Hello, welcome to Melexis Q3 2020 results call. My name is Rinkel. I will be your coordinator for today's event. Please note, this conference is being recorded. For the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero. You will be connected to an operator. I will now hand you over to your host, Françoise Chombar, to begin today's conference. Thank you.
Thank you, operator. Dear audience, amidst all the economic, social, and health-related strains, I hope you are all holding out well. Thank you for attending the Melexis third quarter earnings call. Let's first get a view on the overall business and then dig into the financials. After that, our CFO, Karen van Griensven, and myself will be happy to answer any question you may have. Let's look at the overall business. After a thorough low in Q2, the third quarter came out quite a bit better than we guided. During the quarter, customer sentiment kept improving, and September saw a substantial uptick in orders. Thanks to proactive supply chain and inventory management, Melexis was able to meet this increased customer demand, leading to a quarterly sales growth of a nice +21% versus the previous quarter, and this despite a 2% negative impact due to a weakening U.S. dollar.
We estimate inventory that customers today to be still at low levels. The current order book is steering towards a sales growth of about 15% quarter-on-quarter, though we still have to guard against uncertainties surrounding the current COVID-19 wave in many parts of the world. The rebound is mainly spurred by Asia, and particularly China, where car sales are showing growth versus the same quarter in 2019 and 2018 from June to September in a seemingly sustainable way, whereas other areas of the world are rather stuttering into a recovery. I'd like to highlight that in these on/off pandemic times, our teams have been remarkably resilient and productive. Our product launches are even accelerating. What I'm really happy about is that half of the sensor and driver components launched so far this year were specifically conceived and designed for adjacent markets.
They include smart drivers for motorcycle pumps and best-in-class acoustic and torque performance drivers for fans and pumps in home applications and portable tools. We continue to expand our already extremely broad latch and switch portfolio to serve cost-sensitive applications such as power tools, PCs, servers, and home appliances with features that simplify design and ensure stable magnetic characteristics. Some of our launches target both adjacent and automotive markets. For example, a new universally applicable 3D position sensor for automotive and industrial markets, one that can redefine the way a wide number of applications are designed in HMI, Human Machine Interface, top column sensor stack, and body control because of its strengths, high sensitivity, and versatility, coupled with low power and small size. We also released our third generation QVGA fully integrated time-of-flight solution, which we already announced last year when we launched its bigger VGA brother.
These 3D camera solutions are ideal for automotive use cases like driver monitoring systems, hand movement and robust gesture recognition, and in-cabin monitoring systems. They deliver intrinsic robustness with respect to scenes with low contrast and strong sunlight, which are usually a severe challenge for conventional 2D image sensors. This makes them ideal for applications where reliability and availability of data is important. These twin brothers are also targeting other markets and applications, such as robust people counting and object or obstacle detection. Last but not least, our automotive embedded light family now also provides intelligent animated lighting capabilities that help our customers to enhance modern safety features such as driver assistance prompts and vehicle status information. In the third quarter, the outperforming product lines were embedded motor drivers, temperature sensors, and the magnetic sensor product families.
Nine months year-to-date, the adjacent portion of our sales grew 50% versus the same period last year. That is in line with our strategic intent. All in all, we are cautiously positive for the short term while we remain fully confident in the growth potential of both our automotive and adjacent markets longer-term. For more insights into the financials, I now turn you over to our CFO. Karen, please go ahead.
Thank you, Françoise. Welcome everybody. A bit more on the financial figures for the third quarter of Melexis. The sales for the third quarter of 2020 were EUR 121.6 million, a decrease of 1% compared to the same quarter of the previous year, and an increase of 21% compared to the previous quarter. The euro-U.S. dollar exchange rate evolution had a negative impact on sales of 2% compared to the same quarter of last year, and a negative impact of 2% compared to the previous quarter. The gross result was EUR 49 million or 36.9% of sales, a decrease of 9% compared to the same quarter of last year, and an increase of 16% compared to the previous quarter.
Here we can add as well that the revaluation of the Melexis inventory, due to the weakening U.S. dollar versus the euro, resulted in an exceptional negative impact of 2.4% on the same third quarter gross profit margin. R&D expenses were 15.4% of sales. G&A was at 6% of sales, and selling was at 2.6% of sales. The operating result was EUR 15.7 million or 12.9% of sales, a decrease of 14% compared to the same quarter of last year, and an increase of 55% compared to the previous quarter. The net result was EUR 14.9 million or EUR 0.37 per share, a decrease of 3% compared to EUR 15.4 million or EUR 0.38 per share in the third quarter of 2019, and an increase of 54% compared to the previous quarter.
