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Edited Transcript of OSR.DE earnings conference call or presentation 7-May-20 12:00pm GMT

Preliminary Q2 2020 Osram Licht AG Earnings Call

Muenchen May 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Osram Licht AG earnings conference call or presentation Thursday, May 7, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Francois-Xavier Gerard

OSRAM Licht AG - Senior VP & Corporate Controller

* Juliana Baron

OSRAM Licht AG - Head of IR

* Kathrin Dahnke

OSRAM Licht AG - CFO & Member of the Management Board

* Olaf Berlien

OSRAM Licht AG - CEO & Chairman of the Managing Board

* Stefan Kampmann

OSRAM Licht AG - CTO & Member of the Managing Board

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Conference Call Participants

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* Jürgen Wagner

MainFirst Bank AG, Research Division - Director

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Sandeep Sudhir Deshpande

JP Morgan Chase & Co, Research Division - Research Analyst

* Sebastian Growe

Commerzbank AG, Research Division - Team Head of Industrials

* Sebastian Ubert

Societe Generale Cross Asset Research - Equity Analyst

* Sven Weier

UBS Investment Bank, Research Division - Executive Director and Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining the OSRAM Licht AG Analyst and Investor Call. (Operator Instructions)

I would now like to turn the conference over to Juliana Baron. Please go ahead.

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Juliana Baron, OSRAM Licht AG - Head of IR [2]

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Thank you, Haley. Good morning, and good afternoon, ladies and gentlemen. A very warm welcome to the OSRAM conference call on our second quarter 2020 results. With me on the call are Dr. Olaf Berlien, our CEO; and I'm happy to welcome, for the first time in our earnings release call, Kathrin Dahnke, our new CFO; as well as Dr. Stefan Kampmann, our CTO; and also the first time in the call, but not new, our Head of Corporate Controlling, Francois Gérard. Olaf and Kathrin will comment on the market development and our financial performance. Afterwards, we will be happy to answer your questions.

As a reminder, today's call is being recorded. You can follow the webcast on our website at osram.com/ir, where you will also find the slides available for download.

As with previous results conference calls, I would like to draw your attention to the safe harbor statement on Page 2 of the results presentation. As usual, it applies throughout this call.

It is now my pleasure to turn over the call to Olaf.

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [3]

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Yes. Thank you, Juliana. Ladies and gentlemen, a warm welcome to our conference call today. Before I come to the second quarter results, I would like to introduce my new colleague on the Board. I'm very delighted that we have gained a widely respected financial expert in Kathrin. She has great experience in transforming companies, both medium-sized and publically listed ones. This will be of great benefit to us, especially in the current situation. But it is the best if she introduce herself. Kathrin?

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Kathrin Dahnke, OSRAM Licht AG - CFO & Member of the Management Board [4]

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Thank you, Olaf. Good afternoon to you, ladies and gentlemen. And regarding me, personally, I worked in various companies, listed ones and private family-owned companies and in the various areas such as finance, controlling and the M&A, where I worked for a German bank. Which may be interesting to you is my appointment as the CFO, to the Board of GILDEMEISTER AG, which is a company that is today called DMG Mori AG. At that time, it was listed in the MDAX. And I went as responsible for finance with that company through the financial crisis in 2008 and '09. And I had the pleasure to go through the corporation and the business combination with the Japanese Mori Seiki Company. And I think these 2 aspects were -- are interesting for my current position at OSRAM today.

My last position was with the family-owned group of companies, Werhahn, where I was not only a CFO but also responsible for business Wilh unit, which was the Building Materials unit. I'm also a member of several supervisory boards. And I'm looking forward to the challenge of working for this exciting company.

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [5]

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Yes. Thank you, Kathrin. I will now comment on the current state of our business. Following, Kathrin will present you the detailed second quarter figures. As always, we will then be happy to answer your questions.

Moving to Slide #3. Ladies and gentlemen, despite the coronavirus situation, we achieved a good second quarter in line with the market expectations. We succeeded in keeping the impact on our business moderate. We took countermeasures at an early stage. And due to our performance programs, we were able to even increase our profitability and cash flow. Effective crisis management allowed us to maintain large parts of our supply chain and production. This will be important for the time after corona, when business picks up again. I will go more in detail on the corona measures later.

Up till now, OSRAM has come through the crisis relatively well. However, the effects of the COVID-19 will hit us fully in the current third quarter. This relates to production stoppages at customers, closure of cinemas worldwide, or also the cancellation of shows and concerts. As announced in mid-March, we therefore do not expect to meet our original targets for fiscal year 2020. At this point, the general market situation does not provide more clarity. And this brings me to the second quarter figures.

