Ams Osram Ag Unsp/Adr

Ladies and gentlemen, thank you for standing by. My name is Emma, your chorus call operator. Welcome and thank you for joining the conference call on the first quarter 2023 results. Without today's recorded presentation, all participants are in a listen-only mode. The presentation will be followed by a question and answer session, and if you would like to ask a question, you may do so by pressing star followed by one on your telephone keypad. Please press star followed by zero for operator assistance. I would now like to turn the conference over to Aldo Kamper, CEO and Interim CFO and Moritz Gmeiner, Head of Investor Relations. Please go ahead, gentlemen.

Good morning, ladies and gentlemen. This is Moritz Gmeiner. I'm very happy to welcome you to this morning's conference call. With me is our new CEO, Aldo Kamper, who will lead you through the business and financial developments of the quarter. And with that, I would like to turn over to Aldo.

Thank you, Moritz, and good morning, ladies and gentlemen. I'm very happy to welcome you to our first quarter 2023 conference call this morning. As I'm sure you're aware, this is my first earnings call as the CEO of Amos Osram, and I'm very glad to be able to speak to you this morning in my new role. Let me start with some personal remarks before we head into the update on the quarter. I'm extremely pleased to be at Amos Osram. It's partly a coming home or coming back as I've worked for more than 20 years for OSRAM before, mainly as the CEO of the Opto Semiconductor Division. But it's also much more than that, as it's now AMS OSRAM, the combination of the emitter-based world of OSRAM with IC and sensor world of AMS, an exciting combination that holds a lot of promise. From my perspective, there's a strong industrial logic for this combination, creating a European-based heavyweight in the semiconductor-based optical solution space. And I have to compliment Alex Everke on having executed this vision. For me personally, it means a lot of listening and learning at the moment. Obviously, to get to know the part that's completely new to me, the previous AMS site, with its specific technologies, capabilities, location, and people. But also to reacquaint myself with the previous Osram site, as also in the fast-paced opto-semiconductor space, a lot of progress has been made in the last five years, and there was a way. Starting to get to know the organization was my main focus of the last weeks. And I must say, I'm impressed. Impressed with the vast scope of technology that the combined company offers. Impressed with the enthusiasm, drive and desire of our team to move these technologies forward, to innovate and thereby bring new ideas to market, enable new applications of our customers. Impressed with the speed of integration, especially considering that the combination of the two companies happened during the global pandemic. The next step will be for me to get to know the views of our investors and, very importantly, customers, which I will now focus on. I'm looking forward to the exchange with our investors this week and meeting with customers that follow thereafter. Based on all these inputs, internal and external, I will work intensely with the management team on further sharpening our way forward. Not to change course dramatically, but to see how we can continue to unlock further potential that the company, in its combination of capabilities, inherently has. Given the current market environment and the associated challenges it poses on our financial performance, unlocking these further potentials swiftly and widely becomes even more important. So please give me some time to develop these thoughts with the team and come back to you with a clear, concise plan on our way forward. And please bear with me in today's earning call, as it's only after a month with the company I might not have all the answers yet that you could be looking for. With that said, let's now move on to today's presentation of our first quarter results. I will start with key developments in the quarter as an overview, and I'm on page two of the presentation here. Our first quarter results were in line with the guidance range that we had given, but they also reflect the continuing difficult market environment and the effect of global economic trends. We are experiencing in the month situation important areas that remained unfavorable in the quarter, and in turn resulted in a significant negative impact on profitability. Our automotive business showed very good strength in the aftermarket side of the business, while the semiconductor side declined moderately sequentially in line with our expectations, mainly due to continued inventory adjustments. The consumer business was very muted in the quarter due to clearly lower customer and market demands year-on-year and quarter-on-quarter, enhanced by seasonal and certain mixed effects. Our industrial markets recorded mixed results with expected lower sequential demand for LED industrial outdoor and horticultural lighting, but certain signs of improvement in other product areas. Very positive is that we closed the last communicated disposals and by this step fully completed the planned disposals. Also, our synergy creation is successful and remains fully on track. As communicated, we are investing heavily in new capabilities this year, which logically shows up in the significant sequential increase in capex, mainly driven by the investments into our new eight-inch LED front end fan. Let me now update you on the divestments in more detail on page three of the presentation. We have now closed the last two remaining disposals, entertainment lighting in March, so within Q1, and the digital systems business in Europe and Asia at the beginning of April, so at the start of the current quarter. This means we have successfully completed the planned portfolio realignment following the acquisition of Osram in just about two years' time, which is a tight timeline to implement this whole set of transactions, and I have to compliment the team on that, especially as evolution of the M&A and market environment was not making these transactions easier to implement. I'm therefore very happy to report this completion here today. We expect a total cash inflow this year of a high double-digit million euro, figure from disposal