Osram Licht AG Analyst Call - OSRAM Group Website/media/Files/O/Osram/documents/2017-11-07... · As you can see,with revenue of 1.7billion Euros, OS sets the benchmark, especially

Osram Licht AG

Analyst Call

Fourth Quarter, Fiscal 2017, and Fiscal Year 2017

November 7th, 2017

(3:00 p.m.)

Operator: Ladies and gentlemen, thank you for standing by. I’m your conference call operator. Welcome and thank you for joining the Osram Licht AG conference call on the preliminary, unaudited figures for Q4 and the full year 2017. For today’s recorded presentation, all participants will be (inaudible). The presentation will be followed by a question and answer session. If you would to ask a question, please send them to [email protected]. Your question will be read to the audience in the conference. I would now like to turn the conference over to Andreas Spitzauer. Please, go ahead.

Andreas Spitzauer: Good afternoon as well as good morning, ladies and gentlemen! My name is Andreas Spitzauer, and I'm head of investor relations of Osram, and I want to welcome you to Osram conference call and meeting in Frankfurt for our fourth quar-ter preliminary unaudited financial results 2017.

As a reminder, the conference call will be recorded and is available on our home page www.osram-group.com/investors. You can find today's presentation there as well. There is also a link in the presentation to the video which will be shown during the presentation.

It is now my pleasure to turn over the call and meeting to Dr. Olaf Berlien, CEO of Osram, and Ingo Bank, CFO of Osram.

Dr. Olaf Berlien: Thank you, Andreas. Ladies and gentlemen, warm welcome, thank you for coming to Frankfurt. I would like to present together with Ingo our results for the fiscal year 2017 and our outlook for 2018, and I would like to give you an update on our 3 Pillar Strategy which is Opto Semiconductors, OS, Specialty Lighting, SP, and Lighting Solutions and Systems, LSS.

From a business perspective, the last fiscal year was successful and at a record level. Operating profit reached almost 700 million Euros. This is the highest figure in over

N o v e m b e r 7 t h , 2 0 1 7 – A C – O s r a m L i c h t A G - | 2

100 years of Osram. With a strong team we have been driving forward the transfor-mation of Osram into a high-tech company, and this transformation is making great progress.

As you can imagine, this success is creating a good spirit in our team, and an employee survey has confirmed that our commitment to our company has increased significantly. I'm very proud that in all categories we are ahead of other high-tech companies in this survey. This is clearly a benchmark. The most important drivers for the transformation are the strategy and our clear vision. Those are the basis for our ongoing cultural change into a high-tech company.

Ladies and gentlemen, at the same time, we have been delivering excellent results, so let's have a look. In the last fiscal year, our comparable growth accelerated, and we increased our revenue by more than 8 percent. The main driver of this growth has been our high-tech products in the LED segment and specialty lighting. And as I have men-tioned, adjusted EBITDA hit a record of almost 700 million Euros. Compared to fiscal year 2016, free cash flow grew to around 100 million Euros, and this is despite of the higher capital expenditure for our capacity expansion mainly in Opto. If we exclude the proceeds from the disposal of Felco shares in the prior year, earnings per share in-creased by nearly 11 percent.

That, Ladies and gentlemen, means we have achieved our targets and fulfilled our guidance. So, let's look again on our 3 Pillar Strategy and the ‘Diamond’ initiative. The sale of our traditional lamps business has allowed us to strengthen the 3 Pillar Strategy and clearly align Osram with the future markets. The sale was finalized in March 2017. At the same time, the ‘Diamond’ initiative is in full swing. We have strengthened our technology portfolio in important future markets through strategic acquisitions, and with the expansion and the reshaping of our global industrial footprint, we are improving our flexibility and competitiveness.

Overall, we are on course to achieve our targets for 2020. We believe that investors support our strategy. This can be seen in our positive development of our share price this year. Our shareholders will also benefit from this strong performance. The man-agement board will therefore propose a dividend of 1.10 Euros per share to the super-visory board and the AGM. This represents a year-on-year rise of 10 percent. The increase underlines our optimistic view for fiscal year 2018.

Ladies and gentlemen, on this slide you can see our expectations for the coming fiscal year. It clearly shows that our growth trend is continuing. At the same time, profitability could be affected by the strength of the euro in relation to the US Dollar. Ramp-up costs for our factory is Kulim will affect our profitability as well, and on top of that, we


will invest more in R&D in 2018. If not for these factors, our adjusted EBITDA in 2018 could be more than 150 million Euros higher than in 2017.

I would like to go into detail about this capital expenditure as we are making an effort to invest in the development of our LED and the digital business. If we look at the long-term growth rates, it is clear that investing in our manufacturing is absolutely the right decision. And as you can see, we are growing and investing in our future, ladies and gentlemen. Osram is in an excellent position to benefit from this rapid development of technology for many, many years. Turning our attention to the future, we can see that markets beyond lighting are growing in importance. The focus is shifting towards applications as visualization and of course sensors. These are based on modern tech-nologies such as infrared and have been seeing double digit growth; however, I will come back to that shortly.

It is important to note that we are already in an excellent position that will enable us to shape the future developments. In particular, our first pillar, OS, will benefit from this. As you can see, with revenue of 1.7 billion Euros, OS sets the benchmark, especially for profitability in this sector. Looking at the next slide, you can see that LED market is providing attractive growth potential within next years. On the one hand, we already enjoy an excellent position in the premium segment with LED, laser and infrared. Against prior forecasts, this market is growing much faster than expected. Further-more, we will still believe there is tremendous growth potential in the general lighting market. On the other hand, we can address today the rising visualization and the sen-sor market. Examples include iris scanning and facial recognition, for example on your smartphone, also the range of systems that are paving the way towards driverless cars. This gives us a clear strategy to continue double digit revenue growth and a high mar-gin on our Opto pillar.

First, we will take the opportunity arising from new markets. Second, with the new fac-tory in Kulim, we establish a broad portfolio of premium and general lighting products. On this basis, we can achieve a competitive cost structure. And third, we will continue to grow our premium core business. For OS, we are aiming for profitability in a range of 25 to 29 percent; that is much higher than the whole competition. And we are ex-panding our worldwide LED production. This will continue satisfying the high level of demand. We will increase our site in Regensburg by 50 percent, and we will double it in Wuxi in China. And in a few weeks’ time, the world’s most modern factory for six-inch wafers for LED chips will come on stream in Kulim. So, I want to show you now a short clip of how the factory will look like.


Ladies and gentlemen, let me share with you some cool impressions. Starting point of construction was May 2016. The piling had to go down 20 meters to gain stability. In September 2016, we were setting up the shell. The total space of the ground is 1,000 by 200 meters. In October 2016, we were constructing the roof. In March 2017, we started the installation of the facade and the clean room, and the clean room was ready for equipment in June 2017. And now in November, we will officially open the world's modern LED fabrication. Ladies and gentlemen, Kulim is clearly a milestone in our strategy. We built this factory in only one and a half years, and we are well within the budget and absolutely on schedule. In order to satisfy the strong demand, we will start production of premium products in Kulim earlier and with more volume than originally planned.