For the next quarter, we expect our sales to grow in the range of 15% with a euro-U.S. dollar rate of $1.18. I would like to now open the question and answer session. Please go ahead, operator.
As a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. You will be advised when to ask your question. Star one on your telephone keypad now. We have few questions in the queue. The first question comes from the line of Ruben Devos from KBC Securities. Ruben, you're unmuted. Please go ahead.
Yes. Good morning. Thanks very much. I got two, basically. The first one relates to the great performance of the embedded motor drivers, temperature sensors and magnetic sensors. Can imagine there are many applications for these line of products. I was curious whether you could talk a bit about those applications which may be seeing accelerating growth rates and looking at next year and beyond, where you expect to allocate a higher share of your R&D spend, possibly. That's the first question, then the second one relates to COVID. The pandemic and the effect on businesses is very much in focus again. I was curious whether you could talk a bit about how you assess the risks related to COVID, and now that we're in a second wave, are there any differences maybe or similarities you'd like to point out versus the first wave that we should take into account?
Thank you very much.
Okay. Thank you for your question. On question number one, why are these three specifically growing in Q3? As far as embedded motor drivers is concerned, this has mainly to do with the fact that electrification of the automotive engine is clearly in the focus of all the OEMs. On the other hand, also many of these embedded motor drivers are also being used, not only for engine control but also like pumps and stuff like that. Also in the cabin, for example, for air conditioning. It's a general pickup because the products we make are really highly integrated and very suitable to be used in decentralized environments like these pumps or valves that are used for the thermal management of batteries, and particularly of battery electric vehicles. That's the embedded motor drivers. Magnetic sensors. The magnetic sensor product family is very large.
It goes from position sensors over, say, the simpler but highly integrated latches and switches as well as current sensors. There is a huge number of products that are part of this family. They are driven by multiple trends. Also the electrification in cars, but also, the higher integration of transmission, of more comfort, more safety functions in cars. It's a multitude there. Plus, many of those, as I mentioned in my introduction, are also usable in industrial and consumer markets in general. We see that growing as well.
The last one, you mentioned pressure, but in fact, it's temperature sensors that are high in demand, and they have been so since the start of the COVID-19 pandemic, because they are used in a large number of different applications that are there to help individuals and help organizations, and help also countries in the end, to battle against the virus. For example, they are used in all the diagnostics, in most of them, and probably the majority of the diagnostics. When you have to analyze DNA, you need to have a very stable environment, and temperature plays a very big role in there. Almost all of the diagnostics that are used, that are being built for analyzing, whether it's COVID-19 or other, like DNA analysis, they need very accurate temperature sensing, because it makes the results really reliable. These are professional equipments.
They are used also, and they have been used in the past as well already, in thermometers. Ear thermometers, forehead thermometers, et cetera. Ours is extremely small, so we have been miniaturizing this temperature sensor for a long time. We've been working on this, and it's a fact that we're the smallest medical-grade temperature sensor in the world, and nobody has a better one or a smaller one, for sure. These handheld devices need to be extremely small. You have them in thermometers for building access. We also have some of them in all of our sites to measure temperature when people come in. Those handheld devices that you see in airports and train stations, et cetera, they also can use our temperature sensor.
What we see as a new avenue that has been accelerated by this pandemic, so that's definitely also a silver lining, is that telehealth or telemonitoring systems start really to come up now. You've probably seen in the news, it's a good example of this, but there are other examples, but this one is particularly close to home, is Byteflies. That's a startup company that is doing pretty well now in providing hospitals with telemonitoring systems that are patches that you put on patients so that they can leave the hospital sooner, but they are still monitored by the doctors. That relieves, in fact, hospitals and care centers, so they can free up beds, in fact, much faster. I think that's a very nice application.
All of these, or many of these temperature sensors really make a difference in the world, and it's nice to see that the investment that we have done since 1999, we've been investing in temperature sensing and always getting it better and smaller, and more reliable. I think now are yielding results, and all of this is pretty sustainable business with also quite some growth potential going forward. That is on the first question. On your second question, well, to make the bridge between what I last said on the temperature sensing, in fact, we will continue to invest, from an R&D perspective, into all these markets that have growth potential. We're going more and more into the adjacent markets, which include health and well-being at large, which is not only temperature sensing, but also magnetic sensing.
