Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Q1 2019 Result Conference Call. At this time, all participants are in listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask question, you need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, April 23rd, 2019. I would like to hand the conference over to our speaker today, Françoise Chombar. Please go ahead, ma'am.
Thank you. Dear audience, welcome to the Melexis earnings call for the first quarter of the new year. I will kick it off with how business is evolving. Karen Van Griensven, our CFO, will then take over for the financial perspective. We will welcome your questions afterwards. Melexis Q1 results are in line with guidance. Sales are impacted as anticipated by inventory corrections of customers triggered by the continued uncertain economic and geopolitical situation caused by global trade tensions. We're still in the midst of those inventory corrections. Visibility remains low. As amply explained in our previous earnings call in February, we're experiencing what is called the bullwhip effect in supply chains, named for the way the amplitude of a whip increases down its length. The further from the originating signal, the greater the distortion of the wave pattern.
Swings in inventories amplify in response to shifts in customer demand as one moves further up the supply chain. You know, the automotive supply chain is notoriously long and extremely global, involving lots of different companies. Therefore, the bullwhip effect creates often more damage there than in less complex value chains. Let me repeat that Melexis didn't lose any business. The current dip in our sales is caused by supply chain effects only. It is common knowledge that uncertainty negatively impacts consumer and business confidence. It is also common sense that it recovers over time. Then the swing goes the other way until things finally normalize again. Geographically speaking, this uncertainty has impacted Asia-Pacific more than EMEA and the Americas, as is apparent from the sales by geography that we published. This is in line with the regional differences in car sales in quarter one.
Though we don't have all the numbers yet, we can make some pretty good guesstimates already. While China car sales have been negative for nine consecutive months, the reduction in March of 5% was significantly lower than the 14-ish one in January, February. China's biggest auto industry association, the CAAM, commented that they hope to see the turning point appear in around July and August. That recent government VAT cuts from 16 to 13% are expected to further benefit car sales. In Europe, the minus percentages in Q1 are also lower than in the previous quarter, but of course still negative. On the other end of the spectrum, after a flattish Q4, the U.S. car sales in Q1 dipped 2%. So did Japan. Things are still subdued in the first quarter with an estimated 6% in the minus globally versus the previous year.
On aggregate, one could suppose car sales seem to have hit a bottom, particularly in China. This very mixed picture is representative of the very different dynamics that play regionally and which make our job of predicting the next quarters extremely difficult. Various factors play a role. The U.S.-China trade truce continues to haunt everyone. WLTP is still creating ripples with some OEMs in Europe, Brexit and Italy continue to be a concern. Additionally, consumers have a hard time choosing which car to buy best. A gasoline, a diesel, a CNG, a hybrid, a full electric one? Climate protests, new city regulations, and new stringent norms make buying a car into a conundrum, consumers prefer to wait and see.
For OEMs, it is equally spinning, as they have to invest heavily into new powertrains while being unsure about which one will dominate the landscape in the future of mobility. For your information, according to the European Environment Agency, when you consider the CO2 generated from a vehicle's cradle to grave, so including production, disposal, fuel production, and consumption over lifetime, the CO2 emissions of a new diesel car versus a battery electric vehicle powered by the EU average electricity mix are more or less apart. This is just an example of the complexity of the whole debate. Looking at the short-term future, based on our current order book, we guide for a small sequential sales increase and profit margin expansion in quarter 2, while our full-year sales and gross margin guidance reflects the uncertainty about the timing and curve of an improvement in the second half of the year.
We expect 2019 to remain below the level of last year. Amidst all this uncertainty, Melexis product development carries on at a steady pace. In the first quarter, Melexis launched four new sensor products, which I'd like to tell you more about as they illustrate well the breadth of our innovation potential. The first one is a new version of our far-infrared thermal sensor array that allows for simplified integration of temperature measurement into applications that enhance safety, efficiency, and convenience, especially in harsh thermal conditions. It is particularly suited to applications in the world of cooking, such as conventional ovens, microwave ovens, as well as industrial applications such as detection of power electronics overheating, and of course, automotive.
