Melexis Nv Ieper

Good morning and welcome, everyone. Joining us today for Melexis' second quarter 2025 earnings call. I'm Philippe Ludwig, investor relations at Melexis, and today I'm joined by your speakers, CEO Marc Viron and CFO Karin van Gliensven. Marc, please go ahead.

Thank you, Philippe. Hello, everyone, and welcome to this earnings call. I will briefly discuss our second quarter performance Then I will hand over to Karen for our financial overview and outlook. So on-quarter sales grew sequentially and has included in-quarter customer orders. We are able to support this increase of these short-term orders because of the inventory we continue to build up in order to be ready for the next upturn in demand. We have recorded double-digit quarter-on-quarter sales growth in both China and EMEA. Sales for automotive applications were 88% of the total sales and I would like to highlight powertrain sales which grew both for internal combustion engines and electric motors. In interior lighting, where we have a leading position, sales were also up to double digits. Sales for beyond automotive applications were 12% of total sales We had mainly outperformance in cooling fans for consumer appliances and data centers. While today these applications are a small part of our sales, those show important growth opportunities for the future. To capture these opportunities, we continue to launch dedicated new products for Beyond Automotive applications. In the second quarter, we have added a temperature sensor which enables high accuracy and cost-effective solutions across household, industrial and AI-driven applications. We have also leveraged our tri-axis technology to launch a magnetic position sensor for joystick and human-machine interface applications. This innovation allows for accurate operation even in applications with high magnetic interference. is make it a unique feature for joystick and steering system in heavy machinery, medical device and automation equipment where safety is critical. We have also secured design wins in China and Europe with a good mix of application in all types of powertrain, but also outside the powertrain, for example in braking and lighting application. I also want to highlight a design win for our inductive position sensor in sophisticated service robots. We are very excited about the high number of sensors and the high number of drivers needed in the robotic market, which is a great potential for Melexis in the coming years. Now, I will hand it over to our CFO, Karen van Grinsven, who will comment on our financial results.

Thank you, Marc. And hello, everybody. The sales for the second quarter of 2025 were 211.6 million euro, and the euro-US dollar exchange rate evolution had a negative impact of 2% on sales compared to the same quarter of last year, and a negative impact of 3% on sales compared to the previous quarter. The gross result was 82.6 million euro, or 39.0% of sales. While volume growth will support margins as it returns, we are not waiting for this and are taking improvement actions. Amongst other, we are planning to bring innovative higher margin products on the market, resolve cost of yield issues, diversify our supply chain, and optimize our operations organization, and this by concentrating competencies and moving final testing closer to our customers. All of these should lead to better growth margins. In addition, we are closely managing fixed costs to be stable during this time. R&D expenses were less 13.6% of sales, G&A was at 6.3% of sales, and selling was at 2.3% of sales. The operating result was 35.7 million euro, or 16.8% of sales. The net result was 37.8 million euro or 0.94 euro per share. Furthermore, the Mlexis Board of Directors decided on an interim dividend of euro 1.3, the gross per share, which will be payable from October 16th. Moving to the outlook. Melexis expects sales in the third quarter of 2025 to be in the range of 210 to 215 million euros. And for the full year 2025, Melexis expects sales to be in the range of 835 to 845 million euros, with a gross profit margin around 39% and an operating margin around 16%. all taking into account a euro-US dollar exchange rate of 1.17 for the remainder of the year. And for the full year 2025, Melexis now expects CapEx to be around 40 million euros. This concludes our remarks. We can take your questions now. So, operator, please go ahead.

Maybe just as Philip Ludwig again, just to clarify, we... Appreciate one question, and you stay on the line with one short follow-up, and then please return to the queue so everybody has a chance. Thank you, Gaia.

Ladies and gentlemen, if you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The first question comes from Sandy Dashvender from J.P. Morgan. Please go ahead. Your line is now open.

Hi. Thanks for letting me on to ask the question. My question is regarding your guidance. Firstly, on your revenue, you are not indicating any significant upward movement in your sales, though you say that the inventory correction in the automotive market seems to be ending at this point. Is there a reason why you don't see more positive momentum on the sales? What are you hearing from the customers at this point in terms of the improvements that are likely to happen in the end markets in the second half of the year? And my second question is on the margin. The same question on the margin, I mean, when you go back and look at Melexis' margin in the past, you've had much higher gross margin. and the leverage that you're seeing on the gross margin into the second half of the year is fairly small. Can we talk a little bit about, you know, I mean, at these revenue levels, you've had higher gross margins before. So why is your gross margin being more muted at this point?

Thank you. Yeah, about the revenue. Q1 this year, Q4 last year was probably the bottom of the cycle. Now we start to get out of this bottom and the trend looks good. But also there are a lot of uncertainties and we also receive a lot of short-term orders as I have mentioned in the introduction call. It's why the visibility remains quite short due to this customer order patterns. It's why we gave this outlook based on what we know today.

