ams-OSRAM AG ($AMS)

Good day, and welcome to the ams-OSRAM Q1 '26 Results Credit Investor Q&A Call. My name is Regina, and I'll be your call coordinator. The format of the call includes prepared remarks from the company followed by a question and answer session. [Operator Instructions]. At this time, I will turn the call over to Juergen Rebel of ams-OSRAM. You may now begin.

Hello. Good afternoon, everyone. Good morning to the [indiscernible], if you're already up. This is Juergen speaking. Welcome to today's call on our first quarter '26 results, specifically for credit investors. With me is Rainer, our CFO, who will walk you through the Q1 earnings call presentation. Rainer, the stage is yours. How did we do in Q1?

Yes. Thank you, Juergen. Good afternoon or morning. Yes, how did we do? If you look at the share price, we obviously did pretty well. Now we will quickly go through the presentation. Let's start with Page 3. Overall, we delivered a very strong first quarter and made further tangible progress towards our ambition of becoming a focused digital photonics powerhouse. On a like-for-like basis, our semiconductor core portfolio grew by 9% year-on-year, clearly underlining that our strategic focus is the right one. Group revenue came in well above the midpoint of our guidance range. Adjusted EBITDA reached the upper end. Design win momentum continues unabated across all end markets. From a Digital Photonics perspective, we achieved 2 important milestones in the quarter. And the first one, we are in the process of expanding our portfolio of optical components that are decisive for the system performance of AI-enabled augmented reality smart glasses covering key functional building blocks. And second, in AI Photonics, we signed a development agreement for highly parallel micro-emitter array-based so-called slow and wide optical interconnect targeting hyperscaler AI data centers. In parallel, we advanced on execution topics. The Simplify transformation program is well underway. Our balance sheet deleveraging plan progressed as planned. The sale of the Entertainment and Industrial Lamps business to Ushio closed in early March and cash proceeds were received. The divestment of our non-optical sensor business to Infineon remains well on track with unchanged timing for midyear '26. Finally, we delivered positive free cash flow in Q1. As expected, divestment proceeds offset the seasonally high interest payments that typically occur in the first quarter. Now let's look at the details on Page 4. Q1 performance came in stronger than initially expected. Group revenues came in with EUR 796 million, well within the upper half of the guidance band and adjusted EBITDA reached 16.5% at the upper end of the guidance, driven mainly by the OS division and a very strong Automotive Lamps performance. Year-on-year revenues declined slightly, entirely due to the weaker U.S. dollar with a top line impact of roughly EUR 50 million. On a like-for-like basis at constant currencies, the group would have grown by approximately 8%. Adjusted EBITDA declined modestly year-on-year solely due to the deconsolidation of the Specialty Lamps business despite the FX headwind. And on Slide 5, OS held up very well in the typically soft first quarter. Revenues were almost flat quarter-on-quarter. We experienced supply constraints in selected product lines due to the short-term order increases. Without those, even the sequential growth would have been possible. Margin declined sequentially due to higher gold prices, annual price downs effective January 1 and FX effects. However, it was 2 percentage points higher year-on-year, reflecting higher production volumes that are not fully visible in reported revenues due to the weaker U.S. dollar. CSA delivered a solid performance in the seasonally weakest quarter. Results were driven by continued strong demand for custom sensor products in consumer handheld and a recovery in Industrial & Medical. Revenues were slightly lower year-on-year solely due to the declining contribution from exited noncore portfolio activity. Profitability followed typical revenue pull-through dynamics, however, was down year-on-year, which is due to higher R&D expenses to fund growth projects and FX headwinds on top. Lamps & Systems again delivered a very strong quarter. Aftermarket demand remained elevated, including short notice orders following financial difficulties of a competitor. Specialty lamps contributed for only 2 months because we sold them. The deconsolidation explains why reported revenues did not increase year-on-year. Strong production loading in Q1 supported profitability. Overall, it was mostly a strong quarter across the portfolio. Then on Slide 6. Adjusting for the weaker dollar and the exited non-core portfolio contribution, the clean core portfolio in semiconductor grew 9% year-on-year. The portfolio is now largely wound down with only residual contribution of the order of EUR 10 million contributing. Looking at the markets, Automotive was broadly flat versus a typical seasonal slowdown. After a lackluster start early into the year, we saw a clear ordering uptick in February and March. Given the declining underlying vehicle production outlook, we interpret this as partial restocking after a prolonged period of very lean inventories, combined with some level of precaution due to the turbulences in the Middle East. All regions performed sequentially better, except China, where end market demand remained softer and competitive intensity is elevated. Industrial & Medical showed a clear recovery. Horticulture had a seasonal low point, but professional lighting demand was solid. Order intake improved materially and order patterns at the end of the quarter point to a solid seasonal upswing into Q2. Consumer followed typical seasonal pattern sequentially. Year-on-year, the decline is explained by FX and the phaseout of noncore portfolio elements. Now Slide 7. Q1 is typically the weakest quarter for design win activity, yet momentum remains solid. Total design wins amounted to around EUR 850 million. Naturally, design wins are geared towards automotive, but the other verticals also contributed well. In our classic semiconductor