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

Hello, and welcome to the ams-OSRAM Q2 Results Debt Investor Call. We will start the presentation to be followed by a Q&A section. [Operator Instructions] I will now hand you over to Juergen Rebel to begin this call.

Hello, good afternoon. This is Juergen speaking. I'd like to welcome you to our second quarter 2024 debt investors call. With me is Rainer Irle, our CFO today. And Rainer will talk about the highlights from today's earnings call as an introduction, and then we go into the Q&A session. Rainer, please share your thoughts.

Yes, Juergen, thank you, and thank you for joining. As you probably know, we are quite happy with our solid business performance in the second quarter as market uncertainties increased. So let's have a look at Page #2. Q2 group revenues decreased as guided quarter-on-quarter and came in at EUR 819 million, a EUR 28 million seasonal decline compared to the first quarter. We landed at the midpoint of the guidance. Seasonality is entirely due to the Lamps & Systems business as the semiconductor business is up 3% quarter-on-quarter. We come to the details in a minute. Comparing year-over-year on a like-for-like basis, we stood at EUR 833 million, excluding divestments in Lamps & Systems segment. The currency impact stands at only EUR 2 million. Like-for-like on a constant currency basis, our revenue therefore slightly decreased by 3% year-over-year. Despite seasonally lower revenues, we improved our profitability. The adjusted EBITDA came in at 16.5%, or EUR 135 million, after EUR 124 million in the first quarter. Adjusted EBITDA landed almost at the top end of the guided range, 9% higher than in the first quarter. We see the effect of better factory loading and materializing structure savings from our Re-establish-the-Base program. On top, some tailwind from the IPCEI funding catch-up helped, though there was also obviously the offset that we are now capitalizing less R&D. On the other hand, within that number, there's also a seasonal reduction from Lamps & Systems. For comparison, you see a chart of adjusted EBIT on the right-hand side. Adjusted EBIT margin came in at 6.8% after 5.2% in the first quarter. In absolute terms, adjusted EBIT stood EUR 12 million higher than in Q1, EUR 56 million, increase of 28%. Let us now look at the financial performance of the business segments, and that is on Page 3. Last year, we could record a total design win volume of more than EUR 5 billion lifetime value. We talked about this in early February when announcing the full year '23 figures. We are on track to repeat this outstanding achievement with a strong acceleration in the second quarter. Our year-to-date design wins for the first half of '24 stands at around EUR 2.5 billion. The design wins are across the board but by nature with an overweight to iRGB automotive. The design win base clearly underpins our future growth ambitions. But on Page 4. So far, we have been talking about improving the top-line. Now let us switch our view towards the bottom. Exactly a year ago, we announced a strategic efficiency program, Re-establish-the-Base. We said that most of our product lines structurally healthy but the overall performance is hampered by non-core businesses, primarily in some consumer applications. We also said that we target structural run rate savings around EUR 75 million end of this year and around EUR 150 million end of next year. Today, now 1 year later, I'm glad to report that we are fully on track with the program when it comes to realization of those savings. To date, we have already realized about EUR 6 million structural cost savings. The fall-through into results is also evident in the strongly improving EBITDA in the business unit, CSA. In terms of non-core portfolio cleanup, we have addressed the most burning issues, i.e., Passive Optical Components and the CMOS Image Sensor business. As announced, the key assets of the Passive Optical Components businesses are being sold to Focuslight for around EUR 45 million in cash. We expect the deal to close in the third quarter. And as communicated 3 months ago, we are restructuring the Seamless Image Sensor business to its profitable core and primarily medical applications. Key adjustments of the structure, especially in the U.S., are already implemented. The remaining EUR 200 million of non-core business are being dealt with in the coming quarters. Various solutions for a promised exit on the table, and we are assessing, which option we are best given the various boundary conditions we have. For clarity, this means that our starting base for our midterm operating growth model '23 is around EUR 3.15 billion. This is the level that we measure ourselves against when it comes to the growth of the core business. Conventionally, our midterm target operating model has 3 elements for improving profitability towards the target level. First is, obviously, the Re-establish-the-base, you just talked about. Second is the ramp of new products and design wins, and we talked about the EVIYOS as a key element. And third, an overall market normalization as for market recovery, if you think of industrial and medical end markets for the overall impact of car units. Let me also comment on the adjustment of our microLED strategy that we laid out 3 months ago. With regards to development activities, we have terminated no longer needed contract workers. We have also strengthened the core automotive development and highly -- high-pixelated forward lighting by transfer of key employees. The reduction of factory personnel has started as well. And with regards to the 8-inch factory, we had said that this is a process that will take some time despite the significant interest we had immediately received. The process has started, where interested parties will be handing in their bids, and we are under anticipated timeline, and actually quite a few of the interesting parties have already looked at the factors. And now we are on Page 5, and that is the operating cash flow. That came in at EUR 55 million, as you can see in the chart on the left. We told you that we now included the net interest payments in the definition of operating cash flow, and therefore, obviously, also in the free cash flow. The payment of the EUR 50 million interest would have usually been due in the first quarter but due to a bank holiday, it slipped into the second quarter. As such, Q1 operating cash flow was higher and Q2 lower than according to the underlying business. The next chart shows the cash flow related to CapEx. It stood at minus -- please go back one slide. We're in the midst of that slide here. It stood at minus EUR 176 million, around EUR 90 million higher than a year ago. It is elevated, obviously, compared to our 10% CapEx to sales target. Now in that, there is a significant amount, roughly EUR 60 million of basically invoices that go