ams OSRAM AG

SIX:AMS

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the conference call on the First Quarter 2024 Results. My name is [ Truancy ], the Chorus Call operator. [Operator Instructions] At this time, it is my pleasure to hand over to Juergen Rebel, Head of Investor Relations. Please go ahead, sir.

[Juergen Rebel, executive]

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

[Aldo Kamper, executive]

Thank you, Juergen, and good morning to everyone also from my side. We delivered again a solid business performance in the first quarter in spite of significant market uncertainty.Let us take a look at Slide #2 here. Q1 group revenues decreased quarter-on-quarter and came in at EUR 847 million, EUR 61 million lower than in Q4. We landed at the midpoint of our guided range of EUR 800 million to EUR 900 million. A year ago, automotive was particularly weak, and we stood on a like-for-like basis, excluding divestments in the Lamps & Systems segment at EUR 870 million with a negative currency impact of about EUR 9 million, like-for-like and on a constant currency basis, our revenue therefore increased around 5% year-on-year. We are quite happy that our underlying core business is getting back into a structural growth mode besides certain cyclical elements. The increase is driven by both the automotive and consumer semiconductor business, but other verticals remain in inventory correction.Adjusted EBIT margin came in at 5.2%, below the midpoint of the guided range. With our ad-hoc announcement on the microLED on February 28th, we indicated that we will no longer be able to capitalize R&D expenses for the cornerstone project. This weighs on EBIT with around EUR 11 million in Q1. Without that effect, would have again come in above the midpoint of the guided adjusted EBIT range. In absolute terms, adjusted EBIT stood at EUR 44 million compared to EUR 62 million in Q4 '23.On the right-hand side, you see a chart of adjusted EBITDA. We believe that this is actually a more appropriate KPI for our business because it is representative of the cash flow performance of the underlying business. In Q1 adjusted EBITDA stood at EUR 124 million or 14.6% adjusted EBITDA margin.Let's take a look at the financial performance of the different business segments. The Lamps & Systems segment is shown on Page #3. The business continued to perform very well, exactly in line with what we had expected. Automotive aftermarket business remained strong. We saw revenues of EUR 268 million, resulting in a slight 4% quarter-on-quarter seasonal decline.As I explained in previous calls, Q4 and Q1 are always a strong quarter in the year, as most lamp replacements happened during wintertime in U.S. and Europe, whereby Q4 is typically a bit stronger than Q1. The aftermarket is then rolling off in April into the softer summer months. The lamp sales industrial, entertainment applications remains at a low level of around EUR 40 million. You may have seen the bottom of the cycle, but we need to see how Q2 progresses here.Adjusted EBIT came in very strong at [ EUR 19.1 million ] or EUR 51 million in Q1. The favorable product mix driven by strong aftermarket, but also a positive onetime effect drove this exceptional result.The adjusted EBITDA margin stood at 22.5% or EUR 60 million in absolute terms. The lamps business only requires a small amount of maintenance CapEx every year. As such, around 3% of sales for D&A is typically a good estimate.Turning our attention to the Semiconductor segment on Slide 4. You remember, last autumn, we streamlined our organization and strengthened the end-to-end responsibility of our business units by integrating the respective operation and innovation departments into their organizations, so they're truly end-to-end responsible. Their performance is measured along revenue and profitability KPIs. With this, we are now reporting our semiconductor businesses per business unit separate -- a separate segments here. And I think you will appreciate and the transparency this brings, one of the themes that Rainer and myself have been adamant about since we started.You'll find the graph representing the optical semiconductor business, OS in brief on the left-hand side of the slide. This is our semiconductor business with emitters, for example, LEDs and lasers. We recorded solid revenues at EUR 345 million, primarily driven by healthy automotive demand, while industrial is still weak.Adjusted EBITDA came in at EUR 67 million, representing an adjusted EBITDA margin of 19.3%. There are various drivers for this still below target profitability. Operationally, we continue to see prolonged weakness in industrial markets and as such underutilization charges are weighing on the results. However, the microLED topic is still the major drag on profitability. On the one hand, absolute research and development expenses were still high in Q1; on the other hand, we can no longer capitalize R&D related to the cornerstone project that was canceled. We will talk about the way forward on microLED in a few slides.On the right-hand side of the slide, we see the financial performance of our Semiconductor segment, CMOS Sensors and ASICs, or CSA in short. Revenues came in at EUR 233 million, driven by good momentum in consumer applications, but still heavily impacted by prolonged inventory correction in industrial automation and medical. Adjusted EBITDA for CSA stood at EUR 5 million or 2.2% adjusted EBITDA margin. Clearly, you see the effect of the loss-making non-core businesses that we're working on to exit, as defined in our Re-establish-the-Base program last year. We come to the later development on those in a few minutes. At the same time, the weakness in industrial and medical markets caused underutilization charges, also impacting profitability.Let us switch to Slide #5, looking at the dynamics in the end market in detail. On the very left, you see the revenues of both semiconductor segments combined for comparison purposes. Despite of the seasonal decline, we see a 5% year-on-year growth. The strength in automotive continued in spite of the normalization in demand from China after the year-end rally in Q4 on top of normal seasonality, where