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Melexis NV
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Ladies and gentlemen, thank you for standing by, and welcome to the Melexis FY 2018 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, 6th of February, 2019.I would now like to hand the conference over to your first speaker today, Françoise Chombar. Thank you. Please go ahead.
Thank you, operator. Dear audience, welcome to our today's earnings call. First, let me give you some perspective on the business environment at large, and then our CFO, Karen Van Griensven, will bring some color on the financial side. After which, as usual, we will listen to your questions.So let's look at the business situation. With the fourth quarter in line with expectations, we ended the year with close to EUR 570 million sales. This means, again, double-digit growth of 11% for Melexis in 2018. Without currency impacts, our growth percentage would have been 14%. We appreciate the contribution of all Melexians to these fine results.Geographical spread in Q4 is tilting upwards in Asia Pacific while skewing downwards in Europe. These are supply chain twists. As mentioned during the previous earnings call, we see demand in the fourth quarter distorted by a mix of reasons. The main reason is the higher concern of the macroeconomic and geopolitical situation due to global trade tensions. Q4 suffered greatly from supply chain knock-on effects of WLTP in Europe and severe car sales slowdown in China. Customer behavior was nervous, leading to broad-based inventory corrections.As we're in the middle of these corrections to date, it's essential to recognize the bullwhip effect in supply chain, a well-known concept first coined by MIT's Jay Forrester and well simulated by the Beer Distribution Game developed by MIT Sloan School of Management in the 1960s. Reference to Wikipedia, the bullwhip effect was named for the way the amplitude of a whip increases down its lengths. 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.As the automotive supply chain is notoriously long and extremely global, involving lots of different companies, the bullwhip effect creates often more havoc there than in less complex value chains. We observed already this typical behavior in the crisis years 10 years ago. While year-on-year car sales, '08-'09, decreased by 4% only, it led to 12% less car production, so a factor of 3, but it shrank Melexis sales at the time by 30%, 3-0.Demand surged again in 2010 as all companies in the value chain grappled to bring their inventories back to normal. Melexis sales shot up in 2010 by 70% year-on-year, 7-0. However, the situation today is different in that 2008 and '09, we had 2 deep crises, whereas, today, we should rather speak about a deceleration. Car sales and production '17 to '18 comparison tells us that the reduction of the major markets worldwide is about 1.2% in sales and about 1.6% in production.But regionally, it's a very mixed picture. First, Europe is slightly up in sales with 1.8% down in production, also a consequence of the WLTP crunch. Two, the U.S. is slightly up 0.3% in sales and 1.2% up in production, but we see a reversal of the sales trends in January with minus 2.1%. Three, China is down 3% in sales and 4.5% in production for the first time in over a decade. Four, Japan is down in sales by 1.6% but up in production by 0.5%. So this very mixed picture is representative of the very different dynamics that play regionally and which make our job of predicting the next quarters extremely difficult.Due to a varied number of uncertainties like the U.S.-China trade tensions, Brexit and Italy, people postponed their purchases of durable goods such as cars. It is common knowledge that uncertainty always negatively impacts consumer and does also business confidence. It is also common that it recovers over time, and then the swing goes the other way until things finally normalize again. The correlation between semiconductors and the economy has become pretty close since semi has become ubiquitous.Unless geopolitical tensions intensify, we believe a renewed positive order trend is likely to occur in the second half of 2019. Having said that, based on the current order book, Melexis expects 2019 sales to remain below the level of last year. We do believe, however, that January-February we reached the bottom already.Amidst all these unfavorable dynamics and subdued demand, Melexis stands strong, all next-generation and innovation programs as Melexis customers continue as before. Though short-term customers are all cautious, no program has been put in the freezer. On the contrary, in view of the long-term trend towards more electrified, more autonomous and more personalized cars, Melexis sees continued new opportunities for its sensor and driver components.It makes sense to highlight that every new car now carries, on average, 11 Melexis chips onboard. Over 2018, we launched again more than 1 new product a month. We released the next generation of Triaxis 3D position sensors, new members to the latch and switch TPMS and infrared product families, enhanced performance current sensors and cool new smartphone drivers for both automotive and adjacent markets. And I'm equally excited about the boatload of new releases planned for 2019.Healthy finances, healthy balance sheet, healthy portfolio, healthy launch funnel, healthy award pipeline, healthy secular trends, our fundamentals remain intact.My conclusion. We are realistic and not satisfied about today's situation, but we are positive and confident about our future.Karen, the floor is yours.