The extended temperature range and enhanced thermal stability make this new device even more versatile than earlier devices. We meet our customers' needs for accurate temperature sensing in even more challenging thermal conditions. The second one is a fully integrated automotive-grade VGA time-of-flight image sensor for applications such as in-car and exterior monitoring. Not only does this new kid on the block reinforce Melexis' leadership in this space, it provides our customers also with a single-chip solution that really could help revolutionize the automotive industry. Third, a PCB-less Hall effect latch designed to meet the requirements of automotive manufacturers implementing seat position sensors for driver and passenger safety and comfort. Accurate detection of the seat position can be used by ECUs to adjust safety features such as airbag deployment or seat belt tensioning. The MLX92223 is also applicable to other consumer and industrial applications.
A new member of the third generation tri-axis Hall sensor with dual output that allows customers to save significant size, space, and power. It can indeed remove the need for a second position sensor. It is ASIL C ready. It provides an ambient operating temperature range of up to 160 degrees Celsius and low thermal drift. The MLX90374 is ideal for automotive applications such as transmission range selection sensing or inhibitor switching. It can also be used to detect the position of pedals, steering wheel, or seat height, as well as in the drivetrain. It's an unequivocal contributor to a greener future. Our Q1 was particularly fertile for our innovative sensors, and there is more to come this year.
Talking sensors, it is equally with pride and pleasure that I can announce that according to the Strategy Analytics database, Melexis now ranks third in automotive sensors worldwide, following a 17% growth in this area in the past year. In view of the long-term trends towards more electrified, more autonomous, and more personalized cars, Melexis sees continued new opportunities for its sensor and driver components. My conclusion today is the same as in February. We are realistic and not satisfied about the current situation, but remain positive and confident about our future. Karen, let me hand you the stage now.
Thank you, Françoise. Good afternoon, ladies and gentlemen. Sales came out at EUR 116.5 million, a decrease of 16% compared to the same quarter of the previous year, and a decrease of 18% compared to the previous quarter. There was a positive effect of the euro-USD exchange rate of 3% compared to the same quarter of last year, and no impact compared to the previous quarter. The gross result was EUR 46.8 million or 40.1% of sales, a decrease of 26% compared to the same quarter of last year, and a decrease of 27% compared to the previous quarter. R&D expenses were 17% of sales. G&A was at 6.5% of sales, and selling was at 3.1% of sales.
The operating result was EUR 15.7 million or 13.5% of sales, a decrease of 54% compared to the same quarter of last year, and a decrease of 51% compared to the previous quarter. The net result was EUR 13.9 million, or EUR 0.35 per share, a decrease of 52% compared to EUR 28.8 million, or EUR 0.71 per share in the first quarter of 2018, and a decrease of 51% compared to the previous quarter. For the outlook, we guide for the second quarter, the sales to be in the range of EUR 117 million-EUR 123 million, with a gross profit margin around 41% and an operating margin around 14% at the midpoint of the sales guidance. Melexis expects its full year 2019 sales level to remain below the previous quarter. Gross profit margin is expected to be in the range of 41%-43%, taking into account the euro-USD exchange of 1.13.
We close here the introductory section. We would like to now move to the questions and answers session. Please go ahead.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask question, please press star one on your telephone and wait for your name to be announced. If you want to cancel your request, just press the hash key. Once again, please press star one for question. Okay, ma'am, your first question comes from the line of Matthias Maenhaut . Please ask your question.
Yes, sir. Hello, good afternoon, everybody. First question is actually, if you would now interact with customers, what is actually the feeling that they are giving, the sentiment that is now in the supply chain? Are they actually becoming more optimistic? Is it more or less the same as at the end of the full year results? Are some shifting some of their long-term projections, or is that all staying relatively stable? Second question that I'll actually have is, if you look at full year guidance, you actually lowered the gross margin guidance for the full year. What is actually driving this downwards revision? Is this because you are becoming slightly more cautious on the shape of the recovery, or are there other factors behind? That's my two questions.
Okay, I will take the first question. Karen will take the second one. As far as customer sentiment is concerned, in fact, all customers are still extremely cautious. Everybody says, yes, H2 should recover, nobody for the time being dares to make a prediction. I think that is pretty, how would I say, equal across our customers. They are just being realistic and look at what their customers are saying. Our tier ones have sometimes very low visibility. Whether the situation is good or bad, they always have low visibility from the OEMs. What we look at more, and that's also what I did in the introduction, what we look at more is to see how the car sales and the car production evolve, because that, in the end, at some point in time, will ripple through into the supply chain and to us.
