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

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the conference call of ams-OSRAM. [Operator Instructions] Please I would now like to turn the conference over to Juergen Rebel, Head of Investor Relations. Please go ahead, sir.

Good morning, everyone. I would like to welcome all of you to our call for investors and analysts and our new financing plan. The plan is laying a solid financial foundation for our strategy. Thank you for joining us on such short notice. Aldo Kamper, CEO; and Rainer Irle, CFO, are with me today. They will walk you through the details of the plan. After the introductory remarks, we are happy to take your questions. Aldo and Rainer will refer to the presentation on our financing plan that you find on our website. Aldo, the stage is yours.

Thank you, Juergen, and good morning, ladies and gentlemen. When I started almost 6 months ago, I realized quickly that we have to address various elements to rebuild ams-OSRAM to fully benefit from its underlying strength. Let me quickly recall the building blocks of the new ams-OSRAM that we have already addressed in the first 3 months of my tenure. First, we sharpened our strategy towards structural growth and profitable core of Automotive, Industrial and Medical markets with intelligent sensors and emitter components. Second, we rebalanced the approach we are taking for benefiting from growth opportunity in the portable consumer device arena by focusing only on those where we can truly differentiate sustainably. We prefer single source situations wherever possible. This also comes to the divestment of businesses in this area where the differentiation cannot be achieved. Third, we also made our organization more efficient and accountable by giving true end-to-end responsibility to our business units. At the same time, we're reducing the number of business units in the Semi segment from 3 to 2. This approach overall helps us to have a stringent approach to monetizing innovation going forward. Furthermore, we decided to work on rightsizing our organization to new realities and have initiated an improvement plan to achieve this. With these strategic building blocks defined, it is now time to turn to the financial foundation of our company, its balance sheet, and its financing plan. I'm now on Page 3 of the slide deck. With the Q2 earnings release, we said we have a comprehensive plan on the table. Today, we present this comprehensive holistic plan which is meant to address all expected financing needs for the years to come. We want to be well ahead of the upcoming maturities to exclude dependency on market uncertainties and always be in control of our own destiny. The financial basis needs to be stable and sustainable and take us to the type of business we're in. In order to reflect this, we are targeting an investment-grade profile in our capital structure. Rainer and I have received very positive feedback from the investor community on our Re-establish the Base program with the revised strategy at the center. This down to earth focus on the most promising segments in combination with logical divestments, cost optimizations and clear corporate structures is clearly seen as the right direction to take. Since its announcement after Q2, we've already made good progress. We could implement a new responsibility in the organization and are well on track in preparing the divestiture of the passive Optical Components business, for example. When it comes to the upcoming debt maturities until 2025, we have to cover senior unsecured notes, convertible bonds, short-term bank facilities and promissory notes. We also have to cover some cash flow needs due to the planned and known investments for our growth strategy such as microLED as the biggest block. We have about 70% of OSRAM Licht AG minority shares outstanding as of Q2 2023. We always want to be able to cover the theoretical case that all put options are exercised at once. For this, we have an undrawn RCF in place, and it comes to the form of strength of the balance sheet. We hover at an equity ratio of around 18%, which we consider significantly too low for the type of business we are in. In summary, we need a EUR 2.25 billion financing plan to holistically cover all expected needs until '25, '26. After that, we anticipate regular midsize refinancings according to new maturity profile. Now let's move to Slide 4. Our financing plan of EUR 2.25 billion is designed to increase equity, reduce debt and target a balanced maturity profile for the future outstanding debt. Rainer has been instrumental in putting this plan together. For this, let me hand over to him to explain the details of it.