Slide #4 showed on a comparable basis, revenue in the first 3 calendar months fell by almost 8% to EUR 821 million. The main reason was a restriction on our business in China caused by COVID-19. At EUR 96 million, adjusted EBITDA was a good 1/3 higher than in the previous year. The adjusted EBITDA margin improved by almost 4 percentage points compared to last year's quarter. It was at 11.7%. Our ongoing efficiency programs had a positive impact here. Through targeted cash management, we also achieved a positive free cash flow of EUR 64 million. This is all the more important in view of the current economic conditions. And that brings me to Page #5.

Here we can see the impact on the COVID pandemic on the global economy. For example, the OECD's composite leading indicator, which tracks changes in economic activity, has shown a rapid decline in recent weeks. This is illustrated even more clearly by the JPMorgan Purchasing Managers on the right side. It has fallen dramatically since January. The key will be how the global economy recovers from this blow. Restarting the economy will not be a smooth process everywhere. But the impact on us will depend largely on the recovery process. The effects on the COVID-19 on us are also evident in the global car production forecast.

Slide 6 shows the global production figures as predicted by IHS. According to the latest estimate, production on our current fiscal year will drop to 71 million vehicles. This represents a decrease of more than 20% compared to the previous year. With many car manufacturers shutting down production in recent weeks, the consequences are now being felt. All regions are affected, with declines of up to 25%. The situation is similar for car purchases. Sales figures in March are half the usual level in some cases. Yet, production has started up again in China and IHS predicts a recovery in absolute numbers in the fourth quarter of the fiscal year 2020, however, given the mentioned uncertainties in starting up production, we must wait and see. One thing is certain: The current situation will have an impact on us in short term. More important become the measures we took early against the COVID-19.

I move to Slide #7. All measures follow 3 guiding principles: First, protecting employees; second, keeping operations running; and third, minimizing the financial impact. So far, we have managed all 3 very well. At the very beginning of the crisis in China, we set up a global task force with professional war room and under my direct leadership. We also quickly put specific hygiene measures in place. And we introduced home working to protect employees. With this strict management, we have only 8, 8 confirmed corona cases worldwide at this point. And where these cases occurred, we responded immediately to ensure operations could continue. And thanks to our existing emergency plans and the professional work of our teams, we were able to maintain a large part of our operations. We have also managed to keep the financial impact in Q2 moderate through global cost and cash initiatives.

We have combined these specific corona initiatives and as a so-called SHIELD program. On Page 8, you can see the results of these efforts. Within just a few weeks, we identified an additional liquidity volume of more than EUR 200 million for this fiscal year. The EBITDA effect is in the range of EUR 40 million to EUR 50 million. This relates to HR measures such as short-time working. It also to hundreds of saving initiatives across all plants and legal entities. But of course, we are also driving forward the ongoing transformation of the company.

And which brings me to Page #9 and the structural performance measures. In Q2, we have continued to implement our existing performing programs. This applies especially to measures at Opto and in the central administration. They enabled us to save EUR 26 million in the last quarter. Additional structural measures have recently been announced for the German plants and central innovation. Over the entire year, we now expect gross savings of around EUR 90 million. And for the mid-term target until fiscal year 2022 has been raised to EUR 300 million.

At this point, a brief comment on the planned takeover of ams. Antitrust approvals are still pending. And preparations for the integration process continue to be made in the background. And in the meantime, however, we are focusing on our own performance.

Ladies and gentlemen, to summarize, thanks to the consistent crisis management and our transformation programs, we have kept the impact of the coronavirus in Q2 within reasonable limits. However, for the third quarter, we expect a significant impact on our business. Cost discipline and cash management, therefore, remain a top priority.

And with this, I would like now to hand over to Kathrin.

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Kathrin Dahnke, OSRAM Licht AG - CFO & Member of the Management Board [6]

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Thank you, Olaf. Now let's have a more detailed look into the second quarter figures, and I'm starting to look at the revenue, which is on Page 10. We had favorable exchange rate development as well as portfolio additions, and both with a positive impact on nominal revenue growth. The comparable growth amounted to almost 8%, precisely 7 point -- amounted to a decline of 8%, precisely 7.9%. The revenue decline compared to prior year Q2 is mainly due to the corona impact, as discussed, which sums up to roughly EUR 60 million for the full quarter 2 of the fiscal year.

When looking at our regions, APAC declined by minus 9.5% comparable. Therein not surprising, China declined by minus 15.3% year-on-year. The biggest hit in APAC region came in for DI sales, with an early corona impact on entertainment along with challenges in the city beautification business after new regulations in China and confronted with lockdowns in the region. Also, AM showed revenue decline in APAC, mainly burdened by drop in China demand and a strong decline in traditional light source OEM business.

