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Edited Transcript of MELE.BR earnings conference call or presentation 20-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Melexis NV Earnings Call

Leper Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Melexis NV earnings conference call or presentation Thursday, April 20, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Françoise Chombar

Melexis NV - CEO, MD and Director

* Karen Van Griensven

Melexis NV - CFO

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Conference Call Participants

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* Francois-Xavier Bouvignies

UBS Investment Bank, Research Division - Technology Analyst

* Guy Sips

KBC Securities NV, Research Division - Equity Analyst

* Janardan Nedyam Menon

Liberum Capital Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by. And welcome to Melexis Q1 2017 Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, April 20, 2017.

I now shall hand over the conference to your main speaker today, Françoise Chombar. Please go ahead, ma'am.

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Françoise Chombar, Melexis NV - CEO, MD and Director [2]

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Thank you very much. Ladies and gentlemen, welcome to our first earnings call for 2017. Before our CFO, Karen Van Griensven, gives you the financial highlights, let me first talk you through what stands out in our top line. And at the end, your question will be ours to answer, as always. So we made a pretty good start to the year, with the sales growth versus the same quarter last year that hits exactly in the middle of our year guidance for this year, being 13%. Like last quarter, all regions and virtually all product lines are contributing to this quite nice growth path. Sensor interfaces and magnetic sensors remain the essential growth drivers, and in this respect, I'd like to highlight this quarter our magnetic current sensor product family. As the term suggests, this type of magnetic Hall effect sensors senses the current by converting the magnetic fields generated by current flowing through a conductor to a voltage, which is proportional to the field. Automotive applications are in inverter, converter and battery monitoring applications for hybrid and electric vehicles. But the same technology is also applied in industrial environments, such as in transducers for solar panel systems. This supports our road map towards the new powertrain on the one hand and our diversification into other adjacent markets.

Melexis pressure sensors and fan drivers can be compared to current sensors in the way that they serve both the automotive and the industrial markets, and that they grew above average in sales in the first quarter. Pressure sensors are used today in the powertrain to save energy and reduce emissions, in vacuum brake boosters and in car seats to monitor the pressure of inflated cuffs, but equally in washing machines to optimize water and energy consumption.

Melexis fan drivers are applied in car seats, but equally in gaming and office equipment and in drones.

I'd like also to put 2 other automotive sensor product lines into the spotlight that have shown significant above-average percentage growth in the first quarter, though, of course, they are much smaller in absolute size than the ones mentioned previously. And those 2 are, one, the Melexis automotive 3D time-of-flight sensors used for today gesture recognition in the car, and, two, Melexis rain-light sensors, which steer almost everybody's windshield wipers. It's really great to see so many of our product lines showing an upward spiral.

Finally, a growing order book provides us with the confidence to confirm our guidance for the full year. And now let me hand the stage to Karen.

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Karen Van Griensven, Melexis NV - CFO [3]

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Good afternoon, everybody. First, a few comments on the financials for the first quarter 2017. So the sales came out at EUR 123.6 million; as mentioned already by Françoise, it's an increase of 13% compared to the same quarter a year ago and 3% compared to the previous quarter, with an impact of around 2% of positive impact of the U.S. dollar, particularly compared with the quarter of the last year. The gross margin was EUR 56.6 million, an increase of 15% compared to the same quarter a year ago, and an increase of 3% compared to the previous quarter.

As a percentage of sales, we came out at 45.8%, which is quite higher than a year ago, but slightly lower than the fourth quarter 2016. Our R&D expenses came out at 13.7%, so below the 14.16% range that we have as guidance, but we do expect that throughout the year, R&D as a percentage of sales will further increase.

If you look at G&A, here we come out at 4.5%, sales and selling at 2.1%. Also here, percentages could slightly go up. As a reminder, we did mention last quarter that also this year, we will further invest in automation and in marketing. The operating results came out at 31.5%, an increase of 14% compared to the same quarter of last year, and 7% compared to -- quarter-on-quarter.

The operating margin came out at 25.5%. Net income was EUR 25.4 million, which was also an increase compared to last year of around, I believe, 11%. The earnings per share came out at EUR 0.63 versus EUR 0.57 per share for the first quarter of 2016 and an increase of 1% compared to the previous quarter.

We can now close the remarks on the financial results, and we can go over to the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Francois-Xavier Bouvignies.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [2]

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I have a couple, if I may. The first one is on your gross margin. I mean, it has been a strong quarter, like you mentioned, like 49.8%. And your guidance for the full year is still around 45%. So I was wondering, is there any reason that in the next quarters, we should see a lower gross margin or anything that we should be aware of?

