Earnings Call: Q1 2021

Feb 9, 2021

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Oz Ramlicht 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. I I would now like to turn the conference over to Julie Klosterman. Please go ahead. Thank you, Haley. Good morning and good afternoon, ladies and gentlemen. A warm welcome to the Osram conference call on our Q1 fiscal year 2021. With me on the call are Doctor. Olas Berlin, our CEO Kasdan Dankel, our CFO and Francois Gerard, Head of Corporate Controlling. Olaf and Kasdan 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 As with previous conference calls, I would like to draw your attention to the Safe Harbor statement on Page 2 of the earnings release presentation. As usual, it applies throughout this call. It is now my pleasure to hand over to you, Olav. Yes. Thank you, Julia. Ladies and gentlemen, welcome to our conference call this afternoon. I will start with an overview of our fiscal My colleague, Katrin, will then go into the financials in a 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. The quick rebound in the automotive and electronics industry have led to full order books. Profit and cash Developed positively across all reporting segments. At a 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 the COVID related short term measures. Especially the semiconductor business delivered Excellent performance in the Q1. 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 So I move on Slide number 4 and the figures for the Q1. In the period from October to December, we achieved comparable revenue of €840,000,000 This is more or less the previous year's level and thus the level before the global pandemic. Adjusted EBITDA of over 19%. Free cash flow Also developed very positively, resulting at €50,000,000 In the biggest economic Since World War II, Osram is therefore very well positioned. Especially, OS performed excellently in the Q1 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 lasers were 15%. In the area of semiconductor based illumination, The figure is as high as 23%. The automotive business unit also increased EBITDA in the Q1 compared to the previous year, the strong retrofit and replacement land 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 closed off 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 a higher stocking order. 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. It was the right decision for the future of this company, which takes me to Slide number 6 and 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 'twenty one sees a further recovery. IHS expect global car production numbers now at 86,000,000 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 metric solutions where we are the leading supplier. So this takes me on the Slide number 7 and to our performance programs. Despite COVID-nineteen, We continue to implement our 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 €280,000,000 over this period, meaning That we are ahead of schedule and close to the reaching of our total program target of €300,000,000 And maybe as you know from 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 ballast, drivers and modules. We are convinced that DS, As one of the leading supplier in the market, Chemdasfa further improved its position. For our production plant in Plostiv In Bulgaria, we already found a new owner, the U. S. Company Sanmina, which is one of the 10 largest contract It is taking over the plant and its 800 employees. Samina We'll 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 Katrin for a deep dive Into the financials, Katrin? Thank you, Olaf, and welcome also from my side. Let us now take a more detailed look to the Q1 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 €840,000,000 But compared to the previous quarter, the Q4 of the fiscal year 2020, revenue increased by 14.1%. This development was supported by a swifter 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 Change rate of minus 5.5 percent leading to a comparable growth of minus 0.1%. Also, when looking at our region, we can see a recovery. APAC showed a positive development With 5.7% on a comparable basis, there is 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 percent 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 a sequential growth of 21%. EMEA grew by nearly 9% quarter on quarter, while Americas even improved by 13 Percent compared to quarter 4 of the fiscal year 2020. Let me now come to the revenue development in the 3 reporting segments. Opto grew 4.7% comparable year on year. More remarkable is the sequential growth with 11.7%. This results in a revenue in absolute Terms of €556,000,000 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 very high order entry. Let me now move to the revenue development in the reporting segment Automotive. Overall, The AM revenue came in at €474,000,000 resulting in a 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 4 of the previous fiscal year. Year on year, automotive LED components only showed a small decline in the Q1 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 €162,000,000 in absolute terms, translating in and corona mitigation measures supported the adjusted EBITDA margin. Moreover, we saw positive impacts From volume as well as from an improvement in functional costs in the quarter, Overcompensating price erosion, inflation, a negative mix as well as foreign currency impact due to the weaker U. S. Dollar versus previous years ever. In the Q1, 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 One off mainly related to an insurance compensation. The adjusted EBITDA margin In the automotive with 13.6 percent also outperformed the prior year level of 9.7%. High productivity savings and positive volume effects as well as digression due to the Negative FX effects. The Osram Continental subsidiary continued to be dilutive in the quarter And the adjusted EBITDA stayed negative. Turning 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 point 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 €14,000,000 It is also worth mentioning That our net income from continuing operations resulted at €6,000,000 the first time Positive €6,000,000 the first time since 2018. Turning to Slide 11 and the cash flow. The free cash flow was positive with €50,000,000 as mentioned before in our Q1 of Good year. CapEx was with €21,000,000 still on a low level. However, the CapEx Spend will increase over the next quarters. 