Melexis NV

XBRU:MELE

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Q1 2019 result conference call. [Operator Instructions] I must advise you that this conference is being recorded today, 23rd of April 2019. I would like to hand the conference over your speaker today, Françoise Chombar. Please go ahead, ma'am.

[Françoise Chombar, CEO, MD & Director]

Thank you. Dear audience, welcome to the Melexis earnings call for the first quarter of the new year. I will kick it off with how our business is evolving, and Karen Van Griensven, our CFO, will then take over for the financial perspective. We will welcome your questions afterwards.So Melexis Q1 results are in line with guidance. Sales are impacted as anticipated by inventory corrections of customers, triggered by the continued uncertain economic and geopolitical situation, coupled by global trade tension. We're still in the midst of those inventory corrections, and visibility remains low. As amply explained in our previous earnings call in February, we're experiencing what is called the bullwhip effect in supply chains, named for the way the amplitude of the whip increases down its length. The further from the originating signal, the greater the distortion of the wave pattern. Swings in inventories amplify in response to shifts in customer demand as one moves further up the supply chain. We know that automotive supply chain is notoriously long and extremely global, involving lots of different companies and, therefore, the bullwhip effect creates often more damage there than in less complex value chains. Let me repeat that Melexis didn't lose any business. The variances in our sales is caused by supply-chain effects only. It is common knowledge that uncertainty negatively affects consumer and business confidence. It is also common sense that it recovers over time, and then the swing goes the other way until things finally normalize again.Geographically speaking, this uncertainty has impacted Asia-Pacific more than EMEA and the Americas as is apparent from the sales by geography that we publish. And this is in line with the regional differences in car sales in quarter 1. Though we don't have all the numbers yet, we can make some pretty good guesstimates already. While China car sales have been negative for 9 consecutive months, the reduction in March of 5% was significantly lower than the 14-ish one in January-February. China's biggest auto industry association, the CAAM, commented that they hope to see the turning point appear in around July and August, and that recent government VAT cuts from 16% to 13% are expected to further benefit car sales. In Europe, the minus percentages in Q1 are also lower than in the previous quarter but, of course, still negative. On the other end of the spectrum, after a flattish Q4, the U.S. car sales in Q1 dipped 2% and so did Japan. So things are still subdued in the first quarter, with an estimated 6% in the minus globally versus the previous year. And on aggregate, one could suppose car sales seem to have hit above them, particularly in China. This very mixed picture is representative of the very different dynamics that play regionally and which makes our job of predicting the next quarter extremely difficult. Various factors play a role. The U.S.-China trade truce continues to haunt everyone. WLTP is still creating ripples with some OEMs in Europe, and also Brexit and Italy continue to be a concern. Additionally, consumers have a hard time choosing which car to buy best: a gasoline, a diesel, a CNG, a hybrid, a full electric one? Climate protests, new city regulations and new stringent norms make buying a car into a conundrum and so consumers prefer to wait and see. For OEMs, it is equally [ spilling ] as they have to invest heavily into new powertrain, while being unsure about which one will dominate the landscape in the future of mobility.For your information, according to the European Environment Agency, when you consider the CO2 generated from a vehicle cradle to grave, so including production, disposal, fuel production and consumption over lifetime, the CO2 emissions of a new diesel car versus a battery electric vehicle powered by the EU average electricity mix are more or less on par. This is just an example of the complexity of the whole debate.Looking at the short-term future, based on our current order book, we guide for a small sequential sales increase and profit margin expansion in quarter 2, while our full year sales and growth margin guidance reflect the uncertainty about the timing and curve of an improvement in the second half of the year. We expect 2019 to remain below the level of last year. Amidst all this uncertainty, Melexis product development carries on at a steady pace. In the first quarter, Melexis launched 4 new sensor products, which I'd like to tell you more about as they illustrate well the breadth of our innovation potential. The first one is a new version of our far infrared thermal sensor array that allows the simplified integration of temperature measurement into applications that enhance safety, efficiency and convenience especially in harsh thermal conditions. It is particularly suited to applications in the world of cooking, such as conventional ovens, microwave ovens as well as industrial applications, such as detection of power electronics overheating and of course automotive. The extended temperature range and enhanced thermal stability make this new device even more versatile than earlier devices, and we meet our customers' needs for accurate temperature sensing in even more challenging thermal conditions.The second one is a fully-integrated, automotive-grade VGA Time-of-Flight image sensor for applications such as in-car and exterior monitoring. Not only does this new kid on the block reinforce Melexis's leadership in this space, it provides our customers also with a single-chip solution that really could help revolutionize the automotive industry.Third, a PCB-less Hall-effect latch designed to meet the requirements of automotive manufacturers implementing seat position sensing for driver and passenger safety and comfort. Accurate detection of the seat position can be used by ECUs to adjust safety features, such as airbag deployment or seatbelt tensioning. The MLX92223 is also applicable to other consumer and industrial application.And finally, a new member of the third-generation Triaxis Hall sensor with dual output that allows customers to save significant size, space and power and can indeed remove the need for the second position sensor. It is ASIL C-ready. It provides an ambient operating temperature range of up to 160 degrees C and low thermal drift. And so the 90374 is ideal for customer for automotive applications, such as transmission range selection connection sensing or inhibitor switches. It can also be used to detect the position of pedals, steering wheels or seat height as well as in the drivetrain. It's an unequivocal contributor to a greener future. So our Q1 was particularly fertile for our innovative sensors, and there's more to come this year. Talking sensors, it is equally with pride and pleasure that I can announce that according to the Strategy Analytics database, Melexis now ranks third in automotive sensors worldwide, following a 17% growth in this area in the past year. In view of the long-term trend towards more electrified, more autonomous and more personalized cars, Melexis sees continued new opportunity for the sensor and driver component. My conclusion today is the same as in February: We are realistic and not satisfied about the current situation but remain positive and confident about our future. Karen, let me hand you the stage now.

