Melexis' (MLXSF) CEO Françoise Chombar on Q4 2016 Results - Earnings Call Transcript

| About: MELEXIS NV (MLXSF)
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Melexis NV Ieper (OTC:MLXSF) Q4 2016 Earnings Conference Call February 8, 2017 11:00 AM ET

Executives

Françoise Chombar - CEO

Karen van Griensven - CFO

Analysts

Janardan Menon - Liberum Capital

Guy Sips - KBC Securities

Paul Moran - Northern Trust

Françoise Chombar

Ladies and gentlemen, thank you for joining our conference call for the fourth quarter of 2016 and that's also the full-year 2016. After business update from my side, I will hand the stage to CFO Karen van Griensven for the status report on our financials. And we will then of course be happy to respond to any question you might have. So it's with pride and pleasure that we bring you a topline result which exceeds our initial guidance for the year. Looking at our year-on-year growth of 14%, it is double the market growth in 2016. And as far as we're aware today, Melexis is here with one of the fastest growing and maybe even the fastest growing semiconductor company of 2016.

We definitely owe recognition to our people who gave it their all to serve our customers and we are grateful to our customers for confiding their business to Melexis. All regions and virtually all product lines contributed to this outstanding outcome, highlights in 2016 were magnetic sensors, pressure sensor and fan drivers. The Melexis magnetic sensors portfolio as you know is meanwhile very broad and the sensors find a wide use for position, speed, current and commutation. Pressure sensors find their application for example in vacuum break boosters, in the powertrain to save energy and reduce emissions or in the seat to monitor the pressure of inflated cost. Fan drivers are utilized in car seats, in gaming and office equipments, and in drones.

Whereas the last quarter of the year is usually marked by lower demand as customers adjust their inventory, we've seen the opposite end of last year and that is exceptional. There was a strong demand from our markets which is continuing into the first quarter as well. And though the world has become more unpredictable than ever before, 2017 is expected by all analyst reports to be strong. Our customers seem to voice the same confidence level for their business. And what makes me particularly happy is that we forecast consistent growth in all our product lines for the year to come. Next to the ones I've already mentioned before I can add a couple of more - a couple more that will be moving the needle in 2017.

Sensor interfaces, for example, for high temperature engine applications, air conditioning pressure or electronic stability program systems, ESP systems, 3D sensor for gesture recognition, rain light sensors or our LIN controller IC family in particular the ones used for ambient lighting in cars, and last but not least our highly integrated brushless DC motor drivers that actuates air conditioning flaps, engine cooling fans, water valves and electric pumps. As we see great long-term potential for Melexis product, we will keep investing. In 2017, this will be more in particular invests into R&D, into our sales and marketing capabilities, and into more automation as well.

And this brings us to the bottom line, so I herewith hand over to Karen.

Karen van Griensven

Thank you, Françoise. Good afternoon ladies and gentleman, a bit more color on the financials. As mentioned already, the total sales came out at good EUR450 million, 14% increase versus the last year. The gross margin was just over 200 million, 208 million to be precise or 45.7% of sales, an increase of 9% compared to 2015. R&D expenses were around 14% of sales, D&A at 4.6% and selling cost at 2.1%. This resulted in an operating result of EUR114 million, an increase of 6% compared to last year. This also means an EBITDA or operating margin of 25% in line with guidance for the full year. Net income was EUR96 million or EUR2.38 per share, a decrease of 3% compared to the previous year mainly because of higher tax expenses compared to the previous year.

If we look at the fourth quarter of 2016, we came out at sales of EUR120 million, a bit higher than we anticipated. And it means an increase of 17% compared to the same quarter the previous year, an increase of 5% compared to the previous quarter. The gross margin was EUR55 million, an increase of 16% compared to the same quarter of the last year and an increase of 4% compared to the previous quarter. The gross margin came out at 46%. Operating expenses were a bit higher in Q4 as a percentage of sales leading to an operating margin of 24.5% in Q4. The operating result was EUR29.4 million, an increase of 23% compared to the same quarter of last year and a small decrease compared to the previous quarter. Net income came at EUR25 million or EUR0.62 per share. The Board of Directors approved also a total dividend of EUR2 per share for the accounting year 2016, an increase of slightly more than 5% compared to 2015.

EUR0.70 per share is still payable in 2017 as an interim dividend of EUR1.3 per share was already paid out in 2016. For the forecast in 2017, we expect for the full year growth of 11% to 15%, a gross profit margin around 45% and an operating margin around 25%. This all taking into account a euro US dollar exchange rate of 1.07. For the next quarter, we expect sales levels to be around EUR125 million.

So far for the financial results, I would like to open now the question and answer session. Please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Janardan Menon. Please ask your question, your line is open.