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 $273,000,000 was lower compared to the previous quarter As a result of the €175,000,000 repayment of our credit facility to AMS, however, the cash And undrawn credit facility together are with a total of €723,000,000 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 €507,000,000 And with that, I would like To hand back to Olav for the outlook for the fiscal year 2021. Yes. Thanks, Catherine. Ladies and gentlemen, let's move to the last chart, Slide number 12, my outlook, our outlook. In view of the Karen's developments, we have recently raised our guidance for the Karen 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% 15%. And free cash flow, We now expect to range between €70,000,000 €130,000,000 These ranges imply, Of course, the lower sales for the next quarters compares to the strong Q1. Furthermore, we will see a 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 corporate crisis will not have Significant impact on the Osram business or our supply chain. And with that, Catherine and me, I hand over back to Julia for your question and answer. Thank you. Haley, please open the Q and A session. Ladies and gentlemen, at this time, we will begin the question and answer If you are using speaker equipment today, please leave the handset before making your selections. In the interest of time, please limit yourself to 2 questions And the first question is from the line of Sebastian Growe of Commerzbank. Please go ahead. Yes. Hi, good afternoon. Can you hear me well? Yes, Sebastian. Perfect. Yes, thanks for taking my questions. I got 3 and I Olaf. The first one is on the eye and the announced portfolio change that you have made today on the lighting components. Can you remind us of the overall contribution of that lighting component business that you have in Hungary? I think on the press call, you said About half of the eye comes from lighting components, but you also made in your prepared remarks a statement that you found an agreement with Samina for the Hungary plant. So to just get a better understanding of how big that is compared to what is still then with the company. And may I also ask around the overall terms, if you can disclose them that you have agreed with Samina? That's the first set of questions. And then I have a quick one around Opto, if I may. The first one is on pricemix. I was a bit surprised to Not see stronger tailwinds from pricemix really in the bridge, quite frankly, because I think you also talked about scarcity earlier today. 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 give you the answer together with Katrin. 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 underutilization 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 2 ways. One way is That Zalmina is a much better player in the market to buy electronic components Cheaper in the market than Osram. And the second one is that Zalmina is able to run the plant in 3 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 Ploftiv in a way that we do not have any impairment. That 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. By the price mix, Katrin is coming to that, but I will answer your book to bill. Our book to bill is above 1. In some areas, it's above 2. We have a very strong order book, And that means I expect a very strong Q1 Q2 as well. So as you have seen, We had a 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 Catherine already said and I said, we expect lower Sales in Q3 and Q4, because today the visibility to Q3 and Q4 is much less, but The next quarter, general, February and March will be good. And maybe, Catherine, you can say some words about the price mix. Was one of the questions of Sebastian. Well, I think that the price mix can be best explained in the revenue development as I 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 fastest 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 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? Well, we are very proud that it's not loss making anymore. And you see, therefore, that it was worthwhile really doing a great job there. 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 to grow quarter to quarter by 23% We have the same speed for the next quarter as well. So we are very proud and very happy. Okay. That sounds good. Congrats. Yes. Thanks to Kulim and sometimes it takes time, but now it's coming. The next question? And the next question is from Sandeep Deshpande of JPMorgan. Please go ahead. Yes, hi. Thanks for letting me on. A couple of questions here. I mean, you're guiding you've had a wonderful Q1 19% Plus EBITDA margin. And I mean, 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 you're 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 a 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 If you have any kind of booking numbers because of what we are hearing is that the bookings are extremely strong in the space. So maybe you can help us understand via bookings, etcetera. 