We have, since a couple of years now, been focusing also on alternative mobility. That includes people mobility, but also deliveries. Motorcycles, e-motors, e-scooters, e-bikes, but also automated vehicles like for delivery. These are coming up. It's still small volume, but these are definitely coming up on campuses, big campuses, universities, hospitals, et cetera, to deliver parts to the right place, which also relieves hospital workers and caregivers. Robotics applications for factory automation. That's the second market. The third market that we see improving a lot has to do with 5G clouds, because people are working much more from home. There's a lot of current sensors and smart drivers needed for server farms.
Of course, also gaming consoles, because when people have to stay at home, they have to do something, so they start gaming more, using more these types of application, and that needs also smart drivers, current sensors, latches and switches, for example, in the joysticks, et cetera. Those are three main markets, the health, the alternative mobility, and the edge sensors and drivers for everything that has to do with 5G and cloud applications. COVID-19 risks. Yeah. Maybe it's the fact that we've learned quite a bit during the first wave, in keeping our people safe and healthy. We are applying now, without any trouble, I think our people have, already, in March, and earlier, than that also in Asia, already in January, February, our people have been able to switch literally over the weekend, to working from home. Our IT department has done that wonderfully.
We have a very clear communication strategy. We communicate a lot with our people since this pandemic started. I think people feel safe to come to work. We've had some cases, but well followed up and never any contamination case within the company, always from the outside. Always our people reacted fast. Our COVID-19 task force has a clear view on everything that's happening worldwide and is also supporting and having the support of the site managers on site. I don't see today a significant impact on our operations by COVID-19. Of course, we have sometimes we have to close for a day or two until everything's clear. We might have to close a certain area, but in the past couple of months, never, ever had we to close any of our sites completely in order to contain the risk.
I think we've learned how to live with the virus, how to battle it when it surges, and how to make sure that our customers and our business is not impacted at large. I hope that answers all of your questions.
All right. Thanks very much for the elaborate answer. Much appreciated.
Thank you.
Thank you, Ruben. We have our next question from the line of François Bouvignies from UBS. Please go ahead.
Hi. Good morning, everyone. My first question was regarding your guidance for Q4. Could you give us some color around the mix within these revenues in terms of automotive, non-automotive, would be very helpful. Given the sentiment is improving, like you said in the release, how should we think about your lead time at the moment? Do you see a bit further than Q4? I have other questions if I may after, quickly.
Okay. Thank you, François. On your first, what's the mix in the guidance? We see, in fact, everything going up, both automotive and non-automotive. We see also all regions growing or continuing growth. All three of the regions, Asia, Europe, U.S. The sentiment is indeed increasing. We don't give any guidance on Q1 yet. We will see that in February. Lead times, as we mentioned in the past, we kept our inventory quite high because also we have no indication now that there would be a turn to the worse. We are continuing that policy of keeping our inventories at a little higher level than a few years back. That is because we know that the shortages or the capacity issues upstream, they are not gone. They will return, and they are in some places already returning now.
We see this exacerbated by the fact that our customers procrastinate in keeping their inventories low, which is not a good thing. We try to make them see that this is not a good thing, but it's a hard discussion to have. Why do we do that? Is because we see that upstream, all of our suppliers are, or some of our suppliers at least, certainly in assembly, they are running really at full capacity. Somehow this will not go away. That means that the lead times might again be stretched in 2021. That's why I think it's a good thing that we kept our inventory as high as we did, and of course it surged a lot at the end of the last quarter because everybody stopped ordering and even postponed their orders, which creates this bullwhip effect as you well know.
You see that the sudden surge in orders that we saw in the third quarter, and particularly in September, we could manage that because of that high inventory, even though some of the orders we could not deliver, but most of them we could live up to.
You don't see a risk of double ordering? Yeah. You don't see a risk of double ordering in this context given the COVID-19 and you said Yeah?
We have no indications of that. Of course, there is some restocking, again, we've taken the opportunity in 2019, also now in 2020 to have more insights in the levels of inventories of our direct customers, we keep a much better eye on the end markets. That's how we can relate to what is necessary when we do supply and demand reviews inside and taking decisions on which inventory to build on which type of products.