In short, OS will consolidate its strong position through technology leadership and out-standing market presence and an excellent cost position. Ladies and gentlemen, as you may remember, in January 2016, I showed you the following image. This was based on the business plan at that time, and, to be honest, I'm happy to say that by using the latest technology in Kulim, we are able to manufacture even more premium LEDs than originally planned. As a result, the revenue mix for Opto as well as for Osram will improve compared to previous assumptions. At the same time, the strong growth in our semiconductor business will make this Osram’s largest segment by 2020. This is a cornerstone for transforming Osram clearly into a high-tech company.

So, let's move onto our second pillar, Specialty Lighting. SP is the global number one and makes the biggest contribution to our revenue. SP is growing for more than 30 quarters, I repeat, it's growing for more than 30 quarters in a row and has broadened its market leadership continuously. The automotive sector accounts for about 85 per-cent of its sales. SP is very well-positioned with a profit margin of more than 14 percent.

We can see two defining trends in the future automotive lighting business. On the one hand, the market is growing. According to IHS, today, still more than 80 percent of the annual production of cars are equipped with traditional headlights. Driven by the ongo-ing LED penetration, also light sources per car is increasing. By 2025, every second new car worldwide will be fitted with LED lighting technology. On the other hand, an increasing number of LED modules and systems are installed. This provides an oppor-tunity to participate in the increasing value by lighting solutions.

That is why we are planning a joint venture with Continental AG, a leader in automotive electronics. This moves to us the next level of value creation. The proposed joint ven-ture led by Osram will combine lighting technology with electronics and software. It will develop intelligent light solutions for the automotive industry. We firmly believe that the


two market leaders in electronics and lighting technology will enjoy a strong position in a fast-growing market. Just to make it clear, we do not intend to compete with set makers, but we want to be an important player in future markets and applications.

Allow me to summarize the SP strategy. First, over the coming years, we aim to break into new business segments, not only with our own developments, but also with part-ners. An example is LiDAR, a key navigation technology in driverless cars. Second, we will further extend our number-one position in our traditional business areas sup-ported by growth in Asia. And third, we will focus on entertainment and industry and aim for further growth in these sectors.

And so, I come to our third pillar: Lighting Solutions and Systems, LSS. The business generates revenue of 1 billion Euros, addressing the biggest lighting market. However, we have not been able to take full advantage of this potential. Consequently, we have adapted our LSS strategy. Let me be clear on this: We are not satisfied with our lumi-naires business, and the task of the team is now to consider all options. A strategic decision will be taken in 2018.

In our business with digital system, we see huge potential which we want to tap. There-fore, we have built a factory in Mexico and another one in Bulgaria. With these, we can further grow into digital business. This will be supported by a brand-new field called smart infrastructure. We have strengthened our position in this field with several ac-quisitions and equity investments. For example, some weeks ago, Digital Lumens, a Boston company. Their software platform points to the future of digitalization.

Ladies and gentlemen, allow me to summarize briefly. We are making good progress with our operational capabilities, and the long-term trends are working in our favor. We have a solid base on which to build, invest and grow. Three factors will remain im-portant to us during our journey. It is long-term profitability growth, technology and market leadership and of course the spirit of innovation.

Thank you very much. And now, I'll hand over to Ingo, to my colleague.

Ingo Bank: Thank you Olaf, also from my side, a warm welcome to all of you also on the phone, those of you here in Frankfurt, thank you for showing up and coming to see us today. Olaf gave you, I think, a nice update of our 3 Pillar Strategy and how we see ourselves evolving in the next few years, and let me take you now back to the present and speak a little bit about the fourth quarter and the fiscal year 2017 results, and then, I will conclude a little bit on our outlook for fiscal year 2018 and for that I need the clicker. Thank you.


So, here you see a summary of the fourth quarter, so I think we ended the year on a strong note with a comparable growth of around 12.4 percent, particularly driven by Opto and SP. The LSS market environment, particularly for LS, continues to be chal-lenging. Free cash flow in the quarter was slightly negative, as expected, with capex at 192 million Euros peaking for the fiscal year. And still, for the full year, though, we were able to generate a positive free cash flow of around 99 million Euros. Reported EPS was 40 Eurocents, a bit later than a year ago, due to special items. Adjusted EPS grew with close to 45 percent, however, year-over-year. I think it's important to note with that quarter we delivered the financials as we guided for, largely at the midpoint of the guides we gave for growth, adjusted EBITDA and reported EPS, and with cash flow we came a bit higher at 99 million.

So, if we take a closer look at the revenue picture for the fourth quarter, you can see that from an APAC perspective, we delivered a very strong quarter, and the important thing here to note: It was a strong quarter for all of these three segments that we have, so including LSS. The growth in EMEA or Europe was driven largely by Opto and SP. For LSS in EMEA we saw a middle single-digit decline in the business driven by an accelerated phase-out of our traditional ballast business as the LEDification of lighting controls visibly gained momentum in the quarter. Growth in the US market was flat for LSS as the market continues to be challenging; however, we also have a brighter spot in the US with the after-market of our SP business as the market prepares for the high season of the calendar year.

If we stay with revenue growth for a minute, you can see that the weakening Dollar against the Euro took a little bit of a toll on the growth in the quarter, particularly for our Opto and our SP business. At group level, the weaker Dollar had a negative impact of around 400 basis points or 35 million Euros. At the same time, we saw positive contri-butions from recent acquisitions, particularly Novità Tech in SP as well as Maneri-Agraz in the LSS segment.

Let me also point out that the most recent acquisition of Digital Lumens is now included as a separate business in the LSS segment. Digital Lumens’ contribution in the quarter, however, was immaterial as we only consolidated one month worth of activities. The total benefit from changes in our portfolio compared to last year contributed 480 basis points to the year-over-year growth.

If we now move onto profitability, on slide 24, Osram’s adjusted EBITDA margin for the quarter came in 110 basis points above last year. At 15.5 percent, we delivered 160 million Euros in adjusted EBITDA, a year-over-year growth in absolute earnings of 22


percent or 29 million euros. The biggest driver was volume, only slightly offset by neg-ative portfolio effect on the margin. The major contributors of this increase were, as you can see to your upper right, Opto with a total year-over-year increase of 27 million Euros, and SP with 14 million Euros. Adjusted EBITDA in corporate items was negative at 26 million Euros, slightly lower than the same quarter a year ago.

For the full year, corporate items came in with 96 million Euros, 19 million higher than a year ago. The increase largely reflects stranded costs and dissynergies as a result of the Ledvance divestiture. We’re currently implementing measures to optimize the indirect and supporting functions to address this cost overhang. Special items this quarter amounted to 42 million Euros, the majority of which was related to the LSS segment. For the full year 2017, special items came in at 74 million euros, in line with what we communicated on prior occasions.

So, if you look at the business units for the fourth quarter you can see that two of the businesses grow strongly in the last quarter of fiscal '17, not just in terms of revenue but also in terms of profitability. Opto's growth has driven in all of its business seg-ments. SP was driven by LED components and modules which now make up combined approximately 48 percent of the total revenue of SP, and in addition, I should point out that SP also reported a strong aftermarket performance.

