ams-OSRAM AG (AMS.SW) Earnings Call Transcript & Summary

Good day, and welcome to the ams OSRAM Q3 '25 Results Credit Investor Q&A Call. My name is Sergio and I'll be your Evercall coordinator. The format of the call includes prepared remarks from the company followed by a question-and-answer session, at which point then you'll have an opportunity to ask question 5. Attendees are also welcome to submit questions in writing via the ask a question button found on the upper right of the deal road show. At this time, I will turn the call over to Juergen Rebel, Head of Investor Relations. You may now begin.

Hello. Good afternoon, Europe. Good morning to the U.S. This is Juergen speaking. We'd like to welcome you to our financial and business update on the first quarter -- on the third quarter 2025 for our credit holders. Rainer, our CFO, will walk you through. And during the call, we're referring to an excerpt from the earlier analyst call where you can find the slides on our website. You can also find a full IR presentation on the website for further details. Rainer, the stage is yours.

Yes. Thank you, Juergen, and hello, everyone. It was a good quarter. Our strategic focus is paying off. We delivered strong cash flow and significant growth in the core portfolio on a like-for-like basis. Profitability was better than the previous quarter, also supported by a one-off. Re-establish-the Base savings continued to be ahead of plan. I'm now on Page 3, looking at the financial performance of the group. Revenues came in at EUR 853 million, above the midpoint of the guidance. We saw an almost double-digit percentage improvement in our semi business. In the Auto Lamps aftermarket business, where the double-digit seasonal upswing. The weaker U.S. dollar cost us EUR 20 million top line compared to the previous quarter. Year-over-year, revenues are down a bit with 3%. This is completely due to the weaker U.S. dollar. Note the $0.07 difference in the average euro-U.S. dollar exchange rate, which equates to approximately EUR 35 million top line. If you look truly at a like-for-like comparison based on today's core portfolio at constant currencies, we have grown by about 6% year-over-year. This includes the traditional Auto Lamps business. The semi core business against which we measure our growth grew approximately 9% on a comparable basis, a really good result in the current market conditions. It clearly shows that our portfolio choices are paying off. Profitability. Adjusted EBITDA margin improved quarter-over-quarter and year-over-year by almost 1 percentage point to 19.5%. In euro terms, adjusted EBITDA improved by EUR 21 million. Within that number, we have a profit, a onetime profit of a bit more than EUR 10 million from the sale of some manufacturing assets in our Singapore production facility. Now let's move to the segments. On Slide 4, a snapshot a snapshot of the segment performance that you find in our IR presentation. Opto semi revenues improved 6% sequentially, EUR 365 million compared to EUR 344 million in the previous quarter. The increase was mainly driven by automotive, but also by the seasonal peak of the horticulture business. The upswing could have been higher if it wasn't for the negative impact on the top line of the weaker U.S. dollar. Coming to profitability. Adjusted EBITDA improved by EUR 3 million to EUR 82 million. At first glance, you might have expected a higher fall-through from EUR 20 million more top line. However, the increased was balanced by inventory reduction, the absence of onetime effects that were supported in Q2, such as an [ FCF ] funding catch-up. In the end adjusted EBITDA margin stayed almost flat at 22.6%. Now Sensors and ASICS, an encouraging seasonal jump in revenues by 13% to EUR 271 million. Consumer products were in high demand. Android business was okay. Products, we basically discontinued still saw some further orders, but that live longer as often, little changes in demand for industrial and medical products. Year-over-year, business grew by 2%, mainly driven by the new sensor products, which are more than compensating for the revenue loss from the phased-out non-core portfolio and the top line impact from the weaker U.S. dollar. Adjusted EBITDA jumped to EUR 64 million. However, I mentioned earlier that more than EUR 10 million windfall profit from cell and manufacturing equipment helped. And lastly, in Lamps & Systems, a classic seasonal upswing. We saw a steep 13% quarter-over-quarter increase in revenues driven by the aftermarket season. The darker months in the Northern Hemisphere made drivers replace their broken lights in their cars more frequently. Nothing particular to report in Specialty Lamps for industrial and entertainment applications. The business remained at a similar level as last quarter was approximately EUR 40 million of revenues. We sold this business segment to [ Assure ] as part of our accelerated deleveraging plan. Closing is expected around end of the first quarter '26. Adjusted EBITDA stayed almost flat. [ Wise Road ] revenues were up almost EUR 25 million. The gross profit fall through from higher volume was eaten up by a meaningful reduction of inventories. Now looking at the semi conductor end markets. In summary, we're on Slide 5. Sequentially, 9% up in year-over-year 2% down. If we exclude the noncore portfolio that we discontinued last year, the semi core business grew year-on-year by approximately 9% on constant currencies, well in line with our semiconductor growth model and higher than last quarter. Now first, automotive. LED inventory correction has ended but no