Earnings Call: Q4 2020

Nov 6, 2020

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the ASR unleashed 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 I would now like to turn the conference over to Julia Klosterman. Please go ahead. Thank you, Stuart. Good morning and good afternoon, ladies and gentlemen. A warm welcome to the Osram conference call on our Q4 as well as fiscal year 2020 results. With me on the call are Doctor. Olaf Berlin, our CEO and Katzen Danke, our CFO. Olaf and Katzen 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 alsram.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 2 of the earnings release presentation. As usual, it applies throughout this call. It is now my pleasure to hand over to you, Olaf. Yes. Thank you, Julia. Ladies and gentlemen, a warm welcome to our conference call today. As usually, I will start with an overview of our fiscal year and the current status of the combination with AMS, and Catherine will then go into the financials in more detail. As usual, we will be happy to answer to your questions. So let's get started on Slide number 3. The past fiscal year was dominated by 2 topics, COVID-nineteen and various takeover offers. Thanks to our efficient management, we have mastered the COVID crisis very well. We acted early in January 2020 and consistently. Thus, we were able to protect both our employees and our company. And this has paid off despite the comparable revenue decline of almost 14%, our free cash flow was positive, so no cash burning in 2020. And our adjusted EBITDA margin remained stable at over 8%. It also shows that we continue to make progress with our transformation, delivering on our performance, and as Catherine will show us, on our saving targets, which brings me to the 2nd dominating topic Pending official court entry, we expect operations of the joint company to commence in early 2021. So I move on Slide number 4 and the fiscal 2020 figures by quarter. As anticipated, the month of April May marked the low point in terms of revenue and profitability. We had up to 50 percent decline in April. Since then, most business segments have been seeing gradual improvements, which is clearly shown in the recovery of the Q4 figures. The Opto and Automotive businesses benefit from the improved business situation, especially in China and in North America. On a comparable basis, we recorded a sequential revenue increase of 26% compared to Q3. Adjusted EBITDA improved by almost EUR 100,000,000 quarter to quarter, reflecting the full effectiveness of our COVID-nineteen related saving measures. Overall, this translates to the following yearly figures on Slide number 5. As mentioned, comparable revenue on the whole fiscal year fell by almost 14%, affecting almost all business segments. The entertainment and automotive businesses were hit hardest. At Opto, the streamlining of the product portfolio has paid off. Here, the adjusted EBITDA margin climbed to over 20% despite lower sales volumes. For the whole group, it means that we managed to keep the comparable EBITDA margin almost stable at over 8%. This number reflects the improved cost base due to our performance programs. Free cash flow came out positive at €12,000,000 And I think that's a remarkable result in these special times. This was mainly due to our active working capital management and of course, our CapEx discipline, which brings me to Slide number 6 and the economic environment. We have clearly observed further stabilization in important economic indicators in the last quarter. In line with our own experience, the impact of the COVID-nineteen pandemic on the global economy was mostly felt in April May, as I said. Since then, there has been a rapid recovery progress, which is illustrated by the OECD's composite leading indicator on the left side. It has almost recovered in the last quarter. While another important indicator for us, and you know it from the past, the JPMorgan's Purchasing Manager Index on the right side, already exceed pre pandemic levels. Especially the positive development in China makes us cautiously optimistic for our markets, the most important of which remains the automotive market. So let's take a deeper look on the global car production forecast on Slide 7. This shows the global production figures as predicted by IHS. Light vehicle production for our fiscal year 2020 was down by 18% to less than 74,000,000 vehicles. Yet, it significantly improved in the last quarter. And the forecast for the fiscal year 2021 sees a further recovery. IHS expect global car production numbers to settle at around 20,000,000 vehicles per quarter. That means year on year growth of 13.5 percent to almost $84,000,000 costs. Especially Europe and NAFTA, which were hit hardest last year, should see increases of 17% to 21%, respectively. Whereas China had already recovered to a large extent and expected to