Melexis NV

XBRU:MELE

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and welcome to the Melexis Q1 2021 Results Conference Call. My name is Val, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Francoise Chombar, CEO, to begin today's conference. Thank you.

[Francoise Chombar, CEO, MD & Executive Director]

Thank you very much, and good morning, dear audience. Welcome to the Melexis First Quarter '21 Earnings Call. As usual, Karen Van Griensven, our CFO; and myself, will be happy to take you through the highlights and answer your questions afterwards. With the sales of EUR 155.6 million in the first quarter, Melexis posted a sequential sales growth of 6%, and an increase of 13% compared to the same quarter of the previous year. With this, Melexis sets another record and continues on its growth path. The 3 favorable fundamentals I talked about last time are being confirmed, both in the sales and in the outlook. One is automotive end-demand has returned with adjacent. Two is content growth. Several new programs are ramping up, some also at an unexpected speed. And in line with our strategic intent, three, is a solid growth of the adjacent business, even beating automotive growth versus Q4 2020. Yet, we are constrained by extended lead times and ongoing issues in every step of the supply chain. As demand continues to surge and shortages in the industry persist, matching the elevated demand with a limited supply is one of the biggest challenges we are facing today, and it creates stress in our whole community. Based on the current order book, it has now become more likely that sales will remain strong this year. And that is why we significantly increased our guidance for the full year. We now estimate sales to rise 22% to 25%. Needless to repeat that the root of the chip shortage overall is that the downstream customer base waited for too long to reorder and most didn't take sufficiently into account that it takes a physical cycle time of months to reignite the semiconductor supply chain. The roller coaster continues as the industry is grappling to pull sufficient semiconductor components through the value chain while the world is increasingly hungry for semiconductors in all types of products, be it mobility, industrial, medical or consumer applications. There are no easy fixes to the current supply constraints, and we expect this challenge to continue well into the second half of 2021. In short term, only industry-wide collaboration can help. And that's also what Melexis is doing with it's customers and it's customers' customers. It's a huge amount of work in communicating and creating visibility throughout the chain up to the OEM, which is not an easy walk in the automotive park because of the many tiers worldwide and the typical hoarding behavior of just about everyone in the value chain. The major fear I hear when talking to customers is, I don't want to be the first to stop a car assembly line. The good thing in all of this is that we learned a lot along the way, never waste a good crisis. In the first quarter of 2021, the outperforming product lines were embedded lighting, temperature sensors and the magnetic sensors product family.Let me give you some more color on these. I'm sure you've noticed some recent advertising campaigns from major OEMs showcasing animated lighting in the cabin, which reconfirms a secular growth trend. Lighting provides important information, such as driver assistance prompts, vehicle status updates or advanced comfort functions like adaptive roof light. It is becoming increasingly mainstream to use RGB LED light bars. RGB red, green, blue, LED light bars to communicate with the driver through color-coded, color changing and blinking sequences. Like no other peer, Melexis' embedded lighting value proposition unravels the collateral engineering challenges, such as maintaining consistent color across all of the LEDs in the light bar and implementing simultaneous light changes. We are continuously launching new products in this family as we did, for example, in Q1 as well. Secondly, our temperature sensors are still in high demand for contactless thermometers and point-of-care equipment. These applications seem to represent sustainable business in the years to come. People detection, the smart HVAC, is also doing well in Q1 with some seasonality effects its people but typically buy HVAC in spring and early summer. Last but not least, our magnetic sensors family showed excellent growth in both automotive and adjacent. To just name a few examples: speed sensors for micro mobility; position sensors for gaming, medical and industrial such as for level sensing; latches and switches for door locks and energy meters; and in cars, you'll find them in seats, belts, buckles, seat track position, window lift, brake light switch, door handles, transmission and grill shutters. Product launches in the first quarter were focused on automotive applications, serving the future car, carbon-free, comfortable and classy. Next to the embedded lighting I referred to earlier, we launched a dedicated automotive all-in-one single coil fan and pump driver IC, suitable for air pumps, water pumps, actual fans and radio and cross blower applications. And we also launched another current sensor for redundant monitoring of battery management systems, over-current detection in smart fuses and measuring phase currents in traction inverters and boost recuperation inverters. What differentiates our high-speed current sensor is that it eases assembly, boosts accuracy and enhances stability thanks to proprietary IMC technology. The IMC technology is integrated magnetic concentrators technology, which is also used in Triaxis. The Melexis design can accept more mechanical movement as it requires no severe busbar machining, and it also lends itself to smaller assemblies with surface mount package solutions, avoiding like this, the use of more complex through-hole packages that often require specific lead bending or lead forming native to core-based solutions. Let's now move on to the financials, and thus, to our CFO, Karen. You have the stage.

