Melexis NV (MELE) Earnings Call Transcript & Summary

Hello, and welcome to the Melexis full year 2020 results. My name is Judy, and I'll be the coordinator for today's event. Please note that the call is being recorded. [Operator Instructions] I will now hand you over to your host, Francoise Chombar, CEO, to begin today's conference. Thank you.

Thank you, operator. Dear audience, I sincerely hope that you and your close ones are all healthy and well. Thank you for joining the Melexis Fourth Quarter and Full Year 2020 Earnings Call. Next, to new hopes for the vaccine, the new Year is bringing new opportunities. And together with Karen Van Griensven, our CFO, we'll be glad to talk to you about both the past and the future and answer any question you might have. During the pandemic, the Melexis values were and are our best vaccine, and that shows in our 2020 results. Thanks to the proactive supply chain and inventory management that Melexis adopted and that allowed us to already sequentially grow 21% in sales for the third quarter. We added another 21% sequential growth in the fourth quarter despite a tiny negative euro/dollar exchange rate impact. Q4 came out at EUR 147.4 million, the best quarter ever in the Melexis history. This made us conclude the rollercoaster year with a 4% year-over-year sales growth. Considering worldwide car production contracted by an estimated 15%, this is no small accomplishment. Based on 2020 data, we can now state that on average, every new car worldwide carries 13 Melexis chips onboard from 11 the year before. Another record, showing that Melexis is well underway on its road from 10 to 20. Outperforming product lines in 2020 were temperature, pressure and current sensors and smart drivers for fans and pumps. There was also significant growth for our magnetic latches and switches and for embedded lighting drivers. Already at our previous earnings call, we estimated customer inventories to be at low levels. Today, it looks like everyone in the industry is meanwhile delivering hand to mouth. There is heavy restocking going on. And the bullwhip effect in supply chains is hitting the industry more vehemently than ever before. The root of the matter is that the downstream customer base waited for too long to reorder and most didn't sufficiently take into account that it takes a physical cycle time of months to reignite a semiconductor supply chain. We believe that there is overheated holding in our markets today, which we expect to continue into the second quarter. While remaining cautious about the evolution of market demand in the second half of the year, the Melexis outlook for a 15% to 20% sales growth in 2021 is a combination of 3 favorable factors. Automotive and demand has returned, particularly in China, where car sales has rebounded since June. And customers worldwide are now replenishing their inventories at an astonishing rate. Two is content growth. Melexis and its customers won several new programs that are now ramping up, some also at an unexpected speed. Cases in point are embedded lighting and many new applications for electric vehicles and hybrids. Last but not least, and as mentioned already at several occasions last year, the adjacent portion of our sales grew more than 50% versus 2019, in line with our strategic intent. Also in 2021, the creativity and engagement of our people will allow us to thrive. And I want to thank all Melexians for showing the high level of customer support they're demonstrating every day. In these on/off pandemic times, our business creation teams have been remarkably prolific, too, and 2020 marked another record, namely in total product launches. During the fourth quarter alone, we launched no less than 8 new products, half of which are specifically conceived for adjacent markets, such as 2-/3-wheelers, home applications and Industry 4.0. Newly launched automotive products include current sensors, a smart tire sensor and a novel motor driver for mechatronic applications all of which serve the future car, carbon-free and intelligent. Before I hand the stage to Karen, please allow me to point out another announcement we made this morning right after the publication of our full year results. And that concerns the change in the Board and management. I'm thrilled to announce that Marc Biron will take over my role as CEO as from August 1. I will take over the chair from Roland Duchâtelet on the same day. Roland will remain a member of the Board. Marc will also be joining our Board, subject to shareholders' approval in May. These changes in no way mean a change of strategy. On the contrary, Melexis is in the starting blocks for the new decade and Marc and I are looking forward to contributing to the best imaginable future with our technologies and together with our people and our customers. It's with pleasure that I now pass on to you, Karen, for more color on the financials.