LSS, we spoke about it, continued to be challenged in a weak US market and a decline in traditional ballasts. More positively for LSS, we continued to see double-digit growth in LED-based lighting controls. Overall, lower volumes and a stronger price decline in our lighting controls business, however, turned adjusted EBITDA negative when com-pared to prior year. Structural cost measures are on their way, and we recorded ap-proximately 30 million in special items for LSS in the fourth quarter, largely related to restructuring and transformation charges.

So, when you look at the full year, it's on slide number 26, you can see that we accel-erated our growth trajectory for year delivering 8 percent on a comparable growth while maintaining a high profitability level. Opto was the strongest driver keeping its profita-bility high, growing absolute earnings by approximately 65 million year-over-year. Throughout fiscal '17, Opto reinvested a substantial part of its growth, especially into higher innovation spend as well as marketing and sales. This is to support the ambi-tions in the general lighting business and to sustain our market leading positions in the automotive and infrared markets. SP improved its performance compared to '16 on the back of growth in all regions and the continued implementation of productivity improv-ing programs across the entire business. LSS, as Olaf pointed out, had a difficult and


disappointing year, both in terms of profitability and growth, for reasons we just out-lined.

But all in all, Osram delivered a financial performance in line with guidance provided earlier this year. Based on this strong performance, we will propose an increase of 10 percent for our dividend to 1.10 Euro to our supervisory board and the AGM.

Moving onto cash flow on slide 27, we managed our cash flow well in fiscal year ’17, and we were very active in terms of capital deployment. Free cash flow came in at 99 million Euros, as working capital was lower, whilst increasing our capital expenditure to almost 540 million Euros representing 13 percent of revenues in fiscal year '17. The lion share of this capex went to Opto with 443 million Euros, approximately half of which was invested to build infrastructure for our growth plans in the general lighting business. At the end of fiscal year '17, approximately 60 percent of phase-one capex for Kulim has now been spent. Just as a reminder, phase one overall total projected spend is still 370 million Euros unchanged to prior communication.

Overall, we deployed close to 1 billion Euros worth of capital in fiscal year '17. Next to the capex just outlined, we returned approximately 260 million Euros to shareholders, either through dividends or the finalization of our share buyback program. In addition, we plowed approximately 180 million Euros into M&A, either in the form of outright acquisitions such as the recent Digital Lumens transaction or participations like our 25 percent stake into the Canadian LiDAR flare LeddarTech.

Let me now turn into earnings per share on slide 28. Reported diluted EPS in Q4 '17 was 40 Eurocents, slightly below the same quarter of last fiscal year due to higher special items. Adjusted EPS for the quarter was up 45 percent, coming in at 73 Euro-cents. For the full fiscal year 2017, reported EPS was 2.78 Euros, close to the midpoint of the guidance we gave earlier this year. Adjusted EPS for fiscal year ’17 grew with 7.8 percent to 3.38 Euros. Our corporate income tax rate for the year was approxi-mately 30 percent in line with our expectations.

Let me now change perspective and talk a little bit about the guidance and the future outlook we provided. As we move into the new fiscal year, I think it's important to take into account the current business environment which is reflected in our guidance. As you can imagine, as a company we are following a vast number of macro and industry specific indicators, but we would like to highlight three fairly important ones on slide 29.

To the left you see the outlook for the global vehicle production as compiled by IHS. It's an important reference point for the company as approximately 50 percent of our revenue base is related to the automotive industry. Based on these projections, one


can still expect a year of growth in vehicle production, all beard with different geo-graphic dynamics when compared to fiscal year 2017. Next to these vehicle production forecasts, we believe LED content penetration growth in cars continues to increase at a much faster pace than vehicle production itself. Particularly in front lighting. We ex-pect to clearly cross the 20 percent LED front light penetration mark on a global level in fiscal year '18.

So, what does all of that mean? For our SP business, we expect to continue to grow 2 to 3 percentage points above vehicle production growth. For Opto, a growth in pene-tration beyond 20 percent for front lighting should translate into continued double-digit growth in the LED auto segment, so overall, a healthy picture providing ongoing growth opportunities for the company.

If we now move to another set of macro indicators, that you see more to the right on the chart on slide 29, you see in the gray line the development of the US nonresidential construction growth, and the orange colored line shows the order book development of the US lighting equipment industry, also in the United States. So, if you take it to construction growth on the gray line, we can see a little bit of a bottoming out effect on the last few months; however, when we look at the order intake for the US electric lighting equipment industry, something that is close to us, you see a bit of an up and down, but no clear upwards trend yet.

So, we remain cautious at this point in time and do not expect a meaningful rebound of the US market over the next six months, with possibly first signs of growth for the United States business of LSS in the second half of fiscal year 2018. We believe that these assumptions regarding the US market should also be very much in line with what our competitors and customer companies have recently stated also in public.

Another very important element to take into consideration is the impact of foreign ex-change on Osram's financial results, as you can see on slide number 30. Particularly, the development of the Euro to the Dollar is of importance. As you can see in the pie chart, close to 50 percent of our revenue base is generated in US Dollars, 37 percent in Euros. The revenue picture differs, however, from our cost structure, and as a result, we are long in US Dollars, that means we have more revenue than we have costs denominated in the US currency. On the basis of the average Euro / Dollar exchange rate for fiscal year 2017, of 1.11 Dollar, every cent of change in this currency pair im-pacts our adjusted EBITDA with approximately 9 million Euros on an annualized basis.

As depicted in the chart to the left below, you can see that the overall expected impact of changes to exchange rates between '17 and fiscal year '18, when looking at the current prevailing exchange rate, is negative between 70 to 75 million Euros when


compared to the average rates reflected in our fiscal year '17 financials. The biggest driver again of this impact is the difference in the Euro / Dollar rate. Currently the Euro / Dollar exchange rate is trading in a range between 1.16 Dollar to 1.18 Dollar.

Let me also highlight a few other important assumptions that you do not see on this chart. Olaf already mentioned the ramp up costs associated with a number or produc-tions sites, namely Kulim, in fiscal year '18 which is different to this fiscal year '17. Our capital expenditure level is expected to increase further in fiscal year '18 when com-pared to fiscal year '17, likely around 600 million Euros. As we move more equipment into Kulim, build out Wuxi and Penang backend capacity and get infrared capacity ready in Regensburg.

As the bulk of our fiscal year ’17 capex spend came in Q4 and we expect absolute capex for the new fiscal year to peak in our first quarter of '18, so the quarter we're currently in, our depreciation expense for the fiscal year '18 will see a disproportionate significant increase that needs to be factored properly into income projections. Special items at this point in time are expected to be at a similar level as fiscal year '17 around 70 to 80 million Euros. As Olaf pointed out when he updated you on the strategy of Specialty Lighting, we will start consolidating production sites on a global scale as part of the ‘last man standing’ strategy. In addition, we are pursuing a number of other structural cost measures as well to improve our results. Let me also point out that we have not included the possible joint venture with Conti in the current guidance for fiscal year '18.