significant restocking insight. We even hear some customers who want to reduce their inventory reach even further. Book-to-bill ratio hovered around one throughout the quarter. Nevertheless, we saw a slight sequential increase in revenues of 4%. The uncertainties in the supply chain persist. We still see a lot of short-term ordering, which is not often below normal lead times. Fulfillment channels inventory went further down. Now we are between 7 and 8 weeks. In the old days, 8 to 10 weeks were considered healthy and normal. Second, Industrial Medical, in line with the slow recovery of the overall market, we saw a sequential improvement of 2%. However, we are still below last year's level. When ignoring the weaker U.S. dollar, may be roughly on the same level. As always, we have to look at the verticals individually. [indiscernible] revenues at its seasonal peak. Professional lighting unchanged. The demand for industrial automation is improving only gradually. Same is true for medical. When we look at the channel, same picture as last quarter, Europe and U.S. relatively stronger than China. Third, consumer, a steep seasonal increase of 22% compared to Q2. Our main business is sensors for smartphones and wearables. Year-over-year, we see the impact of the weaker U.S. dollar. The slight decline is entirely due to FX. Business-wise, our new center products more than compensate for the phased out noncore products. Now let's talk about future business. I am slide 6, Design wins are underpinning our midterm growth model in semis. Traction in the market continued unabated in the third quarter. We are well on track in reaching again accumulated lifetime value of EUR 5 billion of new business for the full calendar year. We landed about 800 projects in the last quarter across all verticals. This pushes the total to already EUR 4 billion for the first 9 months, a few wins that we are very proud of are sticking out. Give you some examples. First, Automotive. With our industry-leading intelligent RGBI interior lighting solution, we secured another design leading Chinese OEM and on top of a large design win for a prestigious car platform and European premium OEM. Now second, consumer, our spectrum and proximity centers are the best that you can get. This once again convinced leading customers, where Design wins are worth a couple of hundred million euro. With that, let us look at some of our recent advances when it comes to differentiating technology platforms, that on Slide 7. We do spend a lot of R&D money as we continue to believe in exciting growth opportunities. One part of our R&D is dedicated to mastering the cost pressure in more established technologies by creating cost performance-optimized platforms. The other part of R&D is focused on differentiating technologies, especially for new applications that might see a growth inflection in the future. We are also making sure that our customers benefit from an appropriate IP safety for those innovations. For this, we signed a comprehensive cross-license agreement with Nichia, covering thousands of patent protected innovations in LED and laser technologies. The new agreement also covers sophisticated LED packages and also includes Matrix headlamps as an example. As such, we are the right partner for our customers holding a unique IP position. On Slide 7, you get an impression of our leadership in infrared emitter technologies that are used in a multitude of applications. We are speaking of the AlGaAs material system that provides LED and laser light with 808 and 1130 nanometer, just beyond what the human eye can see, the so-called near infrared. Our LEDs boost industry-leading wildfire efficiency and red glow suppression. Our laser diodes boost industry-leading efficiency and optical output power. Together with high-quality, cost-effective standard packages, these components are highly suited for a multitude of applications that deliver already to date the revenue contribution in the triple-digit million territory. We see the infrared LEDs in the car for in-cabin sensing in consumer applications or in drones amongst many others. Our lasers are very established in material treatment LIDER. These properties also make them ideally suited for future defense applications, such as drone defense or even more visionary regulations like nuclear laser fusion. A technology that will harness the energy generation process of our sun. We think there's much more to come from this technology platform. Now let's switch to the center side of things on Slide 8. We recently introduced the industry-leading 2 dimension and direct time-of-flight sensor platform. Now why direct? The sensors measures the time. The photon travels from the object and back and calculate the distance, pretty fancy. I'm very proud of our engineers who deliver the industry-leading sensors that feature twice the frame rate at the same resolution as competitor devices. Our [indiscernible] resolution at the same frame rate, whatever you need in your application. You can use this performance for gesture and object recognition, but also for 3D distance measurement. And that's quite interesting. It enables edge AI sensing applications in gene smartphones. We see the principal in the lower left corner. When the image is enhanced with the 3 dimension adapt information from the center, you can place objects such as furniture, for example, in an environment completely virtually. Just to give you an example, we see applications for this center technology, not only in smartphones, but also building automation, home appliances, robots, drones, consumer electronics, you