Guido Pickert - VP, IR & Corporate Communications Felix Grawert - President Bernd Schulte - President Charles Russell - VP of Finance and Administration

Uwe Schupp - Deutsche Bank Günther Hollfelder - Baader-Helvea Equity Research Veysel Taze - Oddo Seydler Malte Schaumann - Warburg Research

Good morning, and good afternoon ladies and gentlemen, and welcome to AIXTRON's Full Year 2017 and Q4 2017 Results Conference Call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Pickert, VP of Investor Relations and Corporate Communications at AIXTRON for opening remarks and introductions.

Thank you, Operator. Let me start by welcoming you all to our results conference call. I'd also like to welcome our Executive Board represented by Dr. Felix Grawert and Dr. Bernd Schulte; as well as our VP of Finance and Administration, Charles Russell. As the operator indicated, this call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be re-recorded or re-broadcast without expressed permission. Your participation in this call implies the consent to this recording. As with previous results conference calls, I trust that all participants have our results presentation slides, Page 2 of which contains the usual Safe Harbor statement. I will not read it out loud, but would like to point out that it applies throughout this call. You may also wish to have a look at our latest IR Master presentation, which includes additional information on AIXTRON's markets and its technologies and is available on our website as well. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or a transcript on our website at some point after the call. I would now like to hand you over to Dr. Bernd Schulte for opening remarks. Bernd?

Thanks, Guido. And let me welcome you all to the presentation over AIXTRON's Q4 and full year 2017 results. I will start with an overview of the major developments in 2017, before handing over to Charles Russell, our Vice President, Finance and Administration who will guide you through the financials. This will be followed by Felix Grawert, who will talk about the current market environment. Finally I will close our presentation with our views on our business prospects in 2018. After that we are happy to get your questions. 2017 has been an important year of change for AIXTRON. We did manage to refocus the business on long term profitable opportunities for growth and we could also manage to bring AIXTRON back to profitability. This was on one hand due to the positive effect from the sale of our memory business late last year. On the other hand results from the solid work, the AIXTRON team has done to return our operative business to sustainable profitability. Let me quickly summarize the measures we have taken to achieve a more focus technology and product portfolio. We have sold our ALD/CVD product line for memory applications to Eugene Technology. There we competed with much larger manufacturers from the silicon industry with an increasingly limited opportunities to grow our market share. Hence the chance for us to bring this product line to sustainable profitability has been increasingly limited to. We have frozen over development activities in the area of MOCVD for Compound Semiconductors and Logic processors of 300 millimeter wafers. After discussions with our key customer, the originally expected market opportunities for this innovative technology were not predictable in the near to medium term. Therefore, no further development efforts are being invested in this field of the time being. In the area of OLEDs, we have discontinued our development activities for thin film encapsulation of OLED devices. The OLED activities are now focused on the OVPD technology for depositing different layers of the OLED stick which have been transferred to the AIXTRON subsidiary APEVA. After these steps we are focused on our core technology MOCVD for opto and power electronics applications, Plasma enhanced CVD for NANO structure and organic wafer face deposition for OLEDs. Felix will give you details on the current market opportunities of our MOCVD business. In addition to our MOCVD product line, we are currently developing a second product line for thin film deposition of organic materials primarily for OLED displays. Our OLED activities have been transferred to our daughter company APEVA and the discussions with a potential joint venture partners are ongoing. Gen1 OLED systems is in operation at an Asian display manufacturers R&D line. Gen2 system will be soon installed at the customer facility in order to qualify the technology for mass production. If successful in qualification and adopted by our customer, the OVPD technology offers a very high revenue and profit potential in the years to come. However, if the qualification is not successful then this potential might not materialize at all and we would need to adjust our R&D spending accordingly. As a result and based on our strong position in these market, as well as more efficient production processes, we manage to improve our gross margins last year. This was particularly the case in the second half of the year when gross margin reached 39% to 40% which also reflects the increasing sale of better margin product based on the growing value of high performance solutions to our customer. Finally, with total revenues of €230 million in 2017, we reached the upper range of our target for the year while order intake also developed better than originally expected at 206 to €3 million. We are also better than great even with an EBIT reaching €5 million and a net income of €6.5 million. At this point let me now hand you over to Charles for more detailed overview for the Q4 and the full year 2017 numbers.

