Melexis Nv Ieper

Welcome, everyone, joining us today for the Melexis fourth quarter and full year 2025 earnings call. I'm Philip Ludwig, Investor Relations Director at Melexis, and I'm joined today by our CEO, Marc Biron, and CFO, Garen van Heeringsveen. Earlier today, we published our press release and presentation, which can be found on our website. We will start with some brief remarks on the business and financials before taking your questions, starting with Marc Biron. Marc, the floor is yours.

Thank you, Philippe. Hello, everyone, and welcome to this earnings call. Let me start by sharing some perspective on the full year of 2025 and how we see 2026 as of today. Then we will discuss the last quarter of 2025. Looking back at 2025, at the beginning of the year, we had entered a phase of customer inventory correction later than our peers. We are now in a period with more geopolitical uncertainties and more short-term volatility in demand. The period of customer inventory correction was largely completed by the summer. As a result, our sales were stable or grew sequentially as the year has progressed. High in-quarter ordering has started in Q2, which we could serve from our strategic inventory. Still in 2025, sales in our largest region, APAC, has increased as a percentage of group sales. China has followed an alternating pattern of very strong sales in one quarter, lower the next quarter, and strong again the following quarter, as it was in Q4 when we recorded our highest ever sales in China. Now, looking ahead to 2026, we remain in the recovery phase of the automotive demand cycle. We expect that these fails will not be linear, given all the uncertainties and the late ordering behavior of our customers. Following the very strong Q4, sales in China continue their alternating pattern in Q1, also influenced by Chinese New Year mid-February. We are also facing the expected volatility in our non-automotive business, such as digital health application. Finally, we have to factor in the impact of the annual pricing agreement that we have closed at the end of 2025. Those effects translate to a similar level of sales in the first half of 26 in comparison to 25. We expect growth in the second half of 26 with a similar dynamic as in 25. Now turning to the last quarter of 25, sales of 214.5 million euro means that we return to a year-on-year growth of 9%. China posted its highest ever sales and the rest of Asia was also strong. Total APAC sales were up double digit year-on-year and sequentially. while Europe and the Americas were lower sequentially. On the innovation front, we leverage our technology leadership with strong design wins and an expanded pipeline of opportunities across China, Europe, and South Korea. This trend is also valid in robotics, with the pipe of opportunities up by a factor of five in Q4 versus the previous year. We have launched 90 new products targeting structural growth trends in automotive and robotics. In the last quarter, this included a game-changing inductive sensor for steel-by-wire application that simplifies design and reduces cost, paving the way for the next generation of electrified and autonomous vehicles. We have launched also a code-free driver for automotive ambient lighting. which streamlines the development cycle and reduces the cost of our customers. We also see the high potential in power electronics, and we are extremely proud to offer a world-premier protective device called a snubber. This unique solution protects and enhances power density of silicon carbide power modules. All major power electronics manufacturers have shown interest in our products. A great example is Leeper Semiconductor, a Chinese manufacturer of advanced power modules, incorporating our snubbers in their next generation of modules. Our new protective device family will continue to expand to meet the evolving needs of power modules and emerging power applications. We have been growing faster than many peers in China over the past five years. with our broad offering on high-performance and high-quality products, and our strong local team to support customers. From my side, I came back from China two weeks ago. I'm really impressed how hybrid is gaining traction and how content-rich are reaching mid-range cars much more heavily than in Europe. To continue our trajectory in China, we are accelerating the implementation of our China strategy, including localization of our supply chain. A key step is to have local wafer supply, and we are fully on track to start shipping product this summer based on the 12-inch wafers from our local partner. We also established a dedicated robotic team in China to respond to the stronger interest with more than 60 projects currently. currently underway. As part of our strategy to win in faster-growing markets, we are increasing our effort in India, where we enjoy strong double-digit growth. India presents great opportunities in automotive as well as in alternative mobility, playing to our strengths. We are finalizing the setup of a Melexis entity in India to show our commitment to serve customers locally and further develop in this attractive and growing market. I will now hand it over to our CFO, Karen Van Grisven, to provide more detail on our financial result and outlook.

