ams-OSRAM AG (AMSSY) CEO Alex Everke on Q4 2021 Results - Earnings Call Transcript

Feb. 08, 2022 11:50 AM ETams-OSRAM AG (AMSSY), AUKUF
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ams-OSRAM AG (OTCPK:AMSSY) Q4 2021 Earnings Conference Call February 8, 2022 3:00 AM ET

Company Participants

Moritz Gmeiner - IR

Alex Everke - CEO

Ingo Bank - CFO

Conference Call Participants

Sébastien Sztabowicz - Kepler Cheuvreux

Francois Bouvignies - UBS

Didier Scemama - Bank of America

Robert Sanders - Deutsche Bank

Adithya Metuku - Crédit Suisse

Sandeep Deshpande - JPMorgan

Andreas Müller - ZKB

Moritz Gmeiner

Good morning, ladies and gentlemen. This is Moritz Gmeiner. I'm very happy to welcome you to this morning's conference call on our fourth quarter and full year 2021 results. Alex Everke, our CEO; and Ingo Bank, our CFO, will give you an overview of key developments in our business and our financial performance.

And with that, I would like to hand over to Alex.

Alex Everke

Yes. Thank you, Moritz. Good morning, ladies and gentlemen. I'm very happy to welcome you to our fourth quarter and full year 2021 conference call this morning. In this webcast, I will comment on our business before handing over to Ingo for details on our financials.

When I look at 2021, the integration of OSRAM played a very important role. So let me start with our key achievements. Since we gained control in March 2021, we have been very successful with the integration of OSRAM. We have realized major steps and have achieved our targeted milestones across business areas. On our path to realign our business portfolio, we have announced 3 disposals, of which 2 are already closed.

We have to solve the loss-making joint venture between OSRAM and Continental and we are moving ahead with the remaining disposals, which includes the business related to the former joint venture. Our broad set of integration programs continues to progress very well, and I'm particularly pleased to see the positive momentum that is spreading across our teams.

This momentum is reinforced by positive customer feedback on our expanded capabilities and the opportunities we are discussing with our customers in all markets. Our synergy creation programs have advanced as expected last year and remain fully on track to the targets we have set out.

I'm very glad to see our major achievements in a short time frame since gaining control, and we are not slowing down. But we are fully focused on realizing all integration steps as planned and as quickly as possible. Our remaining portfolio realignment, the full implementation of our new organization, and the creation of the next layer of synergies will mean that 2022 will still show a certain transitional characteristics.

With this in mind, I'm very confident that we will exit this year on a strong platform to drive our business and financial targets based on a leading portfolio for optical solutions. Let's now take a look at our business development for the year and the fourth quarter. I'm pleased to report a positive first fiscal year for ams-OSRAM as a combined company with healthy full year results.

We delivered full year revenues of $5.8 billion or €5.04 billion, which are driven by a strong performance of our automotive business and incorporates the negative effects in our consumer business, which we have previously detailed. Our very solid performance in the ending quarter clearly supported the full year development. Nevertheless, market imbalances persisted through the second half of 2021, particularly in the automotive market and created revenue delays in automotive supply chains as a result of lower OEM production volumes. The supply chain imbalances also had a negative revenue effect in certain areas of our consumer business last year.

Looking at the segments now. Our semiconductor segment provided the majority of our revenues last year. The semiconductor segment's automotive business was successful as a global leader in automotive LED lighting, serving exterior and interior applications with a focus on performance and differentiation.

The business developed robust full year results, driven by a positive backlog situation over the course of the year. At the same time, it successfully managed through a demanding environment and ongoing supply chain imbalances in the global automotive market.

The segment's automotive business showed a very solid performance in the fourth quarter based on existing backlog and despite the mentioned effect from lower OEM volumes. The semiconductor segment's consumer business achieved attractive results last year. Taking into account the mentioned lower year-on-year revenues in the second half, which matched expectations and certain effects from supply chain imbalances.

In this market, we serve world's leading OEMs with a range of optical sensing solutions for smartphones and other devices. I would like to emphasize that we saw strong year-on-year growth in our Android business last year, with a very good performance in the second half of 2021. Here, we are successfully in display management and world-facing and other optical sensing, which includes 3D-based and other camera enhancement functions, such as 1D ToF or automatic white balance.

We also see continued good traction -- design traction in the Android market going forward, which is a good area for us. Accordingly, the overall consumer business performed fully in line with expectations in the fourth quarter of last year.

The semiconductor segment, industrial and medical business performed very well last year. It benefited from increasingly positive demand in markets for established and emerging industrial lighting and for medical and other imaging. I'm glad to report that for the second half of 2021, our industrial business recorded double-digit growth year-on-year.

