Ladies and gentlemen, thank you all for standing by, and welcome to is Alexis Q3 2018 Results Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by question and answer session at which time. If you wish to ask questions, you really press star and the number one on your telephone and wait for me to be announced. I must advise you all that this conference is being recorded today, Wednesday 24th October 2018.
And I would like to hand the conference over to your 1st beautiful day Ms. Francoise Schumbar, please go ahead, ma'am.
Thank you. Welcome, to the Lexus Earrings Call for the third quarter 2018. I'll begin with a business perspective update after which our CFO, Karen Van Vinkston, will carry on with the financial highlights. And of course, subsequently, we will be happy to answer all your questions. Quarter 3 sales came out at 15% growth year on year, just south of 1,000,000 There was no currency impact and geographical spread year on year was the same as well.
Lenex's year to date performance is in line with expectations. This is good growth related to both existing and new programs with us key growth drivers in Q3, magnetic position sensors, embedded motor drivers and pressure sensors. Let's dig a bit deeper into these 3 product lines. 1st, magnetic positions, Our new generation Triaxis, which was launched in April this year, is gaining traction. While the previous generation uphold new design wins too.
It reaffirms the number one position we enjoy in this field. Magnetic position sensors can be found mainly in the powertrain, in particular, also the new electrified powertrain. Both hybrid and pure EV. The recoiling in steering, pedal, and shifter applications, we've seen further ramps. Nalex's products fulfill the higher demands in robustness, safety, integration, and electrification in general.
And added features are driving many of the integration activities. We see these trends to proceed as autonomous driving electrified cars and consumer demands for more confident ease of use, maintain its their course. It's also great to see our embedded motor drivers picking up steam now. We call them embedded, because they contain an MCU core and a flash memory. For these products, the MCU core is proprietary to Lexus.
These are complex, highly integrated products that enable our customers to achieve their targets on emissions, efficient electrification, and silent motors. Smart and small mechatronics in cars is an accelerating trend, and the Lexus is very well positioned with a broad product portfolio. You'll find these embedded motor drivers, for example, in air grills shutters, smart valves, and all kinds of VLDC pumps and drillers. Finally, we want to highlight our pressure sensors getting popular. This product line makes also a significant contribution to developing highly efficient and cleaner vehicles, thereby lowering emissions and preserving the environment.
Next to conventional applications such as braking and that's the universal needs in all types of cars. We see uptake in 2 new areas being seats lumbar that is connected to the trend of personalized vehicles. And thoughts. All of this demonstrates that the long term fundamentals of Melexis are intact Short term though, our visibility is lower than anticipated before. And currently we see demand distorted by a mix of reasons.
The main reason is the higher concern over the economic and geopolitical situation due to global trade tensions. The past, the Trump administration has chosen isn't doing our industry any good. We noticed our customers have suddenly turned much more cautious, and thus, they are scrutinizing their costs. Meaning in the first place their inventories. We reflect this unusual demand distortion in our adjusted sales titles for the full year.
Our opinion today is that the extent of this weakness is likely to be moderate and that it is likely to last for a brief period of time. However, at this point, It is very hard to make any predictions as to how this will play out. But, again, this is short term. Like for turbulence during a flight. Long term is a different and positive story.
When we look at our customer forecast, which comprise a longer time frame than purchase orders and knowing what our design wins are, we have reasons to be confident, mid and long term. This is on the back of both organic growth of existing products and of new products ramping up in 2019. Our content growth is on the rise with multiple product lines as they tick all the boxes on the secular trends. Electrification, assisted drive, and personalization of the car. Key to Alexis is that there is no structural change going forward.
Now I will hand the stage to Karen for the financial update. Thank you, Florence. Good afternoon, ladies and gentlemen. So on the financial, the growth results was 1,000,000 or 46.4 percent of sales, an increase of 17% compared to the same quarter of last year. And an increase of 3% compared to the previous quarter.
