Hello, and welcome to the Melexis Q1 2021 Results Conference Call. My name is Val, and I will be your coordinator for today's event. Please note, this conference is being recorded. And for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions
at the end
of the presentation. I will now hand you over to your host, Francois Champart, CEO to begin today's conference. Thank you.
Thank you very much, and good morning, dear audience. Welcome to To the Melexis First Quarter 2021 Earnings Call, as usual, Karla Grinsen, our CFO and myself will be Happy to take you through the highlights and answer your questions afterwards. With the sales of €155,600,000 in the Q1, Melexis posted a sequential sales growth of 6% and an increase of 13% compared to the same quarter of the previous year. With this, Melexis sets another record and continues on its growth path. The 3 favorable fundamentals I talked about last time are being confirmed both in the sales and in the outlook.
One is automotive end demand has returned with agreements. 2 is content growth. Several new programs are ramping up, some also at an unexpected speed. And in line with our strategic intent, 3 is a solid growth of the adjacent business, even beating automotive growth versus Q4 2020. Yet we are constrained by extended lead times and ongoing issues in every step of the supply chain.
As demand continues to surge and shortages in the industry persist, Matching the elevated demand with its limited supply is one of the biggest challenges we are facing today, and it creates stress in our whole community. Based on the current order book, it has now become more likely that sales We'll remain strong this year, and that is why we significantly increased our guidance for the full year. We now estimate sales to rise 22% to 25%. Needless to repeat that the root of the chip shortage Overall is that the downstream customer base waited for too long to reorder and most didn't take sufficiently into account that it takes a physical cycle time of months to reignite the semiconductor supply chain. The roller coaster continues as the industry is grappling to pull sufficient semiconductor components through the value chain.
While the world is increasingly hungry for semiconductors in all types of products, be it mobility, There are no easy fixes to the current supply constraints and we expect this challenge to continue well into the second half of twenty twenty one. In short term, only industry wide collaboration can help, and that's also what Melexis is doing with its customers And it's customers' customers. It's a huge amount of work in communicating and creating visibility Throughout the chain up to the OEM, which is not an easy walk in the automotive park because of the many tiers worldwide and the typical hoarding behavior of just about everyone in the value chain. The major fear I hear When talking to customers is, I don't want to be the first to stop a car assembly line. The good thing in all of this is That we learn a lot along the way.
Never waste a good crisis. In the Q1 of 2021, the outperforming product lines were embedded lighting, temperature sensors and the magnetic sensors product family. Let me give you some more color on these. I'm sure you've noticed some recent advertising campaigns from major OEMs showcasing animated lighting in the cabin, which reconfirms a secular growth trend. Lighting provides important information such as driver assistance prompts, vehicle status updates or advanced comfort functions like Adaptive roof light.
It is becoming increasingly mainstream to use RGB LED light bars, RGB red, Green blue LED light bars to communicate with the driver through color coded, Like no other peer, Melexis' embedded lighting value proposition unravels The collateral engineering challenges such as maintaining consistent color across all of the LEDs in the light bar and implementing simultaneous light changes. We are continuously launching new products in this family as we did, for example, in Q1 as well. Secondly, our temperature sensors are still in high demand For contactless thermometers and point of care equipment. These applications seem to represent sustainable business in the years to come. People detection, the smart HVAC, is also doing well in Q1 With some seasonality effects, people typically buy HVAC in spring early summer.
Last But not least, our Magnetic sensors family showed excellent growth in both automotive and adjacent. To just Name a few examples. Speed sensors for micro mobility position sensors for gaming, medical and industrial, such as For level sensing, latches and switches for door locks and energy meters. And in cars, you'll find them in seat belt Buckles, seat track position, window lift, brake light switch, door handles, transmission and grille shutters. Product launches in the Q1 were focused on automotive applications, serving the future car, carbon free, comfortable and classy.
