ams OSRAM AG

SIX:AMS

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the conference call on the first quarter 2022 results. [Operator Instructions] I would now like to turn the conference over to Alexander Everke, CEO; Mr. Ingo Bank, CFO; and Mr. Moritz Gmeiner, Head of Investor Relations. Please go ahead, gentlemen.

[Moritz Gmeiner, executive]

Good morning to everyone, who is joining us this morning -- for this morning's call. This is Moritz Gmeiner. I am very happy to welcome you to learn about the results of the first quarter. With me are Alex Everke and -- our CEO; and Ingo Bank, our CFO. And as usual, Alex will give you an overview of the developments of our business, while Ingo who will lead you through the details of our financials.

And with this, I would like to hand over to Alex. Please.

[Alexander Everke, executive]

Thank you, Moritz. Good morning ladies and gentlemen. I'm very happy to welcome you to our first quarter 2022 conference call this morning. In this webcast, I will comment on our business before handing over to Ingo for details on our financials.

Starting off with the key results, our first quarter revenues were solid at EUR 1.25 billion and the adjusted EBIT margin for the first quarter was 10.1%, above the midpoint of our guidance range.

To update you on our portfolio realignment and integration, I'm glad to reiterate comments from the recent Capital Market Day that would remain fully on track with our programs for integration and synergy creation. I'm pleased to see the positive momentum these programs are creating for our business, and Ingo will have a few comments on our progress on the synergy side.

Importantly, we continue to move ahead at a strong pace in realigning our business portfolio. In the first quarter, we already announced the disposal of the automotive lighting systems business, AMLS, to French automotive supplier Plastic Omnium for purchase price of EUR 65 million. The AMLS business had only been established in the fourth quarter as a consequence of dissolving the OSRAM Continental joint venture. So this announcement demonstrates our fast implementation of plans disposals.

And we have just announced the successful closing of the disposal of Fluence, the horticulture lighting systems business to Signify, which will remain an important customer for our horticulture lighting LED products. We are now focused on implementing the remaining portfolio realignments and disposals as communicated.

Let's now take a look at the development of our business. I'm pleased to report a very solid performance of our business in the first quarter, despite a demanding environment characterized by constraints, supply chains and end-market volatility. In light of this situation, our business demonstrated a robust operational performance in the quarter.

Let me emphasize that I'm sure this is very much what you are hearing from our semiconductor peers that the developments in our markets and in our industry are defined by tight chip supply and ongoing imbalances in supply chains. This is not restricted to the automotive market, and we do not expect these imbalances to be resolved quickly. If anything, we see that recent additional volatility in markets like consumer and macroeconomic uncertainties regarding the world economy and Ukraine will add to this demanding environments going forward.

Moving to our business segments. Our semiconductors segment again provided a majority of our revenues at 63% of total. The segment's automotive business recorded a very positive performance in the quarter. We were able to manage through ongoing supply chain imbalances and lower OEM production volumes in the automotive market worldwide.

Our automotive supply chain showed good resilience and we could ensure high shipments levels to our global customer base from available backlog. We generally benefit from our focus on higher tier vehicles and they are more attractive applications as important OEMs continue to concentrate the manufacturing efforts on these segments.

The semiconductors segment's consumer business showed a robust performance in the first quarter, which was fully in line with expectations. We were able to achieve this result in light of a more demanding environment in the consumer market compared to last year. As the first quarter was characterized by sequentially lower global smartphone shipments and emerging volatility in demand on top of typical seasonal effects.

Our consumer business continues to be driven by optical solutions for display management and multiple sensing applications, including 3D and world-facing camera enhancements such as 1D dToF or automatic white balance. I'm happy to confirm that we are strongly engaged with all our top relationships in consumer for both operating systems. These engagements relate to a wide range of development and design in projects at various stages for different applications and devices. This traction contributes to our layered consumer pipeline supporting the mid-term financial targets we have presented at our recent Capital Markets Day.

When I look at the present on the other hand, we are shipping a variety of optical consumer solutions to a strong group of OEMs and this continues to include front-facing 3D sensing components and display management products for non-Android platforms.

The semiconductors segment, industrial and medical business also performed well in the first quarter. This performance continued to reflect our diversified range of lighting and sensing applications in attractive industrial and medical markets. We saw overall good demand in industrial markets for established and emerging LED lighting, augmented by contributions from industrial and medical imaging.

The lamps and systems, or L&S segment, provided the remaining 37% of our revenues and recorded overall positive results for the quarter. The L&S automotive business, including legacy traditional lighting drove this development, which reflected seasonal effects and good overall demand in line with expectations. The non-automotive areas of L&S offered further attractive contributions from diversified industrial building related and medical applications.