[Karen Van Griensven, Chief Financial Officer]

Thank you, Françoise. Good afternoon, ladies and gentlemen. So sales came out at EUR 116.5 million, a decrease of 16% compared to the same quarter of the previous year and a decrease of 18% compared to the previous quarter. There was a positive effect of the euro/U.S. dollar exchange rate of 3% compared to the previous quarter of last year, and no impact compared to the previous quarter. The gross result was EUR 46.8 million or 40.1% of sales, a decrease of 26% compared to the same quarter of last year and a decrease of 27% compared to the previous quarter.R&D expenses were 17% of sales, G&A was at 6.5% of sales and selling was at 3.1% of sales. The operating result was EUR 15.7 million or 13.5% of sales, a decrease of 54% compared to the same quarter of last year and a decrease of 51% compared to the previous quarter. The net result was EUR 13.9 million or EUR 0.35 per share, a decrease of 52% compared to EUR 28.8 million or EUR 0.71 per share in the first quarter of 2018 and a decrease of 51% compared to the previous quarter.So for the outlook, we guide for the second quarter the sales to be in the range of EUR 117 million to EUR 123 million, with a gross profit margin around 41% and an operating margin around 14% at the midpoint of the sales guidance. Melexis expects its full year 2019 sales level to remain below the previous quarter. Gross profit margin is expected to be in the range of 41% to 43%, taking into account the euro/U.S. dollar exchange rate of USD 1.13.So we close here the introductory section. And we would like to now move to the questions-and-answers session. So please go ahead.

[Operator]

[Operator Instructions] Your first question comes from the line of Matthias Maenhaut.

[Matthias Maenhaut, Senior Equity Research Analyst]

First question is actually, if you would now interact with customers, what is actually the feeling that they are giving, the sentiment that is now in the supply chain? Are they actually becoming more optimistic? Is it more or less the same as at the end of the full year results? Are some shifting some of their long-term projections? Or is it all staying relatively stable? And then second question that I actually have is if we look at full year guidance, you actually lowered the gross margin guidance for the full year. What is actually driving this downwards revision? Is this because you're becoming slightly more cautious on the shape of the recovery? Or are there other factors behind? That's my 2 questions.

