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Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the OSRAM Licht AG conference call on the second quarter 2019. [Operator Instructions] I would now like to turn the conference over to Juliana Baron. Please go ahead.
Thank you, operator. Good afternoon and good morning. Ladies and gentlemen, a very warm welcome to the OSRAM conference call on our second quarter 2019 results. With me are Dr. Olaf Berlien, our CEO; and Ingo Bank, our CFO as well as Dr. Stefan Kampmann, our CTO. Olaf and Ingo will comment on the market development and our financial performance and will be available for Q&A afterwards. As a reminder, today's call is being recorded. You can follow the webcast on our website at osram.com/ir where you will also find the slides available for download.
Regarding forward-looking statements, I would like to draw your attention to the safe harbor statement on Page 2 of the management presentation.
And with that, I'm pleased to hand over to Olaf Berlien.
Yes. Thank you, Juliana. Good afternoon, ladies and gentlemen and maybe good morning to the U.S. colleagues. Welcome to our conference call. Let me start with an overview of the second quarter of our fiscal year. Ingo will then provide you with more details on the financial figures and, of course, then we are looking forward to your Q&A session.
So we move to Slide #3. Our performance in the second quarter was as expected. We continued to face a challenging environment in the first 3 months of the calendar year 2019. Continued market weakness in automotive, general lighting and mobile devices clearly impacted OSRAM. In addition, business was facing the ongoing impact of the general economic slowdown and, of course, political uncertainties. This has affected demand and led to inventory buildup, especially in China. We respond systematically to the operational challenges, and we are coming to that. Our performance programs are in place and running at full speed. This gives us confidence for the rest of the year, and we confirm our adjusted full year target.
So let's have a, sort of, closer look at the second quarter results on Slide #4. In the period from January to March, revenue declined by 13.5% on a comparable basis of EUR 862 million. Adjusted EBITDA before special items was EUR 70 million, resulting in a margin of 8.1%. Free cash flow was mainly impacted by CapEx and, of course, of inventory. It amounted better than last year but to minus EUR 76 million.
The Managing Board is taking action and announced in March that we have expanded our various initiatives to reduce our annual cost base. We now expect savings of more than EUR 200 million by 2021. I will come to this later on Slide 9, and Ingo will do it in a deep way as well.
So let's have first a more detailed look at the environment, especially economic environment on Slide #5. The outlook for the global economy continues to decline. The ifo World Economic Climate Index fell from minus 2 points in the previous quarter to minus 13. This is the fourth decline in a row and the worst figure in 7 years. The same trend was mirrored by the Global PMI Index provided by JP Morgan. Global manufacturing expectations further slowed down, as you can see on the right. We clearly noticed this trend in our revenue development in the second quarter as have many of our customers, particularly in the automotive industry.
If we look at Slide #6, we can see on the left that car production continued to decline across all regions. The biggest impact was, once again, in China, where car sales has been declining for 10 [ consecutive ] months. NAFTA car production has also slowed down now making a sidestep. Consequently, IHS has reduced its forecast for global light vehicle production, as you can see from the chart on the right. Yearly production worldwide is now expected to reach less than 93 million cars in 2019 compared to 99 million back in April last year. Together with the inventories that has been built up especially in China, as I said, that and this has hit us hard.
China is our most important market, and accordingly our China revenue year-on-year dropped by 1/3 in the last quarter. This is also why we are less optimistic at this point in time regarding the second half of the fiscal year and the main reason why we adjusted our guidance in March. And as you can see on Slide #8, this assumption is backed by the actual order volumes from our customers. In February, I showed you the order volume agreement for calendar year 2019, shown on the left. The majority of our automotive customers then indicated higher order volumes for 2019 compared to 2018. On the right, you can see the actual deviations of what our customers intended to order and what they have actually ordered year-to-date. As a large part of our customers fall behind the expectation of order volumes, we currently see no indications for a quick recovery. And this takes me to Slide #9.
The managing board has responded actively to this situation. We have stepped up our efforts to cut costs. Our various performance initiatives are now expected to reduce the annual cost base by more than EUR 200 million by fiscal year 2021. On the slide, you can see operational programs, which we report to you on a regular basis. Overall, execution is on track. And I want to highlight our performance programs to reduce headcount and global footprint. Our Fit for the Future initiative at Opto, for example, that we announced last time takes effect already. The targeted worldwide headcount reduction has already been implemented by 80%. At this point, one comment about the talks with Bain and Carlyle, which you're probably most interested in.