proceeds, the majority of which still have to be received. Including the last transactions, the total combined proceeds from all divestments since 2021 are expected to close to 600 million euro. It's an excellent result and well above the expectations formulated at the outset, which were 500 million plus. Please note that we will see a substantial last deconsolidation effect in Q2 from these disposals. This will amount to around 80 million euro revenues that have deconsolidated when comparing Q2 to Q1 revenues. Looking at our synergy creation, I'm now on page four. Providing our latest update, we have created 305 million euro of total synergy and savings at the end of Q1 23, which is fully in line with our plans. This means 87% of the total target of 350 million euro on the run rate cross and pre-tax basis. With this, our synergy creation and integration program fully on track and we're confident to achieve our target total at the end of Q1 24 as planned. We have incurred around 70% of the estimated one-time integration costs at the end of Q1, again, in line with our planning. This means that a further approximately 80 million euro remain based on our total cost estimate of around 270 million euro. Moving to our capital expenditure on page 5 of the presentation now. We are continuing our significant investments into state-of-the-art and industry-leading manufacturing capabilities, which is a key element of our long-term strategy. In line with this, we saw a strong sequential increase in capex in Q1. This was predominantly driven by the investment for the industry-first 8-inch LED front end facility we're building at the moment in Kulim, Malaysia. We're fairly satisfied with the progress of this very large-scale project, Construction continues to progress on schedule, as you could also see myself during a visit there two weeks ago. We are closing in on completion of the building. Next to this, we will see the build-out of support infrastructure and more and more plant equipment deliveries, which will drive in further substantial capex as we move to 2023. Let me emphasize that the development of capex in Q1 and what's expected for the remainder of the year is fully in line with our plans. Total capex for 2023, we expect slightly below €1 billion currently. So you'd expect capex to be strong through the year, but track to that number in total. We reduced the capex spending compared to the previous assumption of over €1 billion, reflecting the current market environment. But establishing the new capabilities requires still very significant spend, which leads to a peak in capex when compared to the last in the next years. This also means that we expect a meaningful year-on-year decrease in 24 in line with existing plans. Let's now take a look at the development of our business, starting with the semiconductor segment on page 6 of the presentation. Semiconductor automotive business recorded modest results overall that were in line with expectation. In our part of the automotive semiconductor market, we saw further inventory adjustments in our downstream supply chain in Q1, which impacted our top and bottom line. However, we saw this adjustment stabilized at the end of the quarter, which is a positive development. Still, our semiconductor automotive volumes were sequentially lower in Q1, and order momentum in our automotive market remained mixed in the quarter. Despite this unsupported short-term momentum, we are seeing continuing good design traction for advanced automotive lighting solutions for exterior and interior applications, which are adding to our overall mid- and long-term pipeline. This also includes more market success for efficient automotive display backlighting solutions. Large head displays are becoming more and more relevant factor in the interior design of upcoming car platforms, and we're happy to support this. Furthermore, we see a high level of interest for intelligent multicolor LEDs for automotive interior applications, which we are addressing with a new family of products. And we are also preparing to ship our highly pixelated headlamp solution into the first vehicle platform for a large European OEM. beginning a measured ramp in the second half of the year. Our consumer business remains subdued in Q1 as shipment volumes for several consumer lines showed a negative sequential trend. This development reflected the lower year-on-year volume demand in the global smartphone and mobile device market, which continues to be largely driven by macroeconomic impacts on consumer spending habits. As a smartphone business, we saw sequential seasonal and product mix effects influencing our business and, at the same time, the China and Android market did not show a notable improvement in the quarter. Our business in the wearable segment saw meaningfully weaker quarter-on-quarter volumes again due to end customer demand. Our development activities and customer engagement in the consumer market remain on a high level, and we are seeing good traction for future opportunities in a number of areas, including display management and different optical sensing applications for mobile devices. We also continue on our development programs, which support our previously mentioned expectation of an improved market share in the consumer market in 2024. At the same time, current demand momentum does not point to a rebound in mobile device volumes in Q2 on a global basis. Semiconductor industrial and medical business showed a mixed performance in the quarter. As we have called out before, certain industrial markets, including the industrial and outdoor lighting and horticultural solutions, Experienced sequentially lower demand in the quarter, which had an impact on total segment performance. Other industrial and medical products were more supportive and in line with expectations. Let me add here that the strong development in industrialization efforts for our leading smaller structure size micro LED technology are continuing very much in line with our plans. Market feedback is confirming the strength of our technology position in this very exciting area. And I can just say I'm excited to see how far this technology has come now from the early R&D efforts I was involved in a number of years ago, and then to sell it off to them. These activities will remain a key area of R&D spending and investment