R and D expenses were 13.3% of sales, G and A was at 5.3 percent of sales and selling was at 2.6% of sales in the 3rd quarter. The operating results were 1,000,000 or 25.1 percent in the 3rd quarter of sales, an increase of 15% compared to the same quarter of last year, and an increase of 4% compared to the previous quarters. The net result was €13,100,000 or €0.74 per share, an increase 7% compared to 1,000,000 or 1,000,000 per share in the third quarter of 2017. And can increase the terms compared to the previous quarters. I would like to open up the questions and answers session.
Thank and wait for your name to be announced. And we've got questions over the phone line. Your first question comes from the line of Francois
Hi. Thank you, very much. I have a couple if I may. The first one is, on the on the growth that you're seeing in in q 4, and the impact of the inventory. Given that your lead times is roughly, I mean, 16 weeks, if I remember correctly, you said in previous calls, and how we think about the beginning of 'nineteen?
I don't, I don't, you know, expect you to give the term 'nineteen guidance, but given the visibility that you have, and you mentioned a brief impact, just to get, you know, a sense of how we should think about ATRA 19, especially given key comps that are, I mean, if I remember, Q1 'eighteen was particularly strong. So you are carrying a very tough comp time as well.
Mhmm. Yeah. Thank you, Francois. So in fact, if you look at the, at the sales that we, guide for in the fourth quarter, it's still equal to year on year sales growth of 6%. So I think that's the first thing that we have to understand.
Now, and indeed, traditionally, we we give only guidance for 2019 after full year publication. So I, I cannot do that today. However, if if you ask me, how do you think that 2019 will begin Well, the honest answer is, for the time being, order behavior of customers is today quite different than usual. The reasons like, we mentioned in the press release and the reasons I mentioned before in the introduction. Current visibility is low.
Customers seem to wait, with, putting in their purchase orders. They are indeed pushing out, their, their orders that they had already put in. Main reason as what they tell us is that they want to make sure that they don't have too high inventories at the end of the year. Some mentioned lower, lower, bad. Some mentioned lower visibility, so we have a bit of everything, but in the end, they wait with ordering.
Now if this trend continues, yeah, it could be that we will face a slow start of the year because, of course, if, for example, a customer shifts out, parts that were ordered in December towards February. Of course, they will not order new parts for January, since you can see that. Now on the other hand, again, based on the customer forecast, that have a much longer time horizon than the purchase orders. And based on the discussions we have, the awards we've been with customers, we have reasons to make a long term. Now these are 2 this foot pattern.
So you have the short term pattern, which is extremely volatile and with low visibility, the inventory corrections, the slow order intake, the waiting, customers, let's say. So that's the short term, pattern. And then you have the second pattern, which is the more structural pattern, pattern, sorry, with expected ramp ups of new business, new and they are super superposed to each other. So we will have to see how, they will correlate, how how one will trade off the other. That is today, very hard to say because of the volatility of the first pattern.
And you mentioned in your remarks that you expect it to be brief, an election term you know, uncertainty. What what makes you think it's gonna be brief? I mean, is there any debt upon that you could, you know, share with us to to
For the same for the same reasons that I already mentioned before, when you when we talk to our customers, we they are very busy with new new programs. We are very busy with new programs together with them. There's a lot of work to do. There's good developments. There's good awards, being discussed.
And that is the reason why we believe this is a Yeah. This is a correction for sure, but this is also a lot of uncertainty. So there there is no other reason than that.
Okay. Thank you. The second one I had is on your gross margin. So your level of inventory is still very high and is systems is what you said in the quarter saying that you are comfortable with this kind of level, although it can be slightly, but the question I had is, if you wanted to deflate this inventories, what should we expect in terms of impact on your gross margin, if any, just to get a sense of of your gross margin profile in a in a, in a, like, more challenging environment?
We don't expect major impact on the, if any, on the margin of, depleting our inventory. Anyway, as mentioned already, we are confident with the level 3 of heating. So We are not, counting on a huge depletion of our inventory levels, in the coming in the in the short system.
Okay. Understood. That's all my questions. I will leave the floor to my place. Thank you very much.
Thank you, Francois. Operator, could you see if there are any other questions?
Yes. The next question comes from the line of Jonardan Mena. The line is now open. Please ask your question.
