ams OSRAM AG

SIX:AMS

Earnings Call Analysis

Strong Q3 performance driven by semiconductors despite automotive challenges.

In the third quarter of 2024, the company reported revenues of EUR 881 million, an 8% increase from Q2, with a 2% year-over-year decline on a constant currency basis. The semiconductor segment, driven by new consumer products, led this growth with revenues of EUR 381 million. Adjusted EBITDA rose to EUR 166 million, reflecting a margin of 19%. Looking ahead, the company expects Q4 revenues between EUR 810 million and EUR 910 million, with an EBITDA margin of 15-18%. For 2025, a gradual recovery is anticipated, projecting revenue growth of 6-10% and a target of positive free cash flow, aided by further cost-cutting measures.

Solid Third Quarter amidst Industry Challenges

In the third quarter of 2024, the company reported group revenues of EUR 881 million, marking an 8% increase from the previous quarter. This performance aligns at the midpoint of guidance provided earlier and represents a slight decline of 2% year-over-year due to sector-wide pressures, particularly in the automotive segment. The revenue growth was primarily driven by the semiconductor business and seasonal increases from horticulture, which significantly contributed to the overall results despite a challenging backdrop in the automotive market.

Profitability Gains Driven by Strategic Actions

Adjusted EBITDA came in at EUR 166 million, translating to a margin of approximately 19%, a notable rise from EUR 135 million in the second quarter. This profitability boost stemmed from improved operational efficiency in semiconductor production and from the company’s 'Re-establish the Base' program, which has realized savings ahead of expectations. Additionally, one-off payments related to non-recurring engineering (NRE) contracts supported this positive momentum.

Segment performance and Strategic Focus

The Lamps & Systems segment recorded revenues of EUR 233 million, experiencing a quarterly growth of 4%. However, comparisons with the previous year reflected some softness in traditional business lines due to phased-out legacy products. In contrast, the Semiconductor segment showed robust growth, with total revenues reaching EUR 647 million, driven by a 19% increase in CMOS Sensors & ASICs, reflecting strong consumer product sales and NRE contributions. The successful pursuit of design-wins and partnerships illustrates the company’s commitment to embedding itself deeper within key growth markets.

Guidance for Upcoming Quarters

For the fourth quarter, the company expects revenues to range between EUR 810 million to EUR 910 million and an adjusted EBITDA margin of 15% to 18%. This guidance reflects anticipated seasonal rebounds within certain markets, although computing demand is expected to remain stagnant. Looking towards 2025, the company projects that automotive-related revenues may recover gradually after a challenging first quarter, supported by growth in the semiconductor core and an expected 6% to 10% CAGR in this segment over the next three years.

Focus on Efficient Capital Management

The management team underscored their commitment to maintaining a prudent capital expenditure strategy aiming for a ratio of CapEx to sales around 8%. They plan to reduce expenditures significantly from previous levels while still investing in R&D and aligning resources to core business strengths. In light of the enhanced liquidity position, with cash on hand increasing to EUR 1.1 billion, reducing debt will remain a priority, alongside efforts to optimize working capital.

Long-term Outlook and Market Positioning

Despite recent market uncertainties, especially in the auto sector, the company retains a strong position backed by significant design-wins totaling EUR 3.5 billion in lifetime value. The strategic emphasis on long-term growth sectors such as consumer devices and professional lighting products validate their optimism. As automotive content per vehicle rises, the company remains confident in its trajectory towards positive free cash flow profitability in 2025 with robust fundamentals in key markets influencing its structural growth outlook.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, welcome to the conference call and live webcast on the Third Quarter 2024 results. I'm Alice, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Juergen Rebel, Head of IR.

[Juergen Rebel, executive]

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

Aldo, please walk us through the key developments during the third quarter.

[Aldo Kamper, executive]

Thank you, Juergen, and also good morning from my side to everybody. The last couple of weeks saw a lot of negative news from the automotive industry and many other industrial sectors. Against the backdrop of this, we are actually happy with the solid business performance in the third quarter that we can show.

Many did not believe us when we indicated that our strong Q3 guidance already includes some weakness in the automotive semi segment. So let's take a look at Slide #2.

