Good morning, good afternoon, ladies and gentlemen, and welcome to the Besi's Quarterly Conference Call and Audio Webcast to discuss the company's 2018 Fourth and Annual Results. You can log into the audio webcast via Besi's Web site, www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer; and Mr. Cor te Hennepe, Senior Vice President, Finance. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced in whole or in part without written permission from the company. I would now like to turn the call over to Mr. Richard Blickman.

Thank you. Thank you all for joining us today. We will begin by making a few comments in connection with the press release we issued earlier today and then take your questions. I would like to remind you that some of the comments made during this call and some of the answers in response to your questions by management may contain forward-looking statements. Such statements may involve uncertainties and risks as described in the earnings release and other reports filed with the AFM. For today's call, we'd like to review the key highlights for our fourth quarter, the year ended December 31, and also update you on the market, our strategy and the outlook. First, some overall thoughts on the year and Q4 results. For the fourth quarter, revenue of €92.5 million and a net income of €22.7 million compared favorably to expectations. Higher than anticipated gross margin of 56.4% and a decrease in sequential operating expenses helped us exceed operating profit guidance despite a 20.7% revenue decrease versus the third quarter. In addition, net cash continued to build and ended the year at €199.4 million. There were a couple of items to note in the fourth quarter results. The 11% sequential operating expense decreased first to third quarter last year was aided by a number of favorable onetime year-end recordings. Such recordings included reductions in the warranty provision due to favorable experience in recent years, the pension curtailments, benefit related to headcount reductions and some favorable R&D grants received. As such baseline operating expenses which include all onetime items, variable compensation, restructuring and forex effect declined by 2.3% to €25.7 million in Q4 versus Q3 2018. In addition, we had a net tax benefit in Q4 due mainly to €4.8 million in tax credits associated with the innovation books program of the Dutch Government for the period 2015 to 2018. This program is ongoing and related to R&D activities performed in [indiscernible]. Besi's 2018 results reflected solid performance and strategic execution in the assembly equipment market significantly more challenging than 2017. Revenue in total of €525.3 million and a net income of €136.3 million declined by 11.4% and 21.3% respectively versus 2017. Our 2018 revenue development was primarily affected by a second quarter slowdown in high-end mobile demand followed by broad weakness in memory and other end-user markets starting in the third quarter of the year. Revenue development was also adversely affected by forex headwinds from a 4.5% average decrease in the value of the U.S. dollar versus the euro. In retrospect, it appears that Besi's second quarter or the weakness was an early indication of an industry downturn both in extended upward trajectory which began in the second half of 2016. In the current downturn, we rapidly aligned productions, supply chain and personnel in response to adverse market conditions. As a result, Besi was able to maintain peer-leading metrics of profitability such as gross margin and net margin of 56.8% and 25.9% and a return on equity of 33.8%. In fact gross margins exceeded 56% in each quarter of 2018 despite a revenue decline of 42.6% between the second and fourth quarter of the year. Further, we successfully reduced costs in the face of decreased customer demand due to the ongoing execution of strategic initiatives, continued reductions of European fixed overhead and the realignment of temporary Asian production personnel to a changing market environment. Also wanted to inform you of a minor change to our supplemental information presented; we are opting to present only orders from now instead of backlog going forward as the preferred means of viewing Besi's prospects in future periods. Backlog is now much less meaningful as an indicator than previously given the significant shortening of cycle times to customers which most often are less than three months. Periodic review for activity is nothing new to our industry. In fact periods of less robust growth let us further own our strategy and financial potential to capitalize on the next major industry upturn. As you can see in this next chart, we took action in Q2 2018 to scale back supply chain activities and temporary protection personnel. Once we saw that market conditions were weakening, we realized our objective to reduce total headcount by approximately 16% by year-end. In addition Besi continues to reduce European overhead as reduced fixed headcount in certain Asian locations post the large production ramp in 2017. In this way, we aim to keep net margins and cash generation well above prior trough levels. From a longer term perspective, we're on track to further reduce annualized structural cost and reach our savings target of 15 million to 20 million per year euros by 2021. Our liquidity position improved significantly this quarter with net cash increasing by €39.3 million or 24.5% due to continued healthy profit generation and reduced working capital needs in the current downturn. We ended the quarter with cash and deposits of €475.5 million or €5.68 per share equal to almost 31% of Besi stock price of €18.48 at year-end. In this next slide you can see how Besi's cash generation has improved over the past five years. Cash flow from operations has steadily improved from 19% of revenue in 2014 to 35% in 2018, even considering both industry upturns and downturns. It also underlines the enhanced flexibility and scalability of the business model in recent years. Strong cash generation continues to support as a shareholder friendly capital allocation program. For all of 2018, we return to shareholders €209.5 million in the form of dividends and share repurchases. We will have returned to investors a total of €608.4 million or €6.57 per share from 2011 to 2018, during the proposed dividends and share repurchases to-date. During 2018, we also upped our quarterly share repurchases from approximately €6 million to €12 million per quarter. For the full year, €35.5 million in share repurchase were made an increase of 51% versus 2017. Share repurchases are continuing in 2019. Given continued strong cash flow generation and our solid liquidity position we proposed to pay cash dividend over the fiscal 2018 of €1.67 per share for approval at our AGM April 2019. This represents a payout ratio of approximately 91% or approximately 9% dividend yield relative to our year end stock price. Next I'd like to speak a little bit about the current market environment. Here is our research now estimates that the assembly equipment market was approximately 4.6 billion U.S. dollars in 2018 and approximately flat with 2017. They also forecast that the market will decline by 12.4% in 2019 primarily related to slowing global economic growth, trade frictions, cautious customer ordering patterns and excess memory and smartphone capacity given the large build out in the 2016 and 2017. VLSI expects a rebound in 2020 of almost 10% if capacity utilization rates increase and new products are introduced. Despite challenging market conditions currently there are many reasons for optimism about the direction of the assembly equipment market and Besi's prospects. We have a leading position in the advanced packaging space whose outlook is bright. As an important enabler of the digital society and the new applications, which will be generated along with it, the advent of the 5G capabilities, artificial intelligence and the ever increasing amount of advanced logic memory capacity necessary for the built out of cloud infrastructure should be strong drivers of innovation and growth in the next customer investment route. The significant customer focus currently is in the development of die bonding and packaging solutions for average smaller highly complex and feature-backed 5G compatible smartphones. 5G connectivity could accelerate advanced packaging adoption over the next five years in the mobile Internet and computing markets and in applications such as artificial intelligence, automotive electronics and the Internet of Things. Industry experts estimate that initial 5G subscriptions will be available by 2020 and that by 2024, 55% of North American and 43% of Northeast Asian subscriptions including China and Japan have migrated to 5G. Now a few words about guidance. At present, the 2019 outlook for this assembly equipment market is hard to predict. There are many factors which could influence the outlook and timing of any anticipated rebound this year such a slowing global growth and trade frictions between the U.S. and China. Looking specifically to the first quarter, we estimate that revenue will decline by approximately 15% versus the fourth quarter last year as difficult market conditions continue in what is traditionally our weakest quarter of the year. However, we expect that gross margins will remain in the 55% to 57% range as we further adjust over at levels to customer demand. Further, we anticipated OpEx will increase by 25% to 30% versus the fourth quarter given approximately 3.5 million of incremental variable compensation expense and the absence of favorable onetime recordings from the fourth quarter. In contrast, we estimate first quarter '19 [indiscernible] on OpEx will increase by only 5% to 10% versus the fourth quarter primarily due to increased R&D spending. And finally, we estimate that our effective tax rate will range between 10% and 15% for 2019 and that CapEx will be approximately €4 million. That ends my prepared remarks. I would like to open the call now for some questions. Operator?