[Karen Van Griensven, Chief Financial Officer]

Thank you, Francoise. A good morning to everybody. So as Francoise has already mentioned, so sales came out at EUR 155.6 million. This resulted in a gross result of EUR 65.3 million or 42% of sales, an increase of 17% compared to the same quarter of last year and an increase of 12% compared to the previous quarter. R&D expenses were 12.7% of sales. G&A was at 4.9% of sales, and selling was at 2.2% of sales. The operating result was EUR 34.5 million or 22.2% of sales, an increase of 44% compared to the same quarter of last year, and an increase of 34% compared to the previous quarter. The net result was EUR 27.8 million or EUR 0.69 per share, an increase of 34% compared to EUR 20.7 million or EUR 0.51 per share in the first quarter of 2020 and an increase of 16% compared to the previous quarter. So as mentioned already by Francoise, we expect sales guidance for the full year to be in the range of 22% to 25%, with a guidance for the second quarter in the range of EUR 155 million to EUR 160 million. We expect for the full year a gross margin of 41% and an operating of 21% at the midpoint of the yearly sales guidance, all taking into account a Euro/USD exchange rate of 1.21. So I would like to now open the questions-and-answer session. [Operator Instructions] So operator, please go ahead with opening the session, the Q&A session. Thank you.

[Operator]

[Operator Instructions]We do have a first question coming from the line of Francois-Xavier Bouvignies from UBS.

[Francois-Xavier Bouvignies]

So my question -- because we have only one now, and I hope I can have a follow-up, if I may. But if we look at your guidance, so of 22% to 25%, so if you look at constant currency, if I'm correct, it's more talking about 27% to 30% growth for the revenues. Now if I look at the forecast -- external forecast for production for this year of cars, we are more around like 15%, 18% for the year. So the outperformance that it implies is more than 10% above the production in terms of growth. And when i look in the past, the average of the last 10 years is more around 800 or 850 basis points. So I was just wondering, can you explain this outperformance? And maybe help us understand what's your production of cars that you embedded into your forecast? And why the outperformance is more than in the past? That's my first question. And if I may, a follow-up, please? Otherwise, I will go back to the queue.

[Francoise Chombar, CEO, MD & Executive Director]

