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Ladies and gentlemen, thank you for standing by. I'm Yasmine, your Chorus Call operator. Welcome, and thank you for joining the OSRAM Licht AG conference call on the third quarter 2018. [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 third quarter 2018 results. As a reminder, the conference call will be recorded and is available on our home page, www.osram-group/investorrelations.com. You can find today's presentation there as well.
It is now my pleasure to turn over the call to Dr. Olaf Berlien, the CEO; Ingo Bank, the CFO; and Dr. Stefan Kampmann, the CTO of OSRAM. Please go ahead, Olaf.
Thank you, Andreas. Ladies and gentlemen, good afternoon. Welcome to our conference call also on behalf of my 2 colleagues, Ingo and Stefan.
First, I would like to give you an overview of the development in the past quarter. In this context, let me briefly comment on our profit warning at the end of June. This has led to understandable criticism. Be assured that we take this criticism very seriously and has acting accordingly. I will come back to this later. Second, I will elaborate on our semiconductor business, OS. These are the markets we have to deal with most at this moment, and this is where we see the greatest potential for putting OSRAM back on track for stronger growth in the long term. Additionally, let me shortly comment on the luminaires business. In November last year, we said that a strategic decision for this business will be taken in 2018. The managing board has now decided to initiate the sales process of the luminaires business. This was announced yesterday.
So let me start and have a look on Slide 4 at the past quarter. In the period from April to June, we maintained comparable revenue at the previous year's level. The adjusted EBITDA margin was around 13%. Free cash flow was positive due to a lower investment activity.
Also, on a positive note, we are pleased that in the end of the third quarter, all required authorities approved the acquisition of Fluence, Vixar, and BAG Electronics. We subsequently completed the closing on July 1. As announced, our joint venture with Continental also started operations at the beginning of July. By combining automotive lighting with software and electronics, we will take an important step regarding the future of OSRAM. On Slide #5, you can see that profitability was significantly influenced by the unfavorable movement of exchange rates that resulted in a burden of EUR 75 million. The lower result also reflects ramp-up costs for our new plant as well as R&D expenses. Without these effects, our profitability would have been significantly better. At the moment, however, we must acknowledge we are facing headwinds within an increasingly challenging market environment.
There has been 3 main changes since the beginning of the financial year. First, we have to come from an extremely strong basis in our Opto business and our competition took advantage of this situation. As you know, last year, the OS order book was so full that we had capacity bottlenecks in the automotive sector for some products. As you may remember, we had already reported this, and yet, in the third quarter of the current fiscal year, we were able to increase revenue for the automotive segment of OS by almost 10% year-on-year. However, we were unable to attain the growth rate of 2017. In addition, the outlook for the global automotive production is much more muted. Looking at Slide 6, we can see that IHS expects the growth rate of global automotive production to be reduced by half from 4% to 1.8% in 2018. Especially in the latest forecast for the third quarter, July to September, we see a clear decline. A look at the individual markets shows the same trend. In 2018, IHS expects growth in China of only 2.3% after 6.8% in the previous year. In China, IHS has lowered the forecast for the third quarter from 4% to 3.1% within the last month. This gets even more striking when we look at the EMEA region. Here, the forecast for the third quarter was lowered from 3% in June to 1.3% in July. This trend had already been anticipated in the last quarter and, of course, this trend explains the part why we had lowered our guidance end of June as well. Slide 7 shows that the customer behavior also corresponds with the development in the regional markets. The actual call-off quantities of our customers, the headlight manufacturers, differed regionally compared to the agreed-upon quantities. As global market leader, with some, we managed to grow; with others, we were shrinking. The reason for this are the mentioned growth rates in the markets due to the regional difficulties, such as in Korea. Here, car manufacturers were, and still are, affected by trade restrictions to China and the U.S. as well as by strikes. And unlike our customers, most of whom are regional actors, the first thing that hit us is the weakness in sales in the individual markets. We have seen the lower demand and the actual profit warnings from many big OEMs in the last days as a result of this development described by IHS. Second, as already announced, there were project postponements in the general lighting and by customers from the mobile communication industry.
As a third and last point, there is a concern of an expanding trade conflict. This is in addition to the stronger euro, which has so far cost us EUR 75 million in earnings relative to last year. We expect Opto earnings in the fourth quarter to be somewhat impacted by product deliveries from Wuxi in China to the United States, which will be subject to the new tariffs.
Accordingly, the sales development of our LED business recently corresponded somewhat with less optimistic business climates. And in parallel to the sales development of almost all well-known LED suppliers, a further complication is that we are currently seeing increasing inventory buildup for general lighting products across the industry and, of course, by customers. It is currently difficult to predict when the situation will normalize. However, we did well in a highly competitive environment. Some of our competitors were hit much harder, with some of their sales declining. In view of the volatility in the market, we will monitor our business even more closely in the future. This should ensure we are better prepared for a changing market. Regardless of the challenging conditions, our strategic goal remains clear: we want to continue our growth within the market with Opto Semiconductors as a leading company. We see good opportunities for this in high-growth markets, especially in the automotive sector, as you can see on the next slide. For example, the LED penetration rate for new vehicles today is slightly above 20%. This is expected to double within the next 5 years. This trend should benefit us in 2 significant ways. Today, we still equip around 75% of all new vehicles with traditional light sources, such as halogen. At the same time, we benefit from the increasing LED penetration. By the switch from halogen to LED, we should continue to experience growth as a result in the coming years. That means the technology change is taking place within our own portfolio.
