ams OSRAM AG

SIX:AMS

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the conference call on the third quarter 2021 results. [Operator Instructions] I would now like to turn the conference over to Alexander Everke, CFO; 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 and gentlemen. This is Moritz Gmeiner. I'm very happy to welcome you to this morning's conference call on the third quarter financial results. As usual, Alex will give you some insights into the development of our business and then Ingo will lead you through our financials. 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 third quarter 2021 conference call this morning. In this webcast, I will comment on our business before handing over to Ingo for details on our financials. Let me start with an integration update. We are seeing further very good progress with the integration, and I'm pleased with the strong momentum of our initiatives. Please recall that we have been in control of OSRAM since March of this year. We continue to move ahead in realigning the portfolio of ams OSRAM. We closed a second smaller scale disposal in October for connected building applications and are in the late stages of a large-scale disposal process. I hope to be able to update you on this situation in the near future.Moreover, the joint venture between OSRAM and Continental has been resolved, which is another important step to streamline our profile. We also completed the delisting of OSRAM's share at the end of the third quarter, which further simplifies our corporate structure. We are well on track with our synergy programs and glad to report a healthy level of creative synergies in line with our plans.Moreover, we are taking first steps related to our future manufacturing setup and are planning an expansion of capacity in Malaysia and Austria. These steps will be part of our CapEx spending target to support future capacity needs and differentiated technologies. We are currently preparing a full concept of our realigned manufacturing footprint and expect to provide further updates in spring next year.As part of our systems integration, we are aligning the fiscal year across the group and will move to a calendar fiscal year from next year. These accomplishments underline our strong commitment to drive the integration, the portfolio realignment and the synergies as laid out.Let me now take a look at our business development. We can report a robust third quarter showing strong operational performance in a demanding and volatile industry environment. Our key metrics of USD 1.52 billion revenues and 10% adjusted operating margin came in well above the midpoint and near the high end -- high point of our guidance.The Semiconductor segment contributed strongly to our performance again this quarter. We recorded very positive results in our automotive market area across product segments and driven by available backlog. Towards the end of the quarter, we saw supply chain volatility starting to appear, triggering by constrained supply and effects from lower production volumes at OEMs.Our consumer line showed a solid development in line with expectations, driven by optical sensing solutions for a range of applications. Here, I can add that we remain exposed to the latest generation of the leading global smartphone platform that was recently launched.The industrial and medical market areas also performed well last quarter. Positive demand momentum continued in industrial lighting for established and emerging markets, while our medical and other imaging lines recorded positive results. We continued our development activities for a broad range of future optical solutions, enabling innovative applications in automotive, consumer, industrial and medical.The lamps and systems segment saw an overall positive development in this quarter. The lamps and systems automotive business, including the traditional markets performed well, offering a solid contribution. This reflects typical seasonality and very good demand across channels. Still, automotive supply chain volatility also started to show towards the end of the quarter. The other areas of lamps and systems business recorded good demand for industrial, building related and medical applications.Industrial demand momentum remained in place while supply chain imbalances are also playing a role in these industrial markets. I have already mentioned the demanding industry environment we are experiencing, very much like our peers. We are faced with ongoing partners and chip supply and imbalances in supply chains, particularly in the automotive market, but also in certain areas of the industrial markets.In automotive, this is introducing revenue volatility into the supply chains as component shortages trigger lower production volumes at automotive OEMs. I expect that these imbalances will persist well into the coming year, and continue to be accompanied by tighter availability of certain materials and supplies. Like our peers, we see certain sourcing costs going up as a consequence. Where possible, we aim to factor such higher sourcing costs into future customer pricing.Looking towards the coming quarters, we continue to see revenue drivers in automotive and industrial lighting, and consumer optical solutions in areas like display management, optical sensing and camera enhancements.At the same time, we invest into our technology road maps for mid- and long-term growth markets in display and visualization, differentiated illumination and advanced sensing. This encompass advanced LED front lighting, UV-C LED, consumer optical sensing, AR and 3D functions [indiscernible] driven displays, [ metric ] systems and horticulture lighting, among others.Before I come to the outlook, I want to update you on a further matter. We have discontinued using the advisory service of former ams CFO, Michael Wachsler, as we have very recently been informed of an ongoing investigation of Michael Wachsler conducted by Austrian authorities. This is related to private securities transactions allegedly assigned to Michael Wachsler and former 2 employees of ams.Moreover, the Supervisory Board of ams AG has acknowledged Mr. Wachsler decision not to stand as a candidate for this supervisory board. As a reminder, Michael Wachsler has stepped down as CFO of the company effective May 2020. Our company sales is not just subject to this investigation or related allegations. We are fully cooperating with the relevant authorities and have also initiated an internal investigation into the matter.Beyond that, we will not be able to comment on ongoing investigations. Let me emphasize that we and I, myself, have been very surprised by this development. We take the matter very seriously and in light of the situation we have taken swift action regarding Michael Wachsler's advisory role to the company.With this, I'm now coming to the outlook for our business. We expect our business to show a solid positive performance in the fourth quarter. We expect fourth quarter group revenues of $1.36 billion to $1.46 billion with an expected adjusted EBIT margin of 8% to 11%, all based on currently available information and exchange rates.Please note that this revenue guidance excludes revenues of the disposed Digital System in North America and connected building applications business as well as deconsolidated revenues from the dissolved joint venture. Therefore, the revenue basis is not identical to the third quarter, and you should assume around USD 45 million of revenues that are excluded compared to the third quarter and around USD 75 million that are excluded compared to the second quarter.Our revenue expectation for the fourth quarter is driven by an overall supportive demand situation. It does, however, also reflects the mentioned revenue volatility in the automotive supply chain. This is due to constrained end-to-end supply situation and lower production volumes at multiple OEMs, irrespective of an overall positive backlog situation.The revenue expectation also reflects an unfavorable exchange rate development next to the mentioned disposal and deconsolidation effects from portfolio changes. Ingo will have some details on these effects. In addition, the outlook reflects a decreased year-on-year contribution from the consumer market in line with previous comments and expectations. Still, we see a very solid operating performance of our business despite these revenue effects, as shown by the expected adjusted operating margin of 8% to 11%.In closing, let me add that we are planning a Capital Market Day around April 2022, where we want to update you on our strategy, our new alliance business portfolio and strong technology position. With this, I would now like to hand over to Ingo.