In horticulture market and multiple areas, industrial lighting were key factors driven this growth. This development confirms our strong position and good growth potential in attractive industrial markets. These market trends were also the main driver for the fourth quarter, which showed further good momentum in horticulture LED.

The lamps & systems, or L&S segment, which covered the remainder of our revenues, showed a good performance last year. The L&S automotive business including legacy traditional lighting developed very positively in light of the industry environment. Full year results reflect attractive demand across channels and lines with fourth quarter performance well in line with expectations.

The other areas of L&S delivered solid full year results from industrial, building-related and medical applications. Demand in key markets recovered over the course of 2021, while certain markets such as entertainment remains subdued for most of the year. In the fourth quarter, the nonautomotive parts of L&S saw further attractive demand and positive signs from lacking markets.

As you can see, we have a number of attractive growth areas across our business, which will contribute to the development of our business in 2022 and clearly also beyond. To deliver on our roadmap for profitable growth, we continue to focus our development activities on differentiated technologies and high-value applications.

In our consumer business, I'm happy to see a good flow of active inquiries and discussions regarding new opportunities and future programs. This includes our largest relationship and spend a time to revenue horizon from about 12 months to over 2 years from now. As an example, in consumer, next to our development work in areas like micro LED, we see very good traction in AR/VR, where major players are working on future devices to address metaverse applications.

Our technology portfolio is geared to support visualization as well as sensing application in this field. To give you a better idea, this could include laser emitters for laser-based visualization systems, eye-tracking technology or highly advanced optic components, among others.

There are some very small business in this area already, and we are firmly on the radar screen of the key players in AR/VR. At the same time, I see good traction, exciting potential in our core and new growth markets across the automotive and industrial medical verticals. Here, we are looking at new programs and wins with a multiyear revenue horizon. In automotive, this includes highly pixelated front lighting or display applications, for example. Horticulture and other differentiated industrial lighting will be very attractive growth field to us, including emerging fields like UV-C LED solutions.

This positive momentum is paying in our drive towards our target model for growth and profitability in the coming years.

Let me now come to the outlook for our business. Looking forward, based on current information, we expect the imbalances in the automotive sector to continue to influence our market for a considerable period of -- for this year. We are making sure to have sufficient capacity available and are ready to serve recovering customer demand once the supply chain and production volatilities disappear.

With this in mind, I will turn to our guidance for the first quarter. As mentioned, we see supply chain volatilities in the automotive market and continuing in the first quarter. These are due to constrained end-to-end supply and reduced production volumes, while overall backlog remains supportive. The first quarter also shows a degree of end market seasonality next to deconsolidation effects compared to last year's first quarter and the decreased year-on-year consumer contribution in line with previous comments.

Despite this backdrop and based on current information and exchange rates, we expect a positive first quarter with group revenues of €1.19 billion to €1.29 billion, or $1.365 billion to $1.465 billion, slightly up at the midpoint sequentially, which excludes the deconsolidation revenues from dissolving the ams -- the OSRAM Continental joint venture and closed disposals as well as their financial effects. We see our business continuing to show a good operating performance and expect an adjusting operating EBIT margin of 8% to 11% for the first quarter.

With this, I would now like to hand over to Ingo.

Ingo Bank

Yes. Thank you, Alex, and a very good morning to all of you. Before I start going through the numbers, let me also make some comments upfront. When we refer to adjusted financial metrics, we refer to adjustments for M&A-related transformation and share-based compensation costs as well as results from investments in associates and sales of our business. A reconciliation to the IFRS basis of presentation is included in the financial information on the fourth quarter that we've published today, and you will find it available on our Investor Relations website.

So let's go first through some of the key financials for the quarter before turning to the group financials for the full fiscal year 2021. I'm on Page 15 now of our Q4 '21 earnings release presentation. With revenues of USD 1.4 billion and an adjusted EBIT margin of 9.6% in the quarter, we came in at the midpoint of our guidance for both metrics. When comparing revenue sequentially, please remember from our prior quarter earnings communication at close to $40 million worth of revenue recorded in the third quarter of '21 was no longer consolidated in Q4. This was due to the divestment of a buildings-related systems business as well as the unwinding of the former OSRAM Continental joint venture.

Adjusted gross margin was 33.5% in the quarter. similar to the prior quarter despite an overall lower revenue base sequentially speaking. Adjusted net result was at USD 136 million with an adjusted basic EPS of $0.52 or CHF 0.49. The fourth quarter group net results, as reported according to IFRS, which was positive at USD 193 million included, amongst others, the benefit of a onetime noncash gain related to our shareholding in LeddarTech as well as a onetime noncash gain related to the unwinding of the former OSRAM Continental joint venture.

