Good afternoon, ladies and gentlemen, and welcome to the Jane Optic Conference Call regarding the Financial Statements 2018. At this time, all participants have been placed on a listen only mode.
Yes. Thank you very much, and a warm welcome from our end here to everyone on the call. Welcome to our earnings call 2018. With me today here in Jena is Anzio Schumacher, our CFO, who later on is going to go into the details around our numbers. Let me kick it off though with saying that 2018 has been another record year for our company really.
We've posted a sales growth of 11.6%. The group posted sales of €834,600,000 in the financial year 2018. And at the same time, we managed to expand our margins considerably. Our EBITDA has been at EUR 127,500,000, which is an equivalent of 19.3% more than prior year. Margins of the business came to 15.3%.
EBITDA of sales prior year margin had been 14.3%. So from a financial perspective, 2018 certainly have been a very successful year and, as I said, another record year for our company. Most importantly, though, I think is that we've started to set in motion our strategic yearning and our transformation of Genoptic. At the beginning of the year, we have communicated a new strategy for our group, a new strategy calling for more focus, more innovation and for more internationalization for businesses, essentially a strategy that calls for transforming a relatively diversified or actually quite diversified industrial conglomerate into a more focused technology group. I do believe that we've delivered on that important milestones.
To me personally, the most important one probably have been the launch of Vincoria, giving birth to a new brand for our mechatronic businesses catering to customers in the defense and aerospace industry has been a, as I said, major milestone for our company and for me personally last year. Throughout the year, we have worked pretty hard on reorganizing our corporate structures. We did communicate that a number of times throughout year 2018. Since the beginning of 2019, we're now operating our 4 new divisions, one division obviously being the Koryan and the other 3 divisions, eventually our optic business, the optics and photonics businesses are now all operating in the new division of structures, light and optics, light and production and light and safety. And at the same time, we have simplified our corporate center structures in our corporate support structures.
We also have realigned our businesses in Asia. We have a new management team in Asia with clearer responsibilities and simple structures in what is actually a very important growth region for us going forward. Another highlight of 2018 certainly have been the acquisitions that we've managed to make. We have acquired Prodomex Automation in the first half of last year, which has been the biggest acquisition that Unopnik has made in the last 15 years actually. Later on, we could acquire Jotaro Group, an important new technology that came to us, in particular, in terms of vision machine vision type technology for our automotive and production business.
Last but not least, we also invested in our existing plants and sites. We have invested into machinery and into modernization for production sites, which should give us a good basis for future strategic developments and future growth. With that said, I would like to hand over to Hans Sitter, who is going to discuss with the numbers in more detail.
Thank you very much, Sachin. A warm welcome from my side as well. To all of you, yes, please follow me to the next page. Here we see the revenue development compared to prior year over the quarters. You see here that the Q4 was EUR 248,200,000 last year has been the strongest Q4 in our history.
And if you look at the quarterly development, you see that all quarters have been very strong, and we increased it quarter by quarter, our revenues. And let me say it in this words with the Q1 of EUR 241,200,000 we had all handful of workloads in our factories and sites, and we say thank you very much to our people who made this possible. If you take the €37,000,000 contribution of the new companies, the acquired companies into account and deducted from our €834,600,000 revenue we reached last year, then we still show an organic growth of 6.6%, which is also a very solid development and solid base, which is very important for us. The revenue development over the year has been, in particular, supported by the areas of semiconductor equipment as well as the traffic safety solutions here. We all remember that we have shown the sales revenues coming from our deliveries of the toll monitoring system in the first half year of twenty eighteen.
Then on the next slide, we see the revenue split over the regions. And here, we see that in overall, 71 percent of our group revenue has been recorded in foreign countries. If you look at the places, you see that Germany went up by 8%, which is driven by the TrollCollect project mainly, but also because of good development in all the businesses related to Germany. In Europe, you see an increase close to 12%. This is also driven by the semiconductor area.
In Americas, you see the 19.7%, which has been influenced obviously influenced by our acquisitions. The Asia Pacific development is influenced by a very good year 2017, where we had a project in Australia in the traffic safety area, which was not in the revenues anymore in 2018, yes? On the next slide, you see the split of revenues by markets. And here, we see that with the acquisition, the Automotive Mechanical Engineering went up at 34%, coming from 30%, which is obviously very much contributed by our acquired companies and the strong demand. On the other hand, the semiconductor equipment grew from 17% to 18%, which shows that we have a higher share of revenue in the semiconductor area, which is obviously very important for our profitability.
Yes, let me come then to the next slide. Here you see our EBITDA and EBIT figures with new records in spite of purchase price allocation effects, which have been booked here, the EBITDA figure reached EUR 127,500,000, which equals to 15.3 percent EBITDA margin, which is 1 percentage point above prior year where we reached 14.3%. And you should take into account that we had 7,000,000 PPA impacts booked from the inventory step up. Normally, you don't see these such big impacts in the EBITDA margin and the acquisition cost of €1,900,000 which are influencing the EBITDA as well. So we took a hit of €8,900,000 in the EBITDA and still reached this very comparable and high margins.