H1 always is a bit weaker than H2. We recorded a strong 13% year-on-year increase. While we expanded our build-up material, for sure, there's also a cyclical element, as we went to an inventory correction a year ago, you might remember.Industrial markets remain extremely weak momentarily, the theme you hear from our peers as well. However, let us look at it in some more detail. Whilst we benefited in Q4 from [ non-cancellable ] orders in industrial automation, we now feel the full swing of inventory correction, both in industrial and medical markets.In professional lighting applications, street lighting is an exception that remains relatively stable. Mass market demand remained relatively weak, especially for emitters, but some new products that were recently introduced such as our new blue laser are in high demand. The medical business still undergoes inventory depletion, as OEMs are adjusting high stock levels here.Consumer business showed a decent improvement compared to a year ago, driven by excellent demand for sensor products for Android smartphones. We are benefiting from our leading market position in spectral sensing. It seems that customers are replenishing some of the inventory on top of genuine and customer demand. The slight sequential decline is rather an effect of typical seasonality that one sees in the consumer business.Now let us take a look at Slide #6. Despite the news regarding microLED, our underlying core business performs well and continues to support our structural growth expectations. We continue to win new business on an ongoing basis, showing the competitive edge of our existing and new products. First, our 25,000 pixel forward lighting solutions, EVIYOS continues to be in high demand. We are continuously winning new designs and are now at more than EUR 350 million lifetime value up more than EUR 100 million since we talked about it last time.Second, our latest hyper-red LED product for the horticulture market, posting highest efficacy on the market is finding very strong traction. We could win an exceptionally large project worth EUR 75 million, amongst many other design wins at key customers. This gives us confidence that the second half of '24 is indeed seeing stronger traction in industrial, especially from the horticultural side of things.Third, we could secure a EUR 100 million design win in medical, as a leading Chinese CT maker, [ UHI ] (sic) [ UIH ] probably [ they are known in the West ], but the biggest player in China by far. We have been a key partner of UIH for over 10 years, growing them from the start to a world-class leader in their field, along our DNA based on innovation competence and strong customer relationships.Finally, as you just heard, we benefited from the recovery in the Android smartphone market for our consumer business. This has only been possible, as we are constantly winning and rewinning sockets in almost all premium to mid-range platforms on the key brands. Now in the last quarter, we secured a number of sockets worth more than EUR 50 million.Now let us switch to the strategic topics regarding the revision of our microLED strategy. We are on Slide #7. In the wake of the cancellation of the cornerstone project regarding microLED, market researchers have started to adapt their view on the adoption of this technology significantly. You see the latest view of the development of the LED market from research firm, TrendForce on this slide. Two segments stick out. On the one hand, general lighting, known to be red ocean market dominated by Chinese vendors. On other hand, automotive, where we are the clear market leader. They'll become the biggest single segment of the LED market according to TrendForce in only a few years.While looking at the segment, microLED self-emitting displays in more detail in this report, one finds out that the volume and revenue outlook for high-performance, very small-scale microLED has been reduced strongly. This is especially true for personal handheld devices, as momentarily no big project by any of the large brand is visible.The most noteworthy segment remains premium TV screens, which comes along with the kind of smooth transition from miniLED, which is known to be a highly commoditized segment. It could become a heavy -- heavily contested area for potentially just a few hundred thousand premium TVs. Other segments that TrendForce still look at positively are automotive displays and AR applications, but these are comparatively small until the end of the decade.This brings us to Slide #8. We promise that we will reassess our microLED strategy after the recent unfortunate events and provide an update with the first quarter financial reporting. Previously, the cornerstone project [ was ] believed to be the watershed moment for the high-performance super miniaturized microLED technology. It was the single largest, most tangible and shorter-term project out there.However, as we've just seen, it's now believed that it will take a long time until the microLED high performance segment comes to life in certain applications such as ARV or smart glasses or automotive displays. And those segments only promise a fraction of the volume that have been anticipated for personal handheld devices.At the same time, we see continued support for assumption of attractive growth in our core markets. With the cancellation of the cornerstone microLED project, we can now fully focus our resources and our management attention on those opportunities in markets that we have been owning for many years. For this, we have decided that we will scale down our microLED development activity significantly and focus on small-scale core development activities that serve our own proprietary needs.We will work in areas, where we're not dependent on exotic mass transfer technologies. For example, high-pixelated forward lighting applications will move from the 25,000 pixel that we spoke about before to a next generation of 100,000 pixels in the next generation. And the pixels are becoming also very small here, incorporating learnings that we have gathered during the last years and the work on the microLED technology will incorporate those learnings into those