Ladies and gentlemen, thank you for standing by, and welcome to the Alexis Q3 2019 Results Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. I must advise you that this conference is being recorded today.
I would like now to hand the conference over to your speaker today, Francoise Schombar. Please go ahead.
Thank you, Andrea. The audience, thanks for joining the Melexis earnings call for the third quarter of 2019. Our CFO, Calvin Raifingsen, will comment on the financials, and I will begin with the business update. And as said, we will welcome your questions afterwards. 3rd quarter sales stands at 100 and 23.3000000, which is at the upper end of our guidance.
Not much change in geographical split versus the previous quarter. Amidst the continuing downward trend in global car sales and the uncertain economic and geopolitical situation caused by global trade tensions. This is a solid performance. Still, it is a decrease of 16% compared to the same quarter of the previous year. We are not out of the woods yet.
Though the severe inventory corrections are clearly ebbing away. Inventories at OEMs and at our customers, seem to get into a more stable state. Customer order behavior also seems to be getting better step by step, and we expect a further sales increase in the last quarter of this year, bringing full year 2019 sales outlook to a fort between 483 and EUR 489,000,000. Next to the economic uncertainty legislation uncertainties make people postpone decisions also on which type of car to buy. Pent up replacement demand should be unleashed at some point in time, though.
Looking where we are today. Year to date car sales worldwide is still down by close to 5%, a little better than a quarter ago. With a combination of plus 0.5 percent in Japan and minus 1% in the U. S, a minus 2% of European car sales, but still a significant minus in China with close to 11% year to date. The month of September saw the opposite of turn to growth in China despite a more benign comparison basis.
As stated at our previous earnings conference, China's auto industry is suffering from the China US trade war, the recent electric car subsidy reductions and the continued absence of government incentives. Visibility worldwide does remain low as uncertainty lingers on. Even if there are signs of moderation in Now let me take a deeper dive into 3 product lines that outperformed in the third quarter. Pressure optical and temperature sensors. The first one, pressure sensors.
They outperformed linked to electrification content growth in cars. A nice example of the innovation Lexus is bringing to market in this regard, is our newly launched System in Package MEMS solution for the reliable measurement of fuel vapor pressure suitable for evaporation systems, which are designed to capture, store and responsibly dispose of the vapor preventing it from escaping into the air. And especially important in hybrid vehicles as more regions introduce strict legislation which prohibits preventing a fuel vapor into the atmosphere. Alexis, herewith, contributes to a healthier environment. Number 2, our optical sensors include automotive rain light sensors and also the time of flight 3 d sensors, which grew nicely in the 1st 9 months versus the same period of last year.
Also nice to see our adjacent optical products move up well again versus the previous quarter. The latter are a family of products near infrared remote control from multiple consumer applications. And then last but not least, our temperature sensors they are a great example of how Melexis leverages its know how and technology in order to grow in both its automotive and adjacent markets. Firstly, the thermocouple interface chips used as part of a system measuring very precisely temperature in exhaust systems, thereby helping again, to reduce emissions of the combustion engine. And secondly, the infrared thermal arrays where I'd like to highlight in particular one application.
Infrared arrays can be used to detect heat sources quickly and precisely. When combining this feature with a classical smoke detector, this results in an advanced Fire Prevention Net System, which is currently being deployed in high speed trains. As you can tell from the previous free product examples or product line examples, Menexis sensor and driver components serve the long term automotive content growth trend and new opportunities in adjacent markets. My conclusion today is pretty much the same as at the previous three quarters. We are realistic and not satisfied about the current situation, but we remain positive and confident about our future as our long term growth drivers remain intact.
For the third quarter, so sales came out at EUR 123,300,000, a decrease of 16% compared to the same quarter. Of the previous year and an increase of 3% compared to the previous quarter. There was euro EBIT dollar exchange rate effect in the magnitude of 2% compared with the same quarters of the last year and a positive impact of 1% compared to the previous quarters. The growth results were 1,000,000 or 40 percent of sales, a decrease of 28% compared to the same quarter of last year, and a decrease of 1% compared to the previous quarters. Continued low utilization of test capacity and a less such as product mix compared to the previous quarters resulted in a slightly lower gross margin.
