Melexis Nv Ieper

Hello and welcome to the Melexis Q2 2024 results call. My name is Saskia and I will be your coordinator for today's event. Today's call is being recorded and for the duration, your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star one on your telephone keypad. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to Marek Biron, CEO, to begin today's conference. Please go ahead.

Thank you for the introduction. Dear audience, thank you for joining the Melexis second quarter 2024 earnings call. We will review our performance over the past quarter and over the first half of this year. In Q2, our sales reached 245.7 million euros, which is close to the higher hand of our guidance. It represents a 4% increase year over year. Compared to the market, we stand tall. Our automotive growth was mainly driven by applications outside the port train. we experience new premium applications that rapidly ripple down into smaller vehicles. For example, comfort features like ambient lighting or advanced climate control, in which we are a successful player, are becoming more and more widespread in the different car segments. We are also hearing from our customer about a renewed focus to develop the next platform of combustion and hybrid engine cars. Melexis is well prepared for this shift since our product portfolio covers all type of powertrain. The diversity in our portfolio make us resilient against recent fluctuation in global car demand. In the second quarter of 24, Melexis has introduced several innovations. We launched a new magnetic position sensor for applications requiring high functional safety level. We have expanded our linear GB family and we have provided a code-free fan driver mainly used in data server. These successes highlight our growth ambition in e-steering technology, ambient lighting solutions, and market beyond the automotive sector. The growth of our pipe of opportunities confirmed the effectiveness of our product strategy. Here is some insight of our five major design wins in Q2. One design win is a driver to actuate valves in the thermal management system of an EV in China. Another design win is also a driver, but it is used in water pumps in Europe. We have booked new business with current sensor for inverter application in the US, and also with magnetic sensor to sense the position in a combustion engine in Korea. We have also one additional ambient lighting application in Europe. Those five examples show that we are succeeding globally, whether it is in EV or in combustion engine, in powertrain, and also in non-powertrain applications. Now, I will hand it over to our CFO, Karen Van Grisven, who will share some financial insights.

Thank you, Marc. So, hello, everybody. I will go a bit deeper into the financial results for the second quarter. So, Marc already mentioned we had 245.7 million euro sales in the second quarter, which is 4% more versus the same quarter a year ago, and 2% more than the previous quarter. and the Euro-US dollar had no effect, neither versus a year ago or versus the previous quarter. The gross result was 108.8 million euro, or 44.3% of sales, which is a decrease of 2% compared to the same quarter of last year, and an increase of 2% compared to the previous quarter. R&D expenses were 10.8% of sales, G&A was at 5.3% of sales, and selling was at 2% of sales. The operating result was 64.4 million euro, or 26.2% of sales, a decrease of 5% compared to the same quarter of last year, and an increase of 1% compared to the previous quarter. The net result was 49.1 million euro, or 1.4%. €21 per share, a decrease of 5% compared to the €51.9 million or €1.28 per share in the second quarter of 2023, and a decrease of 7% compared to the previous quarter. Our Board of Directors also decided on an interim dividend of €1.3, which will be payable after 17 October. And related to our outlook, Melexis expects sales in the third quarter of 2024 to be in the range of €247 to €252 million. And for the full year, Melexis expects 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 remainder of the year. For the full year 24, Melexis expects capex to be around 50 million euro, which at 60 million euro, so previously we mentioned here 70 million euro, so a reduction of 10 million euro. So operator, I would now like to open the Q&A session. So please go ahead.

Thank you. As a reminder, if you would like to ask a question today, please signal by pressing star one on your telephone keypad. In the interest of time, we kindly ask you to limit yourself to one question only. Once again, that is star one for your question today. And up first, we have Francois Bovigny from UBS. Please go ahead.

Thank you very much. So my question would be on your fuller guidance of 1 billion. So if we look at what it's implying for Q4, it's implying revenues up around 5% quarter-on-quarter in Q4, up 7% year-over-year in Q4 at constant currency. And it's suggesting therefore an acceleration and a fairly strong growth, especially when you compare to peers. So my question is really like, what is driving this growth? If you can share anything that you see, because it seems to be at odds versus the peers.

