Melexis NV
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Melexis NV
Earnings Call Analysis
Q3-2024 Analysis
Melexis NV
In the third quarter of 2024, Melexis recorded sales of EUR 247.9 million, matching last year's performance and reflecting a modest 1% growth from the previous quarter. This consistency comes despite challenges in the automotive sector, which saw global car production decline by over 5% in Q3 2024. Despite the tough market conditions, the company is optimistic about a rebound in automotive sales and production forecasts in 2025, driven by a desire among customers to maintain healthier inventory levels.
The company is currently navigating an inventory correction initiated by its automotive clients, particularly in Europe and the U.S., following the end of a supply allocation period. Although previously foreseeing sales in line with full-year guidance nearing EUR 1 billion, Melexis has adjusted its expectations for Q4, now anticipating revenue between EUR 200 million and EUR 210 million. This decision acknowledges the likelihood of lower sales due to increased customer inventories, which Melexis believes will ultimately lead to a stronger recovery path moving forward.
During Q3, a significant portion of Melexis' performance was attributed to its magnetic position sensors, continuing growth in pressure sensors, and innovations in current sensors. The company introduced several new products, such as the Triphibian pressure sensor, specifically designed for electric vehicle thermal management, and advanced sensor interfaces. Notably, Melexis is also seeing promising design wins in key markets, particularly in Asia, indicating a robust pipeline for future growth.
Melexis reported a gross margin of 43.7%, a decrease from the previous year's 48.7%, primarily due to decreased product yields and rising costs associated with assembly, driven by fluctuating gold prices. The operating margin also saw a decline to 25.9%, reflecting a 10% decrease year-over-year. R&D expenses accounted for 10.7% of sales, signaling a commitment to innovation despite lower profit margins. Melexis expects gross profit margins to remain above 43%, down from an earlier forecast over 44%.
For the full year, Melexis has revised its sales expectations to a range of EUR 935 million to EUR 945 million, marking a significant step down from the previous estimate of around EUR 1 billion. The anticipated operating margin is now projected to exceed 24%, adjusted down from a previous expectation of over 25%. This change reflects the ongoing impacts of the automotive market's fluctuations as Melexis adapts to maintain competitiveness without compromising quality.
Geographically, Melexis is enhancing its presence in Asia, particularly China, where revenue contributions have grown from 26% in 2023 to just over 27% year-to-date in 2024. The company highlights a healthy increase in design wins within the region, and plans to release up to 20 new products in 2024, focusing on robotics and alternative forms of mobility such as electric and e-bike applications. This diversification across sectors positions Melexis favorably against potential disruptions in the automotive market.
The company expects pricing negotiations to align with trends observed pre-COVID, suggesting a stable outlook for pricing reductions. While facing pressures due to automotive industry dynamics, particularly in low-cost markets, Melexis maintains that the majority of pricing discussions will reflect historical norms, bolstered by long-term agreements (LTAs) accounting for around 40% of revenues. However, managing customer expectations and market fluctuations will remain a pivotal element in sustaining profitability.
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Good day, and welcome to today's Melexis Q3 2024 Results Conference Call. [Operator Instructions]
And now I would like to hand the call over to our host, Marc Biron, CEO. Please go ahead, sir.
Thank you. Dear audience, thank you for joining the Melexis Third Quarter 2024 Earnings Call. In Q3, our sales reached EUR 247.9 million, which is within our guidance. It's in line with the Q3 of last year and it represents a 1% increase from Q2 to Q3 this year. This being said, next to the solid sales discussions with our automotive customer starting in September indicate that based on the current order book for the balance of 2024, they would end up with higher inventories than desired.
During the past couple of months, we have all read the announcement about the auto industry with global car production down by more than 5% in Q3 2024. Our current order book would result in sales for Q4 which is in line with our full year guidance of around EUR 1 billion. However, we have decided to assume this inventory correction at our customers, which will lead to lower sales for Melexis in Q4.
Where we previously worked to avoid bullwhip effect, we now recognize that we would not prevent it fully, and thus, we are also impacted. The inventory correction that Melexis decided to assume in Q4 follows a period of supply allocation and is centered on automotive customers in Europe and in the U.S. Based on what we know today, global automotive sales and production are forecasted to grow in 2025.
