November 12, 2019 Operator: Juliana Baron - OSRAM .../media/Files/O/Osram...November 12, 2019 – AC Q4 – Osram Licht AG - | 3 If you look at Slide No. 8, you can see the actual

Osram Licht AG

Analyst Call Q4 - November 12, 2019

Operator: Ladies and gentlemen, thank you for standing by. I am Haley, your operator. Welcome and thanks for joining the OSRAM Licht AG Investor Analysts Call 2019. Throughout today's call, all participants are in listen‑only mode. The presentation will be followed by a question‑and‑answer session. If you would like to ask a question, you may press Star followed by 1 on your touchtone telephone. Please the Star key followed by zero for operator assistance. I would now like to turn the conference over to Julian Baron. Please go ahead.

Juliana Baron: Thank you Haley.

Good morning and good afternoon, ladies and gentlemen. Welcome to the OSRAM conference call on the Q4 and the full‑year 2019 results.

I'd also like to welcome our managing board, represented by Dr. Olaf Berlien (our CEO) and Ingo Bank (our CFO), as well as Dr. Stefan Kampmann (our CTO). As a reminder, today's call is being recorded. You can follow the webcast on our website at Osram.com/IR, where you will also find the slides available for download.

As was previous with our conference calls, I would like to draw your attention to the Safe Harbor Statement on page 2 of the results presentation. As usual, it applies throughout this call. It is now my pleasure to hand you over to Olaf.

Dr. Olaf Berlien: Thank you, Juliana.

Ladies and gentlemen, a warm welcome also from my side to our conference call to-day. As usual, I will start with the presentation of the results for the fiscal year, followed by our outlook for fiscal year '20 and, of course, our long‑term view. Finally, we will comment on the late takeover bids by AMS and, of course, the recent opinion that we have published today. As usual, we will then have enough time to answer all your questions.

So let's make a start and look back on the past year. Fiscal year 2019 was one of the most challenging years we have experienced. We continued to confront a very tough market environment, with lower demand across nearly all markets and with ongoing political and economic uncertainties. This clearly impacted our financial results for fis-cal year '19; and we expect these headwinds to also continue in our Q1.

N o v e m b e r 1 2 , 2 0 1 9 – A C Q 4 – O s r a m L i c h t A G - | 2

For the rest of the fiscal year, we assume a more stable development. While market developments are unlikely to help us, we are focusing on our own performance. The countermeasures that we have installed are having an effect ‑‑ especially in the Opto segment. Thanks to these programs, we expect a moderate revenue and earnings development in the current fiscal year.

Before we go into the financial details, let's take a brief look at OSRAM in 2019. I move to Page No. 5. As of today, OSRAM is a company with sales of 3.5 EUR billion and an operating margin of almost 9 percent. OSRAM has a strong IP portfolio with more than 15,000 patents ‑‑ and every working today, two new ones are added. The R&D ratio is 11 percent of sales, and we have a team of 25,000 inspiring colleagues. However, we must also acknowledge that we experienced headwinds from the markets in 2019, and these have affected our full‑year results, as we move to Slide No. 6. Overall, we managed to achieve our targets for fiscal '19 adjusted in March. This is due also in large part to a stronger Q4, which developed quite well. For the full year, comparable revenue fell by 13 percent to roughly 3 1/2 billion EUR, in line with our expectations. The decline was mainly caused by the weak market environment in automotive and in China. Adjusted EBITDA before special items was impacted by the lower volumes and reached 307 million EUR, which translates to a margin of 8.9 percent.

Thanks to the strong Q4, free cash flow for the full year exceeded expectations and was positive at 17 million EUR. This was mainly due to our strong focus on net working capital reductions.

On the other hand, our net profit was affected by goodwill impairment. For the discon-tinued business, this relates mostly to Siteco; and for the continued business, to the joint venture with Continental. We do not expect global car production to pick up sig-nificantly in the near future. Due to these lower market expectations and accounting standards, we have made an impairment on the goodwill of the joint venture of 171 million EUR.

Slide No. 7 shows you the weak market development in automotive last year. Car pro-duction continued to decline across all regions. The biggest impact was noted in China, where car production fell by almost 13 percent year‑on‑year, but also Europe and NAFTA turned negative in 2019. Accordingly, IHS reduced its forecast for yearly global car production every month, as you can see from the right‑hand chart. One year ago, the IHS forecast was almost 98 million cars. 12 months and 12 forecasts later, it ended at 90 million cars ‑‑ by the way, as we predicted early in the year. We clearly noticed that with our automotive customers.


If you look at Slide No. 8, you can see the actual order volumes from our Tier 1 key customers in 2019 compared to the order volume agreements a year ago on the left. Almost all customers fell short of their agreed purchasing volumes, most of them sig-nificantly.

External factors are one part of the story. The other one relates to internal issues; and that we are working on, especially to streamline our processes. You know our strategic execution programs that you can see on Slide No. 9.

I reported their status to you in the previous quarters, and we continue to make good progress with these programs. I want to highlight the divestment of Siteco that we closed successfully at the end of September, and I want to point out our operational improvement at SOS. Our "Fit for the Future" initiative at OS has taken effect in 2019, delivering cost savings of 57 million EUR to date, and we are continuing our efforts ‑‑ not only at OS. All in all, we are confident that with our performance programs, we will get back to a profitable growth.