Yeah, our full year guidance is indeed our best estimate today based on the order book, the dynamic of the order that we see, also the new product launch that we will have toward the end of the year. Yeah, I acknowledge that versus the peers, it's a higher growth, but on the other hand, during the first half of the year, we have also been

bit better than the peers okay and you know maybe a quick follow-up if I may I mean it's if you look at your fuller guide implying this 4% I mean you don't have a lot of peers have seen growth for auto this year I mean even some with strong content stories you know unreported NXP reported TI I mean they are all down for this year for auto and some, you know, in a high single to double-digit percentage. So this plus 4% would be remarkable. I mean, it is already remarkable what you're doing in H1. Can you help us, you know, understand the difference? I mean, or maybe how are you sure it's not really stalking, you know, like inventory buildup? Because it seems like a very big outperformance, and I really struggle to understand why Melexis would have such a bigger market share gain in content-wise versus all the players that I mentioned.

It's indeed remarkable and we can be proud of it. To answer your question, we have a portfolio which is quite insensitive to the type of car which is produced or which is ordered. As I mentioned in the past, we have a similar number of ICs in an EV powertrain or in an ICE powertrain. Then from a Lexus, we are quite insensitive to the choice of car, and we see also an increase of business for what we call comfort and safety, which is outside the powertrain. And we see that this segment is increasing, thanks to the premiumization of the car, I would say.

Great. I will go back to the queue then. Thank you.

Thank you. And up next, we have Sandeep Deshpande from J.P. Morgan. Please go ahead.

Yeah, hi. Just actually following up on that, maybe can you comment on... how you've seen the order trajectory through Q1 and Q2 and whether the orders have continued to improve through the first half of the year. And then secondly, what do you have in terms of understanding of inventory held by your customers, so by your end customers itself, whether there is any risk that your customers themselves may be holding inventory of product at this point?

For your first question, the 2025, I think it's too early to discuss. We are now focused on 2024 and we will not discuss about 2025. And in terms of inventory at our customer, I think we can confirm that the peak is behind us. Now to state when the strong pickup will happen. I think it's difficult to say.

My first question was not regarding 25. My question was on how your order intake in the first half of 24 has gone. Has it been linear through the first half?

That was the question. I think it has been linear. We see that versus last year, The orders are coming later. It's clear that during the previous years, the customer were afraid to not receive their part, and they were ordering very early in the process. And now I would say the dynamic is back to what we knew before the chip crisis and before 2020. The pattern is quite similar to what we knew from the past.

Thank you. Thank you. And up next, we have Ruben De Vos from Kepler Chevrolet. Please go ahead.

Yes, I'll keep it at one question. Just if you could update us on the achieved design wins year-to-date, so both in automotive as in the adjacent markets, and how that compares to the prior two years, which I believe were already quite successful. Yeah, if you could quantify this in some way, that would be very helpful. Thank you.

Yeah, you know that long term our objective is to have 20% beyond automotive, 80% automotive, and this is reflected in the design win. Today we have roughly, let's say, 10% beyond automotive, but we have more design win. The design win beyond automotive is more securing, let's say, the future of 20%. We have this aspect on the DesignWin for the adjacent and the overall DesignWin level, I think we are on good track to reach the target at the end of this year. There is nothing abnormal on the DesignWin. As I mentioned in the introduction, it's important to see that the DesignWin portfolio is quite healthy. It's and for EV and for non-EV and for comfort and safety application and powertrain and non-powertrain. And I would say for a geographical aspect, it's also widespread.

Okay, thanks. And for these applications in the premium segment that are penetrating smaller vehicles, what are some of the key drivers or what's the key appetite there leading that trend?

Yeah, for us, we see this trend clearly for the ambient lighting, for the linear GB, and also for the drivers that are used in the climate control, as an example, but also in the seat comfort. Those are three examples where we see that those comfort features are going down in smaller types of cars.

All right, thank you.