Yes. I think, of course, we will stay on the line until all the questions are answered, but this is just to give everybody the chance to at least have one question before they leave. There are several factors that influence, and it's a particular year, I must say, 2021. So on the one hand, we already saw some uptick in the orders, and we were able to, in Q4 and in Q1, to deliver quite a bit out of the work in progress that we had already started anticipating on this search. But it has -- yes, let's say, the demand currently is exceeding what we had expected. And it keeps going, and that's the big question. Now if you look at some reports -- I agree with you. If you look at some reports, like IHS is saying that if they look at the semiconductor demand, and I'm now talking automotive only because we also have to talk about adjacent in a minute. But if you look at automotive, IHS is saying that it's like a virtual demand that goes to upto 95 million cars. The real demand, as estimated by IHS, and I believe that there is a consensus in the industry that it is the case is that it is 84 million. Of course, there is a portion of restocking of poising the lines again because the automotive is using just-in-time principle a bit too -- yes, too stringently, let's say, which isn't helping because you cannot -- as I mentioned in my intro, you cannot reignite a semiconductor supply chain just like this, like you would with mechanical pieces or something like that. It really takes time. And the -- I also mentioned, often in the past, that there is a structural -- in the whole semiconductor industry, there is a structural capacity constraint, and it hasn't disappeared. And of course, what we now see is a lot of uncertainty that is created for Melexis. Though we are, for example, not delivering any MCUs, we are still dependent on how many MCUs, for example, others of our peers in the industry are able to deliver. And you know that some of the car manufacturers had to stop their production lines, not because of Melexis. And we're doing everything we can to help our customers not stop any of the car assembly lines. And so far, so good. But that is the difficulty on the one hand is the uncertainty on how this will continue. And the other thing is that we know there is over-ordering, but it's very hard to identify which ones are over ordering. And so we have to do a lot of work, a lot of communication. It's a lot of stress on our supply chain people to make sure that we get the best out of our customers that we can learn how they deal with the situation. And of course, we deliver maybe one part to one customer, but that customer is delivering several systems with that one part, several systems to several of their customers. And if they're a Tier 2, yes, then you have the same proliferation, let's say, until it reaches the OEM. You don't know how much hoarding is taking place, how much security others are taking. And that makes the whole thing quite difficult. But that's for the products that are, let's say, already in a mature state, where the volume that Melexis delivers depends on the volume of cars that are being produced. But next to that, as I mentioned in the intro, we have a lot of content growth. And you've noticed that we've launched quite a lot of products in the past year. 2021 is again a year where we will launch a lot of products, more than in the past, in, let's say, on average. And that, of course, is being translated into content growth. That is much more than we had even anticipated. So this is a proof that the choices we've made in terms of spending R&D on the right products, yes, these choices were the right ones to make. So that is for automotive. So why -- then there is the adjacent. I think it was a strategic intent already for quite a number of years to focus our energy in identifying which applications, in which sectors are adjacent to what we do for automotive using the same technology, but designing other types of products that are, of course, directly focused and directly designed for those new applications in adjacent sectors. We have -- we see that there is quite some traction in many of those that we have chosen, which is, on the one hand, micro-mobility. So motorcycles, e-scooters, e-bikes, last-mile delivery vehicles, on-campus automated vehicles, et cetera. So that micro-mobility is going very well. On the other hand, we had a lot -- thanks, in fact, to -- a bit to COVID. Like we mentioned already more than a year ago is that our temperature sensors, but also our magnetic sensors are being used in medical equipment, thermometers, access control, et cetera. And what we believe is that this is sustainable because the world is now more attentive to infection risk, and it will continue for sure for a number of years. And we see also many new applications coming in the medical arena, patient monitoring, et cetera, where our products can definitely find their application and make a difference. And one more, and then I'll stop, is in the gaming, where our smart drivers and also our magnetic product portfolio has really boosted our sales, but also our outlook. So I think, it's the combination of those 3 factors that make us outperform maybe in 2021 a bit better than in the past. Though that has always been our strategic intent to do better than the market and to focus on the strengths of our technologies, and make sure we identify the right applications to go for. I hope that answers your first question. And I'm looking forward to your second one in the second round, Francois.

[Operator]

The next question comes from the line of Ruben Devos from KBC Securities.

[Ruben Devos, Senior Financial Analyst]

Just a bit of follow-up on the first question related to auto. Just thinking about the developments, obviously, and specifically the global chip storage. Yes, we're seeing a strong rebound. But basically, a lot of production stops on lost car sales. In such an environment, I could imagine that Tier 1 suppliers are now very much reevaluating the product sourcing and relationships with vendors. So I was curious basically with all of these happening, do you think at least to some opportunities in terms of forging new relationships, or are there may be other elements that you feel are worth heading based on your latest discussions with customers?

[Francoise Chombar, CEO, MD & Executive Director]

Yes. Thank you. Very good question. Well, any disruption creates opportunity for sure. And yes, it does lead, in some cases, to new relationships with customers. The good thing about the business model that we are pursuing both towards our customers and towards our suppliers is that we are a loyal partner to them. So both towards our customers, towards the ones that are loyal to us as well. So it is a bit reciprocal, of course, and the same thing with suppliers. So because of a -- I mean, we're not perfect, of course, in forecasting and in translating customer and market forecasts into forecast for our own production and for our suppliers production, but our -- both our customers and our suppliers confirm that we're really doing the -- yes, very well in comparison with some others, and that creates, of course, also opportunities for Melexis or to the advantage of Melexis.

[Operator]

The next question comes from the line of Janardan Menon from Liberum.