The overall success of our performance programs is illustrated on Slide No. 10. At 107 million EUR, we managed to overachieve our cost‑saving targets for fiscal year '19 by around 20 percent. This was mainly due to overhead reduction and the adjustment of our footprint. All in all, we managed to reduce our head count by more than 2,300 employees. Ingo will show you that in more detail in a few minutes, which takes me to the outlook for fiscal year '20 on Slide No. 12.

A look at the global business climate shows that the economic environment continues to slow down. After some improvement in Spring, the IFO World Economic Climate index fell again in the last quarter; and also the global manufacturing expectations re-form at a low level, as you can see on the right, from the global PMI index. At the same time, the graph indicates that we might be seeing a trend reversal here. The outlook for our most important market, Automotive, remains challenging.

If we take a look at Slide No. 13, according to IHS again, global car production for fiscal year '20 is expected to reach 88 million units. This is a minus of 2 percent. At minus 5 percent, Q1 in particular should still be challenging, while the second half of the fiscal year, there are some signs of relief. After a declining year with minus 13 percent, es-pecially China might recover, yet we remain cautious, given what we seen so far for terms of order volumes from our customers.

First discussions with key automotive clients indicate a rather flat development in the purchasing volumes for fiscal year '20, with a better second half‑year. Other indicators support the view that the markets may have bottomed out in 2019.


Slide No. 14 shows the historical development for the semiconductor market. After several quarters of declining growth rates, the market might have found a floor in the last two quarters. Hence, the World Semiconductor Trade Statistics forecast a market recovery for Q1 of calendar year 2020; but again for Q4/19, which is our Q1, they also still see negative growth. This is in line with what our customers are telling us.

For the first four to six months, we see more or less a sideways trend, with a better second half of the fiscal year. This is also one reason why we remain cautious regard-ing our outlook for fiscal year '20.

With this, I move to Slide No. 15. For fiscal year 2020, we assume a moderate revenue and margin development. We expect revenue growth for the group in the range of minus 3 to plus 3 percent, and an adjusted EBITDA margin of 9 to 11 percent. Free cash flow is expected to be positive, up in the mid‑double digits.

For the past fiscal year, the Managing Board and Supervisory Board proposed not to pay a dividend. Ingo will explain that in more detail later on. Overall we can say while the outlook for fiscal '20 remains moderate, we are convinced that the long‑term trends are intact.

As a reminder, on Slide 17 you can see the photonics markets we want to address with our high‑tech photonics strategy. We presented it at our Capital Market Day last year. Coming from illumination, we want to enter photonics markets in the field of sensing, visualization, and treatment. As of today, these target markets are still intact.

Move to page 18. This is exactly why we believe in our photonics strategy, and we will continue to strictly pursue it. Yet, we continue to deal with unstable economic and po-litical circumstances. Therefore, we have to make some adjustments along our way to reach our strategic targets.

This means:

First, we will intensify our performance programs with a focus on lean and agile struc-tures.

Second, we will run our traditional products mainly where a focus on cash ‑‑ and less on EBITDA.

Third, we will focus our product portfolio even more on future‑orientated, profitable products.

Fourth, we will speed up our transition to photonic applications beyond illumination. You see, cost and product performance will be in the center on our way forward. They are the key to reaching our financial targets, illustrated on Slide 19.


You know the illustration on the right from the Capital Market Day last November. How-ever, we have to acknowledge that the markets currently are not supporting us. The market weakness in '19 and '20 leads to a postponement of our mid‑term financial targets by two years. Let me be here, we are sticking our targets for the group, with mid‑single digit to double‑digit annual growth rates and an adjusted EBITDA margin of more than 15 percent; but we expect to see them two years later, by '24/'25.

Regarding the business units, we can confirm that OS and Digital are expected to re-main in their target corridors. And also, the traditional business of Automotive. Yet, due to the weaker development of the joint venture, Automotive as a reporting segment is likely not to meet the margin target corridor presented last year. This is something we will discuss with Continental to improve the situation; but overall for the group, we will achieve our mid‑term targets.

Ladies and gentlemen, let me summarize. The market environment remains challeng-ing, with no short‑term market recovery in sight. We have taken counter‑measures to address our own performance. These measures are taking effect, and we will intensify them. With the long‑term trends being impact, we strongly believe in our high‑tech photonics strategy and that it will lead us to success again.

And now I would like to hand over to Ingo.

Ingo Bank: Thank you, and good afternoon from my side. Thank you for joining the earnings call today. I will start with the key financials for OSRAM continued operations on page 21, summarized.

Fourth‑quarter revenue decline slowed down to some extent, in line with typical sea-sonality and supported through positive year‑over‑year growth in DI.

Total OSRAM revenue was 924 million EUR, translating into a year‑over‑year a de-cline of approximately 9 percent. Sequentially, revenue increased by 7.8 percent, also in line with typical seasonality.

Given the significantly lower volumes, adjusted EBITDA came in at 86 million EUR, or 9.3 percent of revenue, however, sequentially improved to Q3/19 with approximately 250 basis points.

Compared to the same period a year ago, low volumes and underutilization in our fac-tories continue to weigh on profitability. The operating leverages both at Opto and our traditional automotive business continued to drive margin contraction.


Our performance programs delivered 40 million EUR in gross savings in Q4/19. We exceeded our original plans for the year by generating approximately 107 million EUR in gross savings for the full fiscal year '19 as we continued to address our cost struc-ture.

Net income from continuing operations was negative, with 213 million EUR in the quar-ter, reflecting a non‑cash goodwill impairment charge of 171 million EUR pertaining to our OSRAM Continental subsidiary. Given reduced expectations regarding both the development of the automotive global light vehicle market and the underlying profita-bility, we impaired the goodwill associated with the joint venture in full, in line with the corresponding accounting standards under IFRS.

