Osram Plans to Slash 7,800 Jobs as Traditional Lighting Business Shrivels Up

Osram stated in its recent 3Q14 financial earnings press release intentions of implementing various additional measures to further improve the competitiveness of its operating units. The associated capacity adjustments of about 7,800 positions worldwide over the next three fiscal years. A Reuter’s report noted 1,700 positions in Germany would be affected, while the remaining 6,100 job cuts will be directed towards other global jobs. Depending on the implementation speed of the measures and the restructuring costs’ effect on earnings, the reported EBITA margin could be below the targeted 8 percent EBITA margin in the fiscal year 2015. Below is Osram's financial report for 3Q14.

In the third quarter of the fiscal year 2014, Osram almost offset the high declines in its traditional general illumination business through substantial gains with LED-based products (Solid State Lighting – SSL) on a comparable basis. On this basis – meaning excluding portfolio and currency effects – revenue dropped slightly by one percent year-on-year and was around EUR 1.2 billion (US $1.60 billion). By contrast, EBITA1 excluding special items rose 9.5 percent to EUR 104 million, translating into a margin of 8.6 percent.

The EBITA improvement was supported by the Opto Semiconductor and Specialty Lighting segments as well as OSRAM Push measures. Reported EBITA more than tripled from the same period last year, when the figure was burdened by comparatively high transformation costs, to EUR 81 million, or 6.7 percent of revenue. The business with LED-based products recorded a comparable revenue increase of 21 percent in the third quarter and had a share of 38 percent of consolidated group revenue. Osram confirms the recently updated outlook for the current fiscal year. Furthermore, the Managing Board confirms the target to reach an average reported EBITA margin of more than eight percent over the cycle from the fiscal year 2015 onwards.

“While earnings continue to develop nicely, the growing market acceptance of LED technology is, as already announced, causing a significantly faster decline of the traditional business,” said Wolfgang Dehen, Chief Executive Officer of OSRAM Licht AG. “We will successfully complete the first stage of OSRAM Push shortly. However, we have always stressed that the transformation of the lighting market will also continue after 2014 and that it will require additional capacity adjustments. Against the backdrop of the latest developments, additional measures are now necessary to safeguard our position as a leading lighting manufacturer in the long term. We need to be even closer to the customer, further strengthen the entrepreneurship of our segments and at the same time create cost structures that are appropriate to the size of the company, but also to that of its individual businesses.”

Current OSRAM Push status and progress on company’s further transformation

The first stage of OSRAM Push started in 2012, and all measures are in implementation or have been completed. At the end of the third quarter, the cumulated gross savings totaled about EUR 760 million, including EUR 118 million from the recent quarter.

As part of the already announced second step of OSRAM Push, the company now intends to initiate further process improvements and conduct structural adjustments after completing consultations with the employee representatives. The second step of the program will run until 2017 and occurs against the backdrop of the rapidly changing market conditions. The measures will impact production capacities for traditional general lighting products and, on a company-wide scale, the sales and administration divisions as well as other indirect functions. Over a period of three years, around 1,700 domestic positions and around 6,100 international positions would be affected. In total, the measures are intended to lead to a permanent cost reduction of about EUR 260 million until the end of the fiscal year 2017. The gross costs are expected to amount to about EUR 450 million in the same period.

Osram’s reporting segments2 and regional developments in the third quarter3 

Osram’s opto-semiconductor components reporting segment (Opto Semiconductors, or OS) recorded a comparable revenue increase of five percent compared with the year-earlier period, which had already been very good. At almost 20 percent, the segment’s EBITA margin was exceptionally high. Besides a favorable product mix and good capacity utilization, OS also benefitted from a EUR 5 million gain from a license agreement.

Specialty Lighting (SP), with its Automotive Lighting and Display/Optics units, continued to benefit from rising demand in the automotive segment and achieved a comparable revenue increase of ten percent. The reporting regions APAC and Americas recorded double-digit growth rates. The EBITA margin of SP came to more than 14 percent in the third quarter. The share of LED-based revenue reached 33 percent of total revenue.

The LED Lamps & Systems (LLS) reporting segment covers the business with LED lamps, light engines as well as LED drivers. It recorded comparable revenue growth of 68 percent in the third quarter due to the fast-growing LED demand. The segment’s EBITA margin also improved in a year-on-year comparison but was still significantly negative at around minus 20 percent.

The advancing market penetration of LED lighting also had a significant negative impact on the performance of the Classic Lamps & Ballasts (CLB) reporting segment in the third quarter. The segment’s revenue was down 14 percent on a comparable basis, while the EBITA margin excluding special items fell to slightly above six percent.

The Luminaires & Solutions (LS) reporting segment comprises luminaires for professional customers, products for consumers, as well as the service and solutions business. LS recorded a sales decline of 13 percent on a comparable basis in the third quarter due to the reorganization of the service business in North America. Thanks to strong growth from LED-based luminaires, the luminaires business posted a comparable revenue increase. The reporting segment’s adjusted EBITA margin was around minus 15 percent.

From a regional perspective, the Osram reporting region EMEA recorded a year-on-year comparable sales increase of two percent, while revenues declined two percent in APAC and four percent in the Americas region on this basis.

Outlook for fiscal 2014

The company confirms the outlook for fiscal 2014 that was updated at the end of May. The Managing Board still expects revenues on last year’s level, at best a modest revenue increase, on a comparable basis. Regarding EBITA adjusted for special items, Osram expects a margin of more than eight percent. In addition, the Managing Board expects net income to rise sharply this fiscal year. Free cash flow should reach a triple-digit million-euro figure, but stay below the high prior-year figure. This decline is driven mainly by higher cash outflows for the transformation and capital expenditure. Furthermore, Osram expects to generate a return on capital employed (ROCE) above the cost of capital of 8.5 percent.

Highlights in the third quarter

One of the most important trade shows of the lighting industry, Light+Building in Frankfurt, ended in early April, and customers’ response to Osram’s fair appearance is very affirmative. Among the featured highlights was the app-enabled intelligent LED lighting system Lightify, which is slated for release in autumn. It can be used at home as well as in the office and will be compatible with many smart-home systems. Another focus topic was Osram’s LED lamp portfolio, which will see a year-on-year increase of 50 percent to more than 90 models for the coming lighting season. The expansion is supported by the new platform production approach in which identical modules are used in different lamps. This is a key advantage because it allows significantly shorter development periods. As a result, products are available on the market faster and at lower cost. Osram is also gaining further momentum regarding laser lighting: With the BMWi8 and Audi R8 LMX, there are now two cars available that contain an Osram laser light module. And the Opto Semiconductors segment developed a multi-chip laser for the first time. This product considerably reduces the complexity of laser projectors while at the same time providing far greater luminosity than conventional models. Osram’s acknowledged technology leadership was also underpinned by the signing of a multi-year cooperation framework agreement with the Vatican Museums that paves the way for possible cooperation regarding additional lighting projects. In a project supported by the European Union, Osram is currently already equipping the Vatican’s Sistine Chapel with an innovative and highly energy efficient LED-based lighting solution.

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