We anticipate that taking such inventory correction now will enable us to resume our growth trajectory sooner than it would otherwise be the case. It also shows our customer orientation and it provides clarity to our stakeholders. Typically, such inventory correction are followed by a new upturn in demand, for which we are already preparing.
Returning to Q3 2024, our performance was mainly driven by our magnetic position sensors, both in automotive and beyond automotive applications. We also had growth in pressure sensor, sensor interface and current0 sensor.
In the third quarter of '24, Melexis has continued to introduce several innovations. For example, we have expanded our sensor portfolio. We have continued to address safety requirement with our Triaxis magnetic product for improved steering and pedal position application. We have also launched the Triphibian pressure sensor with a digital output, designed for thermal management of electric cars. And we have enhanced our current sensor, improving both isolation capabilities and functional safety compliance for demanding automotive applications.
In Q3, we had also encouraging number of design wins with an increasing amount realized in APAC and, in particular, in China. Those are some example of design win concluded in Q3. We had an important design win for embedded motor driver for EV powertrain in China and another one for HVAC application in Japan. We had also multiple design wins for embedded lighting application in Europe and also in China. These examples demonstrate that we continue to win business globally, and this is across the automotive platform and irrespective of the type of powertrain.
Now I will hand it over to our CFO, Karen Van Griensven, who will share some financial insights.
Thank you, Marc. So hello, everybody. A bit more on the financial results for the third quarter.
So the sales came out at EUR 247.9 million, stable versus the same quarter from the previous year and an increase of 1% compared to the previous quarter. The euro-U.S. dollar exchange rate evolution had no impact compared to the same quarter a year ago and a negative impact of 1% compared to the previous quarter. The gross result was EUR 108.2 million or 43.7% of sales, a decrease of 5% compared to the same quarter of last year and stable compared to the previous quarter.
R&D expenses were 10.7% of sales, G&A was at 5.1% of sales and selling was at 1.9% of sales. The operating result was EUR 64.2 million or 25.9% of sales, a decrease of 10% compared to the same quarter of last year and stable compared to the previous quarter. The net result was EUR 51.2 million or EUR 1.27 per share, a decrease of 10% compared to EUR 56.8 million or EUR 1.41 per share in the third quarter of '23 and an increase of 4% compared to the previous quarter.
Now looking further ahead, Melexis expects sales in the fourth quarter of '24 to be in the range of EUR 200 million to EUR 210 million. For the full year '24, Melexis expects sales to be around EUR 935 million to EUR 945 million, previously around EUR 1 billion; with a gross profit margin above 43%, previously above 44%; and an operating margin above 24%, previously above 25%, all taking into account a 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 60 million.
So operator, you can now open the Q&A session.
[Operator Instructions] And our first question comes from Sandeep Deshpande from JPMorgan.
My question is you've talked about in your release that you are seeing some kind of inventory correction at some customer or customers, could you talk about how many customers you have seen this trend at, at this point? And how long do you expect it to continue into '25? Or this is -- do you expect this to be just a fourth quarter phenomenon? And I have one quick follow-up after that.
Yes. I think what we see for the pushout is that it's coming from our European customer and U.S. customer, but it does not come from China or from Asia. I would say, also, it doesn't come from our distributor. We have, let's say, 30%, 35% of the revenue coming from distribution and we don't receive pushout requests from those channels. In summary, it's coming from the European customer.
And do you expect this to continue pushing out in the first half of next year? Or do you expect that this is it, done, there won't be any further pushouts from here?
Actually, we don't have indication that this inventory correction that we are now digesting will continue in '25. But we also don't have clear indication that it will not continue. I mean it's a bit -- there is uncertainty because now we are digesting those inventory correction, but as I mentioned, we don't have indication that it will continue.
We'll now move to our next question from Guy Sips from KBC Securities.
Yes, I would like to focus on the nonautomotive part. Also there, we see a below-par performance compared to the Capital Market Day indications in the longer run until 2030, and it was indicated that you would see there a growth of close to 15% CAGR. Now given the numbers you're hinting at 7% to 8% for this year, can you indicate what's happening there?
We confirm, indeed, that over the long term we will grow by at least 15% for the automotive. But in order to reach this growth, we need to develop the product and then to market the product, and to have a design win for the customers. And now we are indeed in this process to develop and to release the product. As an example, in 2024, we will release 5 beyond automotive products, for example, for some robotic applications. And those are those products that will generate the growth in the future.
