OSRAM Licht AG

Thank you, Haley. Good morning and good afternoon, ladies and gentlemen, a warm welcome to the OSRAM conference call on our First Quarter of Fiscal Year 2021.

With me on the call are Dr. Olaf Berlien, our CEO; Kathrin Dahnke, our CFO; and Francois Gerard, Head of Corporate Controlling.

Olaf and Kathrin will comment on the market development and our financial performance. Afterwards, we will be happy to answer your questions.

As a reminder, today's call is being recorded. You can follow the webcast on our website at OSRAM.com/ir, where you will also find the presentation available for download.

As with previous conference calls, I would like to draw your attention to the Safe Harbor Statement on page two of the earnings release presentation. As usual, it applies throughout the call.

It is now my pleasure to hand over to you, Olaf.

Yes. Thank you, Julia.

Ladies and gentlemen, welcome to our conference call this afternoon. I will start with an overview of our fiscal year, and my colleague Kathrin will then go into the financials in more detail.

And as usual, we will then be happy to answer your questions. So let's get started on slide number 3.

We had a strong start to the fiscal year. A quick rebound in the automotive and electronics industry has led to full order books.

Profit and cash develop positively across all reporting segments. At the comparable revenue level, our EBITDA rose sharply by over 40%.

It shows that we are focusing on the right products with our high-tech strategy, and it's once more the result of our long-term performance programs as well as COVID-related short-term measures. Especially the semiconductor business delivered excellent performance in the first quarter.

OS set an absolute record with the highest EBITDA margin to date. Due to the positive business development in Q1, we significantly raised our outlook for the fiscal year at the end of January.

Meanwhile, we are working together with AMS to complete the business combination pending court procedures regarding the DPLTA registration. So I move on slide number 4, and the figures for the first quarter.

In the period from October to December, we achieved comparable revenue of €840 million. This is more or less the previous year's level and that's the level before the global pandemic.

Adjusted EBITDA climbed by 42% to €162 million, which corresponds to an adjusted margin of over 19%. Free cash flow also developed very positively resulting at €50 million in the biggest economic crisis since World War II; OSRAM is therefore very well positioned.

Especially OS performed excellently in the first quarter with an EBITDA margin of over 31%. It achieved the record results in the Group's history.

Year-on-year growth rates in the first quarter for visualization and laser were 15%. In the area of semiconductor-based illumination, the figure is as high as 23%.

The automotive business unit also increased its adjusted EBITDA in the first quarter compared to the previous year. The strong retrofit and replacement lamp business generated high cash flows, and also the turnaround measures initiated in the digital unit showed positive effects.

Despite the corona-related decline in revenue, we were able to post an almost breakeven result here. Free cash flow was slightly positive, and this in a time close of cinemas and canceled events worldwide; so a really strong performance by the team.

And that brings me to slide number 6, in the economic environment. Q1 showed a continued upward trend in important economic indicators.

The OECD composite leading indicator reached pre-corona levels, while another important indicator for us, as you know JPMorgan's Purchasing Manager Index exceeded pre-pandemic levels. The continued economic recovery has put the global supply chain under pressure.

As we have recently seen in the automotive industry. Volatile demand for semiconductor products has led to shortages in the industry, and of course to allocations at various suppliers, which again resulted in the higher stocking orders.

We have also noticed this trend in our order volumes. And I have to say we are happy to have expanded our production footprint in Kulim, and of course, in Regensburg.

So it was the right decision for the future of this company, which takes me to slide number 6, at the global car production forecast. This shows the global production figures as predicted by IHS.

The light vehicle production in the last quarter continued to improve, and the forecast for the fiscal year '21 sees a further recovery. IHS expects global car production numbers [indiscernible] 86 million cars; this is slightly more optimistic than forecast a quarter ago, especially the forecast for NAFTA and China have been increased.

NAFTA is now expected to grow by 24% over the fiscal year and China by 10%. This positive development is also reflected in our order volumes.

Our order books are full. We are seeing a trend towards high-quality [ph] market solutions where we are the leading supplier.

