OSRAM Licht AG

Ladies and gentlemen, thank you for standing by. I’m Stewart, your chorus call operator.

Welcome and thank you for the OSRAM Licht AG Analyst and Investor Call. Throughout today’s call, all participants will be in a listen-only mode.

The presentation will be followed by a question and answer session. [Operator Instructions] I would now like to turn the conference over to Juliana Baron.

Please, go ahead.

Thank you, Stewart. Good afternoon and good morning, ladies and gentlemen.

A very warm welcome to the OSRAM Conference call on our first quarter 2020 results. With me on the call are Dr.

Olaf Berlien, CEO, and Ingo Bank, our CFO, as well as Dr. Stefan Kampmann, our CTO.

Olaf and Ingo 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 slides available for download.

As with previous results conference call, I would like to draw your attention to the Safe Harbor statement on Page two of the results presentation. As usual, it applies throughout this call.

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

Yes, thank you, Juliana. Ladies and gentlemen, welcome to our conference call.

So let me start with an overview of the first quarter. As usual Ingo will run through the financial results followed by your Q&A session.

As per a challenging 2019, we delivered a robust start in the fiscal year 2020, where market development was still restrained. Our first quarter turned our slightly better than expected.

Revenue increased somewhat on a convertible basis. Adjusted EBITDA margin rose by almost 200 basis points year-over-year.

Good signals came especially from our OS business, where earnings margins returned to historical levels of over 24%. This is mainly due to a higher production volume, as well as our performance programs kicking in and positive effects from IFRS 16 Accounting Standards.

Based on the solid first quarter results and taking into account micro economic uncertainty, we confirm our guidance for the fiscal year 2020. So let’s have a closer look at the first quarter results on slide number four.

As mentioned, revenue for the period between October and the end of December increased slightly by half percent year-over-year to €873 million. Adjusted EBITDA before special items climbed to €140 million resulting in a margin of 13%.

OS showed a significant recovery in returns with an adjusted EBITDA margin of 24.5% and I am also pleased to see that DI, our Digital Business breaking even in the quarter. Free cash flow improved by €180 million compared versus the prior year quarter and turned positive, all this against the backdrop of political and economic headwinds as you can see on slide number five.

The World Economic climate continued its downward trend in the last quarter. Expectations dropped significantly as you can see from the IFO World Index on the left side, it saw a decline in nearly all regions.

At the same time, the global manufacturing expectations showed caution signs of release. As you can see on the right side with the global PMI index on JPMorgan.

It remains to be seen whether this trend will last. Given the mixed signals we are receiving, we remain cautious.

One reason for that is the continuing weakness and car production as we move to slide number six. Global car production continued to decline in the first quarter.

Accordingly, IHS has once more reduced its forecast. Yearly production is now expected to be around 88 million cars in our fiscal year 2020, and minus of 2.5% compared to the prior year.

This is mainly due to a weak development in North America, NAFTA and Europe. China remains to be seen especially now in the wake of the Corona Rio [Ph] situation.

The only thing we know is there will be an impact, in China and of course worldwide, especially if the logistic chain will be interrupted. So to what extent we don't know.

But yes, there are also some positive signs possible. So the updated global forecast from IHS remains cautiously optimistic regarding a return to growth in the second half of the fiscal year.

While the general economic outlook remains uncertain. However, we will concentrate on our own performance, and this includes the transformation of Osram into high tech photonics company.

Here we are making really good progress, as we recently demonstrated very successfully at the CES in Las Vegas. So let's move to the last chart seven.

In the automotive fold, we showcased our solutions for the future of mobility and other slowing mobility at the speed of light. Our latest photonics products, such as the LiDAR systems, and the driver assistance solutions, received great attention.

As did the Rinspeed car that we showcase on our booth, and that attracted a lot of new customers. All CES underlined, that we are on a good path to becoming a photonics champion.

And with this, I would like to hand over to Ingo.

Thank you. Good afternoon, and thanks for joining us today.

Let me start with the key financial for OSRAM, continued operations that you can see summarized on page eight. First Quarter revenue was slightly up by 0.5% on a comparable basis.

Modest revenue growth was slightly negative whereas automotive and digital posted positive growth. Adjusted EBITDA came in at €114 million translating into a margin of 30%, driven by strong profitability in Opto, solid profitability in AM and the breakeven performance at DI.

Free cash flow continued to be positive, with €7 million in the quarter, much improved when compared to the same quarter a year ago, largely driven by improved profitability and lower CapEx. Net income from continuing operations was slightly positive with €1 million in the quarter.