as we move along our path towards realizing high-volume manufacturing of our micro-LED technology in the world's first 8-inch LED front-end facility. Looking at micro-LED in general, we see increasing and broader activity in the market around different larger structure size micro-LED technologies. We appreciate this positive dynamic because these developments only confirm our strategic focus in this area, and our expectation is micro-LED will be the next generation of display technologies for consumer and other markets. Now looking at the lamps and systems for LNS segment on page seven of the presentation. Inside LNS, the largest portion is the automotive business built around legacy, mainly halogen-based, traditional lighting. Here we recorded a very nice performance in the quarter, which was clearly driven by our global automotive aftermarket business for lamps. This business, where we hold a clear market leader position globally, saw strong seasonal demand in the quarter despite macroeconomic trends affecting demand development in certain regions. In terms of seasonality, the aftermarket generally has to skew to the winter semester, that is the fourth and the first quarter of each year. Our other conventional lighting business within LS showed mixed signals, as demand has certainly reduced from market to slowing due to macroeconomic development. With Ingo Wendt leaving the company at the end of April, as communicated before, and Reiner Ehrle joining on July 1st, I will also present today our financial results in more detail. Before I do that, let me thank Ingo for his significant contributions to AMS Osram, and I wish him all the best in his new endeavors. A few comments up front to keep in mind during the financial section. When we refer to adjusted financial metrics, we refer to adjustments for M&A-related transformation and share-based compensation costs, as well as results from investments in associates and sale of businesses. And you will find the reconciliation to the IFRS basis of the presentation available on our IR website. Let us now take a closer look at the development of our group revenues. On page nine here, the presentation. With revenues of €927 million, we came in within our guidance range. Sequential revenue development reflects a difficult market environment with lower volumes in important markets given the prevailing macroeconomic trends. I would also like to highlight the substantial deconsolidation effects of over €70 million due to disposals when comparing the revenues on a year-over-year basis. We'll now turn to our revenue distribution on page 10. You can see the revenue contribution from our two reporting segments with semiconductors at 59% and lamps and systems at 41%. This split reflects a strong contribution from L&S, which was particularly driven by our automotive aftermarket business in Q1. Our end market split shows that our automotive business contributed 50% of revenue in the quarter, industry and medical 34%, and consumer 16%. I already commented earlier on the development of our business in these end markets. Moving on to group profitability, now page 11 presentation. Adjusted gross margin was 29.3% in the quarter, slightly better compared to the prior quarter, while the lower revenue base for Q1 result in a decrease in absolute cross-profit. Cost mitigation efforts in our manufacturing helped reduce, but by far did not compensate the meaningful underutilization effects we referred to earlier. At the same time, we remain ready to serve higher demand and both needs as they materialize. Groups adjusted EBIT margin came in at 5.4% in line with the guidance range and also reflecting the lower cross-profit base. Here, we were able to benefit from a cost mitigation effort related to OPEX, which we will see more clearly on the next page. We achieved a further significant reduction of total OPEX in Q1 as latest addition to a successful sequential improvement of OPEX over the last quarters, supported by cost mitigation and synergy creation efforts. These included tight cost controls across the business, further focusing on certain corporate activities and functions, and review of external services, as well as overhead cost improvements. Adjusted R&D spending therefore came in at €150 million or 12% of revenues in the quarter, with a quarter-on-quarter decrease in absolute terms. We also continued to streamline our R&D and development activities in accordance with our overall strategic approach. Absolute adjusted SG&E expenses also came in lower than for the prior quarter at €116 million or 9% less sequentially and 12% of revenue. In relative terms, we did see an increase in Q1, which was, however, to the sequentially lower revenue base in the quarter. Now, let's have a closer look at the development of our reporting segments in the quarter on slide 13. Revenues for the semiconductor segment were at 574 million euros. In the quarter, a sequential decline compared to the prior quarter, as well as to the previous year. And into my earlier comment on the end markets, The meaningful sequential decline was driven by quarter-on-quarter and year-on-year reductions in volume across important markets for the segment. These impact our automotive, industrial, and medical, as well as, in particular, our consumer semiconductor business in the quarter. They also created noticeable underutilization in manufacturing in the quarter, which in turn had significant impact on the operating profitability of the segment. We implemented mitigation and cost reduction measures also in Q1 and were able to partly compensate this impact. As realty above, which is an EBIT margin, came in at minus 3% for the quarter, which is a strong sequential decline that's not in line with our expectations. Let me adhere that while I'm still building my full understanding of our business and its levers, I'm not satisfied with our current financial performance. Therefore, it will be a clear focus for me and the management team in the next month to define a path forward to address our challenges and deal especially with the muted demand situation in the best possible manner. The limbs and system segment, on the other hand, showed a very robust performance in Q1, coupled with substantially stronger profitability. Revenues for the segment were €380 million, which has declined sequentially and