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. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero, and you will be connected to an operator. I will now hand you over to your host, Mr. Marc Biron, to start today's conference. Please go ahead, sir. Thank you.
Hello, everyone. It's a pleasure to welcome you again to our earning call related to Q3 results. Today, we have 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 question you may have. Q3 comes with a sales level of almost EUR 200 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 with 2021, thanks to the inverter application of the electric car. We see also a very positive trend for our current sensor product line in new applications, such as onboard charger and DC-DC applications. The drivers products used in the thermal management system of the electric car are also growing faster. They will probably grow by 50% in 2022 versus 2021. The magnetic latches and switches products are also growing, thanks to their continued success in the comfort and safety application, such as seat track position and seatbelt buckle. The magnetic position sensors are still growing strong in absolute numbers 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-oriented innovative products address successfully new car platform and back up our confidence in the future. I'm now giving the hand to Karen for more financial results.
Thank you, Marc. Good morning, everybody. Sales for the third quarter came out around EUR 220 million, an increase of 35% compared to the same quarter last year, and an increase of 5% compared to the previous quarter. The euro-US dollar exchange rate evolution had a positive effect of 7% on sales compared to the same quarter of last year, and a positive impact of 2% compared to the previous quarter. The gross result was EUR 98.3 million or 44.7% of sales, an increase of 39% compared to the same quarter of last year, and an increase of 5% compared to the previous quarter. R&D expenses were 10.1% of sales. G&A was at 4.8% of sales, and selling was at 1.9% of sales.
The operating result was EUR 61.5 million, or 28% of sales, an increase of 55% compared to the same quarter of last year, and an increase of 7% compared to the previous quarter. The net result was EUR 48.8 million or EUR 1.21 per share, an increase of 33% compared to EUR 36.5 million or EUR 0.9 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 EUR 220 million-EUR 225 million, resulting in a full year sales growth of around 29%-30%.
A gross profit margin of around 45% and an operating margin of around 27%. All taking into account a euro-US dollar exchange rate of 1 for the remainder of the year. Operator, I would now like to open the Q&A session, please.
All right. Sure. Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. We'll pause for a moment. We'll now take our first question from Matthias Mengel from Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah. Good morning. Can you all hear me? Matthias Mengel, Kepler Cheuvreux. Hello?
Yes, we can hear you.
Yes. Okay. 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? Also, could you maybe elaborate on which kind of products and what the gross margins are of these products? That would be my first question.
I think the products that show a more balanced supply versus demand is, as an example, the ASICs. 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.
The adjacent.
Yes.
Mostly in adjacent and a little bit in ASICs as well.
I noticed the adjusted performance in Q3 was pretty strong. You mentioned that it is to-
Mm-hmm.
Temperature sensor integrated within wearables. Could you maybe elaborate if this is a kind of inventory build-up effect in the third quarter as this is a new product? Do you think that the present run rate of sales can be continued?
You know that such a wearable product, there's a bit seasonality in the demand. Indeed, in Q2 and Q3, we were in the high demand seasonality, and it's why it's indeed quite high in Q3. It's more linked to the seasonality of the final application.
Okay. The final question was actually on your OpEx. It was quite flattish quarter-over-quarter. I think in previous conference call you guided for further increase. How should we see Q4 and then going into next year? Do we need to anticipate further significant step-ups, quarter-over-quarter, or should we more bank on the present run rate?
We still expect inflationary pressure in Q4, particularly on the wages. It certainly will make operating costs increase. However, overall, we guide for around 27% of EBIT. Overall, we still expect quite a bit of leverage on operating margin, thanks to the high growth we see for the moment.
Okay. Thank you. Those were my questions.
Thank you, Mr. Matthias. We'll now take our next question from Janardan Menon from Jefferies. Please go ahead. Your line is open.
Hi, good morning. Thanks for taking the question. Yesterday, one of your peers, Texas Instruments, who you know said that on the conference call, commented that while automotive was strong for them, still staying strong for them into Q4, all the other segments were declining into Q4. 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, 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.
