Hello, and welcome to the Melexis Quarterly Q2 2023 results. My name is Caroline, and I'll be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen-only mode. However, you'll have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your questions. If you have any assistance at any point, please press star zero and you'll be connected to an operator. I will now hand over the call to your host, Mr. Marc Biron, the CEO, to begin today's conference. Thank you.
Hello, good morning. Thank you for joining the Melexis Earnings Call regarding the second quarter of 2023. As always, I will start with the business update, after which our CFO, Karen Van Griensven , will comment on the financials. We will answer your question afterwards. Sales in the second quarter of 2023 came out with an increase of 14% compared to the same quarter of last year. Given that we have realized a steady growth over the last quarter, we are increasing our full year sales and profit guidance. During the second quarter, we observed stable inventory levels at our distributors as well as our direct customer. The best performing product were, once again, our current sensor, magnetic sensor, embedded motor driver and embedded lighting product. It's a trend clearly driven by the electrification, and this trend is set to continue.
The common denominator of the success of this product line is electrification. The obvious beneficiary are our current sensor products. Those products are used in inverter, onboard charger, and DC/DC converter. Another beneficiary is the embedded motor driver, which are extensively used in the thermal management application of the electric car. All the other outperforming products are used in applications that are not related to the powertrain. We call them body, chassis, and safety applications. These applications are gaining more and more traction as the design and the comfort level of the vehicle are more and more important. For example, our embedded lighting product enable interior ambient lighting. In term of chassis and safety, our magnetic sensor can be found, for example, in e-steering or e-braking applications.
In the second quarter, we launched a new time-of-flight sensor for safety critical application, such as dynamic airbag deployment, but also driver attention monitoring. This time-of-flight can also be used in adjacent application such as industrial cameras, robot, and advanced machine vision. We also launched a new embedded motor driver, which is able to optimize the thermal and the expansion valves, which enable a longer range for electric vehicle, which is, as you know, very important for the, for the customer. As evident from our growing design win and opportunity pipeline, electrification will continue to drive our success beyond 2023. We have the right product portfolio. Those portfolios serve the ever-increasing need for electronic in vehicles, be it for powertrain but also for comfort and safety applications. I now give the floor to our CFO, Karen Van Griensven , for the financials.
Thank you, Marc. Hello to everybody. A little bit on the financials. For the second quarter 2023, we were at EUR 236.7 million, which already Marc mentioned, an increase of 14% compared to the same quarter of the previous year, and an increase of 4% compared to the previous quarter. The gross result was EUR 111.3 million or 47% of sales, an increase of 19% compared to the same quarter of last year, and an increase of 8% compared to the previous quarter. R&D expenses were 10.9% of sales. G&A was at 5.1% of sales, selling was at 2.4% of sales.
The operating result was EUR 67.5 million or 28.5% of sales, an increase of 18% compared to the same quarter of last year, and an increase of 11% compared to the previous quarter. The net result was EUR 51.9 million or 1.28 per share, an increase of 9% compared to EUR 47.6 million or 1.18 per share in the second quarter of 2022, and an increase of 2% compared to the previous quarter. The board also decided on an interim dividend of EUR 1.3 gross per share, and the Melexis share will start trading ex-coupon on October 17, 2023.
The outlook for, for, we expect now for 2023, for the 3rd quarter, sales in the range of EUR 245 million- 250 million. For the full year 2023, Melexis now expects a sales increase between 14% and 16%. Previously, it was between 11% and 16%. With a gross margin of above 45%, previously it was around 45%, and an operating margin of around 27%, previously around 26%. All this at the midpoint of the sales guidance, all taking into account a EUR/USD exchange rate of 1.1 for the remainder of the year. For the full year 2023, we now expect CapEx of around EUR 100 million, where it was previously around EUR 70 million.
I would now like to open the Q&A session. Operator, please go ahead.
Sure. Thank you. As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the first question from line, Marcel Achterberg from Degroof Petercam . The line is open now, please go ahead.
Yes, good morning. I have a couple of questions. The first one is on the gross margin in the second quarter of the year. In Q2, you had EUR 8 million extra sales versus Q1, and also EUR 8 million extra gross profit, so roughly 100% margin on the extra sales. Can you explain a bit what happened in the second quarter?
Yeah. Well, in the first place, the, the favorable pricing is now in full, it's, it's now fully impacting the quarter, where in the first quarter, it was only impacting for a few months. So we now have the full impact. We are also still benefiting from cheap wafers, so the price increase is not fully yet felt. That will gradually be felt to up to the end of the year. Product mix is also helping a bit, so we had a lot of parameters that were positive in this quarter. It's also clear that this gross margin is, is, is not sustainable. So as the, the more expensive wafer prices will be felt, we will also see the gross margin adapting to that.
