I will now hand you over to your host, Marc Biron, Chief Executive Officer, to begin today's conference. Thank you.
Hello, everyone. It's a pleasure to welcome you again to our earnings call related to the Q2 result. 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. Q2 comes with a sales level of EUR 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 the increased comfort and safety level contributes to the good results. Those trends are also visible in the outperforming product line.
For example, current sensors continue to pose the highest growth in percentage, thanks to the inverter application of the electric car. The magnetic latch and switches have the second highest growth in percentage, thanks to their success in the comfort and safety applications. Comfort applications as an example, seat track position sensor and seat belt buckle are examples for the safety applications. The drivers used in comfort and safety applications and the thermal management of the electric car are also growing faster than other product lines. Drivers in comfort applications are, for example, the seat fan. Drivers for safety applications are, for example, the headlight fans. This is about the automotive market. On the adjacent market, we should mention renewed interest in the temperature monitoring, both on combustion engines and electric cars. We have also booked very nice additional sockets for battery temperature monitoring system.
During the second quarter, we have also launched six new products on the market, and those launches 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 examples, we have launched the MLX81346, which is the world's first fully integrated 48V pre-driver. This product will help our customers in the automotive, robotics, but also e-bike sectors, to develop compact solutions for very high power, up to 2000 watts. We have also launched the MLX90397, which is a magnetic Triaxis product for cost-efficient position sensing. It has been designed for consumer and industrial markets, such as handheld power tools, gaming consoles, and home automation systems. Last example, we have launched a complete family of new Triaxis 3D magnetic sensors.
Those sensors are intended for cost-conscious automotive customers, and they are used in typical applications like powertrain actuator, transmission sensor, pedal position sensor, and chassis sensors. With all those examples about the product launch, I will now give the hand to Karen for more financial results.
Thank you, Marc, and welcome to everybody. As Marc already mentioned, the sales for the second quarter of this year, of 2022, were EUR 208.4 million. The impact of the euro-US 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% versus the previous quarter. The gross result was EUR 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 EUR 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 EUR 47.6 million or EUR 1.18 per share, an increase of 42% compared to EUR 33.5 million or EUR 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. The outlook for the third quarter of 2022 is in the range of EUR 215-220 million.
For the full year 2022, Melexis expects a sales 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 a euro-US dollar exchange rate of 1 for the remainder of the year. The evolution of the euro-US dollar exchange rate in 2022 has a positive effect of around 5% on the full year sales outlook versus the actual results of 2021. We also decided on an interim dividend of 1.3 EUR gross per share, which will be payable or will be trading ex-coupon on October 18, 2022, and the record date is October 19, 2022. The dividends will be payable as from October 20, 2022. We now come at the end of the introduction. I would now open the session for Q&A. Please go ahead, operator.
Thank you. As a reminder, if you would like to ask a question on today's call, please press star one on your telephone keypad. Please ensure your line is muted locally and you will be advised when to ask your question. That was star one on your telephone keypad. Our first question comes in from the line of François-Xavier Bouvignies , calling from UBS. Please go ahead.
Hi. Good morning. I have a couple if I may. The first one is on the orders. You mentioned the release that it's still robust and strong, and this is interesting given you know what's the feel of the market around the recession. I was wondering if you were seeing anything you know between you know the real world and what's the fear about the recession. 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 this macro uncertainty? That's my first question.
Yeah. Marc will answer, or will start to answer at least. Yeah, 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, or the today situation. Now, you have asked the question on the future. Yeah, this is of course more difficult to answer. What remains correct, let's say, is that, for the time being, it's mainly the supply who is limiting our performance, let's say. We still have more orders than we can supply.
Do you know by how much for on your products specifically? I mean, it's above the supply, the demand?
We have mentioned in the past that it was around 20%, let's say, the mismatch between the order and the supply.
Still the case?
Yeah, it's still I would say it's still the case, and we are in discussion with some strategic customer for 2023, 2024, 2025, and we have the same kind of mismatch, let's say.
Okay. 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 semis that I'm looking at. You seem to have more supply than many of your peers as such. 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 sensors specifically to the supply chain? Just trying to understand, you know, the supply of magnetic sensors or sensors for Melexis addressable market versus the overall industry, you seem to do relatively better.
