Ams Osram Ag Unsp/Adr

Ladies and gentlemen, welcome to the conference call and live webcast on the third quarter 2024 results. I'm Alice, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jürgen Rebbel, head of IR. Please go ahead.

Good morning, everyone. This is Jürgen speaking. I would like to welcome you to our third quarter 2024 earnings call for investors and analysts. With me are Aldo, our CEO, and Rainer, our CFO. Aldo will now comment on business and strategy. Rainer, as usual, will comment on financials. After Aldo's and Rainer's comments, we are happy to answer your questions. During the introduction, they will refer to the earnings call presentation that you find on our website. Aldo, please walk us through the key developments during the third quarter.

Thank you, Juergen, and also good morning from my side to everybody. The last couple of weeks saw a lot of negative news from the automotive industry and many other industrial sectors. Against the backdrop of this, we are actually happy with the solid business performance in the third quarter that we can show. Many did not believe us when we indicated that our strong Q3 guidance already includes some weakness in the automotive semisegment. So let us take a look at slide number two. Q3 group revenues increased quarter over quarter by 8% and came in at 881 million euro, pretty exactly at the midpoint of our guided range. We saw a quarterly increase of 62 million euro compared to the second quarter. The main driver for this is a semiconductor business with ramping new products for consumer handheld devices but also supported by other verticals like horticulture with its seasonal peak. A year ago, we stood at €903 million, looking at the same portfolio. The currency impact is approximately €7 million. Like for like and on a constant currency basis, we were standing at €888 million in Q3, which means that our group revenue decreased slightly by 2% compared to a year ago. Profitability moved up on the back of higher revenues, improved loading of our semi-factories, and the savings for my re-established base program. Adjusted EVTA reached 19% or €166 million after €135 million in the second quarter. It is a much higher than a year ago and a 23% increase compared to a quarter ago. Probability benefited from one-offs like NRE payments which gave us the push above the midpoint of the guidance. Let us now look at the financial performance of the business segments. Lamps and system segments is shown on page number three. The business performed broadly in line with expectations. Revenue stood at 233 million euro, meaning a 4% up quarterly. The automotive lamps aftermarket still had its off-season in July and August, but early signs of seasonal upswing in September drove revenues up. Comparing revenues to a year ago, we have phased out some legacy module business during the third quarter, and traditional business was a step softer. This is the only reason why group revenues were also a bit lower. Looking at the Specialty LEMS business for industrial entertainment applications, we do not see a market recovery yet, but it seems to have found the floor. Revenues hover around 40 million euro for the time being. The adjusted EBITDA came in at 16% or 37 million euro. In absolute terms, it's on a similar level compared to the second quarter. In Q2, we had also benefited from some one-offs like rent, license, income. With entering the lighting season, our markup and selling expenses always go up a few million, impacting profitability this quarter. Turning our attention to the semiconductor segment on slide four. You'll find after semiconductor business on the left-hand side, revenues here improved to 381 million euros. They were driven by the NRE payments for development of novel LED technologies on top of the seasonal peak in horticulture and good professional lighting business. Automotive was down a bit in Q3 in line with the overall market. We are proud of these NRE development contracts as they show the trust of our customers in our technology leadership and long-term roadmap. You'd see revenues compared to 372 million Euro in the second quarter, still a 2% quarter over quarter increase in a difficult market environment with weaker automotive revenues. And these are always advantageous for the profitability as such adjusted EBITDA margin improved to 23.1 up to 22.7 in the previous quarter. In absolute terms, OS recorded €88 million after €84 million in Q2. The NRE-funded technology projects are also reducing the transformation cost for adjusting the micro-LD strategy significantly, as we're reducing fewer people in R&D. On the right-hand side, you see the financial performance of our semiconductor segment, CMOS sensors and ASICs. Revenue jumped quarter-over-quarter by €42 million, or 90%, and came in at €266 million compared to €224 million in the second quarter. The uptake is primarily driven by the ramp of new sensor products for consumer handheld devices, and also a decent overall product sales into consumer device applications. Some of our industrial and medical business, however, continue to stabilize on a low level, as automotive sensors, where we serve some niches, sold well. Adjusted TBDA for CSA, more than doubled to €48 million, or 18% adjusted EBITDA margin. Here you see the effects of higher revenue, lower underutilization, and the structural savings from a reestablished base program. Let us now switch to slide number five, looking at the dynamics of the semi-end markets in detail. On