Earnings Call: Q4 2018

Feb 5, 2019

Ladies and gentlemen, welcome to the AMS Full Year and Fourth Quarter 2018 Results Conference Call. I'm Irwanath, the Chorus Call operator. I'd like to remind you that all participants are in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. At this time, it's my pleasure to hand over to Mr. Alexander Evertke, CEO Mr. Michael Wachsler Markovich, CFO and Mr. Moritzk Minor, Head of Investor Relations. Please go ahead, gentlemen. Good morning, ladies and gentlemen. This is Moritz Gmeiner. I'm very happy to welcome you to this morning's conference call on the full year and 4th quarter 2018 results. Please note that there is a presentation available for this call, particularly for the financial section of the presentation. This can be found on our website atams.com in the Investors section under the Presentations tab. With this, I would like to hand over to Alex Ivek, our CEO. Alex, please? Thank you, Boris. Good morning, ladies and gentlemen. I'm very happy to welcome you to our full year and Q4 2018 conference call this morning. Before I start to discuss our business, let me add a few general comments. We have seen a more difficult year 2018 than we had originally anticipated and especially towards the end. The development of important end markets on customer demand was unexpectedly worse than what we had thought. At the same time, we were able to achieve strong growth last year, and I'm happy to report this despite the difficulties encountered. Now 2019 is starting out on an unfavorable note as well as we see the tough market environment continuing with volatile end market dynamics that are hard to anticipate. We do not take this development lightly and are committed to do our best to work through Jennings' time, but I'm convinced about our strategy and the steps we have taken and are taking to implement it. There has been no change to my conviction and I, together with the continue to take the company forward using our long strong long term platform for leadership in our focus areas. So let me now discuss our business. Starting with some key financial figures, Mike will later take us through the financials in detail. We have achieved strong growth for the company in 2018 with revenues growing 34 percent to $1,627,000,000 a record for AMS. Our 4th quarter revenues played an important role in this reaching $491,000,000 up 4% sequentially and well in line with our updated expectations. Our adjusted EBIT was $146,000,000 for the year, while adjusted EBIT for the Q4 was $62,000,000 or 13% of revenues, well in line with our updated expectations. Our strategy for leadership in optical imaging and audio sensing was the key driver for the substantial growth we recorded last year. However, in the Q4, we faced unexpected weakness in customer demand in our consumer business, which resulted in update to our original expectations for the quarter. Our consumer business was nevertheless our main growth driver last year with optical sensing once more the largest business area for AMS. Optical solutions for 3 d sensing and advanced display management were important revenue streams in 2018. However, in the Q4, the performance of these lines were lower than originally expected. As the leader in optical sensing, we offer a broad portfolio of high performance solutions for 3 d sensing, including VCSEL based illumination, TrueColor and other display management, advanced proximity sensing, spectral sensing and other optical applications. We are a leader provider for 3 d sensing technology and ramp significant 3 d sensing volumes for major global smartphone platform in the second half of twenty eighteen. Looking at the 3 d sensing market, we see an ongoing coexistence of the 3 d sensing approach to structured light, time of flight and active stereo vision as 3 d sensing adoptions in mobile devices is moving ahead. We have been able to win designs in all 3 3 d sensing technologies and expect more 3 d sensing enabled devices to be launched this year. From our OEM engagements, we do not see 1 dominant technology emerging. Rather, technology choices in 3 d will continue to be driven by application, performance, software, solution partners, size and cost considerations. In the 3 d market, we are successful with our current strong focus on 3 d system illumination, winning at AOMs and leveraging superior VCSEL performance across technologies. Here we are working alongside different image sensors vendors and I would like to briefly elaborate on this. Working alongside image sensor vendors means that in a specific 3 d system, we may be covering the illumination on the transmission side and an image sensor vendor, the sensor hardware on the receiving side. This is already the case at multiple OEMs and in solution designs today and we therefore don't see an overlap or competitive issue with the image sensor vendors out there. We have enabled 3 d systems using different image sensor vendors and are able to address all system approaches, including implementations for structured light, time of flight and active stereo vision, which we are either seeing already or expect to come to the market. This broad traction underlines our system capabilities and the strength of our 3 d illumination portfolio covering structured lights dot protection, structured light auxiliary and time of flight flood illumination, time of flight proximity sensing and active stereo vision pattern projection. With design wins in structured lights, iToF and active stereo vision, we provide VCSEL illumination solutions for a range of Android 3 d devices, which are either launched or expected to be launched this year. Leveraging our solution know how, we started shipping 1st VCSEL and 3 d sensing products to Android structured