The introduction of innovative LED technologies also creates opportunities in the field of front lighting. For example, with technologies such as so-called digital mirror device, short DMD, or micro AFS. Let me give you an example to illustrate this. Until recently, a good matrix headlight consisted of 80 individual light points. Just recently, a German premium carmaker presented a car that, thanks to DMD, offers the matrix headlight with 1 million light points. I think this example illustrates very clearly how great is the potential for us. In fact, OSRAM presented DMD technology at the Consumer Electronics Show in Las Vegas at the beginning of this year. Coming to Slide #9, the OS market share. Thanks to innovative products and good market access, we aim to keep our competitor at a distance and strengthen our market position. Slide 9 shows how we have become one of the big winners in the recent years. We were able to continuously gain market share and strengthen our #2 position. Even in 2018, we succeeded to gain market share. That said, growth has always been subject to strong fluctuations depending on the respective economic situation. Despite the continued broad fluctuation range, we want to continue to develop within the growth range of recent years.
Ladies and gentlemen, overall, we should not lose sight of the fact that we are financially very solid with a strong equity ratio, fully funded pension and continued underlying positive profitability. But we are not going to rest here. We have to set up an extensive performance program to ensure that OSRAM is even better prepared for the increased market dynamics and rising macroeconomic uncertainties. That is shown on Slide #10.
The program includes operational measures, such as purchasing and operational efficiency initiatives. This is designed to simply compensate for general cost increase through inflation and/or price erosion. We typically target 6% to 10% in savings per year relative to the [indiscernible] cost base. This is business as usual for us, and we will continue to drive operational excellence also in all of our business in the coming years. Second, the declining trend in traditional product and the shift, such as halogen, to digital products, require an adaption of the production capacities. As already reported, we were able to accelerate this process clearly and laid an excellent foundation with the conclusion of a new [indiscernible] plant 2 weeks ago. As one of the results, we would transform our location, for example, in Schwabmünchen from a traditional production site into a high-tech semiconductor-type facility. Through structural optimization in all areas, we aim to save up to EUR 140 million gross year-over-year.
And third, a continuous streamlining of all global administration functions. As you can see on Slide 11, this reduced our administration costs up to 20%. This makes us become a part of other best-in-class companies in the industry. An external benchmark study comprising 250 companies worldwide is supporting this. We will provide additional information around these programs during our 2 important events in the upcoming autumn. More specifically, at the OS market tech day in mid-September, we will demonstrate the company's technology and growth potential. And with the presentation of the annual figures at the beginning of November, we will then provide a strategy update for the entire company.
So ladies and gentlemen, let me summarize. The alignment of our business strategy alongside important megatrends is the right on mark. We continue to focus on high-tech markets. We are carefully monitoring current market development, and we have taken appropriate countermeasures. And finally, we are sharpening our portfolio with the intended sale of the luminaires business. This will enable us to focus on semiconductor, automotive and the digital marketplace of the future.
So thank you for your attention, and I would like to hand over to my colleague Ingo, who will give you a detailed insight in the financial development within the past quarter.
Thank you, Olaf. Good morning, good afternoon to all of you. Let me provide you with more detail on the company's financial results for the third quarter of our fiscal year 2018. I'm moving to Slide 14 now.
Comparable growth for the company was flat in the quarter. Opto delivered mid-single-digit comparable growth. SP grew in the low single digits and comparable growth LSS was slightly negative. Adjusted EBITDA came in at 13.1%, negatively impacted largely by foreign exchange and higher R&D spend as well. Free cash flow turned positive, with EUR 28 million in the third quarter, as scheduled, with the main CapEx expanding for Opto finalized in the first half of fiscal year 2018.
Reported EPS was at EUR 0.33, lower than prior year by EUR 0.32. Approximately, EUR 0.18 of the difference in Q3 fiscal year '17 are due to a stronger euro and EUR 0.07 were related to higher depreciation. Adjusted EPS was EUR 0.49. Special items in the quarter amounted to EUR 19 million, in line with expectations.
Let's take a closer look at the revenue in Q3 '18 on Slide 15. The weaker dollar versus last year continued to impact our nominal sales and growth in the quarter for all of our reporting segments. Overall, the negative impact of foreign exchange amounted to approximately EUR 48 million, impacting nominal growth negatively with 450 basis points at the OSRAM level. The total benefit from changes in our business portfolio contributed 80 basis points to the year-over-year growth, leaving the overall comparable growth for OSRAM flat when compared to the same quarter of last year.
Looking at the revenue growth in our geographies at the lower right of the chart, one can see that we were able to grow in 2 of the 3 business regions. All of our reporting segments recorded growth in the APAC region during the quarter. Particularly in SP, growth was noteworthy, driven by LED automotive components. Also, our dynamic lighting business continued to expand based on strong demand for sophisticated city beautification project in China. Growth in the Americas was positive, driven by growth in Opto and in our LS service business.
EMEA continued to provide the biggest challenge across all reporting segments. The general lighting environment remained soft and, in addition, the ongoing electronic component shortage limited our ability to supply to full possible demand. The decline in the SP OEM business for traditional light sources was in the high single digits.
Moving on to profitability on Slide 16. In Q3 of fiscal year '18, absolute adjusted EBITDA was EUR 133 million. The company's adjusted EBITDA margin for the quarter came in at 13.1%, lower by 330 basis points compared to the same quarter a year ago. Foreign exchange, higher R&D expenses in Opto and ramp-up costs related to the extension of the industrial footprint of Opto continued to weigh on profitability. The impact of foreign exchange had a negative substantial absolute impact of EUR 25 million net in the quarter, translating into 170 basis headwind in margin. R&D was higher with EUR 11 million, driving 110 basis points of the year-over-year margin difference.
Adjusted EBITDA in corporate items was negative EUR 16 million, in line with our previous quarter. Special items this quarter amounted to EUR 19 million, EUR 7 million of which were related to acquisitions.
