And welcome to today's Malekis Quarter 2019 Results Conference Call. At this time, all participants are in a listen only mode. There will be a presentation session. I must advise you that this conference is being recorded today, Wednesday, 31st July 2019. And right now, I would now like to turn the conference over to your first Mr.
James Van Swacmar. Please go ahead, ma'am.
Thank you. Dear audience, welcome to the Melexis earnings call. The second quarter of 2019. As usual, I will comment on the business environment and in the absence of our CFO today, who is out for a planned medical treatment. Here's Dredendes, who is our Investor Relations We'll then shed some light over the financial perspective.
And of course, we will be happy to answer your questions afterwards. Melexus sales for the second quarter of 2019 came out in the middle of the guidance provided in April, and a shade better than in the first quarter. The percentage split per region is now more in line with historical numbers. Asia has recovered a bit from the drop in Q1. Europe is weaker in line with car sales.
We estimate worldwide car productions year to date to have fallen 7.7%. On the back The worst figures came in from China, with a 12.4% less vehicle sold year to date, despite 1, the VAT cutback and 2, the destocking of China 5 vehicles ahead of the China 6 emissions introduction start in July. The country's auto industry is suffering from the China U. S. Trade tensions, the recent electric car subsidy reductions and the continued absence of government incentives.
Year to date car sales in Europe remains negative versus the previous year, though only by an estimated 1.2%. Amidst legislation uncertainties, people continue to postpone decisions on which car type to buy. Also U. S. Car sales slowed with an estimated 1.9% savings year to date.
All this is leading to a slowdown in the global auto industry and a buildup of pent up replacement demand that will be unleashed at some point in time. The beginning of the year, inventory corrections are happening more slowly than anticipated with all the aforementioned adverse macro conditions rippling across our industry. It remains uncertain at which moment a change in order behavior will occur. Visibility does remain low. That is why we guide This being said, I'd like to highlight the solid performance of 2 product lines in the second quarter.
Linked to Automotivesemiconductor content growth, namely embedded drivers, and pressure sensors. Indeed, growth of smart embedded drivers is expected to remain steady give vehicle manufacturers and our direct Tier 1 customers an easy solution to add motor functions and diagnostics in a flexible way included Lynn Flaps to mix warm and cold air in the HVAC system as used by European OEMs. There were 10 to 20 flats a car. This market is now growing even faster thanks to the Lynn flap adoption by North American And Asian car manufacturers. Additionally, we see new motor applications being produced air grill shutters at the front of the car to reduce air friction and energy consumption or more efficient engine cooling fans to cool the radiator or small water pumps for optimal thermal management of electric car batteries to guarantee longest driving range.
One interesting example where the synergy between the Melexis Sense and Drive technology capabilities is being capitalized on is the fuel vapor pump which removes excess fuel vapor and where both our embedded motor drivers and pressure sensors enable lower emissions, which brings me to the 2nd product line pressure sensors. The recent legislations in China called the call among other things for reducing the pollution generated by gasoline fuel vapor escaping in the atmosphere. Handling fuel vapor is especially critical with hybrids where the fuel vapor pressure built up in the tank keeps increasing while in electric driving mode. And that's when Alexis pressure sensors come in. They're also ideal for motorcycles that are space constrained by nature and in which Melexis solutions also help to reduce emissions, especially in India, making the planet a better place to live for all.
Another Q2 highlight is that Melexis was named a 2019 Best of Sensors Award winner at Sensors Expo in San Jose, California end of June. Our medical grade temperature sensor was recognized as the winner of the Excellence in Sensors Innovation Caturiki. It is indeed an ultra small complete solution in a single 3 by 3 by 1 millimeter package, including the sensor elements, signal processing, digital interface and optics. It is the world's smallest medical grade far infrared sensor. Its high thermal stability and optimization for human body temperature makes it ideal for a new class of This includes, for example, wearable health monitoring devices, hearables, medical grade contact sensors, smart glasses, point of care applications, as well as classic medical devices such as forehead and ear thermometers.