light 3 d face recognition to 2 Asian smartphone OEMs last year. Previously mentioned Android Itoff design wins for 3 d programs as 2 Asian smartphone OEMs are built on our illumination expertise and are either shipping or expected to ship in the first half of twenty nineteen. We first mentioned development efforts for ActiveStereo Vision last summer, given the technology's interesting potential to combine attractive three d performance with cost efficiency and implementation advantages. At the recent CES trade show, we presented a high quality active stereo vision implementation for 3 d face recognition in partnership with leading 3 d software provider, Face plus plus mobile application process leader, Qualcomm Technologies and 3 d software specialist Velos3d. This solution where we contributed the VCSEL illumination model and system design expertise is an excellent example for an ecosystem partnership as industry participants are highly interested to engage with us. We have separately won a design in active stereo illumination and expect 1st active stereo 3 d systems in Android smartphones this year. In active stereo, we believe upcoming reference designs will enable quicker and easier implementation of 3 d sensing for Android OEMs, which we believe will drive adoption of active stereo. We address both front facing related and world facing application based on our leading portfolio in 3 d sensing. For world facing 3 d sensing, we realistically expect another multiyear timeline of adoption as applications and solutions continue to evolve. However, supporting early adoption, we recently finalized an illumination solution for world facing 3 d sensing system at a major Android OEM and see volume shipments starting in the current quarter. I'm very excited that our differentiated technology offers competitive advantages for 3 d sensing that are being recognized in the marketplace. Together with our 3 gs system know how, we are able to drive strong market and design traction for our VCSEL solutions in structured light, ITOF and active stereo. We therefore expect to establish a significant market position in high power VCSEL for 3 d sensing over the next years. Our engagement with OEMs and ecosystem players and our ongoing development efforts are behind our leadership position in 3 d sensing, which is built on our recognized solution capability and system expertise across all 3 d technologies. Looking at other optical sensing, we reinforce our market leader position in display management light sensors including TrueColor, ambient light and proximity sensing. We've shipped a wide range of display management solutions to a broad base of customer OEMs, which included significant volumes of TrueColor solutions that we ramped in the second half of twenty eighteen and very small scale proximity sensing for audio accessories at a major OEM. At the recent CES trade show, we officially introduced an innovative solution for light and proximity sensing behind OLED displays, which enables maximum screen to body ratio and bezel less phone designs. We previously reported first design wins in this technology and have recently started volume shipments for these wins to a leading Asian smartphone OEM. As elimination of the bezel is a key theme in the smartphone market, we are seeing additional OEM interest for this technology. We continue significantly R and D activities for new and future optical sensing and VCSEL illumination technologies last year. We are working to finalize a miniature consumer spectral sensing solution with a major consumer OEM, where we are eyeing out the details and expect shipments to start in mid-twenty 19. Audio sensing was another growth area for MS in 20 18 showing continued good performance in the Q4. We again saw solid volume growth in men's microphone interfaces last year where we are the market leader, given the ongoing market success of home assistant devices with multiple microphone contents. We are also a leader in the growing market for ear and headphone active noise cancellations or ANC, serving a broad base of accessory and device OEMs. Here we recently introduced a highly miniaturized high performance ANC solution for wireless earbuds. Moreover, new technologies such as our single cable power and data interface and hybrid ANC are seeing market traction and offer additional opportunities going forward. We also see potential for audio sensing to support future machine hearing applications in the coming years. For the previously reported opportunistic power component win in a consumer charging application, we expect mass production this year as expected. In autumn 2018, we decided to de emphasize development efforts in the environmental sensing and focus relevant resources on very attractive mid and long term growth opportunities in optical technologies. Based on the decision, we have already implemented steps to internally redeploy R and D resources to its optical sensing focus area. In addition, we are actively exploring strategic options for parts of the environmental sensing business. Following these streamlining efforts, we can pursue a more focused strategy around our strategic pillars optical imaging and audio sensing, which are core drivers for differentiation for us. Let me now look at the non consumer side of our business. Our automotive, industrial and Medici business performed well in 2018, serving advanced sensing applications in a range of end markets. Our automotive business showed attractive growth in 2018. Focus on safety, driver assistance, autonomous driving, position and chassis control, our automotive portfolio is strongly positioned towards structural growth areas in automotive sensing. Supplying a range of leading automotive system suppliers, we see increasing customer interest in Asia, including Japan. At the same time, we expect a more muted development of automotive demand in the coming quarters reflecting the prevailing industry and macroeconomics environment. In automotive LIDAR, development activities continue for a large reported 3 d LIDAR program for a VCSEL array and driver illumination system at the global automotive supplier. The U. S.