Janardan Menon

Hi, good evening. Thanks for taking the question and congratulations on very strong results and guidance. A couple of questions from me, one was, your numbers suggest that revenues the Asia Pacific revenues grew very strongly in the fourth quarter 30% up year-on-year, while EMEA and Americans were sort of a little bit more flattish. Is there something to be read into that or is that just the location of manufacturing of components and therefore it doesn't really mean anything from an overall point of view.

Françoise Chombar

Thank you for that question, well I think if you look at the industry as a whole then growth in our automotive semiconductor industry is definitely stronger in the East than it is in the West, but if you look at and it can vary of course over the quarters. If you look at the Melexis percentages per geography in ‘16 versus ‘15 then these aren’t too different, we see one percentage move in fact from Asia Pacific to EMEA. And this means really that Melexis is present in those markets where it does matter. In the East, you have the volume and it will - it is not ready to change anytime soon.

So I think the East will definitely continue to grow and China is the motor behind it. But innovation is still also a lot in EMEA and in particular in - yeah, Germany is an important innovator still for the automotive industry. So you find innovation both in the West and the East. So I think the 30% as you mentioned for the quarter that can vary from quarter to quarter it has to do with cut-off dates. And indeed like you say it has also to do with where the components are shipped to because indeed these are shipped to charts. But in general, I think the message that is important here is Melexis present in those markets where it matters to us and that’s okay.

Janardan Menon

So, I had a view that you were stronger in sort of Europe and the US than in China. Would this number suggest that that is changing and that you are getting to a similar position in Chinese car makers as you have today and in car markers in Europe for instance?

Françoise Chombar

Well, definitely China as a country is growing significantly more or above average versus the others. It just means that the position we've had in definitely in first place in Europe but also in the US. We are definitely getting there as well in Asia and particularly in China. It's just because I think we have the right product and we also have since a couple of years a good sales force in China with applications engineers that have been trained in the sites here in Europe where the knowledge is and we continuously train them. We also continuously increase our number of people there. So I think it’s the capabilities of our sales and marketing which I mentioned before that’s definitely also quite some investment in China and it does yield as you can see.

Janardan Menon

And moving on to non-auto side, again quite strong growth you did there, I think if I just, there might be some rounding in that but it looks like more than 25% growth in Q4, which may have come from your fan drive business into games consoles and things like that. But when I look into 2017 and 2018 is it that you are increasing your efforts in the non-automotive areas at this point in time and in your forecast of 11% to [indiscernible], is the non-auto, are you counting on growing at roughly the same level or will it be able to grow even faster than the automotive segment as you sort of increase your efforts in non-automotive areas.

Françoise Chombar

Yes, you are absolutely right. So we are since a couple of years stepping up our efforts to look at the useful applications that our sensors and actuators can have on the non-automotive side, particularly in stuff like smart appliances, smart buildings. Yes, we have a very good reputation as far as fan drivers is concerned and they like to buy fan drivers from Melexis because they know they're very good and we've been there for quite a long while and we have the right quality levels.

Our efforts will continue to be strong in that area without losing sight of the efforts that we do in automotive because that’s still extremely important of course from Melexis. I'm not sure how to estimate or assess whether the growth of non-automotive will be stronger in 2017 than auto because it's very difficult even more difficult in non-auto to assess or to estimate than in automotive. But we count, we definitely count on a more - an above average growth let's say for non-automotive versus automotive. That's been our target for a couple of years; it takes some time before you get there. But that's definitely still our target.

Janardan Menon

Just a small third question if I may, which is, you mentioned 3D sensor as being a driver for 2017 you pulled that out. Is that the time of light sensor and are you - have you got design wins outside of BMW in that segment.

Françoise Chombar

Well, we definitely - it is a strong growth percentage wise, it maybe still a lower volume let's say in money wise let's say. Yes, it is a time of light sensor and yes, we are in the BMW. It started in the BMW 7 and BMW is now expanding it into their 4 and 5 series so that's good news for us. We usually do not speak about new design wins until they're really on the marketplace. But we are very busy with this product line and see very good growth potential there as well, with other OEMs and other tier-1 than the one we have right now for the BMW. So that looks pretty nice. But that takes always quite some time before it's there. It takes a long time for qualification and validation also with our customers and then with the OEM, so it’s quite a long cycle. But yes we're pretty positive about that business

Operator

Thank you. And your next question comes from the line of Guy Sips. Please ask your question, your line is open.

Guy Sips

Yes, I’ve got questions, one is on the R&D as a percentage of sales, it was 14% in 2016. Can you give a little bit color on what percentage we can expect in 2017? And a second question is on the US dollar sensitivity. Can you also give there some color on what the 5% decrease of the dollar would have - what impact would that have on your EBIT? Perhaps a third question is a little bit more let’s say philosophical. Today, the factors driving the electronics in the cars are safety, environmental, lifestyle, connectivity and how do you see that evolving over time, which of these four are today the biggest ones and how do you see that evolving five to ten years from now. Thank you.