In the EBIT, we have even an increase which is higher than the 19.3% at the EBITDA. We reached a 21.6% increase. This is coming from a lower increase in functional costs. I will show you later on a little bit later on. So we reached with €194,900,000 EBIT margin of 11.4 percent compared to 10.4% a year ago.
And here, we have also included purchase price allocation effects of EUR 10,500,000 and of course, also EUR 1,900,000 from the acquisition cost side. So all in all, we are very happy with this very solid development of our margin, and it was obviously influenced by our very good Optic and Life Science business on the one side and surely from the Tolpellet project, which contributed a lot to the profitability as promised and as always reported because you all remember in the year 2017, we had a relatively hard hit on the cost side from the toll collected project. So it was also very important that we showed up with the positive impact here. All in all, very good and strong development. If we then look at the P and L of the group in a little bit more details, you see on the next slide the gross margin, which is more or less on the same level like 2017 with 35.1% compared to 35.3%.
This is due to some positive and diluting impact. The positive side aspect here is our very strong development in the Life Science Health Care business, which will be extended on by our CEO. Negatively, dilutive have been the part of the acquired companies here because Portamax with the Automation Integration business normally shows a gross margin below group average. But because they are purchasing a lot of goods, All in all, they have relatively low costs between gross margin and EBITDA, although they have a higher
EBITDA margin, which is
clearly above group average. So we have these impacts, and we balanced it very much because the positive impact on the product mix helped a lot to compensate the dilutive impact. On the functional cost, as already mentioned, we spent more money in R and D and selling. In absolute figures, we spent the same amount for administrative costs. All in all, the costs, the function costs rises with 6.4%, which is much lower than revenue growth, which also helped to increase our earnings.
And all in all, we are very happy with this development as well. If we then look at the financial results, which is clear weaker than in the prior year, we should take into account that in the prior year 2017, we had a one off income from disposals of non operating financial investments, which explains more or less the difference. On earnings before tax side, we are very close to EBIT with EUR 91,400,000, which is also very, very strong performance. And in the special case of here in Optik, as you all know, we have a heritage concerning our carry forward losses for the tax declaration. And the good news is that with the very good development over the last years and every year, we take for different tax calculation purposes every for in Germany, for German tax declaration and the German tax group, we take into account a 5 years planning.
Every year, we calculate it next year comes on top and it's always a good year. So we are now in the situation that we have activated the group taxes more in Germany more or less 100%, which equals to a huge amount of tax assets we activated, meaning that we ended up at a net tax position of more or less 4.4% for the group, which is relatively low for a German company. If you take into account the cash effective tax rate, which equals to 12% compared to prior year 17.9%. We had another positive impact, which was the U. S.
Reform, which also contributed to less taxes. All in all, we ended up at EPS at 1.5 €3 per share related to the cash effective tax rate, it would have been €1.42 compared to 1.27 prior year, yes? All right. Then and by the way, before you will ask me later on the question, we think we see, we have checked this. We think that from now on, our tax rate will increase in the years to come slightly step by step.
And the good news behind is saying it with the words of our CEO, the good news behind is we will come step by step, year by year to a normal German company concerning our tax rate. In the years to come, in the years to come, it will last some years, some 4, 5 years from now on at least. But all in all, we think that we have seen now the low tax rate in the next year, with this year. Then on the next slide, we see the order figures, the order intake and the order backlog, which are very important for us as well because these KPIs are showing out a little bit the future development of the company. We have had also recourse values here and a special very strong order intake in the final quarter.
You may remember our Q3 reportings, and we have realized in Q4 last year new orders of EUR 285,300,000 compared to the Q4 2017 of EUR 226,700,000, a very strong increase, And our CEO will explain to it later on where it has come from. And what happened there, I can say here, it was an increase mainly driven by the demand in the Optics and Life Science and the Mobility segment on the other side. All in all, we ended up at EUR 873,700,000, which equals to an 8.8% increase in the order intake, which is a book to bill ratio of 1.05, which is also a strong indicator and a good indicator for us if you take into account that we had 11.6% growth on the sales side. On the other side, you see the order backlog, which even increased nearly double 15.0 percent, and we ended up at EUR 521,500,000. This is a good basis for the coming months.
We assume that 79% of this order backlog with shipment dates in 2019 will realize as revenue in this year. And for your information, the acquired companies contributed EUR 35,900,000 to this very sustainable mark of €521,500,000 Then on the next slide, we explained to you a little bit, at least for the group CFO, most exciting figure we are publishing today, our free cash flow reached a very, very high level with 108 point 3,000,000 compared to EUR 72,200,000 last year, nearly 50% increase. And it's a little bit above our expectations and our guidance we gave to you throughout the year because in the Q4, we strengthened all our efforts to collect cash and to have our working capital ratio improved, which we realized, thanks to the help and support of operations and sales people in our group. All in all, we are very happy with this strong development of the free cash flow, which is near and very close to our EBITDA figure of EUR 127,000,000, which is an internal benchmark, which shows us that we are able to finance our investments, which are significantly higher than in 2017, our increase in dividend payout and the cash out from the acquisitions, which have been financed from our liquidity, we have been able to close 50% of the spendings in the last month of the year.