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Karen Van Griensven, Melexis NV - CFO [3]

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Yes, we could say that in the first -- it's difficult to predict to look forward. This quarter, we can say that many parameters were on the positive side. So they might move in other directions over the next quarters. I cannot say more than the guidance we've given for the year where we mentioned around 45% for the year.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [4]

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Okay. So you don't feel like more conservative about the full year given the trend that you saw in Q1 -- for the first quarter?

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Karen Van Griensven, Melexis NV - CFO [5]

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Not very thoroughly. No, a lot will depends on the mix for the year. Yes, the mix was very positive in this quarter, but it could change over the next quarters, certainly towards the end of the year. We have also a very good performance in the, what we call, our yield levels, which came out quite high this quarter, which probably will last over the next quarter. It's relatively structural. It helped to compensate the loss we had in Q1 for price revisions, the typical price in the first quarter.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [6]

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Okay. And second one is on your maybe by division, if you could explain -- give a bit more color. I was a bit surprised by your U.S. performance. I don't know if you can give more color. I mean, if you look at your percentage of revenues versus last year, I see revenue is down 3% in that region in Q1. And if we look at the production in this market, it's up 4% in Q1 and even more for the luxury cars, I mean, which is up 10%. So that we are expected to have a better mix in this region. So maybe there is any inventory things, just to explain a bit more on this market. And on the opposite side for Asia, that has been very stronger, but on the opposite side, so positive. Can you explain what is the drivers in this market? And do you see any inventory correction possibility in the next quarters, given the strong demands that you saw in the last quarters? I will have others after.

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Françoise Chombar, Melexis NV - CEO, MD and Director [7]

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Okay. So yes, regionally speaking, of course, every quarter can be a little bit up or down. I think what is more important is to look at the growth trends and how Melexis stands out in those growth trends. It's clear that the strong growth in Asia that you see in Melexis is not only a reflection of what is happening in the market, but even exceeding the market. So that is for us a -- the more important conclusion of the changes in percentages versus the other 2 regions. Europe also continues to rise. I think the U.S. market is -- there's nothing special, really. It's flattish maybe, but, yes, you're looking at one quarter.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [8]

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Okay. But when you say that you're exceeding the market in Asia, is it the market share that you are gaining or the more penetration of your products? Or is it like the mix of luxury cars? Can you give a bit more color on why you are exceeding the market?

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Françoise Chombar, Melexis NV - CEO, MD and Director [9]

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I think it is both. It's a good, healthy mixture of both. Gaining market share and, yes, adding features.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [10]

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And on the inventory correction possibility, I mean, not that I saw anything, but how do you see about the inventory management of your customers? And yes, the supply chain?

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Françoise Chombar, Melexis NV - CEO, MD and Director [11]

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There are no heavy signs or no signs of any heavy impact at this time. Everything seems pretty normal. There is always fluctuation in there. Directly at our customers, we don't see a lot of things going on.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [12]

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Okay. And the other one that I had is, it is on your industrial parts. Can you explain a bit what is your -- what growth you see in the next quarters? I mean, do you think this trend of industrial getting a bigger part of the pie is going to continue? Or how should we think about this?

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Françoise Chombar, Melexis NV - CEO, MD and Director [13]

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Well, in any case, it is a target of Melexis to, on the one hand, keep growing as we did in the past in automotive, but equally to exceed EBITDA growth path in -- outside of the automotive markets. And you can see that in the meantime, like about 2 years or so, we're growing equally and at the same pace in both our core markets and in the adjacent markets. So it is indeed our long-term target to grow a bit more exponentially, let's say, or percentage-wise a bit more in the adjacent markets, because we also see lots of opportunities there, and the market is really just picking up in that respect. I mentioned the current sensors for solar panels. I mentioned also some pressure sensors for washing machines, and we see that trend going on, because we also focus on it. For example, the industrial markets, we serve more through distribution. And we see that also, our distribution sales percentage-wise is picking up, and that's definitely helpful.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [14]

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Okay. And I mean, the last one, maybe I will go back to the queue. But I have some investors asking a lot about the X-FAB application for Melexis, the fact that they are going public. Can you say anything about that? What is the implication for Melexis, if there is any?

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Françoise Chombar, Melexis NV - CEO, MD and Director [15]

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Well, of course, you would need to ask X-FAB for information about X-FAB. The only thing I can say is that I think it's positive for Melexis, because it makes X-FAB stronger, and yes, stronger financially speaking, of course. And that's maybe all I have to say about that.