[Janardan Nedyam Menon, Technology Analyst]

I'll try to fit as much into 1 question as possible, which is that -- so my question is on the shortages of capacity predominantly. So how badly were you capacity constrained in your Q1 and into Q2? So what I'm trying to get at is if there was absolutely no capacity constraint, what would have been your sales? How much more growth could you have achieved in the Q1? And what would be your Q2 guidance in that situation? And then the same is to a certain extent for your full year guidance as well, if you had exactly the same order book and no capacity constraint, then what do you think would the ability to sell? And secondly, I mean, just as a corollary to that, it's not -- it's not a second question. But when you talk to your supply chain, when do you see the -- any signs of the capacity constraints easing off either on your back-end assembly providers or from ex fab, et cetera. Are they saying that -- or are you seeing that they are going to bring in a significantly higher level of capacity by H2 or by Q4 or Q1 next year or something at which point you would think that things would get better?

[Francoise Chombar, CEO, MD & Executive Director]

Well, the reasons for the chip shortage that I mentioned before, one, the short which is still aggravated by the effects that COVID-19 is bringing, and of course, the geopolitical turmoil didn't help. That is 1 reason. The other reason are indeed the supply constraints, due to, but now I'm talking the full industry, has under-invested. And there is also this concentration of capacity with some few players. I think it's very hard to define how much we could have done. A lot in Q1 has been able -- we have been able to use our work in progress, as I mentioned. But in fact, the -- it is also very hard because, as I mentioned before, we don't know how much hoarding is taking place. And what is important is the full year guidance. We sure cannot deliver what our customers want. We have allocated the capacity towards our customers based on what we know from the past. So past -- so we make a difference, in fact, between those programs that we had already and that we understand the volumes of -- from the past. And those programs that are new and we, of course, take care, that also the new programs, we deliver the ramp-up as much as possible to the request of the customer. But we make a distinction. What we could have done in Q1 or Q2, I think it's not really so relevant. The main item is that we see that we have a solid demand that we work well with our customers in order to keep them going. And that this situation is leading to better visibility because now customers are ordering for a longer period of time because they want to be sure. So it gives us a good visibility, which, I think, 3 months ago was not necessarily the case yet. Now we see more and more that we get good orders in, which, yes, therefore, leads us to increase our guidance. How long will it last? Yes, I think it will last definitely until the end of the year already. Some say until beginning of next year, but okay, I think it's hard to predict as such. But definitely until the end of the year, it will remain tight. I hope that answers your question, Janardan.

[Operator]

The next question comes from the line of Marc Hesselink from ING.

[Marc Hesselink, Research Analyst]

I think in the previous call, you talked about -- that you expected adjusting period in the second half of the year-end, or are your clients ordering too much in the first half of the year, and that clearly changed. But why did that change? Is that the -- in the end, the structural end demand, or do you see a trend that indeed because of those too low inventories in the supply chain that people structurally adjust this going forward?

[Francoise Chombar, CEO, MD & Executive Director]

I think it is structural end demand for Melexis for sure. There is some poising of the line, so that the inventories are back or our customers want to bring inventories back to where they were. We had warned them last year that they were allowing their stock levels to go much -- too low. And that's why we factored that into our production planning, which made us able or which allowed us to already raise our output in Q4 and in Q1, but there is a limit to everything, of course. So definitely structural end demand, some inventory buildup, but only to bring inventories back to a more normal level, which we cannot do at this time or which our customers cannot do at this time because they seem to still want more. But the structural end demand is also in other areas, so not only automotive. And that is the good news that, in fact, the strategic intent that we've had in our vision for quite a number of years, is now finally reaching a point, where things are getting traction, and it's a good momentum. So we have to, of course, adapt in our capacity for test. We have to adapt also the forecast to our suppliers, and that's a whole lot of work that is being done as we speak.

[Operator]

The next question comes from the line of Robert Sanders from Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

I just had one, which is when you think about your front-end capacity at X-FAB. Will the Malaysian FAB have sufficient capacity going forward to meet the higher demand, or will you qualify and ramp up their French facility or perhaps more foundries?

