Ams Osram Ag Unsp/Adr

Good morning, ladies and gentlemen. Welcome to the conference call on the first quarter 2024 results. My name is Francise, the chorus call operator. I would like to remind you that all participants will be in a listen-only mode and the conference has been recorded. The presentation will be followed by a question and answer session. If you would like to ask a question, you may do so by pressing star and 1. For operator assistance, please press star and 0. At this time, it is my pleasure to hand over to Jürgen Rebbel, Head of Investor Relations. Please go ahead, sir.

Good morning, everyone. This is Jürgen speaking. I would like to welcome you to our first quarter 2024 earnings call for investors and analysts. With me today are Aldo Kamper, our CEO, and Rainer Ehrle, our CFO. Aldo will comment, as usual, on business and strategy update, and Rainer will comment on financials. After our introductory remarks, we are happy to answer your questions. Aldo and Rainer will refer to the earnings call presentations that you find on our website. For additional information, please bear in mind that we also have a full deck available on the website. Aldo, please walk us through the Q1 business and strategy update.

Thank you, Juergen, and good morning to everyone, also from my side. We delivered, again, a solid business performance in the first quarter in spite of significant market uncertainty. Let us take a look at slide number two here. Q1 group revenues decreased quarter on quarter and came in at 847 million euro, 61 million euro lower than in Q4. Revenue, therefore, increased around 5% year on year. We are quite happy that our underlying core business is getting back into structural growth mode besides certain cyclical elements. The increase is driven by both the automotive and consumer semiconductor business, but other verticals remain in inventory correction. The adjusted EBIT margin came in at 5.2%, below the midpoint of the guided range. With our ad hoc announcement on the micro-LD on February 28, indicated that we will no longer be able to capitalize R&D expenses for the Cornerstone project. This weighs on EBIT with around €11 million in Q1. Without that effect, we would have again come in above the midpoint of the guided adjusted EBIT range. In absolute terms, adjusted EBIT stood at €44 million compared to €62 million in Q4-23. On the right-hand side, you see a chart of adjusted EBITDA. We believe that this is actually a more appropriate KPI for our business because it is representative of the cash flow performance of the underlying business. In Q1, adjusted EBITDA stood at 124 million euro or 14.6% adjusted EBITDA margin. Let us take a look at the financial performance of the different business segments. The LEMS and system segment is shown on page number three. The business continued to perform very well, exactly in line with what we had expected. Automotive aftermarket business remained strong, so revenues of 268 million euros, resulting in a slight 4% quarter-on-quarter seasonal decline. As I explained in previous calls, Q4 and Q1 are always the strong quarters in the year as most lamp replacements happen during wintertime in US and Europe. whereby Q4 is typically a bit stronger than Q1. The aftermarket is then rolling off in April into the softer summer months. The lamb sales in industrial and entertainment applications remains at a low level of around 40 million euro. You may have seen the bottom of the cycle, but we need to see how Q2 progresses here. Ebit came in very strong at 19.1 or 51 million euro in Q1. A favorable product mix driven by a strong aftermarket, but also a positive one-time effect for this exceptional result. The adjusted EBITDA margin stood at 22.5%, or €60 million in absolute terms. The LEMS business only requires a small amount of maintenance capex every year. As such, around 3% of sales for DNA is typically a good estimate. Responsibility of our business units. by integrating the respective operational innovation departments into their organizations so they're truly end-to-end responsible. Their performance is measured along revenue and profitability KPIs. With this, we are now reporting our semiconductor businesses per business unit separate segments here. And I think you will appreciate the added transparency this brings one of the teams that Reiner and myself have been adamant about since we started. You find the graph representing the optical semiconductor business, OS, in brief, on the left-hand side of the slide. This is our semiconductor business with emitters, for example, LEDs and lasers. We recorded solid revenues at €345 million, primarily driven by healthy automotive demand, but industrial is still weak. Adjusted EBITDA came in at €67 million, representing an adjusted EBITDA margin of 19.3%. There are various drivers for this, still below target profitability. Operationally, the contingency prolonged weakness in industrial markets, and as such, underutilization charges are weighing on the results. However, the micro-LD topic is still the major track on profitability. On the one hand, absolute research and development expenses are still high in Q1, On the other hand, we can no longer capitalize R&D related to the CornerStrom project that was canceled. We will talk about the way forward on micro-LED in a few slides. On the right-hand side of the slide, we see the financial performance of our semiconductor segment CMOS sensors and ASICs, or CSA in short. Revenues came in at 233 million euro, driven by good momentum in consumer applications, but still heavily impacted by prolonged inventory correction, industrial automation, and medical. Adjusted EBITDA for CSA stood at 5 million euro, or 2.2% adjusted EBITDA margin. Clearly, you see the effect of the loss in a few minutes. At the same time, the weakness in industrial and medical markets causes underutilization charges, also impacting profitability. Let us switch to slide number five, looking at the dynamics in the end markets in detail. On