At our recent Capital Market Day, we presented our clear strategy for growth through optical innovations. Laying out a strong model for mid and long-term profitability growth -- profitable growth, we confirmed our revenue growth trajectory alongside a clear path for significant margin expansions with defined mid-term financial targets. We expect to deliver this model for a range of attractive growth vectors and differentiated applications across end markets.

Our R&D investments and product developments are focus on these growth vectors, which include consumer and automotive light sensing, 3D for world-facing camera applications, AR/VR applications, display management, horticulture and UV-C LED solutions, advanced automotive LED front lighting, and LED technology for micro-LED displays. To move forward on these opportunities, we will drive the expansion of our technology platform and the focus investments into industry-leading 8-inch LED manufacturing at our existing Malaysia location.

Let me now come to the outlook for our business and guidance for the second quarter. The market environment in the automotive industry remains demanding as supply chain situations continue to be constrained and create ongoing volatility. This will continue to impact production volumes across regions. In addition, we are currently experiencing a volatile development of demand in the consumer market together with decreased year-on-year contribution in line with previous comments.

Our outlook also reflects the consolidation effects from disposals when compared to the previous year. Here the closing of the disposal of the horticulture lighting systems business, Fluence, creates a revenue deconsolidation effect for the second quarter, which reduced the second quarter revenues by approximately EUR 30 million on a comparable portfolio basis. Despite this backdrop and based on current information in exchange rates, we expect a solid second quarter with group revenues of EUR 1.15 billion to EUR 1.25 billion. On a comparable portfolio basis, this means second quarter revenues of EUR 1.18 billion to EUR 1.28 billion almost unchanged at the midpoint sequentially.

When looking at this guidance, we expect our semiconductors business to be practically flat between the first and second quarter with the difference being driven by lamps and systems. We see our business continuing to show a good operating performance and expect an adjusted operating EBIT margin of 8% to 11% based on currently available information and exchange rates.

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

[Ingo Bank, executive]

Thank you, Alex, and the very good morning to all of you. Before I start going through the key financials, a few things 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 and associates and sale of the business.

Starting with 2022, we have now standardized the presentation of functional costs throughout the AMS OSRAM Group as part of the integration. To ensure proper comparability, we have adjusted the consolidated income statement for 2021 accordingly. You will find a reconciliation in the financial information on Q1 2022 that we have published today alongside the overall reconciliation to the IFRS basis of presentation. It is available on our IR website.

As indicated in our Q4 '21 earnings release, starting with the first quarter of 2022, we will focus on presenting the company's financial results solidly in euro being the functional currency of the group and better aligned with the updated business structure and composition of the group.

Now, let me take a closer look at some of the key financial metrics for the first quarter of 2022. I'm on Page 18 of the presentation. As pointed out by Alex, with revenue of EUR 1.25 billion and an adjusted EBITDA of 10.1%, we came in above the midpoint guided for in both metrics. Adjusted gross margin was 33% in the quarter, in line with expectations.

Adjusted net income was at EUR 102 million, net income as reported was EUR 15 million. Operational cash flow continued to be strong in the quarter with EUR 147 million or approximately 12% of revenue and net debt was at EUR 1.85 billion, only slightly higher than -- in the previous quarter. In the quarter, overall leverage stood at around 2x as per the 31st of March, 2022.

Moving to revenues on Slide 19. Revenues for Q1 '22 were 1.4% higher sequentially despite an ongoing rather demanding market environment. When comparing to the same quarter in 2021, on a comparable portfolio basis, that means adjusting for portfolio changes, revenue were higher. It was around 1.9%, supported by a robust automotive as well as industry and medical business development. We see this also reflected in the revenue distribution on Page 20, where we have a well distributed revenue mix with automotive at 42% of revenues in the quarter, industry and medical at 35%, and consumer at 23%. Our semiconductors segment contributed 63% of the revenue generated in the quarter, lamps and systems, 37%.

Looking at the group profitability on Page 21. We can see a stable gross profit and gross margin development moving from Q4 '21 into the first quarter of 2022. Overall, gross margin was at 33.1%. Adjusted EBIT for the quarter came in at 10.1, and an improvement in absolute euro terms on a sequential basis by around 7% to EUR 126 million. Compared to the same quarter in 2021, adjusted EBIT was 1 percentage point lower.

On the one hand, our gross margin in Q1 2022 was lower year-over-year resulting from a less favorable mix. At the same time, however, we were able to reduce our OpEx spending level when compared to the same period a year ago. We can also see this positive development on Page 22. SG&A expense reduced to 11% on revenues also reflecting progress with the realization of our synergy and savings plans. R&D spending was in line with previous quarters at around 12% mark.