year-on-year. However, when you exclude the divestment-related portfolio effects, that is, on a like-for-like revenue basis, revenue were almost unchanged to the period one year ago. This is a very good result that was clearly driven by our L&S automotive business, particularly here by the strong performance of our aftermarket business in an available market economic environment. I'm also very pleased to report the substantial improved profitability of this segment, which recorded an adjusted EBIT margin of 17% per quarter. On the one hand, this excellent performance reflects the strong market position and execution power of the business. On the other hand, it shows clearly the positive margin effects resulting from our disposals, and portfolio streamlining when compared to last year. Turning to the net results in EPS now on page 15, the adjusted net results for the group was positive at 6 billion euros in the quarter. Unfavorable development of adjusted net results in the quarter was largely related to the negative adjusted EBIT development we recorded in the quarter. It includes a net financial result of minus 32 million euros, which was mostly determined by interest payments. As a consequence, this translates into lower basic earnings per share to the first quarter of 0.02 Swiss francs, which reflects the muted profitability of the quarter. I first reported net results, on the other hand, came in at minus 134 million euros. Let me now complete the review of the company's financials with a look at our cash flow and debt position on page 16 and 17 of the presentation. Operational cash flow continued to be strong in the quarter at €162 million, or a very solid 18% of revenues, and actually up year on year. Pre-cash flow came in negative, as expected, at €-139 million, which is based on our high strategic capital expenditures in Q1 as planned and communicated. And, as mentioned before, we also expect capex to come down meaningfully again from this year's level in the coming years, starting in 2024, in line with our overall target spending of around 10% of capex compared to revenues on average through a cycle. Turning to page 17 now, the group's cash and cash equivalents amounted to €861 million at the end of the quarter. The sequential decline you see here particularly resulted as a consequence of the high capex spending in the first quarter. in a deficit of €1.9 billion, reflecting an expected increase when compared to the prior quarter, which was largely due to the lower cash balance. Overall, this development translated into an expected uptick in group leverage to a leverage factor of 2.5 times, which still reflects a solid level. As a reminder, next to our cash balance, we have around €1 billion of available multi-year lines at our disposal. This includes our fully committed multi-year 800 million euro RCF, which remain undrawn at this point. With regard to our debt structure and planning, we do not have major maturities coming up before 2025. Nonetheless, we are already engaged in defining the refinancing approach for these maturities in more detail. This includes potential instruments, their potential culmination, as well as timing considerations. We may opt for a staggered approach here and are keen to take refinancing steps in a timely manner we are getting close to the 25 maturities. Let me now conclude with the outlook for our business on page 18 of the presentation. All of the following expectations are based on the current exchange rate and available information. We are experiencing a demanding market situation which is continuing in the second quarter as macroeconomic trends are impacting demand on a broader basis. In our automotive business, demand is expected to stabilize further, but we still need to see meaningful positive momentum coming on. Order patterns with automotive customers still appear inconsistent, while our aftermarket business will be influenced by summer seasonality. Our consumer business continues to be impacted by reduced levels of end customer demand. This is due to the ongoing weaker year-on-year volumes for smartphones and certain consumer devices, given macroeconomic impacts on consumer spending. Historically, the smartphone market has also shown negative seasonal effects in the second quarter. It typically resulted in a seasonally stronger second half compared to the first half of each year. Industrial and medical business is trending towards the stabilization of order intake and compared to the beginning of the year. In the current quarter, however, demand for industrial and medical lines still remains mixed. Given these dynamics, we expect lowered production volumes to continue in the second quarter with associated utilization levels in our manufacturing and ongoing negative impact on profitability, as shown in our guidance. We therefore expect second quarter group revenues of 800 to 900 million euro, including quarter-on-quarter disposal related deconsolidation effects. This is equivalent to revenues of 880 to 980 million excluding the deconsolidation effects, which means a sequentially flat revenue development at midpoint. Based on this revenue expectation and other factors mentioned, we expect an adjusted operating margin of 3 to 6% for the quarter. These expectations reflect deconsolidation effects, including from closing digital systems Europe-Asia divestment, which reduced expected second quarter revenues by around 80 million euro on a comparable portfolio basis. Furthermore, expectations reflect disposal related to consolidation effects on a year-on-year basis with a second quarter revenue effect of around 150 million euro. Looking further ahead and taking into account current macroeconomic and market trends, we continue to be cautiously optimistic that we will benefit from an improving demand environment in the second half of the year across a number of our markets based on current information and exchange rates. And with that, I would like to now open it for questions.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their telephone keypad. If you wish to remove yourself from the question queue, you may press star, then two. If you have a question, you may press star, followed by one at this time. One moment for the first question, please. The first question is from the line of Jana Danminon with Jefferies. Please go ahead.