So this takes me on to slide number 7, and to our performance programs. Despite COVID-19, we continue to implement our existing performance programs.

Total savings for the quarter amounted to €25 million, which the biggest contribution coming from the corporate overhead adjustments and the transformation of our plants. As you know, since the start of the programs of 2018, we have been continuously working on our performance.

And this also explains our positive development in profit and cash. Overall, we have already achieved savings of €280 million over this period.

Meaning that we are ahead of schedule and close to the reaching of our total program target of €300 million, and maybe as you know from our past and last quarter results, this was originally planned for the fiscal year 2022. Still, the transformation of our company continues, and this takes me to slide number 8.

In recent months, we have checked various options for the further development of our DI business unit. As we increasingly focus on photonics, we have decided to find a new best owner for the DS components business with ballasts, drivers, and modules.

We are convinced that DS as one of the leading supplier in the market can further improve it's position. For our production plant in Plovdiv in Bulgaria, we already found a new owner.

The US companies and Sanmina which is one of the 10 largest contract manufacturers for electronic products in the world. It is taking over the plant and it's 800 employees.

So Sanmina would continue to manufacturing for us. But we'll be able to better utilize the plant.

So, let me summarize quickly. The successful last quarter shows that we have managed the crisis very well.

We have protected our employees and kept the business running, at the same time, we have lowered our fixed cost and brought new innovative products in market at record speed. And as we discussed it in the past, this way we have successfully gained market share.

And with that, I now hand over to Kathrin for a deep dive into the financials. Kathrin?

Thank you, Olaf. And welcome also from my side.

Let us now take a more detailed look to the first quarter figures, starting with our revenue development on slide number 9. Overall, our revenue development was quite stable compared to the prior-year quarter resulting in revenue in absolute terms for the OSRAM group of €840 million, but compared to the previous quarter, the Q4 of the fiscal year 2020, revenue increased by 14.1%.

This development was supported by a swift than expected recovery on our markets, especially for the business units OS and AM. On the other side, we had a negative effect from foreign exchange rate of minus 5.5%, leading to a comparable growth of minus 0.1%.

Also when looking at all regions, we can see a recovery. APAC showed a positive development with 5.7% on a comparable basis.

There China even grew by 12.7% year-on-year. The biggest growth in APAC came from OS with a mid-teens percentage figure.

AM showed a slightly positive comparable development in APAC, while DI sales were still declining. EMEA and Americas showed a moderate negative development of minus 4% and minus 2.9%, respectively.

However, the development in all regions is even more impressive, when looking at the sequential growth rates. The biggest improvement we see is in APAC with the sequential growth of 21%.

EMEA grew by nearly 9% quarter-on-quarter, while Americas even improved by 13% compared to quarter four of the fiscal year 2020. Let me now come to the revenue development in the three reporting segments.

Opto grew 4.7% comparable year-on-year, more remarkable is the sequential growth with 11.7%. This results in the revenue in absolute terms of €556 million.

The growth at Opto was mainly driven by visualization and laser as well as illumination, both showing a very satisfying growth in the low-to-mid-double-digit percentage amount. Revenue in automotive and sensing showed a flat to slightly negative development year-on-year.

What we currently see at Opto automotive is a tight supply and allocation situation due to extraordinarily high and rapidly growing short-term demand increase and the very high order entry. Let me now move to the revenue development in the reporting segment, automotive.

Overall, the AM revenue came in at €474 million resulting in the year-on-year comparable growth of 1.4% mainly driven by the aftermarket business. Sequentially, however, comparable revenue growth was even at 20.4% compared to quarter four of the previous fiscal year.

Year-on-year automotive LED components only showed a small decline in the first quarter of this fiscal year. And last but not least, the revenue development of the OSRAM Continental subsidiary showed again a decline in this quarter.

Coming now to the revenue development of digital; DI sales were still impacted by the corona effects, especially as throughout the last quarters in the entertainment and the city beautification area. Year-on-year, the comparable revenue decline was thus at minus 12.6%.