Special items amounted to 32 million EUR in the quarter. For total fiscal year 2019, special items totaled 131 million EUR.

Free cash flow was again positive at 103 million EUR in the quarter. The strong free cash flow performance in the second half of fiscal year 2019 helped us to deliver pos-itive free cash flow for the full fiscal year, despite the sharp earnings contraction.

Taking now a more detailed look regarding the revenue development in Q4/19, on Slide 22. The impact of foreign exchange as well as the additions to the business port-folio of OSRAM had a positive impact on revenue growth. When looking at our regions, EMEA further declined on the back of an ongoing lower customer demand in our Au-tomotive business, both for traditional as well as LED light sources.

In the Americas, our traditional and automotive LED OEM business declined when compared to prior years. Our Digital Systems business as part of DI saw revenue de-cline as the general lighting market in the US continues to be challenging, also echoed by public statements of large US lighting companies. Still, overall revenue for OSRAM in the Americas grew with low single‑digit, due to a strong performance of Fluence, part of the DI segment.

In APAC, business in China continued to be lower, in a double‑digit range when com-pared to the same quarter a year ago. Sequentially, in other words, when comparing with the third quarter of '19, however, we recorded strong nominal growth. It appears that necessary industrial supply chain adjustments to cope with a lower market de-mand now have largely been completed, yet we remain cautious as to whether from this point forward some form of recovery will occur.

Let me now comment on the revenue development in our three reporting segments.

Opto's revenue in the fourth quarter improved sequentially when compared to third quarter of '19. Relative to the fourth quarter of 2018, this nevertheless still translated


into a year‑over‑year decline of 16.6 percent. Lower volumes and pricing were the major drivers behind this decline, with volume carrying a higher share than pricing.

With Opto, Automotive revenue declined by a double‑digit range when compared to prior year. Sequentially, Automotive revenue was up slightly, driven by higher demand from China. EMEA and NAFTA demands were slightly below, respectively at the same level as prior quarter. Pricing dynamics were stable and in the higher single‑digit range.

In the Industry & Mobile segment of Opto, comparable growth was in the negative double digits, still reflecting a significant year‑over‑year drop in our business for mul-tiple LED applications run distributors. Sequentially, however, in other words, when comparing to our prior quarter in '19, absolute revenue levels were stable. We believe that by now inventory levels in the distribution chain seem to be adjusted, at normal and lower and normalized levels.

The shift toward 3D solutions and biometric sensors for consumer applications also continued well into our fourth quarter.

In Opto's General Lighting business, we continue down the path of recording quar-ter‑over‑quarter sequential revenue improvements, driven by horticulture lighting but also an improved outdoor lighting performance. Compared to the same period a year ago, general lighting posted a positive double‑digit year‑over‑year comparable growth performance.

Moving now to our reporting segment Automotive, revenue declined with 9.9 percent when compared to Q4 of fiscal year 2018. Volume for the traditional business contin-ued to be lower across all regions. The Aftermarket business posted a low single‑digit growth performance compared to Q4/18 and improved its revenue level markedly on a sequential basis, in line with typical seasonality.

Revenue levels at our OSRAM Continental subsidiary, which is part of the AM reporting segment, were more or less sequentially.

Finally, let's take a look at DI, our third reporting segment.

DI's comparable revenue growth was positive in the quarter, coming in with a 4 percent increase year‑over‑other driven by strong performance of Fluence, where demand in North America continued to be strong. Our Traxon business revenue improved se-quentially and was nominally at similar absolute revenue levels when compared to the same period a year ago. Our Entertainment business continued to be in positive growth territory. At the same time, however, we continued to face a challenging market envi-ronment for General Lighting for our business of electronic ballasts in the United States.


DS business levels in EMEA were slightly below the level when compared to the same period last fiscal year. In APAC, however, Digital Systems finished strongly, with posi-tive year‑over‑year growth in the final quarter of fiscal year 2019.

Moving on to profitability, on Slide 23 now. In Q4/19, absolute adjusted EBITDA was 85 million EUR, translating into 9.3 percent in margin terms, representing a sequential improvement of 250 basis points.

When compared to the same period prior year, the operating leverage effect of signif-icantly lower volumes, particularly in Opto, AM, but also DS as part of DI were the main drivers of the absolute decline in adjusted EBITDA. This holds true both at OSRAM level as well as at the segment level.

Negative price, mix, and inflation impacts were successfully offset by our operational and performance savings programs.

Compared to Q3/19, Opto's profitability improved sequentially to 19% of adjusted EBITDA in Q4/19, as the overall performance programs are delivering structural cost savings, combined with sequentially higher volumes.

Still, compared to the same quarter a year ago, lower volumes drove profitability down. Operational improvements combined with the gross savings from the performance pro-grams in Opto were able to offset price erosion and inflation in the quarter, however.

The year‑over‑year decline in Automotive's adjusted EBITDA profitability reflected lower volumes and factory utilization in its traditional light source portfolio. Part of the volume impact was also related to the ongoing effort to reduce inventory levels to im-prove cash flow generation. Price erosion and inflation were compensated by produc-tivity measures.

The OSRAM Continental subsidiary, which is part of our AM reporting segment, con-tinue to be diluted in the quarter, with a negative year‑over‑year impact of approxi-mately 7 million EUR in absolute adjusted EBITDA.