Hi. Thank you very much for taking the question, and welcome aboard, Aldo. I just wanted to go a little bit more into the second half. You said you're still cautiously optimistic that you could see some improvement in the second half of the year. what is the basis of that? Is it that new smartphone models will be ramped in the second half, which your consumer revenues have fallen to a very low level of 16% of revenue in Q1? Is it that that number will start moving up in the second half because of new models or Is it because you see some renormalizing of demand after the inventory correction? Just any clarity on what you're seeing, or is it more coming from the automotive side? Any clarity there would be great. Thanks, and I have a couple of follow-ups.

Yeah, actually, it's both. It's, as you say, seasonal to have your ramps in the smartphone and wearable area in the second half of the year, so we are planning for that. And also, we hope that inventory corrections for automotive will basically be done by the second quarter, and then we will see some volume coming back in general, and also further new product introduction on the automotive side that also should be supportive of the second half of the year. So both aspects will contribute and then at the late part of the second half year we will again also see the aftermarket automotive business of course return as well. In Q2 and Q3 normally that's the low point for that business and in Q4 that will return.

And on that aftermarket and the L&S business where you reported a very strong margin of 17%, What is the sustainability of that margin level? Even if there is some seasonality into Q2 and Q3, is it that you're broadly going to be at the mid-teens range of margin going forward, or was there something exceptionally strong in Q1 which took you to that level of margin?