That your automotive business will continue to be pretty resilient through 2023?
Yeah, I think we can comment based on what we see. For the time being, as Karen just mentioned, we see indeed a sort of more balanced supply versus demand for the non-automotive. For the automotive, we don't share with you.
And in terms of the, you just want to, comment on the inventory levels that you see downstream, both in the distribution system for your adjacent products as well as with your tier one customers on the automotive side? Has that moved up in the last few months? 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. What are you able to push through some price increases at this point, into your 2023 pricing?
Inventory levels are still low at the direct customers. At distributors, again, it's mostly adjacent where we see stocks going up. On pricing, yeah, we I think we mentioned it already, we closed our LTAs for more than 50% of sales with the biggest customers, and it does include price increases for next year. These have been closed and negotiated.
If that is true and the demand environment stays stable, will you be able to achieve a margin increase in 2023 because of the price increase?
We set pricing in such a way that gross margin would remain stable versus what we see today, because we will also have price increases on the supplier side. We balance the two out to keep gross margin more or less at levels that we see today.
Understood. Thank you very much.
Thank you, Mr. Janardan. Once again, if you would like to ask a question, please press star one on your telephone keypad. We'll now take our next question from François from UBS. Please go ahead. Your line is open.
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 seasonality, but I mean, it seems a very strong growth quarter-over-quarter and year-over-year, and I struggle to see the seasonality in the past. I was just wondering if there was any design wins. You talk about temperature in wearables, but I mean, is it a particular customer or anything driving this performance? How we should think about this level of EUR 24 million, you know, into Q4?
The second question is, what, 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, you know, do you think, especially on the automotive side, I mean, you expect inventories to go up, pricing to flatten, you know, or coming down? You know, how should we think about the easing impact on your business, you think? Whether it's 2023, 2024, it doesn't matter. Just how should we think about that?
Okay. I will first answer the adjacent question, where indeed we have. It's a new design win for our new application, an important new application for our new customers. This application is. There is a lot of seasonality in the sales of this new application. We cannot say much more on the application and on the customers. Clearly this is the reason why the non-automotive results have increased.
It's one customer?
Yes. Yes.
Yeah. Where we see inventory is in all applications related to PC service, consumer business. That has been compensated by this one customer.
Okay, I see. Can you tell a bit more about this application than not about the customers, but I mean, you talk about wearables. Can you be a bit more color on this application? Wearables, what kind of wearables are we talking about?
It's smartwatch.
Smartwatches. Okay. Thank you.
Thank you, Mr. Francois.
And, so-
Yes, I think you had a second question, yeah, on the
Okay. All right. Mr. François 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.
Yeah.
Please . Your line is open. Yes.
Yeah. Can you hear me? Great. 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 a alternate product from Melexis or whether there is a need for them to re-qualify with a competing vendor. Then I have a follow-up. Thanks.
Yeah. Indeed, let's say the lighting product line is constrained by the supply, and it's one of the products which is still in heavy allocation, let's say, because it's one of the product who is serving, let's say a new platform. All the new car platform has those ambient lighting product, and it's one of the product which is still very constrained. Yeah, I would say at Melexis, we don't have alternative solution to address this application. I think it's a new application, and in the market there is 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.
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.
I can speak for Melexis. It's mainly a wafer capacity.
Okay. Got it. 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 sensors within BEVs more generally. I mean, is there any 'cause I think this is an area still with very fast innovation, where things are changing very rapidly. I was just wondering how you see that panning out the next couple of years. Thank you.
Yeah. In general, there is huge need and huge traction 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 OEM are developing platform around the battery. It means that, yeah, there is for sure enough demand from Melexis. As I mentioned in my verbal comment, this product line or the turnover of this product line will double in 2022 versus 2021, which is really showing the huge potential. Okay, you mentioned Tesla, which is indeed one of the bigger OEM related to electric car.