So, our guidance for the fiscal year is summarized this chart, we expect comparable revenue growth for ’18 to be in the range of 5.5 to 7.5 percent, so roughly 6.5 at the midpoint of the guidance, adjusted EBITDA is approximately expected to be around 700 million Euros, similar to this fiscal year '17, and this is based on the assumption of a Euro / Dollar exchange rate of 1.18 Dollar. Free cash flow is expected in the range of minus 50 to minus 150 million, as we expect to further increase our capital expend-itures on the back of continued growth investments, particularly for our Opto business. Reported diluted EPS is expected to be between 2.40 Euros and 2.60 Euros reflecting a significant increase in depreciation expense compared to fiscal year '17, and special items as outlined just now.

Thank you very much, and now Olaf and myself and Andreas and my colleagues here in the front, Aldo and Hans will be ready for questions, and we will provide you some answers as well. Thank you very much.


Q&A session

Mod.: Thank you very much, Ingo. So, for the participants in the room, please ask a question in the microphone, and for people who are on the phone, feel free to send us an e-mail on [email protected]. It will be read and asked by someone here in the room. - With this, I would like to open the floor for your questions.

Sebastian Growe (Commerzbank): Good afternoon! Three questions from my side. The first one is on the sales growth trajectory in 2018 and also on the Opto business in particular. Can you give us an idea of the budgeted amount that you expect to come into the general Lumination business, i.e., how much of the revenue is kind of replaced from third-party supplies to now internal supplies from the Kulim plant? To just get a better understanding of the real underlying growth eventually for the full year.

And then on the guidance. When it comes to the EBITDA part, if I do the math correctly, you're also looking at 150 million clean and underlying EBITDA growth before any R&D step-up, before any ramp-up expenses. So, it looks like the contribution margin on EBIDTA is well in order of 50% if I look at the implied number there. So, can you just break it down by the key bucket, how much is really price mix, how much is coming from volume? A rough split at least by the divisions where you would see the 150 million before these kinds of non-recurring items we should expect to see here.

And the last one on the portfolio. You said that, obviously, Luminaires and Solutions is no longer a whole cow. Maybe you can give us a sense then a) on where we stand here in terms of how much is LS, how much is DS revenues to just get a rough idea at least, and related to that DS should be fairly small I assume; it's going to be around 500 million. So, how do you make sure that this can still survive, so to speak as a stand-alone business, if I might put it this way? I heard you obviously on having closed, for example, the recent acquisitions, but what is the trajectory on further M&A deals etc.? Thank you.

Dr. Olaf Berlin: Okay, I would recommend that we start with Aldo and with the growth rates, and then Ingo can go a little bit more in detail about the 150 million. And then I finish with the last two questions about LS.

Ingo Bank: This is Ingo. I think we already mentioned that we are looking at a mean-ingful double-digit growth for OS in the just started fiscal year. The SL business will be growing at least at that pace if not quicker. And to your question: Yes, there will be a


meaningful replacement of chips that we currently buy with the new capacity that we are ramping in Kulim. So, the LS capacity, you cannot take one to one into additional sales, but will in the first step first give a stable base for the factory to ramp with and then over the quarters we'll add also capacities that then will result in excellent revenue growth. That portion of external revenue growth, however, will be less than a quarter for this coming year.

Sebastian Growe (Commerzbank): (inaudible) number. So, give us a rough idea. I think we were talking about 250-ish, 300 million eventually on general Illumination rev-enue, I believe, within Opto. Is it about half or how should we think about the share roughly?

Ingo Bank(?): I think, before Aldo says a number, let me just maybe structure and give you an answer to this. I think you need to think about the ramp-up in a very gradual sense. It's a build-up of capacity over the year where basically some meaningful reve-nue picture will probably be (inaudible) in our numbers in the second half of fiscal ’18. So, even though we start production soon in November, you can’t expect that that will meaningfully quickly contribute to our revenue picture. As Olaf said, we’re going to insource a lot of things, get the yields right and everything else before we then start numbers. I think I would not really like to guide for a number at this point in time.

Let me just say that going back to the other questions, Olaf asked me to answer: We expect meaningful contribution from general lighting to our growth next year. That's what I would like to say.

Dr. Olaf Berlien: Ingo, would you go to the second question?

Ingo Bank: I think, Sebastian, for next year you need to think in similar terms as this year, in terms of what (inaudible) is going to contribute. Opto definitely will be a signif-icant contributor. I think the increase in penetration in LED content in cars, especially front light, will continue to be a significant driver, and that business has very healthy margins for us. We pointed out to a number of other opportunities last year in terms of infrared, if you look at (inaudible) and others, which are also healthy businesses I be-lieve to be in. And then in SP, we still continued to see good growth in the after-market business which is, as Hans will confirm, a very attractive business to be in. And the interesting thing also is that in 2017, we had almost the best of both worlds, in the


sense that we had very strong growth in LED front lights as well as very, very little decline actually in our traditional business. And if you look at the fact that Olaf pointed out that still (inaudible) for today, 80 percent of the cars put on the street have tradi-tional lamps and they need to be replaced, we actually see still a very healthy business in front of us next year as well.

Dr. Olaf Berlien: I would like to come to your third question about LS. You asked: What is the turnover in this business unit? To be honest, the DS business unit is from a general point of view bigger, so the bigger part is in DS. So, as I said in my speech that we have around 1 billion turnover. So, it is a 600 to 400 relation. And you said: What could be the option? I tried to explain if we said that we check all options, that means first of all, the first option clearly is to bring it in the right profitability. And that's option number priority a and that's what we did. We just confirmed with the workers council and the union a plan for layoff and, to be honest, we have a layoff by 30% in Traunreut - that’s really a huge number - to reduce fixed costs and to bring this busi-ness in profitability. But the main headache, to be honest, is not coming in these days from the German one. I think this is well on track. The main headache comes from the U.S. business. So, as Ingo said and Acuity and Eaton reported officially, the U.S. busi-ness is declining, and with our service business in LS, we have a situation where I’m not happy. So, all options or open, including the option - I know you will ask for that - that we maybe would like to sell it.

Sebastian Growe (Commerzbank): Just a very quick follow up on a different piece, just on the LSS business and the guidance, specifically on 2018. You had the former guidance being a break-even result, EBITDA level. Is that the new target for ‘18 or are you really going for more?

Dr. Olaf Berlien: Again,I know I said that. At that time, I didn't expect the decline in the U.S. market. I had a decline in the U.S. market for DS as well. So, DS with the engine is market leader in the U.S., market leader, it was really a very nice market share, and they had to decline as well. We expect - that’s what Ingo said - that in the next six months, there will be not the recovery, but we expect in the second half of the year that the U.S. market is coming back; that’s the signals we get from the statistics and from feedbacks. So, we still expect a nearly break-even for this business together. - Next question.


Sven Weier (UBS): Thank you for taking my questions. The first one is on the increase in the R&D budget that you're planning for next year. I was just wondering if you could give us some examples and maybe also especially a question for Aldo how you look at the VCSEL technology now, if you feel any different on it or if that budget also in-cludes some development on that end.

The second question probably also for Aldo on the start-up costs that you're budgeting. What exactly are you putting into that figure, such as the things that you have on the yield side, or what exactly is baked into that figure?