And these new beyond automotive products, can you give some indications what kind of products they are?
Yes. And for the time being, we are in development. We are working a lot on the robotic application. It's products to -- that we use in the joint of the robot, as an example, either the position sensor to measure the position of the joint; or driver, in order to actuate the joint. This is, let's say, for the robotics. And also you know that we have released recently what we call the Tactaxis, which is a tactile sensor, in order to give the sense of touch of the robot. And this is for the robotics aspect.
We are also developing specific products for the alternative mobility, mainly for the e-bike or for the motorbike. And a bit longer term, because it will be released a bit later, but we are also working on the, what we call, digital health and geofencing, in fact. But in the order of the release, it is first robotic, then alternative mobility and then the digital health via sensor.
Yes, we also had a launch of a product for the service, I think, in the first half of the year where we have the first design win. So that is a product that is already launched and the pipe is filling with the first design now in the third quarter.
Exactly. It's a driver. They're using it in the server or the big data server.
We will now move to our next question from Ruben Devos from Kepler Cheuvreux.
Just the first one on the gross margins. I think based on the new full year outlook for '24, it appears that you're sort of expecting a 2- to 3-percentage point decline in gross margins sequentially in Q4. Could you talk about the moving parts of that decline? Is that entirely volume-driven? Or as well -- or is all pricing coming in lower than what you initially expected? And with regards to the diversification of the foundry partners, to what degree could that already somewhat of an impact in Q4, but also in '25?
Yes. The reason of the slightly lower GPM now is, yes, there are multiple reasons that are all coming together. We still don't have a perfect cost of yield or perfect yield for our innovative new products, and we are working on it in order to improve it. But for the time being, we are still impacted by this low yield. Yes, there is also the gold price adder, which is working against us, because we need to we need to pay a price adder to the assembly house depending on the gold price. There is also the revaluation of the inventory.
Yes, there were many small cost adders in the -- there is not one strong one. It was many smaller, of which actually -- Marc actually mentioned the most important ones. But indeed, it's spread over many different, small reasons why actually the gross margin was slightly lower than in the previous quarter. But this can be very different quarter-on-quarter, actually.
And there is also the lower volume, which is playing a factor.
Yes, which is clearly temporary. Also, cost of yield is supposed to increase or improve in the next year.
Okay. And then just on China. I think in terms of the geographic performance, also APAC improved. You mentioned strong traction with design wins in China. Could you maybe provide more insight into the type and scale of opportunities you see in that market?
Yes. First of all, indeed, during the first 9 months of 2024, the China revenue -- the revenue coming from China has increased by 9%. While, overall, we are close to flat, but in China, it has increased much more than for the overall Melexis. And in terms of design win and opportunity, yes, it is increasing quarter after quarter. And now we have -- indeed, it's one of the main region in terms of design win and opportunities is China. And as I mentioned also at the beginning, yes, we did not receive pushouts from China [ a little bit ]. And it shows, I think, that China is a strong region for Melexis. No pushouts, high increase and a very, very healthy design win and increase of opportunity in the pipe.
We will now move to our next question from Francois Bouvignies from UBS.
Just wanted to come back to Sandeep's question on the inventory correction into next year. I mean if we look in the past when inventory correction happened, let's take 2019 as an example, it rarely happens for only 1 quarter, it lasts -- it's a 1-year process to digest all inventories. And I was wondering why it would be different this time if you think that it can be only 1 quarter? And why it took so long for Melexis, specifically, to see this down-cycle versus many other products? That's my first question, and I have a follow-up, if that's okay.
Yes, why it took so long? As a matter of fact, let's say, we have LTA with customer. And I think the LTA has blurred a bit the picture. Yes, we were also -- we stay longer than others in allocation on some products. And probably, it has also influenced the behavior of our customers. And I think, as you know, it's a bit more in general, yes, some important platform has been pushed out by the OEM during the last 6 to 9 months, and I think those pushout of those platforms explain also why our customer wants to get a more healthy inventory at the end of the year.
And why would you suggest only 1 quarter? I mean if you look in the past, it's usually a much longer process than 1 quarter. So why would it be different this time?
When we discuss with our customers and we discussed in September on this aspect with our customers, they -- yes, they all mentioned that with those pushouts, they come back to a healthy inventory situation at their hand. I can just repeat what the customer told us.
