Melexis NV (MELE) Earnings Call Transcript & Summary

Good day, and welcome to the Melexis Full Year 2022 Results Conference Call. This meeting is being recorded. At this time, I'd like to hand the call over to Mr. Marc Biron, CEO. Please go ahead, sir.

Thank you. Hello, everyone. Welcome to the earnings call related to our Q4 and full year results. Today, we have 2 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 questions you may have. Our revenue in 2022 has increased by 30% compared to 2021. This increase was supported by the dollar effect, the price inflation, the improved product mix, the cap sales increase and the content growth. Our growth in '22 was heavily constrained by the supply, but it was also clearly driven by the car electrification as well as by a significant increase in both the chassis and safety applications. Those trends are also visible in the outperforming product line. First of all, the revenue of the current sensor product line has doubled in '22, thanks to high demand in inverter, on-board charging, DC/DC converter applications. The sales for the embedded drivers, which are supporting thermal management in electric vehicle, has also increased by almost 50% in '22. And the increase of the sensor content in safety application has contributed to the highest growth in absolute value of our magnetic sensors. We have launched 16 new products in '22, and those launch also confirm those trends. Just as an example, we have launched embedded drivers, which are used to position the activator of the thermal valve. And therefore, those embedded drivers are key elements to increase the range of electric vehicles. We have also launched a current sensor, which is used for the battery monitoring of the electric vehicle. And we have launched multiple magnetic position sensors that are used in steer-by-wire system, but also in the thermal valve of the electric vehicle. For 2023, we anticipate the continuation of supply chain constraints for the innovative applications that are used in electric cars and also high-end cars, while for the other application, demand and supply are moving to a healthier balance. I'm now giving the floor to Karen for more financial results.

Thank you, Marc. So hello, everybody, a bit on the financials. So the sales was already mentioned, a 30% increase. We reached EUR 836 million. Then there was an impact of 5%, a positive impact because of the strength of the U.S. dollar. The growth result was EUR 374.7 million or 44.8% of sales, which is an increase of 37% compared to 2021. R&D expenses were 10.8% of sales, G&A was at 4.9% of sales and selling was at 2% of sales. The operating margin, our results was EUR 226.5 million or 27.1% of sales, an increase of 53% compared to EUR 148.4 million in 2021. The net result was EUR 197.2 million or EUR 4.88 per share, an increase of 50% compared to EUR 131.1 million or EUR 3.25 per share in 2021. The Board of Directors also approved a proposal to the Annual Shareholders' Meeting to pay out over the result of 2022, a total dividend of EUR 3.50 gross per share. This amount contains an interim dividend of EUR 1.3 per share, which was paid in October '22, and the final dividend of EUR 2.2 per share, which will be payable after approval of the Annual Shareholders' Meeting. We'll go to the outlook. So Melexis expects sales in the first quarter of '23 to be in the range of EUR 225 million to EUR 230 million. For the full year '23, Melexis expects a sales increase between 11% and 16% with a gross profit margin around 45% and an operating margin around 26% at the midpoint of the sales guidance, all taking into account a euro/U.S. dollar exchange rate of 1.08. For the full year 2023, Melexis expects CapEx to be around EUR 70 million. So I would like to now open the Q&A session. So operator, please go ahead.

[Operator Instructions] Our first question comes from Francois-Xavier Bouvignies from UBS.

I have a couple of questions, if I may. The first one is maybe coming back to your outlook. I mean, if we look at your Q1 guidance, it implies 24% growth year-over-year. And I mean, your full year is on 11% to 16% year-over-year. So I was wondering it would imply significant slowdown or even no growth in the second half of the year. So I mean, are you being conservative here or in light of the macro environment? Or is it something that you see and the slowdown? And any drivers you could provide for this implied slowdown would be helpful.

Yes, thank you for the question. I think the -- yes, we are more cautious by the supply aspect because, I mean, all the -- or the vast majority of the growth is coming for innovative products or for innovative application, electrification, ADAS and also premiumization. And yes, those new products needs to ramp up, and it's why we are a bit cautious on the supply aspect for the full year.

