Hello, and welcome to the Melexis Q3 2021 results call. My name is Jess and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen only. However, there will be the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question at any time. If at any point you require assistance, please press star zero on your telephone keypad and you will be connected to an operator. I will now hand over to your host, Marc Biron, to begin today's call. Thank you.
Thank you. Hello, everyone. It's a pleasure to welcome you again to our call related to the Q3 result. Today we are two speakers, Karen Van Griensven, who is our Chief Financial Officer , and myself. It has been almost three months since my appointment as Chief Executive Officer of Melexis. Our former Chief Executive Officer , Françoise Chombar, took up the position of Chairwoman of the Board, and I'm carrying forward the strategy that we have defined together with Françoise and also together with the executive team. Let's cover first some top line and financial background, after which Karen and myself will be happy to answer any question you may have. Q3 comes with the first or with the third sales record in a row of EUR 162.8 million, an increase of 34% year-on-year, and an increase of 2% quarter-on-quarter.
A beneficial product mix and currency effect were supportive in achieving a strong growth profit margin, and we have reached 43.4%. As a result, we have increased our guidance for the operating margin from around 22% to around 23% for the full year. The ongoing mismatch between the demand and the supply is our main challenge today. Consequently, while we work with our partner to stabilize the supply chain and to increase the capacity of the supply chain, we continue to allocate the material available across the entire customer base. We anticipate that this situation will continue further in 2022, given the current order behavior of our customers. In Q3, the outperforming product line were Embedded Lighting, Current Sensor and Magnetic Position Sensor. We start first with the Embedded Lighting.
We can say that the growth of the Embedded Lighting product or product family stays very robust. Indeed, the interior lighting, which creates a comfortable atmosphere inside the car, is a very demanded option by the end user. In the future, the interior lighting system will be used to communicate information to the driver, but also to the occupant of the car. We continue to provide innovative solution in this domain. For example, with our license-free MeLiBu technology that will enable animated lighting application in the car. The traction for the current sensor family is obviously related to the electrification of the car, but it's also related to various adjacent application. For the automotive part, we are very successful in the high voltage inverter, also in the 48V inverter that are used in the plug-in hybrid car and also in the full electrified car.
Next year we expect further ramp up in onboard charger application, but also in DCDC application in the automotive. For the adjacent market of current sensor, the solar application and the drives as well contributed to the Q3 results. The last outperforming product line is magnetic sensors. We can say that the magnetic sensor has gained traction in Q3, mainly thanks to automotive application. I will now hand over to Karen, and she will give a bit more explanation about the financial result.
Thank you very much, Marc. Good morning or good afternoon for everybody. Yeah, a little bit of guidance on the financial result. As Marc already mentioned, we came out with sales of EUR 162.8 million, and the gross profit margin came out at EUR 70.6 million or 43.4%. A little bit higher margin than in the previous quarter, thanks to an effective or a beneficial product mix and an exceptional currency effect. If we look at R&D. R&D expenses were 12% of sales. G&A was at 4.8% of sales, and selling was at 2.2% of sales.
As a result, the operating results was EUR 39.7 million or 24.4% of sales. An increase of 153% compared to the same quarter of last year, and an increase of 69% compared to the previous quarter. The net result was EUR 36.5 million or EUR 0.9 per share, an increase of 145% compared to EUR 14.9 million or EUR 0.37 per share in the third quarter of 2020, and an increase of 9% compared to the previous quarter. The outlook for the rest of the year.
Melexis expects sales in the fourth quarter of 2021 in the range of EUR 160 million-EUR 165 million, resulting in a full year sales growth of around 26%, a gross profit margin of around 42%, and an operating margin of around 23%, all taking into account a euro-US dollar exchange rate of 1.16 for the remainder of the year. I would like to now open the Q&A session, operator, so please go ahead.
Thank you. If you would like to ask a question, please press star one on your telephone keypads. Please ensure your line is unmuted locally, as you will be advised when to ask your question. Once again, that's star one if you would like to ask a question. The first question comes from the line of François-Xavier Bouvignies from UBS. Please go ahead.
Hi, good morning. I have a few questions if I may. The first one is on the inventory and more particularly your inventory, not really in the supply chain. When we look at the crisis, in the beginning of the crisis, the inventory of Melexis, I mean, if I remember Françoise and Karen were saying that you want like high inventories to gain market share when it's gonna pick up. Obviously the inventories came down since the beginning of the crisis on your balance sheet. My question is, when a lot of industry have been impacted by the shortage, is it fair to say that the magnetic sensors thanks to your inventory management has been less impacted in 2021?