Our performance program programs delivered €31 million in gross savings in Q1, 2020 in line with our expectations, and special items amounted to €16 million in the quarter as expected as well. Taking now a more detailed look regarding our revenue development in the first quarter 2020 on slide number nine.

Movements in foreign exchange rates as well as the additions to the business portfolio of OSRAM had a positive impact on revenue growth. And looking at our regions, business development in EMEA continued to be challenging.

DI and Automotive revenue decline year-over-year. Opto saw a mid-single digit decrease, in automotive we recorded a double-digit decline in our traditional light source OEM business, whilst delivering a seasonably strong aftermarket performance.

LED components revenue declined at a low single-digit clip in the quarter. Within DI, the market for ballast and drivers continue to be weak.

In the Americas, or traditional automotive business had a good quarter driven by the seasonally strong aftermarket business. Within our reporting segment DI, Fluence revenue growth continued to be strong, but overall, Q1 revenue for the company declined in APAC, China returned to positive growth territory, with a comparable growth of close to 6% in the quarter.

This was driven by our automotive business, both traditional as well as led components. Also, Opto’s growth in it’s illumination portfolio was strong in the region.

Let me now comment on the revenue development in our three reporting segments. Opto’s revenue in the first quarter was slightly lower with 4.7% when compared to the first quarter of fiscal 2019.

Within Opto, automotive revenue declined by low single digits when compared to prior year. [Indiscernible] from APAC was positive yet, in EMEA and the America it declined when compared to the first quarter 2019.

Total backlog for Opto’s automotive business remained unchanged at the end of the reporting period. Opto’s illumination related revenue continue to post a strong performance, driven by outdoor and horticulture year-over-year growth.

The sensing and visualization business of Opto had a slow start into the new fiscal year, posting a revenue decline. We expect revenue from 3D sensing to improve in the midterm, whereas demand for industrial laser applications will continue to be soft.

The latter reflects the ongoing challenging overall economic environment of our customer base. Moving to our reporting segment, automotive.

Revenue improved slightly with 0.7% when compared to the first quarter of fiscal 2019. While our traditional light source business, revenue levels in the OEM channel declined as expected, but a strong aftermarket performance in the high season helped to more than offset this development.

Particularly in APAC and in North America, aftermarket revenues were strong overall. Overall, LED component revenue declined at a low single digit level.

Revenue levels and our OSRAM Continental subsidiary, which is part of the AM reporting segments increased at a low double digit. Moving now to Digital, year-over-year comparable revenue growth was positive with the 2.2%.

This performance was driven by Fluence and our entertainment business. Our ballast and driver’s business, digital systems, delivered revenue that was nominally at par with the revenue levels of the same period last year.

Here APAC and the Americas delivered a robust start into the year offset by year-over-year declines in EMEA. Our Traxon business started to be affected by budget cuts in various Chinese provinces as spending priorities are currently under review by local governments.

Together with a slower start in India and the U.S., revenue declined at a low double-digit level. Moving on to profitability on slide 10, A Q1 fiscal 20 absolute adjusted EBITDA was €114 million, translating into 13% in margin terms, which represents a year-over-year improvement of 170 basis points.

Productivity measures compensated pricing, and inflation impact. Higher volume together with a positive impact from the application of IFRS 16 of approximately €14 million drove the year-over-year improvement in absolute EBITDA.

Compared to first quarter 2019, Opto’s profitability improved to 24.5% of adjusted EBITDA. Increased volume was the main driver behind this increase as ongoing operational efficiency improvement efforts, offset price erosion and inflation.

Compared to the same quarter a year ago, Opto’s headcount was lower by 13%. Approximately 220 basis points of the margin improvement in the quarter was driven by one-time non-recurring items.

In our automotive reporting segments, absolute adjusted EBITDA, was maintained at the same level as prior year. Sequentially, it improved markedly on the back of a seasonally strong aftermarket quarter.

Price erosion and inflation were more than compensated by productivity measures. Mix was unfavorable in the quarter when compared to the first quarter of 2019.

Our OSRAM Continental subsidiary continues to be dilutive in the quarter for automotive overall, adjusted EBITDA stayed negative. Let's now briefly look at the DI.

Here, adjusted EBITDA was at a break-even level for the quarter, much improved to prior year. Major drivers were improvements in gross margins across all businesses inside DI portfolio, particularly digital systems.

Overall, this reflects the benefits of our productivity programs coming in combination with a better product mix. Adjusted EBITDA and corporate items for OSRAM continued operations was negative with €20 million as expected.