So in view of the long term trends, towards more electrified, more autonomous and more personalized vehicles on the one hand and new opportunities in adjacent markets such as industrial, consumer and medical markets on the other, Melexis sees continued new opportunities for its sensor and driver. Components. My conclusion today is the same as at the previous two quarters. Am not satisfied about the current situation, but we remain positive and confident about our future. Here, please go ahead with commenting on the financials.
Thank you, Francois. Ladies and gentlemen, Lexus sales for the second quarter of 2019 were 1,000,000. A decrease of 15% compared to the same quarter of the previous year and an increase of 3% compared to the previous quarter. The euro dollar exchange rate evolution had a positive impact on sales of 3% compared to the same quarter of last year, and no impact compared to the previous quarter. The or 41.4% of sales, a decrease of 24% compared to the same quarter of last year, and an increase of 6% compared to the previous quarter.
R and D expenses were 16 point 3% of sales. G and A was up 6.5% of sales and selling was up 3.4% of sales in the quarter. The operating results was 1000000or15.4percentofsales a decrease of 48% compared to the same quarter of last year and an increase of 17% compared to the previous quarter. The net result was 1,000,000 or a decrease of 45% compared to 1,000,000 or per share in the 2nd quarter of 2018 and an increase of 12% compared to the previous quarter. If we then look to the first half year of twenty nineteen, sales were 1,000,000 a decrease of 16% compared to the first half year of twenty eighteen.
The euro dollar exchange rate evolution had also here a positive impact of 3% compared to the first half year of twenty eighteen. The gross result was 1,000,000 or 40.8 percent of sales, a decrease of 25% compared to the same period last year. R and D expenses were 16.6% of sales, G and A was up 6.5% of sales and selling was up 3.3% of sales. The operating result was 1,000,000 or 14.4 percent of sales a decrease of 51% compared to 1,000,000 in the same half year of 2018. The net result was 1000000 or a decrease of 48% compared to 1,000,000 or per share in the first half year Gross per share.
The Melexis shares will start trading ex coupon on October 22nd, 2019, and the dividend will be payable as from October 24th. Malexis expects sales in the third quarter of 2019 to be in the range of 1000000 to 1000000. With a gross profit margin of around 41% and an operating margin around 15% at the midpoint of the sales guidance. Malexis expects its full year 2019 sales level to remain below the previous year. Gross profit margin is expected to be around 41% taking into account a euro U.
S. Dollar exchange rate of 1.30
We are now available
right now we have two questions coming. And our first question comes from the line of Panchua Villas. Your line is now open.
Hello. Thank you very much for taking my questions. The first one I have is on the comments you made on the outlook and the visibility that remains low. Given the discussion that you have with your customers, I was wondering if what can you, what is the probability for you that the uncertainty remains for early 2020, given the discussion with your customers?
Yes, it is, of course, a bit early to already discuss 2020, the usual lead time for our product is, is around, is rather around 16 on average. Sometimes a bit more, sometimes a bit less. So it is a bit early, but a lot of course depends on how car sales will evolve, because as long as car sales are in the negative, customers, in general, are, yeah, not very keen on starting up or on ordering new material as they still have quite some material in the pipe. So even though, the discussions are centered around, well, the bullwhip effect is there, etcetera. I think it's for the moment, still much too early to say anything about 2020, even in the discussions with our customers.
Yes. No, I understand. If we look at the inventories in the supply chain, you said that lower than in the beginning of the year. Obviously, early in the year, it was very high. So it looks like the inventories are not bring down as fast as you said.
How long do you think it's going to take really to completely clean the inventories and supply chain, your best guess?
Well, your crystal ball is as good as mine. I don't know. I cannot So I think it's, it would not be a good idea to speculate over this.
And even when you discuss the inventory situation at your customers. They don't tell you at all where they are when they think it's going to be done, etcetera.
Well, for them, it's also a question of, what their customers needs are. And of course, if, as long as the car manufacturers do not increase their, their requests the same will happen to our customers. They will not increase their requests to us.
Okay.
That's Yes. And you know, the future is, just a tweet away these days. So unpredictability is is everywhere.
That's true. My second question was with regard to your own inventories, still fairly high. And previously, you were saying that you are happy with the current levels. Just wanted to check with you if you still are you still happy with this level or do you plan to reduce it in the next few quarters?