Yeah, there are much more OEM than only Tesla. We have many platform, new platform, new opportunity in many OEM all over the world, I would say.
Sorry.
Yes. The reason.
Sorry, go ahead.
I just wanted to add that growth will be constrained by supply, not by demand.
Yeah. Like, I'm inviting on the previous question, the current sensor, it is another product line which is still constrained by the supply and not at all by the demand.
Can I just check on the current sensor product line? Is that a direct sale to OEM or is it more like a reference design as part of a battery monitoring or broader system? What is the route to market typically outside of Tesla?
Yeah, it's a standard product. I mean, it's more a family of standard products. Those standard products can address the different application of the different OEM. Yeah. I think you know that Tesla is a direct customer, but in other case we have also a team in between Melexis and the OEM for the current sensor.
Got it. Thank you.
Thank you, Mr. Robert. We'll now take our next question from Francois again from UBS. Please go ahead. Your line is open, sir.
Thanks. I don't really know what happened here. Yeah, I just wanted to reiterate my second question. I'm not sure you answered on 2023 or 2024 easing impact on your business and, you know, the inventory management. Whatever you can provide on the easing impact that you expect. Because I understand it's still tight for automotive, but you know, looking at maybe going forward, the supply and demand is likely to be more balanced. Just how should we think about the impact when it happens?
Yeah. I would just indeed repeat that for the innovative application, we still see very high demand and higher than the supply. Okay. For the format of product in our portfolio, it's more balanced. I mean, this is the situation of today. I would say as far as we can see for the beginning of 2023, it will be the same situation.
Imagine for a second, even if you don't believe it happens, that it happens. What's it something you expect like to have pricing to normalize or, you know, catch up or, you know, like a correction of inventories? You know, because ultimately it will happen, right? Whether it's 2023 and 2024, it doesn't, it's not my question, you know. It's just.
Mm-hmm.
Just on the impact, basically.
I would say the better balance now is, I mean, we see it a bit as healthy because it will remove a bit the stress in the supply chain. It will normalize the supply chain. I think it's good that we see a bit of relaxing. Yeah, in the past we have been able to grow double digits without this stress, and we will do it in the same way in the future.
For example, for the easing part, like the adjacent that is not-
Mm-hmm.
You know, as tight, do you see what's the pricing dynamic here? I mean, is it like flat pricing or you still manage to increase the price, or is it coming down a little bit from a high base, you know, on the less tight product? Do you see an impact on the pricing side?
Not for the time being. No. I think we have increased the price in 2022, and we see high single-digit. We did not rediscuss the price going down since then.
Okay, good. Thank you very much.
Thank you, Mr. Francois. We'll now take our next question from Marc Hesselink from ING. Please go ahead. Your line is open.
Yes. Thank you. If you look to the supply side going into next year, I think this year every quarter you have been able to squeeze up your supply a bit.
Now with some easing in some other parts of the demand guide, is it some of the only areas where you're still constrained that you can guarantee some extra supply and that you can fill that demand quicker?
Indeed, we can. I mean, we have the lead time perspective, and the fact that, okay, when a product is in the WIP, where we cannot always change from product A to product B. In general terms, indeed, the fact that in some, for some products we see some easing, then it can help the products that are under constraint. It cannot be done, sometimes it cannot be done very quickly because there is the WIP aspect that we need to take into account. In general, yes. That's why indeed. Indeed we believe it is healthy to have this slight easing. What?
Sorry. It's fair to assume that let's say, two quarters from now, you should have a good balance in most of your products?
I think it's probably too quick statement because we should take into account the technology. There is some easing of demand for products in a certain technology. 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 HTO18 in SOI, and we don't see any easing in this technology. It means that we will not have ambient lighting thanks to the easing situation in the adjacent products.
Okay. Thank you. Thank you.
Thank you, Mr. Marc. We'll now take our next question from Robert Sanders from Deutsche Bank. Please go ahead. Your line is open.
