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Ladies and gentlemen, thank you for standing by. I am Stuart, your Chorus Call operator. Welcome, and thank you for joining the OSRAM Licht AG conference call on the first quarter 2019. [Operator Instructions] I would now like to turn the conference over to Andreas Spitzauer. Please go ahead.
Thank you, operator. Good afternoon as well as good morning, ladies and gentlemen. My name is Andreas Spitzauer, Head of Investor Relations of Osram, and I want to welcome you to OSRAM's conference call for our Q1 '19 results. As a reminder, the conference call will be recorded and is available on our homepage, www.osram-group/investorrelations.com. You can find today's presentation as well as later a transcript there as well.
It is now my pleasure to turn over the call to Dr. Olaf Berlien, the CEO; and Ingo Bank, the CFO of Osram. Please go ahead, Olaf.
Yes. Thank you very much, Andreas. Ladies and gentlemen, warm welcome from my side as well. Let me start with an overview of our first quarter. My colleague, Ingo, will then provide you with a more detailed explanation of the financial figures and of course, followed by the Q&A session from you.
Looking at Slide #3, you can see that we had a quite challenging start to fiscal year 2019. The negative market dynamics that we already saw in the second half of the fiscal year 2018 further increased between October and December. All of our business segments were impacted by a considerable slowdown end of 2018. Main drivers were the weak growth in China, the WLTP issue in Europe and the ongoing trade conflicts. Turning to Slide #4. Revenue from the continuing operations amounted to EUR 828 million in the first quarter. This is a decline of around 15% on a comparable basis. Adjusted EBITDA was at EUR 93 million. The margin reached 11.3%. Free cash flow was impacted by the revenue development on -- and CapEx, but finished slightly better than last year. The comparison with the first quarter a year ago is particularly striking, but we have to consider that we come from a really strong Q1 2018. And as you know, this refers to October till December 2017. The economy was booming at that time. We were unable to meet the high demand of our automotive LED lamp. Whereas, Q1 2019, the weak growth in China clearly impacted us, especially the automotive industry. China reported the weakest quarter in car sales growth since 2005. I will come to that later on. The European automotive industry posted a weak demand too. Here, the effects from the WLTP are still there. Last but not least, destocking in general lighting by our customers and the weak demand in smartphones affected our financials in Q1. The figures no longer include the activities of our service business in the United States. We call it SLS, for which we signed a sales contract in January, nor the European luminaires business, which is currently in a divestment process. So this takes me to Slide #5, and I would like to talk more about markets. The German Economic Research Institute, ifo, reported the weakest number since 2012. It's both economic climate index, you sit on the left side, dropped to minus 2 points in Q4. The same trend was mirrored by the global PMI index on the right side. Global manufacturing expectations slowed down significantly as you can see on the right side. We clearly saw the same trend in our revenue development in our first quarter 2019. The decline that we saw in October and November was in line with our expectations. However, the numbers in December, minus 24%, fell dramatically and without any prior indication. If we look at the global car production on Slide #6, we see this decline in this -- in the last quarter in all regions. We had it in NAFTA, where the growth rates have dropped since November. You can see it on the left side. And we saw it in Europe, where the market suffered from the post-WLTP ramifications. But the biggest impact was clearly in China, where growth rates came down rapidly. As you can see from the right chart, Chinese auto sales have declined sharply, with Q4 of the calendar year 2018 down 15% year-over-year. And Morgan Stanley wrote it is the worst quarter since 2005. Again, this was mainly due to the steep decline in December. And this hit us. We are the market leader in automotive lighting. China is our most important market. And accordingly, our China revenue year-over-year dropped by 18% in the last quarter. Ladies and gentlemen, the uncertainties in the market continue in 2019. Market researchers remain cautious. As a result of the ongoing market and political uncertainties, visibility for the quarters ahead remain rather low. If we have a look at what our customers expect to order, we see an optimistic order volume for 2019. And Page 7 shows you, on the left side again, the deviation in calendar year 2018, between agreed-upon contract value and actual billings. The right-hand chart illustrates the volume agreements for calendar year 2019, showing that the majority of our automotive customers have indicated higher order volumes in 2019 compared to calendar year 2018. This is an important data point regarding our more positive expectations for the second half of our fiscal year. Taking into account the deviations from last year, you may ask, "why should we believe in the 2019 order volumes to come?" The answer is, because the 2019 figures already reflect the cautious forecast of our customers, whereas the 2018 assumptions were made in the times of a booming economy. So there are reasons to believe in more optimistic order volumes for the second half of 2019. But for us, it is -- for the time being, we remain cautious. So the management board has initiated a number of countermeasures. The main focus is on cost savings and, of course, top line growth. On Slide #8, you see our operational program, which we showed you at our Capital Markets Day in November, and which we promised to report on a regular basis. Overall, execution is on track. We delivered what we have promised, but let me just highlight some achievements. In January, we signed a contract to sell our service business in the United States that we had announced last year. And we are