The third question is on the Capex outlook. I guess the coming fiscal year you probably make a decision on the module two for Kulim, and I guess it will come. So, how should we look at the capex trajectory for the group after this year? Is 2018 still the peak with 600 million, and is it coming off afterwards?

And the last question is also following up on Sebastian with LS. I also just wonder if you came to the decision to get out of LS? Don't you think that you would have to also package the deal with DS to make it an attractive disposal candidate? Thank you.

Dr. Olaf Berlien: Okay, so I would start with the first one and then I give it to you about the start-up costs and maybe the VCSEL, but I would like to say something about VCSEL as well. Having the additional and higher R&D costs is not only for Opto. It's clearly that Opto - and I will talk about that for a second - is the main driver in the higher R&D costs for next year, but overall, as I've said, I think two years ago, we would like to increase our R&D costs over the years. And we have arranged by 8 to 10% what we would like to do in this area. But you will go in more detail about that. VCSEL, I think, the best one to explain the VCSEL is really if you - - there is not a VCSEL or infrared. In future applications you need definitely both technologies because for safe bank transactions, you need the iris scan. So, the iris scan is the only one for safe banking transactions, for example, so you cannot use the VCSEL technology which is more facial recognition; but you are the engineer, you can explain it much better than me.

Aldo Kamper: You see at the growth rates that we are at and that we’re also projecting forward that there is a tremendous amount of new applications opening up, and, obvi-ously, you need to do your work beforehand on those. And that's why we're also in-creasing our R&D spend because we see throughout our outer portfolio chances that


we want to grab. It starts without automotive where, obviously, continuous innovation in higher brightness parts and also high integrated parts is a key topic, and in the elec-tronics world, we feel that more integrated more intelligent components, where also ICs are part of the component, will be an interesting growth driver and differentiator, and also here we are building up new capabilities, also in this area. Yes, we are also looking at VCSEL, but it’s not, as Olaf said, the only thing that's out there; that’s just one. We obviously will also continue to expand our sensor portfolio, for example, for wearables.

And, finally, general lighting, also the job isn't done. As you can imagine, that is an area where we also have to heavily invest in to also establish ourselves as a prime player, also in the Sapphire business, we are very strong in high power whites and high power reds for horticultural, but on Sapphire we obviously we still have quite a bit to do. So, all these things together will require R&D money, but at the same time they also will generate very significant growth and good profitability rates, so it's money well spent, I think.

Dr. Olaf Berlien: Can you come to the module two? That was one question.

Aldo Kamper: Module two and also start-up costs; there are a couple things. First of all, obviously, if you start a new factory and it isn't full yet, you have a lot of costs that are there that you cannot really amortize over the amount of profit that you are building, so that is a burden as part of the start-up costs.

Secondly, if you start ramping up, your yields aren't where you want them to be. But your customer is not paying more. And so, also there you have ramp up costs, your yields curve and your learning curve that you're accounting as well for. So those would be the two main buckets.

In terms of module two, we'll see how the business develops. We feel strongly that we will fill module one successfully, as Olaf said, not only with general lighting, with our business, but also much earlier than expected with high power (inaudible) business. We have a very strong demand of the automotive industry, a very strong demand from the general lighting industry as well for this, and we see here the need to increase our capacities quicker, and we are pulling in this ramp up into Kulim, because the team has really done an excellent job in preparing for the ramp up in Sapphire and they were able and willing to take on this job to also establish a second technology in the same factory, very shortly after ramping Sapphire. So, we'll see how the market develops.


Our expectation is that we'll have to come to a decision for model two during this fiscal year, but it will not be in the next few months.

Ingo Bank: Let me maybe add, because you asked that question about the group. If you think about the group from an R&D budget perspective or R&D percentage per-spective, I think you should think about kind of a 9% level range that we should all be getting used to. I think that's pretty much in line with what we said also in the capital markets day approximately two years ago that that should be the kind of spend that we expect, and from a Capex perspective going forward, if you go through the cycle if you like - I think we said that before -, we should think about a range for the company, for the total company of between 12 to 14% of revenue in terms of Capex going for-ward.

Dr. Olaf Berlien: Coming to your last question about LS. As I said, we have an open discussion about all options. There is no decision. We just had a change in the man-agement team, and we gave clearly the new management team the task, please come with all options. Is it an option, as you said, to combine LS and DS? No, it's not an option. We see really huge opportunities and potential with DS, so you get more and more intelligent buildings, and for these intelligent smart buildings and rooms, I think, the DS segment is very well positioned with new products and applications, and we want to be in there, in this area. So, we see a trend for the digital area. And that's one of the reasons why we bought Digital Lumens, the Boston company, because, as I said, it's a huge trend and there’s huge potential in this area, so we wouldn't combine it.

Uwe Schupp (Deutsche Bank): I think, I have three questions. First of all, could you give us an indication on the profitability within LSS, within the sub-segments, i.e., the question would be: Is DS profitable? And then I guess we can draw our own conclu-sions.

Ingo Bank(?): The answer is yes.

Uwe Schupp (Deutsche Bank): That was quick. Are you impressed by DS profitabil-ity?


Dr. Olaf Berlien: If you ask a CFO, come on. I never had in my life that the CFO said: I’m impressed. He is always looking for more.

Uwe Schupp (Deutsche Bank): I would have another question, just a follow-up to the previous one from Sven. Could you go to slide 19 of the presentation, please? If you look at this very closely, I see the sticker “Strategic decision in 2018”, it’s really more on LS than on the LSS overall. Is that intended? I mean it would echo what you just said basically.

Dr. Olaf Berlien: So, what do you mean, that because the sticker is only on LS?

Uwe Schupp (Deutsche Bank): It's more on LS than on anything else.

Dr. Olaf Berlien: It is clearly on LS here. It is really funny. Here is the PowerPoint creator, the master of the PowerPoint. We talked about that to make it -- The alterna-tive would be to make it smaller, and then you can't read it. So, we (inaudible) a little bit, but it's really on LS. To make it clear: We are happy with DS, and that's the reason we invest in two new factories. We just build a new factory in Monterrey and just started with a new factory in eastern Europe. Very well positioned and much better cost posi-tioned, by the way, than in China, so we moved the whole factory from China to Bul-garia, because this factory had much lower costs of sales than the other one, so it is clearly a question of LS.

Uwe Schupp (Deutsche Bank): One slide before that, page number 18, please, we have the market size to the right hand of the slide. Last year same time, the market potential for LSS was thought to be 100 billion if I'm not mistaken. Was privatization just much harsher than you expected or what did you take out of this market potential?

Dr. Olaf Berlien: We took the service. So, usually it is around 100 million with ser-vices -- billion. So, the part between 89 and 100 is the service part in that, and I put that out and moved only on hard equipment, but it's the exact same number, so if you


really split to my charts from 2016 and '17, you will find out that the 89 is really the combination of modules and the Luminaires.