That's very clear. Maybe you follow up on this inventory. Maybe it's a question for Karen on the gross margin. Can you explain a bit what is this revaluation of inventory because of the currency? Why do you have to do it now? What will be the impact in Q4? You mentioned as well underutilization charges. When you started the year, you expected a few 100 basis points negative for the year. You don't talk about underutilization charges this quarter. Just trying to understand the gross margin really between revaluation, underutilization charges, and mix would be great.
Okay. I can give you a bit of color on that. The revaluation has to do with, for years we had pretty stable euro-U.S. dollar conversion rates. Everybody has noticed as well that over the last few months, the U.S. dollar is now trading in another range versus the euro. We also buy quite some material in U.S. dollars, so we have a big portion of our inventory that is valued in U.S. dollars. As you all know, we have more than three months stock. It's a relative high inventory versus a few years ago. If we need to revalue that has an impact temporarily. Once the U.S. dollar stabilizes again, and now the U.S. dollar has been trading in a narrow range for quite a few months, but that's difficult to predict how that will move forward, then this effect will disappear.
Yeah, for the third quarter, this effect was in the range of 2.4%. As we have more than three months stock, this effect will also last in Q4. The effect will be expected depending on how it will further evolve, of course, the dollar. With dollar that we see today, we expect the effect to be less, but there will still be an effect.
Going to underutilization. There we can say that in the short term, we expect that the underutilization is in the range of, or we can improve 1%-2%. In the longer term, it is 3%. Looking one year ahead, it's in the range of 1%-2% that we could gain from better utilization.
Okay.
Does that answer your question?
Today, you have still one or two percentage points drag to underutilization charges. Is that right?
Indeed.
In Q3 and Q4? Okay. Just to explain, the inventory is down roughly 10% quarter-on-quarter. How much is because of the currency, is driven by the currency on the balance sheet?
You mean?
On your inventory of EUR 132 million.
Yeah.
The current, it's down 10% or so quarter-on-quarter.
Yes.
This is mainly due to currency then effect revaluation?
It's both. It's reduced material, but also reduced a few EUR million is also due to the devaluation of the U.S. dollar.
Okay.
It's also volume.
Okay, that's very clear. Okay, I see. Last time, very quickly, last question is on your tax rate and OPEX. OPEX for Q4, what should we expect? The tax rate has been very low, would you just give us an idea of what we think for the full year and maybe 2021 would be great. Thanks.
In Q4, we expect operating expenses. Well, seasonally, we see Q4 as stronger in operating expenses. We see no reason why not. Well, we expect it also somewhat to be this year. Moving forward, in general, we want to keep the growth in operating expenses at a low level so that we can have leverage in general from stronger growth in sales than growth in our expenses. That is moving forward what we expect. In Q4, we do expect definitely our operating expenses to be higher, yeah. Is that clear?
Okay. Yes, Tax rate, it's very low.
Tax rate.
No word on divi-
Yeah.
The tax rate, yeah, that's very difficult to predict. Certainly now with COVID, the product mix is a bit different than we saw. It has also to do with the profit split between the different locations in Melexis. It is quite low in Q3. Longer term, we still expect, we still guide for the 10%-15%. It might be a bit against what we see today, but when profits increase again, we also expect that our tax rates will increase again to ranges of 10%, 15%.
Okay. That's very good. I have a lot of questions from investors about dividend as well. You don't talk about dividend. Is there any plan because the situation is improving to announce again? This is my last question, I promise.
It's a bit early. We just paid out a dividend, well, an interim dividend. That's I think this week, more or less.
Last week.
Last week. Well, the next decision will be as preparation for the shareholders meeting. That will be decided on January, early February. That is still too early to say, considering all the uncertainty with COVID-19, what will be the decision then.
Thank you very much for your answers.
Thank you. We have our next question from the line of Stéphane Houri from ODDO BHF. Stéphane, please go ahead.
Yes, hello. This is Stéphane Houri from ODDO BHF. Thank you for authorizing me to ask a question. I have two, actually. The first one is that on Q4 sales guidance, honestly, I'm a little bit surprised by the optimistic tone that you have while some large countries in Europe are speaking about a new lockdown, especially in France, which is an important market for cars. I would just like to understand how you built your Q4 guidance, if you integrated some cautiousness in it or not at all, or is it based only on the visibility that you have up to now? That's the first question. The second question was to come back on the gross margin. I understand that there will be another valuation, revaluation impact from the inventories in Q4.