making good progress in the sale of our Siteco luminaries business. We are currently in concrete talks with interested parties. Due to the weak first quarter, we have initiated additional measures to improve our performance. This includes strong OpEx measures within Opto to remain competitive and we announced a reduction of about 300 jobs in Regensburg as well as 200 additional temporary staff. So let me finish with some latest developments in Q1 and in the last weeks. A few weeks ago, at the Consumer Electronics Show in Las Vegas, we presented a wide range of fascinating new technologies, technologies that extend far beyond visible illumination, such as LIDAR and sensor application for driver assistance and autonomous driving, facial recognition for smartphones, digital solution for smart farming and as well as our digital ceiling. The CES demonstrated our strategy of becoming a leading high-tech photonic company is making good progress, and we are focusing on the right trends, be it in the digital ceiling, autonomous driving or increased content per car. The feedback from our customers and visitors was overwhelming. We generating 3,600 new customer leads in these few days and 5 million social media engagements in this short period of time, making the CES as a big success for us. The interest in our new technologies is also paying off. Just recently, we achieved our first 2 Vixar designs wins with Asian mobile phone makers. Vixar technologies are being used for facial recognition. Taking that we just bought Vixar last year in the U.S, I think that's a good success. So ladies and gentlemen, let me summarize. While market turbulences and political uncertainties continue, we have taken measures to safeguard revenue and margins. Despite all short-term challenges, our medium and long-term prospects are intact. We continue to evolve into a high-tech photonics company. We focus on the right trends and attractive markets, and we have a clear strategy for the distant future. So therefore, we are very positive about the long-term future despite strong headwinds from short-term.
So first of all, thank you very much. And now I will hand over to Ingo.
Thank you, Olaf, and thank you for joining the earnings call today. Before I get into the numbers, I would like to point out 2 important aspects related to the presentation of the OSRAM financials for the first quarter of fiscal '19.
First, the financial presentation now reflects the new segment reporting structure. We first outlined that on November 7, 2018, during our Capital Markets Day. The changes are related to automotive, or AM, and digital, abbreviated with DI. Opto Semiconductors, OS, is unchanged. An overview of the new segment structure can also be found on Slide 10 of the earnings release. We also provided historical financial information for 2018 for this new segment-reporting structure on a pro forma basis earlier this year. It can be found on our Investor Relations website.
The presentation of the financials for Q1 fiscal year '19 will focus on what now constitutes continued operations. These exclude our U.S. service business, Sylvania Lighting Solutions USA, following the agreement to sell this business to Wesco International. Furthermore, the financials of our European luminaries business also sometimes referred to as Siteco, are also excluded as we are in the divestment process. Consequently, both activities are treated as discontinued operation as of the 1st of October 2018. Let me also point out that in conjunction with the decision to classify our European luminaries activity as discontinued operation, we took an impairment charge to the tune of EUR 61 million.
The following presentation of the financials for OSRAM for the first quarter of fiscal '19 are focusing on what now constitutes continued operations. Moving now to Slide 11. As Olaf pointed out, we had a difficult start into the new fiscal year. Comparable growth for the company was negative with minus 15%. All segments recorded double-digit declines in the quarter. Adjusted EBITDA came in at EUR 93 million or 11.3% of revenue compared to 18.5% in the prior year quarter. Free cash flow was negative with EUR 101 million. CapEx was EUR 105 million. Operational cash flow was slightly positive in the first quarter and special items amounted to EUR 24 million in the quarter. Moving now to revenue in Q1 fiscal '19 on Slide #12. Revenue growth was impacted by weakening automotive demand for both our Opto and automotive businesses. We saw a further softening in general lighting markets, which not only affected Opto's revenues, but also revenues in our electronic ballasts and controls business within the DI reporting segment. Particularly, in the United States, demand slowed further down towards the end of the quarter. Geographically speaking, all regions recorded revenue levels below last year's quarter. For the company, revenue in China was lower by close to 18% year-over-year, with China being approximately 20% of overall OSRAM revenue. This had a meaningful impact on the total company. The impact of IFRS 15 in the quarter was approximately 1%, lower than originally anticipated due to an unexpected swift slowdown in business activity in December. Shipment volumes were therefore much lower in the last working days of the first quarter fiscal '19 than originally planned. At this point in time, we expect the total impact of IFRS 15 for fiscal year '19 to be approximately EUR 20 million to EUR 30 million of revenues, with the corresponding impact in adjusted EBITDA. This estimate includes the impact for the first quarter mentioned above. Moving on to profitability on Slide 13. In Q1 of fiscal year '19, absolute adjusted EBITDA was $93 million, translating into a margin of 11.3%. The drop in revenue and overall volumes took a toll on our profitability, largely a reflection of the operating leverage effect in our Opto Semiconductors and traditional automotive business. Lower volumes also affected factory utilization rates of the industrial facilities in our electronic ballasts and controls business, both in Europe and NAFTA. The pricing environment in the quarter overall was largely as expected. The impact of foreign exchange