ams OSRAM AG

SIX:AMS

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the ams OSRAM Conference Call on Second Quarter and First Half 2021 results. [Operator Instructions]We'd 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 M. Gmeiner, Head of Investor Relations]

Good morning, everybody. This is Moritz Gmeiner. I'm very happy to welcome you to this morning's webcast and conference call on the second quarter and first half results. Please note that the webcast information and presentation is also available on our website in the Investors section in the Presentations and Audio subsection. And with that, I would like to invite Alex to guide you -- guide us through the developments and some of the things we look forward to as a company. And then Ingo will lead us through the financials of the last quarter. Alex?

[Alexander Everke, CEO & Member of Management Board]

Yes. Thank you, Moritz. Good morning, ladies and gentlemen. I'm very happy to welcome you to our Second Quarter 2021 Conference Call this morning. In this webcast I will first lead you through some key aspects of our business positioning as ams OSRAM and how we see it moving forward, and then comment on the developments in the second quarter.We have a clear vision for our company, to create the leader in optical solutions. This is what drives us as the guiding principle for our business, investment and spending decisions. We are fully committed to achieve this vision through bold investments in disruptive innovation and continuous transformation, delivering best-in-class profitability and growth.If you look at Page 3. To this end, we pursue leadership in key segments of the optical space, offering an outstanding combination of emitters, optical components and modules, detectors, related ICs and algorithm. With these solution elements we are addressing the diversified markets for sensing, illumination and visualization. We offer optical solutions for 3 global end markets: consumer, automotive, and industrial and medical where we combine light emission and sensing in an outstanding portfolio.Here on Page 4 you see how we are set up in these markets, our broad range of current strength and the diversified growth areas that we see driving our business development in the future. Focusing on growth fields, these include the following: the next-generation displays, micro LED, mini LED, sensor integration, augmented reality, 3D and near-to-eye applications for consumer. In automotive, it's light applications, high-resolution matrix headlines, exchangeable led lights, head-up displays and in-cabin sensing. And industrial and medical, we see UV-C LED, horticulture, industry 5.0 and robotics, 3D applications and in-vitro diagnostics.We turn to Page 5. So looking around in a nutshell, we see ourselves best-positioned for leadership in the optical solution field. We benefit from balanced revenue streams and a diversified base. We leverage our portfolio and application expertise that is at the forefront of the industry, supporting a broad range of markets, product cycles and customer bases. And we are successful in our markets by being a leader in key optical applications across automotive, consumer, industrial and medical. Based on this, we are putting forward a strong value proposition as ams OSRAM, which consists of 4 elements, which is shown on Page 6.First, a commitment to drive growth. We pursue bold investment into disruptive technologies and innovation-led growth. This is reflected in our target level for R&D spending of 11% to 14% of revenues. We have a clear target of achieving double-digit average yearly revenue growth as a group. With the solutions approach, we address high differentiation opportunities and new markets and reduce M&A to add technology to our portfolio to build leadership.The second element is a strong focus on long-term value generation. We are driving a sustained position as leading technology provider. We reinvest into organic growth opportunities for the company. Our balanced end market exposure creates a broadly supported earnings stream with manageable volatility. We serve a diversified global customer base through different sales channels. And we do continuous active portfolio management to optimize our technology position.Thirdly, we are on the path to strong sustainability and profitability. We are realizing significant synergies and savings of around EUR 350 million until spring 2024. We are committed to drive benchmark levels for operational and support function costs, which is expressed in our target level of SG&A of 7% to 9% of revenues, all to drive our clear target of more than 20% adjusted EBIT margin for the group.And the fourth element is a prudent financial policy. We are committed to deleverage our balance sheet. We target an investment-grade rating and a limited leverage of less than 2x net debt to adjusted EBITDA. Supporting this is our broad array of financing instruments with a balanced longer-term maturity profile. At the same time, a further increase in our ownership of OSRAM is not a priority for us.On Page 7. To underscore this value proposition, I would like to give you a more concrete time line how we expect to build leadership and drive the integration and realization of synergies. In the first step, we create one company. From when we took control in March, well into first half next year this is where we are today. We execute a business portfolio realignment, we implement common platforms to run the combined business and roll out a new organization, including a new culture model. We drive first year synergies which structurally are more related to OpEx and define joint solution roadmaps in our business.The second step will be to start leveraging our strategic portfolio. We expect this from around spring next year well into 2023. Earlier in this step disposals will be materially completed and our new realigned portfolio will be in place. This means that we have established