Thanks Bernd and hello to everyone. Turning to the key financial slide, 2017 was a good year for AIXTRON with revenues and orders at the best levels since 2011. Orders received were €263 million and revenues €230 million, each a 17% increase on 2016. The strong orders reflect improved conditions particularly in our two core markets MOCVD to LED and for optoelectronics. In addition, order intake in Q4 of €66 million means that we begin the year with a backlog based on the budget rate of US$1.20 or €102 million which gives us a good start for 2019. Gross margin was much improved in 2017 at 32% compared with 29% in 2016. This was mainly due to a better product mix particularly in the second half the first half suffered from low margin sales of R6 tools and was also affected by the write-downs from freezing the 351 silicon TFE activities. Overall, as expected both EBIT and net profit were positive a black zero, as a consequence of the sale of the ALD/CVD product line and the other structural actions which we took during the year. We haven't separated out the one-off effects in the slides where you can find them in the notes 5 and 15 to the financial statements. Cash flow in 2017 was €91 million mainly as a result of the sale of the ALD/CVD product line and collections from the high level of receivables at the end of 2016. Moving to the next slide let me go into more depth on the income statement. As a general picture, the activities which we sold or froze during 2017 had revenues of €39 million and even taking into account the profit on disposal of ALD/CVD still made a small EBIT loss. The remaining activities made a small EBIT profit in spite of the low margin R6 sales in the first half. Gross margin in Q4 was 39%, this is free from the effects of desired margin sales from the old or sold product lines and is therefore indicative of what we should expect in the coming periods. For the year, the gross margin improved to 32% as previously mentioned. Selling expenses for 2017 were €10 million compared with €14 million in the previous year. The 2016 costs included the closure of a demonstration facility in China. G&A expenses were €17 million the same as 2016. The costly expense for G&A is unusually low because on completion of ALD/CVD transaction in Q4 transaction expenses have to be reassigned when included within net of our operating income. R&D costs increased by 28% year-on-year from €54 million in 2016 to €69 million in 2017. This includes the write-downs since TFOS and TFE which took place in the first half and also the increase spending on R&D particularly in the OLED area. Our OLED Gen 2 development expense should be relatively higher with the coming months during the period of evaluation. Other operating income includes the €24 million profit on the sale of the ALD/CVD product line. EBIT for 2017 was €5 million compared with minus €21 million in 2016. We recorded a tax credit in 2017 from deferred tax in the USA. We still have substantial amount of unrecognized tax losses both in the U.S. and Germany and if things go to plan, we anticipate further recognition of these assets in 2018. The net results for 2017 was €6 million profit. Moving to the cash flow slide, our cash improved from €160 million last year to €246 million at the end of 2017. The most significant factors in this is the €61 million were received from the sale of ALD/CVD and €39 million from collections from receivables. €12 million of the cash we received as a result of the sale of ALD/CVD we have to payout to third-parties in 2018 and that will reduce this year's cash flow. CapEx for 2017 totaled €10 million compared with €9 million in 2016. Turning to the next slide our balance sheet, AIXTRON's balance sheet is in good shape at the end of 2017 with improvements in metrics for cash receivables, inventories, and customer advance payments. The ALD/CVD liabilities are included in others, and the equity ratio is 81% at the end of 2017. With that, let me hand you over to Felix.

