The conference is now being recorded. Good afternoon, ladies and gentlemen, and welcome to the Jenoptik conference call regarding those financial statements 2018. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Dr Stefan Traeger.
Yeah, 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 Hans-Dieter 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 EUR 834.6 million in the financial year 2018. At the same time, we managed to expand our margins considerably. Our EBITDA has been at EUR 127.5 million, which is an equivalent of 19.3% more than prior year. Margins of our business came to 15.3% EBITDA of sales. Prior year, the margin had been 14.3%.
From a financial perspective, 2018 certainly had 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 journey and our transformation of Jenoptik. At 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 had been the launch of VINCORION.
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, a major milestone for our company and for me personally last year. Throughout the year, we have worked pretty hard on reorganizing our corporate structures. And we did communicate that a number of times throughout year 2018. Since the beginning of 2019, we're now operating our four new divisions. One division obviously being VINCORION, and the other three divisions, essentially our Jenoptik business, the optics and photonics businesses are now all operating in the new division of structures, Light & Optics, Light & Production, and Light & Safety. 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 simpler structures in what is actually a very important growth region for us going forward. Another highlight of 2018 certainly had been the acquisitions that we've managed to make. We have acquired Prodomax Automation in the H1 of last year, which had been the biggest acquisition that Jenoptik has made in the last 15 years, actually. Later on, we could acquire the OTTO Vision, an important new technology that came to us, in particular in terms of machine vision type technology for our automotive production business. Last but not least, we also have 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 development and future growth.
With that said, I would like to hand over to Hans-Dieter, who is going to take us through the numbers in more detail.
Thank you very much, Stefan. A warm welcome from my side as well to all of you. 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, with EUR 248.2 million last year, has been the strongest Q4 in our history. 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 these words, with the Q1 of EUR 241.2 million, 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 EUR 37 million contribution of the new companies, the acquired companies, into account and deduct it from our EUR 834.6 million 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, the revenues coming from our deliveries of the toll monitoring system in the H1 year of 2018. Then on the next slide, we see the revenue split over the regions. Here we see that in overall, 71% 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 Toll Collect project mainly, but also because of a 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 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. On the next slide, you see the split of the revenues by markets. Here we see that with the acquisition, the automotive and 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. Let me come 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 127.5 million, which equals to 15.3% EBITDA margin, which is one percentage point above prior year where we reached 14.3%. And you should take into account that we had seven million PPA impacts booked from the inventory step up. Normally, you don't see such big impacts in the EBITDA margin and the acquisition cost of EUR 1.9 million, which are influencing the EBITDA as well.
We took a hit of EUR 8.9 million in the EBITDA and still reached these very comfortable 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 a little bit later on. We reached with EUR 19 and EUR 4.9 million, the EBIT margin of 11.4% compared to 10.4% a year ago. Here we have also included purchase price allocation effects of EUR 10.5 million and of course also the EUR 1.9 million from the acquisition cost side.
And 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 Optics & Life Science business on the one side, and surely from the Toll Collect project, which contributed a lot to the profitability as promised and as always reported. You all remember in the year 2017, we had a relatively hard hit on the cost side from the Toll Collect project, it was also very important that we showed up with the positive impact here. All in all, a very good and strong development. If we look at the P&L of the group in a little bit more details, you see in the next slide the cross 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 and healthcare business, which will be explained later on by our CEO. Negatively dilutive has been the part of the acquired companies here because Prodomax with the automation integration business normally shows a gross margin below group average. Because they are purchasing a lot of goods, all in all, they have relatively low costs between gross margin and EBITDA. 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 distributive impact. On the functional cost, as already mentioned, we spent more money in R&D and selling. In absolute figures, we spent the same amount for administrative costs.
All in all, the costs of functional costs rises with 6.4%, which is much lower than the revenue growth, which also helped to increase our earnings. All in all, we are very happy with this development as well. If we look at the financial result, which is clearly 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 then very close to EBIT with EUR 91.4 million, which is also very strong on performance. In the special case of Jenoptik, 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, in Germany, for German tax declaration and the German tax group, we take into account a five years planning. Every year we calculate it, next year comes on top and it's always a good year. We are now in the situation that we have activated the group taxes 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. tax reform, which also contributed to less taxes. All in all, we ended up at EPS at EUR 1.53 per share. That related to the cash effective tax rate, it would have been EUR 1.42 compared to EUR 1.27 prior year. Yeah. All right. By the way, before you will ask me later on the question, we think, we see, we have checked it. We think that from now on, our tax rate will increase in the years to come, slightly step by step. The good news behind it, saying it with the words of our CEO, the good news behind this, we will come step by step, year by year, to a normal German company concerning our tax rate, in the years to come. It will last some years, some four, five years from now on at least.