back to last year, a carryover effect is kind of particularly construction services, you only pay you get a bill and you booked the bill, but you only pay it after the full technical approval. And a lot of that came in, in Q2. If you look at the operating cash flow, there were also a few other important things that I quickly want to mention here. The increased factoring in the second quarter but we reduced the reverse factoring, though the first effect was a bit higher. We also built significant inventory in the second quarter in anticipation of the ramp of some complicated products, particularly the ambient light tender that we won that is ramping in Q3 but also more EVIYOS products that have a very complicated supply chain. One point, and another point there's, Q2 is always the quarter where we pay bonuses, variable payments to employees. That is something like an order of EUR 80 million to year full over the entire year. And then you have 3 quarters where it's actually positive because you accrue for it but you don't pay. And then in Q2, it's negative if you pay out, yes, that is together, with that timing difference in the CapEx, that is the major influences that we saw on the cash side. We try to cancel some of the microLED-related equipment. It is not always possible. So we still had to take some of those that we can either use or something else or we will then sell it. We took the transformation costs down to EUR 680 million, is now our estimate we had EUR 700 million before, most of that being impairments. There were no meaningful inflows from divestments. The next one, as I pointed out earlier, it's been very likely in Q3. The divestment of the optical components to Focuslight where we expect the closing in third quarter. The free cash flow, given all these negatives, came in at minus EUR 119 million on the right side, making it definitely the worst quarter of the year. It will become significantly better in the second half with lower CapEx, higher operating cash flow from higher revenues and obviously also then the closing of the divestment. And now I come to Slide #6, which is the cash. We had EUR 900 million cash on hand end of Q2, which is a reduction of EUR 176 million. I explained the free cash flow. We also paid the dividend to the minority investors of OSRAM Licht AG, roughly EUR 30 million in Q2. We also paid back EUR 100 million maturing bilateral loan end of June, while withdrawing another one to replace it. We expect liquidity to rather go up and down in the second half of the year. Bilateral bank facilities, and you see that here, including promising notes, amount to EUR 346 million, a slight reduction compared to last quarter. We have now this in July already repaid the promissory notes of EUR 51 million as planned. Then there's no changes to the outstanding 25 -- 27 converts and also not to the 29 senior unsecured notes. The Malaysia sale and leaseback, which is related to the factory that we are now selling, stood at EUR 401 million. And that accrues a little bit of additional interest every quarter. It is not that technically, but yes, obviously, we include it here and we consider that internally. We are working on the exit of the sale and leaseback in close alignment with the investors and transferring it to a new lessee as we announced. That takes some time. It's a structured process, and we really want to optimize the proceeds, so that will take some time. One sold, depending on the purchase price but it would definitely remove then the EUR 400 million and [ EUR 401 million ] debt-like sale and leaseback liabilities, strengthening the balance sheet, reduce leverage, and it will also take away the EUR 35 million interest expense that we have every year. Completeness, the minority put options amount to EUR 605 million, 14% of shares outstanding. Compared to last quarter, there was only a small reduction of EUR 5 million of the value of shares that were tendered. We have the revolver of EUR 800 million that is unchanged. And that is much more than we would need in the unlikely scenario of a bulk exercise of shares. In summary, we continue to stand with a strong liquidity of EUR 1.8 billion end of the second quarter. Now let's have a look at Slide 7. In Q3, we expect the beginning of the seasonal rebound in the auto lamps aftermarket business. In semiconductors, we expect the demand for our automotive products to weaken in line with the reduced car units forecast by IHS. But we have the design win, so kind of the content will be growing but the number of cars would probably be declining. We will see a good revenue contribution from ramping the new sensor products we talk about for smartphones. We continue to see inventory corrections in some industrial and medical markets. In summary, revenues are expected to come in between EUR 830 million and EUR 930 million. On the back of the stronger sales and progressing implementation of our Re-establish-the-Base program, we expect the adjusted EBITDA to improve quite a bit, coming in between 17% and 20% in the third quarter. Thereby, we assume 1:10 as an exchange rate. Looking at the remainder of '24 as a whole, the target of EUR 75 million run rate savings from Re-establish-the-Base are on track. When it comes to CapEx, for the full year, we had the guidance of EUR 450 million but we are a bit uncertain on when we will receive certain government brands, and governments tend to be sometimes a bit slower. So that might slip into next year or not, EBIT slips. We might end up with something like EUR 500 million to EUR 500 million CapEx. But then, I mean, that would just be a slip by a quarter or two. But then obviously, in '25, we will make up that by the same amount. With the free cash flow standing at minus EUR 179 million for the first 6 months, we will certainly -- yes, we will certainly much stronger in the second half. And as we continue to target a positive free cash flow, excluding the interest in 2024. And then we have a final slide, summarizing a few -- the Q2 takeaways. I think we delivered solid revenues in an increasingly difficult environment. Profitability came out at the upper end of the guidance. Structural growth in automotive semiconductors continued with 6% year-over-year. We continue to win significant new business in our core semi year-to-date at EUR 2.5 billion lifetime value for new businesses, reestablished implementation well on track. The key elements of the non-core portfolio are addressed, restructuring of microLED activities have started. Key resources have been transferred to the automotive core development and high pixelated forward lighting. That has really a very promising prospect. Finding a new lessee, a new owner for the 8-inch factory is on track. Q3 improving revenues, improving profitability despite a more difficult market environment. And that concludes our introductory remarks, and we are happy to take your questions.