Okay, that's clear. Also, Karen, for you, in the balance sheet, there were two new items, the huge prepayments to X-FAB, and also the debt of EUR 135 million. Can you tell us the conditions of the loan with respect to the coupon, the maturity? Is it a bullet, or can you redeem it whenever you want?
We can redeem it, use it as we wish, so it's flexible.
Okay. Will the net impact of the interest costs and the compensation from X-FAB, would that be net neutral in your net financial result?
No, we don't get compensation. It's an operational prepayment, so it is not bearing interest from X-FAB. In that sense, we will not have compensation. You need to look at the whole package. It is an operational advance, where the benefit for Melexis is agreed on volumes in the years to come. That is the, that was the package we negotiated with X-FAB.
So-
So money-
Coupon are you paying? What, what, what kind of interest rates, are, are, are, are you paying nowadays on, on debt?
Around 5%.
5%. Clear. Then now a question for Marc, please. My last one, and then I'll leave the floor for others. Can you explain a bit your IDs and planning for X-FAB's 110 nm process technology? How much of your sales do you see going to that technology in, say, five years from now?
Indeed, X-FAB developed the XT011 technology in Corbeil. We hope that, or we plan that in... It's not a hope, it's a plan, that in 2024 we will start to make sales out of products using this technology from X-FAB. It will grow, it will grow, the capacity of X-FAB will grow year after year, and we plan to use this capacity. In five years, I think in term of volume, we should be able to use, how to say it, the capacity in XT011 will be similar to the capacity in XT018.
Okay, interesting. Maybe concept-wise on that, the chips you design generally do not need to double the transistor count over time. Going to a smaller node means your chips can be smaller and more energy efficient, but also much cheaper, 'cause twice the number of chips fit on the wafer, and the wafer price doesn't double. Is this something that could trigger price deflation per chip?
Yeah, it's correct what you have mentioned, but I would like to add two, two flavor of it. Yeah, first of all, the technology in XT011 is more expensive than in XT018. In fact, usually, what we see is when we go to lower technology, we also add feature, and we add value in the chip. I mean, it's usually we don't copy a chip in XT018 into XT011 with exactly the same feature, and then indeed, the cost is lower. In fact, we use this opportunity to create more value in the chip, than usually it does not work like that.
Let's say, it does not work, that XT011 is always cheaper than XT018, because we don't compare apple and apple. It's really what is important for us is, is the value that we bring to the customer.
Okay. It's clear. That's it. Thank you.
Thank you. We will take the next question from Ruben Devos from Kepler Cheuvreux The line is open now, please go ahead.
Yeah. Yes, good morning. I have two questions, please. Just considering the accelerated investments you're making in, for instance, Malaysia, but also the advanced payments to your, to X-FAB, that suggests you have good degree of confidence for future demand. How far along are you in sort of securing long-standing agreements with, with the tier one suppliers? What is generally sort of driving the growing need for secured supply for the longer term from, from your side? That's my first question.
I would say for, for the time being, we have LTA with X-FAB, till the end of 25, and we have LTA with our customer till the end of 25. We will, let's say, start discussion to extend, to extend those, but the discussion has not been, have not been started.
Okay.
Yeah, in general, business inflow, design win pipe is growing steadily, so we see long-term the growth drivers are there.
We, we, we, we mentioned in the press release that indeed, the design winner are progressing. I would say the opportunity pipe is also progressing. We, we, we can forecast growth, let's say, for the future, based on those parameters.
With a relatively high degree of confidence, is there any comments you could make already on 2024?
We don't give guidance already now for the next year, so that will have to wait.
All right. Fair enough. Maybe more specific on the embedded lighting products. These have been performing well for some time now. I think in an estimate that you've shared in the past, it was shown that lighting solutions were one of the most promising activities within the CBS market. Could you talk a bit more about this type of product? You know, what is, what is the sort of roadmap at which growth may further accelerate, or that you expect to reach a larger penetration, let's say, among your clients? How does, how does this compare from a margin perspective to, for instance, magnetic or current sensors? Thank you.
I would say from a growth perspective, yeah, we don't see plateau in the growth. We are still-- it's one of the product family that are still very much constrained by the capacity, and then we still have much more demand than supply for this kind of product. Yeah, the capacity that we are searching with X-FAB is indeed from a large extent to fill in this demand. This product line is using the XT018 process, but also the XT011 that we discussed just before. The move to XT011 is for the big part to be able to supply more embedded light product.