Q3 group revenues increased quarter-over-quarter by 8% and came in at EUR 881 million, pretty exactly at the midpoint of our guided range. We saw a quarterly increase of EUR 62 million compared to the second quarter. The main driver for this is the semiconductor business with ramping new products for consumer handheld devices, but also supported by other verticals like horticulture with its seasonal peak.

A year ago, we stood at EUR 903 million, looking at the same portfolio. The currency impact is approximately EUR 7 million, like-for-like and on a constant currency basis, we will stand at EUR 888 million in Q3, which means that our group revenue decreased slightly by 2% compared to a year ago.

Profitability moved up on the back of higher revenues, improved loading of our semi factories and the savings from our Re-establish the Base program. Adjusted EBITDA reached 19% or EUR 166 million after EUR 135 million in the second quarter. This is much higher than a year ago and a 23% increase compared to a quarter ago. Profitability benefited from one-offs like NRE payments, which gave us the push above the midpoint of the guidance. Let us now look at the financial performance of the business segments.

Lamps & Systems segment is shown on Page #3. The business performed broadly in line with expectations. Revenue stood at EUR 233 million, meaning a 4% up quarterly. The Automotive Lamps aftermarket still had its off-season in July and August, but early signs of seasonal upswing in September drove revenues up.

Comparing revenues to a year ago, we have phased out some legacy module business during the third quarter and traditional business was a touch softer. This is the only reason why group revenues were also a bit lower.

Looking at the Specialty Lamps business for industrial entertainment applications, we do not see a market recovery yet, but it seems that we have found the floor. Revenues hover around EUR 40 million for the time being. The adjusted EBITDA came in at 16% or EUR 37 million, in absolute terms sits on a similar level compared to the second quarter.

In Q2, we have also benefited from some one-offs like brand license income. With entering the lighting season, our marcom and selling expenses always go up a few million, impacting profitability this quarter.

Turning our attention to the Semiconductor segment on Slide 4. You'll find Opto Semiconductor business on the left-hand side. Revenues here improved to EUR 381 million. They were driven by the NRE payments for development of novel LED technologies on top of the seasonal peak in horticulture and good professional lighting business. Automotive was down a bit in Q3, in line with the overall market.

We are proud of these NRE development contracts as they show the trust of our customers in our technology leadership and long-term roadmap. Q3 revenues compared to EUR 372 million in the second quarter, still a 2% quarter-over-quarter increase in a difficult market environment with weaker automotive revenues.

NREs are always advantageous for the profitability. As such, the adjusted EBITDA margin improved to 23.1% after 22.7% in the previous quarter. In absolute terms, OS recorded EUR 88 million after EUR 84 million in Q2. The NRE-funded technology projects are also reducing the transformation cost for adjusting the microLED strategy significantly as we're reducing fewer people in R&D.

On the right-hand side, you see the financial performance of our semiconductor segment, CMOS Sensors & ASICs. Revenues jumped quarter-over-quarter by EUR 42 million or 19% and came in at EUR 266 million compared to EUR 224 million in the second quarter. The uptick is primarily driven by the ramp of new sensor products for consumer handheld devices and also a decent overall product sales into consumer device applications.

Some of our industrial and medical business, however, continued to stabilize on a low level of automotive sensors, where we served some niches, sold well. Adjusted EBITDA for CSA more than doubled to EUR 48 million or 18% adjusted EBITDA margin. Here, you see the effects of higher revenue, lower utilization and the structural savings from our Re-establish the Base program.

Let us now switch to Slide #5, looking at the dynamics of the semi end markets in detail. On the very left, you see the revenues of both semiconductor segments combined for comparison purposes. At face value, revenues are essentially flat year-over-year. However, if we relook a bit deeper at the performance of the core portfolio, we can see actually some year-over-year growth in the mid-single-digit percentage range.

In 2023, when Re-establish the Base was designed, about EUR 350 million needed to be excluded. And this year, an estimated EUR 200 million non-core revenues are still part of the semi business.