Moving to synergies on Page 23. Here you see what we also presented during our Capital Markets Day recently. As per the end of first quarter '22, the synergy and savings run rate increased to EUR 200 million gross when compared to the baseline of 2019 and as well on track with our plans. As we outlined during the CMD, key contributors thus far have been cost reductions and overhead functions, a streamlining of our go-to-market approach as well as mar-com spending accompanied by a good contribution of procurement synergies, just to name a few key areas.

Key focus areas in 2022 for our synergy and saving spending are the consolidation of ERP and IT application areas, a simplification of our legal entity set up and the consolidation of office spaces, also to name just a few examples.

Turning now to our adjusted net result and EPS on Page 24. The adjusted net results for the group in the first quarter '22 was EUR 102 million similar to the prior quarter and improved compared to the same quarter in 2021. Reported net result was EUR 16 million in the quarter, including a fair value adjustment of minus EUR 25 million. In the net assets held for sale related to the sale, we announced during the quarter or for the AMS, Automotive Lighting Systems, business, which had been established after the dissolution of the former OSRAM Continental joint venture. Adjusted basic earnings per share in Q1 '22 were CHF0.4 respectively EUR0.39 for the quarter.

Let's now move into the segment results, starting with the semiconductors business of the group on Page 25. Revenues for the semiconductors segment were stable quarter-to-quarter at EUR 789 million, delivering a healthy 13% of adjusted EBIT, improving by 1 percentage point when compared to Q4 '21.

Compared to the same quarter a year ago revenue declined by approximately 5%, largely due to the lifecycle effect of the market share loss in our consumer business as we communicated in 2021. As a result of the lower revenue and higher R&D investments, adjusted EBIT for Semiconductors was lower with 4 percentage points compared to Q1 2021.

During the quarter, we saw a robust performance across our automotive product areas as well as the solid performance in our industrial business. Our consumer business had a good contribution in the quarter were in line with expectations. The supply chain environment continues to be challenging, further exacerbated by the war in the Ukraine as well as the COVID-related lockdowns in parts of China.

Now moving into the lamps and systems segment for Q1, I'm on Page 26 now of the presentation. Revenues for lamps and systems were EUR 457 million, up 4% sequentially, driven by solid traditional automotive demand, in line with typical seasonality, particularly in the aftermarket, as well as good demand in the industrial businesses of L&S. The business was able to fully offset the portfolio related divestment impact in its revenue line of about EUR 59 million when comparing to the same quarter in 2021, driven by both the automotive and industrial businesses within the L&S segment.

Adjusted EBIT for the quarter improved to EUR 27 million, representing an adjusted EBIT margin of 6%, up 5 percentage points compared to the same quarter in 2021. In the quarter, we saw the successful signing of the sale of the mentioned AMLS business to Plastic Omnium for EUR 65 million. Ongoing supply chain challenges further impacted by the war in the Ukraine and COVID-related lockdowns in China.

Moving now to our cash flow and debt position for the group, on Pages 27 and 28, the group's operating cash flow was solid in the first quarter of 2022 at EUR 147 million, translating an approximately 12% of revenues. CapEx levels for the first 3 months were at EUR 113 million or 9% of revenues for the group. This was up sequentially and in line with our expectations and the plans we've laid out at the Capital Markets Day. Free cash flow in the quarter was positive with EUR 34 million.

Moving to Page 28 now. The group's cash and cash equivalents stood at EUR 1.2 billion at the end of Q1 2022. In the quarter, we reduced our gross debt further as we retired EUR 60 million of a bilateral bank loan. Net debt was at EUR 1.8 billion in line with our plans. Overall, this translated into a solid financial leverage of the group of approximately 2x at the end of Q1 2022.

Moving now to the outlook for the second quarter of 2022 on Page 29. Alex already gave you the headlines of our Q2 '22 guidance with group revenues of between EUR 1.15 billion and EUR 1.25 billion and an adjusted EBIT margin expectation of 8% to 11%. Let me now add a bit more color to it, particularly from the perspective how we see the business moving from the first into the second quarter.

First important aspect is that we need to account for the fact that as of yesterday, we have deconsolidated Fluence given the successful closing of the sale. This takes approximately EUR 30 million out of the revenue of the second quarter 2022 that otherwise would have been part of the group's revenue guidance. So on a comparable portfolio basis, our revenue guidance for Q2 2022 would have been EUR 1.18 billion to EUR 1.28 billion instead.

Secondly, underlying our Q2 guidance is our expectation that our semiconductors business revenue will be a notch better than Q1 2022. For lamps and systems at the same time, one should expect the typical seasonal effects of a softer second quarter. In addition, we also expect some downside impact in the lower double-digit euro million range. This relates on the one hand to the Ukraine war as we've discontinued our business activities in Russia and Belarus for the time being. In addition, we also expect some supply chain headwinds from the COVID related lockdowns in China related to one of our lamps and systems manufacturing sites.