On a low comparative basis, Opto was able to grow sales in APAC by high single-digit percentage compared to prior year, strongly supported for -- by business for sensing applications. Americas and EMEA both showed negative comparable growth of minus 7.2% in Q2, driven by all the business units.

Let me now drill deeper into the revenue development in the 3 business units. Let's start with Opto. The OS revenue in the second quarter saw a modest decline of minus 1.8% compared to the previous year. Within Opto, automotive revenue had the biggest hit by corona in absolute terms, partly driven by the temporary shutdown of our Wuxi back-end facility beginning of February and partly demand driven. While illumination-related revenue came in rather flat on a comparable basis, visualization faced continuing soft demand for industrial laser applications. Sensing, however, showed strong performance with double-digit percentage positive year-on-year growth.

Let me now move on to the revenues in automotive, our AM unit. With both automotive LED component and aftermarket seeing modest comparable revenue decline in Q2 of this fiscal year, there was no compensation for the ongoing strong decline in traditional light source business. Further, end of the quarter, we started to see a significant drop in demand due to the worldwide shutdowns at the OEMs and the Tier 1 customers. This affected all of our segments' end channels. Overall, the AM comparable revenue growth came in at minus 8.7% for the quarter. Without the corona impact, the decline would have been rather modest at a level of approximately minus 2%. The revenue development of the OSRAM Continental subsidiary, which is part of the AM reporting segment, was in line with the overall development in AM on a global base.

Last but not least, the development of digital. DI sales were hit hardest by supply chain disruptions in China and the exposure to entertainment and city beautification, which experienced an early impact of the corona pandemic. Overall, the comparable revenue decline was at minus 12.3% for the quarter, driven by all segments and all regions, though, with APAC seeing the strongest decline in comparable revenue.

Let's move on to the profitability slide on Page 11. The adjusted EBITDA in Q2 came in at EUR 96 million in absolute terms, translating into an improved margin of 11.7%, as mentioned before. This margin, in comparison to prior year, is mainly driven by Opto and our performance programs, which are successfully taking effect. Pricing and inflation impacts could be overcompensated by these productivity measures by a total of EUR 7 million. In the second quarter, we had an increase of EBITDA by initially applying IFRS 16 of about a EUR 13 million. In the Opto business unit, the adjusted EBITDA improved compared to prior year to 21%, mainly driven by higher gross margins, especially productivity savings and lower functional cost.

The adjusted EBITDA margin in the AM dropped below prior level to 6.9% in Q2, driven by the impact of lower volume and increased functional costs compared to Q2 of the previous year. Productivity savings in Q2 of the current year overcompensated the negative price and inflation effects. Our OSRAM Continental subsidiary continued to be dilutive in the quarter, and the adjusted EBITDA stayed negative.

Coming to the profitability of DI. Despite lower volume and corona impact, the adjusted EBITDA margin improved compared to previous year quarter and sequentially and came positive with plus almost 1% or 0.8%. The improvement of profitability was mainly driven by productivity measures, thus higher gross margin and reduced functional cost. Adjusted EBITDA in corporate items for OSRAM was negative with minus EUR 12 million, positively impacted by rigorous cost management as well as a one-off effect. Please note that as anticipated, we reached in March an agreement for additional redundancy programs in German, Interessenausgleichs und Sozialplans, with the German labor representatives of the company. Accordingly, the personnel restructuring costs in the result amounted to EUR 45 million in Q2.

Let's have a look at Slide 12. Free cash flow was positive, as mentioned before, with EUR 64 million in Q2 of our fiscal year, driven by strict CapEx and net working capital management, as well as the extension of our factoring programs. With EUR 22 million CapEx, this number stayed at a very low level in this quarter. The corona pandemic causes, as discussed, general economic slowdown, geopolitical uncertainties and limited visibility ongoing. Therefore, in this time, it is crucial for us to focus on cash and liquidity. And as you can see in the bar chart on the lower right, our available liquidity in terms of cash and undrawn credit lines amounts to EUR 783 million as of March 31 of this year. Cash of EUR 583 million was significantly increased as a precautionary measure in these uncertain times through early drawing of our syndicated credit facility. The remaining undrawn and committed credit line amounts to EUR 200 million under this facility, and we don't have any major ordinary repayments in the future.

So what is ahead? Given the unprecedented operational and financial challenges resulting from the corona pandemic, the further development is uncertain. Therefore, we cannot quantify at this point in time, the economic impact of the pandemic on OSRAM. However, we are well prepared with a very tight and strict crisis management in place. Our liquidity management includes a broad range of measures, and we have further instruments at hand. We closely monitor the economic development, perform scenario analysis and continuously evaluate and execute all possible cost reducing measures. We are also looking into additional financing sources worldwide.