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

Yes. Thank you, Alex, and a very good morning to all of you. Before I start going through the numbers, a few comments upfront. When we refer to adjusted financial metrics, we refer to adjustments for M&A-related transformation and share-based compensation cost as well as results from sales of business and equity investments. A reconciliation to the IFRS basis of presentation is included in the financial information on Q3 2021 that we published today, and which is available on our Investor Relations website.Let me now start with a snapshot of our key financials for the third quarter. I'm on Page 14 of the presentation. Alex outlined earlier that with revenues of USD 1.52 billion and an adjusted EBIT margin of 10.3%, we came in well above at the midpoint guided for both metrics in the quarter.Adjusted gross margin was 33.8% in the quarter, up sequentially. Adjusted net income was at USD 12 million with an adjusted basic EPS of $0.02 and CHF 0.02. Operational cash flow continued to be strong in the quarter at USD 255 million. And net debt stood at USD 2.2 billion, slightly lower sequentially with a stable, solid leverage factor of 1.7x.Revenues for Q3 came in at $1.52 billion. This translates into a sequential improvement of 5% on a comparable basis. This development was well within our expectations, driven by strong revenue generation across our automotive portfolio as well as a solid performance in our consumer and industrial applications.For the first 9 months of 2021, gross margin for the group stood at 34%, generating USD 1.53 billion in absolute adjusted gross profit. Adjusted EBIT margin for the quarter came in at 10.3%, reflecting the improved gross margin, in particular.When comparing Q3 '21 to the same period in 2020, adjusted EBIT improved by a factor of around 2.5x in absolute dollar terms. This represents an adjusted EBIT margin improvement from 4%, back then, to now 10%. It resulted from a much improved gross profit generation, combined with better SG&A productivity. EBIT, as reported, was USD 97 million.Let's have a closer look at the revenue distribution in the third quarter on Page 16. 67% of group revenues were recorded in the semiconductor segment and 33% in lamps and systems. More details regarding the segments will follow in a few minutes.In terms of end markets, you noticed a well-balanced revenue distribution with automotive having the largest share with 38% of the total Q3 revenue base, followed by industrial and medical at 33% and consumer at 29%. This reflects a very attractive end market mix already today.Turning to operating expenses now on Slide #17. We can see that our total OpEx run rate showed a stable development but averaging the last quarters. Adjusted R&D spend in the third quarter was USD 169 million, which translates into 11% of group revenues. This is within the overall targeted range of between 11% to 14% for the group, as we continue to invest into future technologies and products for the 3 end market segments we operate in.Adjusted SG&A expenses for the group in the third quarter were USD 187 million. And at 12% of revenues, SG&A productivity improved from the prior quarter. Our targeted range for SG&A spend for the integrated group is between 7% to 9% over time.Our synergy realization programs are well on track since taking control OSRAM as of March only this year. Important milestones of integration programs in various functional areas such as finance, IT, HR and sales have been met consistently in the meantime and in line with our original planning.As communicated earlier this year, EUR 50 million of cost savings were already achieved prior to the DPLTA being effective. In addition, as per the end of September 2021, we've now created EUR 80 million in annualized run rate savings, largely in the areas of SG&A and operations, combined with some contributions from R&D.Our synergies and savings are, therefore, currently on track towards the overall total objective of EUR 350 million pretax gross when compared to the relevant 2019 baseline. As a reminder, onetime costs for the integration are expected to be around 0.9x to EUR 300 million total synergy pool over time or approximately EUR 270 million.Turning now to the net result and EPS on Page 19 of the presentation. The adjusted net result for the ams OSRAM Group in the third quarter was USD 12 million, including a net financing result of USD 69 million. Net loss, as reported, was at a minus $48 million, reflecting M&A related transformation and share-based compensation cost as well as results from the sale of business and equity investments. Adjusted basic earnings per share in the third quarter were $0.02 or CHF 0.02, reflecting the sequential decrease in the net results.Let me now look into the segment performance, and I'm now on Page #20. Revenues for the semiconductor segment were approximately USD 1 billion in the quarter, driven by our automotive business as well as a good contribution from our industrial and consumer segment portfolio elements.Adjusted EBIT here in this segment came in at a healthy 13%. And for