Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Q1 twenty nineteen Results Conference Call. Ask questions. I must advise you that this conference is being recorded today 23rd April 2019. I would like to hand the conference over to your speaker today.
Thank you. Dear audience, welcome to the Lexus earnings call for the first quarter of the New Year. I will kick it off with how business is evolving and Karen Van Simpson, our CFO, will then take over for the financial perspective. We will welcome your questions afterwards. So MiX's Q1 results are in line with guidance.
Sales are impacted as anticipated by inventory corrections as 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 and visibility remains low. As Amplea explained in our previous earnings call in February, We're experiencing what is called the bullwhip effects in supply chain named for the way the amplitude of a whip increases down its leg. The further from the originating signal, the greater the distortion of the waste patterns. Swings in inventories amplify in response to shifts in customer demand as one moves further up the supply chain.
We know that automotive supply chain is notoriously long and extremely global involving lots of different companies, and 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 currency 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, and then the swing goes the other way until things finally normalize again. Geographically speaking, this uncertainty has impacted Asia Pacific more than the EMEA and the Americas.
As is apparent from the sales, the geography that we published. And this is in line with the regional differences in car sales in quarter 1. 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 9 consecutive months, the reduction in March of 5% was significantly lower than the 14 ish 1 in January, February. China's biggest auto industry association, the CAAM, commented that they hope to see the turning point appear in around July August.
And that recent government VAT cuts from 16% to 13%, I'd expect to further benefit car sales. 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% and so did Japan.
So things are still subdued in the first quarter with an estimated 6% in the minus globally versus the previous year. And our micrographs, one could suppose car sales seem to have hit a button, 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 quarter 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 and also Brexit and Italy continue to be concerned. Additionally, consumers have a hard time choosing which car to buy best, a gasoline, a diesel, a CNG, a hybrid, a full electric 1, climate protests, new city regulations, and new stringent norms make buying a car into a conundrum, and so 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 reflect the uncertainty about the timing and curve of an improvement in the second Amidst all this uncertainty, Melexis product development carries on at a steady pace. In the first quarter, Melexis launched 4 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 measurements 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. We extended temperature range and enhanced thermal stability make this new device even more versatile than earlier devices. And 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. 3rd, a PCBless Hall designed to meet the requirements of automotive manufacturers, implementing seat position sensors, the 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 seatbelt tensioning. The MLX 92223 is also applicable to other consumer and industrial applications. A new member of the 3rd generation Triaxis fall sensor with dual output that allows customers save significant size facing power.
It can indeed remove the need for the 2nd position sensor. It is AEC ready. It provides an ambient operating temperature range of up to 160 degrees c and low thermal drift. And so the 90374 is ideal for customer for automotive applications such as transmission range selection, sensing, or inhibitor switches. 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 Greena future. So our Q1 was particularly fertile for our innovative sensors, and there's 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, the Lexus now ranks 3rd in automotive sensors worldwide, following a 17% growth in this area in the past year. In view of the long term trend towards more electrified, more autonomous, and more personalized car Nalexis sees continued new opportunities for its sensor and driver component. 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. Garden, let me hand you the stage now.
So this came out at 1,000,001,000,000, a decrease of 16% compared to the same quarter of the previous use and the decrease of 18% compared to the previous quarter. There was a positive effect of the euro, U. S. Dollar exchange rate of trade compared to the same quarter of last year, and no impact compared to the previous. The growth results was 1000000 or 40.1 percent 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 and D expenses were 17% of sales. G and A was at 6 and a half percent of sales and selling was at 3.1 The operating result was 1,000,000 or 13.5 percent of sales, a decrease of 50 4% compared to the same quarter of last year and a decrease of 61% compared to the course. The net result was 1,000,000 or 0.35 euro per share, a decrease of 52% compared to 1,000,000 or 0.71 per share in the first quarter of 2018. A decrease of 51% compared to the previous quarter. So the outlook, we guide, for the second quarter, the sales to be in the range of 117 to 120 1,000,000 with a gross profit margin around 41% and an operating margin around 14% at the midpoint of sales guidance.
Alexis 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% to 43% taking into account the euro in my dollar change of 1.13. So we closed here the introductory site questions, and we would like to now move to the questions and answers session. So please go ahead
Thank you. Okay, ma'am. Your first question comes from the line of Matias Minhota. Please ask your question. Yes.
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 sentiments 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 projects or is that all staying relatively stable? And then, 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 this 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 2 questions.
Okay. I will take the first question. Karen will take the second one. So as far as the customer sentiment is concerned, in fact, all customers are still extremely cautious. The, everybody says yes, half year 2 should recover, but nobody, for the time being, there's to, to make a prediction.