Thank you, Francoise. So good morning, everybody. As mentioned already, Melexis sales came out at EUR 507.5 million for the full year 2020, an increase of 4%, and a small EUR/USD exchange rate effect that was negative of around 1%. The gross results was EUR 198 million or 39% of sales, an increase of 1% compared to 2019. R&D expenses were 15.3% of sales, G&A came out at 6.1% of sales and selling was at 2.7% of sales. The operating results was EUR 75.5 million or 14.9% of sales, an increase of 7% compared to EUR 70.6 million in 2019. The net result was EUR 69.3 million or EUR 1.72 per share, an increase of 15% compared to EUR 60.3 million or EUR 1.49 per share in 2019. If we look then at the fourth quarter, so the fourth quarter came out at EUR 147.4 million, so the highest quarter ever for Melexis. An increase of 16% compared to the same quarter of the previous year and an increase of 21% compared to the previous quarter. Also here, we have a EUR/USD exchange rate effect that was negative for an amount of around 3%. The gross results was EUR 58.3 million or 39.5% of sales, an increase of 16% compared to the same quarter of last year, and an increase of 30% compared to the previous quarter. R&D expenses were 13.7% of sales, G&A was at 5.9% of sales, and selling was at 2.5%. The operating result was EUR 25.8 million or 17.5% of sales, an increase of 41% compared to the same quarter of last year and an increase of 64% compared to the previous quarter. The net result was EUR 24 million or EUR 0.59 per share, an increase of 56% compared to EUR 15.4 million or EUR 0.38 per share in the fourth quarter of 2019, an increase of 61% compared to the previous quarter. The Board of Directors also took a decision towards the final dividend. So the total dividend payable over 2020 is EUR 2.20, at least that is the proposal. EUR 1.30 was already paid out, but 0.9% -- EUR 0.90 per share is still payable after the Board -- the shareholders' decision in May. The outlook for Melexis. So Melexis expects sales to be -- in the first quarter of 2021 to be in the range of EUR 155 million to EUR 160 million. For the full year 2021, Melexis expects sales growth between 15% and 20% with a gross profit margin around 41% and an operating margin around 19% at the midpoint of the sales guidance, and all taking into account a EUR/USD exchange rate of around 1.21. So I would like to now propose to open the session of Q&A. So operator, please go ahead.

[Operator Instructions] The first question in the queue is coming from the line of Francois Bouvignies from UBS.

I just wanted to say, first, I mean, Francoise, after all those years, I think it's a consensus to say that your execution and insight communication were highly appreciated in the investor community. So I just wanted to say thank you for that. Even though you are still around, it's still I wanted to say that. I have a couple of questions. The first one is on your full year guidance. Could you give us the production that you have for the industry in '21 by any chance?

Thank you, Francois. Well, thank you first for your compliment. I would like to add that I didn't do that alone, of course. There are 1,500 Melexians around the globe that managed to put that good result on the table. So I -- I'm definitely not alone in doing that. Your question was about the future. Could you repeat it because I'm not sure I really get your question. Could you repeat the question?

Yes. So in your full year guidance of 15% to 20% for '21, how much do you have for the production volume for the industry? What did you have in your forecast?

For the -- for which industry do you need me to...

Car -- car industry.