the first 9 months of 2021, semiconductor segment revenues were USD 2.94 billion, with a solid adjusted EBIT margin of 14%. In the course of the quarter, we saw ongoing tightness in chip supply and imbalances in the supply chain, particularly in automotive and more apparent also in industrial.First production interruptions and furloughs at car OEMs, reflecting tight availability of certain materials and supplies. We believe we are not alone in expecting this situation to continue also into the next year.Let's move to the lamps and systems segment on the next page. Here, revenues were USD 498 million in the third quarter, slightly down in nominal terms when compared to the second quarter of 2021 due to the deconsolidation effect of the divested Digital Systems North America business. When correcting for such portfolio effects, revenue was actually up sequentially on a like-for-like basis.Revenue generation in the quarter was driven by typical seasonal automotive aftermarket demand as well as a robust industrial lighting demand momentum. Adjusted EBIT for the quarter was positive and came in at 5%. For the 9 months ending September 30, 2021, the lamps and systems segment revenues were USD 1.6 billion with an adjusted EBIT margin of 2%.In the course of the third quarter, we saw the successful closings of the sale of Digital Systems Americas as well as connected building applications, a smaller-scale business. A larger-scale disposal progressing into the late stage of the M&A process, and chip shortages increasing for some lighting applications causing some volatility in end-to-end supply chains.Now moving on to cash flow and the debt position of the group on Page 22, 23. The group's operating cash flow was, again, very healthy in Q3 at USD 255 million. For the first 9 months of this fiscal year, operating cash flow is now at a very solid USD 723 million level or 16% of revenue. Capital expenditures in the third quarter were USD 108 million or 7% of revenues, up sequentially. It reflects debottlenecking investments to improve our capacity as well as investments into future technologies and growth areas.CapEx spending, so far this year, up until the end of September, was USD 255 million or 6% of revenues for the group. For the full year 2021, we see ourselves still tracking to a CapEx spending below 10% of revenues. Free cash flow in the first 9 months of 2021 was strong with USD 468 million for the group.Now moving to Page 23. The group's cash and cash equivalents stood at USD 1.53 billion at the end of Q3 '21. We redeemed EUR 117 million of promissory notes during the quarter, reducing our gross debt position accordingly, in line with our plans.We successfully completed our amend and extend process for our existing revolving credit facility, increasing this line from to now EUR 800 million on a multiyear basis. The existing bridge facility of EUR 750 million was canceled entirely. And please note that the new RCF remains undrawn. In our convertible bond buyback program, we have bought back EUR 44 million nominally so far this year, for around EUR 38 million in cash.The group's net debt came down slightly when compared to end of June, with the financial leverage of the group staying stable at approximately 1.7x at the end of the third quarter '21. We regard this as a very solid financial position for the group overall.Going forward, we expect the financial position largely to be driven by the operational performance of the group as well as future investment needs. We continue to feel very comfortable with the around 80% ownership position we have in OSRAM together with full control through the DPLTA. Increasing this stake further through share purchases is still not a priority for us at this point in time.Let's take a look into the outlook on Page 24. As Alex mentioned, based on expectations, based on current exchange rates and available information, we expect group revenues in the range of USD 1.36 billion to USD 1.46 billion for the fourth quarter. This revenue expectation excludes the disposal revenues of the connected building applications business and the deconsolidation effect of the OSRAM quality joint venture. On a like-for-like revenue basis to Q3 of this year without these exclusions, expected group revenues for the fourth quarter would be USD 1.405 million to USD 1.505 million (sic) [ USD 1,405 million to USD 1,505 million ]. Overall, you should assume these exclusions plus the effect from some unfavorable foreign exchange development to be close to USD 60 million.When looking at the revenue development from Q3 to Q4 at the midpoint of the guidance range, one can assume the remaining difference of approximately USD 45 million to USD 50 million to reflect the impact of supply chain volatilities and constraints, mostly in the automotive market, but also in our industrial markets.The adjusted EBIT margin, we expect to be between 8% and 11% for the fourth quarter, also reflecting the current supply chain imbalances and volatilities and related effects on our business. And with that, I would like to conclude my prepared remarks and open the floor for questions.