Operational cash flow continued to be strong in the quarter at USD 206 million. Net debt stood at USD 2.06 billion, slightly lower when compared to prior quarter and translating into an overall solid leverage factor of 1.9x.

For the full year '21, group revenues were close to USD 5.8 billion, up 5.4% on a truly comparable basis; and up 44% nominally, in particular due to consolidation effects from the OSRAM acquisition. In that, semiconductor revenues were USD 3.8 billion and lamps & systems generated revenues of around USD 2 billion in 2021.

Adjusted EBIT in 2021 for the group was at 10% with the semiconductor segment delivering close to 14% of adjusted EBIT. Lamps & systems came in around 3% for the year. The ams-OSRAM Group adjusted net results for 2021 was USD 313 million on an adjusted basis. On a reported IFRS basis, the group's net result was slightly negative with USD 37 million in 2021, which is an improvement compared to prior year.

Adjusted earnings per share for the full year 2021 were $1.20 on a U.S. dollar basis and CHF 1.14, respectively. EPS based on IFRS were negative was $0.14 or minus CHF 0.13.

Let's have a closer look at the revenue distribution for the full year on Page 17. Regarding the segment contributions to the group, we remain stable, looking at the last quarters. For the full year 2021, 65% group revenues were in the semiconductor segment and 35% in lamps & systems.

If we take a look at the composition of revenues in terms of end markets for the full year 2021, automotive was 40% of the makeup, followed by industrial and medical at 33% and consumer at 27%. The shift in contribution when compared to 2020 relates, on the one hand, to the strong performance of our automotive business, which participated in the robust automotive demand situation through the year.

Our Industrial and medical business portfolio also benefited from a stronger demand pattern when compared to 2020. At the same time, our consumer business provided a lower contribution for the year in line with -- also in line with earlier communication regarding an expected lower market share in consumer. Our Q4 revenues showed broadly comparable contribution levels.

Turning to operating expenses now on Slide 19. We can see that our total OpEx run rate showed a stable development and averaging the last few quarters. Adjusted R&D spend in the last quarter of 2021 was USD 159 million. For the full year, we spent USD 660 million on R&D, translating into 11.4% of revenue, with the vast majority of such spend occurring in the semiconductor segment.

The overall targeted range for the group remains between 11% and 14%.

Adjusted SG&A expenses for the group in the fourth quarter were USD 184 million. For the

full year, adjusted SG&A as a percentage of revenue was 12.8%. Our targeted range for SG&A spend for the group remains to be between 7% to 9% over time. Please note that more than 50% of the absolute spend is incurred within the lamps & systems segment, in line with their commercial channel structure.

Turning to the net result and EPS now on Page 20 of the presentation. The adjusted net results for the ams-OSRAM Group in the fourth quarter was USD 136 million, including a net financing result of minus USD 56 million. Net result as reported was positive at USD 193 million, including M&A-related transformation share-based compensation costs as well as results from investments in associates and the sale of a business on the one hand.

Net result in the quarter also included onetime gains related to the unwinding of the OSRAM Continental JV as well as to the change in our shareholding in LeddarTech on the other hand. Adjusted basic earnings per share in the fourth quarter was $0.52 and CHF 0.49.

Looking at the semiconductor segment performance now. Revenues for the semiconductor segment were $905 million in the last quarter of the fiscal year 2021. Full year was at $3.8 billion, driven by the robust contribution of our automotive business following the overall market developments, a healthy rebound of the demand in industrial and end markets as well as a solid contribution of our consumer business.

Adjusted EBIT came in at 12.3% for the quarter. For the full year, the segment delivered operating profitability of close to 14%. In the course of the fourth quarter, we saw ongoing tightness in chip supply and imbalances in the end-to-end supply chain in automotive and partially also in other end markets and continuing positive demand trends in industrial markets, including robust horticulture LED components demand.

Looking at lamps & systems. Revenues there were USD 504 million in the fourth quarter, up sequentially. Quarter-over-quarter growth was driven by the seasonally strong traditional automotive aftermarket business as well as continuing good demand for industrial lighting products. This seasonality helped to more than offset the deconsolidation effects from the divestment of the building lighting systems related business and the unwinding of the former OSRAM Continental joint venture when comparing the revenues with the third quarter of 2021.

For the full year 2021, revenue was about USD 2 billion in this segment, reflecting our strong market position and underlying demand trends in the automotive industry combined with a robust demand situations in various industrial lighting end markets. Adjusted EBIT for the quarter was 4.5% and about 3% for the full year.