Moving now to slide 11, our performance programs delivered €31 million of gross savings in the quarter, in line with our expectations. We expect gross savings out of the existing performance programs to amount to approximately €80 million for the full fiscal year 2020.

Let me also point out here that additional performance programs are currently being discussed with the respective labor representatives of the company. We are aiming to finalize these discussions towards the end of the second quarter of this fiscal year.

Moving out to cash flow on slide 12, free cash flow was positive with €7 million in the quarter, largely driven by the improved EBITDA performance in the quarter. CapEx continued to be at a low level, and amounted to €28 million in the quarter.

The definition and presentation of net debt now includes the impacts of IFRS-16. The adoption of the New Accounting Standards, as of this reporting quarter, technically increased our net debt position by approximately €224 million after the 31st of December 2019.

Excluding this accounting change, net debt stayed roughly flat sequentially speaking. Based on the results of first quarter 2020, as well as the business developments we’ve seen so far in this new fiscal year, we are confirming our outlook for 2020.

That means, we expect comparable revenue growth to be in a range of between minus 3% to plus 3%. Our adjusted EBITDA margin to be in the range of 9% to 11% and cash flow is expected to be positive, possibly at mid double-digit levels, including significant cash outflows resulting from the ongoing performance program.

Total special items are expected to be similar to the level of fiscal year 2019 with a significant part related to transformation charges expected to be incurred in the second quarter of 2020. And last but not least, let me conclude with some housekeeping.

In the close of tomorrow, we will issue an interim report for the first quarter of fiscal year 2020 according to IAS 34 on our Investor Relations webpage. The reason behind this publication is linked to the planned financial prospectus that ams AG may publish in conjunction with their intended capital increase.

Such prospectus may also incorporate OSRAM’s first quarter 2020 financial as required by capital market laws. And now, Juliana back to you.

Thank you, Ingo. Now we are looking forward to your questions.

Please go ahead.

Hi, good afternoon gentlemen and Juliana. Thanks for taking my question.

The first one was more on the trend that you are seeing in the auto industry. I understand the role [ph] of business was still down to some extent especially in OS in the first quarter.

But are you seeing you know, the improvement you're seeing? Do you think this is more a restock effect?

Or do you think this is more driven by an underlying demand, which is slowly improving in the market?

Yes, thanks, Lucy. I think it's a mixture.

So if I compare and see what's happening in our first quarter, I think it started with the restocking. Many distributors moved down the line of the minimum of capital employed.

So we had a restocking issue, but nevertheless then we had clearly a higher demand from the market coming. So I got a lot of good signals from the Chinese OEMs who had a higher production and cost, so in this case we had clearly a higher demand.

But on the other hand, and that's the reason we are a little bit more cautious now is that if I take all the signals now what's happening in China, we see Corona virus. I think we have to see what really does it mean with the higher demand, and when do we get it restarted all the factories in China?

Thank you. Actually, my second question was going to be on the Coronavirus.

Can you maybe highlight the -- in which different way this is potentially impacting you whether this is on the manufacturing or on the logistics side or simply also the activity of your customer. I mean, is the factory in Wuxi for example still closed or it has reopened after the Chinese New Year?

Again, it's a mixture of information. So first of all, the Wuxi factory will be opened next Monday.

So that's the latest information we got today from the Chinese local government. But so that means we would have only an impact by one week was closed down, but to be honest, Lucy, we have to see how many people really will come on next Monday.

So it's a little bit of situation we do not have a clear view. And so coming to your second question, there are some areas where customers had production, their production will be down for another one or two weeks.

And in the end, we have to see what does it mean? If my customer cannot produce, we cannot deliver.

So, again that it's not a clear situation in these days. And we have to follow day by day.

Thank you. I’ll go back in the queue.

Yes. Good afternoon.

Thank you for taking my question. You mentioned rising production.

But what were the costs of underutilization on crude level, and in Opto and as a follow up to this, and you had 24.5% in Opto, on sales, basically what could happen if revenues grow again significantly let's say next year? Thank you.

Thank you for your question. And we do not see really an impact, definitely not on my next quarter.

So the -- my book-to-bill situation our book-to-bill situation is excellent for the next quarter. And again, it's not so easy to have really a clear view for the full year.

But today, I would say is the coronavirus run like SARS in 2001. And it will be a move in demand, but it's not -- it's not that the world's economy is going down, it is again a little bit later.

So today, we do not see a real impact on our sales for the next quarter.