I was looking at my model, and the last time you reached EUR 140 million of sales quarterly, the gross margin was close to 45%. Excluding this valuation impact, is that the kind of gross margin that you are targeting? Thank you very much.
Okay. Thank you, Stéphane. On the first question, I don't think the tone that I gave was optimistic. I think it was rather realistic.
The new lockdowns that you're talking about, let's face it, Europe is just a small part of this world. The Asian countries are faring far better than we are. I think there are also reasons to believe because of the low stocks that there are, that Q4 is going to show growth as well. How much cautiousness is there in there? Well, I think we also mentioned, or I mentioned in my comments in the press release that, of course, if the COVID-19 pandemic in Europe or elsewhere in the world, in the U.S. it's equally bad, let's say, as in Europe. If that will have major effects, knock-on effects, then of course it could be that it will affect also already the Q4 sales. Today we have no indications of that. Right. Now, I don't think you should qualify my tone as optimistic.
What we t ry to do is be as realistic as possible with the inputs we have at this moment in time. Nobody knows what will happen in the next month.
Okay.
Yeah.
Okay.
I hope that clarifies somewhat your question. Is that okay, Stéphane?
Yes. I was not saying that you were overly optimistic, but you were just speaking about improving demand and shorter lead time, et cetera. I thought it was a bit surprising compared to the fact that the market is also apparently acknowledging the fact that there is an inflection point in the situation as we speak. I understand what you say. Thank you very much.
Okay, good. Karen, you said.
On the gross margin, yeah, we have short term then the effect of the USD on the revaluation. We have some potential up by better utilization. Indeed, there is another effect that has been influencing the gross margin quite negatively over the last years, and that is the product mix. The new products, the growth is coming from different products than in the past. We are growing more with drivers than products like pressure sensors, also temperature sensors. The temperature sensors have strong margins, but others have quite weak margins, and that is also putting pressure on the gross margin, making the 45% gross margin not realistic in the foreseeable future. Does that answer your question?
Yes. What is realistic in your view?
We give some guidance at 2.4% for the revaluation, 1%- 2% for-
These are the main elements that can help you in guiding for moving forward.
Okay. roughly between 40% and 41%, something like that, right?
It will be closer to this. It is always difficult to predict because the product mix, some products have positive impact, so we cannot guide it exactly, but yes, we should talk in these ranges.
Okay. That was it for me. I leave the floor to others. Thank you.
Thank you.
Thank you. We have our next question from the line of Janardan Menon from Liberum. Janardan, please go ahead.
Hi. Good morning. Thanks for taking the question, and congratulations on a very strong set of results. Many of my questions have been answered, but just a few more. Your comment on that half of the products launched in the sensor and driver components were specifically designed and conceived for adjacent markets. I was just wondering, what is the timescale for those new launches to start getting designed in and starting to convert into commercial revenue streams? Is that something that we should expect, say, within 2021 itself? Would that be more in the second half of the year? As that comes through, should we be expecting sort of a stronger upturn in your non-automotive revenues?
Well, the higher attention that we spend towards looking at how we can apply our technologies into more than just automotive, that strategic intent has been there since a couple of years, but it does take time to identify the right areas where we can play best. That translates, of course, first into new product launches because you have to design the products. It takes one or two years to really design the products, but it takes also a couple of years before you can identify the right specification that you can design them to. It has taken us a bit of time, but the product launches are a lead indicator indeed, for future growth in adjacent markets that we feel can be higher, let's say. That growth can be higher than the one we also still see in automotive.
Some of the products that we have launched are already in production with lead customers, and we see quite some traction going forward in several of those. You will see that gradually growing over the next couple of quarters, a bit in the same way as you've seen it in the last couple of quarters. We expect this to continue. It will not move the needle immediately as such, but because it is spread out over different products and different applications and different end markets, you will see a slow growth going forward. That's how we like it also. I've mentioned also in my introduction that if you look at the adjacent portion of our sales year to date in the nine months of 2020, and you compare it to the same period in 2019, we've grown 50%, 50%.
Of course, as I mentioned before, in one of the answers to the questions, with the first question, is temperature sensors, for example, was largely helped by the pandemic. As we know, this pandemic is probably not the last one, and we see that health-related and well-being-related, also mental health-related applications will continue growing. We believe we're in the right market, so pretty sustainable.