However, sequentially DI revenue increased by 8%. Fluence again showed a satisfying development.

Now, let's move on to the profitability on slide 10. The adjusted EBITDA in Q1 came in at €162 million in absolute terms, translating in an, as we think outstanding margin of 19.3%.

Again, our early initiated corona-mitigation measures supported the adjusted EBITDA margin. Moreover, we saw positive impact from volume as well as from an improvement in functional cost in the quarter, overcompensating price erosion, inflation, a negative mix as well as foreign currency impact due to the weaker US dollar versus previous year's level.

In the first quarter, we also had some one-off effects mainly at OS. In the Opto segment, the adjusted EBITDA improved compared to prior-year quarter-to-quarter to an all-time high of 31.7%.

This was mainly driven by portfolio management, strong operational performance and cost control, but also one-off play -- one-off mainly related to an insurance compensation in the amount of more than €20 million were taken into our books. The adjusted EBITDA margin in the automotive with 13.6% also outperformed the prior-year level of 9.7%.

High productivity savings and positive volume effect as well as digression due to the very-high loading in our plants could overcompensate price declines, inflation, and as mentioned before, negative FX effects. The OSRAM Continental subsidiary continued to be dilutive in the quarter.

And the adjusted EBITDA stayed negative. Coming to the profitability at DI; the adjusted EBITDA margin was at the same level of the previous year quarter and came in with minus 0.8%.

This was mainly driven by the corona impact, and therefore low volume. Productivity and strict cost management could however offset the earlier mentioned strong revenue decline.

Adjusted EBITDA in corporate item for OSRAM was negative with minus €14 million. It is also worth mentioning that our net income from continuing operations resulted at €6 million the first time, positive €6 million in the first time since 2018.

Turning to slide 11, the cash flow. The free cash flow was positive with €50 million as mentioned before in our first quarter of the fiscal year.

CapEx was with €21 million, still on a low level. However, the CapEx spend will increase over the next quarter.

Despite our positive revenue and profitability development in Q1, our focus is still on cash and liquidity. And as you can see in the bar chart on the lower right side, our available liquidity in terms of cash and undrawn credit lines, slightly improved versus last quarter.

Undrawn credit lines apply to the revolving credit facility granted to us from AMS. Cash in the amount of €273 million was lower compared to the previous quarter as a result of the €75 million repayment of our credit facility to AMS.

However, the cash and undrawn credit facility together are with a total of €723 million on a very comfortable level. As you can see in the chart on the upper right-hand side, we slightly reduced our net debt at minus €507 million.

And with that, I would like to hand back for to Olaf for the outlook for the fiscal year 2021.

Yes. Thanks, Kathrin.

Ladies and gentlemen, let's move to the last chart, that's slide number 12, my outlook, our outlook. In view of the current developments, we have recently raised our guidance for the current fiscal year.

On a comparable basis, we now expect revenue to grow by 10% to 14%. The adjusted EBITDA margin is expected to be between 12% and 15%.

And free cash flow, we now expect to range between €70 million and €130 million. These ranges imply, of course, lower sales for the next quarters compared to the strong Q1.

Furthermore, we will see higher OpEx in the upcoming quarters due to the ramp-up of new projects. Please also note that the guidance is based on the assumption that COVID crisis will not have significant impact on the OSRAM business or our supply chain.

And with that Kathrin and me, I hand over back to Julia for your question-and-answer.

Yes. Thank you, Haley.

Please open the Q&A session.

Yes, hi. Good afternoon.

Can you hear me well?

Yes, Sebastian.

Perfect. Yes, thanks for taking my questions.

I got three, and Olaf, the first one is on the high end, the announced portfolio change that you have made today on the lighting components. Can you remind us of the overall contribution of that lighting components business that you have in Hungary?

I think, on the press call you said about half of DI comes from lighting components, but you also made in your prepared remarks a statement that you have formed an agreement with Sanmina for the Hungary plant. So to just get a better understanding of how big that is compared to what is still and with the company?