We had recently announced the successful signing of the German agreements to align interest in July of this year. We expect to take the related charge during the course of the fourth quarter of fiscal year 2018. It is expected to be in the range of between EUR 50 million to EUR 60 million. Overall, we expect special items for the full fiscal year 2018 to be between EUR 140 million and EUR 150 million. Summarizing our Q3 performance for the business units on Slide 17. Let me start with Opto. Opto's revenue growth in the third quarter was negatively impacted by a decline in our industry and mobile business and a modest growth in general lighting. Close to 10% growth in automotive LEDs, however, helped to offset the [ negative ] growth in the quarter with a comparable growth of 4%. Opto's adjusted EBITDA profitability was impacted by unfavorable currency developments, increased R&D spend and costs associated with the ramp-up of Opto's industrial footprint extensions. When adjusting for the impact of foreign exchange, Opto's adjusted EBITDA margin would have been closer to 26%. SP comparable growth was 1.3% in the quarter. High single-digit growth in LED components helped to offset the lower revenue in our OEM channels, with traditional light sources, down high single digits, particularly related to xenon. The reduction of SP's profitability was largely related to foreign exchange. Additionally, a less favorable mix burdened profitability somewhat, mainly due to the increased share of automotive LED components in the revenue base of SP. LSS growth continued to be challenged by a weak market in EMEA that could not be completely compensated by strong growth in Asia Pacific. Ongoing electronic component shortages negatively impacted revenue in the quarter by approximately EUR 10 million. Given the lower volume, adjusted EBITDA was negative. Moving on to cash flow now on Slide 18. Free cash flow for the quarter was positive with EUR 28 million, as expected. As you can see on the lower right part of the chart, CapEx spend of EUR 45 million was substantially lower, both compared to prior year as well as sequentially. This is in line with our investment planning communicated way back in November last year, where we indicated to see the peak in CapEx spend in the first half of fiscal year '18, reflecting the finalization of bigger infrastructure buildups for Opto in Malaysia as well as Regensburg. Now that the major infrastructure investments around buildings and shelves for Opto are more or less completed, our investment approach carries more flexibility. This will be supportive for the generation of free cash flow going forward, being a very important financial objective to us. Net working capital performance improved as we continue with our focus on driving cash flow from operations. On Slide 19, let me now turn to earnings per share and net liquidity. Reported diluted EPS in Q3 '18 was EUR 0.33, down compared to Q3 '17, impacted by foreign exchange accounting for approximately EUR 0.18 of the difference. Higher depreciation expense drove approximately EUR 0.07 of the difference. Adjusted EPS for the quarter was EUR 0.49. Our corporate income tax rate was approximately 29%. And our net liquidity increased to EUR 88 million at the end of the quarter given the positive level of free cash flow generated in the quarter. On Page 20, you see the summary of our outlook as communicated on June 28.
Thank you very much for your attention, and Olaf and myself are now looking forward to your questions.
[Operator Instructions] The first question comes from the line of Uwe Schupp of Deutsche Bank.
Two questions, please. Firstly, could you, Olaf, give a bit more insight of what drove your decision to rather sell the entire LS unit rather than do a piece-by-piece solution, so to speak, as those 3 businesses are, well, rather heterogeneous as far as I can see? And then secondly, Ingo, you just indicated in your prepared remarks that CapEx was indeed rather low in Q3. You highlighted the focus on free cash flow heading into next year. Any more color you can give us with regard to how sustainable the low CapEx in Q3 really was heading into next year? And I can see consensus is still expecting a figure of I think almost EUR 500 million for next year, which seems a high number to me, and any thoughts around that would be highly appreciated.
Yes, thanks, Uwe. Yes, good question. Of course, it was a discussion: should we put it in one piece or we split it a little bit? The reason that we said we split it in 2 ways is that we, first of all, we make the decision to sell the service business in U.S. This is on track. And we are now in the phase that we get the first indication for a bit. And I'm quite sure that we will finalize soon and quick. And then the second is that we would like to sell our luminaires, so the whole luminaires business, because as we discussed on the strategy part, on our 3-pillar strategy, the third pillar was always let's see how it will improve. I think now we had the time that the improvement and profitability are coming up. We have a good business plan. And I think now it's a good time to concentrate OSRAM on high-margin business like SP, like OS and the digital part.
So the plan is still to sell the U.S. business first and -- the separate unit and then kind of the European. And does it also include the Asian operations?
A little bit part of the Asian because we have a small part of luminaires in Asia. But again, only the -- it mainly is Europe. It's Germany -- as we call it, GAS, it's Germany, Austria and Switzerland. So our luminaires business, formerly called Siteco, that's more or less the -- 90% is the luminaires in Europe. And we will sell it as one. And the reason why we split it, we are -- with the service part, much faster. We started in November last year to prepare it with historical financial data, management presentation. And this is all the work what we have to do now with the LS business, luminaires business in Europe. So we are now beginning to prepare the financial -- historical financial data, data room and to be -- yes, to make this M&A process now on the road -- take it down the road.
[ Can you provide us an ] indication on the profitability -- sorry to have jumped in now -- on the profitability of the Siteco business? Is it comparable to the U.S. business from an absolute EBITDA perspective?
No. No, it's not. The service business always had a better margin than the luminaires business. I think you know that in these days, in Europe, the luminaires business is a hard time. You see it with some of our competitors and friends not so far away. So again, I think we made our homework. We are now much better than in the past. But we don't report any financial figures for our luminaires business because let's wait before I get some bits on this business, and then I'm coming up with some additional figures.
Okay, and then Uwe, on your question on CapEx. I think what's important to understand that, of course, largely our CapEx investment plan is driven by Opto. And I think what we've accomplished here today is that we've built the infrastructure that we felt was necessary to expand in the various areas that we wanted to expand into, not just in general lighting but also in [ sensoring ] and infrared. We talked about the fact last time that in Kulim, we will have multiple different technologies being produced at that low-cost location, not just general lighting, but also increasingly, automotive and other applications. We also talked in the past about the fact that we were able to improve on the factory layout; increasing machine density, which basically helped us to possibly put more -- much more capacity in the now existing building 1 rather than next year to expand and build another building. So from that perspective, we are saying that sort of the big infrastructure build is now more or less behind us. What we will spend in 2019, therefore, will not be driven by infrastructure, but more driven by 2 things. One, how do we see the need from a capacity perspective in line with how we see markets evolving. And the second thing would be here and there, there might be some interesting areas from a technology perspective that need some investments here and there. But I can already say that without going too much into '19, the number you mentioned I believe seems to be really on the high side.
