ams OSRAM AG

SIX:AMS

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. I am Francie, your chorus call operator. Welcome, and thank you for joining the conference call on the full year and fourth quarter 2022 results. [Operator Instructions]

It's my pleasure, and I would now like to turn the conference over to Alexander Everke, CEO; Ingo Bank, CFO; and Moritz Gmeiner, Head of IR. Please go ahead, gentlemen.

[Moritz Gmeiner, executive]

Good morning, ladies and gentlemen. This is Moritz Gmeiner. I'd like to welcome you to this morning's conference call on our fourth quarter and full year 2022 results. With me are Alex Everke, CEO; and Ingo Bank, our CFO, who will give you an overview of our business and financial developments for the fourth quarter and full year 2022.

And with that, I'd like to hand over to Alex.

[Alexander Everke, executive]

Yes, thank you, Moritz. Good morning, ladies and gentlemen. I'm happy to welcome you to our fourth quarter and full year 2022 conference call this morning. In this webcast, I will comment on our business before Ingo will guide you through the financials.

Starting off with the key figures; our fourth quarter revenues were EUR 1.18 billion, and the adjusted EBIT margin was 7.3%, both fully in line with our guidance. For full year 2022, we achieved revenues of EUR 4.82 billion. This is a slight 2% increase year-on-year on a like-for-like portfolio basis, which means comparing the business portfolio we had at the end of 2022. Adjusted EBIT margin was 8.4%.

I will begin with an update on the disposals and the integration of OSRAM. [ We can ] report that the planned disposals are indeed near completion at this point. We have now signed all planned disposals, with the last one announced in December for entertainment lighting. One disposal was closed in Q4 as expected, and we now have only 2 closings remaining for full completion of the disposal program. This closing, we expect over the course of H1.

We remain fully in line with our expectation of total proceeds from the planned disposals of over EUR 550 million, despite a clearly more difficult market environment last year also in this area. The creation of synergies and savings has continued in line with our plan through last year, and we are focused on realizing further progress, as we move through 2023.

We were also very successful in advancing various integration programs across our combined business last year. This included significant IT systems and ERP harmonization, aligning the fiscal year for the Group, streamlining corporate structures and aligning policies and processes. Here, I am glad to confirm that we achieved a full set of milestones in integration, which we had set ourselves for 2022.

Let's move to the development of our business. 2022 has been a demanding year for the global semiconductor sector and negative macroeconomic trends continue to shape the situation in our end markets as we enter 2023. Our full year and fourth quarter results show an overall solid performance of our business, against the backdrop of the impact from last year's geopolitical and macroeconomic developments, which translated into, among other effects, substantial inflationary pressures.

Looking at our segments now; our semiconductor segment was the key part of our business last year and last quarter, providing 66% of full year revenues. Our semiconductor automotive business recorded solid results last year, particularly in light of the demanding market situation we faced. The market environment in the global auto sector was clearly a challenge last year, as it was characterized by impacts to vehicle production volumes year-on-year and continued supply chain volatility, plus meaningful inventory adjustments in automotive supply chains in the second half of the year.

Looking at the fourth quarter, our semiconductor automotive business performed well in line with our expectations. As the mentioned inventory adjustments continued through the quarter. While managing [indiscernible] situation, we confirmed our position as global leader in automotive LED lighting, and expanded our design pipeline for the future.

We are able to drive strong customer penetration in all key regions, based on high-performance solutions for a full range of exterior and interior applications. To give an example, the revenue pipeline for our next-generation highly pixelated LED front lighting grew nicely last year, and we are successful at several OEMs. We offer a fully integrated light source and driver solution, with outstanding performance, with around 25,000 addressable light points enable a new level of performance and safety functions.

Our semiconductor consumer business recorded full year results that were in line with our evolved expectations, which reflected the less favorable market development during the year. Major segments of the smartphone and consumer market held up well through the largest part of the year, and we benefited from our broad offering for top smartphone vendors. However, the China and Android markets did not see a demand recovery from late first half through the second half of the year, which meaningfully impacted our consumer business last year.

In the fourth quarter, our consumer business tracked muted expectations, given that COVID-19-related manufacturing reductions in China created additional negative volume impact in the smartphone market.

We confirmed our position as a market leader in optical solutions, such as display management and camera enhancement sensing to the leading smartphone OEMs and also saw good market and design traction for future devices last year. Here, I can also confirm that we expect to see a further improved increase of our market share in the consumer market in 2024, for our sensing application.

Let me now provide additional information related to our development and industrialization program for our leading small structure sized micro LED technology. Based on latest available information and its assessment, we can add that we currently expect to start reporting relevant revenues from our microLED technology in 2025. I can also confirm and emphasize that the customer engagement in this area is very deep, significant and active. The market feedback we receive, clearly confirms that we hold a strategic leadership position in smaller structure sized microLED technology and that we are the front runner for high-volume industrialization of this next-generation technology.

