Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Conference Call on the Third Quarter 2021 Results. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press * followed by 1 on your touch-tone telephone. Please press the * key followed by 0 for operator assistance. I would now like to turn the conference over to Juergen Rebel, CFO, Mr. Ingo Bank, CFO, and Mr. Moritz Gmeiner, Head of Investor Relations. Please go ahead, gentlemen.
Good morning, ladies and gentlemen. This is Moritz Gmeiner. I'm very happy to welcome you to this morning's Conference call on the Third Quarter Financial Results. As usual, Alex will give you some insights into the development of our business and then, Ingo will lead you through our financials. Alex?
Yeah. Thank you, Moritz. Good morning, ladies and gentlemen. I'm very happy to welcome you to our third quarter 2021 conference call this morning. In this webcast, I will comment on our business before handing over to Ingo for details on our financials. Let me start with an integration update. We are seeing further very good progress with the integration, and I'm pleased with the strong momentum of our initiatives. Please recall that we have been in control of OSRAM since March of this year. We continue to move ahead in realigning the portfolio of ams OSRAM. We closed the second smaller scale disposal in October for Connected Building Applications and are in the late stages of a large scale disposal process. I hope to be able to update you on this situation in the near future.
Moreover, the joint venture between OSRAM and Continental has been dissolved, which is another important step to streamline our profile. We also completed the delisting of OSRAM share at the end of the third quarter, which further simplifies our corporate structure. We are well on track with our synergy programs and glad to report a healthy level of created synergies in line with our plans. Moreover, we are taking first steps related to our future manufacturing setup and are planning an expansion of capacity in Malaysia and Austria. These steps will be part of our CapEx spending targets to support future capacity needs in differentiated technologies. We are currently preparing a full concept of our realigned manufacturing footprint and expect to provide further updates in spring next year.
As part of our systems integration, we are aligning the fiscal year across the group and will move to a calendar fiscal year from next year. These accomplishments underline our strong commitment to drive the integration, the portfolio realignment, and the synergies as laid out. Let me now take a look at our business developments. We can report a robust third quarter showing strong operational performance in a demanding and volatile industry environment. Our key metrics of $1.52 billion revenues and 10% adjusted operating margin came in well above the midpoint and near the high end, high point of our guidance. The Semiconductors segment contributed strongly to our performance again this quarter. We recorded very positive results in our automotive market area across product segments and driven by available backlog.
Towards the end of the quarter, we saw supply chain volatility starting to appear, triggered by constrained supply and effects from lower production volumes at OEMs. Our consumer line showed a solid development in line with expectations, driven by optical sensing solutions for a range of applications. Here, I can add that we remain exposed to the latest generation of the leading global smartphone platform that was recently launched. The industrial and medical market areas also performed well that quarter. Positive demand momentum continued in industrial lighting for established and emerging markets, while our medical and other imaging lines recorded positive results. We continued our development activities for a broad range of future optical solutions, enabling innovative applications in automotive, consumer, industrial, and medical. The Lamps and Systems segment saw an overall positive development in this quarter.
The Lamps and Systems automotive business, including the traditional markets, performed well, offering a solid contribution which reflects typical seasonality and very good demand across channels. Still, automotive supply chain volatility also started to show towards the end of the quarter. The other areas of Lamps and Systems business recorded good demand for industrial, building-related, and medical applications. Industrial demand momentum remained in place while supply chain imbalances are also playing a role in these industrial markets. I've already mentioned the demanding industry environment we are experiencing, very much like our peers. We are faced with ongoing tightness in chip supply and imbalances in supply chains, particularly in the automotive market, but also in certain areas of the industrial market.
In automotive, this is introducing revenue volatility into the supply chains as component shortages trigger lower production volumes at automotive OEMs. I expect that these imbalances will persist well into the coming year and continue to be accompanied by higher availability of certain materials and supplies. Like our peers, we see certain sourcing costs going up as a consequence. Where possible, we aim to factor such higher sourcing costs into future customer pricing. Looking towards the coming quarters, we continue to see revenue drivers in automotive and industrial lighting and consumer optical solutions in areas like display management, optical sensing, and camera enhancements. At the same time, we invest into our technology roadmaps for mid and long-term growth markets in display and visualization, differentiated illumination, and advanced sensing.