I guess the automotive industry. Well, what -- yes, the point is that, of course, already in June last year, the car industry started to pick up again in China, and it has continued to pick up. I think you see also that there is some recovery in the U.S. Europe stays a bit behind for the time being. But what we see is that mainly in Europe, we're doing well because of mainly -- so we're doing well, not only because of the recovery as a whole worldwide, but also because -- and that is particularly in Europe. We have quite some new applications that are coming on board in the course of 2021 and have started already last year. So that is, I think, the general perspective. Now if you look at the number of vehicles that are forecasted to be sold in 2021, it does not yet reach the volume that we had in '19, let alone in '18. So I think the industry will still need some time to recover further, particularly in the U.S. and in Europe. But what is clear to us already is that on the one hand, we have, as I said, there are 3 factors to our guidance. The first factor is, of course, the recovery as such, which, in our view, okay, you never know what the pandemic does, but with the vaccines coming, we think that recovery is underway, and people will be glad to be able to consume again and to pick up some of the normality of before. So there is, first of all, the recovery. There is, secondly, the restocking, which is, of course, at a higher run rate at this time than the real run rate of the end demand that is behind it, but that is normal, let's say, that's pretty logical. As such, as long as it is not over -- an overreaction, it's okay. There is, secondly, the content growth, as I mentioned, many new applications, a lot of embedded light drivers, and it's not just light for comfort or making your car look nice, but it's a lot of light also in combination with safety, with driver warnings from, let's say, more static light to highly animated light that you find also in high-end cars more and more, also in China. So we're particularly also growing there in China. And we see a lot of new applications on the electric vehicles and hybrids because, yes, there are simply new applications, as we've already mentioned in the past, and we're glad to be able to take those opportunities as well, with all the new products that we've launched in the past year. And then thirdly, the outlook. The third factor is that the adjacent markets have grown tremendously in 2020. And we see that, yes, most of these wins or these awards are sustainable going forward.

Okay. That's very clear. And maybe a follow-up on your drivers. I mean when you speak about inventories as well as restocking. When I look at 2020, for automotive, at least, your growth was plus 1%. And you said the production was minus 15% for the year. So it's significant, 16% outperformance. So of course, in '19, you had this opposite, right, of destocking, and you mentioned the whip effect quite often. So my question is this outperformance in 2020, which is more than most of your peers in automotive. To which extent you had already restocking of your products, not Melexis, but all your products in 2020 and when I look at '21 in this context, I mean even if we assume volume slightly below '19, it's still more than 15% of the production unit. So your guidance of 15%, 20% doesn't seem to reflect much of the content or does it mean that you are conservative? Or does it mean you have a destocking in '21, if you see where I want to go?

I don't think there will be a destocking, but there will be some fluctuation, of course, on the market. And we try to -- as you know, Francois, we always try to be as realistic as possible in our guidance. The fact that we, as you say, did a bit better than most of our competitors in 2020 is because we are extremely proactive. We understand this bullwhip effect in supply chains. And as you know, we've kept our inventories high, and we started already new material ahead -- way ahead of the orders that we got because the orders picked up a bit in September, more in October and went heavily up November, December, and they are still pretty high. And we had a head start in delivering to our customers in the fourth quarter already because of that proactive supply chain management. So some of the restocking, our customers have already done last year because we allowed them to do that. This year, I can only say that certainly in the first half, we have quite good order behavior, quite good visibility. Of course, in the second half is still a question mark. And you may call it cautious. But we call it, we say what we see at the time that we make the statement. And that is a statement that we are happy to make. If you look at the car production or car sales, let's say, prognosis. It's going from 74 million to 84 million units, more or less, which is close to 14%. We say it will be -- ours will be between 15% and 20%. I think that does include some of the additional volumes, taking into account that some of the restocking is behind us for Melexis already -- for Melexis customers already. I hope that answers your question.

Yes. Yes. And the last one for me is on the shortage that is very -- discussed in the industry at the moment. So I was just wondering if you see any impact on your side. I mean I know you have high inventories, but -- you can handle that, but do you see any pricing increase at the foundry level or the packaging side that could impact the gross margin? And how should we think about the gross margin in terms of underutilization charges or a negative impact this quarter quantified would be great? And that's all for me.

So on the gross margin, so the impact in Q4 was, as we predicted, there was still a strong impact of 1.4% after revaluation of the inventory. So the U.S. dollar content in our inventory, the revaluation resulted in an increase -- a decrease of the gross margin of 1.4%. It was more in Q3, it was more than 2% then. It reduced somewhat to 1.4%. It's still an important impact. Moving forward, the impact, there might still be some impact, but it will be small with the current U.S. dollar levels. The underutilization, in general, there is still some underutilization. But on the other hand, we will also take -- start using our new facilities from Q2 in Bulgaria. So that will also additionally increase the cost base for our manufacturing so that all in all, we do not expect a lot of leverage from our internal operational costs in 2021. Is that sufficient answer?