Yeah, and coming back on the gross margins, here I can say that also Q2 we have next to obviously that we don't leverage on our operating costs completely, and because sales are still relatively low, so that operating leverage is missing. But next to that, we also have quite some non-recurring, also in this quarter, costs related to, amongst other, cost of use. Cost of use is gradually improving, but it's still strongly impacting today. Also, revaluation of the dollar, still impacting our profit. And we also had some non-recurrent costs due to the optimization of our operations organization in this quarter. So therefore, there is at least 4% impact from these costs, which are not structural.

But then why is it not improving in the fourth quarter because you have given guidance for the second half?

We are working on, indeed, cost improvements. But, yeah, as we mentioned before, there is a lot of volatility today in the markets. It is our best estimate today from today's point of view.

Thank you.

Thank you, Sandeep.

The next question comes from Jonathan Menon from Jefferies. Your line is now open. Please go ahead.

Hi. Thanks for taking my question. I was just going to comment that the demand improvement that you saw in the second quarter was coming mainly from China and EMEA. Is the lack of U.S. improvement you know, because of tariff concerns or is it because of the big beautiful bill which may be restricting EV sales in that market? And given that the EU and the US have signed a trade agreement, do you think that that clarity will lead to some improvement in your orders from your automotive customers going forward?

Indeed, the improvement is coming mainly from Asia, China, and EMEA. It's also our biggest market. The pure U.S. is 5%. The NALA is 8% to 9%. And the improvement is coming from our big booster or big engine, I would say. And to come back on your question about the impact on the tariff, I don't see the impact. When we discuss with customers and when we discuss about the origin of the order, the tariff aspect has never been mentioned. I do believe on the result of Melexis, the tariff has limited influence.

Understood. And my follow-up is just on the robotics, service robotics design win. When does that go into volume production? And would you regard the volume as significant or is it still quite early stage, small volume?

Versus the volume in automotive, it's still very small volume. I think we are at the beginning of the ramp-up, I would say. then it will remain low volume versus the total melexis result, because the robotic market is still small. But when we look at all the output of the robotics, it will for sure increase in the next years, but it's not for 26, when I say the next years, it's multiple years, let's say. But I think it's very important that we are well positioned in this market today in such a way that we can enjoy the growth in the future.

Thank you.

The next question comes from Francois Boubigny from UBS. Your line is now open. Please go ahead.

Thank you. My first question is on your full year guidance. I mean, you didn't provide any guidance for the full year before because of the lack of visibility, and now you reinstate one. So it would imply that the visibility is improving, I guess, you know, if you feel comfortable about guiding the full year. But at the same time, I mean, Matthew said that there's still some short-term orders, short-term delivery, and visibility didn't seem very, you know, clear. when I listen to you. So why did you reinstate the guidance? What makes you feel confident about the visibility and further guidance now to get one again? Is it because the lead times are increasing or anything could share behind this confidence?

I think one aspect is that now we see that We are out of the bottom of the cycle. There is a kind of trend, let's say. It's easier to see, to give the guidance when there is a trend. And today, even indeed your book has much limited visibility, but let's say four months visibility for a big part of the business. Then I think those two combined gave us confidence to give a full year guidance.

Yeah, and we have always also, we gave guidance on the first half year. So, half year guidance we have continued to give. I mean, we just continue to give guidance now on the second half. For six months, yes.

And what's the bottom, the trend you're talking about, Mark? I mean, what's the data you're referring to? What makes you feel it's a bottom?

Because, as we mentioned, Q2 is better than Q1, and what we guide for Q3 is indeed better than Q2. I think the ordering behavior of the customer, I think we don't have push-out anymore. I think I mentioned it already last quarter, but it's still the case. There is really zero push-out, and on the contrary, we have We have short-term orders.

Yeah, maybe to add position sensors, our biggest product line with also longer lead times, we now see the first signs of recovery in that product line as well.

Excellent. Thank you. And maybe, you know, just my follow-up would be on the Q2 performance, which in fairness was quite encouraging. And you mentioned China. I think China you called a negative last quarter. So what was your performance in China this quarter? And any insight as to why it's recovering all of a sudden? I mean, I would assume if you have an inventory correction happening in China, it's more than one quarter. So I was surprised you're coming back so quickly. So can you, one, give the China growth number and any insight as to what is happening?

First of all, if you refer to the quarter to quarter, if we look at the year to year, China is the only region which is growing year to year. All the other regions are still negative, but China is clearly positive year to year. It has always been a driver for the growth. Yeah, then you refer to the backlog or to the inventory. We have never received huge push-out from China. Also in Q4 last year when we have received a lot of push-out from our customers. Yeah, they did not come from China. They came from other parts of the world.