We have a well-proven liquidity forecast process in place and can rely on a strong relation to our high-quality banking consortium. Therefore, our priority focus in this time is on cash management on one hand and on further cost-cutting measures on the other side. Juliana?

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Juliana Baron, OSRAM Licht AG - Head of IR [7]

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Thank you, Kathrin. We are now looking forward to your questions. Haley, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Sven Weier of UBS.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [2]

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The first one is for Olaf because you mentioned at the press meeting this morning quite thankfully a number what you see for April in terms of your revenue development. I think you said between minus 30% and 45%. I was just wondering, is that the range that you see differing between the divisions? Or is that minus 30%, minus 45% a ballpark for all 3 divisions that you see?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [3]

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That was your first question?

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [4]

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Yes. Obviously, you know as analysts, if you give a number for 1 month, I was just wondering, I know you don't give the guidance obviously for the year. But I think you also said on the press call, obviously, that April is going to be the weakest month. And I was just wondering if you're ready to prepare to give a range also for Q3 as a whole?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [5]

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Yes. Thanks for the question. Let me try to explain a little bit what -- a little bit what I mean with the range of 30% to 45%. The visibility is really, really low. Of course, I have the actual numbers of April. The first numbers are coming now up. And we are in the beginning of May. But we have really 0 visibility for June. And for this reason, we cannot give really fair proposal for the quarter. That's the reason. I think most of our colleagues have the same issue.

So what I mean is with the average is for all the 3 business units. So the numbers, what your question is, for all the 3 business units, average through the company, because we are in all 3. Take a look, as I said in my speech, the DI -- one part of DI is in the cinema business. We are a world market leader. There is no single -- there's no single cinema in the world, which is open. Maybe a drive-through cinema, but the rest worldwide is closed. There's no single outside show, which one is running this month, next month and definitely not in June. So the impact was heavily and will be heavily.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [6]

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And with that kind of rate of decline in April, on the one hand, but on the other hand, you've done obviously a really good job on the cost side. I mean do we still have to assume that with such rates of decline, it's really tough to be breakeven on an EBITDA level on a monthly basis here.

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [7]

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On a monthly basis, yes, I would say, if you have a decline by 30% to 45%, it's impossible to have a breakeven. So I think there's no single company, maybe Amazon or maybe Apple. But usually, your breakeven is definitely -- and you know it from our parts that you see from the profitability, if you have a decline by 30%, it's impossible to have breakeven.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [8]

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Yes. That makes sense. And the second question, if I may, is one for Stefan actually. Because I mean now leaving the short-term challenges aside, I was just wondering if you could also give us an update on the technology side, maybe the latest development that you see on sensing on breakthrough, how you're progressing there? Maybe also on the LiDAR side, I guess, obviously, that was a bit in the background, maybe make a couple of months, but I was really curious if you have an update on that engine.

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Stefan Kampmann, OSRAM Licht AG - CTO & Member of the Managing Board [9]

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Yes. Thanks. I think when we look at the sensing division and the sensing business, I would say the LiDAR is still strong activity. The automotive, however, we see that now a more realistic phase looking forward. In the consumer electronics, we see a strong demand for new solutions, you see the world side and the phase side. On the world side, we see more and more 3D sensing systems, which are announced by our customers for tablet application, but also for smartphone application. And we are very positive in the future demand.

When we look at the LED, currently, we see huge interest in UV LEDs, as you can imagine, because the disinfection applications currently are very interesting for our customers. We are currently supporting this business still with our traditional UV lamps, and we are currently trying to increase the volume, the manufacturing capacities for traditional UV lamps. But we also basically are challenging OS to put more focus on the development of UV LEDs as the kind of transformation of this industry from traditional UV lamps to UV LEDs.

And for instance, if you think about the disinfection of surfaces in the interior of a car, rental cars, shared cars, there's a huge interest of the market to have disinfection solutions based on photonics, and that's something where we are putting a lot of focus and a lot of R&D activities currently in OS. And we are very positive that we will see very soon the first solutions, which we can offer our customers in this regard. So overall, I think even the crisis is demanding new solutions of our photonics business.

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Operator [10]

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The next question is from Sandeep Deshpande of JPMorgan.

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [11]

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If I may ask a question back again on -- in terms of what you're seeing in the June quarter. I mean if you are talking about the kind of decline that you mentioned this morning on -- in April, I mean some of your semiconductor peers have indicated 25% or so revenue decline. On a 25% revenue decline, can OSRAM move around cash or through your working capital management, et cetera, be cash breakeven in the quarter? I understand that earnings-wise, it's not possible.