the very left, you see the revenues of both semiconductor segments combined for comparison purposes. At face value, revenues are essentially flat year over year. However, if we really look a bit deeper at the performance of the core portfolio, we can see actually some year-over-year growth in the mid-single-digit percentage range. In 2023, when reestablished debates were defined, about €350 million need to be excluded, and this year, an estimated €200 million non-core revenues are still part of the semi-business. Automotive revenues came in as expected. They were 7% lower than in the second quarter, reflecting the known weakness and uncertainty in automotive end markets, and a 10% year-over-year decline for the same cyclical reasons. No changes in the fundamental dynamics in industrial end markets. Revenue remains flat quarter over quarter. Again, in detail, the picture is a bit more diverse. On the positive side, professional lighting was doing reasonably well. Horticulture grew to its seasonal peak based on strong design, which was from earlier this year. On the negative, There's no light at the end of the tunnel when it comes to the inventory correction in the capital goods and medical equipment market. Consequently, revenues are lower in a year-over-year comparison. Looking at the business with product for consumer devices on the very right, already mentioned, our new products ramped up as planned. Furthermore, our classic product for the smartphones and wearables market also sold well. Again, we are benefiting from our leading market position in spectral sensing. In total, we record a 45% jump in revenues quarter over quarter. With the ramp of the new products, we could finally switch gears back to structural growth in a year-over-year comparison, and we see a 24% increase. Switching to slide number six now. Besides technology leadership, deep customer relationships are key. Over the last couple of months, we managed to deepen and intensify those with some of our key customers. This resulted in the already mentioned Anna Reefbender Technology Development Contracts, but it also contributed to the unabated design win momentum during the third quarter, despite cyclical weaknesses from markets. Year-to-date, our design mentality stands at €3.5 billion, measured in project lifetime value. Let me walk you through some examples. First, automotive, looking at plastic forward lighting, LED-based products and applications, are bread and butter business. We could lend significant new design wins, more than €150 million a year. Second, our high precision temperature and precision sensing products found great traction in the market, just like in the second quarter. More than 50 million euros of design wins were recorded, addressing both automotive and medical applications. Third, professional lighting. We are not only happy with the good momentum in the overall very difficult industrial market, but also with a new business we can win. More than 75 million euro lifetime wins during the quarter will contribute to the mid-digit percent structural growth ambitions over the coming years. Last but not least, we continue to win meaningful design sockets for ambient light sensors and proximity sensing across the market as a clear leader in that space. Looking at the Android space, more than 50 million Euro design wins in this quarter. This means both renewing of existing sockets with model facelifts, as well as winning new sockets on new models. Let's now switch to slide seven. We often talk about the blockbuster design wins. However, most of our design wins are spread across our entire portfolio. And as such, I want to share a few more details on one of the applications that is often a bit in the shadows. We are speaking of professional lighting applications, and here we serve six out of the top eight professional lighting OEMs. They appreciate our performance and quality value proposition. Our high performance LEDs light up streets, sport arenas, but also office buildings and factory premises. Even now, we are enjoying a good book to build above one and expect mid-single-digit CAGR over the next years contributing to our mid-term structural growth model. Our key strategic initiative is the re-establish a base program, as you all know, looking at now at slide eight. End of the second quarter, our realized run rate savings stood at 60 million euro. This quarter, I'm happy to report that we are progressing faster with implementing the measures than initially planned. End of tier three, we have already realized 85 million euro structural run rate savings, and that is clearly ahead of the plan. You will remember that we set the target structural run rate savings of around 75 million euro by the end of 24, and over 150 million euros by the end of 25. Fall through into results is again evident in the strongly improving EBITDA, especially in the CSA business. Again, one cannot assume a full fall through of the saving measures through the procurement bottom line, as you always have adverse effects from inflation, triggered cost increases, fluctuating price declines, merit increases, and others. In terms of the non-core portfolio cleanup, we said we will deal with the remaining 200 million euro non-core business that are still part of this year's revenues until the end of the year. Assume that we are going to exit them via accelerated end-of-life schemes. Now let us move to slide number nine. You'll hear from all sides of the market, customers and customers and