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Melexis NV
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Hello, and welcome to Melexis Q3 2022 Results Conference Call. My name is Priscilla, and I'll be your coordinator for today's event. Please note, this call is being recorded for the duration of 60 minutes. [Operator Instructions]
I will now hand over you to your host, Mr. Marc Biron, to start today's conference. Please go ahead, sir. Thank you.
Hello, everyone. It's a pleasure to welcome you again to our earnings call related to Q3 results. Today we have 2 speakers, Karen Van Griensven, our CFO; and myself. Let's cover some top line and financial background first, after which Karen and myself will be happy to answer any questions you may have.
Q3 comes with a sales level of almost EUR 220 million. It's a positive change of 5% in comparison to the previous quarter and 35% in comparison to the same quarter of last year. As OEMs are still dealing with their order backlog, we continue to observe strong demand for an important part of our products. Regardless of car sales, the far growing chip content in the car linked to the electrification and to the increased comfort and safety level of the car will keep contributing the solid result of Melexis. These trends are also visible in the outperforming product lines of Q3.
Current sensors continue to grow steadily quarter-over-quarter. The turnover of the product line will probably double in 2022 if we compare with '21, thanks to the inverter application of the electric car. We see also a very positive trend for our current sensor product line, a new application such as onboard charger and DC/DC applications.
The drivers products used in the thermal management system of the electric cars are also growing faster. They will probably grow by 50% in '22 versus '21. The magnetic latches and switches products are also growing, thanks to their continued success in the comfort and safety applications such as seat track position and seat belt buckle. The magnetic position sensors are still growing strong in absolute numbers and are still heavily impacted by de-allocation. On the adjacent market, we have also booked a very nice additional socket for body temperature monitoring system.
Growth pattern show that our future and oriented innovative products address successfully new [indiscernible] platform and back up our confidence in the future.
I'm now giving the hand to Karen for more financial result.
Thank you, Marc. Hello, good morning, everybody. So sales for the third quarter came out around EUR 220 million, an increase of 35% compared to the same quarter last year and an increase of 5% compared to the previous quarter. The euro U.S. dollar exchange rate evolution had a positive effect of 7% on sales compared to the same quarter of last year and a positive impact of 2% compared to the previous quarter.
The gross result was EUR 98.3 million or 44.7% of sales, an increase of 39% compared to the same quarter of last year and an increase of 5% compared to the previous quarter. R&D expenses were 10.1% of sales. G&A was at 4.8% of sales and selling was at 1.9% of sales. The operating result was EUR 61.5 million or 28% of sales, an increase of 55% compared to the same quarter of last year and an increase of 7% compared to the previous quarter. The net result was EUR 48.8 million or EUR 1.21 per share, an increase of 33% compared to EUR 36.5 million or EUR 0.09 per share in the third quarter of 2021 and an increase of 3% compared to the previous quarter.
If we now look further ahead in the year. So Melexis expects sales in the fourth quarter of 2022 in the range of EUR 220 million to EUR 225 million, resulting in a full year sales growth of around 29% to 30%, a gross profit margin of around 45% and an operating margin of around 27%, all taking into account a euro U.S. dollar exchange rate of 1 for the remainder of the year.
So operator, I'd now like to open the Q&A session, please.
[Operator Instructions] We will now take our first question from Matthias Maenhaut from [ Alexis ].
Matthias Maenhaut, Kepler Cheuvreux. So first question is actually on the business comments, Marc, you made. Could you may be elaborate a little bit on the fact or the size, I would say, of the products that are actually seeing more normalized supply demand balances? And also could you may be elaborate on which kind of products and what the gross margins are of these products? That would be my first question.
Yes, I think -- yes, the product that's still in more balanced supply versus demand, it's as an example, the ASIC -- we have ASIC portfolio, which is a minority, as you know, for the ASIC. But those are products where we have a more balanced supply versus demand.
And also be adjacent -- it's mostly an adjacent and a little bit in ASIC as well.
Then I noticed the adjacent performance in Q3 was pretty strong. You mentioned that it is to temperature sensor integrated and wearables. Could you maybe elaborate if this is a kind of inventory buildup effect in the third quarter as this is a new product? Or do you think that the present run rate of sales can be continued?