And I think that is pretty yeah, pretty how would I say, equal across our customers They are just being realistic and look at what their customers are saying. Our Q1s 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. So it's important to look at the originating signal.
As I called it, in order to understand where things go. It's been a question of how fast the inventory of our customers will be, will be depleted or depleted sufficiently for them to reorder. And that's a bit the question today still as it was in February So that has not really changed only. We are 3 months further in the years and 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. I hope that is a and ask to your first question, Matija?
Yeah. That is. That is. Okay.
And then 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's what's valuations. Although we don't exclude the 43% behind us. It's just that today we don't see the authors order teams to confirm that from you.
Yes. And those things can be quick. As well. So we don't exclude it as Karen says. It can be quick, but it can also be slow.
And it's, it's very hard to now make a prediction. And so we don't make that prediction. It could go either way.
And then if I may do a follow-up, if you if you now look at the the midpoint of the gross margin guidance, what kind of a sales increase for the full year, would that be penciling in?
Release is slower sales than 2018. We don't want to specify that more, but we were just on the press release
Alright. Okay. Thank you.
Thanks. You too.
Again, another question comes from the line of Frances. Please go ahead. Excuse me, Ms. Mister Francis Bo Wignes. Your line is open.
Can can you hear me? Thank you very much. My first question was on the, 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 customer's inventory situation. So how do you see this inventory?
I mean, do you mean, 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 that it's still inventory corrections to come. Yes.
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?
Yes, it all depends on the run rate or the take rate and 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, it's the same product of Menexus that they're using for both new programs and ongoing programs. And 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. But in general, we see the we don't have the inventory situation yet.
We only have that, yeah, when people have published their their figures and that's usually one of the first, So 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. So in that sense, that also a sign that things are not worsening anymore as such and we believe, but again, with big caution, because, never say never, but we believe that the big has reached its bottom in Q1 as also we already said in February and that now it depends on how the recovery will how the slope and the speed of the pick up the recovery study will be.
That that's very clear.
The second one I had is on your gross margin.
Karen, I don't know if you explain why, I mean, the gross margin fell a bit short of your expectation. You're actually 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, this, downgrade, if I can
make sense? But in the in case usually we can quite predict for those that are quite a few elements that are difficult to know exactly how it will evolve. And in Q1, they all evolved rather in the negative way. So the product mix did not help in, we expected actually a slightly better product mix regarding gross margin. We also had a bit more cost of yields, in Q1.
Which seems to be not to persist in Q2, but it has an effect for sure in Q1. And then in general, obviously, the operational leverage was also, but this was more than expected that we would obviously not fully use of capacity. Necessarily. They don't necessarily persist particularly the product mix and the cost of field. We don't expect necessarily similar negative impact over the next course to say, but it's like I mentioned, it's not so easy to predict So the lowering gross margin, it's more related to, yeah, a slower recovery that we expect in the second half of the year.
So it's not really unit related, is that product mix?
It's not
necessarily a structural issue we have.
And that 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 I mean, given your comment is still not a recovery yet. And, you never had such a gross margin since 2014, 2015, So just, you know, you just struggle to understand how you can get there?
It is challenging, but not impossible.
Okay. That's clear. And the last one is on your own inventory. You know that I like to talk about this. Your inventory is increased further in terms of days, at least, So we are at 163 days.
If I remember correctly, in the last few calls, you said you were comfortable with this level, was 140 days, but it keeps increasing. So I just wanted to know how you want to with this inventory or if there is anything you can do, to minimize the risk of any write off or or anything like pricing decline, anything like that that could impact you?
Where we manage the inventory, quite well. We are not building, consciously obsolete stocks for sure not. Their, the inventory level whether it's now a bit higher than the last quarter is something we feel still comfortable with and it's a conscious choice to not let it go down and even let it go a bit further up because 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. So 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, and then we want to make sure that we can deliver to our customers and possibly faster than, our competitors could. And of course, we don't have a, always a tool one to one replacement, but sometimes we have. And then it's important, to be sometimes we are dual source, not not often that sometimes we do of course and then it's nice to be able to grab that opportunity. But 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. So we don't expect it to go down the next quarters or so.
Well, if the orders go up, it will go down. Yes, that's the idea.
Your next question comes from the line of Hanar Khanminan. Please ask your question. Hi,
good evening. Thanks for taking my question. It's Jonathan from Liberum. Just on the on the two areas of automotive and non automotive. In Q1, your non automotive was quite weak at about 33% decline.
Your automotive is doing slightly better at about 14.5. Do you see any difference in the behavior of the two segments as you look out into Q2, is one lie to improve a little bit faster than the other from where you're sitting right now. And second question is on the on the margin effect from product mix, which are the products which are doing better at this point in time and what is leading to that, that gross margin pressure from a product mix point? If you could elaborate a bit on that, that'll be great. And that's that's all I have here.