Thank you very much.

The next question comes from Ruben Devold from Kepler Chevreux. Your line is now open. Please go ahead.

Yes, good morning. Thanks for taking my question. I just had a follow-up on China and Europe where you had a stronger design win activity. I was just thinking about, like, at this stage, what would be the usual conversion into sales if you look at the entire sort of design win activity you've had? in these regions because, I mean, they've been quite positive for a few quarters straight. Just curious about the usual conversion into sales and, you know, thinking about the visibility maybe a bit more longer term apart from the order book. That's my first question. Thanks.

Yeah, the design wins. It's a kind of trigger for the long-term business development. The way we record the design win is when we receive the first purchase order. That is really the start of the ramp-up of the business. It's why it gives, let's say, an early indicator of the new business. But at the corporate level, There is for sure business which are going down. And we know that in automotive, when we have a business, it's for a very long time. It's sometimes difficult to estimate or to assess when the business is going down. And on the other hand, there is the new business which is coming from the design. It's difficult to answer your question because there is multiple parameters. that enter in the equation. We just know that the objective, let's say, is to grow the pipe of opportunity quarter after quarter. And we see that this pipe of opportunity is growing quarter after quarter. And at the end of the sales process, the opportunity is transformed in design win. And then the design win is the start for the ramp of the new business.

Okay. And maybe more short term, like obviously apart from maybe the order book you're seeing, you know, Q2 being better than Q1, Q3 got it to be higher than Q2. Like, do you have any sense of how much inventory is still sitting at the distribution or OEM level in these regions, like EMEA and China?

Yeah, at OEM, yeah, I will answer OEM later, but at our customer, let's say, which is more the tier one and the distributor, we see that the inventory of the distributor is quite flat since more than six months. Then it seems that the distributor are managing their inventory in a healthy way. For our customer, we have seen in Q2 again a reduction of inventory versus Q1. We have interviewed our main customer, and there is clearly a reduction of their inventory. Coming back on the OEM, because your question was the OEM, if we look at the... The data from the market firm, the inventory in China, the car inventory in China is quite stable. It usually increases towards the end of the year, but now we are at the middle of the year, then the inventory of today is very similar to the inventory of the previous year in China.

Okay, thank you very much.

Our next question comes from Robert Sanders from Deutsche Bank. Your line is now open. Please go ahead.

Yeah, good morning. I was just wondering if you could talk a bit more about your localization strategy in China. Are you seeing Chinese OEMs now preferring European vendors over American, you know, analog sensor companies? I note that today the largest players in China are actually American, not European. So do you think that's going to change?

Yeah, in terms of localization, since the beginning of the year, we are producing in OSAT. Then the OSAT is the assembly house and the test house. Then for some product, we assemble and we test in an OSAT in China. as an example, the lighting products, but also some latch and switch. And this is ongoing since six months, I would say. In terms of wafer supply, we have taped out our first product in a wafer shop in China. And taped out means that the design has been done. We have, now that the wafer are under process in this wafer fat. And this is the second step of the localization, is to be able to process wafers in China. And this is, I would say, ongoing. And the first production from this wafer fat is planned, I would say, mid-next year. We will have a production outside this wafer fat. This is in terms of localization, where we are. Yeah, your question was also about, yeah, is there some opportunity, let's say, for European company given the trade war? I would say yes. It's probably less massive than what you think, but we have indeed some customers, some Chinese customers that are coming to Melexis in order to have a European supplier. It means that indeed, I think, and from a localization perspective and from a customer support perspective, I really do believe we are doing the right things in China. I think we have positive feedback from the customers. I was in China in June, beginning of June, visiting different customers, also robotic customers. I think we have a good image in China. We have a good position in China. We have a lot of design in China. then I do believe we will benefit, let's say, from this China situation.

Just a quick follow-up on the robotics opportunity. Can you just give us an idea of, like, how much content there could be per humanoid robot or just an idea of the scale of the business, whether it's tens of millions yet or not yet, or could it be larger? That would be a good thing.

Yeah, the content is very big. I would say for Melexis, as big as in a robot than in a car. Of course, the number of robots is much smaller for the time being, but there is some analysis that shows that in 2040, okay, it's not tomorrow, but in 2040, or between 2035 and 2040, we'll have as much of a robot as a car. And to come back on your question on the number, there is, for example, a position sensor in the joint of a robot. We have up to 46 position sensors per robot, and the parallelism is very big. Because there is multiple joints in the robot, you need to move all the parts of the robot. And in every moving part, you have a joint. And in the joint, you have a position sensor to measure the position and a driver to drive the movement. It's why in terms of multiplication, it's very big. But for the time being, we have a limited number of robots. And I could add also that a robot is a kind of electrified moving part. It's a bit like a car of today. It's also an electrified moving part. The drone, the same. And the robot is an electrified moving part. And all the opportunities linked to the electrification exist also in the robot.