name it. Completing our technology and product tour this quarter. And I'm on Slide 11, we have the leading spectral sensing center platform in the industry. DC honors the latest flagship model, the Magic 8, a high-end premium smartphone with 4 cameras on the world-facing side. Our sensors allow for eye-fatigue protection and professional grade color accuracy for an enhanced user experience. With this, let us move to bottom line topics. Re-establish the Base continues to make great success as it has been instrumental in making many of the headwinds to our bottom line, especially when it comes to the gold price this year. We are on Slide 10. By end of September, we have pocketed approximately EUR 185 million of implemented run rate savings, another EUR 25 million during the last quarter. now it's time for more details. Let us look at the balance sheet first. With the private placement of an additional EUR 500 million of U.S. dollar and euro senior notes, we increased our cash on hand position to EUR 979 million end of September. End of October, we are even above EUR 1 billion. After the tap in July, we have approximately EUR 651 million equivalent in U.S. bond and EUR 1.03 billion in the Eurobond, both are due on March '29. Last quarter, we got some questions on why we tapped at that particular moment. And if you look at the leveraged finance market in the last couple of weeks, it turns out that the timing was pretty good. And yes, voluntary conditions would certainly be less favorable. No news in the Malaysia sale and leaseback transaction yet. We continue to talk to interested parties, but we are not yet on the final approach. The value stood almost unchanged at EUR 422 million end of September. This brings us to an almost unchanged net debt position of EUR 2 billion compared to end of June. Kevin just mentioned the SRB. We certainly continue full steam in negotiating the indicated asset disposals on top of the sale of the entertainment and specialty lamps that we announced in July, eventually realized proceeds well above EUR 500 million. We are fully on track. Minority shares with a value of only EUR 11 million were tendered during the summer months. Consequently, the outstanding minority put options amount stood at EUR 570 million, a 12% outstanding at the end of Q3. Taking cash, the revolver and bilateral lines into account, our available liquidity significantly increased to approximately EUR 1.6 billion. We are prepared for all eventualities. Any liquidity concerns in the market should be a thing of the past. And now on Slide 12, cash flows. Strong improvement in third quarter operating cash flow. We recorded EUR 88 million despite us paying the coupon, the high yield bond, which, as you know, is always due in Q1 and Q3. But we managed inventories well and make sure we are collecting money from litigation and subsidies. Last year in Q3, we had a customer prepayment of approximately EUR 220 million that came in as a onetime at the time. CapEx stayed in check, EUR 48 million in third quarter for the full year, we will land between 6% and 7% of revenues, well below the long-term average ratio of 8%. In total, we finished the quarter with EUR 43 million positive free cash flow. This brings us year-to-date breakeven in free cash flow. If you exclude the customer prepayment last year, Q3 was the best quarter in a long time. Though Q4 is certainly expected to be better with lower interest payments and counting on the promised money from the Austrian government and under the European Chips Act. And now on Slide 13, let me summarize the key developments of the third quarter. On the business, we delivered revenues above the midpoint on profitability at the midpoint of the guidance, 9% growth in the core semi business year-over-year on a comparable basis, well in line with our midterm target model. Execution of RTB programs ahead of plan now with EUR 185 million run rate savings. Securing future semiconductor business continues unabated. We are on track to reach again the EUR 5 billion mark for this year, with passing the EUR 4 billion already at the end of September. And on the deleveraging plan, everything is well on track, which are obviously being able to go into further detail now. R&D, I've presented the example of our relentless effort to find future growth opportunities by investing in differentiating technology with great potential. Today, we talked about infrared emitters in 2-dimensional time-of-flight centers. With that, let us look at the right-hand side of the slide, the outlook for the fourth quarter. We expect revenues to come in between EUR 790 million and EUR 890 million with an assumed exchange rate of EUR 1.16 compared to the beginning of the year, the weaker dollar cost is a mid-double-digit figure on the top line. Automotive lamps will see its peak in the annual lighting season. With semis altogether, we expect a small seasonal decline. Industrial & Medical might be kind of stable, but we sent a lot of uncertainty in the auto market, maybe flattish at best, whereas in consumer, the smartphone season is cooling off a bit as always. We expect adjusted EBITDA margin to come in 17.5% plus or minus 1.5 percentage points. In essence, stable compared to Q3, if you back out the windfall profit from selling the manufacturing assets in Singapore. And finally, cash flow with year-to-date 0 in keeping -- we're keeping up our promise for the full year. We expect free cash flow of more than EUR 100 million in the fourth quarter, certainly driven by the expected inflow from Chips Act. And with that, we're ready for your questions.