R and D expenses were 16.1 percent of sales. G and A was at 6.2% of sales
and selling was at 3
percent of sales. The operating results was 1000000 or 14.7 percent of sales, a decrease of 51% compared to the same quarter of last year and a decrease of 1% compared to the previous quarters. The net result was 1,000,000 or per share, a decrease of 49% compared to 13 1,000,000 or per share in the third quarter of 2018. And a decrease of 1% compared to the previous quarters. So Melexis expect sales in the fourth quarter of 2019 to be in the range of 123 EUR229 1,000,000, with a gross margin expectation of 40% and an EBIT margin for the year of around 15%.
I think we can now start the Q and A session. So operator Please go ahead.
Yeah. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Please standby while we compile the Q and A queue. This will only take a few moments.
If you wish to cancel your request, please press the hash key. Your first question comes from the line of Matthew Mahinhold. Please ask your question.
Yeah. Hello. Can you hear
me? Yes. We can.
Yes. Hello. Good afternoon. Two questions from my end, actually. First is actually on the product mix effect.
Can you elaborate just a little bit more what's what is actually driving this? Seems to me that it should be mainly magnetic sensors that are, growing or still contracting. And can you just elaborate a little bit on what drives this? Are you seeing some changes there in the competitive environment? And then how is your market share holding up?
And that would be my first question. And then the second question would be on the visibility you're presently having. As inventory corrections or the effect of the inventory corrections, update, and the ordering behavior becomes a little bit more stable, do you also have better visibility and maybe also a little bit of visibility also in next year? How are your customers giving their views on next year. That would be my second question.
So on the product mix, yes, because of the fact that we have quite some inventory effects, It's very hard to take any conclusion at all on this at this moment in time. What I can tell you is that, the market share as such has not really changed there are always things that we lose, there are always things that we win also against competition. So we don't see a significant change of our positioning in the market. On the visibility does the visibility get better? Well, I wish it would, but I'm sorry to say it is not.
The what we the only thing we can say today is whereas in the last let's say 9 months, we had an even already a little bit indications before, but let's say, certainly, the last 9 months, we've had quite some push outs and hardly any pull ins of deliveries. Today, the push outs have greatly diminished, in both number and and value. The pull ins, they are, let's say, up and down. So there's no real trends to be derived from that yet, but it does, in combination with the, with the distribution inventory and the consignment stock inventory that we have, of course, both a better view on than, with the other customers, when we look at that, we see that it is now a more it's become more stable and it become a more normalized situation, which is another indication, and which is why we also are confident to say that we have the feeling that the inventory corrections are slowly ebbing away. But that's all we can say right now for the future, the visibility remains low.
The uncertainty is there. The car sales worldwide is not yet growing again. Though, of course, the decline is a little bit less. So you see also that's also an indication, but that doesn't mean that, yes, that it's getting better. It's just getting less worse.
Or less bad. That wasn't good English, I think. So visibility into the next year I think it's really much too soon to tell. And anyhow, we will give you that guidance in February as usual.
Thank you for your question. Your next question comes from the line of Francois Bouvign. Please ask your question.
Thank you very much. My first question was, on the you commenced on the order behavior. That you are seeing and improving step by step, as you call it. It's if you compare that twin to acceptance treatment you know, that's published last night. I don't know if she had the chance to look at, what they said, but, it's quite contradictory with what you are seeing.
They are talking about a macro uncertainty weakness across the board, and automotive is is one of the, weak spot with a decline of of revenues sequentially for the next quarter, possibly. So I just wanted to explain or maybe understand, though, how come the other behavior can be different, for Alexis and Texas beyond the product difference because I know you're not doing the same, but the order behavior should be the same because they said that the customers from 90 days ago is much more cautious So it just contradictory to what you're saying. I just wanted to understand how you can reconcile that.
Mhmm. Mhmm. Yeah. Very interesting question, Francois. The if you would recall, when it was a year ago, I think.
We were also the 1st saying that we saw a decline coming ahead in Q4 last year. There are a couple of, well, there is not only a difference in the products that we carry. There is also a difference in lead times. Our lead times are probably a little longer because we make quite complex products, which have, long cycles. And we had been that it was also something we said already over the last year, we were somehow in allocation.
And when you are in allocation, when you get in allocation, you wait a long time or every company waits a long time to tell their customers that they are going in an allocation because once you are there, then customers can be very unpredictable in their order behavior and start ordering more than they really need. And that's usually what you always see, which is why everybody in the industry is cautious and waits as long as possible to even speak about the words. It's like a bit recession. Don't speak about it because then it's a self fulfilling prophecy. Well, with allocation, it's a bit the same thing.