It's important to look at the originating signal, as I called it, in order to understand where things go. It's a question of how fast the inventory of our customers will be depleted or depleted sufficiently for them to reorder. That's a bit the question today still, as it was in February, so that has not really changed. We are three months further in the year. Of course, as we also said in February already, the longer it takes to recover, the less chance there is to recuperate the time that was lost for this year.
All right.
I hope that is an answer to your first question, Matthias.
Yeah, that is.
Okay.
I think it's more or less the answer to the second question as well, as we indeed anticipate a slower recovery in the second half than what Françoise already mentioned. Although we don't exclude the 43% minus, it's just that today we don't see the orders yet to confirm that strongly.
Yeah. Those things can be quick as well. We don't exclude it, as Karen says. It can be quick, it can also be slow, it's very hard to now make a prediction, we don't make that prediction. It could go either way.
If I may do a follow-up. If you now look at the midpoint of the gross margin guidance, what kind of a sales decrease for the full year would that be penciling in?
The guidance in the press release is lower sales than 2018. We don't want to specify that more
Okay. Thank you.
Thanks, you too.
We got another question, comes from the line of Francis. Please go ahead. Excuse me, Mr. Francis Bouvignie s.
Hi.
Your line is open.
Can you hear me?
Francois-Xavier Bouvignies.
Yes, I couldn't. Yes, I didn't recognize my name.
Okay.
Thank you very much. My first question was a bit of follow-up of the first question on the visibility that you have. I understand that it's still dark out there. I just wanted to have your view on your customers' inventory situation. How do you see this inventory? Do you think the inventory correction at your customers is over as we speak, and then it depends on the demand, or do you think there is still some inventory correction to come?
As far as we can see, there is still inventory corrections to come. Yes.
Okay. That's clear. Do you think it's going to be over by Q3, or it's still fairly high, and then it may take a bit longer?
Yeah. It all depends on the run rate or the take rate. That depends of course, on how fast recovery in car sales will take. There are, of course, also new programs coming on board and then it's difficult to understand, because sometimes it's the same product of Melexis that they're using for both new programs and ongoing programs. Of course, we try to find out as much as possible from our customers, but sometimes they are also a bit in the dark on what is happening at their OEMs. In general, we don't have the inventory situation yet. We only have that when people have published their figures, and we're usually one of the first. It's difficult to get a view on this, but if we take the previous, then we see that inventories are either decreasing or they are flat.
In that sense, that's also a sign that things are not worsening anymore, as such. We believe, but again, with big caution because never say never, but we believe that the dip has reached its bottom in Q1, as also we already said in February. That now it depends on how the slope and the speed of the recovery study will be.
That's very clear. The second one I had is on your gross margin. Karen, I don't know if you explained why the gross margin fell a bit short of your expectation. You are usually very good at forecasting your gross margin, and it was a bit lower this time, and you also decreased for the full year your gross margin. Can you tell us a bit the moving parts behind this downgrade, if I may say?
In Q3, we can quite well predict, although there are quite a few elements that are difficult to know exactly how they will evolve. In Q1, they all evolved rather in a negative way. The product mix did not help. We expected actually a slightly better product mix regarding gross margin. We also had a bit more cost of yield in Q1, which seems to be not to persist in Q2, but it had an effect for sure in Q1. Then in general, obviously, the operational leverage was also. This was more or less expected that we would obviously not fully use our capacity.
It's not because of.
They don't necessarily persist, particularly the product mix and the cost of yield. We don't expect necessarily similar negative impact over the next quarters to say, but like I mentioned, it's not so easy to predict.
The lowering gross margin, it's more related to a slow recovery trend that we expect in the second half of the year.
It's not really unit-related, it's like product mix.
It's not necessarily a structural issue we have, no.
If we look at the 43% for the full year, it means that you need to get more than 46% gross margin in H2 which, given your comment, it's still not a recovery yet. You never had such gross margin since 2014 or 2015. I just struggle to understand how you can get there.