kind of products. Nevertheless, we are also still in discussion with one or the other large customer on engaging more significant microLED development towards certain applications, but if and only if they are willing to fund such developments under reasonable contractual terms.The substantial restructuring of our microLED development activities affects more than 500 employees at both Regensburg and Kulim sites combined. Some freed-up resources are reallocated for strengthening the core development, especially in automotive, as just mentioned. Certainly not easy for us, as our teams have worked extremely hard to successfully hit the set development industrialization milestones, but we have no choice given the new market outlook for microLED.The second revision of the microLED strategy concerns the future use of our brand new patents facility in Kulim. As a state-of-the-art turnkey semiconductor facility in a geopolitically neutral hub, where land is scarce and construction costs have again risen, we've received a lot of interest in the fab. Transferring the fab to a new lessee, meaning somebody takes over the facility and steps into the sale and leaseback agreement has become the priority option for us.We will actively engage with first interested parties and will expand this effort in the next weeks. Certainly, we're also in contract -- in contact with our sale and leaseback investors to get their support on our intention to exit. I think you understand that given that this is a meaningful step for us and any interested party that we will need a bit of time until we might have -- sign transaction here.In total, looking at the cost now, we have to bear around EUR 700 million transformation cost in 2024. Of those EUR 700 million, EUR 643 million were booked in Q1, including a write-off of EUR 524 million for dedicated equipment and capitalized R&D. Within the EUR 700 million, we also booked EUR 119 million cash transformation costs for cancellation fees and equipment hook down.Necessary adjustments in the R&D setup for microLED will incur up to around EUR 70 million in the quarters to come. They will include, among others, severance payments for the restructuring. Rainer will comment on the adjusted EBIT and cash flow improvements in his part of the presentation in detail. On top, we also expect to reduce our net debt by around EUR 400 million when a new lessee steps into the contract.In our discussions with investors, we were regularly asked what is the impact on our growth plans, and for this, let us switch to Slide 9. It's very important for me to emphasize that our underlying core business is fully intact, and let's take a look at what it means for our target growth model until '26. Certainly, we had to take out anticipated revenue from the microLED cornerstone project in the 2026 projection, a low triple-digit number. This means that the midpoint CAGR reduced by just 1% from 8% to 7%. Remember, previously, we indicated the [indiscernible] the [ 2022 base ] of EUR 3.1 billion, which excludes the non-core portfolio of 6% to 10%. Now, we say 6% to 8%.Why are we so confident? We always said that the key driver [ in this '26 ] is automotive, driven primarily by bond growth and design wins. The momentum and the view is unchanged. Next biggest contributor is the new mobile light sensor ramping and new design wins is fully on track. Nothing has changed.Looking at industrial, we are bringing out new products, take our benchmark horticulture chip, take our blue laser. We're also strengthening the distribution channel, where we see significant opportunity for us.Look in medical, I just mentioned a few minutes ago, another significant design win in CT scanners. Nothing has changed. We continue to expect growing twice as fast as the market once the inventory correction is over. And you might remember that last time we mentioned aggregated number of design wins in '23 of more than EUR 5 billion, which underpins our future growth ambitions. Design momentum continues to be strong, as we talked about a few slides back.For this, I can only stress again that our core business is fully intact and unaffected by the revision of the microLED strategy. The contrary is actually true. We are shifting a few key resources to core business to strengthen and accelerate developments for new products and growth to come.Now, let's take a look at Slide 10. When we announced the Re-establish-the-Base program last summer, we said that most of our product lines are structurally healthy, but the overall performance is hampered by non-core businesses, primarily in consumer applications. We told you that [ we ] prioritized Passive Optical Components in the process of divesting or exiting the underperforming non-core portfolio. We are making good progress in divesting relevant assets and are confident that we might be able to share news on this in the not-too-distant future with you.We also decided to do infrastructure and other product line and optimize the CMOS imaging sensor business, another product line in the non-core portfolio that we had not talked about perfectly yet. We are stopping the development related to future consumer applications that have caused significant amount of R&D in the CMOS area -- in the CMOS sensor area, which results in overall loss-making business. This includes restructuring one [ site ] and the closure of another small development site in the U.S. The estimated transformation costs are around EUR 4 million.The remaining existing business of around EUR 50 million to EUR 100 million is actually targeting medical and industrial applications, which fits nicely to our overall strategy of steadily developing markets and delivering structural growth. On the slide, you see an application example, the disposable endoscope for medical examinations. We will optimize the setup and this business will become profitable and cash flow positive in 2025. Together, these developments are fully in line with the savings plan of Re-establish-the-Base, we target to deliver EUR 75 million on a run rate basis by the end of the year.With an overview, I now hand over to Rainer for providing you with some more details on liquidity and cash flow.

