Ladies and gentlemen, thank you for standing by, and welcome to the Nellixis FY2018 Results Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today. Wednesday, 6th February 2019.
I would now like to
hand the conference over to your first speaker today, Francoise Chombar. Thank you. Please go ahead.
Thank you, operator. Your audience welcome to our today's earnings call. First, let me give you some perspective on the business environment at large. And then our CFO, Karen Biegelsen, we'll bring some color on the financial side. After which, as usual, we will listen to your questions.
So let's look at the business situation. With the 4th quarter in line with expectations, we ended the year with close to EUR 570,000,000 sales. This means again double digit growth of 11% from Alexis in 2018. Without currency impacts, our growth percentage would have been 14 We appreciate the contribution Geographical spread in Q4 is tilting upwards in Asia Pacific, while skewing downwards in Europe. These are supply chain twists.
As mentioned during the previous earnings call, we see demand in the 4th quarter distorted by a mix of reasons. The main reason is the highest concern over the macroeconomic and geopolitical situations, due to global trade tensions. Q4 suffered greatly from supply chain knock on effect of WLTP in Europe and severe car sales slowdown in China. Customer behavior was nervous, leading to broad based inventory collection. As we're in the middle of these collections to date.
It's essential to recognize the bullwhip effect in supply chains. A well known concept first coined by MIT's Jade Forrester and well singulated by the beer distribution game developed by MIT Sloan School of Management in the 1960s. Reference to Wikipedia, The Bulwark effect was named for the way the amplitude of a width 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.
As the automotive supply chain is notoriously long and extremely global involving lots of different companies, The Bullwit effect creates often more havoc there than in less complex value chains. We observed already this typical behavior in the crisis years 10 years ago. While year on year car sales, 0809, decreased by 4% only. It led to 12% less car production, so factor of 3. But it shrank Melexis sales at the time by 30%.
30.
Demand surged again in 2010 as all companies in the value chain grappled to bring their inventories back to normal. Nalexis sales shot up in 2010 by 70% year on year, 70. However, the situation today is different in that 2009 We had a true deep crisis where as today, we should rather speak about a deceleration. GAR sales and production 17 to 18 comparisons tells us that the reduction of the major market Worldwide is about 1.2% in sales and about 1.6% in production. But regionally, it's a very mixed picture.
1st, Europe is slightly up in sales with 1.8% down in production, also a consequence of the WLTP crutch. 2, the U. S. Is slightly up 0.3% in sales, and 1.2% up in production, but we see a reversal of the sales trends in January with minus 2.1%. 3, China is down 3% in sales, and 4.5% in production for the first time in over a decade.
4, Japan is down in sales by 1.6%, but up in production by 0.5%. So 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. Due to a varied number of uncertainties like the US China trade tensions, Brexit, and Italy, people postponed their purchases of durable goods such as cars. In its common knowledge, That uncertainty always negatively impacts consumer and does also business confidence. It is also common that it recovers over time, and then the swing goes the other way until things finally normalize again.
The correlation between semiconductors and the economy has become pretty close since semis have become ubiquitous. Unless geopolitical tensions intensify, we believe a renewed positive order trends is likely to occur in the second half of twenty nineteen. Having said that, based on the current order book, Melexis expects 2019 sales to remain below the level of last the bottom already. Amidst all these unfavorable dynamics and subdued demand, Melexis stands strong. All next generation and innovation programs as Melexis customers continue as before.
Those short term customers are all cautious. No program has been put in the freezer on the contrary. In view of the long term trends towards more electrified, more autonomous, and more personalized cars Nelexis sees continued new opportunities for its sensor and driver components. It makes sense to highlight that every new car now carries on average 11 Lexus chips on board. Over 2018, we launched again more than 1 new product a month.
We released the next generation of Triaxis 3 d position sensors, new members to the latch and switch TPMS and infrared product families, enhanced performance current sensors and cool new smart fan drivers for both automotive and adjacent markets. And I'm equally excited about the boatload of new releases planned for 2019. Healthy finances, healthy balance sheets, healthy portfolio, healthy launch funnel, healthy award pipeline, healthy, secular trends. Our fundamentals remain intact. My conclusions We are realistic and not satisfied about today's situation, but we are positive and confident about our future.
Darren, the floor is yours. Thank you, Francoise, and good afternoon, ladies and gentlemen. A little bit more information on the financials. So for the full year 2018, sales were 1,000,000 an increase of 11% compared to the previous year. The Euro U.