DI's adjusted EBITDA was positive, with 11 million, main drivers being a strong perfor-mance at Fluence and Traxon. Overall, DI continued to offset pricing and inflation well with productivity measures.

Adjusted EBITDA in Corporate Items for OSRAM continued operations was negative, with 23 million EUR.

Moving to Slide 24, our performance programs delivered 40 million EUR of gross sav-ings in the quarter, translating into approximately 107 million EUR in gross savings for


the full fiscal year. With this strong result, we exceeded our original savings target for fiscal year '19 of between 85 to 95 million EUR and moved into a triple‑digit savings.

Out of the 107 million EUR in gross savings, 55 million EUR of gross savings were generated through our overhead cost reduction programs and 53 million through our programs for our factories.

Moving to Cash Flow on Slide 25. Free Cash Flow was positive, with 103 million in the quarter. Improved working capital management, especially lower inventory levels in combination with lower CapEx, were the main drivers behind the positive free cash flow generation.

Net debt reduced to 350 million EUR, reflecting the strong cash inflow in the fourth quarter.

When we now look back and recap the full financial year 2019 of Slide 26, it was clearly one of the most challenging years in the more recent history of the company. First signs of slowdown already noted in fiscal year '18 in our key markets Automotive, Gen-eral Lighting, and Consumer Electronics, gathered speed in 2019 and impacted reve-nue and profitability of the company in a significant way. As a result, comparable growth for the company declined by around 13 percent, translating into an adjusted EBITDA of about 9 percent for the year, in line with our revised guidance of March 2019.

Key drivers for this development in fiscal year '19 were:

Chinese market demand, being close to 20 percent of the company's revenue base, slowed down markedly, particularly impacting our Opto businesses but also the Tradi-tional Automotive light sources within our AM segment, and translating into a revenue decline for OSRAM in China of 22 percent for fiscal year '19 when comparing it with fiscal year '18.

Global industrial supply chains moved through significant inventory adjustments, par-ticularly for General Lighting and Automotive, and amplified the lower market demand further. The ongoing trade dispute between the United States and China created sig-nificant uncertainty in global supply chains and negatively impacted our business in the United States ‑‑ for instance, in Digital Systems, being part of the DI.

The OSRAM Continental joint venture as part of our AM segment was impacted by a difficult automotive market environment, whilst building up its own infrastructure as a new company. As a result, it finished the year with a negative adjusted EBITDA of 43 million EUR and a negative free cash flow of 68 million EUR, the latter also reflecting capital expenditure needs and the initial buildup of working capital.


We increased our cost reduction measures in light of the overall deteriorating market environment and exceeded our original cost saving targets from performance pro-grams for the fiscal year with, in total, 107 million EUR in gross savings.

Another positive development were the business results of our most recent acquisition, Fluence, which performed very strongly, particularly in the second half of fiscal year '19.

And we made progress with respect to the transformation of our business portfolio by concluding the divestment of our lighting service business in the US as well as our European luminaires business Siteco during the course of fiscal year '19.

Profitability for the year was significantly impacted by the operating leverage of sub-stantially lower volumes with compared to fiscal year 18, as you can see on Slide 27. Lower market demand combined with our own efforts to reduce inventory levels com-pany‑wide to focus on cash flow resulted in a lower utilization of our factories, particu-larly for Opto, Automotive Traditional, and Digital Systems, the latter being part of our DI reporting segment.

The first full year of consolidation of our OSRAM Continental subsidiary had an overall negative impact of approximately 32 million EUR when compared to prior year. In total, the joint venture adjusted EBITDA margin was diluted for the company with approxi-mately 1 percentage point. As you may remember, in fiscal year '18 we recorded a gain of approximately 15 million through the disposal of a non‑core business.

Savings from our performance programs together with our normal operational savings from procurement and operation efficiency programs were overall able to offset price erosion and inflation.

Overall, price erosion was up a notch in certain parts of our business, notably in our automotive businesses.

Overall for the full year 2019, free cash flow came in positively with 17 million as a result of a strong second half of cash generation representing our strong focus on cash flow, driving improved levels of working capital.

CapEx was lower than prior year, also reflecting the changing market environment and slowdown in demand. As a result, CapEx spend totaled 208 million EUR for the year, lower overall by approximately 54 percent when compared to prior year.

Overall special items for the full fiscal year 2019 came in at 131 million EUR.


Moving now to the outlook for our new fiscal year 2020 on Slide 28. As we are moving into fiscal year 2020, we expect the economic environment to continue to be challeng-ing. A number of economic research institutes have recently pointed towards a further slowdown in overall world economic activity. Our three key markets, Automotive, Gen-eral Lighting, and Consumer Electronics, are not expected to be exempted from this development.

When looking into the first quarter of fiscal year 2019, we certainly expect the same headwinds that we faced in fiscal year '19 also to continue. As a result, overall compa-rable revenue growth is expected to be roughly flat or slightly negative when compared to Q1 fiscal year '19, also reflecting the expectation of a sequential Quarter‑4‑to‑Quar-ter‑1 decline in Opto and in DI, in line with typical end‑of‑calendar‑year seasonality.

For the full fiscal year 2020, we expect comparable revenue growth to be in the range of between minus 3 to plus 3 percent. This range reflects the still existing uncertainties in overall global market developments combined with ongoing external geopolitical de-velopments such as ongoing tariff discussions, the Brexit situation, and the difficulties to reliably assess global economic growth prospects for fiscal year '20, particularly for China.