was minor, with a more favorable exchange rate in comparison to prior year being offset through hedges. Please note that approximately EUR 50 million of the year-over-year decline in adjusted EBITDA for DI was due to a one-off gain recorded in Q1 of last year relating to a divestment back then. Adjusted EBITDA in corporate items for OSRAM was negative with EUR 14 million, in line with our previous quarter. Moving now to Slide 14. Before I go into the financial details of our reporting segments, let me provide you with an update of our performance programs. This overview is now also based on continued operations. In other words, existing performance programs for our European luminaire business and U.S. service business are no longer included in this overview, but are, of course, ongoing. The targeted saving areas have not changed. It's overheads in our industrial footprint. Including the new structural cost measure Opto Fit for the Future that Olaf explained earlier, we're now targeting overall gross savings of between EUR 160 million to EUR 180 million in the periods of between fiscal year '18 and fiscal year '20, which is up from the earlier communicated savings by approximately $50 million to EUR 60 million on the basis of OSRAM continued operations. Savings in fiscal year '18 were realized in line with plans. For fiscal year '19, we are now targeting gross savings of between EUR 65 million to EUR 85 million. We now expect to incur transformation-related charges of between EUR 80 million to EUR 90 million in fiscal year '19. This is up from prior guidance and now reflects the addition of the Opto program. Total special items for '19, not just related to the performance of programs just outlined only, are now expected to be in the range of between EUR 100 million to EUR 120 million. Summarizing our Q1 performance for the business segments on Slide 15. Let me now start with Opto. Opto's comparable revenue growth was minus 16.9% in the first quarter. Lower volume and pricing were the major reasons for the reduction, both sectors carrying approximately an equal share, with pricing being in the expected range. In Opto's automotive business, revenue was lower by approximately 14%. Next to pricing impacts in the high single-digit range, we saw a decline in volume, reflecting an overall lower market. Our market share remained stable. General lighting accounted for approximately 1/3 of the absolute decline in revenue year-over-year, as we had a number of bigger horticulture projects last year that were absent in this quarter, making the comps tough for this business line. We also saw elevated inventory levels in the industry for outdoor and indoor lighting applications, impacted by, amongst others, the introduction of trade tariffs between the United States and China. As a result, end markets continued to be softer. Top line reduction within industry and mobile was approximately 14%, largely due to distributors taking destocking measures, impacting mainly the very diverse, multi-market portfolio of Opto, which includes, for instance, end markets such as video walls, LED projection, traffic lights, et cetera. Business for advanced smartphone applications was soft in the quarter. Despite the strong top line decline, Opto managed to keep its adjusted EBITDA profitability at around 20%, also supported by efficiency measures taken by management. The reduction in adjusted EBITDA profitability when compared to prior year's 25% was, by and large, driven by the operating leverage effect of lower volumes, combined with a higher overall available capacity at Opto when compared to a year ago. As mentioned, we put additional structural measures for Opto Semiconductors in place to proactively manage in an environment of limited forward visibility. These measures are expected to result into a restructuring charge in fiscal year '19 of approximately EUR 40 million to EUR 50 million. Expected savings for these measures just this year are targeted to be up to EUR 30 million. Moving now to our segment automotive. Comparable growth was minus 11 in the quarter, driven by lower volumes in our traditional OEM business, particularly in Europe and China. The aftermarket business was stable compared to the same period a year ago, with low single-digit growth in North America. The business development of OSRAM Continental was in line with our expectations. Automotive's adjusted EBITDA profitability was 10.8% in the quarter. The margin difference when compared to the same period a year ago was largely a reflection of the operating leverage impact from lower volumes. Price erosion and inflation were compensated by productivity measures. The inclusion of the OSRAM Continental into the financials of AM had a dilutive effect of approximately 170 basis points. DI had a difficult start into the new fiscal year. Comparable revenue growth was minus 16.7%. Particularly, our electronic ballasts and controls business, also referred to as digital systems, was affected by a further slowdown in the general lighting market in the U.S, where customers unexpectedly extended factory furloughs in December. We believe this to be a reflection of elevated inventory levels put in place in anticipation of the introduction of tariffs between China and the U.S. early on in calendar year 2019, also explaining the higher growth for digital systems in the fourth quarter of fiscal year '18. The European DS business continued to be affected by shortages in electronic components and a generally soft general lighting market. On the positive side, our DS business in APAC continued to be -- to fare well delivering double-digit growth in the quarter. When looking at the other business activities within DI, we saw good performance within our industrial business, driven by our recent acquisition of Fluence. The entertainment business of DI had a slower start into the year as we changed market channels in the United States. DI's dynamic lighting business continued to perform well, but had tough growth comps given that the revenue in the first quarter of fiscal year '18 included 3 large projects that were absent in the first quarter of this fiscal year. And finally, Digital Lumens performed in