We continue to spend significant amount of R&D expenses on this program to drive the ongoing process of industrialization, further downward completion over time, and together with the partners in the ecosystem.

It will continue to be a major engineering focus for us to address the technical challenges that still exist. So please keep in mind, what we said all along regarding the complexity of the technology itself, and manufacturing it in high volume. This includes both, our production of manufacturing and the other steps in the manufacturing chain that need to be in place for the industrialization of this technology.

Moving on to our semiconductor industrial and medical business. This area recorded an overall good performance last year. Our industrial markets offered attractive demand support for a large part of the year across our differentiated portfolio. This included our industrial LED solutions, outdoor lighting and horticulture, as well as a healthy contribution from our industrial imaging lines. Our medical business performed well last year, mainly driven by medical imaging solutions for CT and digital x-ray.

In the fourth quarter, however, an increasingly negative demand momentum impacted the semi-industrial business in several areas, which include Horticulture Solutions and LED, industrial and outdoor lighting. These negative impacts were largely driven by the deterioration in macroeconomic environment and the negative regional dynamics in China.

Moving to the Lamps and Systems segment; this segment provided 34% of full year 2022 revenues and showed a solid performance. Our Lamps and System Automotive business, which includes legacy traditional lighting, achieved overall positive results last year, particularly in light of this [ external ] environment. It also performed well in the fourth quarter, with good support from seasonal effects in the aftermarket.

The other areas of the L&S segment in industrial building and Medical showed solid results for the year, given better demand year-on-year for most of 2022. In the fourth quarter, these parts of the L&S segment also started to see negative influences from global macroeconomic trends.

Offering an update on our industry first 8-inch LED fab at our existing location in Malaysia. Construction of the fab building forecast fully in line with plans last year and is nearing completion. We are glad to say that we are able to build [ the shell ] as planned despite a more demanding situation for large-scale building projects in 2022. And we'll continue further significant expansions, in line with our strategic plans this year, as construction of the 8-inch LED fab is progressing towards production availability during 2024.

Let me now come to the outlook of our business; for the first quarter 2023, ams-OSRAM is experiencing a weakened demand environment in important markets, as negative macroeconomic trends continue to create visible market corrections effects. The overall demand situation in our automotive markets remains muted, while inventory adjustments are showing certain signs of stabilization. At the same time, our consumer and industrial business were impacted by prevailing lower levels of demand, driven by weak smartphone volumes, negative macroeconomic influences and COVID-19 related impact in China, in addition to negative consumer seasonality quarter-on-quarter. These dynamics are expected to drive sequentially lower expected production and shipment volumes for the first quarter.

With additional negative quarter-on-quarter effects from the adverse exchange rate developments and the revenue loss of around EUR 15 million due to a fire related capacity loss at the supplier. We therefore expect first quarter Group revenues of EUR 900 million to EUR 1 billion, excluding year-on-year disposal related deconsolidation, as well as an adjusted operating margin of 4% to 7%. These expectations are based on currently available information and exchange rates, and it reflects a revenue deconsolidation effect for the first quarter from closing the disposal of the Traxon lighting business. This effect reduces first quarter revenues by around EUR 10 million on a comparable portfolio basis quarter-on-quarter. The expectations also include year-on-year disposal-related deconsolidation, with the first quarter revenue effect of around EUR 80 million.

Looking further out and assuming an expected recovery of demand exiting the first half, particularly in China and Europe, as well as current exchange rates, we currently expect an improved business environment in the second half of 2023, compared to the first half, similar to what we hear from other industry participants. In addition, we expect to achieve our midterm financial targets for 2024, within the lower half of target ranges for revenues and adjusted EBIT margin. These expectations are based on the currently expected business mix for the target period. Here, we expect that this year's macroeconomic trends and internal dynamics and inflation pressures will further underline the previously mentioned negative impact to midterm volumes.

Before I hand over to Ingo, let me add some personal remarks. This is my last earnings call for ams-OSRAM, as I will be stepping down from the CEO position on March 31. Over the last 7 years, I have been leading an excellent team in a highly attractive company, as we continue to realize our strategy to clear leadership in the optical space. First is ams and then as ams-OSRAM. I would like to take this opportunity to thank my colleagues and the Management Board and management team as well as our employees around the globe for their dedication and commitment. It has been an exciting journey, and I'm convinced that the compelling technology portfolio of ams-OSRAM offers excellent opportunities for attractive long-term growth and profitability.

Thank you very much. And now over to Ingo.

[Ingo Bank, executive]

Thank you, Alex, and a very Good morning to all of you. Before I start going through our financials, a few comments upfront. When we refer to adjusted financial metrics, we refer to adjustments for M&A-related transformation and share-based compensation costs, as well as results from investments in associates and sale of a business. You will find the reconciliation to the IFRS basis of presentation available on our IR website.

