive

profit territory because simply it's a normal situation; we're

ramping up production, we're ramping up R&D and the

salesforce and the revenue base is not big enough yet to cover

that so from that perspective I don't think you can assume, as

you call it, a positive tailwind at the end of this fiscal year.

As far as the contribution for next year is concerned I think it's a

bit too early to already talk about 19 in particular detail. I think

the most important take-away probably is that again we are

ramping up according to plan. We've asked the team to see what

we can do to get even more output from the existing space that

we have there, which points to the fact that we want to continue

to invest into capacity also next year.

We're not yet fully at scale, to come back to an earlier question,

and that scale level will be reached by a certain capacity that we

expect to over next year. That should also contribute from a

revenue perspective to the overall sales level for Opto. That's all

I want to say at this point in time and we will certainly talk more

about this when we give initial guidance for 19 later in the year.

Guenther Hollfelder And compared with the prices you are currently paying for the

third-party dials is there any target what you plan to achieve in

terms of cost reduction based on in-house production compared

to these prices?

Ingo Bank Well, obviously we know what the prices are that we buy wafers

in for today so obviously [inaudible 01:24:46] what these cost

targets are. But as I said, if you don't have full scale you can't

expect to be fully at those prices at this point in time.

From a cash perspective obviously it's much more attractive still

for us to do it in-house rather than paying somebody else to do

something that we can also do internally but we have a very good

team at general lighting in Opto. They'll know exactly what

market prices are, they know exactly, of course, what customers

are asking for and therefore there's no mistake as to what we

need to accomplish there from a cost perspective but it will take

some time but again that's nothing new and that's always been

a consideration.

Guenther Hollfelder Yes. And one question on the VCSEL sales of up to 300 million

next year; so I understand this is mainly depending on one major

design. When, in a smartphone - so I was just wondering what's

the timing, when will there be a decision regarding this design

win?

Olaf Berlien To make it clear, I never said next year; that would be really

fantastic but that's not true, that it's next year because that would

be 19. I understand that you could like to find out who is it but I

will not and I cannot talk about that. We have current projects

and customer already in Vixar and we are working on a bigger

one and that's really all what I can and will say in this case.

Guenther Hollfelder Okay, fair enough. And a last question on the lidar you

mentioned; you mentioned, I think, 20 design wins, I assume

with lasers, conventional lasers used in lidar systems. Any

indication about the size of your lidar-related laser business, for

example next year, what we can expect?

Olaf Berlien That's really a detailed number I do not want to give you. Sorry

for that but I think in lidar we are clearly, absolutely clearly the

market and the technology leader because really we are nearly

in most of the lidar systems in the world.

So I think it's a growing market and we are really well-positioned

in that and with 20 design wins - and check how many design

wins and In [?] has maybe some other ones - you will find out

that we have ten times more than some others.

Guenther Hollfelder Okay, many thanks, thank you.

Olaf Berlien Thank you.

Operator In the interest of time we have to stop the Q&A session now and

I hand back to Andreas Spitzauer for closing comments.

Andreas Spitzauer Thank you very much for your participation and we're looking

forward to working together with you in the next couple of weeks

and months. Thank you, bye.