Melexis Nv Ieper

Good day and welcome to today's Melexis first quarter 2024 results conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. Later, we will conduct a question and answer session. You may register for your questions at any time by pressing star 1 on your telephone keypad. At this time, I'd like to hand the call over to Mr. Marc Biron, CEO. Please go ahead, sir.

Thank you. Dear audience, Thank you for joining the Melexis first quarter 2024 earnings call. I will share with you the highlight of the past quarter, after which our CFO, Karen Van Grisven, will talk you through the financials. In the first quarter of 24, sales came out at 242 million euro. Despite the inventory correction that we observed in some product line in the past few quarters, sales were up six percent compared to the first quarter of 23. Those results confirm that our product portfolio gives us a very good immunity against any type of car that are preferred by the end customer. We are successful in comfort and safety applications as well as for the different types of powertrain. Through our world premiere innovations, we have a leadership position in our core market, automotive. But we are also investing in emerging markets beyond automotive like robotic, alternative mobility, and health. As an example, in Q1, we have kicked off development of two products for robotic applications. In the first quarter, we have launched our game-changing Trifibion technology, which revolutionized thermal management in electric vehicles. It's an innovative high-pressure sensor which is compatible with a harsh environment. In Q1, we have also revealed Induxys, an inductive switch to be used in safety applications. It can be used, for example, in seat belt buckle or door latch. Our design win in Q1 confirmed the success of our product strategy. Out of the top five design wins, two are related to thermal management, one is related to inverter applications for EV, one for lighting, and one for e-steering applications. Note that two of the top five design wins are for Chinese market. Still in Q1, we have been working on the diversification and localization of our supply chain to meet the future market expectation and to stay relevant independently of the geopolitical constraint. We have also set up a plan to optimize the cost of our product through different initiatives. I now give the floor to our CFO, Karen Van Grisven, who will share some financial insights.

So thank you, Mark. So hello, everybody. A bit more on the financials. So Mark already mentioned we had nearly 242 million euro sales in the first quarter, an increase of 6% compared to the same quarter a year ago. The gross result was 106.1 million euro, or 44.2% of sales, an increase of 4% compared to the same quarter of last year. and a decrease of 4% compared to the previous quarter. R&D expenses were 11.1% of sales, G&A was at 4.8% of sales, and selling was at 1.9% of sales. The operating result was 63.7 million euro, or 26.4% of sales, an increase of 4% compared to the same quarter of last year, and an increase of 4% compared to the previous quarter. The net result was €52.9 million or €1.31 per share, an increase of 4% compared to €50.9 million or €1.26 per share in the first quarter of 2023, and an increase of 6% compared to the previous quarter. If we look forward, so the outlook, Manaxis expects sales in the second quarter of 2024 to be in the range of €242 to €247 million. For the full year, 2024, we expect sales to be around €1 billion, with a gross profit margin above 44%, and an operating margin above 25%. all taking into account a euro-US dollar exchange rate of 1.08. For the full year 2024, Manexis expects CapEx to be around 70 million euro. So I would like to now open the Q&A session, so operator, please go ahead.

Thank you very much. As a reminder, to ask a question, please signal by pressing star 1. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. And please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. Thank you. Our first question comes from Francois Bovigny from UBS. Please go ahead.

Thank you very much. I have two quick ones. The first one may be on mark on your comments. When you said that the inventory correction in some product lines is now behind you. Is it possible to expand a bit on this comment because, you know, it's a bit counterintuitive to think that the inventory is kind of behind when we see the demand slowing down and inventories are still relatively high across the board. So, you know, what makes you think that inventory is behind? What do you mean by that? And also because when I look at your guidance for the full year and forward quarter, you are still implying low single-digit percentage growth rate, which would imply an under-shipping versus demand as such because of the content. So I'm trying to understand a bit more this comment, if you see what I mean.

Yes. First of all, when we look at the inventories of our distributors, we see that they have peaked in, let's say, summer last year. Since then, it is slightly going down, but step-by-step going down since August. And clearly, the inventory situation is improving at our distributor. And from our analysis with our customer, it's the same at the customer side. Now, if we look within Melexis, let's say, very clearly all the adjacent applications are picking up. For example, our driver for adjacent, the temperature sensor, the latch and switch for adjacent, those are really picking up. And we see also some signs in automotive that the situation is improving. It's why we Yeah, we believe that indeed the bottom was in Q1, and then we will grow throughout the end of the year to reach this 1 billion revenue.

