Hello, and welcome to Melix's Q3 2020 results call. My name is Rinkle. And I will be your coordinator for today's event. Please note this conference is being recorded. And 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. I will now hand you over to your host Franciwa Chamba 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 myself, we'll be happy to answer any question you may have. So let's look at the overall business After thorough low in Q2, the 3rd quarter came out quite a bit better than we guided.
During the quarter, customer sentiment kept improving and September saw a substantial uptick in order. 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 plus 21% versus the previous quarter and this, despite a 2% negative impact due to 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-nineteen 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 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.
And 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 top performance drivers for fans and pumps in home applications and portable tools. We continue for you to serve cost sensitive applications such as power tools, PCs, service 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 three d position sensor for Automotive And Industrial market one that can redefine the way a wide number of applications are designed in HMI, human machine interface, top column center stack and body control because of its strength, 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 three d 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 applications where reliability and availability Twin Brothers are also targeting other markets and applications, such as robust people counting and object or obstacle detection. And last but not least, our Automotive Embedded Light family now also provide intelligence, 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 9 months year to date, the adjacent portion of our sales grew 50% versus the same period last cautiously positive for the short term, while we remain fully confident in the growth potential of both our Automotive turn you over to our CFO.
So Karen, please go ahead.
A bit more, on the financial figures for the third quarter of the next So the sales for the first quarter of 2020 were 1,000,000, a decrease of 1% compared the same quarters of the previous year and an increase of 21% compared to the previous quarter. The euro U. S. Dollar exchange rate resolution had a negative impact on sales of 2% to the same quarter of last year and a negative impact of 2% compared to the previous quarter. The growth results were 49000000 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 Malaxis event due to the weakening U. S. Dollar versus the euro resulted in an exceptional negative impact of 2.4 percent on the same third quarter gross profit margin. R and D expenses were 15.4% of sales, G and A was at 6% of sales and selling was at 2.6% of sales. The operating results was 1000000 or 12.9% of sales, a decrease of 14% compared to the same quarter of last year's and an increase of 55% compared to the previous quarter.
The net result was 1,000,000 or 0 per share, a decrease of 3% compared to 1,000,000 or per share in the quarter. So for the next quarter, we expect our sales to grow in the range of 15 dollars with a euro us dollar rate of 1.18. I would like to now open the and answer session.
You. We have few questions in the queue. And our first question comes from the line of Ruben Devos from KBC Securities. Ruben. You're unmuted.
Please go ahead.
Yeah. Yes. Good morning. Thanks very much. I got 2 basically, the first one relates to, yeah, the great performance of the embedded motor drivers and pressure sensors and magnetic sensors.
Can imagine there are many applications for this line of products. So I was curious where you could talk a bit about those applications, which may be seeing accelerating growth rates and, you know, looking at next year beyond where you expect to allocate a higher share of your R and D spend possibly. That's the first question. And the second one relates to, yeah, COVID, you know, the, you know, the pandemic and the effect on businesses, is very much in focus again. Yeah, 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 questions. So on question number 1, why are the why are these 3 specifically growing in Q3? Well, as far as embedded motor drivers, is concerned. This has mainly to do with the fact that, electrification of, the automotive of the Hotobotive engine is clearly in the focus of all the OEMs.
And on the other hand, also, many of these embedded motor drivers are also being used, so not only for engine, control, but also, like, pumps and and and stuff like that, but also, in the cabin, for example, for air conditioning. So it's a general, pickup because the products we make are really highly integrated and very, 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. So that's the embedded motor drivers. Then, magnetic sensors, the magnetic sensor product family is very, very large.
It goes from physician sensors over, latches. So say the simpler, but, highly integrated latches and switches as well as, as current sensors. So there is huge number of, of products that are part of this family. They are driven by, multiple trends. So also the electrification, in cars, but also, yeah, the higher integration of transmission, of, more comfort, more safety functions in, in in cars.
So it's a multitude there. Plus many of those, as I mentioned, in my, in my introduction, are also usable in, in industrial and consumer markets in general. And we see that growing as well. Then 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-nineteen, pandemic because they are used in large number of different applications that are there to help individuals and help organizations to 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 because when you, when you have to, analyze DNA, you need to have a very stable temperature, a very stable environment and temperature plays a very big role in there. So all almost all of the diagnostics that are used that are being built for, analyzing whether it's COVID-nineteen or other like DNA analysis, they need, they need very, very accurate temperature sensing. Because it makes the results really reliable. And these are professional equipments. Then they are used also, and they have been used in the past as well already in thermometers, ear thermometers, forehead thermometers, etcetera, but ours is extremely small.