No, that remains unchanged. So, as we communicated earlier, we see the level of inventory where we are, where we were, let's say, 1 quarter ago and where we are more or less still today as strategic. And we see no reason to change that view. So we are happy with the levels of today. And that being said, we also expect going forward that it will not change that much in absolute numbers.
Okay, that's clear. And maybe if we, if you can comment on the geographic perspective, I mean, if you look at the outlook for each regions, you talked about China being challenging. How do you see Q3 and Q4 trending for each regions would be very helpful.
Yes, because Q3 per region, that is also difficult say, but I think our geographic sales distribution is now more in line with historic figure So somehow, things have already stabilized, as such. But of course, the Chinese drop in car sales is still pretty big. So, I do not exclude that maybe if the car sales keep dropping, that the China sales, the sorry, the sales in APAC in the APAC region might follow that trend. This being said, we have also a little a little decline in Europe and North America. So, I presume that from now onwards, the trending of the distribution in sales will be more or less, what we see in car sales.
This being said, sometimes, production that we deliver into Europe goes to China parts, modules or systems, they go to China, and it could also be vice versa, things that are going to China, or to Asia Pacific, end up in cars that are being sold in Europe or in the U. S. So it's, as you know, the automotive industry is extremely global industry with a very long cycle, with many, many intermediaries, many subcontractors, and it's extremely hard to predict, especially since also these tariffs are have come on board. What we see is our customers are reshuffling their supply chains where they can. Sometimes they can't, but sometimes they can.
And then you see changes in distribution over the world. But that's again extremely hard to follow or to predict, but we did see some shifts from here and there. So our customers are trying to be as local as they possibly can in their supply chain.
If we look at your, at the production of cars, most of industry players are talking about mid single digit down in production of cars Then if we look at your performance this year, it looks like the sales are going to be more like towards -15 plus given the year to date performance. If I look even back, your revenue growth has been more than three times outperforming on the performing the production of cars. So, wondering, how can you explain such big gap between the production on the way up and down for Melexis, it's also the case versus your competitors.
Well, the explanation has been given, I think, already in the past as well. So that is what we call the bullwhip effect, So the further down you are, the further upstream you are, the biggest, the variance is, And that is, that is what explains the high, drop or the higher drop in, in the Lexus. In sales than, than you would see in car production. This is a very typical very typical effect that you should see in this bullwhip concept. So it's not unusual.
Okay. And I was just surprised. So versus your competitors, which are on the same stream?
Well, that depends a bit. If you compare, it depends on, which ones you compare us with. There are some that are, let's say, more digital than us, with large GPUs, for example, for assisted drive, these are very expensive parts in, as far as our mixed signal devices or digital analog devices, earned, the, the USP is a little lower. Sorry, the ASP is a little lower. But it depends a bit on which segments the competitors address.
If it's more mixed signal, then, they will see the same drop if it's more pure digital, And especially when it is directed at, assisted drive or autonomous or more autonomous driving, than they compensate, or it is because of, for example, semiconductor segments that we do not play in like, the MOSFET silicon carbide and, areas like that, which are also high ASP products.
Okay. Our next question comes from the line of Dennard Lineman. Your line is now open.
Yeah, hi, good evening. Well, a lot of my questions have been asked, but I just want to narrow down on the inventory side. You know, you've said that it it's below the level of the beginning of the year, but obviously not yet at the levels that it should be, can you give us an idea of how far we are in terms of, I mean, not in terms of time that will take to to bring it to a normal level, but just, you know, where is the desirable level, versus, you know, where it is now? How far are we? Have we come halfway down or quarter way down or something like that?
Any kind of qualitative comment there? And also when you say inventories, are you talking about absolute inventories levels or are you talking in terms of inventory days?
But all is in the end relative, to what the needs downstream are. So, what is certain is that the levels have somewhat come down. But not far enough apparently for our customers to change their, their ordering behavior. And this is both in terms of number of days, and also there, yeah, number of days is relative to the demand and, as well as in, in the value. So it's very, very difficult to put a number on this on how far are we there.
But I was talking about inventory downstream.