If so, do you think that the inventories of your product categories like magnetics and so forth are maybe at healthier level than other products like let's say microcontrollers, as we enter 2022? That's my first question, and I have another one if I may after.
I would say that in these supply chain constraints in this period of constraints the product mix is very much indeed dependent on supply. We have a favorable mix, indeed, more magnetic sensors, but it's more because in the previous quarter we had more issues to get output for magnetic sensors. It can really vary from It's not that overall, I mean, that magnetic has been benefiting more than other areas I would say. From quarter-to-quarter, there can be quite strong differences. Moving forward, we expect still also in the next quarter a rather favorable product mix continuing, but longer term, that's more difficult to say.
Okay. Just you don't think that your the inventories that you managed to decrease over the years, thanks to your management of high inventories, you don't think that, you know, the magnetic sensors as a whole is in a better shape than let's say microcontrollers where inventories are very, very low at critical levels? Do you see that or no?
I mean, the inventory is across all product lines that we took safety inventory, not only on magnetic sensors. It's
Yeah, yeah. About all your categories, Melexis products.
Yes, indeed.
Yeah. Okay. Maybe a follow-up on your comments about the product mix. You said that it's still gonna be favorable. Can you just quantify FX benefit and mix benefit this quarter? When we look at your full year, you are looking at 42% gross margin. If I look at your year-to-date performance, it would imply 40% gross margin in Q4. I don't really understand, you know, your comment saying that the product mix will be favorable still going forward in Q4 when you assume in your guidance 40% in Q4 and the year-to-date gross margin was above 42%. Is it like conservative or is it because the manufacturing cost is increasing? Why we should put 40% gross margin in Q4?
Well, for the year we guide for around 42%. It's for us 42.4% is also still 42%. Yeah, you have to look at it in that perspective.
Why didn't you increase the full?
Overall-
You increased your EBIT operating margin, your revenues a bit, but not the gross margin. Is there any reason?
Well, it's the
We should be aware.
Rounding effects here. It's pure rounding effect that overall we will be. We expect still 42%.
Mm-hmm.
It will be somewhere between, yeah, on the higher side of the range.
Okay. Maybe let's put it this way, in Q4, is there any reason why we should have gross margin drivers below Q3?
Well, the currency effect will for sure not play in the same way. I mean, unless the dollar moves very strongly. That was exceptional, and it was the biggest effect in Q3. Well, both effects are quite strong, the product mix and currency effect. The currency effect is not expected to last in Q4.
How much was the currency effect in Q3? How much?
Well, if you compare with Q2, you can split between the two more or less evenly, the effect.
Half is currency, half is product mix in the quarter-over-quarter improvement in gross margin. Yeah?
Yeah.
Okay. I have others, but I will leave my peers and go back to the queue.
All right.
Thank you. Thank you very much.
The next question comes from the line of Varun Rajwanshi from JP Morgan. Please go ahead.
Yeah. Hi, good morning. I have a question on your revenue visibility into 2022. You know, what level of visibility do you have on your 2022 capacity based on your discussions with your foundry and back-end partners? I'm just trying to understand what is the level of quarterly revenue run rate that you can sustain purely based on capacity availability. That's my first question. The second one is on the impact of price increases. Can you provide any indication on how pricing will trend into 2022? I'm just trying to understand how much of 2022 growth will be driven purely from price increases. Thanks.
For the second part of the question, let's say, yeah, indeed, we are facing some cost increase from our supplier, as we mentioned in the previous call. Yeah, we are now busy to, let's say, transfer those cost increase toward our customers. Our strategy is to neutralize our cost increase with the price increase. I mean, our goal is to neutralize our cost increase with the price increase. Yeah, in terms of magnitude, I mean, we have different suppliers and they increase their price in different ways, let's say, with different levels. Yeah, you can consider that it's on average a single-digit increase.
For the first part of the question related to future 2020, you know that we don't give guidance at this point in time for 2020. As you mentioned it, I mean, today the business is more driven by the supply than by the demand. Indeed we are working with our different suppliers in order to increase the capacity of the supply chain and also to stabilize the supply chain. You have seen since some quarter that we are able to increase step-by-step the supply chain capacity. Yeah, our objective is to continue of course in this way. What we can say is that, yeah, the order.
We discussed the order book last time, as we mentioned that the order book was well filled, and we can say it's still the same. I mean, the order behavior of our customer did not change recently.
Yeah. Thanks, Marc. Just wanted to follow up on this. Is there any way to quantify this? Because at the moment you are on a quarterly revenue run rate of EUR 160 million-EUR 165 million. I'm just trying to understand, is it possible that this revenue run rate increases to EUR 175 million, EUR 180 million over the next few quarters? Is that something that you see happening?