Well, it is in general quite a healthy business. You might know that we are globally by far the market leader in this segment and actually are able to continue to expand our market share here and also have been quite active in passing on cost increases even in this environment. So that helped combined with the strong demand of the first quarter to really drive the profitability. that business stays healthy, but of course, it's a volume affecting Q2 and Q3 when you have lower demand out of the seasonality that this business inherently has. The second part of the L&S segment is, of course, that also we profit from the sale of the less performing parts of the L&S business over the last quarters and years, and that you start to see now as well in the improved margins that you've seen in the segment reporting here.

And then just a last question for me is on the outlook on 24 from the impact of the ramp of the Coolum fab because you are sort of, you know, spending the capex and building out that fab this year. But previously you had said that the micro LED revenues, the volumes will come in in 2025. My question is, will this be a margin headwind in 2024 because you have a reasonably kitted out fab without meaningful production levels, or is it that the advanced LED production will start kicking in next year and compensate for some of that and so it won't be a margin headwind?

I would expect that, as you say, the factory and the ramp of the factory will be a certain headwind that we manage through. That is, I think, part of the planning. It is clear that you have ramp-up costs if you build up a new fab and especially on these new technologies, if you start to work through the kinks in the cable in 24 to be ready for 25, that will be costly. So there will be some headwinds out of that. And, of course, we will work hard to minimize that. But ramping a large facility like that will have a certain impact. But I think that has been so far also already communicated. There's nothing new about what I'm saying here. Also, Ingo, I think in last quarter's call, if I remember correctly, already said that 24, we will see these effects. And then in 25, we will see first volumes out of the FAP. Understood. Thank you very much.

You're welcome.

Next question is from the line of François Bourvignier with UBS. Please go ahead.

Hi, thank you very much. I have two quick ones. The first one is on the semiconductor division. I mean, you delivered the minus 3% in EBIT margins, and one of the main reasons you mentioned is the under-retention charges. So I was wondering, can you quantify the under-retention charges impact into the quarter for the semiconductors and maybe more broadly at the group level. And by looking at the Q2 guide EBIT margins, what will it be in Q2 would be also very helpful. The second question, Aldo, I mean, I understand you just joined and you may not have all the answers yet, but I just wanted to have your view from a high-level perspective you talked about the discussion you will have with the management team in the upcoming months to unlock the potential and deal with the unsatisfactory financial performance, as you quote, especially in the context of your capex being relatively high. When you look at the balance sheet, your cash, gross cash, was maybe $1.2 billion two quarters ago. We are now at $800 million. 800 million, and with the guidance it seems that it's going to be lower. So can you maybe help us understand the timeline that you give to yourself to decide the decision you would have to make? I understand you won't give the options, but at least give us an idea of when you want to take decisions, especially in light of the current challenging environment.

That's a multifaceted question that you're asking there, so I think there are two parts to that. First of all, as I said in my introduction, I will work very closely with the management team over the next months to fine-tune our plan and to see where we can make further optimization adjustments to really have a very targeted, pointed way forward that helps us deal with the current demand situation in the best possible way, while still, of course, supporting the long-term trends that I strongly continue to believe in, given our technological capabilities. So that will be an exercise over the next month, and I think in next quarter's call, we will already see quite a bit out of that discussion that we can then share with you as a basis for further discussion. In terms of the financing side of things, I think it is not unexpected what happened in this quarter. We had communicated very significant capex spending that happened. Actually, operational cash flow was quite strong in Q1 and actually slightly above Q1 of last year. So I think we're showing that we are managing cash and that we are, of course, continuing to push that. But with the high capex, it's obvious that cash flow will be negative. We still have significant headroom. We are standing at, at the moment, 861 million in the cash balance. There are still proceeds coming out of the sale of the businesses that we have communicated. That will help. But obviously, still, given the high capex, we will see further step down in the cash flow. or in the cash balance, sorry, in the second quarter as well. And as we said in the call, of course, we are noticing this and already now starting to think about how best also to work on the refinancing. I mean, the maturities are 25, but we want to be ahead of the game and also start to already think through what that could mean. That's also part of the exercise that we'll have to go through with especially the finance community in the next months and quarters to get a clear plan

And Francois, let me chip in on the utilization question you had. I think if you compare gross margin Q1 this year to Q1 last year, a large portion of the delta, you could attribute to the annualization cost that we carry. And if you look at Q2, you probably would expect that to be on a similar level in terms of impact on the group compared to Q1.