The other point I would make -- a question I have is in terms of the overall business in the automotive space. Even despite you've seen so much decline, I mean, IHS is indicating auto units decline of almost 50%. So do you think that this weakness continues into the second half of the year?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [12]

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Thank you, Sandeep. Yes, as I tried to explain, and I think you will hear it, and I'm quite sure you hear it from other colleagues in the worldwide industry as well, especially automotive. So I think the COVID-19 lockdown is in Europe. Especially in Germany, we are coming back. We open it. I think U.K. is still locked, and U.S. is locked. But nevertheless -- so my issue, Sandeep, is not the lockdown. My issue is the missing demand. So I'm a little bit afraid that if we -- everything is fine, again, and we are able to walk around and going shopping, but people are not buying anything. So my worry is the missing demand. And for this reason, I would say, in the months of April, May or June, we have to manage the lockdown and the lockdown impact. And in the rest, that was your question.

In the second half of the year, we have to fight for demand. So the buying parts and then that my customer, the automotive industry can produce cars, and then I can deliver parts to the OEM. So I would say it is -- will be a question, it will be really a question how quick people are coming back in the -- for shopping. If I see it in China, it's quite good. So in China -- and I tried to say it in this morning, in China, we have a typical V curve. That means we had the lockdown in January and February. But beginning in March, China came back. And in April, our factory is fully loaded, and it seems to be that demand is in the Chinese market, good. And the question is, and this is really a question and nobody can give me answer, or maybe you can, how quick people are going back for shopping?

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [13]

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And on the cash cost?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [14]

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Yes, on the cash cost, maybe the best one is I give it to Kathrin or to -- Gérard?

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Kathrin Dahnke, OSRAM Licht AG - CFO & Member of the Management Board [15]

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Well, on the cash side, as I outlined, we have so many initiatives in place, especially working capital initiatives, plus the reduction of CapEx. So that the cash impact is sort of softer than the business impact. What we've seen in April, the cash burn, as you may say, was limited. It was small, but limited since we don't have a crystal ball for the months to come. However, we think that the cash impact at the end of the day will not be as strong as, possibly, the revenue.

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [16]

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Just one follow-up. I mean I believe there was a meeting in Germany this week between the auto vendors and Chancellor Merkel. I mean have you heard anything from your customers on what happened and whether there is going to be any scrappage programs or any help for the industry, which will cause that second half not to be so bad and demand to return?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [17]

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Yes. It's true, Sandeep, yes, they had a meeting on Tuesday. It was of course car gipfel, car making summit, car summit on Tuesday. I think maybe the car industry really started quite early with the question, do we get money. I think -- I'm quite sure something will come. I'm quite sure something will come. But I think now from the governance point of view, it is in the main direction, really, that the people coming back and have more flexibility. As you know, we stopped the lockdown and we reopened now all the shops in Germany. We will reopen the restaurants next Monday, and we reopen step-by-step more and more shops and malls. So again, I would say -- but it's a guessing. On Tuesday, there was an open discussion without any decision. And I'm quite sure they will come up with some good ideas.

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Operator [18]

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Next question is from Sebastian Growe of Commerzbank.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [19]

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The first one is around Opto. Earlier this day, you said that in the Malaysian part -- plants, you were temporarily down to only 1,000 full-time employees there. And now you're back to 6,400, i.e., fully utilized. Can you just give me a sense what that meant in terms of cost headwind when you're really running on the plant for the period of time? And can you also give us a sense of how long you have been running at only this 1,000 staff level? And would it be fair to say that based on your earlier demand comments, that you might be prepared to once again shut down or at least reduce the load at the Malaysian plant? Or as long as China is pretty vibrant in demand, then you will be running at 100%. That is it for Opto.

And the other question I would have is around cost savings and the upgraded target here to the EUR 300 million. I think since the early 2018, you have in total booked almost EUR 300 million in special items. The question that I have is how many or how much of special items is needed to get to this EUR 300 million gross savings target? And could you also remind us of what is really P&L charges and expenses compared to what is like the cash cost to that program?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [20]

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Yes. Thanks, Sebastian. Coming to your first question, OS, yes, it's absolutely right. We started with 1,000, then we had a middle step with 3,200. And now the factory is open, and everybody can come back. To be honest, maybe Mr. Gérard can help me. I do not know what was really the EBIT impact for the cost down. I have to say, I do not know. It's simple. I do not know it. I would say it's a single million part. But it's a guessing. It's really a guessing. So I do not know it. But I think what we can do is that we give you a call and that Juliana gives you this information because I do not know it.

