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Melexis NV
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Ladies and gentlemen, thank you all for standing by, and welcome to today's Melexis Q3 2018 Results Conference Call. [Operator Instructions] I must advise you all that this conference is being recorded today, Wednesday, the 24th of October 2018. And I would now like to hand the conference over to your first speaker for today, Ms. Françoise Chombar. Please go ahead, ma'am.
Thank you, operator. Dear audience, welcome to the Melexis earnings call for the third quarter 2018. I'll begin with the business perspective update, after which our CFO, Karen Van Griensven, will carry on with the financial highlights. And of course, subsequently, we will be happy to answer all your questions. So where are we on the business and market side? Quarter 3 sales came out at 15% growth year-on-year, just south of EUR 147 million. There was no currency impact. And geographical spread year-on-year was the same as well.Melexis' year-to-date performance is in line with expectations. This is good growth related to both existing and new programs with the key growth drivers in Q3, magnetic position sensors, embedded motor drivers and pressure sensors. Let's dig a bit deeper into these 3 product lines.First, magnetic position sensors. Our new generation Triaxis, which was launched in April this year, is gaining traction, while the previous generation upholds new design wins too. It reaffirms the #1 position we enjoy in this field. Magnetic position sensors can be found mainly in the powertrains, in particular also the new electrified powertrains, both hybrid and pure EV. But equally, in steering, pedal and shifter applications, we see further ramps. Melexis products fulfill the higher demands in robustness, safety, integration, electrification in general and added features are driving many of the integration activities.We see these trends to proceed as autonomous driving electrified cars and consumer demand for more confident ease of use maintain its tackles. It's also great to see our embedded motor drivers picking up steam now. We call them embedded because they contain an MTU core and a flash memory. For these products, the MTU core is proprietary to Melexis. These are complex, highly integrated products that enable our customers to achieve their targets on emissions, efficient electrification and silent motors.Smart and small mechatronics in cars is an accelerating trend, and Melexis is very well positioned with a broad product portfolio. You'll find these embedded motor drivers, for example, in air grill shutters, smart valves and all kinds of BLDC pumps and blowers.Finally, we want to highlight our pressure sensors getting popular. This product line makes also a significant contribution to developing highly efficient and cleaner vehicles, thereby lowering emissions and preserving the environment. Next to conventional applications such as braking, and that's a universal need in all types of cars, we see uptick in 2 new areas, being seat lumbar that is connected to the trend of personalized vehicles and parts. All of this demonstrate that the long-term fundamentals of Melexis are intact.Short-term goals. Our visibility is lower than anticipated before. And currently, we see demand distorted by a mix of reasons. The main reason is the higher concern over the economic and geopolitical situation due to global trade tensions. The path the Trump administration has chosen isn't doing our industry any good. We notice our customers have suddenly turned much more cautious, and thus they are scrutinizing their costs. Meaning, in the first place, their inventories. We reflect this unusual demand distortion in our adjusted sales guidance for the full year.Our opinion today is that the extent of this weakness is likely to be moderate and that it is likely to last for a brief period of time. However, at this point, it is very hard to make any predictions as to how this will play out. But again, this is short term, like some turbulence during a flight. Long term is a different and positive story. When we look at our customer forecasts, which comprise a longer time frame than purchase orders, and knowing what our design wins are, we have reasons to be confident mid and long term. This is on the back of both organic growth of existing products and of new products ramping up in 2019.Our content growth is on the rise with multiple product lines as they tick all the boxes on the secular trends, electrification, assisted drive and personalization of the car. Key to Melexis is that there is no structural change going forward.Now I will hand the stage to Karen for the financial update.
Thank you, Françoise. Good afternoon, ladies and gentlemen. So on the financials, the gross result was EUR 68.1 million or 46.4% of sales, an increase of 17% compared to the same quarter of last year and an increase of 3% compared to the previous quarter.R&D expenses were 13.3% of sales, G&A was at 5.3% of sales and selling was at 2.6% of sales in the third quarter.The operating result was EUR 36.9 million or 25.1% in the third quarter of sales, an increase of 15% compared to the same quarter of last year and an increase of 4% compared to the previous quarter. The net result was EUR 30.1 million or EUR 0.74 per share, an increase of 7% compared to EUR 28.1 million or EUR 0.70 per share in the third quarter of 2017, hence an increase of 7% compared to the previous quarter.I would like to open now the questions and answer session.
[Operator Instructions] And we've got questions over the phone line. Your first question comes from the line of Francois Bouvignies.