How much supply do you have in volume term? I mean do you get from your foundry partners? Supply incremental...

Can you repeat the question?

What is your supply incremental that you get from your partners? How much you can increase your capacity in '23 versus 2022?

Out of the -- from 11% to 16% increase that we have guided, it's mainly constrained by the supply.

So it's mainly volume here...

Yes, it's difficult because any hiccup in the supply will have immediate effect on Melexis. It's very difficult, therefore, to predict already now what the supply will be.

Yes. And I repeat, we are ramping up those new applications, those new products. And we know that the ramp-up is always a bit sensitive. That's why we want to be cautious.

So you don't see any inventory impact or demand-driven impact in the second half of the year. So it's really only supply that would justify the H2 implied outlook, if you know what I mean.

Yes, we don't see indeed -- for those innovative applications, we don't see demand reduction.

Okay. The second question is on current sensors. I mean you have been talking about that for a while now. Can you help us understand how much is it as a percentage of your revenues, current sensors at the moment?

Yes, as I mentioned verbally, it has doubled if we compare '21 and '22. And it was indeed a small product line at the beginning, and now the product line is growing. And it's, I would say, in the average of other product lines, but we don't give exact number, but it's for sure not a small product line anymore.

So is it like mid-single-digit percentage, high single-digit percentage of revenues, low single-digit still? Just trying to understand because it's obviously a very important driver for your growth. So I understand how big it is. So that's where we can have more visibility on this new product line.

Well, again, we don't give exact numbers on this. But yes, actually, overall, the -- yes, the electrification products is a substantial part, but then that's more than current alone. So there, we speak of a very important portion already of Melexis. But again, we don't want to give -- and then I'm talking of the motor drivers and other application like X, Y, Y-ish type of applications. If you take this into account, you come at least 30% of our sales.

Okay. Great. And maybe last one for me, if I may. On the OpEx, OpEx has been quite high this quarter. I mean is it a new run rate or any one-off in this OpEx? Just trying to model for the year.

Yes, there are -- yes, there is the wage inflation that is -- or inflation in general, but certainly wage inflation that had the full impact for the first time in Q4. There is also a bit -- there are a few exceptional items as well. So it could be that Q1 is again a bit lower. But on the other hand, yes, we want to do -- we plan to do volume hiring for R&D. So yes, in that respect, throughout the year, we expect R&D as we managed to execute. So it's indeed to further go up versus Q4 as a percentage of sales. And -- but at the beginning of the year, it might still be a bit lower.

And our next question comes from Marc Hesselink from ING.

Yes. First question, the ICs per car for Melexis, stable at 18. Can you maybe explain a little bit what's behind there? Is that the shift in maybe a little bit less premium cars? The shift was -- maybe linked to that, how many ICs does Melexis have in electrical vehicle?

Yes. In fact, last year, it was a bit less than 18. It has been rounded up to 18. This year is a bit more than 18, and we keep it why we mentioned 18 plus because we have almost 1 IC per car more versus last year. In fact, indeed, our revenue has grown by -- a growth by 30%. But those 30% were due to some dollar effects on price inflation. We have improved the product mix, thanks to the allocation. And then in terms of volume, the cash sales volume has increased and our content growth has increased. It's why out of those 30%, only part of it is really a volume growth or content growth, and this is corresponding to a bit less than IC per car.

And the element of -- looking forward on electric vehicles, are you above that 18-plus level? Or is it probably similar?

I would say in general, yes, because in the electric vehicle, there is the electrification aspect of the vehicle, but also those vehicles come with a much modern platform. And the much modern platform also contain much more comfort and safety application with a lot of electronic. Then I would say, in total, the electric vehicle is much more than 18 IC per car. If you remember last year or the year before, we mentioned some IC per car for some modern car like the Tesla or the EQS, and we were, yes, 40 plus in such a car. And it is because the electrification is coming with a more modern platform than -- overall, the car is much more modern, meaning with much more electronic.

Okay. Then the second question I have is on the long-term agreements of the forecasted revenue growth. How much of that is on those long-term agreements?