Against this macro backdrop, we expect our adjusted EBITDA margin to be in a range of 9 to 11 percent. This range is largely driven by the possible variance in our revenue growth trajectory in fiscal year '20 and the corresponding operating leverage effects. Furthermore, we expect a demanding pricing environment in our key markets Automo-tive and General Lighting to continue well into the new fiscal year.

The impact of the introduction of IFRS 16, which is this time first applied as per the first of October 2019 by the company, is expected to be positive, with approximately 1 per-centage point in adjusted EBITDA and is already reflected in the above given range.

Free cash flow is expected to be positive, possibly at mid double‑digit levels, including significant cash outflows resulting from the ongoing performance programs.

Special items are expected to be similar to the level of fiscal year '19.

Let me also finally point out that the guidance does not assume a "Hard Brexit" sce-nario or a full‑blown recession. It also excludes possible increases or scope extensions with respect to tariffs pertaining to international goods flows.

And now, Juliana, back to Olaf.

Juliana Baron: Olaf, if you can start with the comments on AMS.


Dr. Olaf Berlien: Yeah. It's very short.

At this point I would like to finally comment on the takeover offer from AMS. As you know, we published this morning our Joint Reasoned Response today. At this state-ment the Supervisory Board and the Managing Board recommend the takeover bid to OSRAM shareholders.

From our viewpoint, the new offer is attractive for our shareholders, for our employees, and for the company, as you can see on Slide No. 30. The offer price of 41 EUR per share offers a high premium to our shareholders of 42 percent. This translates to an enterprise value of 4.5 EUR billion. I think it's a fair valuation of the company. It means an enterprise value multiple of 11.5 compared to the EBITDA.

The new offer also contains substantial improvements for our employees, as you can see on Slide No. 31.

In the new Business Communication Agreement, OSRAM and AMS have agreed on important points for the integration of OSRAM. Most important, employees at the Ger-man sites would be protected against layoffs for transactional reasons until end of 2022. Half of the leaders of the corporate functions and a large part of their teams would be located in Munich as a co‑headquarter. OS and AM would remain corner-stones of the combined company. Future of DI would be assessed on a joint integration team. Last but not least, the Business Combination Agreement also ensures the con-tinuity of OSRAM as a company.

As we move to Slide No. 32, AMS supports the OSRAM photonics advantage. The strong OSRAM brand is aimed to be reflected in the new group's name, and it is also planned to change AMS into a European cooperation with representation of OSRAM in the Managing and Supervisory Board.

To safeguard the interest of both parties, we are happy to announce that with Brigitte Ederer we will install an independent monitor.

So all in all, we can say that compared to the first offer, we have achieved substantial improvements for OSRAM and the future company.

With this, we are now happy to take your questions.


Q&A

Operator: Ladies and gentlemen, at this time we'll begin the question‑and‑answer session. Anyone who wishes to ask a question may press Star followed by 1 on their touchtone telephone. To withdraw your question from the question queue, you may press Star followed by 2. If you are using speaker equipment today, please lift the handset before making your selections. In interest of time, please limit yourself to two questions only. Anyone who has a question may press Star followed by 1 at this time.

And the first question comes from the line of Sebastian Growe of Commerzbank. Please go ahead.

Sebastian Growe: (Inaudible) ... bridge for 2020. And at a higher level, can you just give us some ideas what you are planning by segment to get to the flat to up to 100 million increase in EBITDA year‑on‑year and can you particularly talk about expecta-tions around the Conti JV after the not‑so‑great performance in 2019. And I think, Olaf, you also mentioned that you will discuss that exact performance with Conti to provide us a bit more or give us a bit more insight of what is behind that. And then I also ask and think that's a question then for the CFO, for Ingo, also if you have received any compensation yet by Conti after the 2019 year. Last not least, and related to the bridge, can you also give us a better understanding of what you are planning for DI in particu-lar. That's quite a bit that are on 40 million higher revenues you are able to achieve incremental EBITDA of 20 million, so what's been driving that and what's the way for-ward from here. That would be on the bridge. I made a couple of questions in one.

And then secondly, around CapEx and free cash flow, may I ask what CapEx have you baked into the cash flow target of a million euro a month and because the 2 percent quota to say as we've seen in the second part of '19 should be fairly sustainable, from my point of view ‑‑ thank you.

Dr. Olaf Berlien: Okay. Thank you, Sebastian. I think in the beginning there was a misconnection. Maybe we did not get your first question; but nevertheless, I think you had so many. I think, Ingo, maybe you start with these.


Ingo Bank: Yeah. I just get caught up with something like a bridge. I guess you want to understand how we go from '19 to '20, I presume. So let me start with that maybe.

So I think, as you can see from the revenue guidance, that our volume growth expec-tations for next year show a fairly mixed picture. That's still due to the limited visibility that we have. I think I also pointed in my prepared remarks towards a somewhat ele-vated pricing environment that sort of we have to cater for next year. So, therefore, we expect that overall if you look at the productivity programs and the performance pro-grams that each will be necessary to offset, let's say, pricing and possibly inflation and with not much volume growth, that basically means you have a chance to stabilize and possibly improve margins a bit year‑over‑year. In addition, we do also expect some-what of a more negative product mix next year as we continue to see the traditional products in our automotive business decline faster than a little bit expected, especially halogen and HID. Therefore that weighs also on profitability and is offset, as I said, by mostly costs and other measures. Therefore, that's roughly the bridge.