[Françoise Chombar, CEO, MD & Director]

Okay. I will take the first question. Karen will take the second one. So as far as the customer sentiment is concerned, in fact, all customers are still extremely cautious. The -- everybody says, yes, half year 2 should recover, but nobody for the time being dares to make a prediction. And I think that is pretty -- yes, how would I say, equal across our customers. They are just being realistic and look at what their customers are saying. Our Tier 1s have sometimes very low visibility. Whether the situation is good or bad, they always have low visibility from the OEM. What we look at more -- and that's also what I did in the introduction. What we look at more is to see how the car sales and the car production evolve because that, in the end, at some point in time, will ripple through into the supply chain and to us. So it's important to look at the originating signal, as I called it, in order to understand where things go. It's then a question of how fast the inventory of our customers will be depleted or depleted sufficiently for them to reorder. And that's the big -- the question today still, as it was in February, so that has not really changed, only we are 3 months further in the year. And of course, as we also said in February already, the longer it takes to recover, the less chance there is to recuperate the time that was lost for this year. I hope that is an answer to your first question, Matthias.

[Matthias Maenhaut, Senior Equity Research Analyst]

Yes, that is. That is.

[Karen Van Griensven, Chief Financial Officer]

More or less, the answer to the second question as well. As we indeed anticipate a slower recovery in the second half than Françoise already mentioned, although we don't exclude the 43% [ minus ], it's just as today, we don't see the orders yet to confirm that from here.

[Françoise Chombar, CEO, MD & Director]

Yes, and those things can be quick as well, so it could -- we don't exclude it, as Karen said. It can be quick but it can also be slow. And it's very hard to now make a prediction. And so we don't make that prediction. It could go either way.

[Matthias Maenhaut, Senior Equity Research Analyst]

And then, if I may do the follow-up. If you now look at the midpoint of the gross margin guidance, what kind of a sales increase for the full year we'll then be penciling in?

[Karen Van Griensven, Chief Financial Officer]

We don't want to -- yes, the guidance in the press release is lower sales than 2018. We don't want to specify that more other -- [ what's true, we just ] done in the press release.

[Operator]

We got another question, comes from the line of Francis. Mr. Francis Bouvignies, your line is open.

[Francois-Xavier Bouvignies]

Can you hear me?

[Françoise Chombar, CEO, MD & Director]

I can hear you. So...

[Francois-Xavier Bouvignies]

My first question was on the -- a bit of follow-up of the first question on the visibility that you have. I understand that it's still dark out there. I just wanted to have your view on your customers' inventory situation. So how do you see this inventory? I mean do you mean -- do you think the inventory correction at your customers is over as we speak and then it depends on the demand? Or do you think there is still some inventory correction to come?

[Françoise Chombar, CEO, MD & Director]

As far as we can see, there is still inventory corrections to come. Yes.

[Francois-Xavier Bouvignies]

Okay. So that's clear. Do you think it's going to be over by Q3? Or it's still fairly high and then it may take a bit longer?

[Françoise Chombar, CEO, MD & Director]

Well, it depends on the run rate or the take rate. And that depends, of course, on how fast recovery in car sales will take. There are, of course, also new programs coming on board. And then it's difficult to understand because sometimes it's the same product of Melexis that they are using for both new programs and ongoing programs. And of course, we try to find out as much as possible from our customers, but sometimes they are also, yes, a bit in the dark on what is happening at their OEMs. But in general, we see -- we don't have the inventory situation yet. We only have that, yes, when people have published their figures, and we're usually one of the first. So it's difficult to get a view on this. But if we take the previous, then we see that inventories are either decreasing or they are flat. So in that sense, that's also a sign that things are not worsening anymore as such, and we believe, but again, with big caution because never say never. But we believe that the dip has reached its bottom in Q1 as also we already said in February. And that now, it depends on how the recovery will -- or how the slope and the speed of the recovery, sorry, will be.