[Operator Instructions] Our first question is a written question from Marco with Amova Asset Management. Could you provide some guidance on when the settlement of the domination agreement is expected? Would a time line in the first half of 2026 be realistic? And during this morning's earnings call, you mentioned that the auto inventory correction has not yet peaked and that you anticipate further weakness in Q4? Could you confirm this and share some additional color on your outlook for 2026?

Sure, we can. Yes, the settlement, obviously, not this year, the court hasn't had a date here, so certainly somewhere in '26 if it is in the first half of the year, then probably more towards the end of the first half, could also be in the second half of the year. You said that the auto inventory correction has not yet peaked. I think that's not what we said. We said that the inventory correction is over, but there's no restocking. What we also said is that channel reach in the fulfillment is reducing further down to 7 weeks, which is pretty short compared to 8 to 10 weeks in the past.

And our next question is a written question from Connor with Bank of America. Do you have any update on the sale of the Kulim 2 fab in Malaysia? How many parties might be interested?

Yes. I cannot say much more. It's very confidential, but there's at least a couple of interested parties that we're talking to, they need to do their homework. So things take a time. But it's certainly moving in the right direction. But as I said earlier, we are not yet on the final approach.

And our next question is another written question from Benjamin with Robus Capital. Your cash flow is up but mostly driven by EUR 189 million inflow from other assets. What is behind this?

Yes. That that's a complicated way that cash flows are determined. The other assets have always kind of -- I mean, you book reserves for interest, for example, in Q2 and then you pay it in Q3, that will be part of it. But there's also kind of collections from subsidies, for example, in Germany, it also inflows from a court litigation that we had won and so on. So -- and it's a small portion, less than EUR 20 million, but that is also from a factoring related. But it's really a strong cash flow given that there was such a -- I mean, Q3 is one of the 2 quarters that sees the interest payments and despite us paying so much an interest, the cash flow was really positive. So I'm really happy about that.

Our next question is written question from Lucy with Apollo Global Management. Are you still progressing more than one asset sale process?

Lucy, yes, we are pursuing a couple of things in parallel. We continue to do that. But kind of, as I said, we are very well on track with that, and we will soon need to decide which one then to conclude.

And for our next written question comes from Julie with Alliance Global Investors. In order to face your 2029 maturity wall, don't you need to raise equity and debt?

No, we don't need to raise equity. That's not part of the plan. We have the asset disposal. We have Kulim as disposal, right? And then our net debt-to-EBITDA would have improved and then as we approach the maturities, we'll find the right instrument to replace.

Our next question will be a verbal question from Tomas with Sarria.

In relation to the prepayment you received in Q3 last year. I believe that was in relation to product to be produced from FY '26. Is that still on your -- is that still the same target? And do you account for the prepayment in the working capital, i.e., is it in one of your prepaid liability and your current liabilities?

Yes, yes. It's certainly part of the working capital. So yes, and the plan is to repay it over 10 quarters starting in Q2.

And is it linked to sales of product?

Yes, absolutely.

Okay. So and it's still on target. Thank you.

Our next question comes from Laura with MFS Investment Management. You may proceed.

Just on the asset disposals going back, do you think you'll be in a position to announce any potential deals before year-end? I obviously understand that completion will be in 2026. And then secondly, on the repayment of the 2027 converts, I think part of the proceeds from the TAP issue on the bonds that you completed earlier this year was to partially repay these for EUR 150 million. What about the timing for that? And have you decided whether this is going to be a tender process?

Yes, Laura, thank you for those questions. I mean they're certainly very good questions, but please understand that that's all very confidential, and I cannot really answer that, yes. As soon as we have something to say on the disposals, we will immediately publish it as an ad hoc, but it couldn't give you the exact timing. And when it comes to EUR 150 million or so that we earmarked for the buyback of the convert, that is very high on our list, right? But we'll announce it at the moment where we will start the tender offer.

Our next question comes from [indiscernible] with Lazard Asset Management.

I hope you can hear me. And I have a question regarding your Kulim sales. if it's been a long time that you're trying to sell the Kulim plant, and you always mentioned that you continue to talk to interested parties. It seems that it's progressing well. But just by if you are finally not able to sell the Kulim asset. Is there any alternative plan on this asset?

Yes. I mean it certainly takes a little longer than we had hoped for. But it is a very good asset. And many companies looked at that, and they all confirmed it's a high-quality, absolute kind of best kind of factory you can get. Now there's certainly some buyers it's too large. There's others, let's say, it's too small, right? I mean, it would be small for a major 300-millimeter factory. It would be large for just a simple 200-millimeter factory, but there's buyers for them is just right, and they're waiting for the signal from the market upturn that they would want to start investing, right? I mean you need to somebody who wants to extend capacity now in Asia, and then it's the perfect place and it's a great asset. So we're very confident that somebody will buy it. And it's just the timing is a bit difficult to predict. As I said, we continuously talk to several parties. And I hope that one day, we'll be able then to finally convey the message that we found a buyer.

That's great. And just as a quick follow-up, is the Kulim sale on top of the $500 million target disposal or it's included in the EUR 500 million disposal?

No, no. That's 2 different things.

That's what I understood for the disposal. Yes, please go on.

Yes, please question, please.

Yes, for the disposals, what could be the targeted assets except the lamps business on the pipeline? And what multiple do you target, please?