You know that such wearable products today, there is a big seasonality in the demand. And indeed in Q2 and Q3, we were in the high demand seasonality, and it's why it indeed is quite high in Q3. But it's more linked to the seasonality of the final application.
And the final question was actually on your OpEx. It was quite flattish quarter-over-quarter. I think in previous conference call, you guided for further increase. How should we see Q4? And then going into next year, do we need to anticipate further significant step-ups quarter-over-quarter? Or should we more bank on the present run rate?
We still -- we expect inflationary pressure in Q4, particularly on the wages. That will be visible and certainly will make operating cost increase. However, overall, yes, we guide for around 27% of EBIT. So overall we still expect quite a bit of leverage on operating margin, thanks to, yes, the high growth we see for the moment.
We will now take our next question from Janardan Menon from Jefferies.
Yesterday one of your peers, Texas Instruments, who said that on the conference call comment that while automotive was strong for them -- still staying strong for them into Q4, all the other segments were declining into Q4. But they said on the conference call that they think that rolling over of the automotive business as well is almost inevitable. It's a matter of time. Would you agree with that that you will see some kind of a slowdown in automotive in coming months or quarters? Or do you think that based on your current visibility, the sector will continue to be -- your automotive business will continue to be pretty resilient into -- through 2023?
Yes, we can comment based on what we see. And for the time being, as Karen just mentioned, we see indeed some more balanced supply versus demand for the non-automotive, but for the automotive we don't share this view.
And in terms of the -- can you just give us a comment on the inventory levels that you see downstream both in the distribution system for your adjacent products as well as the Tier 1 customers on the automotive side? Has that moved up in the last 3 months? And also if you could just update us on what is happening to pricing? You're coming to or you're probably in the process of doing annual price negotiations with your automotive customers. So are you able to push through some price increases at this point into your 2023 pricing?
So inventory levels are still, well, the direct customers are still low. At distributor, again it's mostly adjacent where we see stocks going up. On pricing, yes, I think we mentioned it already, we closed our LTAs for more than 50% of sales with the biggest customers, and it does include price increases for next year. These have been closed and negotiated.
So if that is true and the demand environment stays stable, will you be able to achieve a margin increase in 2023 because of the price increase?
We set pricing in such a way that gross margin would remain stable versus what we see today because we will also have price increases on the supplier side. But we balance the 2 out to keep gross margin more or less at levels that we see today.
[Operator Instructions] We will now take our next question from Francois from UBS.
I have 2 quick questions. The first one is a follow-up on the non-automotive adjacent markets. Can you elaborate a bit more because you talk about seasonality, but, I mean, it seems a very strong growth quarter-on-quarter, year-over-year and I struggled to see the seasonality in the past. So I was just wondering if there was any [indiscernible] you talk about temperature in wearables. But, I mean, is it a particular customer or anything driving this performance? And how should we think about this level of EUR 24 million into Q4?
And the second question is, when you see like the easing [indiscernible] the adjacent part as you flagged. And if we assume automotive will follow in the next few quarters, what kind of impact should we expect, do you think, especially on the automotive side? I mean you expect inventories to go up, pricing to flat, turn or coming down? How should we think about the easing impact on your business you think? Whether it's '23, '24, it doesn't matter, just how should we think about that?
Okay. I will first answer the adjacent question where indeed, yes, it's a new design win for our new application, for important new application for new customers. And this application, there is a lot of seasonality in the sales of this new application. But, yes, we cannot say much more on the application and on the customers. But clearly this is the reason why the non-automotive results have increased.
So it's one customer driven then? So it's one customer?
Yes.
Yes. And where we see inventory is in all applications related to PCs or with consumer business. So that has been compensated by this one customer.
Can you tell a bit more about this application, not about the customers, but, I mean, you talk about wearables. Can you be a bit more color on this application, wearables, what kind of wearables are we talking about?
It's smart watches.
[Operator Instructions] We will now take our next question from Robert Sanders from Deutsche Bank.
My first question is about ambient lighting. It seems like the MLX811 series is heavily constrained and doesn't look like there's any kind of prospect of improvement for customers. I was just wondering whether customers have the option to redesign with an alternate product from Alexis or whether there is a need for them to re-qualify with a competing vendor. And then I have a follow-up.