Next to the embedded lighting I referred to earlier, we launched A dedicated automotive all in one single coil fan and pump driver IC suitable for air pumps, water pumps, Actual fans and radio and cross blower applications. And we also launched Another current sensor for redundant monitoring of battery management systems, overcurrent detection in smart fuses and measuring phase currents in traction inverters and boost recuperation inverters. What differentiates Our high speed current sensor is that it eases assembly, boosts accuracy and enhances stability, Thanks to proprietary IMC Technology. The IMC Technology is integrated magnetic concentrator technology, which is also used in Triaxis. The Melexis design can accept more mechanical movement As it requires no severe busbar machining, and it also lends itself to smaller assemblies with surface Require specific lead bending or lead forming native to core based solutions.
Let's now move on To the financials and thus to our CFO, Karen, you have the stage.
Thank you, Francoise. So good morning to everybody. So as Francois already mentioned, so sales came out at €155,600,000 This resulted in a growth result of €65,300,000 or 42% of sales, an increase of 17% compared to the same quarter of last year and an increase of 12% compared to the previous quarter. R and D expenses were 12.7 percent of sales, G and A was at 4.9% of sales and selling was at 2.2 The operating result was €34,500,000 or 22.2 percent of sales, An increase of 44% compared to the same quarter of last year and an increase of 34% compared to the previous quarter. The net results were €27,800,000 or €0.69 per share, An increase of 34% compared to €20,700,000 or €0.51 per share in the Q1 of 2020 and an increase of 16% compared to the previous quarter.
So as mentioned already by Francoise, we expect sales guidance for the full year to be in the range of 22% to 25% with a guidance for the 2nd quarter in the range of €155,000,000 to 160 €1,000,000 We expect for the full year a gross margin of 41% and an operating of 21% At the midpoint of the yearly sales guidance, all taking into account a euro U. S. Dollar exchange rate of 1.21. So I would like to now open the questions and answer session. I would like to ask everybody to limit In the first round, your question just to 1.
I mean, if there are still questions in the second round, then they can ask But in the first round, just one question per person to allow everybody to ask a question If they wish. So operator, please go ahead with opening the session, the Q and A session. Thank
you. Thank you. We do have a first question coming from the line of Francois Xavier Bouvignies from UBS. Please go ahead.
Hi, thank you very much for taking the time to take the question. So My question because we have only one now and I hope I can have a follow-up if I may. But if we look at your Guidance, so of 22% to 25%. So if you look at constant currency, if I'm correct, it's more talking about 27% to 30% Growth for the revenues. Now if I look at the forecast, external forecast for production for this year of cars, we are more around like 15%, 18% for the year.
So the outperformance that it implies is more than 10% Or both the production in terms of growth. And when I look in the past, the average of the last 10 years is more Around 800 or 850 basis points. So I was just wondering, can you explain this outperformance and Maybe help us understand what's your production of cars that you embedded into your forecast And why the outperformance is more than in the past? That's my first question. And if I may follow-up if otherwise, I will go back to the queue.
Yes. I think, of course, we will stay on the line until all the questions are answered, But this is just to give everybody the chance to at least have one question before they leave. There are several factors that influence, and it's a particular year, I must say, 2021. So on the one hand, we already saw some uptick in the orders, and we were able to, In Q4 and in Q1, to deliver quite a bit out of the work in progress That we had already started anticipating on this surge, but it has Yes. Let's say the demand currently is exceeding what we had expected, and it Keeps going, and that's the big question.
Now if you look at some reports, I agree with If you look at some reports, like IHS is saying that if they look at the semiconductor demand, And I'm now talking automotive only because we also have to talk about adjacent in a minute. But if you look at automotive, IHS is saying that it's like a virtual demand that goes to up to 95,000,000 cars. The real demand, as estimated by IHS, and I believe that there is a consensus in the industry that it is the case, It is €84,000,000 Of course, there is a portion of restocking, Of poising the lines again because the automotive is using the just in time principle a bit To yes, to stringently, let's say, which isn't helping because you cannot As I mentioned in my intro, you cannot reignite a semiconductor supply chain just like this, like you would with mechanical pieces or something like that. It really takes time. And the I also mentioned often in the past that there is a structural in the whole semiconductor industry, there is a structural Capacity constraint.