Great. Thank you, Boos.

Next question is from the line of Sandeep Deshpande with JP Morgan. Please go ahead.

Hi, thanks for letting me on. My question is regarding firstly on lamps and systems. When we look at that big improvement in profitability, I mean 6% in Q1 last year to 17%, can you walk through that delta as such in terms of almost 40 million customers euros of EBIT in terms of improvement, where that 40 million has come from, how much of it has come from removal of losses associated with any disposals, and how much of it has come from actual improvement, profitability of the ongoing business. And I have the same question regarding the semiconductor business as well. I mean, there has been a big change in the semiconductor profitability as well. How the delta has moved from utilization, from pricing, from, you know, weaker revenues.

Okay. With the lamps and systems business, it is a big step up. The larger portion actually comes out of the better performance of the business that we continue to carry, but there is a positive mixed effect by the sale of disposals of less performant business. And it is in the automotive aftermarket business, this combination of strong volumes and at the same time also good pricing quality and that really both contributed to good profitability as well as overall good execution of the team. On the semiconductor side, the large part, I mean you've seen the drop year on year in terms of volume and that just in a very capital intensive business really hurts. So the vast majority of that is utilization or demand driven and you can obviously also should see similar uptake if volume start to return. There is a bit of pricing in there, but that is by far not a major concern. It is really mainly volume driven, and with that, .

Thank you, Aldo. Since you've just come on board, I guess you're looking at the portfolio overall. Are you going to come to us to the investor base at some point and talk about what is important for the company in your plan going forward and what is going to be less important for the company going forward?

Yes, definitely. It's clear that we have to be very targeted in our approach. There's only so much money to go around. We need to spend it very wisely and with the optimal return in mind. We have a very large portfolio of technologies and a large portfolio of opportunities associated with that. which is, on the one hand, a pleasure and a strength. At the same time, it also requires you to make choices, and that's what I want to have as an intense discussion with the management team. What choices are we making? Are the ones that we have already made the right ones? Do they need some adjustments? And what will be the result out of that? We will, of course, come back to you as an investor community with our findings there to give you a clear picture of what we focus on going forward.

Thank you.

But again, the good part is we have almost too many choices, not too little choices. It's a very pleasant problem to have in that sense, but still it requires stringency and consequence. Thank you.

The next question is from the line of Adam Angelov with Bank of America. Please go ahead.

Yeah, hi. Thanks for having me on. Two, please. So firstly, just I guess more generally how you're thinking about 2024 from here. And then specifically, you had the previous revenue on margin targets. So how are you feeling about them today? And then secondly, just wondered if you could share any commentary or updates on the sensing win that was previously communicated for 2024. And then likewise, if there's been any changes to the micro-LED timeline for the revenue in 2025. Thanks.

On the guidance, I still have to get it with my arms around all the levers and dynamics. I mean, the demand is volatile, as we have seen over the last month, and also expected to continue in the second quarter. So, we really have to see how the demand signals develop and then judge how feasible the 24 guidance is. It really depends to a large extent. on overall market demand, but at the same time, as I've also outlined in my introductionary remarks, we are working in both consumer and automotive segments on new product categories that also would be supportive of growth in 2024. So in that sense, it will be supportive, but at the end of the day, still overall market, of course, has a huge impact on the feasibility of those targets. To your question, as I said, we continue to be on track with our developments. No news there to be shared. And on the other one, I have to hand over to Maurice because I wasn't aware of the communication there.

Yeah, Adam, on the sensing wind, I think, and Aldo even made a comment in his remarks, so this is one of the programs where we continue in our development efforts, and yes, indeed, so we have this expectation of improved market share in the consumer space 24 on that basis.

