Melexis NV (MELE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Melexis Full Year 2019 Results Call. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Françoise Chombar. Please go ahead.

Thank you, Maria. Good morning, dear audience. Karen van Griensven, our CFO; and myself are pleased to host the Melexis earnings conference call for the fourth quarter 2019 and thus also the full year. We will take you through the highlights of the year, and we'll be happy to answer your questions afterwards. So fourth quarter sales came out at EUR 127 million, a decrease of 10% compared to the same quarter of the previous year and an increase of 3% compared to the previous quarter. Full year sales rounded up to EUR 487 million, a decrease of 14% compared to the previous year. Geographically, Europe's share in 2019 turned out at the same level as 2018. The U.S. was a bit stronger in '19, while Asia Pacific was a bit weaker. This being said, the Q4 percentage for Asia Pacific picked up quite nicely, mainly thanks to distribution. Based on the latest data points, worldwide car sales dropped around 5% in 2019, while Melexis' sales were impacted almost threefold. And this is fully attributable to inventory corrections triggered by an uncertain economic and geopolitical situation caused by global trade tensions. This being said, Q4 marked the end of downward inventory corrections at our customers and distributors. Based on what we observe today and barring any unexpected geopolitical or other adversities, we're confident that 2020 will be a return to growth. Even though we expect another year of lukewarm end market demand, with potential worldwide sales below 2019 levels, Melexis is guiding for around 10%-plus sales in this year on the back of normalized order behavior and automotive semiconductor content growth. I already mentioned in the past that, next to the economic uncertainty, people postpone their decision to buy a car because they are uncertain about which type is best for them. Climate protests; new city regulations; new, stringent norms; and volatile tax rules make buying a car into a conundrum. And in this perspective, I believe it is interesting to highlight the following. On the eve of the Brussels Motor Show on January 10 and 11, the Flemish TV news desk, together with 3 academics, carried out research into the impact of different car engine types on our planet. The research rightly considered the full life cycle from the making of the car, so the use of raw materials; to the combustion itself; the manufacturing of the fuel; and the recycling. The focus was both on air quality and on climate impact. This research yielded some surprising results, though some results were not that surprising to us at Melexis. The overall conclusion was twofold. For one, modern technology, and may I add here that a lot of it is proudly powered by Melexis, so modern technology, makes all types of cars increasingly cleaner, whether for particulate matter or for nitrogen oxide. And secondly, modern fossil-fueled cars almost closed the gap with battery electric vehicles and fuel cells, as far as air quality are concerned. The real fight, as they say, concerns now the climate. Indeed, some of the more counterintuitive conclusions were the following: Electric cars lead the pack only if they run on green electricity, so powered by solar panels or wind turbines, which is not surprising. However, an electric car that runs on electricity from coal-fired power stations is the worst enemy of the climate. As far as particulate matter is concerned, it turns out that the modern Euro 6 diesel cars perform 10x better than gasoline cars, so diesel bashing is clearly no longer in its place. And a third surprising fact is that, due to leakages during extraction and transport, CNG has the largest impact on our climate, larger than gasoline or diesel. Natural gas consists of 80% to 90% methane, and that is a greenhouse gas that is 28x more aggressive than CO2. I believe such research is relevant context, and I'd like to point out here that Melexis innovation and Melexis products serve all types of powertrains. In the press release, we elaborated already on the product lines that outperformed last year, but I'd like nevertheless to add a spotlight here on our temperature sensors. You may remember that, in June '19, our medical-grade temperature sensor, the MLX90632, was recognized as a winner of the excellence in sensors innovation at the Sensors Expo show in the U.S. On December 4, our world's smallest medical-grade FIR sensor received attention again by winning the Elektra excellence in product design for medical in the U.K. As one of our customers stated, miniaturized far infrared sensors are typically sensitive to thermal interference, but our sensor mitigates this effect with smart compensation algorithms. And because it is so tiny in size, the smallest in the world, it is extremely well suited for applications such as contactless ear thermometers to fit into children's ears. In addition, it measures infrared radiation at a wider angle than other types of such sensors, allowing more accurate measurement of body temperature. Many of the Melexis sensors and drivers are indeed increasingly finding their way to interesting other markets. Therefore, it remains crucial that Melexis continues investing into R&D and innovation. I now hand the stage to Karen for the financials.

