Melexis Nv Ieper

Hello, and welcome to the MyLexus Q1 2025 Results Conference Call. My name is George. I'll be the coordinator for today's event. Please note that this conference is being recorded, and for the duration of the call, your lives will be in listen-only mode. However, you have the opportunity to ask questions towards the end of the presentation, and this can be done by pressing star one on top of the keypad. Also, during today's question and answer session, please limit yourselves to one question, to allow most people to ask their questions. If you require assistance at any point, please press star zero, and you'll be thanked to an operator. And I'm going to call over to host today, Mr. Marc Biron, CEO of Briege Drieschamp. Please go ahead, sir.

Hello, everyone, and welcome to our first quarter 2025 earnings call. Together with our CFO, Karen Van Grisven, I will discuss how the year has started for Melexis and how we are preparing for the future as an electrified and robotized world remains the growth driver for Melexis. While taking into account the changes in external conditions and adjusting where needed, we always focus on things within our control. In Q125, sales were within our guidance, despite a volatile and fast-changing market environment. Sales to customers in Asia-Pacific were 64% of total sales, while from end-market perspective, beyond automotive sales were 12%. The current gross profit margin is clearly below where we want to be, and the actions we are taking are expected to have an impact by the end of this year. You may have read that we did not include a comment in our expectation after the first half of this year. Since we reported full-year results last February, customers in our end market are facing a wider range of scenarios due to tariff announcements. Importantly, on average, customers and DC inventories look stable at acceptable levels. The current uncertainty seems to delay the order pickup, and we are also seeing orders coming in very late. Those are the reasons why we did not provide an outlook for the second half of 2025. I would add that there are no signs of customers pulling in order forward to anticipate potential changes to trading terms. Turning back to our results, in the first quarter of this year, our inductive position sensors have performed very well, addressing needs in the powertrain of electrified vehicles and also in the advanced steering and braking system, which are crucial for assisted driving. Similarly, our latest generation of electric motor drivers has excelled for small motor in valves and for larger motor in pump, which are two key applications of the thermal management and in-cabin comfort system. Some of those fun drivers have also found success beyond automotive, such as in refrigerators, to improve cooling efficiency. As for our temperature sensor, our solution continues to be very successful in consumer health wearable applications. Among the product launches, I would like to highlight our automotive dual LED drivers, enabling the most demanding light animation for interior and exterior lighting. Lastly, I remain personally involved in our strategic activities targeting innovative applications in robotics. It is an area where we aim to capture significant market share in the mid-term, and particularly in China. To reach our ambition, we are accelerating the development of several sensor and driverless products, and we start to heavily promote them globally at customers and at fairs. As a takeaway, I reconfirm that wherever electrification or robotization exists, there are growth opportunities for Melexis in the automotive and beyond automotive applications. I also want to highlight more broadly our progress in China. In 2024, sales in Greater China were 28% of Melexis total, coming from less than 20% just five years ago. This is due to bringing strong innovation, product quality, and local technical support. We are pleased to take the next step in our strategy as announced in Electronica China in April. The objectives are to accelerate innovation, intensify customer collaboration, and reduce lead time in this key market. To do this, we have established partnerships to outsource semiconductor assembly and testing. We will also manufacture in China, product developed by Melexis, tailor to the Chinese market, and scheduled to enter production in the first half of 26. We have moved to a new larger office in Shanghai in March to accommodate our growing commercial and technical support activities. Customer feedback has been very positive as we deliver on commitment made in our China for China strategy. Last but not least, according to Tech Insights more recent report released earlier this month, Melexis ranks number four globally in automotive sensor, with one of the highest sales CAGR over the past five years. All in all, I'm pleased to see how our team are managing the present and preparing the future success of Melexis. Now, I will hand it over to our CFO, Karen Van Grisven, who will comment on our financial performance.