Thank you, Charles. Hello to everyone. Let me take you through recent developments in the markets we addressed, turning to Slide 8. First to the laser based 3D sensor market. Lasers are increasingly used for 3D sensor application in consumer electronics, industry and also the automotive sector. We have seen the introduction of 3D sensing features in high-end smartphone and now demand is expected from the Android Camp as well. We trust customers from Europe, the U.S., and Asia, and it is expected that the strong market conditions in the segment will last beyond 2018 as 3D sensing is proliferating across the portfolios of smartphone vendors requiring an ever-growing number of laser unit per year. AIXTRON is well positioned in the segment of MOCVD twisted lasers because this application requires high uniformity and precision in the deposited layers. The strength of our tools matches well with the customer requirements in this segment. In order to keep our strong market position, we make dedicated investment in further improving the capabilities of our tool and we expect a strong return on this investment. For lasers, we currently experience strong and growing demand from customers that serve applications and telecommunication as well. Global data traffic is exponentially growing driven by the increasing use of Internet services, especially video on demand, cloud services, and by the Internet-of-Things. This translates into demand for lasers as optical signal transmitters, photodiode as receivers, as well as optical amplifiers and switches. They are used on the one hand within data centers and maybe found interconnect between servers and on the other hand in the field across the optical Datacom networks. The strength of our technology mentioned before also applies to this segment. In other market with strong orders in 2018 is the area of specialty LEDs. AIXTRON has a strong position in the area of red-orange-yellow LEDs. We call it ROY that are used for large area displays such as in airports or shopping malls and gradually also in automotive technology. This brings me to the display segment on Slide 9. For displays of small to medium size, the AIXTRON Group has two fundamentally different next-generation technologies in the pipeline. On the one hand, our subsidiary company APEVA is working on OLED technology, on the other hand, customers move our tools to develop MicroLED technology. The markets are OLED display, as they're mostly driven by the use in mobile phones in recent years. For the coming years, the further increase in the use of OLED displays in mobile and increasingly used in TV sets is expected. In addition, driver could be the emerging of foldable displays. Market researchers expect the OLED industries revenue to more than triple in the timeframe from 2016 to 2021 to approximately US$50 billion. As mentioned by Bernd earlier in this call, a Generation 2 OLED system of our subsidiary APEVA will soon be installed at the customer facility in order to qualify the technology for mass production. In parallel, we see several customers use our MOCVD tools for development of MicroLED technology. Some TV makers have made announcements of first product at Consumer Electronic Show this year. For MicroLED is expected that a very uniformity across the wafer and precise layer control is needed, again a feature offered in the required precision by AIXTRON MOCVD tools. While OLED technology has matured in volume production OLED today, the MicroLED market is still in an early phase. We get different feedback from customers on the timing of volume wraps. Some claim start of mass production as early as in 2 to 3 years, others expect up to 10 years until true volume. I'll only briefly touch the area of power semiconductors as we discussed this in quite some details in the last earnings call. We see gradual pickup in the demand for tools in the areas of gallium nitride based power semiconductors, as first customer ramp production after a successful R&D and qualification phase at their customers. The market for silicon carbide based power semiconductors is moving toward volume ramp with silicon carbide MOSFET being used in the number of first high volume application such as ED charging station and first ED model. AIXTRON comes from the rather low market share as mentioned in the last call in this segment, but we get positive customer's feedback on the new silicon carbide tool we are currently developing. In addition to the MOCVD and OVPD product lines, we are developing technologies for the production of graphene, carbon nanotubes, and carbon nanowires as part of innovation project. These material promising interesting future potential in the variety of application, be it at battery or in display application. Thus in summary, we see multiple intangible growth opportunities in the market we are addressing. Reason for that is that our equipment enables the development and manufacture of key components for optical data communication for cloud computing for the Internet-of-Things, next generation fast mobile network such as 5G data communication, next generation OLED or MicroLED displays, highly efficient energy conversion and electro mobility, as well as for 3D sensing and smartphone cards and other areas. Due to our proven ability to develop and market innovative enabling deposition equipment, we continue to believe in the positive outlook for AIXTRON and its targeted market. With that, let me hand you back to Bernd for our guidance and wrap up.

Thank you, Felix. Before we open the Q&A session and give you our view on what we expect for 2018, on Slide 10. Based on our current corporate structure and estimate of the order situation in our budget rate of U.S. dollar to the Euro of 1.20, we expect to achieve both revenues and total orders in the range between €230 million and €260 million in 2018. Please note that this represent a gross between 20% and 35% based on the €191 million revenue of the continuous business in 2017, excluding the revenues of the ALD/CVD product line which were sold. On the profitability side and mainly due to the larger share of higher margin product as mentioned before, we expect to achieve a gross margin between 35% and 40% and an EBIT of 5% to 10% of the revenues in 2018. Furthermore, we expect to achieve a positive operational cash flow in 2018. However, we expect the cash flow to be lower compared to 2017 due to the positive effect on the sale of the ALD/CVD product line in the amount of €51 million which were included in the cash flow of the previous year. In addition to that, cash flow in 2018 will be affected by liabilities to what third parties of the ALD/CVD business in the amount of €12 million which we received in 2017 and which will be paid in full during 2018. This expectation for 2018 are based on full consideration of the results of the AIXTRON subsidiary ATEVA with all necessary investments to further develop the OLED activity. This 2018 gross will be fueled by the capacity requirements of our customers to satisfy demand on 3D sensing for mobile and increasingly automotive applications, as well as optical data communication. Beyond 2018, we are looking at the growing usage of white band gap material, silicon carbides, and gallium nitride in power components, particularly in electrical vehicles as the major growth driver. These opportunities require investment in car development now. Finally, let me thank you the shareholders for your continuing support, as well as the Executive Board and the Supervisory Board for their hard work of the last 12 months. Ladies and gentlemen, this concludes our 2017 annual results presentation. And thank you for your attention. We are now available to answer your questions. Guido?