Overall, if you look at the segment ‑‑ I think that was your second part. We don't guide for segments, but overall I would expect Opto to improve compared to this year on the basis of the cost and structural measures that we've taken there in the new team. The management team that has, I think, seen more potential that we could do in Opto. I do not expect an improvement in the joint venture based on the current outlook we have there. As we said, we're in discussions with Conti to see how we can improve their situation. And in DI, it's going to be a mixed picture. I think we will see that Fluence will continue to perform well, but I think I also pointed to still a difficult market environment for DS in there. The other markets we are in, Entertainment, etc. those are not markets that show significant signs of growth at this point in time. So that was roughly what I would say.

In terms of compensation for Conti, yes, I mean, the customer transfer has not been completed, but we get compensation from Conti. For every revenue margin that is still in their books, we get compensated there. That has also been the case this year, and those will be the case up until the moment all of the customer contracts have been transferred eventually into the joint venture.

Then on CapEx, you should expect a similar CapEx level to '19 also in 2020.

Sebastian Growe: For the Conti JV, the compensation and the number you provide, the close to 40 million loss, that is net of those compensations? Is that rightly under-stood?


Ingo Bank: Yep.

Sebastian Growe: Okay. And cash‑wise you have also and already been compen-sated, or is that still to come?

Ingo Bank: Well, sure. I mean, the compensation is accounting and cash. So there's no difference.

Sebaste Growe: Okay. Okay. Right. Thanks so much.

Operator: The next question comes from the line of Charlotte Friedrichs of Berenberg. Please go ahead.

Charlotte Friedrichs: Hello. A few follow‑ups, please. The first one would be on cur-rent trading and is aside from the IHS numbers that you are basing your guidance on partly. Is there anything that you can tell us in terms of sentiment at your customers, the kind of things that they tell you, what sort of visibility do they have right now? Is there anything new here?

Dr. Olaf Berlien: I would say not really new. If you think or if you see what Infineon recommended this morning, what they have seen for their Q4, same like other, for their Q1 and for the 2020, I think we have the exact same view. They had a strong Q4. Obviously we see a little bit of slowdown for the months of October, November, De-cember, and we expect a much better second half of 2020. So we have the same view as coming from the semiconductors. So it looks like that the dealers, the distributors, are starting to order in the second half of 2020. So they are much more optimistic.

If I move to automotive, the same. So as I said, so we see a little bit of a sidestep for the next three months and then it looks like that 2020 is getting better. So that's our order volume and it compares what our colleagues around the corner proposed this morning as well.

Charlotte Friedrichs: Understood. Second question would be on the revenue splits in the automotive division. Can you give us a bit of an idea of where we are right now?


You commented traditional businesses coming down. Where in the process are we currently?

Dr. Olaf Berlien: I think that's a nice question for Ingo.

Ingo Bank: So I'm not sure exactly what you mean, frankly speaking, in there. I think what you will find is that what we've eliminated for the company purposes and group purposes is approximately, I believe, out of my head now, don't quote me please, 750 million. So that give you a sense as to what is there, and I think in the Conti joint venture was around 230 million or so revenue. That tells you what the rest is right now.

Charlotte Friedrichs: Okay. Perfect. Thank you. And within DI, the increase in profit-ability, were there any sort of one‑offs that we should take into consideration or do you think ‑‑ I mean you mentioned some headwinds, but do you think profitability for DI in 2020 is reasonable or not?

Ingo Bank: Well, I think you know in Q4 clearly it's been two parts that drove the positive EBITDA for DI. That was Fluence, on the back of very strong demand. And also Traxon had a very strong quarter. And they have a very high gross margins in Traxon. So therefore you immediately see the benefit if your revenue levels come up.

For next year in DI, I think we will still face a challenging market environment around our digital systems or electronic ballast business, and that is supported by cost measures and restructuring measures that the business has undertaken now for quite a while and is also planning for next year. But I think if there ‑‑ the good earnings momentum within DI at this point in time clearly comes from Fluence, and the rest is basically moving along, not so much growth and possibly improving here and there from cost measures.

Charlotte Friedrichs: Okay. Thank you.

Operator: The next question is from Lucie Carrier of Morgan Stanley.


Lucie Carrier: Hi. Good afternoon, gentlemen. I just wanted to go back to the guidance of 2020, please, because if I understand well from the comments, you kind of expect about 35 million of IFRS 16 benefits in 2020. And if I kind of back out the guidance, it almost looked like you are looking at IFRS 16 for a flat EBITDA. So I was just wonder-ing how we should think about that, because I would have still expected at least cost savings to come through in 2020.

Ingo Bank: Hi, Lucie. That's true and the performance programs will also contribute and continue to contribute; but as I said, that we expect it to be offset by pricing, infla-tion, as well as a negative mix that we see overall. So therefore, it does help to stabilize that but it does not help at this point in time to provide an uplift to the margin year‑over‑year. So still very much dependent on where volume will go next year. Therefore, we've been careful in our assessment at this point in time, given the uncer-tainties and said, well, anywhere between minus 3 and plus 3 percent is a possibility at this point in time. So if growth comes ‑‑ and as Olaf said, the first three to six months are still expected to be headwinds that we've seen already in '19 and the second half better, then we might improve on that. But without that, we at least are able to stabilize our EBITDA levels, despite a somewhat more amplified pricing environment.

Lucie Carrier: And just if we can maybe calibrate a bit the cost savings which, from what I understand right now, you expected only would compensate the additional price pressure in the mix. You have about 100 million left of cost savings on the program. Should we think that a large part of that is going to be in 2020 or is equally between 2020, 2021? How do you model that?