[Rainer Irle, executive]

Thank you, Aldo. Good morning. We are on Page 11 now. After the news on stopping the microLED cornerstone project, we received many questions to what extent this impacts our liquidity situation. While the write-off for equipment and capitalized R&D reduces the equity ratio, our available liquidity remains strong. End of March, we had [ EUR 1,076 million ] cash on hand. Bilateral bank facilities, including promissory notes, amount to EUR 350 million. Of these, we intend to pay back maturing promissory notes of EUR 51 million in July. For the remaining bank facilities of EUR 264 million also due in '24, we will decide whether we want to roll them or pay them back. There are no changes to the outstanding '25 and '27 converts, no to the '29 senior unsecured notes.The Malaysia sale and leaseback transaction stands with EUR 394 million. Technically, according to IFRS, it's not debt, but other non-current liabilities. However, we obviously consider that debt internally. I will explain that one of the key goals is to execute the sale and leaseback in close alignment with the investors by transferring it to a new lessee. That would take away the EUR 394 million debt like liabilities, strengthening our balance sheet and reduce leverage. It would also take away the EUR 35 million interest expense per year.For completeness, the outstanding minority put options amount to EUR 610 million or 14% of shares outstanding. In Q1 put options worth of far less than EUR 1 million executed [ basically ] nothing. We have the revolving credit facility of EUR 800 million, which is, in principle reserved for an unlikely, but possible buyback exercise of the OSRAM Licht AG minority put options, leaving even in that unlikely scenario EUR 200 million of headroom in the revolver. On top, we also have EUR 206 million undrawn bank facilities. In summary, we stand with a strong available liquidity of more than EUR 2 billion end of the first quarter.On the right side, you find a familiar maturity table of our outstanding debt. That is no change.Upon implementation of the decision that Aldo laid out, our positive free cash flow after net interest paid and a strong adjusted EBIT is actually strengthened and accelerated. So you can see that the cancellation of the microLED product actually supports our midterm financial performance, not [ to hurt it ], as some had feared.On the left-hand side, you see the impact on free cash flow. In '24, we see a neutral effect, as cancellation fees and cash transformation costs essentially balance the cash savings from reduced CapEx and benefits from taking cost out of the restructuring. However, in '25, we can save more than EUR 100 million in cash outflows, which would accelerate the path to positive free cash flow after net interest. Starting this quarter, our operating and free cash flow definitions now include net interest paid, and we will come to that when looking at the first quarter financials.Let us take a look at the adjusted EBIT improvements on the right-hand side in more detail. In the ad-hoc announcement on February 28th, we indicated the EUR 30 million to EUR 50 million impact, negative impact to the financial of this year, but we now believe that the impact to adjusted EBIT in '24 will be minimal, obviously, more positive in the second half and more negative in the first half, less capitalization of microLED related R&D and less funding reduced the adjusted EBIT, but then the gross -- cost savings will bring the adjusted EBIT to the same level as before. As such, the total impact will be minimal. The transformation costs are actually not part of the adjustment and not shown here in the adjusted EBIT.In '25, the massive cost savings will be significantly larger than the negative effect of capitalization and [ funding ]. We speak of a relative improvement of around EUR 100 million compared to the plan we had originally.And now let us return to the operational financials in Q1. Page 13, in line with market practice and following our transparency, we now include net interest payments into the definition of operating cash flow, and that was the free cash flow, as I just mentioned. The figures you see, the operating cash flow on the chart on the very left is backward adjusted to include net interest payments also [ for the ] historic quarter.Looking at the next chart, we see that CapEx was almost half compared to Q4. The EUR 120 million still included microLED related equipment for which it was too late to be canceled. As a result, free cash flow include -- including net interest payments, still came in negative in Q1, although significantly less negative in Q4. Please be reminded that the coupons for the new bond will be paid twice a year, and that is in this year in Q2 and Q3. Yeah.And Page 14, looking at gross profit and OpEx. Adjusted gross profit came in at EUR 241 million, minus 7% quarter-on-quarter decline in line with seasonality. Adjusted gross margin stood at 28.4%, just slightly lower than 28.7% in Q4. Gross profit is impacted by the non-core portfolio and the high underutilization costs.Adjusted R&D expenses increased to EUR 140 million from EUR 92 million in Q4. This for 2 reasons. Firstly, R&D