ams-OSRAM AG
Q2 2021 Earnings Call Transcript

Published: 1 Aug 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. I'm Stuart your Chorus call operator. Welcome and thank you for joining the AMS OSRAM Conference Call on Second Quarter and First Half 2021 Results. Throughout today's recorded presentation all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. We'd now like to turn the conference over to Alexander Everke, CEO; Mr. Ingo Bank, CFO and Mr. Moritz Gmeiner, Head of Investor Relations. Please go ahead, gentlemen.

[Moritz Gmeiner:]

Good morning, everybody. This is Moritz Gmeiner. I'm very happy to welcome you to this morning's webcast and conference call on the second quarter and first half results. Please note that the webcast information and presentation is also available on our website in the investors section in the presentations and audio sub section.

[Alexander Everke:]

Yes, thank you, Moritz. Good morning, ladies and gentlemen. I'm very happy to welcome you to our second quarter 2021 conference call this morning. In this webcast, I will first lead you through some key aspects of our business positioning AMS OSRAM and how we see it moving forward, and then comment on the developments in the second quarter. We have a clear vision for our company to create the leader in optical solutions. This is what drives us as the guiding principle for our business, investment and spending decisions. We are fully committed to achieve this vision through bold investments in disruptive innovation and continuous transformation, delivering best in class profitability and growth. If look at Page 3. To this end, we pursue leadership in key segments of the optical space, offering an outstanding combination of emitters, optical components and modules, detectors, related ICS and algorithm. With the solution elements we addressing the diversified markets for sensing, illumination, and visualization. We offer optical solutions for three global end markets, consumer, automotive and industrial medical, where we combine light emission and sensing in an outstanding portfolio. Here on Page 4, you see how we are set up in these markets. Our broad range of constraints and the diversified growth areas that we see driving our business development in the future. Focusing on growth fields, these includes the following. The next generation displays, micro LED, mini LED sensor integration, augmented reality, 3D and near to AI applications for consumer. In automotive, it's light applications, high resolution matrix headlights, exchangeable LED lights, head up displays, and in cabin sensing. In industrial medical we see UVC LED, horticulture, industry applied sub-zero , and robotics, 3D applications and individual diagnostics. We turn to Page 5. So looking around in a nutshell, we see ourselves best positioned for leadership in the optical solution field. We benefit from balance revenue streams, and a diversified base. We leverage our portfolio and application expertise that is at the forefront of the industry, supporting a broad range of markets, product cycles, and customer basis and we successful in our markets by being a leader in key optical applications across automotive, consumer, industrial and medical. Based on this, we are putting forward a strong value proposition at AMS OSRAM which consists of four elements which is shown on Page 6.

[Ingo Bank:]

Thank you, Alex, and very good morning to you all. Before I start going through the financials, a few things up front. When we refer to adjusted financial metrics, we refer to adjustments, or M&A related transformation, and share based compensation costs and results from sales of business units, and equity investments. Reconciliation to the IFRS basis of the presentation is included in the financial information on Q2 2021 that we published today and which is available on our Investor Relations website. Comparable prior year financials are not available this quarter due to the acquisition of OSRAM, with the consolidation having started from the third quarter of 2020 onwards. Let me now start with reviewing the financials by going briefly through a snapshot of our key financials for the second quarter. I'm on Page 11 of the presentation. Alex outlined earlier, that was revenues of $1.49 billion and an adjusted EBIT margin of 8.8% became in well above the midpoint guidance and for both metrics. Adjusted gross margin was 33.2% in the quarter, also in line with expectation. Adjusted net income was $84 million, with an adjusted basic EPS of $32 or CHF0.29. Operational cash flow continued to be strong in the quarter at $229 million. Net debt stood at $2.3 billion reflecting amongst others, the settlement of the delisting offer and the buyback of our outstanding convertible bonds. Overall leverage was a solid 1.7 times as of the 30th of June 2021, particularly when taking the delisting effect into accounts.

[Operator:]

Mr. Deshpande. Can you please unmute your telephone?

[Sandeep Deshpande:]

Yes, hi. Can you hear me?

[Alexander Everke:]

Yes, we can.

[Sandeep Deshpande:]

Yes, hi. I have a couple of questions. Firstly, this is Sandeep Deshpande from JP Morgan. Regarding your guidance in the margin for the second half, would you say now that now that you've seen what's happened in terms of revenue loss in the second half in your consumer business, that these levels of margin, this level of margin can be sustained for the second half or if there could be further changes into the fourth quarter and beyond? And then my second question is, on this consumer business itself, have you worked, continue to work with that customer? And do you believe that there are further future opportunities with that customer?