So if we add back the portfolio change related to the Fluence closing of approximately EUR 30 million and the combined impact of the Ukraine war and the zero COVID policy in China, our midpoint guidance for Q2 2022 will about equal our actual revenue for Q1 2022. In other words, a stable quarter-to-quarter development or without a disposal of Fluence, the midpoint guidance -- point of our guidance for Q2 2022 would be just around EUR 10 million shy of our Q1 '22 actual revenue levels.

And finally for reference purposes when comparing to the second quarter of 2021, the portfolio effect on the top line amounts to approximately EUR 80 million. This means that this amount of revenue was in our prior year Q2 financials, but no longer in our expected Q2 '22 financials given the deconsolidation that was effective during the course of 2021.

And with that, I would like to thank you for your attention and go back to the operator opening the floor for questions.

[Operator]

[Operator Instructions] The first question is from the line of Janardan Menon from Jefferies.

[Janardan Menon, analyst]

I just want to go a little bit deeper into your margin trends. So your margin overall is not showing much improvement quarter-on-quarter both Q4 to Q1 and Q1 to Q2. And I'm just wondering you have exited from the AMLS business, which I sort of regarded as being a loss making business and therefore should have a positive effect on your margin trajectory. So can you just tell us what the moving parts like you did for the revenue side, what the moving parts are? Can you just give us a little bit of guidance on what the moving parts on your margin as you're moving from -- as you move from Q4 to Q1 and Q1 to Q2?

And also you've given quite a wide range for your margin for Q2. If you are at the high end of your revenue guidance that does -- would that imply that you could be at 11% margin in Q2? Or are there other factors, which are affecting that range that you've given that? And I've got a quick follow-up as well.

[Ingo Bank, executive]

Yes. Thank you for your questions. So on the margin trends, just to avoid any misunderstanding so, yes, we sold, we signed a sales agreement for AMLS, but AMLS is still in our numbers because the closing of the transaction hasn't yet taken place. So therefore, like Fluence was also still in our Q1 numbers is because we just signed was -- we closed the business yesterday. AMLS is still there, and we also expect it to still be there in Q2 because we expect the closing of AMLS more into in the third quarter of this year, which is typical for all kinds of approvals and disentanglement activities that you need to take in order to then also facilitate the closing itself. So from that perspective, it would be inadequate to assume that there is already a benefit.

The second comment maybe in general on divestments, which I also highlighted last year in the call and also during the CMD is that we would expect still some stranded costs of some of these business because you typically have an infrastructure that is based on the business you have and then foreign exits, you are still here and there, you have some remnant costs as to the infrastructure you had in place largely fixed cost and it takes some time to move these out of the P&L. So that's therefore it sort of should show an improvement over time, but not in immediate impact after you have sold the business.

Second -- third thing I would like to point out is that compared to a year ago our SG&A expenses were more than 1 point better overall, which shows that we are working on synergies and savings and are showing results in the financial, so it's clearly visible year-over-year in our financials. And if you look at also the improvement, particularly in lamps and systems in the quarter compared to Q4 and Q1 last year, I think you can clearly see that some of the things we're doing there, including divestments and other things we've done there, cost savings et cetera are showing fruits. So it's not that you don't see that overall I believe.

Then on the Q2 guidance, I think you've seen us giving guidance in the same range for now quite a while 8% to 11%. You also have seen us where we then eventually came in from that perspective and it is certainly true that sort of, if you give a range on the revenue then typically somewhat the range you give on your EBIT margin guidance is also somewhat related given the fact that you do have, of course, scale effects depending a little bit on how our revenue goes. So, also there we have not changed the approach that we've chosen now for quite a while.

[Janardan Menon, analyst]

Understood. And just a quick follow-up, you've previously commented about some loss of revenue this year on the consumer side. Is the quantum that we are looking at this year roughly in the region of about EUR200 million? Or has -- is that understanding not valid anymore at this point in time?

[Ingo Bank, executive]

I think we have said in the past that you would see the normal lifecycle effect that you would expect of a program or a number of programs. So I don't think we have particularly said what the number would be. What you're saying is about is not wrong, let me put this way.

[Operator]

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

[Didier Scemama, analyst]

I just wanted to discuss a little bit the segmental trends, if you could maybe give us a sense of the direction of gross margins or underlying gross margins at least in Q1 and Q2 for semis versus the automotive lighting business. I'm just trying to compare the direction of gross margins that you've shown versus your peers. And it feels like you don't see the same mix or at least pricing benefits of some of your peers just wanted to double check that. And also if you could quantify the impact of FX in your guidance on top line and also on OpEx or gross margin or at least the EBIT margin, let's say that would be helpful.