Okay, but the automotive comment you made, because adjacent and distribution channel, I think it's like a smaller portion of your revenues. Correct me if I'm wrong. Automotive is the most important part. What are the signs that you see bottoming out on this part? Because I guess the visibility is not as clear as the distribution channel. So just trying to understand what intelligence you have to suggest that.

Perhaps first to correct your assumption on the distribution. At ESAT-Melexis, distribution is not only for adjacent. And we have a lot of automotive business going through distribution.

Yeah, it's 25 to 30% of our sales.

Yeah, I think even 30%. Including auto, 20 to 30%.

Yeah, mainly Asia is going, a lot of Asia is going.

Yeah, distribution is a bit more than 30% of the sales, and indeed, mainly in Asia, Japan, China, Korea, is via distribution. And what we see on distribution is really relevant. It's not only about non-automotive businesses.

Okay, good to clarify. But then the auto piece, which is 70%, can you maybe elaborate on that part? I mean, what do you see there?

I can give an example of time when I say we see sign. It's, for example, the push-out that we see or the cancellation that we see in the order. We have a much better situation on those aspects now than... six months ago, I would say.

Thank you for clarifying. Maybe my second question would be on China. I mean, we asked you before, but it seems that China is pushing more and more towards localization. Yes. And, I mean, you mentioned that your thermal, for example, design winds, you know, some are in Asia, in China. So, Do you see any, I guess it's a bit too early to see a meaningful change versus maybe three months ago, but what's the risk? I mean, do you see any, like, Chinese players entering the market more aggressively right now? It seems that you have been relatively immune from the Chinese competition so far, and honestly, I don't know many Chinese semis doing, you know, magnetic sensors, so, you know, maybe you could help on that front and should we expect your market share in China to go down over time because of this effect?

I think first, as you mentioned, it is not a short-term effect. As a matter of fact, our revenue in China has grown two times more than the overall corporate growth in Q1. And I think For the time being in China, as you mentioned, we don't see a threat. But also, as you mentioned, in the longer term, it can be different. It's why we are taking initiative, as I mentioned, to localize our part of the supply chain in China because it's one of the long-term requirements from our customers. The second aspect, why are we... as you mentioned, immune to this. I think it's thanks to our innovation. I mean, we have a very successful innovation machine, and I think our Chinese competitor cannot copy our innovation product. I can just take the example of the launch of this quarter, the Trifibion. It's a very complex product. it's even not only a chip, it's really a solution. And I think it's, for the time being, it's impossible to be copied there. I can take another example, which is our TPMS, which is also a complex product that will not be copied soon. It's three dyes in the same package, then very complex, I would say. And I think the success of Melexis is, and will be in the future linked to our innovation. I can take a third example, because I was this week with a customer here in Belgium. We are developing a product, which is the highest level of safety for a chip. I think this is something that our competitor in China cannot copy anytime soon, I would say.

And do you see, if I may squeeze a quick one, do you see any pricing difference by regions? I mean, like China pricing trend and Europe, U.S. trend. Do you see any difference?

I think in general, we are in a growing market. I mean, 15 years ago, it was a niche market. Today, it is indeed a very big market. And, okay, we for sure enjoy it. the benefit of this growing market but there is also competition and for sure there is also a price price discussion now to answer your question do we see do we see a difference in between the the market i think it really depends on the on the type of product and it depends also yeah when we can bring unique feature when we can bring innovation there is no limited price discussion of course for the more mature product Yeah, the price is part of the discussion, but I would say it more depends on the type of product than on the region.

Makes sense. Thank you very much.

Thank you.

We will now move to our next question from Janardhan Menon from Jefferies. Please go ahead.

Hi, good morning. Thanks for taking the question. I just want to dive a little bit more into the two new products you've announced, the Trifibion and the Induxus. Is the Trifibion sort of competitive? Is it competing with a normal temperature sensor? Or what is it? Will it replace temperature sensors? Or what is the additional value you get there? And have you already got some design wins for it? And how does the ASP of that compare with whatever the equivalent product you've been selling so far?

Yeah, the 3F is a pressure sensor. It's not a temperature sensor, as you mentioned. It's a pressure sensor. And in terms of ASP, I will not give an accurate answer, but this is more than a chip. It's really, we call it a solution. meaning that in terms of ASP, it's more expensive than a single or simple die because we really provide a chip in a complex package. What does it bring versus the other product? I think it brings cost advantage for the customer. If the customer is using this Trifibium, it will be able to reduce the cost of the overall module because we integrate a lot of functions in the product. And it has been designed specifically for the thermal management of the car, mainly the EV car, and it's used in this product. And the last question was about the design win. Well, we have a lead customer, a lead tier one, which is a big tier one, which is using this product, or will use this product in the application, but we don't have yet a design. But we have a very active lead customer.