Ingo Bank(?): Maybe the underlying question is also whether something happened structurally in that market in the meantime. The answer is: not really other than what I said in my prepared remarks that the price erosion and the deceleration or the accel-eration of phasing out the traditional balance has accelerated in the year. We were able to compensate it to volume growth, so that, you know, you kept your revenue line relatively flat in that regard, but clearly it provides us on the one side with double digit growth in digital lighting controls, but a much faster decline on the traditional side also driving somewhat of a price erosion right now, but the overall market hasn't really change, just the dynamics within it has sort of moved a little bit in a different mode last year.

Uwe Schupp (Deutsche Bank): I have two questions left for Aldo, please. Aldo, in a prior conference call, we gave you a hard time on the VCSEL question in particular, and you've always been somewhat more cautious than maybe the euphoria in the mar-ket. And it seems that to some extent you were right in hindsight, because there are obviously severe challenges to get yields right, if you look at some of the high profile delayed phones in the market, especially one phone. The question would be: There is a photonics company in the U.S. where their conference call indicated that a 3D sens-ing solution would be potential also possible using edge emitting solutions, just what you offer basically. Is that something you would echo, or is it basically really only for the facial recognition, as Olaf said, and not the (inaudible)?

Aldo Kamper: It depends on the application you're talking about. I would say an edge emitting laser for a facial recognition application is probably overdone. It has too much power, and also probably the size of the component is too large. That being said, if you go to applications where you need more power, like autonomous driving and LiDAR applications, we believe that for long-range LiDAR, for example, VCSEL is not an al-ternative; then your edge emitter is just the right choice. You need the power levels, you get them very efficiently actually from a cost perspective. There is no reason not to use an edge emitter application. So, it depends very much on the application and power level that you need. In certain applications, there is an advantage for VCSEL, and some of them for an edge emitter. In some cases, actually, an infrared diode,


which is the cheapest of all these solutions, does the job also very nicely as Olaf out-lined.

Dr. Olaf Berlien: If you have maybe some applications for games, there may be the facial recognition the better one; so it's really a question of application.

Uwe Schupp (Deutsche Bank): Last one from me, again for Aldo, there's more talk in the trade press recently on micro LEDs, and your name in particular is mentioned bascially in all the articles. Is it correct that your market position is relatively dominant, to say the least in that, or what's your view on micro LEDs, and if you are so strong, why are you so strong there?

Dr. Olaf Berlien: Be careful.

Aldo Kamper: I can't say very much about it at this moment. It's a market that will be coming, and it's also a market that still has a lot of challenges. It's technologically a very demanding application, and we feel that we have a very good technological un-derstanding. I leave it at that.

Dr. Olaf Berlien: We strongly believe that this market will come. I think we're well position for that. But I think the market is not ready in 2017 or 2018 for this technology. It will take a little more time, but it will come.

Karsten Iltgen (Bankhaus Lampe): Maybe switching the division and talking about the Conti JV. Can you give us some more details around this, what you are contrib-uting, what Conti is contributing in terms of people, head count, revenues, and how the revenues will be in the first year?

Dr. Olaf Berlien: A very good question for Hans.

Hans-Joachim Schwabe(?): First of all, it’s a complimentary merger because they are contributing their light control units for lighting. We are contributing the SSL, the


Solid State Lighting based module business including laser modules and these kind of things. So, we are really complimenting each other to build up innovative platforms. We are merging - this is at least day one estimation right now - about 1,500 people from both companies into one joint venture, and we are planning to be around the 400 million Euros as a starting point for the joint venture revenue.

Ingo Bank(?): I think it’s important that we still point out to the fact that we just signed a term sheet, and it will still take some time before we conclude the contract and eve-rything will be prepared, before we actually go life, so hence also my remark in my prepared remarks that we didn't include any of those numbers into our guidance for fiscal year '18. So, I would like to still caution you in that regard.

Karsten Iltgen (Bankhaus Lampe): Roughly speaking, out of those revenues and head count, how much of that is from you and how much is from Conti?

Ingo Bank(?): It's trying to be a 50/50 joint venture, so I think that's probably a good indication.

Karsten Iltgen (Bankhaus Lampe): That much LED module revenues already on your own P&L?

Hans-Joachim Schwabe(?): We already have, let’s say, over the last five years a constant growth business with two double digits, let's say over the last five years, add on to the existing component business where we are already number one as you know for traditional light sources and also LED components. So, for us it was an opportunity to create solutions in combining them with electronics is due to the trends we see in the market right now. Electronics and intelligent lighting is merging more and more; it’s a right step and in time.

Karsten Iltgen (Bankhaus Lampe): Coming back to (inaudible) then. You chartered the same flight as two years ago on the expected mix in 2020. From today’s perspec-tive, how are products going to look like in 2020, the contribution of premium LEDs?


Dr. Olaf Berlien: I showed you exactly not the same, but I showed you the slide and I said: I showed you two years ago this slide, and now I give you an update on that. I you mean this one?

Karsten Iltgen (Bankhaus Lampe): Yes. But it’s bigger.

Dr. Olaf Berlien: It's an update. So what I would like to tell you here is really - and that's what I said -: I showed you originally this chart, and I said in January ‘16 with Aldo together our original plan, in general ‘16 based on the business plan ‘15, I had 35% for the LED for General Illumination, and now we are expecting 16. And I said in January ‘16, the business plan for the whole Osram will represent general lighting 15%, and this will reduce to 7. So that means the mix is now much more healthier on pre-mium chips. That's the reason I really said let's go to the same chart and give you an update on that, it may be helpful to understand that we have now a better mix and we expected that two years ago.

Karsten Iltgen (Bankhaus Lampe): Sure, that’s clear now. - Coming back to the VCSEL story, I understood earlier, in previous weeks or months, that you were consid-ering M&A in that area as well. Is that off the agenda? You sound a little bit --

Aldo Kamper: No, we are (inaudible) up to electronics. And VCSEL at the moment is one of the technologies that we don't have in house. Is it possible we do that in house? Yes. We do lasers, we do LEDs, VCSEL is somewhere in middle, technologically speaking. So, the one thing is that we obviously put our own resources and our own minds to this and will come up with own products in this area, but it might be that we can speed up these efforts by acquisitions, and that is still on the table.

Dr. Olaf Berlien: And we did, so if you remember, at the beginning we bought a smaller company, LED Engin in California. Some weeks ago, we bought the Digital Lumens. We had some small rubicon, so today we're looking for smaller technology portfolios, so to buy really the pure technologies. Small teams, sometimes 15, 20 people with the IP rights. That's what we're really interested in.

Aldo Kamper: For VCSEL, it could also be (inaudible).


Dr. Olaf Berlien: It could be both.

Karsten Iltgen (Bankhaus Lampe): But you do also consider large M&A in that area which would really make you a player in that market?

Dr. Olaf Berlien: What it must be, I don't want to say yes or no. I tell you why, because it must be attractive. So, if you look for some multiples and I have to pay high premium, maybe it would be not attractive. So, in the end it must fit really from the investor’s point of view as well, so it must fit from the technology point of view, from the IP rights and it must be attractive from the purchase price.

Karsten Iltgen (Bankhaus Lampe): And if you don't buy yourself into this market, are you developing at the moment, are you putting money in it?

Aldo Kamper: Yes, but it's mainly an accelerator if we would buy externally.