These encompass advanced LED front lighting, UVC LED Consumer Optical Sensing , AR and 3D functions, new LED driven displays, biometric systems and horticulture lighting, among others. Before I come to the outlook, I want to update you on a further matter. We have discontinued using the advisory service of former ams CFO Michael Wachsler, as we have very recently been informed of an ongoing investigation of Michael Wachsler conducted by Austrian authorities. This is related to private securities transactions allegedly assigned to Michael Wachsler and two former employees of ams. Moreover, the Supervisory Board of ams AG has acknowledged Mr. Wachsler's decision not to stand as a candidate for this supervisory board. As a reminder, Michael Wachsler has stepped down as CFO of the company effective May 2020. Our company itself is not subject to this investigation or related allegations.
We are fully cooperating with the relevant authorities and have also initiated an internal investigation into the matter. Beyond that, we will not be able to comment on ongoing investigations. Let me emphasize that we and I myself have been very surprised by this development. We take the matter very seriously, and in light of the situation, we have taken swift action regarding Michael Wachsler's advisory role to the company. With this, I'm now coming to the outlook for our business. We expect our business to show a solid positive performance in the fourth quarter. We expect fourth quarter group revenues of $1.36 billion-$1.46 billion, with an expected adjusted EBIT margin of 8%-11%, all based on currently available information and exchange rates.
Please note that this revenue guidance excludes revenues of the disposed Digital Systems North America and Connected Building Applications business, as well as deconsolidated revenues from the dissolved joint venture. Therefore, the revenue basis is not identical to the third quarter and you should assume around $45 million of revenues that are excluded compared to the third quarter and around $75 million that are excluded compared to the second quarter. Our revenue expectation for the fourth quarter is driven by an overall supportive demand situation. It does, however, also reflect demand-side revenue volatility in the automotive supply chain. This is due to constrained end-to-end supply situations and lower production volumes at multiple OEMs, irrespective of an overall positive backlog situation. The revenue expectation also reflects an unfavorable exchange rate development next to divestment disposal and deconsolidation effects from portfolio changes.
Ingo will have some details on these effects. In addition, the outlook reflects a decreased year-on-year contribution from the consumer market in line with previous comments and expectations. Still, we see a very solid operating performance of our business despite these revenue effects, as shown by the expected adjusted operating margin of 8%-11%. In closing, let me add that we are planning a Capital Market Day around April 2022, where we want to update you on our strategy, our new aligned business portfolio and strong technology position. With this, I would now like to hand over to Ingo.
Yeah, thank you, Alex, and very good morning to all of you. Before I start going through the numbers, a few comments up front. When we refer to adjusted financial metrics, we refer to adjustments for M&A related transformation and share-based compensation costs, as well as results from sales of business and equity investments. A reconciliation to the IFRS basis of presentation is included in the financial information on Q3 2021 that we published today and which is available on our investor relations website. Let me now start with a snapshot of our key financials for the third quarter. I'm on page 14 of the presentation.
Alex outlined earlier that with revenues of $1.52 billion and an adjusted EBIT margin of 10.3%, we came in well above the midpoint guidance for both metrics in the quarter. Adjusted gross margin was 33.8% in the quarter, up sequentially. Adjusted net income was at $12 million, with an adjusted basic EPS of $0.02 and CHF 0.02. Operational cash flow continued to be strong in the quarter at $255 million. Net debt stood at $2.2 billion, slightly lower sequentially, with a stable solid leverage factor of 1.7 times. Revenues for Q3 came in at $1.52 billion. This translates into a sequential improvement of 5% on a comparable basis.
This development was well within our expectations, driven by strong revenue generation across our automotive portfolio, as well as a solid performance in our consumer and industrial applications. For the first 9 months of 2021, gross margin for the group stood at 34%, generating $1.53 billion in absolute adjusted gross profit. Adjusted EBIT margin for the quarter came in at 10.3%, reflecting the improved gross margin in particular. When comparing Q3 2021 to the same period in 2020, adjusted EBIT improved by a factor of around 2.5 times in absolute dollar terms. This represents an adjusted EBIT margin improvement from 4% back then to now 10%. It resulted from a much improved gross profit generation combined with better SG&A productivity. EBIT, as reported, was $97 million.