the very left, you see the revenues of both semiconductor segments combined for comparison purposes. In spite of the seasonal decline, we see a 5% year-on-year growth. The strength in automotive continued, in spite of the normalization in demand from China after the year-end rally in Q4, on top of normal seasonality, where H1 always is a bit weaker than H2. We recorded a strong 13% year-on-year increase. While we expanded our bill of material for sure, there's also a cyclical element as we went to an inventory correction a year ago, you might remember. Industrial markets remain extremely weak momentarily, a theme you hear from our peers as well. However, let us look at it in some more detail. We benefited in Q4 from non-cancellable orders in digital automation, we now feel the full swing of inventory correction, both in industrial and medical markets. In professional lighting applications, street lighting is an exception that remains relatively stable. Mass market demand remains relatively weak, especially for emitters, but some new products that were recently introduced, such as our new blue laser, are in high demand. The medical business still undergoes inventory depletion as OEMs are adjusting high stock levels here. Consumer business showed a decent improvement compared to a year ago, driven by excellent demand for sensor products for Android smartphones. We are benefiting from our leading market position in spectral sensing. It seems that customers are replenishing some of their inventory on top of genuine end customer demand. The slight sequential decline is rather an effect of typical seasonality that unsees in the consumer business. Now, let us take a look at slide number six. Despite the news regarding micro LED, Our underlying core business performs well and continues to support our structural growth expectations. We continue to win new business on an ongoing basis, showing a competitive edge of our existing and new products. First, our 25,000-pixel forward lighting solution, Evios, continues to be in high demand. We are continuously winning new designs and are now at more than €350 million lifetime value, at more than €100 million since we talked about it last time. Second, our latest hyper-RED LED product for the horticulture market, boasting highest efficacy on the market, is finding very strong traction. We could win an exceptionally large project worth €75 million, amongst many other design-wins at key customers. This gives us confidence that the second half of 2024 is indeed seeing stronger traction in industrial, especially from the horticultural side of things. Third, we could secure a €100 million design win in medical at the leading Chinese CT maker, UHI, probably still known in the West, but the biggest player in China by far. We have been a key partner of UIH for over 10 years, growing them from the start to a world-class leader in their field, along our DNA, based on innovation competence and strong customer relationships. Finally, as you just heard, we benefited from the recovery in the Android smartphone market for our consumer business. This has only been possible as we're constantly winning and re-winning sockets in almost all premium to mid-range platforms on the key brands. And over the last quarter, we secured numerous sockets worth more than €50 million. Now, let us switch to the strategic topics regarding the revision of our micro-LED strategy. We are on slide number seven. In the wake of the cancellation of the Cornerstone project regarding micro-LED, market researchers have started to adapt their view on the adoption of this technology significantly. You see the latest view of the development of the LED market from research firm Trendforce on this slide. Two segments stick out. On the one hand, general lighting, known to be a red ocean market dominated by Chinese vendors. On the other hand, automotive, where we are the clear market leader, will become the biggest single segment of the LED market, according to Trendforce, in only a few years. When looking at the segment micro LED self-emitting displays in more detail in this report, one finds out that the volume and revenue outlook for high-performance, very small-scale micro LEDs has been reduced strongly. This is especially true for personal handheld devices, as momentarily no big project by any of the large brands is visible. The most noteworthy segment remains premium TV screens, which comes along with a kind of smooth transition for mini LEDs, which is known to be a highly commoditized segment. It could become a heavily contested area for potentially just a few hundred thousand premium TVs. Other segments that Transforce still looks at positively are automotive displays and AR applications, but these are comparatively small until the end of the decade. This brings us to slide number 83. We promise that we will reassess our micro-LD strategy after the recent unfortunate events and provide an update with first quarter financial reporting. Previously, the Cornerstone project was believed to be the watershed moment for the high-performance, super-miniaturized micro-LD technology. It was the single largest, most tangible, and shortest-term project out there. However, as we've and those segments only promise a fraction of the volume that had been anticipated for personal handheld devices. At the same time, we see continued support for our assumption of attractive growth in our core markets. With the cancellation of the cornerstone micro-LED project, we can now fully focus our resources and our management attention on those opportunities in markets that we have been owning for many years. For this, we have decided that we will scale down our micro-LD development activities significantly and focus on small-scale core development activities that serve our own proprietary needs. We will work in areas where we're not dependent on exotic mass transfer technologies. For example, high-pixelated forward lighting applications will move from the 25,000 pixels that we spoke about