Thank you, Bernd, Felix and Charles. Operator, we will now take the questions please.

[Operator Instructions] And the first question comes from Mr. Simpson. Mr. Simpson you have the word.

Maybe just a couple clarification questions from me actually. Just looking at that silicon carbide development that you're doing, is there anything you can give us as far as timeline and design advantages that AIXTRON would have into that space. And whether or not you consider this is definitively for automotive end markets or if it's got a wider appeal?

Yes thank you for the question. So we expect the first R&D tool by the end of 2018, first volume shipment early of middle 2019. This tool will target the broad silicon carbide market both for industrial application and also for automotive application.

So you’re startling both autos and industrial.

Yes.

Maybe if I step back a little bit and look at the general landscape for 35 compounds. If you look across the semiconductor space, there is a crowding R&D starting to happen. We know [Cree] is doubling investments [ST] you are pushing into use of GaN in automotive even [indiscernible] look at power amplifiers for GaN on silicon. And I wondered from your perspective maybe two questions I have got here. What is it that keeps you ahead of others as we move into 35 compounds on silicon and whether you think there is a process maybe a silver bullet process in the market that will be sort of winner takes all, who do you think or where do you think that sort of layering on silicon could actually be advantaged to your customers?

Two questions, what keeps us ahead and what is the silver bullet yes. So let me go to the first question first. So what keeps us ahead, essentially the compound power semiconductor market both gallium nitride and silicon carbide has to be looked upon by subsegment, yes. So we cannot just look at the overall but for example gallium nitride for at least for different market segments. We believe that we have a very promising - we have very good tools already today in the marketplace for some of these markets and for those markets where we’re not ahead we have and according to development pipeline. So, we look and summary segment by segment and make sure we had a winning value proposition for each tough segment. To your second question whether there is the one silver bullet I would say, no there isn’t because this market falls in so many sub-segment that have to be addressed individually and that have to be understood in their specific requirements and this is our approach.

So, it's different bullets for different sub-segments basically?

Correct.

The next question comes from Mr. Schupp. Mr. Schupp you have the word.

Two questions please, first of all quite a few of your customers have announced overall three to six months quite substantial plans to expand CapEx particularly for the 3D sensing topic for potentially both of the major Optoelectronics companies ultimately. Just wondering not really reflected and how far is this reflected in your Q4 already and how are you looking at the first half, I guess the precise question would be are you to some extent building a great order book. Is there potentially to kind of delay as much as you can orders in order to set out the lead times somewhat. And the second question would be just on guidance, if I take your guidance Slide 8 of your results presentation and you show that the order backlog is already about 100 million as per the end of last year, you have a safe several tax revenue of up to 45 million for the year. In other words the backlog is safe revenue of 150 million for the year, you can size that assuming you get orders for the first eight months that you can still invoice this year implies about 50 million or so of what order - next year [Technical Difficulty]?

Mr. Schupp, I think we lost you, are you hearing us. I think we lost the speaker, we may switch or let me answer the question as long I have understood them. I think one question was about the CapEx ramp in the 3D sensing space and what is the pattern between Q4 and years to come, I think we see both. We have part of the orders in Q4 definitely been for three sensing applications but we also expect a certain capacity rents to come in the first half of 2018. So it’s in both and regarding our guidance, first of all I think Mr. Schupp mentioned that we may be able to invoice orders we receive the first eight months. We have to anticipate that order cycle times are increasing because of the heated semiconductor market and the supply chain. So in our guidance we basically assumed that we take basically the first orders we take in the first half that they recognize this revenue and this [indiscernible] basically we took here and I think when you look at the guidance you see this is - we’re assuming a continued business size what we experienced in the second half of year 2017.