[Alexander Everke:]

Yes, maybe start with your first question. So I think what I can say, of course, is you seen the guys who gave on the third quarter. And I don't want to give, let's say also guides already for the fourth quarter. But I think it's all fair to assume that we also expect the fourth quarter to be a good quarter for us. Yes, and then on the second question, since we can't talk about one specific customers, but what I can clearly say that we have good interaction and good opportunities at our large customers and in consumer space and certainly with the expanded portfolio. Now, as I mentioned over last quarter, we see a various opportunities moving on for the next years to come. Absolutely.

[Sandeep Deshpande:]

Right. So, if I just have a quick cost follow-up. Ingo, we've seen some rebalancing on the R&D and the SG&A has that already started in terms of synergy; these are - is this just some kind of movement you've seen in the SG&A and R&D in the second quarter?

[Ingo Bank:]

I think on the R&D side that was just some movement where we looked at some of the R&D projects, we did some reprioritization here and there and we had a bit of a lower capitalization. And RDS as you know, is not necessarily the primary target for the synergies, and yes, we see already some of the G&A benefits showing and reflected in the numbers.

[Operator:]

Next question is from the line of Sebastien Sztabowicz from Kepler Cheuvreux. Please go ahead.

[Sebastien Sztabowicz:]

Yes. Hello, everyone. And thanks for taking my question. On licensing, it seems that one of your competitors is getting a little bit of market share in the market and potentially at large customer, your largest customer three. Is it possible to expect a little bit of market pressure in your licensing going forward? And the second one would be on the LED market? Could you provide a little bit some comment on the strength of the LED market today? And notably, where supply and demand are evolving? Is that market specifically, and more long term view? What kind of goals should we expect from the LED market opportunity in the coming years? Thank you.

[Alexander Everke:]

So just request, let me start. So market share, I think we communicated the market share loss in consumer business, we feel confident for the future development. We don't expect major changes there. On the LED markets, it's a good growing market, specifically on the automotive side. It's very tied situation and the whole trend goes into LED. If you look at electrification of cars, it certainly have very strong motivation to go into the LED space. And our supply is fully loaded. Also industrial LED is moving up. So the whole LED business, we see clearly the trend upwards. And we feel very confident about this. And that's why I also chose that. In LED we see the short, mid and long term a significant cost opportunity for us as a company and then obviously, most moving into the more sophisticated LED technology like micro LED, mini LED is certainly an opportunity we see for the next years to come where we see a significant growth, and then obviously, going back to LED, where we have specific features like UVC or for horticulture for specific light waves to accelerate growth. That is certainly an area where our IP is very, very strong. And we see opportunities there where we utilize the specific feature sets we have now at LED technology.

[Sebastien Sztabowicz:]

Thank you. One follow-up if I may on the Malaysia because of the COVID-19 and the lockdown that resulted from the pandemic? Have you seen any impact on your manufacturing capacity or pollution that would put in Asia over the past couple of weeks?

[Alexander Everke:]

No, we have not. We have implemented a very solid hygiene concepts in our facilities in Asia Pacific, have also been tested by local governments on that. And we've not seen any shutdowns, we've started also vaccination of our employees at the various sites that we have to act responsibly, obviously as an employer, and hence we are happy to see that the local management did an excellent job there. And employees are quite happy to return to our facilities to help us supply our customers where the demand is still strong.

[Operator:]

Next question is from the line of Didier from Bank of America. Please go ahead.

[Unidentified Analyst:]

Thanks for taking my question. And good morning, gentlemen. First question, I just wanted to you know, could share your thoughts on the impact of the disposal of DS in North America, whether that's big team entirely in Q3 or already having an impact in Q2. And then my second question, looking at the longer term sort of ambition of more than 20% operating margin target. Can you can you share with us what sort of Embedded revenue growth is assumed to get that to that number on a sort of pro forma basis since you highlight further disposals. And I guess my question is, can you get there with minimal revenue growth, purely on the back of the cost synergies that you're targeting?

