Melexis NV (OTCPK:MLXSF) Q2 2022 Earnings Conference Call July 27, 2022 4:30 AM ET
Company Participants
Marc Biron – MD, CEO and Director
Karen Van Griensven – CFO
Conference Call Participants
Francois-Xavier Bouvignies – UBS
Janardan Menon – Jefferies
Marc Hesselink – ING
Robert Sanders – Deutsche Bank
Michael Roeg – Degroof Petercam
Operator
And I will now hand you over to your host, Marc Biron, Chief Executive Officer, to begin today’s conference. Thank you.
Marc Biron
Hello, everyone. It’s a pleasure to welcome you again to our earnings call related to the Q2 results. Today, we are two 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.
Q2 comes with a sales level of €208.4 million. It’s a positive change of 13% in comparison to the previous quarter and a positive change of 31% in comparison to the same quarter of last year. The fast-growing chip content in the car linked to the electrification of the car and to their increased comfort and safety level contribute to the good results. Those trends are also visible in the outperforming product line. For example, current sensors continue to post the highest growth in percentage, thanks to the inverter application of the electric car. The magnetic latch and switches has the second highest growth in percentage, thanks to their success in the comfort and safety application. Comfort application, as an example, seats track position sensors and seat belt buckle are example for the safety application.
The drivers use in comfort and safety application and the thermal management of the electric car are also growing faster than other product lines. Driver in comfort application is, for example, the seat fan and driver for safety application are, for example, the headlight fans. This is about the automotive market. But on the adjacent market, we should mention renewed interest in the temperature monitoring, both on combustion engine and electric cars. And we have also booked very nice additional sockets for body temperature monitoring system.
During the second quarter, we have also launched 6 new products on the market, and those launch are in line with our product strategy, which is to deliver innovative products that are good for the planet and good for the people. Just some example, we have launched the MLX-81346, which is the world’s first fully integrated 48-volt pre-driver. This product will help our customers in the automotive, robotics, but also e-bike sector to develop compact solution for very high power, up to 2,000 watts. We have also launched the MLX-90397, which is a magnetic Triaxis product for cost-efficient position sensing. It has been designed for consumer and industrial market such as handled power tools, gaming console and home automation system. Last example, we have launched a complete family of new Triaxis 3D magnetic sensor. Those sensors are intended for cost-conscious automotive customer and they are used in typical application like powertrain actuator, transmission sensor, pedal position sensor and chassis sensors.
With all those examples about the product lines, I will now give in the hand to Karen for more financial results.
Karen Van Griensven
Thank you, Marc, and welcome to everybody. So as Marc already mentioned, so the sales for the second quarter came off this year of 22 were €208.4 million. And the impact of the euro-U.S. dollar exchange rate had a positive impact on the sales growth of 5% compared to the same quarter of last year, and a positive impact of 2% and versus the previous quarter. The gross result was €93.6 million or 44.9% of sales, an increase of 40% compared to the same quarter of last year and an increase of 13% compared to the previous quarter. R&D expenses were 10.6% of sales, G&A was at 4.9% of sales, and selling was at 1.9% of sales.
The operating result was €57.3 million or 27.5% of sales, an increase of 57% compared to the same quarter of last year and an increase of 15% compared to the previous quarter. The net result was €47.6 million or €1.8 per share, an increase of 42% compared to €33.5 million or €0.83 per share in the second quarter of 2021, and a decrease of 2% compared to the previous quarter.
If we now also have a look at the outlook. So the outlook for the third quarter of ’22 is in the range of €215 million to €220 million. And for the full year, 2022, Melexis expects a sailings increase between 28% and 30%, with a gross profit margin of around 45% and an operating margin of around 26% at the midpoint of the sales guidance, all taking into account the euro-U.S. dollar exchange rate of 1 for the remainder of the year. The evolution of the euro-U.S. dollar exchange rate in ’22 has a positive effect of around 5% on the full year sales outlook versus the actual results of ’21. We also decided on an interim dividend of €1.3 gross per share, which will be payable or will be trading ex coupon on October 18, ’22, and the record date is October 19, ’22. The dividend will be payable as from October 2022.