core business, Automotive remains the backbone with triple-digit million euro contributions across the portfolio and strong momentum in forward lighting. Industrial showed very good traction, particularly in professional lighting with customers in the U.S. and Europe, while horticulture performed materially better year-on-year. Consumer continued to see recurring sensor design wins in Android-based smartphones, particularly in display management. On the Digital Photonics side, progress was equally encouraging. The buyers continue to add platforms, taking the number of awarded platforms to well above 60 and interest for new designs remain strong, especially in China. Augmented reality, several of our existing components such as ambient light and spectral sensors are already designed into smart glasses models available in the market. In AI photonics, product development for micro-emitter arrays for highly parallel AI optical interconnects have started. Hence, we are not doing this alone. We signed a collaboration agreement with a strong AI infrastructure partner. We will now look at these Digital Photonics themes in more detail, turning to Slide 8. Augmented reality smart glasses are key Digital Photonics growth theme. While the category is still at an early stage, adoption is accelerating even with today's limited functionality. AI is a game changer, making these glasses potentially the midterm replacement of our smartphones. Some of our sensors and LEDs are already designed into several commercially available smart glass models. Our current and future portfolio covers key functional domains, being health and well-being, sensors enabling measurement of parameters such as melatonin levels via blue light, heart rate and UV exposure. Privacy and camera performance, spectral and flicker sensors as well as high-performance LEDs. And then probably most important, the display engine. Today, our LEDs illuminate LCOS displays. Going forward, microLED arrays can enable substantially higher brightness, resolution and power efficiency. World sensing comprises gesture and 3D Time-of-Flight sensing. HMI, today, we supply our proven proximity sensors. Tomorrow, we have a super tiny optical force sensing buttons in store. And eye tracking can be done with our integrated optical sensing solutions. This illustrates our strategy of focusing on decisive system components built on our core technology. Content estimates naturally vary depending on volumes, life cycle stage and customer implementation choices. For this, we see content potential between EUR 50 and EUR 100 per device, which underpins the triple-digit million annual revenue opportunities we outlined when launching our Digital Photonics strategy. Now on to our next highlights of today, turning to Slide 9. Our progress in AI Photonics is accelerating. I have 3 slides for you. First, where our products will sit in the data center; second, how do we fit into the architecture; and third, which components are we targeting. We believe that the so-called slow and wide optical interconnects based on highly parallel micro-emitter arrays can play an important role in future AI data center architecture. Though slow is relative as we are talking about 8 gigabit switching speed and hundreds of parallel channels. Initially, the focus is on shorter distance scale-out interconnects, between racks and scale-up connections within racks, replacing copper over distances of up to several tens of meters. Over time, chip-to-chip connections, for example, between the GPUs and high-bandwidth memory could become addressable as well, a really great market potential for us. Now Slide 10, probably a bit more complicated, but very important to distinguish between integration concepts on the top and the optical engine technology itself. On the integration side, today's solutions on the upper right rely on pluggable transceivers or active optical cables with energy consumption of up to 30 picojoules per bit, so quite high. In these solutions, not only the longer copper traces, but typically also signal shaping chips consume quite a lot of power. And in the center on the top, near port optics can reduce this to roughly 5 to 10 picojoules per bit. The optical engine moves much closer to the ASIC. And then finally, on the left, the co-packaged optics, CPO promises further reductions towards 1 to 5 picojoules per bit over time. The optical engine moves as close as possible to the ASIC. Put simply, the closer the optical engine fits to the chip, the lower the electrical losses and the associated thermal load. The slide illustrates this through distance comparisons. Independently of the integration approach, optical engines can be implemented either as fast and narrow or slow and wide solutions. Fast and narrow is today's established technology based on indium phosphide lasers, often EMLs and silicon photonics integration concept. We believe in future slow and wide architectures, highly parallel micro-emitter array based optical engines that transmit light pulses at chip speed without the need for power hungry serializers and deserializers. Key advantages include substantially higher bandwidth density, very low power consumption per bit and inherent redundancies through parallelism, 1 micrometer fills, no worries. There are enough channels for backup, an important consideration for hyperscale customers. Now on Slide 11. On the left, you see our prototype, which helps accelerate the signing of a development agreement with our ecosystem partner, a leading AI infrastructure supplier. The table in the center illustrates the simplified technology stack for highly parallel optical interconnects. In essence, you can think of the transmitter side, the receiver side and the advanced packaging technology that glues everything together. Our current development focus is on the transmitter side, microlens and micro-emitter arrays. Given our CMOS and sensor capabilities, we are also evaluating opportunities beyond on the receiver side. We will keep you updated as development progress. Let us now look at selected financials, slide 12. Generated EUR 37 million free cash flow in Q1, which includes EUR 90 million divestment proceeds. Cash