So when you say pressure sensor, how do you do thermal management with a pressure sensor? I mean, just can you explain that technology?

Yeah, when we say thermal management, it means that we need, there is a fluid, let's say it, moving around in order to transfer the heat or to transfer the temperature. And this fluid is moving through valve, meaning that in the thermal management system, you need a position sensor, you need driver to open and close the valve. As you mentioned, we need temperature sensor to measure the temperature, but also the pressure of the fluid moving around is an important indicator. It's why there is also a pressure sensor in the thermal management system. And those are harsh environments because the fluids are, I mean, it's not simple water, let's say. And the chip must be robust against this harsh environment.

Is this for the battery mainly?

Then you have, I would say, three types of thermal management. You have, indeed, the thermal management of the battery, because you need to keep the battery as much as possible close to 25 degrees, because if it's too hot or if it's too cold, the battery is not efficient. There is, indeed, thermal management to keep the battery in the correct operating zone. But there is also thermal management for the cockpit of the car because in the ICE, the heat is for free, meaning that you can heat the cockpit of the car for free because the heat is generated by the engine. In the case of the ICE, the heat is for sure not for free because it's coming out of the battery. I mean, the energy is coming out of the battery. And then in this case, the OEM, have a complex thermal management system to minimize as much as possible the energy coming from the battery and to keep the cockpit at the correct temperature.

Understood. And on the induxes, you had at your capital markets day, et cetera, talked about inductive position sensor as an alternative to a magnetic sensor. Is this that product or is this sort of a replacement for a latch and switch kind of product?

This one, the one that we discussed now, is indeed the replacement of a latch and switch. But you are right, we have also position sensor inductive. But the one that we discussed now is to replace a latch and switch. It's why I gave the example it can be used for the seat belt buckle, because it's with an on-off chip that we detect if the seat belt is in the buckle. And the same for the door handle. This is indeed for switch. But the fact that we have a huge portfolio of magnetic sensors, very successful, but indeed we want also to propose, to put in our portfolio, to propose to our customers some inductive version because in case of electrification, let's say the inductive version is more robust against the magnetic disturbances.

But that product has already been commercially launched, the position sensor?

Yes. Then we have two position sensors, one high speed to detect the position of the motor. This one has been launched. The number is 90510, I think. And we have also a low speed position sensor to detect, for example, the position of the pedal. I mean, 90513, this product is used by a customer to detect the position of the pedal with an inductive solution.

And just moving on to the inventory, as Francois was discussing before, so can we assume, as you said, we are growing at less than what we would assume is the growth, including content growth and car growth in your revenues right now. So can we assume that as we go to the latter part of the year and into 2025, your growth rates will keep accelerating from this point onwards, given that you're saying that the inventory correction is over? Or is there any uncertainty on the Tier 1 actual level of inventory, et cetera, which still reduces your visibility on how that trend will come through in coming quarters?

Yeah, I would say for the time being, we stick to the guidance of 24, and we believe that the growth will increase to reach 1 billion at the end of the year. And there is no sign to give contrary view, let's say.

And is the inventory situation that you described more applicable to, say, your Asian customer base, or is it a global phenomenon that you're seeing in terms of the inventory levels?

I don't have, on the local aspect, I don't have view. I think it's indeed more a global view, yes.

And last, sorry.

No, long term, we can reiterate our statement of 10% CAGR, over 10% CAGR, which we also mentioned on the capital market day. And so outperforming the markets is still our plan.

And so if the inventory is truly over, then by 2025, you should be achieving those kind of growth rates, right? I mean, logically.

I don't want to look for the short, but the long term, we reconfirm.

But given that you have more confidence of the inventory position in the adjacent markets, would it be fair to say that you will see an acceleration of growth there in coming quarters? Would that be a fair assumption?

It's too early to make a statement in this. We never give guidance beyond one year, so we also don't want to do that.

I'm sort of more looking into the second half, just on the adjacencies.

Yeah, the second half, we guide for one billion, meaning that the second half will be stronger than the first half year.

And would that be more true on the adjacencies, and would that be the bigger driver, or will it be growing faster than your automotive business, let's put it that way, in the second half?

Yeah, I would say the adjacent will go strong in the second half, yes.

Got it. Thank you very much.

