Melexis N.V.

Thank you for the introduction. Dear audience, thank you for joining the Melexis fourth quarter and full year 2024 earnings call.

Together with our CFO, Karen Van Griensven, I will look back on the past year and share how we see the coming year. First, I would like to take a step back and give a bit more perspective on ‘24.

It has been an unusual year for Melexis with significant contrast in our markets. We have started the year with most of our products still in allocation and the order book has reflected good visibility.

As the year progressed and the allocation period ended, we thought that we had avoided the bullwhip effect, which is often experienced in our industry. This was, however, not the case and we did not achieve our original sales target of around €1 billion, which is disappointing.

Despite this, our ‘24 sales were broadly stable and significantly better than most of our peers. Of course, there are many highlights in ‘24.

We had a record number of product launches, which is the starting point for future sales growth. The success of Melexis has always been built on enabling our customer to gain market share based on our innovations.

I’m happy to see that we continue to capture a strong level of design wins in automotive and beyond automotive applications. In automotive, design wins covered a wide range of electrification, comfort and safety applications.

In powertrain, the design wins are well balanced across EV, hybrid and ICE, enabling us to capture growth irrespective of the type of engine. Geographically, we had a strong design win performance in China, confirming that we are taking the right steps to ensure our position in this important market.

Looking ahead, in the short term, some customer inventory correction are continuing in the first half of ‘25. We continue to work very closely with our customers to manage their short-term outlook, while push-out requests are returning to normal level.

We are closely monitoring many data points and are cautiously optimistic that customer demand will start to improve around summer. We have been through cycle before where customer needed to adjust their inventory levels and each time there followed years of sustained strong growth from Melexis.

Many product launches are planned again this year as we continue to invest in innovation. The high number of design wins achieved over the past year, are leading indicator of future sales.

Content growth is here to stay and we are well positioned to capture it. I believe that the seeds for the next phase of Melexis’ growth are now being sown.

Now I will hand it over to our CFO, Karen Van Griensven, who will comment on our financial performance.

So, thank you, Marc and hello everybody. So the sales for the full year 2024 were €932.8 million, a decrease of 3% compared to the previous year.

The Euro-U.S. dollar exchange rate evolution had no impact on sales compared to ‘23.

And the gross result was €401.4 million or 43% of sales, a decrease of 9% compared to last year. R&D expenses were 11.8% of sales.

G&A was at 5.5% of sales and selling was at 2.1% of sales. The operating result was €219.9 million or 23.6% of sales, a decrease of 16% compared to €261.3 million in 2023.

The net result was €171.4 million or €4.25 per share, a decrease of 18% compared to €209.5 million or €5.18 per share in ‘23. Sales for the fourth quarter of 2024 were €197.4 million, a decrease of 21% compared to the same quarter of the previous year and a decrease of 20% compared to the previous quarter.

The Euro-U.S. dollar exchange rate evolution had no impact on sales compared to the same quarter of last year and a positive impact of 1% on sales compared to the previous quarter.

The gross result was €77.6 million or 39.3% of sales, a decrease of 31% compared to the same quarter of last year and a decrease of 28% compared to the previous quarter. R&D expenses were 15.3% of sales, G&A was at 7.2% of sales and selling was at 2.8% of sales.

The operating result was €27.6 million or 14% of sales, a decrease of 55% compared to the same quarter of last year and a decrease of 57% compared to the previous quarter. The net result was €18.3 million or €0.45 per share, a decrease of 63% compared to €49.8 million or €1.23 per share in the fourth quarter of 2023 and a decrease of 64% compared to the previous year.

The Board of Directors also approved on February 3, ‘25 to propose to the Annual Shareholders’ Meeting to pay out over the result of 2024, a total dividend of €3.7 gross per share. This amount contains an interim dividend of €1.3 per share, which was paid in October ‘24 and a final dividend of €2.4 per share, which will be payable after approval of the Annual Shareholders’ Meeting.

The Melexis shares will start trading ex coupon on May 2025 and the record date is May 21, ‘25. Now we also will say something about the outlook.

