Earnings Call: Q1 2020

Feb 6, 2020

Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus call operator. Welcome and thank you for the Asram Leuchtt 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 would now like to turn the conference over to Juliana Baron. Please go ahead. Thank you, Stuart. Good morning and good afternoon, ladies and gentlemen. A very warm welcome to the Ostrom conference call on our Q1 2020 results. With me on the call are Doctor. Olaf Berline, our CEO and Ingo Bank, our CFO as well as Doctor. 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 ottram.com/ir, where you will also find the slides available for download. As with previous results conference calls, I would like to draw your attention to the Safe Harbor statement on Page 2 of the results presentation. As usual, it applies throughout this call. It's now my pleasure to hand over to Olaf. Yes. Thank you, Johanna. Ladies and gentlemen, welcome to our conference call. So let me start with an overview of the Q1. As usual, Ingo will then run through the financial results followed by your Q and A session. After a challenging 2019, we delivered a robust start in the fiscal year 2020. While market development was still restrained, our Q1 turned out slightly better than expected. Revenue increased somewhat on a comparable basis. Adjusted EBITDA margin rose by almost 200 basis points year on year. Good signals came especially from our OS business, where earnings margins return to historical level of over 24%. This is mainly due to higher production volumes as well as our performance programs kicking in and positive effects from IFRS 16 accounting standard. Based on the solid first quarter results and taking into account macroeconomic uncertainty, we confirm our guidance for the fiscal year 2020. So let's have a closer look at the Q1 results on Slide number 4. As mentioned, revenue for the period between October and the end of December increased slightly by 0.5 percent year on year to EUR 873,000,000 Adjusted EBITDA before special items climbed to €140,000,000 resulting in a margin of 13%. OS showed a significant recovery in returns with an adjusted EBITDA margin of 24.5%. And I'm also pleased to see that DI, our digital business, breaking even in the quarter. Free cash flow improved by €180,000,000 compared with the prior year quarter and turned positive. All this against the backdrop of political and economic headwinds, as you can see on Slide number 5. 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 relief, as you can see on the right side with the global PMI index on JP Morgan. 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 in car production as we move to Slide number 6. Global car production continued to decline in the Q1. Accordingly, IHS has once more reduced its forecast. Yearly production is now expected to be around 88,000,000 cars in our fiscal year 2020, a 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 coronavirus 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 yet, 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 the 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 7. In the automotive hall, we showcased our solutions for the future of mobility under the slow mobility at the speed of light. Our latest Photonics product, such as the LiDAR systems and the driver assistance solutions, received great attention, as did the RIN Speed car that we showcased on our booths and that attracted a lot of new customers. All in 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 financials for Osram's continued operations that you can see summarized on Page 8. First quarter revenue was slightly up by 0.5% on a comparable basis. OS revenue growth was slightly negative, whereas Automotive and Digital posted positive growth. Adjusted EBITDA came in at €114,000,000 translating into a margin of 13%, driven by strong profitability in Opto, solid profitability in AM and the breakeven performance at DI. Free cash flow continued to be positive with €7,000,000 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 €1,000,000 in the quarter. Our performance programs delivered €31,000,000 in gross savings in Q1 'twenty, in line with our expectations. And special items amounted to €16,000,000 in the quarter as expected as well. Taking now a more detailed look regarding our revenue development in the Q1 2020 on Slide number 9. Movements in foreign exchange rates as well as the additions to the business portfolio of OSRAM had a positive impact on revenue growth. When looking at our regions, business development in EMEA continued to be challenging. DI and automotive revenue declined 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 the eye, the market for ballast and drivers continued to be weak. In the Americas, our traditional automotive business had a good quarter, driven by the seasonally strong aftermarket business. Within our reporting segment DI, Fluent's revenue growth continued to be strong. Whilst 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 its illumination portfolio was strong in the region. Let me now comment on the revenue development in our 3 reporting segments. Opto's revenue in the Q1 was slightly lower with 0.7% when compared to the Q1 of fiscal 'nineteen. Within Opto, automotive revenue declined by low single digits when compared to prior year. Growth from APAC was positive, yet in EMEA and the Americas, it declined when compared to the Q1 'nineteen. Total backlog for Opto's Automotive business remained unchanged at the end of the reporting period. Opto's illumination related revenue continued 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 3 d 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 Q1 of fiscal 2019. For 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, LED component revenue declined at a low single digit level. Revenue levels at our Osram Continental subsidiary, which is part of the AM reporting segment, increased at a low double digit clip. Moving now to digital. Year over year comparable revenue growth was positive with 2.2%. This performance was driven by Fluence and our entertainment business. Our ballast and drivers 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 traction 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. In Q1 fiscal 'twenty, absolute adjusted EBITDA was €114,000,000 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 €14,000,000 drove the year over year improvement in Epsilon's EBITDA. Compared to Q1 2019, Opto's profitability improved to 24.5 percent 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 onetime nonrecurring items. In our Automotive reporting segment, 