I would say it's also a clear product line where Melexis bring, bring added value or bring, bring USP. We have, we have plenty of plenty of demand. We see also in, in, in, in, in the new, in the new modern car, that all those new modern car have plenty of ambient lighting. We see that some years ago it was, it started for the high-end car, this, this ambient lighting, but now we see that more and more medium, medium class car use those use these features. For the time being, this feature is, is mainly what we call the comfort, it's to, to create, let's say, a cool atmosphere in, in the car, with, with the light.
We see that this ambient lighting will be used in the future more for safety application. For example, to inform the driver about the danger, or later on to inform the driver that they need to take back the, the steering wheel. We are, we are moving step by step from a pure comfort to a more safety application. As I mentioned, yeah, there is, there is huge demand, and we don't see, we don't see the, the plateau. The plateau is created-
Right.
By the lack of supply, I would say.
Okay. All right. Okay, that's helpful. So thinking about your gross margin again of 47%, and you mentioned that it's partly by product mix. Is it therefore also a fair assumption to say that, well, apart from maybe magnetic sensors, it also embedded lighting is contributing to that positive product mix, or is that taking it too far?
Drivers is still rather below the average than above the average. There has been, I mean, with the favorable pricing mechanisms, the, the difference is, is now narrowing in, in difference in gross margins between different products.
Yeah, and I confirm that we have, we have plan and ID in term of product, but in term of process, to, to close the, the gap. I think to come back on the initial question, XT011 is, is part of the plan to close this, this gap.
All right. Thank you very much.
Thank you. We will take the next question from line. Marc Hesselink from ING . The line is open now, please go ahead.
Yes, thank you. First question is on the guidance for the third quarter. Bit of a bigger step up versus previous quarters. And then earlier calls you shared that you, you, yeah, you grow with your supplier when they increase the capacity. Is that simply because this quarter they also have that increased capacity, or can you also maybe take some capacity from, from other clients that scale down a bit?
I, I think it's, it's not really linked to other, to other clients. I, I think, the, the order book is, is as that, that indeed, we, we, we believe we can reach, the, the guidance that, that we have, that we have mentioned. It's correct that the, the capacity of, the wafer capacity is increasing quarter after quarter, month- after- month, and we, we, we take benefit from this capacity increase.
Okay, clear then. The, the second question on, so you increase the, the CapEx because the, earlier the, the good progress on the, on the pro facility in Malaysia, is this going to have a benefit for you in, in, in 2024, if you, if you have it completed earlier?
Well, we need to, we. There is indeed a pressure in time, because right now we are with our probing and with our supplier. As sooner, as soon as we can move out, they can use the capacity that we free up to fill with their equipment. It helps in building up faster, additional capacity, wafer capacity.
That affects you to go out to be visible in 2024 then?
That will help in 2024. Yeah.
Okay, thanks. Then, the final question that I have is, like you especially mentioned that the design wins, and I think in the earlier call, you also said that especially 2022 was exceptionally strong. Normally takes two-three years before you really start to see that into the revenues. If you sort of map that design wins pattern that you've seen over the years, is that... Are the, the impact on the revenues, are those going to increase in 2024 and 2025 versus what you've seen in 2021 and 2022 and 2023, or is, is that, is that, fair to say?
Well, I think it's fair to say that indeed, the design win of 2022, will have, will have influence for the, the 2024 revenue. Yeah, you say auto- you know, in the automotive, let's say the, the ramp, the ramp up is, is quite slow, but it's steady, it's a steady ramp up. I would say, we could say that in 2024, we start to see the result of the design win of 2022. Yes, this is, this is correct.
Is, is that a fair conclusion to say that everything else equal, volumes, pricing, that kind of stuff, that, that normally your growth would accelerate a bit because of these design wins into the next years?
Well, I think we need to take also into account the, the supplier, the supply situation. As, as we mentioned in, in the previous call, we still have some product family that are heavily constrained by, by the supply. I mentioned ambient, ambient lighting in, in the past question, so, so the case for embedded driver and also for some of the magnetic sensor, for those product lines, the supply is still, is still the constraint. For other product, we have a better, better balance between the, the supply and the demand. It means that the, the, the, the revenue of 2024 will not be only depending on the, on the demand and on the design win of, of 2022, but also by the, by the supply situation.
Okay. Thank you.
Thank you. We will take the next question from line, Robert Sanders from Deutsche Bank . The line is open now, please go ahead.
Yeah, hi. Good morning. I just wanted to check for the products you have on allocation, what % of your, of your revenue is actually on allocation right now? For those products, what, what is the level of demand that you're seeing above your ability to supply? I have a follow-up. Thanks.