grow another 5%. This positive development is also reflected to our order volumes, especially bookings for our automotive LEDs here in the Q1 of the year 'twenty one are very strong for our full first half year, that means October till March. However, all this is subject to a corresponding development of the upcoming months, especially regarding COVID. So I think it's good to be remain cautious. For the time being, our measures to safeguard liquidity remain essential, so I move to Slide number 8. Despite the pandemic and our efforts of retaining cash, this was never an expensive of strategic projects. One of these projects at OS is the technological evolution of the LEDs for display solutions. Here, the market is currently moving from standard site emission backlighting to so called mini LEDs. They are only about 200 micrometers in size and mark an important technology step forward in terms of high end displays. Production will start soon in our plant in Kulem, Malaysia, where we can use our existing expertise. In a second step, and this will be after 2022, OS is well positioned in the area of the microLED. This is the next generation of LEDs. At less than 100 micrometers, they are smaller than a diameter of a human hair. That shows you really the increase of the performance. By combining red, green and blue micro LEDs into an array, we will enable direct emissive displays with clear benefits, namely brilliant colors, high contrast, high efficacy and fast reaction times. That takes me to Slide 9, Apoprofrost. In the last two quarters, I presented the so called shield program to you. It contains more than 500 corona measures in the group that we took to safeguard profit and cash. Human resource measures such as short time working as well as hundreds of operational and financial saving initiatives. In total, we were able to implement measures with an EBITDA effect of over €50,000,000 only in 2020. At €132,000,000 the Shield program has also had a significant effect on free cash flow, while liquidity was improved by almost 190,000,000 So but of course, we have also continued the transformation of our company as we reported in the past, and which brings me to Slide number 10. Also in Q4, we continued to implement our existing performance and transformation program, with the biggest contribution coming from corporate overhead adjustments and the transformation of our plants worldwide. Total savings only in Q4 amounted of €35,000,000 And despite the COVID-nineteen challenges, I think and the integration project with an annual savings of another €128,000,000 we clearly exceeded our ambitions by more than 1 third. And now, I hand over to Katrin for a deep dive in the financials. Thank you, Olaf. Let's now start to take a more detailed look at the 4th quarter figure, starting with our revenue development on slide 11. Overall, our revenue development improved substantially compared to the previous quarter, meaning the Q3 of the fiscal year, due to a slight recovery in our core markets, resulting in a revenue in absolute terms for the Osram Group of €739,000,000 Sequentially, that was an improvement over 26.3%. Looking at the development year over year, we had a moderate negative effect from foreign exchange rate, but on the other hand, a slightly positive portfolio effect. Thus, comparable growth was minus 17.7% and mainly impacted by COVID-nineteen. Looking at our regions. APAC declined by minus 18.3% comparable. Therein, China declined by minus 11.6 percent year over year. The biggest hit in APAC region came in for DI sales with the corona impact on entertainment along with some challenges in the city beautification business. AM declined significantly in APAC and Opto sales and showed a clear decline compared to prior year. The biggest hit this quarter can be seen in EMEA with a comparable decline of minus 20.9%. This development was driven by all business units, with the I showing the biggest decline followed by OS and AM. Americas showed a significant drop in revenue with minus 14% on a comparable basis driven by all segments. Let me now come to the revenue development in the 3 reporting segments, and let's start with Opto. Compared to the Q3 this year, OS revenue showed a comparable growth of 11.4%, while the OS revenue in the 4th quarter saw a significant decline of minus 14% compared to previous fiscal year to previous quarter 4 of the previous fiscal year, thus resulting in a revenue in absolute terms of 3 €20,000,000 Within Opto, automotive revenue had the biggest hit in absolute terms, mainly demand driven. While illumination related revenue came in rather flat on a comparable basis, visualization and laser experienced a slight increased demand for industrial laser applications. Sensing showed significant to the revenue development in the reporting segment automotive. Overall, the AM revenue came in at €395,000,000 resulting in