Yes. Indeed the lighting product line is constrained by the supply and it's one of the products which is still in heavy allocation because it's one of the products we're serving with a new platform. All the new car platform has those ambient lighting product, and it's one of the products which is still very constrained. Yes, I'd say at Melexis, we don't have alternative solution to address this application and I think it's a new application in the market with few solutions in general. Of course Melexis is not the only solution, but all the potential solution has the same potential constraint.
And what is this constraint that you talk about? Is it foundry family capacity? Is it something else, materials, if you say that it's a problem for everyone?
I can speak for Melexis. It's mainly warehouse capacity.
And I was just wondering on current sensors. It sounds like Allegro has been very optimistic about taking share for a new platform at Tesla in current sensors. I was just wondering if there's any kind of potential platform design ahead within battery electric vehicles that would make you worry about potentially losing share in current sensors within [indiscernible] more generally. I mean, is there any, because I think this is an area still with very fast innovation where things are changing very rapidly. So I was just wondering how you see that panning out in the next couple of years.
Yes, in general, there is huge need and huge traction for all the current sensors related to the battery monitoring system in general. And I don't have any worry about losing share. I think this product line will grow because, as you know, all OEMs are developing platform around all the battery. And it means that, yes, there is for sure enough demand for Melexis. And as I mentioned in my verbal comments, this product line or the turnover of this product line will double in '22 versus '21, which is really showing the huge potential. You mentioned Tesla, which is indeed one of the bigger OEM related to electric car, but, yes, they are much more OEM than only Tesla. We have many, many platform, new platform, new opportunity in many OEMs all over the world, I would say.
I just wanted to add that growth will be constrained by supply, not by demand.
Yes. Like I'm inviting on the previous question, the current sensor. It is another product line, which is still constrained by the supply and not at all by the demand.
Can I just check on the current sensor product line. Is that a direct sales OEM? Or is it more like a reference design as part of a battery monitoring broader system? And what is the route to market typically outside of Tesla?
Yes, it's a startup product. I mean, it's more a family of startup products. And those startup products can address the different application of the different OEM. And, yes, I think you know that Tesla is a direct customer. But in other cases, we have also a teasing between Melexis and the OEM for the current sensor.
We will now take our next question from Francois again from UBS.
Yes, I just wanted to reiterate my second question. I'm not sure you answered on '23 or '24 easing impact on your business and the inventory management, whatever you can provide on the easing impact that you expect? Because I understand it's still tight for automotive, but looking at may be going forward, the supply and demand is likely to be more balanced. So just how should we think about the impact when it happens?
Yes. I would just indeed repeat that for the innovative application, we still see very high demand and higher than the supply. For the [indiscernible] product in our portfolio, it's more balanced. I mean, this is the situation of today. And I would say, as far as we can see, for the beginning of 2023, it will be the same situation.
Imagine for a second, even if you don't believe it happens, that it happens. So is it something you expect like to have pricing to normalize or catch up or like a correction of inventories because ultimately it will happen, right, whether it's '23 and '24, it doesn't -- it's not my question, but just on the impact basically?
I would say the better balance now is, I mean, we see it a bit of healthy because it will remove a bit of stress in the supply chain. It will normalize the supply chain, then I think it's good that we see a bit of relaxing. And, yes, in the past we have been able to grow double digit without distress, and we will do it in the same way in the future.
So for example, for the easing part like the adjacent, it is not as tight. Do you see what's the pricing dynamic here? Is it like flat pricing? Or you still managed to increase the price? Or is it coming down a little bit from a high base on the less tight product? Do you see any impact on the pricing side?
No, for the time being, no. I think we have increased the price in '22, where we see high single digit, and we did not re-discuss the price going down since then.
We will now take our next question from Marc Hesselink from ING.
If we look to the supply side going into next year, I think this year, every quarter, you've been able to squeeze up your supply a bit. Now with some easing in some other parts of the demand, is it the only areas where you're still constrained that you can guarantee some extra supply and that you can fill that demand quicker?