Thank you, Marc. And hello, everybody. So as already mentioned, the sales for the first quarter of 2025 were 198.2 million euro, a decrease of 18% compared to the same quarter of the previous year, and stable compared to the previous quarter. And the euro-US dollar exchange rate evolution had a positive impact of 1% on sales compared to both the same quarter of last year and the previous quarter. And the gross result was 75.7 million euros, or 38.2% of sales, a decrease of 29% compared to the same quarter of last year, and a decrease of 2% compared to the previous quarter. R&D expenses were 14.3% of sales, G&A was at 6.8% of sales, and selling was at 2.4% of sales. The operating result was 29 million euro or 14% of sales, a decrease of 55% compared to the same quarter of last year and an increase of 5% compared to the previous quarter. The net result was 24.6 million euro or 0.61 euro per share, a decrease of 54% compared to 52.9 million euro or 1.31 euro per share in the first quarter of 2024, and an increase of 35% compared to the previous quarter. Now, looking at the outlook, so despite a weaker euro-US dollar exchange rate of 1.09, previously 1.03, Manexis confirms its outlook for sales to be around 400 million euros for the first half of 2025. And for the same reason, Menexis now expects a gross profit margin around 39%, previously around 40%, and an operating margin around 15%, previously around 16%, for the first half of 2025. Menexis continues to expect an upturn in sales later this year, Sorry, Menexis expects capex to be around 50 million euro. I would like to now actually open the Q&A session. Operator, please go ahead.

Thank you very much, Mary. Ladies and gentlemen, once again, if you wish to ask a question, please press star 1 on your telephone keypad, and please limit yourselves to one question each. Our first question is coming from General Ben Menno of Jefferies. Please go ahead, your line is open.

Hi, good morning. Thanks for taking the question. Just a little bit, you know, just to dive a bit more deeper into the second half outlook, where, you know, you had talked about a significant increase in the second half versus the first half in your Q4 result, and clearly you are not... not confirming that at this point in time. But what can you tell us about the second half? I mean, do we at least have some confidence or feeling based on your current order outlook, booking level, that you will see higher revenues in the second half versus the first half? Is that something that can be confirmed? Or is there some uncertainty on that as well? And just in the same thing, On your Q2 guidance of around 202 million euros at the midpoint, can you confirm what exactly is the currency effect? I mean, if the currency had stayed at the lower level rather than 109, then what would have been your revenue for this quarter? Thanks.

Yeah, on the first part of the question, as you have understood and as you know, probably there are a lot of uncertainty in the market in general. We are also receiving the order very, very late. It's exceptional. As an example, last week we have still received order for Q2. Q2 will stop in two months, but last week we are still receiving order. It means it's really difficult to give an accurate view on what will happen in the second half of You have also read that OEM are giving in the press, let's say, some message recently. What I can say is that we believe that the Q4-24, the Q1-25 is somewhere at the bottom of the situation, but I think we need to be conscious that All scenarios are probably on the table. Does it answer your question?

Yeah. Just to follow up, some of the other companies have talked about a rising book-to-bill, and in most cases it's gone above one. Would that be something that Molexis has also seen in terms of a rising book-to-bill? And is the uncertainty that you're talking about more because you're not sure whether the book-to-bill, the order book is reliable or not?

We discussed during the last conference call about the different indicators that we are following, and book-to-bill is one of them. I would say that since last time, it's relatively stable. It does not degrade, but it is stable.

Understood. And on the Q2 guidance, what would be the currency impact on the revenue?

It's around, for 5% dollar impact, it's around 2% sales impact.

Thank you. Our next question will be coming from Francois Bovini of UBS. Please go ahead.

Thank you. I just wanted to come back on Asia revenues. I noticed that Asian revenue was down 10% year-over-year. It was also down last quarter. So I was just wondering, I guess China is a big part of this Asian revenue. Can you maybe tell us the trend that you see in China at this point? And of course, you know, we noticed the strong acceleration of strategy in China. So maybe you can elaborate as to why you are accelerating this China strategy. Is it because you see that this is a market share loss somehow or some risk emerging with locals? That would be my first question, maybe.

Asia and China have indeed decreased, if you compare with last year, but they have decreased much less than in Europe or in the U.S. I think it's a positive sign that China or Asia performed better than the rest of the world. Indeed, we are accelerating our... our strategy in China not because we are seeing risk or because we lose market share but more because we see that there are a lot of business opportunities there and we want to be well positioned in China in order to grasp this business and it's more for a positive reason than for a negative reason.