Let's have a closer look at the revenue distribution in the third quarter on page 16. 67% of group revenues were recorded in the Semiconductors segment and 33% in Lamps and Systems. More details regarding the segments will follow in a few minutes. In terms of end markets, you notice a well-balanced revenue distribution, with Automotive having the largest share with 38% of the total Q3 revenue base, followed by Industrial and Medical at 33%, and Consumer at 29%. This reflects a very attractive end market mix already today. Turning to operating expense now on slide 17, we can see that our total OPEX run rate showed a stable development when averaging the last quarters. Adjusted R&D spend in the third quarter was $169 million, which translates into 11% of group revenues.
This is within the overall targeted range of between 11%-14% for the group as we continue to invest into future technologies and products for the three end market segments we operate in. Adjusted SG&A expenses for the group in the third quarter were $187 million. At 12% of revenues, SG&A productivity improved from the prior quarter. Our targeted range for SG&A spend for the integrated group is between 7%-9% over time. Our synergy realization programs are well on track since taking control of ams as of March only this year. Important milestones of integration programs in various functional areas such as finance, IT, HR, and sales have been met consistently in the meantime and in line with our original planning.
As communicated earlier this year, EUR 50 million of cost savings were already achieved prior to the DPLTA being effective. In addition, as per the end of September 2021, we've now created EUR 80 million in annualized run rate savings, largely in the areas of SG&A and operations, combined with some contributions from R&D. Our synergies and savings are therefore currently on track towards the overall total objective of EUR 350 million pre-tax gross when compared to the relevant 2019 baseline. As a reminder, one-time costs for the integration are expected to be around 0.9 times the EUR 300 million total synergy pool over time, or approximately EUR 270 million. Turning now to the net result in EPS on page 19 of the presentation.
The adjusted net result for the ams OSRAM Group in the third quarter was $12 million, including a net financing result of $69 million. Net loss, as reported, was at -$48 million, reflecting M&A related transformation and share-based compensation costs, as well as results from the sale of business and equity investments. Adjusted basic earnings per share in the third quarter were $0.02 or CHF 0.02, reflecting the sequential decrease in the net results. Let me now look into the segment performance, and I'm now on page 20. Revenues for the Semiconductors segment were approximately $1 billion in the quarter, driven by our Automotive business as well as a good contribution from our Industrial and Consumer segment portfolio elements. Adjusted EBIT here in this segment came in at a healthy 13%.
For the first 9 months of 2021, Semiconductors segment revenues were $2.94 billion with a solid adjusted EBIT margin of 14%. In the course of the quarter, we saw ongoing tightness in chip supply and imbalances in the supply chain, particularly in automotive and more apparent also in industrial, first production interruptions and furloughs at car OEMs reflecting tight availability of certain materials and supplies. We believe we're not alone in expecting this situation to continue also into the next year. Let's move to the Lamps and Systems segment on the next page. Here revenues were $498 million in the third quarter, slightly down in nominal terms when compared to the second quarter of 2021 due to the deconsolidation effect of the divested Digital Systems North America business.
When correcting for such portfolio effects, revenue was actually up sequentially on a like-for-like basis. Revenue generation in the quarter was driven by typical seasonal automotive aftermarket demand, as well as a robust industrial lighting demand momentum. Adjusted EBIT for the quarter was positive and came in at 5%. For the nine months ending September 30, 2021, the Lamps and Systems segment revenues were $1.6 billion with an adjusted EBIT margin of 2%. In the course of the third quarter we saw the successful closings of the sale of Digital Systems North America, as well as Connected Building Applications, a smaller scale business. A larger scale disposal progressing into the late stage of the M&A process and chip shortages increasing for some lighting applications, causing some volatility in end-to-end supply chains.
Now moving on to cash flow and the debt position of the group on pages 22, 23. The group's operating cash flow was again very healthy in Q3 at $255 million. For the first nine months of this fiscal year, operating cash flow is now at a very solid $723 million level or 16% of revenue. Capital expenditures in the third quarter were $108 million or 7% of revenues up sequentially. It reflects debottlenecking investments to improve our capacity as well as investments into future technologies and growth areas. CapEx spending so far this year, up until the end of September, was $255 million or 6% of revenues for the group.
For the full year 2021, we see ourselves still tracking to a CapEx spending below 10% of revenues. Free cash flow in the first nine months of 2021 was strong with $468 million for the group. Now moving to page 23. The group's cash and cash equivalents stood at $1.53 billion at the end of Q3 2021. We redeemed EUR 170 million of promissory notes during the quarter, reducing our gross debt position accordingly in line with our plans. We successfully completed our amend and extend process for our existing revolving credit facility, increasing this line from $450 million to now EUR 800 million on a multi-year basis.