Yeah, the, the, for those product, the, the gap is, I would say 20%, in between demand, between demand and supply. It's a serious gap. It creates creates serious, serious gap. Yes.
That's mainly ambient lighting and current sensors, or are there other categories?
In fact, technically, it's mainly the 0.18 micron technology, the XT018 and the XHO eighteen technology. The product line using those technology are ambient lighting, embedded driver, and part of the position sensor, magnetic position sensor.
Got it. Then on the, the EV business you have, it seems like you've had a lot of success in China and the big U.S. player. It does seem like there's a incremental cost downs that those companies are facing, 'cause they're trying to cut prices, and they seem to be pushing prices down in the supply chain. How, how, how have you seen that pressure so far, and, and when will we see that in the financials?
I think we need to distinguish the different case, let's say. First of all, we have LTA with some of the customers, where the volume and the price has been fixed. Another aspect is what you just mentioned, the constraint of the supply, then for some of the products in China, but also not in China, we still discuss much more about volume supply than about price. For the products that are more in balance between supply and demand, I would say we are more in back to normal business. For those products, we will have discussion about price after after summer.
I mean, it's more, it's more as, as usual, in the, in the normal business. Yeah, I repeat, this is, this is for a small portion of the overall portfolio, because we have LTA, and because we are still have constraint of supply. I don't know if you want to add something, Karen?
No, I think that's indeed, yeah. Nothing-
You, you have seen, you have seen already those companies in the EV supply chain trying to squeeze you when they're not on LTA or, or you haven't yet seen it?
No, no. No, no, I think the price of 2023 are fixed. We don't discuss about the 2023 price.
Okay. It's more for the years after. Okay. Thank you.
Thank you. We will take the next question from line, Nikos Kolokotronis from Van Lanschot Kempen. The line is open now, please go ahead.
Hi, good morning, and thanks for taking the question. My first one is related to the lead times. I mean, a close peer, peer of yours, yesterday spoke about almost normal levels of lead times after a decline of around 30% in the, in the previous quarter. I was just wondering if you can provide a bit more color on what you are seeing at your end, and how it has been, how it has evolved actually in the previous quarter?
Yeah. You, you mean the, the lead time of the process ?
Yeah. Yeah, exactly.
Yeah. Yeah. I think it's, it's bit linked to previous discussion, for the, for the process where we have, supply constraint, the lead time did not change, and it's still, it's still big, long, sorry. For the, for the, for the process, technology process where we have less constraint, the lead time has, has reduced a bit, and, and, yeah, we have updated our, our sales catalog at beginning of July, and, and for so, so for those products we have, we have reduced the, the lead time. In general, it's, it has improved, but it's still long, I would say.
Okay, yeah, thanks. What are the dynamics that you are seeing at your, at your orders intake, actually, at, at, at this stage, I mean, in the previous quarter, in fact?
Well, order intake is still very irregular for the moment. On the one hand, we have huge backlog for the, for the, for the products that are still in supply constraints. On the other hand, we see normalized order behavior in the, in the rest of the business.
Okay. Thank you.
It's difficult to make a general statement here.
Yeah. Yeah, yeah, I see. Okay. Thanks a lot.
Thank you. We will take the next question from line of Olivia Honychurch from Jefferies. The line is open now, please go ahead.
Hi, hi, good morning. This is actually Janardan on Olivia's line. A couple of questions. One is, I, I joined the call a bit late, so I might have answered this earlier, but the gross margin of 47% that you got, what, what actually drove that? Was there any pricing increase, or was that because of capacity utilizations, or was it product mix? Can you give a bit of color on what is driving the higher gross margin?
Yeah, so, so the, the biggest reason is indeed, favorable pricing that was now effective for the full quarter. Where in Q1, there was. It was only started somewhere in the quarter, the, and now we have the full effect of that in Q2. That's the, the most important, combined with still, buying cheap, the wafers that, the, the, I mean, there is a delayed effect in seeing also the cost increase, mainly on the wafers, because of inventory effects. That is still very much visible in Q2. Also, a little bit product mix, probably, and leverage operational, operational leverage, but in the first place, the price increase with in full effect, with still, delayed, timing of the wafer increased pricing.
S ure. So looking out, at, at the, the price increase, will hold up? I mean, are we looking at more at the 47-ish kind of margin range into the second half, or is there any other effect that will play on that?
No. The prices will remain stable throughout the year, and we see the big move somewhere in the beginning. It's the usual. Price, price changes happen in the beginning of the year, but then remain stable on the sales side. On the cost side, we will gradually see increased pricing, so that will put some pressure on the margin in the second half.