S. Dollar exchange rate revolution had a negative impact on sales of 3% compared to 2017. The growth results was 1,000,000, or 45.9% of sales, an increase of 11% compared to 2017. R and D expenses were 13.7 percent of sales. G and A was at 5.3 percent of sales, and selling was at 2.6 percent of sales.
The operating result was 1,000,000 or 24.3 percent of sales, an increase of 4% compared to 1,000,000 last year. The net result was EUR 115,500,000 or EUR 2.86 per share, an increase of 4% compared to 100 1,000,000 or per share in 2017. So for the fourth quarter of 2018, we were at EUR141.6 million, an increase of 7% compared to the same quarter of the previous year and a decrease of 3% compared to the previous quarter. The U. S.
To euro, U. S. Dollar exchange rate. Evolution had a positive effect on sales of 2% compared to the same quarter of last year and a positive impact of 1% compared to the previous closures. The growth results was EUR 64,200,000, or 45.3% of sales, an increase of 5% compared to the same quarters of last year, and a decrease of 6% compared to the previous quarter.
R and D expenses were 14.7% of sales, G and A was at 5.6% of sales, and selling was at 2.5% of sales. The operating results was 1,000,000 or 22.5 percent of sales, a decrease of 11% compared to the same quarter of last year, and a decrease of 14% compared to the previous quarters. Share, an increase of 7% compared to €26,600,000 or €0.66 per share, in the fourth quarter of 2017 and a decrease of 5% compared to the previous quarters. We also or the boards of Manaxas decided on a final dividend, to propose to the annual shareholders meter to pay out over the result of 2018, a total dividend of EUR 2.20 growth per share. This amount contains an interim dividend of per share, which was paid in October 2018, and the final dividend of per share, which will be payable after approval by the annual shareholders meeting.
So the Nelexis shares will start trading ex coupon on April 24, 2019. Looking at the outlook, Menexus expects sales in the first quarter of 2019 to be in the range of 112 to 118. 1,000,000 with a gross profit margin around 41% and an operating margin around 13% at the midpoint of the sales guidance. Manexus expects its full year 2019 sales level to remain below the previous year. Gross profit margin is expected to be around 43 percent, taking into account a euro, U.
S. Dollar exchange rate of 1.15. So I think we can now start the question and answer session. So operating, please go ahead. Hello, operator?
Alright.
Are you ready? Are you going to begin the question and answer portion?
Yes, please.
Alright. Ladies and gentlemen, we will now begin the question and answer session. And wait for your name to be announced. Alright. Your first question comes from the line of.
Please ask your question.
Thank you very much. My first question is on your, I mean, Q1 guidance. So if we take the midpoint, it implies -19 percent at constant mercy year over year. So, I mean, when you describe the situation, and rightly, you compared to 2009 and and and, you know, like, that maybe this time it gonna be, short, like, a a a slowdown like you mentioned. But do you think the issue could be a bit more deep than than the short lived inventory correction, especially when we look at minus 19% year over year, you never had such, you know, impact since 2009.
And, you know, you had inventory correction before, like you said, 2015, for example, it was not disconnected. So just with your experience, do you think it could be more, I mean, a bit deeper than than people expect? Especially with the situation you described around macro environment, trade war, Brexit, and Italy.
What, we believe is that it is not deeper that, the, supply chains can make big twist, and they do. We see that. So, no. My answer is it is not more deep than that. For us today, as it stands with what we know and what we see, what we observe.
It is, supply chain effects due mainly to uncertainties in the market. Uncertainty with consumers who postpone their purchases. And this creates havoc in this very long chain that the automotive has.
Okay. But if we, I mean, you also said like January, February was a bottom what makes you think it's about them? Do you have any data points or to Yes. To flight?
That is based on the order behavior and the order coverage that we have today. We're also always very clear on this is a picture we take today, and we can only express, the conclusion based on the information that is available to us at this moment in time. And at this moment in time, we have the impression from the order behavior of our customers, and from the current order coverage that January, February seemed to note or to be to represent the, the bottom.
So you see a pickup in orders in the already for the Q2 quarter? If I if I
order in March is already higher than in than January, February. And we see that orders keep coming in for Q2 as well.
Okay. So if you see this recovering Is it still not possible to give a full year guidance?
No. Not at this moment in time, unfortunately. I wish I could. Because it would make things also easier for us, in our production planning. But, today, we have to work with, with what we
have. Okay.
That's right.
I understand. The other question I had is, if we look at Melexis performance, standalone and we've if if we compare it to others like Infineon or SD Microelectronics, they all reported And if we compare the 2 performance for the Automotive division, we see a a very different you know, picture. How can you explain such such difference? You know, I understand a couple of percentage point could be product mix, could be like geographic mix, but such a big difference is difficult to, to connect the dots.