Hi, good evening. Thanks for taking my question. When I look at your q3 numbers, your non automotive revenues fell very sharply. Around 24% to both quarter on quarter year on year. While your automotive revenues actually seem to have done very well, they went up, you know, 6% or so.
I'm just trying to the weakness that you are seeing, some of your peers have talked about a lot of weakness in the distribution channel, Tina, I talked about it, SD Micro talked about it. And obviously, your non automotive is quite a lot into a distribution channel. Is most of the weakness that you're seeing in the distribution channel, for non automotive? And is that where we should expect much of the decline into Q4, or are you also seeing quite a bit of weakness in the automotive side?
Yes. So you are you are absolutely right that, most of the, adjacent and what we call adjacent markets are going through the distribution channel. And indeed, we see weakness there, and we see already some more weakness there in Q3 than with automotive. That is correct. Now the uncertainty that, that we see seem to have been more, pronounced with adjacent markets than with the automotive markets so far.
But indeed, also in Q4, we do not expect it to change, dramatically. So it's not like, the, non auto will suddenly, be boosted and auto will suddenly drop. I think it will be more or less the same in Q4 as far as, percentage is concerned.
So in q4 also, you will see more weakness in the adjacent markets and less weakness in automotive. Is that what I'm getting from you?
No. No. What I mean is we now have 92% automotive and that we think as far as we see today, but again, we're in a very straightforward situation. We see the same, like, 92 or something for automotive in, Q4. It might even increase a bit.
And we believe that the uncertainty that you see in adjacent markets, I mean, it's easier for cost for any customers to, dingade so here we work. Looking for the work to delay their purchases. They say, oh, we'll we'll wait to buy another washing machine or another I don't know what or no, I'm not going to buy that drone. For my kids now, I'm going to wait, until we're a bit more clear about the economy. I think, therefore, we do see a higher volatility in the, adjacent market.
And the second thing is that, with adjacent markets, we're more exposed to China. Than, with automotive.
Got it.
But China also is is yeah. Is influencing the lower adjacent market contribution in Q3 and in Q4.
Okay. And in automotive, you know, some of your peers are saying that there is not much weakness. So they, in fact, they're saying it's very strong. Again, STM today morning was saying that it's a strong, Elmos came out after the quarter ended and said they're not seeing any weakness and they're across the area was Infineon, at least during the last time they said, again, half the quarter has completed that they said everything is in automotive is very strong. On the other hand, I agreed DI yesterday, said that automotive has got some weakness as well.
I'm just wondering your weakness. I mean, how do you explain this discrepancy between some suppliers who seem to be seeing a little bit more weakness and especially in your case, is it that, perhaps you have a a higher level of exposure to someone like Volkswagen with has seen a much bigger impact from WLTP than some of the other companies. And it's that end customer or OEM or tier 1 exposure, which is showing resulting in this difference, or is there some other explanation for this?
Okay. Well, we communicate in a very transparent way on how we see the situation. We cannot speak for other companies. The only thing I can see is that in the last days, we've seen several tier ones and OEMs making business comments, which support our view. And to your, comments that do we have a higher exposure to some OEMs, like VW?
I don't think so because the the situation that we're seeing is very, very spread over, over our customer base. And, we are not more exposed to Volkswagen than to any other
Got it. And one last question from me. When you say brief period of time, I know this is a a difficult question to answer, but would one I mean, I'm not gonna hold you to it at all, but is 1 quarter a brief or 2 quarters brief and would long I presume long would be like 3 to 4 quarters, but what what would be brief around?
Well, if I would be able to predict that, I'll probably help you seeking it. I don't know. I think nobody knows. Honestly, if we're honest to ourselves, nobody knows because it's, it's it's hard to predict, especially since the Trump administration seems to change, course very quickly. So what's is valid today might not be valid tomorrow anymore or might be different tomorrow.
So what what is important, I believe, is to to look at the fundamentals of the industry. And the fundamentals of the industry is, and definitely, so the automotive industry at large, is that the industry needs to innovate in order to bring to market those products that customers are looking for, namely cleaner vehicles. There's a push both in China and Europe, definitely less in, in the U. S. But in China, which is the biggest market, and in Europe, there is a big push buy the general public for cleaner environments, that means they want cleaner cars.