So Melexis expects sales in the first quarter of ‘25 to be in the range of €190 million to €200 million. And for the first half year of 2025, Melexis expects sales to be around €400 million, with a gross profit margin around 40% and an operating margin around 16%, all taking into account a Euro-U.S.

dollar exchange rate of 1.03. Sales in the second half of 2025 are expected to grow significantly compared to the first half of ‘25.

And this is based on forecasted global automotive production for the full year 2025 to remain at the same level as last year and increasing semiconductor content in automotive applications. And for the full year 2025, Melexis expects CapEx to be around €50 million.

So this ends the introduction. So operator, you can now open the Q&A session, please.

Yes, good morning. Thanks for taking my questions.

I just have two. The first one is really the sort of expected question on the inventory correction.

It looks to be somewhat deeper than you expected 3 months ago at the end of October. Could you just talk about how your views have changed since October as we’ve gone through the critical end of year quarter?

That’s my first question.

Yes. Thank you for the question.

Indeed, if we come back, in summer ‘24, yes, starting in August and in September, we have seen a lot of push-out request. It means that our order book contain real order but those orders were not needed by the customers anymore.

And we have accepted all the push-outs during Q4, meaning that now our – now we don’t see push-out anymore. And our order book is, I would say, stable and healthy and will translate in real sales.

Then to answer your question, yes, what has changed our view since Q4? I would say that, first, we have seen many reports, for example, the S&P report who mentioned that the inventory in the Tier 1, then in our customers and at the customer of our customers, yes, this inventory will deplete it around summer.

And yes, we have also interview many of our customers to understand what’s their level of inventory. And as a conclusion of the interview, we have some customers who have low inventory, 1 month of inventory but we have still customers that have higher inventory, let’s say, up to 3 to 4 months of inventory.

And when we compare their uptake and the inventory, yes, we believe that indeed around summer, the inventory of our customers will be depleted. It’s why we have given this guidance.

Okay, that’s very helpful. Thank you.

And then the second one related to pricing, I guess. So many of the LTAs signed in the previous years, I guess they are expiring 2025.

How do you see the transition back to possibly to standard agreements playing out and what impact could that have on pricing and volume going forward?

Yes, we have – we had some prices – pricing negotiation in ‘24, I would say, a bit independent of the LTA, the LTA have been – has been signed, yes, in a different perspective. I mean we are not in the same situation than when we have signed the LTA.

Then indeed, we had already in Q3 and Q4 price and volume negotiation with our customer, a bit independent of the LTA. But the LTA was the base of the discussion, let’s say.

But yes, we have not been strict on this aspect.

Okay. Okay.

So sort of the pricing expectation, as you alluded to in the past, low single digit, maybe 2% to 3%, that’s expected to continue?

Yes, indeed, we have. It’s this order of magnitude that we have reached in ‘24 and it will be probably the same in the year to come.

Alright. Thank you very much.

Yes, hi, good morning. Maybe the first question on the gross margin, can you just talk a bit about the sharp fall you’ve seen in gross margin?

How much is that is down to geography and how much is down to product? Obviously, there has been a lot of press reports about customers like BYD asking for 10% price downs.

And I am just wondering how you see the impact of China affecting your gross margin or whether it’s more of a product mix issue? Thanks.

Thank you for the question. I can answer quite briefly.

It is neither the effects that you bring forward. It is purely a temporary effect, mainly because of underutilization of the capacity in our testing, in our own testing facilities.

And there is also a temporary effect of higher yield loss but both are not structural. There is no impact of price erosion in Q4.

And there is also in ‘25, there will be a small price erosion, but it will not impact – will have much impact on the gross margin overall, because it is partially also compensated with price erosion on the supply side. And the product mix is also not of influence today.

Got it. And just in terms of your LTAs and the back-to-back deals we – you’ve got with X-FAB and your customers, how do you see that playing out in terms of capacity expansions that X-FAB is doing on your behalf?

Is – do you think that there is a need to make an adjustment to the amount of capacity that you’ve secured and to readjust your plans, for example, tied to your prepayments? Thank you.

Yes. For the time being, indeed and with our customers and with our supplier, the LTA is the base for the discussion, let’s say, but there is a lot of, I would say, flexibility on the LTA, because indeed, as I mentioned before, the LTA has been signed in a time that [Technical Difficulty] and our suppliers accept some flexibility.