And it hasn't disappeared. And of course, what we now see is a lot of Certainty that is created for Melexis, though we are, for example, not delivering any MCUs. We are Still dependent on how many MCUs, for example, others of our peers In the industry are able to deliver. And you know that some of the car manufacturers had to stop their production lines, Not because of Melexis, and we're doing everything we can to help our customers not stop Any of the car assembly lines and so far so good. But that is the difficulty on the one hand is the uncertainty On how this will continue.
And the other thing is that we know there is over ordering, but it's very hard to identify Which ones are over ordering? And so we have to do a lot of work, a lot of communication. It's a lot of stress on our supply chain people to make sure that we get the best out of our customers, that we can learn how they deal with the situation. And of course, We deliver maybe one part to one customer, but that customer is delivering several systems with that One part several systems to several of their customers. And if they're a Tier 2, yes, then you have the same Proliferation, let's say, until it reaches the OEM.
You don't know how much hoarding is taking place, how much Security, others are taking, and that makes the whole thing quite difficult. But that's for the Products that are, let's say, already in a mature state, where they where the volume that Melexis delivers depends on the volume of cars that are being produced. But next to that, as I mentioned in the intro, We have a lot of content growth. And you've noticed that we've launched quite a lot of products in the past year. 2021 is again a year where we will launch a lot of products, more than in the past in, Let's say, on average.
And that, of course, is being translated into content growth That is much more than we had even anticipated. So this is a proof that the choices we've made In terms of spending R and D on the right products, yes, these choices were the right ones To make. So that is for Automotive. So why Then there is the adjacent. I think it was a strategic intent already for quite a number of years to focus Our energy in identifying which applications in which sectors Are adjacent to what we do for automotive using the same technology, But designing other types of products that are, of course, directly focused And directly designed for those new applications in adjacent We have we see that there is quite some traction in many of those that we have chosen, which is on the one hand Micro Mobility, so motorcycles, e scooters, e bikes, last night delivery vehicles, On campus automated vehicles, etcetera.
So That micro mobility is going very well. On the other hand, we had a lot, thanks in fact to a bit To COVID, like we mentioned already more than a year ago, is that our temperature But also our magnetic sensors are being used in medical equipment, thermometers, Access, control, etcetera. And what we believe is that this is sustainable because The world is now more attentive to infection risk, and it will continue for sure for a number of years. And we see also many new applications coming In the medical arena, patient monitoring, etcetera, where our products can definitely find their application and make a difference. And one more and then I'll stop is in the gaining where our smart drivers and also our magnetic product portfolio It has really boosted our sales, but also our outlook.
So I think it's the combination of those three factors that make us outperform maybe in 2021 a bit better than In the past, though that has always been our strategic intent to do better than the market and to focus on the strengths of our technologies and make I hope that answers your first Question and I'm looking forward to your second one in the second round, Francois.
Thank you. The next Question comes from the line of Ruben Davos from KBC Securities. Please go ahead.
Yes, good morning. Thanks for taking my question. Just a little follow-up on the first question related to auto. Just thinking about the developments obviously, specifically the global ship shortage, Yes, we're seeing a strong rebound with basically a lot of production stops and lost car sales in such environment. I could imagine that Tier 1 suppliers are now very much reevaluating the product sourcing and relationships with vendors.
So I was curious basically with all of these happening, do you think that leads to some opportunities in terms of forging new relationships? Or are there maybe other elements that you feel overt adding based on your latest discussions with your customers? Thank you.
Yes, thank you. Very good question. Well, any disruption creates opportunity, for sure. And yes, It does lead, in some cases, to new relationships with customers. The good thing about the business model that we are pursuing Both towards our customers and towards our suppliers is that we are a loyal partner To them, so both towards our customers, towards the ones that are loyal to us as well.
So it is a bit reciprocal, Of course. And the same thing with suppliers. So because of a I mean, we're not perfect, of course, in In forecasting and in translating customer and market forecasts into forecasts for our own production And for our suppliers' production, but both our customers and our suppliers confirm that we're really Doing the, yes, very well in comparison with some others. And that creates, of course, also opportunities for Melexis or to the advantage Of Nelexis.