a comparable revenue growth of remarkable 45% compared to quarter 3 of this fiscal year and mainly driven by our traditional business and Osram Continental. Year on year, however, automotive LED components and our traditional light source business with OEM showed a substantial a Coming now to the revenue development of digital. DI sales were hit the most due to the corona impact, especially in the entertainment and city beautification area. A recovery in Q4 over Q3 as we saw in the other business units. Year on year, the comparable revenue decline was at minus 35% for the quarter, driven by all segments and all regions, though with APAC seeing the strongest decline in comparable revenues. However, the revenue development improved sequentially with a comparable growth of 8.2% versus previous quarter 3 due a strong development at Fluids. Let's now move on to the EBITDA side and to Slide 12. The adjusted EBITDA in quarter 4 of the current fiscal year came in at €71,000,000 in absolute translating into a margin of 9.6%. As you can see, thanks to our early corona mitigation measures, we were able to keep our margin nearly flat compared to quarter 4 in the previous year. We saw positive impacts from productivity, overcompensating price erosion and inflation by €14,000,000 as well as from an improvement in functional costs. In the Q4, we had a positive impact on EBITDA by applying IFRS 16 of about €13,000,000 However, these positive effects were not able to compensate the negative volume and aggression effect of minus €61,000,000 Coming to the segments. In the Opto reporting segment, the adjusted EBITDA improved compared to prior year quarter 4 to a remarkable 21.3%. This was mainly driven by an improved operational performance, product portfolio improvements as well as lower functional costs. The adjusted EBITDA margin in the AM reporting segment with 5.5% came in quite flat compared to prior year level, which was at 5.8%. Negative effects from volume, price and inflation were offset by productivity savings. The Osram Continental subsidiary, however, continued be dilutive in the quarter and the adjusted EBITDA stayed negative. Last but not least, the profitability of DI. The adjusted EBITDA margin was below the strongest the strong previous year quarter and came in minus 4.2%. This deterioration was mainly driven by the corona impact and therefore, lower volume. Productivity and strict cost management reduced bottom line the impact of corona crisis. Adjusted EBITDA in corporate items for Osborne was negative with minus 12. Let's now move on to Page 13 to the free cash flow. The free cash flow was in the quarter 4 negative with minus 50 €2,000,000 while for the fiscal year in total, it was positive, as mentioned before. CapEx were up at €32,000,000 after very low levels over the past quarters. In the previous quarter, during these times of the corona pandemic, followed by a general economic slowdown, geopolitical uncertainties and limited visibility, it is crucial for us to focus on cash and liquidity. As you can see in the bar chart on the lower right side, our available liquidity in terms of cash and undrawn lines amounts to €600,000,96 as of September 30 this year. Undrawn credit lines apply to the revolving credit facility granted from us by AMS as a shareholder loan. Cash of €321,000,000 was lower compared to the previous quarters as a result of partial use of cash to repay bank debt triggered by the change of control with AMS. However, the cash and undrawn credit facility together are with a total of €666,000,000 on a similar and comfortable level compared to previous quarter. Now the summary for the key financials. Let's have a look on the total on Slide 14. Overall, our top and bottom line development was strongly impacted by the global consequences of the COVID pandemic. But thanks to our cost cutting programs and our early implemented measures, we were able to mitigate those effects partially. Revenue for the Osram Group declined by minus 13.8% and came in at €3,000,000,000 This translated into an adjusted EBITDA of 8.3% for the year, in line with our revised guidance in September. Adjusted EBITDA in absolute terms came in at €253,000,000 mainly impacted by the decline in volume. Our productivity gains were able to offset effects from price and inflation to a large extent. In fiscal year 2020, we had an increase of EBITDA by applying IFRS 16 of about €54,000,000 Let's have a closer look on the revenue development in the regions. EMEA was hit hardest with a decline of minus 17.1% for fiscal year 2020. This was driven by all business units with AM and DI experiencing the biggest decline. APAC declined by minus 10.5%, mainly impacted by DI and therein by their businesses in China. Overall, China declined only by a mid single digit. Our business in the Americas showed a substantial decline of minus 13.9 percent for fiscal year 