-based automotive lidar startup working with us presented their latest 3 d lidar solution incorporating 128 VCSELs at the recent CES trade show. LiDAR and 3 d technologies are gaining increasing OEM intention for automotive applications. Here we offer VCSEL and optical sensing expertise and system know how for high performance optical implementations. Design activities for the 1st in cabin 3 d sensing project are progressing among increasing OEM interest. In this area, we see potential to leverage our system expertise in iToF and active stereo. Our industrial business recorded another successful year. As a leader in industrial sensing, we offer a wide range of differentiated solutions for industrial automation, factory automation, HABA and other industrial markets. Manufacturing, HABA, industrial IT and other application markets continue to see increasing demand for sensor based data acquisition. As a consequence, we expect new sensing technologies including 3 d sensing to create further growth opportunities in the coming years. Industrial Imaging and Machine Vision was particularly successful last year, winning new designs for our industry leading global shutter here technology. We brought innovation to the market and remain at the forefront of growth applications in high performance image sensing. Our medical business showed a good performance again last year. As market leader in medical imaging for computed tomography and digital x-ray, we successfully ran first solutions for our new Asian medical imaging OEM and see continued good market traction in Asia. We also introduced the latest generation of our micro cameras last year, offering the world's smallest camera system for endoscopy. Based on this exciting technology, next generation medical endoscopy continues to be a growth area for AMS. Looking at operations, we completed a substantial expansion of manufacturing capacity in our Singapore locations last year to support customer plans. At the same time, we achieved major efficiency improvements and reduced process times in several production areas. These have resulted in a lower utilization of our expanded optical manufacturing and filter deposition capacity. We expect this situation to continue to create operational headwinds this year. On the positive side, these advances in manufacturing allow us to expect very significantly lower capital expenditures for 2019 compared to 2018, which will support our financial strength. Our in house wafer manufacturing capacity in Austria was again fully utilized through 2018. Construction of our internal VCSEL production line continues with limited equipment investment remaining. We see future we see further differentiation opportunities in both design and manufacturing of high power VCSELs, which are keen to be exploited with this manufacturing investment. To optimize operational and cost effects of the wafer manufacturing line as part of our total VCSEL capacity, we have adapted the front end production ramp of the line to be planned start around the end of this year. In line with previous expectations, we will cover anticipated VCSEL volume needs for this year through our established outsourced supply chain. Given the current volatile capital market environment and as we do not see additional capital needs at this point of time would drive that would drive a shared placement, we have decided to postpone the planned secondary listing at the Hong Kong Stock Exchange. We successfully completed the prerequisite jurisdiction admission process for Australia in December and expect to pursue the planned secondary listing at a later point in time. Let me now come to the outlook for our business. For the Q1 2019, we expect revenues to reflect the current more unfavorable and end market environment and the subdued smartphone demands we are experiencing effects that adds to characteristic consumer markets seasonality in the Q1. As a result, we expect Q1 revenues of $350,000,000 to $390,000,000 based on available information. This reflects a continued unfavorable dynamic in the consumer market, in particular, while macroeconomic and general industry trends do not appear to offer additional support. Despite these additional influence, our revenue expectation for the Q1 is not significantly different from typical Q1 seasonality in the past years for the consumer supply chain that we are part of. We anticipate lower production volumes in our consumer business in the Q1, which will in turn impact our profitability. We therefore expect an adjusted operating margin for the Q1 in the low single digit percentage, which is similar to the levels we saw in the Q1 2017. Even in light of these effects, we see the potential to generate a small positive operating cash flow for the Q1 based on current information. We are generally experiencing growing end market volatility, customer performance that is becoming more difficult to anticipate and ongoing uncertainty regarding end market demand trends, industry development and the macroeconomic environment. Reflecting this situation, we have decided to continue to provide detailed financial guidance on a quarterly basis for each upcoming quarter and to discontinue other numerical guidance. Despite this more difficult environment we are operating in, I would like to reiterate that I'm convinced of the strength of our strategic position, our