Thank you. [Operator Instructions] Our first question is from Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead sir your line is open.

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

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

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

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

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

I would argue even stronger. Now, we have launched where it is, yes. We have launched a new version flip chip machine, which is currently being qualified by several of the memory manufacturers and that machine is much faster than any other system on the market today. However, it's still in memory, it is a very big cost battle. So any way to avoid flip chip will be used by the memory manufacturers. But, at some point they will be forced whether that is this year or next year, more likely next generation in my view. But Besi is in an excellent position.

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

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

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

Yes.

Okay. That's fair. Thank you.

The next question is from Nigel van Putten, Kempen & Co. Go ahead please sir.

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

Well, the factors influencing gross margin are in the first place product related. So it depends very much on the product mix going forward. And we have said in several calls that there's a difference between gross margins in the smartphone space, computer space and automotive space. And also there's a margin delta in the higher end versus the medium end. So you have to define a certain scenario. And at the same time there's ongoing cost reduction. We are improving our supply chain. We are improving our cost structure in operations. So anticipating certain ongoing developments. Yes. It's very encouraging that we guided sometime ago that the low-end of the gross margin would be around the low 50s. And it appears to be somewhat higher even taking into account headwind from a U.S. dollar and still a major part of our business over 50% over 60% is U.S. dollar based. So also the dollar has an impact on that gross margin. So will the dollar's slide out due to trade wars et cetera that will have a negative impact. So all these variations Nigel, it's hard simply to say well, if this is the bottom, it's also the bottom of the gross margin. But, yes, you can say it looks very, very positive.