2020. Within Americas, our Opto business experienced the biggest decline of more than 20%. All our business units were impacted by the consequences of the pandemic. However, especially in the Opto segment, we were able to mitigate the effects on the bottom line, resulting in an EBITDA margin for us of 20.1%. And thus, even 280 basis points above previous year. Our automotive business was, of course, affected by the weak development of the automotive market as well as the dilutive impact of Osram Continental, resulting in a margin of 4.8%. And as already mentioned, DI was hit hardest, mainly due to entertainment and city beautification. The adjusted EBITDA margin for the DI segment came in at minus 3.8% for the full year. And with that, I would like to hand over to Olaf for the outlook. Yes. Thank you, Catherine. So coming to our last page and then to your questions, I move on Slide 15 and the outlook for fiscal year 'twenty one. Regarding the further economic recovery, quite promising. We can therefore confirm our outlook for the new fiscal year published at the end of September. For fiscal year 'twenty one, we expect a comparable revenue growth of 6% to 10% and adjusted EBITDA margin between 9% and 11%, and the balanced free cash flow and might optimistically up to a double digit million figure. Please note that this forecast is based on the assumption that the effects of COVID-nineteen will be overcome during fiscal year '21. So something I think we are all hoping for. And with this, I hand back to Julia. First question is from the line of Sandeep Deshpande from JP Morgan. Yes. Hi. Thanks for letting me on. Olav, two questions from me. Firstly, on the numbers itself that you reported. You have now moved Osram Continental into a move for sale or whatever. They've moved out separately. So can we understand the full year numbers of what kind of loss or profit was reported for Ostrand Continental or was it not there in the numbers at all as you have reported today? That's my first question. 2nd question is on the backlighting business. You've mentioned you're entering into the micro LED and then sorry, mini LED then micro LED. I mean, historically, if I remember in your presentation, this was backlighting was not a focus for Osram. Is this a new focus that you want to be in this market? Because historically, pricing pressure in this market has been considerable. And then finally, a quick one on the current environment. Have you seen any changes in the current environment orders or sales to customers because of the new lockdowns in Europe, etcetera? I will start with question number 23, and then I give it for the Osram, Bonnie, to Katharine. So let me start with the backlighting micro and mini. Now the reason why I put it in for you was because I have seen now so many reports talking about microLED and many authors, especially the press, is confused between micro and mini. And to make it clear, there is no single micro LED in the market today and there will be no single microLED next year. So to make it clear, many people are confused from micro and mini and that was a reason to show a little bit the progress between the traditional LED, the mini LED, which is coming up now, is just started in production for by Osram and Kulim and then the MicroLED is coming later on. To the that was only to help you a little bit to give you an overview and not mix the micro and mini. The second point is are we interested to going in the backlighting business? No, no, no, no. So we are not producing television, but the micro and especially the mini and the micro LED are very interesting for displays. And these kind of LEDs will replace the OLED. And for this reason, many people call the microLED OLED killer because today in smaller displays and in higher displays, but let me talk about smaller displays and in automotive interior areas. So our interest is to deliver to automotive interior displays, smaller one, and you see that more and more displays are coming up in a car, interior car. And for this reason, the micro and the mini LED are very helpful because the accuracy and the lighting potential is very high. And especially if you have any lighting from the sun with the traditional backlighting that is and have a disadvantage. In this area, there is a huge potential in the future. And for this reason, we would like to be in this special area of, let me say, backlighting and applications for automotive. The third question was the current environment. And as I said, and to give you a little bit an indication, and you are right, Sandy, that usually OSRAM is an early indicator for many things. I'm I have a strong order book for the Q1 and Q2. That surprised me, especially in automotive LEDs. That means that today, still in November, there is no impact from the current lockdown visible for us. And if I compare the book to bill from this year to last