All in all, we think that we have seen now the lowest tax rate in the next years 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 record 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 285.3 million compared to the Q4 2017 of EUR 226.7 million representing a very strong improvement and o ur 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 demand in the Optics & Life Science and the mobility segment on the other side. All in all, we ended up at EUR 873.7 million, 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 at the 15.0% and we ended up at EUR 521.5 million. 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.
For your information, the acquired companies contributed EUR 35.9 million to this very sustainable mark of EUR 521.5 million. Then on the next slide, we explain 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 EUR 108.3 million compared to EUR 72.2 million last year. It's nearly 50% increase, 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 salespeople 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 million, 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 payouts 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 EUR 27 million, meaning we are net debt-free, so to speak, compared to EUR 69 million a year ago. 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 from my point of view here. For me, you see our number of employees for the group, which increased through to 4,043 colleagues around the world. Obviously, also an increase driven by our acquisitions. 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 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 sales chart to the big project we had a year ago in Australia, which was not there in this year. All in all, we had a very strong development and it was also necessary to welcome new colleagues on board. Having said this, I'd like to hand over to our CEO again, to Stefan, which will give us to our segments. Stefan, it's your turn.
Thank you, Hans-Dieter. Let me go straight into the Optics & Life Science segment. Actually, for the last time, because going forward, we'll talk in our new divisional structures, but for the last time, talk about the old segments. In Optics & Life Science, we have seen a very, very strong 2018 in essentially all financial performance indicators. Order intake in Optics & Life Science grew by a remarkable 18.7% and came to EUR 350.8 million in 2018. In particular, 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 EUR 165 million at the end of last year, which gives us a good basis for sales and growth in 2019. Sales revenue came in to EUR 290 million for the segment Optics & Life Science, a growth of 11.8% driven by the ongoing strong demand in semiconductor equipment industry, in particular throughout 2018. Also driven by a very positive development in healthcare and industry arenas in which we are playing. Overall, strong order intake, very good sales growth. As a result of the volume and mix effects that we have in this business, we saw EBITDA margins to step up significantly another time.
The EBITDA margin of Optics & Life Science came to 24.1%, again, driven by product mix, volume, and very good utilization of our capital and equipment. Said that, let's go to the next segment, mobility, which has seen two special effects in 2018. For our mobility segment, in particular for our automotive division, which is going to be reported under Light & Production going forward, we have seen two acquisitions. Alluded to that already. We have closed the acquisition of Prodomax and of OTTO 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 Toll Collect project there.
I think that those of you who follow us on a regular basis will 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 from Toll Collect project is a Q1, Q2 effect. H1 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 EUR 37 million 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 Toll Collect effect here. In the profitability, we've seen a significant rise in 2018. The EBITDA of the segment came to EUR 40.5 million, a step up of 45.4%.
Included, i.e., digested with this number, are already acquisition-related costs of minus EUR 1.9 million and a PPA effect of minus EUR 7 million in the EBITDA figure. I think we did explain that in last few calls. We do see a PPA effect in the EBITDA figure due to some inventory step-up effects. And obviously there are PPA effects in the EBIT of about EUR 10.5 million. 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 this 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. Said that, let me go to our, it used to be Defense & Civil Systems segment.
Again, we're talking that for the first time and for the last time in this way. Obviously, large parts of Defense & Civil Systems have been rebranded and are now operating under the VINCORION brand. For the last time, the former Defense & Civil Systems segment as a whole has seen a stable business environment. We have seen essentially flat order intake, slightly declined order intakes of minus 1.3% and 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% EBITDA over sales versus 10.9% prior year. We do see an operating efficiency effect in the business with essentially stable effects.
If you follow me to page 16, it will have for you here the 2018 numbers pro forma for our new divisional structure as promised throughout the year, so that you have a better understanding and can get a better understanding of where the business would have been if we would 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. That's a good thing. They actually add up. That's a positive. EUR 834.6 million in group sales. In the numbers here included are PPA effects, obviously, which all come into the Light & Production division that you see in the middle. The new Light & Production division would have had EUR 210.9 million in sales and an EBITDA margin of 11.7%.