But no flexibility on price, I mean X-FAB is saying their wafer prices are 30% higher than they were in 2019, so presumably no flexibility on the price from your side.

As I mentioned, what I said with our customers, it is the same with our supplier. I think we are back to a regular price negotiation with the customer and also with the supplier.

Got it. Thanks so much.

Hi, good morning. Thanks for taking the questions.

I just want to go into a bit more granularity on your comment of a significant improvement in the second half of the year but you’re also saying that the inventory correction will be completed in the summer. So when you say the summer, it sort of assumes that the inventory correction will continue into Q3.

And some of your peers have sort of alluded to the automotive inventory correction finishing by sort of midyear and you’re sort of suggesting more sort of a Q3 time frame. So I’m just wondering how that leads to the second half.

Is that mainly a Q4 jump that you expect or would you expect an improvement into Q3 itself?

It’s difficult to say. When we say summer, we meant indeed midyear, around midyear.

I think we know that the upturn will come. We don’t know exactly when.

And we know also that in those circumstances, that the customer order very late. It’s why it’s really difficult to answer your question.

Will it be a, yes, midyear, Q3. We know it will come.

We have early signs that it will come. But the exact date is difficult.

Sure. And on the visibility both for Q2 and into second half, is – you said it’s looking – the second half improvement also you’re looking at S&P’s global car production forecast, et cetera.

But is your order book, your long-term forecast from customers currently suggesting that Q2 will be flat and then you will see an improvement in the second half. Is that already something that is reflected in your order book?

Yes. In our book-to-bill, we see that the book-to-bill is indeed increasing and it’s why indeed we have given this guidance.

Understood. And my last question is on the adjacence – on the non-automotive side, you had talked about some magnetic sensor product development for robotic joints, et cetera.

And you’ve also talked about strong design win momentum beyond automotive. So I mean there have been recently some speculation about robotics and physical robots being the next big thing.

Do you see Melexis positioned for that? And where are your outside beyond automotive design wins coming today predominantly, which kind of end markets is it coming from?

Yes, indeed robotic is part of the strategy. It’s a strategic intent in the beyond automotive.

And yes, we have made some – we have made four product launch outside automotive this year and some of them was indeed for robotic and to activate the joint of the robots, as an example. In ‘25, we will make an important launch with the Tactaxis, which is also to give the sense of touch of the robot.

And we are – yes, we are quite – we are very active on the robotic field. And as you mentioned, we see that the opportunity intake in the opportunity pipe is growing very fast in robotics.

The process is, we develop the product. We start to have product developed, then we make the launch.

We have already made some launch in ‘24 more will come in ‘25. And then we have customer traction.

The pipe is increasing. And then we have design win and later on, we have sales.

And I would say now we are in the phase where we have customer traction and the pipe of opportunity is increasing.

And is it, in outside automotive, is robotics your strongest area or are you seeing in other areas as well?

In term of design win, I would say, in digital health with our temperature sensor, this is still the strongest. But this is more of an historical product, I would say.

In the new products that we have started to develop some years ago, robotic is clearly the biggest grow, yes.

Got it. Thank you.

Yes, thank you. My first question is on China, can you maybe explain a bit more what you’re seeing there and if it’s different versus other regions, especially also your comment, which mentioned that you spoke to your clients and the clients of your clients and then you have the visibility on sometimes 1 month inventory, sometimes 3 to 4 months.

I’d be very interested to see if that’s similar in China or you can have the same kind of discussions there.

Your question is then more related to the supply chain situation, not about the business, I think. In term of supply chain situation, we did not get a lot many push-outs in ‘24 from China, which is also a sign that the push-outs were more coming from Europe and from the U.S., not a lot or even not at all from China.

And it’s clearly not the same dynamic, let’s say, in China and in the other region of the world.

And also the design win are going quite strong in China, much stronger than in Europe.

Exactly.

Okay. So no risk on inventory correction on that side.

No.

Okay. Then my second question is actually on the OpEx and linked to that R&D cost.

Quite modest growth, I think, over the full year ‘24. But looking at the guidance for the first half of the year, you expect actually that cost to move up a bit again.

Is that true? Is there a step-up in the investments for the longer term again?

Could you please repeat?

Yes. If I look to your guidance for the operating margin for the first half of the year, suggest that the OpEx cost will move up a bit in the first half of the year versus last year despite no real growth on the revenues.