Thank you. The next question comes from the line of Janardan Menon from Liberum. Please go ahead.
Hi, good morning. Thanks for taking the question. I'll try to fit as much into one question as possible, Which is that? So my question is on the shortages of capacity predominantly. So how badly were your capacity constraint in your Q1 and into Q2.
So what I'm trying to get at is, if there was absolutely no capacity constraint, What would have been your sales? How much more growth could you have achieved In the Q1 and what would be your Q2 guidance in that situation? And then the same is To a certain extent, for your full year guidance as well, if you had exactly the same order book and no capacity constraint, Then what do you think would be ability to sell? And secondly, I mean, just as a corollary to that, it's not a second question, but When you talk to your supply chain, when do you see the any signs of the capacity constraints easing off, either on your Back end assembly providers or from XFAB, etcetera, are they saying that or are you seeing that they are going to bring in A significantly higher level of capacity by H2 or by Q4 or Q1 next year or something, at which point you would think that things would get Better. Thanks.
Well,
the reasons for the chip shortage that I mentioned before, 1, the short term inism, which is still aggravated by the yo yo effect that COVID-nineteen is bringing And of course, the geopolitical turmoil didn't help. That is one reason. The other reason are indeed the supply constraints Due to but now I'm talking the full industry Has underinvested, and there is also this concentration of capacity with some Few players. I think it's very hard to define how much we could have done. A lot In Q1, we have been able to use our work in progress, as I mentioned.
But in fact, the it is also very hard because as I mentioned before, we don't know how much hoarding And what is important is the full year Guidance, we sure cannot deliver what our customers want. We have allocated the capacity towards Our customers based on what we know from the past, so past so we make a difference in fact between those programs that we had Between those programs that we had already and that we understand the volumes of From the past and those programs that are new and we, of course, take care that also the new programs, we deliver the ramp up As much as possible to the request of the customer, but we make a distinction. The What we could have done in Q1 or Q2, I think it's not really so relevant. The main, yes, item is that we see that we have a solid demand That we work well with our customers in order to keep them going and that this Situation is leading to better visibility because now customers are ordering for a longer period of time Because they want to be sure. So it gives us a good visibility, which I think 3 months ago was not necessarily the case yet.
Now we see more and more that we get good orders in, which, yes, therefore, leads us To increase our guidance, how long will it last? Yes, I think it will last definitely until the end of the year already. Some say until beginning of next year, but okay, I think it's hard to predict As such, but definitely until the end of the year, it will remain tight. I hope that answers your question, Gennardan.
Thank you very much.
Thank you.
Thank you. The next question comes from the line of Mark Hesselink from ING. Please go ahead.
Yes. Thank you. I think in the previous call, you talked about that you expected a digestion period in the second Half of the year, as were your clients ordering too much in the first half of the year? And that clearly changed. But Why did that change?
Is that the in the end, the structural end demand? Or do you see a trend that indeed because of those too
I think it is structural end demand for Melexis, Sure. There is some poising of the line so that the inventories are back Our customers want to bring inventories back to where they were. We had warned them last year That they were allowing their stock levels to go much too low, and that's why we factored that in to our production planning, which made us able or which allowed us to already raise Our output in Q4 and in Q1, but there is a limit to everything, of course. So definitely structural end demand, Some inventory buildup, but only to bring inventories back to a more normal level, which we cannot do At this time or which our customers cannot do at this time because they seem to still want more, But the structural end demand is also in other areas, so not only automotive. And that is the good news that, in fact, the strategic intent that we've Had in our vision for quite a number of years, is now finally reaching a point where, Yes, where things are getting traction, and it's a good momentum.
So we have to, of course, adapt then our capacity for test. We have to adapt also the forecast to our suppliers, and that's a whole lot of work that is being done as we speak.
