Melexis NV

XBRU:MELE

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, good afternoon, and thank you for standing by. Welcome to Melexis' Quarter 1 2018 Results Call. [Operator Instructions] I must advise you that this conference is being recorded today, April 20, 2018. I would now like to hand the conference over to your speaker today, Françoise Chombar. Please go ahead.

[Françoise Chombar]

Thank you, operator. Dear audience, let us welcome you to our first earnings conference of the year. Your speakers are, as usual, Karen Van Griensven, our CFO; and myself, Françoise Chombar. After market and financial highlights from our side, we will be happy to answer any questions you may have. So let's kick it off.Some highlights from the business and market side. Sales for the first quarter of 2018 were EUR 139.3 million, an increase of 13% compared to the same quarter of the previous year and in line with expectations. The euro-dollar exchange rate evolution had a negative impact of 7% compared to the same quarter of last year and this is a very high percentage by comparison to the past.Excluding this negative currency impact, sales growth year-on-year would have been 20%. The geographical spread is exactly the same in quarter 1 as it was for the full year 2017. The portion of standard product sales has meanwhile grown to 64% of total sales in line with our long-term strategic impact.Looking at our quarter 1 growth drivers, we are satisfied, that is again broadly based. So let me give you 5 [ speaking ] examples. Our embedded lighting products are sprinting ahead. Ambient lighting is adopted into more and more cars, and Melexis is an outspoken market leader in this field. Two, pressure sensors are also doing extremely well. Last December, we launched the MLX90818, which is representative for what Melexis is mastering, namely, making a significant step forward in automotive pressure measurement by offering the market highest accuracy and smallest size pressure sensor for harsh automotive applications. This device will make a significant contribution to developing highly efficient and cleaner vehicle, thereby, reducing pollution and preserving the environment. Thirdly, it was also a good quarter for our temperature sensors, both the smart integrated sensor types and also the sensor interface type for very high temperatures. Next, in the magnetic space. I'd like to highlight our latch and switch sensor product family. I believe it's fair to say that Melexis meanwhile has the largest and most innovative portfolio in the marketplace, which is why these products rise up in sales for many subsequent quarters now.In automotive, growth is driven by key customers that are moving the needle for several applications, linked to safety systems and powertrain application. These customers find our products just optimum for automotive safety and energy consumption purposes. Applications include seatbelt buckles, window lift and all types of motor communication. At the same time, consumer and industrial customers like our value-optimized product and the breadth of our portfolio, which allows them to leverage this value into their product. Examples are usage in key locks, medical beds and all types of industrial motors. Both automotive and adjacent markets equally appreciate the roadmap we present with continuous innovation ahead.Then last but not least, our magnetic position sensors continued to grow as well. We launched in March, a new generation of our Triaxis, again, reaffirming our #1 position in this field. Main applications continue to be powertrain, and in particular, the new electrified powertrain, both hybrid and pure electric vehicle. Furthermore, you will find these products in steering, pedal, shifter applications, et cetera. The higher demand in robustness, safety, integration, electrification in general and added features are driving many of the integration activities in this area. We expect these to continue for the foreseeable future as autonomous driving, electric cars and consumer demand for more comfort and ease of use continue to grow.Our sales outlook for the second quarter is around the same level as the first quarter. For the full year 2018, our guidance of 12% to 15% sales growth is reconfirmed. Sales outlook reflects what we see in our quarter book. To conclude, this is a solid start of the year and we are geared up for further growth. Karen, you now have the stage.

[Karen Van Griensven, Chief Financial Officer]

Thank you, Françoise. Good afternoon, ladies and gentlemen. A little bit explanation on the financials. So the sales was already mentioned, 13% growth versus the quarter a year ago with a high impact of the dollar of around 7%. If you look at the growth results was EUR 63.1 million or 45.3% of sales, an increase of 11% compared to the same quarter of the last year and an increase of 3% compared to the previous quarter.R&D expenses were around 13.3% of sales, G&A was at 4.9% of sales and Selling was at 2.4% of sales. The operating result was EUR 34.3 million or 24.6% of sales, an increase of 9% compared to the same quarter of last year and a decrease of 5% compared to the previous quarter. The net result was EUR 28.8 million or EUR 0.71 per share, an increase of 13% compared to EUR 25.4 million or EUR 0.63 per share in the first quarter of 2017 and an increase of 8% compared to the previous quarter.I would now actually like to open the question-and-answer session. So operator, please go ahead.