In February, we announced that management was in a detailed discussion with Bain and Carlyle about the possible takeover of OSRAM. This discussion and the due diligence process is still ongoing. As communicated from the beginning, it remains open whether an agreement will be reached. The Managing Board is conducting the discussions on the interest of the company and thus of the shareholders, employees and other stakeholders such as business partners and customers. Please understand that we cannot comment in a more detail at this point in time as the talks are ongoing. We will inform the capital market and the public in due course.
So let me summarize, ladies and gentlemen. While market weakness and political uncertainties continue, we have actively taken countermeasures. We're addressing our cost structure consequently. Our medium and long-term strategy is clear intact despite the current challenges. We're pushing ahead with our photonic strategy and continue to evolve in a high-tech company with a clear vision of the digital future.
So that's from my side. Thank you very much, and now I would like to hand over to Ingo.
Yes. Hello also from my side, thank you for joining the earnings call today.
Let me go right into the numbers for OSRAM continued operations summarized on Page 9. Revenue growth continued to be very challenged in all business units turning comparable growth to be a negative 13.5% for the company as markets for automotive and general lighting continued to show weakness. Our business in China faced further declines in the second quarter, particularly for all segments in Opto as well as our traditional automotive business as well. Meaningful recovery for our business in China is not visible at this point in time.
Adjusted EBITDA came in at EUR 70 million or 8.1% of revenue below last year. The volume decline in combination with price erosion could not be offset by cost productivity. The high operating leverages in Opto but also in traditional automotive were the clear driving forces accounting for the drop in our adjusted EBITDA margin year-over-year. Special items were at EUR 59 million, largely driven by the structural cost measures currently being implemented at Opto. Free cash flow was negative with EUR 76 million. CapEx was EUR 61 million. For the year, we expect CapEx spend to be between EUR 220 million and EUR 240 million of which more than 70% has been spent year-to-date March.
Net income for the quarter was negative with EUR 91 million, including an impairment of approximately EUR 40 million at digital systems and a loss to the tune of EUR 6 million for discontinued operations. Let's now take a closer look into our revenue development in the second quarter on Slide 10. The impact of foreign exchange as well as the additions to the business portfolio of OSRAM made a slight positive impact on revenue growth. Particularly, the acquisition of Fluence contributed well to the revenue generation as part of our digital reporting segments.
Top line growth continued to be challenged in all regions. EMEA growth was impacted by ongoing weakness in our automotive business both for traditional as well as LED light sources. In NAFTA, growth for automotive LED components was positive year-on-year but could not offset negative growth in automotive traditional light sources and a strong revenue decline in our digital systems business as part of DI. In APAC, China continued to be a challenging market environment. For the company, revenue growth in China declined close to 1/3 when compared to prior year at the same time also representing a further sequential decrease when comparing to first quarter of this fiscal year. As a reminder, China represents approximately 20% of the overall company's revenue. One positive highlight in China for us was Traxon that managed to grow the business in double-digit territory both year-over-year as well as sequentially.
The impact of IFRS 15 in the quarter was at approximately 0.6%.
Moving on to profitability on Slide 11. In Q2 of fiscal '19, absolute adjusted EBITDA was EUR 70 million, translating into 8.1% in margin terms. The drop-in revenue and with it the drop in overall volumes, took a significant toll on our profitability, largely a reflection of the operating leverage effects in our Opto Semiconductor and traditional automotive business. In addition, we reduced our inventory levels further due to the market outlook, creating additional negative effect of missing cost absorption. This is particularly true for Opto where the impact of inventory reductions compared to the same period in the prior year represent more than 30% of the volume degression impact shown here in the bridge. The pricing environment in the quarter overall was largely as expected yet elevated for Opto when compared to a year ago. Foreign exchange had a positive impact to Opto. Savings from our performance programs amounted to approximately EUR 24 million in the quarter. Adjusted EBITDA in corporate items for OSRAM continued operations was negative with EUR 22 million in line with our expectations. Moving now to Slide 12. Before I go into the financial details of our reporting segments, let me provide you with an update of our performance programs. As communicated, we have increased our savings target from our performance programs to be above EUR 200 million by 2021. This increase is related to further structural measures taken at Opto to also reflect the significant volume declines combined with limited business visibility at this point in time. The targeted saving areas are unchanged, overhead and our industrial footprints. For fiscal year '19, we're now targeting gross savings of between EUR 85 million to EUR 95 million, up from the earlier communicated ambition of EUR 65 million to EUR 85 million. Approximately 40% of these savings have been realized fiscal year-to-date.