competitive technology advantages, our customer traction and the longer term growth potential for AMS. Let me now hand over to Michael for a detailed look at our financial performance. Thank you, Alex, and good morning, ladies and gentlemen. As usual, it's my pleasure to give you an overview of our IFRS consolidated and our adjusted numbers. For those of you who follow the presentation, let me start on right on Page 19 and jump into the details of our P and L. We saw, as Alex mentioned before, revenues coming in on a record level of EUR 1,627 point 4,000,000 in 2018, a 34% increase year over year compared to EUR 1,200,000,000 and EUR 13,800,000 in 2017. Q4, although, reflects the unfavorable consumer market environment and the subdued smartphone demand we have seen. So in Q4, our revenues declined by 8% from DKK536.6 million in Q4 2017 to DKK 491.4 million in Q4 2018. In line with our typical seasonality, we have seen a significantly stronger business in the second half twenty eighteen. Next Page 20, you can see our revenue distribution. The retail split obviously, as usual, doesn't say a lot. Consumer customer distribution did not change very much in 2018, but billing locations changed and the supply chain is obviously defined by our customers. On the right side of the page, you see our development by markets. We have seen a strong increase in our consumer business for over 70% of our total business, also given less attractive automotive, industrial and medical end market development towards year end. Within the AIM segment, automotive did very well. Industrial obviously remained the largest part within that segment. Our backlog at year end 2018, what you can see on the next page, Page 21, reflects the unfavorable market environment we have seen towards the end of the year, lower smartphone demand and also typical seasonality. We also see shorter ordering cycles of our customers. Our gross profit margin on Page 22 shows the reflects or reflects the product mix, the strong underutilization of our manufacturing sites in Singapore, mainly driven from the first half or coming from the first half twenty eighteen. Gross profit margin decreased from 43% in 2017 to 31.7% in 2018. In absolute terms, there was an almost flattish development. Q4 gross profit margin came in at €174,000,000 or 35.4 percent of revenues. These are adjusted numbers. Our IFRS numbers show 27.2% gross profit margin in 2018 and 28.2% in Q4, respectively. As you may recall, we had a very weak gross margin in the Q2 2018, which played into the full year development of the gross margin. In addition, a less favorable product mix in the second half resulted in less attractive gross margin as well as lower than expected utilization in the second half and in the fourth quarter. Q4 gross margin was in line with expectations though, a solid result despite the lower than expected revenues. I would like to add that we had onetime restructuring costs in Q4 2018 regarding customer related equipment in our manufacturing, is not included in the adjusted gross margin. This is regarding customer related equipment that we planned for, but the underlying capacity requirements did not materialize and we did not add the equipment. So we had to take a charge for costs related to not taking up the equipment. This one time effect amounted to US24.6 million dollars in the Q4 2018. Further down the P and L, you see our R and D expenses. We had a substantial increase in absolute terms from $244,000,000 in 2017 to $273,000,000 in 2018. High R and D investments continued through 2018 for large projects in our consumer and non consumer markets. In relative terms, we have seen a substantial decrease in 2018. Q4 2018, however, shows some year end effects. So this is clearly not the role model for the future. In Q3 2018, for example, our R and D spending was US68 $1,000,000 Our SG and D spending on the next page includes very selective improvements of the organizational structure and the global sales team. We continue to manage our SG and A expenses very well. We have seen a significant decrease in relative SG and A spending showing the cost discipline in our business and obviously the effects of lower revenues in the Q4 for some commission structures. Our operating result, our EBIT and EBIT margin for 2018 shows the gross margin impact of underutilization in the first half last year. However, lower than expected demand in the 4th quarter, product mix in the second half and improvement related underutilization plus the higher R and D costs in the 4th quarter. Our EBIT for full year came in at 145 point 0.9% in 2018 compared to 15.9 0.9% in 2018 compared to 16.9% in 2017. The 4th quarter EBIT was €61,900,000 compared to €146,600,000 in Q4 2017, 58% decrease. EBIT margin in the 4th quarter was 12.6%, right in line with guidance. We had a one time restructuring cost in the 4th quarter 2018, as I mentioned before, for customer related equipment in manufacturing, and we also had some expenses for restructuring in our environmental sensor business, which is reflected in our operating margin. Looking at Page 26 in our net financial result, we see a major impact of the U. S. Dollar convertible bond option component and its valuation effects. We are required under IFRS rules to record changes in the value of the option element of the foreign currency convertible bond as noncash items in the group financial result. This was the case throughout 2018 and led to this very strong positive financial result. Our actual interest payments are lower in comparison. Net interest paid for 2018 was actually $18,800,000 Our tax expense on Page 27, the P and L was again negative due to unwinding of historic tax structures, release of provisions and different tax effects across our different