In Q1 there is always the China New Year so that also explains to some extent, a drop versus Q4. It will go up again in Q2.

As we mentioned during the Q1, the design win and the opportunity is growing well in China. If we speak about beyond automotive and the robotics, we see also a lot of traction in China for those kind of applications. It's why we want indeed to strengthen our position there.

Thank you. We'll now move to Sandeep Deshpande of J.P. Morgan. Please go ahead. Your line is open.

Yeah, hi. Thanks for letting me on. My first question is regarding your currency assumption on the margin. I mean, if you assume, I mean, clearly you're not giving any guidance for the second half, but Given where the currency is today, say 114 or so to the dollar, would it mean that if the revenue remained at the same level, say 400 million in the second half of the year, that your gross margin will decline further in the second half of the year given the currency has shifted? And my second question is regarding your exposure. You talked about your growth outside automotive in robotics, etc. Can you talk about how your design win activity is going? So, I mean, today you're approximately 88% automotive exposed. Is your design win activity in terms of signed up designs more or lesser in automotive today than the reported revenue? So for instance, that your design win activity is 85% versus 88% today for the next two, three years. Thank you.

I will first take the US dollar question. Actually, the effects that we see today of the Euro-US dollar is mainly not structural. It has to do with revaluation of our inventory. Structurally, the impact of the US dollar on the margin is quite limited. It actually even has a slightly positive effect on the gross margin. On the EBIT margin, it's quite stable. So the effect we see today of the US dollar is purely on inventory revaluation is not structural. So 2% in Q1 in our gross margin is actually lost due to revaluation reasons, so not structurally. 2% is also linked to yields, and that is also not structural. The yield improvements will happen throughout the year, most likely by year end. The yields will be back to more historical levels. Does that explain your question?

You're implying in that that actually even if the revenue remained 400 million, then your margin would improve in the second half of the year because this is not... Yes, for two reasons.

If the dollar remains quite stable, it will improve because there will not be a revaluation effect and also the yields we expect to improve.

Understood. Yes, on the design win question in Beyond Automotive. Yes, first of all, the design win is really the end of the business creation process. When we start to create the opportunity, let's say, there is months, sometimes even two years to get the design win. Design win is really at the end of the business creation. then we don't see yet a tremendous effect on design win for the beyond automotive because it's too late in the process but we see a very significant effect on the business creation and the opportunity increase and we see that we have more and more opportunity coming from the beyond automotive market and now the job of the business creation team is to convert all those opportunities in design.

Thank you. Our next question will be coming from the CIPs of KBC Securities. Please go ahead and let us open.

Yes, thank you. I want to come back to your next step in your China strategy. You're focused until now in the comments on the non-automotive part, but can you also give us some indications what your

view is on on china automotive market and and how you do you want to position yourself going forward thank you indeed when i say there are a lot of opportunity in china i added mine in automotive and in beyond automotive uh yeah the chinese the chinese market is that it lead is leading the the ev uh application it's also leading all the premiumization of the car in terms of comfort and safety, then there are a lot of new business opportunities in China also in automotive. And in order to address those opportunities, there are different mandatory actions. I would say the first one is to bring the right innovation with the right supply chain. coming back to the China for China strategy. It's why the Chinese customers expect that, for the time being, part of the supply chain is done in China. But in the near future, the full supply chain should be in China. It's why we have, in automotive, products that are today assembled in China and also test in China. And we will increase those number of products. And for the wafer FAP, we are in design process in the wafer FAP in China in order to be able to deliver automotive products coming from a China process in the future. And I mentioned the objective is that the first product, which will be a current sensor, will go out of China FAP in 2016. And last but not least, the third mandatory aspect is the customer support, the technical support. We clearly see that the Chinese customer expects immediate reaction, immediate answer in case of question. They expect a kind of plug and play product. They don't want to lose time to understand how the product is working, how to include the product in the application. It must be, let's say, plug and play. If it's not plug and play, we should answer immediately their question. It's why we are strengthening the team in China in order to optimize, let's say, the customer support on this. Thank you. And just perhaps to finish on the supply chain in China, the two other reasons to have the supply chain in China is the lead time. We need to reduce our lead time in China and also the cost aspect, obviously.

