Melexis NV

XBRU:MELE

Earnings Call Analysis

Melexis Q2 2024 Highlights Strong Sales and Innovation

In Q2 2024, Melexis achieved sales of EUR 245.7 million, a 4% increase year-over-year, driven by strong performance in non-powertrain automotive applications like ambient lighting and advanced climate control. The company introduced new innovations, including a magnetic position sensor and a cord-free fan driver for data servers. Noteworthy design wins span global markets, including applications for electric vehicles in China and water pumps in Europe. The company's diverse product portfolio, encompassing both electric and combustion engine vehicles, and non-automotive sectors, ensures resilience against market fluctuations.

Solid Financial Performance in Q2 2024

Melexis reported sales of EUR 245.7 million in the second quarter of 2024, reflecting a solid 4% year-over-year growth and a 2% increase from the previous quarter. The growth performance aligns closely with the company's guidance, displaying resilience despite market headwinds. The automotive sector, particularly applications beyond powertrain systems, drove this growth, demonstrating Melexis's adaptability to changing consumer preferences.

Innovative Product Development Fuels Future Growth

The company introduced several innovative products in Q2, including a high-safety magnetic position sensor and expanded capabilities in ambient lighting solutions. These advancements not only enhance its product portfolio but also indicate a strategic focus on emerging automotive technologies and markets beyond traditional automotive applications. Five major design wins underscore this innovation, including designs for electric vehicles and ambient lighting applications, affirming Melexis's global competitiveness and future growth trajectory.

Steady Margins but Slight Declines in Profitability

Despite the overall revenue growth, the gross profit margin decreased slightly to 44.3%, showing a 2% decline year-over-year. The operating result reached EUR 64.4 million (26.2% of sales), marking a 5% decrease compared to the previous year. Moreover, the net income stood at EUR 49.1 million, or EUR 1.21 per share, down by 5% year-over-year. While these declines might raise concerns, they reflect normal fluctuations in the highly competitive tech sector.

Guidance Indicates Continued Growth Momentum

Looking ahead, Melexis expects Q3 sales to range between EUR 247 million to EUR 252 million, maintaining optimistic forecasts for overall annual sales projected at around EUR 1 billion. Additionally, the company anticipates maintaining a gross profit margin above 44% and an operating margin above 25% for the year. This guidance indicates confidence in sustained business expansion and operational efficiency, providing reassurance for investors.

Investment in Non-Automotive Markets Shows Promise

Melexis is actively investing in non-automotive sectors such as robotics, two-wheelers, and digital health, aiming for a diversified growth strategy that targets emerging technologies. Notable advancements include developing specialized sensors for robotics and traction in digital health applications. While non-automotive contributions are currently around 10% of total revenue, the company is focused on reaching its long-term goal of 20% in this segment, highlighting strong future potential.

Inventory Levels and Order Trends Appear Manageable

Management noted that inventory levels among customers have stabilized, indicating that the peak of excess inventory is behind them. Orders have resumed a more normalized pattern, barring fears stemming from prior supply chain disruptions. This trend could indicate a more balanced business environment moving into the latter half of 2024, which may support ongoing growth.

Strategic Relationships and Future Outlook

Melexis maintains strong relationships with key partners, ensuring a robust order pipeline bolstered by design wins. Despite concerns regarding some of their significant customers like Sensata, management confirmed no immediate adverse impact on their business. With ongoing investments in innovation and a steady pipeline of projects, Melexis appears well-positioned for continued growth, giving investors confidence in its strategic direction.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, and welcome to the Melexis Q2 2024 Results Call. My name is Saska, and I will be your coordinator for today's event. Today's call is being recorded. [Operator Instructions]

I will now hand you over to Marc Biron, CEO, to begin today's conference. Please go ahead.

[Marc Biron, executive]

Thank you for the introduction. Dear audience, thank you for joining the Melexis second quarter 2024 earnings call. We will review our performance over the past quarter and over the first half of this year.

In Q2, our sales reached EUR 245.7 million, which is close to the higher end of our guidance. It represents a 4% increase year-over-year compared to the market we stand tall.

Our automotive growth was mainly driven by applications outside the powertrain. We experienced new premium application that rapidly rippled down into smaller vehicles. For example, comfort features like ambient lighting or advanced climate control in which we are a successful player are becoming more and more widespread in the different car segments.

We are also hearing from our customers about the renewed focus to develop the next platform of combustion and hybrid engine cars. Melexis is well prepared for this shift since our product portfolio covers all type of powertrain. The diversity in our portfolio makes us resilient against recent fluctuation in global car demand.

In the second quarter of '24, Melexis has introduced several innovations. We launched a new magnetic position sensor for applications requiring high functional safety level. We have expanded our LIN RGB family, and we have provided a cord-free fan driver mainly used in data server.