before to a next generation of 100,000 pixels. pixels in the next generation. And the pixels are becoming also very small here. Incorporating learnings that we have gathered during the last years on the work on the micro-LED technology will incorporate those learnings into those kind of products. Nevertheless, we are also still in discussion with one or the other and the reasonable contractual terms. The substantial restructuring of our micro-LED development activities affects more than 500 employees at both Regensburg and Kulim sites combined. Some 3DEP resources are reallocated for strengthening the core developments, especially in automotive, as just mentioned. Certainly not easy for us, as our teams have worked extremely hard to successfully hit the set development industrialization milestones, but we have no choice given the new market outlook for micro-LED. The second revision of the micro-LED strategy concerns the future use of our brand-new 8-inch facility in Kulin. As a state-of-the-art turnkey semiconductor facility in a geopolitically neutral hub where land is scarce and construction costs have again risen, we've received a lot of interest in the FAB. Transferring the FAB to a new lessee, meaning somebody takes over the facility and steps into the sale and leaseback agreement, has become the priority option for us. We have actively engaged with first interested parties and will expand this effort in the next weeks. Certainly, we're also in contact with our sale and leaseback investors to get their support on our intention to exit. I think you understand that given that this is a meaningful step for us and any interested party, it will need a bit of time until we might have a signed transaction here. In total, looking at the cost now, we had to bear around €700 million transformation cost in 2024. Of those €700 million, €643 million were booked in Q1, including a write-off of €524 million for dedicated equipment and capitalized R&D. Within those €700 million, we also booked €119 million cash transformation costs for cancellation fees and equipment hookdown. Necessary adjustments in the R&D setup for micro-LD will incur up to around €70 million in the quarters to come. They will include, among others, reference payments for the restructuring. Reiner will comment on the adjusted EBIT and cash flow improvements in his part of the presentation in detail. On top, we also expect to reduce our net debt by around €400 million when a new lessee steps into the contract. In our discussions with investors, we were regularly asked, what is the impact on our growth plans? And for this, let us switch to slide nine. It's very important to me to emphasize that our underlying core business is fully intact. And let us take a look at what it means for our target growth model until 26. Certainly, we had to take out anticipated revenue from the micro-LED cornerstone project in the 2026 projection, a low triple digit number. This means that the midpoint CAGR reduced by just 1% from 8% to 7%. Remember, previously we indicated the growth band, the 2020 true base of 3.1 billion euro, which excludes the non-core portfolio, of 6% to 10%. Now we say 6% to 8%. Why are we so confident? We always said that the key driver in 2026 is automotive, driven primarily by BOM growth and design wins. The momentum and the view is unchanged. Next biggest contributor is the new mobile light sensor. Ramping in a new design wind is fully on track. Nothing has changed. Looking at industrial, we're bringing out new products, take a benchmark or a culture chip, take a blue laser. We're also strengthening the distribution channel where we see significant opportunity for us. Looking at medical, I just mentioned a few minutes ago, another significant design in the CT scanners. Nothing has changed. We continue to expect growth twice as fast as the market once the inventory correction is over. And you might remember that last time we mentioned the aggregated number of designers in 23 of more than 5 billion euros, which underpins our future growth ambitions. The design momentum continues to be strong, as we talked about a few slides back. For this, I can only stress again that our core business is fully intact and unaffected by the revision of the micro-LD strategy. The contrary is actually true. We are shifting a few key resources to core business to strengthen and accelerate developments for new products and growth to come. Now let us take a look at slide 10. When we announced the re-established base program last summer, we said that most of our product lines are structurally healthy, but the overall performance is hampered by non-core businesses, primarily in consumer applications. We told you that they prioritized. News on this in the not too distant future with you. We also decided to restructure another product line and optimize the CMOS imaging sensor business, another product line in the non-core portfolio that we had not talked about publicly yet. We are stopping the developments related to future consumer applications that have cost significant amount of R&D in the CMOS sensor area, which result in overall loss-making business. This includes restructuring one site and the closure of another small development site in the U.S. Estimated transformation costs are around €4 million. The remaining existing business of around €50 to €100 million is actually targeting medical industrial applications, which fits nicely to our overall strategy of steadily developing markets and delivering structural growth. On the slide, you see an application example, the disposable endoscope for medical examinations. We will optimize the setup, and this business will become profitable and cash flow positive in 2025. Together, these developments are fully in line with the savings plan of Re-establish the Base, where we target to deliver 75 million euro on a runway basis by the end of the year. With this overview, I now hand over to Rainer for providing you with some more details on liquidity and cash flow.