[Francois-Xavier Bouvignies]

That's very clear. The second one I had is on your gross margin. Karen, I don't know if you explained why, I mean, the gross margin fell a bit short of your expectation. You're usually very good at forecasting your gross margin, and it was a bit lower this time. And you also decreased for the full year, your gross margin. Can you tell us a bit the moving parts behind this downgrade, if I may say?

[Karen Van Griensven, Chief Financial Officer]

Indeed usually, we can quite predict for those. There are quite a few elements that are difficult to know exactly how they will evolve. And in Q1, we [ only talked ] rather in the negative way, but the product mix did not help. And we expect that, actually, slightly better product mix regarding gross margin. We also had a bit more cost of yields in Q1, which seems to be not to persist in Q2, but it has an effect for sure in Q1. Yes, and then in general, obviously, the operational leverage was also -- but this was more or less expected that we would, obviously, not fully use our capacity. They don't necessarily persist, particularly the product mix and the cost of yields. We don't expect necessarily similar negative impact over the next quarter to say. But it's like I mentioned, it's not so easy to predict. So the lowering gross margin, it's more related to, yes, a slower recovery that we expect in the second half of the year.

[Francois-Xavier Bouvignies]

So it's not a unit-related effect product mix?

[Karen Van Griensven, Chief Financial Officer]

It's not necessarily a structural issue we have, no.

[Francois-Xavier Bouvignies]

And -- but if we look at the 43% for the full year, it means that you need to get more than 46% gross margin in H2, which I mean, given your comment it's still not recovery yet. And you never had such gross margins since 2014 or '15. So I just -- you're -- just trying to understand how you can get there.

[Karen Van Griensven, Chief Financial Officer]

It is challenging but not impossible.

[Francois-Xavier Bouvignies]

Okay. Okay, that's clear. And then the last one is on your own inventory. You know that I like to talk about this. Your inventory has increased further in terms of days, at least, so we are at 163 days. What -- if I remember correctly, in the last few calls, you said you were comfortable with this level, which was 140 days, but this -- it keeps increasing. So I just wanted to know how you want to deal with this inventory. Or is there anything you can do to minimize the risk of any write-off or anything like pricing decline, anything like that, that could impact you?

[Françoise Chombar, CEO, MD & Director]

Well, we manage the inventory quite well. We are not building consciously obsolete stock, for sure not. The inventory level, whether it is now a bit higher than last quarter, is something we feel still comfortable with. And it's a conscious choice to not let it go down and even that let it go a bit further up. Because as we mentioned before, as of previous earnings conference, when things come back, the structural issues that were there before, like in 2018, structural issues of capacity constraints as with everywhere in the semiconductor value chain, they are still there. So we need to be sure that we can level up the peak that we believe can happen. I'm not saying it will happen, but the peak can happen. And then we want to make sure that we can deliver to our customers and possibly faster than our competitors could. And of course we don't have a -- always a full one-to-one replacement, but sometimes we have. And then it's important to be -- sometimes we are dual source, well not often, but sometimes we dual source. And it's nice to be able to grab that opportunity. But we feel very comfortable, and we don't see a need to reduce our inventory or manage it differently than we have done so far.

[Francois-Xavier Bouvignies]

Okay. That's very clear. So we do -- we shouldn't expect it to go down the next quarters or so.

[Françoise Chombar, CEO, MD & Director]

If the orders go up, it will go down. Yes. That's the idea.

[Operator]

Your next question comes from the line of Janardan Menon.