For that, the industry must innovate. For that, the industry must also look at technology like the one supplied by Lexus. So that's why we believe there is, there is no need for, say, a big panic. Again, I cannot tell you how long this correction will last. But in the end, what we can tell you is that mid- long term, technologies provided by Alexis are needed in the industry.
Got it. Thank you very much.
Thank you for your question. Your next question comes from the line of Guy Sipps. Your line is now open. Please ask your question.
Yes. Thank you. Most of my questions are already answered, but I have one question on your R and D going forward. Has the current turbulence any impact on your R and D spending as a percentage of sales and can you give us some guidance into 2019 from this regard? Thank you.
Regarding the next quarter, the 4th quarters. Yeah. We I think we can see there that, it's likely that, as a percentage sales, R and D will be at a higher component versus sales than we have in the first quarter. For next year, however, That is this will depend very heavily on the sales, we will have next year. And if this is too early to to to give an answer.
Okay. Thank you. The second question is also related to the nonautomotive code because if you put together then the the 6% sales increase that you'll, yeah, that you'll indicate for the 4th quarter and the 92 or even higher percentage of of automotive field in the fourth quarter, then it actually, yeah, indicates that the that the problem is especially in non automotive, more than in automotive sales. And so if you put all that together, isn't that, you know, the the problems still have to come in automotive in the first quarter of next year, or or is it a little too pessimistic?
Again, it's it's very hard for us to say in this very volatile environment, we have no reason to believe that what we're currently seeing short term is related to is stand on on its on its own. Yeah. It's more than, yeah, and it economically and geopolitically, or the effects of the economy and the geopolitical situation. And does it does affect uncertainty does affect consumers. Right?
So It's I I don't think that there is any other reason, honestly speaking. Will automotive be worse in Q1, or will we see the will we see the heat coming in Q1 more? I honestly cannot predict
Thank you. Your next question comes from the line of Marcel Asttabug. Your line is now open. Please ask the question.
Hello. Just one follow-up question on the R and D spend, in a hypothetical situation, if growth next year doesn't say 10% but it's 5. Would that, make you, reduce the, r and d spend as you were planning, for, 14% of sales kind of, targets there. The same, would you also slow down your, your CapEx plan for 18 19? In in such a scenario, would you say, well, 5% missing of digit growth is still good enough to to to carry that?
Yeah. It's difficult to, again, a lot depends on the top line. And for the moment, certainly, short term, the visibility is low. Our R and D spending is is is a long term interest, and we will definitely keep We we might be cautious on the one hand, but on the other hand, we will invest structurally where we feel we need to enter. If that answers your question.
Alright. Thank you very much.
Yeah. Marcel, maybe I can add, and I, second what Karen has said, again, if we if we look at all the discussions we have with customers, there is no reason to, reduce our R and D spending because there's a lot to do. There's a lot of opportunities going forward. We also say that in our, in our press release, there are so many opportunities. It would be, very short sighted to now suddenly because of a short turbulence, suddenly start reducing heavily, on the long term important R and D spend or investments that we need.
In fact, in times when maybe there is a little bit less to do on the production side, it's nice to have some time to do some to focus on some other stuff than, than focusing on getting production out the door as customers want. So we're we're not, we're not worried about this, even if this is a, slowdown. The opportunities going forward are, more than, more than enough to continue our investments.
Yes. And just so you will continue. Is it building the foundation for for future growth.
Exactly. Because that's what we see.
Perfect. Thank you very much. Thank
you. The next question comes from the line of Andreas.
Thank you. Well, my question has already been answered more or less. I would like to ask it a bit differently. When I, consider your gross guidance and your EBIT margin, it looks to me that you have some flexibility in your, SG and A costs to, well, to reduce, overhead costs, so to say. Is that correct, Cecilio?
So you assume I'm not sure I understand the correct one, the the question.
Well, the question, I can't put it more stable. Is the 25% margin really realistic given the slowdown in sales, or does that re re require a a cost cost?