Got it. Many thanks.

Next question is from the line of Jürgen Wagner with Diesel. Please go ahead.

Yeah, good morning. Thank you for letting me on. I have two questions on automotive. How has pricing developed most recently or how do you expect it to progress as the inventory correction is nearing an end in Q2? And from your Osram experience, how significant should we model this demand recovery once the inventory correction is over in automotive? Thank you.

Pricing on the land and system side I already touched upon. On the semiconductor side, what I've seen from the team is that usually semiconductors get better and cheaper at the same time usually. But there was a significant slowdown in the becoming cheaper part in the negotiations last year, given the cost increases on energy and gases and other raw materials. So there was with that a very measured decline in prices compared to normal productivity years, and that also continues into this year. In the automotive semiconductor space, you normally have annual conflicts that you negotiate with customers that you have long-term relationships with, so you have to anyway find a reasonable balance between short-term pressures and long-term relationship and business aspects. And I think the team has been able to find a good balance there, and that will also help us in this year. In terms of the demand recovery, I think both the question of inventory adjustments that we think we are working through right now in the last quarter and hopefully second quarter we will have all of that or most of it behind us. Then for the second half here, it kind of also depends at the end of the day on the the number of cars that are being built and the availability of overall semiconductors beyond the optical semiconductors we supply, of how much of a strengthening in the production volumes of cars that we'll see in the second half year. At the moment, market studies still indicate a stronger second half than the first half. And there's at the moment, I would also say at the moment, nothing that contradicts that, although it is not a huge jump up, but it's at least it's a turning of the direction, which is good and it's important. The volumes are very important for this very heavily-intensive business. Okay, understood.

Thank you. You're welcome.

Next question is from the line of Sebastian Stabovic with Kepler-Chevreux. Please go ahead.

Yes, hi everyone, and thanks for taking my question. On your cost-cutting action, you have already executed 90% of your synergies for Q4 2024, and your margins are still in the low to meeting LG today. So do you see any room for incremental cost-cutting action? Or your margin should be more driven by a recovery in volume and top line going forward? That would be the first question. And the second one is on 3D sensing behind OLED, because it has been a long time that we have not discussed this topic. And I just wanted to know if you have made any kind of progress on the development of the technology 3D sensing behind OLED, because some of your peers seem to be ready for commercial deployment. Just wanted to have... an update on this one. Thank you.

On the second one, let me get back to you next time. I don't have all the roadmap yet digested, so I can't comment spontaneously intelligently on that question. On the first part of your question, yes, the team already has done a lot, so it is not obvious. What are the next steps in further cost optimization? And I think it will have to go hand in hand with making choices in the portfolio. What do you work on? What do you stop working on? Or what do you slow down working on? And that's part of the discussion that we will be having in the management team over the next months. But at the same time, still, of course, also again and again looking at further optimization potential. We need to be, the lean is that we can be in this current environment. Of course, with the dimensions, The structures have to be adjusted given the lower revenue base that we have now compared to where we were two years ago. Part of it has been done, but I think that's a continued effort that we need to continue to focus on. But it is really, again, about making the right portfolio choices going forward and then adjusting spending towards that. And then, yes, of course, volume will definitely be part of that journey as well. we have to also get some tailwind out of the market plus out of the product that we're introducing to increase the utilization of our factories. And with that also, we will see, of course, an associated profit improvement as well.

Okay. And just to follow up on the CapEx question, Do you expect to return already to a capex to revenue of 10% in 2024? Or it is too early and you will have some incremental capex links to your micro EDFAB in Kulim?

And it will go down in 24, no question, 2023 is the highest spending year on CapEx. But I would expect that in 24, there's still also some work to be done above the average. The exact number, I don't know by heart, but we will work through it as well. But directionally, yes, it will be a significant step down, but it will still be above the average cycle.

Okay, thanks for that.

You're most welcome.

Thank you very much, ladies and gentlemen. This concludes our question and answer session for this call for today. We thank you very much for joining us this morning and we look forward to updating you on our business development with the next quarter's results. Thank you very much and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.