[Operator]

[Operator Instructions] And you have several questions on the line. The first question comes from the line of Francois Bouvignies.

[Francois-Xavier Bouvignies]

The first one I had is on your seasonality and your Q2 guidance. And so if we see that we have a quarter-on-quarter flat revenue growth in Q2 versus Q1, if we compare it to the historic, it was more around plus 6% on constant currency in my math in the last 5 years. Is there any particular reason that would explain that this difference versus your historic seasonal quarter-on-quarter growth in Q2 versus Q1?

[Françoise Chombar]

Okay. Let me take that question for you. So growth as Melexis is experiencing does not really go up in a straight line. When we look at our order coverage, we see indeed, the second quarter to be in line with the first quarter, but it still represents -- is, of course, this materializes, let's be clear, this would still represent a year-on-year growth of around 8%. And that excludes the negative currency effects, which will still be significant. We saw similar patterns in earlier years, and even the last example was last year Q2 to Q3. And yes, what causes this -- main effects are probably short-term patterns -- in that short-term pattern we see are probably supply chain effect. You will always have that and it's hard to tell.

[Francois-Xavier Bouvignies]

And is there an intent there, was inventory build in Q1?

[Françoise Chombar]

We can never be sure of that, of course. You should also make a clear view that the negative impact of the lower dollars will be much more in the first half of this year than in the second half of this year because the spread is really big. I cannot even remember if we've had such spreads before in the exchange rate year-over-year.

[Francois-Xavier Bouvignies]

That's why I mean, my question because you had a significant negative impact. So at constant currency, a very strong growth in Q1. And that's why I was wondering, maybe, you know it's possible that you had inventory build in the supply chain, that's why your Q3 is a bit softer than your seasonal pattern, let's say?

[Françoise Chombar]

Well, if you look at the general markets, if you look at the inventories of the car manufacturers of the Tier 1s, of our inventory, the inventory of the distribution, there is not a big buildup as such. It's pretty much okay. And yes, you have those effects. I mean, we cannot force our customers to order more. And what we try to do in giving our guidance to the market, is always to be as close to what we believe will be the reality at the end of the next quarter and the end of the year as we possibly can.So what we see is Q2 is a bit the same. Q3, we -- and the rest of the year, we expect sequential growth to pick up again. It's still early in the year, but the guidance range of 12% to 15% remains intact. And it's our best estimate today. I don't know if I mentioned already, but the customers' sentiment continues to be positive.

[Francois-Xavier Bouvignies]

Okay. That's very clear. Just the commonalities on your own inventory, given that you see the inventory and the supply chain positive. So in Q4, it was high, I mean, compared to your historic, again. And you mentioned that you had a stronger growth pipeline and that I totally understand that you saw it -- we saw it in Q1, but it's still high in Q2. And I was just wondering, should we expect this to go down or to continue at this kind of level going forward?

[Françoise Chombar]

I think it's a pretty good level going forward. And it also signals that we're set up for growth.

[Francois-Xavier Bouvignies]

Yes, of course. So we shouldn't expect the massive decline of your inventory days, then?

[Françoise Chombar]

A massive decline?

[Francois-Xavier Bouvignies]

We shouldn't expect a decline.

[Françoise Chombar]

No, I don't think so. I think it's at a good level, there will always be some fluctuations.

[Francois-Xavier Bouvignies]

Okay. That's clear. The other one I had is on your R&D investments in Q1, how should we think about, I mean, the full year? If I remember correctly, last quarter you said that OpEx investment will be in line with growth, and R&D, you have some new fabs under construction and to build, how should we think about the rest of the year but R&D as a percentage of sale, maybe for the full year?