[Alexander Everke:]

Okay, let me maybe start with DS America. Obviously, DS America's was still included in our Q2 financials, the transaction was closed on the first of July. So at the end of end of Q2, end of June, we held the Americas in the balance sheet as an asset held for sale in the meantime and have closed, we've already received the proceeds. And it will therefore not be reflected anymore in our Q3 financials going forward other than the cash proceeds it received from acuity already in the meantime. And then to your second question, as I presented in my speech, before we use our disposes to clean up the portfolio, which we will plan to finalize in next year 2022. This is the basis for the growth and we expect double digit growth for the next following years to come. And that's the basis of the improvement. In conjunction obviously, with the cost reduction, the synergies, the portfolio management, we are executing currently.

[Unidentified Analyst:]

Wonderful. My follow-up if I may, just in terms of sequential growth rate, sort of organic to Ag disposal. You know, at which point do you think we've sort of reached a flow on revenues? Is it already behind us or do you think that sort of next year could find a bit of a flaw on revenues and who can grow that double digit which is highlight from their own?

[Alexander Everke:]

I think look, I mean, what Alec said earlier, we are still in the process of making very fundamental adjustments to our portfolio in DI, so I don't think you can speak of a flow as of yet. As Alex said, and as we pointed out on one of our slides in the presentation, we expect that to sort of baseline if you like reset to be there in the course of 2022. And then from then onwards you should see what, maybe you would call a flow. Of course again always taking into account the normal seasonal pattern in the underlying business that will stay with us.

[Unidentified Analyst:]

Many thanks.

[Operator:]

Next question is from the line of David O'Connor from Exane BNP Paribas, please go ahead.

[David O'Connor:]

Great. Good morning and thanks for taking my questions. One or two from my side. Maybe Firstly, Ingo, just going back to the guidance. So guiding the second half revenues slightly above the first half, just to complete the picture, can you give us any additional color on that second half, adjusted EBIT margin? I mean, reading through the depressor seems you're implying the second half margin below first half, maybe if you can give us even some puts and takes that we should bear in mind when modeling that. And I have a follow-up.

[Ingo Bank:]

Yes, I think thanks for the question. So obviously, we've undertaken quite some measures, since we communicated in earlier this year, about the market share, loss in the consumer business. And we've taken some significant cost measures to try to mitigate, some of what will be lower utilization in our factories in the second half. If you go back to what I said, when one of your colleagues asked earlier, what the margin is also in Q4, and you look at where we are marginalized in the third quarter, I think I say that we expect also somewhat of a good quarter in Q4, that should give you a sort of an idea of what our current thinking is.

[David O'Connor:]

That's helpful. Thanks. And maybe if, as a follow-up, if I could ask about the imbalances, Alex, that you mentioned supply imbalances impacting their ability to deliver. Can you just give us a bit more color there on where exactly are these supply imbalances that you're seeing is something on the wafer side subcontractors equipment? You know, and when exactly would you expect these to be resolved? Thank you.

[Ingo Bank:]

Yes, I think for the question, yes, actually, we see this on both sides on the backend side, subcontracting side, on the front end side, wafer supply. It's very strong up for obvious reasons in the automotive industry, and you have a direct impact and an indirect impacts one is, which affects us directly and then obviously, if other suppliers are affected for the same platform, then it also has an indirect impact on us. Secondly, I think it's also important that we see also a trend in the suppliers from all sides acknowledging the short supply in automotive and for that we have to support automotive more. That means on the other hand, that we also have a certain impact on the automotive business because wafers are allocated to different kind of target segments. So as I mentioned, it's very complex supply situation. It's certainly continuous for the remaining part of the year. But so far, we are able to manage this and our customers is according to the situation supportive. And also, we mentioned that our manufacturing related to those business is very fully. And for that reason, we cannot supply the whole demand we have in our order books.

[David O'Connor:]

Very helpful. Thank you.

[Operator:]

Next question is from the line of Jurgen Wagner from Stifel. Please go ahead.

[Jurgen Wagner:]

Yes. Good morning. Thank you for taking my question. Actually, I have to two, one follow-up on your midterm margin target. What portfolio structure can allow that margin given the high auto exposure of awesome, and the lower margin profile of that business, at least historically? And then 3D behind screen and consumer applications, when do you expect first revenues? Thank you.

[Alexander Everke:]

Let me start with the second question. You can take the first one 3D behind all that, as I mentioned last quarter, we are working closely with display manufacturers together, it's very come more clearer that also the solutions are very much related to the display itself. And that means to the display manufacturer. So we're doing progress, but it's still a decent way to move on that.