Thank you, Marc. Sales for the full year 2025 were €839.6 million, a decrease of 10% compared to the previous year. The EURUSD exchange rate evolution had a negative impact of 2% on sales, compared to 2024, and the gross result was €324 million, or 38.6% of sales, a decrease of 19% compared to last year. R&D expenses were 13.8% of sales. Q&A was at 6.5% of sales, and selling was at 2.4% of sales. The operating result was €134 million or 16% of sales, a decrease of 39% compared to €219.9 million in 2024. The net result was €112.5 million or €2.78 per share, a decrease of 34% compared to €171.4 million or €4.24 per share in 2024. Sales for the fourth quarter of 2024 were 214.5 million euro, an increase of 9% compared to the same quarter of the previous year, and stable compared to the previous quarter. The Euro-US dollar exchange rate evolution had a negative impact of 3% on sales compared to the same quarter of last year, and no impact on sales compared to the previous quarter. The gross result was 82.3 million euro, or 38.4% of sales, an increase of 6% compared to the same quarter of last year, and a decrease of 1% compared to the previous quarter. R&D expenses were 14.5% of sales, G&E was at 6.7% of sales, and selling was at 2.5% of sales. The operating result was €31.5 million, or 14.7% of sales, an increase of 14% compared to the same quarter of last year, and a decrease of 17% compared to the previous quarter. The net result was €22.6 million, or €0.56 per share, an increase of 24% compared to €18.3 million, or €0.45 per share in the fourth quarter of 2024, and a decrease of 18% compared to the previous quarter. Now, turning to the dividends, the Melexis Board of Directors approved on February 2, 26, to propose to the annual shareholders meeting to pay out over the result of 25, a final dividend of 2.4 euro per share, which will be payable after approval of the annual shareholders meeting. This brings the total dividend to 3.7 gross per share, including the interim dividend of 1.3 euro per share which was paid in October 2025. Now for our outlook, here Menexis expects sales in the first quarter and first half of 2026 to be around the same levels as the previous years. Sales in the second half of 2026 are expected to grow compared to the first half of 2026. For the first half of 2026, Manexis expects a gross profit margin around 40% and an operating margin around 17%, all taking into account a Euro-US dollar exchange rate of 1.17. And for the full year 2026, Manexis expects CAPEX to be around 14 million euro. Our outlook includes the first benefits of our cost action taken in 2025. such as improvement in the cost of yields. We remain disciplined in executing our cost improvement roadmap, for example, a shift in some operations to be closer to customers in Asia, and this to keep moving towards our long-term smarting objectives. This concludes our remarks. We can now take your questions.

Thank you, Mark and Karen. For the Q&A, We ask you to pose one question and one follow-up each time to give everybody a chance to ask questions. You can always rejoin the queue after your first set of questions. Operator, can you now give instructions and open the Q&A?

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 is coming from Alexander Petterch from Bansine. Your line is now open. Please go ahead.

Yes, good morning. And thank you for taking my question. I think the first one will be pertaining to your guidance. So as in last year, this year you also refrained from a four-year guidance. Could you give us a bit more color? So just help me understand if I got this right. So H1 flat. And then I think, Mark, you said in your introductory remarks Second half should be higher than the first half in a similar manner to what we've seen in 25. So is it then right to assume we're looking at a ballpark, something about flattish for the full year? I'm not trying to extract the full year guidance for you. I'm just asking if the math is correct here. And then I have a quick follow up. Thank you.

Yeah, I confirm your understanding. In my introduction speech, I have indeed mentioned that H2 will grow in a similar manner than H2 last year. Thank you very much.

Yeah, that volatility remains, it's very low. So the, if you look purely at Q1, we see that Mostly, Asia is staying behind. So, Asia was very strong at the end of last year. We see the order intake there is much lower than, for instance, for Europe. Europe is actually increasing. So, it's all attributable to Asia, and particularly also China. And we know that in China, there is a lot of volatility in orders behavior, and also very late ordering. So, I want to put that also in that perspective.

Thank you very much for that, Colette. Very useful. Thank you. And then secondly, on China versus Europe, we have a lot of debate going on about Chinese vendors, automotive brands gaining share in Western markets. What does this imply for your market share? Do you have your market share with local Chinese players that is similar to what you have in Europe, or is there a discrepancy there? Thank you very much.