Okay. And maybe my follow-up is on pricing. Obviously, we are in this end of the year negotiation period. We hear that autos, I mean, makers are, obviously, in struggle asking for a lot of discounts. How should we think about the pricing mix for Melexis? How do you feel about the pricing negotiation right now in the current environment?
Yes, we are indeed in the middle of the price negotiation, it has not been finished. I would say, yes, the volume is a question. That there is indeed always correlation, let's say, between the volume and the pricing, which increase complexity. We have the LTA, which is still valid for '25, which we need also to take into account in the pricing negotiation. And all those parameters are playing a role. Of course, we know that, yes, we cannot really enforce the LTA, but I think it's a good basis for discussion on the price. From what I see, we will have a price reduction which is similar to what we had before COVID.
But more. You don't see more pressure than usual into the pricing, mainly because of LTAs?
Yes. As I mentioned, that there is indeed, as usual, a lot of expectation. But on the other hand, we have our innovative product which are really bringing new feature on the market. Yes, there is the volume, which is part of the discussion, and we have our LTA as a basis. And all in all, I do believe we will reach the usual price reduction at the end of the year.
We will now move question from Marc Hesselink from ING.
Yes. I want to come back on the inventory correction, just to make sure that I fully understand it. I think you said that without inventory correction, you would end up at the guidance range. So that means that the inventory correction is something like EUR 60 million pushed out from the fourth quarter. And then you mentioned in the press release that you assume that it will happen. I'm not sure if I understand that word correctly, because I would think that this is based on the orders that you received from the clients. So what is the part that you assume? Or could it still be different from that EUR 60 million pushout that you expect?
What we mean is we had order in order to reach indeed the Q4 results. But the -- and the customer has sent the orders to Melexis in the past and we have the orders, but now the customer asked us to push out, out of Q4. And when we mean we assume, it means that, yes, we have decided to accept those requests.
Okay. Okay. Okay. Got it. And then the second one is also coming back on the price discussion. You said there's a correlation between volume and price. I assume that you mean that whenever volumes are high, the price is better, or the way around. But we can also think that at the current market where inventories at the clients are still relatively low and they really have to look at it, then -- I mean, actually, that it probably was lower volume and lower price. Or is that not the way to think about it?
Yes. It's always indeed the objective, let's say, of Melexis, is indeed to optimize the revenue and at the same time to optimize our profitability. And the negotiation is indeed always, yes, how can we find this optimum between the volume of next year and the right profitability.
We will now take our next question from Michael Roeg from Degroof Petercam.
I have a follow-up question on the LTAs for 2025. And the line was a bit blurry, so I missed some of it. So I hope I don't ask something that has already been answered. Could you indicate really how much of the volume for next year is covered by LTAs? And will those LTAs end in December '25? Or is there still a tail in 2026?
The vast majority of the LTA end in '25. We have, with some customers, LTA that are a bit longer, but the majority is in end of '25. The problem is that the volume that are, let's say, written in the LTA are far to be not realistic versus the current situation. The LTA has been signed, if you remember, in end of '22 for '23, '24, '25. And in '22, we were in the middle of the chip shortage, and then the customers have signed LTA with very, very high volume, which is, as a matter of fact, not valid now. Then I cannot answer your question because I think it's indeed not relevant anymore. And it's why I mentioned we are using this LTA in our price negotiation.
Okay. I understand. Basically, the contracts were much higher than what you expected to be shipping in Q4, Q1 and so on. But would you say that half your customers have an LTA? Or is that also difficult to answer how that works out?
40%.
Yes, indeed, what we have in the LTA is a bit more than 40% of the volume.
Okay. Clear. I have 2 tiny questions. So hopefully, I can do 2 instead of one. The first one, what are the forecasts from Standard & Poor's for growth in car production next year? And do they also have something about the mix change next year?
Yes. The IHS forecast 2% global car production increase in '25 versus '24.
And do they have a strong mix change from ICE to hybrid NAV? Or is it a modest growth in penetration of those 2 categories?
I don't have exactly the information, the last information from IHS in front of me.
Okay.
No, but it's more in China than versus the Rest of the World. So -- and China is, in general, more easy.
Well, geographically, China is increasing more than the rest of the world.