Thank you, Aldo. Good morning. We are on page 11 now. After the news on stopping the micro-LED cornerstone project, We received many questions to what extent this impacts our liquidity situation. While the write-off for equipment and capitalized R&D reduces the equity ratio, our available liquidity remains strong. End of March, we had 1 billion 76 million euro cash on hand. Bilateral bank facilities, including promissory notes, amount to 350 million euro of these. We intend to pay back material promissory notes of 51 million euro in July. For the remaining bank facilities of 264 million, also due in 24, we will decide whether we want to roll them or pay them back. There are no changes to the outstanding 25 and 27 converts, no to the 29 senior unsecured notes. The Malaysia sale and leaseback transaction stands with 394 million euro. Technically, according to IFS, it's not debt but other non-current liabilities. However, we obviously consider it as debt internally. I'll explain that one of the key goals is to execute the sale on lead-back in close alignment with the investors by transferring it to a new lessee. That would take away the €394 million debt-like liabilities, strengthen our balance sheet, and reduce leverage. It would also take away the 35 million euro interest expense per year. For completeness, the outstanding minority put options amounted to 610 million euro, or 14% of shares outstanding. Key one put options worth of far less than a million euro executed, basically nothing. We have the revolving credit facility of 800 million euro, which is, in principle, reserved for an unlikely but possible bike exercise of the Osram Licht AG minority put options, leaving even in that unlikely scenario 200 million of headroom in the revolver. On top, we also have 206 million euro undrawn bank facilities. In summary, we stand with a strong available liquidity of more than 2 billion euro end of the first quarter. On the right side, you find the familiar maturity table of our outstanding debt. There's no change. Upon implementation of the decision that Aldo laid out, our past deposit of free cash flow after net interest paid and a strongly adjusted EBIT is actually strengthened and accelerated. So you can see that the cancellation of the micro-LED project actually supports our mid-term financial performance not worth it as some had feared. On the left-hand side, you see the impact on free cash flow. In 24, we see a neutral effect as cancellation fees and cash transformation costs essentially balance the cash savings from reduced capex and benefit from taking costs out of the restructure. However, in 25, we can save more than 100 million euro in cash outflow, which would accelerate the path to positive free cash flow after net interest. Starting this quarter, our operating and free cash flow definitions now include net interest rate, and we will come to that when looking at the first quarter financials. Let us take a look at the adjusted EBIT improvements on the right-hand side in more detail. In the ad hoc announcement on February 28th which indicated the 30 to 50 million euro impact, negative impact to the financial of this year. But we now believe that the impact to adjusted EBIT in 24 will be minimal. Obviously more positive in the second half and more negative in the first half. This capitalization of micro LED related R&D and less funding reduce the adjusted EBIT. But then the gross cost savings will bring the adjusted EBIT to the same level as before. As such, the total impact will be minimal. The transformation costs are actually not part of that adjustment and not shown here in the adjusted EBIT. In 2025, the massive cost savings will be significantly larger than the negative effects of capitalization and funding. We speak of a relative improvement of around 100 million euros compared to the plan we had originally. And now let us return to the operation of financials in Q1. Page 13, in line with market practice and following our principles of transparency, We now include net interest payments into the definition of operating cash flow, and that's also free cash flow as I just mentioned. The figures you see for operating cash flow on the chart on the very left is backward adjusted to include net interest payments also with a historic quarter. Looking at the next chart, we see that CapEx was almost half compared to Q4. The 120 million euro still included micro-LED related equipment for which it was too late to be canceled. As a result, the pre-cash flow, including net interest payments, still came in negative in Q1 this year, and that is this year in Q2 and Q3. And page 14, looking at gross profit and OPEX. Adjusted gross profit came in at €241 million minus 7% quarter-on-quarter decline in line with seasonality. Adjusted gross margins to the 28.4%, just slightly lower than 28.7% in Q4. Gross profit is impacted by the non-core portfolio and the high underutilization costs. The adjusted R&D expenses increased to €140 million from €92 million in Q3. This for two reasons. Firstly, R&D in absolute terms has been going up due to stepping up the industrialization and development efforts for the micro-LED cornerstone project before it was counted. Along the lines we had commented in our last call. Secondly, you now see the full effect of this and the overall micro-LED run rate, as we can no longer capitalize these R&D expenses. We have planned to capitalize some 70 million euros of R&D expenses in the whole year 24 for the micro LED. This is no longer possible, and it will take some time to reduce the R&D cost to the new target. Adjusted SG&A expenses came in at 93 million euros in the first quarter. A significant reduction of minus 21% quarter-on-quarter due to two effects. The first effect is that in Q4, SG&A was above normal due to about 50 million Euro one-off in conjunction with a catch-up in bonus accruals during Q4. Secondly, and that is now very important, we see first effects from continuously implementing the re-establish the base program. For example, we have reduced the overhead in our now much smaller site in Singapore. So, in the SG&A, you really see the effects of the re-establish the base program, and that will improve. With this, let us take a look at adjusted net result and earnings per share on the next slide. Net financing results in the first quarter stood at minus 57 million Euro, compared to minus 80 million Euro in Q4. In Q4, though, we had booked about 40 million new one-time charges for the refinancing. The higher run rate of the net financing result in comparison to the average quarterly number in 23 comes from the higher interest rates for the new unsecured senior notes issued during the refinancing. For this and the lower cross-profit because of the lower seasonal revenue, the adjusted net result came in also lower than in Q4, standing at minus 35 million new. The adjusted diluted earnings per share amounted to minus 4 euro cents to 3 euro cents in the last quarter. Please bear in mind that in Q4, the earnings per share calculation for the Q4 quarter were based on the weighted average share count of 456 million. And now the reference is after the capital increase, 998 million shares. less the treasury shares we hold ourselves. The clean IFRS reported net result was minus €710 million in Q1. This very negative result is dominated by the €632 million one-off cost for the restructuring of the micro-LED business. Beyond the micro-LED-related transformation cost, adjustments other transformation costs mostly relating to reestablish the base. Tax expenses were also bit high in Q1, which will come down for the rest of the year. And now let us take a look at the outlook for Q2 and the updated comments on 24. And I am now on slide 16. In Q2, we will experience, on the one hand, the normal seasonal decline in the automotive aftermarket business. In addition, we will continue to see inventory corrections in industrial medical markets. And that's in summer. Revenues are expected to come in between 770 and 870 million euros. With slightly lower revenues and cost savings materializing, we expect the adjusted EBITDA to come in between 14 and 17 percent in the second quarter, so a little lower revenue and a little higher EBITDA margin. Thereby, we assume the Euro-US dollar exchange rate of 110. Looking at 24, we have some changes for the whole year as a consequence of the revised micro-LED strategy. We are on track to divest or exit the first part of the non-core semiconductor portfolio. We continue to see the second half of 24 coming in stronger than the first half, driven by design winds going into production and the potential normalization in certain industrial verticals, where we sense some more confidence during the quarter. We are also cautiously optimistic about continuing demand from the Android space. CapEx in this fiscal year will now come in much lower. Originally, we had expected more than 700 million euro cash flow burden from CapEx, including 100 million capitalized R&D and 100 million euro carry. Cancellation costs for equipment are not included, as it is a one-off operational payment, and that the R&D costs that cannot be capitalized any longer will move also to operational cash flow, until we will be able to eliminate such costs completely. And now looking a bit into 2025, obviously capex will be much lower. We confirm our target of a positive free cash flow, excluding interest payments for this year, 2024. When it comes to the impact on adjusted EBIT for 24, remember the net effect of less capitalization and step-by-step reduction of R&D expenses and factory costs related to micro-LED. We have indicated 30 to 50 million euro impact in the ad hoc announcement, and we target definitely to minimize the impact, and we believe today that the impact to adjusted EBIT will be minimal, as I explained above. All the one-off costs are in the adjustment. And now for the summary, I hand back to Alden.