The next question comes from the line of Peter Reilly of Jefferies.
I've got 2 questions, please. Firstly, the slide on Page 9, which is very interesting, about the lower call-off rates from your automotive customers. There's clearly quite a few things happening underneath the numbers in terms of production rate, mix and share loss. And I wonder if you can help us understand particularly what's happened in terms of your share loss with your automotive customers, whether that's the main driver of why you've had lower call-offs, and whether you think that share loss has now stabilized going into next year? And then secondly, I just wanted to come back on this issue of LSS. I know it's early in the process, but can you give us some numbers about the size and profitability of what you're keeping? Because clearly, people are going to start focusing on fiscal '19. I'm just trying to get a feel for what's actually left in LSS going forward in terms of the size and the profitability so that we can get a feel for how OSRAM is going to look in 6, 9, 12 months' time.
Okay. Peter, let me start with the last question and then Olaf can talk about Slide #9. So I mean, as Olaf just said, we are just starting with the process. As Olaf said, we are more progressing with our service business in the U.S. For the rest, we are now preparing for the luminaire business in Europe and, therefore, the timing of whatever interest will come in and when, et cetera, is not here right now. So I would not speculate right now how LSS numbers would look like next year. Olaf pointed to our update on the strategy on the 7th of November, in line with our year-end numbers, and then we will talk more about the third pillar. Of course, we are thinking about how we progress our strategy. And of course, we understand that if there is a point in time where LS will leave the family, so to say, that we all need to understand how the third pillar of our strategy will look like. And that's in preparation. But please give us some time to do it properly, and then we will also tell you what the financial profile of that looks like, and that's going to be in November. Now I'll hand over back to Olaf, on Slide 9.
Yes. Peter, thank you for the 2 questions, both good. And as Ingo said, I think give us a little bit time and we will come with full transparency end of October, beginning of November with an update on strategy. And then you get the [ all the ] feedback and figure, how it looks like, the OSRAM group of 2019 and later. The Chart #7, Peter, I put it in because some of the feedback was, "Olaf, did OSRAM lose some market share," and maybe, "We had a call with this customer and he had a good growth." And what I would like to show on this chart, and usually it's not a standard chart, to give you a little bit the feeling that maybe some of my clients and customer is in 1 region and had a good quarter and maybe a good half year. And let's take maybe customer #3, if you would call him, he would say, "I had a great year," and I would say, "Yes, I had a great year with him as well, with 8% additional volume." But what I would like to show you on Chart 7 is that we, as a market leader in automotive lighting, get really an overview overall. That means we have customer -- we are market leader in China. We have customer in Korea, in China, in Japan, in America. So that means if you go through my clients, and again usually I wouldn't show them, you see a different picture. I have -- in some region, I have growth and we grow with this customer, so I did not lose any market share. And I had customer and one customer, he is supporting and delivering to Hyundai. Hyundai had 18% decline in production. And the 2 main reason, the tariffs to U.S. cost Hyundai 10% of production; and then they had the trade barriers to China. And this is public knowledge, they had the reduction to ship cars to China minus 30%. So overall, if you would call this client from OSRAM, you would say maybe I have minus 13%, 15% or 16%. So overall, what I would like to show you, there is a different mixture of picture. And IHS supported this kind of chart, that you have regions like China had 1/3 less growth than 1 year before, and maybe some areas of Europe had really great. And we see this as well.
Okay. I was just asking because you said in your prepared remarks that your competitors are taking advantage of some of your capacity issues. So clearly, it's not just the production rates. And hopefully, that is, in effect, is going to stabilize going into next year. And the other thing is just as a follow-up, and maybe it's a slightly unfair question. But do you feel that...
Peter, I'm sorry, I just want to make sure you don't misunderstand the chart. The chart is not indicative of market share shifts between competitors, because these are programs, typically, where 1 supplier is called in. When we talk about market share loss, that is more share of wallet in the total program of a supplier. These are programs where we are a single supplier and they are showing the differences in the call rates. And that's where Olaf is coming from, that for them, volumes develop differently than what they told us in the beginning of the year and, hence, also for us the impact. So please don't misunderstand the market share. So I was thinking...
The market is stable. The market share, Peter, it shows -- Page 9. So overall, OS gained market share in 2018 as well. But I think it would be not right if I would say we did not lose market share in this situation of allocation. So I said in my last call, I expect that we lost 2%. That was my proposal. Overall, if I take a look to the official statistics of IHS, Page 9, I gained market share. But I would say, in our situation where we are not able to deliver what my customer are asking for, that I would say today, I lost 2%.
Okay, that's very helpful. I did misread the chart because I assumed that the Chart 7 was a mixture of production rates and share. I didn't realize it was just production rates. And are you a bit nervous about automotive? In your final quarter, we have WLTP production cuts coming. It's still not very easy to work from the outside exactly what happens in the September and in your fiscal first quarter. So are you still a bit cautious about automotive for the final quarter?
Yes, I'm not nervous because, let me say, I'm happy that my fourth quarter is finished in September and not in December. So I would say, what I see is and what I read and I think you do the same, I see that now Ford, GM, Fiat, they all made profit warnings. Volkswagen said today, we had a good first half year, but we see the second half of the year is a different. So I see there is clearly -- and if you think about that you cannot order any Porsche today, you cannot order 1 Porsche, so of course, I'm a little bit pessimistic. But I see really a different second half year than a first half-year. Thank God that my financial year is finished in September, and that's in 6 weeks.
The next question comes from the line of Lucie Carrier of Morgan Stanley.