Automotive revenues came in as expected. They were 7% lower than in the second quarter, reflecting the known weakness and uncertainty in the automotive end markets and a 10% year-over-year decline for the same cyclical reasons. No changes in the fundamental dynamics in the industrial end markets. Revenues remained flat quarter-over-quarter. Again, in detail, the picture is a bit more diverse.

On the positive side, professional lighting was doing reasonably well. Horticulture grew to its seasonal peak based on strong design-wins from earlier this year. On the negative, there is no light at the end of the tunnel when it comes to the inventory correction in the capital goods and medical equipment market. Consequently, revenues are lower in a year-over-year comparison. Looking at the business with products for consumer devices on the very right, already mentioned, our new products ramped up as planned.

Furthermore, our classic product for the smartphones and wearables market also sold well. Again, we are benefiting from our leading market position in spectral sensing. In total, we recorded a 45% jump in revenues quarter-over-quarter. With the ramp of the new products, we could finally switch gears back to structural growth in a year-over-year comparison, and we see a 24% increase.

Switching to Slide #6 now. Besides technology leadership, deep customer relationships are key. Over the last couple of months, we managed to deepen and intensify those with some of our key customers. This resulted in the already mentioned NRE funded technology development contracts, but also contributed to the unabated design-win momentum during the third quarter despite cyclical weakness in some markets. Year-to-date, our design-win LTV stands at EUR 3.5 billion measured in project lifetime value.

Let me walk you through some examples. First, automotive, looking at plastic forward lighting, LED-based products and applications, our bread-and-butter business. We could land significant new design-wins, more than EUR 150 million here. Second, our high-position temperature and position sensing products found great traction in the market, just like in the second quarter. More than EUR 50 million of design-wins were recorded, addressing both automotive and medical applications.

Third, professional lighting. We are not only happy with the good momentum in the overall very difficult industrial market, but also with the new business we can win. More than EUR 75 million lifetime wins during the quarter will contribute to the mid-digit percent structural growth ambitions over the coming years.

Last but not least, we continue to win meaningful design sockets for ambient light sensors and proximity sensing across the market as a clear leader in that space. Looking at the Android space, more than EUR 50 million design-wins in this quarter. This means both renewal of existing sockets with model facelifts as well as winning new sockets on new models.

Let's now switch to Slide 7. We often talk about the blockbuster design-wins. However, most of our design-wins are spread across our entire portfolio. And as such, I want to share a few more details on one of the applications that is often a bit in the shadows. We are speaking of professional lighting applications. And here, we serve 6 out of the top 8 professional lighting OEMs. They appreciate our performance and quality value proposition, our high-performance LEDs, light up streets, sport arenas, but also office buildings and factory premises.

Even now, we are enjoying a good book-to-bill above 1 and expect mid-single-digit CAGR over the next years, contributing to our midterm structural growth model.

Our key strategic initiative is the Re-establish the Base program, as you all know, looking at now at Slide 8. End of the second quarter, our realized run rate savings stood at EUR 60 million. This quarter, I'm happy to report that we are progressing faster with implementing the measures than initially planned.

End of Q3, we had already realized EUR 85 million structural run rate savings, and that is clearly ahead of the plan. You will remember that we set the target structural run rate savings of around EUR 75 million by the end of '24 and EUR 150 million by the end of '25. Fall through into results is again evident in the strongly improving EBITDA, especially in the CSA business.

Again, one cannot assume a full fall-through of the saving measures to the [ benchmark ] bottom line as you always have adverse effects from inflation, triggered cost increases, fluctuating price declines, merit increases and others. In terms of the non-core portfolio cleanup, we said we will deal with the remaining EUR 200 million non-core business that are still part of this year's revenues until the end of the year. Assume that we are going to exit them via accelerated end-of-life schemes.

Now let's move to Slide #9. You will hear from all sides of the market, customers, end customers and peers that visibility is getting rather worse than better. On top, the uncertainty about the timing of cyclical recovery in key markets is increasing. For example, we currently see much shorter-term ordering in automotive. Looking at some of our industrial and medical markets, there's simply no sign of timely recovery yet. However, we want to sustain our trajectory towards industry benchmarks while we continue to invest into differentiating technologies and products for future growth.