Our expectation as to the transformation-related charges for this fiscal year has not changed. Out of the EUR 80 million to EUR 90 million anticipated for fiscal year '19, approximately 80% have been occurred fiscal year-to-date. I'm going to summarize now our Q2 performance for the business segments on Slide 13. Let me start with Opto.
Opto's revenue decline continued into the second quarter. Lower volume and pricing drove the reduction of 18.8% with volume carrying a slightly higher share than pricing. Biggest contributor to the absolute year-over-year reduction in revenue for Opto was recorded in the industry and mobile segments. This was by and large driven by distributor business, covering a rather broad and diverse portfolio of applications. Distributors continued to destock also given a weak Chinese markets. The [ image sensor ] laser portfolio of I&M showed a small year-over-year decline as tough comps with respect to the iris scan from fiscal year '18 could only be partially offset by new business in biometric sensors and 3D. Overall, however, comparable growth in IM declined significantly.
In automotive, revenue declined. Next to pricing impacts in the low double-digit range, volume declined by mid-single digits, reflecting by and large a weaker market environment in China. The revenue decline in automotive in the region EMEA was like-for-like in the mid-teens. Whereas, we recorded a like-for-like mid-single-digit growth in the Americas.
In Opto's general lighting business, we saw a sequential improvement in revenue generation, driven by outdoor and horticulture demands. Still year-over-year business declined largely due to weakness in indoor lighting, reflecting a weak Chinese market and destocking efforts in the industrial supply chains. Market price pressure remain elevated, particularly in China. The combination of overall strong volume decline, price erosion and a lower inventory build, when compared to prior year's quarter, reduced Opto's adjusted EBITDA profitability to 14.6% in the quarter. The year-over-year impact on profitability from negative cost absorption effect due to lower inventories in the quarter was close to 5 percentage points.
As mentioned, we put additional structural measures for Opto Semiconductors in place to actively manage in an environment of limited forward visibility. For those measures, we took a restructuring accrual in the second quarter of approximately EUR 44 million. We do expect savings for these measures to be between EUR 30 million to EUR 40 million within this current fiscal year.
Moving to our segment automotive, or AM. Comparable growth was negative 10.6% in the quarter. Volume continued to decline, particularly in China and Europe, both for the traditional as well as the LED business. The aftermarket business was in line with expectations. AM's adjusted EBITDA profitability was 9.7% in the quarter. The decline in margin compared to the same period a year ago was largely a reflection of lower volumes and the corresponding operating leverage impact. Price erosion and inflation were compensated by productivity measures. The inclusion of the OSRAM Continental financials in automotive had a dilutive effect of approximately 200 basis points.
Looking into our third reporting segment now. DI managed to slowdown the revenue decline when compared to the first quarter of this fiscal year with close to all of its underlying businesses contributing to a sequential improvement in absolute revenue generation. Still comparable growth was negative with 8.5% when comparing with the same period a year ago. The decline was largely driven by our electronic ballasts and controls business, also known as digital systems, or DS, where elevated customer inventory levels in U.S. and to some extent also in EMEA combined with the rapid decline in traditional balance drove negative growth, albeit, at a slower rate when compared to the first quarter of this fiscal year. When looking at the other business activities within DI, we saw a sequentially improved performance in our entertainment business on the back of well-received new product introductions. In our industrial portfolio, Fluence continued to perform well, whereas our projection business continued its expected decline given its stage in the technology maturity curve. DI's dynamic lighting business picked up momentum and delivered sequential growth. Year-over-year, it recorded a low single-digit decline.