Yes, that's very clear. And the shortage, I mean, any impact on your side on the cost or...

Well, it's clear that some of the -- that there are some price increases that have been announced. We have raw materials that are more expensive. However, we have long-term contracts with most of our suppliers. And we always consider -- when we do negotiations, whether it's with our suppliers or with our customers, we always consider the whole business relationship in that long-term perspective. That doesn't mean that we will not have any price increases by our suppliers. Price increases towards our customer base, that remains very hard in the automotive industry, because there are many elements impacting price setting. And in some cases, we will indeed increase some of the prices if, for example, the underlying material cost has surged significantly. But Melexis is loyal to its loyal customers.

And the next question in the queue is coming from the line of Varun Rajwanshi from JPMorgan.

I have 3 questions. The first one is on the adjacent end market opportunities. This business is currently at EUR 60 million annual run rate. And you've been introducing new products specifically to address this market. And the design and momentum has also been good recently. How should we think about the revenue profile of this business in '21 and going forward? The second question is around electric vehicles and hybrids. Francoise, you mentioned in your comments that there are several new applications for EVs and hybrids that you're targeting with your products. So the question is, do you track how much of your sales comes from EVs and hybrids? And how has that business been growing? And can you also elaborate on the design and momentum for electric vehicle and hybrid applications? And finally, on your market share in magnetic sensor ICs, you mentioned that you're now addressing 13 chips on average per car. Can you also comment on your market share in magnetic sensors overall? And how has that trended through 2020?

Okay. That's a lot of questions, Varun. Let me start by the first one. So the adjacent, yes, we have been, as you have noticed also or may have noticed in our product launches for some time now, we are launching new products, specifically designed and aimed at adjacent markets. You will find those mostly in temperature sensors, in magnetic latches and switches, in some position sensors, in smart drivers and, yes, here and there also -- and current sensors, not to forget current sensors as well for the server market, for the solar market, et cetera. So that is one. So it was a strategic intent. And of course, our business creation people have been, as I said, very productive in that area. And we aim currently and are progressing currently in the following main markets. So you mentioned the 2-/3-wheelers, the e-scooters, the e-bikes. And what we recognize in our markets is that, one, our existing customers are also going there and because they know us, it's for them an easy transition, let's say, to use our products. They know us, plus in many occasions, the product is already there and can be used as is before we then make -- yes, sometimes an existing product serves as a base for a specific adjacent product as well, which makes it pretty easy. But what we also see is that there are new customers on board -- coming on board and using our automotive expertise, if you take also like these last mile connected vehicles that are coming on the stage more and more or Industry 4.0 applications in warehouses or on campuses, in hospitals, et cetera. Even if they are industrial applications, they do need the safety levels that Melexis is used to from the automotive industry. For us, it is, I'm not going to say it's easy, but at least it's -- it might be easier than for other companies to transpose this knowledge and this know how into specific adjacent products, targeting alternative mobility, last mile urban area connected vehicles, et cetera. So I think that is one of the aspects that is extremely important. And secondly, and it's a boost we got from the pandemic, but it's also very sustainable and has to do with health applications, where particularly the temperature sensors, but also magnetic position sensors, latches and switches, smart drivers are very wanted. And we see that really as sustainable for access control, buildings for diagnose equipment where you need, for example, a very stable temperature accuracy. So it is -- that is the second one. And the last one is everything that has to do with the fact that due to the pandemic, we people are shopping online, meeting online, entertaining online, everything is online. And that has, of course, boosted the connectivity market, the server farms and all these need energy and thermal management. And our products are really very well suited and are in the sweet spot of that market as well. So those are the 3 markets that we are successful in today, where we have launched new products last year and which will continue to come on board more and more in the coming years. So we see that as a positive spot to be in. That's your first question. The second question was on EVs and hybrids. Giving you an answer on what percentage of our sales is in EVs and hybrids, that's really, really a difficult question to answer. Because there's not only -- I mean the -- if you take it for the powertrain, we've published -- I would like to lead you to the presentation on our website, where we have updated our view on the market versus the different areas. And what you will see is that, for example, the hybrids have increased quite a bit. And our -- the sockets that we address there or can address there are also quite good and are continuing to increase. But of course, it's not only the powertrain. I mean there are many more applications. We've added a -- I think we've added Tesla example in the presentation. So this is a new slide, an updated slide from the one we had already used like 2 years ago, where you see that we have increased also the number of parts in the Tesla Model 3 and that gives you also a sense of it's not only the powertrain. There are many other applications in the body, in safety, in chassis that these new vehicles -- new energy vehicles are taking on board. But I honestly cannot give you any percentage because it's already hard to understand. It's a lot of work to understand which parts are used in which car because that's a myriad of possibilities. But what we are -- what I'm very positive in is that we understand the systems behind it. And many of our technologies find their application in those new vehicles, whether it's in the powertrain or in the body, chassis, and safety systems. Then the third question was the market share of magnetics. I think the market share of magnetics is more or less unchanged. The magnetic sensors, we have -- if you look at our product launches last year, we've launched quite a number of new current sensors, of new latches and switches as well, position sensors, where we see that -- and what we will see going forward is that we are bringing new parts on board that are specifically aimed at the electric vehicle and hybrid market. Why? Because you have a different environment. In electric vehicles, you have much more disturbance around. Hybrid and electric vehicles, you have more disturbances around. And our position sensors, we have slowly adopted -- or gradually, not slowly. I don't think we were slow. We have gradually adopted our product to serve also those markets. So I think our market share is steady. And we're gaining market share in the current sensor arena, also thanks to new products and to specifically applications in EVs and hybrids. I hope that answers all your questions for us.