Ingo Bank: Well, at this point in time the expectation is that a big part of that will be in 2020 and then a residual in 2021. That's currently the expectation.

Lucie Carrier: Thank you very much.

My second question was around the Conti JV, please. I mean, there is a significant goodwill impairment here of roughly 170 million. Can you, first of all, indicate to us what was the value of the asset you had in the book so we can kind of assess how much of it has been written down? And also for us to understand maybe a bit better, because I appreciate the weakness of the auto industry that we are seeing now, but typically you know those impairment decisions are not made on kind of short‑term considerations


on a business. They've been more medium‑term to long‑term. So is there anything that you are seeing now in terms of demand, in terms of how the automotive market is heading to, that lowers your expectation fundamentally on what this JV can deliver?

Ingo Bank: Well, Lucie, what I think I said in my prepared remarks is that the goodwill has been written off in full and the trigger was simply that we looked at the new busi-ness plan that the joint venture management team presented, reflecting overall an ex-pectation that market demand in the automotive industry will, at least on the near term, midterm, not substantially improve. And overall also showing somewhat lower profita-bility than we originally assumed. Those two basically triggered an impairment under IFRS which we then took in full in the last quarter.

Lucie Carrier: Thank you. Sorry, I had missed the full written off. But in terms of the lower forecast for the medium term, especially around profitability, where is really the variation coming from? Because again, I guess where I struggle is it seems that you ‑‑ by writing it off completely, it seems that you're giving us the signal that maybe this is not going to be as interesting an area as you were thinking initially when you put together the JV.

Ingo Bank: Well, I think we have to consider two things, of course. One is that the original business plan was made at a time when the automotive industry was doing still relatively well and since then until then ‑‑ the joint venture was actually constituted some time past and we now had a chance to relook at some of the market assessment. We also now have first insights coming from our customers in the joint venture. And overall because of the automotive market, the starting point from a revenue perspec-tive for the joint Venture in fiscal year '19, of course, was lower and therefore the tra-jectory in terms of growth for the joint venture, plus a somewhat reduced outlook from a car production perspective over the next few years, certainly made us look at different types of revenue figures than we originally had seen and a slower ramp‑up of all that we still see and the order intake of the joint venture is still there. So they were quite successful.

The other thing we saw is also that the progression of higher‑margin very specific matrix lights in the front is expected now to be somewhat slower. As a result, the prod-uct mix is expected not to be as positive as originally planned but coming, therefore, also later. And all these two shift basically meant that overall we had to make a value


adjustment here. But overall the idea of the joint venture, of the combination of lights, sources, and electronics and sophistication that we can bring to the table, and possibly also an evolution in how we AMS will think about front lighting architecture in the car in the future is absolutely still intact and also confirmed in discussions we have with customers.

Lucie Carrier: Thank you.

Operator: As a reminder, if you wish to ask a question, please press Star and 1 on your actively.

The next question comes from the line of James Moore of Redburn. Please go ahead.

James Moore: Yes. Hi, everyone. Hi, Olaf. Hi, Ingo.

Further detail. I've got a few questions. Maybe I'll go one at a time. You mentioned some of the increased pricing challenge in full year '20. Would it be possible to update us on what pricing incentives turned out to be at the group level at Opto and even Opto Auto full year '19 and how you think that is going to change in full year '20? That's my first question.

Dr. Olaf Berlien: Ingo.

Ingo Bank: So, I think on a group level, looking at price reduction is not very mean-ingful because their businesses are operating in completely different pricing environ-ments. And what we saw with Opto is certainly something that is in the sort of higher single‑digit range and we expect that to be at least at that level if not slightly higher than next year. That's one the minutes comments I made earlier is around pricing.

In the traditional part of Automotive, certainly in the OEM part, not the aftermarket, we've also seen a little bit more pricing discussions simply because some smaller and other competitors are now trying to also gather volume in what is overall a declining volume market from a last‑man‑standing perspective, so here and there there's some expectations that the pricing will change a little bit also somewhat going into next year. In the OEM, not in the aftermarket business. And by the way, our aftermarket business


in overall revenue terms is already higher than the OEM business for traditional light sources. I think that's important to understand.

And then on the DI side, I think it's more meaningful to discuss that for our ballast businesses or systems because the rest is largely project business and alike. And there we've seen some elevated pricing levels in '18 that sort of stayed a bit in '19, and also in 2020 we expect it not to come down ‑‑ at least we don't expect it to increase but also not to come down. And therefore overall if you look at what we see in the automo-tive business at least, we expect therefore that the pricing impact will be little bigger than it was in 2019 for the company.

James Moore: That's very helpful. On the savings. Am I right in saying that the original target or the upgraded target of the first half of a total savings of over 200 million is unchanged and that you've brought forward the savings a bit faster in FY19, or is that the overall number is now a bigger number and, if so, could you comment on that?

Ingo Bank: The overall number is not expected to be higher. So if you take the period that we pointed to, so including '21, we now expect it to be around 220 million and no longer just 200 million, simply because we accelerated the savings in fiscal year '19 and hence you know that was an addition ‑‑ partly or largely Opto, that is. Therefore, if you remember what I said to Sebastian, I said that I expect Opto to improve its prof-itability somewhat next year. That is largely on the back of the cost measures they took.

James Moore: And the split at the digital business I get confused with because there was a presentation of all the three business unit structure. You also talk about Traxon and Entertainment, the DS and Fluence. Would it be possible to give us some flavor for what the current revenue size is and margin variation is of those pieces?