So we have been miniaturizing this, temperature sensor for a long time. We've been working on this and we can and it's a fact that we're the smallest medical grade, temperature sensor in the world and nobody has, has a better one or a smaller one for sure. So, these handheld devices need to be extremely small. Then you have, them inter monitors for access building access, yeah, we also have, some of them in all of our sites to measure temperature when, when people come in. And those handheld devices on, that you see in airports and train stations, etcetera.
They also can use our temperature sensor. And then what we see as a new, as a new avenue that has been accelerated, by this pandemic. So that's definitely also a silver lining is that telehealth or tele monitoring systems start really to, to come up now. And, you've probably seen in the news a good example of this, but it's there are other examples, but this one is particularly close to home is bite flies And that's a startup company that is doing pretty well now in providing hospitals with tele monitoring 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. So that relieves, in fact, hospitals and care centers from, so they can free up beds in fact, much faster.
And I think that's a very nice application and all of these or many of these temperature sensors really make a difference in, in the world and it's nice to see that the investment that we have done since 99, 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. So that is on the first question. On your second question, well, to make the bridge between what into all these, growth potential, all these markets that have growth potential. So we're going more and more into the adjacent markets, which include health, health and well-being at large.
Which is not only temperature sensing, but also magnetic sensing. We have quite some since a couple of years now have been focusing also on alternative mobility that includes, people mobility, but also deliveries. So, motorcycles, e motors, e scooters, e bikes, but also, vehicles, so automated vehicles like, for, for delivery, these are coming up. It's still small volume that these are definitely coming up coming up on campuses, big campuses, universities, hospitals, etcetera, to deliver, parts to the right, to the right place which also relieves hospital workers and caregivers. But also robotics applications for factory automation.
So these are, that's the 2nd market and the 3rd 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 in there's a lot of current sensors and smart drivers needed for service farms. And of course, also gaming consoles that, because when people have to stay at home, they have to do something. And so they start gaming more, using more, these, types of, application. And that needs also smart drivers, current sensors, latches, for example, in the joysticks, etcetera, So those are 3 main markets, the health, the alternative mobility, and the edge census and drivers for everything that has to do with 5G in cloud applications.
COVID-nineteen 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, in Asia already in, in January, February, our people have been able to switch literally over the weekend, to working from home. So our IT department has done that wonderfully. We have a very clear communication strategy. We communicate a lot with our people since 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, from the outside. But always, we reacted our people reacted fast. Our COVID-nineteen task force is has a clear view on everything that's happening worldwide and is, also supporting and having the support of the site managers on-site. So I don't see today, a significant impact Of course, we have sometimes we have to close, for for a day or 2 until, everything's clear.
We might have to close a certain area, but never in the past couple of months never ever had we to close our sites, any of our sites, completely in order to to contain the risk. So 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. Thank you.
Thank you, Ruben. We have a next question from the line of Franco Bovini from UBS. Please go ahead.
My first question was regarding your guidance for Q4. Could you give us some color around the mix within this, you know, revenues in terms of automotive, non automotive, would be very helpful. And 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? Have other questions, if I may have to quickly.
Okay. Thank you, Francois. So on your first, what's the mix in the guidance? We see, in fact, everything going up, both automotive and non automotive. And we see also all regions going, or continuing, growth.
So both Asia or both, I mean, whole 3 of the regions, Asia, Europe, U. S. The sentiment is indeed in reasing, we don't give any guidance on Q1 yet. We will see that in February. Lead times, well, the, 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 worst.
We are continuing that, that policy of keeping our inventories at a little higher level than a few years back. And that is because we know that the shortages or the capacity issues in in, order capacity issues upstream, they are not gone. They will return and they are in some places already returning now. So 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, it's a hard discussion to have.
But we and why do we do that is because we see that up stream, they're all of our suppliers are, or some of our suppliers, at least certainly in assembly, they are they are running really at full capacity. Somehow this will, this will not go away. So 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 that 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 didn't want and even postponed their, their, their orders, which creates this bullwhip effect as, you well know.
But you see that the the Southern surge in orders that we saw in the third quarter, and particularly in September, yes, we could manage that because of that high even though some of the orders we could not deliver, but most of them we could live up to.
So you don't see a risk of double ordering, yes, you don't see a risk of double ordering in this context. Given the COVID and you say?
No, we have no indications of that. Of course, there is some restocking, but again, we've taken the opportunity in 2019, but also now in 2020, to have more insights in the levels of inventories of our direct customers but also of, so we keep a much better eye on the end markets. And, 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.