line with plans and showed growth. DI's profitability was negative in the first quarter of '19, largely due to the lower revenues in digital systems and to the corresponding volume degression impact. In addition, the bottom line was impacted by cost inflation for certain electronic components. Please also note that for comparison purposes, the first quarter financials of fiscal year '18 included an extraordinary gain to the tune of EUR 15 million related to the divestment of a business out of the industrial portfolio of DI, which I already mentioned earlier on. Moving to cash flow on Slide 16. Free cash flow was negative with EUR 101 million, including CapEx spend of EUR 105 million. More than 80% of that spend related to Opto. We do expect that first quarter of '19 to have represented the peak spend of CapEx for us in fiscal year '19. The free cash flow effect from inventories was approximately EUR 81 million in the quarter, also being a reflection of the unexpected sharp slowdown of the business environment towards the end of the first quarter fiscal year '19. Our performance regarding the collection of receivables was good, helping to compensate such increase. Net debt increased to EUR 172 million as per end of December. Moving to Slide 17. Clearly, our outlook for fiscal year '19 has become more challenging on the back of a weaker-than-expected first quarter. Also, visibility remains low. The substantial decline in revenue in particular has resulted into the initiation of a number of countermeasures that Olaf also mentioned. Those include, amongst others, structural measures such as for the Opto Semiconductors business unit as outlined earlier. The various measures are intended to secure the guidance for the fiscal year. However, the achievement of the guidance is also subject to a revival in our order intake in the months ahead. Andreas, back to you.
Okay. Thank you, Ingo. Coming to the Q&A.
[Operator Instructions] The first question is from the line of Uwe Schupp from Deutsche Bank.
I will limit myself to one question then. Basically, coming back to the very interesting slide on slide deck #7, where you basically show the expectation of the preagreed volumes and also pricing contracts with your biggest customers. Would be interested really in how did those numbers on the right-hand side, i.e. the expectations of your customers change during the last few weeks, if at all? And when do you expect to see the low point really in year-over-year terms for your volumes? Some companies, obviously, called the volume bottom in automotive already for December. Others seem to be a bit more cautious and even point to later in Q1. So really would be interested in where you stand really, and whether you can see light, so to speak, at the end of the WLTP tunnel.
Thanks, Uwe, for your question, I showed you these charts last year, and we agreed that we are coming up regular on a follow-up with this chart. I think in these uncertain times, you have to collect a lot of data points and to get a better view what could happen. And what we would like to show you amongst the negative indication and data points, as I showed on IHS on the Morgan Stanley study, the positive point is that my customers still stay with these [ OPAs. ] That means, we agreed on the [ OPAs, ] and no customer did not change them until today or renegotiate. That means the signal is, they all stay with the proposal. Again, it's one data point. And I think, in these uncertain times, it is important to collect a lot of data points to get a better view. But here from the top customer, we have clear signals that 2017 and that's what we said at the beginning, Uwe, that we see that the second half will be better than the first half. And that's what's happened in the first quarter, much harder than we expected, especially for the December. But again, they all stay in these [ OPAs. ]
And would those [ VPAs ] look or indicate a trough already in January, and seeing a gradual recovery already in February? Or is it really fiscal year H2 loaded really?
Uwe, this is Ingo. Maybe just one other interesting data point as well. So what we saw in Q1 was, proportionately speaking, a much sharper slowdown in the interior part of automotive than the exterior part. I think that's probably also important to understand. Whether we've been looking at the trough or not, I think that's probably too early to tell. Even if you look at January, we haven't seen any changes really in trends neither negative nor meaningfully positive, and I just think it's too early to tell.
Next question is from Sven Weier from UBS.
First question is on Conti. You said that the portfolio effect on automotive was 0.4% in the quarter. So very minor, actually, given the size of Conti. So first of part of the question would be why was it such -- very small to revenue impact? And you mentioned, there was 100 basis points dilution to the margin because of that. So how do I square those 2 factors? That would be the first question.
Sven, I'm not sure how you would refer to the 40 basis points or so in automotive. I don't think, in my prepared remarks, that I made that comment.
You have it on the Page 12 where you show the revenue growth bridge. And on automotive, you say 0.4% portfolio effect, so I suspect that's Conti. But given that it should have a quarterly revenue of -- to the tune of EUR 40 million, I would guess, I would have expected a much bigger portfolio effect.
Oh, I see what you mean. Yes, the portfolio effect of Conti at this point in time is still relatively slow. That's more due to some technical administrative issues of transferring customer contracts into the joint venture. So the joint venture's running well. We're already getting good orders from our customers. It's just some technical issues that are outstanding on the -- on that. The 170 basis points then on the automotive business is simply that, of course, we do get a compensation for the margin for the revenues not yet in the joint venture. And that is contrasted by the ramp-up cost that we have in Conti. The initial investments we have made on revenue -- sorry, on R&D, and all the integration costs. That's how you can have to -- you have to square this.