our new revenue base for the group, and this will be the base from which we will grow. We will drive second year synergies, which we expect to be both OpEx and COGS driven. And we will also drive developments for our first generation joint solutions and can fully leverage the combined IP and resources.The third step will be to drive growth and profit targets. We expect this from around spring 2023, beyond the spring of 2024. During this period we expect to see the midterm growth drivers kicking in and anticipate a longer-term growth vectors to come into sight. We will drive third year synergies, which will structurally set them more around manufacturing costs and revenue effects. And so in spring 2024 we will see the synergy run rate realized that we have laid out. I believe this offers a clear view of our plans and we are fully focused on implementing these with the same determination we have shown for the previous steps to combine ams and OSRAM.If you move on to Page 8. Now I would like to update you on the strong progress we have already seen with the integration. And let me remind you that we have only been in control of OSRAM since March of this year. We have successfully completed the delisting of OSRAM, and our current shareholding has increased to 80.4%. We have realized the first portfolio disposal. And the realignment of the portfolio is progressing as planned. This shows our commitment to creating the new portfolio for ams OSRAM with further announcements expected in the next month.The synergy realization is on track. As an example, we have agreed OpEx related planned staff reductions in Germany with the labor representatives. We are implementing the new internal organization and have completed first steps in the integration of IT. And importantly, we are in the process of rolling out new corporate identity, purpose, values and leadership principles as part of our new culture model.Moving to Page 9. Let me now comment on the development of our business. I'm pleased with our performance in the second quarter as our key matrix of USD 1.49 billion revenues and 9% adjusted operating margin came in well above the midpoint of our guidance in a complex industry environment. Healthy overall demand drove our positive group results with sequentially lower revenues that we expected, reflecting typical seasonal effects. We particularly noticed ongoing robust automotive demand and a corresponding order situation in the quarter.The semiconductor segment showed a very healthy development where the automotive lines continue to see strong demand with total backlog further increasing. The consumer lines also record a healthy performance in line with seasonal effects, driven by our range of optical sensing solutions. The industrial and medical markets areas generally benefited from increasing macroeconomic momentum. Demand for the majority of industrial lighting applications has seen a good recovery, while horticulture lighting demand is expanding. Medical and other imaging product lines also developed positively in the quarter.We pursue development activities for new optical solutions in light sensing and 3D, including solutions for world-facing AR and 3D authentication as well as camera enhancement and display management. Our innovation areas include future near-to-eye visualization and sensing technologies for AR devices.The Lamps & Systems segment recorded a very solid overall performance in the second quarter. The Lamps & Systems automotive business, including traditional markets, performed strongly and contributed very positively to the overall group, driven by a sustained demand recovery and in line with typical seasonality. I'm happy to say that in other areas of Lamps & Systems we saw a very attractive recovery in industrial demand, including building related and semiconductor equipment. Other industrial and medical markets, Lamps & Systems are still seeing a mixed demand environment. These developments resulted in a very solid adjusted operating margin for the group, and we, again, delivered strong operational cash flow in the quarter. This also drove an attractive free cash flow for the quarter, while the cash outflow from the delisting offer for OSRAM remained moderate.Looking forward, we see an ongoing tightness in chip supply as well as imbalances in the supply chain which continue to limit the ability to fully deliver against ongoing very robust demand, particularly in the automotive market. I expect these imbalances to extend well into the latter of -- part of the second half based on current information.Short-term revenue drivers for us continue to be automotive lighting and consumer optical sensing in areas like display management and camera enhancement. At the same time, we are moving on integrated product road maps that will drive our position in midterm growth markets, including UV-C LED, advanced LED, front lighting systems, AR, 3D applications and more.Let me now move to our outlook for the third quarter. We expect our overall business to show a solid development across segments in the third quarter. This expectation is particularly driven by continuing robust automotive demand globally, despite ongoing imbalances of the tightness in the supply chain. Demand trends in the other end markets are expected to drive attractive contributions from our other business. For the third quarter we, therefore, expect group revenues of $1.45 billion to $1.55 billion, slightly up sequentially at the midpoint, with an expected adjusted EBIT margin of 8% to 11%, all based on currently available information.Importantly, this revenue guidance excludes the revenue of the disposed Digital System business in North America as the transaction closed early July. Let me add that we plan to update you on our strategy, our new aligned business portfolio and strong technology position at the Capital Markets Day envisioned for the early next year.With this I would now like to hand over to Ingo.