So, you are probably investing a little bit ahead for future years. Can you maybe explain a bit what you are investing and if that’s indeed true?

That’s indeed correct. We keep investing in the first place in R&D.

We see a lot of potential still in automotive, but we are also investing in beyond automotive. It is today 25% of our sales.

That’s indeed why we keep investing in people, mainly in people, yes, to ensure long-term growth because the – yes, the underlying parameters for growth remain intact. We have today a temporary inventory correction, but the fundamentals remain intact.

It is also a fact that in Q4, we had some, yes, strong increase versus Q3. This is partially indeed because we are investing in, amongst other R&D.

But part of it is also not recurring and will not be – it’s a one-off in Q4. Around €3 million, I believe we can expect to reduce in Q1 versus Q4.

Does that answer your question?

Yes. Yes, very clear.

Thank you.

Yes, I have three follow-up questions. One is on the push-outs.

Can you give us an idea of the magnitude of the percentage of the total order book of these push-outs? And the second question is on China.

After the Q3 numbers, you gave an indication of the percentage of sales that China represents. And now you are indicating that there are no push-outs from China, so I presume that percentage will increase.

And the last question is on the situation of the facility in Kuching. It was indicated that the new building was expected to be completed by the end of 2024.

Can you give us an update on the situation over there? Thank you.

Yes. And I will start with the last question, the Kuching.

Yes, the building has been opened during summer ‘24 and now it is operating. Then we have the probing.

The probing test is done in the new building. And we have also started a lot of collaboration with university there in order to recruit test engineers and designers in order to – we have to set up a development team also in Kuching.

And this development team is now becoming active, let’s say and develop a driver product. In terms of the China, in Q4 Greater China was 31% of our sales, which is a record.

If you remember the previous quarter, it was more 26%, 27%, but in Q4, it was then 31%. And I must say I forgot your second question, the question, which is…

Push-outs, I think.

Can you remember me your second question, please?

The impact of the push-outs…

I remember, of push-outs.

Yes. In fact it’s around €50 million, which is the difference between our initial forecast in Q4 and the actual of Q4.

The difference is all the push-out that we have accepted.

Okay. Thank you.

Yes. Hi.

Thanks for letting me on. My question is, I mean you said that China is relatively stronger than the other markets in terms of the inventory correction.

But is there a difference between products in terms of inventory correction that there is a greater inventory correction in some kinds of products for you versus some other kinds of products for you? And then associated with that, do you understand from your customers whether the weakness is being seen because of the weakness in EV or hybrids or it is just the general auto market weakness, which is causing this ongoing inventory correction?

For the type of product, I don’t see a big difference. There is a difference in timing and all the inventory correction did not come at the same time.

I think this difference is timing. It’s probably linked to the fact that we went out of allocation at different time for the different products.

But in terms of type of product, I don’t really see a big difference.

And then, I mean earlier, you said that in terms of timing, you expect things to recover by the second half of the year. I mean is this – I mean you said that you have had some conversations with companies.

But do you see that, for instance, from the previous quarter, when you first saw the slowdown to the current quarter, do you see that the customer inventory levels are lower now and thus, the risks are reducing because the end markets have remained pretty weak in Europe and since then. So, have there been any changes in the inventory or the inventory levels have remained similar given the weakness ongoing in the end market?

Yes. The inventory level of our customers is indeed going down.

As you mentioned, also in the question you have asked, is it an overall regular, let’s say, automotive correction or not, or was it linked to the EV, I think it’s more linked to the fact that in terms of car sales, the global car sales remains constant, but you clearly see that the European OEM are going down in term of car sales and this is compensated by the Chinese OEM. And I think part of the reaction of our customer is because indeed, in Europe, they have seen that the car sales volumes were going down.

I think this is the root cause of the correction.

Thank you very much.

Hi. Good morning.

The question I was going to ask has already been asked. So, I will go for another one, maybe a little bit more open, more long-term.

Simply would be, what has Melexis learned from previous down cycles like in, let’s say, 2018 or 2019 that you think guys, you could apply now? Thank you.

Yes, we have indeed analyzed different trends coming back in, as you mentioned, 2018 but even before to try to define some early indicator of the change. And we are using those early indicators in order to try to predict what will be the future.