And may I also ask around the overall terms, if you can disclose them that you have agreed with Sanmina? That's the first set of questions, and then I have a quick one around Opto, if I may?

The first one is on price mix. I was a bit surprised to not see stronger tailwind from price mix really in the bridge, quite frankly, because I think you also talked about scarcity earlier today.

I'm talking about scarcity, can you also remind us of where the book-to-bill is currently standing? That were my questions.

Yes. Thanks, Sebastian.

I'll give you the answer together with Kathrin. Let me start with the announcement of the portfolio change.

It's the ballast and components business, and it's not Hungary, it's Bulgaria. It's in Bulgaria, this plant.

And it's a supplier plant, an internal supplier plant with around 800 people. And it developed and produced the ballast and the components.

So it's an internal turnover and not an external. And in future days, I think we move from make to buy.

That means that we do not have the risk of under-utilization in our plants. So we have, coming to the terms, what I can say to the terms is that we will have a cost advantage in future days in two ways.

One way is, that Sanmina is a much better player in the market to buy electronic components, cheaper in the market than OSRAM. And the second one is, that Sanmina is able to run the plant in three shifts that means it will reduce fixed costs in the way that we have a higher productivity and that will be a cost advantage for OSRAM.

We will not have any -- we sold Plovdiv in a way that we do not have any impairment. That means we got all what we invested including return on capital employed.

So in this way, it was a good deal for OSRAM today and a good deal in the future. About the price mix, Kathrin is coming to that, but I will answer your book-to-bill.

Our book-to-bill is above one. In some areas, it's above two.

We have a very strong order book. And that means I expect a very strong Q2 as well.

So if you had seen, we had the great start in Q1, but I see that we will have the same speed in Q2. So very nice and good Q2 we expect and that's what Kathrin already said.

And I said, we expect the lower sales in Q3 and Q4 because today the visibility to Q3 and Q4 is much less, but the next quarter, January, February, March will be good. And maybe Kathrin, you can say some words about the price mix that was one of the questions of Sebastian.

Well, I think the price mix can be best explained in the revenue development, as I outlined. So we had a strong, as I commented on earlier, we had a strong revenue growth in both visualization laser and illumination, and these were the passive growing business segments within OS with a good margin.

And therefore, some of the EBITDA margin improvement is due to that revenue switch into those segments.

Sebastian, is it fine for you?

Does that answer your question, Sebastian?

Yes, that does make sense. If I may just ask one quick thing around illumination.

My understanding would still be that this is still a loss-making activity within Opto. Is that assumption correct or assuming that [ph].

No, we are very proud that this is -- it's not, not loss making anymore.

No, it's not correct. No.

As you see, therefore that it was worthwhile really doing a great job there on focus and also on cost structure.

And Sebastian, it's really changing. As I said, we had the growth quarter-to-quarter by 23%.

And we have the same speed for the next quarter as well. So we are very proud and very happy.

Okay, that sounds good. Congrats.

Yeah. Thanks to Kulim, I meant, sometimes it takes time, but now it's coming.

The next question?

Yes, hi. Thanks for letting me on.

A couple of questions here. I mean, you know, your guiding -- you had a wonderful first quarter 19% plus EBITDA margin, and when you look at your guidance, you're seemingly suggesting that your margin is declining in the next few quarters because you would need a big decline in the margin to be at the kind of range and giving for the full year, why is the margin going to decline for the rest of the year?

That's my first question. The second question I have is, I mean what we are hearing across the board from the auto space is very strong orders, many semiconductor companies are not able to supply.

And you're saying that you're going to see softness in terms of semiconductor supply or whatever your product supply into the next couple of quarters? Why is that you're seeing this sort of trend?

Is it just that you're cautious and you don't know whether the order book is real? Or is it because you're actually seeing softness?

And then, my other question is maybe you can comment on where your -- if you have any kind of booking numbers because of what we are hearing is that the bookings are extremely strong in this space, so maybe you can help us understand why are bookings as such, and I have one follow-up after that. Thank you.

Okay. Thanks, Sandeep.

Thanks for your question. In fact, as I said, we had a strong Q1.