The first one actually is a follow-up on the last question from Peter. I remember during the last conf call you had end of June, it sounded like more the guidance reset was mostly driven by your concern around your fourth quarter, and I believe you had indicated you were expecting the fourth quarter to be down on the third quarter. So just to clarify, is that still the way you are seeing the year ending? Or actually, maybe not necessarily?
Lucie, I don't think that we said that the fourth quarter would be down or so on the third quarter, I don't think that's what we said when we changed our guidance in June. We were reflecting upon 3 things. One was that we had postponement of orders for our general lighting and horticulture business, number one. Number two, we had a postponement of a larger mobile device/smartphone type of order, that was originally in the plans for the second half of the year. And currently, we talked about the uncertainty around in automotive reflected somewhat in uneven order intake behavior and pushouts on automotive. Those are the reasons to change the guidance for the full year. And those reasons were factored into the way we've guided for. And so far what we've seen is indeed playing out for us right now and hence the guidance.
Okay. Sorry, I had understood back then, that's why you were saying your main concern had been around the fourth quarter rather than the third quarter. But I might have misunderstood. But then in this case, how should we think about the fourth quarter versus the third quarter, please?
Well, I mean, you've seen the third quarter numbers now. We've -- the guidance is also reflected. Therefore, I think, what you will have to expect is the fourth quarter as it is coming out. Obviously, the fourth quarter, what we typically have is a good pickup in September for our after-market business in automotive. We've also taken a short-term cost measures, of course, to reflect on the lower-growth environment that we had when we issued the profit warning. We had intensive talks with a lot of customers, people in the chain et cetera on how we would see things develop. And as Olaf said just now, some of the things that we will -- we alluded to such as the WLTP, et cetera, will play out probably also in the 4th-calendar quarter of the year. So all of these things we took into account and were reflected in the guidance we gave back then and that is still what we believe in.
Okay. My second question was around the bridge that you have shown, EBITDA bridge. In that, we are mostly kind of seen that the Chinese is driven by FX R&D cost that you had signaled at the beginning of the year would be higher as well as the clean ramp up. What I would like to understand a little bit better is of course if you recall also last time in end of June, you mentioned a specific headwind in your end market which were kind of increasing. So when we think actually about the bridge, how should we think about those headwinds as part of the bridge, because right now it's not really visible, and I think it's difficult for us to understand the sensitivity of your earnings in the light of the headwinds that you are mentioning? Because the breakdown we are seeing is only what I would call more kind of a mechanical type of effect, such as FX, rather than really reflecting the trend in the end markets.
Well, the bridge reflects basically the change in profitability with the major factors year-over-year. It doesn't -- we are not showing bridge as to changes into, let's say, in our guidance or the plans we had originally. And, obviously, the headwinds that we were alluding to by the end of June were all revenue-related. As I said, postponement of orders for general lighting horticulture, postponements of big orders for mobile device and smartphone business and of course -- and also pushouts for automotive, these are all revenue-related headwinds. And that made us take down our guidance from a growth perspective and also from an EBITDA perspective. So that's relative to the prior guidance. What the bridge we give here is relative to a year ago.
I understand, but -- I understand your revenues headwind. But they, of course, have an impact on the bottom line, and I think what we maybe would like to understand a bit better is on how a downgrade of 150 basis point of organic growth at the midpoint can drive that element on the margin. And I think this is what I am trying to get at, trying to understand a little bit better the sensitivity of your earnings, specifically when you are seeing variation in your automotive end market?
Sure. I mean given that we are fairly at the back end of our fiscal year, you can imagine that on the short term, that type of revenue adjustment basically puts us also at a higher operating leverage that it goes down and not just go up. And I think in '17, what you saw is a fairly high operating leverage for Opto on the uptake and now we see in the opposite side of it as well. You know that Opto is automotive and also the industry in mobile device business, these are very high-margin businesses for us. Otherwise, you cannot explain the high EBITDAs that we generate in Opto. And let's also not forget with the buildup of facility in general lighting and the somewhat more difficult general lighting market, there are costs now that we are not fully recovering with the revenue that we generate at this point in time with general lighting. All of that then basically provides a fairly substantial operating leverage in both directions.
My last question was just around the OS margin. I understand that in the quarter actually the growth in the automotive part of OS was quite good at about 10%. I see, of course, you have the FX impact of roughly 450 basis points. And you said without FX, it would have been 26% margin. But that would still be about over 200 less than last year, even though the auto growth has been actually quite good. So are you seeing maybe some headwind or other type of headwind, which are eroding kind of the mix? Because if we exclude the FX, it would still be more than 200 basis points lower, even though auto is quite strong in the quarter.
Yes, no, that's a fair your comment. I think the other thing that weighs relative to last year in the quarter, we had -- last year, we had the peak for our iris scan product, which is -- was a very high-margin business for us, that obviously was less this year. And then the other factor, which I was just trying to mention is that the buildup of our facility in anticipation of growth also into '19, and '20, of course, is there that the costs that we have there right now and is not fully recovered by the top line at this point in time.
Okay. And just as a precision, the Slide #9 is the market share not for auto LED, but this is for overall OS. So that also include, of course, I guess, the market share you have from now producing general lighting chip of your own?
Yes, that's correct.
That's correct. It's the official IHS statistics, it's not an OSRAM statistics.
No, no, of course, of course, but just to make sure it's -- whether that was only auto, whether that was for the overall OS?
The next question comes from the line of Sven Weier of UBS.
So the first one is referring to the delays that you've mentioned in June, and I guess some of those are delayed already into the new fiscal year also in Opto. So I was just wondering because we were speaking about consensus previously how confident you feel from today's point of view about the 10% like-for-like sales growth that the market is looking for next year? That would be the first question, please.