Thank you very much, Reiner. And now switching to slide 17, summarizing today's key takeaways. We delivered, again, solid revenues and adjusted EBIT in the first quarter as guided in a difficult environment. Very importantly, we showed a 5% year-on-year growth on a like-for-like constant currency basis, driven by strong automotive and consumer business in semis. We continue to win significant new business in our core semi-business, underlying the structural growth path of our application markets and our strong market positions here. We keep a very solid liquidity position of €2.1 billion, consisting of cash, undrawn RCF, and bilateral facilities. Re-establish the base is executed well, as you have seen from the SG&A improvement in the decision to restructure CMOD's imaging sensor business. We started the substantial restructuring of the micro-LED-related organizations, and we decided that we want to exit the Coulomb 8-inch facility sale and leaseback in close alignment with our sale and leaseback investors to a new lessee. These steps will improve our financial situation by improving EBIT and cash flow in 2075 significantly, and will reduce net debt and leverage as well. Our mid-term growth model outside micro-algae is unaffected and solid. For the second quarter, we expect a decline in revenue and adjusted EBIT in line with seasonality and inventory correction in industrial and medical and cool swing. This concludes today's introductionary remarks, and Ryan and I are now happy to take your 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 and 1. If you wish to remove yourself from the question queue, you may press star and 2. Anyone who has a question may press star and 1 at this time. Our first question today comes from Francois Bonvier from UBS. Please go ahead with your question.