What I can say Sebastian is that Malaysia plays a really important role for China, for China automotive. And we have a huge -- we have a good demand from China. And it was very important for OSRAM to reopen or to get the full capacity because we try to utilize more Regensburg. That was one of the reasons that the Regensburg plant was in February and March full running because they tried to compensate the missing capacity in Malaysia. So we are quite happy now to be back and can deliver to our customer. And again, the number is coming from Juliana, and maybe François can -- maybe or maybe, Kathrin, can you answer the question, the second question?

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Kathrin Dahnke, OSRAM Licht AG - CFO & Member of the Management Board [21]

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Yes. The cost saving program, which you mentioned, totaled to EUR 300 million. It was started in 2018 and is expected to run until 2022. We're sort of like in the middle of it, and it is all about earnings improvement. There's no liquidity as we have under the SHIELD program. We already managed to materialize a little bit above EUR 180 million under this program as per quarter 2.

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Francois-Xavier Gerard, OSRAM Licht AG - Senior VP & Corporate Controller [22]

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And maybe to your question.

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Kathrin Dahnke, OSRAM Licht AG - CFO & Member of the Management Board [23]

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And in the quarter...

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [24]

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In the quarter, it was 26%, but accumulated, it's EUR 180 million. And we are quite confident that we achieve the EUR 300 million maybe a little bit earlier than 2022.

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Francois-Xavier Gerard, OSRAM Licht AG - Senior VP & Corporate Controller [25]

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Yes. And Sebastian, maybe to add on that, regarding your question on special items. So we booked the majority of our special items in the year 2020 in the first half of the year. But we still have a few programs outside of Germany, which we are going also to account. So the original guidance we gave in terms of special items, roughly at the same level of last year, is still holding.

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Sebastian Ubert, Societe Generale Cross Asset Research - Equity Analyst [26]

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I was just wondering, when one looks at the EUR 180 million that you saved so far, as you said, at the same time, you have booked almost EUR 300 million. So the ratios, obviously, almost EUR 2 that you spent for EUR 1 of savings. And that is the nucleus of the question. So what does it really need to get to EUR 300 million? Or is it really like the majority is done and now it's really smaller bits and pieces that are still coming. But it's basically what I was interested in. And then on the cash part, I was not so much asking for any liquidity leeway. I was more asking how much of the special items is ultimately really a cash charge, i.e., that you need to make redundancy payments, whatever comes to mind, and that is my question.

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Francois-Xavier Gerard, OSRAM Licht AG - Senior VP & Corporate Controller [27]

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Yes. So on the first one, as mentioned, we still have in the second half of the year, we will have some charges. And we have a usual run-rate as well when we go into 2022, but it's not factored in. So we will be done mostly by the end of this year with this program. Regarding the cash, there is not a lot of difference between the accrual and the provision we book and the cash out. So we have certain assumptions obviously, depending on the monitoring program and when we will have this executed so that it will reap in the second half and probably more in next year, our cash.

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [28]

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And we booked it -- if you announce the program, you have to book it.

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Kathrin Dahnke, OSRAM Licht AG - CFO & Member of the Management Board [29]

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Yes. That's not on cash.

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [30]

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The earnings -- and the savings are coming later. So I would say the EUR 300 million, what we booked already if you get then the savings over the years, you have a good return. So in this case, I would say it was the right decision to lean the organization and to streamline and to increase the performance.

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Francois-Xavier Gerard, OSRAM Licht AG - Senior VP & Corporate Controller [31]

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And maybe I don't know if you...

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [32]

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And you see it in the results, Sebastian. (inaudible) you see in this corona crisis, we increased the profitability to 12%. And in OS, you see that we increased from 14% to 21%. So I think it's a good return. So I'm happy about that.

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Sebastian Ubert, Societe Generale Cross Asset Research - Equity Analyst [33]

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Yes, no doubt at all about that, quite frankly. That wasn't meant to be any criticism also from my end. The contrary is the case. I think you had a straight beat in the quarter much better than everybody would have expected. Was that really to get a proper sense? Because usually, you never have a 1:1 ratio, EUR 1 expense and then EUR 1 saving that in reality very rarely works, at least based on my experience. And that was basically the background of the question. I think there was one other comment you wanted to make. And I have one very quick follow-up just on the CapEx budget of the EUR 50 million in the first half of the year, what should be the run-rate? Is it still around EUR 25 million a quarter? Or is there at a certain point in time, a tipping point reach where you will have to increase the CapEx spend?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [34]

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Now, we have a CapEx freezing, I will say, I think in a time where you are running a crisis like this one, it's good to stop breathing and stop spending. And that's the reason we said, look, as we have a CapEx freeze, really a CapEx freeze like a hiring freeze. And only spending, if you need it because something has to replace, then we do it. But -- Francois?