Okay. That's very clear. And maybe you follow-up on this inventory and maybe it's a question for Karen on the gross margin. So Can you explain a bit, you know, what is this evaluation of inventory because of the current I mean, why do you have to do it now? And what will be the impact in Q4?
And, you know, you mentioned as well under it is on charges. When you started the year, you expected a few 100 basis points negative for the year. You don't talk about under acquisition charges this quarter. So do you have any I mean, just trying to understand the gross margin, really, between a revaluation under attestation charges and mix would be great.
Okay. I can give you a bit of color on that. So yes, the revaluation has to do with with, well, 4 years, we had pretty stable euro dollar conversion rates. But over yes, everybody has noticed as well that over the last few months, the dollar is now trading in another range versus the euro. We also buy quite some material in dollars, so that we have a big portion of our, inventory that is valued in US dollar.
And as you all know, we have more than 3 month stock So it's a pretty well, it's a relative high inventory, versus a few years ago. So if we need to revalue that, that has an impact temporarily. Once the dollar stabilizes again, and now, the 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 effect will disappear. But, yeah, for the third quarter, this effect was in the range of 2.4 percent as we have more than 3 months stock.
This effect will also last in Q4. But the effect will be we expect it depending on how it will further evolve, of course, the dollar. But with dollars that we see today, we expect the effect to be less, but there will still be an effect. Going then 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% to 2%. In the longer term, it is 3%.
But looking 1 year ahead, it's in the range of 1% to 2% that we could see gained from battery utilization.
Okay. So you still have today, you have still 1 or 2 percentage points drag to other antigen charges. Is that right? In Q3 in Q4? Okay.
Okay. And just so to explain, the inventory is down roughly 10% quarter on quarter. So how much is because of the currencies is driven by the currency on the balance sheet. It's You mean, River. On the on the on your inventory, you know, of 132,000,000, the current it's down 10% or so quarter on quarter.
This is mainly due to currency then affect the revaluation?
It's both. It's reduced material, but also reduced a few 1,000,000. It's also due to the revaluation of the dollar.
Okay, that's very clear. And okay, okay, I see. And last time, very quickly, question is on your tax rate and OpEx, OpEx for Q4, should we expect? And the tax rate has been very low. So could you just give us an idea of what we think for the full year and maybe 'twenty one would be great?
So in Q4, we expect operating expenses, while seasonally we see Q4 stronger in operational expenses we see no reason why we expect it also somewhat to be, this year. But moving forward, in general, we want to keep the growth in operational 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 But in Q4, we do expect definitely our operational expenses to be higher.
Yes. Yes. Yes. And and tax rate, I mean, it's very low and and and no words on. Yeah.
The tax rate, Janette, very difficult to predict certainly now with COVID. The product mix is a bit different than, than we saw. It has also to do with the profit split, which the different locations in Alexis. So it is quite low in, in Q3 longer term, we still expect, we still guide for the 10% to 15%. It might be a bit against what we see today, but When profits increase again, we also expect that our tax rate will increase again to ranges of 10%, 15%.
Okay. That's very, very good. And I have a tough question from investors about dividend as well. You don't talk about dividend. Is there any plan because the situation is improving to to announce again?
And this is my last question.
It's a bit early. We just paid out a dividend, well, an interim dividend. I think this week more or less. Last week. And, we will, well, the next decision will be as preparation for the shareholders meeting.
So that will be decided on early I mean, and January, early February. So, and that is still too early to say, considering all the uncertainty with COVID, what will be decision then.
We have a next question from the line of Stephen Hori from ODDO BHF. Stephen, please go ahead.
Yes. Hello. This is Stephane Henry from OHS. Thank you for authorizing me to ask a question. I have 2 actually.
The first one is that on Q4 sales guidance, honestly, I'm a little bit surprised by the, by the optimistic tone that, that you have while Some large countries in Europe are speaking about a new lockdown, especially in France. Which is an important market for Carls. So, 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 that you have up to now.
That's the first question. And the second question was to come back on the gross margin. So I understand that there will be another evaluation revaluation impact from the inventories in Q4. But I was looking at my model and the last time, you reached 1,000,000 of sales quarterly. The gross margin was close to 45%.
So excluding this valuation impact, is that the kind of gross margin that you're targeting Thank you very much.
Okay. Thank you, Stefan. 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. And, the, the Asian countries are 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. And is there how much cautiousness is there in there? Well, I think that we also mentioned in our, in our, or I mentioned in my comments in the press release, That's of course, if the COVID-nineteen pandemic in Europe or elsewhere in the world.
In the U. S, it's still it's equally bad, let's say, as in Europe. If that will have major effects, knock on effects. Yeah. Then of course, it could be that, it will, it will affect also already the Q4 sales.