Again, it's it's too early to I mean, we don't know what the we I mean, we haven't given any guidance yet of 2019. I
I'm talking about 2018 because
the 4th quarter could be quite a tough one.
For the fourth quarter, we can expect a lower EBIT than Q3 indeed. But we still keep the EBIT margin for 2018 at around 25%.
Okay.
The next question is comes from the line of Jeff Osborne. You're now live. Please ask your question.
Hey. Good afternoon. Most of them have been answered, but, as it relates to the working capital in 4Q as well as early 2019, can you just talk about the moving pieces there? It sounded like inventory wasn't going to improve and then you've got a a dividend payment in the fourth quarter. What I'm trying to get at, is there a is there a minimum cash balance that you're from, comfortable with?
Okay. Maybe I can, first, answer the inventories, and then you can take over, Stratham. So The inventories are indeed higher than, the same comparison of last year. But it's not that our today's inventories are too high. It is rather that the previous year inventories were too low.
Because we were in a, in an accelerating mode and with, capacity shortages a bit everywhere in the supply chain. Which is now, much more improved. And we're working hard to move towards a normalized situation in the supply chain as near end. Now the inventories today, as already mentioned, we feel, okay with these. They are strategic also because we are still concerned with security of supply.
And inventories are not a problem as long as they remain sellable, and hours are sellable. So the risk of obsolescence is not more than usual. In fact, excess inventories as some of, people call them, they are really a blessing. They are blessing, especially at a time when everyone has been in waiting mode to order and then suddenly find out too late that their own inventories have depleted fast. And then at that moment in time, Alexis will be able to deliver and take advantage.
So, stages in the inventory. So finished goods versus work in progress, it's not different than than usual. So, again, this is a strategic choice, and we feel well about it, and we have it well under control. So I hand to Karen for the rest of the question. I hope that answers your question on inventory.
No, that's very helpful. I appreciate that. And then is there a physical euro level of cash that you feel comfortable with or that are required by covenants?
Covenants wise, you have to worry at all. We expect by year end to to come out. Yeah. Probably around 0, might be a small method. But more or less, yeah, a zero position.
Got it. And then, it was alluded to on the prior questioner about CapEx for next year. Is there a specific target? I think it was 70 1,000,000 for this year. What are you thinking out for next year?
It was unclear with some of your fab expansions. How much lingers into 2019 versus this year?
But we don't give you guidance yet today on the the CapEx for next year. For 2018, we indeed we confirmed the 75. For the year, we said 70 to 75. We will most likely end at around 75 for 2018. For next year.
No specific guidance yet. What we what we can say is that that we we have heavy investments in 2018 in equipment. It's likely that this will slow down in 2019. On the other hand, we will heavily invest in facility, particularly in in Sofia. So there, we will see an increase versus 2018.
Perfect. And the last question I had is just with the disruption in the market and with European OEMs as well as the Chinese. Is there any, delays or push outs of, of RFPs or qualification process I know you don't report bookings, but just in general, the new design wins, is there any deceleration of those awards given what's going on?
Not that we can see today, Jeff. No. No details.
Thank you. That's all I had.
Okay. Thank you.
Thank you for your question. We've got one last question on the line that comes from the line of Gus Parrino. Please ask your question.
Hi, good afternoon. Thank you for taking my questions. I have 3 if I may. The first one is about the revenue growth by on a regional basis in Q3. It's interesting to see that all regions have been growing at the same base of 15%.
And I would like if you could please elaborate the implied revenue growth for Q4 of 6%, can you elaborate on a regional basis? What do you see there?
What's the first question?
I'm sorry. We did not make that, we did not we did make that estimation at this time. From my gut feeling, I don't think there will be such a big difference. There might be some changes, but I don't think there will be major. But honestly, we have not made that, see, we could have made that simulation.
We have the the data, of course, that We did not prepare for that here.
And the second one is if you could just please remind me, how much inventory do your customers typically haul? And And how long does this tuck in, just to be more cautious if that's all, how long does it take?