Yeah, looking at the past five years, the CAGR of Melexis grew by 10%, a bit more than 10% over the last five years. And in China, the CAGR grew 14%, which is higher than the majority of the peers in China. And I do believe we are gaining market share in China if we compare to the CAGR of Melexis with the competition. And there is nothing structural that would tell me that this will change in short term. And I would say in the longer term, when we consider our design win, our pipe of opportunities, we see also that those design win and the opportunity pipe is increasing faster in China or in Asia than in Europe.

Very useful. Thank you very much.

The next question is coming from Amelia Banks from Bank of America. Your line is now open.

Please go ahead. Thank you. Yes, my first question is just on gross margins. You sort of said last quarter that you saw around cumulative sort of four percentage points of temporary headwinds stemming from yield issues and wafer inventory revaluation. I'm just wondering if you could maybe break down what you were seeing in Q4 and then also in terms of bridging sort of how you're seeing that guide to get to 40% in H1. Thank you.

Yeah, we still had that same headwind in Q4, indeed, because of inventory revaluation. We also still had high cost of yields, but this cost of yield both affects, well, particularly cost of yield is what will drive margin improvements in 2026. it will be a major contributor. And that is the reason why we expect around 40% gross margin in the first half of the year.

OK. And is that largely just reliant on revenues picking up and demand picking up to get through the yield issues, the wafers that you're seeing in your inventory? Is that the main driver of that?

No. It's that we get more material out of one wafer. So it's not volume related.

OK. I just remember last quarter you were saying about how you have sort of yield issues in one of your fabs. And that's led to sort of impacted wafers in your inventory that you're still having to work through. Is that still relevant?

Most of that material is now out of the inventory. So we now have an inventory. with higher yields, and that is helping us to improve the margin.

Okay, perfect. And then just my quick follow-up. Just on this sort of annual price reset, so just wondering if you could maybe guide on what sort of ASP change you've been seeing in 26 sort of versus 2025.

I believe the average selling price in 26 will be close to the 25. average selling price. That is the expectation today. Okay.

Thank you. The next question is coming from from Jefferies. Your line is open. Please go ahead.

Yeah, hi.

Thanks for taking the question. I'm just looking for your second half guidance and just wondering what is giving you the confidence that you will see the kind of increase in the second half like you saw last year, especially given your commentary on quite a lot of volatility in the China market. Are you expecting that market to stabilize over the next couple of quarters and therefore give you some upside there? And just associated with that question is, you know, we just came off the Infineon call and they said that perhaps because some of the customers, including in automotive and other areas, is concerned about strong AI demand giving rise to supply tightness even in areas outside of AI. customers are willing to put more longer-term lead time orders now just to avoid any future capacity tightness. So is that something that you're seeing which is also giving you some confidence on the second half of the year?

Thanks. I think there is indeed multiple reasons for this statement on the second half of the year. First, we know that the inventory at our DC in Asia, in particular in China, is very low, and we know that they will reorder later in Q1 or in Q2 because the inventory is really low, especially in China, and especially for the magnetic product, I would say. A second reason is we are, in many big customers, we are changing the version of the product, and this change of version will happen in Q2, Q3. And it's why our customers are now busy to reduce their inventory of the previous version before they order the new version, let's say the more modern version. This is clearly visible for driver's product, but also for some ASIC. Yeah, in our price negotiation that has been finished in December, we have We have also received the forecast from our customers, and clearly the forecasts are stronger in H2 versus H1. Those are the different reasons, let's say, that bring this comment. To follow up on your question about, let's say, the supply problem, we have some signs, let's say, for example, of assembly houses. where indeed those assembly houses are moving, let's say, their capacity to a different kind of package, more complex package in order to incorporate those complex AI chips. We have this view, let's say, from the assembly house. No really yet consequence on Melexis, no real consequence on any allocation, but there is indeed this this trend, which is a bit more than the noise, I would say.

Thank you very much. I have no other questions.

The next question is coming from Craig McDowell from JP Morgan. Your line is now open. Please go ahead.

Hi there, morning. Thanks for taking my question. The first one, I'll just go back to the gross margin. Just can you help us understand the step up from Q4 into Q1. On the face of it, the sequential improvement, I think we're on 150 basis points. It looks quite difficult, getting off the volumes, annual prices taking in, currency likely worse. Just trying to understand what's going to get us that sort of 150 basis points step up in the face of those headwinds. Thank you. I've got a follow-up as well.