Yes, Aldo, thank you. Over the next 6 months, we want to execute an equity and debt combination deal and some asset-level transactions to finance around EUR 1.9 billion. We plan a discounted subscription rights offer of EUR 800 million. We will seek approval for the capital raise in an extraordinary shareholder meeting that will be held on October 20 at our headquarters in Austria. We also plan the placement of new senior unsecured notes with a total volume to the order of some EUR 800 million. I will comment in more detail about the advantages of such a combo deal structure in a moment. Furthermore, we are progressing well with certain asset level financing transactions such as the sale and leaseback that would provide proceeds of at least EUR 300 million. We will finance the remaining amount of about EUR 350 million throughout '24. And we want then to select the optimum of debt instruments when it comes to that subject to market conditions. In total, this will yield a pro forma equity ratio of approximately 30%. I would also like to mention that our business plan is supported by various governmental funding schemes, which help greatly to accelerate the development of certain cutting-edge technologies. You may have seen our announcements on the important project of Common European Interest Funding and the support of the Malaysian Investment and Development Authority recently. We are applying for further grants and other schemes across the globe. Put all together, you can think of a high triple-digit million euro amount that we are supposed to receive over 10 years' horizon, subject to the milestones and conditions of each funding scheme. So far, we have been cautious with taking the proceeds of the divestments of the noncore semiconductor portfolio into the financial plan. The first conversations though with potential buyers for parts of this portfolio, such as passive Optical Components, felt promising. With increasing confidence in these negotiations going forward, we would consider potential proceeds from those divestments in the financial plan. Again, to optimize the overall financing costs and to reduce leverage. In summary, our financing plan increases equity, reduces gross and net debt, and will enable a balanced maturity profile of the outstanding debt for simpler refinancing in the future. Thus, we have put together a comprehensive plan to have a stable, sustainable and future approved financial basis. Let us look at some details now. And on Slide 5, you find an overview of the outstanding debt maturities of EUR 2.2 billion until 2025. As of June '23, we had a cash position of EUR 841 million. We have EUR 120 million of promissory notes outstanding that need to be repaid this year and in '24. We also have EUR 404 million of bank facilities outstanding. Of those, EUR 111 million is due this year and EUR 264 million due next year. In '25 now, we have the 3 major maturities. The euro-denominated senior unsecured note of EUR 850 million, the U.S. dollar-denominated senior unsecured note of EUR 440 million, and finally, the EUR 447 million convertible bond, which is deep out of the money, which means it is plain debt. On Slide 6, you find a graphical representation of the staged financing plan. You clearly see the stages to be executed over the next quarters. As repeatedly mentioned to the market the last couple of weeks, we want to execute the decisive steps as quickly as possible to make any question mark on our balance sheet disappear. Let me comment on the center piece, the rights issue. We want to create a solid financial base once and for all. We have also been encouraged by investors when addressing the financing topic to rather go big than leaving any questions on the table. For this, we will invite to an extraordinary general shareholder meeting on October 20, and suggests the rights issue of EUR 800 million. The rights issue has been volume underwritten by HSBC, Morgan Stanley and UBS. We plan to combine the rights issue with issuance of around EUR 800 million of new senior unsecured notes. It will consist of a mix of U.S. dollar and euro notes with staged maturities. Clearly, this mix will be designed to achieve a smooth maturity profile for the future. The beauty of this so-called combination deal is that it brings advantages for both equity and debt investors. Typically, equity is waiting for the debt side, and the debt side is waiting for the equity side, and we fix both now at the same time. With the underwriting by HSBC, Morgan Stanley and UBS, bond investors can trust that the rights issue will be executed. This is expected to also lead to better financing conditions. The new bonds will go in escrow at issuance until the rights issue has been completed. This tells the equity investors that the financing will work. As such, both equity and debt investors can trust that the full financing will be executed successfully. The third element in the first 6 months includes certain planned asset-level transactions such as asset sale and leasebacks. We cannot or we do not want to share more details right now as the transactions are in progress, but rest assured that we will communicate details once such deals are signed or executed. We are planning with an amount of at least EUR 300 million from those transactions, and we are very confident that those will close. Why did we add this element to the mix? Will such transactions have very good borrowing costs and help us optimizing the overall borrowing costs? And in '24, then we will finance the remaining amount, presumably around EUR 350 million. We are thinking of an additional senior note, maybe bilateral credit lines or other debt instruments like converts. We will decide on individual instruments and the potential mix subject to the best available market conditions when it comes to that. In total, we want to bring in the EUR 2.25 billion. And now let us have a look at Slide 7. Our ultimate goal