DI's adjusted EBITDA stayed negative at EUR 4 million, yet improved from the first quarter of this fiscal year. Compared to the prior year, the reduction in profitability was largely driven by comparatively lower revenues in digital systems and the corresponding volume diversion impact including the impact of lower plant utilization rates. Pricing and inflation were offset successfully by productivity measures. Moving now to cash flow on Slide 14. Free cash flow was negative with EUR 76 million, including CapEx spend of EUR 61 million. More than 70% of such spend related to Opto. The reduction in trade payables was mainly related to Opto amongst others due to lower purchase volume, given the reduced business activity levels and less capital expenditure spending. Net debt increased to EUR 350 million as per end of the March, reflecting the negative free cash flow in the quarter and the dividend payout for fiscal year '18. And now on Slide 15, the outlook. On March 28, we published our revised guidance for fiscal '19 that you see again summarized here. This outlook for fiscal year '19 reflects on the one hand a second quarter below original expectations. It also reflects the lack of substantial improvement in business activity, factoring in the absence of a revival of our order intake during the course of the second quarter. The guidance implies no meaningful recovery or improvement in the second half of the year but rather a stabilization of what is currently still a business environment with very limited visibility.
Juliana, now back to you.
Thank you, Ingo. We're now looking forward to your questions. Operator, please go ahead.
[Operator Instructions] First question comes from the line of Sven Weier with UBS.
The first question would be related to your revenue decline in the first half in the mid-teens organically. I was just wondering if you had kind of an estimate how much of that was related to your clients' destocking? And how much of it was related to weakness in the end customer demand? That would be the first one.
Thanks, Sven. I think, Ingo will do this.
Well, it's always a bit difficult to do an estimate there. I mean, we saw destocking in the general lighting business, particularly in China. We also saw some destocking with distributors. So I would quantify that type of destocking impact that we expect for, kind of, the year, which indeed took place mostly probably in the first half, somewhere between EUR 30 million to EUR 40 million.
And as you just said, it's -- you think it's largely concluded now?
Well, we have -- I wouldn't call it completely concluded now because we still have -- I mean, we're seeing people coming down with their stock levels. In some areas, they're still a bit higher than they are -- normally are also compared to prior years. So there's still a chance that some destocking will still take place. I think what's also more important than is, of course, what they themselves have in their point-of-sale and whether then they see momentum coming to restock again. And that momentum we haven't seen yet.
And is EUR 30 million to EUR 40 million, you said was on Q2 specifically or is the whole first half?
You asked me for the first half so...
Okay. Good. The follow-up was just on the Bain, Carlyle, situation. I understand you wouldn't say anything more, but I think previously you said the discussions are going well or making good progress. I mean would you repeat that qualitative comment?
Yes. Absolutely. Absolutely. We had good progress. We have good discussions, and -- yes.
Next question comes from the line of Peter Olofsen from Kepler Cheuvreux.
I had a question on automotive. On the Slide 7, you also mentioned share of wallet as a key reason. I get that, that dates back to 2017 when you were on allocation and some of your clients started to qualify other suppliers. Could you maybe give some idea how material the impact from changes in share of wallet is? And given the time it takes for an automotive customer to qualify a new supplier and to see volume ramp, how likely is it that this headwind becomes even more meaningful next year, so in 2020?
Yes. It's a fair and good question. I think Ingo and me will answer this. I think, first of all, what we said and that's still prudent that we -- it seems to be that we lost around between 3% and 4% market share. And that's happened because we are unable in 2017 to deliver what our customer wanted. And in that time, they qualified a competitor. And I think what we see is that we have lost around between 3% and 4% market share.
The share of wallet is the same. It is -- in the current customer, we have the same share of wallet. Of course, we have sometimes a new model is coming, the share of wallet is a little bit less, but we don't see any issue in the share of wallet. What we clearly have is to win back the market share. And so especially for 2020, there is a clear target that we will win every year between 1% and 1.5% market share back. That's our target for the year '19 and '20. Ingo, anything you want to add?
No, I think that's a good question.
That is helpful. Maybe on general lighting, threefold question. Can you provide an update where you stand with the sale process of Siteco? And then considering that DI is loss-making, are you happy with the current portfolio in DI? Or could there be potential further disposals? And lastly on DI, there was around EUR 40 million goodwill impairment in DI. Can you disclose which unit within DI this relates to? And what triggered this impairment?