So we now come at the end of the introduction. I would now open the session for Q&A. So please go ahead, operator.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question comes in from the line of Francois-Xavier Bouvignies calling from UBS. Please go ahead.
Francois-Xavier Bouvignies
Hi, good morning. I have a couple, if I may. The first one is on the orders. So you mentioned in the release that it’s still robust and strong and this is interesting given what’s the feel of the market around the recession. So I was wondering if you were seeing anything between the real world and what’s the feel about the recession? And maybe you don’t see anything today, but how should we think about the impact going forward from your order intake or your customer demand? Do you expect any impact from the — this macro uncertainties? That’s my first question.
Marc Biron
Yes, Marc will answer or will start to answer at least. Yes, I can confirm that factually, let’s say, today we don’t see effect on our order intake. The book-to-bill is still very high, and we don’t see any push out, let’s say, from our customer. This is the actual situation, let’s say the today situation. Now you have had a question on the future. Yes, this is, of course, more difficult to answer. What is — what remains correct, let’s say, is that for the time being it’s mainly the supply who is limiting our our performance. So let’s say, we still have more order than that we can supply.
Francois-Xavier Bouvignies
Do you know by how much on your products specifically? I mean, it’s above the supply, the demand?
Marc Biron
Yes, we have mentioned in the past that it was around 20%, let’s say, the mismatch between the order and the supply. Yes, it’s still — I would say it’s still the case, and we are in discussion with some strategic customers for ’23, ’24, ’25, and we have the same kind of — we have the same kind of mismatch I would say.
Francois-Xavier Bouvignies
Okay. And it’s a good transition to my second question which is around the supply. If we look at your performance, I mean, a very significant growth quarter-on-quarter, I think it’s the highest from all the other auto SMEs that I’m looking at. So you seem to have more supply than many of your peers as such. So I was wondering if this kind of supply allocation that you seem to manage quite well, give you more an advantage at least or maybe you can — does it mean that you increase more maybe inventories of magnetic sensor specifically to the supply chain? Just trying to understand the supply of magnetic sensors or sensors for Melexis’ addressable market versus the old industry, you seem to do relatively better.
Marc Biron
I think we have probably been a bit cautious in the past related to the supply of the label because I think you remember that X-FAB is ramping up the new wafer fab in Corbeil in the South of Paris. And of course, in this ramp-up, we have decided to be a bit cautious to make sure that we are not — we don’t have, let’s say, a surprise or a bad surprise. Okay, now we have a better visibility about the supply — sorry, about the supply that will be available for Q3 and Q4. That’s why we have given this guidance. Now I realize I don’t answer your question when you say have you a better supply coverage than the competition? I must say, I don’t know. It’s correct that it has — we have — the main bottleneck is the wafer supply, and it’s correct that for Q3 and Q4, we have more supply than what we have anticipated at the beginning of the year. So Karen.
Karen Van Griensven
Also you cannot conclude on one quarter anyhow. And what — I mean, an NXP offer came out with relatively strong numbers.
Francois-Xavier Bouvignies
Yes. But not 15% quarter-on-quarter growth from the auto business.
Karen Van Griensven
But again, we shouldn’t conclude on one quarter alone on this. But indeed, the output of FAB has been quite strong.
Francois-Xavier Bouvignies
Okay. And do you have any sense of the inventories of your products, specifically in the supply chain? I mean it’s — because you still have a big disconnect between your sales and that the production is and we start seeing some inventories in some products and subsegment areas and TSMC is even talking about an inventory correction in the second half of the year, H1, probably not in automotive, but I was just wondering if you could see any impact on the inventory side of things for your products or automotive in general?
Marc Biron
I think you’re correct that we should make the distinction between the automotive market or the automotive application and the non-automotive application. I think there is a clear difference there. But for the automotive part, I could not say that there is 0 inventory in the supply chain, but what I can say is that there are still a lot of gap between the supply and the demand because we are still in many difficult discussion with our customers with the OEM because we don’t supply enough than there is — there is, for sure, still a numerous number of pocket without enough supply. Now is that the same everywhere? I must say, I don’t know.