[Operator]

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

[Sébastien Sztabowicz, Head of Tech]

Question, first of all, what kind of visibility you have for the coming quarters, globally speaking? And could you please comment on the size of your backlog today? What is the kind of backlog coverage that you have right now? And do you see the inventory in the channel today?And the second one would be on the manufacturing setup of the combined entity, do you have taken in the decision regarding the front-end fab in for LED in Kulim, Malaysia. And also, how do we see the global setup of the company building up in the coming months?

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

Yes. So maybe let me take the first -- final question, then Alex can comment on the footprint. So as we said in the prepared remarks, the visibility at this point in time is relatively small because the volatility in the supply chains are quite substantial.As you can see, I think also from things you read outside of our earnings release. So therefore, we said that we expect some of these imbalances also to continue well into the next quarter. We have still weekly calls with our suppliers and customers on components and shortages and changes in certain delivery plans. So that makes it very difficult on the short term also to exactly say what's going on.We have seen that if you look at the inventory in the channels that -- over time in the last month or so, that inventories have increased back to -- closer to back where they used to be historically, but still within that backlog or these inventories with distributors, you see still significant imbalances from an end demand perspective, for instance, for car OEMs.So it's sort of inventory levels increasing, but it's still in many areas in balance. So we're also indirectly then affected fund [indiscernible] and other components that not necessarily have anything to do with what we can supply.Our backlog, particularly, if you look at automotive, industrial, is still very solid. But you see that in that backlog, there is, of course, because of the supply situation I was just describing, there's quite some movements in there in terms of delivery dates and the like. That's maybe on this question. And Alex, maybe on the footprint?

[Alexander Everke, CEO & Member of Management Board]

Yes. So thanks, Sébastien, for the question. So as I mentioned, we made a decision to further invest in Kulim in Malaysia, and also in our step in [indiscernible] for differentiated technology. In Austria, it's more related to CMOS manufacturing. In Kulim, obviously, for LED manufacturing and future technologies, which is the future we're focusing on for future growth.The rest of the industrial footprint, it's still in the project. And we -- as I mentioned, we will be able to certainly communicate in the beginning of next year. There's also a time when the portfolio is more aligned and that we invest in the growth areas of the company accordingly.Last but not least, I think it's also important, and that's also one reason to invest further in Kulim that the utilization is actually quite high, driven by the specifically automotive events for LED manufacturing. So there's a very positive sign we're seeing for the future to come.

[Operator]

The next question is from the line of Stephane Houri from ODDO.

[Stephane Houri, Research Analyst]

It's Stephane Houri from ODDO BHF. First of all, I wanted to talk a little bit about the visibility you have when you look at 2022 with the automotive constraint that you have highlighted, the consumer being a bit under pressure with the market share losses.How can you see -- how do you see 2020? Do you think it will be a year of growth? And if you can improve your margins given the synergies that you are generating in 2022 versus 2021? And also, can you update us on the evolution of the consumer business, taking into account the market share versus if you have any success with other customers?