inflow from the sale of the Specialty Lamps business was received early in March. Operating cash flow at breakeven, reflecting seasonally high interest payments on our senior notes, higher, as you know, than a year ago after the EUR 500 million tap last summer. CapEx remained disciplined and well below our full year guidance of 8% of revenues. With that, let us take a quick look at our Simplify program that we launched with Q4 announcement on February 10, and that is on Slide 13. Last quarter, we reported that Re-establish the Base has delivered the savings 1 year early. The implementation of the remaining measures that had been identified will continue. The Re-establish the Base program delivered EUR 230 million of savings, which is really a great success. In February now, we launched a successor program called Simplify, which is a broader transformation program, aimed at reshaping our operating model and delivering EUR 200 million of additional annual savings by '28. All savings measures have been identified and 90% have high maturity level. Cost speed, agility, are our guiding principle as we reshape our operating model. Implementation started immediately. And after just 1 quarter, teams have already delivered EUR 5 million of realized savings, demonstrating disciplined execution continuity. Now let's look at liquidity and capital structure on Slide 14. As you know that very well, in Q1, the interest payments for our senior notes due with the cash proceeds from the sale of the specialty lines, the free cash flow was positive, such that the cash on hand position only reduced because we paid back EUR 200 million nominal of the convertible note, which -- and the cash now stands at around EUR 1.3 billion end of March. With that, available liquidity position closed accordingly at EUR 2 billion, which is the cash revolving credit facility and bilateral lines. The sale-end leaseback moved up a little with currency swings and with the quarterly interest accrual. With that, let us zoom in on the coverage of the upcoming short-term maturities, very important slide, Slide 15. So we have EUR 1.3 billion cash on hand. And when we enrich that with the EUR 570 million from Infineon at closing somewhere midyear, then the amount is close to EUR 1.9 billion in pro forma cash. This company will cover all near-term maturities. And that is the outstanding '27 convertible, which now stands at EUR 560 million. We received the money from Infineon, we have 120 days to offer the amount related to guaranteed assets at par to noteholders of approximately EUR 130 million. And second, the business needs in gray for the transition effect in '26. Now what is that? That is lower adjusted EBITDA because we're selling businesses, and we have stranded costs that we will start cleaning up after it is closed. High transformation costs from the Simplify program. We will have quite some cash outflows this year for Simplify. And then we will be repaying USD 100 million in customer prepayments this year. And we also will reduce factoring by about EUR 100 million. Now excluding disposal proceeds, expect something triple-digit million negative. Now putting as much as possible into '26, starting clean into '27, the '27 free cash flow will be substantially better. In this, if business remains strong as we see it today, we expect the free cash flow to move to positive territory, excluding disposal proceeds and even that we need to repay a similar amount of customer prepayments. Now and third, it will cover the tendering of the OSRAM minority shares after final verdict. We assume that for the second half of the year, so it could slip further out. And after all of that, that should leave us with around EUR 500 million in cash. And now this is, I think, very important when you look at that slide, all upcoming near-term maturities are taken care of. We have the funds available. And then thinking ahead, this allows us to focus conceptually on optimizing the cost and maturity profile of our 2019 senior notes. We will keep you posted what our plans are. Now summarizing, on Slide 16. In Q1, we beat again our revenue profitability guidance. The semi core business grew 9% like-for-like. Free cash flow was positive, completed Re-establish the Base and started executing Simplify. In Digital Photonics, we continue to progress on a comprehensive component portfolio for AI-enabled smart glasses, giving us a content opportunity between EUR 50 and EUR 100 per smart glass. And we initiated the product development of micro-emitter-based AI optical interconnects together with the commercialization partner. We also progressed on balance sheet deleveraging, especially Lamps transaction closed, proceeds were received. The Infineon transaction remains on track, no changes to the indicated closing time line mid of the year. And now finally, the outlook for the second quarter. We expect revenues between EUR 725 million and EUR 825 million, adjusted EBITDA around 15.5 plus/minus 1.5 percentage points at an exchange rate of 1.17. Now the traditional auto lens business will show the usual seasonal slowdown in view of the overweight in the aftermarket. Remember, all non-automotive business transferred to Ushio. We still had EUR 10 million revenue in Q1 and 0 in Q2. That obviously EUR 10 million reduction is part of the guidance. Semis will make a step forward in Q2 more than typical seasonality. We see strong order intake and book-to-bill higher than previous quarters. Now our full year '26 outlook remains unchanged. Group revenues modestly softer given the divestments and the exchange rate impact. Adjusted EBITDA also around 15.5% plus/minus 1.5 percentage points, assuming the FX at 1.17 million. Adjusted EBITDA will be negatively impacted by several one-offs, the divestments, stranded cost, precious metal prices, particularly gold and the other factors. Free cash flow, certainly well above EUR 300 million, including the divestment proceeds. And into '27, we see a path to positive free cash flow without, and not counting any potential divestments. Even that we still have to repay a similar amount, roughly $100 million of customer prepayments. And with that, we are happy to discuss your questions.