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Francois-Xavier Gerard, OSRAM Licht AG - Senior VP & Corporate Controller [35]

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Maybe -- I mean, as mentioned by Olaf, on Page 8, I mean, as you see, the free cash flow measures, I mean the main part of this non EBITDA is related to CapEx. So I would say it's a mid-double-digit number, what we are looking at. And obviously, that will reduce our CapEx in the second half of the year.

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [36]

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What you I said, I think EUR 25 million is good.

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Francois-Xavier Gerard, OSRAM Licht AG - Senior VP & Corporate Controller [37]

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Exactly. The majority we could have that. And...

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [38]

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That's the minimum, what we need to keep it running.

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Operator [39]

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The next question comes from Lucie Carrier of Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [40]

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The first one, I was hoping if you could give us some color around the strength in the sensing business you've seen in the second quarter in OS. I was just curious if you could give us some idea which type of application it was, whether there was any specific contract that was related to that? And if so, what would be the length of that contract or those contracts, if there are several?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [41]

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We are quite -- I think it's good to be in Germany and not in U.K. -- sorry, to say, but if I take a look to the numbers in U.K., I'm very afraid. But I think from French to French, Francois, that's a perfect answer.

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Kathrin Dahnke, OSRAM Licht AG - CFO & Member of the Management Board [42]

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Which language?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [43]

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You can do it in French.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [44]

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I'm only half French, so.

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Kathrin Dahnke, OSRAM Licht AG - CFO & Member of the Management Board [45]

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Okay. Do it in English then.

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Francois-Xavier Gerard, OSRAM Licht AG - Senior VP & Corporate Controller [46]

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I think regarding the sensing business, right?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [47]

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Yes.

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Francois-Xavier Gerard, OSRAM Licht AG - Senior VP & Corporate Controller [48]

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I mean we had -- in the quarter, I mentioned a very good evolution. I think we have the one or the other program ongoing. So that's definitely what help us. And then looking forward, obviously, to more of that. I think the sensing is a very good market, a tough market. And now we have the one or the other program towards that one, supporting us in Q2.

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [49]

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And you have seen this is very -- this is a stable -- it's a stable business, sensing business in COVID crisis as well. So we are quite happy. I think it was a good progress. It helped in terms of the --

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [50]

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Sorry, just maybe -- I don't know if my question was clear. But I was not so much talking about the cost elements of that business. But just want to understand a little bit the top line development, because you said that business was up, I think, either high single digits or double digits. And I was just keen to understand which applications have driven that and whether there was any specific contract related to this?

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Francois-Xavier Gerard, OSRAM Licht AG - Senior VP & Corporate Controller [51]

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I think we're not discussing on specific customers on that one. But what I mentioned in terms of program was not the cost program, but the program we have in the one or the other mobile customers what we are delivering. So I think usually, we don't disclose, and we will not give that on that call.

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Kathrin Dahnke, OSRAM Licht AG - CFO & Member of the Management Board [52]

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Absolutely. And you know, Lucie, that we're also quite balanced, and the industry with smart mobile devices and so on. And yes, what Francois mentioned was related to the business, not to the cost.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [53]

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Okay. So from that standpoint, I should understand that there was not any -- I'm not asking for a customer name, but there was not any specific programs, which had a bigger ramp-up in the quarter versus what you expect for the rest of the year, for instance.

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [54]

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Yes, there was a program -- if you mean a customer order, yes, there are some customer order that ramped up in this quarter. That's for sure. I think if you take a look to this market, you have seen that there are some new products that are coming up, and we are in these products. So there was a program, and we are in.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [55]

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And a question related to the potential recovery in automotive. One, on one side, I'd be keen to understand which type of conversation you are having right now with your largest customer, considering the amount of pressure they are on and how they're thinking about allocation, but also pricing and also the type of product that they are good to go for?

And then secondly, as well, you've mentioned that China was picking up quite nicely since March, April. I was -- how much visibility do you have, whether the demand you are seeing, which is improving, is more related to what I would call a restocking effect versus a demand actually in the market from the final customer?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [56]

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I think the first one is, of course, we have a lot of discussions with our customer, and I think that's maybe the change and the learning effect from 2008. I think one is really that you have a conversation really every week with a large customer. And I'm in close contact with the BMW CEO and the Mercedes CEO and with our direct clients like HELLA and so on. So they all have very limited visibility. And the visibility was, of course, in 2 steps. The one was a lockdown and how long does it take? I think now we have better visibility. We are all back. We ramp up our factories, it's BMW and Volkswagen or in Daimler. But now the next wave is the visibility how good is the demand. That's what I was talking about. And the question is, people are now able to go out for shopping. And -- but the question really is are they willing to spend money? And that's -- we do not have any visibility. That's -- we do not know. We simply do not know.