Thank you, Françoise, and good morning, ladies and gentlemen. So for the full year 2019, sales were around EUR 487 million, a decrease of 14% compared to the previous year. The gross result was EUR 196.2 million or 40.3% of sales, a decrease of 25% compared to 2018. R&D expenses were 16.3% of sales. G&A was at 6.3% of sales, and selling was at 3.2% of sales. The operating result was EUR 70.6 million or 14.5% of sales, a decrease of 49% compared to EUR 138.5 million last year. The net result was EUR 60.3 million or EUR 1.49 per share, a decrease of 48% compared to EUR 115.5 million or EUR 2.86 per share in 2018. Sales for the fourth quarter of 2019 were EUR 127.1 million, a decrease of 10% compared to the same quarter of the previous year and an increase of 3% compared to the previous quarter. The gross result was EUR 50.4 million or 39.7% of sales, a decrease of 21% compared to the same quarter of last year and an increase of 2% compared to the previous quarter. R&D expenses were 16.1% of sales. G&A was at 6% of sales, and selling was at 3.2% of sales. The operating result was EUR 18.3 million or 14.4% of sales, a decrease of 43% compared to the same quarter of last year and an increase of 1% compared to the previous quarter. The net result was EUR 15.4 million or EUR 0.38 per share, a decrease of 46% compared to EUR 28.5 million or EUR 0.70 per share in the fourth quarter of 2018 and a status quo compared to the previous quarter. The Board of Directors approved also on January 31, 2022 -- 2020, to propose to the Annual Shareholders' Meeting to pay out over the result of 2019 a total dividend of EUR 2.20 gross per share. This amount contains an interim dividend of EUR 1.3 per share which was paid in October 2019 and a final dividend of EUR 0.9 per share which will be payable after approval of the Annual Shareholders' Meeting. The Melexis shares will start trading ex coupon on May 13, 2020. The record date is May 14, 2020. So with this, we have ended the first session. We are now ready to receive your questions. So please, operator, go ahead.

[Operator Instructions] And the first one is coming from the line of Matthias Maenhaut.

Matthias Maenhaut, Kepler Cheuvreux. Three questions actually from my end and 2 on guidance and 1 broader-based question, and maybe going to ask them one by one. First question is actually on the guidance. I see no mentioning of the coronavirus. Is there any impact of -- negative impact of that implied in guidance? And could you maybe give us a little bit of an idea? I know it's been a while, but was there any disruption when there was SARS virus in 2002? That will be my first question.

Okay. Matthias, thank you. So we see no impact today on order behavior. I think it's also much too soon to see that. Last week was the usual Chinese Lunar New Year holiday, anyways, so I think it's really too soon. Now as such, we did not factor in any impact of the coronavirus in our guidance, but as you will have noticed, we guide sequential flat sales over the year, so that means we do factor in some uncertainty. We are cautious in general, and that is because the markets are still volatile and the visibility remains low.

All right. And second question then, maybe as you already kind of answered my second question I had on guidance, is on the gross margin. I see it's still down quarter-over-quarter. What are the main drivers? Because sales are up 3% but still gross margin down. So that was for me a bit surprising.

Yes, indeed it's slightly down, yes. That is mainly impacted by -- yes, gross margin is impacted by many factors. Capacity utilization today is the main contributor to the lower margin than we've seen in the past, but there are also some other elements like U.S. dollar, like product mix and -- but also some, yes, inventory effects. So what we saw in Q4 is related more to one-off events. And we do expect, as we grow, that gradually the gross margin will further increase and over the next quarters or so. Also for 2020, we guide somewhat higher gross margin mainly because of a better use of capacity, and this should further evolve in that direction as we grow.

All right. Then for the last question. I appreciate your comments on the Belgian research, yes, but still it seems that, electrical vehicles, the adoption of it is going quicker than anticipated. If you look at the midterm guidance that you gave at the Capital Markets Day last year, I think it was 10% to 15% sales growth over the midterm. Do you think that this faster-than-anticipated adoption in any way could limit your ability to grow? Or you think it's just going to be vice versa?

Well, I think we are well positioned both for the powertrain side as for the non-powertrain, so body, chassis and safety, side of the car. So no matter which car -- or which powertrain is in a car, I think there are always Melexis products inside. And if you remember, when we -- on the Analyst Day, we even made or gave 2 examples. That was, I think, a 530 BMW e, e530 (sic) [ 530e ]; and a Tesla. And you could see that, while the -- overall our presence in cars is about 11 chips, and that has not changed last year. So it was flat last year. We have over 30 and sometimes over 40 chips in such electric vehicles, so in that sense I think it's more -- I wouldn't -- it will never be exactly the same, of course, but I will say, for us, because of the fact that we deliver to all powertrains but also because of the fact that we have many applications in body, chassis and safety systems, and that's then, yes, powertrain neutral, let's say, we still believe that the midterm or long-term growth opportunities are there.