Thank you. We will now move to our next question from Sandeep Deshpande from JP Morgan. Please go ahead, Sandeep.

Yeah, hi, thanks for letting me on. My question is, on one hand, you're saying that your inventories at your customers are reducing, but when you look at your own inventory on your balance sheet, it has increased very dramatically from last year, as well as increased from the fourth quarter. Can we understand the dynamics of your own inventories increasing when inventories are decreasing at your customers? I mean, I would have thought that if your customers are seeing and distributors are seeing lower inventory, your own inventories would decline on the back of that. And that I have a follow-up.

Yeah, I think in Q1, in absolute value, the inventory stays very much stable. But yeah, indeed, if you look more in the past, it has increased. I think we are always, our goal is always to level out the production and to use the capacity at best. It's why we have selected some products without risk of obsolescence and we create some inventory also because it's clear that the behavior from the past of the customer is back. They are much more short-term oriented and it's why we want to be agile and we want to be able to serve the customer. when they came with short-term order. The inventory has increased, but I think first it's a healthy inventory because we pay attention that there is no risk of obsolescence and we want to be ready for the next wave of the dynamic.

It's strategic for us and we've done it in all the cycles and it always... has helped us a lot when the market picks up.

So, I mean, following on that, I mean, you're saying that the inventories that your customers have reduced or the distributors have reduced, your own inventory is high, but then why are you not indicating or guiding to acceleration of your growth at this point, given that normally when inventories decline in the channel, you should be seeing revenue growth associated with that as the channel restocks as such?

Yeah, we can only restate the four-year guidance as we have done in the past, and that we will see acceleration in the second half of the year, as we mentioned already earlier as well. And long-term, the fundamentals are there, so that we expect to see substantial growth in the long term, I mean in the future. But we don't want to say more than that.

I mean, one last thing maybe I should try. I mean, when you talk about the growth in the second half, that is already guided by you at the beginning of the year in terms of the year-on-year growth at $1 billion. If you're seeing a transition here or you're seeing a change here, should that not mean that the second half growth is better than what you guided at the beginning of the year?

I think, yeah, we have... We have reached 242 in Q1. We are guiding between 242 and 247 in Q2. It means that Q3 and Q4 must be much higher, let's say, to reach $1 billion. And I think what we are seeing now are integrated in the full-year guidance to recover the versus $1 billion, the weak Q1 and the weak Q2, let's say.

Yeah, we've always said that it would be a soft landing. It's not different today than what we said in the previous quarters, but maybe the market did not fully believe it.

Okay, thank you so much.

Thank you. We will now move to our next question from Mark Hesseling from ING. Please go ahead.

Yes, thank you. First question is coming back on the pricing environment. And I think we discussed it also in the previous conference call. I think we expected the normal price deflation on average. Over the quarter, we've actually seen quite a lot of comments about OEMs wanting to push down the cost of their products and also pushing on their suppliers. How do you square that with just limited price deflation on your end and more aggressive price pusher from the OEMs?

Indeed, we are reading the same press. I confirm this. First of all, for 2024, there is no discussion about the price. But indeed, we anticipate some price discussion. Usually, it's after summer. for 2025. As we said last time, I think it's nothing new. I mean, it did not happen during the last two years because of the cheap shortage, but it was a bit the normal way of business in the previous year. And yeah, I would say we are preparing ourselves for those discussions. First, yeah, we have our innovative product. And as I mentioned at the beginning, the innovative product creates some immunity versus the difficult price discussion. It also ensures some higher margin. And for the more mature product, indeed, we need to prepare ourselves for those price discussions. And it's why indeed we are internally We are working on the product cost in such a way that we can have those price discussions. We are preparing internally in our supply chain those price discussions. More for the mature product than for the innovative product, as I mentioned.

Okay, clear. And the second one is actually on your own cost. As we took some cost measures in the fourth quarter, quite visible in the first quarter. How do you expect your cost to trend in the coming years? I know you kept your above 25% guidance, but it seems that you're trending a bit on a higher level. Please share if you have anything to add there.

I think there is, yeah, we have indeed taken some cost measures, as you mentioned. and the goal is to keep the cost in line with our revenue in such a way that we can continue to predict 25%.

Operational costs are historically low for the moment, also thanks to the cost optimizations. I do expect, as we will keep investing in R&D, that it will further improve It might go up a bit moving on, but we will keep it under control.

Okay, thank you.

We will now move to our next question from Michael Roig from DeGroove Bittercam. Please go ahead.