[Francoise Chombar, CEO, MD & Executive Director]

Well, we -- Melexis uses all of the fabs of X-FAB. So effort, it's a and also Corbeil. Indeed, we have been working in the past couple of years already quite a bit because it takes a long time before you can qualify a new fab or a new process in a new fab. So we've been working with X-FAB to indeed increase output in -- increased output in all the facilities, but definitely to increase the number of products and technologies that we have been qualifying in Corbeil in France. And that's where the highest output increase will happen in this year, rolling over to the next.

[Operator]

The next question comes from the line of Michael Roeg from Degroof Petercam.

[Michael Roeg, Analyst]

Yes. I was wondering the increase in guidance, is that entirely volume-driven or is there also a price component to that? And if there's a price component, is it just a general increase in prices or are you passing on higher raw material prices?

[Francoise Chombar, CEO, MD & Executive Director]

Yes, it is mainly volume driven, Michael. And there are some price increases. But as I mentioned before, Melexis is a loyal partner to both its customers and its suppliers, and we have loyal customers and loyal suppliers. And of course, some of the price increases of our suppliers are being handed through to our customers, but not all of them, let's say. But we are increasing some prices, for example, to some less loyal customers or new customers or distribution customers. But that does not move the needle necessarily as much as the volume. It's really new programs and good volumes that drive our updated guidance.

[Michael Roeg, Analyst]

Okay. That sounds very reassuring because volumes are more of a good indicator than pricing. But why are you doing yourself at this surface by not passing on every price hike that you get from your suppliers? What is the constraint in passing everything?

[Francoise Chombar, CEO, MD & Executive Director]

Well, you know that it's hard, and it's a second question, but I'll allow it for now. because it indeed attaches to your first question because loyalty pays off long term. That's why.

[Operator]

[Operator Instructions] The next question is a follow-up question coming from the line of Francois-Xavier Bouvignies from UBS.

[Francois-Xavier Bouvignies]

It's maybe more turning on the profitability side, if I may. So if we look at your EBIT, I mean, margin has been particularly good. And if I look at 2 components, whether it is profitability, obviously, the gross margin and the OpEx line. And the gross margin seems to be when you look at the guidance, unchanged despite higher revenue. So I was wondering what is the delta.And why don't you see more leverage here? And on the OpEx side, the OpEx to sales ratio, I mean, in Q1 was at least below 20%, which is, I think, the lowest in your history, I mean, from what I can see and the guidance would imply as well very low level versus your history. So I was wondering what we should think -- how we should think about OpEx going forward? Do you want to invest a bit less in terms of percentage of sales? Just how we should think in the medium term or short term, please?

[Karen Van Griensven, Chief Financial Officer]

So first on the gross margin. So indeed, gross margin of 42 with a guidance of 41. So in the Q1, we were still helped by increased capacity utilization. And also, we grew quite strongly in magnetic sensors. This helps offering the product mix. So the impact of the product mix was also positive in Q1. However, for the rest of the year, it's very difficult to predict the product mix. And what we also know is that we will need to increase capacity, and we will take the new facilities in use as from the second half of the year. So this will put some pressure on the gross margin for sure. That's why we guide overall for the year for a gross margin of 41%. Coming down to the overall OpEx, indeed, it is low. It is also low compared to what we had budgeted internally, the OpEx. And we do expect some increases off. However, this will be not huge either. So more or less in line with what we will see in growth in sales -- the potential sales growth over the next quarters. So -- and mostly in R&D and then what I mentioned already, the fact that we will start using our facilities in Bulgaria will also bring along some additional costs as well. So yes, a gradual increase, but not very high.

[Operator]

The next question comes from the line of Jeff Osborne from Cowen & Company.

[Jeffrey David Osborne, MD & Senior Research Analyst]

Just 2 quick ones for Karen. One, can you talk about what the shares outstanding were? I might have missed it in the release, but for the first quarter, given the issuance, and what we should think about for the second quarter? And then also, you had a -- it was a negative $2.1 million financial result loss. Can you talk about what the impetus of that was?

[Karen Van Griensven, Chief Financial Officer]

Yes. So the first question, the share issuance...

[Francoise Chombar, CEO, MD & Executive Director]

Shares outstanding.

[Karen Van Griensven, Chief Financial Officer]

The shares outstanding, what do you mean, the total number of shares?