What I'm doing is that I'm looking to the 3 areas like in America, China and in Europe, to the stock of the dealers, their detailed statistics. And you can see that the dealers in U.S. are full with cars. We can see that in China, they are selling cars from the dealer. So that's the reason that the Chinese automotive industry is producing cars. So as I said, it looks like that we have, in China, a combination of destocking and really demand. And there's one very simple reason that -- and this has maybe changed to 2019. We had a decline in 2019, you still remember. And I was talking about that people are thinking spending money more in real estate and less in an owned car because infrastructure was so good in big cities like in China. Now people are thinking about how good is it to travel with bus or sub. So they're thinking about to buy cars again. So there's a changing in mind, and that is one thing. Question is how long does it take, but it is a demand definitely in China there. And -- but the question is for Europe and America, we have to see. So it's -- answer is, it is a destocking and it's a demand definitely in China.

And pricing, we do not have pricing discussions. There's no question. It is in the past, in the first 3 months of this new year, our 2Q. It was really a question of the supply chain. Are we able to deliver? And in China, we really had hard times to deliver on time, especially I had the reduced capacity in Malaysia. But as I said, we manage it with Regensburg. So in this time, we do not have a pricing issue. What we have and what we expect, Lucie, is that we maybe have a special promotion programs. So I'm quite sure that one tool for a better demand will be -- maybe help from the different governments. But definitely will be good prices. And I think in this case, maybe some promotions are coming up.

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Operator [57]

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The next question comes from Jürgen Wagner of MainFirst.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Director [58]

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Yes. Thank you. Good afternoon. I have a follow-up question on your cash initiatives. And you mentioned you had limited cash burn in April despite sharp volume drops. But on Page 12, you show us that you have drawn quite a bit of your credit facilities. Why have you done this? And second question would be how strategic is the Conti joint venture with a negative EBITDA margin even on adjusted level?

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [59]

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Yes, it's a very good question, Jürgen. I'll give the first one to Kathrin and the second one to my colleague, Stefan.

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Kathrin Dahnke, OSRAM Licht AG - CFO & Member of the Management Board [60]

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Okay. Well, the cash -- the drawing of the facility is very easy, therefore, just for caution. Because as an experience from the financial crisis in 2008, you better make sure that all the committed lines really are there. And if you draw into those lines, they are just then used. That is just -- may not be the most efficient type of liquidity measure, but it's the most cautious approach.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Director [61]

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Okay. Understood.

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Olaf Berlien, OSRAM Licht AG - CEO & Chairman of the Managing Board [62]

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I think it's good to have your line. So it's always cash is king in these times.

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Kathrin Dahnke, OSRAM Licht AG - CFO & Member of the Management Board [63]

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Cash is important.

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Stefan Kampmann, OSRAM Licht AG - CTO & Member of the Managing Board [64]

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And Jürgen, in regards of the your question regarding the joint venture, when we currently look at the acquisition results of the joint venture, we see that the rationale to form this joint venture, but we always said it's important to join basically competencies in electronics and lighting. These joint force is successful. We have currently awards of new businesses with new solutions, like, for instance, light car boards for cars. We're looking to new light electronic solutions where we are very successful in awarding new businesses. So looking forward, also what we already disclosed the acquisition volumes, which we had last year, fulfilled and overfulfilled our targets. We are currently suffering a little bit from the inherited business, which came into the joint venture that we have to work on the manufacturing costs. And this is basically the burden which we currently see. But looking forward, we are very happy with the results, which the management is currently showing in regards of awarded volumes and also the new technologies where we see a high customer acceptance.

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Jürgen Wagner, MainFirst Bank AG, Research Division - Director [65]

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The awarded volumes, can you quantify this?

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Stefan Kampmann, OSRAM Licht AG - CTO & Member of the Managing Board [66]

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No, but they are supporting basically the growth which we have planned for the joint venture.

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Operator [67]

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And there are no more questions at this time. I hand back to Juliana Baron for closing comments.

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Juliana Baron, OSRAM Licht AG - Head of IR [68]

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Yes. Thank you very much, and thank you very much for all your participation. With that, we would like to close this conference call. If you do have further questions, please get in contact with our Investor Relations team. Have a very good day. Thank you, and goodbye. Stay healthy.

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Operator [69]

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