year, we have much better situation. So today, in the current environment, I do not see weak signals for the pandemic decline in the business. It is the opposite. People are allowed to drive cars. They don't like to use public transportation. In North America, people are not willing to fly or to take the train or the Greyhound bus. They are using cars. So the demand, especially in driving mileages are increasing. And there's a clear correlation between driving a car mileage and change of halogen lens. So we are more or less sold out in North America, and we have a very good order halogen aftermarket business in North America. And the same is a little bit in China. People love to have their own car. And you see it, by the way, here in Munich as well. Streets are full, but public transportation is empty. And the third question and first question is coming to you. And the first question, in fact, Sandeep, thank you for that regarding the Thank you for that. Regarding the Alzheimer's Continental joint venture, as in the previous fiscal year, the revenue amounted to roughly €220,000,000 And we continue to have a negative EBITDA margin, and therefore, that's dilutive for AM of approximately 20%. As a result, at the end of the day, there was also a negative free cash flow deriving from that activity. Sandy, is it okay? Sorry, my question just one that, Ostrand Continental, it's about $40,000,000 negative EBITDA is what you is the dilution is what you're saying. Thank you. Thank you. Thanks for your questions. The next question comes from the line of Sebastian Grova from Commerzbank. Please go ahead. Yes. Hi. Good afternoon. Can you hear me? Yes. Very good. Just double checking. Right. So the first one would be on the outlook, if I may. It's implying about a 20% to 40 percent contribution margin based on my calculation. So again, the background, how should we think about the growth by divisions when I'm looking at your 6% to 10 percent organic growth guidance? Any potential currency impact that you might have baked into that margin guidance, cost inflation? So any color on sort of the moving parts would be very, very much appreciated. And the same question is around portfolio. So digital, I would assume, has suffered pretty much from especially the Clay Park Estate Entertainment lockdown situation. Can you give us a bit of sense how much sort of the traditional specialty lighting, which was moved into the digital division, kind of created this €30,000,000 EBITDA loss? And how much is really related then to all other activities within digital? And if I may follow-up quickly on the prior question around the Conti JV, could you just update us on the overall process, what is intended, the time line? And what is sort of the exit route? Is there anything here? Well, maybe I'll start with the Othram Continental since I was just answering that question. It's still the same time line as we envisage it. So we intend to unwind the 2 businesses. I think that's a term for it by the end of the next fiscal year, meaning by September of 2021. That's still the idea. And the idea is also unchanged that the parties have agreed on what activities exactly they are basically taking along the lines from what they brought and integrated in that business when it was first established. And there's a lot of details to work on, and especially, it's the customer orders, which need to be complied with and fulfilled, and that's the most important question. However, no changes, and it's as we envisage, and that's why you also will find an impairment for the quarter 4 in our numbers because all of that has been anticipated and impaired. I'm coming to question number 2 and number 1 about planning assumptions that Gerard will help us a little bit to come through. Portfolio, the IDS, we had a huge impact, Sebastian, on Entertainment Lands and Clay Park. The decline is up to 95%. That means there are no single entertainment lamps we can sell more or less. It's really a little bit replacement. As you know, all cinemas worldwide are closed, all theater are closed, Opera is closed. Any shows are very limited. So the entertainment is really absolutely down. And the biggest losses came clearly from entertainment. We have positive results from horticulture. Our company, Fluence, are running quite well. Horticulture is still growing in turnover, revenue and profitability. As you know, local for local, the people love to reduce transportation and produce fruits and products local. For this reason, the horticultural by fluence is running quite good. And so the last one is that we have losses in Europe for controls, and we have more or less 0 profitability for controls in North America. So overall, the biggest impact came from entertainment. And for this reason, that we have the losses what Catherine explained. Maybe coming to some of the planning assumptions for the outlook. If I