[Jeffrey David Osborne, MD & Senior Research Analyst]

Exactly. Didn't you issue a couple of hundred thousand new shares or was that out of treasury?

[Karen Van Griensven, Chief Financial Officer]

That is still -- [indiscernible] 2.4 million. The total we always...

[Jeffrey David Osborne, MD & Senior Research Analyst]

Okay. And then what about the financial result?

[Karen Van Griensven, Chief Financial Officer]

So the financial result is mainly related to USD exchange rate. So the weakening of -- the strengthening of the dollar at the end of the quarter.

[Operator]

We do have a follow-up question coming from the line of Michael Roeg from Degroof Petercam.

[Michael Roeg, Analyst]

Yes, second question or third actually. What is your view on geopolitical sovereignty, considering your sales mix is very much skewed towards Asia, and that's quite well known that China wants to be semiconductor independence? Now the U.S. is following and even European Union is thinking of semiconductor independence. Do you see it as a risk or a threat to Melexis?

[Francoise Chombar, CEO, MD & Executive Director]

Geopolitical turmoil is always a risk to everyone, not only to Melexis. So it's not different for us than for the others. Now we are not busy in the areas, for example, 5G, which is mostly what the U.S. is targeting. We, of course, suffer because Huawei, for example, is a customer, has been a customer, until last year. I think, it's not good news because, indeed, deliveries have stopped mid-September last year. And we're -- as you probably read in the press, there is hardly any company that had -- so we also asked for a license, applied for the license, that there's hardly any company that got the license from the U.S., which makes you wonder about how the U.S. is using this, in fact, to give advantages to their own industry. So I would for plead for -- as I said before, semiconductors are used in every walk of life in almost every product. And I think it is a mistake to not work together over the whole world for semiconductors. And it's better in my view, to use the appropriate channels, which have been a bit inactive in the past years, and that is the WTO. If we could get together, use the WTO to get us out of trouble, then it will help the world. It will help climate, yes, the fight against climate change. It will help the fight against pandemics because semiconductors are important in order to get out of these difficult challenges. So I hope that our politicians wake up to that challenge. To be seen, I have no or little influence, let's say, what is happening there. But I think it would be a mistake in Europe because I know that, yes, it's been all over in the press that we also want sovereignty, but I think Europe has to work on its strengths and play out the strength that it has. We have very specific semiconductor equipment and semiconductor players that we can definitely build on. And we have also a fantastic consumer base, which has to be interesting for the U.S. and for China. So I hope that along these lines, we get to better conversations, let's say it like that.

[Operator]

There is another question in the queue, and this comes from the line of Varun Rajwanshi from JPMorgan.

[Varun Rajwanshi, Analyst]

Just a quick follow-up on content growth. Francoise, you mentioned that content growth in certain areas was better than what you had expected. So I was just wondering, can you elaborate a bit more on which applications you are gaining shares specifically with your product portfolio? And as you think about the medium term, is there any upside to your content growth assumptions of high single-digit percentage, specifically in the automotive space?

[Francoise Chombar, CEO, MD & Executive Director]

Well, I would invite you to subscribe to our Analyst Day, which is on June 1, and I think you'll get good answers there. I think, it would lead us too far here, but it's not too long. It's a bit more than a month from today. And I think you will get a good overview of the content growth that we're seeing.

[Varun Rajwanshi, Analyst]

I had a feeling, you would say that. I look forward to Analyst Day.

[Francoise Chombar, CEO, MD & Executive Director]

Yes, it's a way to invite you as well. Yes, but I think it's better to wait for that because then you get a 360-degree view.

[Operator]

There are currently no further questions in the queue. So I'll hand the call back to our speakers for the conclusion remarks.

[Francoise Chombar, CEO, MD & Executive Director]

Okay. Thank you very much, dear audience, for having joined our call today. Our next earnings conference is scheduled on July 28, and that will be my last one in the role of CEO. But before that, we'll host our virtual Annual Shareholders Meeting on May 11. And as I mentioned just now, our online Analyst Meeting on June 1, where my successor, Marc Biron, will be speaking as well. Looking ahead, please do stay safe. Goodbye.

[Operator]

Thank you for joining today's call. You may now disconnect.