Understood. And then just another word, in other previous question, the difference between the revenue decline that you're seeing in sort of the mid teens kind of range versus the production. I'm just wondering where content go? Because the bullwhip effect that you're talking about is a predominantly to deal with inventories at different stages of the supply chain, etcetera. I'm just wondering how where is content growth figure in that whole equation?
Maybe to put the question another way, are there areas of very high content growth where you are seeing positive trends right now. And some of your competitors have sort of broken this down into legacy automotive and sort of the high growth automotive part, are there sort of high growth areas within your portfolio which are showing year on year growth rates right now and it's just that what can be categorized as legacy where there isn't that much of content growth on dragging it down quite significantly at this point in time.
Yes. Yes. Well, that's, that's very well said, I must say. So the point is that what others might call legacy, is primarily in the mixed signal area, but also in those legacy products, there is innovation going on. And there are new applications coming on board gradually.
And the ones that I was talking about in my introduction. So the embedded drivers, for example, and also the pressure sensors, those are exactly examples where content growth really is already showing. Of course, Once car sales will pick up again, you will see this more and more coming on board, but legislation is driving this. But equally in the willingness of car manufacturers to be differentiating their cars in terms of, of emissions, in terms of, energy consumption, in terms of safety, and in terms of personalization. So we see a large, opportunity in all those what you called or what other of our peers might call legacy products, where we see still a lot of innovation.
And that goes back to what we explained also at our Analyst Day in December. So nothing has changed in that respect. And the long term story and the opportunities that underpins remains fully intact.
Understood. And just my last question is on the non automotive side, your decline, the revenue declines there are still very, very significant, 35% to 40%. Again, some of your competitors or other companies selling into the distribution channel in China have said that they're seeing some kind of a bottoming out there even as the automotive business is still quite weak Is that something that you are seeing that the there is some, you know, the inventory situation on the non automotive side and the distribution channel, especially in Asia, is is bottoming out and could see some improvement into the second half, even if the same cannot be said about the automotive side?
Yes, we have seen indeed inventories in the distribution channel coming down. That is correct. And I would say I don't exclude that there is a bottoming out, but time will tell. Today, I think it's too early, to, to say that, but yes, inventories have come down. And it could be indeed that for those applications in adjacent markets, we might be at the bottom.
I don't exclude, but I cannot confirm it neither. You're welcome.
Okay. Our next question comes from the line of Matija Simeonhoek Your line is now open.
Is actually maybe a follow-up on one of the previous questions. So if I understood, well, there are no customers currently giving the indication that despite all those challenges and all the strength of the automotive supply chain is undergoing at this point in time. That they are slowing down the pace of innovation, what others call those so called legacy business. So you do not see any slowing down there of innovation that could potentially in the short or mid term, impact content growth going forward.
That is correct. That is correct. The only area where it might be a bit less sometimes is in, yes, maybe the comfort functions that even there we see that, or you could imagine that this would be less, but then you would see it in the very complex areas, maybe. Which are still very small in terms of market potential. But in the larger areas, like the ones I've highlighted in embedded drivers of pressure sensors, we see the pace of innovation is is steadily going.
There's no reduction of, of attention or of speed. So That's why also for us, it's important to keep developing, to keep our development even if we keep our costs well under control, it is still important to keep our development community going ahead with all of the developments that we have. So no development has been stopped or slowed down, and new new business cases come on board at the same level as we've seen in the past. Does that answer your question, Matias?
Yes, it does. It does. Thank you. The second question that I had was actually on the free cash flow generation. We already discussed inventory, but there was some other investments in working capital.
So I think total working capital investment is now standing at 40,000,000 roughly 40,000,000 for the first half. How should we think about that going forward? Are you still going to invest in working capital? Are some of those elements are going to Can you give a little bit more color on working cap?
Yes, Matias. Indeed, correct. The first half year of 2019, we have seen a significant, let's say, cash outs going into working capital. To summarize on that, the most important elements are, onto one hand inventory. On the other hand, tax cash outs or cash outs in income taxes.
Going forward for the second half of the year, we expect that this will, well, that this will not be the case anymore for income taxes. We have basically had the cash outs, were done in the first half as set for inventory and also for working capital in general, we think we are, at the high, at the highest point today. So it will not further require cash. So that being said, cash flow will improve in the next quarters.