Yeah, thanks. I just wanted to have one quick follow-up. Now that the year is almost done, 2022, looks like you're gonna grow 29% in euros, which is roughly 24%, I think, in constant currency. 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, you know, companies like Elmos are saying more than, you know, more than half of their annual growth this year is pricing. I just wanted to sort of see what it was for you guys. Thanks.
Sorry, it's not more than half. It's high single digits, as Marc mentioned earlier, the price, and the rest is volume.
Got it. Thank you.
Thank you, Mr. Robert. We'll now take our next question from Michael Roeg from Degroof Petercam. Please go ahead. Your line is open.
Yes. Good morning. I have a question about your test facilities. Several years ago, you expanded them in anticipation of growth. Now this growth has materialized. How much further can you grow your top line before you have to expand again?
For the next at least three years, we are still okay with the Sofia. We are also starting to invest in Malaysia, but more in probing capacity to be released in one year, one and a half years from now.
Okay. From that viewpoint, should we assume CapEx to remain around EUR 45 million per year for the next couple of years?
It will increase because we, for future growth, we will have to step up investment. More, I mean, we cannot say more at this point. We will guide on this when we come out with the Q4 figures.
Okay, good. That's clear. Thank you.
Thank you, Mr. Michael. We'll now take our next question from Janardan Menon from Jefferies. Please go ahead. Your line is open.
Hi. Thanks for the follow-up. I'm just wondering, can you tell us a bit about what the capacity increase plans at your foundry partner is? How much of capacity they're currently planning to bring on board in 2023? How does that sort of sequentially progress? Is it coming in the first half or is it more towards the second half of the year? A separate question is, you know, some of your competitors on magnetic sensors, for instance, are producing it in-house, whereas you are outsourcing it, and one of your competitors is also outsourcing it to another foundry in Asia.
Suppose if the in-house production is adequate in capacity and they can provide sufficiently to the market, do you think that could be a factor in any loss of market share? Can your OEM customers switch on a product like magnetic sensors from one supplier to the other in a short period of time, because there is easier supply coming from an alternative supplier? Is that a possibility or does it take too much time to change between suppliers?
On the capacity increase from our suppliers, I think it's more gradually. I would say since some quarter, we see that the capacity is increasing quarter after quarter steadily, and it will continue in the same way. I think we have already mentioned that, for the wafer aspect, the main capacity increase will come from Corbeil and the new fab in the south of Paris.
Mm-hmm.
Yeah, related to the magnetic sensor and the risk, let's say, to lose some of the market. I would say first, we have signed an LTA with our supplier, and we have signed LTA with some of our major customers. We made back-to-back LTA, meaning that we have guarantee from in our LTA that we will use the maximum capacity of IC fab. I think it is a good back-to-back balance situation between the two LTA. Now coming on your question, yeah. Is it easy for our customers to change suppliers? It's. I would say the answer is no. They need years.
1-2 years to change supplier. In automotive, there is a lot of regulation in the change management. We don't have a competitor who has a one-to-one replacement for the magnetic product. There is always something to change in the final application to be compatible with a new product. I mean, it's anyway, it should anyway take time.
Understood. Just to go to your first answer. The capacity is coming on board sort of incrementally every quarter, in the French fab. It's not that there is a big increase later in the year or something. It's happening in Q4 into Q1 on a steady basis.
Exactly, yes. Mm-hmm.
Okay, understood. Thank you.
As it is the case since the beginning of the year. That's right.
Okay.
Thank you, Mr. Janardan. It appears there is no further questions at this time. Mr. Marc, I'd like to turn the conference back to you for any additional or closing remarks. Thank you.
Okay. I would say thank you for the questions. It's always useful to have your question and to be able to answer. I think I will welcome you again for the Q4 results and for the final year 2022 results in early February, I think. Thank you, everybody.
Thank you for joining today's call. You may now disconnect.