But today, we have no indications of that, right? Now, yeah, I think, I don't think you should qualify, my tone as optimistic.
We what we try to
do is be as realistic as possible with the inputs we have at this moment in time, and nobody knows what will happen in the next month. So that's I hope that well, that clarifies the somewhat your question. Is that okay,
Yes. Yeah. Yes. Yes. I was not saying that you were overly optimistic, but you were just speaking about improving demand and shorter lead time, etcetera.
And I I thought it was a bit, surprising compared to the fact that the market is also currently acknowledging the fact that there is an inflection point in the situation as we speak, but I understand what you say. Thank you very much.
Okay. Good. And then, Karen,
you say so on the gross margin, Yeah. We we have, short term and the effect of the dollar on the reevaluation. We have some potential up thanks to, I mean, by better utilization. But indeed, there is another effect that is negative been influencing the gross margin quite negatively over the last years. And that is the product mix.
So the new products we've The growth is coming from different products than in the past. We are growing more with drivers and products like pressure sensors also temperature sensors. Some have, yeah, 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. And so what is realistic in your view?
Well, we give some guidance at 2.4% for the reevaluation. 1 to 2% for, so it is with, yeah, these are the main elements that can help you in guiding for, moving forward.
Okay. So roughly, between 40% 41% to something like that, right?
It will be closer to to this. It's always difficult to predict because the product mix some some products have positive impact, so we cannot guide it exactly, but yes, we should talk in, in these ranges.
Thank you.
Thank you. We have a next question from the line of Janardan Menin 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 on, that half of the products launched in the sensor and driver components were, you know, specifically designed and conceived for adjacent markets. I was just wondering, what is the time scale for those, new launches, to start getting designed in, and starting to convert into, you know, commercial revenue streams.
Is that something that we should expect, say, within, 2021 itself? And would that be more in the second half of the year? And as that comes through, should we be expecting, a sort of a stronger upturn in your non automotive revenues?
Well, the attention or 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 the right areas where we can play best. And, that translates, of course, first into new product launches because you have to design the product. It takes 1 or 2 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. So it has taken us a bit of time. But the, the product launches are a lead indicator indeed for future growth in adjacent markets that we feel can be more can be, higher, let's say that 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, probably in the core, I mean, 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. So we expect this to continue. It will not move the needle immediately again. Will not move the needle immediately as such, but it's because it is spread out over different products and different applications and different end markets, you will see a slow growth, going forward.
And that's how we like it also. I've mentioned also in my introduction that adjacent, if you look at the adjacent portion of our sales year to date in the 9 month of 2020 and you compare it to the same period in 2019, we've grown 50%, five-0%. So And of course, that 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, by the pandemic. And 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. And 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. And and China, has also started showing improvement, from the second half of the year. You know, there has been a feeling that perhaps mallexis was a little bit more focused in the past on the internal combustion engine powertrain.
But your comments also earlier were on on the fact that you embedded, you know, motor drivers and magnetic sensors, current sensors were seeing quite a strong pull from electrification, battery management, etcetera. So can you just give us a qualitative comment on how you are seeing electrification or like EV growth rates come through on your order book. And whether you see that as being a more important driver, going forward on your on your overall automotive sales than it has been in the past?
Well, electrification is not a new a new trend. It has been there for quite a long while. And we've seen it coming, and therefore, it's also, we've also directed our R&D investments in the past couple of years towards electrification of vehicles. And that has an effect on the powertrain, of course, as you say. So that will definitely continue, but it's not only powertrain.
I mean, 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, assisted driving. So driver monitoring systems helping both the driver and the road users. So also pedestrians, etcetera, to understand what's happening.
And you see also light applications that are needed for for electric vehicles, for example, to, to show state of state of charge. I don't know, all these things So 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 of that electrification. So, and I think, Alexis, it's fair to say that Alexis plays in a bit everything surrounding that new energy as such. So we're not at the end of our inspiration as far as innovation is concerned in mobility as a whole.
Understood. And this is a very last small question for me. You've said that you think, you estimate that inventory levels are low at customers Does that also apply to the channel, or are you is your comment specifically on, your tier 1s or OEM customers?
It's more outspoken in the direct customers in that area. In distribution, in the distribution channel, we would say it's rather at level or a little too low, but definitely not too high. But the distribution channels are better equipped. I would say then 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 they are that they want to, to, to reduce.
So yeah. So inventory levels, direct customers, lowest than in the distribution channel. That's how that's what we're seeing. Thank you.
We have 2 more questions in the queue. And our next question comes from the line of Mark Hessling from ING.