Yeah, I can only repeat the biggest reason why that will happen is indeed that we have gone in inventory through most of the products with high cost of yield loss. So, we will, and as you remember, that was a high contribution of reduction in gross margin in 26, close to 2%. So, but as we are now leaving that mostly behind, we will see improvement as of Q1 already. Okay, thank you. we still expect a step up because of this big improvement in cost of use.

Thank you. And then just to follow up, I realize it's early, but I appreciate your thoughts on the acquisition of MSOs around center portfolio by Infineon. Just wondering your reaction of how that might change competitive dynamics in that segment of the market where obviously you're strong.

Thank you.

Yeah, in our, let's say, product scope or application scope, yeah, OZRAM is not a real competitor of Melexis, meaning that I think this acquisition will not change a lot for us.

OK, thank you.

The next question is coming from Francois Bovigny from UBS. Your line is open. Please go ahead.

Thank you very much. I have actually really one question. I mean, when I look at your revenues, you mentioned flat year-on-year in Q1 and Q2. Now, when I look at your competitors like Allegro, for example, which I think is the closest, I mean, they are growing their auto revenues by more than 20% year-on-year in December. Quarter and March, by the look of it, is still 19-20% year-on-year. So they are really growing significantly. You mentioned China growing 14% in the last five years, but I would imagine that the growth in China was actually higher than 14%. I mean, given all the EV growth that you have seen, the car sales as well in there. So the content and the growth in China was clearly higher than that. So what I'm trying to understand is, is there anything structural here? I mean, a bit more, because it feels a bit more than an inventory correction, especially when you compare the growth with some other peers. Even NXP is going 11% in autos. TI is growing low teens. STM is growing mid-teens in March quarter. So you seem to be well below the others. So I'm just wondering, why is that?

I think there is for sure nothing structural. I repeat that I was in China two weeks ago. My conclusion from the trip, which was the same when I was in China in November, I think that the Chinese customer, they like the Melexis product. They have a lot of trust on our quality. They like our technical support, which is very important in China. And I confirm there is no structural problem in China, also not in Europe. Yeah, we are facing this volatility. The order in China was very high in Q4. In Q1, it is lower because of this Chinese New Year, also because the incentive scheme for EV in China has changed from 25 to 26. But from my perspective, we still have the same traction. And when we refer to the design win, or when we refer to all the pipe of opportunity, the discussion with customer, I don't feel any problem there.

Yeah, and I also want to add that Melexis started to cycle much later than all the other players in the market. Usually we start it later, but we also come out later in general.

I understand that. But versus Allegro, I would say why they would see differently than you. I mean, they do similar things, not only the same. But what is your revenue in China? I mean, in Q1, how much down it is, China, you would expect to be?

China? It will be down quite a bit compared to, well, based on the order intake we have now, because January was still strong. February, March is still obviously still order intake. February looks quite weak, but that's probably a lot to do with China New Year. And March, yeah, orders are still coming in. So it's also, even in Q1, it is difficult to predict where exactly we will, We will be landing because of, yeah, the very late order intake, certainly also in China. But it's particularly low compared to Q4. But as I mentioned, we don't, yeah, there is no reason to believe why that wouldn't, throughout the year, pick up again. Q1 tends to be always a lower quarter, well, not always, but usually a lower quarter in China anyway.

So on a year-on-year China, what do you expect of guidance?

On a year-on-year, yeah, it will be probably close to what we had a year ago.

It might be slowly lower, but like we said, order intake is coming in quite late.

Francois, maybe just to come back to some of your comparisons. It's Philip here. Allegro, I think the five-year CAGR is 2% to 24%. Okay, we can update for 25% as well, whereas ours is 14%. In China, we outgrow Allegro as well over a five-year period. So I know we look ahead. Of course, we also look ahead. But I think if we look over time, as Karin mentioned, the quarters are not always in sync. I think the long-term growth track record of Melexis stacks up well versus many, if not the majority of our peers.

Thanks a lot.

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

Yes, sorry, the line just went bad. I didn't hear the answer to the last question. Did you say the year-on-year decline in U.S. dollars or euros for Q1 China alone? Did you answer that?