is to achieve an investment-grade profile and getting also the associated appreciation by the credit rating agencies. Today, we stand at BB- from S&P and B2 from Moody's. This is not what we want. The key prerequisite for receiving a positive outlook and ultimately improvement in the rating is to have a leverage below 2 and a positive free cash flow. Leverage means here the net debt to adjusted EBITDA. In Q2 of this year, we showed a leverage of 2.9% -- 2.9x. Given the still higher than target ratio of 10% capital expenditures for investments in future technologies in '24, especially microLED, this ratio would peak above 3x in the first half '24. Consequently, the proceeds from the rights issue will be used almost exclusively to repay debt to increase the equity ratio. On a pro forma basis, taking Q2 figures as a starting point, as you see on the slide, we would come out at a leverage ratio of 1.8x. This would present a solid financial base to execute the recently announced strategy and the starting point for improving our credit rating. At the same time, we also work hard to improve the EBITDA of the company, especially in the semiconductor segment. As you might recall, our Re-establish the Base program is planned to deliver EUR 150 million EBIT improvement by end of '25, and we are targeting at least 15% adjusted EBIT by 2026. On Slide 8, You will find an overview of rights issue. Let me comment on some important points. When issued, the shares will trade at the theoretical ex-rights price, defined as a weighted average price of old and new shares. The shares are offered to existing shareholders by way of a subscription price on a pro rata basis. How does it work? Every shareholder gets allocated subscription rights for buying a certain amount of new shares at the exercised price. The rights issue with subscription rights gives existing shareholders 3 options. Basically, 1 is to exercise all rights, which will result in no economic or voting dilution. Number 2, obviously, is to sell all rights and somebody else will exercise it. And option 3 is kind of a combination, which is cash neutral, where you sell some and exercise others. And on the right hand side you the principal mechanics with the discount to TERP calculation. Now on Page 9, without commenting on every detail, you will find further information on the EGM such as resolutions, available documents, recording dates, proxy representations, and shares. Now looking at Page 10 and our liquidity position. End of Q2, we had a healthy cash balance of EUR 841 million, maybe a bit too much. On top, we hold a total of EUR 926 million of undrawn credit facilities. And within that amount, there is an EUR 800 million revolving credit facility. We have reserved this revolver for always being able to cover potential large bulk exercises of put options on the outstanding OSRAM Licht AG minorities. I will explain details on the minorities in a minute. Regarding the revolver, we are in advanced discussions with our relationship banks to extend its maturity to September 2026. So the total available liquidity stood at around EUR 1.8 billion at the end of Q2. As a guiding figure of our cash balance, we will target an operating cash balance of around EUR 500 million, which forms a planning basis for our comprehensive financial plan. We often get asked on the liabilities and status with respect to the outstanding shares held by the minority shareholders in the OSRAM Licht AG. Let me explain the details on Slide 11. Based on the Domination and Profit and Loss Transfer Agreement, remaining shareholders have a put option at EUR 45.54 per share. End of Q2 this year, around 17% of OSRAM shares were still outstanding. We estimate that within those 17%, about 3% to 4% are held by retail investors and around 13% by institutional investors. We see regular exercise of such put options during the quarter with a pretty erratic pattern. At the end of every quarter, we report the remaining outstanding percentage to you. The total liability for these put options is recognized fully as other liability in our balance sheet and stood at EUR 748 million in June 2023. Legally, the company's view on the valuation of the OSRAM Licht AG shares was confirmed by the first court ruling already in June 2023. However, as expected, an appeal was filed and the final verdict is estimated around 2025 or even later. This is a pretty normal procedure in German public M&A situations. For completeness, German corporate law allows a squeeze out at 90% threshold for shares held. Although we are not aware of any details, typically certain institutional investors in such minorities speculate on the final verdict or potential squeeze out procedure, hoping for even more money. It is in the unlikely event that all outstanding put options are exercised at once, and we keep our undrawn revolving credit facility of EUR 800 million in our back pocket to cover this eventually. Now before summarizing the key takeaways of our financial plan, let me say a few words about the indicated sales of the treasury shares held by the company, and we are on Slide 12. We hold those shares to cover obligations for our share-based long-term compensation schemes of key employees. Now under Austrian corporate law, treasury shares are not eligible to subscription rights in the rights issue, which is weird. Consequently, the company's own holding would be automatically diluted. We hold around 30 million treasury shares and the subscription rights could amount to a double-digit new euro amount, maybe EUR 20 million, all subject to the conditions at the rights issue, and we do not want to give up this amount. After the rights issue, we will initiate a share buyback program to be again in a position to cover our long-term obligations for share-based compensation. Net, this is just a pure technical transaction to avoid automatic dilution. So that is the summary. And with that, back to Aldo.