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 Q1 of 'nineteen. Our Austrian Continental subsidiary continued to be dilutive in the quarter for automotive overall. Adjusted EBITDA stayed negative. Let's now briefly look at the eye. Here, adjusted EBITDA was at a breakeven level for the quarter, much improved to prior year. Major drivers were improvements in gross margins across all businesses inside the 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 Alstrom continued operations was negative with €20,000,000 ex expected. Moving now to Slide 11. Our performance programs delivered €31,000,000 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 €80,000,000 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 Q2 of this fiscal year. Moving now to cash flow on Slide 12. Free cash flow was positive with €7,000,000 in the quarter, largely driven by the improved EBITDA performance in the quarter. CapEx continued to be at a low level and amounted to €28,000,000 in the quarter. The definition and presentation of net debt now includes the impacts of IFRS 16. The adoption of the new accounting standard as of this reporting quarter technically increased our net debt position by approximately €224,000,000 as per the 31st December 2019. Excluding this accounting change, net debt stayed roughly flat, sequentially speaking. Based on the results of Q1 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 free 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 2019, with a significant part related to transformation charges expected to be incurred in the Q2 of 2020. And last but not least, let me conclude with some housekeeping. In the course of tomorrow, we will issue an interim report for the Q1 of fiscal year 2020 according to IAS 34 on our Investor Relations webpage. The reason behind this publication is linked to the plan for natural prospectus that AMS AG may publish in conjunction with their intended capital increase. Such prospectus may also incorporate Osram's Q1 2020 financials as required by capital market laws. And now, Giuliana, back to you. Thank you, Ingvar. Now we are looking forward to your questions. Stuart, please go ahead. Ladies and gentlemen, at this time, we will begin the question and answer First question is from the line of Lucy Carrier from Morgan Stanley. 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 overall the business was still down to some extent, especially in OS in the Q1. But are you seeing the improvement you are 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 Q1, 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 in cars. So in this case, we had clearly a higher demand. But if 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 coronavirus. I think we have to see what really does it mean with the higher demand and when do we get a restart at 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 Vooty, for example, still close 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 open 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 1 week with 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 a 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 1 or 2 weeks. And in the end, we have to see what does it mean if my customer cannot produce, we cannot deliver? So again, that's it's not a clear situation in these days, and we have to follow day by day. The next question is from the line of Jurgen Wagner from MainFirst. Please go ahead. Yes, good afternoon. Thank you for taking my question. You mentioned rising production, but what were the costs of underutilization on group level and in Opto? And as a follow-up to this, you had 24.5% in Opto on flat sales. Basically, what could or would happen if revenues grow again significantly, let's say, next year? Thank you. Thank you, Jurgen, for your question. We do not see really an impact, definitely not on my next quarter. So 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, if the corona virus run like bazaars in 2,001, it will be a move in demand. But it's not that the world 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, we know your midterm targets are there 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 detail, you see that they are running quite successful. So I'm good. I'm very optimistic that the margins will be in this range. Basically, just to add on this, so I said in my prepared remarks that out of the 24.5, 220 basis points were onetime nonrecurring. So obviously, that gives you sort of an operating level where we are right now. And of course, if volume were to pick up again, then the operating leverage that went down last year should go up this year. So and that we do would expect. And next to that, we have supported the cost structure by taking out cost in a significant way. I told you how much we brought down headcount in Opto as compared to the last year. So but it's too early to count on volume in this business because China is a very important factor in the holdings for us, not just in, let's say, the LED part but also in the traditional part of automotive. And therefore, we really have to see now how the coronavirus will affect the not just our production, but especially the supply chain of our customers and what kind of disruptions that would mean. We also then have to see to what extent order behavior from our customers might be changing just because they want to, again, build inventory because they themselves want to be flexible the situation of uncertainty. So that's why it's not feasible for us at this point in time to give you a very specific outlook as we simply don't know enough at this point in time. Okay. Thank you. We have a follow-up question from the line of Lucy Carrier from Morgan Stanley. Please go ahead. Hi. Hello again. Well, I'm happy to be back so quickly. Just if I just have a follow-up on the OS margin. Ingo, can you maybe indicate what was the 200 basis point one time? And are you able to split the IFRS benefits between the division? Because having made the calculation for the group, I guess, if we were excluding the IFRS benefit, the margin for the group was only up about 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 updated the document on the web page where you can see the impact for Opto, I think, out of my head. The positive impact from IFRS was 1 percentage points, 1.25 percentage points, probably on a margin level. The one off items I was referring to were releases of accruals that were no longer necessary for different types of reasons, And hence, they are not expected to recur again. So that's but we've in the meantime, if you look at the document on Page 6, 17, we have now also included information which shows you also the IFRS impact per 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 points, the margin in an underlying basis was up, let's say, by about 150 basis points, 200 basis points in OIBDA? Yes. That's correct. Yes. Okay. Thank you very much for the confirmation. 