I think we have probably been a bit cautious in the past related to the supply available because I think you remember that X-Fab is ramping up the new wafer fab in Corbeil in the south of Paris. Of course in this ramp up we have decided to be a bit cautious to make sure that we don't have let's say surprise or bad surprise. Okay now we have a better visibility about the supply that will be available for Q2 and Q4. Yeah it'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.
Okay.
It's correct that it has. 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. Sorry, Karen Van Griensven, I stole you.
Yeah, it's also, you cannot conclude on one quarter anyhow. I mean, NXP also came out with relatively strong numbers.
Yeah, not 15% quarter-on-quarter growth on the auto business.
Again, we shouldn't conclude on one quarter alone on this. Indeed, the output of FAB has been quite strong.
Okay. 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 the production needs. We start seeing some inventories in some product and sub-segment areas. 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.
I think you are 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. For the automotive part, I could not say that there is zero inventory in the supply chain. 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 customer and/or with the OEM because we don't supply enough. There is for sure still a numerous number of pockets without enough supply.
Okay.
Now, is there the same everywhere? I must say, I don't know.
Okay. Maybe last one if I may, squeeze one last one. If we look a bit more long-term, I mean, I look at your charts, 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. When we look at the content, you know, per car, I mean, you show in the slide 18 that, you know, in the full hybrid and you have 83 ICEs versus 45 for EV. I was just wondering, like, what would be the impact if we had no hybrid in 2030 for Melexis, relative to your long-term targets, of course?
Yeah, I think we have indeed all. First of all, first answer to your initial question about the split between plug-in hybrids 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. Okay, this is the IHS picture from six months ago, let's say. Yeah, next year we will have the update and indeed perhaps the move to EV will be a bit quicker than what was anticipated. I tend to agree with your analysis. On the consequence.
Yeah, in the plug-in hybrid there is for sure. I mean, we said in the past we win two times because there is all the ICE and all the electrification aspect. We see also that there are more and more electronics in the pure EV. If we take the example of the thermal management, which has, let's say, underestimated in the past how much electronics we will need to manage the management of the temperature in the EV, then I believe that in the future we will have more electronics than what we anticipate now on the EV.
Thank you very much, Marc.
The next question comes in from the line of Janardan Menon calling from Jefferies. Please go ahead.
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?
Well, the 28%-30%, the low end is indeed not much growth for the second half. Indeed, I mean, we have better visibility today than the previous quarter, because it's only two quarters left. In the fourth quarter, it's still, I mean, yeah, the guidance is always mainly influenced by supply, and so risks on the supply side. We are conservative on this, so that's why we guided 28%-30%.
Understood. Just on the supply, I understand that you're being conservative, but you know, overall, is X-Fab continuing to ramp capacity? Is there headroom in the France fab to ramp capacity in Q4? Does that capacity continue to ramp into 2023 as well?
Yes, we will continue indeed to work with X-Fab in order to increase the capacity step by step. Yes.
Yeah.
Understood. Similarly on the operating.
No, go ahead.
Sorry, continue.
No, go ahead. Go ahead.
Yeah. Similarly on the operating margin, you know, 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 strong into the second half, but you're guiding 26% for the full year, which suggests increased OpEx into the second half. Could you give us some guidance on how you expect the OpEx to trend into Q3 and Q4?
Indeed, as we mentioned also in the previous quarter, we do expect, I mean we are investing in people. We have inflationary pressure, particularly in Belgium, in Q3. We have the mandatory indexation, which is more than 8% here in Belgium. 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. It's our plan to indeed grow or strengthen our R&D team. There is also a need for other investments in other areas. Yeah, the cost basis is expected to further increase. Also in Bulgaria, for instance, we have a pressure to increase the wages due to the very high inflation there. Yeah.
Understood.
Does that answer your question?
Yeah. I mean, you're not giving a 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?
Yeah. I think it's the idea, yeah.
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. They were talking about you know, inventories in the automotive side, which has been there for some time and continues to be there. They're also talking about potentially lower production than expected in autos, et cetera. I can see that you know, your ASIC proportion is coming down quite rapidly, which probably reflects that shift, especially at that customer.
I was just wondering, can you give us any color on why there is a mismatch between what they are seeing and what you know, yourself and some of the other chip vendors are seeing?