That results in a net debt of minus €27,000,000 meaning we are net debt free, so to speak, compared to €69,000,000 minus €69,000,000 a year ago. So even taking all our spendings into account, we are already, again, net debt free, which is very good from our point of view. And we are very happy that we could achieve this free cash flow development of our group. Having said this, I'd like to come to the final slide, which from my point of view here for me, you see our number of employees for the group, which increased through to 4,000 and 43 colleagues around the world. Obviously, also an increase driven by our acquisitions, but not only by our acquisitions because we also invested in our people to be able to support our customers with on time delivery, especially in the optics area, which was heavily needed.
And we have been able to take some new colleagues on board, which we are very happy about. You see that the Germany figure where we passed the 3,000 mark, now we have 3,062 colleagues in Germany working for us, and we are very happy. If you look at the only negative figure in Asia Pacific, it's linked like in the sales figure in the late sales chart to the big project we had a year ago in Australia, which was not there in this year. So all in all, we had a very strong development, and it was also necessary to welcome new products on board. Having said this, I'd like hand over to our CEO again to Stephan, which will go with us through our segments.
Stephan, it's your turn.
Thank you, Anseetur. And let me go straight into the Optics and Life Science segment. Actually, for the last time, because going forward, we will talk in our new divisional structures, but for the last time, talk about the old segments. In Optics and Life Sciences, we have seen a very, very strong 2018 in essentially all financial performance indicators. Order intake in Optics and Life Sciences grew by a remarkable 18% 7% and came to €350,800,000 in 2018.
In particularly, we had a very strong Q4. As Dieter alluded to that, we did see a very large contract landing at the end of the last year coming out of the semiconductor manufacturing industry, and that helped us to have such a record high order intake. As a result of that, the backlog in this segment has been at €165,000,000 at the end of last year, which gives us a good basis for sales and growth in 2019. Sales revenue came into $290,000,000 for the segment, Optics and Life Sciences, a growth of 11.8%, driven by this ongoing strong demand in semiconductor Equipment Industry, in particular throughout 2018, but also driven by a very positive development in Healthcare and Industry arenas in which we are playing. So overall, strong order intake, very good sales growth.
And as a result of the volume and mix effects that we have in this business, we saw EBITDA margins to step up significantly amount of time. The EBITDA margin of Optics and Life Sciences came to 24.1%, again driven by product mix, volume and very good utilization of our capital and equipment. So that's it. Let's go to the next segment, Mobility, which has seen 2 special effects in 2018. From Mobility segment, in particular for our Automotive division, which is going to
be reported on the lighter production going forward,
we have seen 2 acquisitions. I alluded to that already, we have closed the acquisition of Protomax and of OTO for this segment, which gave us obviously a lift in our order intake and sales figures. The other special effect in the Mobility segment in 2018 had been the rollout of the Tall Collect project. And I think that there's a few who follow us on a regular basis. Remember that we have said a number of times throughout 2018 in these earnings calls that the tailwind that we get in our sales figures on Falkirk project is a Q1, Q2 effect, I.
E. First half 2018 has been particularly high. And obviously, that does have an impact to the comparator for 2019. Sales for 2018 has grown by 21.4%. That does include 30 €7,000,000 from acquisitions.
If you strip out the acquisition effects, the organic growth of this business Mobility segment came to 7.7%, which I believe is a very strong figure. Again, somewhat skewed due to the total collect effect here. In the profitability, we've seen a significant rise in 2018. The EBITDA of the segment came to $40,500,000 a step up of 45.4%. Included, I.
E, digested with this number, are already acquisition related costs of minus €1,900,000 and a PPA effect of minus €7,000,000 in the EBITDA figure. I think we did explain that in last few calls. We do see an EBITDA and a PPA effect and the EBITDA figure due to some inventory step up effects. And obviously, there are PPA effects in the EBIT of about CHF 10,500,000. It's important to say that the PPA effects in the EBITDA, we have essentially fully booked in 2018.
There's not going to be any negative PPA effect in the segment in 2019 when it comes to EBITDA. Obviously, in EBIT, there will be ongoing PPA effects. Margin of the segment does came to 12.4% of EBITDA versus sales or over sales actually. With that, let me go to our it used to be Defense and Civil Systems segment. Again, reporting that for the first time and for the last time rather in this way.
Obviously, large parts of Defense and Civil Systems have been rebranded and are now operating under the Vancorion brand. So for the last time, the former Defense and Civil Systems segment as a whole has seen a stable business environment. We have seen essentially flat order intake, slightly decline in order intake of minus 1.3% and yes, essentially flat revenue development. I think what's important
and very positive is that
we see an ongoing margin expansion in this business. We have seen a margin of 11.2 percent EBITDA over sales versus 10.9% prior year. So we do see operating efficiency effect in the business with essentially stable FX. If you forward me to Page 16, if you have for you here the 2018 numbers, pro form a for our new divisional structure as promised throughout the year so that you have a better understanding and you can get a better understanding of where the business would have been if you could have had reported the 2018 financial year already in the new 2019 and ongoing structure. You see on the right hand side the group revenues, which obviously aren't the same as in the old structure, but the good thing actually add up.
So that's a positive. €834,600,000 in group sales. In the numbers here included are PPA effects, obviously, which all come into the Light and Production division. As you see in the middle, the new Light and Production division would have had €210,900,000 in sales and an EBITDA margin of 11.7 percent. Again, let me point out, included all the PPA effects from the inventory step up, the EBITDA for minus €7,000,000 and for minus €10,500,000 in the EBIT number.