For this, we decided to step up and extend our strategic efficiency program by another EUR 75 million run rate savings to be effective by the end of 2026. The initiatives will primarily address overhead and corporate structures as well as R&D footprint, which will affect additionally more than 500 employees globally with the majority in Germany. About 1/3 of the affected functions will be relocated to best cost countries. The upsizing of the reestablished base will cost approximately EUR 40 million of additional transformation costs, most of which will be due next fiscal year.

Let me now comment on the adjustment of our microLED strategy. I'm on Slide 10. We are nearing completion of adjusting the relevant R&D. We were able to redeploy some key resources to core automotive development like the high-pixelated forward lighting. We also filled some gaps in our core bread and butter business to accelerate road maps. And as I mentioned earlier, could also reallocate a number of engineers to NRE-based programs for the development of novel technologies that may or may not lead to products in a few years, a very good solution as we keep optionality for potential upsides in the future. With this, we can also minimize the transformation costs related to microLED.

And of course, we have to release not only R&D, but also factory personnel still in meaningful numbers as a consequence of the microLED change. When it comes to the future use of the 8" factory, we had to learn that patience is a virtue. The process of working with interested parties that would take over the facility has been strongly influenced by the semiconductor cycle. Despite principal strategic interest, everybody is scaling back investment and reducing short-term outlooks. We will need more time until somebody takes over the facility.



The process is certainly continuing with full effort. However, as many of you told us, maximizing the value out of the facility is more important than timing, and we have to agree to you.

Every year, we complete our yearly strategic planning cycle after the summer. And today, we want to give you an update on some of the results on Slide #11. We are nearing the completion of exiting the non-core semiconductor portfolio, as mentioned earlier. We think it's time to sharpen the view on structural growth of the underlying core portfolio.

For this, we now base our midterm target operating model on the core semiconductor business. Taking the current macro environment and semiconductor cycle into account, we plan to grow our semi business with 6% to 10% CAGR over the next 3 years until 2027.

For avoidance of doubt, the launch pad for this are this year's semiconductor revenues, excluding the EUR 200 million non-core revenues I spoke about before that we will mostly exit by an accelerated end of life until end of this year. The Lamps and Systems business is expected to be slightly down or flat. It is primarily driven by the aftermarket for traditional halogen lamps and auto. As you know, we are pursuing a last minute standing strategy that means that we're primarily managing this business for cash flow and EBITDA.

When looking at CapEx and we're working very hard on our plans, including capital efficiency measures, we now plan to achieve an 8% CapEx to sales ratio over the cycle. This figure includes, as before, investment in PP&E and capitalized R&D reduced by capital grants.

With this, let us look at the updated profitability trajectory. Our maximum focus lies on cash generation going forward. With this in mind, we think EBITDA is a more appropriate benchmark for profitability. The key levers driving the group profitability improvements remain unchanged. First, structural savings from the now upsized, Re-establish the Base program. Second, ramp up new products and design-win. Third, the market.

Of course, we are subject to the semiconductor cycle and the recovery in key markets. The recovery in the capital goods market and other industrial and medical markets is not yet in sight. At the same time, automotive is entering a phase of uncertainty, which means that we may need some patience until H2 next year before we see structural growth year-over-year again in auto, although content per vehicle continues to rise.

Altogether, we now expect between 20% and 24% EBITDA in 2027. Bear in mind that this target corridor now assumes an 8% CapEx to sales ratio when it comes to understanding the DA portion in it.

If you do the math, we are adjusting '26 to a level that sell-side analysts had modeled all along if you look at the consensus figures. As said, it's the third driver, market cyclicality that is driving the adoption. The underlying structural profitability potential of our business is unchanged. Our aspiration to achieve positive free cash flow, including net interest paid as soon as possible is certainly unchanged. We plan this for 2025.

With this, I hand over to Rainer, who will provide you with some more details on liquidity, cash flow and financials in general.

[Rainer Irle, executive]

Thank you, Aldo. Good morning, everybody. I'm now on Page 12, talking about my favorite subject, cash.