The existing bridge facility of EUR 750 million was canceled entirely. Please note that the new R-RCF remains undrawn. In our convertible bond buyback program, we have bought back EUR 44 million nominally so far this year for around EUR 38 million in cash. The group's net debt came down slightly when compared to end of June, with the financial leverage of the group staying stable at approximately 1.7 times at the end of the third quarter, 2021. We regard this as a very solid financial position for the group overall. Going forward, we expect the financial position largely to be driven by the operational performance of the group as well as future investment needs. We continue to feel very comfortable with the around 80% ownership position we have in OSRAM, together with full control through the DPLTA.
Increasing this stake further through share purchases is still not a priority for us at this point in time. Let's take a look into the outlook on page 24. As Alex mentioned, based on expectations, based on current exchange rates and available information, we expect group revenues in the range of $1.36 billion-$1.46 billion for the fourth quarter. This revenue expectation excludes the disposed revenues of the Connected Building Applications business and the deconsolidation effect of the Osram Continental joint venture. On a like-for-like revenue basis to Q3 of this year, without these exclusions, expected group revenues for the fourth quarter would be $1.405 million-$1.505 million. Overall, you should assume these exclusions plus the effect from some unfavorable foreign exchange development to be close to $60 million.
When looking at the revenue development from Q3 to Q4 at the midpoint of the guidance range, one can assume the remaining difference of approximately $45 million-$50 million to reflect the impact of supply chain volatilities and constraints, mostly in the automotive market but also in our industrial markets. The adjusted EBIT margin we expect to be between 8%-11% for the fourth quarter, also reflecting the current supply chain imbalances and volatilities and related effects on our business. With that, I would like to conclude my prepared remarks and open the floor for questions.
Ladies and gentlemen, at this time we will begin the question-and-answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Sébastien Sztabowicz from Kepler Cheuvreux. Please go ahead.
Question. First of all, what kind of visibility you have for the coming quarters globally speaking? Could you please comment on the size of your backlog today? What is the kind of backlog coverage that you have right now? How do you see the inventory in the channel today? The second one would be on the manufacturing setup of the combined entity. Do you have taken any decision regarding the front-end fab for LED in Kulim, in Malaysia? How do you see the global setup of the company building up in the coming months? Thank you.
Yeah. Maybe let me take the first line of question, then Alex can comment on the footprint. As we said in the prepared remarks, the visibility at this point in time is relatively small because the volatility in the supply chains are quite substantial. As you can see, I think also from things you read outside of our earnings release. Therefore, we said that we expect some of these imbalances also to continue well into the next quarter. We have still weekly calls with our suppliers and customers on components and shortages and changes in certain delivery plans, so that makes it very difficult on the short term also to predict exactly what's going on.
We have seen that if you look at the inventory in the channels that over time in the last month or so that inventories have increased back to closer to where they used to be historically. Still within that backlog or these inventories with distributors are still significant imbalances from an end demand perspective, for instance, for car OEMs. It's sort of inventory levels increasing, but it's still in many areas imbalanced. We are also indirectly affected from shortages at other components that do not necessarily have anything to do with what we can supply. Our backlog, particularly if you look at automotive, industrial, is still very solid.
You see that, in that backlog, there is of course, because of the supply situation I was just describing, there's quite some movements in there in terms of delivery dates, and the like. That's maybe on this question then Alex maybe on the footprint.
Thanks, Sebastien, for the question. As I mentioned, we made a decision to further invest in Kulim in Malaysia and also in our fab in Premstätten near Graz for differentiated technology. In Austria, it's more related to CMOS manufacturing. In Kulim, obviously for LED manufacturing and future technologies, which is the future we are focusing on for future growth. The rest of the industrial footprint, it's still in the project. As I mentioned, we will be able to certainly communicate in the beginning of next year. That's also a time when the portfolio is more aligned and that we invest in the growth areas of the company accordingly.
Last but not least, I think it's also important, and that's also one reason to invest further in Kulim, that the utilization is actually quite high, driven by the specifically automotive demands for LED manufacturing. That's a very positive sign we are seeing for the future to come.
Thank you.
The next question is from the line of Stéphane Houri from ODDO. Please go ahead.