Francois-Xavier Bouvignies
Okay. And maybe last one, if I may squeeze one last one. If we look a bit more long term, I mean, I look at your chart, Slide 16, and you see the market split electrification, you see EV and hybrid, full hybrid and ICE. I mean it seems that hybrid, plug-in hybrid — full hybrid would present almost the same size as EV or even more by the look of it. Now when we look at the OEMs target, it seems to be like a full EV, more trajectory as such. And when we look at the content per car, I mean, you show in the Slide 18 that in a full hybrid, and you have 83 ICs versus 45 for EV. So I was just wondering like what — what would be the impact if we had no hybrid in 2030 for Melexis relative to your long term target of gross?
Marc Biron
Yes, we have indeed, all — first of all, first answer to your initial question about the split between plug-in hybrid and EV. I mean this is an IHS assessment from February. Perhaps the picture is changing a bit because indeed we see that more and more the EV will gain some traction. But okay, this is the IHS picture from 6 months ago, let’s say. And yes, next year, we’ll have the update. And indeed, perhaps the move to EV will be a bit quicker than what was anticipated. I plan to agree with your analysis.
On the consequence, yes, in the plug-in hybrid there is for sure. I mean, we said in the past, we win 2 times because there is all the ICE and all the electrification aspect. But we see also that there are more and more electronic in the pure EV. If we take the example of the thermal management was, let’s say, underestimated in the past, how much electronic we will need to manage the management of the temperature in the EV, then I believe that in the future we will have more electronic than what we anticipate now on the EV.
Francois-Xavier Bouvignies
Thank you very much, Marc.
Operator
The next question comes in from the line of Janardan Menon calling from Jefferies. Please go ahead.
Janardan Menon
Hi, good morning. Thanks for taking the question. I just wanted to go into your guidance a little bit more. You’re sort of implying, if I put in the midpoint of your guidance in Q3, then it’s sort of flattish into Q4. Is that because of capacity constraints that you are assuming a more flattish profile into Q4? Or is there any other reason for that?
Karen Van Griensven
It’s — well, the 28% to 30%, the low end is indeed not much growth for the second half. But indeed, I mean, we have better visibility today than the previous quarter because it’s only 2 quarters left. But in the fourth quarter, it’s still — I mean, the guidance is always mainly influenced by supply, so risks on the supply side, and we are conservative on this. So that’s why we guided 28% to 30%.
Janardan Menon
Understood. But just on the supply, I understand that you’re being conservative, but overall is X-FAB continuing to ramp capacity? Is there headroom in the France fab to ramp capacity in Q4? And then does that capacity continue to ramp into 2023 as well?
Marc Biron
Yes, we will continue indeed to work with X-FAB in order to increase the capacity step by step, yes.
Janardan Menon
Understood. And similarly, on the — on the operating, sorry, could you do.
Karen Van Griensven
No, go ahead. Go ahead.
Janardan Menon
Yes, similarly on the operating margin, you’ve done more than 27% in the first half of the year and the guidance on the top line and the gross margin is stronger in the second half, but you’re guiding 26% for the full year, which suggests increased OpEx into the second half. So could you give us some guidance on how you expect the OpEx to trend into Q3 and Q4?
Karen Van Griensven
So indeed, as we mentioned also in the previous quarter, we do expect — I mean, we are investing in people. We have inflationary pressures, particularly in Belgium in Q3. We have the mandatory index — indexation, which is more than 8% here in Belgium. So that will all drive up the cost side. How fast it will go is always difficult because it’s also not so easy to find people in the market. But it’s our plan to indeed broad — or strengthen our R&D team. There is also need for other investments in other areas. So yes, the cost basis is expected to further increase. Also in Bulgaria, for instance, we have pressure to increase the wages due to the very high inflation there, so, yes. Does that answer your question?
Janardan Menon
Undersood, yes. So I mean, you’re not giving an exact number, but can I assume therefore, that the increase in OpEx would largely cover sort of the gap which is coming up in the operating margin for the second half of the year?