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

I think it's more confirming a longer term trend. At this moment, order activity across the board is as it is and it has to do as we said in the comments. The overall situation, uncertainty and once that uncertainty becomes less uncertain, you may see investments in directions as you are indicating whether it will be really disruptive is always to be seen. Sometimes there's some wishful thinking. But experience tells us this industry is not so fast in development whether it's going from 14 to 10-nano or EUV or [novo] [ph], name many examples. So in our view these new technology introductions will always go slowly. But the key is that that you have to be involved and in strong positions. So if it comes, it certainly will help us.

Very good. Thank you.

The next question is from Mr. Rob Sanders, Deutsche Bank. Go ahead. Your line is open.

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

Well, we can only confirm with what you have heard and not only from semiconductor, but I was sitting next to the person in an airplane from Chengdu to Taipei. And they were moving production of lawnmowers China back to Taiwan for the U.S. market by airway. So, yes, that's happening. Also our customers clearly are developing more plans for future production expanding, but those are new products outside of China. There is also clear evidence that the investments of China in the semiconductor is slowing down. You would expect it to increase, but it's slowing down. So the part of the negative sentiment is due to debt uncertainty. Will that ignite a lot of CapEx outside of China? That depends enormously on GDP. But sooner or later, you will have a different landscape and we are excellently positioned for what's happening in both areas.

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

Well, at a high level, if you follow the -- let's say information out of the high-end smartphone universe, it's pointing towards 2020 next generation. And that's not unrealistic because if you look back in history there's always a two, three year lapse. And that would fit. [Technical Difficulty] Can you still hear me, Rob?

I can hear you, but I'm assuming that the moderator won't be able to record you. [Technical Difficulty].

So is '19 a transition year, it's always hard to tell. This industry is extremely; let's say sensitive to GDP et cetera. My biggest clearly guidance is more what's happening in the world, VLSI is always behind the fact. They record their observations, which is fine. But, we're prepared whether we have an recovery soon, it would be excellent. And we have been able to ramp 60% even 80% quarter-on-quarter. If it stays somewhat softer, the quarter longer, we have seen our gross margins, you've seen our net margins, you've seen the guidance of the OpEx. That's also fine.

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

Correct.

So beyond that it should go back to whatever you are guiding minus 3.5, correct?

Correct, yes.

Okay. Just want to check that. Thanks.

And the increase is due to some higher R&D spending compared to Q4.

We have a question now from Mr. Marc Hesselink, ING. Go ahead. Please sir.

Yes. Thank you for taking the question. And my first question would be on the application of driving demand for 5G, which you mentioned also in the press release. I can imagine that there is more of the 2020 story you talked before in the call. Could you explain how it's going to drive demand for you, is it purely that is return replacement toward smartphone or is it also that that change the chipset in 5G is driving that demand for you.

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

So basically -- so it's building up over time the period.

The transition period as we said, you can expect in the next five years. In the next three years a rollout and that's how it typically happens.

Great. The earlier comment you made on the increase in R&D spend. Something particular that you have to sustain or set some request from the clients, was it just you surely want to open up the new opportunities going forward.

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

So, you can see -- your designs in [indiscernible] at this stage.

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

Great. Thanks. Then on the new guidance of 15% sequential decline, you kept the order intake, I guess that most of the weakness is still down in the smartphone offset by some strong in cloud applications. Is it fair to say that automotive is then somewhere in between those two?

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

Okay. Thanks. And then, final question on -- I just want to ask a bit about the M&A, I know in previous calls you said that [indiscernible] were not right yet or you cannot acknowledge that you cannot achieve anything like [indiscernible] or anything but just in general what are you seeing on the side of potential seller?

Well, I could answer maybe as follows; that we are still as always very much interested to expand our product offering to the leaders in this industry. So if an opportunity along those lines occur then we are able to act and that will determine -- then whether something will happen or not. It's not just because prices are interesting. And as you said of course it's something will occur, we will be able to timely share that. But what often happens in downturns, certainly customers realign their strategies. Also the suppliers like us look at their strengths and weaknesses, but also the others. So in those downturns, sometimes opportunities arise. But again, customer driven because it has to -- in the end improve our product position vis-à-vis our main customers. And at the same time due to 100% integration like KLM and Air France. That should reduce our cost.