Thank you.

As a reminder, if you wish to ask a question, please dial poundkey5 on your telephone keypad. The next question comes from Mark Hasling from ING. Your line is now open.

Please go ahead. Thank you. First question is for Mark. Mark? Yes, Jamie?

It's a very bad line. It's not great, but let's try. Okay.

Okay, so the first question is a follow-up on the guidance.

You guide for the third quarter. Does it also include an expectation for these short-term orders?

Yes, I think it's indeed, the guidance includes everything, yes.

Because in the last quarter, you actually had a, you beat your own guidance a bit, given those short-term orders, but I guess that, I mean, the visibility on that's even lower than usual, but you already take someone to account that that will continue to happen, I guess.

Yes, yes.

Okay, then the second question is on the gross margin. So you gave multiple short-term reasons why it's now under pressure, but if you look further out, is there any reason why you would not go back to, let's say, your usual gross margin of 45% whenever the volumes come back, whenever you have solved your yield issues? Are there any structural reasons why it would not come back? And what kind of timeline would you expect it to come back? The measures that you're taking, when will it start to pay off?

Yeah, like I mentioned, 4% today is non-structural. That doesn't add up to 45% yet. But there is also operational leverage that will also help to get closer to the target margin. When this will happen is very difficult because it depends on so many parameters. Like I mentioned, there is quite a bit of volatility in the market. But yeah, we stick to our target, it's 45% gross margin. And this remains our target also today.

Again, to complement, we are working hard on all those parameters.

Yeah. Yeah, and maybe also to add, we intend to grow with higher margin products as well. It's also important.

Thank you. Our next question comes from Michal from . Your line is now open. Please go ahead.

Yeah, good morning. My first question is about the guidance for Q3 and the full year. If I take the midpoints, then I calculate that your second half sales will be about 5% higher than in the first half. And if I translate that into US dollar growth, it's about 12%, which is sort of a constant currency growth. Is that 12% what you had in mind earlier in this year when you assumed significant growth in the second half versus the first half? Or has something changed?

Yes, we confirm your assessment or your calculation. Yeah, I think at the end, if you look a bit longer term, the fundamentals remain positive. The fundamentals that were positive at the beginning of the year are still positive today. We have a lot of product launches. We have a lot of new opportunities. We have design wins. As I mentioned, we are successful in the growing market. the fundamental are the same, and at the end we should reach what was expected at the beginning.

Okay. That sort of suggests that, indeed, on the line you think not much has changed, but if I then look at Q3, 2% growth versus Q2 at the midpoint, and then sort of flattish in Q4, that doesn't seem a very strong uplift. So has something changed with your view for H2 compared to what you felt at the start of the year?

Nothing has fundamentally changed, as I mentioned. I mean, fundamentally, the fundamentals are positive. Indeed, in short term, there are some headwinds. But the long-term drivers remain intact. And indeed, we... I think we are all facing the short-term headwind and the short-term, let's say.

Okay, clear. Good. Then I have just two very small financial questions. What were the net interest costs in Q2? And I noticed that the depreciation costs were up 19% quarter-on-quarter. Is the Q2 depreciation the new normal going forward, or was there an exceptional item in there?

So moving first to the, what was it? The interest. The interest. Yeah, that's around a good $3 million is interest costs. And your second question was on the... Depreciation. Yeah. And, yeah, the depreciation is very, yeah, that's been... I don't have anything specific to mention there. So your question is, is it the new normal?

Yes, indeed. It went from 11.7 to 13.9, you know, small numbers. The delta is relatively in absolute numbers small, but, you know, yeah.

Yeah, it can fluctuate.

It's quite big.

Yeah. Yeah. Yeah, year-on-year it's not a surprise because we are investing. We have invested last year. So year-on-year increase in depreciation, it's normal. So yes, it is the new normal.

Okay, so close to 14 run rate a quarter. Good. That's it. Thanks.

There are no more further questions at this time, so I will hand the conference back to the speakers for any closing remarks.

Thank you, Operator. Thank you, Philippe. Thank you, Karen, also. Before closing, I would like to highlight the Capital Market Day that we will hold on November the 5th. More detail will be made available in the coming period. In summary, Melexis is progressively seeing sales trend improving, winning new business with innovation across product portfolio, but also across geographies. We are also supporting our customers by being able to deliver short-term lead times. We will report our Q3 results on the 29th of October. Waiting for it, or in the meantime, I wish you a good summer. Thank you for joining the call, and goodbye.