Okay. A lot of questions. I'll start with the first one with LS on Siteco. We -- I think I said it in February and this is still valid that we expect to come to a final stage between April and May. We still have a clear timetable to have this final stage in May. That means I'm expecting in the next 2, 2.5 weeks a final proposal. And then I have a clear view, which bidder could be -- go in the last round of the M&A process. So this is still on track. And I'm optimistic because we still have enough bidder in the round. Second point came to DI. I think, I do it -- I shared with Ingo. First the sentence is, I clearly said over time that we are looking for portfolio measurements. So that is a permanent progress. If we see that a business, a business field or a company is not achieving the agreed results, we are going immediately in the portfolio optimization process. That's what we're doing in the last years. Last year, we sold our process technology. It was a business in automotive. And if we find something in DI, we will do so in the same area. But maybe Ingo you have something on DI and on the results and on the impairment.
Yes. So the question relating to impairment, in my prepared remarks, I said that the impaired assets have a goodwill in DS, digital systems. And the trigger for that was simply that when we had to update our guidance, we also saw a reduced outlook for DS, and that is typically a trigger for an impairment test. And as a result of that impairment test, we had to incur EUR 40 million of the goodwill that was still residing in DS from an acquisition back in 2011.
Next question comes from the line of Sandeep Deshpande with JPMorgan.
My question is, I mean, when you look at the margin guidance EBITDA, adjusted EBITDA margin guidance for the full year, it does seem like second half adjusted EBITDA margin is declining second half versus first half. Can you talk us through what is happening on the adjusted EBITDA margin, inventory or price pressure or any other impacts there? And I have one short follow-up after that.
Thanks, Sandeep. I think that's a great question for our CFO.
Yes. If you look at the next 6 months, as you said, the visibility is still limited. The results year-to-date are heavily impacted by the operating leverage effect that we've seen both in traditional OEM, automotive as well as LED. We now go into the summer period, more or less, where we don't know yet how long the summer furlough will be of some of the OEM manufacturers. So maybe some caution here. Again said, of course, we will have bit of a higher run rate of savings we generate through the performance programs where roughly 60% of what we said is expected to come into the second half. So if you take all these pluses and minuses together, we still have to see a little bit how this eventually will evolve.
And one quick follow-up on Vixar. I mean you had bought this Vixar company last year and said that you have potential to have significant volume somewhere in the mobile phone market this year. Can you give us an update?
Yes, I can. We are -- we have ordered, and we are in current discussion with mobile companies in Asia. You know that we always had our main focus on Asian companies, mainly in China, Korea and Taiwan and Japan. So we already have -- we already delivered Vixar chips to Asian companies, and we are in the process to get more. But maybe, Stefan, would you like to say something about that? Maybe 2D, 3D, that's a little bit change in the mobile industry out of price pressure for mobile companies, mobile device companies. And for this reason, there's a little bit of change from 3D to more 2D, but we're in this process as well.
I think there is rationale why Vixar is still very valid and will support our business in the future. Vixar is a light source for all these sensing elements with -- according our planning in the applications, which Olaf mentioned before many consumer electronics talking about smartphones, but we see also more and more interest in the automotive sector for Vixar for interior positioning, scanning of driver and passengers. So Vixar will be regarded as an appropriate illumination source for a lot of sensing applications. That's basically the market demand from our capabilities. I think that Vixar company is developing as we have planned. We have excellent resources here in regards of engineering capacities and we can basically follow up on all the needs which the different application features for the future for Vixar as a light source for sensing applications.
Next question comes from the line of Lucie Carrier with Morgan Stanley.
The first one I would have is on the OS profitability. I was hoping you could give us a little bit more granularity in terms of when we look at the drop in the margin, which is roughly, I mean, going from 24.5 to roughly 14.5. Are you able to segregate for us what has been really, what I would call, operating deleverage, i.e. the Volume impact, what has been the inventory? And what has been possibly other factors like price or cost inflation? And related to that, I think, of course, you have added a lot of fixed assets in this division over the last 3 years in Regensburg, in Kulim and other places and so it's a little bit difficult for us to have a sense of what is really the operating leverage or deleverage impact that you are facing on this kind of a relatively new fixed asset base. So can you help us maybe do the bridge a little bit more precisely for this division, please?
Okay. Yes. So I think maybe the first one is that Ingo. And Stefan, would you like to start with this part?