Understood. Thanks. Then just on the demand pattern. One area in the automotive market which has been doing exceptionally well in Europe, has been the EV market, where growth rates are very high right now. China has also started showing improvement from the second half of the year. There has been a feeling that perhaps Melexis was a little bit more focused in the past on the internal combustion engine powertrain. Your comments also earlier were on the fact that your embedded motor drivers, magnetic sensors, current sensors were seeing quite a strong pull from electrification, battery management, et cetera.
Can you just give us a qualitative comment on how you are seeing electrification or EV growth rates come through on your order book, and whether you see that as being a more important driver going forward on your overall automotive sales than it has been in the past.
Well, electrification is not a new trend. It has been there for quite a long while, and we've seen it coming, and therefore, we've also directed our R&D investments in the past couple of years towards the electrification of vehicles. That has an effect on the powertrain, of course, as you say. That will definitely continue. It's not only powertrains. You see a lot of needs, or we see a lot of needs in the market for everything else as well. Meaning, body safety, chassis is increasing. We see increasing demands. What we do see that has somehow changed, let's say, is that the autonomous drive is further away than people thought. However, there is a strong drive towards still assisted driving. driver monitoring systems, helping both the driver and the road users, also pedestrians, et cetera, to understand what's happening.
You see also light applications that are needed for electric vehicles, for example, to show state of charge. I don't know, all these things. You see that the electrification or the EVs and the new energy vehicles are driving a lot of innovation overall, not only in the powertrain but also on the edges of that electrification. I think it's fair to say that Melexis plays in a bit everything surrounding that new energy as such. We're not at the end of our inspiration as far as innovation is concerned in mobility as a whole.
Understood. There's a very last small question from me. You've said that you estimate that inventory levels are low at customers. Does that also apply to the channel, or is your comment specifically on your tier ones or OEM customers?
It's more outspoken in the direct customers, in that area. In the distribution channel, we would say it's rather at level or a little too low, but definitely not too high. The distribution channels are better equipped, I would say, than the inventory levels at our customers, and that's, as I mentioned before, it seems to be a concrete choice of many of our direct customers, and a choice that we don't like that much. Because, of course, they want to preserve cash, and they get consultants to tell them that's the way to do it, is to keep their inventories low, but the collateral damage of such policies is often worse than the disease that they want to reduce. Inventory levels, direct customers, lower than in the distribution channel. That's what we're seeing.
Understood. Thank you very much.
You're welcome, Menon.
Thank you. We have two more questions in the queue, and our next question comes from the line of Marc Hesselink from ING. Marc, please go ahead.
Yeah, thank you for taking the questions. Firstly, I also want to come back on those inventories. Quite nicely, you have been able to sell it out of your inventories. I think that's something you discussed before in the call and also in previous calls, that's very well-positioned. Does it mean that over the coming quarters, you want to build up the inventories a bit again, to be able to react again? If you want to build that up, what kind of timeframe can you do that? I guess that the cycle times in your foundry are relatively low, and you maybe also have some time to prepare your supplier there. How do you think of that?
Well, the inventory at the end of Q3 was, of course, lower than at the end of Q2, but that was because the end of Q2 was also particularly high because of the bullwhip effect. What we try to do is to keep it at least as stable as possible so that we can anticipate on potential surges in demand or short-term demand. It is not so much the surges in demand, but the short-term reaction time that is put upon us by our customers. I think we are going to continue the policy that we have carried over the last two years, let us say, is to pre-produce where there is a decent confidence that these products will not be obsoleted soon.
If we see that products like current sensors or latches and switches, smart drivers, whatever, all these products where we know that they are used by multiple customers, that they are not going to disappear soon, there we sometimes take more risk. Of course, risk is very relative in that sense. It's more risky to not build up inventory and then not be able to deliver, than it is to have it in inventory for a little longer. The cost of not being able to deliver is much higher. I think we are not going to change our inventory policy as such. It will, of course, depending on supply and demand, it will continue to fluctuate. That's the idea. Inventories must fluctuate.
Okay, very clear. The second question is on the CapEx. You continue to run at a very low level. I'm not sure what exactly now is the status of the new facility in Sofia. You still have to put a lot of CapEx in there. What do you expect for the fourth quarter, and also is there going to be a catch-up effect in the years after, or is that not the case?