That's too early to say, I would say. A gradual increase, but we are still in negotiations to have already a definite answer on that. As usual, we only give guidance on the full year, as from with the Q4 results.
Yeah. We still see a lot of, let's say, instability of the supply chain. I think it's not appropriate, let's say, to give long-term guidance. We will go quarter per quarter, given the complexity of the supply chain.
Okay. Thank you.
The next question comes from the line of Matthias Maenhaut from Kepler Cheuvreux. Please go ahead.
Yes, good morning. Congratulations with the Q3 results. Question from me as well on inventory levels, but then rather in the supply chain. We have seen significant production cuts actually in Q3 having given way to substantial downward revision of light vehicle production for this year. I was wondering your sales remain pretty strong across the board. I was wondering what your take is on inventory levels. Are you presently noting quite significant inventory buildup from the very low levels? Or do you think that inventories are still low? And then I have a second question.
We can say that we are still short for all the product and product line that we deliver to our supplier, to our customers, sorry. Indeed. The Q3 production volume was low. We hear from our customer that the OEM have also reduced to our customer. The OEM have reduced their order for Q4. Then it seems that Q4 will be a bit similar to Q3 from OEM perspective. The OEM mentioned that Q1 and Q2 next year will be again very strong. We don't see this effect. I mean, we are still, I would say, running after the fact towards our supplier, towards our customer, sorry.
We are short in delivery, meaning that our inventory is still very low. I mean, we deliver hand to mouth, day after day.
Thank you. On OpEx question. It's been quite stable quarter-over-quarter from Q2 to Q3. What should we expect for Q4 and then for next year?
We expect a gradual increase of the operating expenses, certainly now that Corona measures. It's to be seen what it will be over the next months. We see more activity, also travel and so on, outsourcing activities. We do expect them to see growth over the next quarters, and certainly also into next year. R&D are at historical low levels, so we will invest, we will step up investment there as well. We do expect them to grow over the next quarters.
Okay.
In Q4.
Okay. That's clear. Thank you.
The next question comes from the line of Ruben Devos from KBC Securities. Please go ahead.
Yes. My first question revolves around the order book. In your prepared comments you mentioned that the mismatch between demand and supply remains the key challenge and that will continue into 2022 based on current order behavior. We're also hearing in the sector that in the current environment it's becoming increasingly difficult to have visibility on the order book. Yeah, I was curious whether you could talk more in detail about, yeah, the order behavior of your customers, you know, thinking about lead times, geographic spread, double ordering, that would be very helpful. That's my first question. I have another one maybe after your answer.
Concerning the order book, it's still very high. I mean very similar to the status when we discuss three months ago, and we don't see any change, let's say, in the behavior of our customer. Last time I mentioned that let's say the visibility of the long-term view of the order book was towards longer term than before. I think it is still the case. The order book is filled for short-term, but we see also much more longer term than before.
Yeah, in terms of lead time, the lead time is, as in the past, still very much impacted by the bottleneck in the supply chain and by the situation in the supply chain. We don't see for sure any reduction of lead time. Yeah, this is firstly what I can. If you want to add something.
Yeah, geographically was also your question.
Yeah. Geographically, yeah.
I think, but also there, I think, it's strong in all geographical areas, not particularly weak in one. Yeah, not much change versus-
No.
Q3, except maybe that in the distributor level we do see some inventory increase, but yeah, it's still at very acceptable levels.
All right. Just a second question. I believe you've mentioned earlier in the year that there were some issues with packaging suppliers in Asia when talking about the difficulties of matching, you know, elevated demand with limited supply. Given the ongoing challenging conditions, I was wondering whether you could give an update on the areas where you face most challenges today, across the supply chain, you know, maybe thinking about your dependence on suppliers for wafers, packaging services, yeah, et cetera.
Yeah.
Thank you. Yeah.
Indeed, let's say during the first half of the year, bottleneck was clearly on the assembly house, so because we had made some inventory as discussed just before. We have worked a lot with the assembly house in order to get some capacity. We have been successful to secure the capacity at the assembly house. Saying that, we had also in Q3 or after summer linked to COVID in Malaysia. Probably you heard in the press that COVID in Malaysia, let's say-
Mm-hmm.
We have been affected and the supply chain has been indeed disrupted during summer, after summer because of the COVID in Malaysia. Okay. Since then, at least our partners have been vaccinated with the two doses, and we hope that this will improve the situation. But indeed, it has been tense, let's say, during Q3, really to the assembly house. Not really anymore because of capacity, because I think we have secured it, but more because of the COVID.
All right. Thank you very much.