[Ingo Bank, CFO & Member of the Managing Board]

Thank you, Alex, and very good morning to you all. Before I start going through the 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, and results from sales of business units and equity investments. A reconciliation to the IFRS basis of the presentation is included in the financial information on Q2 2021 that we published today and which is available on our Investor Relations website. Comparable prior-year financials are not available this quarter due to the acquisition of OSRAM with the consolidation having started from the third quarter of 2020 onwards.Let me now start with reviewing the financials by going briefly through a snapshot of our key financials for the second quarter. I'm on Page 11 of the presentation. Alex outlined earlier there was revenues of USD 1.49 billion and an adjusted EBIT margin of 8.8%, we came in well above the midpoint guided for both metrics. Adjusted gross margin was 33.2% in the quarter, also in line with expectation. Adjusted net income was at USD 84 million with an adjusted basic EPS of $0.32 or CHF 0.29. Operational cash flow continued to be strong in the quarter at USD 229 million. Net debt stood at USD 2.3 billion, reflecting amongst others the settlement of the delisting offer and the buyback of our outstanding convertible bonds. Overall leverage was a solid 1.7x as of the 30th of June 2021, particularly when taking the delisting effect into account.I'm now on Page 12 of the presentation. Revenues for Q2 '21 came in at $1.49 billion. Sequentially, this translated into a 3% decline on a comparable basis. This was well within our expectations as it reflects typical seasonality, particularly for the consumer as well as the automotive markets we are operating in. For the first half of 2021, ams OSRAM generated total revenues of USD 3.04 billion.As Alex pointed out earlier, we are still affected by a challenging supply chain environment across the different industries and end markets we are operating in. Whilst demand stayed strong, particularly for automotive, but also industrial and consumer applications, we still had to deal with allocations relative to our customer order backlog given shortages in different areas of our overall industry value chain, both down as well as upstream. We expect this situation to also continue in Q3 '21.Adjusted gross margin in the second quarter came in at 33%, in line with expectations. The sequential decrease reflected lower capacity utilization following the overall seasonal pattern of our top line and volume development. For the first 6 months, gross margin for the group stood at 34%, generating USD 1.03 billion in absolute adjusted gross profit. Adjusted EBIT for the quarter came in at 9%, reflecting a sequentially speaking lower gross margin level as well as a quarter-on-quarter uptick in R&D expenses whilst SG&A was lower when compared to Q1 '21, both in absolute numbers but also in percentage of revenues.EBIT, as reported, was negative at USD 143 million, reflecting M&A-related expenses, share-based compensation, transformation costs as well as a onetime charge related to tangible fixed assets of USD 182 million pretax. This noncash impairment was related to our manufacturing asset base in Asia, following a review of the useful life of specific machinery and manufacturing equipment in our semiconductor consumer business. Let me also point out that second quarter EBIT adjustments include a charge of approximately USD 30 million related to an agreement with the labor representatives in Germany regarding reductions in overhead positions.Let's have a closer look at the revenue distribution for the first half of 2021 on Page 13. With respect to the segment split, 64% of group revenues were recorded in the semiconductor segment and 36 in Lamps & Systems. I will look at more details regarding the segments in a few minutes. The group's revenue distribution with respect to end markets has already substantially changed compared to the historic ams business. This already today reflects a very balanced and attractive end market mix where the first half saw around 30% consumer, around 40% auto and around 30% industrial and medical revenues. Let me emphasize that this H1 split was driven by industrial and medical being recovering quite strongly through the first half, which moved the split towards industrial, while our consumer business remained a very healthy contributor as expected.Regionally speaking, we also see a rather well-balanced geographical distribution of our revenues. Over time, we do expect this to balance out even further, also taking into account the anticipated portfolio changes related to planned divestments in the Lamps & Systems portfolio.Turning to operating expenses now on Slide 14. We see that our total OpEx run rate showed a stable development when averaging the last quarters. Adjusted R&D spend in the second quarter was USD 185 million, which translates into 12% of group revenues. This was a tick higher on an absolute as well as relative basis due to roadmap driven planned R&D investments in our innovation areas and lower capitalization in the quarter. Overall spending level in the quarter was well within the targeted band of between 11% to 14% of revenues. Adjusted SG&A expenses for the group in the second quarter, on the other hand, were USD 188 million, which is a good sequential decrease, translating into SG&A at 13% of revenues. Our targeted range for SG&A spend for the integrated group is between 7% to 9% over time.To complete the picture, I would also like to note that we've recorded a book gain due to the sale of a real estate site in Germany, which is reflected in our other operating income. This gain, however, was excluded from our adjusted EBIT financial metric. It is, on the other hand, part of the EBIT according to IFRS.Moving to Slide 15 now. Our synergy realization programs are well on track after actually having gained control of OSRAM only since March. First important milestone of the organizational integration have already been reached. One example is the successful go-live of a joint CRM platform for our semiconductors business, helping our sales and marketing organization to address our joint customer base within the entire semiconductor portfolio of ams OSRAM. Savings are on track towards the overall objective of EUR 350 