I can give some examples of relevant indicator, let’s say, because yes, some of them are also un-relevant. But in terms of relevant early indicator, if we look in the past, clearly, the – let’s say, the trend of the order book, not really the absolute value, but the trend is the order book moving up or is it moving down, it’s an early indicator.

We have also see that we have some product line on product family like the latch and switch. We have – they have a shorter lead time.

It means that they react, let’s say, one quarter earlier than the other product family than they react, one quarter earlier up and down, then it’s a good early indicator. Yes, we have for sure, also the inventory of the distributor and the inventory of the customer as early indicator.

And those are three examples. We have some more.

I think we cannot make a conclusion based on one indicator, but I think a combination, sorry, of five, six indicators could give us a bit better visibility.

Thank you. That’s very useful.

Hi. Good morning.

Just a couple of questions to better understand the visibility you have. In terms of the order book, how many months does that now cover the outlook?

I presume that’s sort of a normalized situation. You said we now see that healthy, the orders we are in the order book we expect to ship.

So, how many months coverage does that provide you? That’s my first question.

Yes, it’s between two months to – three months to five months, three months to six months outlook. And we see that or we know that in those circumstances, the customers are always ordering very late.

It’s why when I answered the previous question, I would say we know it will come, but we don’t know exactly when. It’s based on our experience, let’s say.

And in order to be ready for the upturn, yes, we are building some inventories in our own supply chain. Yes, we – the ambition is to have the right product at the right place in the supply chain in such a way that, yes, we can answer quickly because obviously, our lead time is longer than the delay when the customers book the invoice.

Yes. Can you just remind us, I mean in my notes, I think it’s been six months to nine months, but I am not sure if that was perhaps a different environment.

How long are your lead times today? And I fully understand that there are products like latch and switch, which you just alluded to that have shorter lead times.

But I guess on average, if you sort of provide a weighted average…

I think in average, six months to nine months is correct, yes.

Nice. Okay.

Thanks. And then my last question, I presume there is no more products in allocation at the moment.

And I think when that happened last time – last cycle, I presume a couple of years ago, I think there was a bit of, well, surprise that customers showed their real demand. And I am just – my question would be, if that perhaps also played into the push-outs you have been seeing that as products came out of allocation, customers were not double ordering or showing their real demand and pushed out some remaining orders.

Yes. I think it’s clearly one of the reason, I agree with you.

Yes.

And I guess that then provides you more visibility that the order book you have today is healthy because those effects are now in the rearview mirror.

Yes.

Okay. That’s very helpful.

Thank you very much.

Yes. Good morning.

I have a question about the stocking and destocking effect. In the first three quarters of last year, you had on average €245 million in sales per quarter.

And with hindsight, that was much more than your customers needed. Because of that, you have Q4 and the first half of this year with on average only €200 million per quarter, which is actually lower than what your customers need, but they are destocking.

If you smooth everything, then you get to an average of €222 million which is sort of a normal base for a six-quarter period. If from the second quarter of this year to the third quarter, your sales would move from that €200 million to the normal base of €222 million, would you consider that significant, or are you aiming for higher?

Yes. When we say significant, we mean that it will be visible.

But optically from €200 million in the second quarter to €222 million, the baseline is optically very visible. But is that significant enough in your view, or are you aiming higher?

Yes. As I have mentioned, I can repeat it.

We don’t have yet this visibility. I mean the order book is, as I mentioned, between three months and six months ahead.

And yes, it’s difficult to say what will be H2. I appreciate your example.

But if – I would say it’s an example that you have given, I would say it is significant. But I just want to repeat, it’s an example.

Okay. And where – well, your price pressure this year is something you have repeated, so that is not going to be the main game changer in the second half?

Global car production is probably going to be flat. That’s also sort of similar to the previous outlook.

So, that’s not going to be the main game changer. So, will mix be then the main game changer that will determine how strong the second half will be mix, EVs, hybrids?

I don’t think so because I think we are globally exposed, let’s say, we have a broad portfolio. And I don’t think so that the product mix will be the game changer.

I think the game changer will be, first, the fact that the inventory are going down, the fact that China will probably continue to grow faster than the other region of the world. And I think we are – yes, we are well positioned for those game changers.