Thank you. The next question comes from the line of Robert Sanders from Deutsche Bank. Please go
ahead. Thank you for taking my question. I just had one, which is When you think about your front end capacity at ex fab, will the Malaysian fab have Have sufficient capacity going forward to meet the higher demand? Or will you qualify and ramp up the French facility or perhaps more foundries? Thank you.
Well, we Melexis uses all of the fabs of ex fab. So Kuching, AirFort, Itsoho, Lubbock and also Corpay. Indeed, we have been working in the past couple of years already quite a bit because it takes a long time before you can qualify a new Fab or a new process in a new fab. So we've been working with X Fab to indeed increase output In or no, increased output in all the facilities, but definitely to increase The number of products and technologies that we have been qualifying in Corvea in France, And that's where the highest output increase will happen In this year, rolling over to the next.
Thank you. The next question comes from the line of Michael Vogt from Degroof Petercam. Please go ahead.
Yes. Good morning. I was wondering, the increase in guidance, is that entirely volume driven? Or is there also a price component to that? And if there's a price component, is it just a general increase in prices?
Or are you passing on higher raw material prices?
Yes. It is mainly volume driven, Michael. And there are some price Increases, but as I mentioned before, Melexis is a loyal partner to both its customers and its suppliers. And we have loyal customers and loyal suppliers. And of course, some of the price increases of our suppliers Are being handed through to our customers, but not all of them, let's say.
But we are increasing some prices, for example, to some less loyal customers or new customers Or distribution customers, but that does not move the needle necessarily as much as the volume. So it's really new programs and good volumes that drive our updated guidance.
Okay. That sounds very reassuring because volumes are more of a good indicator than pricing. But Why are you doing yourself a disservice by not passing on every price hike that you get from your suppliers? What is the constraint in passing everything on?
Well, you know that it's hard and it's a second question, but I'll allow it for now because it indeed attaches To your first question, because loyalty pays off long term, that's why.
Thank you. Before starting with the follow-up questions, just a reminder, you may ask your question or your follow-up question Thank you. The next question is a follow-up question coming from the line of Francois Xavier Bouvignet from UBS. Please go ahead.
Thank you very much. I get the second chance. It's maybe more
turning on the profitability side, if I may. So if we look
at your EBIT, I mean, Tisai, if I may. So if we look at your EBIT, I mean, margin has been particularly good. And if I look at 2 components with it, it's Profitability, obviously, the gross margin and the OpEx line. And the gross margin seems to be, when you look at the guidance, unchanged Despite higher revenues, so I was wondering what is the delta and why don't you see more leverage here? And on the OpEx side, the OpEx to sales ratio, I mean, in Q1 was at least below 20%, which is, I think, the lowest In your history, I mean, from what I can see and the guidance would imply as well very low level values versus your history.
So I was wondering what we should think how we should think about OpEx going forward. Don't you do you want to Invest a bit less in terms of percentage of sales. Just how we should think, yes, in the medium term or short term, please? Thank you.
So first on the gross margin. So indeed, the gross margin of 42 with the guidance of 41. So in the Q1, we were still helped by increased capacity utilization. And also, Javi grew quite strongly in magnetic sensors. This helps offering the product mix.
So the impact of the product mix was also positive in Q1. However, for the rest of the year, it's very difficult to predict The product mix and what we also know is that we will need to increase capacity, and we will take the new facilities In use, as from the second half of the year, so this will put some pressure on the gross margin for sure. That's why we guide overall for the year for a gross margin of 41%. Coming down to the overall OpEx, Indeed, it is low. It is also low compared to what we had budgeted internally, the OpEx.
And we do expect Some increases. However, this will be not huge either. So more or less in line with what we We'll see in growth in sales the potential sales growth over the next quarters. So and mostly in R and D. And then what I mentioned already, the fact that we will Start using our facilities in Bulgaria.
We'll also bring along some additional Costs as well. So yes, a gradual increase, but not very high.
Thank you very much.
Thank you. The next question comes from the line of Jeff Osborne from Cowen and Company. Please go ahead.
Hey, good morning. Just two quick ones for Karen. One, can you talk about what the shares outstanding were? I might have missed it in the release, but for the Q1 given the issuance and what we should think about for the Q2? And then also you had a It was a negative $2,100,000 financial result loss.