Yes, good morning. I have two questions. First one is on China, a follow-up question. In your presentation there's a very interesting slide number 10 where you show all the industry firsts from alexis and that shows indeed that you are innovating and which helps to keep you know the low end of the market far away from you nevertheless we all see that chinese customers are buying massive amounts of semiconductor manufacturing equipment and there was also recently some news that chip production in china in q1 grew by 40% year-on-year. So if this is not affecting you, which companies are threatened by this massive expansion in China in mature chips that are simpler than your innovations? Can you explain where that threat is? Who is suffering from it?

I think it's not up to us to define who is suffering of what. I can just repeat that Our answer is innovation and we have also taken some organization adaptation that we discussed during the last quarter to make sure that we boost our innovation machine. The first answer is innovation and the second answer is localization. From the mature product, we are going to localize some parts of the supply chain in China Yeah, for cost reason, but also because it's the expectation of our customer.

Okay, but there's nothing in particular that you hear from either your customers or other parts of the supply chain that suggests where all that equipment and capacity is going to, whether it could be a threat in the midterm for you?

No, what we hear mainly from our customer is in the midterm, the need of localization in China.

Good, okay. Clear. Then I have sort of a technicality on inventories because you mentioned that you keep especially products with limited risk of obsolescence in the inventories. And although that makes sense, every year in the annual report, I see that you have write-downs of around 6 million, but you also have a reversal of write-downs from the year before of 5 million. So just a technicality. Why are you writing down your inventories when you reverse that every year the year thereafter?

These are new. I mean, it's a continuous change. I mean, this is the normal way of working. In general, it is usually around the effect is around half a percentage of the margin, but it's extremely stable. It's a very stable percentage.

Yeah, but the net impact is close to zero, so why write it down?

No, there is each year an impact, but it's rolling forward because we keep certain rules in place. There is always a small effect on the inventory, but it's very stable and neglectable. And it's different products. Sometimes we resell parts, sometimes that we wrote down because it had been in stock for too long, so it changes. But the overall effect on the P&L is limited to around maximum half a percentage.

Okay, cool. That's it. Thank you. Thank you. As a reminder, to ask a question, please signal by pressing star 1. Our next question comes from Robert Sanders from Deutsche Bank. Please go ahead.

Yeah, hi, good morning. My first question is just on the capital structure. Is there any plan to do any further prepayments and do you expect to draw down on any kind of credit facility in the next sort of 12 months?

Well, next quarter we have a big dividend payout, so yes, we will increase our debt position, but then to be reduced further in the year. in Q2 is the peak always of debt and it has to do with the dividend payment.

And on the XFAB wafers that you've signed a deal with for 0.11 micron for the next three years, I mean the prevailing market price is a lot lower than what you've agreed. Is there any opportunity to extract concessions or perhaps migrate volume away a little bit from XFAB, just in order to improve your cost structure? Because, I mean, some of your competitors will have lower cost wafers.

Well, we in general are diversifying our supply chain across the board. This is in all areas. But the commitments to XFAB, we will keep intact. That is clear.

Got it. And just last question, just on the pure EV situation, obviously you've seen price pressure since middle of last year. How is that playing out as we look into 2024? Is there continued price pressure because those guys don't sign LTAs or is it starting to level out because of any particular reason, maybe because of the ramps coming next year?

We don't have... price discussion for the 24 situation with our customer and link to the EV. I think what I mentioned in the past, I think it's still valid. From Alexis, if we build an EV powertrain or an ICE powertrain, it's the same. I mean, we have the same number of sockets or the same number of products or the same number of opportunities in an EV powertrain versus an ICE powertrain. What is important for Melexis is the comfort and the safety aspect. Then it's important that this powertrain, EV or ICE, come with a modern platform. Because on the modern platform, there are much more electronics linked to comfort and safety. And for us, we are quite immune if at the end the car is built with ICE or with EV powertrain. as long as it's on a modern platform, I would say.

But the swing back to plug-in hybrids this year should be a big positive for you, should it not?

You could say because there are two types of engines. Yes. For us, if we have an EV and an ICE engine in the car, it is positive.

Got it. Thanks a lot.

Thank you. As a final reminder to ask a question, please signal by pressing star 1. We will pause for just a moment to allow you to signal. And it appears there are currently no further questions at this time. With this, I'd like to hand the call back over to Mr. Marc Durand, CEO, for any additional or closing remarks. Over to you, sir.

Yeah, thank you. And thank you for the discussion. Thank you for the question. And we are all looking forward to discuss with you again for the half-year result beginning of August. Thank you all.

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.