in absolute terms has been going up due to stepping up the industrialization and development efforts for the microELD cornerstone project before it was canceled, along the lines we had commented in our last call. Secondly, you now see the full effect of this and the overall microLED run rate, as we can no longer capitalize these R&D expenses. We have planned to capitalize some [ EUR 70 million ] of R&D expenses in the whole year '24 for the microLED strategy. This is no longer possible, and it will take some time to reduce the R&D cost to the new target.Adjusted SG&A expenses came in at EUR 93 million in the first quarter. The significant reduction of minus 21% quarter-on-quarter due to 2 effects. The first, [ I thought ] is that in Q4, SG&A was above normal due to about [ EUR 50 million ] one-off in conjunction with the catch-up in bonus accruals during Q4. Secondly, and that is now very important, we see first effects from continuously implementing the Re-establish-the-Base program. For example, we have reduced the overhead in our now much smaller site in Singapore. So in the SG&A, you really see the effects of the Re-establish-the-Base program, and that will improve.With this, let us take a look at adjusted net result and earnings per share on the next slide. Net financing result in the first quarter stood at minus EUR 57 million compared to minus EUR 80 million in Q4. In Q4, though, we have booked about EUR 40 million onetime charges for the refinancing, the higher run rate of the net financing result in comparison to the average quarterly number in '23 comes from the higher interest rates for the new unsecured senior notes issued during the refinancing for this and the lower gross profit because of the lower seasonal revenue, the adjusted net result came in also lower than in Q4, standing at minus EUR 35 million.The adjusted diluted earnings per share amounted to minus EUR 0.04 to EUR 0.03 in the last quarter. But please bear in mind that in Q4, the earnings per share calculation for the Q4 quarter were based on a weighted average share count of 456 million. And now the reference is after the capital increase, 998 million shares, less the treasury shares we hold ourselves. The clean IFRS reported net result was minus EUR 710 million in Q1. This very negative result is dominated by the EUR 632 million one-off cost for the restructuring of the microLED business.Beyond the microLED related transformation costs, adjustments containing M&A-related costs of about EUR 25 million, about EUR 5 million of share-based compensation and EUR 7 million of the other transformation costs mostly relating to Re-establish-the-Base. Tax expenses were also a bit high in Q1, which will come down for the rest of the year.And now let us take a look at the outlook for Q2 and the updated comments on '24, and I am now on Slide 16. In Q2, we will experience on the one hand, the normal seasonal decline in the automotive aftermarket business. In addition, we will continue to see inventory corrections in industrial and medical markets. And that, in summary, revenues are expected to come in between EUR 770 million and EUR 870 million. With slightly lower revenues and cost savings materializing, we expect adjusted EBITDA to come in between 14% and 17% in the second quarter. So the lower revenue and a little higher EBITDA margin. Thereby, we assume the euro-U.S. dollar exchange rate of [ 110 ].Looking at '24, we have some changes for the whole year, as a consequence of the revised microLED strategy. We are on track to divest or exit the first part of the non-core semiconductor portfolio. We continue to see the second half of '24 coming in stronger than the first half, driven by design wins going into production and the potential normalization in certain industrial verticals, where we sense some more confidence during the quarter. We are also cautiously optimistic about continuing demand from the Android space.CapEx in this fiscal year will now come in much lower. Originally, we had expected more than EUR 700 million cash flow burden from CapEx, including EUR 100 million capitalized R&D and EUR 100 million carryover from last year. We have now reduced this combined number to below EUR 450 million. This is a substantial reduction. However, please bear in mind that the cancellation costs for equipment are not included, as it is a one-off operational payment and that the R&D costs that cannot be capitalized any longer will move also to operational cash flow until we will be able to eliminate such costs completely. And now looking a bit into '25, obviously, CapEx will be much lower.We confirm our target of the positive free cash flow, excluding interest payments for this year '24. When it comes to the impact on adjusted EBIT for '24, remember the net effect of less capitalization and step-by-step reduction of R&D expenses and factory costs related to microLED. We have indicated EUR 30 million to EUR 50 million impact in the ad-hoc announcement, and we target definitely to minimize the impact, and we believe today that the impact to adjusted EBIT will be minimal, as I explained [ above ]. All the one-off costs are in the adjustment.And now for the summary, I hand back to Aldo.