Our first question is a live question from Marco with Innova Asset Management.

I have a couple of questions, if I may. So the first one is just on the RCF. Were you able to extend RCF because last time you guided for mid-2026 for the kind of extension. So if you could just provide some color there? And the second question is on the one-off cost for 2026. I heard earlier you mentioning EUR 100 million. Could you just confirm if it's EUR 100 million or EUR 150 million for this year? And then the third question is just on the AI data center opportunity. When do you expect to see sales potentially? Like if you just provide some color? And then also a follow-up will be the TAM. Like what sort of TAM could you -- like, if you could just provide some color for the AI data center.

Starting with the one-off. So overall, we believe that the program will have one-off roughly EUR 150 million. Of that, we already booked some last year. A smaller portion, quite a bit will come this year. And now I'm talking about the expense, right, booking the reserve. And there will be a bit more to come in the next year. Now the other question is how much of that is cash out. And we believe that the cash out for the program this year should be somewhere between EUR 50 million and EUR 100 million. Now the revolver, I would say we are in a very progressed negotiations with the banks to extend that, final steps. Then the AI data center opportunity, yes, I think it's very exciting. It will certainly be before 2030, hopefully before '29. And then the size of the opportunity, I mean, that is a bit of a difficult question depending on how much of the value we will add if it is just emitter or if it is more a system. It is certainly a 3-digit million opportunity in 2030 and beyond with a gradual ramp. But in case, we would do more, we would do also the photodiodes, we would do the driver or even the amplifier, then it could be obviously a much, much higher number. We're discussing with a lot of different partners now, and there's a lot of different positions where we could play a role.