Let us first have a look at some of the key financials. I'm now on Page 23 of the Q4 2022 earnings release presentation. With revenues of EUR 1.177 billion and an adjusted EBIT margin of 7.3% in the quarter, we came in within our guidance for both metrics. For the full year, revenue was EUR 4.8 billion, with an adjusted EBIT margin of 8.4%. Adjusted gross margin was 28.5% in the quarter, similar to the prior quarter. Adjusted net result was at EUR 29 million in the quarter.

Operational cash flow continued to be strong in the quarter at EUR 201 million. Net debt was EUR 1.7 billion at the end of the fiscal year 2022, lower when compared to the same quarter a year ago and slightly up when compared to prior quarter. Overall, this net debt position translated into a solid leverage factor of 2x.

Moving to Group revenues on Page 24 of the presentation; for the full year 2022, Group revenues were EUR 4.8 billion, nominally lower by 4.4%, largely reflecting deconsolidation effects from the portfolio realignment. When comparing the equivalent portfolio 2022 to 2021 for a like-for-like comparison, we actually saw a sequential growth like-for-like of 2%.

If you look at the revenue distribution on Page 25, you can see that in 2022, 66% of the Group's revenue were driven by semiconductor segment, with the balance coming from Lamps and Systems. From a net market perspective, automotive was the strongest contributor with 41%, followed by Industrial and Medical with 35%, and Consumer was 24%.

Moving now on to Group profitability, I'm on Page 26 of the presentation now. Sequentially, adjusted gross margin was stable at 28.5%, amongst others, reflecting lower factory utilization levels in a weaker demand environment, in combination with planned inventory reductions in our operations. The Group's adjusted EBIT margin of 7.3% for Q4 2022 was very similar to the prior quarter. For the full year, the Group's adjusted EBIT margin was 8.4%, 160 basis points lower than in 2021, reflecting a far more challenging macro environment in 2022, particularly in the second half and a less favorable mix when compared to 2021.

Turning now to the operating expenses on Slide 27, we see that the adjusted R&D spend for the year was stable across the quarters at around 12% of revenue mark. The overall targeted range for the Group remains to be between 11% and 14%. Adjusted SG&A expenses for the Group came down in the second half of the year, as integration-related synergy effects and resulting cost advantages contributed to an overall lower spend for the Group. For the full year adjusted SG&A as a percentage of revenue was 10.8%, a very clear improvement by 110 basis points when compared to fiscal year 2021. Our targeted range for SG&A spend for the Group remains to be between 7% to 9% over time.

Turning now to the net results on Page 28, the adjusted net result for the ams-OSRAM Group in the fourth quarter was EUR 29 million, including a net financial result of negative EUR 43 million. Adjusted basic earnings per share in the fourth quarter were EUR 0.11 and CHF 0.11.

Revenues for the Semiconductor segment were EUR 767 million in the quarter. Full year 2022 revenue in our semiconductor segment amounted to EUR 3.17 billion, which is lower compared to a year ago, as it reflects demanding market situation, particularly in the second half of 2022. As Alex already pointed out, the automotive market environment in 2022 was characterized by continued supply chain volatility, as well as notable inventory adjustments in its end-to-end supply chains. In the consumer market, a lack of demand recovery in the China and Android markets meaningfully impacted our Consumer business.

Adjusted EBIT came in at 6% for the quarter, reflecting lower demand as well as lower utilization of our industrial base, which we took on, to actively manage inventories in a weaker demand environment. For the full year 2022, this segment delivered operating profitability of 10%.

In the course of the fourth quarter, we saw ongoing inventory corrections in end markets and increasingly unfavorable demand effects driven by the macroeconomic environment and regional dynamics in China, impacting the segment's industrial business in certain areas, including LED, industrial and outdoor lighting and horticulture solutions.

Moving now on to the Lamps and Systems segment. Revenues here were EUR 412 million in the fourth quarter, up sequentially. Quarter-over-quarter growth was driven by the seasonally stronger traditional automotive lighting aftermarket business. This seasonality helped to more than offset the disposal related to deconsolidation effects of around EUR 10 million from the prior quarter.

For the full year 2022, revenue was around EUR 1.65 billion in this segment, reflecting our strong market position in automotive and various industrial lighting end markets. On a like-for-like portfolio basis, in other words, reflecting the deconsolidation effects throughout 2022, we actually saw a meaningful growth year-on-year.

Adjusted EBIT for the quarter was 10% and 6% for the full year. This is a strong improvement compared to 2021, reflecting positive effects from the portfolio disposals as well as efficiency measures. In the course of the fourth quarter, we saw the successful closing of the Traxon transaction, our business for Dynamic Lighting Solutions, as well as the signing of the sale of Clay Paky, the entertainment lighting fixture business.

Let me now complete the review of the company's financials, with a look at the cash flow and debt position of the ams-OSRAM Group on Pages 34 -- 31 and 32 of the presentation. The Group generated EUR 201 million of operating cash flow in the last quarter of 2022. For the full year 2022, the Group's operating cash flow continued to be very strong at EUR 599 million or a very solid 12.4% of revenue. 2022 CapEx spent in the Group was EUR 537 million, translating into a spending level of approximately 11% of revenues. Overall, spending increased as expected in the second half of '22, but we stayed below our previous expectation of EUR 600 million in the end.