On the first on the difference between automotive and non automotive, we have seen it in the past as well that non auto reacts faster than auto. So the chain let's say the value chain is longer in automotive than in non automotive. It looks as if, from the figures, it looks indeed like auto is doing a little bit better than non auto. But in fact it's more or less the same in general. Because of the fact that the reaction times in nominal to are shorter than in auto, that can also be a reason why the situation is what it is.
Sorry. There's no specific, reason, why non auto and also should be different except for the fact that the reaction time and the information delay is different between the two.
So your 3% roughly growth guidance quarter on quarter into Q2, that we can assume is roughly similar for both sides?
Yes, maybe auto will be still a bit better because there we from the figures that we have. But again, with a lot of caution, it looks like auto is recovering a little bit faster than non auto, but 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. And again, we will have parts to deliver if is that those orders come in, we will be able to deliver. Usually, when you're able to deliver staff and customers will wait a bit longer as well to that's simply the way it goes in our business.
So it's hard to make any conclusions from that at this point in time.
The gross margin, so we have relatively less magnetic sensors in the field Q1, which is not necessarily we we expect that not to last. But that has negative impact on our, overall gross margin as they have slightly better gross profit margin. Or gross margins than average.
And can you think of any reason why in the 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 effective cannot draw conclusion just on a quarterly basis. There are differences from quarter to quarter it was indeed, but that makes sense. So what we did the next quarter, it could be a lot of product lines.
Got it.
Thank you very much.
We got another question. Wooten. Please ask your question.
Just one on the OpEx. It seems to have been very well managed in quarter, but a bit at odds with the guidance you provided last quarter, which I think was for a slight increase throughout 2019. And then I try to reconcile that with the 14 percent operating margin guidance for the second quarter, would it make sort of sense to assume a reacceleration, or was there something specific in the first quarter that's falling out in the second, any context will be very useful?
No, there is indeed slower, expense, mainly in the in the outflows part. So it is related to to employment costs. There we are. Yeah. It was even a slight increase, but the outsource part we have reduced and that, current sales levels, I don't see to to grow that substantially over the next quarter.
So we are also somewhat adapting to the sales level we see today.
We got another question.
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've talked about, but 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. So no slowdown.
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 1s?
It's both. It's both in car monitoring and exterior monitoring.
Very good. And then the last two is just in light of the slowdown, is there any change to the dividend policy company or your CapEx plans? And then if you could remind us of what to expect for both of those items for the year, that would be helpful.
Digital policy? Yes, for the dividend policy, We have a tax record, of free being a big portion of profit. And I don't, well, the policy. We don't have a strict policy, but we don't see to that we will break that that practice, considered in this situation. Obviously, the final decision will be taken in the sum.
So we will most likely come with the statement from dividends with the half year, if you figure
And, Karen, on the CapEx plans, any potential slowdown there in light of the the OpEx being throttled back? Is there any slowdown in your expansion in Sofia or any of the other locations?
The CapEx remains at we projected in the last call around 1,000,000.
You.
And we got another question. I'm sorry. Stepan Howdy. Please go ahead.
Yes. Hello. Good afternoon, is Stefanoy from ODDO. So I
have two questions. The first one is about your comment on the inventory correction. So basically you're saying that maturing direction is continuing. So I'd like to know according to you until when it can last before it becomes dangerous for your customers, is about the tax rate, because it was pretty low this quarter. So is there any change in the guidance in the tax rate?
Thank you.
Okay.
The fan, are you still there?
Yeah, I'm still here. Sorry for that.
Okay, no problem. You just heard the nice, auto music. No problem. Okay. So on the inventory correction, until when, can it continue until it become pages for our customers.
Very hard to say. Usually customers are always too late to react. So 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. So It's a very difficult question to answer this.
I'm sorry that. They're usually going too late, which is contributing to the progress effect. Because they react late, and then until it ripples through to the through the supply chain, it's it's in some cases indeed 2 days. Yes. So that's why we have to do with effect.
So the tax rate, Karen? So all the
tax rate, indeed, we had a lower, we were at around close to 10 percent in the first quarter. The lower profitability for the moment is indeed also lowering the expectation of the tax rate 2019 where we gave guidance of 15% to 20%. We now see more guidance of 10 to 15% for the year.
Okay. Okay. So it should be higher in the rest of
the year, not as low as
the 10% in Q1, but remaining pretty low compared to what you said before. And after 2019,
Yeah. For a for a profit levels that we saw in 2018, it will be rather again in the age of 15 to 20%.
Okay. Okay. That's clear for me. Thank you.
There are no further questions at this time. Please continue.
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 disconnect.