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Operator [16]

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(Operator Instructions) And the next question of the day comes from the line of Janardan Menon.

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Janardan Nedyam Menon, Liberum Capital Limited, Research Division - Analyst [17]

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I just had a couple of clarifications on the previous questions and then a couple. One is, you said your gross margin was positively impacted by yield -- better yield levels. Can you just explain that, what exactly you mean by yield? Is it yield at X-FAB or your other foundries? Or is it your testing yield? Can you just explain a bit more what that yield is?

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Karen Van Griensven, Melexis NV - CFO [18]

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Yes, what we mean by yield is the number of good chips on a wafer that we can ship to the customer. From a Melexis -- from the perspective of Melexis, so where we impact? So not where X-FAB is impacting. So -- and by -- it's mainly -- yes, the quality there depends on the design and the way we test the chip. And it fluctuates with time. So...

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Janardan Nedyam Menon, Liberum Capital Limited, Research Division - Analyst [19]

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So is this the -- so is it that when you buy a wafer from the foundry, it is -- you're paying a flat rate for the wafer regardless of the yield on the wafer, and therefore, if the yield is better, you get a advantage? Is that the way it works?

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Karen Van Griensven, Melexis NV - CFO [20]

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The advantage is to Melexis, indeed. We have certain level of yield agreed to, in effect. But there is also yield that is in our own hands. And we're talking here about the yield that is influenced by Melexis directly. And that comes to our good benefits if we can improve it.

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Janardan Nedyam Menon, Liberum Capital Limited, Research Division - Analyst [21]

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And so would it be fair to assume that these are generally for newer products that you're introducing where you get this fluctuation on the yield, whereas for your existing sort of magnetic sensor kind of portfolio, it will be more stable at higher level?

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Karen Van Griensven, Melexis NV - CFO [22]

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The material products, indeed, tend to have an optimal yield. But more new products, and particularly in the actuator domain, we have quite some new products over the last quarters. There we worked on improvement, indeed.

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Janardan Nedyam Menon, Liberum Capital Limited, Research Division - Analyst [23]

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Understood. And just going back to the question on industrial growth, your percentages would suggest, I agree, that there's rounding errors probably, I mean, or rounding in those percentages. But it would suggest you're already growing a little bit faster year-on-year in sort of noncore areas than automotive. But you said you are expecting sort of exponential growth or strong growth coming forward. What -- when do you expect a big acceleration to happen in the industrial market? Is that still some way away? Or is it already beginning to happen? And is it broad-based? Or is it across current sensors, pressure sensors, fan drivers, et cetera? Or do you expect 1 or 2 products to be the main sort of drivers of that growth?

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Françoise Chombar, Melexis NV - CEO, MD and Director [24]

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Well, you did not hear me say that I was expecting exponential growth. I said it is our long-term target to grow a bit faster in the adjacent markets, not only the industrial, but the adjacent markets, then in automotive. We want to really continue growing as we do in automotive, and that will continue to be some extremely important markets for us for many years to come. But again, we do see quite some interesting applications not necessarily for all of our products. There are, indeed, products that are more suitable to sell in nonautomotive environments -- industrial, consumer, mostly industrial, let's say, for the time being. And these are, indeed, things like current sensors, fan drivers -- I forget one, pressure sensors, temperature sensors. Those are the -- so there are a few that we focus on to bring that about in the markets adjacent to automotive. And it's mostly -- it's maybe across the sensors and actuators, but it's some particular sensors, some particular drivers that we feel are very suitable.

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Janardan Nedyam Menon, Liberum Capital Limited, Research Division - Analyst [25]

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And the margin profile in nonautomotive, you would expect to be similar to automotive?

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Françoise Chombar, Melexis NV - CEO, MD and Director [26]

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Yes, it's more or less similar. Yes. Today it is, yes.

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Janardan Nedyam Menon, Liberum Capital Limited, Research Division - Analyst [27]

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And just a last question for me. On the time-of-flight, is there any -- are you in discussions? And is there signs of progress beyond BMW? And do you think, given that a lot of companies seem to hype up that market, would you be able to be as dominant in automotive time-of-flight as you have been in some of the other areas, like you pointed out, rain-light sensors, et cetera? Do you feel comfortable that you are in a leadership position there?