locations. Still, we paid taxes last year in different countries, including Switzerland. The total tax payments amounted to around $13,000,000 which you can see in our cash flow statement. We'll now come to our net income and earnings per share. Our adjusted net income was significantly impacted by considerable valuation effects of the option element of the U. S. Dollar convertible. We therefore report adjusted net result and earnings per share excluding the accounting related effect from the valuation of that option. This is a non cash distorting item, which is why this is being excluded. I mentioned this topic before in the context of the net financial result. However, this item was also the reason for the strong decrease of the adjusted net result as over the course of 2018, this item turned into a very large positive figure, so excluding it decreased the adjusted net result and EPS. So our adjusted net result and EPS for 2018 came in at CHF 12,100,000 or CHF 0.15 and CHF0.14 respectively, which is basic and diluted or $0.15 and $0.13 respectively in U. S. Dollars. In the 4th quarter, our adjusted sorry, our adjusted earnings per share came in at CHF0.02 basic and diluted or US0.02 dollars basic and diluted. Now let me give you some additional information on the balance sheet. Turning to Page 30. We've seen a very positive working capital management in the light of the very strong business growth. Working capital at the end of 2018 shows a certain balance sheet effect balance sheet date effect though regarding trade receivables and liabilities. Here you can see the very tight management of our working capital. Generally, it remains a priority for us. Inventories obviously reflect a year end effect from the current demand environment. So we saw a higher inventory base at the end of the year. On Page 31, some information to our net debt, cash and short term investment situation. Our net debt increased considerably in 2018, mainly driven by further capacity investments in our Singapore operations. The strong increase in cash and cash equivalents reflect the strong second half cash generation and the lower CapEx in the second half this year. I may remind you that the large portion of debt are long running convertible bonds, which mature in 2022 2025, respectively. We are well aware of the higher than desired leverage at this point in time and are very focused on improving the situation over time and I would expect also over the course of this year. As I said, cash balance is high and it strongly improved in the second half and towards year end given significant cash generation and lower CapEx. So our cash at the end of the year was 713.3 $1,000,000 compared to $447,700,000 at the end of 2017. Our net debt increased though from RMB987,900,000 at the end of 2017 to $1,362,200,000 at the end of 2018. Now let me give you some additional information on the cash flow. On Page 33, operating cash flow was significantly better in 2018 and also in the Q4 when compared to 2017. The strong Q4 cash flow shows the capability of our business to generate high cash amounts, helped by lower CapEx. Free cash flow in the 4th quarter came in at US226 $1,000,000 Operating cash flow was $293,500,000 in the 4th quarter alone. Now let me turn to Page 34 and the capital expenditures. After mentioning CapEx before, here it is. We saw a strong CapEx in 2018 again. And that is mentioned, this year marks the completion of a major investment in CapEx cycle we have gone through. As you can see, CapEx already came down very significantly Q4 also versus the Q3. And as we have mentioned, we expect CapEx for 2019 to be significantly below 2018 levels. And with that, I would like to thank you for your attention and would like to open the floor for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. The first question comes from Andrew Gardiner with Barclays. Please go ahead. Good morning. Thanks, gentlemen, for taking the question. 2, if I could. Firstly, just sort of Alex, regarding the increase in end market volatility and your quote around customer performance, it's difficult to anticipate. I'm just interested in a bit more detail around how you guys are thinking about managing the business in such a challenging environment. You've been investing in in new products where you seem to be getting design wins, but sort of the lack of certainty around what those design wins will mean in terms of volume and perhaps price, Certainly, from our point of view in the markets makes it challenging to model. And I presume given what you're saying, it makes it more challenging to manage. And I suppose if I look at some of the other financial items that Michael you just mentioned, backlog is down significantly year on year and it seems it's more than just sort of seasonal or macro, it's a significant reduction. You highlighted shorter order your ability to utilize the CapEx you put in place? And your ability to utilize the CapEx you put in place and work on the inventory, those kind of things. Just a bit more detail in terms of the how you manage the business in such an environment would be helpful. Thank you. Yes. Andrew, thanks for the question. Of course, as I said, there's much more volatility than we have seen the year before. But the way to manage the business, I mean, most importantly, first of all, as we announced, we got multiple more design wins, not only in the Android space but also in the non consumer space. And the more you diversify from large customers, like more customers on the plate with very leading technology, this can stabilize the business. At the same time, we also are more careful in which kind of projects we're taking on board. So we need to understand what the application is and how successful we anticipate the