Again, let me point out, included are the PPA effects from the inventory step-up, the EBITDA of around minus EUR 7 million and of around minus EUR 10.5 million in the EBIT number. You see the Light & Optics business, which does now include, going forward, two photonics businesses from the old DCS segment, our industrial sensor business, and our joint venture, Hillos. The revenue of that new division would have been at around EUR 340 million last year with an EBITDA margin of a tad under 22%. You do see Light & Safety, which have seen a strong tailwind last year from the Toll Collect project. Revenue would have been at around EUR 117 million, 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 EUR 166.4 million in sales with an EBITDA margin of 12.1%. Now again, there have been certain effects in 2018 which do carry over into 2019. I mentioned the tailwind that we have seen in Light & Safety, in the former Traffic Solutions business. The conclusion of that, we do see a somewhat negative growth potential for Light & Safety going forward in 2019, simply because of the comparator in the H1 of 2018. For Light & Optics, for 2019, we see mid-single-digit sales growth. For Light & Production, we do see the potential for double-digit growth, which does include the annualization effect of the acquired companies that we talked about going forward. 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 H1 , in particular in 2018, has been affected in particularly by the Toll Collect revenues and a couple of other effects, so that the comparator for the H1 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 H2. So we expect further growth and another record year for the company in 2019. We guide for a 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% to 16% of sales. Again, 2018 has been the second 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 in 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 H1, is a bit challenged. 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. We would basically pause here and would be happy to answer the questions you might have, and you will have them, to be sure.
Yes. Ladies and gentlemen, if you would like to ask a question, please press nine and the star key on your telephone keypad. In case you wish to withdraw your question, please press nine and star again. Please press nine and star to state your questions. The first questioner is Craig Abbott from Kepler Cheuvreux. Over to you.
Good afternoon, everyone. Just a couple of questions to start off from my side. 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 & Life Science, still sticking with the old structure. You mentioned that you had this very large order in semi in the Q4, 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 semi performance.
We won't be able to maintain these high levels of profitability forever." That cautionary tone seems to be missing this year, I just wondered 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 brought in in the Q4. My third question is just simply, in your outlook statement, you made the disclaimer, before major portfolio changes. Is that just now a standard disclaimer or is this maybe an indication that pretty significant M&A in either direction is really likely in 2019? Thank you.
Hey, Craig. Thank you very much. Thanks for your questions and good afternoon from our end as well. I'm going to take it in sequential order. I'll start with the last one because it's the easiest one. It's a bit of a standard disclaimer you're right. Obviously, as you know, we can't comment in detail. Clearly, your question aims at VINCORION, 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. That does include potential activities this year. So we'll see how it goes there, but at the moment, no active process.
Okay.
On the overall order intake one, look, 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. This year, Q1 order intake, 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 Q1. 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. In a sense, if we get one of these biggies, then it flushes into the order intake over the months when it's been called off, if you want, or purchase ordered 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-off dates and quantities. Therefore, according to our rules, there was a "had to" book the whole thing in one go in December-- I may as well say it, in December of last year.
I'm saying that because the way I explained it, if it would not been in that way, we would have seen constant order inflow throughout the periods. That's what sort of business as usual would have been.
Okay.
With this particular project, it's different. It's a very large one, fairly large one, which does not bring constant order inflow throughout the periods in terms of order intake. I'm saying that, and I raised that because now it gets me to your sort of H2 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, the backdrop of your question is everybody talks about the potential downturn in semicon and why is Jenoptik not stressing that? I think the answer to that is that we're actually operating in two different segments when 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, the H2 of last year already. That segment is not as important and has been overbalanced, if you want, by ongoing strong demand in the optical lithography space. 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 are not that many customers in that segment.
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, shall we say, important players in the industry is that the third and Q4, H2 of the year will see momentum to build up. I hope that does give you enough sort of color. 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.
The next questioner is Stefan Maichle from LBBW. The floor is yours.
Yes. Stefan Maichle 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 IFRS 16 impact. Could you quantify this impact and provide probably a like-for-like margin for 2017? The second question goes to free cash flow for Mr. Schumacher. EUR 80 million guided now for 2018, 2019 below 2018 due to higher CapEx. Could you probably provide major investment activities planned for 2019? Thanks.