Okay. And on the margin in Opto, I mean we know your mid-term target

Yes. As I said, we had a good start and you see that the performance programs where we are talking last year about that, you know, that we talk about in details.

You see that, they are running quite successfully. So I am good -- I'm very optimistic that the margins will be in this range.

Basically, Jurgen, just to add on this. So, I said in my prepared remarks that other than 24.5, 220 basis points for a one-time non-recurring.

So, obviously that gives you sort of operating level where we are right now. And of course, if volume where to pick up again then the operating leverage just down last year, should go up this year, so -- and that we'd expect.

And next to that, we have supported the cost structure by taking out cost significant way. I told you how much we brought down headcount in Opto as compared to a last year.

So -- but it's too early to count on volume in the business, because China is a very important factor in the whole mix for us, not just in, let's say, the LED part, but also in the traditional part of automotive. And therefore, we really see now how the coronavirus will affect not just our products but especially the supply chain of our customers and what kind of disruptions that would mean.

We also then have to see to what extend order behavior from our customers might be changing just because they want to again build inventory because they themselves are want to flexible in a situation of uncertainty. So that's why its not feasible for us at this point in time to give you very specific outlook, as we simply don't know enough at this point in time.

Okay. Thank you.

Hi. Hello, again.

Well, I'm happy to be back so quickly. I just have a follow-up on the OS margin.

Ingo, can you maybe indicate for what the 200 basis point one-time? And are you able to split the IFRS benefits between the division which is having made the calculation for the group, I guess if we were excluding the IFRS benefit, the margin for the group was only up 20 bps versus last year.

So I'm just trying to understand what's the real improvement specifically in OS in terms of the margin like-for-like?

Yes. So, in the meantime we update the document on the webpage where you can see the impact for opto, I think out of my head.

The positive impact on IFRS was one percentage point -- 1.25 percentage point probably on the margin level. The one-off items I was referring to were releases of accruals that were no longer necessary for these couple of reasons.

And hence they are not expected to recur again. So that's -- but we -- in the meantime if you look at document on page 17, we have now also included information which shows you also the IFRS impact to our other reporting segment.

So, is it fair to say that, if we look at it kind of like-for-like between the 200 bps and then the IFRS impact 100 to 150 basis, the margin in an underlying basis was up let's say by about 200 -- 150 to 200 basis points in OS?

Yes. That's correct, yes.

Okay. Thank you very much for the conformation.

And just one last one as well on the CapEx. I know you've been quite tight on this to maximize the cash flow.

The CapEx as percentage of service [ph] particularly low in the quarter about 3%. It doesn't look extremely sustainable considering the fixed asset based that you still have in many factories.

How should we think about the level from here for the rest of the year? Or margin really as a normalized level?

Well, we do expect CapEx to go up somewhat in the balance of the year. At the same time, we've also done quite a lot of work to reduced complexity and especially Opto's flows and that has help also to reduce CapEx need by just improving the flow factors in the factories and unlocking or improving asset productivity in that sense.

So from that perspective we will of course do what necessary to maintain our asset base. Just let me also remind you as you know, we've invested quite heavily in all into Opto's space in the last two, three years.

So also, their maintenance CapEx typically isn't as at the same level of depreciation in the first two or three years of such an influx of new capital. And that's all reflected in numbers.

But we will not do anything, let's say, just to inflate short-term cash flow numbers, because we're building this business for the longer term. So no worries, no worries there.

Are you able to guide us somewhat on a range as CapEx as percentage of sales on an absolute amount?

I think -- I believe I said when we get first guidance that it would be very similar to last year.

Okay. Thank you very much.

Yes, good afternoon. Just one question from my side which relates to the takeover by AMS.

And refers to the domination agreement which AMS has not really officially announced yet, I guess. What's your opinion on that?

I mean, when it comes to realizing the synergies what you insist on that being struck first? Or what's your opinion on that situation?

Thank you.

Yes. Thank you, Sven.

As you said, it's not officially announced. So I cannot speculate when they'll announce it.

If you take a look at the official offer documents, there was an original plan to do it, but when, I do not know. The second question is the synergies, you know, they had it in the offer document as well.

So they expect around 300 million. And what we did in the meantime, when is that we just started to talk to AMS and we have now 13 work streams to go a little bit deeper.

Deeper means, whatever we can do in this phase, because before we do not have the antitrust approval. We are still competitor and for this reason we cannot share detailed information.

And in this case, it means, we do not have detailed numbers. So, again, the official number is around 300 million.

But, let's say when it would come to making significant reductions, obviously, that some would be also on the OSRAM. And I mean, would you insist that there needs to be a domination agreement first before you agree to significant adjustments at OSRAM.