You see the Light and Optics business, which does now include going forward 2 Photonics businesses from the old DCS segment, our Industrial Sensor business and our joint venture, Helos. The revenue of that new division would have been at around EUR 340 million in euros last year with an EBITDA margin of a tad under 22%. We do see Life and Safety, which have seen a strong tailwind last year from the Tor Collect project, revenue would have been at around EUR 117,000,000 with an EBITDA margin of 13.6%. You also see the Vincorion number. As Vincorion is operating and reporting from now on going forward.
Vincorion would have seen 166 €400,000 in sales with an EBITDA margin of 12.1%. Now again, there have been certain effects in 2018, which do carry over into 2019, mentions the tailwind that we have seen in Light and Safety in the former Traffic Solutions business. The conclusion of that, we do see a somewhat negative growth potential for Light and Safety going forward in 2019 simply because of the comparator in the first half of twenty eighteen. For Light and Optics, for 2019, we see mid single digit sales growth. And for lighter production, we do see the potential for double digit growth, which does include the annualization effects of the acquired companies that we talked about going forward.
So that said, if you would like to follow me please to Page 18, where we basically give our guidance for the whole group. I think I've pointed out a number of times that the first half, in particular, in 2018, has been affected and particularly by the Tolcolac revenues and a couple of other effects, so that the comparator for first half is quite challenging, shall we say, in 2019. We do believe that our sales momentum will build up throughout the year, in particular in the second half. So we expect further growth and another record year for the company in 2019. We guide for revenue growth in the mid single digit percentage range before major portfolio changes, which we do not want to exclude for the year.
We guide for an EBITDA margin expansion and believe that EBITDA margins will come in at about a range of between 15.5% 16% of sales. Again, 2018 has been the 2nd record year in a row. 2017 has been very strong already. We have seen strong growth and margin expansion in 2017 and another record breaking year, 2018, which makes us proud. I think we have made substantial way forward in developing and delivering actually on our strategy that we have set out beginning of 2018, communicated beginning of 2018.
We do look with quite some confidence into the new fiscal year that has just started. We have a solid basis with a very strong order backlog. We believe that whilst the comparator, in particular in the first half, it's a bit challenged. We see we believe that momentum will be building up throughout the year, and we have good reasons to believe that we will see good growth and another record year in 2019. Thank you very much for your attention, and we will basically pause here, and we'd be happy to answer the questions you might have.
And you will have one, pretty sure.
And the first questioner is Craig Abbott from Kepler Cheuvreux. Over to you.
Yes. Good afternoon, everyone. Just a couple of questions to start off from my side. I have two questions on the order intake.
First of
all, I just wondered in general if you could maybe give us some color on how the order intake in general has developed so far in Q1. Secondly, a bit more specific in looking at optics and life science, still sticking with the old structure. You mentioned that you had this very large order in semi in the 4th quarter. But I just wonder if you see any further such projects in the pipeline because I noticed a very distinct difference in the tone from a year ago. A year ago, the message was please do not extrapolate the current strong selling performance.
We won't be able to maintain these high levels of profitability over the forever. And that cautionary tone seems to be missing this year. And I wonder what has changed to give you that level of confidence besides the fact that you're obviously starting the year with a very nice order intake because of this large order bought in, in the 4th quarter. And my third question is just simply, in your outlook statement, you made a disclaimer before portfolio managing major portfolio changes. Is that just now a standard disclaimer?
Or is this maybe an indication that pretty significant M and A in either direction is rather likely in 2019? Thank you.
Hey, Craig. Thanks very much. Thanks for the questions, and good afternoon from our end as well. I'm going to take it in sequential order. So I'll start with the last one because it's the easiest one.
It's a bit of a standard disclaimer, you're right. And obviously, as you know, we can't comment in detail. Clearly, your question aims at Vincorion. And we stick to what we've said throughout the whole of last year. There is no active process to sell our Vincorion business, but we explicitly don't want to exclude it.
And that does include potential activities this year. So we'll see how it goes there. But at the moment, no active process. In the on the overall order intake one, look, I mean, we don't really like to guide on order intake by quarters. Let me just say that, obviously, Q1 is typically relatively weak for us in terms of order intake.
Last year was fairly good in the Q1. And so this year, Q1 order intake. And again, don't take that as a guidance, but I don't think that we can repeat every quarter a record breaking quarter like we have seen in the Q4. And that gets me to this particular effect that we have seen in the Q1. Yes, we have got a large order in the semi arena.
Why did I even mention that? Because it was somewhat differently structured from what we used to get. Typically, we get a frame contract, and we book it in our frame contract backlog, if you want, and then we call it an order and book it as an order when we get purchase orders. So in a sense, we get one of these biggies, then it flashes into the order intake over the months when it's been called off, if you want, or purchase orders from our customers. In this particular case, the structure of the contract has been a bit different.
In this particular case, the contract has included specific call of dates and quantities. And therefore, according to our rules, we there was a had to book the whole thing in one go. In December last or well, no, I may as well say, in December last year. And I'm saying that because the way I explained it would have if it wouldn't have been in that way, we would have seen constant auto inflow throughout the periods. And that's what sort of business as usual would have been.