So if you go back to my prepared remarks, I said that the year-over-year impact on profitability from cost absorption effect around inventory is roughly 5 points -- 5 percentage points. The operating leverage of Opto at this point in time is high, indeed also because of the additions to the fixed asset base that we've made with the utilization being not at the levels that we, of course, wanted it to be. So at this point in time, the operating leverage is somewhere probably between 60% to 65%-or-so. And obviously going forward, we will work very much on trying to lower that again because it's very high at this point in time, and that was basically this plus a price erosion where the effect -- price erosion, however, if you then compare that with the productivity programs that we still have in place was more or less compensated, but it was not possible to then also compensate for the volume degression impact. And the volume degression impact, Lucie, is on the one hand the lack of absorption because of lower volumes plus in this case the delta in inventory compared to prior year.
So 500 basis point, is it inventory and operating deleverage together? Or is this solely inventory?
It's together basically because again at the end of the day, it's all leverage because either you sell something or you build inventory for the sale in the next month or so. And given the volume outlook that means that if you don't produce, you don't absorb fixed cost in your balance sheet. They run straight through your P&L, so overall, it's all basically the same topic. It just doesn't run through your sales line and that's why when you look at the revenue drop relative to the EBITDA drop, it's not really proportional and that's why we sort of mentioned the inventory reduction as well.
Okay. Because 500 basis point is about half of the effect you have, so this is why I'm trying to kind of add up. So the rest is what precisely?
What I said is pricing against that is productivity, a little bit and then volume degression of the volume difference for last year.
Okay. And you were mentioning the capacity utilization in the factory currently is low. Are you able to, kind of, give us a percentage roughly? Because, of course, I remember 3 years ago, it was almost -- I mean very close to 100%. So where are we now precisely?
Lucie, I certainly could give you that number, but if you allow me, I will not because there's many people listening to our call and that's an information that it's not at the level that -- where we are able to run without underutilization.
Okay. Okay. My second question was around the comment you made actually to follow up on the market share and that you're aiming to win back 1% to 1.5% market share per year starting next year. I'm assuming this is on the auto LED portfolio or the OS auto portfolio. Can you maybe give us a little bit more color on how you're planning that market share kind of regained?
Yes. It's clear. I think, as I said, we lost between 3% to 4% and it's clear to the sales force. We cannot and I cannot accept it. So we have to regain with 2 things. First of all, I think we are -- as a technology leader, we are coming with new innovation. So I do not want to do it through prices. So to gain market share is easy, if you reduce price, but that's not the way I would like to do it. There is a new system coming up, [ Metric Helpline ], for example. So we are going to our customer and promote a new technology. And with this new technology, I'm quite sure that we can regain our market share on the old level than we had in 2017. I think it's not too aggressive to get 1% market share back.
Next question comes from the line of Sebastian Growe with Commerzbank.
It's also a follow-up on the market share of customer you had before. Where do you stand currently after this 3% to 4% market share loss? And the question that I had is why shouldn't the OEMs eventually continue to balance the supplier structure further i.e. expand really the share of wallet with other supplier accounts? And can you also comment on how pricing has developed since these share losses accrued? And would you say that it has normalized now after eventually what was the stronger price erosion in the more recent past?
Yes. Thanks, Sebastian. I think again, I think, it's not so aggressive to gain market share by 1% year-over-year on your current level. So I think as a market leader in LED and in halogen, I think one of our advantages is that we can deliver to the customer both products. And again, today still 70% to 75% of all brand-new cars are equipped with halogen. So if you sit with your customer together, he needs both products and it's still a good solution to have it from one hand, from OSRAM. And I think that's the reason we are market share. The second point why I'm optimistic to gain market share is clearly that the #2 and #3 in the market acting weaker. I think it's in this situation sometimes easier to gain market share. And your third point is that was a share of wallet, as you described. I think most of my customer had to well balance position between my competition, second source, third source and OSRAM. And as you know, it takes a long time to qualify any supplier. So as a long-time company, trusted company with less [ sale-out ] and good quality, I'm quite sure that we can get this 1% year-over-year additional market share. Your third question was on prices. I would say, prices are normalized. I think we had especially in a declining market you always have more pressure on prices. It's clearly but what we expected for our planning that we had around 8% price decline in this range between 8% and 10%, we still finished our contracts. And again most of the contracts will be finished in December 2018 for the year '19. So I do not expect additional price pressure for 2019.
Okay. That's clear. And just on the share as such, so are we talking 30% give or take? Or where are we currently?