Thank you.
Okay, I'll take the first cut at the IFRS 16.
16. Wonderful.
Also, I have to admit that I'm glad that I have my CFO with me. 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 report.
Yes.
That the order of magnitude that we see is around EUR 10 million in 2019. Now, the thing to focus on is, we're not in the airline industry. 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, dare I say, a secondary effect is probably not fair, but there is an impact of around EUR 10 million to our EBITDA. I think I'll leave it there. Hand over to Hans-Dieter for the free cash flow question.
Yeah.
You have, 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 by the first roll equipment, by the much higher investments we are planning for the next year, which will be clear above the EUR 42 million of last year. What is the main investment area there? We have two areas where we are investing. One 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 and R&D site from Villingen-Schwenningen for our Light & Production businesses. Stefan and I, we recently have been there for the Spatenstich. I don't know the word in English to be honest. It was some days ago. We participated there.
A lot of interest has been there, and it's an investment of around about EUR 13 million 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. It's mainly driven by infrastructure investment, and we are also investing in machinery and equipment to modernize our production floor with new machines and equipment, new processes there, especially in the Light & Optics businesses, in our different sites in Jena, Göschwitz, 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. 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 S/4HANA introduction from SAP.
We are doing the next step in evolution, and it's budgeted also with, let me say, some EUR millions in the budget. So these are the main areas of investment. But we feel that it's the right time and it's necessary to invest. We decided to went up with the investment plannings. As already told to all of you during the last year, that we will start to invest more in our company to support growth.
Okay. Maybe a follow-up on the margin. If I add them, assume maybe EUR 10 million also for 2017, it's come up with an EBITDA margin of 16.6% like for like. You are guiding 15.5% to 16% for 2019. This would assume a decline. What is behind that? What is the reason for that guidance? Is it conservative or we are missing something? Maybe additional, your midterm target was around 16%, now already achieved in 2019, probably. 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 Traeger, our CEO, is the right person to answer.
Yeah.
I would take over the first part of the question, if I may, and my CEO is saying yes to me, so to speak. I answer the first part of your question, your calculation is correct. I cannot say different to it. What is our assuming at the moment? First of all, we are very at the beginning of the year 2019. It's not so easy to say precisely where we will end up. We gave this guidance. 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. As we told to all of you in the last year that we try our very best to compensate Toll Collect as much as possible, it was very profitable. But clearly above group average from the margin side, yeah. It's missing now. 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&D and sales. Year by year, we have a clear target to increase our R&D spendings to roughly 10% of sales. We will do. We will spend more, we try to book it in the costs as long as possible, as much as possible and under IFRS rules. Clearly, we will follow IFRS rules. So we have more spendings in our plannings, in our budget for this.
And so 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 branch like in last year. It was an extraordinary year concerning the absolute increase in the margins there. All in all, this leads us to this guidance, yeah.
Yeah. For the year 2019. For the strategy, for the midterm part of your question, I would like now to give hand over to Stefan. He will answer this question.
Sure. Again, I'm just so glad that hopefully we don't have all these IFRS changes year four.
Well.
It's a bit puzzling at some point.
Hopefully.
But anyway. 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, a number of times, what would have been necessary or under what circumstances would you have to change your mid-term guidance? I think I did say toward the last year, when I got this question, I did say all the time, we don't like guidances that change with cycle. Above cycle, below cycle, through cycle, 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 semiconductor will not continue to grow as much as it grew in 2018 all the time and forever. Obviously that does have a mixed impact for us.
The second part of the answer from my end always had been, if we sit here the end of 2019 and the semiconductor world is still as strong for us as it was at the time, then yeah, we might be at 16% much earlier and then we celebrate and move on and look for a new target.
Yeah.
That's exactly our position. At this very moment, we give you guidance for 2019, and we'll see how 2019 develops. Once we achieve the 16% EBITDA margin, we celebrate and then look for a new target and communicate that. Okay.
Okay. Thanks. Seeing you tomorrow in Frankfurt. Bye-bye.
No more questions. Looking forward to that.
We are happy to see you. Yeah.
Next up is Robin Brass from Hauck & Aufhäuser.