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Françoise Chombar, Melexis NV - CEO, MD and Director [28]

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Well, I think it's a fact that we are in a leadership position, because there's nobody else besides Melexis that is in production. But that should not bring us into a complacent behavior. The market is very dynamic. And yes, of course, we are working with others, with others beyond BMW for this type of products. And it will be an interesting way forward, I would say. But yes, we cannot -- as you know, we never talk about things that have not been done yet, that are not visible on the markets. So the ones that are visible, we can talk about. But otherwise, for the sake of also -- out of respect for our customers, we do not disclose that. But yes, of course, we're working on further, how you call that, introduction of new -- onto new platforms and onto new car manufacturers and possibly also other applications of the same technology.

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Janardan Nedyam Menon, Liberum Capital Limited, Research Division - Analyst [29]

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So you are trying to address nonautomotive applications as well with time-of-flight?

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Françoise Chombar, Melexis NV - CEO, MD and Director [30]

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Yes, that is possible. That is possible as well.

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Operator [31]

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(Operator Instructions) And the next question of the day comes from the line of Guy Sips.

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Guy Sips, KBC Securities NV, Research Division - Equity Analyst [32]

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On the automotive semiconductor market in general, specialized in -- focusing on Asia and the BRICs, one of the drivers is lower emission legislations. Do you see there earlier adoptions than expected, so new legislations coming up in some countries?

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Françoise Chombar, Melexis NV - CEO, MD and Director [33]

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Well, yes, of course, China is really boosting its legislation in that respect. And the drive towards making the current combustion engine more efficient and emitting less particulate matter and stuff like that is very, very prominent in China, which, of course, we feel as well in the demand that our customers are putting ahead of us. But it's also in -- if you look at China, we also do see a faster adoption of the electric vehicle than we would see in other areas of the world. So there is a region -- there are definitely regional differences in that respect -- all driven by legislation, of course, but with different implementations across the regions.

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Guy Sips, KBC Securities NV, Research Division - Equity Analyst [34]

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And is this only China or there are other areas where you see these trends? Or is it mainly China where you see this, because Brazil and India are lagging the...

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Françoise Chombar, Melexis NV - CEO, MD and Director [35]

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Yes, they are lagging indeed. And for example also, India, there has been a talk about -- because we also look at, for example, direct injection for motorcycles. And the Indian legislation for that has been announced for pretty much ages almost now, and it doesn't come forward. And that's -- so they are lagging behind. But I think at some point in time, they will get there as well. It's not a question of if but when. So in any case, it will drive the need for more efficient motors or more efficient engines, and it will, at the end of the day, also lead to more hybrid and electric vehicles.

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Operator [36]

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(Operator Instructions) And the next question comes again from the line of Francois-Xavier Bouvignies.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [37]

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I just had a question on the -- on your lead-time visibility. If I remember correctly, in the last quarters, I don't know if it was last year, you said it was 16 weeks also. Is it that number? Or is there any change of your lead-time visibility?

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Françoise Chombar, Melexis NV - CEO, MD and Director [38]

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Well, 16 weeks is more or less the average lead time for, let's say, the pretty standard mature products. Some are more, but 16 is more or less what we give out. I don't think it has changed a lot. It may be a little bit longer, but not significantly. So there's not too much change. The supply chain can always be sometimes a bit more heated than other times. It's really dependent on the months or the year. I wouldn't say there is significant difference.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [39]

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Okay. And the last one is on your industrial coming back to this -- last quarters -- I mean, the last quarters, you were saying that automotive will remain the key focus, and I'm sure it still is, but you seem to talk a bit more about industrial. Should we think a shift more focused on to this market to diversify you away from automotive? Is there any change or from this point?

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Françoise Chombar, Melexis NV - CEO, MD and Director [40]

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I would not say there is a change at all. I think we have been -- we will continue to focus on automotive. It's still a very nice market, one we know well. We will continue to do that. So the focus will not shift. The focus will stay on automotive. At the same time, when we look at some of our products, sensors, fan drivers, they do find nice applications outside of automotive. And that's also, there has been a focus in the last couple of years. That's why, yes, I mean, there is no change in that sense. There is no shift. It has been like that for a couple of years now. And it will remain like that.

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Operator [41]

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(Operator Instructions) There seems to be no further question at this stage. Please continue.

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Françoise Chombar, Melexis NV - CEO, MD and Director [42]

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Thank you very much for your questions. Our Analyst Day will be held at Autoworld in Brussels on May 3, and our first half year results will be published on August 2. So see or hear you at one of or both of those locations. Thank you very much for your interest in Melexis, and goodbye from all of us here.

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Operator [43]

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Now that concludes our conference for today. Thank you all for your participation. You may now disconnect your lines. Speakers, please stand by.