Thank you, Françoise, and good afternoon, ladies and gentlemen. A little bit more information on the financials.So for the full year 2018, sales were EUR 569.4 million, an increase of 11% compared to the previous year. The euro-U.S. dollar exchange rate evolution had a negative impact on sales of 3% compared to 2017. The gross result was EUR 261.1 million or 45.9% of sales, an increase of 11% compared to 2017.R&D expenses were 13.7% of sales, G&A was 5 -- at 5.3% of sales, and selling was at 2.6% of sales. The operating result was EUR 138.5 million or 24.3% of sales, an increase of 4% compared to EUR 132.6 million last year. The net result was EUR 115.5 million or EUR 2.86 per share, an increase of 4% compared to EUR 111 million or EUR 2.75 per share in 2017.So for the fourth quarter of 2018, we were at EUR 141.6 million, an increase of 7% compared to the same quarter of the previous year and a decrease of 3% compared to the previous quarter. The U.S. -- the euro-U.S. dollar exchange rate evolution had a positive effect on sales of 2% compared to the same quarter of last year and a positive impact of 1% compared to the previous quarter. The gross result was EUR 64.2 million or 45.3% of sales, an increase of 5% compared to the same quarter of last year and a decrease of 6% compared to the previous quarter.R&D expenses were 14.7% of sales, G&A was at 5.6% of sales, and selling was at 2.5% of sales. The operating result was EUR 31.9 million or 22.5% of sales, a decrease of 11% compared to the same quarter of last year and a decrease of 14% compared to the previous quarter. The net result was EUR 28.5 million or EUR 0.70 per share, an increase of 7% compared to EUR 26.6 million or EUR 0.66 per share in the fourth quarter of 2017 and a decrease of 5% compared to the previous quarter.We also -- or the board of Melexis decided on a final dividend to propose to the Annual Shareholders Meeting to pay out, over the result of 2018, a total dividend of EUR 2.20 gross per share. This amount contains an interim dividend of EUR 1.3 per share, which was paid in October 2018, and a final dividend of EUR 0.90 per share, which will be payable after approval by the Annual Shareholders Meeting. So the Melexis shares will start trading ex coupon on April 24, 2019.Looking at the outlook. Melexis expects sales in the first quarter of 2019 to be in the range of EUR 112 million to EUR 118 million, with a gross profit margin around 41% and an operating margin around 13%, at the midpoint of the sales guidance. Melexis expects its full year 2019 sales level to remain below the previous year. Gross profit margin is expected to be around 43%, taking into account a euro-U.S. dollar exchange rate of EUR 1.15.So I think we can now start the question-and-answer session. So operator, please go ahead.
[Operator Instructions] Your first question comes from the line of Francois Bouvignies.
My first question is on your, I mean, Q1 guidance. So if we take the midpoint, it implies minus 19% at constant currency year-over-year. So I mean, when you described the situation, and rightly, you compared it to 2009 and like -- that maybe this time, it's going to be short like a slowdown like you mentioned. But do you think the issue could be a bit more deep than the shorter inventory correction? Especially when we look at minus 19% year-over-year, you never had such impact since 2009, and you had inventory correction before, like you said, in 2015, for example. It was not this magnitude. So just with your experience, do you think it could be more, I mean, a bit deeper than people expect, especially with the situation you described around macro environment, trade war, Brexit and Italy?
What we believe is that it is not deeper, that the supply chain can make big twists, and they do. We see that. So no, my answer is it is not more deep than that. For us, today, as it stands with what we know and what we see, what we observe, it is supply chain effects due mainly to uncertainties in the market, uncertainty with consumers who postpone their purchases. And this creates havoc in this very long chain that the automotive has.
Okay. But if we -- I mean, you also said like January-February was a bottom. What makes you think it's a bottom? Do you have any data points to flag?
Yes. That is based on the order behavior and the order coverage that we have today. We're always very clear on -- this is a picture we take today, and we can only express the conclusion based on the information that is available to us at this moment in time. And at this moment in time, we have the impression from the order behavior of our customers and from the current order coverage that January-February seem to note or to be -- to represent the bottom.
So you see a pickup in orders in the -- already for the Q2 quarter, if I read correctly.
That the order in March is already higher than in -- than January-February. And we see that orders keep coming in for Q2 as well.