Yes, it does.

And the next person in the queue is Matthias Maenhaut from Kepler.

Also 3 questions from my end. First question is actually more surrounding capital expenditures. So I recall that when we were coming out of 2017, at the start 2018, you announced a pretty important investment plan of some EUR 125 million. I recall that a part of that has been postponed. A part of that has been executed. How should we think about this plan going forward? Will this now be executed? And how should we think about CapEx and CapEx phasing both next year and over the years to come? And I have 2 more, but I will ask them one by one.

All right. So on the CapEx, I don't think we ever had more than EUR 100 million as planned. But indeed, we have high investment levels in 2017, '18, rather in the EUR 70 million, EUR 80 million range, I think. But yes, for this year, it was -- for 2020, it was clearly lower. It was rather around EUR 25 million. And for 2021, we expect levels of around EUR 40 million. So definitely, still way below the high levels we had a few years ago. Moving beyond that, that is -- yes, we are not prepared to give guidance on that today. But for 2021, we expect levels rather around EUR 40 million, of which EUR 10 million will still be for the Bulgaria facility.

Okay. Second question was actually on content growth. So indeed, very nice growth, growing from (sic) [ to ] 13 ICs from 11. How should we think about this going forward? Will this further accelerate over the coming couple of years? Or is this pace pretty much the pace you're aiming for going forward?

Well, content growth for us, Matthias, is definitely continuing. There are quite some new products in the pipe, as I mentioned. We've already launched quite a lot of them last year, and it will go on this year. I think our understanding of the market and of the new requirements is very good. And I'm positive about the ability of Melexis to serve the future transformed auto industry going forward. Is that an answer or do you have additional questions on that?

Yes. No, I recall there was a target to grow to 20, I think, by 2023. Is that a target to -- is that target still valid? Do you still aim to grow to 20 ICs per car by 2023, because it do kind of implies a significant acceleration? How should we think about that?

I don't think we put a year on it when we announced this, that was even, I think, in 2018, if I'm not mistaken. So the world was quite different at the time. But we didn't put a year on it. Definitely, we -- that is -- that continues to be our goal. And what we see is that with a pretty, let's say, depressed car industry in 2020, we were still able to increase our content in 2020 from 11 to 13. So I would say that is a good sign for the coming years. And definitely, that would be nice to have this by '23, but let's see what the world does in the coming years and let's see what Melexis does, but that's definitely our long-term target still, yes.