[Operator Instructions] Now we have a question from Mr. Hollfelder. Mr. Hollfelder, you have the word. Günther Hollfelder: You mentioned R&D in the coming months so can you provide an R&D Ber Schulte, rough guidance for 2018?

I think we have guided - it’s Charles here, I think we’ve guided for the EBITs and we've guided for the gross margin and so the OpEx logically is around 30% in between that which is around 75 million. We don't expect much change in the level of SG&A and therefore the difference from the similar level of SG&A is this year to next year is the R&D spend.

The reason for the increase is simply that we’ve got the machine which will be evaluated over a period of time and we have to expense over that period.

And as I mentioned Mr. Hollfelder that we assume for the entire year the full cost of the OLEDs development and the OLEDs daughter APEVA to be consolidated in our numbers. Günther Hollfelder: In terms of the time horizon for the OLED qualification for mass production when do you expect to have a decision?

So we currently have Gen2 OLED deposition system which is been built up at the site in Asia. The system is up and running. We are currently doing some technical fine tuning and close collaboration with our customer. If that is successful, then the tool will be moved into our customer R&D fab for qualification and this moving into the fab we expect into Q2. Günther Hollfelder: And one question on silicon carbide, you mentioned the new tool, can you talk about what will differentiate the tool is it a throughput issue that you want to differentiate by throughput and at the end of the day by costs so, but what is your strategy here?

Yes, so our tools are already today very strong in term of uniformity and the layer and the thickness and precision, so this box, this requirement of our customers we already fulfill today. And what we are today missing is the throughput topic and with a new development this gap is being addressed. And we expect that the new tool move in terms of throughput at and the leadership position in the competitive environment. Günther Hollfelder: And for sales you expect during 2019 related to the new tool or...

Correct. Günther Hollfelder: And last question just on your optoelectronics business, I mean you announced during the past two years a very nice orders also related to your 3D sensing VCSEL suppliers. On the other hand, your sales have been relatively stable for example 2017 compared to 2015 and was some of the - let's say 3D sensing related VCSEL business offset by the weakness we've seen over the past let's say 12 months in the Datacom Telecom area, and now you have pretty much a perfect scenario where Datacom Telecom is coming back and at that same time you're also seeing 3D sensing?

I wouldn't expect it like that. I think the 3D sensing showing some significant volume, we only experienced in 2017. And while the Datacom Telecom business is a relatively stable business, we had over the years and basically you can say on this is stable demand, we had let's say for the last - one or two years on Telecom this 3D sensing comes on top.

The next question comes from Mr. Taze. Mr. Taze, you have the word.

Yes, Veysel Taze, thank you for taking my questions. The first will be around the EBIT guidance. You already touched the topic, but nevertheless if I look at your gross margin guidance it's really very strong. But then the EBIT margin is, yes, implies at the midpoint roughly 70 million OpEx, yes, 73 million OpEx. That looks quite high, if I look back at your previous communication where we were talking about 40 million to 50 million. So I was wondering if there are new elements in the OpEx?

In the R&D spend in 2018, we will as I said before have to expense the Gen-2 demonstrator which we are in the process of getting qualified and that’s we’re expensing full during 2018. That's the major change in the R&D compared with 2017s continuing R&D and the additional spend on power electronics development.

May I clarify in addition Mr. Taze. The numbers you mentioned is basically excluding the cost for the OLED. And as we mentioned, we are in continuous discussion with some joint venture planning’s for our APEVA daughter company. And as we do not know exactly how the result is going to be, we decided to guide with the full cost for the OLED product line. And this was the cleanest way we thought to present.

Well understood. I didn't have to expand on Gen-2 tool, so that's okay. On the OLED part, I mean there were recently a lot of rumors from Samsung, what is going to happen today OLED business? There are some push-outs in the CapEx plan. I think particularly for the Fab 5 what they have, which is in this OLED space. How do you read this topic? What's your take on that?