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 in my speech and maybe on one of the answer 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'm 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 carefully 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 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, storage is empty. So we have a strong booking For two reasons, real demand and market and destocking of the product. So I 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 this destocking 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 1 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 this EBITDA margin Maybe on the right side of our guidance means really to the range what we said And EBITDA between 12% 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 Booking numbers, what you mean with booking numbers? I'm not quite sure what you mean with booking numbers. The real number, what My booking numbers for January, February, I can't give it to you today. Okay. Maybe I'll ask, thanks, Olav. I mean, one follow-up On another metric, cash free cash flow, I mean, you're guiding €70,000,000 to €130,000,000 which is essentially only €80,000,000 at the top end for the rest of the year when you've done a very strong job of €50,000,000 in the Q1 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 EBIT or lower free cash flow conversion from the EBITDA, such as CapEx or some other balance sheet like mine moving? Yes, I think Catherine can give you a little bit of 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 4 is just outlined by Olav. 2nd, 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 years 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 amounts in working capital. That's three reasons basically. And maybe on add on that, Sandeep, is that I think we talked already about that 2 New technologies, products are coming up in future days called mini LED and micro LED. And we need, as Katrin said, some investments, especially for the mini LED, And we will start with the mini LED in Coolen soon. And for this reason, we need Additional CapEx. And for this reason, cash flow is going down. Understood. And, Mohan, my final question on digital. I mean, you've Done an incredible job on the Optosemi business and the 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, etcetera, 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 products are in real estate, the components and ballast And entertainment business, and we are a market leader for cinema. In cinema business, I think there is no single The 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 that's a great achievement from the team. Nevertheless, as I said, that the digital business will never Chief, 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 divestment. And coming to your point, in the other parts of digital is, for example, the horticulture Culture business, this is running quite well. Our company Fluence in U. S. Had growing rate It's above 25% year over year and is highly profitable. So I would say that It could be and it 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 will do next. Thank you, Olaf. Thanks, Sandeep. The next question is from Joseph Yao of Redburn. Please go ahead. Hi, Olaf. Hi, Catherine. And thank you for taking my questions, which I have 2. My first question is on your cooling investment. Obviously, 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 cooling is still being an unfinished piece This is your original ambition. And could you give us some color on that and even the CapEx spend? I think it was 50 1,000,000 in October last year. What's your current CapEx plan for the year and for future, please? And that was my first 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 had fully transparency about our steps we would like to do in Kulim. And I already said, We do it in steps. Step 1 was, as you remind, €400,000,000 and then we said we will invest up To €1,000,000,000 And this plan is still valid. The cooling capacity is we are fully Utilizarib, that means we are running by 100%. We invest in Kulim. We invested in the last The 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, 2 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 it is 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 effective factory we have. Let me add 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 point, I understand your Opto division typically Experiences 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 tight supply situation. I think I give the answer together with Catherine. As you know, with many of our customer, We have we call it FAU PA. That means we have a clear agreement about The productivity increase, we have to deliver price increase, price decline. And altogether, we have Price erosion by mid single digit. So that means something between 5% 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 are under allocation, Price erosion is you have some good points in your hand. If in one hand, your customer is asking for Product, 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. Catherine is saying yes to me by Nicking, I don't know what the English is. Confirming. Confirming. But you can confirm what I'm saying, Catherine? 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. So we are 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 this BPA. Most of them are kicking in on the 1st January. So to the previous question, in terms 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. And there are no more questions at this time. I hand back to Julie Closterman for closing comments. 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. Bye. Hi.