Okay. So if you see this recovering, it's still not possible to give a full year guidance?
No, not at this moment in time, unfortunately. I wish I could because it would make things also easier for us in our production planning. But today, we have to work with what we have. That's our job.
Okay. I know. I understand. And the other question I had is if we look at Melexis performance stand-alone, and we -- if we compare it to others like Infineon or STMicroelectronics, they all reported. And if we compare the 2 performance for the automotive division, we see a very different picture. How can you explain such difference? I understand a couple of percentage point could be product mix, could be like geographic mix. But such a big difference, it's difficult to connect the dots.
Okay. I see what you mean. Now there are 2 elements in this picture. One is what is the status of the allocation, whether it's real or perceived allocation by customers. When you have a high rate of allocation perception or real allocation, customers tend to order quite a bit, much more than they really need. It's also a very normal behavior. Once you tell customers that your lead times are slowing down -- are, sorry, not slowing down but are reducing, and so you confirm orders on a shorter notice, and they notice that, then customers will then start looking at their inventory and start doing inventory corrections. We have no more allocation at this moment. If you read -- you mentioned a couple of names. If you read those press releases, then you will notice that some say we are still in allocation or even strong allocation in some areas. So those people would see different order behavior at this time than we would because we are no longer in allocation. That's one. The second, and particularly because if you look at the guidance for the full year, there are not many of our peers that give guidance for the full year, there is, for the moment, unless I'm mistaken, only 1 that gives that full guidance -- full year guidance, and that's Infineon. But if you then dig deeper in what they tell you about their -- the distribution of their product lines, then you will see that power management, on the one hand, and then the others, microcontrollers, so the complex microcontrollers, are due to grow by 50%, 5-0 percent. We are, at Melexis, not at all in those areas. We do not have power management, so IGBTs and stuff. And we do not have large microcontrollers for ADAS. We are in different areas. And if you look at the comments they make on the rest of their automotive business, then you will notice they say exactly the same as we do. I hope that answers...
I think that -- yes, yes. No, that's very helpful. And just the magnitude still is quite important. I mean, there's still magnetic sensors, right? And you know that they are strong competitors of yours. And I mean, in that sense, the IGBT -- I mean, as you said, it's like the content is coming from ex EV and ADAS. And I mean, you should have content increase according to your statements as well that you have higher content in EV and hybrid.
Yes. Yes, that is true, and we do. But again, these are real supply chain twists, and it's very hard to take any, but really, any conclusions looking at just 1 quarter or even 2 or even 3. So it is really virtually -- it's really extremely difficult to take any conclusions from just looking at 1 quarter. The swings are just too unpredictable, let's say, too volatile.
Okay. And just for the full year, you didn't guide on EBIT margin. I guess, it's because you don't know where the top line will be. Can you give the OpEx an absolute term then?
What we can say is if you look at Q4 OpEx, we expect still a slight increase throughout 2019.
Sorry. So with Q4 OpEx, we should do like a run rate of the net...
Take that run rate with a slight increase.
Okay. Okay. Okay, that's clear. And last one, and then I'll leave the floor to my peers. Sorry about that. But Q1 gross margin, I mean, lower than we could expect for a stabilized company like you. And I mean, you always had like above 43% gross margin in the past. So I was just wondering if you could explain what's going on with 41%?
So it has to do with the fixed components in our gross margins. To give as a reference, in Q4, we had EUR 19 million components fixed.
And what is it?
The fixed component is our internal test. So it's mainly equipment depreciation and our internal people. So it's a component for our internal testing. And as you know, we invested quite heavily in 2018. We had EUR 76 million in investment in 2018. Obviously, the depreciation of this investment will be fully visible in 2019. So we take that along with us in 2019.
So it's not really a one-off then. I mean, do you get 43% for the full year?
Pardon? For the full year, we expect 43%.
You did guide for a 43%. So it means that you need a very strong recovery then.
We expect that, yes, economies of scale. When sales pick up again, there will be economies of scale because investment need in 2019 will be much less lower than in 2018.
Okay. So the 43% is based on the significant recovery in the rest of the year.
Indeed.
And your next question comes from the line of Guy Sips.
I have 2 questions. First is also related to the discrepancy between your guidance and those of Infineon and Sensata who reported a few hours ago. I think -- is the discrepancy for Sensata related to this bullwhip effect only? And is there like a time lag of 1 or 2 quarters in this? And then coming back to Infineon, so you are indicating that the sensor market are growing at a lower CAGR than power electronics for ASSP technology. Can you give us some guidance of the growth of the CAGRs for powertrain and for body compared to the 50% you were highlighting for power electronics?