Marc Biron
Yes. I think it’s the ADAS.
Janardan Menon
Yes. And then one of your big customers, Sensata was a lot more cautious on their outlook into the second half of the year than both you as well as other companies like NXP, and they were talking about inventories in the automotive side, which has been there for some time and continues to be there. And they’re also talking about potentially lower production than expected in autos, etc. I can see that your ASIC proportion is coming down quite rapidly, which probably reflects that shift, especially at that customer. But I was just wondering, can you give us any color on why there is a mismatch between what they are seeing and what yourself and some of your — some of the other chip vendors are seeing?
Marc Biron
It’s difficult to comment on Sensata. What we can say is, indeed, in short term, we have a strong order book. We don’t see any push out, that’s why we gave this guidance for Q3, Q4. It’s also true that in the midterm it’s a bit more uncertain because of all of the reasons that we know and that you have already mentioned, linked to the macroeconomic perspective. This is for the midterm and the long term, yes, we are also confident because of the automotive trend and because of the Melexis position in this trend. And it’s — yes, it’s why we have a bit of different view on short, mid and long term. And… Yes, why Sensata is more cautious, I must say, I mean we don’t want to comment. I don’t know. It’s indeed, it’s an important customer of Melexis, that’s clear.
Janardan Menon
Okay. And my last question is, you didn’t say much on the sort of nonautomotive adjacent markets. And I understand that most of that goes through the distribution channel, etc., but you have some consumer exposure there as well. Can you just give us a feel for how the order trends there are progressing into the second half of the year?
Marc Biron
Yes, we have that 10% of our revenue and we have difficulties to increase this 10% because of all the allocation problem and because we we give priority to the automotive customers, meaning that, yes, the order book in consumer is also strong because we cannot anyway supply. That’s a bit the same for consumer, more for automotive. But I think it’s reinforced by the fact that we give a bit more priority to automotive in our allocation.
Janardan Menon
Understood. Thanks a lot.
Operator
The next question comes in from the line of Marc Hesselink calling from ING. Please go ahead.
Marc Hesselink
Yes, thank you. Can you talk about the impact of the price increases in your portfolio, and on the other side, the inflation? It seems that your — maybe the impact on the growth level, but also it seems that you can keep the gross margin very stable. So that means in an absolute level, it’s contributing more. Is that also the way to look it forward here? You keep the margin stable and therefore inflation is actually a positive thing given on the absolute numbers?
Karen Van Griensven
Indeed, indeed. There is a positive effect in the gross margin of the dollar as well, of yes, but not more than 1%, I would say. But all in all, as you have seen in the press release, we guide for 45%. So we do expect that 45% to be sustainable also in the future.
Marc Hesselink
Okay. And on average, the price increases that you now have in your portfolio?
Karen Van Griensven
It’s high and single digit.
Marc Hesselink
And do you expect more of those price increase to come in the coming quarters to offset the cost?
Karen Van Griensven
We have typically once a year at the beginning of the year, renegotiations with our customers. So throughout the year we saw the big change in the beginning of the year, but then throughout the year, there is limited change. And then beginning of next year we have new new negotiations ongoing, which is actually part of the long-term agreements, and we expect also there a price increase.
Marc Biron
And the follow… Okay, go ahead.
Marc Hesselink
Yes, is that actually linked also to the cost side there? You also have this annual agreements with your supplier.
Marc Biron
Exactly what I wanted to say that in ’23, we’ll use the same strategy than in ’22, meaning that we will transfer the cost increase to the price increase. We want to stay fair. And even as Karen mentioned in the LTA with some customers, we have been very transparent to show them that we don’t want to take advantage, but we want to transfer the cost to the price increase.
Karen Van Griensven
So we have long-term agreements as much with the suppliers as with the customers. And yes, also suppliers come in the first place with cost increase. And indeed, in a fair way we also transfer that to the customer.
Marc Hesselink
Okay, clear. And the other question that I have was on — in earlier calls, the key objective is not to be responsible for clients needing to stop the line, and I think you did well there. And what’s the impact there on your negotiations with to win new — to win new orders? Do you see that your performance throughout this supplies chain constrained situation for the industry helped you in winning new orders?