Operating cash flow came in very strong at EUR 246 million, as you can see in the chart on the left. Besides the improved revenues and EBITDA, a key element for this performance was a customer prepayment for the development and production of new products. The prepayment is to be treated as a non-financial liability, and we will repay it through the delivery of products starting in 2026.

In addition, NIEs for the development of certain novel LED technologies contributed positively to the operating cash flow, as Aldo pointed out. Just as a reminder, in line with market practice, net interest payments are included in the definition of operating cash flow, and that's also in free cash flow. We paid about EUR 64 million net interest in the third quarter. Working capital was up quite a bit. Inventories were up as lead times are long. We reduced wafer starts, but we will only see the benefits in Q4.

Accounts payable were up as we have started to reduce factoring given the strong cash position. This is what we told investors during marketing of the high-yield bonds. And accounts payable are down with lower CapEx levels.

The next chart to the right shows cash flows related to CapEx and improved to minus EUR 102 million compared to minus EUR 176 million in the second quarter. There's still some overhang from microLED-related equipment coming in around EUR 30 million in these numbers, but we are approaching past our CapEx to sales target.

In the next chart to the right, you see the EUR 45 million inflows from divestments that relate to selling the passive optical components assets to Focuslight, which closed in September. As a result, free cash flow, including net interest payments, came in with EUR 188 million. A good addition to our cash balance, which we will talk about on the next slide. In Q4, we will have a careful eye on the working capital while we plan to reduce factoring further.

Now on Slide 13, we had EUR 1.1 billion cash on hand at the end of Q3. The increase of almost EUR 200 million compared to the previous quarter relates to various contributions. We received the already mentioned customer prepayment of more than EUR 200 million. We received some NREs. We optimized our maturity profile by tapping into the euro-denominated high-yield bond, extending it by EUR 200 million as we announced in September.

But we also paid back one bilateral short-term bank loan of EUR 100 million and a promissory note of EUR 51 million. Bilateral bank facilities and promissory notes currently stand at EUR 195 million, a 45% reduction compared to the end of June. There are no changes to the outstanding '25 and '27 converts.

The U.S. dollar senior unsecured notes due in '29 are unchanged. But you see the EUR 200 million second tap into the senior unsecured notes, which now stands at EUR 825 million. The Malaysia Sale-and-Lease Back transaction stands at EUR 441 million at the end of the third quarter. As always, the quarter-over-quarter change comes from both the quarterly accrual of the catch-up payment at maturity and FX effects, which were actually pretty high in Q3.

For completeness, the outstanding minority put options amount to EUR 604 million or 14% of outstanding shares. In the third quarter, put options worth around EUR 1 million were executed. Our revolving credit facility could, in principle, fully cover an exercise of all outstanding OSRAM Licht AG minority put options. In summary, we continue to stand with a strong available liquidity of almost EUR 1.9 million at the end of the third quarter. On the right, you find the familiar maturity table of our outstanding debt.

I'm now on Page 14, looking at gross profit and OpEx. Adjusted gross profit came in at EUR 262 million in the third quarter, EUR 90 million higher than in Q2. Adjusted gross margin stood on 30%, similar to Q2. Year-over-year, we note an increase of 70 basis points. Looking a bit deeper, there are many effects contributing.

We have genuine cost improvements coming from Re-establish the Base, but we also have quite a few product mix effects within that number. Just think of new products going through the yield learning curve. Remember also that raw materials prices play a role. Gold has hit its all-time high as an example.

Looking at adjusted R&D expenses, we see an 18% decline quarter-over-quarter to EUR 82 million. Whilst we're shaving off costs in R&D, and the steep decline is mainly a temporary effect due to the already mentioned NRE payment, which included some catch-up. On top, within some public funding schemes, we also recorded a bit of a catch-up. Going forward, we'll continue to receive NRE, but we expect a bit higher adjusted R&D, maybe around EUR 90 million in the fourth quarter.

Next in line are the adjusted SG&A expenses. The quarter-over-quarter increase is essentially due to seasonally increased marcom spending for the traditional Automotive Lamps aftermarket business.