And I said it's in my speech and maybe on one of the answers of Sebastian. I expect a strong Q2 as well because we already have the January and we are in the middle of February.

And of course, we have a good visibility to March. Why do I am a little bit softer for Q3 and Q4?

And the reason is that, in fact, I have seen or we have seen a strong order in Q1 because it was a restocking, especially all the industry OEMs and suppliers, they are very careful in COVID times in 2020, cash is king, people are moving production down, return kept -- they're trying to reduce capital and so on. So we had a low stocking in 2020, and on the other hand, we had a strong demand for automotive sales, as you said.

So the demand is on one side there, on the other side [indiscernible]. So we had the strong bookings for two reasons, real demand and market and destocking of the product.

So, I do not have the same in Q3 and Q4. I have it still in Q1.

Our Q1 means January, February, March, but we see that these destockings will not happen in Q3 and Q4, and then, of course, Sandeep, it's a little bit a guessing. How strong is the market with COVID, and all these worldwide economic issues we have in Q3 and Q4?

So we are a little bit more softened for Q3 and Q4, but nevertheless, if we are one quarter ahead and we have then a better visibility, it could be that we have a different view. But today we are more softened for Q3 and Q4, and for this reason, we expect these EBITDA margin maybe on the right side of our guidance means really to the range what we said, an EBITDA between 12% and 15%, and it will be more closer to the 15% than to the 12%.

That was the question for your order book and real. And the booking numbers, what you mean with booking numbers.

I'm not quite sure what you mean with booking numbers? The real number -- what is my booking numbers for January, February?

I can't give it to you today.

Okay. Maybe I'll ask -- Thanks, Olaf.

I mean, one follow-up on another metric, free cash flow. I mean you're guiding €70 million to €130 million, which is essentially only €80 million at the top end for the rest of the year when you've done a very strong job of €50 million in the first quarter itself.

Is there something happening on the balance sheet that you expect through the rest of the year that will mean that will cause lower free cash flow from the EBITDA or lower free cash flow conversion from the EBITDA such as CapEx or some other balance sheet line item moving?

Yes, I think Kathrin can give you a little bit better flavor on that.

Yes. You're perfectly right.

The planning assumption behind that one is, first of all the margin erosion in the Q3 and Q4 as just outlined by Olaf. Second, I also mentioned that CapEx in Q1 was unusually low.

So that will increase to our budget CapEx. You may remember that we had a strong CapEx restriction in the previous fiscal year.

We are determined today to go into the CapEx needed as in the fiscal year before the year of the crisis and therefore CapEx is like speeding up. That's also one of the reasons, and the third reason is with business increase as such.

You need some more working capital but there is no major effect behind that. It's just that we have a recap of the business and that also requires some more amount in working capital.

That's three reasons basically.

And maybe add on that Sandeep is that I think we talked already about that, two new technology products are coming up in future days called Mini LED and Micro LED. And we need, as Kathrin said, some investments especially for the Mini LED, and we will start with the Mini LED in Kulim soon, and for this reason we need additional CapEx, and for this reason cash flow is going down.

Understood. And one final question on digital.

I mean you've done an incredible job on the Opto semi business and automotive business in terms of margin. The digital business though good for the current circumstances is still just about close to breakeven as such really.

I mean, once you've announced that you are going to exit this ballast business, et cetera, so this components business, once that is done, would you expect the margin in digital to improve or are there more divestments required or more cost-cutting required to make this an ongoing profitable business?

Yes, it's a good question, Sandeep. I think we have to be a little bit fair with the digital colleagues.

I think as you know, the main product in real estate the components, the ballast, and entertainment business, and you know where market leader for cinema and cinema business, I think there is no single cinema open in the world. Most, 99% of all the cinemas are closed.

I think all the theater, opera, and so on are closed. So they had a huge decline in their business, and I think, they made really a good job with 20% less turnover they achieved breakeven.

I think it's a great achievement from the team. Nevertheless, as I said that the digital business will never achieve our target on profitability.