The CapEx spending also reflects the progress made on the building of the new 8-inch LED fab in Malaysia, which had a meaningful share in the Group's CapEx spend in 2022. We expect this upward and elevated trend for CapEx spending coming out of Q4 '22 to continue into 2023, in line with our previous communication. This is firstly due to the building completion of the new 8-inch facility, and subsequently to equipment being installed over time. Overall, we are still targeting to keep the overall CapEx spend below EUR 1 billion for 2023, also in line with our previous communication.

Turning to Page 32 now; the Group's cash and cash equivalents amounted to EUR 1.09 billion at the end of the year. We actually repaid well over EUR 400 million of debt in 2022, most importantly, the matured USD convertible bond, as well as some other liabilities. The Group's net debt stood at EUR 1.72 billion as for the end of 2022, slightly up when compared to the September quarter, but importantly, on a lower level when compared to the end of 2021. Overall, this translated into a financial leverage of the Group of approximately 2x net debt-to-adjusted-EBITDA, which we regard as a solid situation in the industry environment. And our fully committed EUR 800 million revolving credit facility in euros remains undrawn.

On Page 33, you find the overview of our outlook for Q1 '23 that Alex already outlined earlier, with expectations based on current exchange rates and available information. We expect Group revenues in the range of EUR 900 million to EUR 1 billion for the first quarter, using the currently prevailing EUR o-dollar exchange rates. The adjusted EBIT margin, we expect to be between 4% and 7% for the first quarter of the new fiscal year.

As this is my last earnings call with ams-OSRAM, I would like to take the opportunity to thank my colleagues and the Board and the management team for their strong support over the past years. Also, a special thank you goes out to my amazing finance team. And finally, I would also like to thank our employees, who have done a stellar job in 2022, in what was one of the most volatile market and macroeconomic environments we've seen for quite a while.

And with that, I would like to open the floor for questions.

[Operator]

[Operator Instructions] We have the first question from Janardan Menon from Jefferies.

[Janardan Menon, analyst]

I just wanted to narrow in a little bit on the microLED, your statement that you will get revenues in 2025. There was -- previously, I think, you even alluded to on your Capital Markets Day presentation that there will be a ramp in 2024. So is this -- I just want to clarify whether this is a delay in the expectation for that microLED revenue? And if that is at all the case and since you're saying that the fab will be in place in 2024, will there be a margin impact because the fab will be actually delivering revenue only 1 year later? And then I have a brief follow-up.

[Ingo Bank, executive]

Okay. Well, what we've always said in the past is, that we are building a new 8-inch facility and readying for ramp-up in 2024, that's what we said. And that goal has not changed. We said that we expect to be in a position to have that ready, but we've never communicated a timing expectation for a ramp of microLED technology.

As to your second question, as I said, we still are working on being able to be ready for a ramp in 2024. As it is usual, if you ramp facilities in a year, you have some costs, some idling costs in a normal ramp-up environment, and that estimate has not changed really.

[Janardan Menon, analyst]

Understood. And on the second half recovery, are you seeing any clear signs, such as you started the automotive inventory correction quite early. Are you seeing any signs of that bottoming out by the first half of this year, or anything else which gives you confidence that your end markets will start improving into the second half, and then take you to the low end of your guidance range in 2024?

[Alexander Everke, executive]

Yes, this is Alex. So first of all, we see that the inventory in the chain is addressed by industry players. As you correctly said, we started relatively early because we announced weakness in automotive market, as one of the first companies. So we see that from the supply chain point of view, that inventories gets addressed. We also see that the chip shortage in the automotive space is getting easier, and we see that from the demand point of view, kind of stabilizing in the automate space. And for that reason, we can assume in the automotive area, a recovery in the second half from the [indiscernible] perspective. We see that in the consumers business, assuming that China does resolve the COVID-19 situation within the first half, that also there should be a recovery in the consumer space. How strong, it's hard to say. But if you look at the facts and the inputs we're getting from customers and industry players, we could -- we can assume a recovery in the second half of this year.

[Ingo Bank, executive]

I think it's important that demand recovery is starting to materialize when we exit the first half. That's clearly important. Right now, as we said before, the demand situation is rather challenging, which I think you also see reflected in our first quarter guidance. So clearly, if you look at the second half, that means that we do expect the recovery out of key markets, particularly China and Europe as well.

[Operator]

The next question is from Sandeep Deshpande from JPMorgan.

[Sandeep Deshpande, analyst]

My question is regarding the continuing improvement of your business. So given the challenging environment that you face in 2023, do you see the improvements you've seen, for instance, in autos year-on-year to continue or whether that will reverse? And then, of course, in the consumer side or rather the semiconductor side of your business, how do you see that full year behavior, given the weak first quarter that you are seeing?