With this particular project, it's different. It's a very large or fairly large one, which does not bring constant order inflow to periods in terms of order intake. And I'm saying that and I raised that because now it gets me to your sort of second half of that third question. Is there a change in the undertone? No, there is not.
We have seen a very strong semiconductor business in 2018. If we talk about and I mean, the backdrop of your question is everybody talks about potential downturn in semicon and why is it an uptick, not stressing that. I think the answer to that is that we're actually operating in 2 different segments if it comes to semiconductor manufacturing. We sell to optical inspection businesses or customers, and we sell to customers in the optical lithography space. We have seen in the optical inspection business a softening throughout, in particular, second half of last year already.
But that segment is not as important and has been over not over scheduled, but over balanced, if you want, by ongoing strong demand in the optical lithography space. And that, I think, is the explanation why throughout the whole of 2018, we haven't seen a significant weakening and softening in the semiconductor manufacturing simply because the lithography subsegment is so much more important for us in terms of sales and profit. Now it has to be seen how the lithography space develops, and we all know that there is there are not that many customers in that segment. And we have to follow how and we do follow very closely how a particular customer and how this segment develops and how we're seeing the development going forward, particularly in the Q1 and Q2. I think the communication of, let's say, important players in the industry is that the 3rd and fourth quarter, second half of the year will see momentum to build up.
I hope that does give you enough sort of color. And please do understand that, again, we don't want
to guide on quarterly order intake
and things. But I hope it gives you at least some color on where we sit.
Indeed, that was all very useful. Thank you very much, Stefan.
And the next questioner is Stefan Meijer from LBBW. Your floor is yours.
Yes. Stefan Meisel from LBBW. Good afternoon, gentlemen. Two questions from my side, if I may. First one on your EBITDA margin guidance for 2019 as read in your report, including a kind of EFS 16 impact.
Could you quantify this impact and provide probably a like for like margin for 2017? And the second question goes to free cash flow for Mr. Schumacher. €18,000,000 guided now for 2018 below 2019 below 2018 due to higher CapEx? Could you probably provide major investment activities planned for 2019?
Thanks.
I'll take the first cut at the IFRS 60 16. I have to admit that I'm glad that I have my CFO with me. And every time when it comes to IFRS, shall we say, changes, particularly in the last year, there were so many things that changed. IFRS 16 has an impact for us, and we have seen and I think communicated that in the reports that the order of magnitude that we see is around $10,000,000 in 2019. Now I think it's important to note, we're not an aircraft we're not an airline the airline industry, we're
not in the
we're not in a business and in an industry where we see large impacts from IFRS 16.
We're not
a logistics company here. We're not a retailer business or anything like that. There is an impact. Obviously, there was a secondary effect. It's probably not fair, but there is an impact of around $10,000,000 to our EBITDA.
And I think that I'll leave it there. And hand over to Hans Dieter for the free cash flow question.
Yes. Thank you, Stefan. Concerning the free cash flow, you mentioned already that we will probably have a free cash flow, which is clearly below the free cash flow of the year 2018. This is mainly driven and in the first row, driven by the much higher investments we are planning for the next year, which will be clear above the EUR 42,000,000 of last year. What is the main investment area there?
We have 2 areas where we are investing. 1 is for the very first because it's the highest amount in our infrastructure. We are just starting our investment in the new production and administration administration and R and D side from our in filling and training and from our light and production for our light and production businesses. Stefan and I, we recently have been there for the Spartanstisch. I don't know the word.
Though it was some days ago, we participated there. A lot of interest has been there, and it's an investment of roundabout €13,000,000 alone for this new building. It helps us to support the growth of the business there and to improve our processes, which is necessary with the growing businesses there. So it's mainly driven by infrastructure investment, and we are also investing in modernize our production flows with new machines and equipment, new processes there, especially in the Light and Optics businesses in our different sites in Liena, Gershwin and in Berlin, for example, but also abroad in U. S, we are investing there.
So it's mainly driven by the infrastructure and the investments in machinery and equipment. And also included is our IT project, we call it Globe, Global Business Excellence, which is mainly behind our internal start for the digitalization project. It's the S4HANA introduction from SAP. So we are doing the next step in evolution, and it's budgeted also with, let me say, some 1,000,000 in the budget. So these are the main areas of investments.
But we feel that it's the right time and it's necessary to invest. So we decided to wind up with the investment planning. As already told to all of you during the last year, we will start to invest more in our company to support growth.
Okay. Maybe a follow-up on the margin. If I add then, assume maybe €10,000,000 also for 2017, it has come up as an EBITDA margin of 16.6% like for like. So you are guiding 55% to 16% for 2019. This would assume a decline.
So what is behind that? What is the reason for that guidance is conservative for? Am I missing something? And maybe additional, your midterm target was around 16%, now already achieved in 2019, probably. So is that a peak margin?
Or would you be willing to give us a new midterm target?
I think to the last part of your question, Stefan Dreger, our CEO, is the right person to answer it. I would take over the first part of the question if I may. So my CEO is saying yes to me, so to speak. So I answer the first part of your question, and your is correct. I cannot say different to it.