[Aldo Kamper, executive]

Thank you very much, Rainer. And now switching to Slide 17, summarizing today's key takeaways. We delivered again solid revenues and adjusted EBIT in the first quarter, as guided in a difficult environment. Very importantly, we showed a 5% year-on-year growth on a like-for-like constant currency basis, driven by strong automotive and consumer business in semis. We continue to win significant new business in our core semi business, underlying the structural growth part of our application markets and our strong market positions here.We keep a very solid liquidity position of EUR 2.1 billion, consisting of cash, undrawn RCF and bilateral facilities. Re-establish-the-Base has executed well, as you've seen from the SG&A improvement and the decision to restructure CMOS imaging sensor business. We started the substantial restructuring of the microLED-related organizations, and we decided that we want to access the Kulim 8-inch facility sale and leaseback in close alignment with a sale and leaseback investors to a new lessee. These steps will improve our financial situation by improving EBIT and cash flow in 2025 significantly and will reduce net debt and leverage as well.Our midterm growth model outside microLED is unaffected and solid. For the second quarter, we expect a decline in revenue and adjusted EBIT in line with seasonality and inventory correction in industrial and medical in full swing.This concludes today's introductory remarks. And Rainer and I are now happy to take your questions.

[Operator]

[Operator Instructions] Our first question today comes from Francois Bouvignies from UBS.

[Francois-Xavier Bouvignies, analyst]

I have a couple, if I may. The first one is on the free cash flow and maybe the exit on the microLED. You mentioned about the EUR 400 million that you can reduce the debt and your negotiation with parties. You also said that you think it's going to take time. Maybe can you help us manage expectations a bit on this time line? Is it like a 2024 next quarter or 2, 3 quarters? Just that would be helpful to manage expectations here.My second question is on the CMOS that you action as well that you are doing. And I was wondering why -- I mean what changed? Because you did already a review 6 months ago or more with these new plans and now you come up with this new additional one. So why didn't you take that decision already 6 months ago and now you are acting further?And the final one would be on the H2 recovery. Many of your peers are plugging H2 recovery in the industry. I was wondering if you were seeing the same because you don't talk about so much about the outlook beyond Q2? And what would that be the impact on your gross margin? Your gross margin has been flattish, but what leverage or product mix we should expect that the impact will have on the gross margin in the second half of the year?

[Rainer Irle, executive]

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

[Francois-Xavier Bouvignies, analyst]

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

[Rainer Irle, executive]

Yes. I mean, we definitely try to maximize it. And I told you that construction costs have increased since we are definitely trying to get as much as possible. Maybe a quick clarification that I mean, if we exit the sale and leaseback, that would reduce the debt will be shown as a positive free cash flow. So even if we sold it for EUR 400 million, they will be only EUR 400 million free cash flow positive. If we get more than EUR 400 million, we get EUR 470 million, we will also get another EUR 70 million in cash. And we -- if we get more than EUR 470 million, obviously, we will see a significant cash inflow.