Okay. I see what you mean. Now there are 2, elements in, in this picture. One is, what is the status of the allocation? Whether it's real or perceived allocation by customers.
When you have, a high rate of allocation perception or reallocation customers tend to order quite a bit much more than they really need. Also a very normal, behavior. Once you tell customers that your lead times are slowing down or or, sorry, not slowing down, but reducing. And so you confirm orders on a shorter notice and they noticed that, then customers will then start looking at their inventory and start doing inventory corrections. We have no more allocations at this moment.
If you read, you mentioned a couple of, of names. If you read those retro releases, then you will notice that some say we are still in allocation or even strong allocation in some areas. So those people would see different order behavior at this time than, we would. Because we are no longer in allocation. That's one.
The second And particularly, because if you look at the, guidance for the full year, there are not many of our peers that give you guidance for the full year. There is, for the moment, unless I'm mistaken, only one that gives us full guidance, full year guidance, and that's infinium. But if you then dig deeper in what they tell you about their, distribution of their, product lines, then you will see that power management on the one hand and then the, other microcontrollers, so the complex microcontrollers are due to, grow by 50%, five-0%. We are, as Melexis, not at all, in those areas. We do not have power management, so IGBTs and stuff.
And we do not have large microcontrollers for others. We are in different areas. And if you look at the, comments they make on the rest of their automotive business, then you will notice they say exactly the same as we do. I hope that answers.
Yeah. Yeah. No. That's very helpful. Understood.
The magnitude still is quite important. I mean, my opinion has also magnetic sensors. Right? And, you know, that there are strong competitors of use. And, I mean, in that sense, the IGBT I mean, it's not a it's a debate, but it's like, the content is coming from the XTV and ADAS And, I mean, you should have content increase according to your statements as well that you have higher content in EV and hybrid.
Yes. That is true, and we do. But again, these are real supply chain twists, and it's very hard to take any, but really any conclusions, looking at just 1 quarter or even 2 or even 3. So it is it is really virtually, but it's really extremely difficult to take any conclusions from just, looking at 1 quarter.
Okay. Okay. That's it.
The swings are just too, too unpredictable, let's say, too volatile.
Okay. And just for the full year, you didn't get on EBIT margin. I guess it's because you don't know where the top line will be. But can you give the OpEx an absolute and then?
What we can say is if you look at q4 OpEx, we expect still a slight increase throughout 2019.
Sorry. So Q4 all text, you we should do, like, a run rate of the 19.
The run rate with a slight increase.
Okay. Okay. Okay. That's that's clear. And last one, and then I'll leave the floor to my peers.
Sorry about that. But the Q1 gross margin, I mean, lower than we could expect, you know, for a fabulous company like you. And, I mean, you always, had, like, above 40 some gross margin in the past. So I was just wondering if you could explain what's going on with 41%.
So it has to do with fixed components in our, yes, in our gross margin. To give, a reference in, Q4, we had €19,000,000 component fixed.
And what is it?
The the fixed component is our internal test. So it's mainly equipment, depreciation and our internal people. So it's a component for our internal testing. And, as you know, we invested quite heavily in 2018. We had 76,000,000 and invest in 2018.
Obviously, the depreciation of this invest will be fully visible in 2019. So we take that along with us in 2019.
So it's not really one of them. I mean, do you still get 42% for the full year? It means that you did a very strong recovery then?
We expect that, yeah, economies of scale. When sales pick up again, there will be economies of scale. Because the investment need in 2019 will be much less lower than in 2018.
Okay. So for the 43% is based on the significant recovery in the rest of the year?
And your next question comes from the line of guys, Please ask your question.
Yes, thank you for taking my question. I have two questions. The first is also late to the discrepancy between your guidance and those of Infineon and Sensata who reported a few hours ago I think that is the, yeah, the discrepancy, for Sensata related to this, bullet effects only And is there a time lag of 1 or 2 quarters in in this? And then coming back to to Infineon, so you were indicating that the sensor market are growing at a lower CAGR, power electronics for ASSP Technology. Can you give us some guidance of the growth of, the CAGRs for power train and for body compared to the 50% you were highlighting for power electronics.
Thank you. Okay.
No problem. So, first, Sensata. So Sensata is, a tier that is further downstream from from us That means, in a bullwhip effect concept, they will have less swings and weirdness. So there is also a time lag. Now that time lag depends, on a lot of things, it depends not only on the, cycle times that are needed, but also on, the information lag So you have a coupling of the 2.