peers, that visibility is getting rather worse than better. On top, the uncertainty about the timing of cyclical recovery in key markets is increasing. For example, we currently see much shorter-term ordering in automotive. Looking at some of our industrial medical markets, there's simply no sign of timely recovery yet. However, we want to sustain our trajectory towards industry benchmarks while we continue to invest into differentiating technologies and products for future growth. For this, we decided to step up and extend our strategic efficiency program by another 75 million euro run rate savings. To be effective by the end of 2026, the initiatives will primarily address overhead and corporate structures, as well as R&D footprint. This will affect additionally more than 500 employees globally, with the majority in Germany. About a third of the effective functions will be relocated to best-class countries. Upsizing of the reestablished base will cost approximately €40 million of additional transformation costs, most of which will be due next fiscal year. Let me now comment on the adjustment of our micro LED strategy. I'm on slide 10. We are near completion of adjusting the relevant R&D. We were able to redeploy some key resources to core automotive development, like the high pixelated forward lighting. We also filled some gaps in our core bread and butter business to accelerate roadmaps. And, as I mentioned earlier, could also reallocate a number of engineers to the NRE-based programs for development of novel technologies that may or may not lead to products in a few years. A very good solution as we keep optionality for potential websites in the future. With this, we can also minimize the transformation costs related to micro-LED. And, of course, we had to release not only R&D, but also factory personnel, still in meaningful numbers as the consequence of the micro-edity change. When it comes to the future use of the 8-inch factory, we had to learn that patience is a virtue. The process of working with interested parties that would take over the facility has been strongly influenced by the semiconductor cycle. Despite principal strategic interest, everybody is scaling back investment and reducing short-term outlooks. We will need more time until somebody takes over the facility. The process is certainly continuing with full effort. However, as many of you told us, maximizing the value out of the facility is more important than timing, and we have to agree to you. Every year we complete our yearly strategic planning cycle after the summer, and today we want to give you an update on some of the results on slide number 11. We are nearing the completion of exiting the non-core semiconductor portfolio, as mentioned earlier. We think it's time to sharpen the view on structural growth of the underlying core portfolio. For this, we now base our mid-term target operating model, the core semiconductor business. Taking the current macro environment and its semiconductor cycle into account, we plan to grow our semi-business with 6% to 10% CAGR over the next three years until 2027. Without a doubt, the launchpad for this Are this year's semiconductor revenues excluding the 200 million euro non-core revenues that we spoke about before, that we will mostly exit by an accelerated end of life until end of this year? The lamps and system business is expected to be slightly down or flat. It's primarily driven by the aftermarket for traditional halogen lamps and auto. As you know, we are pursuing a last-man-standing strategy that means that we're primarily managing this business for cash flow and EBITDA. When we're looking at capex and with working very hard on our plans, including capital efficiency measures, we now plan to achieve an 8% capex-to-sales ratio over the cycle. This figure includes, as before, investment in PP&E and capitalized R&D reduced by capital grants. With this, let us look at the updated profitability trajectory. Our maximum focus lies on cash generation going forward. With this in mind, we think EBITDA is a more appropriate benchmark for profitability. The key levers driving the group profitability improvements remain unchanged. First, structural savings from the now-upsized re-established base program. Second, ramble of new product and design wins. Third, the marketing. Of course, we are subject to the semiconductor cycle and a recovery in key markets. The recovery in the capital goods market and other industrial and medical markets is not yet in sight. At the same time, automotive is entering a phase of uncertainty, which means that we may need some patience until H2 next year before we see structural growth year over year again in auto, although content per vehicle continues to rise. Altogether, we now expect between 20% and 24% EBDA in 2027. Bear in mind that this target corridor now assumes an 8% capital to sales ratio when it comes to understanding the DA portion in it. If you do the math, we are adjusting 26 to a level that sell-side analysts had modeled all along, if you look at the consensus figures. As said, it's the third driver, market security, that is driving the adaption. The underlying structural profitability potential of our business is unchanged. Our aspiration to achieve positive free cash flow, including net interest paid as soon as possible, is certainly unchanged. We plan this for 2025. With this, I hand over to Rainer, who will provide you with some more details on liquidity, cash flow, and financials in general.