No, no, I'll answer, no problem. Sven, as you can imagine, we are now in the process of updating our midterm planning. That is a normal process that we are undertaking right now. We will finish that in September. And then we will say in November where we are. We will also do an update on Opto and its growth potential in its end markets by middle of September or so. And I think at that point in time, we should talk about this, not right now. We just need also reflect upon the fact that right now we are moving through markets that have quite some headwinds for us, with quite some regional differences in terms of the momentum of that. And I think we are all well advised to just take the information and study the environment and then look at it collectively with proper analysis in September.
And when you mentioned that the EUR 500 million CapEx forecast is on the high side for next year, I was just wondering about the ramp-up in Regensburg. So has all the money that you needed to spend also on the tools has been already expensed this year? Or is there also some amount until next year?
Again, what I said was that the infrastructure is there to start building in Regensburg. My understanding is also there's a few equipment there, so everything is there. And we are now at the point where we can determine how and when to move in capacity in OSRAM and how we believe the market will develop over the next 12 to 15 months. And again, that's an update we will give in the middle of September during the Tech Day for Opto.
So when you mean the infrastructure is the empty shell, but you haven't gotten expense for the tools, which should be the major cost, I would guess?
Well, that's not always the case. Putting a building in Germany down is not cheap. And so, therefore, I would be careful in sort of judging from the fact that the capacity in the equipment is cheaper than what what you have to put in -- again, the more important argument here for us is that the infrastructure is now there and it may now be more flexible going forward to invest in line with and how we see markets and the capacity we need to [develop].
And we have seen that in the past. We have this situation that we cannot deliver to our clients. So there is a point of time that you have to put additional infrastructure in and then you have the chance to grow and to be right on the demand and on the market. So the situation, what we have now is good in this case that we have now the flexibility for the growth.
Okay. Understood. And the other question I had on the cost savings that you also mentioned again today. I mean, to what extent do we need to assume in our running spread just that those savings are needed to compensate pricing pressure and things like that? And how much of that could be actually net cost savings on top of the existing earnings?
So as you know, we have 2 programs, that we said 2 big programs. The one is as I described in my -- beginning, in my remarks, was that we had the continuous program as to work against inflation, cost increase in energy, salary and benefits. So that's usually a program between cost savings, 6% to 10%, so on our cost base. So we are talking about numbers by EUR 250 million year-over-year we have to achieve to be cost-competitive.
And the additional one is structural one. That means that we have to work on our structure to be leaner, smaller, faster, and that means in our factories, where we have the transformation from halogen down to LED that we have to streamline the processes and the capacities, or the headquarter that we have to be leaner. And that means that we are running a project that brings us, in comparison to the cost base of 2017, that brings us EUR 130 million to EUR 140 million each year.
So and that's what we implemented now to be cost competitive. And the -- that's the cost base. And then we have -- of course, we have -- additional costs will come up in some years as well, and so we need another program. So that is a continuous path.
Just to add to that, Sven. Of course, these are gross savings, right, let's be clear about that, too. And also some of it what Olaf was mentioning. If you look, for instance, at the collective bargaining or the bargaining agreement we concluded in Germany, that also included for instance some of our factories here in Germany. And some of that will be needed to compensate for the lower volume that we will have over the next few years in our traditional light sources for cars, so halogen and xenon. So you cannot count everything back into a net bottom line. But of course the idea is that we improve profitability that we lean up our overhead processes and structures not just here in Germany, but across the globe. And that's part of the program of course as well. But we will talk more in detail about this also during our update of the strategy on the 7th of November. So I don't want to steal all the thunder here right now, and there will be more clarity as to where it lands when we sit together on the 7th of November.
But what we really did is that instead of having only a cost cutting by 10% for the lean headquarter or whatever number you put in place, we said let's use it in this case that we taken consulting from, we made the benchmark for each department, from HR to communication, from controlling to financing, so that we see which one had the best benchmark, which one is best-in-class, and we changed it with a portfolio of 250 companies. And we said in the benchmark that we can save 20%, and that's what we will now implement.
And is the corporate items line that was now running for 2 quarters in a row at the mid-teen level, is that the new run-rate now in terms of your costs for the central line? Because there used to be EUR 20 million to EUR 25 million, right, so we now have quite a substantially lower run-rate on that entity there?
No. I mean, obviously, we look at this all the time as well, and we already took measures earlier than the bargaining agreement. There is always a bit of difference between the third and fourth quarter due to seasonality of some expenses, et cetera. And again, Sven, I'm sorry to say that again, but let me -- let us take the time when we update you on '19 and tell you what we expect there as well. Because part of what Olaf just explained on the overhead reduction of course will also feed into that line, and let's do that in a proper way that we don't get mixed up in numbers, and you don't need to put it in the wrong lines in the P&L, I think we should do this in an orderly process.
And the last question, if I may, you mentioned the Chinese tariff impacting Q4. I was just wondering if you have already done a calculation on the annualized impact if the next round of tariff also goes ahead, which will involve some additional LED product?
Yes. First of all, I'm happy really to say that I do not have the LED factory in China. So I'm happy to have it in Malaysia. What we calculate of course is the -- what could be the impact, and we have an impact in Opto with the packaging LED from Wuxi to U.S. And we said that it's a low double-digit number.
So if you -- Sven, if you think about the 25% tariff that I guess you are referring to, the expectation is that if things don't change and we are not successful with some of the mitigation measures that we are now looking into, of course, we would be exposed to something like EUR 10 million-or-so...
EUR 10 million, yes.
For next year. If there would be additional tariffs, that somewhat are stipulated in Twitters or tweets, then of course, in the whole company would be subject to that given our footprint in China, then we would have to calculate what that is. I don't want to speculate how much that would be right now because the focus right now we have is on what we have, the EUR 25 million and what we can do to mitigate this to the largest extent possible. But before mitigation, the possible exposure to Opto's numbers next year is around EUR 10 million.
I think the next step would be just a longer list of LED products, right? And then maybe higher...