So that when we looked at the Sensata, information, we didn't really see any contradiction to what we are seeing. Then on Infineon, I cannot give you a power management, in or a CAGR information on power management. There, it's important to note that these, in general, are pretty high ASP, as far as I'm I'm aware. And that, these are also in, the highest or the strongest allocation. So you have a double effect there.
That might also explain, what we're seeing. Does that answer your question,
is a little bit, but you can confirm that you are not losing market share.
Oh, yeah. Yeah. If that's what you were hinting at. Sorry. I did not get it.
Yes, no, we are not losing market yet.
Okay. Thank you.
Again, it's only an inventory effect. The bullwhip effect in full in in full effect these days. Thank you. Operator, do you have more people with questions?
Oh, yes. We have your next question is from from the line of Marias Mainhu. Please Ask your question.
Yes. Good evening, everybody. A couple of one from my end. Maybe the first one on the full year guide. So you guide for sales go below or sales below 2018 levels.
And now if we looked at the first quarter guidance you guide for on a gross margin of 41% when sales are down 20%. Now for the full year, you do guide on gross margin 43%. Now if you would extrapolate that, that would actually imply that you see full year sales down, still high single digit numbers. Is this the kind of of of number we should look for? And, also, can you get a little bit more color on on on on the split between what is going to happen in automotive and non automotive.
And then a second question is actually on, capital expenditures. Do you plan to to actually, lower CapEx investment substantially and what kind of amount should we actually look for for next year?
Okay. I'll take your first questions and then Karen can take the CapEx question. So, 43% clearly assumes that there will be growth in the second half year of 'nineteen. We have to see the magnitude of that. So when you look at when we look today at what we know, and also about what we do not know.
What we reckon is that the effects of the WLTP supply demand crunch because it was quite disruptive in the value chain as well. And that was Europe, of course. That is expected to be that digested soon. A lot more will depend on the outcome of the trade talks between China and the U. S.
Of course, highly questionable. So we expect to have to have some use on this beginning of March. Now if these two countries can find a way to manage their rivalry to the benefit of the world economy and their own, then I think, or we believe that consumer and business confidence should return positive again. And then demand can pick up. And as, I explained, it can pick up extremely quickly.
So we hope for a positive outcome of the trade talks in March, of course. Now the deeper or longer that uncertainty remains in half year 1, the more difficult it becomes to recuperate that lost time, and and the lost sales in in half years too. But, of course, customers are now depleting their inventories. And somewhere in 2019, they will have to replenish them again. There is no other way So in that sense, it's very hard to understand today how things will play out.
So that is, that should answer your question on the full year guidance and the extrapolation of in gross profit margins. Then what would auto and adjacent do Well, it's that is that is equally hard, to tell. The only thing that, we can say is when we look at the at the q 4, then, adjacent has suffered more than automotive. You you notice that as well. I'm sure.
And the reason is that most of that adjacent, not all, but most, most of it goes through distribution. That means we have another, another tier in the value chain that can create, a an an amplified pool of effect. Now when we look at the the adjacent as such, it's It's a bit everywhere, but mainly still in in Asia. And it's Asia, half is about half is China, about the other half is the rest of Asia. So we see, in fact, a bit the same, the same happening as with, with automotive.
It's a shift and its supply chain, twist. How this will play out in the future? Also there, we have not lost any business. All the business is still there. The only thing is that customers tell us they have less demands.
And they have to build off their inventories. So, again, the uncertainty that plays there. We do expect that adjacent because we have, we continue to have a focus on it. We do expect it to, to increase in 2019 as well. So we have gained new, programs, new awards there, that come on board in 2019.
I hope that answers those two questions.
If I if if if I may, the the the 43 the the 43% gross margin. There has to there has to be like a top line assumption. So can you share the top line assumption for the full year? Is it minus 5? Is it minus 10?
But if we would have been able to make that, make that statements we would have. But today, it's, it's very hard, but Yeah. It does give us also some headroom now.
Alright. Fair.
We are quite comfortable the 43% of gross margin. Alright. Okay. And then there was a question. Is that okay, Matias?
Yeah. That's a that's a that's a
good, that's a fair response.
And then maybe in terms of capital expenditures, what should we expect for 2019 and maybe 20 as well?
So the capital expenditures, we expect around 1,000,000, of which house has an infrastructure, and that will be invested for sure because we are in the middle of, the expansion in Sofia. And the other half is more related to, top line growth. So that is less predictable, but our best guess today is around €45,000,000.