It is challenging, but not impossible.
Okay. That's clear. The last one is on your own inventory. You know that I like to talk about this. Your inventory increased further in terms of days at least. We are at 163 days. If I remember correctly, in the last few calls, you said you were comfortable with this level, which was 140 days. But it keeps increasing. I just wanted to know how you want to deal with this inventory, or if there is anything you can do to minimize the risk of any write-off or anything like pricing decline, anything like that could impact you.
Well, we manage the inventory quite well. We are not building consciously obsolete stock, for sure not. The inventory level, where there is now a bit higher than last quarter, is something we feel still comfortable with, it's a conscious choice to not let it go down and even let it go a bit further up, as we mentioned before, at the previous earnings conference, when things come back, the structural issues that were there before, like in 2018, structural issues of capacity constraints a bit everywhere in the semiconductor value chain, they are still there. We need to be sure that we can level off the peak that we believe can happen. I'm not saying it will happen, but the peak can happen. Then we want to make sure that we can deliver to our customers, and possibly faster than our competitors could.
Of course, we don't have always a full one-to-one replacement, but sometimes we have. It's important, sometimes we are dual source, not often, but sometimes we're dual source. It's nice to be able to grab that opportunity. We feel very comfortable, and we don't see a need to reduce our inventory or manage it differently than we have done so far.
Okay, that's very clear. We shouldn't expect it to go down the next quarters or so.
Well, if the orders go up, it will go down. Yes.
Okay.
That's the idea.
Okay. Thank you very much.
You're welcome.
Your next question comes from the line of Janardan Menon. Please ask your question.
Hi. Good evening. Thanks for taking my question. It's Janardan from Liberum. Just on the two areas of automotive and non-automotive. In Q1, your non-automotive was quite weak at about 33% decline. Your automotive was doing slightly better at about 14 and a half. Do you see any difference in the behavior of the two segments as you look out into Q2? Is one likely to improve a little bit faster than the other from where you're sitting right now? Second question is on the margin effect from product mix. Which are the products which are doing better at this point in time? What is leading to that gross margin pressure from a product mix point of view? Could elaborate a bit on that'll be great. That's all I have here.
Okay. Well, I'll take the first and you the second, Karen. On the first, on the difference between automotive and non-automotive. We've seen it in the past as well, that non-auto reacts faster than auto. Let's say the value chain is longer in automotive than in non-automotive. From the figures, it looks indeed like auto is doing a little bit better than non-auto. In fact, it's more or less the same in general. Because of the fact that the reaction times in non-auto are shorter than in auto, that can also be a reason why the situation is what it is. There's no specific reason why non-auto and auto should be different, except for the fact that the reaction time and the information delay is different between the two.
Your 3%, roughly, growth guidance quarter-on-quarter into Q2, that we can assume is roughly similar for both sides?
Yeah, maybe auto will be still a bit better because from the figures that we have, again, with a lot of caution, it looks like auto is recovering a little bit faster than non-auto. Then again, non-auto has very short reaction time, so it could still be that there are orders coming that we didn't see yet, and that will still be delivered in Q2. Again, we will have parts to deliver. If those orders come in, we will be able to deliver. Usually, when you're able to deliver fast, then customers will wait a bit longer as well. That's simply the way it goes in our business. It's hard to make any conclusions from that at this point in time.
Understood. On the mix?
On the mix-
On the gross margin, we had relatively less magnetic sensors in the sales in Q1, which is not necessarily, but that has a negative impact on our overall gross margin, as they have slightly better gross profit margin or gross margin than the average.
Can you think of any reason why, in the sort of inventory correction or downturn, magnetic sensors have been impacted more than other parts of the portfolio?
No, it's a quarterly effect. You cannot draw conclusions just on a quarterly basis. There are differences from quarter to quarter. This quarter it was indeed magnetic sensor that was somewhat weakest. Next quarter it could be another product line.
Got it. Thank you very much.
We got another question, comes from the line of Nigel van Putten. Please ask your question.
Hi, good afternoon. Just one on the OpEx. It seems to have been very well managed in the quarter, but a bit at odds with the guidance you provided last quarter, which I think was for a slight increase throughout 2019. Then if I try to reconcile that with the 14% operating margin guidance for the second quarter, would it make sense to assume a re-acceleration? Was there something specific in the first quarter that's falling out in the second? Any context would be very useful.
