Melexis NV (OTCPK:MLXSF) Q3 2022 Earnings Conference Call October 26, 2022 4:30 AM ET
Company Participants
Marc Biron – MD, CEO and Director
Karen Van Griensven – CFO
Conference Call Participants
Matthias Maenhaut – Kepler Cheuvreux
Janardan Menon – Jefferies
Francois-Xavier Bouvignies – UBS
Robert Sanders – Deutsche Bank
Marc Hesselink – ING Bank
Michael Roeg – Bank Degroof Petercam
Operator
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 and your line will be on listen-only, however, you will have the opportunity to ask questions at the end during the Q&A session. [Operator Instructions].
I will now hand over you to your hosts, Mr. Marc Biron to start today’s conference. Please go ahead sir. Thank you
Marc Biron
Hello everyone. It’s a pleasure to welcome you again to our earning call related to Q3 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.
Q3 comes with a safe level of almost €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 fast 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 it with ’21. Thanks to the inverters application of the electric car.
We see also a very positive trend for our current sensor of product line in new application success on both module and DC/DC applications. The drivers product used in the thermal management system of the electric car 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 application, that they have seat track position and seat belt buckle. The magnetic position sensor are still growing strong in absolute number, and are still heavily impacted by the allocation.
On the adjacent market, we have also booked a very nice additional circuit for body temperature monitoring system. Those patterns show that our future and oriented innovative products address successfully new data form and backup of confidence in the future.
I’m not giving the hand to Karen for more financial results.
Karen Van Griensven
Thank you, Mark. So good morning, everybody. So sales for the third quarter came out around €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 €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 results was €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 €48.8 million or €1.21 per share, an increase of 33% compared to €36.5 million or €0.9 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 €220 million to €225 million, resulting in a full year sales growth of around 29% to 30%. The gross profit margin of around 45% and an operating margin of around 27%. All taking into an account a Euro-U.S. dollar exchange rate of 1 for the remainder of the year.
So operator I would like to open the Q&A session please.
Question-and-Answer Session
Operator
[Operator Instructions] We’ll now take our first question from Matthias Maenhaut from Alexis [ph]. Please go ahead. Your line is open.
Matthias Maenhaut
Good morning. Can you hear me? Matthias Maenhaut, Kepler Cheuvreux. Hello?
Marc Biron
Yes, we can hear you.
Matthias Maenhaut
Yes. Okay. So my first question is actually on the business comments, Marc, you made. Could you maybe 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 maybe elaborate on which kind of products and what the gross margins are of these products? And that would my first question.
Marc Biron
Yes, thanks. The product that showing more balanced supply versus demand is as an example, the ASIC, we have a 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.
Karen Van Griensven
And off the adjacent, it’s mostly in adjacent and a little bit in this ASICs as well.
Matthias Maenhaut
Okay, 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 kind of inventory built up 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?
Marc Biron
You know that such a wearable product, there will big seasonality in the demand and indeed, in Q2 and Q3 we were in the high demand seasonality, and that’s why it’s indeed quite high in Q3, but it’s more linked to the seasonality of the final application.
Matthias Maenhaut
Okay. 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?
Karen Van Griensven
We still — we expect the inflationary pressure in Q4, particularly on the [indiscernible] that will be visible. And it certainly will make operating costs 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 the height growth we see for the moment.
Matthias Maenhaut
Okay, thank you. That all are my questions.
Operator
Thank you, Mr. Mathias. We’ll now take our next question from Janardan Menon from Jeffries. Please go ahead. Your line is open.
Janardan Menon
Hi, good morning. Thanks for taking the question. Yesterday, one of your peers, Texas Instruments, who said that on the conference call comments 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 know, 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?
Marc Biron
Yes, I think we — yes we can comment based on what we see. And for the time being as Karen just mentioned we see indeed sort of more balanced supply versus demand for the non-automotive, but for the automotive, we don’t have any view.
Janardan Menon
Okay. And in terms of the — kind 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 your Tier 1 customers on the automotive side has that moved up in the last few 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 what — are you able to push through some price increases at this point into your 2023 pricing?
Karen Van Griensven
So intensity levels are still — well at the direct customers are still low. At distribute — again, it’s mostly adjacent what we see stocks going up. On pricing. Yes, we — I think we mentioned it already, we closed our LTES for more than 50% of sales with the biggest customer and it does include price increases for next year. These have been closed and negotiated.
Janardan Menon
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?
Karen Van Griensven
We set pricing in such a way that gross margin would remain stable for just what we see today, because we will also have price increases on the supplier side. But we balanced the two out, to keep gross margin more or less at levels that we see today.
Janardan Menon
Understood. Thank you very much.
Operator
Thank you Mr. Janardan. [Operator Instructions] We’ll now take our next question from Francois from UBS. Please go ahead. Your line is open.