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

Okay. Yes. Thank you for your question. And let me answer the question on visibility and then Alex can say something about consumer business developments we see. So as I said, the visibility is certainly impacted by the supply chain imbalances in the automotive, but also in the industrial environment that we are still operating in.As you know, we're not providing guidance for full year for 2022 or for next year at this point in time. Also because we have a lot of moving parts still in the portfolio with the planned divestments that are still ongoing. Therefore, 2021 is still a year where we see or anticipate big changes in the business scope and the revenue base. And from that onwards, we then -- once we've achieved that position, then from that onwards, we see our business then also growing going forward.So that's basically where we are at this point in time from visibility going into '16 (sic) [ '22 ]. And it will also be -- again, what I just said also to the question from your colleague early on, it will continue to be also in Q4 a matter of weekly engaging with our suppliers and customers to see how things are evolving.If you look at -- from a profitability perspective, I think the guidance we gave for the fourth quarter also, sort of, with a somewhat reduced revenue base compared to Q3, shows you that we've done quite some work on the cost structure and the synergies and we will also see, of course, that will continue well into '22.So overall, we now have added EUR 80 million in the synergies from a creation perspective and the outlook for the EUR 350 million overall is still valid. So I'm confident that we will progress there well. Alex, consumer?

[Alexander Everke, CEO & Member of Management Board]

Yes. So on the consumer side, we continue to be successful in the consumer as an advanced optical sensing application with multiple design wins at different Android OEMs. And this includes a range of solutions such as behind OLED and the light sensing combined with proximity sensing and different camera enhancement applications. And as an example, we are very successful in the 1D direct time-of-flight we're facing for camera enhancement, so that looks very promising.On top of that, as we also mentioned last time, we have very positive engagement with our large customer bases in the consumer spaces, seeing opportunities in the future coming up and are really getting positive feedback -- very positive feedback on our technology platforms and capabilities we have for mutual applications. And then certainly, we are focusing on bringing new applications and new features and technologies into the market and the consumer space, which also relates to production capacity enhancements we are planning to do.

[Stephane Houri, Research Analyst]

Okay. And just a last follow-up, if I may. Can you update us on the digital division, what remains to be sold?

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

Yes. So as we said, we are -- we have completed a smaller scale transaction in the quarter, connected building applications. We've moved a larger scale transaction towards the sort of final stages of the M&A process. So that would be -- and then Alex said that we hope to announce something soon there. And then we are continuing to -- well on some of the other M&A tracks we have in that. Overall, we said that we would envisage this process to be completed around midyear next year, and that is only the expectation at this point in time.

[Operator]

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

[Didier Scemama]

I've got 2 which are quite long dated. I just wondered if you could give us an update on the LIDAR program. And then completely out of the blue, I just wondered to what degree is your IP portfolio relevance in shape or form to compound semiconductor materials, such as silicon carbide and gallium nitride?

[Alexander Everke, CEO & Member of Management Board]

So let me start with the LIDAR. So we have continued to win business in the LIDAR area, what is [ now decide ] the VCSEL-based applications, also edge-emitting lasers, which is creating a much broader portfolio for the company. But we clearly see that the current market situation with the shortages and the complex supply chain situation potentially will delay the introduction of significant LIDAR application further, and we expect that the midterm revenue driver will be a time frame of 3 years-plus for us as a company.And this is predominantly what we clearly see driven by the shortages and the complexity of the supply chain in the current situation. But from the design win activities, it looks very, very promising. On the second question, silicon carbide is actually not relevant for us. So we cannot give more insight there.

[Didier Scemama]

Just on the LIDAR, can you give us an update on the value of your backlog on that particular product?

[Alexander Everke, CEO & Member of Management Board]

When we announced the 1 or 2 larger programs in the past, we are adding additional projects there, but we are not giving total design win numbers. But what I clearly can say that we are engaged with multiple OEMs, Tier 1s, on those projects, both on VCSEL as well as on edge-emitting lasers.

[Operator]

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

[Jürgen Wagner, Director]

Question on CapEx, how significant will the increase be for Malaysia? And the second one on 3D sensing outside consumer. We increasingly hear about adoption in industrial applications, and you mentioned it in your handout. When would you see first meaningful revenues?

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

So maybe on your question of CapEx. Look, I think what Alex said is basically that based on what we're seeing is that enhancing the footprint we have in Malaysia and expanding on what is already there is absolutely required. And we're currently putting together the exact plans, and we will update you on exactly what it will look like and what we want to do in April when we have our Capital Market Day. And the same is true what we're planning to do in [indiscernible]. Alex?