What is our assuming as a woman? First of all, we are very at the beginning of the year 2019. So it's not so easy to say precisely where we will end up. So we gave this guidance we gave. And don't forget, in the year 2018, we had the positive impact, very positive impact on the margin side from the Toll Collect project, which is missing in 2018.
And we told to all of you in the last year that we try our best to compensate Toll Collect as much as possible, but it was very profitable. It was clearly above group average from the margin side there, and it's missing now. So we have to compensate. On the other side, we are willing and take a little bit into account that it will cost margin. We are investing in R and D and sales.
Year by year, we have a clear target to increase our R and D spending to roughly 10% of sales. And we will do. We will spend more, and we try to put it in the costs as long as possible, as much as possible under IFRS rules. Clearly, we will follow IFRS rules. So we have more spendings in our planings in our budget for this.
And we have done some calculation concerning our product mix. We don't think that we will have the same increase of the high margin business in the semi realized like in last year. It was an extraordinary year concerning the absolute increase in the margins there. So all in all, this leads us to this guidance, yes, for the year 2019. But for the strategy, for the midterm part of your question, I'd like now to give head over to Stefan.
Who will answer his question.
Sure, sure. And again, I'm just so glad that hopefully, we don't have all these IFRS changes here for you. It's a bit puzzling at some point too. But anyways, look, I mean, if it comes to the long term guidance, I have been asked a number of times in the last, shall we say, year or so, number of times. What would have been necessarily or under what circumstances would you have to change your midterm guidance?
And I think I did say throughout the last year, when I got this question, I did say all the time, we don't like guidances that change with cycles, above cycle, below cycle, through cycle or whatever. We have dialed in our long term models a certain, I wouldn't say softening, but we have dialed into our long term models. The notion that semicon will not continue to grow as much as it grew in 2018 all the time and forever. Obviously, that does have a mix impact for us. And then the second part of the answer from my end always has been, if we sit here the end of 2019 and the semicon world is still as strong for us as it was at the time, then yes, we might be at 60% much earlier and then we celebrate and move on and look for a new target.
And that's exactly our position. At this very moment, we give you guidance for 2019, and we'll see how 2019 develops. And once we achieve the 16% EBITDA margin, we celebrate and look for new margin targets and communicate that. Okay. Thanks.
Seeing you tomorrow in Frankfurt. No more questions.
Next up is Robin Brass from Hauke and Alfauser.
Yes, hello, also from my side. Again, one question to the semiconductor industry. Many semi players say they expect revitalization of the business in H2. Is in your guidance or your anticipation for the second half this year also maybe an improvement in this segment? Or is this more or less stable business?
For example, also Micron yesterday said something similar, but at the same time, they also cut their CapEx guidance, for example, is it affecting you? And on the other hand, the Life Science business, of course, you I think you also look maybe for potential target in this industry, but I guess the multiples are quite high right now. But recently, you released the statement that you have now a life science partner business. Is this maybe also an option to have more partner business like that in the future?
Let me address that. Semicon First and Life Sciences. So no, I think pretty much similar to the rest of the industry. We do believe that momentum is going to build up in the second half, very much in line with what the industry actually is communicating. 2nd part of the question, Life Sciences.
Innovators are right. I mean we always have been a partnering player, OEM player in life science. And we do have business in laser based therapy. We do have already business in bioimaging, particularly when it comes to DNA sequencing and molecular diagnostics businesses. And what we have released relatively recently is that we have been after quite an interesting discussions, and we're very pleased actually that we have won a very, very large global supplier of life science and health care equipment to be our distribution arm, if you go on that, that's not the right word, to partner with us on a product for them to sell onto the end customer markets based on our science platform that we have shown to the community, I think, at the Capital Market Day last year, I think, for the first time.
It's a major success for us. It's a big contract, obviously. It's not going to lead into sales right away in, let's say, Q1, Q2 here. But there's a buildup effect, obviously, typical in such business. Is this a model for the future for our biophotonics businesses?
Yes, it is because it's the business we're operating in at the moment. And ever since. The other part of the question, of course, is can that change with the potential acquisition? And here again, yes, it could. But you pointed out rightly that we keep saying the margins, although the multiples in this segment are very, very high and one has to have.
We would have the power to execute a deal, even a large deal. If from a financial perspective, we could do that. But only we would only be willing to do that if the absolute right strategic fit and cultural fit would come our way. We have other things to do as well. We can spend our money in other segments and continue to look forward to a former trade deal with this segment when it makes sense.
Okay. Thank you.
The next question comes from Malte Schaumann from Warburg Research.
Good afternoon, gentlemen. Sorry for investing on the margin again. I mean, if I compare apples to apples, I would even exclude the inventory step up and acquisition related costs of another €9,000,000 Then I would compare the 15.5% to 16% to even more than 17% in 2018. So maybe some more flavor on that besides the total product mix issues and the mentioned R and D increase, should we expect on an overall level and the functional costs disproportionately high wise in 2019? And then secondly, do you already include kind of one off effects for whatever, maybe portfolio adjustments, whatever, maybe to simulate the magnitude we saw last year, which might explain that margin development?