Thank you very much. I have a couple if I may. The first one is on the free cash flow and maybe the exit on the macro LD. You mentioned about the 400 million and that you can reduce the debt and your negotiation with parties. You also said that you think it's going to take time. Maybe, you know, can you help us manage expectations a bit on this, you know, timeline? You know, is it like a 2024 next quarter or two, three quarters? Just, you know, that would be helpful to manage expectations here. My second question is on the CMOS that you, you know, action as well that you are doing. And, you know, I was wondering why, I mean, what changed? Because you did already a review, you know, six months ago or more with these new plans, and now you come up with this new additional one. So why didn't you take, you know, that decision already six months ago, and now you are, you know, acting further? And the final one would be on the H2 recovery. because you don't talk so much about the outlook beyond Q2, and what would that be the impact on your gross margin? Your gross margin has been flattish, but what leverage or product mix we should expect that the impact will have on the gross margin in the second half of the year? Thank you.

All right, François, thank you for the question. on the divestment of the factory in Kulim. So interestingly, I mean, we haven't started an official sales process, but we got like at least 10 cold calls from interesting parties. So that is a factory that is at a great location, you know, where everybody wants to go and the space is getting rare. And it's a very modern factory that can be used for many different applications. That's a lot of interest, and we have it in the book with a value of 470 million, while the sale and leaseback is only a portion of that, which is 390 million euros. So we will take time to really maximize the proceeds from there. We can, you know, with the increased cost of... of building such factories, we actually hope for quite a bit of upside to compare what we originally paid. So that is something that we should expect then probably in 25, as it will take some time to do that.

Okay, and Rainer, just to put up on this, this $400 million that you mentioned, do you see, given the interest as a floor, because if you have a lot of interest, I guess you could get a bit more out of it, I would imagine. So do you see upside to this $400 million? I mean, how do we think about that?

Yeah, I mean, we definitely try to maximize it, and I told you that construction costs have increased since. We are definitely trying to get as much as possible.

Maybe a quick...

sold it for 400 million that would be already 40 million free cash flow positive if we get more than 400 we get 470 we would also get another 70 million in cash and we if we get more than 470 million obviously we will see a significant cash inflow okay let me follow up on your other two questions on the c-med image sensor site this was one of the product lines that has been part of the re-established base

portfolio cleanup all along. We have said we only talk about it kind of step by step as we don't want to damage the sales process, so that's why optical components we have spoken about openly, and we're getting close to a positive conclusion there. But the CMOD image sensor has been part of that set of product lines that we wanted to divest all along. We've also, over the last quarters, tried hard to sell the business here, to find a new home. but have realized that there was no adequate buyer to be found for this and therefore we've now come to the conclusion after evaluating our options here that the restructuring is the smartest and wisest thing to do to make this going forward a profitable and cash positive part of our business and with the divestment or with the stopping, sorry, of the restructuring of the AR consumer related camera products, we saved significant R&D for a market that is getting later and later. And with that, there was no revenue associated to it. And we concentrate on the market that we have already today, especially on the very small medical image sensors where we have a good, strong market position. That will continue, and when we clean up the consumer side of things, this will become also a product line that contributes positively to our growth and profitability. On the H2 recovery, we don't really guide H2 yet. I think on quarter two, you have seen slightly down. Keep in mind, for the semiconductor peers, we have an AMSB business that logically just out of seasonality will see a significant increase step down, and that is normally Q2, Q3, and then we'll step up again in Q4 as the dark season again starts. So that is a normal seasonality that we have to deal with that our peers probably don't have. This at the same time means that the semi-business is quite stable in Q2, and overall profitability, as you've seen in the guidance for Q2, slightly goes up because of the reestablished base actions and the mixed effect.

Thank you very much. On the gross margin directory, I mean, should we think this level is for now an appropriate level?

Apologies. Can we please also let Aziz in the queue? You already had four questions. Yeah, absolutely. I will be back to you. Thank you.

The next question comes from Jadana Menon from Jefferies. Please go ahead with your question.

Hi, good morning. Thanks for taking the question. This is a clarification. Sorry, can you hear me? Yes, we can hear you well. Yeah. This is a clarification on the second sale and lease back. I mean, can you just explain to me why you're doing that? I So why a second sale and lease back versus just a sale itself? I mean, and the second sale and lease back, you're saying you don't have to make lease payments. So what exactly is the mechanics of that transaction that you're trying to get to?

Yeah, certainly. So what we're seeing is, I mean, there's The easiest way in respecting the needs of our investors in Malaysia would be if we sell it in a way that a new owner would step into the sale and leaseback agreement, into the existing agreement, which is well-structured, and then give us a compensation payment on top. So somebody would step in, and then the sale and leaseback leaves our books. the debt and the leasing payment. So it's clear for us, would be good for new investors, for the investors in Malaysia, and we clear up our bench.

Okay, so from our purposes, we should see the second sale and leaseback as pretty much a sale from your point of view.

Yes, so when you look at our books, I mean, from an IFIS point of view, it was not considered to be a true sale, the sale and leaseback. So technically, we sold it, and we would buy it back. But from IFRS, it was not a true sale. So when somebody else steps into the sale and lease back, under IFRS, we will account for it as a sale, right? So we will see positive cash flow, and we will see a reduced debt level because the obligations of the sale and lease back go away. But it would be the same contract. It would just be another lessee stepping into it.