Yes, hello. It's Stéphane Houri from ODDO BHF. Thank you for taking my question. First of all, I wanted to talk a little bit about the visibility you have. When you look at 2022 with the automotive constraint that you have highlighted, the consumer being a bit under pressure with the market share losses, how do you see 2022? Do you think it will be a year of growth? If you can improve your margins given the synergies that you are generating in 2022 versus 2021.
Also can you update us on the evolution of the consumer business, taking into account the market share losses if you have any success with other customers? Thank you very much.
Okay, yeah. Thank you for your question. Let me answer the question on visibility, and then Alex can say something about the consumer business development we see. So as I said, the visibility is certainly impacted by the supply chain imbalances in the automotive, but also in the industrial environment that we are still operating in. As you know, we're not providing guidance for a full year for 2022 or for next year at this point in time, also because we have a lot of moving parts still in the portfolio with the planned divestments that are still ongoing, and therefore, 2021 is still a year where we see or anticipate big changes in the business scope and the revenue base.
Once we've achieved that position, from that onwards we see our business then also growing going forward. That's basically where we are at this point in time from visibility going into 2016. It will also be, again, what I just said also to the question from your colleague early on. It will continue to be also in Q4 a matter of weekly engaging with our suppliers and customers to see how things are evolving.
If you look at from a profitability perspective, I think the guidance we gave for the fourth quarter, also sort of with a somewhat reduced revenue base compared to Q3, shows you that we've done quite some work on the cost structure and the synergies and we will also see, of course, that work continue well into 2022. Overall, you know, we now have added EUR 80 million in the synergies from a creation perspective, and the outlook for the EUR 350 million overall is still valid. I'm confident that we will progress there well. Alex, consumer.
Yeah. On the consumer side, we continue to be successful in the consumer as an advanced optical sensing application with multiple design wins at different Android OEMs. This includes a range of solutions such as behind OLED ambient light sensing, combined with proximity sensing and different camera enhancements, applications. As an example, we are very successful in the 1D direct time-of-flight we're using for camera enhancements, so that looks very promising. On top of that, as we also mentioned last time, we have a very positive engagement with our large customer bases in the consumer spaces, seeing opportunities in the future coming up and are really getting very positive feedback on our technology platforms and capabilities we have for future application.
Certainly, we are focusing on bringing new applications and new features and technologies into the market consumer space, which also relates to production capacity enhancements we are planning to do.
Okay. Thank you. Just a last follow-up if I may. Can you update us on the digital division, what remains to be sold? Thank you very much.
As we said, we have completed a smaller scale transaction in the quarter, Connected Building Applications. We've moved a larger scale transaction towards the sort of final stages of the M&A process. That would be. Alex said that we hope to announce something soon there. We are continuing to work on some of the other M&A tracks we have. In that, overall, we said that we would envisage this process to be completed around mid-year next year. That is still the expectation at this point in time.
Okay. Thank you very much.
The next question is from the line of Didier Scemama from Bank of America. Please go ahead.
Well, thank you so much for taking my question. I've got two which are quite longer dated. I just wondered if you could give us an update on the LiDAR program. Completely out of the blue, just wondered to what degree is your IP portfolio relevant in any shape or form to compound semiconductor materials such as silicon carbide and gallium nitride? Thank you.
Let me start with the LiDAR. We have continued to win business in the LiDAR area. What is new besides the VCSEL-based applications for the edge-emitting lasers, which is creating a much broader portfolio for the company. We clearly see that the current market situation with the shortages and the complex supply chain situation potentially will delay the introduction of a significant LiDAR application further. We expect that the midterm revenue driver will be a timeframe of 3 years at plus for us as a company. This is predominantly what we clearly see driven by the shortages and the complexity of the supply chain in the current situation. From the design win activities, it looks very, very promising.
On the second question, silicon carbide is actually not relevant for us, so we cannot give more insight there.
No, thank you. Just on the LiDAR, can you give us an update on the value of your backlog on that particular product?
Well, we announced one or two larger programs in the past. We are adding additional projects there, but we are not giving total design win numbers. What I clearly can say that we are engaged with multiple OEMs, tier ones on those projects, both on VCSEL as well as on edge-emitting lasers.
Thank you very much.
The next question is from the line of Jürgen Wagner from Stifel. Please go ahead.
Yeah, good morning. Thank you. A question on CapEx, how significant will the increase be for Malaysia? And the second one on 3D sensing outside consumer. We increasingly hear about adoption in industrial applications, and you mentioned it in your handout. When would you see first meaningful revenues? Thank you.