I'm not quite sure if I followed your calculation in all details. But I think what you're basically saying is should we do we expect yes, let me answer it this way. We do have mix effects in our business, as we all know. And we have some businesses that are very profitable, has been very profitable. And I did Greg pointed to that already.
We can't expect that these businesses continue to raise their margins forever, essentially. So on the contrary, I think at some point, we will see a stagnation, shall we say, in the margin expansion in these businesses. Obviously, we hope that others will continue to raise its margin and therefore lifting up the group average. I think that's part of the effect that we've seen. Yes, there is some step up effect from the IFRS 16, but I mean, we have we've talked about that.
I'm not sure what you meant by your why you would strip out another 7% is that the PPA? Yes.
I can't make the
calculation that compared 2018 to 2019, but I think you additionally have to exclude the inventory step up from Photomax and acquisition related costs and then the gap gets even bigger.
Well, then we would have been even more profitable apparently in our ongoing businesses. Hey, look, I see what you're pointing at. Essentially, you request or you're trying to understand how much conservatism is in our guidance. And of course, on our end, we're saying, well, look, there's so many effects in here. So at this moment, I think we're happy with the guidance we gave you, and we'll see how the year develops.
Okay. And specifically to the functional costs, do you see something 2019 as a year where there's no improvement in functional costs relative to sales. So maybe an equal rise in functional costs or maybe an even higher rise, stronger rise in functional costs or other one offs that are already baked into the guidance?
No specific increase in functional costs other than what we always communicated. We do want to invest a bit more in R and D and sales and marketing, but not in a step function, but sort of an ongoing increase in that. And of course, there is pressure on labor cost. I think that is fair to say. We have communicated throughout the whole of 2018 that one of our biggest hurdles for more growth is to get skilled labor.
And funny enough, that's still the case, and that drives up labor costs. And of course, we're trying to manage that, but it is a fact that labor costs rise even here in East Germany and in Vienna and in other places where we're operating, labor costs too rise and that has an effect on our businesses.
Yes. Okay. And then with respect to the large semiconductor order in the 4th quarter, is all of the, let's say, additional volume when I compare Q4 to the previous quarters more or less relating to this order? Or are there other projects included in the high order intake?
No. The Q4 would have been strong without that already, but it has been a large contract. And then you have to please understand that we cannot communicate any details for legal reasons about this particular order. But we have other projects booked in Q4. In the traffic industry segment, we did communicate that we booked the Oman and the Algeria tender.
And let me just say, if we strip out this particular order, then Q4 would have been good, very good actually, very strong order intake, but not as phenomenally high as we have seen it in reality.
Okay. Would have been, Q4, then the strongest quarter in the Optics and Life Science business in the year?
It would have been a very strong quarter. And please don't push me anymore. I really can't go into any more details for legal reasons. I would love to be able to tell you more, but I really can't for legal reasons.
Yes, sure. Fair enough. Just the last question on that is over how many periods does that order backlog last? So does it last 2, 3 years or even longer? Or what's the time schedule?
Not longer than that.
Yes. Okay.
Then on the working capital development. I mean, working capital ratio has come down to 26% now, quite a bit below the 30% level. What's your take on the future development? Is this the yes, in mid-20s level, are you satisfied with that? Is that a reasonable number?
Was that kind of exceptional? And do you expect that to snap back to the closer to 30% level? What's your take on that front?
I think I'll take this question. From today's point of view, we are quite happy with the level we have reached because we all know that growth and we intend to grow further our business needs working capital, yes? We need and you see it in our figures. If you look more in details already in the last year figures we have recently published, you see in certain areas of our business an increase in inventory because we are preparing ourselves to deliver our customers. So we increased inventory, especially in the semi and opticals area.
But also in the business, we increased inventory to be ready to deliver. And on the other side, if we have a high sales in December or November, you can expect that we will get the money 2, 3 months later. So if our business is growing, we have trade receivables and inventory going up. So we try to manage this, but not pressing out the last year, let me say in this word, because we are in a strong and good financial position. So we are all happy that we have made this progress coming from clear above 30%.
When I started, it was more 35% than 30%. And now we are below our target of 30%. We worked hard for it. But now we are talking to our colleagues in operations and purchase department what we can do more. But we really try to handle it and to balance it, yes?
As the business is growing, we are happy with the level we have reached now, yes? If we are going forward, we will see. But this is what we can say today.
Okay. Good. Then my last question would be on maybe the comments on the individual market development. Is there other market niches, not market pockets you want to mention that maybe developed pretty strong currently despite the economic environment or pretty weak. Are there any areas which are worth to highlight these days?
Yes. There is one. There is one that I maybe I used the opportunity here to point out that there's a number of we have business that we can't convert into sales at the moment because of missing export licenses for Vincorion. That has an effect, a significant effect. We hope that the solution or that the political environment in Berlin will find a solution at some point.
But at the moment, it seems as if not a lot gets decided when it comes to export licenses. And we're waiting for export licenses since a number of months actually as long as it takes to produce a baby and like literally. And we hope that we get some movement there in Berlin. But at the moment, we're yes, we're we have to hold back on, yes, significant numbers of sales numbers for Vicorin.
Okay. And that product then probably not included in your guidance and would provide upside or
No, it would not provide upside.
Okay.
Very profitable business, but yes. Okay.