Firstly, I also want to come back on those, inventories. So, quite nicely, you have been able to set it out of your inventories. I think that's something discussed before in the in the call and also in previous calls that that's very well positioned. Does it mean that over the coming quarters, you want to build up the inventories, like, a bit again, to to be able to react again. And if you want to build it up, what kind of time frame can can you do that?
Because I guess that the, and the cycle times in your foundry are relatively low and you maybe also have some time to to prepare your your your supplier there. How 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 of course because the end of Q2 was also particularly high because of the, 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's not so much surges in demand, but the short term reaction time that is, that is put upon us, by our customers, I think we are going to continue the policy that we've carried over the last 2 years, let's say, is to, reproduce not be to to reproduce where there is a a decent, confidence that these products will not be obsoleted soon. So, if it's, if we see that, products like current sensors or latches and switches, smart drivers, whatever, I mean, all 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, but of course, risk is very relative in that sense It's more risky to not build up inventory then it is to have it in inventory for a little longer.
The cost of not being able to deliver is much higher. So I think we are not going to change our inventory policy as such. But it will of course, depending on supply and demand, it will, it will continue to fluctuate. There is no, that's, that's the ID. Inventories must fluctuate.
Okay. Very clear. The second question is on on the CapEx. You continue to run on that at at a very a lower level. That's and and, yeah, this and I'm not sure what exactly now is the status of the of the new facilities of VIA still have to put a lot of CapEx in there.
What do you expect for the for the fourth quarter? And also, do you have is there going to be a catch up effect in in the years after, or or is that not the case?
Yeah, we expect an increase in Q 4 because the the Sophia Building, yeah, we're is going it's moving quite fast now, although there is that have been delayed throughout the year, we will see an upturn in Q4 to be continued in Q1. To even further increase in Q1. So overall, we expect investments of in the range of 1,000,000, for the full year. Where we were at around 1,000,000, I think at the end of Q3. On the other hand, yes, so for the normal CapEx, that means that we stay at low level still for a while.
The increase is mainly coming from the investments in Bulgaria.
Okay. Also clear. Then final question also coming back on on the gross margin. You 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. But if you if you look further out when the Sofia facility is fully up to steam and and the the the new products become more mature.
Is that a structural reason why you're not moved back to the 45%? Or is that really, yeah, so how was that trajectory over the let's call it the 5 year period.
Oh, that's a very long period. But it can improve indeed because of, indeed, further capacity utilization Correct. But to reach the 45%, that is extremely stretched. In the foreseeable future.
Thank you, Mark. We have a last question from the line of Robert Sanders from Deutsche Bank. Robert, please go ahead.
Hey, good morning. Thank you. Thanks for filling me in. I 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 ICs, alongside our Audram's LEDs, Naldorena, do you know, the clear market leader, and have a follow-up.
Yes. I was waiting for your second question, but okay, let's answer your first question. I believe that the automotive lighting of, of, of Oseram is a little different from ours, but, I think that it's more exterior light, for the time being whereas we are more interior lighting We do not give out a an exposure as such versus our sales. But as far as we know, in the area where we play, namely mainly the interior lighting and the animated lighting, we today have about 70% at least 70% market share. As far as we know.
And then the second question, thanks for that. And the second question would just be about the combustion engine business. I think it's about 30, 35 percent 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, you know, 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?
So that's actually fine or something like that, something like 35, right?
Where did you get that information? Because that seems like, a bit wrong, I would say.
Oh, okay. Well, what what is the number?
Definitely not. I mean, no. No. I don't think where you got that information from, definitely not from Alexis. I can definitely tell you that this is not the case at all.
It might have been that maybe 10 years ago, but, yeah, BVs were at that time also not really, I mean, was 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 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 show 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.
And 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. So I have zero worries on the ICE exits because the ICE exit is part of our business plan. So please, let's kill
that person. 5% But just just in 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 that the 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 the end of life. Your the customers usually I mean, the customers where 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. So it hard for a company like Alexis or any semiconductor company to just say, okay, I'm going to rise raise the the, the price on our old products, yeah, then you don't get any new business. So I don't think that is a that is a realistic, realistic, avenue to follow. We like our customers, like all of our customers, and we try to make it a balanced relationship And 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 heavily neither.
Got it. So the R and D goes away, but the gross margin doesn't change.
Thank you, Robert. We have no more questions in the queue. So I will hand it back to you for any closing remarks.
Okay. Thank you for having joined us today and for your sharp questions. Our next earnings conference is scheduled on February 3rd next year when we will publish our full year results And until then, please do keep safe and stay healthy. Goodbye.
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