Maybe on your question of CapEx, look, I think what Alex said is basically that, based on what we're seeing is that enhancing the footprint we have in Malaysia and expanding on what is already there is absolutely required. We're currently putting together the exact plans, and we will update you on exactly what it will look like and what we want to do in April when we have our Capital Markets Day.
The same is true what we're planning to do in Traumstedt. Alex?
Yeah. Going on your second question, 3D sensing in the industrial space, we also made some announcements. We are getting more and more design wins in the industrial base related to 3D. To give you examples, applications like door locks or home appliances, they are still emerging applications, but certainly this is the nature of industrial segments. The moment it gets broader and the use case from consumer get accepted, which because it's much more convenient and safe, we see clearly a growth vector in the industrial base and a very stable growth vector, which is much less volatile than compared to the consumer business.
We are seeing good traction there, but certainly it will take some time to materialize a meaningful revenue.
Would it be more in 2023 then?
Well, it's increasing year by year. But in the industrial basis, the project itself are certainly smaller than in a consumer space, but it will add up on revenue over the next few years, and it will create a very nicely growing, stable growth vector for us as a company as we want to accomplish this to keep a very healthy balance between industrial, medical, automotive, and consumer. That's exactly the strategy, and we actively getting design wins and design ins to accomplish this kind of revenue split to be more stable as a company.
Okay. Thank you.
The next question is from the line of François-Xavier Bouvignies from UBS. Please go ahead.
Hi. Good morning. I have two quick ones. The first one is on your pricing comments. You mentioned that, you know, you will try to increase the pricing where possible. Can you give us a sense where you see pricing increasing within your portfolio and by how much and, you know, how much compared to the cost increase? Is it something that will be net neutral, or you expect to increase more your pricing versus the cost increase, so to have a sense of the gross margin? The second question is on the customer concentration. With all the moving parts, you know, a market share loss in consumer and automotive dynamics, how we should think about your customer concentration by the end of the year.
I mean, basically how much, as a range you can give in terms of your largest customers, would be very helpful. Thank you very much.
Yeah. Thank you for the question. First of all, on pricing, it really depends on contracts we have on customers, but we actively going out to increase prices at various customers and customer segments. Certainly with the ambition to at least compensate for the price increases where possible. We obviously honor contracts we have with customers, but with significant price increases on our cost side, we also expect price increase on the customer side. This is an ongoing process. It certainly will have a strong impact on future price negotiations with customers because we see this kind of situation, as I mentioned, going into next year, well into next year. That's why pricing for next year will or need to have incorporated these kind of increases.
We are doing this thoughtfully with our customers, and I think there's also clear understanding in the industry that that has to happen. On the customer concentration, I think it's very important to see that the concentration of customers after the acquisition of OSRAM is significantly lower. One of the good outcomes of the acquisition, the consumer business for us in the third quarter was around 29% of total revenue. We see more momentum into the automotive right now and we plan to keep it in this area, that we have a very balanced portfolio and revenue structure between consumer, automotive, industrial and medical.
For that reason, you clearly can see that also the dependency on large customers we had in the past has significantly decreased, and that keeps also our revenue stream less volatile and more predictable. Certainly, in all customers we engage in, we have the clear ambition and the target to grow the business in each of our customers.
Thank you very much.
The next question is from the line of Dominik Olszewski from Morgan Stanley. Please go ahead.
Yes, good morning, everyone. Just two on my side. Firstly, just quickly, given obviously all the deconsolidations, the synergy process and the customer changes, could we just get a view on OpEx, on the OpEx base into Q4? A second one, more thematic, but given the auto shortages, are you seeing a trend towards more premiumization from the OEMs that you are selling through to, specifically in regards to illumination? I'm curious about the underlying trends, like how much additional illumination dollars or content per car is actually being sold today, and does any of that reflect a pull forward, like I say, because of premiumization or anything else? Thank you.
Yeah, thank you for your question. Let me start by maybe the OpEx question. Overall, if you look at the development of OpEx, it has been relatively stable as we're still in the implementation phase also of a number of integration measures, especially on the ERP side of the house, for instance, that will also carry us into let's say the next year. At the same time, you've seen also relative to a year ago, when you look at SG&A, that we have demonstrated significant cost discipline and of course, the first synergies coming in. I do not expect that situation to materially be different in the fourth quarter. Maybe on automotive, Alex.