And does it go to the normal revenue contribution then from Q2? Or what would be your...
That's the -- yes, that's the plan. Right now there is a few technical things outstanding, but we expect those to be resolved in the second quarter. So that we should see a more -- a bigger portfolio impact, certainly, in the second, but that's certainly also in the second half of the year.
Okay. And the follow-up would be also on coming back to Uwe's question on Slide 7. I mean, I understand that's probably a value chart. If I look at volumes, they are probably even more positive than what you show there because it includes the pricing pressure, I would guess. So why would that be a cautious planning, right? If you have some clients really being even up over 30%, I guess. I don't understand that. And the other question would be what's the penalty for the clients if they walk away from that? So what's their incentive to really give you a fair conservative view on that?
There to -- coupled with first -- the second question, there is no penalty. But usually, that you are sitting together once a year and have, on a regular basis, some update. But they reserve some capacity, and this capacity was and is based on their preorders and proposal from their customer. So in the end, there is no penalty. This has not happened in the automotive industry. So if Daimler is canceling something, they don't pay any penalty to their supplier. But it's -- over the last years, it was usually in a good range. And what I would like to show you here and that was the reason that I came back with the chart because I showed it last year as well is that it seems to be that not only OSRAM had this view that we see the second half is getting better, our customer has this view as well. And if you listen -- what you see in the newspaper in the last days what Infineon are thinking about the second half, they see a stronger second half in '19. So overall, we do not take these data points as the truth. It's one data point overall and we have some negative ones and we have some neutral ones and some positive ones. But that's the top 10 customer. And usually, the top 10 customer gives you a quite good view about what could happen.
Next question is from Peter Reilly from Jefferies.
I'd like to ask about the cost-reduction plan, please. You've expanded the scope of the cost-reduction plan. The incremental savings are relatively small, about another EUR 20 million or so. But the incremental cost is quite high, another EUR 50 million. So can you talk about what you're doing with the extra money? I understand it's mainly for Opto. Is it a timing issue that more of the savings are going to appear in 'fiscal '20? Or is it just getting more expensive and difficult to take that because a lot of the cost reduction is happening in high-cost countries like Germany?
I think, Ingo is going for that.
Peter, I think, first of all, when you take these measures, you take the provision or the accrual right up front. And obviously, then the execution and practice will take longer. That's why you have a bit of a mismatch this year between the accrual relatively to the savings we expect. So I think I said in my prepared remarks that we expect Opto to generate up to EUR 30 million savings out of this program still this year. And mind you that basically means roughly EUR 30 million within the period of 6 to 7 months, so you can imagine that the run rate of that is much higher. And as you have probably seen in the press, a lot of these measures are here in -- taken in Germany, which typically, from a restructuring perspective, is a bit more expensive than elsewhere in the world. That's -- those are the reasons.
And if I could just follow up on mix in automotive. Obviously, you've been talking about what happened in '18 and what you expect to happen in '19 in volume terms. But in mix terms, when you go through a period of volumes coming down, do you see an impact where there are -- more of a hit on premium cars where you have higher content? And maybe the economy cars where you have lower content are less affected? Or does everything come down for you because there's actually not that much of a mix impact? Just trying to work out what we should think in terms of the mix going into 2019.
Well, I think if you look at '19, Peter, and if you look at our Opto business, because I think that's what you're referring to, the 3 big drivers really are: a, the development of car production. That's a big driver. The second bigger driver is the LED penetration rates, particularly for front light. And here we see, basically, the assumptions we made last year and we said we want to move towards 26%, 27-or-so percent. That's largely reflected so far also in the VPAs and what we've also seen in the last few months or so. And the third variable here in this context is pricing. And pricing, of course, is a bit higher. The pricing impact is a bit higher than in '18, but in line with what we had expected. So far we've concluded around 75% or so of our VPAs. There's a few others, typically those with our Asian customers, that will be concluded up until March given that they have a slightly different fiscal year as the rest. And so far, what we've seen there from a pricing is also in line. So in other words, it's not so much, I think, the premium versus other car type of variable that would drive volumes for us this year or not. It's more our car production will grow, our LED penetration will continue because again, pricing is pretty much in line with what -- so for at least what we've seen.
The next question is from the line Alexander Virgo from Bank of America Merrill Lynch.
So I guess a couple of follow-ups, primarily on Page 7. I wonder, just in housekeeping terms, if you could just quantify or give us some indication how much of your sales these cover? Just so that we have an understanding. Because I think the -- obviously, maintaining your revenue guidance implies double-digit growth in the second half, at least, I think. So I'd appreciate a little bit of color in that, please.
So this is -- I think this is what the top 10 or top 15 of our customer base, and they cover a fairly large part of our automotive business in Opto or more than 50%.