[Janardan Nedyam Menon, Technology Analyst]

It's Janardan from Liberum. Just on the 2 areas of automotive and nonautomotive in Q1, your nonautomotive was quite weak at about 33% decline. Your automotive was doing slightly better at about 14.5%. Do you see any difference in the behavior of the 2 segments as you look out into Q2? Is one likely to improve a little bit faster than the other from where you're sitting right now? And a second question is on the margin effect on product mix. Which are the products which are doing better at this point in time? And what is leading to that gross margin pressure from a product mix point of view? Could you elaborate a little bit on that? That will be great. And that's all I have here.

[Françoise Chombar, CEO, MD & Director]

Okay. So I'll take the first, and you the second, Karen. So on the first one, the differency between automotive and nonautomotive. We've seen this in the past as well that nonauto reacts faster than auto. So the chain, let's say the value chain is longer in automotive than in nonautomotive. It looks as if from the figures, it looks indeed like auto is doing a little bit better than nonauto. But in fact it's more or less the same in general. Because of the fact that the reaction times in nonauto are shorter than in auto, that can also be a reason why the situation is what it is. There is no specific reason why nonauto and auto should be different, except for the fact that the reaction time and the information delay is different between the 2.

[Janardan Nedyam Menon, Technology Analyst]

So your 3% roughly growth guidance quarter-on-quarter into Q2, that we can assume is roughly similar for both sides?

[Françoise Chombar, CEO, MD & Director]

Yes, maybe auto will be still a bit better because there, we throw in the figures that we have. But again, with a lot of caution. It looks like auto is recovering a little bit faster than nonauto. But then again, nonauto has very short reaction time, so it could still be that there are orders coming that we didn't see yet, and that will still be delivered in Q2. And again, we will have parts to deliver. If that -- those orders come in, we will be able to deliver. Usually, when you're able to deliver fast then customers will wait a bit longer as well to -- that's simply the way it goes in our business. So it's hard to make any conclusions from that at this point in time.

[Janardan Nedyam Menon, Technology Analyst]

Understood. And on the mix?

[Françoise Chombar, CEO, MD & Director]

And on the mix...

[Karen Van Griensven, Chief Financial Officer]

The gross margin, so we have relatively less magnetic sensors in the sales in Q1, which is not necessarily -- we expect that not to last. But that has a negative impact on our overall gross margin as they have slightly better profit margin or gross margin than average.

[Janardan Nedyam Menon, Technology Analyst]

And can you think of any reason why in the sort of inventory correction or downturn, magnetic sensors have been impacted more than other parts of the portfolio?

[Karen Van Griensven, Chief Financial Officer]

No, it's a quarterly effect. You cannot draw conclusion just on a quarterly basis. There are differences from quarter-to-quarter. This quarter, it was indeed magnetic sensors that were somewhat weakish, but next quarter, it could be another profit line.

[Operator]

We got another question, comes from the line of Nigel Van Putten.

[Nigel Van Putten, Analyst]

Just one on the OpEx. It seems to have been very well managed in the quarter, but a bit at odds with the guidance you provided last quarter, which I think was for a slight increase throughout 2019. And then if I try to reconcile that with the 14% operating margin guided for the second quarter, would it make sort of sense to assume a reacceleration? Or was there something specific in the first quarter that's falling out in the second? Any context would be very useful.

[Karen Van Griensven, Chief Financial Officer]

No, there is indeed slower expense, mainly in the outsourced part. So it's related to employment cost. There we are -- yes, was even a slight increase. But the outsourced part, we have reduced. And at current phase level, I don't see to grow that substantially over the next quarters. So we are also somewhat adjusting to, yes, the sales level we're seeing today.

[Operator]

We got another question, comes from the line of Jeff Osborne.

[Jeffrey David Osborne, MD & Senior Research Analyst]

A couple from my end. I was wondering if you could give us a sense of the quoting activity for future design wins. I fully understand the inventory correction that you talked about, but is there any slowdown in the broader design win and quoting activity that you've seen?

[Françoise Chombar, CEO, MD & Director]

Okay. No, there isn't. We see continued activity. And we're pretty satisfied with what we see coming, yes. That gives us also the confidence on the long term, of course. So no slowdown.