[Alexander Everke, CEO & Member of Management Board]

Yes, and Jürgen, on your second question, 3D sensing in the industrial space. We also made some announcements we are getting more and more design wins in the industrial base related to 3D. To give you examples, applications like [indiscernible] or home appliances, there are still emerging applications, but certainly, this is the nature of industrial segment.But at the moment, it gets broader and the use case from consumer gets accepted, which, because it's much more convenient and safe, we see clearly a growth vector in the industrial base and a very stable growth vector, which is much less volatile than compared to the consumer business. So we are seeing good traction there, but certainly, it will take some time to materialize the meaningful revenue.

[Jürgen Wagner, Director]

So would it be more '23 then?

[Alexander Everke, CEO & Member of Management Board]

Well, it's increasing year-by-year. But in an industrial basis, the project itself are certainly smaller than in the consumer space, but it will add up on revenue over the next few years, and it will create a very nicely growing stable growth vector for us as a company as we want to the accomplish this to keep a very healthy balance between industrial, medical, automotive and consumer. That's exactly the strategy, and we're actively getting design wins and design-ins to accomplish this kind of revenue split to be more stable as a company.

[Operator]

The next question is from the line of Francois Bouvignies from UBS.

[Francois-Xavier Bouvignies]

I have 2 quick ones. The first one is on your pricing comments. So you mentioned that you will try to increase the pricing where possible. Can you give us a sense where you see pricing increasing within your portfolio and by how much and how much compared to the cost increase. Is it something that will be net-net neutral? Or you expect to increase more your -- the pricing versus the cost increase. So do I have a sense of the gross margin.And the second question is on the customer concentration. With all the moving parts with a market share loss in consumer and automotive dynamic, how should we think about your customer concentration by the end of the year? I mean basically, how much as a range you can give in terms of your largest customer is would be very helpful.

[Alexander Everke, CEO & Member of Management Board]

Yes. Thank you for the question. So first of all, on pricing, it really depends on contracts we have on customers, but we're actively going out to increase prices at various customers and customer segments. Certainly, with the ambition to at least compensate for the price increases where possible. We, obviously, honor contracts we have with customers, but with significant price increases on our cost side, we also expect price increase on the customer side.And this is an ongoing process. It certainly will have a strong impact on future price negotiations with customers because we see this kind of situation, as I mentioned, going into next year -- well into next year. That's why pricing for next year will need to have incorporation -- incorporated these kind of increases, but we are doing that thoughtfully with our customers. And I think there's also a clear understanding in the industry that, that has to happen.On the customer concentration, I think it's very important to see that the concentration of customers after the acquisition of OSRAM is significantly lower, one of the good outcomes of the acquisition, the consumer business, for us, in the third quarter was around 29% of total revenue. And we see more momentum into the automotive right now, and we plan to keep this in this area that we have a very balanced portfolio and revenue structure within consumer, automotive, industrial and medical.And for that reason, you clearly can see that also the dependency on large customers we had in the past significantly decreased and that keeps also our revenue stream more or less volatile and more predictable. But certainly, in all customers, we engage in, we have the clear ambition and the target to grow the business in each of our customers.

[Operator]

The next question is from the line of Dominik Olszewski from Morgan Stanley.

[Dominik P. Olszewski, Research Analyst]

Just two on my side. Firstly, just quickly, given obviously with deconsolidations, the synergy process and the customer changes, could we just get a view on OpEx on the OpEx base into Q4? And then the second one, more thematic, but given the auto shortages, are you seeing a trend towards more premiumization from the OEMs that you are selling through to, specifically in regards to illumination.So I'm curious about the underlying trends, like how much additional illumination dollars or content per car is actually being sold today? And does any of that reflect the pull forward, like I say, because of premiumization or anything else?

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

Yes. Thank you for your questions. So let me start by maybe the OpEx question. Overall, if you look at the development of OpEx, it has been relatively stable as we are still in the implementation phase also of a number of integration measures, especially on the ERP side of the house, for instance, that will also carry us into, let's say, the next year.At the same time, you've seen also relative to a year ago when you look at SG&A that we have demonstrated significant cost discipline and of course, the first synergies coming in. I do not expect that situation to materially be different in the fourth quarter. Maybe on automotive, Alex?