Alright. And maybe one short short short add on, in terms of income tax rate should we anticipate any difference for 2019?
So the guidance remains 15 to 20%.
Yep. Alright. Thank you. Thank
you. Operator, are there any other questions
Your next question comes from the line of Stephanie Hurry. Please ask your question.
Yes. Hello. Good afternoon. Still a question on the guidance for the full year. I'm sorry for that.
And I'd like to understand, where you see, where in the year you see the inflection point, because starting by minus 19%, in, in Q1, which is minus 17.5% year on year. Is it possible that you have, according to what you see in the market and the bottoming of the orders kind of double digit, growth sequentially in Q3 and Q4 because this is exactly what you need if you take the assumption of minus 5 for the year, or maybe minus 5 is just completely out of reach from from what you're seeing. That's the first question. And also the link, the comparison that people make with with Infineon and NFT. I'm not sure I do understand the percentage according to you of yourself that are linked to Adas and XEV, for instance, Infineon is saying that this is about 15% of their, of their total automotive sales.
So can you help us in having kind of comparison about that? Thank you very much.
Okay. On your first question, full year guidance, when do we see the inflection point We don't know. We can only make assumptions based on what we see today and what we see today letters to giving you a guidance as we did in the, in the press release. What we do see, as I said, also is that February, sorry, January February, theme to be the bottom. So there is already a slight increase in March.
And, the guidance for Q2, we will give in with the results of Q1. So we cannot give you more information than that. Then, can you repeat your question on, Infineon again?
Well, yes, what would you, how how do you think you are exposed to, to ADAS and XEV? Because Infineon basically saying 15% of the automotive sales is, XUV and us and the rest being the, I would say, the global market for automotive. Can you give a comparable number for you?
Well, what we, what we have in, exposure in terms of, the electric power train is mainly in, current sensors, temperature sensors, and embedded drivers. That's those are the main, product lines that are exposed to EVs. But they are equally exposed to, hybrids and equally exposed to, internal combustion engine, as such. We do not give any numbers on, our distribution on our product families. We don't do that.
But, if you look at Infineon, when they talk about EV, it's power management. So the power, the the the IGBTs, etcetera. And when they talk about others, they talk about their as far as I understood about their highly complex microprocessors. For others. Both of which, both those types of product lines, we do not carry.
Okay, understood. And maybe if I can ask to, to, to repeat the comment she made, on OpEx level. I, if I understand where we take the level of Q4, per quarter and we do a small increase? Or yes. That is that that's correct, right?
Q4 times 4 plus a small increase.
Okay. And this kind of seasonality on the OpEx or not at all?
Not really. No. Not not.
Okay. Thank you very much, Rachel. Okay.
Thank you, Stefan. Are there more questions, operator?
Yes. Your next question comes from the line of Jeff Osborne. Please ask your question.
Yeah, thanks a lot. One quick question I had on my end is just you mentioned that the orders for March were getting better. Can you talk about, which geography that was from? You you pointed us to following car sales and the bull with the fact that I just wanted to get a sense of where you're seeing some improvement.
Sorry, but, that level of detail I don't have right here.
Okay. Any sense then, you know, looking back, you highlighted the inventory, in the channel as a problem. Can you talk about the acuteness or severity of the problem by geography. Is it safe to say that the China has the biggest problem followed by Europe and then maybe the US is potentially a little bit better?
Yeah. I would say that, China, was more or less flat. For example, in in q4, there was more or less flat in auto. So it was the rest of Asia that, that's largely increased in, North, so in the Americas, it was also a slight increase for auto and the same for adjacent. So slight slight increase, not enormous.
And Europe, was down in automotive. And again, that was mainly due to the, the crunch we had due to WLTP.
I mean, I'm not sure I understood your response. I was asking about the inventory at your customers. It where where is the severity of the problem? Yeah. I was Is that the bulk of the inventory in the channel in China followed by Europe and the U.
S. Is a little bit more normalized? Or where which geographies, you know, do we need to monitor to then get comfort that this bull with the fact that you're alluding to? You know, what is starting to go away and we've we've hit the bottom as you described.
Yeah. We don't have exact figures right here, but to what what, what I feel is probably that Europe and Asia have probably a bit more inventory than the U. S. Would have at this point in time.
Thanks. I appreciate it. Thank you.
Operator, do we have other questions?
There are no further questions at this time. Please continue.
And thank you to your audience. We hope to welcome you to our next earnings conference, which will take place on April 23rd which is the same day as our shareholders meeting. Have a good day.
That's a further conference for today. Thank you for participating. You may all disconnect. Speakers. Please stand by.