Okay. That indeed suggests where the mix is heading. That's clear. And the second tiny question. I noticed in the balance sheet that the prepayments have gone down by EUR 20 million. Is that, going forward, the run rate for every quarter?
Can you repeat the question?
Yes. I noticed in the balance sheet that the prepayments to your supplier have decreased by EUR 20 million versus last quarter.
Yes. But that is -- you see an increase in the short term, in the short-term current assets. And that is really -- it's moved from long into short term, but the total is still the same.
Okay. So actually, there have been no prepayments coming back to you that...
No, that is for '25. The contract is still good at -- in the second half of '25, we will see prepayments of -- by our suppliers on this.
And is that a level of payments of, say, EUR 15 million or EUR 20 million every quarter the same amount? Or is it -- will it fluctuate strongly?
It will be a fixed amount per quarter. I think, yes, basically. It's quite fixed. There are 2 contracts. In '25, it's the first contract on which we will have prepayments. I think in the range of EUR 16 million or so, I think, a quarter [indiscernible].
And we will now take our last question from Robert Sanders from Deutsche Bank.
I just had a question about China. It does feel like that business used to be the higher-margin part of your business, but it could become now the lower margin part of your business just because they're growing and they seem to be doing auctions, and that's where you do seem to be part of a 2-supplier setup. So do you recognize that pricing pressure should increase in China just because they use these auctions and that, that could affect your mix in '25?
Yes, there is indeed some auction for some product family, but for sure not all of them. And indeed, when there is auction, there is indeed, as you mentioned, some price pressure. But on the other hand, it's a very limited part of our volume in China in this situation. On the other hand -- and I was in China during 2 weeks in September, all our innovation initiative, innovative products, are still very well welcomed in China. And the goal is always to bring new product, innovative products to avoid the price competition. And this new product should compensate, let's say, the products that are more mature.
This is a strategy we have always used, not only in China, since the beginning. It's why we are -- we insist so much on the launch of new products. In '24, we will launch 20 new products on the market. This is innovation, and this is why we are able to keep our profitability. It's the case in China as it is in the other parts of the world.
And do you -- how do you expect the 2025 gross margin to pan out then given that, presumably, pricing is going to be more of a problem next year and the regional mix is going to be different? What can you say?
Well, we don't run ahead for -- with guidance on '24. There is a lot of, yes, uncertainty in the market. But what we can say is that we are also working on our -- yes, on our supplier base to counterbalance the price erosion that we have always had in the past. So it's not new price erosion. But also on the supplier side, we are working on this to limit the impact on our gross margin moving forward.
We are also launching products that -- with a better cost structure. And it's also part of the of the price negotiation. We always try in the price negotiation to get, let's say, awarded for a change and to be able to provide a chip with a better cost structure in the future. It's another example of what we try to get outside the price negotiation.
[Operator Instructions] And we have a follow-up question from Sandeep Deshpande from JPMorgan.
I just wanted to clarify, you said that China rose 9% in the first 9 months of the year. How much was China as a percentage of your sales in '23? And how do you see that developing in '24 as a percentage of your sales in '24? And a quick follow-up on the pricing negotiations as well. You mentioned to a response to the earlier question that you expect pricing to be like it was pre-COVID. Does that mean that you will see a bigger correction now compared to -- because in the last few years, you've seen price increases probably. And so is this going to be a different kind of negotiation compared to what it was over the last 3 years?
Yes. Perhaps I have expressed myself not correctly. What I wanted to say is that the price reduction will be at the same level than the price reduction before COVID. I didn't want to say that we will come back on the pre-COVID price. It was just about the percentage of price reduction.
Understood. And does that mean that pre-COVID, the price reductions were higher? Is that the point you're making?
No, no. I want to say that pre-COVID, we have always at, let's say, a low single-digit price reduction, and I do believe that it will be similar.
Understood. And then on China?
Yes. On China, in 2023, it was 26% of our revenue. And now year-to-date in '24, it is a bit more than 27% of our revenue.
Thank you. It appears there are currently no further questions. So with this, I'd like to hand the call back over to Marc Biron for any additional or closing remarks. Over to you, sir.
Thank you. Thank you for all the questions and for the discussion. And I'm looking forward to discuss again with you during the Q4 results and the full year results that will be the 5th of February in 2025. Thank you to all of you.
Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.