Now, so lead times allocation have a have an influence. That means if, if you are If you have not spoken about this, then maybe there was not a need for customers to to start ordering more than they need. And once you then do see a decline in your end markets, Yes, it takes you the delay in information. It takes you longer. That means that, yes, Texas Instruments is apparently only now seeing a decline in their orders.
That could be another reason. And we can only say what we see. We cannot speak for, for Texas instruments And yes, we've read through their, through their PR and the transcripts, but it's not something that we, became wiser of. So you can read that as well. We don't have an explanation necessarily for that.
Others than different product mix, different maybe different customers, different lead times, different supply chains.
Okay. That's very clear. Thank you. The second question I had is on your the inventory situation and in the supply chain. So if we look at the release, you mentioned that inventories are ebbing away.
But do you expect this inventory correction to be over by the end of the year? Or do you think it's going to continue still in 2020?
Well, with some customers, it might, still continue. But as said, it's really diminished. So we have the feeling that we are reaching the bottom in, the last quarter. But again, the future is still very uncertain. We believe that inventories in our customer base and at OEMs are relatively stable.
And we keep our inventory also at a, let's say, at the same level, more or less, as before, because the This is for us a strategic thing. It's strategic because of many factors, but definitely also because the industry, allocation risk that we have in 2017 2018 is still there. So once the market picks up again, we will see the same thing happening, and we just want to be, ready for that and keep our our machine, oiled and greased.
I see. And if we just take a bit more on the on your own inventory situation, if you the market recovers and, obviously, I guess you're gonna use your inventories to capture the market, market share, like your strategy. So if it happens, should we expect your inventories to go down?
Yeah, that could be, but that will very much depend on the steepness of the rise. We have seen a slow decline and now maybe we will see a slow ramp up but I cannot predict anything there. But in any case, our idea is to keep inventories in the at the same level, because at some moment in time in the past, exactly because of that allocation and because in which some customers, we were living hand to mouth. We, yeah, we keep our inventories, or our inventories were too low. In the end.
So we don't feel they are too high at this moment in time. We feel they are just at the right level for the market dynamics that we meanwhile know very well.
And the low utilization rate that's impacting your gross margin in Q3 and I guess, in Q4 as well, I guess you will need a much higher production to reduce this lower utilization rates. So my point is, should we expect this fluctuation rate to impact for a couple of quarters, still given, given the lack of strong recovery for now.
It's clear that sales growth indeed will, will increase, I mean, the load in our in our factory. There is a direct link here.
But you still get for 40% gross margin next quarter, yes?
In the short term, indeed, it will not play so significantly,
indeed,
Well, yeah, in the short term, not, but in the longer term, for sure the utilization rates will increase. It also depends a bit how inventory will move up and down.
Okay. And can we know exactly the impact of, of underutilization charges this quarter on your gross margin?
The impact of, yes, that's in the range versus a year ago. That's in the range, that's more than 3%.
Percentage points, yes. Okay. Thank you very much.
Thank you for your question. Your next question comes from the line of Janardan Menon. Please ask your question.
Hi, good evening. I just would like to go back to the recovery and you're saying that that, orders are now, sort of showing some improvements step by step in the inventory severity event. In your in your experience, how does order behavior typically behave over the next few quarters? So a couple quarters from this stage of the cycle. I completely agree that this cycle may be or the shape of this recovery may be completely different from previous recoveries But if you were to generalize, I mean, is it that you would normally see quite a quick acceleration from this point onwards say over the next 3 or 4 months, where you sort of get back to the kind of revenue levels that you less before you started this slowdown, or would it take more time than that, looking at the past experience?
Yes. You are right that every cycle has its own dynamics? Now what is clear is the is that as long as car sales is it is very hard to compensate that completely or even exceeded with content growth. So I think a a steep recovery could only be possible in my opinion, in my humble opinion, it is only possible if there is a steep recovery of car sales. And as I said in my introduction, car sales is still in a declining mode, though the decline in Q3.
It's a bit better, or it's not as bad as it was before. Now Content growth goes much slower in the end. But content growth is much more robust as well over time. So in that sense, I think we really have to see what comes to play now.
And do you think to get a proper, you know, sort of strong recovery. You need to see car sales globally grow again, or is it enough if you reached sort of a 0 level stabilization, and then the content plays in. Would that be a sufficient scenario for the industry to start showing a proper recovery? You may not necessarily get back to the same level of revenue if you've lost, I don't know, 6% of car volume over the course of the last year, but Is that scenario good enough to sort of get you back to normal recovery mode acceleration?