I know, I understand your question, and we never gave an exact number because competition is listening in my call. What we always said is, it is in a range above 30%, and that's still valid.
Okay. And if I may quickly move onto automotive. Just within the mix for what you have in terms of LED revenues, which on my number should be around EUR 800 million or so on an annual basis, can you just comment on the structural outlook from here, i.e. what's happening especially interior lighting? I think it was a topic on prior calls, is growing faster than, for example, for the head lamp lighting. How that would affect the overall profitability level at the LED part within automotive?
I understand your point. Well...
I mean if I can chip in a little bit? So overall, if you look at our revenue base, the exterior part is always the major part of the automotive LED base, and the margin difference between interior and exterior is there, that's correct. But at the same time, also the pricing on interior is less -- or the price erosion on interior is less elevated than it is on exterior. So in that sense, you have some mix impact but also somewhat different dynamics. What is growing right now in interior is very much display technologies in that sense. And it will take a while still until new functionality, RGB, will go until more sophisticated lighting will come into the interior. So from that perspective, yes, there is some growth, but it's very specific to display technology. And the other areas, they will still need some time before they pick up pace.
And within this display part, would you consider yourself being greatly positioned? Or are simply others better off for the time being?
I'm not sure how you would classify that. So in that sense...
I think, I would say -- maybe Olaf can satisfy...
I think you have to put in your mind in the display business, the technology is changing as well. In the former, in the old technology for displays was from [ was ] and is not in. But the chip size, they're moving and maybe you heard about these mini LEDs and micro LEDs and in -- moving in this phase of the smaller chips, of course, OSRAM is in, in this technology, but not in the old one.
Next question will come from the line of Jürgen Wagner with MainFirst.
Actually, I have a follow-up on OSRAM on Opto margins. What other measures are you taking in Kulim to achieve a better utilization, let's say, over the next 2 years, except taking back market share that you mentioned?
Thank you, Jürgen. I think, you had a great question for Stefan.
Thank you that you put the focus on Kulim. As you know, we have planned Kulim for some technology but the advantage that the machines which we have bought and that in normal world the semiconductors have a highly versatility. And with the versatility, you can basically generate different solutions and different actions and projects and applications. And we are currently looking into sapphire-based products, which basically fit different applications. One was just mentioned, backlighting for displays and besides the general lighting. In the automotive business, which we already talked about for Kulim, within also a certain area of applications, which we take advantage of the installed capacity. So we're looking confidently to the next 24 months that we will have additional business for Kulim, and we can basically use the capacity, which we have installed already.
Next question comes from the line of Leo Carrington with Crédit Suisse.
I've actually a small follow-up on Lucie's question. The inventory balance in chip, the unchanged sequentially, slightly down, but only slightly down. Typically, it's an ongoing risk of underproduction and keeps your underabsorption of overhead in H2, and if so, is this already captured in the guidance?
Well, the inventory movement that you see is on the overall level of OSRAM. What I was talking to with Lucy was just the impact from the Opto. And let's also remember that when we talk about bridges, we look at the comparisons to prior year. So in the prior year, in the quarter, there was an inventory build which had a positive impact because you absorb fixed costs. In the current quarter, we had an inventory reduction which has a lower fixed cost absorption impact. And if you add the positive and the negative together, you see the total absolute difference to a year ago. So that's how the bridges work, number one. Number two is that we saw indeed an inventory reduction at Opto. At the same time, inventories in DI were staying at a rather high level. So in the guidance we gave, we have assumed that, that inventory level for the DE, especially will come down in the second half, which typically does. Also historically, if you go back, that's always what kind of seasonality would suggest and what the plans are. And the absorption effects in digital, particularly in DS are nowhere near comparable to Opto because DS has a completely different cost structure. It's -- the building material is a very, very, very significant part of DS. So there is -- it's almost negligible from an absorption perspective. But, of course, we gave guidance we also looked into our good movement for the balance of the year.
We have a follow-up question from Sven Weier with UBS.
So there were 2. The first one is because you mentioned you expect to gain share also on metrics LED, if I understood it correctly. There was one thing I was interested, maybe that's a question for Stefan, because HELLA mentioned earlier this year in terms of their market expectations that they haven't changed the LED market share assumptions, but they said they would expect it to be more of a standard LED solutions versus more sophisticated ones. So my question would be basically how you look at the longer-term LED penetration? Have you also have a different view on the structure of that or hasn't that really changed?