So, of course we cannot comment on a decision's by any player in the industry. You just mentioned the big player here, but we overall see that there still is a is a very high demand, very strong demand and that the signals we get, regardless of any short term movement.

Then on the VCSEL part of the business from your previous call what I understood is, your market share is close to 100% or something. So you're a competitor VECO, I think they introduced a new tool generation for the VCSEL market. How do you see them, their tool versus yours? Is it, yes, it's part rather for Datacom et cetera and you're more strong into in the 3D sensing or is that any threat to you?

Certainly, we believe that our tool today is the leading tool and I'm not prepared and not able to say exactly the market share, but I think we are, I think we can say we have the leading tool in both in 3D sensing and in Telecom Datacom. And there's always competition and we always welcome competition. And there ever been competition and we take competition always very serious. But today, all we can say is that, we believe we have the tool of record in these markets.

And the final one, I don't know if you are willing to share that but in your total tool shipments in 2017, how many tools were related to silicon carbide?

Small number, two, three, four, something in that order. Don't have the exact numbers here. But we mentioned before that silicon carbide, we come from a low market share and we want to grow based on the new developments which we discussed earlier.

The next question comes from Mr. Bernstein. Please state your question.

I have two. One is just on the Datacom market and ramp over the next couple of years. I guess in prior years the Metro and long-haul markets have taken on the order of 300,000 lasers or so and now that talking about replacing essentially Ethernet, netcards with fiber-optics. We're talking about millions. Is that your understanding and are we expecting a ramp in VCSEL production to meet that?

Well, I must admit that I'm not the expert in the end device, but we would be seeing definitely, is that a mid-haul and short-haul are now in getting usage of laser devices in particularly in this big cloud computing, cloud centers and this is the driver of our customers to order more tools.

And then could you just talk about large customers, top 10 customers et cetera, any new ones in 2017? How you expect things to maybe change in 2018? What percentage is the top 10 customers were for the year?

Well, I believe the top 10 customers have not been changed over recent years. And honestly, I do not also expect them to change in 2018 and forward think the - in particular in the optoelectronic area. I think the battlefield is quite clear. And I think it's all the known suspects you can think of.

And how big as a percent where your top 10 customers in 2017?

I would say, it's typically top 10. It's typically in the 60% to 70% range.

The next question comes from Mr. Schaumann. Mr. Schaumann, please state your question.

Maybe that's me, Malte Schaumann, Warburg. First question is on OLEDs, more than one company is putting millions or billions of dollars into inkjet printing and betting on that technology. So maybe you can elaborate on how do you see inkjet in comparison to your OVPD technology, maybe for both applications smartphones and large area TV displays?

So we believe that also the OLED market will fall into different sub-segments. The Inkjet printing has a benefit when it's not about finding pixels, but very, very large screens, the high resolution is not needed or layers where no pixilation and all it needed, so there is likely to be a coexistence of different technologies in the marketplace. And how exactly that game will play out, the future will show.

So high resolution smartphones, but probably a lot of rely on vacuum deposition looks better...

Exactly. Yes, for high resolution the inkjet printing we would not expect to give the right - the required resolution in terms of pixel density for very large TV screens that can be a different topic.

And then secondly, maybe you can comment on your working capital, how that might develop going forward? You came from pretty high working capital level both from inventories and receivables at the end of 2016 both reduced substantially to pretty low level in 2017 from a working capital sales ratio of below 10%. So maybe you can give us some guidance. What should we expect and then model in 2018, 2019?

I think the total receivables in particular between 2016 and 2017 was because a lot of the sales in Q4, 2016 were bunched in December. And that as I think around a third of the year sales were made in one month of December. So that was unusual. And don't forget during the year we sold ALD/CVD activity which is another reason why inventories and receivables and working capital requirements have fallen during the year. So the levels you've got at the moment where the inventory turns to something just under for the receivables are quite low in terms of day sales, that’s something its 30 something. They look to me to be fairly normal for the MOCVP business because that business has advance payments. I don't expect any substantial change there, apart from the volume effects of having a bigger business. For that OLED activity, in the future if that gets production orders then that's a different question and we'll have to see that when we get those orders.

There are no further questions anymore.

With this, we conclude our results conference call for today. You know where to find us, if you have any questions left. And we would welcome you again to our next conference call in Q1 at the end of April. Thank you very much and have a good day.