The first one is on the growth that you're seeing in Q4 and the impact of the inventory. Given that your lead times is roughly, I mean, 16 weeks, if I remember correctly, you said in previous calls, and -- how should we think about the beginning of '19? I don't expect you to give the '19 guidance. But given the visibility that you have, and you mentioned a brief impact, just to get a sense of how we should think about H1 '19, especially given the comps that are, I mean, if I remember, Q1 '18 was particularly strong, so you're entering a very tough comps environment as well?
Yes. Thank you, Francois. So in fact, if you look at the sales that we guide for in the fourth quarter, it still equals a year-on-year sales growth of 6%. So I think that's the first thing that we have to understand. Now -- and indeed, traditionally, we give only guidance for 2019 after full year publication. So I cannot do that today. However, if you ask me how do you think that 2019 will begin? Well, the honest answer is, for the time being, order behavior of customers is today quite different than usual for the reasons like we mentioned in the press release and the reasons I mentioned before in the introduction. Current visibility is low. Customers seem to wait with putting in their purchase orders. They are indeed pushing out their orders that they had already put in. Main reason what they tell us is that they want to make sure that they don't have too high inventories at the end of the year. Some mention lower demand. Some mention lower visibility. So we have a bit of everything. But in the end, they wait with ordering. Now if this trend continues, yes, it could be that we will face a slow start of the year because, of course, if -- for example, a customer shifts out parts that were ordered in December towards February, of course, they will not order new parts for January. I think you can see that.Now on the other hand, again, based on the customer forecasts that have a much longer time horizon than the purchase orders and based on the discussions we have, the awards we win with our customers, we have reasons to be confident, mid and long term. Now these are 2 different patterns. So you have the short-term pattern, which is extremely volatile and with low visibility, the inventory corrections, the slow order intake, the waiting customers, let's say. So that's the short-term pattern. And then you have the second pattern, which is the more structural pattern, with expected ramp-ups of new business, new products, and they are superposed to each other. So we will have to see how they will correlate, how one will tradeoff the other. That is today very hard to say because of the volatility of the first pattern.
And you mentioned in your remarks that you expect it to be brief, like short-term uncertainty. What makes you think it's going to be brief? I mean, is there any data point that you could share with us to show your confidence?
Well, for the same reasons that I already mentioned before, when you -- when we talk to our customers, we -- they are very busy with new programs, we are very busy with new programs together with them. There is a lot of work to do. There is good developments. There is good awards being discussed. And that is the reason why we believe this is a correction for sure, but this is also a lot of uncertainty. So there is no other reason than that.
Okay. The second one I had is on your gross margin. So your level of inventory is still very high and is consistent with what you said last quarter, saying that you're comfortable with this kind of level, although it increased slightly. But the question I had is, if you wanted to deflate this inventories, what should we expect in terms of impact on your gross margin, if any? Just to get a sense of your gross margin profile in a, like, more challenging environment?
We don't expect major impact on the -- if any, on the gross margin of depleting our inventory. Anyway, as mentioned already, we are confident with the levels we have seen. So we are not counting on a huge depletion of our inventory levels in the coming -- in the shortest term.
Operator, could you see if there are any other questions?
Yes, the next question comes from the line of Janardan Menon.
When I look at your Q3 numbers, your non-automotive revenues fell very sharply, around 24% both quarter-on-quarter and year-on-year, while your automotive revenues actually seem to have done very well. They went up 6% or so. I'm just trying to -- the weakness that you are seeing, some of your peers have talked about a lot of weakness in the distribution channel, TI talked about it, STMicro talked about it. And obviously your nonautomotive is quite a lot into the distribution channel. Is most of the weakness that you are seeing in the distribution channel for nonautomotive? And is that where we should expect much of the decline into Q4? Or are you also seeing quite a bit of weakness in the automotive side?
Yes. So you are absolutely right that most of the adjacent, what we call adjacent markets are going through the distribution channel. And indeed, we see weakness there, and we see already some more weakness there in Q3 than with automotive, that is correct. Now the uncertainty that we see seem to have been more pronounced with adjacent markets than with the automotive market so far. But indeed, also in Q4, we do not expect this to change dramatically. So it's not like the non-auto will suddenly be boosted and auto will suddenly drop. I think it will be more or less the same in Q4 as far as percentage is concerned.
So in Q4 also you will see more weakness in the adjacent markets and less weakness in automotive, is that what I'm getting from you?