Yeah, we expect an increase in Q4 because the Sofia building is moving quite fast now. Although there have been delays throughout the year, we will see an upturn in Q4 to be continued in Q1, or to even further increase in Q1. Overall, we expect investments in the range of EUR 25 million for the full year. Where we were at around EUR 17 million, I think, at the end of Q3.
Clear.
For the normal CapEx, that means that we stay at low levels still for a while. The increase is mainly coming from the investment in Sofia.
Okay. Also clear. Final question, also coming back on the gross margin. You already explained that it's at a 41%-42% level, because of the mix is probably where it should be now for a while. If we look further out when the Sofia facility is fully up to steam and the new products become more mature, is there a structural reason why you not move back to the 45%? How is that trajectory over the, let's call it a five-year period?
That's a very long period. It can improve indeed because of indeed further capacity utilization. Correct, but to reach the 45%, that is extremely stretched in the foreseeable future.
Okay. Very clear. Thanks.
Thank you, Marc. We have a last question from the line of Robert Sanders from Deutsche Bank. Robert, please go ahead.
Hey, good morning. Thank you for fitting me in. I've just got two questions. Can you remind me first your exposure to automotive lighting? The reason I ask is ams have been quite vocal about wanting to do the driver IC alongside OSRAM's LEDs. OSRAM, as you know, are the clear market leader. I have a follow-up.
Yeah. I was waiting for your second question, but okay, let's answer your first question. I believe that the automotive lighting of OSRAM is a little different from ours. I think that it's more exterior light, for the time being, whereas we are more interior lighting. We do not give out an exposure as such versus our sales. As far as we know, in the area where we play, mainly the interior lighting and the animated lighting, we today have about at least 70% market share, as far as we know.
Got it. The second question. Thanks for that. The second question would just be about the combustion engine business. I think it's about 30%, 35% of your revenue. As development slows down and maybe even stops for combustion engines, do you think that would mean your business here would become a kind of cash cow, the sort of position sensing business, or do you think that those ICE platforms, because they'd be restructuring, would push more price pressure down upon you? Thanks.
If I understood you well, Robert, you're saying combustion engine is 75% of our business?
No, 35% or something like that. Something like 35%, right.
Where did you get that information? Because that seems a bit-
Too high.
Wrong, I would say.
Oh, okay. Well, what is the number?
Definitely not. I mean, no. I don't think where you got that information from, definitely not from Melexis. I can definitely tell you that this is not the case at all. It might have been that maybe 10 years ago, but yeah, BEVs were, at that time, also less than 1% of the market. Of course, it's far less. I'm not going to give you a percentage because it's difficult to say. Certainly because, it's not only about powertrain, it's also about all the other devices that we deliver for chassis, body, and safety systems. So difficult to put a percentage on that, but I can assure you that the exit out of the internal combustion engine cars has been anticipated years ago, and that meanwhile, we have been investing quite a lot in multiple areas, that are even powertrain agnostic to begin with.
There are a lot of new applications in electrified vehicles, whether they are hybrids or EVs or fuel cells, that provided for a lot of opportunities for our drivers and sensors to get designed into. I have zero worries on the ICE exit because the ICE exit is part of our business plan. Please.
Okay
Let's kill that 35%.
Sure. Just in principle, as these companies restructure, I'm sure you see that they're laying off tens of thousands of people, and potentially they will stop altogether innovating on that platform. Do you think that the most likely scenario is that the remaining business you have, however small, will become a kind of cash cow, or is it just too early to say?
Okay. In that sense.
Usually in automotive, you have little chance to increase your prices at end of life. You always have some products that are end of life, but you have many more others that are not end of life and that are starting up. It's hard for a company like Melexis or any semiconductor company to just say, "Okay, I'm going to raise the price on our old products." Yeah, then you don't get any new business. I don't think that is a realistic avenue to follow.
Okay.
We like all of our customers, and we try to make it a balanced relationship. Of course, competition is always there. It's not that we're going to lower our pricing at the end of life, but we cannot increase it that happily neither.
Got it. The R&D goes away, but the gross margin doesn't change. Okay, thank you.
Yeah, you could say it like that. Yeah.
Thank you, Robert. We have no more questions in the queue, so I will hand it back to you for any closing remarks. Thank you.
Okay, thank you for having joined us today for your sharp questions. Our next earnings conference is scheduled on February 3rd next year, when we will publish our full year results. Until then, please do keep safe and stay healthy. Goodbye.
Thank you for joining today's call. You may now disconnect your line.