And now let's have a look at earnings per share on Page 15. The net financing result came in with EUR 35 million. The IFRS net result came in positive, standing at EUR 24 million. The adjusted net result was EUR 37 million. This was meaningful driven by one-off effects like NRE catch-up, a reduction of microLED restructuring provisions and the positive effect in the financing result. It points to the right direction, but we have to continue our path to fundamentally turn this business positive in a structural sense.

If we stay on this trajectory despite the persistent and partially growing uncertainties, we are stepping up to restate the base along the lines Aldo mentioned earlier. Tax expenses in Q3 were in the order of EUR 10 million. For modeling purposes, you can continue to assume around EUR 50 million net tax expenses for the full fiscal year.

In '25, we not only want to be cash flow positive, including interest, of course, but also deliver again a positive adjusted net result. Adjusted diluted earnings per share came in at EUR 0.37 and the IFRS diluted earnings per share at EUR 0.24.

Now let's have a look at Page 16. In Q4, we will see the seasonal rebound in the Auto lamps aftermarket business. In semiconductors, we expect flattish demand for automotive products in line with the reduced car unit forecast by AHS.

Many industrial markets remain muted due to persisting inventory corrections, except maybe professional lighting. At the same time, while fundamentally intact, the business with products for consumer device applications and horticulture will see a seasonal slowdown in the fourth quarter.

In summary, revenues are expected to come in between EUR 810 million and EUR 910 million. And with slightly lower sales, less positive one-offs and in conjunction with product mix effects, adjusted EBITDA margin is expected between 15% and 18% in the fourth quarter despite the good traction in implementing Re-establish the base. Thereby, we assume the euro-U.S. dollar exchange rate of 1.10. We are ahead of realizing our run rate savings from Re-establish the base towards the end of the year '24. When it comes to CapEx for the full year, we continue to expect EUR 500 million to EUR 550 million.

As there is a lot of uncertainty in the market about next year, we want to give you some indications for '25. First, looking at revenues. We will see a soft start into the year with relatively weak revenues in the first quarter. That is particularly true for automotive, where we expect the cyclical trough in the first quarter, but a steady improvement thereafter throughout the year. Consequently, we will expect to grow revenues in the core semi portfolio for the full year '25. Second, looking at CapEx, we really want to bring it down to the level of 8% CapEx to sales.

Third, we certainly hold up our aspirations of delivering positive free cash flow in '25, which includes net interest.

And now for the summary, I hand back to Aldo.

[Aldo Kamper, executive]

Thank you, Rainer. So switching to Slide 17, summarizing today's takeaways. We delivered solid revenues in a difficult environment that was coined by a string of profit warnings from automotive OEMs. Profitability came in above the midpoint of the guided range, supported by NRE payments. We saw the consumer segment with the ramp-up of new products, compensating the weakness in automotive and industrial. The semiconductor core business, which excludes the noncore portfolio, would record a year-over-year increase estimated at mid-single-digit percent.

We continue to win significant new business in semi businesses. Year-to-date, we stand at EUR 3.5 billion of lifetime value. We delivered a strong free cash flow of EUR 188 million through customer prepayment, NREs and operational performance. We are ahead in terms of implementing expected run rate savings from Re-establish the base, and we upsized the Re-establish the base by another EUR 75 million run rate savings to be effective by the end of 2026. This is to safeguard our short-term profitability targets and achieve benchmark structures midterm.

Despite a very difficult macroeconomic environment, we see in Q4 quite reasonable revenues of EUR 810 million to EUR 910 million and profitability between 15% to 18%, fully in line with seasonal mix and fall-through.

With this, we are done with introductory remarks, and we're happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Harry Blaiklock, UBS.

[Harry Blaiklock, analyst]

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

[Aldo Kamper, executive]

We will continue to deliver on the plan. And I think we have been showing that we are a bit ahead of the plan over the last quarters already, and that will continue. So you will see further savings in Q4 adding to the tally as well.



The new program will further extend that. With that, of course, we want to accelerate the savings further, the original plan of EUR 150 million by the end of next year. We will definitely overshoot with this new program on top of that. And quite a bit of the savings already will be seen in '25. Then there's a part in '26 that then is added on to this as well because of the transfers that we're also doing.