No, no. What I mean is, we now have 92% automotive. And that, we think as far as we see today, but again we're in a very volatile situation. We see the same like 92% or something for automotive in Q4. It might even increase a bit. And we believe that the uncertainty that you see in adjacent markets, I mean, it's easier for end customers to delay their purchases. They say, ah, we'll wait to buy another washing machine or another, I don't know what, or no I'm not going to buy that drone for my kid now, I'm going to wait until we're a bit more clear about the economy. I think -- therefore, we do see higher volatility in the adjacent markets. And the second thing is that with adjacent markets, we're more exposed to China than with automotive.
Got it...
But China also is, yes -- is influencing the lower adjacent market contribution in Q3 and in Q4.
Okay. And in automotive, some of your peers are saying that there is not much weakness. So they -- in fact, they're saying it's very strong. Again STM today morning was saying that it's strong. LMOS came out after the quarter ended and said they're not seeing any weakness and they are quite a close peer of yours. Infineon at least when the last time they've said, again, after the quarter has completed, that they said everything is -- in automotive is very strong. On the other hand, I agree TI yesterday said that automotive has got some weakness as well. I'm just wondering your weakness -- I mean, how do you explain this discrepancy between some suppliers who seem to be seeing a little bit more weakness and especially in your case? Is it that perhaps you have a higher level of exposure to someone like Volkswagen, which has seen a much bigger impact from WLTP than some of the other companies? And it's that end customer, OEM or Tier 1 exposure, which is showing -- resulting in this difference? Or is there some other explanation for this?
Okay, well, we communicate in a very transparent way on how we see the situation. We cannot speak for other companies. The only thing I can see is that, in the last phase, we've seen several Tier 1s and OEMs making business comments which support our view. And to your comment that do we have a higher exposure to some OEMs, like VW? I don't think so because the situation that we're seeing is very, very spread over our customer base, and we are not more exposed to Volkswagen than to any other.
Got it. And one last question from me. When you say brief period of time, I know this is a difficult question to answer, but would one -- I mean, I'm not going to hold you to it at all, but is one quarter brief or 2 quarters is brief, and would long -- I presume long would be like 3 to 4 quarters. But what would be brief around?
Well, if I would be able to predict that, I would probably not be sitting here. I don't know. I think nobody knows. Honestly, if we're honest to ourselves, nobody knows because it's hard to predict, especially since the Trump administration seems to change course very quickly. So what is valid today might not be valid tomorrow anymore or might be different tomorrow. So what is important, I believe, is to look at the fundamentals of the industry and the fundamentals of the industry is and definitely so the automotive industry at large is that the industry needs to innovate in order to bring to market those products that customers are looking for, namely cleaner vehicles. There is a push both in China and Europe, definitely less in the U.S. But in China, which is the biggest market and in Europe, there is a big push by the general public for cleaner environment. That means, they want cleaner cars. For that, the industry must innovate. For that, the industry must also look at technology like the ones supplied by Melexis. So that's why we believe there is no need for, say, a big panic. Again, I cannot tell you how long this correction will last. But in the end, what we can tell you is that mid-, long-term technologies provided by Melexis are needed in the industry.
Your next question comes from the line of Guy Sips.
Most of my questions are already answered. But I have one question on your R&D going forward. Has the current turbulence any impact on your R&D spending as a percentage of sales? And can you give us some guidance into 2019 on this regard?
Regarding the next quarter, the fourth quarter, yes, I think we can see there that it's likely that as a percentage of sales, R&D will be the highest component versus sales than we have in the third quarter. For next year, however that is -- it will depend very heavily on the sales we will have next year and it is too early to give an answer.
Okay. Second question is also related to the non-automotive growth. Because if you put together the 6% sales increase that you indicate for the fourth quarter and the 92% or even higher percentage of automotive sales in the fourth quarter, then it actually indicate that the problem is especially in nonautomotive more than in automotive sales. And so if you put all that together, isn't that the problem still has to come in automotive in the first quarter of next year or is it little bit too pessimistic?
Again, see, it's very hard for us to say in this very volatile environment. We have no reason to believe that what we're currently seeing short term is related to Melexis stand on its own. Yes, it's more an economically and geopolitically -- or the effect of the economy and the geopolitical situation. And thus it does -- uncertainty does affect consumers, right? So I don't think that there is any other reason, honestly speaking. Will automotive be worse in Q1 or will we see the hit coming in Q1 more? I honestly cannot predict that.
Your next question comes from the line of Marcel Achterberg.
Just one follow-up question on the R&D spend. In a -- say, in a hypothetical situation, if growth next year isn't, say, 10%, but it's 5%, would that make you reduce the R&D spend, as you were planning for 14% of sales kind of target there? Same would you also slow down your CapEx plan for '18 and '19 in such a scenario? Or would you say about 5% mid-single-digit growth is still good enough to carry that?