Do you think that there was capital investment will reverse. So that it will be lower at 40,000,000 for the full year, or it will probably remain around 40,000,000 for the full year.
For inventory, for inventory, it will probably stay around the same levels. The same is true for, for receivables there were some, some other current assets, which mainly linked to receivables on VAT and deferred charges, which might reverse in the second half. So there, we expect an improvement
And the cash tax out on, that will probably remain stable for the full year.
That will more or less remain where it is at this point. But no substantial increases there to be expected.
Okay. Our next question comes from the line of Mike Salink. Your line is now open.
Thanks for taking the question. First, coming back on those innovation cycle and also related to your own R and D cost. I think if I'm going to correct from previous calls, then you see that you're continuing to invest. You said that you continue to invest in the on the R and D side. However, now it seems that it's slowing down a bit.
Could you relay that to your earlier comments on that the innovation side will still continue? And second question is,
may I be first on this one? Yes. Thanks.
Well, we continue on the developments, but we are not we are very, spartan, let's say, on what we spend. For example, we do not allow our people to travel too much. If it is needed for customers, we do because there's no restriction on traveling to customers. But on other travels, we do have a restriction also on, on external services, So we're extremely frugal everywhere, but without sacrificing the long term. So anything that is business critical, anything that would, if not done, impact negatively our long term, we do not do.
So we do we are extremely we choose really what we do. And that is a bit, yeah, being a bit more frugal than otherwise.
Okay, clear. And would it imply that this smaller growth level that we see now in this quarter is likely to continue in the coming quarters?
Well, we, we guide operating cost to remain around the levels where
And the other question is on the, which you discussed earlier on the bullwhip effect. Clearly, So, in 2010, you're pretty sure that that fee shaped recovery given now maybe that also declines in a little bit not as steep as it was at those time what kind of recovery is then likely in the industry if we see that the volumes are picking up again? Is that given that today, would it then also imply just be a very steep recovery? Or do you think it would be more gradual?
Well, in comparison to what we saw in the crisis years, 'eight, 'nine, there, the, of course, we had, on top of that, a serious financial crisis, which then triggered an economic crisis. So we had a perfect storm And even though, overall, over the long, over the year, we only had a couple of percentages down in car sales, the drop, was much steeper, for Alexis, but also the the ramp up again afterwards, the recovery was much steeper. What we see now is that the total car sales is a bit more down, but over a longer period of time, So the drop is somehow not so big as it was back then, and therefore, the recovery might also take a bit longer. Usually, in the cycle, it takes between four and six quarters to recover. But again, every crisis is a bit different.
So it's very hard to predict, but that's where I think we should be looking at.
Sure. And if that, I can say that 4 to 6 quarters, would that also be the time that you need to recover your margins to the to the level that you had before the slowdown?
Well, that will be dependent of course on, how fast the recovery ramp will look like. And I think it's really too soon to tell anything about 2020. We will do that when we get there meaning in February.
Our next question comes from the line of Jeff Osborne. Your line is now open.
Hey, good afternoon. Most of the questions have been answered, but I had a few. Any sense on what we should be thinking about for capital expenditures for the year in light of the elongated automotive slowdown, are you considering slowing down the rate of any expansions in Sofia or any of the other locations that you had in mind?
Well, we have in the CapEx for the first half was 15,000,000. We guided for a level of 45 in the beginning of the year with all the information we have now on the table we expect that it will be a bit less. So, rather in the around 1,000,000, So, still for the second half, the investments that we planned in our test facility in Sofia, they continue as before the lower expectation is on behalf of a bit lower investment in equipment which is on the as a result of the top line, which is well, which is what it is today So $40,000,000 for the year, rather than $45,000,000.
Got it. That's helpful. And then just more broadly in terms of a cash and capital allocation, can you just talk about, I think you added about 28,000,000 of debt in the quarter, long term debt, if I'm reading it right. And then you've got the dividend payment, which you confirmed in the release this morning. I'm just curious why the dividend wouldn't go down or you would preserve some of the cash, especially given the working capital challenges you had in the first half elevated CapEx in the second half and not a visibility.
Can you just talk about your broader capital allocation strategy as a whole?