The next question comes from the line of Marc Hesselink from ING. Please go ahead.
Yes. Thank you. Can you explain the mix between automotive and non-automotive? I think we've seen an obviously very strong performance in non-automotive up to this quarter, now a little bit slower. Is that just sort of digestion period, or is it also an element of choice in there that you prioritize automotive over this non-automotive business?
Yeah. I would say there is nothing structural. I mean, it's not that the demand was particularly different in Asia than before. It's more the overall supply chain effect that create this reduction, let's say, of Asia at least relatively. Yeah, it's not related to the demand. It's more some supply chain effect. I think Q4 will be in this regard, let's say, similar to Q3. It will not come back, let's say, in Q4 as it was during the first part of the year.
Okay. The supply chain effect is bigger on this non-automotive part than on the automotive part?
For the moment, yes.
Okay.
Varies from quarter-to-quarter.
Okay, clear. The other question is, you obviously discussed already a bit in previous answers, but more in on the bullwhip effect. In the beginning of the year, you were saying that you fear that the clients were also ordering a little bit too much, therefore you guided them that the second half of the year would be a bit slower. Now that clearly changed in the past two quarters. What is in your own modeling, what kind of order level should be normal? Are people now still adding in general? Is there still that risk of double ordering? What do you see in your own model on the end demand?
It's not that we don't want to answer, but it's very difficult to answer. That's for sure. Yeah. We mentioned that there is, let's say, a mismatch from 20%-30% between the demand and the supply. As you mentioned, part of it is linked to some supply chain effect. Part of it is linked to inventory that is low, and the part of it is indeed linked to the chip content increase or to the market share increase. Let's say there are three parameter that explain this mismatch. I'm not able to say to give a ratio in between these three parameter, but I'm very sure that the three effect play a role.
I'm also very sure that there is a chip content that play a role. Yeah. Is it 1/3? Is it half? Is it less than 1/3? Difficult to say, I must say.
Okay. I think that that's helpful. Thanks.
For sure, the electrification of the car helps all the modern cars with much more electronics help in the figures, but it's really difficult to make the distinction between the different effects. I mean, there is much more electronics in the safety, in the comfort function, in the electrification function, that is for sure. I would say we lost a bit of our reference between. Because 2018 was very high, and then 2019 and 2020 has been stable, let's say. It's a bit difficult to give an accurate answer.
For sure, also the fact that the OEM prioritize, let's say, the high-end car, I mean, the electrified car and also the high-end car, this is also beneficial for Melexis because there is obviously much more electronic and much more function in the high-end car. The product mix of the OEM is also helping. Sorry to not give you a very concrete-
No.
Straightforward answer.
No, this is already, great. Thank you, thank you.
The next question comes from the line of Michael Roeg from Degroof Petercam. Please go ahead.
Yes, good morning. First question I have is a follow-up question on the one from Ruben. Melexis never discloses the backlog or the order intake, so I was wondering, could you give us a bit of color how the backlog divided by sales was prior to COVID, sort of an average? Probably between 0.5 and 1, and then how it is today, presumably much higher.
Oh, indeed, we don't give numbers on this, but it is clearly still higher than prior to COVID. During the summer, it was probably at the highest peak. It's slightly down, maybe, versus the peak, but it's still extremely high versus what we saw prior to Corona.
Yeah, if you say extremely high, I have no idea. Is that a full year of sales or a half year of sales? 'Cause I don't have a reference point.
Orders are placed today much earlier than usual. I cannot say much more than that on it today, except that the order book is coming in quicker than usual. That's part of the reason that it is higher. We don't wanna give absolute numbers on this.
Okay. I'll make my own estimate. The second question I have is a boring bookkeeping question. Your net financial result has been anything between EUR -2 and EUR +3 on a quarterly basis. Could you provide a bit of explanation what it should be going forward in a normal situation, and what drives all of a sudden the fluctuations?
The financial result, I mean, moving forward should rather be around zero, I think, for modeling. We have now two quarters in a row and exceptional effect from its unrealized profits on financial products, inflation swaps. This is, yeah, unrealized, so this can go all directions moving forward. Under normal circumstances, it's around zero.
Okay. I had that as well, but again, yeah, the surprise is occasionally. Good. Thank you for that. That's it from my side.
You're welcome.
The next question comes from the line of Robert Sanders from Deutsche Bank. Please go ahead.
Yeah, hi. Just maybe a longer-term question. I was just, you know, over the last couple of years, we've seen a big rise in the battery electric vehicle, but plug-in hybrid sales have started to disappoint a little bit. Obviously, there is a regulatory push to take away subsidies from plug-in hybrids. I just wondered if you could address that issue, the mix shift from plug-in hybrids to battery EVs for you guys, given obviously the content opportunity in battery EVs is considerably lower than for plug-in hybrids. Are you seeing your content opportunity changing a little bit? What are OEMs telling you?