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

First of all, you have to ask the question, would that improve our position with our current customers and offer better positions with other customers. Well, the answer to that question is negative. But then, if you look at the entire transaction where Shinkawa and Yamaha have joined, I think for Japan itself it is a very good development, but for us it's very far away.

It's clear. Thank you very much.

We have another question for Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead. Please sir.

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

Yes. There will be a slight effect usually we guide between 12% and 15%. Now we can say for the rest of the year between 10% and 15%. Fluctuations are simply because of profits in jurisdictions and certain facilitations or arrangements but it's between 10% and 15%, so there will be some effect of this credit.

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

Well, you first -- there are three different sets of customers in China. One is the China-China customers at Chinese companies. Number two is joint ventures with outside China companies. And 3 is outside customers having factories in China like an SD, like in Intel. And if you look at that landscape, clearly Chinese semiconductor industry will continue and over time we will gain certain market shares. The question is of course with the outside companies that situation has, I would say changed in anticipation of whatever outcome. So that part will be affected. On the other hand, for us there is no difference whether these machines are installed in China or in Philippines or in Thailand or in Vietnam. We're happy to install anywhere. So as a percentage China will change, but there's a total -- probably not.

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

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

Also it's a big opportunity for you.

Yes.

Yes. Okay. So but on the ad market disclosure that is something that will follow at a later stage then.

My guess would be that smartphones, high-end smartphone communication which was 35 maybe is now around 30. Computing is definitely 25 and auto may have gone up from 17 to 20. That's the difference mix. Spare parts has gone up and so scrap has gone to 15, but we will confirm that data once it is fully settled and in the end we will report.

Okay. Thank you.

Next.

Our next question is from Mr. Edwin de Jong, NIBC. Go ahead. Please sir.

Good afternoon, gentlemen. A few questions left. On 3D sensing, has there been any developments in the last quarter your -- what's your end client is saying that and/or there is also adopting this technology and does that require equipment from your side or can you tell a little bit about that?

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

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

Usually there is a seasonal effect. You see we always look at and those numbers you can't go to that and if you look at the DSOs net inventory turn in rapid declining market as we've seen it now. Inventory turn usually worsens a bit before it goes up then all you need to do is work out. DSO usually stays flat or increases a bit when a business is down. Customers tend to sit on their money somewhat longer. So there's a seasonal effect when revenue goes down, your working capital will be less. But if you look at the metrics they will go up a bit, before it will be back to normal, once specifically looking at the inventory, once the inventories are back on a normal level. But we are organized in a way that that is no risk for obsolete [orders] [ph]. It's not a big topic, but we do see some relatively some higher revenue as compared to earlier days, but that would be back to normal in the course of 2019. So, if you look at development of Besi's net cash, we always see three quarters of growth, then you pay out a dividend. Of course, then the net cash is back to where the levels where we would like it to be, net goes up. So there's nothing specific about it.

Okay. Thank you. And then, maybe on [innovation box] [ph] tax benefit. And that went for a couple of years I think you said in the answer.

That's a technicality. Once you start to apply for an innovation box, you have to do that when your tax loss carry forwards are reducing. When you do the application, you can go back to the years that haven't been assessed finally that those years are always lagging behind -- reality lagging behind the current filings. So we could go back to '15 because that was still not finally assessed but that's normal. That's normal to term.

Okay. That's also something that you can expect going forward.

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

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

No. There's continued evaluation of our technology at those major solar companies. There are some programs in a well-advanced stage. And it could be that they will materialize this year. So there's no at first evolved, it's only -- it's market acceptance, it is cost, it is life cycle and life time guarantee. And that is the testing that that takes very long. But the interest is still very positive.

That could be an issue for later this year maybe.

Yes.

Okay. Thank you.

And we have a question from Mr. Rob Sanders, Deutsche Bank. Go ahead. Please sir.

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

Well, dividend is very much depending upon our continued performance. So if we continue to perform as we are doing also in relative terms. There is no reason to change our allocation policy. So it may go up and down, our profitability but the policy is as it stands. On the second question, I already answered that. We're very much involved in photonics also different photonics related to the 5G modules in a very good position. So the major installed base already. So yes, that's a really interesting segment of the market.

Okay, great. Thank you.

Gentlemen, we have no further questions. Please continue.

Well, then I think everyone taking the time to listen to this call and your questions. If any further questions don't hesitate to contact us. Bye-bye.

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