business. And we are very careful in our R and D spending and in OpEx spending. For example, that's the reason why we address the environmental business to utilize resources we have within the company for growth opportunities we have on hand right now without hiring more people. And then lastly, I think most important is especially our CapEx spending. We mentioned it that we expect the CapEx spending in this year significantly lower than we had last year. And because of better performance in our manufacturing line, we also don't need additional capacity. And in general, strategically, the core for the company is to focus more on outsourcing wherever it's applicable, not utilizing own assets for future manufacturing. Okay. Thank you. And then I understand you're not wanting to give more sort of numerical guidance as we look forward. But just thinking to the Q2 and comparing it to last year, clearly, we had a significant drop in the 2Q last year that was quite unusual and related to customer specific movements. Is there any reason at this point in time to anticipate a similar kind of drop this year? Or do you expect it to be more normal in terms of seasonality? As you can imagine, we cannot comment on the Q2 now. But what I could say is that certainly we see the second half of the year twenty nineteen better than the first half. So this kind of seasonality we clearly see for this year, but I can't refer to the Q2. Okay. Thank you. The next question comes from Jonathan Menon with Liberum. Please go ahead. Hi, good morning. I just wanted to know whether you can take an estimate of what your market share in illumination is right now. You are sort of focusing on illumination across all the technologies as your sort of core offering to the market. Given the design wins that have already come out and the design wins that you've either won or not won, what would be your estimate of market share? And also as part of that question, what is the kind of price pressure that you're seeing in this in the VCSEL market? I mean for a similar bid last year versus this year, what would be the rate of price erosion that you're seeing in the market? And maybe last question is on spectral sensing, can you give us a small update, please? Thanks. Yes. Thanks for the question. I can't give specific numbers on market share, but it's clearly we are leading in illumination. And if you just add together what we have announced, the design win pipeline we are seeing, especially in our VCSEL arena, we are winning in the Android space, one design after the other. And the encouraging sign we see is that it's really based on very differentiating technology, what only we have. Going forward even and we also announced that this high power capability we have in our illumination business also drives the real future growth and significant growth in the 3 d light automotive business. So we are very confident that we are leading in this and continue to lead. And of course, we are also, as I mentioned in this call, addressing all 3 d sensing technology, structured light, active stereo vision at the time of flight. On the pricing, we see similar. I mean, we don't see major changes in price pressure, but we see obviously, there is price pressure, but we see very similar as in the past. And the more I can tell you, the more differentiated technology you have, the less competition you have and the less price pressure you see. And then on the third question, on spectral sensing, we said we have a business we expect to ramp in the mid of this year. But we keep good traction, engagement with customers, understanding the feature you can address with spectral sensing, whether it's color matching, whether it's food analyzers, utilizing those technologies and their applications. So we see very good traction there. Got it. Thank you very much. The next question from the phone comes from the line of David Mulholland, UBS. Please go ahead, sir. Hi. Thanks very much. I know you can't comment too much on absolute levels in Q2, but can you comment a little bit on mix and how you see or could you say anything on how you see mix of customers versus last year? Because obviously last year had a big issue with one key customer. Are there other ramps that are coming already in Q2 this year that you might have a more diversified business Q2 this year compared to last year? That'd be really helpful. And then just secondly, on the spectral sensing commentary, just a quick follow-up. But can you I think in the past, you've commented that you expected it to be somewhere in the kind of single digit millions volume size. Any quantification on the kind of scale of ramp that you expect this year would be really helpful as well? Yes, David, thanks for the question. To the first one, I think you're raising a very good point. Based on the announcement we just did and did in the past, we do have a significantly better pipeline for the Android mobile business for Q1 and also Q2 and the quarters to come. So this is a big difference to last year. So quite some volume is ramping already this quarter and will continue the following quarters. On the spectral sensing, I don't recall that we gave any numbers there, but you see small volume ramping mid mid-nineteen for first applications coming to the market. And we expect the moment those applications are visible to other customers, will create more interest and small design wins for the future. We have seen this with other technologies in the same way. That's great. Thank you. The next question comes from Robert Sanders with Deutsche Bank. Please go ahead, sir. Yes. Hi. Good morning. My first question is just on your move towards more outsourcing. I was just wondering if you've done any work actually looking at a more asset light