You might have seen in the communications about more than 500 people that we are reducing in high cost and about 200 of those are being replaced by lower cost positions in, for example, Malaysia. And we, of course, need to build up the people there and the expertise to then be able to transfer some of these activities, both in overhead functions as well in R&D function. So that last part will take a bit of time, but a lot of the other topics you will see as add-ons in '25.

[Harry Blaiklock, analyst]

Got it. Very helpful. And then my second question is just on the Sale-and-Lease Back. Obviously, kind of you're taking a time given where we are in the cycle. I'm wondering if you could provide a bit more color on that. Are you still having positive conversations with how many kind of interested parties? What's the realistic time line on it now?

[Rainer Irle, executive]

No, we're still in the process. I mean it is not an easy process, as you can imagine, given the cyclicality of the business. But we are still in active discussion and that with a number of parties. So we are still ongoing, and it's kind of hard to judge how quickly that will result in closure today.

[Operator]

The next question comes from the line of Sébastien Sztabowicz, Kepler Cheuvreux.

[Sébastien Sztabowicz, analyst]

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

[Aldo Kamper, executive]

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

[Sébastien Sztabowicz, analyst]

Okay. But you mentioned still some inventory correction in the industrial end market, capital goods and so on. I'm just wondering, it seems like you have some excess of inventory. And the second one, in automotive, do you see normal level of inventory there?

[Aldo Kamper, executive]

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

[Sébastien Sztabowicz, analyst]

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

[Aldo Kamper, executive]

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

[Sébastien Sztabowicz, analyst]

Is this linked to microLED or not that much if one?

[Aldo Kamper, executive]

We are not able to comment on that.

[Operator]

The next question comes from the line of Janardan Menon from Jefferies.

[Janardan Menon, analyst]

My question is more on your first question is on your 2025 outlook. In an environment of relatively low visibility, you're saying that sort of Q1 will be the bottom and you will see a gradual improvement through the rest of the year, a steady gradual improvement with core semiconductors growing 6% to 10%. I'm just wondering how you have that kind of visibility? Is it that you're making an estimate on the industrial inventory correction ending by Q1?

And to what extent is that 6% to 10% based on additional design-wins, both automotive and consumer ramping in 2025, either in the first half or in the second half?

[Aldo Kamper, executive]

Yes. Obviously, the design-wins are a big portion of our growth. That is why we are more optimistic, for example, in automotive than probably overall build volume -- vehicle build volume number for next year. We have those designs in our pocket, and we know that they will ramp. Some of them have been pushed out a bit, but they will still [indiscernible] conviction, and that helps us to have a better growth path than just the underlying vehicle build numbers would indicate.

And yes, also for our overall business, the growth that we still are expecting is that, for example, in the consumer space, we continue to have very good traction, and we continue to win new programs across the board, and they will also add to further growth of this segment in the next year. But also in that market, as you know, the seasonality. So kind of the automotive weakness that we think will be mainly in Q1 and then stepwise reduced comes together in Q1 also with seasonal low for consumer. And that's why we are kind of cautious on the outlook on Q1, but still see that we are in structurally attractive markets and that the design-wins and the customer feedback continues to give us the confidence that we will see growth midterm.

[Janardan Menon, analyst]

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

[Aldo Kamper, executive]

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

[Janardan Menon, analyst]

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

[Aldo Kamper, executive]

I can't really comment on that either.

[Operator]

The next question comes from the line of Didier Scemama, Bank of America.

[Didier Scemama, analyst]

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

[Aldo Kamper, executive]

Yes. I can't give you the exact percentages on the top of my head. But in general terms, the consumer business usually has the strongest business in Q3 and in the beginning of Q4. Usually, Q1 and Q2 are low season for that. Automotive is actually not unusual to have not a fantastic Q4 given Christmas shutdowns and so on and then somewhat a slow start into the year, but then picking up speed in Q2 and Q3.

On Industrial and Medical, there's no real cycle in that, I would say. That is kind of as it comes at the moment, more a question of end customer demand. That is not so much an annual cyclicality that we observed there. And of course, for AMSP, it's clear that the lighting season drives most sales in Q4 and Q1.