Just one quick follow-up in terms of like the development cost for this AI data center opportunities. Like, who would usually show the cost? Would it be you guys or the client or is it both? Could you just share that?

Yes. I mean in the case now where we work with a partner, there we share the cost. We get NREs, but we are certainly also developing quite a few other things where we currently pay the cost ourselves.

Our next question is from Laura with MFS Investment Management.

Just a few, please. So regarding the senior unsecured notes, you said you'll keep us posted. I think previously, you mentioned you would look to refi these in sort of early 2027 when the coal price steps down. Is that still sort of your base case? Or are you potentially considering addressing these earlier? Then secondly, just regarding the converts, for EUR 130 million, I think you need to tender for, will you try and tender for more? Or are you just going to leave the remaining portion outstanding up until maturity and then redeem them with the liquidity that you have? And then 2 final questions. Pro forma EBITDA, I think previously, you guided for EUR 533 million that was based on financial year 2025, where reported was EUR 608 million. So for 2026, should we expect this to be sort of lower because of obviously the cost overhang that you mentioned from the divestments? And then lastly, the Kulim plant, if you could just give an update on any discussions you may have or timing or what do you think is possible there with regards to an exit?

Yes, it was really a good quarter. Now the senior notes, we are obviously strategizing what options we have. 2027 is kind of the base case, but we are certainly looking at the alternatives and kind of breakeven calculations. But we will talk about that when we have a conclusion. On the convert, it is -- yes, we have to make an offer of EUR 530 million at par. We will -- yes, we already made an offer earlier this year at a bit lower price, EUR 200 million were offered. We certainly want to optimize at what price we pay that back, we will probably make an offer, certainly not at EUR 100 million. And yes, if an amount develop, we will just let us then expire in September 2027. On the EBITDA, so yes, there is a few things that are against us. The one thing that we said is the businesses we are selling, which is roughly EUR 75 million EBITDA on an annualized basis, but the stranded cost, maybe EUR 100 million together. And then we also have the headwind from the precious metals. On the other side, obviously, we also have a business that is developing nice, but it will be quite a bit lower compared to last year and maybe it's a good idea to have a look at the consensus. Now Kulim, 2 updates, yes, it's now almost 2 years, and a lot of parties look at that. We are not at the point where somebody made a concrete offer, still talking currently to a few interested parties. It's nothing that we would sign within the next few weeks. But we see that the momentum in the whole semi industry, particularly in the areas where companies might have interest in our facility is picking up. So we remain optimistic that we will be able to resolve that.

Great. Maybe one follow-up just with regards to the Kulim plant. In terms of timing, you obviously said like not in the coming weeks, but you're confident to resolve this. So do you think realistically speaking, it's more likely to be like a 2027 event? Is that fair?

Laura, I mean, it's not fully in my hands, right? So we need a buyer who is willing to write a check. So I cannot give you any additional details on timing other than that the feedback we are getting remains to be very constructive and that we are positive that one day we will get such check.

We have 2 written questions from Christian with BlackRock. The first question raised on the FY '27 FCF outlook, how much of this target depends on a successful refi of the [ 2029] ? Or can you achieve it with current coupons? The second question is on factoring. What is the current level of nonrecourse factoring? And by how much do you plan to reduce usage of factoring?

I'm trying to understand the question. Yes, go ahead, Juergen.

Yes. The first question regarding the free cash flow outlook, then obviously, we're looking at refinancing the main part of our bond that the plan what we mentioned. And obviously, we need also to have better control. So with the current coupon, obviously, that will be a stretch to get there. So that's the first question. Second question regarding the factoring. Currently, we are at EUR 150 million roughly. And we mentioned that over the course of the year, we are going to reduce the factoring level by roughly EUR 100 million. So that's basically also costs we have to pay and that will also reduce our interest cost going forward.

Our next question is a live question from [indiscernible].

I wanted to ask about the AI optical solution. Is that being contemplated for a CPO solution? And could that potentially be used in kind of MPO as well?