Karsten Iltgen (Bankhaus Lampe): What would you think, by what time frame would you have the product ready?

Aldo Kamper: In the not too far future. It's not something that's impossible for us to do, and we will do it. There is a market need for it, and we will also play in this market. At the same time, let's not get over excited by this market. It is only a portion of the overall market, even though the application is really sexy.

Karsten Iltgen (Bankhaus Lampe): One more question on the depreciation. Can you give us more guidance there?

Ingo Bank(?): I read a report this morning from a colleague in London, and she was relatively precise on that, so I would recommend to read that report.


Harald Schnitzer (DZ Bank): I’ve got two questions on the LED side. What price pres-sure did you experience in the past year, for the general LEDs and for the high-end LEDs? First question. And second: Are you aware that competitors are planning facil-ities in China or Malaysia as well as you did? What are you thinking, what your com-petition is doing?

Dr. Olaf Berlien: I can start with the last one, with the competition, and then we can come to the price range. As I already really said, the demand for investment for the next few years, so what we expect with 2022 is an investment by 5 billion, so if we really think about what kind of machines are going out of the market, so we installed, for example, 6-inch machines; it’s the latest technology. We still have a huge portion of 2-inch machines. They have to go out. So, you read on the market. So, you need replacement. So, we expect on one hand the replacement of the 2-inch machines, and we expect and we need additional capacity, because the demand is there and we can-not fulfill all the demand with our capacity. So, we know - and it is absolutely fine with us - that other competitors are investing in capacity as well. And you read it, Nichia is doing it in Japan, Seoul Semi had a small investment in Vietnam, and Chinese com-petitors are investing as well now.

Aldo Kamper: To answer your question on pricing, I think the times where the price decline in the general lighting market was tremendous, those days are somewhat over. We have a much more balanced demand and supply relation as we had predicted, the last 12 months, and yes, there will be a number of new investments coming online, ours including, but at the same time, as Olaf said, demand is growing both by the market as well as by replacement. So, we do continue to expect moderate price de-clines, where moderate for general lighting will still mean slightly low double-digit num-bers on premium products, it will be more high single-digit numbers.

Dr. Olaf Berlin: Some more questions?

Unidentified Speaker: Maybe we have some from the web?


Unidentified Speaker: Yes, we do. We have several questions. So, let me start with Peter Reilly from Jefferies on phase two of Kulim. Does the lower proportion of GI sales as was shown mean that phase two can be delayed as non GI have higher prices and therefore consume less capacity? And the second question: Can we have an update on your infrared capacity expansion? How big is the increase, two times maybe? And on Kulim risks: How much of the new capacity is already presold? How much is the commercial risk there? And then do (inaudible) automatically in fiscal year ’19 as the ramp-up casts fade fade, assuming no other changes in the mix?

Aldo Kamper: I think it was phase two to start with. Why did we start Kulim? To really get to a meaningful economy of scales, to have a sizeable of a factory that is compet-itive, also when the pressure in the industry increases. With phase one, we already make a huge step in that direction, and filling phase one quickly and profitably is the first and utmost goal. Then we continue to see that the demand is out there for more, if the hunger is there, we will satisfy the hunger as long as the prices we get are attrac-tive. So, that is really driving the decision of phase two, how market demand develops in these different segments. Do we ultimately need phase two to be satisfied in the next years? Not necessarily, as already in phase one we get a lot of the economies of scales that we were looking for.

Dr. Olaf Berlien: And we have investments in Regensburg.

Aldo Kamper: Exactly. We have a very competitive factory in Kulim, and we'll expand as markets requirements will ask from us. So, to talk about infrared components, the expansion in Regensburg is mainly towards two topics, the one is red and infrared which from a production perspective is very similar. Both we only produce in Regens-burg, you need other treatment systems, abatement systems we don't at the moment have in Asia. So, that is demand that is mainly satisfied or only satisfied in Regensburg.

Secondly, we have a number of new innovation topics that we also drive out of Re-gensburg. Be it, for example, our laser business, both our infrared lasers for LiDAR applications as well as (inaudible) lasers, for example, for projection applications. Those are things that are very new, so very much in development. The closeness to the R&D community in Regensburg is very important, and that's why these topics, for example, find their home production in Regensburg, also in automotive, for example, μAFS, the system that we talked about for a while, pretty high resolution headlamps,


also very complicated products with a lot of new production steps, also these kinds of products we obviously first make in Regensburg as the majority of our R&D community is there to support such new product developments.

Unidentified Speaker: Do you have a presold capacity of Kulim?

Aldo Kamper: In a sense yes. As Ingo said, we are insourcing a lot of the products that at the moment we are outsourcing. We only are producing a very small amount of the chips that we need at the moment ourselves. First step for the next couple of quar-ters is really getting more and more of the volume service by in-house production. In that sense it's already presold in the sense that I'm already having that revenue right now where we have those contracts. And over the quarters, the capacity will arise and obviously then more and more will also excel new revenue that we need to acquire. Do we have the customer relationships? Yes, we do.

Unidentified Speaker: I have another follow-up question on LS for the strategic re-view. Does that mean DS is staying and is DS profitable?

Dr. Olaf Berlin: The answer was from Ingo very quick. Yes, it's profitable. And it will stand. As I said I see huge potential for DS and clearly see, as I said, with smart build-ings and smart rooms huge potential for us in the future.

Unidentified Speaker: I have a question from James Moore from Redburn. Can you help me on the Kulim mix? Are we talking about 100% General Illumination in 2018? And can you split commercial General Illumination versus residential General Illumina-tion in 2018? And how will the mix look like in you 2020 guidance with respect to com-merciall General Illumination versus residential General Illumination versus other pre-mium products?

Dr. Olaf Berlien: Good question for Aldo.

Aldo Kamper: The split for the coming year will be for Kulim about 25 percent UX:3, our top emitter high grade product and 75 percent on the volume emitter, our general


lighting product. Within that at the moment, the majority is on the consumer side but it's increasingly moving towards the professional side, but I would not like to talk about percentages there.

Perspective on this mix going forward, it will roughly stay there in that same magnitude I would think. On the one hand we have high growth expectations for our general light-ing business. At the same time, we also see still very drastically increasing demands, for example, for automotive products. As Olaf shared with you, about 20% this year of the new cars that are being built will have LED frontlighting. That doesn't sound like much, but only two years ago we all thought - not only us, but also our customers in the markets - it would be 10 to 15%. So, we are significantly ahead of the penetration curve, the conversion curve. And the same is true if you look at 2020 and 2022. We have basically almost doubled the penetration rate that we thought we would have when we looked at it two years ago, which is very good news. The demand that is driving this UX:3 capacity need, we will obviously satisfy that then also in Kulim now going forward and that will help to continue to balance out the UX:3 to Sapphire ratio in Kulim, and with that it will roughly stay the same as it will be for 2018, we expect.

Ingo Bank: Maybe let me answer that within the general lighting parts of the 75% that Aldo mentioned there would also be our mission to increase the professional part in that segment and reduce the consumer part (inaudible). It should be more (inaudible) from a margin perspective for us.

Unidentified Speaker: Can you say what proportion of work at Penang or Regensburg will be freed up by Kulim?