million pretax gross. We will provide regular, more detailed updates on our synergy and savings realization progress on a half yearly basis. The next update will therefore come with our Q3 21 financials.At the same time, I'm very pleased to also share an important update in the context of our synergy realization with you. We completed a further review of the expected integration expense estimates after obtaining control of OSRAM. As a result, we now expect onetime costs for the integration to be significantly lower at only around 0.9x the EUR 300 million total synergy pool over time or approximately EUR 270 million pretax. This is a substantial reduction of around EUR 120 million of total integration cost compared to the original estimate of 1.3x.For the avoidance of doubt, let me also reconfirm our target to total pretax synergies and savings at the level of EUR 350 million, in line with our communication earlier this year in conjunction with our Q1 2021 financials.Turning to the net result and EPS now on Page 16 of the presentation. The adjusted net result for the AMS OSRAM group in the second quarter was USD 84 million, including a net financing result of USD 40 million. The sequential decline was driven by the lower overall operating profitability. Net income, as reported, was negative at USD 190 million, also reflecting the onetime effects I outlined earlier. Adjusted basic earnings per share in the second quarter were $0.32 or CHF 0.29, reflecting the sequential decrease in the net results.Let's now have a look at the segment performance. Revenues -- on Page 17. Revenues for the semiconductor segment were USD 952 million, driven by strong demand in automotive and industrial and solid demand with seasonal influences in the consumer market. Adjusted EBIT came in at a healthy 13%, reflecting a strong automotive business paired with seasonally lower consumer business. For the first 6 months of 2021, semiconductor segment revenues were USD 1.95 billion, resulting into a very solid adjusted EBIT margin of 15%. In the course of the second quarter, we saw ongoing resilient demand, particularly driven by automotive, building further backlog with a meaningful portion of customer orders still in allocation. A continuation of a tight supply chain, resulting into imbalances, both up and downstream, we expect this to continue well into the second half of the year.Moving now to Lamps & Systems on Page 18. Revenues for the Lamps & Systems segment were USD 539 million in the second quarter, driven by solid automotive demand, including traditional lines and in all market areas, as well as ongoing recovery in key industrial lighting applications. Adjusted EBIT for the quarter was positive and came in at 1%. For the first 6 months of 2021, the Lamps & Systems segment revenues were USD 1.082 billion, resulting into an adjusted EBIT margin of close to 1%. In the course of the second quarter, we saw the successful disposal of the DS North America business with the transaction closed in the meantime and proceeds part of our Q3 cash position. Ongoing recovery in important industrial end markets, particularly in Asia Pacific and an ongoing strong performance of the automotive aftermarket business.Moving now to cash flow and the debt position of the group on pages 19 and 20. The group's operating cash flow was again healthy in Q2 at USD 229 million, and therefore strong for the first half of 2021, contributing a total of USD 478 million. Capital expenditures in the second quarter were USD 53 million or 4% of revenues. CapEx spending for the first 6 months amounted to USD 149 million or 5% of revenues for the group. The overall CapEx spend in the first half was mainly driven by the pickup in demand levels, particularly for our automotive and industrial markets.For the full year 2021 we see ourselves tracking to a CapEx spending below 10% of revenues. Free cash flow in the first half of 2021 was very robust. And as a result, the USD 329 million for the group.Moving to Page 20 now. The group's cash and cash equivalents stood at USD 1.6 billion at the end of Q2 '21. Next to the positive free cash flow in the quarter, we also recorded cash receipts related to the divestiture of a manufacturing site in Bulgaria and the real estate site in Germany. Against these cash inflows, we had of course the settlement of the delisting offer and further open market purchases of OSRAM shares amounting to overall approximately USD 520 million in the quarter, and approximately $20 million related to the continuing buyback program of our outstanding convertibles.The settlement of the delisting offer was done via existing cash. Consequently, I can confirm that the bridge financing we had put in place earlier for purposes of acquiring OSRAM shares remains undrawn. Given the cash movements just outlined, the group's net debt went up by only USD 280 million compared to end of March despite the full settlement of the delisting offer within the quarter. Overall, this translated into a financial leverage for the group of approximately 1.7x at the end of Q2, a very solid financial position as a group after the successful completion of the delisting offer.Going forward, we expect the financial position therefore largely to be driven by the operational performance of the group as well as future investment needs. We also feel very comfortable with the 80% ownership position we have in OSRAM, together with full control through the domination profit and loss transfer agreement. Increasing this stake further through share purchases has no priority for us at this point in time. The development of our cash position over the next few quarters will also be augmented by additional expected disposal activity we mentioned earlier.On Page 21 you find summarized for your reference again the outlook that Alex already outlined for the third quarter of 2021. Let me quickly repeat it. We expect group revenues in the range of USD 1.55 billion to USD 1.55 billion in the third quarter. The adjusted EBIT margin we expect to be between 8% and 11% of revenues for the third quarter. And again, I would like to stress that the revenue expectation excludes the disposed revenues of the DS North America business, which you should assume to be around $40 million per quarter.And with that I would like to thank you for your attention and open the floor for questions.