Thank you, Rainer. And now turning to the summary page. Today, we have presented to you a comprehensive financial plan to finance EUR 2.25 billion. The goal is reducing our debt level, thereby improving our equity ratio to approximately 30% pro forma for achieving investment grade profile by 2026. The financing will comprise, as Rainer outlined, a staged smart combination of rights issue, senior unsecured notes, and other financial instruments covering all expected needs until '25, '26. Over the next 2 quarters, we plan to finance around EUR 1.9 billion out of that, a rights issue of EUR 800 million subject to approval at the EGM on October 20, 2023. New issuance of senior unsecured notes of around EUR 800 million in a mix of euro, dollar and different maturities, and other asset transactions such as sale and leasebacks in order to optimize the overall borrowing costs in a high interest environment. In 2024, additional debt instrument of around EUR 250 million will be issued. We will select the instrument that offer the best conditions when we get there. And as a continued backstop for the outstanding offer minority put options, we expect that our undrawn revolver of EUR 800 million will be continued to September 2026. Last but not least, we are proud of the trust that governments across the globe put into our innovation and investor relations power, releasing a triple-digit million euro amount over the next 10 years. This concludes our introductory remarks. And now Rainer and I are happy to take your questions.

[Operator Instructions] The first question from Sébastien Sztabowicz from Kepler Cheuvreux.

I know it is maybe a little bit too early to say, but do you have any idea of your cost of financing post the financing plan is closed? And second one on the capital increase from a technical point of view, you are planning to have this EGM on 20th of October. What kind of timing do you have in mind for the capital increase?

So yes, the timing is kind of -- I mean, very much given under Austrian law. So there's -- I mean, the EGM will be on the 20th, and then comes a technical period, and then comes kind of the capital increase, and then the trading period for the subscription rights, which gives us a settlement roughly in the second week of December.

So the other question on the cost of financing. So kind of, end of Q2, we had like EUR 2.9 billion debt, probably with good EUR 800 million cash. We will reduce that a little. And then comes the EUR 800 million capital increase that will reduce the debt, and then kind of -- we do not know exactly the interest rate that we will be paying, but we are kind of hopeful that it will be single digit, high single digit, obviously. And that gives you a rough idea of the interest cost going forward.

Next question comes from Jürgen Wagner from Stifel.

When will you announce the subscription price? And can you share with us the minimum price your banks have committed on the underwriting?