[Ingo Bank:]

Maybe the portfolio question you had. So as we said that the portfolio adjustments we are undertaking right now focus very much on the business that was under the digital segment when it was with OSRAM, which is was largely a traditional lighting portfolio. And we already booked the first progress as you know, with the sale of the DS Americas business, and we expect also more progress on other transactions possibly in the next couple of months. So the portfolio eventually that will be the sort of new baseline as of next year will then also include still, of course, the traditional automotive business, which is a very strong business in terms of market position worldwide, which has a very high share already of aftermarket in there with a strong recurring revenue stream with very little investment needs in the handful are also fairly high margin base. So overall, this will be helpful for the margin of the overall group.

[Jurgen Wagner:]

Okay, thank you.

[Operator:]

Next question is from the line of Robert Sanders from Deutsche Bank. Please go ahead.

[Robert Sanders:]

Yes. Hi, just a couple of questions. My first one is just on automotive, if you could just comment on automotive LED pricing trends. One of your customers has been complaining that the prices have been going up. I'm assuming that that is partly response to you guys are partly responsible for putting up pricing maybe because it's tight, and whether you have any plans to add capacity and then just a question on the on the impairment. Am I right to assume that that contributes to around 100 basis points up on the gross margin in Q3 given the lower depreciation charges? Is that right? And related to that when the country deal gets unwound is that already excluded from your adjusted margin? So, it doesn't affect the adjusted margin or is it already is included? Thanks.

[Alexander Everke:]

Let me establish the first question. Certainly as I mentioned before, the LED business is lead to motive is very, very strong. And in areas where there is the opportunity to adjust pricing upwards according to supply situation and complying with legal agreements, we have a customer, certainly we will take opportunity in a constructive way. But we see this overall in the market that's in general prices are going up from our suppliers as well from us to customers where it's possible to accomplish this.

[Ingo Bank:]

Yes. And then, on the other questions you had. So in our current outlook and guidance, and also in the numbers in Q2, the is of course included, so there is no exclusion or adjustments, what have you. Obviously, we're still in the process of returning what we originally contributed to the joint venture back into the AMS group now. And that is anticipated to be in two, three months from now. And then, once it's with us, we already preparing for its future and it's likely not going to remain with us. And if that's clear, and we making progress, we will also announce it. But for now, of course, it's still there and we also fully including it into the financials as well as in the guidance. On the impairment side, I don't think we would like to give now specific guides on the impact. But I think the number you mentioned is a bit too high in my eyes. So if I were you, I would work with a number that is lower than that. Thanks a lot.

[Operator:]

Next question is from the line of Stephane Houri of ODDO. Please go ahead.

[Stephane Houri:]

Yes, good morning. Thank you for taking my question. Actually, it's about the margins going forward, waiting for your 20% plus, targets when you will reach it like to know for 2022 there's a lot of moving parts with the disposal of digital and more is coming with the restructuring that you're making, and also the first synergies, but at the same time, the impact of the market share loss. So I guess my question is to understand what direction will the margin take in 2022? Can we expect more pressure on the margin because of the market share losses before it goes better or how do you see that? Thank you.

[Alexander Everke:]

So I think as you as you rightfully pointed out, there's still quite a number of moving parts, particularly when you think about the portfolio and the ongoing integration efforts that we have. And as Alex mentioned earlier in his prepared remarks, we are sort of setting the base business if you like in 2022. So as you know, we don't give guidance at this point in time we're ready for next year, or so I think it's fair to assume that we will definitely not be at the 20% level or so that we aspire to in that year for the reasons I just mentioned. Changes we are conducting right now are very fundamental in various pods, and they will not be concluded by then.

[Stephane Houri:]

Okay. And you've been talking of the disposal of the rest of the digital division. And you've said that the US part was had an impact of about $40 million per quarter if I'm correct, what will be the additional impact of the next disposal that that you will do, when you will do them? Thank you. In terms of revenue of course.

[Alexander Everke:]

Yes. Well, obviously, that very much depends on a number of factors we have. A number of let's say, divestiture processes going on in parallel right now, at different stages. It's a bit too early to indicate for obvious reasons also, because we don't want to intervene into the process itself. So, rest assured that once we have concluded, we will also indicate what the impact will be. And as I said, we do expect some further progress there in the second half of the year.

[Stephane Houri:]

Thank you very much.

[Moritz Gmeiner:]

Ladies and gentlemen, this concludes our question-and-answer session for this morning. We thank you very much for joining us for this conference call and we look forward to updating you and our business development again after the third quarter. Thank you very much and have a good day.

[Operator:]

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.