Okay. That's helpful. And then a follow-up would be, I think the disappointing developments in December in Q4 in particular relative to prior expectations, probably more on general lighting and the nonauto business, which although smaller, clearly the declines were much, much greater relative to expectations. So I just wondered given you don't have as much visibility -- I mean, arguably very little visibility on the auto side as well, but given you don't have as much visibilty on the nonauto business, what gives you the confidence that we don't see those sorts of headwinds purveyed into 2019 -- or the rest of 2019?
I think as we tried to explain, I think, the October, November was in our absolutely line on high single-digit decline. The December was really different because in the middle of December, we really had dramatically slowed down nearly to 0 in ordering. And I think the reasons are that the customer are afraid and cautious, and they tried to reduce their capital employed. And that means, in the supply chain, and if we talk to some of our distributor, for example, they reduced their supply chain dramatically as well. So we had, more or less, this time a little bit of a onetime impact, and we do not see this impact in January as we had it in December. So that means the December was an unusual year-end result, different to the regular quarter what we usually have.
Next question is from the line of Sandeep Deshpande from JPMorgan.
I have 2 short questions. I mean, just to understand, I mean, Olaf, you just mentioned that December was particularly bad in terms of orders. But at the same time, you are not directly saying that the order intake has improved in January. But given it was so bad in December, would you say that it is better now than it was in December at this point? And then secondly, regarding pricing, I mean, your output from your new Kulim capacity is clearly not all going to autos as yet and so a lot of that is going to the general market. And how are you seeing that pricing develop there in the general lighting market? And will that continue impacting you in 2019?
Okay. So I will repeat it a little bit. As I said, January was better than December. So as I said, we did not see much of a change overall in the trends in January. But we didn't have these, let me say, slowdown in the second half of the month. January, therefore, is one data point and to be insufficient to -- for the whole year or for the Q2. But nevertheless -- again, if we talk to our customer, and we do it really now very close on a daily and weekly basis, if they have additional data points and they all are cautious for the first half, that means for the next 3 months, but they all are optimistic that the trend will change and that's the reason they still stay with our -- with the order volume with OSRAM through the [ VPAs. ] So that makes me, I don't want to say optimistic, but that makes me more clearer that the second half is getting better because all my customer is telling me this. Do they all wrong? I don't know. But again, we are talking to so many, especially to the big ones. And I think rather than next coming weeks and months, we'll also be -- get some answer to -- for crucial questions. And Ingo said that, is that will the automotive demand in China recover? If I have seen what Morgan Stanley wrote this morning in a result they reported that there was a decline only by 1%. So that shows me another data point that January in China was, year-over-year, only minus 1%. That's what Morgan Stanley this morning wrote. So again -- so it gives me an optimistic view, the second half is getting better than the first half. And the second point, maybe Kulim -- sorry, what was the second part? GL pricing.
My second question was...
Yes. So in GL pricing, I think it's fair to say that if you look at the mid-power segment, particularly in China because of higher inventory levels, there's certainly somewhat more price pressure. If you look at the reasons for that, again, a lot of that seems to come still from the entire China/U.S. tariff discussion, where people started to produce in anticipation of tariffs going up as of 1st of January. And given that, that has been sort of delayed or postponed, if you like, a little bit, that then slowed down the market a bit again. At the same time, for higher-power products, which are really relevant for us from a professional perspective, pricing has not been different so much than what we said earlier. So it's in the mid- to sometimes high single-digit range. But nothing has changed really in that sense that there are different pricing dynamics in that part of the general lighting market right now.
The next question is from the line of Leo Carrington from Crédit Suisse.
I'll start my first and then a follow-up. What was the rationale behind the Ring Automotive acquisition [ I spotted?] Is this an opportunistic move? Or is this something that we can floor out in terms of future strategy and products or distribution?
Yes. Very good question. Thank you. I know that you're maybe asking why we are buying something in U.K. close to the Brexit. But the aftermarket business is for OSRAM very important. We have a strong position. We make a good margin, and we clearly had a strategy to grow our aftermarket business. And we usually can do it as a market leader only through market. So U.K, it's an important market with a lot of cars. So the Ring acquisition is a U.K. company. And it will sell in U.K. So that means that from the U.K. market for the U.K. And in this case, Ring is helpful to add our market share in the U.K. market. And second point, what we would like to do is we will bring Ring as a brand name to the United States. We are working in U.K. and U.S. with the brand name Sylvania, very well known in U.S. And as the second brand, we will bring Ring in the shops, and we already had discussions and agreements with the big shops in U.S. So Ring will help us to add with another brand name as a house of brands, as we call it, in this case. And so in this case, the Brexit will not have a -- directly impact because, as I said, they are selling in U.K. for U.K.
Let me maybe add to that, Leo. The important here is also that Ring has -- roughly 50% of its portfolio is automotive lighting products and 50% is different automotive-related products as well. So it helps us to leverage the very strong brand and channels we have outside of the U.K. with that portfolio, which is largely sourced from elsewhere. And secondly, within the automotive lighting portfolio, the lighting products there are, at this point in time, not sourced from OSRAM, but from a third party, and obviously, we will change that. So we have revenue synergies and we have also cost synergies with that acquisition.