remember your question, but please correct me, it was a question what kind of dollar we have inside and what is the price decrease. Maybe, Catherine, we can try to manage it. Well, regarding the foreign exchange assumption behind the business plan, we are still calculating on the basis of margin of 1.17%. So that's basically where we are today. As always, in Osram, we generally are expecting pressure on margins. And therefore, we are basically looking at price at margin decline. And that's why we are constantly improving our cost structure in order to work against that. That's the same as it has been all the time. And therefore, for the next year, we are very confident that our productivity gains will exceed the pressure on the prices. That's The next question is from the line of Juergen Wagner from MainFirst. Please go ahead. Yes. Good afternoon. Thank you. And a follow-up question on Page 8 or Slide 8. Last time you showed us a slide on microLEDs. I think you in terms of time frame, you rather mentioned '23, 'twenty four. And as you are buying or intend to supply auto, they tend to be rather slow for new technologies. So what is driving that early adoption? And you gave us the free cash flow guidance. You also said first half orders for the first half are very strong. Should we look at negative free cash flow as you build as you grow first half and then positive in the second half? Thank you. Coming to your first question with microLED, yes, what is maybe a little bit changed, but again, it's a range of 22% to 24%. What is maybe changed is that from the technology point of view, the issue with the microLED was never the development of OSRAM for the microLED, so this is finished. The issue is to pick the LED and bring it to a wafer. So the biggest issue was in the past that we have to find a solution with the right machines to pick the LED and bring it to a wafer. And it seems to be that this is getting now much better, and we expect to be a little bit faster. So that's the reason I said it could be 'twenty three, 'twenty two, 'twenty three instead of 'twenty four, but that's now our latest proposal for the micro LED. That was the reason that I bring this down. But as I said, the biggest one was to explain a little bit the difference between mini and micro. The second question is coming up that we expect, again, as I said, strong order entry. And we had a strong turnover and order in Q4, and you have seen that our receivables increased. You see that on the charts of Catherine, and that increased to €73,000,000 alone receivable. I expect that this receivable will change to cash. If Catherine is tough enough, and she isn't, to bring us these receivable to our cash position. So I expect a good free cash flow for Q1. And for this reason, I do not see an issue in this area. We have a follow-up question from the line of Sandeep Deshpande from JPMorgan. Please go ahead. Thanks for letting me on again. Two quick follow ups. Firstly, on again the SRAM Conti JV, this so called wind down of the JV, I mean, will there be a cash cost to Osram associated with it? And do you have an estimate on how much it would cost to do this? And then the second question I have overall is, I mean, now with the domination agreement with AMS, are you already working with AMS on joint products, whether in LiDAR or any other business unit? And how quickly will they produce revenues? Thank you. Okay. I would recommend that Catherine is starting and then I'm coming to the nomination. There are no cost attached, which hadn't been reflected in this year's impairment. Therefore, all we're looking at next year will be the operative continuing unfortunately loss situation, which is already included in our prognosis. And there are no additional one offs. That was, I think, the question. Coming to your second question, domination agreement, joint products, we just started to think about a road map. As you know, OSRAM is strong in emitter, in LEDs and visible light and in visible light and AMS is strong in sensors and for optics. And I think the combination of emitter, sensors, optics bring us really to the vision to be the market leader and world market leader in photonics, illumination and sensing. And so we are working on new products as a combination of both core competency, but we didn't again, we are on roadmaps and not on actual developments today. We would like to wait if we have this domination agreement is officially valid and that we expect in the beginning of the year 2021. And then we are really starting together in the development of new products. Thanks for your questions. There are no further questions at this time. And I would like to hand back to Julia Klosterman for closing remarks. Please go ahead. Thank you. 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. Thank you, and goodbye. All right. Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.