[Karen Van Griensven, Chief Financial Officer]

R&D. Yes, we are heavily investing in R&D. We've seen it already in Q1, it will continue throughout the year. And it, obviously, still [ feel ] so expect to grow. But it might be that as a percentage of sales, also R&D will increase over the next quarter though.

[Francois-Xavier Bouvignies]

Okay. That's clear. And one last question for me because I want to just [ refer ] to my peers. The other nonautomotive growth, how should we think -- I mean, you had a very strong year in '17 and maybe it's very tough comps. But it seems to me that you had this relation in this part of the business. So I'm just wondering how should we think about this in the -- going forward?

[Françoise Chombar]

Well, Q1 is always a little bit less unless there are new products coming on board, which was not the case for Q1 this year. But you always have the Chinese New Year, which is creating a little dip. As far as the long term is going forward, adjacent markets continue to be in our focus. I think it's -- again, you have the supply chain effects and effects of, for example, seasonality effects like Chinese New Year that influence. But on the longer term, it is, of course, still our intention that it will lift off at some point in time. But the automotive is growing so well that it's hard for the adjacent to keep up. But they are more or less keeping up now with the same growth over the last, maybe, 1.5 years to 2 years more or less, where previously the adjacent market percentage was in decline. We have more or less stabilized it now over the last 2 years. And yes, it's still the intention that at some point in time, it takes a better turn. But again, it's because automotive is also -- it's also because the automotive is doing so well.

[Operator]

The next question comes from the line of Guy Sips from KBC Securities.

[Guy Sips, Senior Financial Analyst]

First of all, personal comment to Françoise. Congratulations with your recent prize for the Global Prize for Women Entrepreneurs. And secondly, I have 2 questions, one is related a little bit to the previous speaker, that is the -- so the -- you are very optimistic on the second half of this year, is already taking into account the expansions that you're doing in Sofia, Bulgaria and the one in France? Or will we see the results of that later this year? And the second is, this is the second quarter in a row where if we compare the quarter-on-quarter or the year-on-year increase of the nonautomotives, that there the growth is lower than in the automotives area. Is that -- is there reasons for that? Or can we expect that also in nonautomotive that, that can pick up and contribute to the growth going forward?

[Françoise Chombar]

Okay. Well, first of all, Guy, thank you very much for the congratulations. I consider this is a real team success, it's not a personal success, because 3 of the 4 criteria were related to Melexis. So I'm very proud as being the CEO of a company that is successful. And of course, we will all work together to continue to make it successful. But thank you for your nice words. So on your first question, when you say we are very optimistic for the second half, when in fact, it's not about being optimistic or pessimistic. I think we assess what we see in our order book. We can only say that the order book is healthy and that the guidance reflects it. And the second point is that in the second year, the spreads between the dollar in the second half of last year, and yes, let's say, the current one that we see, if the current one would go on, then it's not going to be such a large spread. Does the expansion in -- the expansion plans that we have in Ypres contribute? Yes, Ypres will already contribute, because the idea is that the building should be operational like around summer, latest September, which means we will see some of that flowing into the 2018 figure. Sofia, we just started and building will not be completed until end of next year, so there will not be a direct impact. But, of course, we are continuing, also, to put more equipment in order to have larger capacity in Sofia. So this is a gradual like we do in Ypres, like we do in Erfurt, like we do in Kuching. I mean, it's a gradual increase of the capacity as such. So gradually that will also contribute. But that's all factored in. And as far as Corbeil is concerned, we are not going to start until or we're going to ramp or kick it off, let's say, Q2 operationally. But the ramp, the real ramp will not be for this year. The real ramp is then now more or less end of the year, beginning of next year. And because it's a way for probing side, it also means that it will not flow into our output until maybe Q1, Q2 next year. That's more or less when the capacity comes on board. Now then, on your second question, indeed that goes back to what I said before. I think it's clear that the adjacent markets are much more volatile than the automotive market. As far as visibility is concerned, the automotive market these days are, let's say, the last couple of years are much less -- give us much less visibility than it was before. And that has to do also with China because China is still learning how to forecast. Our customers don't have planning in their vocabulary sometimes in China. So that needs to professionalize and we hope it will continue to improve. We do already see improvements there, but it's very hard. That's why it's also more difficult today than in the past to make good estimates. But I think we didn't do too badly in the past, so we tried to be realistic in any assessments that we make. And as far as the nonauto is concerned, the adjacent like we prefer to call it, yes, I do expect it to pick up. The only problem is that it's very -- it's even harder to predict. So the intention is there, the products are coming slowly on board. We see good design wins in that space. Well, not design wins necessarily got a good pipeline, I'd rather say. And yes, at some point in time, it will pick up. But it more or less grows at the same pace as automotive, which is really already very good comparing to some of our peers. So I hope that answers your question.