[Aldo Kamper, executive]

Okay. Let me then follow up on your last 2 questions. On the CMOS image sensor side, this was one of the product lines that has been part of the Re-establish-the-Base portfolio cleanup all along. And we have said we only talk about it kind of step by step, as we don't want to damage the sales process. So that's why optical components, we have spoken about openly, and we're getting close to a positive conclusion there. But the CMOS image sensor has been part of that set of product lines that we wanted to divest all along.We've also, over the last quarters tried hard to sell the business here to find a new home, but have realized that there was no adequate buyer to be found for this. And therefore, we've now come to the conclusion after evaluating our options here that the restructuring is the smartest and wisest thing to do to make this going forward, a profitable and cash positive part of our business.And with the divestment or with a bit of stopping, sorry, of the -- and the restructuring of the AR consumer-related camera products, we save significant R&D for a market that is getting later and later. And with that, there was no revenue associated to it. And we concentrate on the market that we have already today, especially on the very small medical image sensors, where we have a good strong market position. That will continue. And when we clean up the consumer side of things, this will become also a product line that contributes positively to our growth and profitability.On the H2 recovery, we don't -- I mean, we don't really guide to H2 yet. I think on quarter 2, you have seen slightly down. Keep in mind, versus our semiconductor peers, we have an AMSP business that logically just out of seasonality, we'll see a significant step down, and that is normally Q2, Q3, and then it will step up again in Q4, as the dark season again starts. So that is a normal seasonality that we have to deal with that our peers probably don't have. At the same time, means that the semi business is quite stable in Q2 and overall profitability, as you've seen in the guidance for Q2, slightly goes up because of the Re-establish-the-Base actions and the mix effect.

[Francois-Xavier Bouvignies, analyst]

On the gross margin trajectory, I mean, should we think this level is for now...

[Juergen Rebel, executive]

Apologies, can we please also let others in the queue. You already had 4 questions.

[Francois-Xavier Bouvignies, analyst]

Yeah. Absolutely. I will be back to queue.

[Operator]

The next question comes from Janardan Menon from Jefferies.

[Janardan Menon, analyst]

This is a clarification, sorry, can you hear me?

[Rainer Irle, executive]

Yes, we can hear you well.

[Janardan Menon, analyst]

Yes. Just a clarification on the second sale and leaseback. I mean, can you just explain to me why you're doing that? I mean, you have a lot of potential interest in the fab. So why a second sale and leaseback versus just a sale itself? I mean -- and the second sale and leaseback, you're saying you don't have to make lease payments. So what exactly is the mechanics of that transaction that you're trying to get to?

[Rainer Irle, executive]

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

[Janardan Menon, analyst]

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

[Rainer Irle, executive]

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

[Janardan Menon, analyst]

Understood. And just 2 short follow-ups for me. One, is your exit from the EUR 300 million to EUR 400 million of initially announced businesses, including Passive Optical Components, is that going on schedule? Because -- and when can we expect to hear any announcements of actual sale? Is that something that will come through by Q3? Or will that be Q4? And can you just give us a number for what could be the savings from the exit of the CMOS image sensor business in consumer?

[Rainer Irle, executive]

Well, yes, so that is part of the portfolio cleanup. And of course, with that, there's now the EUR 50 million to EUR 100 million of revenue, out of the EUR 300 million, EUR 400 million that we will not sell, but they have now restructured, or we have decided to restructure. So that number comes down a bit, but that's one of the actions.The second action, as I said, is on optical components, where we are getting very close to a deal. So I think we will be able to inform you shortly about that. And then there's another 1 or 2 product lines that are a bit further down the queue, so they will probably either late this year [ or then ] in early next year.

[Janardan Menon, analyst]

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

[Rainer Irle, executive]

No. That is part of the cleanup. I mean, if we would have sold it, it would have, also have taken care of the losses. And now we're taking care of the losses in other way by restructuring it. So the overall ambition level remains at [ EUR 150 million ] by the end of next year, and we are on track to deliver [ EUR 75 million ] at the end of this year, and the CMOS action are part of that.

[Operator]

Our next question comes from Robert Sanders from Deutsche Bank.

[Robert Sanders, analyst]

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

[Rainer Irle, executive]

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

[Robert Sanders, analyst]

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

[Rainer Irle, executive]

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

[Operator]

The next question comes from Juergen Wagner from Stifel.

[Jürgen Wagner, analyst]

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

[Aldo Kamper, executive]

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

[Operator]

The next question is from Didier Scemama from Bank of America.

[Didier Scemama, analyst]

Didier Scemama, Bank of America Securities. Thanks for taking my call and squeezing me in. I just wondered -- I apologize because I missed the beginning of the call, so you might have addressed that point earlier. On your smartphone design win ramp up in the back half, can you just give us an update, where you are on that and whether you have sort of received additional design wins for future generations in compensation for the cancellation of the microLED project.

[Aldo Kamper, executive]

That ramp-up is progressing as planned. You will start to see revenue out of that in the second half of the year and preparation for that is running smoothly, both in Premstaetten, as well as in Singapore, and we expect a successful ramp here. On the other topic, we are in discussions with our customers like we've said in the PR earlier as well. And that's all I can say to that at the moment.