All right, very clear.

You're welcome.

You had a third question -- that was the third question, yes, yes. Sorry. Go ahead.

The next question is coming from the line of Francois Bouvignies.

I have a couple, if I may. So the first one is on your Q1 guidance. So if we look at your Q1, it's like a 15% year-over-year growth at constant currency. Now if we compared to your peers -- and the productions as well. It's much higher than the others. So I just wanted to understand if there is any inventory buildup specifically to magnetic sensor or anything to explain such outperformance. That's my first question, and I have others.

Okay. Francois, thank you. Well, you will remember that, more than a year ago, we were also the first to say that things would drop. And the others then followed suit afterwards, maybe with a quarter or 2 of delay. Our Q1 guidance, as usual, we guide to what we see, so -- and this does not involve any inventory buildup at our customers or distributors at all because the inventory levels there are very, very healthy. So I don't see any particular thing. It's, of course, the -- let's say, the comparison base. If you take Q1 last year, that was our lowest quarter as well, so the comps are a bit benign in Q1 as such.

Okay. So there is no specific product ties or ramp or...

No, no, not really, no. I think it's across the board. And of course, there are always some products that do better than others, but yes, nothing special really.

Okay. So now if we take Q1. And of course, you said that you want to have a cautious view. So if we take the Q1 and your full year guide, it means that, like you said, the quarter-on-quarter development for the rest of the year is flattish. And so the year-over-year will slow down in terms of growth, so I just wanted to understand what -- why you have this as such, like, trajectory. Infineon, just before you, said that they will -- they expect a very strong H2 in terms of production, so I'm just trying to understand. Is it -- are you conservative basically? Or is there any specific reason why the growth should slow down for the rest of the year?

Yes. Well, as I said before, we have -- we are always saying what we see. We don't have necessarily a full view on half year 2. And we try to be as close to reality as we possibly can. There are no elements today that leads for us to be either negative or optimistic at this stage. So I think it's a good guidance that we're giving. It's a return to growth. We see the opportunities that we've been going after, that they are good for us. We have, on the one hand, the better -- so the regulations that are coming up. And on the other hand, many of our products, many of our product lines have different applications in non-powertrain. So it's just a continuation of the good opportunities that we have been working on in the past.

Okay. Okay. But sorry. Just trying to understand why you would go from minus -- plus 15% growth to, let's say, low single-digit growth in the second half of the year. Just trying to explain, maybe given your visibility you have now, why it would slow down.

Well, as I said before already, the comparison base Q1 2019 is, of course, that was the lowest quarter, so the comparison base over the next quarters will be different.

Okay. Okay. That's very clear. And in production for 2020, you talked about sales for -- sales to be flat to even negative maybe, but for the production, you expect the same for '20?

Well, it's very hard to tell at this point in time. I think the markets are still extremely volatile. And that's also a reason for us to be just saying what we see for the time being, and our guidance is the best we can do from today's point of view. And it does not differ -- yes, the base assumption that we have today doesn't differ as much versus the sales in cars, yes. But we do see a little low -- it will not -- we don't feel that it will be -- that sales will be increasing. That means that also production of cars will follow the sales trend. So it will be rather flattish to maybe a little down. Again, for us it's normalized order behavior. Inventories of our customers and distributors are healthy at this time. We do not see any inventories or special inventory buildup at all. And it's mainly semiconductor content growth and new applications and new markets that we see giving us growth in 2020.

Okay. That's very clear. And maybe last one for me. In terms of R&D and CapEx for 2020, what kind of levels should we expect?

For our operational expenses, we continue to invest in the future. We will see a slight increase, but the increase will be definitely lower than sales growth. So as a percentage of sales, our operating expenses will go down in 2020, also R&D.

Okay. Okay. And then CapEx?

In CapEx, we expect around EUR 40 million, yes, EUR 40 million investment in 2020.

Next question is coming from the line of Varun Rawajgi (sic) [ Varun Rajwanshi ].