In the course of the fourth quarter, we saw the successful signing of the sale of Fluence, our business for horticulture lighting fixtures for USD 272 million. Closing of the transaction is expected within the first half of 2022. Other M&A processes are underway, including also the sale of the former OSRAM Continental joint business that came back to the group. Chip shortages and other supply chain constraints continue to be tight also for lighting applications.

Let me now complete the review picture of the company's financials with a look into the cash flow and the debt position of the ams-OSRAM Group on Pages 23 and 24, respectively, of the presentation. The group generated USD 206 million of operating cash flow in the last quarter of 2021. For the full year 2021, the group's operating cash flow continued to be very strong at USD 908 million or 16% of revenue.

2021 CapEx spend in the group was USD 355 million, translating into a spending level of approximately 6% of revenues. Overall spending increased as expected in the second half of 2021, making up for 60% of the overall spend in 2021. We expect this upward trend for CapEx spending to continue into 2022 with the overall ratio of spend versus revenue to be well above 2021. This reflects our plans to support future growth as well as technology innovations. It is in line with our comments during our Q3 '21 earnings regarding further investments into our manufacturing bases in Malaysia, as well as Austria.

Turning to Page 24 now. We successfully finalized our convertible buyback program at the end of December '21, resulting overall in the purchase of €77 million in nominal terms with a related cash outflow of €67.3 million at the same time. The group's cash and cash equivalents amounted to USD 1.53 billion at the end of the year. The group's net debt stood at USD 2.06 billion as per the end of 2021, lower when compared to the September quarter. Overall, this translated into a financial leverage of the group of approximately 1.9x ending 2021 on a solid footing.

With the rebalancing of our financing structure in 2021, particularly through the increase of our still undrawn revolving credit facility, in combination with the cancellation of the bridge facility, we exited the year with a well-balanced funding structure in place based on the mix of funding instruments and different maturities. Our shareholding in OSRAM, including the treasury shares remained at approximately 80.5% per year-end 2021. Further increases in the shareholding are currently not a priority.

Now turning to Page 25, the outlook. You find the overview that Alex already outlined, with expectations based on the currently prevailing exchange rates and the available information at this point in time. We expect group revenues in the range of €1.19 billion to €1.29 billion, or USD 1.365 billion to USD 1.465 billion for the first quarter using the currently prevailing euro-dollar exchange rate. This reflects a slight sequential increase at the midpoint of the guidance range. The adjusted EBIT margin, we expect to be between 8% and 11% for the first quarter of 2022 as well.

Finally, let me also point out that with entering the new year 2022, being the first aligned fiscal year for the entire group, we will focus on presenting the company's financial results solidly in euro, which is the functional currency of the group and better aligned with the updated business structure and composition of the company. Nevertheless, the outlook for the first quarter is still given in U.S. dollars as well next to the euro, to facilitate this change.

And with that, I would like to conclude my prepared remarks and open the floor for questions.

Question-and-Answer Session


[Operator Instructions] First question is from the line of Sébastien Sztabowicz from Kepler Cheuvreux.

Sébastien Sztabowicz

Could you please comment on your backlog for the coming quarters and help us quantify a little bit the missed sales opportunity that you have in the automotive business due to the supply constraint? And basically attached to that, what kind of visibility do you have on your business for the coming quarters, generally speaking? And more specifically, on your largest customer, do you have any visibility on the upcoming designs for the next device? Do you see any potential risk there?

Alex Everke

Yes. So let me maybe start with the questions on backlog and the visibility. So we started -- or ended the year with a solid backlog across the various end markets that we're in, particularly also certainly in automotive. We clearly still have a solid backlog. At the same time, obviously, we're still seeing supply shortages on the one hand in some of the markets that we operate in.

And on the other hand, we see also the indirect effect of imbalances in supply chains that do affect us indirectly in our ends.

So from that perspective, there's still going to be some uncertainty that we're looking into. But overall, if you look also into the guidance that we gave, let's say, for the first quarter of 2022, which we feel good about, we have, let's say, still a better understanding of what's moving right now. But for the full year, it's still a bit early to say. So overall, good backlog, but still some uncertainties and short-term volatility in the environment we're dealing with.

Ingo Bank

Yes, let me take -- Sébastien thanks for the question. The second part, as you know, we can't speak to dedicated -- about dedicated customers. But what I clearly can say in consumer space, we are engaging in very interesting projects based on our capabilities and technologies we have. So we are very positive in that and this is related to all customers. And it's clearly coming across that the broader portfolio in the optical space is clearly supporting a positive momentum.

And we mentioned that we see a timeline 12 to -- 12 months to 2 years inside for opportunities coming or projects coming up. So we are very positive on this. And it's very clear that our customer base is very excited about the portfolio we're having right now. So that's why we also mentioned that we see a good consumer business for ourselves also for this year.