[Ingo Bank, executive]

Well, look, I mean, as we just said, we've seen very early on last year, first corrections in the automotive, distribution chain in terms of inventories that, as Alex has said, seems to be stabilizing right now. We are very early in the value chain. So we think it's early -- see early when they are adjusted either up or down. So from that perspective, sort of -- we see that there's an opportunity in the second half, of course, driven on by sort of end demand at the end of the day.

For consumer, I think we said that also, if you look at the fourth quarter, there were certainly impacts also coming out of the COVID situation in China, and still a rather muted Android market. At this point in time, if you look at the sort of first quarter, we don't necessarily see that recovering. There's obviously an expectation that overall China, throughout the year will start recovering, including consumer end demand. So that should help also for the second half.

For the last one for Industrial, we also flagged in the fourth quarter already that there are certain developments, particularly from rising energy costs for certain applications that we sell, as well as for outdoor lighting, where construction plays a little bit of a role. So there, we also see some adjustment process. Still ongoing and also as we go into the first quarter, and that adjustment process will still take a bit. And then we should also see some of that coming back into probably the second half. But again, that's the current assumption, and it's really very much dependent on particularly Europe and China demand recovering when we have exited the first half.

[Sandeep Deshpande, analyst]

And just a quick follow-up on your gross, Ingo, you'd announce the synergies as well as cost-cutting plans. Where are we on that front at this point in terms of -- is there going to be further positive impact to the margin from there, or we are running out of steam on that front?

[Ingo Bank, executive]

Yes. On the synergy side, we are progressing in line with plans. I mean we updated you in the third quarter, where we were at around, I think, the EUR 248 million or so mark of synergy run rate, that is still progressing in line with plans. And as you know, the target is to be at around EUR 350 million by the first quarter of '24, so that's all on track. That's particularly still ongoing on the SG&A side, as well as some operational costs. We also told you that we would start the footprint -- industrial footprint process in the fourth quarter, which we started, which we did, where we basically reduced one location we have in Asia Pacific. And that should also help, let's say, reduce operating expenses also going into particularly 2023. And then when we spoke about the EUR 100 million cost savings program, that's also in full implementation. Because obviously, if you're working in such an environment, macro wise, you focus very clearly on the things you can control and that's cost and cash, and that's what we're doing. We've done it always in the past. And so that's all on track.

[Operator]

The next question comes from Robert Sanders from Deutsche Bank.

[Robert Sanders, analyst]

Yes. Good luck to Alex and Ingo on your future endeavors. I just -- my first question would just be on microLED. There was a report from the SEC, which is an industry analyst saying that microLED for Apple watches would be 5x more expensive than OLED, and that it would only feature in a premium device, a sort of $800 device. What is your kind of current thought process on the adoption rate within the watch lineup and within -- and in terms of moving to [indiscernible], because it does seem like the main OEM in this area seems to be pushing out their adoption rate? And I was just wondering, what are the key kind of drivers of that adoption and getting the cost down? Is it going to be mainly pick and place or is it somewhat to do with what you guys are producing?

[Alexander Everke, executive]

Yes, Rob, Alex here. So as you know, we can't give comments on specific end products. But if you look back, when the transition happened between LCD and OLED, we had actually exactly the same question. And obviously, every new technology, when you introduce it to the market and at a higher cost level than the replace technology. But it shows, and that's also the plan, the more you go in high-volume production, which is on our side, but also it applies for the whole supply chain, the costs will come down to a level that a broad adoption is absolutely possible.

And when you look from the past, when OLEDs took over the share of LCD screens, it started -- which is normal on the high-end side first, but then deployed and got deployed to midrange. And now basically, most of the mobile devices have an OLED screen. We see the same or very similar transition for the new microLED technology entering, obviously, in a higher end first, but then migrated into the other segments over time. And the main driver for cost reduction is obviously yield improvements, high-volume production, which will happen then naturally.

[Robert Sanders, analyst]

Great. And just a quick follow-up, just on the 28% gross margin. Could you say what that gross margin would be without underloading? Because it feels like that -- you're still relatively underloaded, and you haven't quite completed the kind of manufacturing location optimization programs. So is there going to be a big step-up in the future when you pull out some fixed costs, you close sites, et cetera? And when is that going to come through?

[Ingo Bank, executive]

Yes. So Rob, I think if you look at the differences in, let's say, adjusted EBIT margin for the semiconductor segment year-over-year, for instance, in the fourth quarter -- to some extent also in the third quarter, you can assign an unsubstantial part of that difference -- to a difference in the underlying gross margin, which indeed also has to do with utilization. So indeed, part of the plan is from an industrial footprint conservation part where we start now, to take more of the cost out. There's more also to come also in 2023. But of course, another part also is, of course, driven also by how the volume overall will then develop when we move in the second half of '23 and into 2024.