; Okay, no problem. So first, Sensata. So Sensata is a tier that is further downstream from us. That means, in a bullwhip effect concept, they will have less swings than we would. So there is also a time lag. Now that time lag depends on a lot of things. It depends, not only on the cycle times that are needed but also on the information lag. So you have a coupling of the 2. So that's -- when we looked at the Sensata information, we didn't really see any contradiction to what we are seeing. Then on Infineon, I cannot give you a power management or a CAGR information on power management. There, it's important to note that these, in general, are pretty high ASP, as far as I'm aware, and that these are also in the highest or the strongest allocation. So you have a double effect there. That might also explain what we're seeing. Does that answer your question, Guy?
Yes, a little bit. But you can confirm that you are not losing market share.
Oh, yes, yes. Is that what you were hinting at? Sorry, I did not get it. Yes. No, we are not losing market share. Again, it's only inventory effect, the bullwhip effect in full effect these days.
Your next question comes from the line of Matthias Maenhaut.
A couple one from my end. Maybe the first one, on full year guidance. So you guide for sales growth below -- or sales below 2018 levels. Now if we look at the first quarter guidance, you guide for gross margin of 41% when sales are down 20%. Now for the full year, you do guide on gross margin, 43%. Now if you would extrapolate that, that would actually imply that you see full year sales down still high single-digit numbers. Is this the kind of number we should look for? And also, can you give a little bit more color on the split between what is going to happen in automotive and nonautomotive? And then the second question is actually on capital expenditures. Do you plan to actually lower CapEx investment substantially? And what kind of amount should we actually look for, for next year?
Okay, I'll take your first question, and then Karen can take the CapEx question. So 43% clearly assumes that there will be growth in the second half year of '19. We have to see the magnitude of that. So when you look at -- when we look today at what we know and also about what we do not know, what we reckon is that the effects of the WLTP supply-demand crunch, because it was quite disruptive in the value chain as well, and that was Europe, of course, that is expected to be digested soon. A lot more will depend on the outcome of the trade talks between China and the U.S. Of course, highly questionable, so we expect to have some news on this beginning of March. Now if these 2 countries can find a way to manage their rivalry to the benefit of the world economy and their own, then I think or we believe that consumer and business confidence should return positive again. And then demand can pick up, and as I explained, it can pick up extremely quickly. So we hope for a positive outcome of the trade talks in March, of course. Now the deeper or longer that uncertainty remains in half year 1, the more difficult it becomes to recuperate that lost time and the lost sales in half year 2. But of course, customers are now depleting their inventory. And somewhere in 2019, they will have to replenish them again. There is no other way. So in that sense, it's very hard to understand today how things will play out. So that is -- that should answer your question on the full year guidance and the extrapolation of the gross profit margin. Then what would auto and adjacent do? Well, it's -- that is equally hard to tell. The only thing that we can say is when we look at Q4, then adjacent has suffered more than automotive. You noticed that as well, I'm sure. And the reason is that most of that adjacent, not all, but most of it, grows through distribution. That means we have another tier in the value chain that can create an amplified bullwhip effect. Now when we look at the adjacent as such, it's a bit everywhere but mainly still in Asia. And it's Asia -- about half is China, about the other half is the rest of Asia. So we see, in fact, a bit the same happening as with automotive. It's a shift and it's supply chain twists. How this will play out in the future also there, we have not lost any business. All the business is still there. The only thing is that customers tell us they have less demand, and they have to build off their inventories. So again, the uncertainty that plays there. We do expect that adjacent because we have -- we continue to have a focus on it. We do expect it to increase in 2019 as well. So we have gained new programs, new awards there that come onboard in 2019. I hope that answers those 2 questions.
If I may. The 43% gross margin, there has to be like a top line assumption. So can you share a top line assumption for the full year? Is it minus 5%? Is it minus 10%?
If we would have been able to make that statement, we would have. But today, it's very hard. But yes, it does give us also some headroom.
We are quite comfortable about the 43% gross margins.
Okay. And then there was a question. Is that okay, Matthias?
Yes, that's a fair response. And then -- and maybe in terms of capital expenses, what should we expect for 2019 and maybe '20 as well?