Thank you, Aldo. Good morning, everybody. We're now on page 12, talking about my favorite subject, cash. Operating cash flow came in very strong at €246 million, as you can see in the chart on the left. Besides the improved revenues and EBITDA, a key element for this performance was a customer prepayment for the development and production of new products. The prepayment is to be treated as a non-financial liability, and we will repay it through the delivery of products starting in 2026. In addition, NIEs with the development of certain novel LOD technologies contributed positively to the operating cash flows, as Aldo pointed out. Just as a reminder, in line with market practice, net interest payments are included in the definition of operating cash flow, and that's also in pre-cash flow. We paid about 64 million net interest in the third quarter. Working capital was up quite a bit. Inventories were up at three times along. We reduced wafer stats, but we will only see the benefits in Q4. Accounts payable were up as we have started to reduce factoring given the strong cash position. This is what we told investors during marketing of the high-yield bonds. And accounts payable are down with lower CapEx levels. The next chart to the right shows cash flows related to CapEx. It's improved to minus 2 million euros compared to minus 76 million euros in the same quarter. There's still some overhang from micro-LED-related equipment coming in, around 30 million, these numbers, but we are approaching fast our CapEx-to-sales targets. In the next chart to the right, you see the €45 million inflows from divestments that relate to selling the passive optical components as it's the focus light which closed in supply. As a result, free cash flow, including net interest payments, came in with €188 million. A good addition to our cash balance, which we will talk about on the next slide. In Q4, we will have a careful eye on the working capital while we plan to reduce factoring further. Now on slide 13, we had 1.1 billion euro cash on hand end of Q3. The increase of almost 200 million euro compared to the previous quarter relates to various contributions. We received the already mentioned customer prepayment of more than 200 million euro. We received some NIEs. We optimized our maturity profile by tapping into the euro denominated high yield bond, extending it by 200 million euro as we announced in September. But we also paid back one bilateral short-term bank loan of 100 million euro and a promising note of 51 million euro. Bilateral bank facilities and promising notes currently stand at 195 million euro, a 45% reduction compared to end of June. There are no changes to the outstanding 25 and 27 converts. The US dollar senior unsecured notes during 29 are unchanged. But you see the 200 million euro second tap into your senior unsecured note, which now stands at 825 million euro. The Malaysia general leaseback transaction stands at 441 million euro end of the third quarter. As always, the quarter-on-quarter change comes from both the quarterly accrual of the catch-up payment at maturity and FX effects, which were actually pretty high in Q3. For completeness, the outstanding minority put options amount to €604 million, or 14% of outstanding shares. The third quarter put options worth around €1 million were executed. Our revolving credits facility could, in principle, fully cover an exercise of all outstanding Osram Lichter AG minority put options. In summary, we continue to stand with the strong available liquidity of almost €1.9 million at the end of the third quarter. On the right, you find the familiar maturity table of our outstanding debt. I'm now on page 14, looking at gross profit and OPEX. Adjusted gross profit came in at 262 million euro in the third quarter, 90 million euro higher than in Q2. Adjusted gross margin stood on 30%, similar to Q2. Year-over-year, we note an increase of 70 basis points. Looking a bit deeper, there are many effects contributing. We have genuine cost improvements coming from real estate with the base. But we also have quite a few product mix effects within that number. Just think of new products going through the yield learning curve. Remember also that raw materials prices play a role. Gold has hit its all-time high as an example. Looking at adjusted R&D expenses, we see an 18% decline quarter over quarter to €82 million. Whilst we're shaving off costs in R&D, this steep decline is mainly a temporary effect due to the already mentioned NRE payment, which included some catch-up. On top, within some public funding schemes, we also recorded a bit of a catch-up. Going forward, we'll continue to receive NIE, but we expect a bit higher adjusted R&D, maybe around 90 million Euro in the fourth quarter. Next in line are the adjusted SG&A expenses. The quarter-on-quarter increase is essentially due to seasonal increased mark-home spending for the traditional automotive lamps after market visits. And now let's have a look at earnings per share on page 15. The net financing result came in with €35 million. The IFRS net result came in positive, standing at €24 million. The adjusted net result was €37 million. This was meaningful driven by one of the effects like NAE catch-up, a reduction of micro-LED restriction provisions, and the positive effect in the financing result. It points to the right direction, but we have to continue our path to fundamentally turn this business positive in a structural sense. That we stay on this trajectory despite the persistent and partially growing uncertainties, we are stepping up the restating the base along the lines Aldo mentioned earlier. Tax expenses in Q3 were in the order of 10 million euro. For modeling purposes, you can continue to assume around 50 million euro net tax expenses for the full fiscal year. In 25, we not only want to be cash flow positive, including interest, of course, but also deliver, again, a positive adjusted net result. Adjusted diluted earnings per share came in at 37 cents, and the IFRS diluted earnings per share at 24 euro cents. Now let's have a look at page 16. In Q4, we will see the seasonal rebound in the auto limits after market business. In semiconductors, we expect slantish demand for automotive products in line with the reduced car unit forecast by HHS. Many industrial markets remain muted due to persisting inventory corrections, except maybe professional light. At the same time, while fundamentally intact, the business with products for consumer device applications and horticulture will see a seasonal slowdown in the fourth quarter. In summary, revenues are expected to come in between 810 and 910 million euro. And with slightly lower sales, less positive one-offs, and in conjunction with product mix effects, adjusted EBITDA margin is expected between 15 and 18% in the fourth quarter, despite the good traction in implementing re-stabilizer base. Thereby, we assume the Euro-US dollar exchange rate of 110. We are ahead of realizing our run rate savings from real estate with the base towards the end of the year 24. When it comes to CapEx for the full year, we continue to expect 500 to 550 million euro. There's a lot of uncertainty in the market about next year. We want to give you some indications for 25. First, looking at revenues, we will see a soft start into the year with relatively weak revenues in the first quarter. That is particularly true for automotive, where we expect the cyclical trough in the first quarter, but a steady improvement thereafter throughout the year. Consequently, we will expect to grow revenues in the core CME portfolio for the full year 25. Second, looking at capex, we really want to bring it down to the level of 8% capex to sales. Third, we certainly hold up our aspirations of delivering positive free cash flow in 25, which includes net interest. And now for the summary, I hand back to Aldo.