[Operator]

The next question comes from Sebastien Sztabowicz from Kepler.

[Sébastien Sztabowicz, analyst]

Coming back to the gross margin question. What kind of fab loading do you have today in your front-end fabs? And what are the underutilization charges that you have booked in Q1 just to have an idea of the drag from underutilization charges [ those days ]?And the second question is linked to the OpEx. You have a lot of moving parts with cost cutting, but also some microLED, I would say, the investment. What should we model in terms of OpEx for the full year? Can you help us modeling a bit OpEx?

[Rainer Irle, executive]

So on the gross margin, underutilization cost, so the underutilization costs that we book are around EUR 300 million per year. Now please be reminded that it's impossible to get back to 0, right? I mean, you cannot have all factories loaded at 100%. But reducing that substantially is part of our growth plan. And kind of whenever you have existing capacity and generate additional revenue, the fall through is extremely high, right? So please be also reminded that divesting things kind of with the divestment, you also divest certain underutilization charges.Now with the cost cutting is coming in, it's well on track, you saw the reduction in SG&A. You will also see reductions in R&D going forward. The reason why it increased was because we cannot no longer capitalize, which is kind of [ EUR 70 million ], we will be showing [ EUR 70 million ] higher R&D, and that will continue to come down. We expect for the year now every quarter an improvement in EBITDA.

[Sébastien Sztabowicz, analyst]

Okay. And on the fab loading today, where are you standing right now? Do you have any numbers to share with us?

[Aldo Kamper, executive]

No, we have not shared those numbers.

[Operator]

The next question is from Sandeep Deshpande from JPMorgan. Your line is open. Maybe you're on mute.

[Sandeep Deshpande, analyst]

Yes. Can you hear me?

[Rainer Irle, executive]

Yes.

[Sandeep Deshpande, analyst]

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

[Aldo Kamper, executive]

Yes. I mean, like we said last year, we will become much more selective, but we don't want to step out of the consumer business. This is still an important market segment for the sensor business, especially, but we have to be selective and careful in the project that we focus on. And as you can see with the topics that we've spoken about optical components, now with CMOS imaging -- CMOS image sensors, also on the consumer side, you can see that, that we are withdrawing out of all product lines that don't have the outlook that we were hoping for. That's the one part. So it is a cleanup, as part of Re-establish-the-Base.And then going forward, the selectivity of the project, where it is important for us that we feel that we have a full differentiator and that the investment that we are making have kind of a multigenerational impact that is not a one go for one project for 1 or 2 years, and then you're kind of stuck with investment in CapEx and R&D, and you are in a difficult negotiation position. We want to either have projects, where the differentiation is big enough that we can have that longer differentiation or have a good reuse of the capacity and capability, so that we're not overly tied to one single project or a customer.With those conditions in place, we are, however, still interested in the business because we have strong positions in the -- both the ambient light sensor or display side, but also the spectral sensing on the camera side. These are features that make a true difference for our customers, and we continue to engage very heavily, especially in the Android space with all of our Chinese, Korean friends that love our sensors and use them in the phones and afterwards get the top rankings. So that we want to continue a strong position. And now as demand is coming back, also increasingly an attractive business to be in.

[Sandeep Deshpande, analyst]

Actually, maybe my follow-up will be on this itself. You talked about spectral sensing, et cetera. Do you have new products coming out in this area that have potential future traction, that's not really, I mean, but clearly, you're in the ambit light sensor, but some of these other things like spectral sensing, do they have any future significant traction in any customer base?

[Aldo Kamper, executive]

Well, it is an ongoing effort. I mean, this is not a step change, as you see, but we, over and over again, keep improving the sensitivities and the ability of our customer to use this data in a way that helps them optimize his camera performance. So over and over again, we keep making progress here and these new parts are being designed in. And part of the design wins that we have shown on the design win page are part of that as well. So yes, we see good traction. Yes, that defends and expands our market position. But the number of sockets is -- especially in the high end, we already have a lot of the sockets. You cannot expense the number of sockets dramatically. But with this, you can keep defending them, and with that keep benefiting from this segment.

[Operator]

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

[Juergen Rebel, executive]

Yes. Thank you, everyone. That brings us to the end of today's call. For any follow-up questions, you may contact us at Investor Relations, and we try to respond as quickly as possible. Thanks a lot, and talk to you next time.

[Operator]

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