Marc Biron
I think we — I’m sure we received many positive feedback from our customers on the way we manage the situation. Many customers have told us that yes, we do what we say and we say what we do. Even if they don’t like our initial message, which is — will not be able to meet your demand. But I think they appreciate, let’s say, our transparency, and they appreciate that, okay, we almost always need what we have committed. And they also appreciate that we try to improve. I mean, we give an allocation, and throughout the year we try to a bit over produce, let’s say. I think this, for sure, they appreciate. And I assume that as a consequence, indeed, they are willing to give us more business, but it’s also true that, yes, today, we try to manage the situation. We try to allocate the wafers to different customers, then indeed we are not always able to answer positively to the new business.
Karen Van Griensven
But all in all, design wins are very strong.
Marc Biron
Yes. We have — after the first half of ’22, we have strong design win, yes. And also the pipe of opportunity is increasing very steadily.
Marc Hesselink
Okay, clear. And then final question also on visibility on supply growth going into ’23. You already said that you’re working together with your supplier to increase the capacity. But is there also maybe an element in there that maybe some of the other clients of your supplier might actually ask for a little bit less and that you can take some of the supply of those other clients. Is that in there as well?
Marc Biron
Yes, no comment. For the time being, X-FAB gave us 6 months ago, let’s say, their forecast for ’23, ’24, ’25, we have used those forecasts in our LTA. with our customers.
Marc Hesselink
Okay. And then, but does it happen then that did you — that somebody drops out and you can take that over that is — that can happen?
Marc Biron
Yes. For the time being, indeed, we have more supply than — we have more demand than supply. But yes, I don’t know more.
Karen Van Griensven
No, we don’t know what we don’t know.
Marc Hesselink
Okay, perfect. Thank you.
Operator
Thank you. The next question comes in from the line of Robert Sanders calling from Deutsche Bank. Please go ahead.
Robert Sanders
Yes, hi. Good morning. I’m just thinking to what you’re saying on supply. It sounds like you’re fully booked for 2023 because I mean, X-FAB is probably growing their wafers maybe 10% a year next year. It sounds like is it fair to say that you’re fully booked for next year, and that if they provide you with more wafers than the current plan, then you will be able to sell them. Is that fair? I have a follow-up. Thanks.
Marc Biron
We don’t comment about ’23 I think we don’t give for the time being indication on the ’23 forecast, let’s say, or outlook.
Karen Van Griensven
It’s the only thing we already mentioned. We have gradual capacity expansion with X-FAB, that will continue also next year. But more than that, we cannot guide.
Robert Sanders
Okay. And then on the LTAs you’re signing, what percent of your business looking out to ’24 is under LTA now? And how many of these are signed with — directly with OEMs and how many are with the Tier 1’s?
Marc Biron
Yes, we have selected, let’s say, out of 30 customers for this. It’s — the vast majority is with our direct customers with our Tier 1. And yes, in terms of number of wafers, I would say, yes, it’s really not negligible. The wafers that are included, let’s say, in the LTA, iIt’s really nonnegligible versus the complete capacity, the overall capacity.
Robert Sanders
But are they like take-or-pay terms with these LTAs, like X-FAB has take-or-pay terms and cost step-ups for inflation. Is that a similar situation for you guys?
Marc Biron
Yes. We have — our goal is to make a kind of back-to-back situation than we have similar terms with our customers than with X-FAB. Meaning, we agree on the volume, we agree on the price, and we agree on penalty in case of.
Robert Sanders
Got it. And then the last thing would just be on pricing. I mean X-FAB is talking about 25% higher pricing in 2024 versus 2021. I mean that’s just for the wafer. Presumably, your cost structure is not rising in the non-wafer part as much as that. But is that a fair indication that pricing will continue to rise into ’23 and ’24 just because of your increased foundry input costs?
Marc Biron
Yes. Yes, it is. But we have indeed, and with X-FAB and with our customers under LTA an agreement for’ 24 — ’23, ’24, ’25 and volume and price.