Thank you, Reiner. So switching to slide 17, summarizing today's takeaways. Delivered solid revenues in difficult environments that was coined by a string of profit warnings from automotive OEMs. Profitability came in above the midpoint of the guided range, supported by energy payments. We saw the consumer segment with a ramp up of new products, compensating the weakness in automotive and industrial. The Semi is a core business, which excludes a non-core portfolio, with record a year-over-year increase estimated at mid-single-digit percent. We continue to win significant new business in Semi businesses. Year-to-date, we stand at 3.5 billion euro of lifetime value. We delivered a strong pre-cash flow of 188 million euro through customer prepayment, NREs, and operational performance. We are ahead in terms of implementing expected run rate savings from re-established to base, And we upsize the reestablished base by another 75 million euro run rate savings to be affected by the end of 2026. This is to safeguard our short-term profitability targets and achieve benchmark structures mid-term. Despite a very difficult microeconomic environment, we see in Q4 quite reasonable revenues of 810 to 910 million euro and profitability between 15 to 18%, fully in line with seasonal mix and fall through. With this, we are done with introduction remarks, and we're happy to take your questions.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questions on the phone are requested to disable the loudspeaker mode and eventually turn off the volume from the webcast while asking a question. In the interest of time, we kindly ask you to limit yourself to two questions. Anyone who has a question may press star and one at this time. Other question comes from the line of Harry Blakelock, UES. Please go ahead.