Francois-Xavier Bouvignies
Thank you. Good morning. I have two quick questions. The first one is a follow up on the non-automotive adjacent market. Can you elaborate a bit more because you talk about the negative, but I mean, it seems a very strong growth and a quarter-over-quarter year-over-year? And I struggled to see the seasonality in the past. So I was just wondering if there was any design wins, you talk about temperature in wearables, but I mean, is the particular customer or anything driving this performance? And how should we think about this level of €24 million into Q4?
And the second question is, when you see like the easing probably more on 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 flood, 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?
Marc Biron
Okay, I will first answer the adjacent question. We’re indeed we have — it’s a new design win for our new application our important new application for a new customer. And this application is there is a lot of seasonality in the sales of this new application, but we cannot say much more on the application and on the customer. But clearly, this is the reason why the non-automotive results has increased.
Francois-Xavier Bouvignies
So it’s well customer driven then — so it’s one customer.
Marc Biron
Yes, yes.
Karen Van Griensven
And what we see inventory is in all applications related to PC service consumer business. That has been compensated by this one customer.
Francois-Xavier Bouvignies
Okay, I see. And can you tell us a bit more about this application then if 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?
Marc Biron
It’s a smartwatches.
Francois-Xavier Bouvignies
Smartwatches, okay. Thank you.
Operator
Thank you, Mr. Francois…
Francois-Xavier Bouvignies
And…
Marc Biron
Yes, I think you had a question on the…
Operator
Okay. All right. Mr. Francois has dropped, probably he can press star one again to queue up. We’ll now take our next question from Robert Sanders, from Deutsche Bank. Please go ahead. Your line is open.
Robert Sanders
Can you hear me? Great. Yes, 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 alternate product from Melexis or whether there is a need for them to re qualify with a competing vendor? And then I have a follow-up. Thanks.
Marc Biron
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 product tools which serving a new platform, the old — the new car platform as those ambient lighting products, and it’s one of the products, which is still a very constrained.
Yes, I would say, at Melexis, we don’t have alternative solution to address this application. And I think it’s a new application then in the market there was few solutions, let’s say in general. Of course, Melexis is not the only solution, but all the potential solution has the same potential constraint.
Robert Sanders
And what is this constraint that you talk about, is it foundry capacity? Is it something else? Materials? If you say that it’s a problem for everyone.
Marc Biron
I can speak for Melexis, it’s mainly wafer of capacity.
Robert Sanders
Okay. Got it. And I was just wondering on current sensors, it sounds like Allegro is being 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 centers within EVs more generally? I mean, is there any, because I think this is an area still with really 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? Thank you.
Marc Biron
Yes, in general, there is there is huge need and huge collection for all the current sensors related to the battery monitoring system in general. I don’t have any worry about losing share, I think this product line will grow, because, as you know, all OEMs are developing a platform around all the battery. And it means that, there is for sure enough demand for Melexis. And as I mentioned in my verbal comment, the product line or the toner of this product line will doubled in ’22 versus ’21, which is really showing the huge potential.
And yes, we are — okay you mentioned Tesla, which is indeed one of the bigger OEM related to electric car, but much more OEM than only Tesla. We have many, many platform, new platform new opportunity in many OEM all over the world, I would say.
Robert Sanders
Got it. And the reason. Sorry, go ahead.
Karen Van Griensven
I just wanted to add that growth will be constrained by supply, not by demand.
Marc Biron
Yes, like on lighting on the previous question, the current sensor always is another product line, which is still constrained by the supply, and not at all by the demand.
Robert Sanders
Can I just check on the current sensor product line? Is that a direct sales OEM or you kind of it is more like a reference design as part of a battery monitoring broader system? And what is the route to market typically outside of Tesla?
Marc Biron
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 OEMs. And it’s, I think, you know, that Tesla, it’s a direct customer. But in other case we have also a teams in between Melexis and the OEM for the current sensor.
Robert Sanders
Got it. Thank you.
Operator
Thank you, Mr. Robert. We will now take our next question from Francois again from UBS. Please go ahead. Your line is open, sir.
Francois-Xavier Bouvignies
Thanks. I don’t really know what happened here. But yes, 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 maybe going forward, the supply and demand is likely to be more balanced. So just how should we think about the impact when it happens?
Marc Biron
Yes. I would just indeed, repeat that for the innovative application, we still see very high demand and higher than the supply. For match our product in our portfolio, it’s more balance, I mean, this is the situation of today. And I will say as far as we can see, for the beginning of 2023 it will be the same situation.
Francois-Xavier Bouvignies
Imagine for a second even if you don’t believe it happens, but it happens. So, what — is it something you expect like to have pricing to normalize or catch up or like a correction for inventories, what’s — because ultimately it will happen, whether it’s ’23 or ’24 it doesn’t — it’s not my question. But just on the impact, basically?
Marc Biron
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. And 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.
Francois-Xavier Bouvignies
So, for example, for the easing, part, like the adjustment is not as tight, do you see, what’s the pricing dynamic here? I mean, is it like flat pricing, or you see them just to increase the price? Or is it coming down a little bit from the high base on the less tight product, do you see an impact on the pricing side?