I think we mentioned last time that the long-term agreement was for half of the volume.

And that's still the case.

It's still the case, yes. We -- yes, we still have some -- we have added some long-term agreements recently, but it does not change really the needle. I think, overall, it's 50%.

And final question. In the growth guidance, sorry to miss this, how much of that is a price component? How much is for raw mat price?

I would say it's very low double digit.

We will now move to our next question from Guy Sips from KBC Securities.

Yes, a few questions from my side. First on nonautomotive. Can you give some color on that segment?

Yes, I would say that the situation is similar to the previous quarter. We have 10% of the revenue, which is related to the nonautomotive. And yes, I would say there are 2 reasons why it does not increase. The first reason is linked to the allocation. We have -- during the full '22 , we have always given clarity to the automotive business, meaning that we have, let's say, derived some wafers from nonautomotive to automotive customers. This is one aspect. And the second aspect, which came throughout the end of the year, is indeed we have also seen some reduction of demand for the nonautomotive, which was healthier for us because we have been able to derive even more wafers to the automotive business. And then all in all, the 10% remains stable throughout the year.

And as automotive is stable or still growing in a quite difficult climate for other semiconductor segments, do you see new kids on the block are still the usual suspects in the competitive landscape?

I would say the usual suspect, yes.

Design win was very strong in '22, so...

Yes. We have -- already in '21, the design win was very strong, and we were wondering can we beat '21, but we have beat in '21 largely in '22. But it was a very strong design win.

And last question is on this trend, like you benefit from electrification at a user experience. Which of these trends do you expect to be more important in the shorter run and which will be more, let's say, for 3 to 5 years out?

If we look, let's say, the projection of the growth from -- for the next 5 years, let's say, clearly, the highest growth is coming from the electrification of the car. I think yes, to IHS, for example, expect that between 2022 and 2027, the CAGR will be 28% for the electric vehicle, and this is for sure the highest contributor and then the premiumization is the second one in terms of contribution. And the ADAS, I would say, 5 years ago, the goal was to reach Level 5 in ADAS. But now I think everybody is much more modest. Level 5 is not for the near future, but we see that more and more cars are moving to Level 2 and to Level 3, which is also good for Melexis because to reach Level 2 or Level 3, you need much accurate products. You need also a product with more safety. Sometimes to create the safety, you need also 2 projects in parallel. Then I would say this is the third in terms of contribution.

And our next question comes from Robert Sanders from Deutsche Bank.

I guess my first question would just be around the Malaysia fab issues that X-FAB experienced. Did that affect you in Q4 or Q1? And would your revenue have been significantly higher? Or was it not that material? And I have a few follow-ups.

Yes. In fact, indeed, you are right. I have -- our supply in Q1 is affected by this problem. And this problem happens, something in October. And given the supply chain lead time, in Q1, we have some supply limitation due to this problem.

Does that mean your lead time has got longer?

No, no, no, it's not a problem of lead time. It's really a problem of lack of supply.

I mean lead time for your products in the market, in the channel.

Yes. In a way, yes, because we have received last -- I mean the supply chain was a bit empty at one point in time, then it creates some delay in the overall supply chain.

Okay. Can you -- just coming back to a previous question regarding the contribution of price to the growth in 2023. I just want to clarify what you meant by -- did you say low double digit? So pricing is up low double digit, very low double digit. Is that what you meant or something else?

Yes, it's indeed around 10%, I meant.

Okay. So if you're guiding for -- in the teens, then 2/3 is driven by price. Am I interpreting that the correct way, yes?

Yes.

Okay. So more than half. Okay. And then in terms of LTA enforcement, obviously, there's going to be a challenge going forward when we have this correction in 2024. So X-FAB has been very clear that they will strictly enforce LTAs. How does it feel for you guys in terms of strictly enforcing take-or-pay type terms? Is it a bit more tricky for you guys given that some of your competitors will have better supply than you and will likely start undercutting you? Or is this something that -- and will you enforce these LTAs strictly in 2024?