[Operator]

[Operator Instructions]

[Sandeep Sudhir Deshpande, Research Analyst]

I have a couple of questions. Firstly, this is Sandeep Deshpande from JPMorgan. Regarding your guidance in the margin for the second half, would you say now that, now that you've seen what's happened in terms of revenue loss in the second half in your consumer business, that these levels of margin, this level of margin can be sustained for the second half? Or is there could be further changes into the fourth quarter and beyond? And then my second question is on the -- on this consumer business itself, have you worked -- continued to work with that customer? And do you believe that there are further future opportunities with that customer?

[Ingo Bank, CFO & Member of the Managing Board]

Yes. Maybe start with your first question. So I think what I can say of course is you've seen the guidance we gave on the third quarter. And I don't want to give, let's say, also guidance already for the fourth quarter, but I think it's overall fair to assume that we also expect the fourth quarter to be a good quarter for us.

[Alexander Everke, CEO & Member of Management Board]

Yes. And then on your second question, since we can't talk about one specific customers, but what I can clearly say that we have good interaction and good opportunities at our large customers in the consumer space. And certainly with the expanded portfolio now, as I mentioned also last quarter, we see various opportunities moving on for the next years to come. Absolutely.

[Sandeep Sudhir Deshpande, Research Analyst]

Right. And I just have a quick cost follow-up, Ingo. We've seen some rebalancing on the R&D and the SG&A. Has that already started in terms of synergies? Or this is just some kind of movement you've seen in the SG&A and R&D in the second quarter?