Ingo Bank: I don't want to get into guidance for sort of subsegments or so. You know, look from a total perspective DS and certainly ballasts is still the most important part of the segment, with roughly a little bit less than half of what it overall is. The business in Fluence is developing well into almost a triple‑digit type of revenue business, that is. And the rest pieces of the DI segment are also, by and large, somewhat in that same level, probably a bit higher than Fluence. And if you add that all up, roughly you


should be at the numbers that are a sort of subsequent level. But please understand, James, that I don't want to start guidance at that level.

James Moore: Well, I wasn't expecting guidance. Just exactly as you gave. So that was very helpful. Thanks. And now for Continental, obviously a similar number this year. But do you have an ambition for when you think it can get to break‑even.

Ingo Bank: Yes, we do have an ambition, but that requires discussions which we cur-rently have in the decision bodies of the joint venture where parties from both parents are represented, so both OSRAM and Conti, and I don't want to sort of preempt those discussions as to what if. I mean, both parties are not happy with the financial perfor-mance of the joint venture and, as we speak, we are discussing those improvement areas. So I can't give you a clear regimen, but I can repeat what I said earlier, that at this point in time I do not expect a material improvement in the joint venture's financial performance for next fiscal year.

James Moore: Finally, if I could, it's a technology question Opto. I don't know if it's for you or Stefan. But would it be possible to update us on the penetration for the year just finished, of non-LED versus LED and how you now think that that's going to develop, given your comment about matrix perhaps not being adopted as fast. And the second part to that is you've talked in the past about 3D and infrared and other technologies. Would it be possible just to have a bit of an update as to how they're progressing on the high‑tech end of the revenue portfolio?

Ingo Bank: James, so we don't really have right now the fixed numbers on LED pen-etration. What we think, though, is that it has increased, of course, this year a little bit more even than the expected, especially driven by China; but the next level of numbers will come out soon. There's always a little bit of a mixup with IHS numbers in that regard. So we're not able today to give you that. But overall our estimate is that it went up more than we expected originally and that it's driven largely by the developments in China.

Stefan Kampmann: To take about a few questions about sensing and 3D, we see an increased number of projects also equipped with components from our company which


we acquired last year. So the expectations for these fields of application are supported by the projects which we currently are discussing with our customers. So I think we are on tracks in this as well.

James Moore: Thank you very much.

Operator: In the interest of time, please limit yourself to two questions only.

The next question comes from the line of Jürgen Wagner of MainFirst. Please go ahead.

Jürgen Wagner: Yeah. Good afternoon. Thank you for letting me on.

I have a follow‑up on pricing in Opto. You said it is worsening but still you are doing better than the more consumer‑focused players. How long do you think your auto LED business can keep the price premium versus consumer LEDs? And a second question on the AMS takeover process. Workers representatives still upholds the AMS offer and especially Mr. Abel is very active in the German press. What is the background for his action? Thank you.

Ingo Bank: Let me comment first on the price erosion question you had, and then Olaf will comment on AMS.

So I don't think I used the word "worsening." I said that pricing will be more elevated. I wouldn't call it worsening because that sounds like something dramatic will happen. What we just see is that at this point in time you're working in an environment where there's too much capacity out there from ‑‑ and also both on the LED as well as on the traditional side. And with that the pricing power is shifting more to customers and less to suppliers. I think that's a normal economic development. We've also seen that we have not seen any new entrance into the automotive front lights or exterior lighting market from that perspective, and we don't expect it to be. That's also not the indica-tions we have from customers that they are looking for that. So from that perspective, with the normalization of demand now, also moving to 2020, we think that beyond 2020 it will start normalizing a little bit about it again. On the traditional side, as I said, it's a market that will continue to decline in volumes. And there it is important that if we want


to be successful from a last‑man‑standing perspective, we start managing this busi-ness also more towards cash. And it helps to possibly consolidate volume in a declining market and helps also with the utilization of the factories that we have.

So that's how I would describe it. I don't think it's a structural issue. I think it's more related to the current, simply the situation that we had a very strong correction in the automotive industry overall from production volumes and from inventory levels with distributors. We had a very strong correction led by China. And as I said, our business in China is in the mean of 20 percent of the company's revenue. And depending on how economic developments will be, we also expect that to recover.

Dr. Olaf Berlien: Coming to your second question, I think, of course, the real back-ground I think you have to ask Mr. Abel. So I cannot talk about the background, but I think it maybe started with the unexpected first offer of AMS, in combination with some miscommunication at the beginning. So maybe the start was not the best one. I think in the meantime there were a lot of discussions with the IG Metall and with AMS. I think we are on a good way. We made good progress and I am quite sure if we would be successful, if this offer will be successful in mid of December, then we are coming in a normal range of discussion. I think that's the point. I think it's a matter of time to come to a normal situation.

Jürgen Wagner: Okay. Thank you.

Operator: In the interest of time, we have to stop the Q&A. I hand back to Juliana Baron for closing comments.

Juliana Baron: Yes. Thank you very much for your participation. With that, we would like to close the conference call. If you have further questions, please get in contact what our investor relations team.

Have a good day. Thank you and goodbye.

Operator: Ladies and gentlemen, the conference is now concluded and you may dis-connect your telephone. Thank you for joining, and have a pleasant day. Goodbye.

Documents

November 12, 2019 Operator: Juliana Baron - OSRAM .../media/Files/O/Osram...November 12, 2019 – AC Q4 – Osram Licht AG - | 3 If you look at Slide No. 8, you can see the actual