Thanks so much, sir. We will now move to Ruben Debas of Kipchoge Group. Please go ahead, Elias Olsen.

Yes, good morning. I just had a follow-up on China still. So just thinking about maybe, let's say, the last 12 months and also recently what has been happening around tariffs and sort of the hostility between China and the U.S., Have you been seeing, let's say, a structural shift in China towards more local content initially, but then also preference for non-US origin chips in the customer design? That's the first question.

Yes, the short answer is yes. We have seen some requests from Chinese customers coming to Melexis for this reason. We have set up... It's a work group in China in order to address those opportunities. And yes, we have seen some move in this direction.

Okay. And can you... I believe you said 28% of sales is China, right? And how does that percentage compare in terms of design?

We... I cannot answer directly. I can say that for the first time... In Q4-24, we had more design in China than in Europe.

Clear.

It's higher than the 28% anyway that we have in sales. Yes.

Okay, okay. And then just a second question around foundry, the foundry mix. I think last year you already added a foundry next to XFAP. I think it was a Korean foundry, if I'm not mistaken. Now you're also looking into China. Just could you give us a general overview of how the foundry mix will look like, let's say by 26, 27? How much of the sourcing will happen across those three foundries and for which applications mainly?

In 26, 27, the very, very vast majority of the production will still be in ICSAP because you know that those sources the trend of the business are very, very slow. And in the future, XFAP will remain our main foundry partner.

Thank you, sir. We will now move to Mark Heslake. And before we do that, ladies and gentlemen, could you please limit yourselves just to one question? One question, so no other signals. You can come back with follow-up questions. Thank you. Mark, please go ahead.

Yes, thank you. Then the question is also on China. If you move to this Chinese foundry and also with the earlier move to the other foundry, what are the impacts on your gross margin? Are they going to be similar or do you also get some gross margin benefits from it? And maybe in the run-up to that, do you have some one-off costs from switching to the other foundry as in the design phase, given that you use maybe some different toolboxes from the foundries?

Yeah, on the second question, what we want to do is we don't want to copy an existing chip in another foundry because, as you mentioned, it's a lot of development costs which are a bit waste it, and we want to focus our development effort on new products, on innovative products, and the first strategy is not to copy-paste a product in China, but to develop, and I repeat, with the China process, we want to develop new products that fit the need in China. Indeed, to not waste our development effort. On your first question on the GPM, yeah, it's always also depending on the market price. And the market price in China is for sure different than the market price outside China. It means that I don't expect that the GPM will be improved, let's say, with this China process.

Thank you, sir. We'll now move to Robert Sanders of Deutsche Bank. Please go ahead.

Yeah, hi, good morning. You've mentioned in the past that China is, you know, two to three years ahead on the powertrain. I was wondering what you thought that measure was for software-defined vehicles and how do you play into software-defined vehicles? Do you have a particularly good content story there? It'd be good to just hear a bit more of that. And related to that, do you need to be on the reference designs from big players like NVIDIA and Qualcomm going forward? Thanks.

Yeah, the software-defined vehicle will need exactly in the same way sensors and driver in order to sense, let's say, the environment of the vehicle and the driver to actuate the different valves that The basic need will be the same with the software-defined vehicle than for the vehicle today. There are a lot of discussions with the OEM, and we are part of this discussion, indeed, to define how the sensor will be connected, let's say, to the ECU. There are different options, there are different architectures with a main ECU in the car and some secondary ECU on the different applications of the car and the discussion is indeed will the sensor and driver connect directly to the main ECU or to the secondary ECU? Will the software be inside the product, inside the sensor or inside the ECU? All those discussions are are ongoing and for sure Melexis is part of the discussion with the OEM directly because it's really important for us to understand in advance how our product will be connected and if they need, let's say, a simple sensor or a sensor with more intelligence. It's a bit early to answer the question. What I can say is that We are very much involved in those discussions with the OEM. And also the basic need of sensor and driver will not change.

Thank you for your questions, Mr. Sanders. Ladies and gentlemen, once again, if you have any questions or follow-up questions, please press star 1 at this time. We'll now go back to Mr. François Boubigny of UBS with a follow-up question. Please go ahead, sir.