Aldo Kamper: The overall demand is rising so rapidly that we need all our factories. So, yes, we are reallocating some of our capacities out of Regensburg and moving them to Kulim, and we’re doing the same with our factory in Penang that we will all concentrate in Kulim from a chip manufacturing perspective because then we have one big site that is cost competitive. So, yes, there are some trends for business, but it doesn't mean that these other sites will be idle. On the contrary, we're looking for space.

Dr. Olaf Berlien: It's the opposite. Definitely the opposite.


Unidentified Speaker: Then I have a question from John Quealy from Canaccord Genuity on the Continental JV. What will the investment basis for the joint venture? Will it be cash, equity, IP, what will be brought in? And a second question: Productivity program in 2018, what can we expect there?

Ingo Bank(?): Maybe let me, again on this. The Conti JV I would like say at this point that we just signed the term sheet and we are still in negotiation so I can't make any comments on what kind of contributions etc., because it's subject to negotiation and discussion between the parties. And the second question was?

Unidentified Speaker: That was on productivity.

Dr. Olaf Berlien: Productivity increase.

Ingo Bank(?): Well, we have been very successful, particularly in Hans’ business, but also Aldo's business to continue to drive procurement, efficiency with our supplier base and also to drive manufacturing efficiency. It’s part of the yearly Capex, for instance, we have in particular in Hans’ business also driving more automation and productivity improvements into the factories that have it, and that will just continue also for next year, so our expectation is that we will have similar levels as we had this year.

Unidentified Speaker: Then I have a question on LSS on the weak markets we see, also competition is facing that. Are price pressure, under absorption of volume the biggest drivers of these weak results?

Dr. Olaf Berlien: Absolutely right, it's the combination of market and in this market usually then you have price pressure. So, it's really a combination, but I have to be fair. It's really a split between the different markets. Asia, for example, we had the very good run in Asia, so we had growth by 10%, and the price pressure in the market is really something in North America.


Unidentified Speaker: Then I have an overall question on depreciation: What will be your estimate of depreciation for 2018? This question has been asked several times.

Ingo Bank(?): I indirectly answered it, yes.

Dr. Olaf Berlien: Do you have another one?

Unidentified Speaker: Yes, I have several ones, so I have one from Alok Katre from Société Générale on the Kulim ramp-up. Could you outline how we should think about the growth effect on the Kulim ramp-up in fiscal year ‘18 and beyond? What could go wrong, what are the risks that you already baked into your guidance? Seems that there are a lot of things already that could go wrong, (inaudible), an upside.

Dr. Olaf Berlien: You asked about the risk. We monitored this project the last two years very closely, so we have really different levels of project management, and, as I said, we are absolutely, really absolutely engaged in the project plan, and we are under our budget plan. So that means we didn't invest more than in some other big projects, we are absolutely in our budget and in the timeline, and the same we monitor the de-velopment of the new and latest technology with Aldo and his team. So, as always, no risk, no fun, if you are in business, I have to say. But we try really to close, to monitor all the risk as much as we can.

Aldo Kamper: I think that’s well described. We have a good feel on where we stand and what's ahead of us and terms of yield expectation and so on. We have been mak-ing these chips in low volumes already at our Penang facility. Also, the team has al-ready the experience on how to handle the equipment and how to run it. So, we don't expect and we haven't also planned for any major disasters in our ramp-up, but still, as we said before, there is, obviously, in the beginning if you ramp a factory (inaudible) effect and there is a learning curve and yield effect that we have factored in. Is there a risk in that? Yes, things can still go wrong, but we feel quite confident (inaudible) in our plan that we can achieve this ramp.

Unidentified Speaker: And on the EBITDA guidance, how should we think about your R&D ramp up and Kulim effect beyond fiscal year ’18? Should we expect R&D step up


in 40 to 60 million ramp up effects just for early fiscal year 2018 or is there more sus-tained headway?

Ingo Bank: As I said earlier, I think two years ago, we said at some point in time we'll be a company running at around 9% level of R&D. I think we will be slightly above that next year. Beyond that, we should be sort of circulating at that type of altitude through-out the cycle; that's our expectation.

Unidentified Speaker: Could you outline what the Capex plan for fiscal year is and how should we think about Capex of phase two and three in Kulim and also ongoing Capex outside Kulim? Should we be thinking step up of fiscal year level or stabiliza-tion?

Ingo Bank: I think in my prepared remarks I was guiding towards a Capex level of around 600 million. I would expect that for fiscal year ’18 similar to this year; the lion's share will go to Opto, which is a very logical thing; we need to build the back end for the front end in Kulim. We also, Aldo, talked about expanding in Regensburg. So, that will be the lion’s share for that. And beyond that, I believe I said that we should think about level of Capex for the company in total of between 12 to14%. That should help us understand where we'll be going.

Unidentified Speaker: And I have a question from David Vos from Barclays. You talked about potential new businesses in LSS, what is that, how do all the acquisitions fit in?

Dr. Olaf Berlien: Repeat it, to all the acquisitions?

Unidentified Speaker: To the acquisitions we made this fiscal year, how could that be integrated into LSS?

Dr. Olaf Berlien: What we bought was Digital Lumens and that new technology for, as I said, a smart building, a smart room. And we will integrate it in this way that they run independently, but on the other hand, we have a transfer of technology between the


two businesses. So, as I said, what we are looking for in general, is that we're looking for technology portfolios, so try to buy small IP rights, so Digital Lumens has very nice patents and IP rights, and that was the main driver for Osram to take a step in. So, it's not a full integration, it’s new fields and new areas. So, we would like to grow, as I said in my speech, there will be a new pillar, a new feed in the future with digital business, and this fits in this new field digital business, and more will come.

Unidentified Speaker: I have another question on Opto Semiconductors. Are there any parts in the U.S. portfolio that are not growing? If so, are they fast declining?

Aldo Kamper: The nice thing that I can say is all businesses, all product lines in all regions are growing at the moment. It's very healthy growth. We are not a one-trick pony. I think that has always been our strength. We are not overly dependent on one industry alone. As I said, in all of our businesses, be it consumer electronics, be it general lighting, be it automotive, be it industrial, we see very nice growth rates and also all regions are contributing to this growth.

Dr. Olaf Berlien: As I said, Aldo’s target range is really something between 25 and 29%, and the same target range is not the same. Hans has a target range between 11 and 14 in profitability, not in growth. So, we gave all the segments now clear targets what they have to achieve.

I think we are done. Thank you very much for coming and being on the telephone conference with us. Thank you colleagues and we, Hans, Aldo, Ingo, are starting with our road show, and you will be in Paris tomorrow, and we'll be together then tomorrow evening in London, and then we are coming back for Frankfurt, and next week, Aldo, we are in New York. So, I hope to see you soon, some of you next Friday here in Frankfurt. Thank you for coming and have a nice evening!

(Finished at 4:27 p.m.)

Documents

Osram Licht AG Analyst Call - OSRAM Group Website/media/Files/O/Osram/documents/2017-11-07... · As you can see,with revenue of 1.7billion Euros, OS sets the benchmark, especially