Understood. And just two short follow-ups from you. One, is your exit from the 300 to 400 million of initially announced businesses, including passive optical components, is that going on schedule? And when can we expect to hear any announcements of actual sale? Is that something that will come through by Q3 or will that be Q4? And can you just give us a number for what could be the savings from the exit of the CMOS image sensor business in Kazuma?

Thanks. Well, yeah, so that is part of the portfolio cleanup. And, of course, with that, there's now the $5,200 million of revenue out of the $300 million that we will not sell, but we have now restructured, or we have decided to restructure. So that number comes down a bit, but that's one of the actions. The second action is as I said, is on optical components where we are getting very close to a deal. So I think we will be able to inform you shortly about that. And then there's another one or two product lines that are a bit further down the queue. So they'll probably be either late this year or then early next year.

On the CMOS image, I'm just saying, you know, you've already got $75 million of cost reduction. Can we add something on top of that because of the additional exit from the Or the 75 plus 75, 150, can we add something on top of that for the CMOS image sensor?

No, that is part of the cleanup. I mean, if it would have sold, it would have also taken care of the losses, and now we're taking care of the losses in another way by restructuring it. So the overall ambition level remains the 150 by the end of next year, and we are on track to deliver 75 at the end of this year, and the CMOS actions are part of that. Understood. Thank you.

Our next question comes from Robert Sanders from Deutsche Bank. Please go ahead.

Yeah, hi. Thanks for taking my question. I guess just to follow up on the SLB, I guess one option that I guess you don't seem to be considering is to break the SLB and then monetize the asset yourself. Is that because there's just not that many cash buyers out there and therefore or maybe there's a contractual issue? you know, penalty for you to do that approach. I'm just trying to understand why that doesn't seem to be an option you're considering.

Thanks. Rob, I think in the books, in our books, it would look exactly the same, right? It is, let's say somebody gives us, for example, you have a combat today as, as a sale of 470 million euros. And if somebody gives us more, it means better, right? And because it was not a true sale, so somebody would be stepping in. It looks like somebody's taking over the sale and lead back, and whatever kind of value we agree on with the buyer, we would get the delta as a cash compensation. But in our books, it would like a sale of 470 million because we haven't considered that as a true sale. And you know, there's the investors in there in Malaysia. We already talked to them. They are very supportive if they get a good name into the building. And they would be happy to have a partner that will continue production there. So that is the easiest and the fastest way out. We will not leave any money on that track.

Got it. And just for a follow-up, just on the debt maturity, you say you have refinancing available for the maturities up to 26. I just wondered what you were thinking about 27 and what is the refinancing that you have to support the maturities this year, next year, and then 26? Thanks.

So we have refinanced everything up to the March 25 convert. That's what I said. And then, I mean, cash flow will be positive starting next year. And if the sell-on-leaseback goes out, our veering comes down. So, I would expect a positive development in our credit rating. And that gives us then in early 26 several options to refinance the 27 convert. And we are looking at that, but we really see a lot of options, and quite a bit of that would come actually from positive cash flow.

Thank you.

The next question comes from Jürgen Wagner from CISO. Please go ahead.

Yeah, good morning. Thank you for letting me on. On your CSA segment, what margin level would be realistic, let's say in upturn 26 and post all disposals in 25? And then you mentioned our second question on your high pixelated lighting, you mentioned them. in the handout of your assignment. How is adoption progressing in general and how significant can that be for you in, let's say, also 26? Thank you.

On the first one, it's clear that the 2% is definitely not where we want and need this business to be. Very clear the steps that we're taking on the restructuring here, both in terms of the divestment of the underperforming product lines, but also Other actions, adjusting our structures and our setup here within CSA, we are extremely active, and that will yield significant results in the quarters to come. Similar to the OS business, this is a business that needs to be significantly north of 20% EBTA. So we have, I think, a clear plan on how to get there, but 20, 25% EBTA, I think, is definitely the right target to shoot for here for CSA. On the Vios, it is, in my own experience, the single biggest and quickest growing product family that I've ever seen. The interest from our customers across the globe is really significant. It's not only Europe that likes it, but also the Chinese car makers like it. Regulation just changed in the U.S., also making this adaptive beam lighting possible, and it opened up another market for us. So we continue to expect that this will become one of the biggest categories within our automotive space in the years to come, and we have very good traction across the globe on this. Okay.

Thank you.

You're welcome, Jorgen.

The next question is from Didia. Kim Mian, excuse me, from Bank of America. Please go ahead.