And from this point of view, it will be a dilution on our business of Opto and our automotive business. And for this reason, we said, let's go to a divestment.

And coming to your point, in the other parts of digital -- it's, for example, the horticulture business, this is running quite well. Our company Fluence in US had growing rate above 25% year-over-year and is highly profitable.

So I would say that could be and will be a nice product and nice business in our portfolio. So step by step, we are selling now the DS business.

And then let's see what we would -- we will do next.

Thank you, Olaf.

Thanks, Sandeep.

Hi, Olaf. Hi, Kathrin.

And thank you for taking my questions, which I have two. My first question is on your Kulim investments.

Obviously, a CapEx has taken a pause for a couple of years. And what is your plan for current year CapEx as well as future CapEx given the auto production is recovering, and Kulim is still being an unfinished phase versus your original ambition?

And could you give us some color on that and even the CapEx plan, I think it was €50 million [ph] in October last year. What's your current CapEx plan for the year and for future, please?

And that was my first question.

Yes, thanks Joseph. I have to smile a little bit.

I got a lot of questions about Kulim about the last years and one learning session is that I will never talk about what kind of investments in detail we will do in one plant. We were open and fully transparent about our steps we would like to do in Kulim.

And I already said, we do it in steps. Step one was as you remind €400 million.

And then we said we will invest up to €1 billion. And this plan is still valid.

The Kulim capacity is, we are fully utilized. That means we are running by 100%.

We invest in Kulim -- we invested in the last year in Kulim and the year before, but I didn't talk about that, and we will invest currently as well, and we will invest next year. So we are right on plan.

And as I said two new products are coming up. The Mini LED will start soon.

And of course, we need investment for the machines for the Mini LED. And so this plant is we will expand, and yes, that's what I can say to Kulim.

We are happy to have it. Without Kulim, to be honest, we wouldn't achieve 31% margin by Opto.

So the biggest part for this nice increase of margin, of course, came of our production in Kulim in Asia because that's the best factory we have.

And let me add that the overall level of CapEx which we always had was in the area of 6% to 7% of revenue, and that's also in the budget for this year.

Thank you. Thanks for the color.

Then my second question is to do with pricing. I mean just going back to the pricing points, I understand that your Opto division typically experiences a kind of a high single-digit price erosion.

And can you give us some color on the current price erosion level at Opto and your expectation for 2021, please? This is particularly given the full utilization and also a tighter supply situation.

I think I'll give the answer together with Kathrin. And as you know with many of our customers, we have, we call it VPA.

That means we have a clear agreement about the productivity increase. We have to deliver price increase, price decline, and altogether, we have a price erosion by mid-single digit.

So that means something between 5% and 7%. And what I can say is that we are very successful with the development of the discussion with my customer.

Of course, if you have a situation, like we have now, that you've under allocation, price erosion is you have some good points in your hand, if in one hand your customers are asking for products, then you do not have this pressure on price pressure. So we had in our budget, price erosion mid-single-digit and that's what we achieved.

Kathrin is saying, yet to be making. I don't know what --

Confirming.

Confirming. But you can confirm what I am saying, Kathrin?

Sure, sure. Exactly.

So we see that price erosion since it's part of the long-term contracts agreed. However, we are fighting against it every day and the situation may be helping, but in general, the price erosion is sort of like characteristics of the industry.

Yes. And as I said, we already agreed 90% of all the contracts for this year.

Exactly. Exactly.

So we're in safe haven. Again, that's helpful in the time where you are under allocation, then you come much faster to agreements with your customer.

And maybe -- Francois here, one additional remark regarding these VPA. Most of them are kicking in on the 1st of January.

So to the previous question, the chances of the profitability in Q1 higher than the overall guidance. Obviously, this will be a negative impact starting in January for our main European customers.

Thank you very much.

Thanks, Joseph.

Yes, thank you very much for your participation. So with that we would like to close this conference call.

And if you do have further questions, please get in contact with our Investor Relations team. Thank you, and goodbye.

Bye. See you wherever it will be.

Goodbye.

Bye.