Thank you. And as a brief reminder, there's a star one for your questions today. We're now moving on to a question from Jana Dan Menon from Jefferies. Please go ahead.

Hi, good morning. Thanks for taking my question. Just going back to your sales growth, which is looking more resilient than your peers, when I specifically look at some of your direct competitors like Allegro, You know, they're seeing a significant or, you know, broadly their trends are significantly falling this year versus yours, which is flat to slightly up. And we don't know exactly how Infineon's magnetic sensors sales are doing within their overall automotive portfolio. But, you know, it's possible that you would be outgrowing them as well in that specific area. So do you have evidence of, clear evidence of share gains where you are actually taking design wins at specific customers versus your competition that happened, say, in the last few years and then that is coming into your revenue stream right now? And also, just as an associated with that, you know, is it that you are seeing a lot of growth in any geography like China where some of these ambient lighting features are being deployed in a lot of cars by the Chinese OEMs, etc., and you have a stronger position there versus some of your competitors who might be stronger in the U.S. or Europe or something like that. Is there any geographical situation which is causing your strength versus others?

I would say it's difficult to answer your question or to quantify this in such short term. As I mentioned, our design win is are going well, are going as expected, I would say. The pipe of opportunities are growing also as expected. Yeah, on the geographical aspect, I would say that, yeah, we are well, I mean, we cover the different geography. Yeah, China, perhaps your underlying question was China. I think the design within China are going also well. And it's a good geography spread, I would say. It's a good type of engine spread. And it's a good overall application spread between powertrain-related and non-powertrain-related. And are you seeing... It's difficult to answer your very concrete question.

Got it. But are you seeing more strength today? I mean, is your China growth higher than your non-China growth today?

No, it's growing in the same... in the same order of magnitude.

Understood.

Thank you.

Thank you. And we now move on to our next question now from Vaikupeka ING.

We don't hear the question.

Okay, apologies. We're now moving on to our next question from Vaiko Pekka Silvasti from ING. Please go ahead.

Hello, good morning. Can you hear me? Yes. Good. So, it's Vaiko Silvasti from ING on behalf of Mark Hessling. I have one question regarding pricing discussions that normally start over the summer for the next year. So, what kind of pricing discussions do you expect this time around. Is there more deflation in the pricing than usual, or is it going to be quite similar as in previous years? Thank you.

As you mentioned, indeed, we start the price discussion usually after summer, and we did not start yet. What we anticipate is that it will be the regular price discussion as we knew them from before the crisis. And we plan to handle them in the same way, I would say. And we are back to normal.

Okay, thank you.

Thank you. And we're now taking a question from Robert Sanders from Deutsche Bank. Please go ahead.

Yeah, hi there. I just wanted to pick up on that last point about the pricing. So some of the auto suppliers seem to be pointing at a contract and saying price is not offered in negotiation, but volume, we're open to negotiation. But I think there's a general expectation in the industry we're going to go back to sort of mid single digit price declines next year. So at what point do you have to start renegotiating the pricing into next year? Is that going to be a pricing discussion happening starting September, October for next year, or is there a large part of next year's revenue that is kind of under contract?

No, we will indeed start the discussion after summer, then September, October, as you mentioned. You mean that we have some LTA with our customers, which is, I think, a good basis for the discussion. But we have also customers without LTA where we need to We need to handle the discussion as we did it in the past, I would say.

Do you have a ratio between customers under LTA and customers not under LTA for next year's sale?

Yes, between 40% and 50% are with LTA.

Got it. And is it fair to say that the China EV U.S. major EUV customer is the one of the types of customers that don't sign LTAs, whereas the sort of traditional, you know, old school OEMs are the ones under LTA, or is that not a fair kind of characterization?

I would say the customer with LTA are more the traditional customer.

Got it. Thanks. And just last question would be related to the inventory days. I don't know if this was addressed earlier. Sorry if this is a repeat question, but what is your target level of inventory given that the inventory currently is basically six months? It doesn't feel like the historical level, which was typically less than four months. So I'm just interested to understand where you think that's going to settle down. If we go back to normal industry conditions, does that mean that there's a sort of big cash inflow next year from running down inventory?