[Operator]

Your next question comes from the line of Janardan Menon from Liberum.

[Janardan Nedyam Menon, Technology Analyst]

You said in your previous answer that perhaps the reason for the sort of lower than past seasonal trend into Q2 was supply chain effects. I was just wondering, could you just describe a little bit more what do you mean by a supply chain effect? And then I have a couple of follow-ups.

[Françoise Chombar]

Yes. Well, customers are always concerned for 2 things: One, their inventory should not be too high and they keep that clear with very tight KPIs sometimes. And then, of course, when people in the procurement area or in the planning area have these KPIs, they look at it because they're penalized if they don't keep their inventories at the right levels, not too high. So that's one thing that could influence. The second thing that is important for our customers is the security of supply. And as is commonly known in the industry already last year as well, there is a tightness that leads to some customers getting at some point in time into may be a panic, I don't know. And yes, we cannot exclude that, as I said it in previous calls as well. You can never exclude that customers would order a bit more than they usually would if there would be not tightened, no tightness at all. So the 2 things play together. You can never really -- because we're not in the heads of our customers and we're not in the systems of our customers, you can never really know what plays. There is always some fluctuation. There is also the fluctuation in demand, that ripples through the supply chain. There is a time delay with that. I mean, it's the usual supply chain fluctuations that you would normally see. Maybe they're a bit more these days because of some uncertainties. But we don't really have a big question mark about it. Because, again, we confirm the order book is healthy and the guidance reflects the order book. We tried to be as realistic as possible.

[Janardan Nedyam Menon, Technology Analyst]

But, just -- I mean, going -- just going with your previous experience of being in this industry for a long time, when you go through a situation where there is some degree of say, double ordering as you were alluding to. And then, you see that's softened a little bit, perhaps even on a temporary basis. Is that a sign of concern for the -- how the overall market is trending or you would not regard that as a particularly major concern at this point in time?

[Françoise Chombar]

No, I would not consider this as a concern. If we talk to our customers, then they see growth, they see new applications for them. We get very good design wins. We have gained -- to gain market share in a number of places. And in general, the market is -- in Europe, for example, is very good. The market in China is also good. It's maybe -- and it's maybe not. If you look at the figures of car sales, it might be a little bit soft, but that has also what something to do with the tax incentives, that are being reduced. But overall, I was even in China myself last week, talked to quite a number of customers, and they all see growth coming so that it -- even if it would be a bit soft because of maybe supply chain effect, it does not reflect the trend as such. We don't see any indicator today that would lead us to say, this is a trend. No, it is not a trend at all. Because, again, Q3, we see very good sequential growth coming.

[Janardan Nedyam Menon, Technology Analyst]

Understood. So just on that last point. To get to say, your midpoint of around 13.5% growth, you would need to do like 4% and 8% or 5% and 7% or something like that in the third and the fourth quarters, which would be higher than what you have historically done in the third and the fourth quarters at least in the past few years. So does that suggest that going the other way that your customers are probably even more bullish about the second half than they have been in the past years? I mean, how would you characterize their optimism about the market today versus what you saw say at the similar point last year?