So the capital expenditures, we expect around EUR 45 million, of which half is in infrastructure, and that will be invested for sure because we are in the middle of the expansion in Sofia. And the other half is more related to top line growth, so that is less predictable. But our best guess today is around EUR 45 million.
All right. And maybe one short, short add-on. In terms of income tax rate, should we anticipate any difference for 2019?
So the guidance remains 15% to 20%.
Your next question comes from the line of Stephane Houri.
Still a question on the guidance for the full year. I'm sorry for that. But I'd like to understand where you see -- where in the year you see the inflection point because starting by minus 19% in Q1, which is minus 17.5% year-on-year, is it possible that you have, according to what you see in the market and the bottoming of the others, kind of double-digit growth sequentially in Q3 and Q4? Because this is exactly what you need if you take the assumption of minus 5% for the year or maybe minus 5% is just completely out of reach from what you are seeing. That's the first question. And also, the link, the comparison that people make with Infineon and ST. I'm not sure I do understand the percentage. According to your view yourself that are linked to ADAS and ex-EV, for instance, Infineon is saying, that this is about 15% of their total automotive sales. So can you help us in having kind of comparison about that?
Okay. On your first question, full year guidance, when do we see the inflection point? We don't know. We can only make assumptions based on what we see today, and what we see today led us to giving you a guidance as we did in the press release. What we do see, as I've said also, is that February -- I'm sorry, January and February seem to be the bottom. So there is already a slight increase in March. And the guidance for Q2, we will give in with the results of Q1. So we cannot give you more information on that. Then can you repeat your question on Infineon again?
Well, yes. What would you -- how do you think you are exposed to ADAS and ex EV? Because Infineon basically is saying 15% of the automotive sales is ex EV and ADAS and the rest being, I would say, the global market for automotive. Can you give a comparable number for you?
Well, what we have in exposure in terms of the electric powertrain is mainly in current sensors, temperature sensors and embedded drivers. That's -- those are the main product lines that are exposed to EVs. But they are equally exposed to hybrids and equally exposed to internal combustion engine as such. We do not give any numbers on our distribution on our product families. We don't do that. But if you look at Infineon, when they talk about EV, it's power management, so power -- the IGBTs, et cetera. And when they talk about ADAS, they talk about their -- as far as I understood, about their highly complex microprocessors for ADAS. Both of which -- both those type of product lines, we do not carry.
Okay. Understood. And maybe if I can ask to Karen to repeat the comment she made on OpEx level. I -- if I understand well, we take the level of Q4 per quarter, and we do a small increase. Or -- yes, that's correct, right?
Q4 times 4 plus a small increase.
Okay. And this kind of seasonality on the OpEx or not at all?
Not really. No, no, no.
Your next question comes from the line of Jeff Osborne.
One quick question I had on my end is just you mentioned that the orders for March were getting better. Can you talk about which geography that was from? You pointed us to following car sales and the bullwhip effect. But I just wanted to get a sense of where you're seeing some improvement.
Sorry, but that level of detail, I don't have right here.
Okay. Any sense then, looking back, you highlighted the inventory in the channel as a problem. Can you talk about the acuteness or the severity of the problem by geography? Is it safe to say that China has the biggest problem, followed by Europe, and then maybe the U.S. is potentially a little bit better?
Yes, I would say that China was more or less flat. For example, in Q4, they were more or less flat in auto. So it was the rest of Asia that largely increased. In North -- so in the Americas, it was also a slight increase for auto and the same for adjacent. So slight increase, not enormous. And Europe was down in automotive, and again, that was mainly due to the crunch we had due to WLTP.
I meant -- I'm not sure I understood your response. I was asking about the inventory at your customers. Where is the severity of the problem? Yes, I was -- is the bulk of the inventory in the channel in China, followed by Europe, and the U.S. is a little bit more normalized? Or which geographies do we need to monitor to then get comfort that this bullwhip effect that you're alluding to is starting to go away and we've hit the bottom as you described?
Yes. We don't have exact figures right here. But to what's -- what I feel is probably that Europe and Asia have probably a bit more inventory than the U.S. would have at this point in time.
There are no further questions at this time. Please continue.
Okay. Thank you, operator, and thank you, dear audience. We hope to welcome you to our next earnings conference, which will take place on April 23, which is the same day as our shareholders meeting. Have a good day. Thank you again. Goodbye.
That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please standby.