It could also be kind of a wholesale of everything, right, because if what was tweeted is down in the whole set of all imports into the U.S. from China are subject to a tariff, and that's also then would include other products that we manufacture and ship out of China, not just with Opto.
Yes, yes. But I mean you have a current list subject under the [EUR 35 billion], but if you go to the EUR 200 billion, that is planned already, there is a longer list of LED products that is already existing, as I was just wondering if there's additional stuff where you would be impacted?
Well, again, we're looking into this right now, I can't make a meaningful statement around this at this point in time. I can only tell you what I know, and that's the EUR 10 million that we -- prior to mitigation...
We see the EUR 10 million today and nothing more.
The next question comes from the line of Sandeep Deshpande of JPMorgan.
I have 2 questions. Firstly, I'm trying to understand and square this issue that you are talking about the weakness in the auto market associated with the cuts you're seeing from IHS, et cetera. At the same time, there is an ongoing increase in content in cars associated with LEDs. And secondly, I mean, we don't see the other semiconductor suppliers in the auto market seeing these cuts associated. So does this mean that content increase associated with LEDs in the automotive market is slowing down? Or there is some kind of transition, which is why this content increase is not happening at this point? And my second question is on OS, but maybe after this first question.
Okay, Sandeep, thanks for your question. So as you know, there are basically 3 or 4 very important drivers for our growth in LED components with Tier 1 suppliers. One is car production growth, and we talked about this. The other one is the penetration rate os how fast LEDs are being adopted in, especially, front lights. And I think Olaf showed a chart that sort of confirms what we said before on this. And the third measure is an increase in content, i.e., what in terms of sophistication, if you like, of front lights. And also there I think Olaf mentioned in his prepared remarks what sort of a matrix LED display looks like. So we're still seeing a lot of interest in more sophisticated lighting solutions in the front. Obviously, these always start typically with premium cars before they then migrate into sort of a broader set of cars, probably also at different price points. But that's an overall trend that we don't see has changed much. One has always been to assume how fast this will penetrate and how successful some of these models are, but that's something we are monitoring permanently. So I would say that we haven't seen any significant change in how we would look at content per car at this point of time.
The long-term trend is intact, and that's what I mean is that the potential -- and you see it on this chart. The potential is huge for the next 10 years, so the penetration rate already is only 23% today and will increase definitely to a higher number, to 40%, 60% and 80% in the next decade. So the long-term trend is intact.
But you are seeing that there is a short-term issue at this point, that this penetration in the short term may not follow the long-term trend?
Yes, it's true. As I said, we had this situation that we cannot deliver and at that time we have a short-term impact, and that's what we have definitely.
Okay. And my second question is in OS. In terms of OS, can you I mean since you're now producing from the Kulim fab and the fab is not yet auto qualified. Are you actively shipping LEDs into the consumer market and is that a reason for impact on the margin?
So when we look at Kulim, we are delivering product into the professional general lighting markets. And we've also started to sell some into consumer just to get channels access, et cetera. As the professional segment is certainly more profitable than the consumer segment, that's also why that midterm is our target segment, not the consumer segment, if you like. I think what's more important is what I said earlier when Lucie asked me the question about the margins. Obviously, with industrial setup now is more or less complete in Kulim, we don't have yet full capacity in there. Hence, there is some sort of underabsorption of fixed costs in the P&L of Opto that was not there a year ago. And I don't think that I would attribute that to the consumer sales channel.
But you asked for the qualification, it is true. The qualification process for automotive is running. But as every OEM is doing their own qualification and as well a qualification process for mobile is running as well. The first step is achieved. But then the question to your answer -- the answer to your question is yes, it's in the process, and we'll finish step-by-step soon.
The next question comes from the line of Charlotte Friedrichs of Berenberg.
My questions are more focused on Q4 because I think the medium-term outlook you want to cover on your Capital Markets Day. So maybe can you give us an idea of what the status is on the timing of the delayed projects in horticulture and for mobile phones. Could they maybe still fall into fiscal Q4? Or are they more likely to fall into the next fiscal year?
Charlotte, yes, it definitely will not come in Q4. It will definitely move in the next fiscal year. So maybe I get one as an ordering, but it will not be in sales or turnover and then profitability.
Okay. Understood. And then for Q4 in Opto, can you give us maybe a rough idea of how much of the sales contribution we should factor in for Kulim? Sort of will it cover the cost at some point? Or will that come next fiscal year?
I know that you are asking -- sorry, but a lot of questions about Kulim. I hope really that we -- on our September day, we -- you can ask all the question about Kulim and then we will finish it in the future, not talking about 1 plant. I tell you I have 0 headache with Kulim. My utilization is above 80%. I sleep quite well with Kulim. I have high, nice utilization. Still in the ramp-up phase. So nobody is asking about my utilization in Penang or in Wuxi. Okay, Kulim, we will do it on September once and then we have to finish it to talking all the time about 1 plant in my many plants, okay.
Okay. Maybe one follow-up on CapEx. So you're saying that the Q3 number -- while, it may be lower than previous. Is that sort of a run-rate-ish or a little bit higher? I think that was suggested earlier as well?
Sorry, I'm not sure I understand the question properly.
Sort of run-rate CapEx, how should we think about that?
Well, obviously, there will still be some CapEx in the fourth quarter. I mean, year-to-date, we are around [ 400 ], I think. There will be some also in Q4. And then we will provide an update as to what we think about next year. I believe I gave Uwe quite an indication as to what I believe it will be different than maybe the consensus right now. But again, please give us the time and we will do it properly in November.
The next question comes from the line of Guenther Hollfelder of Baader-Helvea.
Just one question. First on OS. Given the lower-than-expected growth in OS, are you adjusting capacity utilization right now then in Regensburg?
Can you explain exactly what you mean with that question?
Do you cut production in Regensburg to adjust to the market demand right now?