But clearly, over year-over-year, you can assign a big -- not insubstantial part, due to underutilization. Please also bear in mind that, in the fourth quarter, we've reduced our inventory position with more than EUR 100 million. And obviously, that's next to, let's say, a somewhat weaker demand environment, another impact that we took on consciously to make sure that we run our balance sheet with the proper inventory levels in such a macro environment, and that had an additional effect, of course. So I think that's kind of the effect you have to take into account.

[Operator]

The next question comes from Jurgen Wagner from Stifel.

[Jürgen Wagner, analyst]

A follow-up on the microLED, you mentioned in your prepared remarks that due to technical challenges, the product is delayed. Where are those challenges, and what does that mean for you? And second question on the sensor socket wins for '24 that you basically have confirmed with your market share gains in consumer, how is that progressing? And is that also at risk for a delay?

[Ingo Bank, executive]

So I don't think we said that there are technical challenges or that there is a delay, the only thing we did today is that we added information available to us and based on an assessment we did that we expect now relevant revenues to be -- for microLED in 2025. We still expect our 8-inch LED manufacturing facility to be ready for ramp in 2024. Also if you go back, we said all along that when -- coming back to microLED, it's, of course, a highly differentiating technology, which will have technological challenges and process challenges. That's what we always said. And we also said that we're working here in an ecosystem, where it's not just us, but also others that need to make sure that it can be industrialized, et cetera, et cetera. So that's -- I think, what we've also said.

And sorry, your second question was maybe Alex...

[Alexander Everke, executive]

The second was on the sensing -- improvement in the consumer market share. So as you know, sensing devices and design wins in this area projects, which are designed to plan platforms. So we don't expect changes there. And this is based on IP and manufacturing capability, which is running for the company since quite a while.

[Operator]

The next question comes from Sebastian Sztabowicz from Kepler Cheuvreux.

[Sébastien Sztabowicz, analyst]

It seems that some other microLED players and notably, one called PlayNitride is considering ramping up an 8-inch microLED fab as well. How do we see the competition building up on microLED? And attached to that, when do you expect to see the first prepayment from your LED strategic partner, microLED strategic partner?

[Alexander Everke, executive]

Yes. Alex here, thanks for the question. So if you look at the facts and what we hear from industry player, we are clearly far ahead of competition in IP technology and obviously, in the investment in the first 8-inch LED manufacturing capability. I think it's good news that more and more companies are getting interested in this technology. It shows that the market sees the market potential and the wide range of market application, which is good news. But getting the feedback from various customers, suppliers, industry players, I clearly can state that we are clearly upfront with our positioning as a company in microLED technology.

[Sébastien Sztabowicz, analyst]

And for the prepayment, when do you expect to receive the prepayment?

[Ingo Bank, executive]

So there's no update on the prepayment. We didn't -- you didn't see it in the Q4 financials and I cannot give you an update when it's -- we just announced that we received it in terms of an agreement and how and when we will make use of it, we will see.

[Sébastien Sztabowicz, analyst]

Okay. And one last question, if I may. On the modeling side, how should we model the OpEx moving into Q1? And also, do you have any indication on the modeling for the full year, given all the cost-cutting action ongoing? The disposals have been already completed, what needs to be done with the 2 [indiscernible]? What should we model the OpEx for Q1 and this year?

[Ingo Bank, executive]

Well, I mean you've seen that we did quite some steps on the SG&A side in the second half of 2022. We've now more or less completed the ERP rollout that we had in mind, there's still some sort of aftercare we are doing right now, but that has been very successful. That should give us further improvement possibilities in the -- sort of also starting in the first half somewhat. I just mentioned, started readjustments on the footprint that should move -- that takes a little bit longer typically before you see that in the financials. And on the synergies, I don't expect, let's say, a kind of a different rhythm into the numbers than we've seen in '22. So that's all I would say at this point.

[Operator]

The next question comes from Adithya Metuku from Credit Suisse.

[Adithya Metuku, analyst]

Yes. Two questions, please. So firstly, just on the micro LEDs, you talked about process challenges, et cetera, to expect as you ramp these things as usual with any technology. So I just wondered if you could talk a bit about how we should think about profitability in the micro LED landscape, whenever it is that you ramp? And are you able to give us some color on what sort of yields you're seeing, at least in your R&D processes, when you're trying to replicate these steps, so that we have some idea of how this numbers might trend, as you industrialize this technology?

And secondly, I just wondered if Ingo, you could give us some idea of the underutilization charges you had in 2022, to give us a sense of how much uplift there might be on the gross margin side as utilization levels increase? And if you could also give us some sense of where you expect this to go in 2023, if you're able to, that would be helpful. And all the best in your future endeavors to both Alex and Ingo.

[Ingo Bank, executive]

Yes. Thank you. So look, I mean, I think we need to remember a few things. First of all, the 8-inch LED facility we are putting in place in 2024, is meant to cater for very differentiated LEDs and microLED, and it's built for a very long period of time for the next 10 to 20 years to shape our LED business also, based on the growth opportunities we clearly see in the longer horizon. Also acknowledging that, we knew that at some point in time, in the not-too-distant future, we would otherwise run out of existing capacity overall. So I think that's -- that we should not forget when we talk about microLED.