Well, 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. It's why we gave this guidance for Q3, Q4. It's also true that in the medium term it's a bit more uncertain because all of the reasons that we know and that you have already mentioned are linked to the macroeconomic perspective. This is for the medium term. The long term, yeah, we are also confident because of the automotive trend and because of the Melexis position in this trend. It's why we have a bit of different view on short, mid, and long term.
Okay. Understood.
Yeah, why Sensata is more cautious, I don't know. It's indeed an important customer of Melexis, that's clear.
Okay. My last question is you didn't say much on the sort of non-automotive adjacent markets. I understand that most of that goes through the distribution channel, et cetera, 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?
We have that's 10% of our revenue and we have difficulties to increase this 10% because of all the allocation problem and because we give priority to the automotive customer. Meaning that the order book in consumer is also strong because we cannot anyway supply. It'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.
Understood. Thanks a lot.
The next question comes in from the line of Marc Hesselink, calling from ING. Please go ahead.
Yes, thank you. Can you talk about the impact of the price increases in your portfolio, and on the other side, the inflation. Maybe the impact on the growth level, but also it seems that you can keep the gross margin very stable. That means in an absolute level, it's contributing more. Is that also the way to look at it going forward, that you keep the margin stable, and therefore, inflation is actually a positive thing, given the absolute numbers?
Indeed. There is a positive effect on the gross margin of the US dollar as well. Not more than 1%, I would say. All in all, as you have seen in the press release, we guide for 45%. We do expect that 45% to be sustainable also in the future.
Okay. On average, the price increases that you now have in your portfolio?
It's high single digit.
Do you expect more of those price increases to come in the coming quarters to offset the cost?
We have typically once a year at the beginning of the year, renegotiations with our customers. Throughout the year, we saw the big increase in the beginning of the year, but then throughout the year, there is limited change. Beginning of next year, we have new negotiations ongoing, which is actually part of the long-term agreements. We expect also a price increase.
That typically match-
Sorry, go ahead. Go ahead.
Yes, is that actually linked also to the cost side? You also have this annual agreement with your supplier?
Exactly. What I wanted to say that in 2023 we'll use the same strategy as in 2022, meaning that we will transfer the cost increase to the price increase. We want to stay fair. Even as Karen mentioned in the LTA with some customer, 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.
We have long-term agreements as much with the suppliers as with the customers. Also suppliers come in the first place with cost increase, and indeed, in a fair way, we also transfer that to the customer.
Okay, clear. The other question that I have was in earlier calls, you said the key objective is not to be responsible for clients needing to stop the line. I think you did well there. What is the impact there on your negotiations with to win new orders? Do you see that your performance throughout this supply chain constraint situation for the industry helped you in winning new orders?
I'm sure we receive many positive feedback from our customers on the way we manage the situation. Many customers have told us that, yeah, we do what we say, and we say what we do, even if they don't like our initial message, which is, we'll not be able to meet your demand. I think they appreciate, let's say, our transparency, and they appreciate that, okay, we almost always meet what we have committed. They also appreciate that we try to improve. I mean, we give an allocation, and throughout the year, we try to a bit overproduce, let's say. I think this for sure they appreciate.
I assume that as a consequence, indeed, they are willing to give us more business. It's also true that today we try to manage the situation, we try to allocate the wafers to the different customers. Indeed, we are not always able to answer positively to the new business.
All in all, design wins are very strong.
Yes, we have after the first half of 2022, we have strong design wins, yes. Also, the pipeline of opportunities is increasing very steadily.
Okay. Then the final question, also on the visibility on supply growth going into 2023. You already said that you're working together with your supplier to increase the capacity. 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?
Yeah, no comment. For the time being, X-Fab gave us six months ago, let's say, their forecast for 2023, 2024, 2025. We have used those forecasts in our LTA.
Okay.
with our customer.
Clear. Does it happen then that somebody drops out and you can take that over? That can happen?
Yes. For the time being, indeed, we have more demand than supply. Yeah, I don't know more.
No, we don't know what we don't know.
Okay, perfect. Thank you. Okay, thanks.
Thank you. The next question comes in from the line of Robert Sanders calling from Deutsche Bank. Please go ahead.
Yeah. 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.
We don't comment about 2023. I think we don't give, for the time being, indication on the 2023 forecast, let's say, or outlook.