These successes highlight our growth ambition in e-steering technology, ambient lighting solutions and market beyond the automotive sector. The growth of our pipe of opportunities confirm the effectiveness of our product strategy.

Here is some insight of our 5 major design wins in Q2. One design win is a driver to actuate valves in the thermal management system of an EV in China. Another design win is also a driver, but it is used in water pump in Europe. We have booked new business with current sensor for inverter application in the U.S. and also with magnetic sensor to sense the position in the combustion engine in Korea. We have also won additional ambient lighting application in Europe.

Those 5 examples show that we are succeeding globally, whether it is in EV or in combustion engine, in powertrain and also in non-powertrain applications.

Now I will hand it over to our CFO, Karen Van Griensven, who will share some financial insights.

[Karen Van Griensven, executive]

Thank you, Marc. So hello, everybody. I will go a bit deeper into the financial results for the second quarter.

So Marc already mentioned, we had EUR 245.7 million sales in the second quarter, which is 4% more versus the same quarter a year ago and 2% more than the previous quarter. And the euro-U.S. dollar had no effect, neither versus a year ago or versus the previous quarter.

The growth result was EUR 108.8 million or 44.3% of sales, which is a decrease of 2% compared to the same quarter of last year and an increase of 2% compared to the previous quarter.

R&D expenses were 10.8% of sales, G&A was at 5.3% of sales, and selling was at 2% of sales.

The operating result was EUR 64.4 million or 26.2% of sales, a decrease of 5% compared to the same quarter of last year and an increase of 1% compared to the previous quarter. The net result was EUR 49.1 million or EUR 1.21 per share, a decrease of 5% compared to the EUR 51.9 million or EUR 1.28 per share in the second quarter of '23 and a decrease of 7% compared to the previous quarter.

Our Board of Directors also decided on an interim dividend of EUR 1.3, which will be payable after 17th of October.

And related to our outlook, Melexis expects sales in the third quarter of '24 to be in the range of EUR 247 million to EUR 252 million. And for the full year, Melexis expects sales to be around EUR 1 billion with a gross profit margin above 44% and an operating margin above 25%, all taking into account the euro-U.S. dollar exchange rate of 1.08 for the remainder of the year.

For the full year '24, Melexis expects CapEx to be around EUR 50 million, which -- at EUR 60 million. So previously, we mentioned here EUR 70 million, so a reduction of EUR 10 million.

So operator, I would now like to open the Q&A session. So please go ahead.

[Operator]

[Operator Instructions] And up first, we have Francois Bouvignies from UBS.

[Francois-Xavier Bouvignies, analyst]

So my question would be on this -- on your full year guidance of EUR 1 billion. So if we look at what is implying for Q4, it's implying revenues up around 5% quarter-on-quarter in Q4, up 7% year-over-year in Q4 at constant currency. And it's existing there for an acceleration and a fairly strong growth, especially when you compare to peers.

So my question is, really, what is driving this growth here? Can you share anything that you see? Because it seems to be at odds versus the peers.

[Marc Biron, executive]

Yes. Our full year guidance is indeed our best estimate today based on, yes, the order book, the dynamic of the order that we see, also the new product launch that we will have toward the end of the year .

Yes, I acknowledge that versus the peers, it's the highest growth. But on the other hand, yes, during the first half of the year, we have also been a bit better than the peers.

[Francois-Xavier Bouvignies, analyst]

Okay. And maybe a quick follow-up, if I may. It's -- if you look at your full year guide implying this 4%, you don't have a lot of peers that have seen growth for auto this year. Even some with strong content stories on reported -- the NXP report, TTI, and they are all down for this year for auto, some in the high single to double-digit percentage.

So this plus 4%, it would be remarkable. It is already remarkable, what you are doing in H1. Can you help us understand the difference? Or maybe how are you sure it's not really stocking, like inventory buildup? Because it seems like a very big outperformance. And I really struggle to understand why Melexis would have such bigger market share gain in content wise versus all the players that I mentioned.

[Marc Biron, executive]

Yes, it's indeed remarkable, and we can be proud of it. To answer your question, we have a portfolio, which is quite insensitive to the type of car which is produced or which is ordered. As I mentioned in the past, we have the similar number of IC in an EV powertrain or in a ICE powertrain.

Then for Melexis, we are quite insensitive to the choice of car. And we have also -- we see also increase of business for what we call comfort and safety, which is outside the powertrain. And we see that this segment is increasing, yes, thanks to the premiumization of the car, I would say.

[Operator]

And up next, we have Sandeep Deshpande from JPMorgan.

[Sandeep Deshpande, analyst]

Just actually following up on that. Maybe can you comment on how you've seen the order trajectory through Q1 and Q2 and whether the orders have continued to improve through the first half of the year easily?