Can you talk about what the impetus of that was?
Yes. So the first question, the share issuance.
Shares outstanding.
The shares outstanding, what do you mean the total number of shares?
Exactly. And it's
still Did you issue
a couple of 100,000 new shares or was that
not a treasure? It's still
$4,000,000 the total we always
Okay. And then what about the financial result?
So the financial result is mainly related to U. S. Dollar exchange rate. Thank you. So the weakening of the strengthening of the dollar at the end of quarter.
Perfect. Thank you.
Thank you. We do have a follow-up question coming from the line Michael Vroger from Degroof Petercam. Please go ahead.
Yes. A second question or third actually. What is your view on geopolitical sovereignty, considering your sales mix is very much skewed towards Asia? And it's quite well known that China wants to be semiconductor independent. Now the U.
S. Is following and even the European Union is thinking of Semiconductor Independence. Do you see it as a risk or a threat to Melexis?
Geopolitical turmoil is always a risk to everyone, not only to Brexit. So it's not different for us than for the others. Now we are not busy in the areas, For example, 5 gs, which is mostly what the U. S. Is targeting.
We, of course, suffer because Huawei, for example, Is a customer, has been a customer until last year. I think it's not Good news because indeed deliveries Has stopped mid September last year and which as you probably read in the press, There is hardly any company that had so we also asked for a license, applied for a license, but there is hardly any company that got The license from the U. S, which makes you wonder about how the U. S. Is using this, Yes, in fact, to give advantages to their own industry.
So I would plead for, as I said before, semiconductors are used In every walk of life, in almost every product, and I think it is a mistake To not work together over the whole world For semiconductors, and it's better in my view to use the appropriate channels, Which have been a bit inactive in the past years, and that is the WTO. If we could get together, Use the WTO to get us out of trouble, then it will help the world. It will help climate, Yes, the fight against climate change, it will help the fight against pandemics because semiconductors Are important in order to get out of these difficult challenges. So I hope that our politicians Wake up to that challenge To be seen, I have no or little influence, let's say, what is happening there. But I think it would be a mistake in Europe because I know that It's been all over in the press that we also want sovereignty, but I think Europe has to work on its strengths And play out the strength that it has.
We have very specific Semiconductor equipment and semiconductor players that we can definitely build on. And we have also a fantastic Consumer base, which has to be interesting for the U. S. And for China. So I hope that along these lines, We get to better conversations, let's say it like that.
Okay, good. Thanks for the elaborate answer.
Thank you. There is another question in the queue, and that comes from the line of Varun Rajvansi from JPMorgan. Please go ahead.
Hi. Thanks for letting me on. Just a quick follow-up on content growth. Francois, you mentioned that content growth in certain areas was better than what you had expected. So just one thing, can you elaborate a bit more on which applications you are gaining shares specifically with your product portfolio?
And as you think about the medium term, is there any upside to your Content growth assumptions of high single digit percentage, specifically in the automotive space. Thanks.
Well, I would invite you to subscribe to our Analyst Day, which is on June 1. And I think you'll get good answers there. I think it would lead us too far here. But it's not Too long. It's a bit more than a month from today, and I think you will get a good overview Of the content growth that we're seeing.
I had a feeling you would say that. I look forward to having this case. Thanks, Francois.
Yes, it's a way to invite you as well. Yes, but I think it's better to wait for that because then you get a 360 degree view.
Perfect. Thank you. You're
welcome. Thank you. There are currently no further questions in the queue. So I'll hand the call back to our speakers for the conclusion remarks.
Okay. Thank you Very much, dear audience, for having joined our call today. Our next earnings conference is scheduled on July 28, and that will be my last one in the role of CEO. But before that, we'll host our virtual Annual Shareholders Meeting on May 11. And as I mentioned just now, our online analyst meeting on June 1, where my successor, Marc Byron will be speaking as well.
Looking ahead, please do stay safe. Goodbye.
Thank you for joining today's call. You may now disconnect.