[Ingo Bank, CFO & Member of the Managing Board]

I think on the R&D side that was just some movement where we looked at some of the R&D projects, we did some reprioritization here and there, we had a bit of a lower capitalization. And R&D, as you know, is not necessarily the primary target for the synergies. And yes, we see already some of the G&A benefits showing and reflected in the numbers.

[Operator]

Next question is from the line of Sébastien Sztabowicz from Kepler Cheuvreux.

[Sébastien Sztabowicz, Head of Tech]

On ambient licensing, it seems that one of your competitor is getting a little bit of market share in the market and potentially at your large customer -- your largest customer, sorry. Is it possible to expect a little bit of some market share pressure in ambient licensing going forward? And the second one would be on the LED market. Could you provide a little bit some comment on the strength of the LED market today and notably where supply and demand are evolving in that market specifically? And more on a long-term view, what kind of growth should we expect from the LED market opportunity in the coming years?

[Alexander Everke, CEO & Member of Management Board]

So let me -- yes, first three question let me start. So market share, I think we communicated the market share loss in the consumer business. We feel confident for the future development. We don't expect major changes there. On the LED market, it's a good growing market, specifically on the automotive side. It's very -- still a very tight situation. The whole trend goes into LED. If you look at electrification of cars, it certainly a very strong motivation to go into the LED space. And our supply is fully loaded. Also industrial LED is moving up. So the whole led business we see clearly the trend upwards, and we feel very confident about this. And that's why also it shows that in LED we see on the short-, mid- and long-term significant growth opportunity for us as a company. And then obviously more -- moving into the more sophisticated LED technology like micro LED, mini LED, is certainly an opportunity we see for the next years to come where we see a significant growth. And then obviously, going back to LED, where we have specific features like UV-C or for horticulture for specific light waves to accelerate growth. That is certainly an area where our IP is very, very strong. And we see opportunities there where we utilize the specific feature sets we have in our LED technology.

[Sébastien Sztabowicz, Head of Tech]

One follow-up, if I may, on Malaysia because of the COVID-19 and the lockdown that have resulted from the pandemic. Have you seen any impact on your manufacturing capacity or production output in Asia over the past couple of weeks?

[Ingo Bank, CFO & Member of the Managing Board]

No, we have not. We have implemented a very solid hygiene concepts in our facilities in Asia Pacific, have also been tested by local governments on that. And we've not seen any shutdowns. We've started also vaccination of our employees at the various sites that we have, also to act responsibly, obviously, as an employer. And hence, we are happy to see that the local management did an excellent job there, and employees are quite happy to return to our facilities to help us supply our customers where the demand is still strong.

[Operator]

Next question is from the line of [ Didier Shimao ] from Bank of America.

[Unknown Analyst]

First question, I just wondered if you could share your thoughts on the impact of the disposal of DS in North America, whether that's baked in entirely in Q3, already having an impact in Q2. And then my second question, looking at the longer term sort of ambition of more than 20% operating margin target, can you share with us what sort of embedded revenue growth is assumed to get that to number on a sort of pro forma basis since you highlight further disposals? And I guess my question is, can you get there with minimal revenue growth purely on the back of the cost synergies that you're targeting?

[Ingo Bank, CFO & Member of the Managing Board]

Okay. Let me maybe start with DS Americas. Obviously DS Americas was still included in our Q2 financials. The transaction was closed on the 1st of July. So at the end of Q2, end of June, we held DS Americas in the balance sheet as an asset held for sale. In the meantime, we have closed. We've already received the proceeds. And it will therefore not be reflected anymore in our Q3 financials going forward other than the cash proceeds we've received from acuity already in the meantime.

[Alexander Everke, CEO & Member of Management Board]

Yes. And then to your second question, as I presented in my speech before, we use our disposals to clean up the portfolio, which we will plan to finalize in the next year, 2022. This is the basis for the growth. And we expect double-digit growth for the next following years to come, and that's the basis of the IP improvement. In conjunction obviously with the cost reduction, the synergies, the portfolio management we are executing currently.

[Unknown Analyst]

Wonderful. My follow-up, if I may. Just in terms of sequential growth rate, sort of organic. So ex disposal, at which point do you think we've sort of reached a flow on revenues, is it already behind us? Or do you think that sort of next year could find a bit of a flow on revenues and can grow that double digit you just highlighted from there on?