[Operator Instructions] And our first question comes from [ Conor Curane ]

[ Conor from Peyton]. Thank you for hosting the debt investor call. I had a couple of questions on your free cash flow guidance. The first one for 2024 guidance. Given the uncertainty on those government grants to the tune of kind of EUR 50 million to EUR 100 million, I just wanted to clarify the free cash flow positive before interest guidance that you've reaffirmed, that assumes that CapEx stays at EUR 450 million. Is that right?

No, it does not. I mean, there's kind of -- the cash flow guidance, there's always a lot of uncertainties. We believe it will remain positive, no matter if it slips or not. But obviously, it would slip into next year would be much lower. But I kind of -- depending on business realm and a few other things, but we remain confident that even if it slips, we could still deliver free cash flow that is positive, excluding interest paid.

Okay. Great. So that's kind of offset by just better delivery on operating cash flow.

Yes. Less positive. Yes, I mean, I told you about the inventories, I told you kind of about the other contributors. It is not that we wouldn't get any grant that would just be less, yes. And it's also on the back of an improving business.

All right. And then for next year, 2025, I think previously in your quarterly updates, you've included a piece of guidance for 2025 to be positive on all-in free cash flow, so after interest payments, and I didn't see that today, I didn't hear it mentioned. I just wondered if that was kind of intentionally left out. Are you kind of stepping away from that guidance for the moment, or is that still in place?

We're not stepping away. We're just kind of focused today on the Q2. No, I mean I think I said last time that it's our clear intent, we didn't [indiscernible] it as a guidance. But yes, depending if it slips or not kind of either year will be even better. But we will confirm to intend next year's free cash flow to be positive, including interest.

Our next question comes from [ Sebastian Hoffmann ].

What do you guys intend to do with the EUR 158 million bank facilities due in '24? Do you want to roll them or pay them back? And then the other thing is, could you give us an idea of the -- you said in Q2, you had a positive impact from IPCEI funding support, so that helped to improve profitability. How much was that quarter-over-quarter in the increase?