Okay, Sven. I think a great question for Stefan.
If you look in the front light, [ words ] that we differentiate and put a little bit more detail into the subject that you will see on the one hand side, innovation-driven, feature-driven solutions when we talk about increasing the resolution, you had to go from an adaptive front-light system to what we call projection. And what Olaf mentioned, the wireless generation, which we are launching in the next year, Generation 1 and then in the following years Generation 2, is basically increasing significantly the number of pixels to go basically versus its projection feature. And on the other hand, we will see a higher penetration of LED-based front light systems with more standardized solutions and it's more likely what HELLA mentioned in their comment. These applications will be fitted with more standardized LEDs. So we have basically a twofold development or twofold-driven penetration of LEDs in the automotive sector. One is this feature-driven and the other one is more, let's say, the commodity-driven, where we go into the high-volume segments, this is increasing, the number of LEDs overall. But this will also be, let's say, more a cost or price-driven segment. And therefore, our development strategy and our business strategy is twofold as well. We have on the one hand side an innovation-driven path that we go for the future where we expect basically a higher margin, higher prices, but we have also basically to take advantage of the penetration in the more commoditizing business, which we are supporting with the appropriate manufacturing cost basis to keep our margin also in this segment. And I think if you look into the future business of automotive headlights, you will see these 2 trends in business-wise you have to be prepared for these 2 approaches into the business.
And when you look at the standard segment, I mean, is it same happening as we had it maybe over the backlight where initially you also started with more sophisticated stuff and then over time the kind of barriers to entry came down? Because obviously there's still quite a bit of a difference on the brightness level. So I would suspect it's not that easy even on the standards solutions.
Absolutely. But I think, this business especially in this volume and in this commoditizing business, you will be paid by photons. So you can take advantage of your know-how in the semiconductor business. If you can generate the same output with a smaller chip then you have lower manufacturing cost and you have to basically drive your margin by this innovation in the semiconductor field. So it's not that it's the cheapest manufacturing and you have to go to the cheapest location, you can basically gain also advantage by innovation, the cost innovation based on the semiconductor know-how, simply by getting the same number of photons from smaller chips, get the same price because you get the same feature or you sell the same feature but have advantage on the manufacturing cost side by using smaller chips. So I think it's a normal behavior. You will have standardized products with commoditizing business behavior but you still can also make your fortune out of that by driving innovations on semiconductor level.
Okay. Stefan, the other question was on the Conti JV because I think in Q1, we already had a fairly small revenue contribution and it seems in Q2 as well. So -- and I think back then you mentioned some technical reasons for that. So is that now that you expect that for the second half that there is more meaningful revenue? Or how should we look at that?
Yes, Sven. That's exactly the expectation. We had some more delays than we had hoped for. Also with some transfers of customer contracts it took a little bit longer. Also at the customer side it turned out to be a fairly complicated process, but we've now moved a significant step further and therefore indeed we should see more revenue flowing through OSRAM in the second half. Let me also just point out as we did in prior calls on this topic that the economic value of that revenue still accrues to us, and that means that we get a reimbursement of the corresponding margin from Conti and that is run through the numbers of AM in our numbers.
A follow-up question from Peter Olofsen with Kepler Cheuvreux.
It's for Ingo. It's on the share buyback. In January, you announced the first tranche of up to 9.5 million shares, but so far, you've only been buying about 1,000 shares a day. So for our modeling, should we assume it remains at a current low level? Or is there a potential for the buyback activity to pick up?
Well, when we commissioned the bank back in December and announced it in January, we obviously had different circumstances. But today, a lot of what's happening with OSRAM share prices is related to the speculation and rumors around Bank Carlyle. And we believe as a result the trading volume and the share buyback program is at this point in time, very low. It's the commission with the bank, as I said. So it's a decision that bank takes, not we. We're not involved in that. So I can't tell you what the future will bring, but right now we believe this is because of the rumors underlying the stock movement.
Ladies and gentlemen, due to time limitations, I hand back to Juliana Baron for closing comments.
Thank you very much for your participation. With that, we would like to conclude the conference call. If you do have further questions, please get in contact with our Investor Relations team. We hope you enjoy the rest of the day. Thank you, and goodbye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.