[Ingo Bank, CFO & Member of the Managing Board]

Yes, I think, look, I mean, what Alex said earlier, we are still in the process of making very fundamental adjustments to our portfolio in DI. So I don't think you can speak of a flow as of yet. As Alex said, and as we pointed out on one of our slides in the presentation, we expect that to sort of baseline, if you like, reset to be there in the course of 2022. And then from then onwards, we should see what maybe you would call a flow. Of course again always taking into account the normal seasonal pattern you have in this -- in the underlying business that will stay with us.

[Operator]

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

[David O'Connor, Analyst of IT Hardware and Semiconductors]

One or 2 from my side. Maybe firstly, Ingo, just going back to the guidance, guiding the second half revenue slightly above the first half. Just to complete the picture, can you give us any additional color on that second half adjusted EBIT margin. I mean, reading through the press release, it seems you're implying the second half margin below first half. But maybe if you can give us even some puts and takes that we should bear in mind when modeling that? And I have a follow-up.

[Ingo Bank, CFO & Member of the Managing Board]

Yes. Thanks for the question. So obviously we've undertaken quite some measures since we communicated in earlier this year about the market share loss in the consumer business, and we've taken some significant cost measures to try to mitigate some of what will be lower utilization in our factories in the second half. If you go back to what I said when one of your colleagues asked earlier what the margin is also in Q4, and you look at where we are margin-wise in the third quarter. I think when I say that we expect also somewhat of a good quarter in Q4, that should give you sort of an idea of what our current thinking is.

[David O'Connor, Analyst of IT Hardware and Semiconductors]

That's helpful. And maybe if -- as a follow up, if I could ask about the imbalances, Alex, that you mentioned, supply imbalances impacting your ability to deliver. Can you just give us a bit more color there on where exactly are these supply imbalances that you're seeing? Is this something on the wafer side, subcontractors, equipment? And when exactly would you expect these to be resolved?

[Alexander Everke, CEO & Member of Management Board]

Yes. Thanks for the question. Yes, actually we see this on both sides, on the back-end side, subcontracting side; on the front end side, wafer supply. It's very strong for obvious reason in the automotive industry. And you have a direct impact and an indirect impact. One is which affects us directly. And then obviously, if other suppliers are affected -- if other suppliers are affected for the same platform, then it also has an indirect impact on us. Secondly, I think it's also important that we see also a trend in the suppliers from all sides acknowledging this short supply in automotive, and for that reason also trying to support automotive more. That means, on the other hand, that we also [indiscernible] certain impact on the nonautomotive business because wafers are allocated to different kind of target segments. So it's -- as I mentioned, it's a very complex supply situation. It certainly continues for the remaining part of the year. But so far we were able to manage this and our customers is according to the situation supportive. And also, we mentioned that our manufacturing [indiscernible] business is very full. And for that reason we cannot supply the whole demand we're having in our order books.

[Operator]

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

[Jürgen Wagner, Director]

Actually I have 2. One follow-up on your mid-term margin target. What portfolio structure can allow that margin given the high outlook exposure of OSRAM and the lower margin profile of that business at least historically? And then 3D behind screen in consumer applications, when do you expect first revenues?

[Alexander Everke, CEO & Member of Management Board]

Yes. Let me start with the second question. Ingo can take the first one. 3D behind OLED, as I mentioned last quarter, we are working closely with display manufacturers together. It's very become more clearer that also these solutions are very much related to the display itself, and that means to the display manufacturer. So we are doing progress, but it's still a decent way to move on that.

[Ingo Bank, CFO & Member of the Managing Board]

Yes. Maybe the portfolio question you had. So as we said that the portfolio adjustments we are undertaking right now focus very much on the business that is -- or was under the digital segment when it was with OSRAM, which is -- was largely a traditional lighting portfolio. And we already booked the first progress, as you know, with the sale of the DS Americas business. And we expect also more progress on other transactions possibly in the next couple of months. So the portfolio eventually that will be the sort of new baseline as of next year will then also include still of course the traditional automotive business, which is a very strong business in terms of market position worldwide, which has a very high share already of aftermarket in there with a strong recurring revenue stream with very little investment needs and therefore also fairly high margin base. So overall this will be helpful for the margin of the overall group.