Good morning. Thanks for taking my question. The first is just on the cost saving program. You've made some good progress already this year. Can we expect to see further savings in Q4? And then what are you expecting in terms of the phasing of the remaining 155 million in savings, or I guess slightly less than that? Will it be more front-end loaded in 2025 or evenly distributed across the next few years?

We will continue to deliver on the plan, and I think we have been showing that we are a bit ahead of the plan over the last quarters already, and that will continue, so you will see further savings in Q4 adding to the tally as well. The new program will further extend that. With that, of course, we want to accelerate the savings further, the original plan of 150 million by the end of next year. We will definitely overshoot with this new program on top of that. And quite a bit of the savings already will be seen in 25. Then there's a part in 26 that then is added onto this as well because of the transfers that we're also doing. You might have seen in the communications about more than 500 people that we are reducing in high cost, and about 200 of those are being replaced by lower cost positions in, for example, Malaysia. And we, of course, need to build up the people there and the expertise to then be able to transfer some of these activities both in overhead functions as well as in R&D functions. So that last part will take a bit of time, but a lot of the other topics you will see as add-ons in 2025.

Thank you. Very helpful. And then my second question is just on the sale and leaseback. Obviously, you're taking your time, given where we are in the cycle. I'm wondering if you could provide a bit more colour on that. Are you still having positive conversations with how many interested parties? What's the realistic timeline on it now?

Well, we're still in the process. I mean, it is not an easy process, as you can imagine, given the sexuality of the business. But we're still in active discussion, and that's with a number of parties. So we are still ongoing, and it's kind of hard to judge how quickly that will result in closure. Okay.

Fair enough.

Thank you. You're welcome, Harry.

The next question comes from the line of Sebastian Stabovic. Kepler Sugar, please go ahead. Mr. Stabovic, your line is open. You may ask your question.

Sorry, I was on mute. Thank you. I've got one question on inventory and notably in the automotive and the industrial market. Where are you standing today? in terms of inventory into your channel or at your largest customer versus the normal level? This is the first question. Thank you.

The overall inventory levels are quite reasonable. I think we and our customers are managing through this carefully. And with that, we have no over inventory situation. at the moment in the channel, it's still quite okay. And also we are not stuffing the channel here to pump up the numbers. I think that is just changing the quarter of the problem. So we just want to stay close to our customers and provide the right product at the right time.

Okay, but you mentioned still some inventory correction in Vinciol and Marquet, and so on. Correct. It seems there is some excess of inventory. And the second one, in automotive, do you see normal level of inventory there yet?

Yeah, so automotive inventories are quite okay. They are not out of the unusual. What we have said before, also in earlier calls, is that The industrial market, especially, we knew already last year that our customers were seeing a lower demand, but we had non-cancelable orders to be shipped against, so we knew we were loading them with higher inventory levels, and we were hoping that... that it will bleed through their inventory throughout the year, and that is going very slowly. So on the industrial sensor side, that continues to be a problem. It's not a new problem. It's a problem that we already had seen in the last quarters as well, and there the movement is quite slow. But on automotive and also the general channel inventories for other markets are still quite normal.

OK, thank you. And the second question is on the prepayments and the NREs. Can you comment a little bit, what are the technology behind that on LED? And do you expect any other sizable prepayment down the road? Or is it a kind of specific project, kind of one-off? Any further detail on this prepayment would be very interesting. Thank you.

Yeah. No, we can't really say much about it in detail. On the NRE side, it was an unusually high amount. We'll still see some of that also in the upcoming quarters, but not to the same extent.

Is this linked to my quality or not that much, this one?

We're not able to comment on that.

Okay, thank you. Thank you. Bye.

The next question comes from . Please go ahead.

Hi, good morning. Thanks for taking the question. My question is more on your, first question is on your 2025 outlook. You know, in an environment of relatively low visibility, you're saying that sort of Q1 will be the bottom and you will see a gradual improvement through the rest of the year, a steady gradual improvement. with core semiconductors growing 6% to 10%. I'm just wondering how you have that kind of visibility. Is it that you're making an estimate on the industrial inventory correction ending by Q1? And to what extent is that 6% to 10% based on additional design wins, both automotive and consumer ramping in 2025? either in the first half or in the second half. Thanks.

Yeah, obviously the design wins are a big portion of our growth. That is why we are more optimistic, for example, in automotive than probably overall vehicle build volume numbers for next year. We have those designs in our pocket, and we know that they will ramp. Some of them have been pushed out a bit, but they will still come is our conviction, and that helps us to have a better growth path than just the underlying vehicle build numbers would indicate. And, yes, also for overall business, the growth that we still are expecting is that, for example, in the consumer space, we continue to have very good traction, and we continue to win new programs across the board, and they will also add to further growth. growth of this segment in the next year, but also in that market, as you know, the seasonality. So kind of the automotive weakness that we think will be mainly in Q1 and then stepwise reduced comes together in Q1 also with seasonal low for consumer. And that's why we are kind of cautious on the outlook on Q1, but still see that we are a structurally attractive market and that the design wins and the customer feedback wins. continues to give us the confidence that we will see growth mid-term.

And you had a material design win on consumer ramping in the second half in Q3 of this year. Do you have any further design win which could ramp in the second half of next year to support that growth outlook?

Yes. I mean, this was an important program, as you know, for us to regain the socket. That is now introduced into a number of the phones, but the mobile portfolio that this product will be used in is expanding. So also this will help. Plus also in many other phones, we are seeing good traction for our Mbit Lite and Detox products.