And then secondly, what do you have in terms of understanding of inventory held by your customers to buy your end customers itself, whether there is any risk that your customers themselves maybe holding inventory of products at this point?

[Marc Biron, executive]

Yes. For your first question, the 2025, I think it's too early to discuss. We are now focused on 2024, and we will not discuss about '25.

And in terms of inventory at our customer, we can confirm that the peak is behind us. Okay, now to state when the strong pickup will happen, I think it's difficult to say.

[Sandeep Deshpande, analyst]

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

[Marc Biron, executive]

What -- yes, I think it has been linear. We see that versus last year, the orders are coming later. It's clear that during the previous years that the customer were afraid to not receive their part, then they were ordering very early in the process.

And now I would say, the dynamic is back to what we knew before the chip crisis and before -- the pattern are quite similar to what we knew from the past.

[Operator]

And up next, we have Ruben Devos from Kepler Cheuvreux.

[Ruben Devos, analyst]

Yes, I'll keep it at one question. Just if you could update us on the achieved design wins year-to-date, so both in automotive as in the adjacent markets and how that compares to the prior 2 years, which I believe were already quite successful. Yes, if you could quantify this in some way, that would be very helpful.

[Marc Biron, executive]

Yes. You know that long term, our objective is to have 20% beyond automotive, 80% automotive, and this is reflected in the design win. Today, we have roughly, let's say, 10% beyond automotive, but we have more design win.

The design win beyond automotive is more securing, let's say, the future 20%. Then we plan to -- yes, we have this aspect on the design win for the adjacent. And the overall design win level, yes, we think we are on good track to reach the target at the end of this year.

And there is nothing abnormal, let's say, on the design win. As I mentioned in the introduction, it's important to see that the design win portfolio, let's say, is quite healthy. It's -- and for EV and for non-EV and for comfort and safety application and powertrain and non-powertrain, and I would say, for a geographical aspect, it's also widespread.

[Ruben Devos, analyst]

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

[Marc Biron, executive]

Yes. For us, we see this trend clearly for the ambient lighting, for the LIN RGB, and also for the drivers that are used in the climate control, as an example, but also in the seat comfort. Those are 3 examples where we see that those comfort features are going down in a smaller type of car.

[Operator]

[Operator Instructions] We're now moving on to a question from Janardan Menon from Jefferies.

[Janardan Menon, analyst]

Just going back to your sales growth, which is looking more resilient than your peers. When I specifically look at some of your direct competitors like Allegro, they are seeing a significant -- or broadly, their trends are significantly falling this year versus yours, which is flat to slightly up.

And we don't know exactly how if Infineon's magnetic sensor sales are doing within their overall automotive portfolio, but it's possible that you would be outgrowing them as well in that specific area.

So do you have evidence of -- a clear evidence of share gains where you are actually taking design wins at specific customers versus your competition that happen, say, in the last few years and then that is coming into your revenue stream right now?

And also, just as -- associated with that, is it that you are seeing a lot of growth in any geography like China where some of these ambient lighting features are being deployed in a lot of cars by the Chinese OEMs, et cetera, and you have a stronger position there versus some of your competitors who might be stronger in the U.S. or Europe or something like that? Is there any sort of geographical situation which is causing your strength versus others?

[Marc Biron, executive]

I would say it's difficult to answer your question or to quantify this in such short term. As I mentioned, our design win are going well, are going as expected, I would say. The pipe of opportunities are growing also as expected.

Yes, on the geographical aspect, I would say that, yes, we are well -- we cover the different geography. Yes, China, perhaps the -- your underlying question was that China, I think the design win in China are going also well. And it's a good geography spread, I would say. It's a good type of engine spread, and it's a good overall application spread between powertrain-related and non-powertrain-related. It's difficult to answer your very concrete question.

[Janardan Menon, analyst]

Got it. But are you seeing more strength? Is your China growth higher than your non-China growth today?

[Marc Biron, executive]

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

[Operator]

And we now move on to our next question now from Veikkopekka, ING.

[Marc Biron, executive]

Yes, we don't hear the question.

[Operator]

We are now moving on to our next question from Veikkopekka Silvasti from ING.

[Veikkopekka Silvasti, analyst]

Can you hear me?

[Karen Van Griensven, executive]

Yes.

[Veikkopekka Silvasti, analyst]

Good. So it's Veikko Silvasti from ING on behalf of Marc Hesselink. I have one question regarding pricing discussions that normally start over the summer for the next year.

So what kind of pricing discussions do you expect this time around? Is there more deflation in the pricing than usual or it's going to be quite similar as in previous years?

[Marc Biron, executive]

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

[Operator]

And we're now taking a question from Robert Sanders from Deutsche Bank.