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 a percentage of sales is particularly low in the quarter, about 3%. It doesn't look extremely sustainable considering the fixed asset base that you still have in many factories. How should we think about the level from here for the rest of the year or more generally 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 reduce complexity in especially Opto's flows, and that has helped 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's necessary to maintain our asset base. Just let me also remind you, as you know, Lucie, we've invested quite heavily in into Opto's space in the last 2, 3 years. So also there, maintenance CapEx typically isn't at the same level of depreciation in the 1st 2 or 3 years of such an influx of new capital, and that's all reflected in the 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 there. Are you able to guide us somewhat on the range as CapEx as percentage of sales or an absolute amount? I think I believe I said when we gave first guidance that it would be very similar to last year. Okay. Yes. Okay. Thank you very much. Next question is from the line of Svein Vayer from UBS. Please go ahead. 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 that I guess. What's your opinion on that? I mean, when it comes to realizing the synergies, would 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 announce it. If you take a look in the official offer documents, there was an original plan to do it, but when I do not know. The second question is the synergies. They had it in the offer document as well, so they expect around €300,000,000 And what we did in the meantime, Sven, 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 300,000,000. Dollars But let's say when it would come to making significant reductions, obviously, that sum would be also on the Osram end. I mean, would you insist that there needs to be a domination agreement first before you agree to significant adjustments at OSRAM? Is that a prerequisite or is But I think again it's a speculating, but to make it clear, if we do not have a domination 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 1 shareholder. So that means that 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. Next question is from the line of Sebastian Grova from Commerzbank. Please go ahead. Yes, hi. Good afternoon, Olaf and the rest, sorry, and busy with other stuff. Three areas of questions on OXXO to start with. The first one is around the really impressive EBITDA improvement year on year. Has been rather low on the volume side, at least from my perspective, only slightly up. So can you just really give us a bucket here what is pricemix 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 gains, especially on the price side? Then for the automotive segment as such, can you give us a sense of the Conti JV and what you would expect in terms of incremental revenues for the full year? Obviously, we had, in terms of incremental revenues for the full year? Obviously, we had a bit of a tailwind in the quarter 1 already. And what's your thinking and planning for the rest of the year? And then you mentioned in your prepared remarks around the 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 charges in the Q1 already? And then for DI in particular, what is your planning here and how to get the business finally on track? Obviously, I noticed that you had a €10,000,000 improvement year on year, but that shouldn't be the end of the 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 57,000,000 this year, but maybe Ingo? Yes. So yes, so on just I mean, a number of let's start with the performance programs. As I said, the expectation for the existing performance programs this year is savings of around €80,000,000 We did €31,000,000 in the Q1. Then we are indeed in discussions about new performance programs that, of course, need an alignment with our stakeholders on the employee side, and that's currently discussions ongoing. So you have to please accept that I cannot disclose any details here on this. I said also in my prepared remarks that I would expect special items to be similar to last year. We also said in our annual report that we would expect special charges related to transformational costs to be in the high double digit type of range. So that sort of 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 parties at this point in time. As to the Conti JV, I think there our 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 and what we can do together to improve. From a revenue perspective, from what I've seen, things are moving along the lines of what we had expected for here, 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 impacts in also automotive, but also in other areas like visualization sorry, illumination, 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 BPAs, and there are some contracts where it's in the high single digits. There are a few cases where it's in the low double digit range, but overall, pretty much in line with what we had expected for the year. So for Opto, if you look at the quarter, I'd say that the productivity programs largely together with a higher R and D efficiency compensated for price erosion, and then we had positive impacts of volume for the first time in many, many quarters for Opto that helped to uplift the margins next to the one off time onetime issues that I mentioned to Lucy and the IFRS 16 impact. Okay. That's helpful. And if I just may ask on a specific number, if possible, on the quantity JV, what you would expect in terms of incremental revenues? Or it's 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 improvements, but how much it will be, we still have to see also there what the market is going to be. I mean, we started the year with a solid order book and a good visibility on the year, so 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. Next question is from the line of Sebastian Hubbert from Societe Generale. Please go ahead. 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 we've had a question to Ingo, but fully understand that you will not comment at this stage. Thank you. Thank you, Sebastian. There are no further questions at this time. And I would like to hand back to Juliana Baron for closing comments. Please go ahead. 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 goodbye. Ladies and gentlemen, the