My second question is, again, on the prepayment. You said that... that the NRE is on LED technologies, but you've not specified the prepayment. Is the prepayment also LED, or is that on the sensor side?

I can't really comment on that either.

Got it. Thanks.

The next question comes from . Bank of America, please go ahead.

Yeah, good morning. Thanks for taking my questions. My first question is on the Q1 commentary you've sort of given us. Can you remind us what's your historical seasonality for Q1 for the various business units and any qualifier around that would be helpful, whether it's consumer lands or the automotive ADD business at the high level? And I've got a follow-up, thank you.

Yeah, I can't give you the exact percentages on top of my head, but in general terms, the consumer business usually has the strongest business in Q3 and in the beginning of Q4. Usually Q1 and then Q2 are low season for that. Automotive is actually... Not unusual to have not a fantastic Q4 given Christmas shutdowns and so on, and then a somewhat slow start into the year, but then picking up speed in Q2 and Q3. On industrial and medical, there's no real cycle in that, I would say. That is kind of as it comes at the moment, more a question of end customer demand. It is not so much an annual cyclicality that we observe there. And, of course, for AMSB, it's clear that The lighting season drives most sales in Q4 and Q1. That's one addition on the semiconductor side. Also, some typical security you will see in horticulture, where you usually will win the programs in the first half year and execute in the second half year. And also on the auto side, besides usually a bit of a slower start early in the year, also then the new pricing, the volume purchase agreements will kick in. So some of the pricing impacts you will also see in the beginning of the year.

Okay. And so I'm not sure what the message is. I mean, do you expect well below normal seasonality for Q1?

We expect below normal seasonality for automotive in Q1. I think the other seasonalities, I would say, are pretty normal. But I think the auto demand, if we look at the order book for Q1, that's where we see the unusual pattern.

Okay, got it. And then the follow-up is on the cooling mating fab disposal process. I think, as you mentioned, unfortunately, from a cyclical standpoint, there are a lot of factories that are under-loaded at the moment. I think a number of your European peers are probably about to shut down some six-inch and eight-inch fabs due to overcapacity, so I'm just wondering When you are in negotiations with these parties for the disposal of cooling, what's the unique selling point of that factory? I mean, can you entice them with support from the Malaysian government when it comes to tax breaks or anything that would make this factory more attractive than, say, one from one of your competitors that may come to market at the same time?

Well, I think, first of all, it is in the right geographical location. I think that's actually one of the key selling benefits of this factory. Being in Malaysia, it is both low cost, good talent base, and at the same time, from a geopolitical situation, kind of between the blocks. Secondly, it is super modern. It is state of the art, well built, well equipped. And also that was the feedback that we got through many of the visits that the people are really very impressed with the build quality and the way we have laid it out. So that's what we can do for it, and I would assume, I mean, we have gotten subsidy commitments from the Malaysian government to fill this up with exciting technology. I can imagine that if the right buyer comes and also brings in exciting technology, that also, again, there will be subsidy support or tech breaks of the Malaysian authorities as well. They would like to continue to bring in high-tech into the country, and they are quite supportive.

Very clear. Thank you so much.

Welcome.

The next question comes from Robert Sanders, Twitcher Bank. Please go ahead.

Yeah, good morning. A big theme of this results season has been that China for Semicos is becoming a sort of lower than normal margin region, having been a higher than normal region. So are you seeing more price pressure in response to tariffs? on these Chinese vehicle companies that is leading them to be more aggressive, for example, using auctions and that kind of way of squeezing suppliers. And I have a follow-up. Thanks.

Yes, I mean, there is obviously a battle going on in China between especially low-to-medium EV companies, and they are aggressively reducing their prices to consumers. In China, it's not so much an export topic, but also within China, there is a fierce battle going on, and yes, they are looking to their supply base to also contribute. However, we also see that it is very important that... that they differentiate themselves, and that is through technology, and that's often through the belt and whistle that we provide. And in that sense, as long as we keep providing the innovations that they're looking for to differentiate, that is kind of outside of this price pressure that you're talking about. So in that sense, we see that we are holding our ground in China, that we continue to have a very significant share, similar to Europe, a market share in China. We continue to see growing relationships there. We just also won another award by BYD, for example, as one of their core suppliers in the lighting space. So we continue to be very engaged, and that's, I think, the right way to deal with these additional price pressures.