It's the only thing we already mentioned. We have gradual capacity expansion with X-Fab that will continue also next year. More than that, we cannot guide today.
Okay. On the LTAs you're signing, you know, what percent of your business looking out to 2024 is under LTA now, and how many of these are signed directly with OEMs and how many are with the tier ones?
Yeah. We have selected, let's say, our strategic customer for this. It's the vast majority is with our direct customer, with our tier one. In terms of number of wafers, I would say, yeah, it's really not negligible. The wafers that are included, let's say, in the LTA, it's really non-negligible versus the complete capacity, the overall capacity.
Are there like take-or-pay terms with these LTAs, like X-Fab has take-or-pay terms and cost step-ups for inflation? Is that similar situation for you guys?
Yes. We have our goal is to make a little kind of back-to-back situation. We have similar term with our customer than with X-Fab. Meaning we agree on the volume, we agree on the price, and we agree on penalty in case of.
Got it. The last thing would just be on pricing. I mean, X-Fab's 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. You know, is that a fair indication that pricing will continue to rise into 2023 and 2024 just because of your increased foundry input costs?
Yes. Yeah, it is. We have indeed, and with X-Fab, and with our customer under LTA, an agreement for 2023, 2024, 2025, and volume and price.
Got it. Okay, thank you.
We currently have no further questions coming through. As a reminder, if you would like to ask a question on today's call, please press star one on your telephone keypad now. We have a question coming through from the line of Michael Roeg, calling from Degroof Petercam. Please go ahead.
Yes, good morning. I have a follow-up question on your gross margin in relation to cost inflation. Because if I remember correctly, 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. Those new prices should come into play roughly by now. That would suggest that you and e.g. other customers would all of a sudden have cost inflation starting now. Yet your gross margin suggests this is not the case, 'cause it's gonna be nice and flattish at 45% throughout the year. Where's the mismatch in my perception? Can you please enlighten me?
Well, for Melexis, the biggest impact is already in the numbers we have today. That's why we also don't expect major. There might be a slight pressure in the next quarters to come from increased prices still from X-Fab, but it will be very limited for Melexis.
Okay.
I don't know. I cannot match with the X-Fab statement.
Suppose that you indeed got that price increase earlier than I perceive. Maybe at the start of the year. This has probably then partly been one of your drivers to raise your prices by that high single-digit percentage I heard earlier.
We also mentioned that there would be some delayed effect, but it is limited as you can see, because there are so many other factors also influencing today, the growth margin, the product mix, for instance, also, is then impacting positively. The operating leverage is impacting positively. For us, there is not much impact to be expected for the remaining quarters of the year.
Okay, good. That's reassuring. Thank you. That's it.
We have a follow-up question coming through from the line of Janardan Menon calling from Jefferies. Please go ahead.
Hi. Thanks for giving me another chance. I just wanted to look at your content growth and what you think it is. Because, you know, when we take your top line growth of, say, 29%, and take off 5% for currency, you know, you're still in the 25% kind of range. The average content growth in semiconductors, automotive semiconductors 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. Your you know and car production levels are very low, a bit lower last year and this year as we've seen.
There's clearly a big mismatch between your growth and car production growth. If we put the 10%-ish figure of content growth, that still leaves us, you know, over 10% every year between your growth and the car production volume growth. I'm just wondering, you know, would you say 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?
Yeah. I think there is limited inventory buildup for the time being. I base my statement on the numerous field call and communication we have with our customers, showing that, yeah, they are really still hungry about the Melexis chip to build the car. I think the inventory is. If there is inventory buildup, it's limited or perhaps even very limited. This is one point. The second point on the 10% electronic growth, I think we should also take into account that for the time being, the OEM give priority to the ICE car. 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.
There is also chip content increase because we are moving up in the level of the car, and the premium car has much more electronics than, let's say, an average car. That'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. The third aspect is, I think indeed Melexis is probably over-performing versus the pure chip content aspect.
Understood. That, that's very clear. Thank you very much for that.
Thank you. We have no further questions coming through. Just as one final reminder, if you would like to ask a question, please press star one on your telephone keypad now. There are no further questions coming through, so I shall hand the call back across to yourself, Marc, for any concluding remarks.
Okay. I want to thank you for the question and for the interest in Melexis. 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.
Thank you for joining today's call. You may now disconnect your handsets.