[Jeffrey David Osborne, MD & Senior Research Analyst]

Excellent. That's good to hear. Just 3 other real quick ones here. On the new Time-of-Flight sensor that you have mentioned on the call and in the press release, is there a bias to what you're seeing in terms of internal monitoring within the cabin or external? I was just curious in terms of the initial interests that you're seeing from Tier 1s.

[Françoise Chombar, CEO, MD & Director]

It's both. It's both in-car monitoring and exterior monitoring.

[Jeffrey David Osborne, MD & Senior Research Analyst]

Very good. And then the last 2 is just -- in light of the slowdown, is there any change to the dividend policy of the company or your CapEx plans? And then if you could remind us of what to expect for both of those items for the year, that would be helpful.

[Françoise Chombar, CEO, MD & Director]

Dividend policy?

[Karen Van Griensven, Chief Financial Officer]

Yes, for the dividend policy, yes, we have a track record of repaying a big portion of our profit. And I don't -- well, the policy -- we don't have a strict policy, but we don't see to -- that we will break that practice, considering the situation. Obviously, the final decision will be taken in the [ summer ]. So we will most likely come with the statement on dividend with the half-year review figure.

[Jeffrey David Osborne, MD & Senior Research Analyst]

And Karen, on the CapEx plans, any potential slowdown there in light of the OpEx being throttled back? Is there any slowdown in your expansion in Sofia or any of the other locations?

[Karen Van Griensven, Chief Financial Officer]

The CapEx remains as we projected in the last call, around EUR 45 million.

[Operator]

[Operator Instructions] And we got another question, comes from the line of Stephane Houri.

[Stephane Houri, Research Analyst]

This is Stephane Houri from ODDO. So I have 2 questions. The first one is about your comment on the inventory correction. So basically you're saying that the inventory correction is continuing. So I'd like to know according to you, until when it can last before it becomes dangerous for your customers to have too low inventories? That's the first question. And the second question is about the tax rate, because it was pretty low this quarter. So is there any change in the guidance in the tax rate?

[Françoise Chombar, CEO, MD & Director]

Yes, on the first question... [Technical Difficulty] Stephane, are you still there?

[Stephane Houri, Research Analyst]

Yes, I'm still here.

[Françoise Chombar, CEO, MD & Director]

Okay, so on the inventory correction. Until when can it continue until it becomes dangerous for our customers? Very hard to say. Usually customers are always too late to react. So we try to make sure that within -- in very good touch with them, very close connection with them, with at least some of them to tell them when we feel it can become dangerous. But it's very hard to know, of course, yes. So it's a very difficult question to answer, Stephane. Sorry about that. But usually they're too late, which is contributing to the bullwhip effect, because they react late and then until it ripples through to the -- through the supply chain. It's, in some cases, indeed too late. Yes, but that's why we have the bullwhip effect. So the tax rate, Karen?

[Karen Van Griensven, Chief Financial Officer]

So on the tax rate, indeed we had a lower -- we were at around close to 10% in the first quarter. The lower profitability for the moment is indeed also lowering the expectation of the tax rate for 2019 where we gave guidance of 15% to 20%, we now see more guidance of 10% to 15% for the year.

[Stephane Houri, Research Analyst]

Okay. So it should be higher in the rest of the year, not as low as the 10% in Q1, but remaining pretty low compared to what you said before. And after 2019.

[Karen Van Griensven, Chief Financial Officer]

Yes, for profit level that we saw in 2018, it will be [ larger ] again in the range of 15% to 20%.

[Operator]

There are no further question at this time. Please continue.

[Françoise Chombar, CEO, MD & Director]

Okay, thank you, operator, and thank you, audience for your kind attendance. We hope to welcome you to our next earnings conference on July 31. Enjoy the spring and goodbye.

[Operator]

This concludes our conference for today. Thank you for participating. You may now all disconnect. Speaker, please standby.