[Ingo Bank, executive]

Yes. So let's start with the environment. So clearly, as we all know working in an environment that clearly has started to display inflation also already beginning -- end of last year in the fourth quarter, we've done quite some work on translating that into also somewhat different pricing with the customers where there is possible where contractually that was doable and I think we've been so far quite successful.

So my current expectation is that for the year that there will be some headwind, but not in a material way. So I think teams have done quite a good job. Of course you also see that because of the war and the lockdown policies that you have some pressure on your logistic and other expenses because you need to reroute certain shipments. It needs to take different routings and that sort of thing so we're also trying to see how to compensate that with customers. But clearly it's an environment that clearly shows inflation and we're doing a lot of work. And teams are doing excellent work also on the cost side to try and compensate for that. So far we -- I think, we've been quite successful in compensating that to the largest extent.

I think if you look into the quarterly margin developments also in the gross margin as you all know and that's not -- you know that it's not different from prior years we have now with the second quarter, the normal seasonality in the consumer and the automotive businesses that you are in as you have every year. And we will move through that like we also did in prior years and, of course, that also have sort of the normal expectation you should have what that means in the P&L.

And then the third element is certainly the work we're doing again on savings and synergies. And there, as I said, we did a good job and our SG&A expenses were more than 1 point -- percentage point lower this quarter in Q1 than they were in Q2 -- Q1 last year. And also as we reiterated during the Capital Markets Day, I do expect that we have ongoing progression also from an expense perspective, SG&A that is particularly for the rest of the year as we are moving through the programs. And particularly, towards the second half, I would expect some impact -- positive impact here as well. So I think those are the key things on the margin.

On the foreign exchange, we do have some benefits of a stronger dollar. It's -- around 60% of revenues are still driven by in the dollar-by-dollar denominated environment and we also have some benefit on the profit side. However, that is to a larger extent also offset because we do have a rolling -- a policy of rolling forwards hedging, where you basically do that in order to do better plan -- to be able to better plan the business and it's a kind of a rolling forward type of program that we have for a bigger part of the business part of another small part of what should be benefit is then obviously then compensated by hedging and the other way around, of course. So, yes, there was some benefit in the quarter, but it was also offset by some of the hedging that we're doing.

[Didier Scemama, analyst]

Okay. So if I understand correctly what you're saying is that the net impact of repricing versus rising input cost is still a small negative, let's say, is that correct? And is that -- is that valid for semis and automotive or is there -- automotive system or is there difference between the 2 things?

[Ingo Bank, executive]

No, I think there will be a general remark for the group.

[Operator]

The next question is from the line of Jurgen Wagner from Stifel.

[Jürgen Wagner, analyst]

A question on your technology roadmap. How are you progressing with your micro-LED technology testing so to say? And when do you see first design wins? And on OSRAM minorities, how much have you acquired recently? And what are your plans going forward?

[Alexander Everke, executive]

Yes. Thanks for the question, Jurgen. Let me take the first part. So on the technology roadmap related to micro-LED, I think we gave quite some information during the last Capital Market Day, but we are progressing -- executing according to plan. We are very satisfied with our R&D teams to move forward.

As you know we invested into a pilot line and now expanding capacity. It's a significant investment of pilot line, which shows very, very good results to industrialize the technology. So we are really on the right track to industrialize the micro-LED technology for wheel applications. We also mentioned that we are investing into the first 8-inch LED manufacturing site in Malaysia, which is a very strong competitive advantage because of cost and functionality and performance for micro-LEDs.

And then thirdly, I clearly can say that the customer engagement related to this technology is very, very strong and we are very satisfied with the progress and that's also one of the reasons obviously for this investment in this technology. And on the mid to long-term, we are strongly believing as we mentioned multiple times that this is the future technology for displays with the advantage from AMLS awesome to integrate any kind of light sensing functionality within the display, so we are very excited about this moving forward.

[Ingo Bank, executive]

Yes. And then maybe your question on the minority situation, let me maybe reiterate what we said during the Capital Markets Day. So acquiring more shares of OSRAM is not a priority for us right now from a capital allocation perspective. We do own around 80.5% at this moment in time. We occasionally get very, very small amounts of shares back under the existing DPLTA agreement, but these are really too immaterial to even mention on this call. And as I said, this is not a priority right now for us.

[Jürgen Wagner, analyst]

Okay. Maybe a third question. You talked about as a consumer business, how do you see the second half momentum for you?

[Alexander Everke, executive]

Yes. So on the consumer part, usually the second half is stronger than the first half. We see a more challenged situation in the Android camp, which is certainly driven coming from China and Ukraine. I think this impacts all the industry will see and has seen already, but on the way forward, design and activities were very positive moving forward.

[Operator]

The next question is from the line of Sebastien Sztabowicz from Kepler Cheuvreux.