And the other markets, automotive, for example, is more or less running according to plan?
Yes. Nothing major to report. I think we talked about the segments, in automotive a number of times in the past. So I think in particular in automotive, the trend to more automation is helping us. Laser processing is independent of combustion engines.
And metrology has seen some softening, but not a complete decline in the market. And again, I think we the question why are we not affected more by the auto crisis in the automotive industry is essentially because we are in the CapEx and not in the OpEx business. And in other words, we are not directly linked to the number of cars sold. We're not in the car supply chain. We're an engineering business.
And yes, I think that's and maybe we can talk about the rest tomorrow. But I think that's the reason that overall, we don't see a major decline in the automotive industry.
As we have recently published at the beginning of January, 2 major orders we've got our new acquisition of photovoltaics in total, I think, 12,000,000. We publish it. This gives you a hint that it's good development for Genus.
Yes. Very much is happening. There's a lot in this the chance to read
the annual report in total. But coming back to IFRS 16, can you tell us the effects on EBIT and the net debt from the application of IFRS 16?
Yes. We have published it in our annual report on Page 144. You'll find all the details which you require, but I can summarize it a little bit. So we have 2 impacts. The first impact is in the balance sheet where we what is essentially behind the IFRS 16 is the idea to show now in the balance all this kind of stuff which is rented or leased, yes?
And as we have some sites like the head quarter from the Corion in Medel, which is a rental contract or the headquarter of Life and Safety Business in Monheim, which will come now into the balance sheet. And it's all in all between €55,000,000 €60,000,000 which we assume, which is coming into the balance sheet. And as it is an obligation because we pay rental, we have to show it in the balance sheet and it will influence our debt situation. So at the moment today, we are net debt free. If you would publish the same figures, we have a debt situation because the difference is €50,000,000 to €60,000,000 in the debt situation.
It increases our bank liabilities by €50,000,000 to €60,000,000 meaning we have a net debt situation. We talked already to our banks and the of our colleagues who are part of our ZYN loan. And we adopted already our ZYN loan to the new rules, regulations, meaning it does not count against us, so to speak, yes? So no impact there. So all in all, our balance sheet our balance sum will also be longer by €50,000,000 to €60,000,000 all in all, which means we have a slightly lower on several paribus assumptions, a little bit lower own capital ratio than before.
This is what is happening on the balance side. On the EBITDA side, we have published it and the colleagues have already asked the question, the MAPF calculation.
Yes. Talking about EBIT. Yes.
EBIT is close to 0. It's only an impact of EUR 1,500,000 to EUR 2,000,000 on a positive quite a positive, yes. It's increasing our EBIT by EUR 1,500,000 to EUR 2,000,000. So it's only a minor impact compared to the impact of the EBITDA, which we have talked about, yes? On the EBIT side, it's a little bit lower.
But in the EBIT, we're still facing purchase price allocation impacts, yes, which are €5,000,000 to €6,000,000 next year still, yes? So all in all, we have a little bit positive impact, but more negative impact coming from the purchase point allocation side, yes? And that's the main major issues,
major influences now.
For PPA, you mentioned, dollars 5,000,000 to $6,000,000 from protomax at the end?
Yes. Yes. Okay. Then
yes, further question regarding your tax rate. In your presentation, you that extent. What is your view on the tax rate for 2019? So on not on the cash tax rate but on the reported one.
It's above 4.4%. But it's not very, very astonishing if I say it because we are close to the euro right now. And for a German headquartered company, it's already a very poor, a relatively low tax rate. I think our calculation is above 10%, let me say it in this way, yes, it's maybe 10% to 15%. We are not quite sure.
It's depending on the development of the results outside of Germany in the regions. So the calculation is not very precise at the beginning of the year, but we are thinking about 10% to 15% in this ratio. Okay. And one point regarding
traffic safety pipeline. On the one hand, we have seen here some issues with your range speed control in Germany, where it stopped now to work. Have you here a new view? And will this impact your business? And on the other hand, how do you consider your project pipeline for further traffic safety projects?
Yes. When it comes to Section Control, you're right. This prototype business has been this project has been put on hold at the moment. We have to say officially that all communication to this project will be with the Interior Ministry of the Lower Saxonia. But we can say from our end that we use Section Control in many parts of the world.
We provide products to many other countries. And it's we don't think that any decision in the Commonwealth of Lower Saxonia will have that much of an impact on our business here in satellite and safety. And again, it's we shouldn't we should not communicate about it. It's a matter of the politicians to solve and to communicate from our end. We can only say that we have a good technology that we use in other parts of the world.
We have not planned significant sales for 2019 and would be affected by any decision in North Saxony.
And in general, the pipeline for traffic safety projects?
Look, it's pretty good. We are constantly in discussions. We have seen communicated at the end of last year good order intake, large order intake from Arabia, from Oman and Nigeria. And we do see ongoing demand. There is one area in the world where things came to a standstill.
That's in the U. K. But I think that to nobody surprise, apparently, the governmental bodies in the UK have other things to do at the moment and to deal with traffic safety. But other than that, the demand is high. When we say that and when we do guide you and anticipate a decline in this business.
And really it's due to the special talk effect.
Okay. Thank you.
At the moment, there seem to be no further questions. So if you have any additional questions,