Yes. Hello, also from my side. Again, one question to the semiconductor industry. I mean, many semi players say they expect revitalization of the business in H2. Is in your guidance or your anticipation for the H2 this year also maybe an improvement in this segment, or is this more or less a stable business? Also Micron yesterday said something similar, but at the same time, they also cut their CapEx guidance, for example. Is it affecting you? On the other hand, the life science business. Of course, I think you also look maybe for potential target in this industry, but I guess the multiples are quite high right now. Recently you released a 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?
Mm-hmm. Let me address that. Semiconductors first and life sciences. No, I think pretty much similar to the rest of the industry. We do believe that momentum is going to build up in the H2. Very much in line with what the industry actually is communicating. Second part of the question, life sciences, in a way that's right. 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 bio-imaging, in particular when it comes to DNA sequencing and molecular diagnostics businesses.
What we have released relatively recently is that we have been after quite an interesting discussion, and we're very pleased actually that we have won a very very large global supplier of life science and healthcare equipment to be our distribution arm as well. 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 a 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, I would say Q1, Q2 here. By there's a build-up effect, as is 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 a potential acquisition? Here again, yes, it could. You pointed out rightly that we keep saying the margins or the multiples in this segment are very high. We would have the power to execute a deal, even a large deal. From a financial perspective, we could do that, but 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 on other segments, and continue to look for a transformative deal with this segment when it makes sense.
Okay. Thank you.
The next question comes from Michael Schaumann from Warburg Research.
Good afternoon, gentlemen. Sorry for insisting on the margin again. If I compare apples to apples, I would even exclude the inventory step-up and acquisition-related costs of another EUR 9 million. I would compare the 15.5% to 16% to even more than 17% in 2018. Maybe some more flavor on that. Besides the talk like product mix issues and the mentioned R&D increase, should we expect on an overall level in the functional costs disproportionately high rise in 2019? And then secondly, do you already include kind of one-off effects for whatever, maybe portfolio adjustments, whatever, maybe to some magnitude we saw last year, which might explain that margin development?
I'm not quite sure if I followed your calculation in all details. And I think what you're basically saying is do we expect. 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, have been very profitable, and Craig pointed to that already. We can't expect that these businesses continue to raise the margins forever, essentially. 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. We talked about that.
I'm not quite sure what you meant by why you would strip out another EUR 7 million. Is that the PPA effect? I think it's the PPA effect.
Yeah. Just step up my calculation and compared 2018 to 2019. I think you additionally have to exclude the inventory step-up from Prodomax and acquisition-related costs, and then the gap gets even bigger.
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 give you. Let's see how the year develops.
Okay. Specifically to the functional costs, do you see something 2019 as a year where there's no improvement in functional costs relative to sales? 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&D and sales and marketing, but not in a step function, but sort of an ongoing increase in that. 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. Funny enough, that's still the case, and that drives up labor cost. 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 Jena and in other places where we are operating. Labor costs do rise, and that has an effect on our businesses.
Okay. With respect to the large semiconductor order of the Q4, 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 products included in the high order intake?
No, the Q4 would have been strong without that already. It has been a large contract, and you have to please understand that we cannot communicate any details for legal reasons about this particular order. We have other projects booked in Q4 in the traffic segment. We did communicate that we booked the Oman and the Algeria tender. Let me just say, if we strip out this particular order, 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 & Life Science business in the year?
It would have been a very strong quarter. 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.
Yeah, sure. Fair enough. Just the last question on that is, over how many periods does that order backlog last? Does it last for two, three years or even longer, or what's the time-
No
in the schedule?
Not longer than that.
Yeah. Okay. On the working capital development, working capital ratio has come down to 26 now, quite a bit below the 30% level. What's your take on the future development? Yeah, a 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 side?
I think I 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. 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 optical area, but also in the defense business. We increased inventory to be ready to deliver. And on the other side, if we have high sales in December or November, you can expect that we will get the money two, three months later. So if our business is growing, we have trade receivables and inventory going up.
We try to manage this, but not pressing out the last EUR, let me say in these words, 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. We really try to handle it and to balance it. As the business is growing, we are happy with the level we have reached now. If we are growing forward, we will see. This is what we can say today.
Okay. Good. My last question would be on maybe in the comments on the individual market development. Are there market niches, 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?
Yeah, there is one. There is one that maybe I use 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. It has a significant effect. We hope that the solution or that the political environment in Berlin will find a solution at some point. At the moment it seems as if not a lot gets decided when it comes to export licenses. We're waiting for export licenses since a number of months actually, as long as it takes to produce a baby, and literally. We hope that we get some movement there in Berlin. At the moment we have to hold back on significant numbers of sales numbers for VINCORION.