With any kind of technology when you ramp in the first year, one should not expect that, that will generate a profitable contribution to your bottom line. That's normal. You have the typical learnings that you have. You don't have the most fantastic yields initially, and that's not going to be different here, than it has been also with other technologies. And then what we've seen, however, in the past, also when we look back in our Singapore engagement back then, we've seen very quickly the team being able to improve yields and get the learning effects in there. And then you can see, certainly in the -- so year 1 is always kind of a ramp year. And then in year 2, you see very meaningful improvements, obviously. And part of it obviously is then also a bit dependent on the underlying volume. So here, I would not see any kind of difference.

On your gross margin question on the utilization, I would just reiterate what I said to Rob, basically. I think if you look at the difference in profitability, in the semiconductor area, which is the biggest part where we talk about, let's say, underutilization given the asset structure there, you can certainly sort of take a -- not insubstantial part of the difference in adjusted EBIT we have there, as part of a gross margin difference, and that is largely driven by underutilization which we started, especially to see in the second half of the year. So third quarter, we already [ factor ] that. Fourth quarter, we clearly saw it now also in the numbers. So I think that's the best indicator of what it is.

Obviously, that's also in the semiconductor area, what I said earlier in my prepared remarks, there was a mix impact there -- and the mix in this business was a little bit unfavorable, when compared to a year or two ago, has also to do with a -- little bit with our consumer business. So it's not just all underutilization, but certainly, that plays a very big part now.

Moving into 2023, clearly, in the first quarter, that's not going away, the demand environment out there is difficult, as we said. And then when you look at what we said about our expectation that there should be some kind of recovery in the second half, of course, pending demand recovering in China and Europe, what we said, then you also quickly see as that happens, how the underutilization sort of turns around completely and the elevator goes up again and not down. So from that perspective, that's just the nature of our industry, and that's how we should see it evolve.

So certainly, some impact still in the first half and then second half should be different.

[Operator]

The next question comes from David O'Connor from BNP.

[David O'Connor, analyst]

Great. Maybe first one, Ingo on -- maybe following on the last question on the second half improvement. I understand you are hopeful of a second half recovery. But I mean, do you see anything in your orders or visibility of customers to support that? And can you remind us of your lead times across the business? That's my first question.

[Ingo Bank, executive]

So look, I mean, as I said, it's very early on in the year. So I think nobody has a real clear view. But like any other -- like a number of other industry participants and also based on customer engagements, there is an understanding or an assumption that the demand will recover in China and in Europe when we exit H1 and then we move into H2. That's clearly what the underlying assumption here is. And of course, in that direction, the orders have to be built. But we're still early on in the year, so January just ended. So that's the situation we're in right now.

[David O'Connor, analyst]

Okay. Fair enough. Maybe a question on the FY '24 target model. It seems like you've lowered that around EUR 300 million. Could you split that out for us across the kind of [ big buckets ] of industrial and new growth drivers, just to get a sense of kind of where the shortfall is coming from.

[Ingo Bank, executive]

Yes. Now the reason -- look, the reason why we've qualified our guidance for 2024 -- mid-term guidance for 2024 today, is simply because we've seen a bit of a worsening of the macro environment since the fall of last year. And therefore, we expect some kind of trailing effects of that evolution in '23, possibly also into '24. If you look at China right now, if you look at sort of the ongoing inflation pressures, it has certainly on some consumer demand, for instance. And if you then translate into our assumed business mix for 2024, we expect that, that will have some trailing effect into '24. That's why we qualified it today, and said it's more in the lower half of the target range.

[David O'Connor, analyst]

Okay. Got it. And one last clarification from my side. Just a [ clarity ] on the microLED that there has been no change in the time line of microLED ramp-up versus the CMD last year. Is that correct?

[Ingo Bank, executive]

No. What we said at the CMD is that, we would expect our 8-inch LED facility being ready for ramp, and that's still the goal, and we're working towards that. I mean Alex pointed out to -- that we're making the good progress on, let's say, the build of the facility and the infrastructure in that, and that's still ongoing. So that -- what we said in the CMD is still valid. The only thing we did today is we provided some additional information based on recent information and our assessment of that, as to when we expect out of that facility coming relevant microLED revenue, and that we now, as said, is in 2025.

[Operator]

The next question comes from Francois Bouvignies from UBS.

[Francois-Xavier Bouvignies, analyst]

One quick clarification, if I may. So if we look at your EBIT margin at the Group level, I mean it was 8% in Q3, 7% in Q4. I know you are guiding EBIT lower at the midpoint. And you mentioned that you did some work on, of course, on the synergies, also deconsolidation, which in theory should be better margins. You also mentioned some offset in terms of business mix. So we still don't see the improvement with all your work you have done, and of course, you have the underutilization charges and the mix that you mentioned, but I was just trying to understand, when do you think we will be able to see this work -- fruits basically, and should we treat the Q1 as maybe the low base for this year as -- if we expect a recovery, and also the synergies and the consolidation impact coming through?