[Françoise Chombar]

I don't like the word optimistic because it suggests that it would be more than realistically possible. What I said was that the customer's sentiment continues to be positive, and that's also what I feel when I talk to customers and what I feel when the -- when I get feedback from the teams that, the sales teams, the product marketing teams that are in touch with customers. We make our best estimates always. We try to be as correct as possible. I think we have a name for that. And today, this is our best estimate. So flat in Q -- or around the same level in Q2, and sequential growth to pick up again in the third quarter, that's what we see today. And there is no reason why this would not be impossible. Because we do see the right levels of interest and new products coming on board, new programs coming on board, organic growth in the existing programs, that's what we see when we talk to customers. So that's why we assess that this is what it probably will be without having a crystal ball. Sometimes I would like a crystal ball.

[Operator]

Your next question is from Marcel Achterberg from Degroof Petercam.

[Marcel Achterberg, Research Analyst]

There's already been a lot of ground covered. Just one question. Given the material impact of your dollar rate on the quarter and it's probably also on the coming quarter on the revenue, is there also an impact or has there been or will there be in -- become a quarter on the gross and the EBIT margins that you could possibly quantify?

[Karen Van Griensven, Chief Financial Officer]

The guidance is for around 25% for the full year. Obviously, quarter-to-quarter, it's difficult to predict, but in general, we stick to that guidance. So sales will increase, operational expenses will increase as well. And two, how much it will be in sync, it's very difficult to predict. But we don't expect a major deviation in one way or the other.

[Marcel Achterberg, Research Analyst]

So there's not really a big time like between the impact on revenue and the impact on the margin?

[Karen Van Griensven, Chief Financial Officer]

Yes, in Q2, there might be a little bit more impact still if you have a flat sales growth. We are hiring. We are also investing. So this might play somehow. But we need to say as well that we have a dollar effect in Q1, a negative dollar effect, which we will not have in Q2, so that might compensate.

[Françoise Chombar]

On the inventory.

[Karen Van Griensven, Chief Financial Officer]

On the inventory, yes.

[Operator]

And the next and last question in the queue is from Jeff Osborne from Cowen and Company.

[Jeffrey David Osborne, MD & Senior Research Analyst]

Most of the questions have been answered. But just a few quick ones for me. I was wondering if you could just touch on thematically, are you seeing more strength in the bookings and the revenue in ADAS applications or electrification, you typically highlight both, but I didn't know if there is a bias towards one or the other?

[Françoise Chombar]

Yes. Well, what we do see today, and definitely, in combination also with what we see on the market is electrification is really driving a lot. There is also some ABS impact or, let's say, influence, rather. But the ABS programs are rather longer term, so on a longer horizon, whereas the electrification items or programs are much more short term. So I would say electrification at least -- as far as the portfolio of Melexis is concerned today, electrification impacts more than autonomous or assisted drives.

[Jeffrey David Osborne, MD & Senior Research Analyst]

That's helpful. Two other quick ones. One, the 5 items that you had offered, the ambient lighting and finishing with magnetic position sensors. Were those in order of strength in the quarter, meaning, ambient lighting was what drove the revenue? I was just curious, how you came up with the order that you wanted to discuss those?

[Françoise Chombar]

Well, the order in which I wanted to discuss it had nothing to do with whether the first one was stronger than the last one or vice versa. It's just that the first one is a driver type of product and all the others are sensor products. It is not -- it was a bit in -- yes, it was at random necessarily, but of course, the magnetic space, you have the latch and switch, the last 2 were in the magnetic space, latch and switch and then magnetics -- sorry, position sensor. The first one was a driver and the 2 middle ones were other types of sensors. It was more at random than anything else.

[Jeffrey David Osborne, MD & Senior Research Analyst]

Okay. It makes sense. And then the last one, just any thoughts on tax rate for the year, what we should be assuming there?

[Karen Van Griensven, Chief Financial Officer]

Well, we gave the guidance 15% to 20% and that's still -- that remains intact.

[Operator]

[Operator Instructions]We have not received any further questions. Please continue.

[Françoise Chombar]

Thank you. So dear audience, it was a pleasure to have your interest and sharp questions. Thank you for having joined us. Looking forward to our next earnings conference call on August 1. Goodbye, and enjoy this lovely spring. Thank you.

[Operator]

Ladies and gentlemen, this does conclude your conference for today. Thank you very much for participating. You may now all disconnect. Speakers, please stand by.