Next question is from the line of Francois Bouvignies from UBS.

Francois Bouvignies

I have 2 quick questions. The first one is on your CapEx for this year and more broadly around the capacity. So when we're seeing a supply shortage, I was wondering how you think about the CapEx for this year? And how -- I mean how much capacity you expect to increase in 2022 versus '21? Would be very helpful to know, I mean, at least the range or something to help us around that because it seems to -- you invest a bit less than maybe some of your peers maybe in different products area.

And the second question is on the Fluence sale. Can you help us understand the impact on the revenue side? How much revenue should we expect to go away once it's closed in H1?

Alex Everke

Yes, sure. So let me start with CapEx. Yes, indeed, let's say, 2020 and 2021 CapEx levels are certainly subdued for a number of reasons, partially market-related, some other reasons as well. As I said, we increased our spending levels in the second half of '21 also to help remove bottlenecks here and there, given the strong and solid demand that we see. And as I said also, I expect that we -- so we closed the year with 6%, and I said that I would expect 2022 to be well above that.

As you know, we have always said that we would see the company spending on average, sort of 10% of CapEx across the cycle. So I can't tell you exactly where we are, where we will be this year, but it will certainly be elevated from a year ago. And it's also somewhat linked to the synergies that we expect from an operational perspective from our manufacturing footprint, and we will be talking more about that during the upcoming Capital Markets Day in early April. So we will probably be able to say a bit more about this topic when we meet in April.

Then on Fluence. So indeed, we have signed the contract. And we expect it to close in the course of the first 6 months. So therefore, I cannot tell you exactly how much revenue we will miss. But if you think about it this way -- if you take into account also the sale of the electronic [ballast] Business in North America in 2021 and the former industrial building systems related business as well and you take Fluence into account then on an annualized run rate basis, if you call it, the ex-digital businesses, we're looking right now at around an impact on an annual basis of around €300 million compared to a situation before the divestment process.

Again, that's annualized. That's -- obviously, it will not be the case given that Fluence will depart sometime in the first 6 months. But overall, DI so far a run rate annual base is around €300 million.


[Operator Instructions]

Didier Scemama

It's Didier from Bank of America. I just wanted to come back to one of the statements you made earlier and then a clarification. First, you mentioned that you've got good traction in Android devices. Do you see 2022 as a sort of a turning point for your consumer business driven by Android or is it too early to say?

And then second of all, you used were kind enough to give us the annualized impact from the disposal. I think at this stage, consensus is standing at around €5 billion or thereabouts of flat revenue for '22. Just maybe commenting around that. Do you feel that this is an appropriate number for this year or not?

Ingo Bank

Yes. Thanks for the question, Didier. Let me take the first question. So on the consumer part, for the Android, we see a growing business in the Android consumer business, as mentioned. And this is a very positive sign.

We also, across the board, see very positive development in the consumer part. Certainly, that will not completely cover the share loss as we indicated. But we see a growing business we have in the consumer parts and the [indiscernible] part certainly.

Alex Everke

Yes. Then maybe on the question regarding the full year and -- so as you know, we do not give full year guidance. So thank you for understanding the quantification I just gave on the divestments is related to an annualized run rate, which indicates to you that because we have still a couple of moving parts in the course of 2022, Fluence being one of them, but also there's a few other disposals that we are in the process of concluding at this point in time.

So in the first half of the year, so to say, that's going to make it a fluid picture for us from an absolute revenue perspective. So it's a bit early to tell how overall '22 will look like compared to '21, given all the moving parts that we see. I think it's good to see that the first quarter is a good quarter when you look at it. It's slightly sequentially up. So I think we have a good start into the new fiscal year.

Didier Scemama

Yes, absolutely. May I have a quick follow-up?

Alex Everke

Sure. You're still on the line.

Didier Scemama

Yes. No, I just wondered if you could help us because obviously the model is very, very hard to call for all of us on the buy side or on the sell side. If you could just give us a sense of what you think is the real -- the right assumption for incremental margins going forward given all the disposals and all the sort of moving parts in the perimeter that would be helpful so we can model gross margins correctly.

Alex Everke

Sure. I think what we said when we update on synergies in Q3, for instance, we said that we were on track and that they came from a number of areas, including also operations, procurement and also SG&A. And that we're still good on track to do so. We will tell a bit more about this also during the upcoming Capital Markets Day.