Yeah, on automotive. Certainly, as you correctly stated, the illumination automotive is getting more and more important. We see obviously a strong backlog currently related to illumination for automotive. Looking into the future, the ratification of lamps getting more and more important, especially when you look a bit more out with battery-driven cars, there is no way around that. The other thing is the features for automotive that interior and exterior lighting getting more and more important for comfort and feeling.
When you look at modern cars, we have a lot of internal lighting in cars with different colors, and this is a trend we clearly see from the car OEMs to invest more in internal lighting besides the front and rear lamps to give passengers a better look and feel inside the car. Also for features internally and externally for visualization and projection with new technologies related to the car, we clearly see that content increase related to lighting for the car manufacturers is certainly increasing. We can't comment on single customers or projects. For us, this is a very big market. That's why the investment in LED is certainly...
That's why also the additional investments in Kulim to expand capacity is certainly a growth driver for us as a company and going into more sophisticated and higher technology LED capabilities in the next years to come. A very important market for us.
Thank you.
The next question is from the line of Robert Sanders from Deutsche Bank. Please go ahead.
Yeah, hi. Maybe just to dig in a bit on the SG&A again. You've put out the 7%-9% of sales target. I think that's something you can probably control a bit better than the kind of implied 40% gross margin that you're looking for. What is the kind of timeline to getting that 7%-9% down, getting to that 7%-9%? I understand digital sales gonna get you there partly, but it would be great to get a kind of view on how quickly you think you can get that down to 7%-9%. I think you're at 13% right now. Then the second question would just be on MicroLED.
You know, just can you just update us on how much you've invested so far? Are you in pilot production yet or any kind of indication there would be great? Thanks a lot.
Yeah, let me maybe talk about the question on the SG&A, but maybe also a little bit on gross margin and OpEx, and then Alex can say a few words about our perspective on MicroLEDs. So I think yourself mentioned already. Rightfully so, a number of elements driving us in that direction, particularly on the portfolio side. As mentioned earlier, we expect that portfolio adjustment to be largely, let's say, concluded in the sense of, you know, having closed, not having basically signed all the transactions we intend to sign by the middle of next year. Then it will still take a while to move these through the P&L.
Still, 2022 is gonna be a year where we're still in transition and transformation from that perspective. The same is true with, as I said just now, some of the ERP and IT larger scale IT integration projects ongoing. They are also still ongoing well into the first half of next year, 2022. Once that is completed, you should see efficiencies from the synergies coming there. Thirdly, if you look at gross margin, we mentioned a number of times the work that's going on the footprint. We've progressed to some extent here in the sense that now certain scenarios are currently being vetted, and we are planning to update the market on the overall footprint strategy.
We mentioned two aspects of them already today, the expansion in Kulim and also some augmentations we plan to do in Premstätten. I'm sure that if you look at the projection of gross margin, the part of the footprint that we will be showing in next year in April will also be a important part of getting us to the overall ambition level that we've decided. As you know, with footprint projects, there are certain lead times involved with certain footprint progressions, not just on what you can control yourself, but also on if you have to re-qualify, for instance, certain production lines with certain customers, et cetera. That overall should give you a bit of a picture on when we see all of this materializing.
Maybe now, Alex, on MicroLED.
Let me talk about MicroLED. Certainly MicroLED is one of our key initiatives for the company. We are clearly superior with our technology compared to peers. We started to invest in pilot line for MicroLED production, and we expect good results there. Clearly it's a very, very important topic for us, where future investment will come. Clearly also the market is a few years away, so this is nothing that happens next year. This is such a secure and complex technology, where we invest to make sure we stay ahead of the curve and position ourselves as a clear leader in future MicroLED and display technology in the years to come.
Thanks a lot.
The next question is from the line of Sandeep Deshpande from JP Morgan. Please go ahead.
Hi. Thanks for letting me on. I have two questions, if I may. Firstly, regarding the Continental JV, this JV had consolidated losses in the OSRAM numbers. How should we be looking at it now that the revenue has been deconsolidated? Are you still carrying the losses associated with this JV or your share of losses associated with this JV in the numbers? The second question I have is, I mean, when we look at the consensus ahead of today, and you've given that updated number, deconsolidating it, but even then, there is a base of about EUR 100 billion. Is this mainly coming from the auto side, or is this also on that you think the market has miscalculated your consumer revenues?