Yes. It's difficult -- again, a lot depends on the top line and for the moment, certainly short term, the feasibility is low. Our R&D spending is a long-term invest, and we will definitely keep -- we might be cautious on the one hand, but on the other hand, we will invest structurally where we feel we need to invest. If that answers your question.
Yes. Marcel, maybe I can add and I second what Karen has said. Again, if we look at all the discussions we have with customers, there is no reason to reduce our R&D spending because there is a lot to do. There is a lot of opportunities going forward. We also say that in our press release. There are so many opportunities. It would be very shortsighted to now suddenly because of a short turbulence suddenly start reducing heavily on long-term important R&D spend or investments that we need. In fact, in times when maybe there is a little bit less to do on the production side, it's nice to have some time to do some -- to focus on some other stuff than focusing on getting production out the door as customer want. So we're not -- we're not worried about this. Even if this is a slowdown, the opportunities going forward are more than enough to continue our investments.
Yes. And so you will continue building the foundation for future growth?
Exactly, because that's what we see.
The next question comes from the line of [ Andrés. ]
Well, my question has already been answered more or less. I would like to ask it a bit differently. When I consider your growth guidance and your EBIT margin, it looks to me that you have some flexibility in your SG&A costs to reduce -- well, to reduce overhead cost so to say. Is that correct to assume?
So you assume -- I'm not sure I understand correctly the question...
Well, the question, I can put it more simple. Is the 25% margin really realistic given the slowdown in sales or just that we require a cost cut?
Again it's too early to -- I mean, we don't know what -- I mean, we haven't given any guidance yet for 2019.
I'm talking about 2018 because the fourth quarter could be quite a tough one.
Fourth quarter. Okay. For the fourth quarter, we can expect a lower EBIT than Q3 indeed. But we still keep the EBIT margin for 2018 at around 25%.
The next question comes from the line of Jeff Osborne.
Most of them have been answered. But as it relates to the working capital in 4Q as well as early 2019, can you just talk about the moving pieces there? It sounded like inventory wasn't going to improve and then you've got a dividend payment in the fourth quarter. What I'm trying to get out is there a minimum cash balance that you're comfortable with?
Okay, maybe I can first answer the inventories and then you can take over, Karen. So the inventories are indeed higher than the same comparison of last year. But it's not that our today's inventories are too high. It is rather that the previous year inventories were too low because we were in an accelerating mode and with capacity shortages a bit everywhere in the supply chain, which is now much more improved and we're working hard to move towards a normalized situation in the supply chain at year-end. Now the inventories today, as already mentioned, we feel okay with these. They are strategic also because we're still concerned with security of supply. And inventories are not a problem as long as they remain sellable, and ours are sellable. So the risk of obsolescence is not more than usual. In fact, excess inventories, as some of people call them, they are really a blessing. They are a blessing especially at a time when everyone has been in waiting mode to order and then suddenly find out too late that their own inventories have depleted fast. And then at that moment in time, Melexis will be able to deliver and take advantage. So if we look at the distribution also between the different stages in the inventories, so finished goods versus work in progress, it's not different than usual. So again this is a strategic choice and we feel well about it, and we have it well under control. So I hand to Karen for the rest of the question. I hope that answers your question on inventories.
No, that's very helpful. I appreciate that. And then is there is a fiscal year level of cash that you feel comfortable with or that are required by covenants?
Covenant-wise, we don't need to worry at all. We expect by year-end to come out probably around 0, might be a small net debt, but more or less 0 position.
Got it. And then it was alluded to on the prior questioner about CapEx for next year. Is there a specific target. I think it was EUR 75 million for this year? What are you thinking at for next year? I was unclear with some of your fab expansions, how much lingers into 2019 versus this year?
Yes, we don't give guidance yet today on the CapEx for next year. For 2018, we indeed reconfirm the EUR 75 million. For the year, we said EUR 70 million to EUR 75 million. We will most likely end up around EUR 75 million for 2018. For next year, no specific guidance yet. But what we can say is that we have heavy investments in 2018 in equipment. It's likely that this will slow down in 2019. On the other hand, we will heavily invest in facility, particularly in Sofia. So there we will see an increase versus 2018.
Perfect. And the last question I had is just with the disruption in the market, and particularly with the European OEMs as well as the Chinese. Is there any delays or pushouts of RFPs or qualification process? I know you don't report bookings, but just, in general, the new design wins, is there any deceleration of those awards given what's going on?
Not that we can see today, Jeff, no. No deceleration.