Understood. Is, is the price increase, at all playing into your guidance into Q3, or is that mainly volume driven?
That is volume driven.
Got it. The inventory arose in the quarter, how do you see that trending into the second half of the year?
Inventory, how it. Our own inventory?
Yes, your own inventory.
Well, the, the biggest increase we've seen so far was, was, is based on the pri- I mean, also the inflation of the prices. There is some volume increase as well. Yeah, it's, we are still in, in constraints, so we still favor where we can to, to take inventory. Here and there, there might be, some finished goods, but it's still very limited. Yeah, in general, we are still in, in a situation where we would like to see, some, yeah, improved inflow of, of material.
Understood. My last question is-
Do not expect major deviations to come, in, in that respect, no.
Okay. My last question is just on this, on this sentence you put, saying that you have a new embedded motor driver that improves thermal and expansion valves, in electric vehicles, extending their range. Can you just describe that, that technology a little bit, how, how it improves, what it exactly does, and how much is the range expansion that you can get using that technology?
Yeah, I cannot answer how much. I don't want to, to state on the, the quantity of extended ranges. But, but, in fact, the, in the, in the electric car, the, all the, the thermal management is full of, is full of electronic, and this thermal management is, is very important for two aspects. First of all, I would say in, in ICE, you have the heat for free. I mean, the, the engine generate the heat, and then this heat can be used to heat up the, the cabin, as an example. In an electric car, the heat is not, is not for free, because if you use the, the battery to heat, then you reduce the, the, the range. In electric car, all those thermal management is extremely important.
It's, it's important, yeah, to heat up the cabin and to keep the cabin around, around 20 degrees. It's also very important because the battery is efficient, if the battery is close to 20 degrees, meaning that in winter, you need to heat up the battery, and in summer, you need to cool down the battery to keep it around, around 20 degrees. There is then thermal loop for the cabin and for the, and for the battery. This, this thermal, this thermal loop, yeah, use a lot of valves to, to open and close. We are supplying the, the actuator to actuate the valve. We are also supplying some, some position sensors to define the position of the, of the different valve.
A lot of, all the OEM are working hard to have this thermal loop as efficient as possible. Okay, then we enable some of those, some of those applications.
Understood. Thank you very much.
If, now that I'm thinking of to give an idea about the range. Okay, I cannot give the number, but if you go in at the OEM shop for some car, there is an option which is called something like thermal management, and you can take or not the option. Okay, the option is some EUR 1,000, but if you take this option, you see that the range of the car increase.
Understood. And, is your drivers more on the HVAC?
The name of the option is Heat Pump.
Thank you.
In, in, in French, pompe à chaleur, and in, in English, heat pump.
Okay. Is your drivers more on the HVAC side, or is it more on the battery, cooling, I mean, temperature control side, or it's, it's equally-?
Both.
on both? On both. Okay.
Both. Yeah, both.
Got it. Understood. Thank you so much.
Thank you. We will take the next question from line. Robert Sanders from Deutsche Bank. The line is open now, please go ahead.
Yeah, just a quick follow-up on the 0.11 micron SOI. It sounds like you're transitioning from 0.18 micron to 0.11 SOI. The substantial uptick in the wafer cost, does that mean that your average selling price is gonna follow suit? Because it seems like the number of mask layers, obviously the process technology is more expensive. Do you expect that to lead to a step up in your ASP, perhaps because you're integrating more, more functionality, or, or, or not? Thanks.
Yeah. You say we transition to XT011. Yeah, I think we are still using XT018 capacity, this capacity will increase at X-FAB in XT018. At the same time, they offer the opportunity to also use XT011, meaning that we will also develop specific product in XT011. We see XT011 as an opportunity to extend the capacity, I would say. In term of, in term of average selling price, as I have explained in the past, indeed, the everybody expect that when we go in lower feature size, yeah, the cost decrease and the price decrease.
There is the other effect, which is that we want to add more value to customer, meaning that we add, add more feature, which, which then create a, a bigger chip. In, in total, yeah, what will be the, what will be the, the balance about those two, those two effects? I, I, yeah, I cannot say for the time being. For sure, we want to add more value to the, to the customer.
Got it. Thank you.
Thank you. As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We have no further question in the queue. I'll hand it back over to your host. Thank you.
Yeah, Marc is back. Thank you for all the question and, and the discussion. We are looking to, to hear you at the end of the Q3 results. Since then, for the one that have not been on holiday yet, I wish you, or we wish you a good holiday.
Thank you for participating in today's call. You may now disconnect.