[Robert Sanders, analyst]

I just wanted to pick up on that last point about the pricing. So some of the auto suppliers seemed to be pointing at a contract and saying, "Price is not up for negotiation, but volume, we are open to negotiation."

But I think that the general expectation in the industry were going to go back to sort of mid-single-digit price declines next year. So at what point do you have to start renegotiating the pricing into next year? Is that going to be a pricing discussion happening starting September, October for next year? Or is there a large part of next year's revenue that is kind of under contract?

[Marc Biron, executive]

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

[Robert Sanders, analyst]

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

[Marc Biron, executive]

Yes, it's between 40% and 50% with LTA.

[Robert Sanders, analyst]

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

[Marc Biron, executive]

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

[Robert Sanders, analyst]

Got it. And just last question would be related to the inventory days. I don't know if this was addressed earlier. Sorry if this is a repeat question, but what is your target level of inventory, given that the inventory currently is basically 6 months?

It doesn't feel like the historical level, which was typically less than 4 months. So I'm just interested to understand where you think that's going to settle down. If we go back to normal industry conditions, does that mean that there's a sort of big cash inflow next year from running down inventory?

[Marc Biron, executive]

Yes. Today, let's say, we use our inventory to level out our production because, yes, we want also to be ready when the strong demand will come back. Then we want to be ready to be able -- to be ready to be flexible in order to be able to deliver to our customers.

And this is the way we see our inventory. Today, as I mentioned at the beginning, the -- I would say, the customers are a bit short-term focused, and we want to be ready with the available product to deliver when the need is there. And some more on anticipation for you.

[Operator]

[Operator Instructions] And we're moving on to a question from Ben Zarrour from [indiscernible].

[Unknown Analyst]

My question is on CapEx. I was wondering if you could elaborate a bit on the adjustment of the CapEx guidance.

[Karen Van Griensven, executive]

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

[Operator]

And our next question now comes from Trion Reid from Berenberg.

[Trion Reid, analyst]

I just wanted to follow up on that CapEx question regarding what does that imply for next year. Does it mean that actually CapEx will be more like a flat number next year? I think before, you expected that to be down.

And then this is the main question I wanted to ask is just on Sensata, which I think still a big customer of yours. They recently guided to a sequential revenue decline in Q3 and mentioned the exit from some underperforming products. I just wondered if that had any impact on you, maybe not yet, but potentially in the future.

[Karen Van Griensven, executive]

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

And yes, on the other...

[Marc Biron, executive]

Yes. On the Sensata, yes, there is no -- we did not receive any information from Sensata about any impact. Yes, we are still working according to the LTA that we have.

[Operator]

And we take a follow-up question from Janardan Menon from Jefferies.

[Janardan Menon, analyst]

Just want to follow up. I just want to ask about the nonautomotive side. The nonautomotive percentage is staying roughly flattish. Are you seeing any signs of improvement in that market after the weakness last year? And would you expect into the second half of the year the nonautomotive to outperform automotive?

And also perhaps, you could give us an update on the progress in digital health. How are you seeing that in terms of approvals and things that are coming through?

[Marc Biron, executive]

Yes. In terms of the nonautomotive, yes, we are investing in those markets. On emerging markets, you know that we have selected some emerging markets beyond automotive. And we are investing in our development bandwidth.

We focus mainly on robotic, on 2-wheelers and also on wearable. On robotic, we have this sense of touch, what we call the Tactaxis, which is a sense of touch sensor. But on top of that, we are working also on some specific position sensor that will be used in the joint of the robot. We cannot use a position sensor from automotive in the joint of the robot. We need more resolution as we develop a specific product.

We developed also a torque sensor that will be used in this robot. And all the goal is to improve the accuracy of the movement of the robot.

For the 2-wheelers, we are also quite successful with current sensors. We are winning some business in the 2-wheelers for the current sensors.

For the health sector that you mentioned for the -- we have also more and more traction on application outside the watch. You know that we have an important design win -- or an important production for a watch. But outside the watch, we see more and more traction for the digital health and for the sense of touch sensor.

[Janardan Menon, analyst]

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

[Marc Biron, executive]

Traditionally, let's say, Q2 and Q3 are quite strong for the digital health. It's linked to the dynamic -- or not the dynamic, to the timing of the market with the release of the wearable. Then, yes, Q3 will be also probably strong for the digital health.

[Operator]

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

[Marc Biron, executive]

Thank you. Yes, thank you for all the questions. I hope we have answered all of them as clear as possible. And I'm looking forward to see you or to discuss with you at the end of October, I think, the 30th of October, the next call for the future release.

And for the ones that have not been on holiday yet, I hope you will be able to relax and enjoy the month of August. Thank you.

[Operator]

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