Yes. So first, the question on the facilities that are maturing, we will roll it or refinance it. I mean, we're in discussion with a few banks on that. And on the IPCEI, that was certainly -- there was a catch-up effect, right, every quarter, we get a bit of IPCEI. So there was a positive catch-up effect. On the other hand, we had a negative effect because we -- the amount of R&D that we are capitalizing has come down massively as we are no longer capitalizing anything around the microLED technology. So the one was a positive, the other one was a negative effect.

Can you quantify what the net effect quarter-over-quarter from Q1 to Q2 was?

As I said, I mean, the capitalization was negative. The IPCEI was a bit higher in Q2 due to the catch-up.

Okay. And then on kind of the free cash flow items that are part of your guidance for being free cash flow-positive pre-interest, could you help us talk a little bit about what you guys expect from that? I know it's obviously -- these are moving parts, moving things. But what you guys expect on the working capital side, exceptional side, and cash taxes and obviously cash interest?

Yes. I mean, we have some wiggle room around factoring, I believe. We had built inventory. We are not planning to build a lot of additional inventory in the second half. And I talked about the business and kind of that is more positive, right, because we continue to see the negative impact on EBIT but we are not paying out. We continue to expect the inflow of some subsidies that will be a positive. And on the interest, I think -- I mean, there's always 2 quarters in the year where we pay the major interest twice a year, that was Q2, and we will see that in Q3. Q4, the interest payments will then be much lower but kind of Q3 will be comparable to Q2 and then Q4 will be lower. Yes. And I guess on the taxes, we expect for the whole year around EUR 15 million. So second half will be less than this. I hope that suffice.

Our next question comes from [ Ryan Aylward ].

The design win of EUR 2.5 billion life-to-date, how do you guys overlay that against the programs that are reaching end of life? And could you comment on just, if we think -- if replacement rate is programs that are leaving, new programs divided by programs that are leaving, so if you're replacing a program dollar-for-dollar, that's 100%. How does this kind of EUR 2.5 billion map to programs that are reaching end of life?

Yes, Brian, if life was that easy. But I mean last year, we had EUR 5 billion design wins. And I mean, that is always lifetime value. And that was very much what we need for the kind of the growth plans we have been plotting. I mean, you never know kind of -- it's always the design wins are multiplied with estimated volume. Volumes can be higher or lower. So kind of there's some uncertainty how the market -- how the platforms really develop, right, if you have designed into a smartphone, into a car, into a computer or whatever, but kind of EUR 5 billion per year fully supports our growth plan.

Okay. Got it. So you're about like halfway there for the year.

So basically saying, will you win more than expires, right?

Well, I guess these EUR 5 billion will expire, you're saying?

Yes, you have to [indiscernible] No, no, no. I mean, it's not an exact sign, it's a design win. You have to bear in mind, you have existing business. And if you look at automotive, its existing business across classic products that is typically negotiated every year and so-called volume purchase agreements. And then you have a high share of business related to new products, new wins, and then they go through that typical design win process. And that is an ongoing theme. You have that every year. And you cannot really relate that in a sensical way, in a mathematical way, how would the growth rate really look like because in reality, the plans are then made bottom-up from 2 assumptions, et cetera. And maybe to give the granularity also on the design win, that's blended across all businesses. So in automotive, maybe you have a typical lifetime value of 5 years. In industrial, you have 8-plus years. In consumer, of course, 2 to 3 years, depending on the individual platform. And that makes it basically impossible to draw from that in a mathematical manner, whether this goes 1% up or 1% down. But from the overall fitment to the long-term growth model, that is roughly what you would expect you would need for that 7% growth on the core portfolio. But of course, I mean, if suddenly car units go up by 10%, then it's much higher in terms of value. If it goes down by 10%, it's much lower as an example. The basic idea that we published those numbers, also in some more detail, is to give credibility that underlying without having an exact number for the percentage that we do have a basis for the claim that there will be structural growth.

Yes. So while you have to go contract-by-contract, vertical by -- the business line-by-business line that can't really map it but I guess that -- the pace of the design wins supports the volume of design wins, I guess, supports management's optimism around the growth. So those 2 are highly tied together.

Yes. Exactly.