Are they changing the roadmap to pull in much higher levels of volumes of battery EVs, and what are they doing with their plug-in forecasts? Thank you.
I would say for Melexis, we have two big family of application. The first one is what is related to the powertrain. The second one is related to what we call body chassis safety. For the powertrain-related application, we believe that we have the same slot, the same number of slot, let's say, in the traditional ICE versus the full electrified car. For us, the number of slot or the number of opportunity is very similar if we have an ICE or an electrified car in term of powertrain. You can have more detail if you refer to the Analyst Day presentation. We have given a bit more detail.
What is beneficial for Melexis is all the electrified car come with a much more, let's say modern interior, modern application in the body chassis safety application. There's much more comfort, much more safety in the car, meaning that moving to the electrified car is also moving to more opportunity slot for Melexis. Not really because of the powertrain, because it's very similar, but more because of all the opportunity related to the body chassis safety application.
For the powertrain, there is indeed application linked to the battery as you mentioned in the question, but we have also a lot of application linked to the thermal management, which is much more important and much more difficult, let's say, to manage in electrified car because there is a thermal management related to the battery and also the thermal management related to the cabin of the car, which is more difficult because there is less heat available, let's say. To answer your question, how do you see, let's say, the behavior of our customer? We see that our customer are working a lot, very hard on the thermal management aspect.
In this thermal management, we have pressure sensor driver for the valve, position sensor for the valve, and there are many opportunity of Melexis in those thermal management. This is, let's say, the push from our customer linked to the battery but also linked to the thermal management for the powertrain.
Got it. Do you have a sense of whether you can keep your historical content growth? I think it was something like 7% or 8% above light vehicle volumes over the last 10 years. Do you think you can keep that kind of growth rate going forward?
Yeah, if you look at the content guidance that we give and the bottom-up exercise we did with the number of chips growth in powertrain and in body, chassis and safety, which is also in our PowerPoint presentation. Yeah, then you see we should at least do what we did in the past or maybe even more.
Great. Thank you very much.
The next question comes from the line of François-Xavier Bouvignies from UBS. Please go ahead.
Thank you. Just a quick follow-up. It's a bit on the mix effect from the previous question. If we look at 2021, obviously we saw a strong push from, you know, the EV penetration going up and the high-end of cars as well have been more, you know, favorable in terms of mix. That's probably one of the reasons the semis are seeing a very stronger performance with this production. Given that you have a pent-up demand, maybe for the mid to low end, should we think 2022, maybe the mix is getting more, you know, content mix less favorable, I would say, versus 2021? Is it something we should think about, or should we think this outperformance that you are seeing in 2021 just to continue at the same level?
What I can say is that we don't see this in the different order that we receive. I must say you are right when you say that clearly the OEM have given priority to the high-end EV in 2021. This is correct. It's also correct that it is beneficial for us. Will it change in 2022? We don't see it. Anyway, even if it's in 2022 with lower-end EV, there are also the plenty of option in those lower-end EV with plenty of opportunity for Melexis. We don't see it. I think this is the most accurate answer I can give.
Thank you, Marc.
Karen, do you want to add something?
No. No, indeed. The trend of more EVs in general will only continue. That will not. Even the lower end is still full of electronics for Melexis. Also in design wins, design win intake in EV is very strong.
Mm-hmm. No, I understand. I was just thinking in terms of magnitude. I'm sure your EV content is increasing, no doubt about that. But you know, this year you're doing 26% growth on revenues, right? When the production is barely growing. You know, this outperformance, how should we think about that, you know, in 2022 and even beyond that? Yeah, that's the thinking. But thank you for your answers.
Yeah, that's still too early to answer. Structural growth is there, the electrification trend will drive growth for the next years. Yeah, of course, it's 26% a year is probably not what we should also calculate in. I mean, there is clearly also some inventory effect, like Marc already explained in the figures of this year.
Thank you, Karen.
There are currently no questions in the queue. Just one final reminder, please press star one if you would like to ask a question. We have no further questions in the queue, so I'll hand the call back to your host for some closing remarks.
Okay then, I want to thank you everybody for the question. I think it was very interesting question, a relevant question. I hope we have given the answer you have expected and that we have helped you, let's say, in your analysis. We will see each other in 2022 in February. In the meantime, I wish you a very good end of the year. Thank you, everyone.
Thank you for joining today's call. You may now disconnect your line.