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Melexis NV
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Hello, and welcome to the Melexis Q3 2021 Results Call. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, Marc Biron, to begin today's call. Thank you.
Thank you. Hello, everyone. It's a pleasure to welcome you again to our call related to the Q3 results. Today, we have 2 speakers, Karen Van Griensven, who is our CFO; and myself.It has been almost 3 months since my appointment as CEO of Melexis. Our former CEO, Francoise Chombar, took up the position of chairwoman of the Board, and I'm carrying forward the strategy that we have defined together with Francoise and also together with the executive team. Let's cover first on top line and financial background, after which Karen and myself will be happy to answer any questions you may have.Q3 comes with the first or with the third sales record in a row of EUR 162.8 million, an increase of 34% year-on-year and an increase of 2% quarter-on-quarter. A beneficial product mix and currency effect were supportive in achieving a strong gross profit margin and we have reached 43.4%. As a result, we have increased our guidance for the operating margin from around 22% to around 23% for the full year.The ongoing mismatch between the demand and the supply is our main challenge today. Consequently, while we work with our partners to stabilize the supply chain and to increase the capacity of the supply chain, we continue to allocate the material of labor across the entire customer base. And we anticipate that this situation will continue further in '22, given the current order behavior of our customers.In Q3, the outperforming product lines were embedded lighting, current sensors and magnetic position sensors. We start first with the embedded lighting. We can say that the growth of the embedded lighting product or product family stays very robust. Indeed, the interior lighting, which create a comfortable atmosphere inside the car, is a very demanded option by the end user. And in the future, the interior lighting system will be used to communicate information to the driver, but also to the occupant of the car. And we continue to provide innovative solution in this domain, for example, with our license free [ Malibu ] technology that will enable animated lighting application in the car.The traction for the current sensor family is obviously related to the electrification of the car, but it's also related to various adjacent application. For the automotive part, we are very successful in the high-voltage inverters, also in the 48-volt inverter that are used in the plug-in hybrid car and also in the full electrified car.Next year, we expect further ramp-up in onboard charger application, but also in DC-DC application in the automotive. With the adjacent market of current sensor, the solar application and the drives as well contributed to the Q2 results. The last outperforming product line is magnetic sensors and we can say that the magnetic sensor that gained traction in Q3, mainly thanks to automotive application.I will now hand over to Karen and she will give a bit more explanation about the financial results.
Thank you very much, Marc. So good morning or good afternoon for everybody. Yes, a little bit of guidance on the financial results. So as Marc already mentioned, we came out with sales of EUR 162.8 million and the gross profit margin came out at EUR 70.6 million or 43.4%. Thanks a lot -- a little bit higher margin than in the previous quarter, thanks to an effective or a beneficial product mix and an exceptional currency effect.If we look at R&D, so R&D expenses were 12% of sales. G&A was at 4.8% of sales and selling was at 2.2% of sales. As a result, the operating result was EUR 39.7 million or 24.4% of sales, an increase of 153% compared to the same quarter of last year and an increase of 9% compared to the previous quarter. The net result was EUR 36.5 million or EUR 0.90 per share, an increase of 145% compared to EUR 14.9 million or EUR 0.37 per share in the third quarter of 2020, and an increase of 9% compared to the previous quarter.The outlook for the rest of the year. So, Melexis expects sales in the fourth quarter of 2021 in the range of EUR 160 million to EUR 165 million, resulting in a full year sales growth of around 26%, a gross profit margin of around 42% and an operating margin of around 23%, all taking into account a euro-U.S. dollar exchange rate of $1.16 for the remainder of the year.I would like to now open the Q&A session, operator. So please go ahead.
[Operator Instructions] And the first question comes from the line of Francois Bouvignies from UBS.
I have a few questions, if I may. The first one is on the inventory and more particularly your inventory, not really in the supply chain. So when we look at the crisis in the beginning of the crisis, the inventory of Melexis, and I mean, if I remember, Francoise and Karen were saying that you want like high inventories to gain market share when it's going to pick up.Obviously, the inventories came down since the beginning of the crisis on new year balance sheet. So my question is when a lot of industry has been impacted by the shortage, is it fair to say that the magnetic sensors, thanks to your inventory management has been less impacted in 2021? And if so do you think that the inventories of your product categories, like, magnetics and so forth are maybe at a healthier level than other products, like, let's say, microcontrollers as we enter 2022? So that's my first question. And I have another one, if I may, after.