Is that prerequisites or is…?

But -- I think again, it's a speculating. But to make it clear, if we do not have a termination agreement, we are both independent companies and anything what we do has to be in the view that we all shareholders get the same intention.

So there will be no advantage for one shareholder. So that means, we have to deal like with a third-party, and that's what you have to do from the legal point of view.

So, we strict follow the legal requirements.

Okay. Thank you, Olaf.

Hi. Good afternoon, Olaf and the rest.

Three areas of questions on Opto to start with. The first one is around the really impressive EBITDA improvement year-on-year.

It’s been rather low on the volume side, at least from my perspective on a slightly up. So can you just really give us a bucket here what price mix related?

So is it really auto doing the trick here, and when it comes to auto in particular, have you seen some sort of windfall gain, especially on the price side? Then for the automotive segment as such, can you give us a sense of the Conti JV.

And what she would expect in terms of incremental revenues for the full year? Obviously, we had a bit of a tailwind in the quarter one already and what you're thinking and planning for the rest of the year?

And then you mentioned in your prepared remarks around performance programs, that there might be more that you need to do over the course of 2020. So two questions on that one.

The first one is the charges. What's the current guide that you would have out here, because we obviously had some challenges in the first quarter already?

And then for DI in particular, what is your planning year and how to get the business finally on track? We noticed that you had a 10 million improvement year-on-year.

But that shouldn't be the end of story, I guess.

Okay. Thanks, Sebastian.

I think some of these Questions. I think the best one is that Ingo is going again, to this one as well, especially about the performance programs.

I think you already said that we achieved the €57 million this year, but maybe Ingo.

Yes. So yes, so, I mean, -- a number of you let some of those programs.

As I said, the expectation for the existing performance programs this year is savings of around €18 million to get €31 million in the first quarter. And then we have leasing [ph] discussions about new performance programs that of course, needs an alignment with our stakeholders on the employee side, and that currently discussions ongoing, so you have to please accept that I cannot disclose any, any details here on this.

I said also in my prepared remarks that I would expect special items to be similar to last year and we also said in our annual report, that we would expect special charges related to transformational cost to be in the high double digits type of range. So that third assessment, I think, at this point hasn't changed.

But I can't give you more specifics, because I don't want to intervene in the process that's running between us at this point in time. As to the Conti JV, I think their focus right now is to find ways to improve profitability.

As we said last year, we're not happy with the way things are running and we're currently in discussions with the other partner in the joint venture, what we can do together to improve. From a revenue perspective, from what I've seen, things are moving along the line -- along the lines of what we had expected over the year.

We don't know yet what the impact is of the coronavirus, as Conti is of course also delivering into the automotive industry. But overall, the Conti joint venture was of course expected to help us with some of the growth that was part of the guidance that we're seeing.

As far as Opto is concerned, I think that was the first part of your question. We saw some positive volume, impact in also automotive but also in other areas like visualization or sorry, illumination, and not so much in the sensing and in the visualization area.

Visualization is laser, largely the price erosion dynamics were more or less as expected, not much changed in automotive. We're in the midst of negotiating our DPAs [ph] in there are some contracts where it's in the high single digits.

There are a few cases where it's in the lower double-digit range, but overall pretty much in line with what we had expected for year so far. Opto, if you look at the quarter, I'd say that the productivity programs largely together with a higher efficiency compensated for price erosion.

And then we had positive impacts of volume for the first time in many, many causes for Opto. That helps to, to uplift the margin next to the one-off time, one-time issues that I mentioned to Lucy and the IFRS 16 impact.

Okay. That’s helpful.

Thank you Ingo and if I just may ask on a specific number if possible on the Conti JV, what you would expect in terms of incremental revenues are completely impossible to put a number behind that?

Yes, I wouldn’t like to put a number behind that right now. So there should be some improvement, but how much it will be, we still have to see also what the market was.

I mean we started the year with a solid order book and a good visibility on the year so that that we clearly have, but, as things are moving along now, we still have to see again what the impact might be of customers having to shift out certain programs or other things because of supply chain disruptions from the coronavirus.

All right, okay. We’ll leave it there.

Thanks.

Yes, good afternoon, and thanks for taking my question, which has been just answered in the question from Sebastian before. It would have been around the additional restructuring measures and without a question to Ingo, but fully understand that you will not comment at this stage.

Thank you.

Thank you, Sebastian.

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

If you do have further questions, please get in contact with our investor relations team. Have a good day.

Thank you, and good bye.