Well, like I said, order intake is very late. There could be a decline in the first quarter, although in January we haven't seen it yet, and that's the reality. February and March is still in orders, so very difficult to predict even in one quarter where we will land, particularly for China.

Got it. My question was more around in the medium term. So you've seen a lot of the BEVs being cancelled by Western OEMs. More than 30% of launches have been cancelled. It looks like BEV demand is just not flying without big fingers on the scale. And now that they've taken away subsidies in the US and China, it just doesn't seem to be as strong. So you're going to see a lot of people moving back to plug-in hybrids and zonal architectures as a kind of bigger source of differentiation. So does that affect your term growth? Because if I remember rightly, you brought it down at the CMD, your long-term growth. Does it affect how you think about that? Or are you kind of agnostic still to that trend?

I share your view indeed that hybrid seems to be the preferred option for many of the customers and many of the manufacturers. Hybrid is great for Melexis because there is an electric engine and a combustion engine. We win two times because we contribute to the electric engine and we contribute to the ICE. then for us it's the best of both worlds, the hybrid motorization. And as I said during the introduction speech in China, I was really impressed how much those hybrids were taking over. Because initially, let's say, the hybrid had a battery with, let's say, 50 kilometer range, but now it's 100, 150. And 100, 150 kilometers in Shanghai, for example, it's more than enough to move in the city during one day. And it's the reason why this hybrid is gaining traction.

And what you see at the Western OEMs, obviously, they're restarting their development. I mean, a lot of their combustion engine R&D was shut down. Now they're restarting those teams. Is that a good thing for you? they will get more involved in the engine management side? Or is it perhaps there's a short-term issue because of cancellations and then a long-term gain because of plug-in hybrid RAMs?

Yeah, discussing with our customer, the tier 1, the tier 1 have faced, indeed, in 25, a lot of or some cancellation of platform. I think it's also one of the reasons of the current situation. They all told me that 27 will be different. And in 27, they forecast a lot of new platform, which is one aspect. And to answer your questions, for Melexis, what is important is that either the electric engine or the combustion engine come with a new platform, because a new platform is usually much more electronic-rich. with much more comfort, much more safety features, then those new platforms are always a benefit for Melexis. But it could be combustion engine or electric engine. It does not make a lot of difference for us because we have the same kind of contribution in both types of motorization. I repeat my previous answer, but hybrid is the best of both worlds for us.

Got it. Thank you.

The next question is coming from Guy Sips from KBC Securities. Your line is now open. Please go ahead.

Yes, thank you. My question is on the inventory level of 300 million euros plus. We see it increasing quarter over quarter. How comfortable are you with this inventory level and do you expect that we are now on the peak?

Yes, it's indeed a peak level. As we progress in 26, we will probably keep it around that level, maybe a bit lower. But we don't have the intention to further increase it.

And I think this inventory is a strategic asset from Alexis because we have a lot of in-quarter order. And we can respond positively to those in quarter order because we have the inventory with the right products. And when the business will pick up any time soon, we'll be ready to ship to our customer thanks to this inventory. Then we really see this as an asset. And I think it's much, much more expensive to lose business in the future than to keep this inventory as it is today.

And then a follow-up question on your sales in Europe, which is just above 15 million euros in the fourth quarter of 25. And I think you have to go back to, yeah, to COVID times to see this kind of level, what is actually, yeah, what could be, The third point for your European sales, can you elaborate a little bit on that?

The center of gravity of the business is indeed, for the time being at least, moving from Europe to China or to Asia. That being said, Europe remains very important. Also, U.S. remains important. But this move from Europe to China is indeed the trigger for us to focus our organization on China. We have, at the end of 25, we have updated our organization in China in order to give to this organization in China more autonomy, more autonomy in the business aspect. to give them the opportunity to answer very quickly to our customer because we do realize that in China speed is really an essence and we should avoid the communication flow between China and Europe and the autonomy has been given to the China team to be on top of the business discussion and I think this is a very important asset for the future to strengthen our China team because indeed for the time being, and I repeat, for the time being, the business is moving to China, but we also see that in the expectation of the OEM, the European OEM in 26, but even more on 27, they will launch more and more new car with new platform, EVs, cheaper, then it's not impossible that a kind of rebalance will happen later this year or later next year.