I would say that, yes, in the supply chain constraints in this period of constraint, yes, the product mix is very much indeed dependent on supply. We have a favorable mix indeed, more magnetic sensors, but it's more because in the previous quarter, we had more issues to get output for magnetic sensors. So it can really vary from quarter to quarter. It's not that overall, we have been much -- I mean, that magnetic has been benefiting more than other areas, I would say. But from quarter to quarter, there can be quite strong differences. Moving forward, yes, we expect still also in the next quarter a rather favorable product mix continuing. But longer term, that's more difficult to say.
Okay. But just -- so you don't think that your -- the inventories that you managed to decrease over the years, thanks to your management of high inventories, you don't think that the magnetic sensors as a whole is in a better shape than semi-controller where inventories are very, very low at critical levels. Do you see that or no?
We don't -- I mean, the inventory is -- it's across all product lines that we took safety inventory, not only on magnetic sensors.
Yes, yes, about all your categories, Melexis' products, yes.
Yes.
Okay. And maybe a follow up on your comments about the product mix. So you said that it's still going to be favorable. So can you just quantify FX benefit and mix benefit this quarter and when we look at your full year, you are looking at 42% gross margin.If I look at your year-to-date performance, it would imply 40% gross margin in Q4. So I don't really understand your commenting that the product mix will be favorable still going forward in Q4 when you assume in your guidance 40% in Q4 and the year-to-date gross margin was above 42%. So is it like conservative or is it because the manufacturing cost is increasing? Or why we should put 40% gross margin in Q4?
So for the year, we guided for 40% -- around 42%, so it's -- for us, 42.4% is also still 42%. So yes, you have to look at it in that perspective.
So why didn't you increase your operating margin, your revenues a bit, but not the gross margin. Is there any reason we should be aware?
Well, it's the effect here. It's pure a rounding effect that overall we will be -- yes, rounded, it will -- we expect 42%. But it will be somewhere between -- yes, on the higher side of the range.
Okay. Maybe to put it this way, in Q4, is there any reason why we should have gross margin drivers below Q3?
Well, the currency effect will for sure not play in the same way. I mean, unless the dollar moves very strongly. But that was exceptional and it was the biggest effect in Q3. It was even slightly -- well, both effects are quite strong, the product mix and currency effects. But the currency effect is not expected to last in Q4.
And how much was the currency effect in Q3, how much?
Well, if you compare it with Q2, you can split between the 2 more or less evenly the effect.
So as is currency, as its product mix on the quarter-on-quarter improvement in gross margin, yes?
Yes.
Okay. I have others, but I will let my peers and go back to the queue.
The next question comes from the line of Varun Rajwanshi from JPMorgan.
I have a question on your revenue visibility into '22. So what level of visibility do you have on your '22 capacity based on your discussions with your foundry and back-end partners. I'm just trying to understand what is the level of quarterly revenue run rate that you can sustain purely based on capacity availability? So that's my first question.The second one is on the impact of price increases. Can you provide any indication on how pricing will trend into '22? Just trying to understand how much of '22 growth will be driven purely from price increases.
For the second part of the question, indeed, we are facing some cost increase from our suppliers as we mentioned in the previous call. And yes, we are now busy to, let's say, transfer those cost increase toward our customers and our strategy is to neutralize. I mean, our goal is to neutralize the -- our cost increase with the price increase. Yes, in terms of magnitude, there is -- I mean we have different suppliers and they increased their price in a different way, let's say, with different level. But yes, you can consider that it's in average, a single-digit increase.For the first part of the question related to 2020, you know that we don't give guidance at this point in time of 2020. As you mentioned it, I mean, today, the business is more driven by the supply than by the demand. Then indeed, we are working with our different suppliers in order to increase the capacity of the supply chain and also to stabilize the supply chain. Okay, you have seen since some quarters that we are able to increase step-by-step the supply chain capacity. And yes, our objective is to continue, of course, in this way.What we can say is that yes, we discussed the order book last time as we mentioned that the order book was well-filled, and we can say it's still the same. I mean the order of behavior of our customers did not change recently.
Just wanted to follow up on this. Is there any way to quantify this because at the moment, you are on a quarterly revenue run rate of EUR 160 million to EUR 165 million, I'm just trying to understand, is it possible that this revenue run rate increases to EUR 175 million, EUR 180 million over the next few quarters? Is that something that you see happening?