Yes. This is Juergen. I can answer that. I mean, as we tried to illustrate in the slide, in principle, this can be used in various integration opportunities that are shown on the top slide. We can't go into very specific details right now, but what I can say, it's probably not going to be a CPO solution at the beginning. So the customers we're currently working with, probably looking at different integration opportunities.

And following up on that, I think you mentioned you are in discussions with other parties. Are those parties at a similar part of the ecosystem as your current partner? I know I think it was asked on the earnings call, you can't specify exactly who it is, but are you getting inquiries from kind of different areas?

Thanks for the appreciation that we cannot be very specific who it is and also not give too strict guidance that you might be able to single out. But what we can firmly say is it's not only on a similar integration level that we are speaking, but basically, we're speaking with everyone because, I mean, all these optical interconnect technologies that affect various levels of the AI ecosystem and the infrastructure. So we're not restricted to one level of integration, but there are many discussions going on.

And then lastly, you did mention some supply constraints on the optical side. What is the magnitude? I think you said optical will be positive sequentially if those resolved. But what's the magnitude of the supply constraints? And when should we see those resolved?

Yes. There were on some automotive products where we were for automotive emitter products, automotive LED products on the classic side. And we've got basically a lot of surprise orders. And as Aldo mentioned earlier on the call today for the equity analysts that we probably also saw a little bit of ordering driven out of fear with all the Middle East crisis going on. And then we couldn't react as fast. So you asked about the order, probably a couple of million as we indicated in one of the comments that could have pushed OS even in a growth quarter-on-quarter.

It's not lost business, right? It goes into backlog and it gets shipped with a slight delay. I mean when customers come with the short-term orders, I mean, that's what sometimes happens. But actually, we were surprised by the amount of orders. And there are certainly areas where we need to expand the capacity.

We have a couple of questions from Julian. First is, could you please quantify the impact of FX headwinds on the semi segment EBITDA? And could you please quantify the impact of the gold prices at group level?

Yes, sure, we can. I mean the impact of the gold price group level, we said that in the last call, we expect that headwind this year to be around EUR 60 million year-over-year headwind. We currently see it, yes, we currently see that the gold price have come down a little, so it might be a little less. And the first question, the impact on FX, why only on the semi segment. In a simplified way, we typically say that EUR 0.01 for the full year is around EUR 20 million of revenue. And the fall-through of that is kind of for the portion is somewhere EUR 5 million, EUR 6 million or so percent. And that is true for all segments together.

Our next question is a follow-up question from Marco with Innova Asset Management.

So just one quick clarification. So your smartphone business and exposure to shortage earlier on the equity call, you mentioned that the impact is minimal. Is that correct?

Yes, that is correct. I mean there's -- yes, you always read that the memory shortage reduces smartphone sales, but kind of as our products are very overweight in the high-end models, and we haven't seen any impact of the memory shortage on the high-end models. So we really don't see on the staffing.

And just in terms of numbers, [ 600 million ] from smartphones.

Yes. Well, take the consumer share on the semi side, and there are probably a high majority is on the -- from smartphones, but there is also a decent share of variables and then a long tail of smaller ones, but it's certainly fully overweight on the commercial side.

Okay. And I'll just squeeze another one in. So in terms of the coupon that you're looking to lock in on the refi for the 2029 bonds, is it fair to assume that you're looking for 5% to 6% coupon?

I mean as we said, I mean, we haven't taken a decision when to go ahead. And then if we were to decide, we will certainly test the market and see what we can get.

Our next written question is a follow-up question from Julien. In 2027, do you expect to receive a large inflow from customer prepayments similar to what it received in Q3 FY '24?

The customer prepayment thing in '24, that was a onetime thing. Now we have to pay it back between Q1 '26 and mid of '28. That is not something that we see frequently in our business.

It appears there are currently no further questions. Handing it back to Juergen Rebel of ams-OSRAM for any final remarks.

Thank you, operator. Thanks, everyone, for dialing in, for the interest and the questions. If there will be any further questions, reach out to us at Investor Relations. With that, we wish you a great day and speak to you soon or latest next quarter. Thank you very much.

This concludes today's call. Thank you, and have a great day.