And content growth in general every year, I mean the growth today in automotive semi is mainly content growth that is also valid for Melexis.

Yes. If you compare in 2018, ‘19, 92 million cars has been sold and it was ‘18, ‘19, okay, now we are around 86 million.

And you would say since 6 years, the car sales is flat, but the Melexis revenue has grew a lot, yes, almost factor two, I would say, meaning that this is the proof that this is the content who is the game changer. And there is no reason to believe that this content will not stop to grow.

When you see the modern car with a modern platform, the electrification require a lot of semiconductor, all the premium feature require a lot of semiconductor. And this is also very visible in China.

In China, there is a lot of – the vast majority is the electric car or hybrid with a lot of premium feature. And this is somewhere the proof that the content will be the game changer.

Okay. That’s clear.

Good. Then I have one final question, a short one.

STM said in their conference call that they noticed some substitution in China, but it wasn’t really clear which end markets they refer to. Have you noticed anything in your automotive end market about substitution accelerating or changing or perhaps some comments about other end markets where that may be happening?

Can I ask you what do you mean by substitution exactly?

The Chinese companies, car companies or other companies substitute foreign chips for chips made in China.

Okay. Another way to ask the same question is, do we see competition – do we see Chinese competition in China, I think it’s what you…

Yes. It’s something about which there is a lot of news, a lot of speculation and so far, not really much impact on the Western companies.

But STM mentioned it, so I thought have you seen or heard something in particular or not?

I think there are, for sure, competition in China, from Chinese competitor. They are not yet the main competitor for Melexis, but we see them on the mark.

But there is no noteworthy intensification of that competition.

I think the competition is there in China. And I think we have still a lot of strength versus this competition.

But I would not say that this is stable. I think they are also learning.

They are also bringing new products. Then yes, I would not say it is stable.

Okay. I think this is clear.

Yes, provision is healthy, I would say that. I mean it’s normal.

The market in China is developing. There are more and more business in China.

Then I would find it abnormal that we don’t find any Chinese competition in China.

Okay. That’s it from my side.

Thank you.

Yes. Good morning.

Thank you for taking my question. I have a broader question regarding margins.

In the press release, you mentioned EBIT margins of 16% for the first half of the year. But could you maybe provide some more insights into the expected margins or the dynamics that you are seeing for the second half of the year?

I just want to make sure that I am not missing anything.

Yes. It’s difficult to guide for the full year if you don’t give a guidance on the sales.

But what I could say is that our mid-term target is 25% EBIT. For that, we need to reach €250 million, €260 million sales.

I think that can be maybe help you in guiding for or estimating your EBIT margins.

Okay. Thank you.

Hi. Thanks for taking my follow-up.

I was just going back to the point you talked about where different products went into – or went out of allocation at different stages. So, if I remember right, I think it was your magnetic sensors, which went first out of allocation and your actuator driver IC kind of chips went out of allocation early last year.

And so I am just wondering if that had a progressive effect on the speed at which different products went into inventory correction, then are you seeing any change in the product level at this point on the way out? Are you seeing some more positive trends, say, in the products which went first out of allocation and into inventory correction like a magnetic sensor or a latch and switch, which has a smaller lead time, while the actuators are still seeing significant levels of inventory correction.

Can we make any such differences in what you are seeing at this point on those products? Thanks.

Yes. I think yes, the trends are consistent, let’s say.

Latch and switch went out of allocation, the first one. And latch and switch went also out of push-out, the first one.

And as you mentioned, the drivers, the embedded drivers, meaning the complex drivers went out of allocation, the last one in – yes, between Q1 and Q2 ‘24. And this is the one that are – that went, the last one out of the push-out.

There are clearly a trend in summary.

So – but my question is, are you seeing any signs of improvement in the latch and switch sensors right now, even though the actuators, the drivers are still weakening or something like that?

Yes. As I mentioned, as a conclusion of our lessons learned, the latch and switches is an early indicator.

And we see indeed that the order level of the latch and switches is better relatively to the other products.

Got it. Thank you.

Thank you. And thank you all of you for all your questions.

And I am looking forward to continue the discussion either on one-on-one or for sure during the result of the Q1 in April. Thank you.