How much inventory are customers keep where, of course, in we're a component supplier. And, we have at least 2 of our customers, downstream. So if in the best case with a tier 2, so we have the tier 1 and then we have the OEM before it then goes to the consumer. So we have at least 2. But in many cases, we have many more.
We have sometimes distribution in between, which sometimes have subcontractors of our customers in between, sometimes even 2 subcontractors before it ends up at this year. 2, and then it has to still go to a tier 1. So it's very, very hard to, give you now a figure like our our customers always keep x amount of months in, in stock. It's really very hard to to estimate that. But what I can say is that it is typical in a supply chain, in, yeah, in a supply chain.
That the the further down or the further up you are upstream And we're pretty much upstream in the end.
Yeah.
The higher the, the higher the swings will be. And, a a a a brief ripple in at the end of the stream, and mean pretty high swing, at the other end upstream. So depending on where we are, in, in that stream, let's say, we have either very high swings of a or not so high swing. So it's and how long it takes is really dependent also on the information flow. So it's the the change and the the change in behavior came in fact very recently, but just started, really.
So it takes some time before the information flows through through the value chain as well. So today, we're a bit in a because within the beginning, it's, not so easy to estimate how long destocking will continue.
Maybe just too short some more on the CapEx and on the investment plans. Can you please let me know how much as a whole of my legs as you're increasing capacity. How much capacity are you adding?
In 2018, we did not make huge investment in capacity in, actually, the new most of the capacity fee will be made available, in 2019. And even, yeah, and and trying to the Bulgarian investment is 2 John King. So, for the moment, we are not extending capacity, or hardly increasing capacity. By 2020, we will have increased, total capacity by around, I think 40% in that range.
Okay. Maybe a follow-up on this one. I'm just just maybe the last one, if I may. It's on in our recent public conference, the head of Automotive at Infineon, said that over the medium to long term, there was he was seeing double digit revenue growth for the semiconductors. In the automotive market.
And I know you have said already that the long term picture doesn't change, but Is that something like a 10% they were guiding for the long term, maybe over the next 5 to 10 years, is that kind of a growth rate that you are comfortable with it over the next 5 to 10 years?
It's already difficult to explain the next 3 months, let's say, or next 6 months. Over the next 5 to 10 years, I I would I would say that around 10% for the industry, for the semiconductor industry in auto is an overall, I mean, is maybe on the high side. For us, our target has always been to do double digit. So that is what we are striving for. That is what we will continue to strive for in the next years.
But we're not living in a vacuum, and there's always, an economic, an economic situation that we will have to take care of. Thank
you very much.
We've got one last question on the line that comes from the line of Mr. Hallfelder. The line is now open. Please ask the question.
It's good to hear from Baader Helvea. Just had two questions on the timing of the of the automotive slowdown. Was was this already reflected in in your orders in the September quarter, you know, like a like a book to bill?
We don't do book to bill. We don't disclose that. But, no, as I said before, it is very recent. So it's very recent that we saw the slowdown coming to us.
Okay. And the second question, you you mentioned, consumer, caution us and slowdown in consumer, potentially consumer demand. With washing machines and other things. I mean, if I take your year over year growth, the 6% you mentioned the December quarter. I mean, if at the same time, your customers are reducing inventories, as you indicated, I mean, it's it it does not sound to be, you know, too bad the situation, you know, from the end demand out there.
Well, thank you for your optimistic note, I would say.
Okay. But it's indicating that, you know, that it would be higher than percent. Yeah.
Sorry. Come again.
Yeah.
I I was just it it it it should indicate that the real end demand for your product, it's it's is above the 6%. You know, if there's a inventory correction component included.
Yeah. That could be conclusions that you could take, yes, I guess.
Thank you. No further question at this time, ma'am. Please continue.
Okay. Thank you very much for your interest and your questions. So we will, be very happy to meet some of you in person at our upcoming Analyst Day, which is on December 5th, or else at our full year earnings call next year on February 6th. So for now, goodbye, and have a good rest of the day.
Thank you. And that this concludes our conference for today. Thank you all for participating. You may all disconnect. Speakers, please standby.