Good morning, gentlemen and ladies and gentlemen, I'm Mark from Bank of America Securities. Thanks for taking my call and squeezing me in. I just wanted to apologize because I missed the beginning of the course. You might have addressed that point earlier. On your smartphone, you know, DesignWin ramp up in the back half, can you just give us an update where you are on that and whether you have sort of receive additional design wins for future generations, you know, in compensation for the cancellation of the micro-ADD project.

Thank you. That ramp-up is progressing as planned. You will start to see revenue out of that in the second half of the year, and preparation for that is running smoothly, both in Premstetten as well as in Singapore, and we expect a successful ramp here. On the other topic, we are in discussions with our customers, like we've said in the

pr earlier as well and and that's all i can say to that at the moment all right thank you so much welcome the next question comes from sebastian tabovic from kepler please go ahead yeah hello everyone thanks for taking my question uh coming back to the gross margin question what kind of fab loading do you have today in your front-end tabs And what are the underutilization charges that you have booked in Q1, just to have an idea of the drag from underutilization charges those days? The second question is linked to the OPEX. You have a lot of moving parts with cost-cutting, but also some micro-ADD, I would say, in investment. What should we model in terms of OPEX for the full year? Can you help us modeling a bit OPEX? Thank you.

So, on the gross margin and the underutilization cost, so the underutilization cost that we book are around 300 million euro per year. Now, please be reminded that it's impossible to get that to zero, right? I mean, you cannot have all factories loaded at 100 percent, but reducing that substantially is part of our growth plan. kind of whenever you have existing capacity and generate additional revenue, the fall-through is extremely high, right? So, PSP also reminded that divesting things, kind of with the divestment, you also divest certain underutilization charges. Now, with the cost-cutting is coming in as well on track. You saw the reduction in SG&A. You will also see a reduction from R&D going forward. The reason why it increased was because we cannot no longer capitalize, which is kind of 70, we will be showing 70 million higher R&D, and that will continue to come down. We expect for the year now every quarter in a movement in TPTA.

Okay, and on the subletting today, where are you standing right now? Do you have any number to share with us?

No, we have not shared our numbers.

Okay, thank you.

The next question is from Sandeep Deshpande from JP Morgan. Please go ahead. Your line is open. Maybe you're on mute.

Yeah, hi. Can you hear me? Yeah. Yeah, hi. Sorry. In terms of the disposals and the shutdowns of internal businesses that you're going to do over the next year, is the intention to continue to reduce the consumer business of to a much smaller amount of consumer business. And so what are the consumer businesses that you are going to target going forward? Clearly, you've got a new win in the second half of the year, but to understand in the future, what are the consumer businesses you're going to target? And then I have a quick follow-up on the balance sheet.

Yeah, I mean, like we said last year, we will become much more selective, but we don't want to step out of the consumer business. It is still an important market segment. for the sensor business especially, but we have to be selective and careful in the project that we focus on, and as you can see with the topics we've spoken about, optical components, now with CMOS image sensors, also on the consumer side, you can see that we are withdrawing out of all product lines that don't have the outlook that we were hoping for, that's the one part, so it is the clean as part of reestablish the base, And then going forward, the selectivity of the project, where it is important for us that we feel that we have a full differentiator and that the investment that we are making has a kind of a multi-generational impact, that it is not a one-go for one project for one or two years, and then you are kind of stuck with investment in CapEx and R&D, and you are in a difficult negotiation position. We want to either have projects where the differentiation is big enough that you can have that longer differentiation or have a good reuse of the capacities and capabilities so that we're not overly tied to one single project or customer. With those conditions in place, we are, however, still interested in the business because we have strong positions in both the ambient light sensor or display side, but also the spectral sensing on the camera side. These are features that make a true difference for our customers, and we continue to engage very heavily, especially in the Android space, with all of our Chinese-Korean friends that love our sensors and use them in the phones that afterwards get the top rankings. So that we want to continue, strong position, and now as demand is coming back, also increasingly an attractive business to be in.

Actually, maybe my follow-up will be on this itself. You talked about spectral sensing, et cetera. Do you have new products coming out in this area that have potential future traction? Clearly, you're in the ambient light sensor, but some of these other things like spectral sensing, do they have any future significant traction in any custom base?

Well, this is an ongoing effort. I mean, this is not a step change that you see, but We over and over again keep improving the sensitivities and the ability of our customer to use this data in a way that helps him optimize his camera performance. So over and over again, we keep making progress here, and these new parts are being designed in, and part of the design wins that we have shown. But the number of sockets is, especially in the high end, we already have a lot of sockets. You cannot expand the number of sockets dramatically, but with this you can keep defending them, and with that keep benefiting from this segment.

Thank you.

You're welcome.

Ladies and gentlemen, that was our last question for today, and I would like to turn the conference back to Juergen Rebo for closing comments.

Thank you, everyone. That brings us to the end of today's call. For any follow-up questions, you may contact us at Investor Relations.

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