No, there is indeed slower expense, mainly in the outsourced part. It is related to employment costs. There we are. There was even a slight increase, the outsourced parts, we have reduced. At current sales levels, I don't see to grow that substantially over the next quarters. We are also somewhat adapting to the sales levels we see today.
That's very clear. Appreciate it. Thanks.
We got another question, comes from the line of Jeff Osborne . Please ask your question.
Yeah, good evening. A couple from my end. I was wondering if you could give us a sense of the quoting activity for future design wins. Fully understand the inventory correction that you talked about, is there any slowdown in the broader design win and quoting activity that you're seeing?
Okay. No, there isn't. We see continued activity, and we're pretty satisfied with what we see coming. Yeah. That gives us also the confidence on the long term, of course. No slowdown.
That's good to Excellent. That's good to hear. Just three other real quick ones here. On the new time-of-flight sensor that you've mentioned on the call and in the press release, is there a bias to what you're seeing in terms of internal monitoring within the cabin or external? I was just curious in terms of the initial interest that you're seeing from tier ones.
It's both. It's both in-car monitoring and exterior monitoring.
Very good. Last two is just in light of the slowdown, is there any change to the dividend policy of the company or your CapEx plans? If you could remind us of what to expect for both of those items for the year, that would be helpful.
Dividend policy? For the dividend policy, yes. We have a track record of repaying a big portion of our profits. We don't have a strict policy, we don't see that we will break that practice considering the situation. Obviously, the final decision will be taken in the summer. We will most likely come with a statement on dividends with the half-year review figures.
Karen, on the CapEx plans, any potential slowdown there in light of the OpEx being throttled back? Is there any slowdown in your expansion in Sofia or any of the other locations?
The CapEx remains as we projected in the last call, around EUR 45 million.
Very good. Thank you.
Once again, if you would like to ask question, please press star one on your telephone and wait for your name to be announced. We got another question, comes from the line of Stéphane. I'm sorry. Stéphane Houri, please go ahead.
Yes, hello. Good afternoon. This is Stéphane Houri from ODDO BHF. I have two questions. The first one is about your comment on the inventory correction. Basically, you're saying that the inventory correction is continuing. I'd like to know, according to you, until when it can last, before it becomes dangerous for your customers to have too low inventories? That's the first question. The second question is about the tax rate, because it was pretty low this quarter. Is there any change in the guidance in the tax rate? Thank you.
Yeah, on the first question, I'm coming.
Hello?
Stéphane, are you still there?
Yeah, I'm still here. Sorry for that.
Okay, no problem. We just heard the nice auto music. No problem.
Sorry.
On the inventory correction, until when can it continue until it becomes dangerous for our customers? Very hard to say. Usually, customers are always too late to react. We try to make sure that we're in very good touch with them, very close connection with them, with at least some of them, to tell them when we feel it can become dangerous, but it's very hard to know, of course. Yeah. It's a very difficult question to answer, Stéphane. Sorry about that.
Yeah. Okay.
Usually they're too late, which is contributing to this bullwhip effect because they react late, and then until it ripples through the supply chain, it's in some cases, indeed, too late. Yeah. That's why we have the bullwhip effect.
Yeah. Okay.
The tax rate, Karen?
On the tax rate, indeed, we were at around closely 10% in the first quarter. The lower profitability for the moment is indeed also lowering the expectation of the tax rate for 2019, where we gave guidance of 15%-20%. We now see more guidance of 10%-15% for the year.
Okay. It should be higher in the rest of the year, not as low as the 10% in Q1.
Q1
remaining pretty low compared to what you said before. After 2019?
Yeah, for profit levels, as we saw in 2018, it will be rather again in the range of 15%-20%.
Okay. That's clear for me. Thank you.
You're welcome.
There are no further questions at this time. Please continue.
Okay. Thank you, operator, and thank you, audience, for your kind attendance. We hope to welcome you to our next earnings conference on July 31st. Enjoy the spring and goodbye.
This concludes our conference for today. Thank you for participating. You may now all disconnect.