From a disposal perspective, you always have to factor in, a, first of all, we, let's say, concluded just 2 of the disposals also sort of later in the year of 2021. That's the first thing one has to take into consideration. Secondly, once you have concluded such a disposal, you still have most of the time, some corporate infrastructure costs that you need to address, sometimes also refer to as stranded costs and they typically take up to 12 months or so to move out of the P&L. So you have a bit of a, if you like, a shifting evolution of, let's say, a margin improvements because of the divestment itself, but at the same time, also still the work that needs to be done on getting some of the stranded cost out of the P&L. And therefore, I would say I would not expect a major impact in 2022, probably more in the next year from disposals.


Next question is from the line of Robert Sanders from Deutsche Bank.

Robert Sanders

I just wanted to just double-click a bit on the manufacturing footprint. It sounds like that is where you are targeting significant uplift in margin is because there's a lot of idle cost right now. So if you could just talk a little bit about what you expect in terms of the gross margin uplift once you've completed your manufacturing kind of optimization that would be great. I mean -- and are we right to assume that the biggest source of margin uplift in the model as we look forward? And I have a follow-up.

Alex Everke

Yes. Thank you for the question. So I think, first of all, I think it's important to note that if you look at our gross margin evolution throughout the year 2021. We talked about the market share loss in the first half of '21 and the possible impact on the manufacturing side. I think it's good to see that in the first quarter, our gross margin on an adjusted basis is actually a little bit higher than in the second quarter, which sort of speaks to the cost measures we were able to take and some other improvements we saw.

So we've done everything possible on the short term to sort of balance out some of what we indicated earlier regarding our consumer business. I think that's -- and we will continue, of course, to manage our operations for efficiency irrespective of investments. I think that's very important to understand as well.

And secondly, if you look at the footprint as such, we will talk more in depth more about this during the Capital Markets Day. As we said earlier, that's going to be an important topic that we want to give more clarity there because we are now in the process of having almost finalized our plans and scenarios and therefore, we're then in a position to say a bit more about it. And definitely, a gross margin improvement relative to where we are now is certainly an important factor indeed in the sort of midterm targets we set ourselves from a profitability perspective.

We've given earlier pointers as to what we expect on an SG&A and an R&D basis. You've seen that on the R&D side, we are already there, more or less, for the company. And on the SG&A, we still have quite some room to go. But there I'm very, very confident that we will get there. There's a lot of measures underway.

I mean, we should not forget that we're only 11 months in control here with OSRAM and there's quite a number of integration projects on the operational side, still ongoing. Systems and applications and other processes as you might imagine. And a big part of that will be finalized in the course of 2022 as well. So from that perspective, yes, indeed many different contributors and certainly, the gross margin is one important factor as well.

Robert Sanders

And just quickly on the display opportunity, it sounds like that's not going to be ready in the major customer until '23 or '24. So I was just wondering where are we in terms of that opportunity? And how much larger is it that opportunity today versus what is in existence today in a typical smartphone?

Alex Everke

When you talk about -- Alex here. When you talk about micro LED, this is, as we've mentioned multiple times before, an opportunity, we see that the market will develop -- it's a very large opportunity, but this is not within the next couple of years. It's a highly complex technology, not only for LED manufacturing but also in the transfer. We also mentioned that we see the first application in smaller displays like wearables. But we clearly see the markets go in that direction and we are working intensively on this technology and product development to be ready when the market requires it.

And we are very, very positive about these opportunities.


Next question is from the line of Jürgen Wagner from Stifel.

Jürgen Wagner

On LIDAR, how is your project with [indiscernible] doing? Last quarter, I think you mentioned delays and what sales level are you looking at currently?

And secondly, on 3D sensing, you talked about opportunities in consumer. How are you progressing with your industrial customers, for instance, robotics?

Alex Everke

Yes, Jürgen, thanks for the question. So LIDAR, I mentioned last quarter, we see a delay of approximately 2 years, which is market driven. And we clearly see that the automotive market is really very busy to manage the chip shortage. And I think the first priority currently really is to manufacture as many cars as possible and that means to be careful with additional content in semiconductor. But besides that, we're making even more progress in additional design wins with other customers.

So we see clearly the LIDAR market will come, but there is a, delay, and this is basically is a fact. But we see this very positively. And we also mentioned that we now have a more broader portfolio, not only VCSEL for the LIDAR, where we were talking from the ams stand-alone business. But also now with the edge-emitting laser, which opens up more opportunities in the next years to come.

On the 3D sensing, we are seeing good progress there in the industrial space. But obviously, it's a smaller business. It's a more fragmented market with small opportunities. But the engagement level with projects and customers is very positive. And we are seeing that more applications coming up like automatic door opening, where you recognized with your face and doors for offices or homes will be opened and other applications.