Karen van Griensven

Okay. I will answer your first two question and Françoise will take the last one. Regarding the R&D as a percentage of sales, we expected more or less to grow in line with sales growth. So to remain around 14%.

For the second question, the US dollar dependency, a $0.05 change in dollar still results in around EUR3 million, EUR4 million net operating effect, net effect on the operating margin.

For the third question, I would refer to Françoise.

Françoise Chombar

Okay. Thanks, Karen. So the trends that you have mentioned are still very much around. Let's say the somewhat already older trend, if I may, the environmental trend is still going very strongly. Regulations are getting still tighter. China is going faster in many cases if you compare the speed at which regulations in China for environmental issues and justifiably so are being driven. Then of course it's clear that this will remain a trend for many years to come. And we see good potential in everything that has to do with electrification and hybridization. So for us, a hybrid car, as I mentioned already many times in the past, a hybrid car is like the Walhalla for Melexis products, because you have two motors, you have the combustion engine, you have the electric motor and they have to talk to each other. So lots of sensors and actuators to make that control loop work perfectly. So that will still continue very strongly in the next couple of years.

The two newer trends, which are the safety trends and the comfort functions, they are newer for sure. The safety trend is advanced driver assistance, which lead in the end or will be leading in the end to the autonomous car, but we're still very far away from that, despite all the buzz that is around you to Tesla and Google cars, et cetera. What we see is that there is still quite some challenges to be overcome, but on the road towards the autonomy drive, we’ll see quite a number of these driver assist systems, where also a lot of sensors will be needed. So that's definitely a trend going forward. The comfort trend I think is a bit up and down. If things go well, if the economy is growing well, then people do have interest for, yeah, nice things in a car, like ambient lighting and you see that OEMs use that to make their cars more attractive certainly also to youngsters.

I think that's a trend that could go on if it is also coupled with safety. And we do see that this is very possible that it will be combined also with safety, so that you use light or colors in the car to warn the driver or the passengers that something is wrong. So it could be embedded, it could get embedded into the second trend of more safety and go the road to autonomous cars. I believe that these are the three trends that will drive our business very much. But of course, there are other trends like connectivity, where we are not really playing and we don't have the intention to play there. But I think that's definitely also an area where we will see growth in the coming years.

Operator

Thank you. Your next question comes from the line of Paul Moran. Please ask your question.

Paul Moran

Thank you. Paul Moran from Northern Trust. Just a question about market share. Could you comment, has there been any change in the different verticals that you operate in with respect to market share in the last 12 months. And secondly, given the commentary on inventory, is there any, I know it’s been very low in Q4, is there any change recently in the usual 3% to 5% price deflation that we usually see on a structural basis given the inventory comments that you made? Thank you.

Françoise Chombar

Could you repeat your second question? I'm not sure if I really understand your point. Could you repeat your second question please?

Paul Moran

So the question is with regard to pricing. So we typically see on a like-for-like basis price deflation, which is made up for in new features. Given the inventory trend that you point out in Q4, which is hardly exceptional, is there any - is there a follow through with respect to pricing, i.e., is there a little bit more pricing power there? It’s a very short term thing and the question is more structural. So I just wonder if there's any change in pricing.

Françoise Chombar

No. In pricing, I don't see really any big change or a disruption coming there. The inventory trend indeed was a bit exception. So we've not seen that in years, which is probably hinting towards the fact that our customers are confident and do not want to be stuck with no product to build and thus no product to sell. So we see that this has to do with confidence levels of the customer.

The market share, your first question, well, if you see that, we don't have the figures yet of the whole market as such. Those come out maybe April, May timeframe. So I would be able to answer that only then with two figures behind. But even then, if we look at the fact that Melexis is growing double the market growth, it does mean that we are gaining market share. Otherwise, it’s, yeah, somebody has to lose and something's got to give. So I think in the last 12 months, we’ve surely increased our market share in the product lines that we carry. But I won't tell you how much.

Paul Moran

Yeah. I understand that. I guess that’s the answer I expected. And is that driven simply by the IP that you've got, you’ve obviously got a stable of intellectual property there, is it really just leveraging what you've got that’s driving the market shares. Is there any other reason why you think that might be the case that you’re growing so fast versus the market.