[Operator]

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

[Robert Duncan Cobban Sanders, Director]

Just a couple of questions, if I may. First one is just on automotive. If you could just comment on automotive LED pricing trends. HELLA, one of your customers, has been complaining that the prices have been going up. I'm assuming that that is partly -- you guys are partly responsible for putting up pricing maybe because it's tight. And whether you have any plans to add capacity? And then just a question for Ingo. On the impairment, am I right to assume that, that contributes to around 100 basis point uplift on the gross margin in Q3 given the lower depreciation charges, is that right? And related to that, when the Conti deal gets unwound, is that already excluded from your adjusted margin, so it doesn't affect the adjusted margin? Or is it already, is it included?

[Alexander Everke, CEO & Member of Management Board]

Yes. Alex here. Let me start with your first question. Yes. Certainly, as I mentioned before, the LED business related to automotive is very, very strong. And in areas where there is the opportunity to adjust pricing upwards according to supply situation and complying with legal agreements we have with customers certainly we will take opportunity in a constructive way. But we see this over in the market that in general prices are going up from our suppliers as well from us to customers where it's possible to accomplish this.

[Ingo Bank, CFO & Member of the Managing Board]

Yes. And then on the 2 other questions you had. So in our current outlook and guidance and also in the numbers in Q2, the Conti joint venture is of course included. So there's no exclusion or adjustments, what have you. Obviously we're still in the process of returning the -- what we originally contributed to the joint venture back into the ams group now. And that is anticipated to be sort of in 2, 3 months from now. And then once it's with us, we're already preparing for its future, and it's likely not going to remain with us. And if that's clear, and we're making progress, we will also announce it. But for now of course it's still there, and we also have fully included it into the financials as well as in the guidance. On the impairment side, I don't think we would like to give now specific guidance on the impact, but I think the number you mentioned is a bit too high in my eyes. So I would -- if I were you, I would work with a number that is lower than that.

[Operator]

Next question is from the line of Stephane Houri from ODDO.

[Stephane Houri, Research Analyst]

Actually it's about the margins going forward, waiting for your 20%-plus target in -- when you will reach it. I would like to know for 2022 there is a lot of moving parts with the disposal of Digital and more is coming with the restructuring that you're making and also the first synergies, but at the same time, the impact of the market share loss. So I guess my question is to understand what direction will the margin take in 2022? Can we expect more pressure on the margin because of the market share losses before it goes better? Or how do you see that?

[Ingo Bank, CFO & Member of the Managing Board]

So I think as you rightfully point out, there's still quite a number of moving parts, particularly when you think about the portfolio and the ongoing integration efforts that we have. And as Alex mentioned earlier in his prepared remarks, we are sort of setting the base business, if you like, in 2022. So, as you know, we don't give guidance at this point in time already for next year. Also I think it's fair to assume that we will definitely not be at the 20% level or so that we aspire to in that year for the reasons that I just mentioned. The changes we are conducting right now are very fundamental in various parts, and they will not be concluded by then.

[Stephane Houri, Research Analyst]

Okay. And you've been talking of the disposal of the rest of the digital division. And you've said that U.S. part was -- had an impact of about $40 million per quarter, if I'm correct. What will be the additional impact of the next disposal that you will do when you will do them? In terms of revenue of course.

[Ingo Bank, CFO & Member of the Managing Board]

Yes. Well, obviously, that very much depends on a number of factors we have, a number of, let's say, divestiture processes going on in parallel right now at different stages. It's a bit too early to indicate for obvious reasons also because we don't want to intervene into the process itself. So rest assured that once we have concluded, we will also indicate what the impact will be. And as I said, we do expect some further progress there in the second half of the year.

[Moritz M. Gmeiner, Head of Investor Relations]

Ladies and gentlemen, this concludes our question-and-answer session for this morning. We thank you very much for joining us for this conference call, and we look forward to updating you on our business development again after the third quarter. 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. Goodbye.