strategy overall for your business and including such things as carve outs, etcetera. And I'd be interested also to sort of get an idea if your campaign line in VCSEL is actually now when it become cost competitive with using outsourcing? And I have a follow-up. Thanks. Yes. Thanks, Rob, for the question. On the outsourcing, so strategically, there is no change. We always said that only technologies which are highly differentiating with other words, no one else can do it. We will do in house, the rest will be outsourced. We continue this strategy, but we are actively looking for additional sources where technologies which are maturing over time can be outsourced even faster. This is clearly the strategy. And the way going forward is, of course, we want to limit our capital expenditure to the minimum needed. And the same applies for the VCSEL manufacturing building up in Singapore currently. We will start production end of the year and utilizing the established supply chain we have already in the course for the year. But as you know, we needed to invest to make a 3 d launch for the home market happening. Without the investment we have done in the last 2 years, you wouldn't have seen this application on the market as you see today. And this enabled the technologies, enabled the market we just had to do. Got it. And just on spectral sensing, is it still roughly a $2 content item when you think about getting into the smartphones, for example? Thanks. Yes, it's multiple dollar. Yes, it's a highly complex technology, very, very differentiating. It's a multiple dollar device. Okay. Thank you. Next question from the phone comes from Achal Sultania with Credit Suisse. Your line is now open. Please go ahead, sir. Hi, good morning. Just a question on the mix. Like how should we think about the mix as we go into the back half of the year? Obviously, mix has been a specific issue that you've been raising for the last few quarters. Given that we're already in the start of the year and you already must have got some indications from customers around product launches that are expected in Q2, Q3. Is mix expected to significantly improve or should we expect volumes to be a bigger driver as we think about margins in the back half of the year? And then I've got a follow-up on VCSEL. Thanks. Yes. Hi, this is Michael. Yes, we expect the significant improvement of the mix. That's why we also said we expect a stronger second half than the first half as we have seen also historically. And this has obviously also been driving margins. Okay. And just on the VCSEL side of things, obviously, you expect a ramp of mass production end of this year 2019. Like clearly, that fab is going to take some time to ramp up because of the CMOS nature of products. Should we expect any short term negative impact on margins as that fab starts to ramp up? Or is it going to be too small in the bigger scheme of things that we should not care about the ramp that much? Yes, it's definitely small. So compared to our better size of the company, we won't see much of an effect. Okay. Thank you. Thank you. The next question comes from David O'Connor with Exane BNP Paribas. Please go ahead. Good morning, gentlemen. Thanks for taking my questions. A question for Michael on cash and the balance sheet. What's the priority for you for capital allocation in 2019? On the one hand, you've suspended the dividends. Previously, in November, you announced a partial buyback of the convert. If you can give us some color around that, that should be great. And I have a follow-up. Yes, sure. I mean, clearly, as you have seen with the development of our cash at the end of the year, preserving cash is very important these days with the high net debt. And clearly, our intention for 2019 is to reduce our net debt and bring it more in line with our own expectations. And is there a target is there a leverage target for exiting 2019 that you guys have set? I can't give you any number, but it should be significantly lower. Okay. Got it. And maybe one follow-up for Alex on the automotive, medical and kind of industrial bucket of the business. You talk about a more muted development there on automotive, which is not I'm sorry, surprising given what you quote from peers. Can the Austrian fab remain fully utilized in 2019 in this kind of environment? Or can you give us some color about the how much of that business is outsourced in and around the Austrian fab? Thanks. Yes. Thanks for the question. Actually, this a little bit more muted demand actually helps the factory Austria was at the edge of capacity last year. This ease up the situation a bit. So I have no concern at all that we have annual utilization in FEP in Austria. So this will be fully loaded. And we also do have the flexibility that certain products we have we can manufacture in house and outsource. And that means in case of any event that there would be spare capacity, we can in source again. So this is very valuable managed and I don't see any problem for this year. Very helpful. Thank you. The next question comes from Sebastian Stavowicz, Kepler Cheuvreux. Please go ahead. Yes. Hello. Thanks for taking my question. Could you please make an update on the charging project? When do you expect to have the first revenue contribution from this specific project? And also on the Singapore fab, what was the utility rate in the last quarter of 2018, please? To the first question, this charging project, it will ramp in the first half. We are very excited about this. It's an opportunity project, as you know, but the ramp will happen in the first half and continues for quite a while. And this is Michael. To your utilization question, we can't give specific numbers, but obviously, it was low and we've seen some headwinds and