And I just want to repeat that Europe had a strong start.

Q1 is higher than Q4. Yes. Operator, can we take the next question?

Yeah, we're on to the next question. It's coming from Mark Hessling from ING. Your line is open.

Yes, thanks. First, I would like to come back a little bit on the volatility that you call out on the revenue. Because I think the fourth quarter was a bit below what you initially expected. Then another step down in the first quarter and a quite significant step up in the second quarter, sequentially. Just trying to understand that a bit better, what changed there? Because I think earlier we talked more about small sequential improvements quarter over quarter, and now you certainly see this volatility. I think you discussed it briefly, but just really square, what is really happening causing this volatility?

Like we mentioned, the drop is fully for Asia, and then also particularly for China. And China, from one quarter to the other, also last year, can really move up 10 million in one, easily move up, yeah, close to even 10 million from one quarter to the other. So we don't have really another reason than there is huge volatility in China in general, and that it is obviously also impacted seasonally by China New Year.

Yeah, and it has been also amplified by the change of incentive scheme in China at the end of 25.

Okay, and then the second one is a clarification on what you said on the pricing, because I think you said that the ASP will be very close to 26 level to the 25. But you do call it out as one of the reasons for maybe a bit slower revenue in the beginning of the year or less growth in the first half of the year. She just wanted to understand, product for product, are the ASPs stable? That would be probably a bit better than what you initially guided, which was the normal decline of 3%, 4%, I guess.

No, we need to clarify that. Stable ASP doesn't mean that we don't have price erosion. Price erosion is mid-single-digit expectation for 26, but the product mix has a positive effect in 26. This can vary from one year to the other, the product mix effect.

Okay, yeah, that's one of the things.

The next question is coming from Michael Hoog from the Growth Petercamp. Your line is now open. Please go ahead.

Yes, good morning. I have a question about the China business, which was very strong in Q4. Do you have a sort of a crude estimate how much of your products end up with the top five Chinese car makers and how much ends up with all the other names?

On the top five car maker, I cannot answer. What we know is that, let's say, half of the Chinese business is for Chinese OEM, and the other half is for the European OEM.

And within those Chinese OEMs, you do not really have a good view on how much ends up with sort of the big companies, the familiar names, and how much ends up with that very long tail?

No.

Okay. Do you see a risk that if there eventually will be a shakeout of all those smaller players, that eventually their car volumes will move to the big players, the big domestic players, which have much better pricing power than those smaller players. Have you done scenario analysis for that? How much that could impact your business?

Yeah, the consolidation will indeed happen. There are a lot of OEM in China, then for sure consolidation will happen. but we don't have an accurate answer to your question. I think, indeed, innovation will also help at the end. It's all about new products that we bring on the market to compensate this price erosion. In the product that we have launched recently, We have product with much more AFP, much more margin. I don't see any reason why this consolidation will be negative, because on the other hand, having a lot of small customers, it also requires a lot of effort to support all those customers, especially in China. We have a lot of application engineers working with all those small customers, and there is also a very negative effect to have so many small customers. And I could also add that it's the case in Europe. In Europe, we have a lot of big customers and a very limited number of small customers. And it will probably indeed move in this direction in China, but we are able to manage it in Europe. Then we will manage it in the same way in China.

Okay. Well, my impression was that the bigger OEMs in China have much more favorable purchasing conditions so that if the volumes were to move to them, that it could affect your overall ASP in China. But you think there will be some compensation in being able to lower your OPEX?

I think it's the same in Europe. The big customers in Europe, our big customers in Europe have also a better pricing than the small customer, and it's why also we like this long tail for the reason you mentioned. But yeah, it will be the same in China, and we will manage the situation in the same way. I think, yeah, the price matrix is always high volume, lower price.

Yeah.

But overall, we expect higher price erosion in China than in the rest of the world.

That is calculated in our model. Very clear. Thanks for the feedback.

We go on now to the last question, and it's from Nigel van Putten from Morgan Salle. Your line is now open. The floor is yours.