I apologize because I joined the call slightly late. I have a couple of questions. The first one is for Karen. Is there any way to quantify the impact from underutilization on your gross margin? You're guiding for a 70 bps improvement year-on-year in 2020 despite a 10 percentage points growth in your sales. So I'm just trying to understand how much negative impact are you suffering because of underutilization at the moment. And I have a follow-up.

Yes. So underutilization, it's accounting for more than 2% at the moment, yes, if that answers your question.

No, that's clear. And the second question is on the sales growth itself. I mean clearly inventory restocking and content growth are the key sales drivers for Melexis in 2020. And based on your commentary, it sounds that content growth is a big part of your 10% top line growth. So I'm just trying to understand. You mentioned normalized order behavior in the supply chain. Does that mean that there is much better inventory restocking at the moment? And if this continues, then inventory restocking will become a bigger portion of your sales driver, which means that this 10% can easily be 14% to 15% if order momentum continues to improve from here? So I just want to understand from your perspective, how do you see the end demand play out and how should we think about supply chain dynamics.

Yes. Well, when I talk about normalized order behavior, it's just -- that's what it means. It's normal, so that doesn't imply at all that there is a restocking or excessive restocking as such, rather that there is no destocking anymore because it's not necessary. The inventories are healthy today. And we see no -- we see the order behavior coming back to normal, so that means that our customers and our distributors order what they see as a need in their markets. So it's, yes, normalized, what it -- what the word means.

And sorry. Is there any way to quantify out of this 10% sales growth, how much is driven by content growth? Or would you say that majority of that is essentially content growth?

I think the majority of that is content growth as such because, if you look at the sales of cars by itself, yes, then we see no increase there. Of course, there is a -- there are always changes in types of cars, types of vehicles that are sold, but overall we don't expect 2020 even to have a higher number of car sales than 2019. We rather expect it to be a minus 1% or minus 2%, particularly also in China. So that's not -- markets are pretty mature. And as I said already in the introduction, there is also still quite some volatility as far as tax legislation is concerned. We have automakers that need to comply to new, stringent rules, which is in the end good for us, those stringent rules, because Melexis technology powers a lot of those applications that automakers need in order to comply to the new, stringent rules. So for us it's good, in fact.

That's very clear. So basically you haven't really factored in any inventory restocking in your guidance at this moment.

At this moment, no.

Next question is coming from the line of Janardan Menon.

It's Janardan Menon from Liberum. I joined the call late as well, so I might have missed some of your opening comments, but I'm still extremely confused by your full year guidance and the seasonality that you seem to be expecting through the course of this year. When I look at all your previous years, you've always had Q1 as the lowest quarter of revenue growth -- or sorry, Q1 as the lowest quarter for absolute revenues. And the typical seasonal pattern has always been flat to up through the course of the year. There was one exception in 2018 where Q4 fell by about 3%, but that was when you went into the whole inventory correction that you're now coming out of, but otherwise, almost every year, Q1 is the lowest. And things have sort of been upward from there onwards. Your current guidance is for something completely the opposite because, if I multiply EUR 136 million times 4, I get to EUR 544 million, which will be 12% growth, but you're guiding to EUR 535 million, which means that you actually expect future quarters to be down from Q1 levels, which is going to be completely the reversal of previous seasonality. And that, too is a recovery year where typically the sort of seasonality will be amplified rather than sort of going the other way, which is normally when you're going into a down cycle. So I'm very confused by this guidance. And if you could just explain a little bit more what your thinking is and why you do not expect any normal seasonality through the course of this year, it will be very helpful.

Yes. Well, the past is never a good guide for the future, yes. If you take into account all the still many uncertainties around geopolitics -- and even if there is a now a sort of agreement between China and the U.S., it's rather obtuse. And the volatility there in the international trade is still there. Now it's mainly our guidance mainly can take from that, the uncertainty and the volatility we see in the markets today and the difficult visibility that we have. And that's why we are careful, for the time being. That's it. So I don't think you need to be confused. I think Melexis has a tradition of saying what we see and not trying to speculate on the future. And speculating on the future has become exponentially more difficult than it was a couple of years back.

Okay. Okay. But if you do get at least your normal seasonal pattern, you would admit that this guidance could prove conservative through the course of the year.

Again, we guide to what we see and to what we feel is correct for the market. And of course, I hope, together with everyone, that maybe the economic situation will improve, but as long as we don't really have that visibility, we prefer to stick to what we can see.