Sure. Okay. The -- there is a big spend on some of this microLED equipment. I know you guys are working on releasing Malaysia. Is there any sort of recovery value that you guys are working for or think is realistic on the equipment, or is that going to be included in the lease and so there's not going to be just divestiture proceeds associated with the equipment...

No, look, I mean, a lot of the equipment is sitting in the new factory in Malaysia that we are about to sell. So -- and that can be highly specialized equipment for microLED or it can also be more fab related like overhead transport systems or other stuff. So we obviously first offer it to the buyer of the factory, right? I mean I'm pretty sure they could make good use of the OHT and other things. What other equipment is so specific to microLED that there is probably very little value, right? And there's also certain equipment that we can continue to use for kind of -- for our EVIYOS highly pixelated headlight. So it really differs. But yes, part of the write-off was obviously that we took down the value of the equipment quite a bit.

Okay. And then the last thing for me, and you used the word dividend to the OSRAM shareholders. Is that a true dividend or is that just a reduction in the put liability that happened during the quarter?

No. It's true -- as part of the domination agreement, we pay each shareholder EUR 2.50 dividend per year, which is a EUR 30 million cash outflow.

And what's the duration of that? Is that until all of the shares are fully -- or when does that, I guess, liability terminate?

No, I mean the shareholders -- I mean, we currently -- the offer is still out. They can tender the shares. But shareholders might prefer to hold on or maybe in anticipation of a higher offer in the years to come. That is their choice what they do but we will continue to pay the dividend as long as their shares outstanding.

Okay. That's what I was getting on. So once those shares are no longer outstanding, that EUR 30 million dividend goes away?

Yes.

[Operator Instructions] And our next question comes from [ Dan Grow ].

So first one, just coming back to the OSRAM shares, I'd just like to ask if you sort of had any progress in buying back any recently, and if you intend to like in the near future, any update on that?

We made a part of -- I mean, when we enter the domination profit-loss transfer agreement, we made an offer to the outstanding shareholders. That has been appealed. The court was the first ruling that was in our favor. It got appealed again. And then there will probably be a final ruling next year. And until that final ruling, outside shareholders still have the right to tender their shares under the existing offer. That offer will expire 2 months after the final verdict of the court. And during that time, shareholders may decide to tender, or they might decide to hold on and to continue to get the dividend. And I'm pretty sure that a lot of shareholders are then waiting for a higher offer going forward as part of a squeeze-out procedure.

Okay. So I know you said next year, can you -- is there any specific kind of time scale for that, like what the latest that could be...

No, really not. That's just kind of typical time that it takes for similar proceeding.

Okay. And then just on the Kulim-2 plant, I know you've -- you said that you're still looking for a new lessee. Just wanted to clarify maybe how you're going about that? Because I know you said there were perhaps like 10 parties interested back in the previous call in the first quarter, and just how discussions are going there, if you can comment any further.

Yes. I think what we said is that about 10 parties that approached us, not us approaching them, Malaysia is currently a wonderful place to be with all the geopolitical issues. It is an independent place. It's not China, it's not outside China. It's everywhere. It is kind of a low-cost country. So the space is limited, and kind of there's really a lot of interest in just taking a brand-new factory that is absolutely high end. And that would accelerate a lot of plans for other people. That's why a lot of people approached us. We have entered into a formal process where we have contacted even more potential buyers and seen a lot of interest. You're signing NDAs, showing the factory, giving management presentation, and then we are expecting LOI pretty soon. And then kind of we will choose the ones that we continue in more detailed discussion in the hope to sign a deal then this year.

We'll return to [ Ryan Aylward ] for follow-up.

I know you guys -- management initially talked about for the non-core divestitures that while you say rate from explicit numbers, I think you kind of talked about high 8 figures, low 9 figures in total potential proceeds. And obviously, this one came in, I think, what I heard was EUR 35 million for Focuslight. Is that -- are you guys still targeting kind of that ballpark for the remainder, or have you guys kind of changed your thinking on that?

No. I mean the first one is sold, still to be closed but that looks good. The second one, the new tenders we decided to restructure because kind of the cash flow from the core that we then keep this higher than kind of the price we are able to achieve. So we decided to restructure that was the better decision. And yes, there's 1 or 2 other things out where we're still kind of in the process kind of if we want to rather restructure or sell it.