We've got one last question on the line that comes from the line of Gaspar Ariño.
I have 3, if I may. The first one is about the revenue growth by -- on a regional basis in Q3. It's interesting to see that all regions have been growing at the same pace of 15%. And I would like if you could please elaborate the implied revenue growth for Q4 of 6%? Can you elaborate on a regional basis, what do you see there? That's the first question.
I'm sorry, we did not make that -- we did not really make that estimation at this time. From my gut feeling, I don't think there will be such a big difference. There might be some changes, but I don't think they will be major. But honestly, we have not made that -- we could have made that simulation. We have the data, of course, but we did not prepare for that here.
Okay. And the second one is, if you could just please remind me, how much inventory do your customers typically hold? And how long does destocking, just to be more cautious, if that's all, how long does it take?
How much inventory our customers keep, we're of course in -- we're a component supplier, and we have at least 2 of our customers downstream. So in the best case whether Tier 2, so we have the Tier 1 and then we have the OEMs before it then goes to the consumer. So we have at least 2. But in many cases, we have many more. We have sometimes distribution in between. We sometimes have subcontractors of our customers in between. Sometimes even 2 subcontractors before it ends up at the Tier 2, and then it has to still go to the Tier 1. So it's very, very hard to give you now a figure like, ah, our customers always keep X amount of months in stock. It's really very hard to estimate that. But what I can say is that it is typical in a supply chain that the further down -- or the further up you are upstream and we're pretty much upstream in the end, the higher the swings will be and a brief ripple at the end of the stream can mean pretty high swing at the other end upstream. So depending on where we are in that stream, let's say, we have either very high swings or very -- or not so high swings. So it's -- and how long it takes is really dependent also on the information flow. So it's the change, and the change in behavior came in fact very recently. So it just started really. So it takes some time before the information flows through the value chain as well. So today, we're a bit in a -- because we're in the beginning, it's not so easy to estimate how long destocking will continue.
Okay. And maybe just to short some more. And on the CapEx, on the new investment plans, can you please let me know how much, as a whole of Melexis, you're increasing capacity? How much capacity are you adding?
In 2018, we did not make huge investments in capacity. In -- actually the new -- most of the capacity will be made available in 2019, and even the Bulgarian investment is 2020. So for the moment, we are not extending capacity or hardly increasing capacity. By 2020, we will have increased total capacity by around, I think, 40%, in that range.
Okay. Okay. Maybe I'll follow-up on this one. And just maybe the last one, if I may. It's on -- in a recent public conference, the head of automotive at Infineon said that the medium to long term there was -- he was seeing double-digit revenue growth for the semiconductors in the automotive market. And do -- I know you have said already that the long-term picture doesn't change. But is that something like 10% they were guiding for the long term, maybe over the next 5 to 10 years. Is that the kind of a growth rate that you are comfortable with over the next 5 to 10 years?
It's already difficult to explain the next 3 months, let's say, or next 6 months. Over the next 5 to 10 years, I would say that around 10% for the industry -- for the semiconductor industry and auto is overall I mean, is maybe on the high side. For us, our target has always been to do double digits. So that is what we are striving for. That is what we will continue to strive for in the next year. But we're not living in a vacuum and there is always an economic situation that we will have to take care of.
We've got one last question on the line that comes from the line of [ Mr. Hals Halder ]
[indiscernible] I just had 2 questions on the timing of the automotive slowdown. Was this already reflected in your orders in the September quarter, like a book-to-bill?
We don't do book-to-bill. We don't disclose that. But no, as I said before, it is very recent. So it's very recent that we saw this slowdown coming to us.
Okay. And the second question, you mentioned consumer -- caution us on slowdown in consumer potentially consumer demand with washing machines and other things. I mean, if I take your year-over-year growth of the 6%, you mentioned for the December quarter, I mean is that the same time your customers are reducing inventories, as you indicated? I mean, it does not sound to be too bad the situation from the end demand out there?
Well, thank you for your optimistic note, I would say.
Okay, but it's indicating that it would be higher than 6%?
Sorry, come again?
Yes. It should indicate that the real end demand for your products is above the 6% if there is a inventory correction component included.
Yes, that could be a conclusion that you could take, yes, I guess.
No further question at this time, ma'am. Please continue.
Okay. Thank you very much for your interest and your questions. So we will be very happy to meet some of you in person at our upcoming Analyst Day, which is on December 5 or else at our full year earnings call next year on February 6. So for now, goodbye and have a good rest of the day.
Thank you. And that does conclude our conference for today. Thank you all for participating. You may all disconnect. Speakers, please stand by.