I think you didn't have the chance to follow up on my previous one. Did I understand correctly that China is down year-over-year? I mean, Karen, you mentioned quarter-on-quarter seasonality, but you also said year-over-year, right?

Correct. Indeed, but the whole Malaxus is 18% down quarter-on-quarter. I mean, versus a year ago. And China is much less down, but it is still down. The inventory correction is also impacting China.

That's the point I wanted to ask. This is the first time I hear that they are doing some inventory correction in China. I'm sure it will happen or it would happen at some point. But the first time I hear China down year over year, When you look at the car sales in China, it's fairly healthy. The hybrid and EVs is very healthy. The outlook is okay. So I'm a bit surprised to have China down year over year. At least the first company that I've been hearing, maybe I'm missing, that China is correcting inventories in China. So can you give a bit more color on that?

I think a difference... that we have noticed between China and the rest of the world is that China did not ask any push-out or any cancellation at the end of last year, while the rest of the world has requested a lot of push-out and cancellation. Not in China. We didn't receive such a request from China.

Okay. I still don't understand why it's down here over here so much. I mean, it must be a matter of correction, but The demand is very strong, so I don't know. I'm a bit confused.

There are also European players in China who are not always doing so well.

Okay, understood. Thank you very much.

We have another follow-up question, this time from Robert Sanders of Deutsche Bank. Please go ahead.

Yeah, just relating to the last question, my last question about NVIDIA and Qualcomm. So if the intelligence moves to the zonal computer, then that leaves you doing a kind of slave sensor to those companies. So why would you not end up working... with the NVIDIAs and Qualcomm's on a reference design. I mean, certainly Elmos is doing that. They're very excited that they're on these reference designs from NVIDIA and Qualcomm, yet you didn't mention anything on that.

Yeah, today, indeed, I repeat what I've said. We are in contact with the OEM mainly to define, indeed, the architecture and the need of the products.

Okay. Thank you. Thank you. Thank you, Mr. Sanders. As we have no further questions, Mr. Biron, I'll return to you. Sorry about that. We have one more question that came into the queue, sir. It is Nikos Kolokotronis of Van Latchart-Kenton. Please go ahead. Your line is open.

I have a question. Before it was mentioned that you expect yields to improve toward the second 25%. So can you provide a bit more color on what this improvement and it related to the qualification ramp of production with the Chinese partner? Thanks.

No, no, it's not linked to this. It's more linked to the, let's say, it's more a pain of increasing capacity. The FAP have increased their capacity. They build up, let's say, new equipment. And we are still suffering, let's say, for the ramp up of those new equipment with bad yield. And it's why we still need some time, let's say, to digest the wafers with the lower yield to fix the technical problem. It's why Karen mentioned toward the end of this year, we should see the result of all those activities. But it's more linked to a ramp up of new capacity.

in the fall. Perfect. And then my second question is on the inventory levels, which continued going up in Q1, currently standing at 210 days, which is pretty high. So can you comment a bit on how you think about this going forward over the next quarter? Yeah, that's my second question.

Your question is about the inventory level at Melexis, I understand. Yes, exactly, at Melexis.

Yeah, we expect that to further increase. As we are building our first strategic inventory, because we cannot exclude also, I mean, there is for sure also a scenario to take into account that we grow first, I mean, that we continue growing throughout the year.

And we know that when the pickup will happen, it will be a sharp increase. And we know also that the supplier which will be able to supply the part will win. Then we want to be ready with, let's say, the right part in the right inventory in order to be able to grasp a new business when the pickup happens.

OK. So do you think you are happy with these levels going forward in order to bid for the pickup? Or do you want to increase a bit more, actually?

We still want to further increase it.

Okay, thank you. Thank you. What's your question, Zadnikos? We do not have any further questions at this time. I would like to call back over to Marcivito for any additional closing remarks. Thank you. Thank you, Operator.

In summary, Melexis is navigating the current market condition and continue to focus on growth driver through innovation and strengthening our presence in China. The steps we are taking now are making Melexis stronger and will enable our customers to win without our target market like automotive and robotics. Then we will report our Q2 results on July 30. And I want to thank you for joining our call and tell you goodbye.

Thank you. Thank you very much. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may disconnect. Have a good day and goodbye.