[Sébastien Sztabowicz, analyst]

Just to come back on the previous question on micro-LED. Have you received any kind of initial commitment from any of your customers regarding micro-LED at this stage? And also could you help us understand the level of fab loading in your LED front-end fabs in Kulim and Regensburg today.

[Alexander Everke, executive]

Let me start with the first question then maybe you could repeat the second. We didn't get. So on the micro-LED design win activities, I can clearly say that we are seeing a very positive trend in this remark that there is a clear alignment with the customer base and the investment related to development and manufacturing, which gives us a very positive and strong confidence in making this happen. But obviously, it's difficult at that point of time to give details on this activity.

And the second question, could you repeat your second question please?

[Sébastien Sztabowicz, analyst]

It was on -- it was on the fab loading on your LED front-end fabs today in both Kulim and Regensburg, where are you in terms of fab loading right now?

[Alexander Everke, executive]

Yes. So on fab loading in general on Regensburg is very well utilized, also Kulim is increasing and that's the reason why we are expanding our capacity. So basically the timing is the moment the additional capacity we have currently installing in Malaysia. When this capacity is able to ramp up, we clearly see that the existing capacity in Kulim will be loaded. So it's a very good timing. So this is a matter of couple of years, but this is the timing of to fully utilize Kulim factory of today will then phase over into the additional capacities we are building up. And just to complete the statement, the additional capacity will be -- will have the capability an 8-inch for micro-LED, as well as other differentiated LED technology.

[Sébastien Sztabowicz, analyst]

Okay. And as a follow-up, on the OpEx side, how should we model the OpEx moving into Q2, taking into account the disposals ongoing at Fluence and also the synergy?

[Ingo Bank, executive]

Yes. Look, I mean we don't give particular guidance on line items, but, as I said, let's -- first of all again compared to a year ago, we made good progress. I also said that we have a number of programs running that I expect to complete more towards the second half of the year. And I think that should give you a sense as to what to expect in Q2 probably.

[Operator]

Next question is from the line of Sandeep Deshpande from J.P. Morgan.

[Sandeep Deshpande, analyst]

2 questions if I may actually going back to one of the earlier questions. I'm trying to understand in terms of the synergies. I mean, if you see Slide 23 of your presentation, you can see that incrementally from September '21 to March '22, you have implemented another EUR 70 million of synergies. My question is why are we not seeing that either in the reported numbers or in the guidance? And then the second question is in terms of the deals -- in terms of the deals that need to be completed to complete your ongoing program. I mean are there multiple deals yet to be done in terms of disposals? Or are there only 1 or 2 here?

[Ingo Bank, executive]

Yes. So maybe on the -- starting with the synergies, look, I mean we have -- I think it's 2 important things to remember. First of all, this is a run rates, which means that it's an annualized number that doesn't mean that all of that is yet reflected in the P&L. That's different -- the P&L view is a bit different than that, but that's been the way we've been reporting this for quite a while.

Secondly, it's a gross number. So against that you need to see expenses and investments that we're doing. And if you look at for instance in R&D, for instance, we are consistently investing. I also said in my prepared remarks that we had a higher spend in R&D in our semiconductors investment, sorry, segment than a year ago. So we're also reinvesting part of it. So it's not -- you cannot just take it and add it to the numbers. Therefore, it was important for us to make sure that we understand that these are gross numbers.

On the divestments, which I think we said clearly on the -- at the Capital Markets Day what these are, we just closed Fluence yesterday. We announced AMLS that we expect to close probably in Q3 of this year. We have the electronic ballast business for Europe and Asia. That is currently being negotiated, and we also are still in the process of selling the entertainment fixtures business Claypaky, which we also announced during the Capital Markets Day. We do we expect to close these transactions also in the course of this year, so that means that we basically start operating the business with fully reset portfolio, starting with the year 2023 and that plan is still on track.

[Sandeep Deshpande, analyst]

Maybe going back to one of those earlier questions, so will we see an improvement in the margin in the second half, because I mean since the 2 companies have been merged, you've been reporting EBIT margin -- adjusted EBIT margin of 8% to 11%, and it hasn't broken out of that range. I mean, at what stage, I mean is it the OpEx -- is it the SG&A costs or the disposals are going to cause this margin to break out of this range which has been since the merged companies merged?

[Ingo Bank, executive]

Yes. Look, I think also if you look back at what we presented during the Capital Markets Day in one of the slides, we clearly indicated also the timing of the synergies that should feed also into the margin development. And particularly on the cost of goods sold synergies and those SG&A synergies, you said that you would see it in 2022, 2023. I just pointed out to the improvement in SG&A compared to year ago. So I would expect also that this is an improvement we still see throughout this fiscal year.