So we clearly see a good trend in the industrial market, but every project is a smaller scale than in the consumer market.

But in general, as a company, we see and we mentioned this today that the industrial market with all opportunities in total, is a significant growing market segment for us as a company. And we mentioned that we had a double-digit growth in the industrial market, which is quite impressive. And we're adding those portfolios like 3D and others in this portfolio or UV-C to accomplish a higher growth. So it's sum of multiple opportunities.

And that's the beauty of the breadth of portfolio now at ams-OSRAM that you have such a broader optical portfolio and then the sum of smaller projects add up to a nice growth vector for us as a company. And it's a very sticky business, a sustainable business, more predictable business, which is the other benefit we are seeing here.

Jürgen Wagner

Okay. And a follow-up on your manufacturing footprint. How was your utilization in Q4 across your front-end fabs?

Alex Everke

Well, in the front-end fabs, whether we talk about our LD manufacturing or CMOS manufacturing is quite high utilized. So we are utilizing the capacity there. And that's why we mentioned also last quarter that we are doing additional expansion on both sides, just to ensure that future demand will be manufacturable and that we are ready for additional demand from our customers. So that looks very promising.


Next question is from the line of Adithya Metuku from Crédit Suisse.

Adithya Metuku

Yes. Maybe first one, just when you guys look at your various end markets and the potential for high volume wins, I just wondered if you could give us some color on where do you see the biggest opportunities? What excites you the most from a revenue viewpoint?

And secondly, just a question for Ingo, on the tax rate. I noticed you had a positive effect in this quarter. Can you give any color on what happened there and what tax rate we should expect going forward?

Alex Everke

Yes, let me -- Adithya, thanks for the question. Let me start with your first question. I think, again, to repeat, it's very important to see the difference of ams standalone now the combined entity. ams standalone have been only a few growth drivers. Now it's a completely different picture.

In high volume or higher volume segments, we see obviously opportunities in the consumer business, and this is whether it's any kind of optical sensing from display management, 3D and proximity opportunities, certainly mid and long term, as we mentioned many times already, micro LED, which will be a very large opportunity for us as a company. We are looking at UV-C opportunity for nonchemical disinfection. We are looking at the pixelated lighting in the automotive industry, more midterm.

So you see we have a broad range of higher volume of market opportunities, which is very -- very positively. But on top of that, for the question before, if you look even in industrial space, each projects are not that high volume, but the sum of those can make a significant positive impact on the company related to revenue. And that's the beauty of the portfolio we're having right now. We're addressing higher volume markets like automotive in the consumer space, but we're also addressing markets where medical industrial project sales is -- the size is smaller, but the sum contribute significantly to the revenue over time and is therefore also more steady and more predictable and more sustainable. And horticulture is another one.

So there are many, many of those. Ingo, please.

Ingo Bank

Yes. No, sorry, I wanted to finish, of course. Yes, maybe then on the question on the tax rate. So compared to 2020, we did recognize a higher tax expense, driven by a slightly different income generation from a geographical or country perspective compared to prior years, also kind of reflecting, of course, our business development in 2021 compared to 2020. And we also had somewhat higher sort of nondeductible tax expenses for year.

The tax rate or tax quote is always a bit difficult to say because if you move close to an earnings before tax at around 0 or breakeven, that's always hard to fluctuate, and that's also why we fluctuated a little bit over the quarters. But for the year 2022, what I would say is that you should expect an absolute tax expense similar to what we had in the year 2021.

Adithya Metuku

Understood. And this is on a reported basis, I take it?

Ingo Bank

Yes, it is.


Next question is from the line of Sandeep Deshpande from JPMorgan.

Sandeep Deshpande

I have 2 quick questions, if I may. Can you, in any way, you lost some share at a consumer customer. Can you in any way quantify your growth in the consumer business or in the semiconductor business, excluding the loss? So in the sense that did you grow outside that loss as such really in 2021 in the overall semiconductor business? Then secondly, my question is, again, back to the SG&A.

I mean, when you look at your SG&A, I mean, 13% of sales at the moment, the guidance in the midterm is much lower as such really. What is it that is going to get it so significantly lower from the current levels? Is it the disposals? Or is it restructuring? What is going to get into those much lower levels.

Ingo Bank

Yes, let me take your first question. So for the consumer business, excluding the share loss, we saw actually last year 2021, a very positive momentum with the double-digit growth, which is based on the products we had design ins and the technology we have. So we gave multiple examples. So we are quite positive.

We also expect that we see a growing Android business in year 2022 and this year. And as we mentioned, we are working on large opportunities with larger customers for the next years to come as well. So actually, with excluding share loss, we are actually very positive with the growth in the consumer business we are predicting and with the fit of the portfolio and technology we're having for our customer base.