That's too early to say, I would say. A gradual increase, but we are still -- yes, negotiations to have already a definite answer on that. And as usual, we only give guidance on the full year as from -- yes, with the Q4 results.
Yes, we still see a lot of, let's say, instability of the supply chain. And I think it's not appropriate, let's say, to give long-term guidance. We will go quarter per quarter given the complexity of the supply chain.
The next question comes from the line of Matthias Maenhaut from Kepler Cheuvreux.
Congratulations with the Q3 results. A question from me as well on inventory levels, but then rather in the supply chain, we have seen significant production cuts actually in Q3, having given way to substantial downwards revision of light vehicle production for this year. I was wondering, your sales remain pretty strong across the board. I was wondering what your take is on inventory levels. Are you presently noting quite significant inventory buildup from the very low levels or do you think that inventories are still low? And then I have a second question.
We can say that we are still short for all the products and all the product line that we deliver to our supplier -- to our customers, sorry. Yes, indeed, the Q3 production vehicle was low. We hear from our customer that the OEM have also reduced to our customer, the OEMs have reduced their order for Q4. And it seems that Q4 will be a bit similar to Q3 from a OEM perspective.But also the OEM mentioned of Q1 and Q2 next year will be again very strong. But we don't see this effect, I mean, we are still, I would say running after the fact towards our supplier -- towards our customers, sorry. And we are short in delivery, meaning that our inventory is still very low. I mean we deliver our hand-to-mouth day after day.
And then on OpEx, question, it's been quite stable quarter-over-quarter from Q2 to Q3. What should we expect for Q4 and then for next year?
Yes. So we expect a gradual increase of the operating expenses certainly now that Corona measures, well, to be seen what it will be over the next month. We see more activity, also travel and so on, outsourcing activities. So we do expect them to now to see growth over the next quarters and certainly also into next year, yes, R&D are at historical low levels. So we will invest -- we will step up investment there as well. So yes, we do expect them to grow over the next quarters and I think Q4.
The next question comes from the line of Ruben Devos from KBC Securities.
Yes. My first question revolves around the order book. In your prepared comments, you mentioned that the mismatch between demand and supply remains the key challenge, and that will continue into 2022 based on current order behavior.We're also hearing in the sector that in the current environment is becoming increasingly difficult to have visibility on the order book. So yes, I was curious whether you could talk more in detail about the order behavior of your customers, thinking about lead times, geographic spreads, double ordering, that will be very helpful. That's my first question. And I have another one maybe after your answer.
So concerning the order book, it's still very high, I mean, very similar to the status when we discussed 3 months ago and we don't see any change, let's say, in the behavior of our customers. Last time, I mentioned that the -- let's say, the visibility of the -- the long-term view of the order book was towards longer term than before.I think it is still the case. The order book is filled for short term, but we see also much more longer term than before. Yes, in terms of lead time, the lead time is, as in the past, still very much impacted by the bottleneck in the supply chain and by the situation in the supply chain. We don't see, for sure, any reduction of lead time. Yes, this is what I can, and if you want to add something.
Yes, geographically...
Yes, geographic.
I think -- but also there, I think it's strong in all geographical areas, not particularly weak in one. So yes, not much change for us in Q3, except maybe that's at distributor level, we do see some inventory increase, but it's still at very acceptable levels.
All right. Just a second question. I believe you've mentioned earlier in the year that there were some issues with packaging supplies in Asia when talking about the difficulties of matching elevated demand with limited supply given the ongoing challenging conditions. I was wondering if you could give an update on the areas where you face most challenges today across the supply chain, maybe thinking about your dependence on suppliers for wafers, packaging services, et cetera.
Indeed, during the first half of the year clearly on the assembly house because we had made some inventory, as discussed just before. Then we have worked a lot with the assembly house in order to some capacity. I would say we have been successful to secure the capacity at the assembly house saying that we add more. I mean in Q3 or after some linked to COVID in Malaysia. Probably you heard in the press that COVID in Malaysia, let's say, picked up. And we have been affected and the supply chain has been indeed disrupted during the summer because of the COVID in Malaysia.Okay, since then at least our partner has been vaccinated with the 2 doses, and we hope that this will improve the situation. But indeed, it was -- it has been tense, let's say, during Q3, failure to the assembly house, not really anymore because of capacity because I think we have secured it, but more because of the COVID.
The next question comes from the line of Marc Hesselink from ING.
