Ams Osram sells and leases back its vital micro LED plant in Malaysia

Ams Osram reported yet another quarterly sales and earnings decline, but profit margins bounced up as new CEO Aldo Kamper continues applying strident recovery initiatives such as a financial restructuring that now includes the sale and leaseback of a critical micro LED plant in Malaysia.

For the third quarter ending Sept. 30, revenues fell 25% to €904 million ($963 million) from €1.21 billion ($1.29 billion) in the same period a year ago. The company’s net income tumbled 40% to €29 million ($30.9 million) from €47 million ($50.1 million).

The Premstaetten, Austria–based outfit has endured a long stretch of such like-for-like quarterly declines. It has not reported a rise in net income since the first quarter of 2022. Its last increase in revenues was in 2021’s third quarter.

While macroeconomic trends have been a factor, the company has struggled to find a balance in the aftermath of ams’ acquisition of Osram, which won regulatory approval in July 2020. Part of the problem has been the financial repercussions of the takeover, in which minnow ams, a sensor specialist, swallowed whale Osram, big in LEDs and lasers and, at the time of the acquisition, in general illumination.

The long and winding acquisition entailed a convoluted series of borrowings and share sales. For about two years after the closing, the newly combined company hived off many Osram operations to help pay for those obligations and to focus the company on chip-level operations.

High capex

But financial challenges have persisted, exacerbated by the company’s considerable ongoing capital expenditures (capex), which have been restraining free cash flow below desired levels. Capex stood at 29% of revenue at the end of the third quarter, well above an eventual target of 10%. In April 2022, ams Osram committed nearly $1 billion to expand its manufacturing site in Kulim, Malaysia, where it is building a facility to make micro LEDs, a centerpiece product in ams Osram’s future revenue strategy.

Ams Osram brought in CEO Kamper in April to help set things right. He has acted quickly, shedding some ams product lines, reasserting the importance of LEDs, declaring a massive €1.3 billion write-down, and restructuring the company’s optical semiconductor group, as part of what Kamper calls the Re-establish the Base program. The company has also removed two remaining ams-linked executives from its management board, chief technology officer Thomas Stockmeier and chief business development officer Mark Hamersma.

In the most recent example of major stabilization efforts, Kamper and new chief financial officer Rainer Irle in late September devised a €2.25 billion ($2.39 billion) financing plan, with roughly €800 million ($852.3 million) set to come from a rights issue, €800 million from new senior unsecured notes, €300 million ($319.7 million) from the sale of assets, and about €350 million ($373 million) from what the company calls “additional debt instruments.”

Kamper and Irle have not yet announced the timings on most of those steps, but this week they revealed that they have jumped ahead on the asset route by securing €450 million ($479.5 million) in transactions, which is 50% more than the targeted €300 million.

“Selling the future”

Headlining that development was a €400 million ($426.2 million) sale and leaseback of the Kulim micro LED site. The company said it is handing ownership to three Malaysian pension funds: Permodalan Nasional Berhad (PNB), the Employees' Provident Fund (EPF), and Retirement Fund Incorporated, also known as Kumpulan Wang Persaraan (KWAP). Ams Osram expects the transaction to close later this year or in early 2024.

“It’s vey complicated to explain all the details,” CFO Irle explained to an analyst who had asked about the arrangement during the company’s third-quarter analysts’ call this week. “But it a simplified way, we sold the shell, the building, of our new factory to some pension funds in Malaysia, and we will buy it back after ten years, or we can also buy it back earlier if we want.

“It’s in a way like a secured loan, where we pay rent, but the rent is accounted for as interest,” he added. “The interest payment will be a bit backloaded. There’s a kind of a catch-up at the very end of the agreement.”

The maneuver could help with cash flow.

The development was notable not only for the financial boost it should provide for now, but also because, in a sense, ams Osram is selling its future given the factory holds huge significance to revenue projections starting in 2025, when micro LED contributions are expected to meaningfully kick in. The Kulim site will use an 8-inch wafer process — more economical than existing 6-inch technology — to make micro LEDs.

The expansion has been closely scrutinized by financial analysts since before Kamper arrived, and is a top priority for the new CEO.

The €450 million of asset sales also included what ams Osram described as “the divestment of a phased-out manufacturing facility located in Asia with proceeds of mid-double-digit million (euros).”

Kamper’s considerable measures to reverse what he not long ago characterized as “lackluster” performance appear to be showing benefits.

Margins up

In the quarter, operating margins, or adjusted EBIT margins, bounced up to 7.9% from 7.5% in the same quarter a year ago “due to a positive impact from tight cost control measures and some positive one-time effects with respect to funding,” the company said in a press release.

Ams Osram recently received a commitment for German and Bavaria government funding of €300 million to expand production in Regensburg, Germany, where, like in Kulim, the company is adding 8-inch wafer production for making micro LEDs.

Kamper also noted that sales have been lively for LEDs in the automotive sector, particularly for interior lighting, but have been slow in other markets. LEDs Magazine will report on this in a separate article.

MARK HALPER is a contributing editor for LEDs Magazine, and an energy, technology, and business journalist ([email protected]).