Thanks. Today, let's say we use our inventory to level out our production because we want also to be ready when the strong demand will come back. then we want to be ready to be flexible in order to be able to deliver to our customer. And this is the way we see our inventory. Today, as we mentioned at the beginning, I would say the customers are a bit short-term focused, and we want to be ready with the available product to deliver when the need is there. It's more an anticipation view.

Got it. Thanks so much.

Thank you. And as a brief reminder, that is star one for your questions. And we now also invite follow-up questions to queue. And we're moving on to a question from Ben Zerour from Detail. Please go ahead. Your line is now open.

Hi. Good morning. My question is on CAPEX. I was wondering if you could elaborate a bit on the adjustment of the CAPEX guidance. Thank you.

Yeah, we indeed reduced it a little bit. It is more a timing effect of some investments that will be moved into early next year.

Okay. Thank you. And our next question now comes from Trion Reid from Burenburg. Please go ahead.

Hello there, yes, thank you. I just wanted to follow up on that CapEx question regarding what does that imply for next year? Does it mean that actually CapEx will be more like a flat number next year, I think, before you expected that to be down? And then the main question I wanted to ask was just on Sensata. I think still a big customer of yours, they recently guided to a sequential revenue decline in Q3 and mentioned the exit of some underperforming products. I just wondered if that had any impact on you. Maybe not yet, but potentially in the future. Thank you.

Yeah, on the CapEx for next year, it's really too early because it depends a lot on the product mix. It's too early to comment on what to expect in CapEx for next year. And Yeah, on the other question.

Yeah, on the Sensata. Yeah, there is no, we did not receive any information from Sensata about any impact. Yeah, we are still working according to the LTE that we have.

Perfect, okay, thank you.

Thank you. And we take a follow-up question from Jeannadane Menon from Jefferies. Please go ahead.

Hi, thanks. I just want to follow up. I just want to ask about the non-automotive side. The non-automotive percentage is staying roughly flattish. Are you seeing any signs of improvement in that market after the weakness last year? And would you expect into the second half of the year, the non-automotive to outperform automotive? And also, perhaps you could give us an update on the On the progress in digital health, how are you seeing that in terms of approvals and things like that coming through?

In terms of non-automotive, we are investing in those markets. On emerging markets, you know that we have selected some emerging markets beyond automotive, and we are investing in our development bandwidth. We focus mainly on robotic, on two wheelers and also on wearable. On robotic, we have this sense of touch, what we call the tact axis, which is a sense of touch sensor. But on top of that, we are working also on some specific position sensor that will be used in the joint of the robot. We cannot use a position sensor from automotive. In the joint of the robot, we need more resolution as we develop a specific product. We develop also a torque sensor that will be used in this robot. And all the goal is to improve the accuracy of the movement of the robot. For the two wheelers, we are also quite successful with current sensor. We are winning some business. in the two wheelers for the current sensor. For the health aspect that you mentioned, we have also more and more traction on application outside the watch. You know that we have an important design win or an important production for a watch. But outside the watch, we see more and more traction for the digital health and for the temperature sensor.

And just into the second half of the year, are you seeing any improvement in the non-automotive side in terms of just end demand in the short term from customers?

Traditionally, let's say, Q2 and Q3 are quite strong for the digital health. It's linked to the to the timing of the market with the release of the wearable, then Q3 will be also probably strong for digital health.

Understood. Thanks.

Thank you. And as there are currently no further questions in the queue, I'd like to hand the call back over to you, Mr. Biron, for any additional or closing remarks.

Thank you. Thank you for all the questions. I hope we have answered all of them as clear as possible. And I'm looking forward to see you or to discuss with you at the end of October, I think the 30th of October, the next call for the Q2 release. And for the ones that have not been on holiday yet, I hope you will be able to relax and enjoy the month of August. Thank you.

Thank you for joining today's call, ladies and gentlemen. You may now disconnect.