Okay, that's very clear. And then my follow-up was I think on the back of Peter's question on the previous cost out measures. It appears that the cost savings targeted for fiscal '18 weren't fully realized. I mean, am I right in saying that? And if so, can you indicate why? And indicate how confident you are in reaching the higher cost-cutting targets that you've set yourselves?
Well, the cost-saving targets for fiscal '18 were fully realized. I think that's also what I said in my prepared remarks, so there was no slippage there. Also, if I look at the measures that we managed very, very closely and review on a very frequent basis, we see a good [ fill ] level of activities to support the savings that we just mentioned, so the EUR 65 million to EUR 85 million this year. So I'm very confident that we will manage it. Why is there such a step-up? It's simply because we announced these measures in '18 when we also took some of the charges. And some of these measures, of course, take time to prepare, et cetera, before they start coming back into my P&L. And therefore you see a ramp-up this year relative to prior year.
Next question is from the line of Lucie Carrier from Morgan Stanley.
The first one is a short one. I was curious to know whether you could give us some indication on the current capacity utilization of your OS factories?
Okay. So usually, we do not report on the different factories. But we have clearly -- in the last quarter, with the slowdown in capacity or the slowdown in demand, we have idle capacity. In the past, as you know, we run by 100% in [Tabat]. So I do not have an exact number from Regensburg, but we have some idle capacity in Regensburg, and that was one of the reasons that we make these reductions in workforce as well.
And regarding the other factories you have in Wuxi, Penang, Kulim, how are they running at the moment?
Little bit the same. That means, if you are 80% below in turnover, you have idle capacity available. And -- but the idle capacity -- the biggest point is the fixed cost in salary and benefits to people. So what we do and that what we did to react immediately and we reduced workforce in Penang, less in Kulim. In Penang, we reduced workforce, and we reduced workforce a little bit in Wuxi. And the 300, as I said, in Regensburg.
Understood. My second question was around the DI business. And I was hoping you could remind us kind of the share of each segment of DI as part of sales, i.e. DS and the other businesses. And to understand a little bit better what really happened in DS. Because when we look at some of your competitors or generally in the industry, I wouldn't say that it has been booming, but we haven't seen the same type of decline here. So is that because you are exposed to some specific customer? Or specific product segment? Or -- I mean, just trying to understand that double digit, which seems quite extreme versus what we are seeing everywhere else. And related to that, in terms of the profitability, I understand last year, you had some exceptional. What should we think in terms of profitability for this business this year?
Lucie -- so clearly, the lion's share of revenue in the DI segment is DS, which I believe is also not a surprise to you. And there, we also saw clearly, headwinds, particularly in the United States. I mentioned that a number of our key accounts told us unexpectedly that they would extend their factory furloughs, which typically is a day or so in the Christmas period, to a whole week without any prenotice. So that hit us quite hard actually there. And that's one. And in EMEA, you also saw that in some cases, some customers because of lower volumes started to use their own facilities or insourcing, if you like, first before they started to [ ask us for a ] system provide. So that's basically what we saw. I mean, we continued to see, of course, a decline in the traditional ballasts business, the ECGs. That continues at the same type of clip that you are probably aware of. Also last year, similar also with our competitors. And also, what we saw here, in the United States certainly, but also in Europe, is that as you well remember, we had quite a period last year where the availability of certain electronic components was difficult. That still continued albeit somewhat lower than a year ago this quarter. And quite some customers have built inventory levels because they were experiencing supply shortages, et cetera. So it's here, I think it's more of a inventory destocking and cleanup kind of exercise that I don't read too much into for the rest of the year. Also in the U.S, but clearly it's affected us. And as Olaf said, it happened almost largely in December of last year.
And maybe add on that. We are market leader in U.S., and for this reason, we were hit on this effect, as Ingo said, a little bit more than maybe some of my competitors in this area.
The next question is from the line of Alok Katre from Societe Generale.
Just to follow-up here is going back to the VPA slide. Sorry to labor on that. If I just look -- perhaps you could explain or give some color on how the -- let's say, the VPA scenario was at the same time last year? And how it kind of went through 2018? What I'm trying to sort of understand a little bit more is, we saw a similar, let's say -- or maybe I think, from a commentary perspective, we did see a quite a sharp slowdown despite the VPAs that you had back in April and June last year. So what, let's say, gives us confidence that this will not, let's say, happen to any extent in 2019? I mean, just wondering how this -- how -- or what the sanctity of some of those VPAs is given perhaps what we saw last year. So that's the follow-up. And then in terms of the question. I mean, should we -- on the CapEx side now given the overcapacity, et cetera, should we kind of see a pretty steep cut in the next quarters, coming quarters? I know, Ingo, you mentioned EUR 100 million is kind of the peak in Q1, but just wondered if you could help us over there in terms of how you expect the CapEx to trend? And is it still somewhere around that EUR 370 million, EUR 380 million sort of range for the full year?