Can you explain the mix between automotive and non-automotive? I think we've seen, obviously, a very strong performance in non-automotive to this quarter, now a little bit slower. Is that just sort of digestion period? Or is it also an element of choice in there that you prioritize automotive over this non-automotive business?
Yes, I would say there is nothing switch on. I mean, it's not that the demand was particularly different in adjacent than before. It's more the -- all the supply chain effect that create this reduction, let's say, of adjacent at least relatively. Yes, it's not related to the demand. It's more some supply chain effect and I think the -- yes, Q4 will be on this regard, let's say, similar to Q3. It will not come back, let's say, in Q4 as it was during the first part of the year.
Okay. So the supply chain effect is bigger on this non-automotive part than on the automotive side?
For the moment, yes. Varies from quarter to quarter.
Okay. Clear. And then the other question is, you obviously discussed already a bit in previous answers, but more on the bullwhip effect. In the beginning of the year, you were saying that you fear that the clients were also ordering a little bit too much, therefore you guided them in the second half of the year would be a bit slower. Now that clearly changed in the past 2 quarters. But what is in your own modeling, what kind of order level should be the -- should be normal? Are people now still adding in general? Is there still that risk of double ordering? Or what do you see in your own model on the end to month?
It's not that we don't want to answer, but it's very difficult to answer. That's for sure. Yes, we mentioned that there is, let's say, a mismatch from 20% to 30% between the demand and the supply. As you mentioned, part of it is linked to some supply chain effect, part of it is linked to inventory that is low, and part of it is indeed linked to the chip content increase or to the market share increase.And so there are 3 parameters that explain this mismatch. And I'm not able to say -- to give a ratio in between these 3 parameters, but I'm very sure that the 3 effects play a role. And I'm also very sure that there is a chip content that play a role. But yes, is it 1/12, is it half, is it less than 1/12, difficult to say, I must say.
Okay. I think that's helpful.
But for sure, the electrification of the car help although the modern car with much more electronic help in the figures, but it's really difficult to make the distinction between the different effect. I mean, there is much more electronic in the safety, in the comfort function in the electrification function, that is for sure.I would say we lost a bit of reference between -- because 2018 was very high and then 2019 and '20 have been stable, let's say, and then it's a bit difficult to give an accurate answer. But for sure, also the fact that the OEM prioritize, let's say, the high-end cars, I mean, the electrified cars and also the high-end car, this is also beneficial for Melexis because there is obviously much more electronic and much more function in the high-end car. And the product mix of the OEM is also helping. Sorry to not give you a very concrete straightforward answer.
No, this is already great.
The next question comes from the line of Michael Roeg from Degroof Petercam.
First question I have is a follow-up question on the one from Ruben. Melexis never discloses the backlog or the order intake, so I was wondering could you give us a bit of color how the backlog divided by sales was prior to COVID, sort of an average, probably between 0.5 and 1 and how it is today, presumably much higher?
Indeed, we don't give numbers on this, but it is clearly still higher than prior to COVID. During the summer, it was probably at the highest peak. It's slightly down maybe versus the peak, but it's still extremely high versus what we told prior to corona.
And yes, if you say extremely high, I have no ID, is that a full year of sales or a half year of sales because I don't have a reference point?
Orders are placed today much earlier than usual. So I cannot say much more than that. Only today, except that our -- the order book is coming in quicker than usual, that's part of the reason that it is higher. But we don't want to give absolute numbers on this.
Okay. And I'll make my own estimate. And then the second question I have is a boring bookkeeping question. Your net financial result has been everything between minus 2% and plus 3% on a quarterly basis. So could you provide a bit of explanation what it should be going forward in a normal situation and what drives all of a sudden the fluctuations?
So the financial result on -- I mean, moving forward should rather be around figure for modeling. We have now 2 quarters in a row an exceptional effect from its unrealized profits on financial products, inflation swaps. So this is, yes, unrealized, but it can go all directions moving forward. So under normal circumstances, it is around 0.
Okay. I had that as well. But again, yes, the surprise is occasionally good. That's it from my side.
The next question comes from the line of Robert Sanders from Deutsche Bank.