[Alexander Everke, CEO & Member of Management Board]

Yes, on automotive. So certainly, as you correctly stated, the illumination automotive is getting more and more important. We see, obviously, a strong backlog currently related to illumination for automotive. But looking into the future, the LEDification of lands getting more and more important, especially when you look a bit more out both with battery-driven cars, there is no way around that.And the other thing is the features for automotive that interior and exterior lighting getting more and more important for comfort and feeling. When you look at modern cars, we have a lot of internal lighting into cars with different colors. And this is a trend we clearly see from the car OEMs to invest more in internal lighting besides the front and rear lamps, to give passengers a better look and feel inside the car.But also for features and externally for visualization and projection with new technologies related to the car, we clearly see that content increase related to lighting for the car manufacturers is certainly increasing, but we can't comment on single customers or projects.And for us, this is a very big market. That's why the investment in LED is certainly -- and that's why also the additional investments in Kulim to expand capacity is certainly a growth driver for us as a company and going into more sophisticated and higher technology LED capabilities in the next years to come, a very important market for us.

[Operator]

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

[Robert Duncan Cobban Sanders, Director]

Maybe just to dig in a bit on the SG&A again. You've put out the 7% to 9% of sales target. I think that's something you can probably control a bit better than the kind of implied 40% gross margin that you're looking for. So what is the kind of time line to getting that 7% to 9% down -- getting to that 7% to 9%?I understand digital -- the digital sale is going to get you there partly, but would be great to get a kind of view on how quickly you think you can get that down to 7% to 9%. I think you're at 13% right now. And then the second question would just be on micro LED. Just -- could you just update us on how much you've invested so far? Are you in pilot production yet? Or any kind of indication there would be great.

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

Yes. Let me maybe talk about the question on the SG&A, but maybe also a little bit on gross margin and OpEx. And then Alex can say a few words about our perspective on micro LEDs. So I think you yourself mentioned already rightfully saw a number of elements driving us in that direction, particularly on the portfolio side.And as mentioned earlier, we expect that portfolio adjustment to be largely, let's say, concluded in the sense of having closed -- not having basically signed all the transactions we intend to sign by the middle of next year. So then it will still take a while to move these through the P&L. So still 2022 is going to be a year where we're still in transition and transformation from that perspective.The same is true, as I said, just now with some of the ERP and IT -- larger-scale IT integration projects ongoing. So they are also still ongoing relative to the first half of next year 2022. So once that is completed, you should see efficiencies from the synergies coming there.Thirdly, if you look at gross margin, we mentioned a number of times the work that's going on, on the footprint. We've progressed, to some extent, here in the sense that now certain scenarios are currently being vetted, and we are planning to update the market on the overall footprint strategy.We mentioned 2 aspects of them already today, the expansion in Kulim and also some augmentations we plan to do in Premstaetten. And I'm sure that if you look at the projection on gross margin, the part of the footprint that we will be showing in next year, in April, will also be a important part of getting us to the overall ambition level that we've decided. As you know, with footprint projects that there are certain lead times involved with certain footprint progressions, not just on your -- on what you can control yourself, but also on if you have to requalify, for instance, certain production lines with certain customers, et cetera, et cetera. So that, overall, should give you a bit of a picture on when we see all of this materializing? And maybe now, Alex, on micro LED?

[Alexander Everke, CEO & Member of Management Board]

Yes. So let me talk about micro LED. So certainly, micro LED is one of our key initiatives for the company. We are clearly superior with our technology compared to peers. We started to invest in pilot line for micro LED production, and we expect good results there. But clearly, it's a very, very important topic for us where future investments will come. But clearly, also the market is a few years away.So this is nothing what happens next year, but this is such a superior and complex technology where we invest to make sure we stay ahead of the curve and position ourselves as a clear leader in future micro LED and display technology in the years to come.

[Operator]

The next question is from the line of Sandeep Deshpande from JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

I have two questions, if I may. Firstly, regarding the Conti JV. This JV had consolidated losses in the OSRAM numbers. How should we be looking at it now that the revenue has been deconsolidated? Are you still carrying the losses associated with this JV? Or your share of losses associated with this JV in the numbers?The second question I have is regarding -- I mean, when we look at the consensus ahead of today and you've given that updated number, deconsolidating it. But even then, there is a miss of about EUR 100 million. Is this mainly coming from the auto side? Or is this also on that you think the market has miscalculated your consumer revenues?