Okay. That product are then probably not included in your guidance and would provide upside or?
No, it would not provide upside.
Okay.
Very profitable business, yeah.
Okay. The other markets, automotive, for example, is more or less running according to plan.
Yeah. Nothing major to report. I think we talked about the segments in automotive a number of times in the past. I think in particular in automotive, the trends 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 markets. Again, I think 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. In other words, we are not directly linked to the number of cars sold. We are not in the car supply chain. We are an engineering business. 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.
We have recently published at the beginning of January two major orders we got via our new acquisition of OTTO Vision-
OTTO Vision, yeah
in total, I think EUR 12 million. We publish it.
gives you a hint that it's good developing business.
Yeah. photonics is helping us a lot in this business.
Yeah.
Yeah. Good. Okay, thanks.
You're welcome.
Now we're coming to the next questioner. It is Peter Rothenaicher from Baader Bank. Over to you.
Yes. Hello, gentlemen. Sorry, I did not have the chance to read the annual report in total, coming back to IFRS 16, can you tell us the effects on EBIT and the net debt from the application of IFRS 16?
Yeah we have published it in our annual report on page 144. You find all the details which you require, I can summarize it a little bit. We have two impacts. The first impact is in the balance sheet, 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. As we have some sites, like the headquarter from VINCORION in Wedel, which is a rental contract or the headquarter of the Light & Safety business in Monheim, which will come now into the balance sheet. It's all in all between EUR 55 million and EUR 60 million, which we assume, which is coming into the balance sheet.
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. 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 EUR 50 million to EUR 60 million in the debt situation. It increases our bank liabilities by EUR 50 million to EUR 60 million, meaning, we have a net debt situation. We talked already to our banks and to our colleagues who are part of our syndicated loan, we adapted already our syndicated loan to the new rules, regulations, meaning it does not count against us, so to speak. No impact there.
So all in all, our balance sheet, our balance sum will also be longer by EUR 50 million-EUR 60 million, all in all, which means we have a slightly lower. On shareholders' ceteris 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 and made the calculation.
I'm asking about EBIT.
Yeah, the EBIT is close to zero. It's only an impact of EUR 1.5 million to EUR 2 million on. Positive. A positive. It's increasing our EBIT by EUR 1.5 million to EUR 2 million. For only a minor impact compared to the impact of the EBITDA, which we have talked about. On the EBIT side, it's a little bit lower, but in the EBIT, we're still facing purchase price allocation impacts, which are EUR 5 million to EUR 6 million next year still. So, all in all, we have a little bit positive impact, but more negative impact coming from the purchase price allocation side. That's the major issues, major influences.
PPA, you mentioned EUR 5 million to EUR 6 million from Prodomax at the end.
Yes.
Okay.
Yeah.
A further question regarding your tax rate. In your presentation, you mentioned that this effect we have seen in 2018 will likely be the last time to that extent. What is your view on the tax rate for 2019? Not on the cash tax rate, but on the reported one.
It will be above 4.4%, but it's not very astonishing, if I say it, because we are close to zero right now. For a German headquartered company, it's already a very poor, relatively low tax rate. I think our calculation is above 10%, let me say it in these words. 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. The calculation is not well precise at the beginning of the year, but we are thinking about 10 to 15% in this ratio.
One point regarding the traffic safety pipeline. On the one hand, we have seen here some issues with your section control in Germany, where it stopped now to work. Have you here a new view and will this impact your business? On the other hand, how do you consider your project pipeline for further traffic safety projects?
Yeah. When it comes to section control, you're right, this prototype business, 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 Lower Saxony. We can say from our end, we use section control in many parts of the world. We provide products to many other countries. We don't think that any decision in the commonwealth of Lower Saxony will have that much of an impact on our business here in Light & Safety. Again, 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 that would be affected by any decision in Lower Saxony.
And in general, the pipeline for traffic safety projects?
Look, it's pretty good. We're constantly in discussions. We have seen communicated at the end of last year, good order intake, large order intake from Arabia, from Oman and Algeria. 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's to nobody's surprise. Apparently, the governmental bodies in the U.K. have other things to do at the moment than to deal with traffic safety. Other than that, 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.
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