Well, in an ideal theoretical scenario, if you would say, it's flat sales, then of course, you will you would see content growth increasing the demand. But the problem is that it is not linear. It is not theoretical. And so it depends on so many factors. And the, as you know, the automotive industry has such a long value chain and a long supply chain, one of the most difficult ones or the most complex ones in the world, with a lot of back and forth shipping, everywhere, plus the automotive industry adopts very slowly new programs, because they do a lot of testing and qualification, etcetera.
So you have a lot of delay factors on the 9. So nevertheless, even if content growth is a long term growth driver, and that remains definitely for Alexis. Fully intact, you will, need to see at least stabilization of the car sales or a slight growth in order to really set the whole machine in motion again. That's what what we believe.
And regionally, one of your competitors recently said that they're seeing a stabilization in the U. S. And Europe, but still it's quite a difficult situation from an inventory perspective in China and from an order perspective. But your your current order book suggests that the recovery is sort of uniform in all regions of the world, is it?
Yes. You could say that more or less, yes. Yes. Because I think that the recovery we're seeing today has more to do with inventory. Corrections than with demand, corrections, right?
So it's logical that it would be then across the board.
Okay. And just a last question on the gross margin development, you're guiding at 40% roughly into Q Four as well. Is that because the adverse mix continues into Q Four? Otherwise, I would have thought that you would have got at least about 1 percentage upside if the mix had sort of rectified itself into Q4?
Yeah, we assume today, more or less similar mix. Of course, it can always be different from what we assume today because it moves. I mean, or the behavior still can change somewhat, but that's our best assumption today.
Understood. Thank you very much.
Thank
you for your question. Your next question comes from the line of Stefan Hori. Please ask your question.
Yes, hello. Good afternoon. So yeah, well, some of the questions have been already, but sorry to come back on 2020 visibility, but, when we look at the market research analysis for next year. We see that at best, the market, the car market will be will be flat. So in your experience and given the description that you can have with your customers, do you think that growing double digit next year is a potential possible assumption?
This is what the consensus is looking for. That's the first question. And, so how do you see your CapEx budget for the end of the year? And how do you evaluate your CapEx for next year with this lack of visibility? Thank you.
Okay. Well, I think that the analyst predictions are as good as mine. So if they say it will be a flat car market, I think they're probably right. That then comes back to how much content growth will be ramping up. And we cannot provide that guidance at this moment in time.
That is, a bit too soon to tell. We see Q1 bond is, is maybe also a lot too bad, but again, it's really because of the low visibility, the high uncertainty. Everyone being cautious, though positive, So customers are not negative at all. The it is too soon to tell what it's going to do. So I cannot tell you, whether it's going to be single digit growth or double digit growth or growth at all for the time being.
Then on the cappings, maybe I relate to Cara?
Yes. On the CapEx, we assumed 40,000,000 dollars, $45,000,000. We only have the 3 quarters, we have now just above EUR 20,000,000. The main reason of delay is, is our expansion in Sofia, which has delay. So that's the main reason.
Also, we have a little bit less manufacturing investments due to the, the sales that came down throughout the year. It's clear that the investments for Bulgaria will move, I mean, what if whatever is not spent this year, it will be then spent next year. So that's a delay spread over, over 2 years now. Okay.
And did the extension delay, it was because of a technical reason or it's decision that you made?
Yeah. Permitting things like that. And you didn't push, of course.
And so for next year, what do you foresee at the moment?
That's too early. We will give guidance on that, when we give the guidance on the full year 2020.
Okay. So it
means that in February this year,
you will give a guidance for the full year, right?
Yes, including traffic.
Thank you for your question. Your next question comes from the line of Mark Hesselink. Please ask your question.
Yes. Thank you. First question, I'm glad to come back on the on the gross margin, on the on the next comment. The change in the mix, is that something that is, a very temporary, or is it also to do with some of maybe your your lower gross margin products has been growing faster and so that they have might be the higher products in the future. Or is it simply a temporary thing?
Well, the guidance for
next year,
we will
give in February, in general, there are so many items that play in the product mix and in the gross margin. That it's, difficult to to give any further guidance on that. What is an an item that is relatively new and that I do can add is that, today we sell more euro, than in the past. And this means that we are in absolute terms, fully hedged today. And that means that if the dollar goes comes up.