Okay. Very clear. Last question is actually on gross margins. How should we think about the gross margin in Q1? Is it clearly going to be a quite significant sales uplift? And can we see gross margin decently up because there's also less impact from a weaker U.S. dollar? Also more midterm, how should we think about gross margins given the different growth projects and the shift in the portfolio, I would say, with adjacent clearly taking up a bigger share?

Yes. So on the -- on Q1, indeed, with higher sales levels and also less impact of the U.S. dollar, we do expect our gross margin to be higher than in the fourth quarter. But it's difficult to say to -- at what level because there are many elements that impact positively or negatively, amongst others, the product mix, the capacity utilization, the dollar, the yield loss. There are many aspects that add to this. But yes, under normal circumstances, higher gross margin than Q4. Moving forward, midterm, we still -- yes, we aim to gradually increase our gross margin to better -- because of better capacity utilization, also the product mix adjacent is helping in the margin, limiting price iterations. There are several ways to work on our gross margins. So -- but for the foreseeable future, we stick to rather the levels of the 41%, I would say.

And the next person in the queue is Janardan Menon from the Liberum.

Francoise, I'd like to echo Francois's comments earlier, to say what an exceptional job you've done in this company over the -- over your period here, and I think you're leaving it in exceptionally good shape. So congratulations on a great tenure. I guess moving onto the questions. My main focus is on inventory, to be honest, and your comments on inventory. So you were saying that inventories for Melexis or your customer inventories for your parts have started rising before that for other semiconductor companies. So roughly, when did -- when do you think the inventories for your parts at your customer or channel started increasing? Was that around September, October last year? Or was it later than that?

Okay. Well, when you -- maybe you recall in the previous earnings call, we stated that inventories at our customers were, at that time, low -- at low levels. And we had -- we have -- had been warning our customers for their, let's say, low order behavior already for months. We -- because we're getting better and better at managing our supply chain, but it is still very difficult to completely match the order behavior. Even today, it's difficult. I mean it's -- the visibility is, on the one hand, good because customers have ordered a lot, but on the other hand, it's not so good because we don't know how much of that is meant for restocking and how much of that is underlying real demand. And that's an attention point. We know it for some, but we don't know it for all. Now we started -- as you might have noticed in our inventories, we, in fact, kept our inventories high because we know that these -- the parts that we make, or at least most of the parts that we make, not all of them, of course, but most of the parts that we make have no risk of obsolescence. We know that these will be needed to build cars. So for us, it was already clear at the end of Q2 that it would change at some moment in time. And when we saw the market pickup in China in June and then sustainably in July, we already decided in August that we would again put new material in the flow because we are also very aware that the structural capacity constraints in the semiconductor industry, they are not gone. They are still there. And they might even have exacerbated over 2020 because of the pandemic. So we did not see our -- the inventories of our customers replenish that fast. They were just quite late. Some of them were quite late in answer -- in answering to that pickup. And because we were so proactive, we were able to match some of their orders already in Q3, starting Q3, but heavily in Q4 as well. And that's a good thing because we did not, to my knowledge, yet stop any OEM from building cars, while, yes, some of our peers, as you have read in the press, have. So that makes Melexis quite a reliable supplier as such in the automotive industry. Inventories today are still low. Distribution customers, for example -- distribution channel is, for example, not high at all. It's -- and that's not necessarily a sign of higher demand, but rather of, yes, sometimes a bit of panic even because some of the -- our distribution customers might say, "Well, I might not need it, but with all these shortages around, with everything that I'm reading in the press, I better make sure that I have my orders and that I have my parts in-house rather than at the distributor." And so there might be some panic ordering as well. I think we will see more and more clear as the quarter goes on and that come our next earnings call we will be able to give you more information about this. But today, it's a bit difficult to...