It's a fair question. And I'll start with the first one. Ingo is going to the second one. As I said, I tried to show you what kind of data power do I have. I think it doesn't help you if I give you only the negative parts and talking about the negative one. I think it doesn't help you if I am too optimistic and show you only the best optimistic chart. So I would like to -- and that was the idea or that was the -- to give you some data points positive ones from my customers. And that's order, preorder from my customer. That's the [ VPAs. ] And of course -- and I was talking about the market in China in Europe and U.S. But nevertheless, your question is correct in this time, and I would say the answer is the following. In 2018, in that time, where we cannot deliver enough, my customer ordered like hell. So they made traditionally a little bit higher VPAs than there may be needed because they are so happy to get enough LED automotive chips. So this is maybe the difference between the VPAs they ordered, the number they ordered with OSRAM and then they really ordered in the end of the day. And what's happened to 2019. I would say, if you are coming from this cautious 2018 that you know the super cycle automotive is maybe to come an end and you have a weak October, November, December. I would say they are optimistic that overall, the number of production of cars is still stable. So if you take a look and if you listen to the OEMs and to the other customer, they expect 94 million cars produced for 2019. So they do not expect a huge decline overall. If you take a look in IHS, you see they expect a decline in the first quarter. They expect a decline in the second quarter -- our second quarter, and they expect a growth in Europe, in Asia in the third and the fourth quarter. So again, it's another data point. Is IHS always true? No, definitely not. But another data point to my customers as well. So overall, I would say, maybe they were too optimistic in '18 and maybe they are coming now from the reality what they really need for 2019. That gives me the -- a little bit more confidence for the second half. Ingo, would you go to the second question that was...
On the CapEx? Yes. So certainly, we always look at our CapEx spending. And as you well remember, we have always made clear that the spending -- expected spending levels for fiscal year '19 will be substantially lower than what we spent in fiscal year '18, and that is still, of course, true. Depending on how volumes, of course, develop, and we pointed to also the importance of the next months ahead in terms of order intake. Of course, we will look at CapEx from a free cash flow perspective. We've always tried -- what we've always succeeded to do is to create very flexible contracts with our suppliers for capital equipment, which allows us certain flexibility either to pull in because we need it earlier or to also maybe shift because certain projects shift on the customers' side for instance and things of that nature. So we have quite some flexibility here, and we will certainly use it either way.
The next question is from James Moore.
Ingo and Olaf, some of the key topics I think have been addressed. So I'll try and ask some others if I can. Could you perhaps help a little bit with the savings phasing and the divisional split of the savings as we progress through this year? That's the first question. And then I'll come back with the second, if I can.
James, yes, so overall if I look at the savings run rate, the savings run rate in the second half of the year is higher than in the first half of the year, say it's a ratio of 2:1 basically in a way. I don't want to -- I mean, I mentioned how much we expect from Opto so that number you have. And Opto, so far in the last year's numbers at least that we announced, was not part of the equation, so you can imagine that the remainder is for the other 2. It is also not -- it's also known to you that if you look at the split between in terms of overhead and plants that as far as factories is concerned, certainly, the plants that we have are addressing our traditional automotive segment because their volumes are, as expected, in a decline. That sort of follows a kind of a sunset type of evolution, and we gradually need to adjust there. So therefore, transformation of plants is largely with automotive. And on the overhead side, which is the other bucket, we do have both the automotive and also DI participating in those next 2, obviously, what you know; also some central functions here in our headquarter.
Very helpful. And on Opto auto, can you give us a sense for the difference in organic growth decline between interior and exterior? I'm not trying to be precise, but it's an interesting comment you made earlier. And I just wonder why you think there is that difference?
Oh, why there is a difference? I think there is a difference because in the interior, the LED penetration is fairly high. And therefore, the growth that you can create from increases in penetration is less so an impact than it is still in the exterior. If you remember, on the exterior side, we said that still today, roughly 25% to 30% -- or sorry, 75% to -- 65% to 70% of all cars are more or less equipped with either halogen or HID. And therefore, the run rate from a growth perspective from the exterior LED side is much larger. That's different than the interior side.
I assumed it was that, but does it have a margin impact in the sense that I would have thought exterior is favorable from a profitability perspective? So there is some favorable mix story going on underneath the bonnet of the cyclical pain?
Well, I think, again, if you look at the decline for Opto in the first quarter and them being able to manage 20% adjusted EBITDA is still a -- I think a good performance after all I would say. And in general, if you look at our automotive business, exterior, interior, I'm actually quite happy with the margins that we generate there.
Okay. Please excuse us, we are out of time right now. There are no further questions. And I would like to hand back to Andreas Spitzauer for closing comments. Please go ahead.
Yes, thank you very much for your participation, and we hope you enjoy the rest of the day. Thank you, and bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.