Got it. And then just in terms of the convertible, the 27 convertible, it's quite a large principal amount. I mean, as I look into 26, presumably if you do refinance that convert at the end of this year, at the end of next year, sorry, your interest expenses are going to go up at the same time as when this prepayment is going to unwind. So when into 26, how do you offset some kind of cash pressure either from higher interest expenses or the prepayment unwinding? Thanks.

Yeah, Rob, I mean, we are certainly aware of all of that and we have a plan that at this point I do not want to fully disclose. It's certainly a combination of improvement In the underlying business, it is also obviously that we are still thinking about divesting something smaller here and there and taking all of that together. I think we have a clear plan, but I do not want to fully point that out at this point of time. Got it. Thanks a lot.

Next question comes from the name of Jurgen Wagner. Please go ahead.

Yeah, good morning. Thank you. I have a follow-up on Android demand. You mentioned strong design wins, but also this reporting season, we had other companies complaining about a pronounced mix shift to the low end within 5G phones. How do you see that impacting you over the medium term, or are you not seeing that? Thank you.

Our products are mainly used in mid to high end phones and over that whole spectrum, we continue to see very brisk demand and strong design inactivities. So perhaps it is just a shift that's within the scope that we anyway we're having or we're just very well positioned. I think probably both is true.

Okay, clear. Thank you. And then a follow up on China automotive products. How do you see your competitive positioning in general in China as we hear from others that Chinese competition seems to grow up a bit?

Unfortunately, LED seems to be not as much into the strategic focus of the government in terms of forcing companies in China to move to local sources. We get continuously the message from our customers that they are free to make the choices that they think are right. And at the moment, we continue to see a very good engagement with them, and they continue to be the ones that keep absorbing our new technologies and our innovations the most rapidly. And that innovation push still resonates a lot with them. And at the same time, it's also a very established relationship with many of them. We've been very active over decades and also know how to – accompanying them both in terms of quality but also in terms of cost optimizations that they can also grow the application by bringing the features over time in higher volume at better cost points. And that has been a good, strong partnership with many of them over the years, and the partnership seems to hold up also in this new environment.

Okay. Thank you.

Sure. You're welcome.

The last question comes from the line of Sandeep Deshpande, JP Morgan. Please go ahead.

Hello. Can you hear me?

Yes, we can.

Yeah, hi. My question is regarding your long-term guidance. I mean, you raised your long-term growth guidance. I want to understand what is it that makes you confident on growth in the longer term at this point? given the short-term challenges being seen in the auto market and other markets as such and then secondly regarding the existing fab in malaysia which you know you've been dealing with the situation there can you give an update on on what's happened on that fab at this point

The second point I think we already outlined before, we are still in the sales process, still in active discussions, but we had hoped to already have clarity now and we're not able to provide that clarity as also the potential buyers are working through their own plans and their own outlooks at the moment. So that's still in process and nothing much more to be said about that.

Just to clarify there, is that you have one party which is negotiating with you or is it still in multiple parties and multiple negotiations occurring?

Is it still with a number of parties that we're discussing at the moment?

Okay.

And secondly, on your first point, In terms of the growth model, you have to be careful how to look at this. We raised the percentage slightly, but we have focused on the core semi-portfolio. And, of course, there's also the AMSP, the LEMS business, that is basically flattish. So if you do the math, the number is slightly below, but close to the old number. But we wanted to give better clarity on the products that matter most in terms of growth. And there we continue to see the traction on the design wins that we seem to have the right technology for the right applications here and the right customer relations to drive that growth. So that's why we wanted to focus more on that to get that clarity out to you. That's why the numbers look a little bit higher, but the overall statement is roughly the same as before.

Okay. Thank you.

Sure.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Jürgen Reppel for any closing remarks. Jürgen?

Thank you, operator. Thank you, everybody, for joining today's call, for your questions, and for any remaining questions, please reach out to us from Investor Relations. And with this, we would like to close the call for today and talk to you soon. Goodbye.

Ladies and gentlemen, the conference is now over. Media representatives wishing to ask questions may connect to the media conference call taking place at 11 a.m. Central European time. Thank you for choosing Coral School and thank you for participating in the conference. You may now disconnect your lines. Goodbye.