Françoise Chombar

I think it's a consistent strategy towards doing, choosing those things to do that we really are good at or excellent at. If we look at a product to make, then we really try to figure out what can differentiate our offering from the offering that is already there. But in particular, what are the customer pains that we can solve. And if we can listen well to our customers and define the right product with the right features, then I think this complements the capabilities in IP and technology that we already have. So it's not only about doing a nice new thing or innovating just for the fun of innovating. It's really looking at what can we solve that is not solved yet today. And that requires of course being in the market, talking to lots of customers and understanding their pain. So I think it's a combination of both.

Paul Moran

I understand. Just one final question, with respect to the 3D and time-of-flight products, are you willing to point out who else in the market you see strong in that product portfolio?

Françoise Chombar

Well as far as I'm aware, there is one that has a product that is similar or comparable to ours and that’s Infineon with a partner.

Operator

Thank you. Your last question comes from the line [indiscernible].

Unidentified Analyst

Hello. Thank you for taking my questions. The first one is, can you maybe give more color on your outlook revenue guidance. And can you split for example the wages coming from front end, what is coming from volume growth from your customers and market share gain, just to give a sense of the underlying performance, Infineon does it for example. So just wanted to see. I will ask other question, but maybe one by one.

Françoise Chombar

Okay. Yeah. It’s very difficult to give you more color on this. I think it's everything. It's growing, we're growing in existing products, we're growing in new products, we’re growing in volumes and we're growing in new applications. So it’s a very broad mixture of everything, but it's very hard to give you any numbers on that.

Unidentified Analyst

Yeah. I understand it's complicated. And I mean in terms of market share, obviously Melexis has been very strong the last few years. Do you expect at some point this market share to slow down again or even to grow in line with the markets? How should we think about the longer term revenue through cycle of Melexis? It’s very difficult to address and because you had such strong growth the last few years, I mean, should we think about double digit in the next three years for cycle, I mean how should we think about that with your new product portfolio and everything?

Françoise Chombar

Well, I think we should keep our both feet on the ground and first make sure that we delivered on our promises for 2017. I think our idea is to, I think we still have quite some room for improving our market share. We wanted to be robust. It's not like we, I mean, you will not hear me say that in the next couple of years, we'll do 20% or more. I don't think that is important. Important is that we bring the right product on the market with the right features and that provides for robust results over time and that's what we're heading for, we’re not necessarily heading for short term gains. We're really heading for the long term, but of course that leads to the fact that we, yeah, seem to have also good short term results.

Unidentified Analyst

Yeah. Understand. And maybe as we see more and more focus on the automotive industry, I mean you see many acquisitions, et cetera, new players coming in. Do you feel that the competition is generally increasing around you? I mean across existing products or new products, new commercial markets with big players, do you feel about or not at all?

Françoise Chombar

Well, there has always been in the history periods where automotive seemed to be sexy and then afterwards something else became sexy and they left automotive. Our customers in automotive know this also. And they're, let's say, cautious about going with a company, a new entrant that has not been so strong in automotive and suddenly now shows interest for automotive. So they're very cautious. That means that for a company like Melexis who have been very committed to automotive for over 25 years, they trust that we won't go for the next nice thing to do elsewhere. So we're very committed and we stay committed. Now as for, do we see the competition rising with all the acquisitions, et cetera, I would say it's a bit the opposite. Short term, it means that these companies are busy doing something else than looking or taking care of their customers.

In many cases, yeah, there is a big turmoil and people aren't secure and things change a lot, et cetera and as a company, you restructure, et cetera. So that means your attention is maybe not where it should be. And on the long term, it means the lesser companies there are, the less choice our customers begin to have and that is again positive for Melexis because Melexis is still small player in, if you compare to the likes of Infineon or Texas Instruments or ST, we’re a small player, but we are a very consistent players. We are true to our market and true to our automotive market in particular, which makes us a very credible partner to work with. So in that sense, I think there is not a lot of change, but if there is any change, then it's slightly positive for us.

Unidentified Analyst

That’s great. Thank you. And the last one maybe on my side, on the M&A side, what is your strategy here? Should we expect, maybe that you do some bolt-on M&As. If yes, in which area would you look at? Just some color around this would be great.

Françoise Chombar

Yeah. Well, as you know, we are not so active in M&A. We look at ways to of course complement our portfolio by looking on the outside and sometimes in the past, we have done acquisitions of smaller companies, mostly technology related acquisitions. We continue to do that and yeah, I cannot tell you which ones we could possibly have, but it's always - it will always have to do with complementing the technology that we carry or adjacent technology to what we already have. So we will - there is no change in strategy versus the past in this respect.

Operator

Thank you. And there are no further questions at this time. Please continue.

Françoise Chombar

Okay. Well, thank you very much. Ladies and gentlemen, this concludes our full year 2016 conference call. Our next conference call will be on April 20th. That will be the same day as our annual shareholders meeting. And from all here at Melexis, thank you and good bye.

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