that's why the margin actually is where it is. Okay. One last question, if I may, on the CapEx. You expect a significant reduction for 2019. Could you be a little bit more precise helping us to model a little bit the free cash flow for this year? Well, we don't give any specific numbers as you know. But if I say significantly lower, you can really expect that. Looking into Q4, you have already seen that it is significantly lower than Q4 2017. So probably you can read something out of it. Okay. Thank you. The next question from the phone comes from the line of Sandeep Deshpande with JPMorgan. Please go ahead, sir. Yes. Hi. Can you talk a little bit about this world facing 3 d sensing? And I mean, what components you would supply to this market as well as any other kind of 3 d sensing that where you will have revenues in probably in the lower end versions of 3 d sensing where you might be supplying components and when both these will start substantially contributing to revenues and if there are any wins in those? Thanks. So on world facing, I mean, I mentioned it in the call right now. It's a lot is based on our illumination various illumination competencies, and you could expect this in a similar way for the world facing architecture. We're quite excited about this because it's the first time this new application will come to market. And as we have seen it from the front facing, we expect that this will evolve to more customers over time. So this is a quite exciting topic. And we are very encouraged that we are on the front facing also winning one after the other design win, which clearly shows the competencies and system knowledge we have and the broad portfolio, which includes system architecture, knowledge and software. And the ramp will happen, as I mentioned, in the first half. And we are seeing a good traction on this business. Thank you. The next question comes from Michael Firth with Vontobel. Please go ahead. Yes. Hi, gentlemen. Three questions. You mentioned the utilization rate in Singapore in the Q4. You cannot give a specific number. But can you tell us how you expect this to trend in 2019 according to your current budget? Will it sort of be twice as loaded as in the Q4? Any indication on that would be helpful. 2nd question, again, on the spectral sensing. I seem to remember that you talked about a small number ramp already late in the Q4 initially and now it seems to be in the mid year. So can you tell us what created that delay? And then finally, just on your reporting, you seem to restate your past numbers systematically, I guess due to changing the FX rate. So effectively, you're reporting in euros and not in dollars. Any could you give maybe a clear historic restatement every time you do that? That would be very helpful just as a remark. Thank you. Yes. Let me Alexia, let me take your second question and Michael address the first and third one. On the spectral sensing, as I mentioned, this is a very highly technology, which includes software. And for that reason, we're working currently with the customer on the project and for obvious reasons there had been a certain delay. But we are very confident that mid of the year this will be launched. And we experienced this when new projects and new technology coming to market, this is this can happen. To your loading questions, this is Michael. We obviously, it's low. I mean, you can see it with the revenue development, and we expect to improve over the course of the year. Having said that, the second half, we see an improved product mix and we see a similar pattern of second half versus first half. We also see the loading to improve in the second half and therefore, the margin situation. To your currency question, we our functional currency obviously is euros and we calculate then the U. S. Dollar we report. We use the last quarter's average FX rate for also historical numbers to really compare apples with apples yet. Yes. Then it would be helpful to have the euro numbers all the euro numbers as well because it keeps on shifting everything. That is good numbers are obviously there. You find it in your report. Okay. Thank you. The next question comes from Jurgen Wagner with MainFirst. Please go ahead. Yes. Good morning. You mentioned in your prepared remarks that you don't see 1 dominant 3 d technology, but as a follow-up question on the utilization question, Assuming that time of flight or even active stereo vision would replace the structured light solution you have at the moment for face ID, what would happen to your utilization of the Singapore fab? And the second question is you had some traction with your behind OLED Life Sensor, how meaningful can that be or can that become over the next, let's say, 2 years? Thank you. Yes. Thank you for the question. So behind OLED is a meaningful business and we see very strong traction after the announcement at the CES this year from multiple customers to engage with us to have behind OLED in their platform. And especially when you look at potential new phones with multiple displays, this adds a lot of volume to this business. Regarding 3 d sensing technologies, as I mentioned, I do not see that one of the technology gets replaced. It's more a coexistence of 3 technologies. And we see in this discussion with customers, everybody has a different focus, a different application, software requirements and cost assumptions. So we see this living along each other and not that one will replace the other. Okay. Okay, good. Thank you. Thank you very much, ladies and gentlemen. This was the last question for this morning's question and answer session. We thank you very much for your interest this morning, and we look forward to speaking to you again with our Q1 results. Thank you very much, and goodbye.