Well, the Board has decided to keep the interim dividend stable versus last year. Main reason for that is that we continue to to believe that we will see at a certain moment in time a recovery So, we continue to be a very profitable and company having strong cash flows. Let's say in last quarter, the last year, we have seen a couple of one offs, like I explained earlier, we have seen an an increase in working capital. We have had cash outs related to income taxes, but these elements going forward look different in terms of cash outs, which means actually that we expect the link between on the one hand profit and cash flow, well, the cash flow, which comes out of the profit is will be better than it was in the last quarters. So, that's an important element to, to take with you.
And on capital allocation, we continue to to distribute a substantial part of our profits to shareholders. That being said, we I think we will have to see going forward next year where we are at that moment and take again a new decision, but it's far too early So we feel very confident that, with the dividend distribution
as it
has been decided. And we think the cash outs with respect to working capital or, let's say, much lower going forward.
That's helpful. I had 2 other quick ones, if you don't mind, but One is on the guidance. Can you just remind us of your typical visibility as you provide guidance? I think you mentioned that the typical lead times are 16 weeks, if I heard you right, does that mean you're fully booked for the guidance or how should we think about that?
Yes, I think the like we said in the press release, visibility remains low. So, we give guidance for 1 quarter and, we are, we cannot see much further than that this moment. And that's also the reason why we refer to later statements with respect to Q4 and the beginning of next year. So from that perspective, I think visibility is, yes, it's a different situation than, let's say, 1 year ago.
Cycles and where I'm going with this is just is there a risk to inventory obsolescence in some of your better selling magnetic sensors, haul sensors, pressure sensors, etcetera, as you come out with new products and your inventory is a bit high here for the past 3 to 4 quarters, if the auto market remains in a subdued state for another 6 months or so. Is there risk to a material write down of the inventory as we enter 2020? Just as you come out with new product cycles that replace older ones or no?
Well, if you make a comparison to the same period of last year, it's not that our today's inventories are too high, but rather that the previous year's inventories were too low in Q2. We were still last year, we will still, at, yeah, in some cases in allocation. Now the inventories we build up are strategic, but they are also, only done in those areas where we are sure that they remain sellable. So anything any risk of obsolescence is not more than usual. So when the recovery will take place, those excess inventories, from today's point of view, excess, will no longer be excess because there will be a blessing, if everybody has been in a waiting mode to order and then suddenly, and that, that happens, the, because of the, There's not only a delay, when you go upstream, but there's also delay in information.
So when customers will suddenly find out, that they have too less inventory, and they find out too late, then Melexis will be able to deliver and take advantage of that.
Very good. I appreciate all the detail. Thank you.
You're welcome. Our next question comes from Yes. Good afternoon. Mike Roach from Degroof Petercam. If I look at the guidance for Q3, it seems as if your business is stabilizing, in the 1st 3 quarters of the year, both in terms of sales and in gross margin.
Now I don't know whether it's a coincidence or not, But if I look at the gross margin, it's about 500 basis points lower than your previous peak. And this is roughly the same what happened in the previous downturn. Could you tell me whether you have the impression that your gross margin is currently bottoming out or are there any other mechanisms that could perhaps push it even lower than it is today?
Well, the the difference in gross margin is for a big, big portion related to that underutilization of capacity. So that's a mechanism which simply plays and which has an impact depending on the the top line level and that taking into account our current equipment or depreciation, the people we have on the floor, we are or we end around, that 41% with the top line of 120,000,000 that can still deviate quarters quarterly, let's say, because of other influences like product mix, like yield, yield losses of products and so on. But that is basically how it works. If top line increases we will see an improved gross profit margin. Okay.
That's very helpful. So utilization is the main game changer. A follow-up question on that. Inventory buildup or hopefully release in due time. Is that something that can have a meaningful impact on your gross profit or not?
It's at this moment, it's not really playing. I think the impact of the inventory in a couple of 1,000,000 or down is neglectable. The main driver in the GPM difference in Q2 versus Q1 is the different product mix.
Okay. That's very helpful. Okay, ma'am. There are no further questions at this time. Please continue.
Okay. Thank you. The audience we Thank you for your attention and hope to have your attendance again at our next conference on October 23rd. Goodbye and have a lovely summer.
Okay. That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please standby.