Just maybe a longer-term question. I was just -- over the last couple of years, we've seen a big rise in the battery electric vehicle, but plug-in hybrid sales have started to disappoint a little bit. And obviously, there is a regulatory push to take away subsidies away from plug-in hybrids.I just thought if you -- I was just wondering if you could address that issue, the mix shift from plug-in hybrids to batch EVs for you guys, given obviously the content opportunity in battery EVs is considerably lower than for plug-in hybrid. Are you seeing your content opportunity changing a little bit and what are OEMs telling you? Are they changing the road map to pull in much higher levels of volumes of battery EVs and what are they doing with their plug-in forecast?
Yes, I would say for Melexis, we have 2 big family of application. What -- the first one is what is related to the powertrain. The second one is related to what we call body chassis safety. For the powertrain realist application, we believe that we have the same slot, the same number of slots, let's say, in the traditional ICE versus the full electrified car.And for us, the number of opportunity is very similar if we have an ICE or an electrified car in terms of powertrain. And you can have more detail if you refer to the Analyst Day presentation, we have given a bit more detail. What is beneficial for Melexis is all the electrified car come with a much more, let's say, modern interior, modern application in the body chassis safety application at much more comfort, much more safety in the car, meaning that moving to the electrified car is also moving to more opportunity slot for Melexis. Not really because of the powertrain because it's very similar. But more because of all the opportunity related to the body chassis safety application.Yes, for the powertrain, there is indeed application linked to the battery as you mentioned in the question. But we have also a lot of application linked to the thermal management, which is much more important and much more difficult, let's say, to manage in electrified car because there is a thermal management related to the battery and also the thermal management related to the cabin of the car, which is more difficult because there is less heat available, let's say.And to answer your question how do you see, let's say, the behavior of our customers, we see that our customers are working a lot, very hard on the thermal management aspect. And in this thermal management, we have pressure sensor driver for the valve, position sensor for the valve, and there are many opportunities of Melexis in those thermal management. And this is, let's say, the push from our customers linked to the battery, but also linked to the thermal management for the powertrain.
Got it. And do you have a sense of whether you complete your historical content growth, I think it was something like 7% or 8% above light vehicle volumes over the last 10 years. Do you think you can keep that kind of growth rate going forward?
Yes, if you look at the content guidance that we give and the exercise with the -- the bottom up exercise we did with the number of chips growth in powertrain and in body chassis and safety, which is also in our PowerPoint presentation yet then you see we should at least do what we did in the past or maybe even more.
The next question comes from the line of Francois Bouvignies from UBS.
Just a quick follow-up. It's a bit on the mix effect from the previous question. And if we look at 2021, obviously we saw a strong push from the EV penetration going up and the high end of cars as well have been more favorable in terms of mix. And that's probably one of the reasons the semis are seeing a very strong performance with this production.Given that you have a pent-up demand maybe for the mid- to low-end, should we think 2022, maybe the mix is getting more content mix less probable, I would say, versus '21, is it something we should think about? Or should we think this outperformance that you're seeing in '21 just to continue at the same level?
Yes. What I can say is that we don't see this in the different orders that we have received. I must say you are right when you say that clearly the OEM has given priority to the high-end EV in '21. This is correct. It's also correct that it's beneficial for us. Will it change in '22? Yes, we don't see it. And anyway, even if it's with -- in '22 with lower-end EV, there are also plenty of option in those lower-end EV with plenty of opportunity for Melexis. And we don't see it. I think this is the most accurate answer I can give. Karen, do you want to...
So indeed, the trend of more EVs in general will only continue. That will not -- and even the lower end is still full of electronics for Melexis. Also in design wins, design win intake in EV is very, very strong.
I understand. I was just thinking in terms of magnitude. I'm sure your EV content is increasing, no doubt about that. But this year, you are doing 26% growth on revenues, right, when the production is barely growing. So this outperformance, how should we think about that in '22 and even beyond that, yes, that's the thinking.
That's still too early to answer that, but the structural growth is there, and the electrification trend will drive growth for the next few years, but -- yes. Of course, it's -- 26% a year is probably not what we should also calculate in. There is a pent-up -- I mean there is clearly also some inventory effect like Marc already explained too in the figures of this year.
There are currently no questions in the queue. [Operator Instructions] We have no further questions in the queue. So I'll hand the call back to your host for some closing remarks.
Okay. Then I want to thank you, everybody, for the questions. I think it was very interesting question, relevant question. I hope we have given the answer you have expected and that we have helped you, let's say, in your analysis. And we will see each other in 2022 in February. And in the meantime, I wish you a very good end of the year. Thank you, everybody.
Thank you for joining today's call. You may now disconnect your line.