Robert Sanders
Got it. Okay. Thank you.
Operator
We currently have no further questions coming through. [Operator Instructions] We have a question coming from the line of Michael Roeg calling from Degroof Petercam. Please go ahead.
Michael Roeg
Yes, good morning. I have a follow-up question on your gross margin in relation to cost inflation because if I remember correctly, then X-FAB said that they were relatively late in hiking their prices, but that they first had to work through their entire backlog at the old prices before they could implement the new prices, and those new prices should come into play roughly by now. So that would suggest that you and X-FABs other customers would all of a sudden have cost inflation starting now, yet your gross margin suggests this is not the case because it’s going to be nice and flattish of 45% throughout the year. So where is the mismatch in my perception? Can you please enlighten me?
Karen Van Griensven
For Melexis, the biggest impact is already in the numbers we have today. So that’s why we also don’t expect major — there might be a slight — slight pressure in the next quarters to come from increased prices still from X-FAB, but it will be very limited for Melexis.
Michael Roeg
Okay. So…
Karen Van Griensven
I said not much with the X-FAB statement.
Michael Roeg
Okay. So suppose that you indeed got that price increase earlier than I perceive, so maybe at the start of the year. So this has probably then partly been one of your drivers to raise your prices by that high single-digit percentage I heard earlier.
Karen Van Griensven
You mentioned that there was some delayed effect, but it is limited as you can see, because there are so many other factors also influencing today, the gross margin, the product mix, for instance, also is then impacting positively, the operating leverage is impacting positively. So for us there is not much impact to be expected for the remaining quarters of the year.
Michael Roeg
Okay, bood. That’s reassuring. Thank you. That’s it.
Operator
We have a follow-up question coming through from the line of Janardan Menon calling from Jefferies. Please go ahead.
Janardan Menon
Hi, thanks for giving me another chance. I just wanted to look at your content growth and what you think it is because when we take your top line growth of, say 20%, 29% and take off 5% for currency, you’re still in the 25% kind of range. And all the average content growth in semiconductor — automotive semiconductor is averaging out EVs plus ICE as per market research companies like Gartner and all that seems to be very consistently somewhere in the high single digit, around 10% kind of range. So your — and car production levels are very low, have been lower last year and this year as you’ve seen. So there’s clearly a big, big mismatch between your growth and car production growth. And if we put the 10%-ish figure of content growth, that still leaves us over 10% every year between your growth and the car production volume growth. So I’m just wondering, would you say that, that is inventory build? Or would it be likely that Melexis’ own content growth in cars right now is about double that of the broader industry. Is that a possibility in your mind?
Marc Biron
Yes, I think there is limited inventory buildup for the time being. And I base my statement on the numerous [Indiscernible] and communication we have with our customers, showing that yes, they are really still hungry about the Melexis chip to build the car. Then I think the inventory is — if there is inventory buildup, it’s limited or perhaps even very limited. This is one point.
Second point on the 10% electronic growth, I think we should also take into account that for the time being the OEM gives clarity to the high-end car. And when you see the, let’s say, all the IHS simulation, there is indeed electronic content increase due to the electrification of the car, due to the more safety, the more comfort. But there is also content chip increase because we are moving up in the level of the car and the premium car as much more electronic than let’s say an average car. And it’s why I think it’s probably your 10% is a bit on the low side because it’s not only the overall content, there is also the move to the premium brand and the premium car. And the third aspect is, I think indeed Melexis is probably overperforming versus the pure only chip content aspect.
Janardan Menon
Understood. That’s very clear. Thank you very much for that.
Operator
Thank you. We have no further questions coming through. [Operator Instructions] And there are no further questions coming through, so I shall hand the call back across to yourself, Marc, for any concluding remarks.
Marc Biron
Okay. I want to thank you for the question and for the interest in Melexis, and I’m looking forward to see you or to hear you again in the future, and for sure, at the latest for the Q3 results. Thank you all.
Operator
Thank you for joining today’s call. You may now disconnect your handsets.
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