So minimum price is -- again, in any of the volume underwriting, the prices are -- they're 1 Franc, in this case, around 1 euro. That is kind of -- so the procedure works that is up to 800 million new shares. Obviously, that is not the price we have in mind. So let's see how the price develops, kind of -- I mean, we saw erection this morning. Overall, we truly believe that, I mean, with the feedback from all the investors we had over the last months that kind of this was the thing that was in the way. So we expect that after the initial reaction to be really catalyst and kind of to focus on the equity story instead of that maturity wall. So once we know the price, then in a couple of months we will determine the discount. That is something that will happen pretty late in the process, just prior to the beginning of the trading of the subscription rights and that will be around in late November.

Okay. And on the bonds, what are the interest rates indications? Can you share those with us?

Yes. I mean, I wish -- I could tell you the wish I have. But I mean, if you look at the outstanding bonds that we have and the yield to maturity that came down nicely after our Q2 announcement. It was single digit. We had on the euro. Yesterday, before the announcement, it was even slightly below 9%. And then the U.S. dollar was close to 10%. So I think that's an indication, but I mean, we will really only know once we go through the book filling procedure.

The next question comes from Robert Sanders from Deutsche Bank.

I was just wondering about the time line for the uplift in your financials from the exit of the business as you've announced that you're getting rid of it in Consumer. Does that sort of take time to come through the financials next year? Or are you being quite aggressive in terms of sort of ramping down businesses that may not find a buyer?

Well, I think we've also covered this in the Q2 call. It is an approach that we have just started. I mean, the strategic review we did basically during the second quarter, drew our conclusions then in July, and then started the sales process on the Optical Components piece that also Rainer mentioned. We are quite advanced now in the preparation. We're talking to investors, and that might move relatively quickly. The other business that we have in mind, we're still in a preparatory phase, and it will take throughout 2024 to see whether and how these deals exactly materialize.

[Operator Instructions] The next question comes from Tomas Mannion from Sarria.

If I get the timing right on this, you're going to be launching a high-yield issue in the next couple of days, is that -- so prior to the rights issue? And just for confirmation, you were looking to put the high-yield bond issuance into escrow until the rights issue is raised. Have I got the timing right on that?

Yes. Thanks for the question. You're probably a bit too early. So we will do it prior to the subscription rights. And it will go in escrow. This is kind of nothing that we would do right now. That also comes somewhere in November there.

Okay. So the EGM is likely to be the first step?

Yes. The EGM is the first step, and we will be talking to a lot of investors, we'll be on road show, explain it in more detail. So we're finding a lot of interest there. And then comes the EGM, and then we will do the marketing of the balance, the book building, collect the money, our banks will hold it in escrow until the rights issue is through. So kind of in the second week of December, we get the money from the rights issue, and then 1 day later, the money will release from the escrow from the high-yield bond.

The next question comes from Daniel Lion from Erste Group.

Can you share a little bit more detail on the previously announced investment of your clients for the cooling fab. Do you expect this to happen this year under the point asset transactions? Or is this rather a topic for the additional financing in 2024? You also referred to bilateral financing structures.

I mean, nothing has really changed there. We are still working very hard towards a 2025 launch and are making the steps to support that. And in terms of capital requirements, of course, this will still mean that we will see elevated CapEx level this year and also in '24, and that is taken into consideration also in the financing plan.

Gentlemen, so far there are no more questions from the phone.

Okay. Well, if there are no further questions, then many thanks for dialing in on short notice. I hope that we were able to give you a good outline of this very comprehensive financing plan that the team has put together. In our minds, it's a smart way of combining the instruments to get to good results. The good result being, in our mind, a very stable financial base for our future growth. And with it out of the way, it allows us to fully focus on the execution of our strategy and the improvement of our results and cash flow. And that's what we are really dedicated to do and where there's a lot of energy in the team to get it done. So many thanks from my side to the financing team that has put this together. And now we'll go through the motions here to make sure it all happens as planned, and at the same time, continue to work on the operational side on the improvement that we have outlined. So thanks so much, and have a good day. Bye-bye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.