It's beneficial for our sales, but it's a negative impact on our on our gross margin and that it's one of that we see today as well, that is playing also on the gross margin today. So Yes, so if the dollar would 1st and strengthen, then our gross margin will be negatively impacted today.
Great. Thanks. And second question is also something you discussed in previous calls as basically high level of R and D that you are doing for your, for clients for new applications? Could you tell a little bit what's the progression there? What are you seeing?
Is that in the state of data or the PI number of applications are coming to the market here? In the coming quarters?
Well, we have continuously new applications ramping up new products ramping up. And that also plays. You are right. That also plays in the product mix in some quarters. So from one quarter to the other, if you have a difficult project ramping up, it could be that there are some yield issues in the beginning, etcetera, that's played in there.
But in fact, we rather continuously have new applications coming on board. I don't know if that answers your question, Mark.
Yeah. And and I saw it a little bit weird because the, if I look to your to your arsenic of, which I think you you kind of posted that you would not really spend less on that. And I think in the last quarter, we discussed it that you still continue to invest heavily in the R and D, but you are more scrutinizing the vehicle on travel and stuff like that. That continues to be, yeah, very, very much on the controls. So just looking if if there's something that, you're delaying there?
Is there a certain method?
No, we're not delaying. I think we're keeping the cost under control. And, of course, being very cautious in the choices we make. But indeed, we can we have not, I mean, we will not sacrifice the short term for the sorry, we will not sacrifice the long term for the short term. So our R and D projects, they continue, to go on.
They are important for that long term, growth path. Thank
you for your
question. Your next question comes from the line of Jeff Osborne. Please ask your question.
Yes, good evening. Most of them have been asked, but just two quick ones, as customers are getting reengaged, is there any change in the discussions around pricing relative to, three or four quarters ago?
In automotive industry, there is always pricing pressure, and the pricing pressure is high in good times and it's equally high and sometimes higher in bad times. So yes, Pricing pressure will always be there and everybody has it difficult. Everybody is being squeezed, certainly with the tariffs that have come on board. With the disruption that these tariffs have created in the supply chains. New qualifications weigh sometimes heavily on yes, on the engineering resources that you have to spend, because if customers change their supply chains, they, of course, have to re qualify.
And what we see, certainly our customers who are global, they try to now with the, let's say, this, closing doors scenario, you could say, where they try to have in every region their manufacturing to service the region in itself. But of course, they come from a previous situation where, yeah, the whole world was used. And with the tariffs that has created quite some disruption, so Yeah. There is there is cost pressure in the whole, in the whole supply chain. And, yeah, that creates tensions everywhere, for sure.
Makes sense. Several questions asked about this for next year. I understand you're not giving guidance, but just as we think about what the pressures are on gross margins, you've obviously got pricing, you've got mix that was addressed. How do we think about Sofia ramping up and the impact of that new facility on margins?
Sophia ramping up, yes, that's the we will only take the factory and to use, in the second half of next year. So the impacts will still be relatively small.
Got it.
So more equipment will only be purchased at need basis. So it's
the main infrastructure now that we anticipate.
Got it. That's helpful. And then the last question I had is just you mentioned in the prepared remarks that the time of flight 3 d sensors were up nicely. Can you just talk about what specific application those are being used for that you saw the strength year over year that you called out?
Yes. For the time of for this time, the time of flight, it's still gesture recognition in cars. Mainly.
Got it. Thanks.
Okay. Thank you.
You're welcome.
Thank you. Your next question comes from the line of Jonathan Mertens. Please ask your question. Hi. Thank you for taking the question.
I have a question about the dividend yield. So even if the results do not improve materially in 2020, do you still increase the dividend next year?
Well, we will continue to pay out the high portion of the of our, I mean, of our profits. We already set a high precedent with the interim dividend of 1.3 which gives us, I mean, which means that we have, believe in the future anyway. Of course, how much the exact amount, we don't have a fixed through of how much percentage we pay out. That is at the discretion and opportunistic decision for the board. Yeah.
But at least for the interim dividend, we actually went along as we did before.
Thank you for your question. There are no questions at the moment. So, please, speaker, go ahead.
Okay. Well, thank you, everyone, for your questions. Our next earnings conference for the full year 2019 will be on February. 5, and we hope to welcome you all again there. Goodbye for now.
Thank you.
That concludes the conference for today. Thank you for participating. You may all disconnect.