Marc Biron
No, for the time being. We have increased the price in ’22, we still high single digit. And we did not discuss the price going down sensor.
Francois-Xavier Bouvignies
Okay, thank you very much.
Operator
Thank you, Mr. Francois. We’ll now take our next question from Marc Hesselink, from ING. Please go ahead, your line is open.
Marc Hesselink
Thank you. 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 price in some of only areas we are still constrained that you can guarantee some extra supply and that you can fill that demand quicker?
Marc Biron
Indeed, we can use for the — I mean, we have the lead time perspective and the fact that okay, when a product is in the [indiscernible], we cannot always change from product A to product B, but in general term indeed the fact that in some for some product, we see some easing, then it can help the product that are under constraint. But it cannot be done, sometimes it cannot be done very quickly, because there is the weight aspect that we need to take into account. But in general, yes. It’s why indeed, — sorry indeed we believe it is healthy to have this light easing.
Marc Hesselink
It’s unfair to show…
Marc Biron
Go ahead.
It’s unfair to show, let’s say, two quarters from now you should have a good balance in most of your products?
Marc Biron
I think it’s probably two quick statement, because we should take into account the technology. There is some easing of demand for products 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] in LY [ph], and we don’t see any easing in this technology. It means that we will not help ambient lighting. Thanks to the easing situation in the adjacent product.
Marc Hesselink
Okay. Thank you.
Operator
Thank you, Mr. Marc. We will now take our next question from Robert Sanders from Deutsche Bank. Please go ahead. Your line is open.
Robert Sanders
Yes, thanks. I just wanted to have one quick follow up. And now that the year is almost 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 LMOS [ph] is saying more than half of the annual growth this year as pricing. I just wanted to sort of see what it was for you guys? Thanks.
Karen Van Griensven
First, it’s not more than half, it’s single — high single digits, as Marc mentioned earlier, the price and the rest is volume.
Robert Sanders
Got it. Thank you.
Operator
Thank you, Mr. Robert. We’ll now take our next question from Michael Roeg from Degroof Petercam. Please go ahead. Your line is open.
Michael Roeg
Yes, good morning. I have a question about your test facilities. Several years ago you expanded them in anticipation of growth, now there’s growth has materialized. How much further can you grow your top line before you have to expand again?
Karen Van Griensven
For the next, at least three years, we are still okay with Sofia and we are also starting to invest in Malaysia but not improving capacity to be released in one year, one and a half years.
Michael Roeg
Okay. So, from that viewpoint, should we assume CapEx to remain around €45 million a year for the next couple of years?
Karen Van Griensven
It will increase, because we — for future growth we will have to step up investments. But more I mean, we cannot say more at this point. We will guide on this when we come out with the Q4 figures.
Michael Roeg
Okay, good. That’s clear. Thank you.
Operator
Thank you, Mr. Michael. We’ll now take our next question from Janardan Menon from Jeffries. Please go ahead, your line is open.
Janardan Menon
Hi, thanks for the follow up. I was just wondering, can you tell us a bit about what the capacity increase plans to your foundry partner is how much of capacity they’re currently planning to bring on board in 2023. And how does that sort of sequentially progresses? 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 of producing it in-house whereas you are outsourcing it and one of your competitors also outsourcing it to another foundry in Asia. Suppose if the in-house production is adequate and capacity and they can provide sufficiently to the market?
Do you think that could be a factor in any loss of market share? Will — 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?
Marc Biron
Yes, so first on the capacity increase from our supplier. I think it’s more heavily I would say as since some quarter we see that the capacity is increasing quarter after quarter very 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 government under the new — in the south of Paris.
Related to the magnetic sensor and let’s say to lose some of the market. I would say first, we have sign an LTA with our supplier and we have signed LTA with some of our major customers and we made the back to back LTA meaning that we have guarantee from in our LTA that we will use the maximum capacity of a fix often I think if there is a good back to back balance situation in between the two LTAs.
And now coming on your question. Yes. Is it easy for our customers to change suppliers? I would say, the answer is no. We need — they need years. One two years to change to change supply. 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 military support if there is always something to change in the final application to be compatible with the new product. And I mean, its anyway take time.
Janardan Menon
Understood, just to go to your first answer. So the capacity is coming on board sort of incrementally every quarter in the French fab, it’s not that there’s a big increase later in the year or something, it’s happening in Q4 and Q1 on a steady basis.
Marc Biron
Exactly. Yes.
Janardan Menon
Thank you, understood. Thank you.
Marc Biron
As it is the case since the beginning of the year, I would say.
Janardan Menon
Okay.
Operator
Thank you, Mr. Janardan. It appears there’s no further questions at this time. It’s Marc, I’d like to turn the conference back to you for any additional or closing remarks. Thank you.
Marc Biron
Okay, I would say thank you for the question. Always its useful to have your question and to be able to answer. And I think we will — I will welcome you again for the Q4 results and for the final year ’22 results in early February, I think. Thank you, everybody.
Operator
Thank you for joining today’s call. You may now disconnect. Hosts please stay on the line and wait for further instruction.
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