[Ingo Bank, executive]

Yes. So I think actually, we saw some of that in the numbers clearly last year. If you look at, for instance, SG&A expenses that came down, was 110 basis points, which obviously is related to, let's say, the cost reduction and synergy efforts we've been taking. Secondly, we've also said that the synergies are gross pretax numbers and some of that obviously gets reinvested. We talked a lot about the readiness for the facility.

Obviously, that also requires underlying R&D spend for the products that we want to launch into that facility, that's important. And you clearly saw it in the Lamps and Systems margins, where you see the improvement year-over-year being quite substantial actually from a profitability perspective. So I think we have actually already seen -- of course, against that, we've seen the macro environment, right, which -- when we started the entire acquisition was, of course, not in the cards.

We've seen inflation, which was clearly a headwind for everybody last year, especially on the procurement side of the house, and these are all effects that go against some of the things we're doing. And going into 2023, I already -- I believe, answered the question as to how -- what I see on the synergies. It's progressing as planned. We talked about EUR 100 million of cost savings that we have been implementing and should see some improvements also going through in 2023.

And then we took the first step into, let's say, the footprint consolidation in Q4, that we announced also earlier on when we gave guidance for Q4 and Q3, and that should also see some impact. But again, this is against the macro backdrop now, that kind of dilutes a little bit, obviously, what we're doing on the cost front, but we're moving on. Of course, doing, as I said, all the things we should be doing given that's the things we can control.

[Francois-Xavier Bouvignies, analyst]

And I mean if I look at Q1 with the macro impact, the recovery that you see from -- through the year and the mix potentially turning more positive. I mean should we treat Q1 as a low point of the year, any improvement from there or it's still quite uncertain at this stage?

[Ingo Bank, executive]

I would be -- I mean, we're very early in the year and the environment is still very dynamic. So I think -- for now, as I said, we're working on the things we can control. We have sort of formed a view on the second half, also supported by some of the things we see from other industry participants and customers as well. But look, 2022 has been very dynamic, and I'm very early on, its only January. So I think it's too early to form a very clear view yet.

[Francois-Xavier Bouvignies, analyst]

Okay. And maybe one last clarification for 2024. You mentioned in the past a new sensor design win in the smartphones is still on track. I mean, there is no impact from this program to your 2024 downgrade, right? I mean if I summarize correctly, it's just macro driven, nothing with this design win for 2024?

[Ingo Bank, executive]

So what is -- win for 2024, obviously, also compensates negative effects we mentioned. But it shows at the same time that we are really on track in our customer engagement, in our portfolio positioning and that we are regaining market share in the consumer space as we have planned. And that's a very strong confirmation in the right direction.

[Operator]

The next question comes from Didier Scemama from Bank of America.

[Didier Scemama, analyst]

Yes. Most questions have been answered. Just wondered if you could give a bit of color on the interest payments in Q4? It was a bit above what I expected. And also if you -- maybe a question for the entire management team, I know you sort of said it's early days, but would you say that you would expect fiscal year '23 to be a revenue decline of substance, or I mean, is there anything you can help us sort of quantify the revenue for 2023?

[Ingo Bank, executive]

Yes. So on the interest payments, we typically pay not every quarter the same. That's different to how we accrue, of course, for the interest expense. So that's why not -- but the interest payment we had in Q4 was fully in line with what we actually planned for. So you can't assume every quarter the same interest payment. But overall, it was completely in line with what we had, and we have right now gross and interest. If you look at the total portfolio, we have of around 3% -- between 3.8% and 3.9%, I believe, at this point in time.

Obviously, for 2023, the only thing I can say about full year, as we're just starting the year, is that there will be some effect, of course, from the deconsolidation of some of the activities we still had in the year 2022, similar to what we had in '22 when comparing to 2021. And that will depend a little bit on when we expect the closing of this. So it's also for me right now, a bit too early to say -- that's the only thing I can say at this point in time.

[Operator]

The next question is from Harald Eggeling from ZKB.

[Harald Eggeling, analyst]

One follow-up on the prepayment. To understand it correctly, I guess the prepayment is related to some kind of milestones. Probably you could elaborate a bit on this? And the amount, what you then might receive, a certain milestone would be achieved? Is it related to future sales, or what would it be related to, please?

[Ingo Bank, executive]

Yes. Look, I appreciate the interest in that topic. But as we said already in Q2 when we first announced it, I'm not at liberty to disclose right now what the specifics of it is. I would just like to highlight that we didn't utilize it in Q4. So it's not in the financial statements.

[Moritz Gmeiner, executive]

Thank you very much ladies and gentlemen. This concludes our question-and-answer session of the call this morning, and we would like to thank you for joining us this morning and look forward to speaking to you again with the next set of results. Thank you very much, and have a good day.