Indeed we can use for the, I mean, have the lead time perspective and the fact that when a product is in [indiscernible], we cannot always change from product A to product B. But in general term, indeed the fact that for some products, we see from easing, then it can help the products that are under constraint. But it cannot be done. Sometimes it will be done very quickly because there is the [indiscernible] aspect that we need to take into account. But in general, yes, it's why indeed we believe it is healthy to have this slight easing.
So is it then been fair to assume that 2 quarters from now you should have a good balance in most of your products?
I think it's probably 2 quick statements because, yes, we should take into account the technology. There is some easing of demand for product in a certain technology. And of course we can help the other product in the same technology. If we come back on the ambient lighting from the previous question, this ambient lighting is using a specific technology, which is called [indiscernible] and we don't see any easing in this technology. It means that we will not have ambient lighting, thanks to the easing situation in adjacent product.
We will now take our next question from Robert Sanders from Deutsche Bank.
I just wanted to have one quick follow-up. Now that the year is almost done, 2022, it looks like you're going to grow 29% in Euros, which is roughly 24%, I think, in constant currency. So I was just wondering if you just look at that 24% constant currency, if you could just break out what was volume, what was price, what was mix? That would be great. Just because the reason I ask is companies like Elmos are saying more than half of their annual growth this year is pricing. I just wanted to sort of see what it was for you guys?
It's not more than half. It's high single digit, as Marc mentioned earlier the price, and the rest is volume.
We will now take our next question from Michael Roeg from Degroof Petercam.
I have a question about your test facilities. Several years ago you expanded them in anticipation of growth. Now this growth has materialized. How much further can you grow your top line before you have to expand again?
For the next, at least 3 years, we're still okay with the Sofia. And we're also starting to invest in Malaysia, but more improving capacity to be released in 1.5 year only.
Okay. So from that viewpoint, should we assume CapEx to remain around EUR 45 million a year for the next couple of years?
It will increase because for future growth, we will have to step up investments. We cannot say more at this point. We will guide on this when we come out with the Q4 figures.
We will now take our next question from Janardan Menon from Jefferies, again.
I'm just wondering, can you tell us a bit about what the capacity increase plans at your foundry partner is? How much of capacity they are currently planning to bring on board in 2023? And how does that sort of sequentially progress? Is it coming in the first half? Or is it more towards the second half of the year? And a separate question is, some of your competitors on magnetic sensors, for instance, are producing it in-house, whereas you are outsourcing it. And one of your competitors is also outsourcing it to another foundry in Asia. Suppose if the in-house production is adequate in capacity and they can provide sufficiently to the market. Do you think that could be a factor in any loss of market share? Can your OEM customers switch on a product like magnetic sensors from one supplier to the other in a short period of time because there's easier supply coming from an alternative supplier? Is that a possibility? Or does it take too much time to change between suppliers?
Yes. First on the capacity increase from our suppliers. Yes, I think it's more gradually. I would say since some quarters, we see that the capacity is increasing quarter-after-quarter steadily, and it will continue in the same way. And I think we have already mentioned that for the wafer aspect, the main capacity increase will come from Corbeil, the new hub in the South of Paris. Yes, related to the magnetic sensor and the risk to lose some of the markets. I would say, first, we have signed an LTA with our suppliers, and we have signed LTA with some of our major customers, and we made back-to-back LTA, meaning that we are guaranteed in our LTA that we will use the maximum capacity of X-Fab, then I think there is a good back-to-back balance situation in between the 2 LTAs.
And now coming on your question, yes, is it easy for our customers to change to change suppliers? I would say the answer is no. They need years; 1, 2 years to change supplier in automotive. There is a lot of regulation in the change management and we don't have a competitor who has a one-to-one replacement for the magnetic product. There is always some things would change in the final application to be compatible with the new product. And this anyway takes time.
Just to go to your first answer. So the capacity is coming on board sort of incrementally every quarter at -- in the French Fab. It's not that there's a big increase later in the year or something that's happening in Q4 into Q1 on a steady basis.
Exactly. As it is the case since the beginning of the year, I would say.
It appears there is no further questions at this time. Mr. Marc, I would like to turn the conference back to you for any additional or closing remarks. Thank you.
Thank you for the question. It's always useful to have your question and to be able to answer. And I think I will welcome you again for the Q4 results and for the final year '22 result in early February. Thank you, everybody.