We've done a lot on the cost of goods sold already. We pointed to a number of other synergies around the footprint, the asset utilization as well starting a bit later. So from that perspective, you should expect certainly on the SG&A side we see -- we continue to see the improved picture from that perspective. So -- and then we also point out when the acquisition was -- the intention was announced in 2019 that was all pre-COVID and pre-war. And I think that's important not to forget when we make these comparisons as well.

[Operator]

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

[Robert Sanders, analyst]

My first question is just around the old AMS, so pre-OSRAM. I was just wondering if you could discuss efforts to restructure both R&D and manufacturing there, for example, closing Woodlands, you've talked about that transferring VCSEL and filter to Europe. I just, if there's any timing on that? And I have a follow-up.

[Ingo Bank, executive]

Well, if you look at what we presented during the Capital Markets Day, we said that we would expect these moves to happen in 2022 and '23, which is still the plan. So we will start some of these moves this year, we will continue to do some of these moves into next year because you also need to work with your customers, particularly beyond some of these moves when you change manufacturing locations and also sometimes with suppliers, but that's again what we said in earlier this -- in April, that -- again that is in 2022, 2023. So the impact in the numbers from in terms of savings will not be visible this year, but starting in 2024, which is also again what we said during the Capital Markets Day.

[Alexander Everke, executive]

Yes. Alex here, maybe let me add that on top what Ingo has mentioned to you that with all the activities we announced and which are in progress, I can tell you that the R&D investments we have from the old AMS is exactly aligned with projects we are seeing and developing currently on the one hand. And on the second hand, the industrial footprint related to the old AMS business is aligned with the growth vectors we have indicated in the CMD. So on the industrial side, on the R&D side, the investments we have today are aligned with the future business we are working on and produce them in the years to come.

[Robert Sanders, analyst]

Got it. And just as a follow-up on micro-LED, I see your annual report talks about being in a strong position to become the number one player. Can you talk a bit about your role in the supply chain? It sounds like you're going to avoid getting involved in the kind of pick and place packaging side to complete -- to make a complete display. So does that mean the business will be kind of direct OEM, and the OEM will handle the pick and place and does that mean that you can supply you know several OEMs with your LED wafers or package LEDs.

[Alexander Everke, executive]

Yes, Robert. That's correct. So our focus was on the micro-LED manufacturing to pick and place and the manufacturing afterwards is not the focus we are looking at. This is done by the supply chain either OEM or partners and it depends on the application and customer, obviously, but our focus is on the pure LED manufacturing and sell of those in development and that also gives us the opportunity to deliver multiple application and therefore customers moving forward.

[Operator]

The next question is from the line of Adithya Metuku from Credit Suisse.

[Adithya Metuku, analyst]

Maybe 2 questions from me. Just firstly on the L&S business. I just wondered if you could contrast the pricing trends you're seeing in that business to the pricing trends you're seeing in the semiconductors business? Are they higher, similar, lower? And just a clarification for Ingo, the tax line had a positive impact in the quarter. I just wondered how should we think about this going forward through the year and beyond.

[Ingo Bank, executive]

Yes. So on lamps and systems, the trend you see there on, let's say inflation pricing is actually very similar also in semiconductors because there are multiple different supply chains affected by what's going on both the war as well as now also the zero COVID policy in China here and there, so also across different industries that we operate in also the industrial seeing this, not just in automotive or let's say consumer.

So I would not necessarily see that there is a big difference we also see, as I said, the impact on logistics is a general impact, obviously. And it doesn't really distinguish between whether it's a semiconductor product or industrial product that you are transporting. So I wouldn't necessarily see this as a fundamentally different trend that we see in the 2 segments.

The tax line, yes, that's a technicality, what happened in the first quarter because of the AMLS disposal, so I still expect that we will have a tax expense for the full year of around negative EUR 50 million. So you shouldn't sort of extrapolate what we saw in the first quarter was technical for the year, so expect around EUR 50 million of tax expense negative.

[Operator]

Next question is from the line of David O'Connor from BNP Paribas.

[David O'Connor, analyst]

Maybe a question on my side on the micro-LED. It's -- when you look at the CapEx, the EUR 800 million wave of CapEx to build out the 8-inch fab. Ingo, how should we think about the return on invested capital on that investment? Is that along similar line to what we saw previously on the Singapore investment? And I have a follow-up.

[Ingo Bank, executive]

Yes. So the EUR 800 million also includes the sort of the setup of a new building. So it's not just equipment or so that we need to factor in here. So that's important I think to understand hence it take some time to build it. And then as we said, during the Capital Markets Day, we should see it ramping in 2024. And then if you look at the plans we have, it's not just for micro-LED, it's also for, as Alex just said, also following another question -- it's also for other differentiated technology and LEDs given also the growth that we expect in other LED applications that we also presented during the Capital Market UVC horticulture, just to name a few others.