Hi, good morning. Thanks for letting me ask a question. I just wanted to talk about the growth or the guidance for the full year, which is flat, maybe not comparing it to others, which have indeed sort of implied you know, some growth you guys aren't able to. So how do I sort of get from, I think in the past, you would say on sort of zero-star growth, still penetration would add, what, high single digits? Let's say that's mid-single digits today. You said pricing in the mix is kind of flat. There's no real inventory digestion going on. So how do I get from, let's say, mid to high single digit volume growth to zero on the euro side? Is that the dollar? Is that sort of headwinds from the non-automotive business. Is there a mix? Could you just, you know, give us some more color or the pieces, the building blocks, how to get to, how to get down from, you know, a volume number to a revenue number in Europe? That's my first question. Thank you.

It's a mix. As you mentioned, we did not discuss in the Q&A about the The non-automotive business, I mentioned it in the introduction speech, but one of our big non-automotive customers has decided to alternate their supplier, and I think it's quite normal. We had the chance to be doing three years in a row in the application. In 26, they have decided to make the alternance, which affects our revenue. Again, it's not abnormal. We have good hope that we will come back in the next years. We have good technical features, but this is indeed in the mix of answers. This is one of the reasons that we didn't mention in the past.

It's great to receive one of the reasons. Can you quantify the impact and also give us just a bridge from... I've covered companies for quite a while. It's always been volume growth. used to be teens, then high single-digit. I think it's now mid-single-digit. But still, this is a material step down. And I don't have any ways to calculate that. And it would be super helpful, very helpful for you guys to give a little bit more disclosure and color on how to model the business into 26 and what are the moving parts.

And our customer and probably also the OEM are navigating to cautious recovery in auto. It's why this volatility in sales order is coming. I think it's difficult to give more color and really to give the building block for your answer because of this high volatility.

The volatility is in the near term, and I'll move on after this one, but I do want to try again. It's for the full year, so it's not exactly normalized, but it's not you know, the month-to-month volatility that you pointed out, I fully comprehend that. But it's just, you know, compared to peers and also compared to the financial model, the growth model that I'm used to, this is very different. I mean, I could have understand it. It used to be, you know, the bullwhip inventory effects, that is a big impact, but that doesn't seem to be driving it. So I'm just, you know, I need to update my understanding about how I model your top line, I think, and it would just be helpful if we can get a little bit more color on that.

In the longer term, we confirm our high single-digit growth. What we have mentioned to the CMD is still fully valid. We have the design win. We have the opportunity pipe. We have in our development the relevant product to reach this growth. And in long term, I think the model did not change. In short term, we have this volatility that we mentioned. We have the price erosion that we have mentioned, mid single digit, low to mid single digit. This is the reason of the change. But I repeat, in long term, we are fully confident that what we have said to the CMD is still valid. we need now to face the short-term headwind.

Okay. More math now on the gross margin. I think, Karin, you talked about the potential of sort of four percentage points worth of idiosyncratic or self-help or specific items. I think two percentage points related to the yield improvement. I think that's probably what we're seeing in the first half, if I'm not mistaken. And then on top of that, there was potential you know, further improvement or, you know, the dollar, I think, some normalization would have helped. You've mentioned a restructuring impact of about a percentage point before. So I'm just trying to get to the full year gross margin. It seems like, given there's no growth either, we probably should have seen, like, 40% for the full year. Yeah, can you maybe elaborate a little bit if that's the correct way of thinking or is there an element missing?

That is correct indeed. We need more operating leverage to push it beyond that 40%.

Okay. Maybe then just a quick follow-up. You've guided first half gross margin, not first quarter. I think it's just how you usually talk to the market, but should we assume, you know, that improvement towards 40% in the first quarter, or is it more towards the second? So we step up from, I don't know, 39.5% and then...

As from Q1, we accept.

As from Q1. All right, that's very clear. Thank you.

This was the last question in the queue. There are no more questions at this time, so I hand the conference back to the speakers for any closing remarks.

Thank you, operator. To summarize, 2025 was a year of navigating through cautious and choppy demand while maintaining our cost discipline. In parallel, we have introduced many innovations for automotive applications, grew business opportunities, accelerated our China strategy, and took action to improve margins. These efforts will start to deliver in 26, and we will continue to build on them to further strengthen our business and to move toward our long-term objectives. Thank you for joining the call, and goodbye.

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