Alex Everke

Yes. And maybe on the SG&A. If you go back to what I said earlier, I think there's a few things important. One is that -- we should recognize already that today already more than 50% of the absolute SG&A spend is in lamps & systems. So that's not proportional to the revenue contribution of that segment, as you know.

So I think that's kind of an indication. Secondly, we should, again, not forget that we're only 11 months into the integration, and hence, we're working on a significant amount of projects around SG&A in the various work streams that we have to harmonize systems, processes and also applications. And before all of that is done, you, of course, need the resources to help you do so. So there's a timing aspect related to the integration as well.

And of course, we're driving also towards efficiency and benchmark levels in some of the functional areas of IT, finance, et cetera, and HR. And that will entail also some kind of restructuring indeed. So all of these are contributors to the target. I feel very confident around this 7% to 9%, and we will say a bit more during the Capital Markets Day, more specifically what these projects are so you can get a better sense why we're having that confidence that we will get there.

Sandeep Deshpande

Just a quick follow-up back again to Alex, your response on the earlier question. I mean, you talked about wins in the metaverse. I mean when do you expect those wins in the metaverse to start ramping up into your revenues? Just as you said, that Android and the other stuff is growing strongly. When do those start to -- metaverse design wins start to ramp up?

Alex Everke

We actually have already a small business in this area. But it's less depending on our design win activity, it's more depending on the growth of metaverse and therefore, the applications like AR/VR glasses. I think a realistic time frame to see significant ramps there is a matter of 18 months roughly to 24 months, that's what we expect. But the momentum and the amount of customers -- leading customers in this area is quite promising. So I think it's more dependent depending on the real growth of these markets and driving applications like those glasses, which determines the growth for us as a company.

But the broadness and the excitement level and the designing activities, engagement levels with multiple customers is very encouraging.


Next question is from the line of Andreas Müller from ZKB.

Andreas Müller

I've got a question on the inventory levels at your clients and also in the supply chain, how does it look like? And then an additional question on the seasonality throughout the year. Q1, it seems it's clearly better than the previous year. Would you say Q1 seasonality is sort of a new normal? And then my last question on pricing power, likely you had some, at least in some products in Q4.

Do you see that that's going to be stable is pricing power also going forward?

Ingo Bank

Okay. Let me take a look at the questions you have. Inventory. Yes, so we see that the inventory levels started to sort of refill during the course of 2021. And then they are now what we think are in a healthy normalized level also what we've seen historically, at least in the part of the supply chain that we operate.

And, of course, you have in some areas still little availability of certain incoming components there. Inventory levels are extremely short dated and therefore, that we are still also struggling with that. But that's more on the -- on our buying side, so to say, what we see towards the customers, et cetera, we see kind of normalized inventory levels at this point.

We ourselves have taken the precautionary measure to increase inventory in the last quarter because of that supply shortage that I just mentioned, but also as a precautionary measure because of certain geographies, countries might enter into a lockdown, particularly in Asia Pacific. That risk is still there -- here and there. So we wanted to make sure that we still have availability to supply. Therefore, we increased our inventory levels a little bit consciously in the fourth quarter. So -- but of course, also when we look into 2022 and you've seen our outlook for Q1, we had to rebuild a little bit to be able to serve that inventory, that revenue level.

In terms of seasonality, I would say that the normal seasonality that some of the markets we operate in will also be there in the future. So automotive has its normal seasonality and consumer will continue to have its normal seasonality. So I think what you see now more with our numbers is a good mix of different revenue basis. As we said before, that was part also of what the acquisition would do for us that we have a bit more better mix in that whole end market exposure. That's also helping us to be less sort of exposed to strong seasonality factors.

But there will be some seasonality for us also going forward? And maybe, Alex, to conclude on the pricing, a few words, maybe.

Alex Everke

Yes. So on the pricing, so basically, pricing power, as you described it, is actually twofold. One is that we have very differentiated technology and good technology, which helps us in the pricing power, we utilize also in the year 2021. And second is the overall market situation as we're all aware that wafer prices, raw material prices are moving up, that's a driver for cost increases, and that's what's obviously also utilized for the pricing negotiations. I can clearly say that we did good progress in the year 2021, and we will continue 2022.

At the same time, we own large contracts and agreements, but we see clearly opportunities and also with an understanding from the customer base that prices has to increase to a reasonable level. That's very clear.

Moritz Gmeiner

Ladies and gentlemen, thank you very much for your questions. This concludes our question-and-answer session for this morning. We enjoyed having you on the call, and we look forward to discussing our next results with you again. Thank you very much, and have a good day.

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