And sort of, if you completely build a new factory with everything, including the building, a sort of a return is expected anywhere around 7 to 8 years. That's a normal return horizon that you expect for sort of investment of this size because this is a facility that we built for at least the next 30 years or so like we also built Kulim 1 back then. Then we had a very similar expectations into -- there also the expectation is that obviously reality now kicking very much the same. So from that, it's fair to assume that that should be the same.

[Alexander Everke, executive]

Yes. Alex here, maybe let me add a few comments. I think if you, when you compare Singapore investment and LED investment, there is a significant difference of those. The former Singapore investment was more back-end-related manufacturing processes, which is by definition more dedicated to certain technologies and applications. The investments we are doing now for micro-LED of 8-inch manufacturing is a front-end manufacturing investment, which, as we mentioned multiple times, is not only micro-LED, but also for other differentiated LED technologies. And the timing actually is very, very good because if you have such a large fab coming up with 8-inch manufacturing, the increase and the ramp up of a factory is a very decisive of point that means ramping such a fab with higher volume products is a very strong advantage and therefore the timing we consider is very, very good.

And then secondly, the ability to manufacturing any kind of LEDs on 8-inch fab delivers us a very strong technology and cost advantage compared to our competitors, where we are the only one with an 8-inch fab at that point of time. So the combination of the flexibility of manufacturing different kind of LED technologies there, plus ramping a fab with higher volume products and thereby being competitive is a good yield on the fab with a broad range of product portfolio gives us clearly an advantage, not only micro-LED, but in the general LED business at all.

[David O'Connor, analyst]

And maybe just a follow on from the comments. When that does come -- I know it's a bit far, but when that fab does come online, say late '23, how should we think about the loading of that? Would that again be similar to what we saw in the Singapore facility that ramped up a few years ago?

[Ingo Bank, executive]

Well, the fab -- the ramp is more topic of '24, and the ramp will be done certainly determined by the first volume products, which will be decided in the course of the next 2 years, but we are still very confident that we will have a significant ramp in the -- in starting '24 for this wafer fab, and then moving into a broader range of portfolio afterwards.

[Operator]

Our final question is from the line of Harald Eggeling from [ CBTB ].

[Unknown Analyst]

First question, please. What is your incremental expectation on price pass through in H2 versus H1? And second question, basically listening to the call, reading your statements and so on, I get the impression that topline increasingly is at risk, I would say with inflationary pressure probably also accelerating versus Q1. So what would you answer to the thesis that Q1 earnings could be peak earnings in 2022, please?

[Ingo Bank, executive]

So I think we need to be careful what we read into this. What we tried to say is that given what's going on around us is that the visibility, of course, is a bit different than it was, let's just say year or so ago. That's all what we say. And again, if you think back about the guidance we gave for the second quarter where we -- where I said that we expect semiconductors business to be a notch up compared to Q1, and the lamps and systems business being down because of seasonality, normal as every year and the conscious decision of us discontinued business in Russia and Belarus. And the zero COVID policy because we have 1 factory affected in China because of it right now, tells you that despite that environment actually the outlook we gave is pretty solid.

So I think that's what number 2 is that, we do not see why the seasonality we typically see in any given year where the second quarter seasonally always the softer and then you see towards the end of Q3 ramps and then Q4 as well why that should be fundamentally different from prior years. So I would say that is how we would look at it right now, so very much the same as we did in prior simply given the fact that this is sort of corresponding to the different end markets we work in, particularly consumer and automotive.

And then the first part of your question on pricing, we are -- we have been working already since last year with our customers here and there so I would not expect any kind of sort of really meaningful change in momentum or so between H1 and H2, which really -- it's also very much depending on the type of contracts you have when you start changing over, et cetera. So, but I think it's important to go back to what I said earlier that overall for the year. It is a headwind, but it's not a material headwind, how we are compensating the inflationary pressure that we're seeing.

[Unknown Analyst]

Okay. One quick follow-up regarding the price pass through, so you would say H2 was basically similar to H1, but would you then agree that inflationary pressure is incrementally increasing likely in H2?

[Ingo Bank, executive]

Well, again, we have -- so pricing arrangements are at least for 4 years. So therefore, and by now, we should have been pretty clear with all of our customers from an inflation perspective what certainly started to come in a bit more now was the -- because of the Ukraine war you had to reshuffle your supply chain here and there, but that we also have, let's say, managed also with our businesses to feed that back into our customer base and unless something else is happening around of macro speaking, which as you hope not will be the case. I would not necessarily see that if you see something on top of what we already know now from an inflation perspective.

[Alexander Everke, executive]

Thank you very much to everybody. This concludes the question-and-answer session for today. We thank you for joining this earnings call this morning and we look forward to speaking to you again with our next set of results. Thank you very much and have a good day.

[Operator]

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