No. We don't do it because take a look to Q3, we had 10% growth in automotive OS. So we had a growth. And over 2 years, we had 30%. So last year, we had 20%. This year, in this quarter, I had 10% growth. So there is no cap in production. But Stefan, do you missed the OS, no.
I think if you look at the fiscal growth which was built relative to what Olaf said, and if you calculate placing your product exchange rate you see that on a piece of volume base, you still have significant increase, so there is no chance at all to reduce basically production volumes.
Okay. And regarding -- you mentioned the infrastructure, the clean room expansion in Regensburg. But I understand that the equipment move in is sort of on hold and you will decide according to demand? Or will that be a [accepted] movement?
Again, with a higher-growth rate which we had anticipated earlier, we had a higher, let's say, demand from machines basically on the volume increase which we currently see on the piece basis, we still have a need for bringing in new equipment. And we are basically due to the time line of the lead time for the machines, we have the flexibility to adjust basically our CapEx spending according to the needs of our growth.
But the current CapEx is -- nothing is on hold. So we put it as we describe. And as we ordered, it's coming in, and we need it. And as Stefan said, we have an increase in chips. And what we are talking is for the '19 or '20 that we may be careful what is the demand, how many machines we should order. Is it 5 machines or 6 or 7 or 8? So that's what we are looking for.
Okay. Good. And the last question is you mentioned also on the slide that there was a decline in mobile devices in OS in sales related to mobile devices. So do you have visibility when you expect here a return to growth in this segment? I mean, I assume in the fourth quarter that still will be a decline, but is there any visibility regarding projects that will drive growth in the mobile device-related LED business?
Yes, it's a good question and it's fair. I think the advantage of automotive business that you have much more stable demand, and if you have an order for the new car this type, you have usually a constant delivery.
In mobile, you have an order or you don't have an order. That's a little bit on and off and the visibility is not clear. So we are working with some of the mobile companies, and I think you have read in the newspaper that some of them have a delay, and then of course we have delay as well. And so I can't say that I have the visibility in which month it will come.
The next question comes from the line of Alok Katre of Societe Generale.
Quick clarification. Did you say -- I didn't catch the CapEx figure that you mentioned for Q4, so maybe if you could clarify that, and then I can put my questions in?
That's because I didn't give a number.
So is the guidance for the year, because I think there was some chat about previously of about EUR 600 million, that seems quite high. So I just wondered, do you have any specific...
No, I would agree to that, that at this point in time, EUR 600 million is certainly too high. I think we will be looking closer to probably sort of a EUR 500 million level. That's it.
Now, Ingo, I sort of saw news while escorting you saying that you are looking carefully at the general lighting and car operations. Now, I just wanted to make sure we have it right. I mean, how should we be reading it? Are you thinking about M&A? Are you sort of thinking slowdown? Just wanted to sort of get your thoughts on what exactly you mean there? That was the first question.
And then secondly on the luminaires in LSS side, just wondering how -- what your thinking on strategy there is in terms of keeping the DS side of things? Because it seems to me from the outside, hard to imagine that it can earn the same margins or returns as you had on Opto or SP. So just wondered why you still keep DS. I mean what are the attractions over there?
Okay. So I don't know where you got that quote from but what I said is exactly what Olaf said as well, is that we, of course, given the situation, we are monitoring the market in which we operates especially in general lighting and automotive on a daily basis very carefully. Just to make sure we understand what is going on, that we talk to our customers. That is the comment, there is nothing more behind it.
On your second question on LSS, I think we clarified it in the call that we are on track with our service business in the U.S., and we are now starting the luminaire, the process for the luminaire business in Europe. On DS, I think we said before that DS is a strong business in terms of its market access, its #1 in the United States and it's a strong #3 here in Europe. It has, in our eyes, a lot of potential to build a solid digital business. And we will say more about this, how we see this business evolving and things that we might add to it during our strategy update in November.
And on top of what Ingo said is I think the potential for -- in smart building and the smart city, I think, DS has the ground with their product in the digital area. And I think if OSRAM thinking about the components on one hand and on the other hand to have a business area for the digital world, I think DS could be a great opportunity with great products. And for this reason, we would like to show you really on our Capital Markets Day what are the trends, what are the potential, what's the market share, what do we see in the future and that's we would like to do in deep with you together on our Capital Markets Day beginning of November.
Can I squeeze in one more, if that's okay. I was just trying to square, let's say, the comments from other automotive-exposed companies, and we've had one today in Germany and some of the others as well. And none of them seem to be sort of, let's say, sharing the same concerns that you seem to be sort of expressing. So I just wondered where the disconnect really is? Is it just geographic exposure that you have? But I would tend to think that they would have global exposures as well. So I'm just trying to square that together. I mean why is it that only OSRAM seeing, let's say, pressure and none of the other companies are really talking much about it?
Yes, I would see it a little bit differently, if you I think, we have to really split between the first 6 months and the outlook for the next 6 months. And if you think about that GM, Chrysler, Fiat and Ford made forecast warnings last week for the second half of the year 2018, that means I see this little bit earlier, so that means, I think, we have no disconnect. And of course, these are customers of us. If you always put to come to 1 OEM, maybe in Germany, they are running quite well and happy. But if you see what I have read in the morning, they see a little bit more pessimistic outlook for the second half of the year as well.
So I think there is no disconnect. What is clear and that I tried to explain with IHS, there is a difference, the different markets. So we have more struggling market in Korea, we have much more lower growth in China. But Europe, especially Germany, is quite good. But the first, I think, again, there is no disconnect. I think we see it a little bit earlier because we have the demand today. They build it, they sell the car and this car is coming then in 3, 4, 5 months, but we have the delivery today. So I think we are in line.
In the interest of time, we have to stop the Q&A session and hand back to Andreas Spitzauer.
Yes. Thank you very much for your time. And yes, we hope all of you have a nice summertime. Thank you and bye-bye.
See you. Bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may now disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.