There's one addition on the semiconductor side, also some typical cyclicality you will see in horticulture, where you usually will win the programs in the first half year and execute in the second half year. And also on the auto side, besides usually a bit of a slower start early in the year, also then the new pricing, the volume purchase agreements will kick in. So some of the pricing impact you will also see in the beginning of the year.

[Didier Scemama, analyst]

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

[Aldo Kamper, executive]

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

[Didier Scemama, analyst]

Okay. Got it. And then the follow-up is on the Kulim 8" fab disposal process, I think as you mentioned, unfortunately, from a cyclical standpoint, there are a lot of factories that are under loaded at the moment. I think a number of your European peers are probably about to shut down some 6" and 8" fabs due to overcapacity. So I'm just wondering when you are in negotiations with these third parties for the disposal of Kulim, what's the unique selling point of that factory? I mean, can you entice them with support from the Malaysian government when it comes to tax breaks or anything that would make this factory more attractive than, say, one from one of your competitors that may come to the market at the same time?

[Aldo Kamper, executive]

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

[Operator]

The next question comes from the line of Robert Sanders, Deutsche Bank.

[Robert Sanders, analyst]

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

[Aldo Kamper, executive]

Yes. I mean there's obviously a battle going on in China between especially a lot of the new EV companies, and they are aggressively reducing their prices to consumers in China. There's not so much an export topic, but also within China, there is a fierce battle going on. And yes, they are looking to their supply base to also to contribute.

However, we also see that it's very important that they differentiate themselves, and that is through technology. And that's often through the bells and whistles that we provide. And in that sense, as long as we keep providing the innovations that they're looking for to differentiate, that is kind of outside of this price pressure that you're talking about.

So in that sense, we see that we are holding our ground in China that we continue to have a very significant share, similar to Europe, our market share in China. We continue to see growing relationships there. We just also won another award by BYD, for example, as one of their core suppliers in the lighting space. So we continue to be very engaged, and that's, I think, the right way to deal with these additional price pressures.

[Robert Sanders, analyst]

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

[Rainer Irle, executive]

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

[Operator]

Next question comes from the line of Juergen Wagner, Stifel.

[Jürgen Wagner, analyst]

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

[Aldo Kamper, executive]

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

[Jürgen Wagner, analyst]

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

[Aldo Kamper, executive]

Fortunately, LED seems to be not as much into the strategic focus of the government in terms of forcing companies in China to move to local sources. We get continuously the message from our customers that they are free to make the choices that they think are right. And at the moment, we continue to see a very good engagement with them, and they continue to be the ones that keep absorbing our new technologies and our innovations the most rapidly and that innovation push still resonates a lot with them.

And at the same time, it's also a very established relationship with many of them. We've been very active over decades and also know how to accompany them in both in terms of quality, but also in terms of cost optimization that they can also grow the application by bringing the features over time in higher volume at better cost points. And that has been a good strong partnership with many of them over the years, and the partnership seems to hold up also in this new environment.

[Operator]

The last question comes from the line of Sandeep Deshpande, JPMorgan,

[Sandeep Deshpande, analyst]

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

[Aldo Kamper, executive]

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

[Sandeep Deshpande, analyst]

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

[Aldo Kamper, executive]

It's still with a number of parties that we're discussing at the moment.

And secondly, on your first point, in terms of the growth model, we have to be careful how to look at this. We raised the percentage slightly, but we have focused it on the core semi-portfolio. And of course, there's also the AMSP, the lamps business that is basically flattish. So if you do the math, the number is slightly below, but close to the old number, but we wanted to give better clarity on the products that matter most in terms of growth.

And there, we continue to see the traction on the design-wins that we seem to have the right technology for the right applications here and the right customer relations to drive that growth. So that's why we wanted to focus more on that to get that clarity out to you. That's why the numbers look a little bit higher, but the overall statement is roughly the same as before.

[Operator]

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

[Juergen Rebel, executive]

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

[Operator]

Ladies and gentlemen, the conference is now over. Media representatives wishing to ask questions may connect to the media conference call taking place at 11:00 a.m. Central European Time. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.