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

Maybe let me start with your last question. So I think we've explained how we see our revenue moving from Q3 to Q4. First of all, you have to take out, of course, the deconsolidation effects of the joint venture, then the no longer existing CBS or its connected building application business and also differences in -- unfavorable differences in foreign exchange.That in itself alone is already EUR 60 million of revenue that is not there that was there in Q3. And hence, that has nothing to do with a bad quarter or anything like that. It's just simply because of the portfolio changes that we're actively addressing. For the rest, I think you've heard us actively speaking to supply chain balances, production changes at car OEMs, also component shortages affecting our industrial portfolio, and that's simply the reason for the delta between Q3, Q4.Otherwise, it would have been a flat quarter for us when you compare Q3, Q4. And as far as consumer is concerned, we've already told the market earlier this year about the market share loss and obviously that is reflected also in the outlook for Q4. So nothing new there.Then on the joint venture. The joint venture is in this dissolution. We have no longer the revenues. We have -- what happened is that the part that we contributed is coming back to us into the -- and we're basically also looking for disposing that part of the business because it's not at the overall profitability levels that we expect.So there will be some negative impact from the business that has come back to us formally related to the joint venture, but also there, we are seeking to dispose of it. And the process of that disposal is also already on its way.

[Operator]

The next question is from the line of David O'Connor from Exane PNB Paribas.

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

One or two from my side. Maybe firstly, Ingo, on the imbalances in the supply chain. Just to be clear, is that translating into lower orders in Q3 from your auto OEMs and industrial OEM? Second question on the -- maybe on the seasonality. What should we expect kind of as we go from -- out of Q4 and into Q1 next year, given the deconsolidation. Some peers are talking about a kind of a flattish Q1. So maybe even if you don't want to get into the detail on that, what are the puts and takes we need to factor in?And lastly, on the CapEx side of things, can you help quantify maybe what percentage are you planning to increase your manufacturing footprint? I mean is that a 10% to 15% overall capacity increase? Or is this something more significant? And what timeframe is the ramp-up around that? Is that 2022 event or 2023?

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

Okay. Let me try to answer your questions and then, Alex or Moritz, if you want to add to it, feel free. So as far as the order book or the order intake is concerned, we said that we left the quarter 3 with a very solid order book, particularly for automotive. That's still the true -- the case.We have clearly seen that the order intake itself has started to normalize somewhat because in prior quarters, you saw quite some ordering that was driven by situations of allocations, uncertainty about the outlook, very increased demand. And some of this has normalized now, but that still leaves us with a very solid backlog in the quarter.The capital expenditure is a mix, as Alex said, it's a mix of extending capacity for technologies that we are seeing ourselves already strong in to make sure that the anticipated volume growth we see longer to -- mid- to longer term is going to be satisfied in that sense and produce. And then also, we are expecting some investments in technologies that we do not carry maybe as much as we do today. And that's something we will update more on when we do our Capital Markets Day in April because there are still some scenarios, anyhow -- and options we have are being vetted, but clearly, the direction will be according to that.Plus, of course, if you look at an integration perspective of these 2 companies, particularly if you look at the footprint in Asia Pacific, you should also expect that some of the investments we will be doing are related to consolidation of certain existing capacities to make the footprint overall more adequate for the combined entity as well. So it's a number of different elements. So I'm sorry, it's not a straight answer to your question, I know, but all of that will be presented comprehensively in April as of next year.

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

That's quite helpful. And maybe just on my third question on the seasonality. Any puts and takes you should bear in mind there as you exit the year on the winter -- backlog.

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

Yes. So our seasonality, obviously, as we've seen on the environment, there's not -- you cannot talk about normal seasonality at the moment because the supply chain environment is not normal, simply speaking, at this point in time. Certainly, the normal effect you have around -- how many hours of daylight you have doing that, of course, will somewhat impact consumption of some of our products at the end of the day.But again, it's -- all of this is very much driven right now with all the imbalances. Of course, there will be some seasonality when we go into next year. And there will be some seasonality that we've also seen in the past where the first quarter has always been different than the fourth quarter. Based on our current expectation, I would not see that to be that much different. The sort of the magnitude and the amplitude of that Q4, Q1, we still have to see, given the supply chain imbalances, yes, but there will be some normal seasonality to be expected for us also when we start into the new fiscal year.

[Moritz M. Gmeiner, Head of Investor Relations]

Thank you very much, ladies and gentlemen. This is concluding our question-and-answer session for this morning. We thank you for joining this presentation, and we look forward to speaking to you again at our next earnings release. 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.