Maybe let me start with your last question. I think we've explained how we see our revenue moving from Q3 to Q4. First of all, you have to take out, of course, the deconsolidation effects of the joint venture, then the no longer existing CBS, so it's Connected Building Applications business, and also unfavorable differences in foreign exchange. That in itself alone is already EUR 60 million of revenue that is not there that was there in Q3. Hence, that has nothing to do with a, you know, a bad quarter or anything like that. It's just simply because of the portfolio changes that we're actively addressing.
For the rest, I think you've heard us actively speaking to supply chain balances, production changes at car OEMs, also component shortages affecting our industrial portfolio. That's simply the reason for the delta between Q3, Q4. Otherwise, it would have been a flat quarter for us when you compare Q3, Q4. As far as consumer is concerned, we've already told the market earlier this year about the market share loss, and obviously that is reflected also in the outlook for Q4. Nothing new there. On the joint venture, the joint venture is in this dissolution. We have no longer the revenues. What happened is that the part that we contributed is coming back to us into the...
We are basically also looking to dispose of that part of the business because it's not at the overall profitability levels that we expect. There will be some negative impact from the business that has come back to us, which was formerly related to the joint venture, but also there we are seeking to dispose of it, and the process of that disposal is also already on its way.
Thank you.
The next question is from the line of David O'Connor from Exane BNP Paribas. Please go ahead.
Great. Thanks for letting me ask a question. One or two from my side. Maybe firstly, Ingo, on the imbalances in the supply chain, just to be clear, is that translating into lower orders in Q3 from your auto OEMs and industrial OEMs? Second question on the seasonality, you know, what should we expect kind of as we go from out of Q4 and into Q1 and next year, given the deconsolidation. Some peers are talking about a kind of a flattish Q1. Maybe even if you don't want to get into the detail on that, what are the puts and takes we need to factor in?
Lastly, on the CapEx side of things, can you help quantify maybe what percentage are you planning to increase your manufacturing footprints? I mean, is that a 10%-15% overall capacity increase, or is it something more significant? What timeframe is the ramp up around that? Is that 2022 event or 2023? Thank you.
Okay. Let me try to answer your questions. Alex or Morris, if you want to add to those, feel free. As far as the order book or the order intake is concerned, we said that we left quarter three with a very solid order book, particularly for automotive. That's still the case. We have clearly seen that the order intake itself has started to normalize somewhat because in prior quarters, you know, you saw quite some ordering that was driven by situations of allocations, uncertain about the outlook, very increased demand. Somewhat this has normalized now, but that still leaves us with a very solid backlog in the quarter.
The capital expenditure is a mix, as Alex said, of extending capacity for technologies that we are seeing ourselves already strong in to make sure that the anticipated volume growth we see mid to longer term is gonna be satisfied in that sense and produced. Then also we are expecting some investments in technologies that we do not carry maybe as much as we do today. That's something we will update more on when we do our Capital Markets Day in April, because there are still some scenarios, you know, and options we have are being vetted, but clearly the direction will be according to that.
Plus, of course, if you look at the integration perspective of these two companies, particularly if you look at the footprint Asia Pacific, you should also expect that some of the investments we will be doing are related to consolidation of certain existing capacities to make the footprint overall more adequate for the combined entity as well. It's a number of different elements, I'm sorry it's not a straight answer to your question, I know, but all of that will be presented comprehensively in April of next year.
Thanks, Ingo. That's quite helpful. Maybe just on my third question on the seasonality, any puts and takes we should bear in mind there as you exit the year on what are almost record backlog?
Yeah. Seasonality obviously, as you've seen in the environment, you cannot talk about normal seasonality at the moment because the supply chain environment is not normal, simply speaking, at this point in time. Certainly, the normal effect you have, you know, around how many hours of daylight you have during the day. That, of course, will somewhat impact consumption of some of our products at the end of the day. Again, all of this is very much driven right now by all the imbalances.
Of course, there will be some seasonality when we go into next year, and there will be some seasonality that we've also seen in the past for where the first quarter has always been different than the fourth quarter. Based on our current expectation, I would not see that to be that much different. The sort of magnitude and the amplitude of that Q4, Q1 we still have to see given the supply chain imbalances. Yes, but there will be some normal seasonality to be expected for us also when we start into the new fiscal year.
Very helpful. Thank you.
Thank you very much, ladies and gentlemen. This is concluding our question and answer session for this morning. We thank you for joining this presentation, and we look forward to speaking to you again at our next earnings release. Thank you very much, and have a good day.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.