Melexis N.V.

Good morning, and welcome, everyone. Joining us today for Melexis' Second Quarter 2025 Earnings Call.

I am Philip Ludwig, Investor Relations at Melexis. And today, I'm joined by our speakers CEO, Marc Biron, and CFO, Karen Van Griensven.

Marc, please go ahead.

Thank you, Philip. Hello, everyone, and welcome to this earnings call.

I will briefly discuss our second quarter performance. then I will hand over to Karen for our financial overview and outlook.

Second quarter sales grew sequentially and has included in-quarter customer orders. we are able to support this increase of these short-term orders because of the inventory we continue to build up in order to be ready for the next upturn in demand.

We have recorded double-digit quarter-on-quarter sales growth in both China and EMEA. Sales for automotive applications were 88% of the total sales, and I would like to highlight powertrain sales, which grew both for internal combustion engine and electric motors.

In interior lighting, where we have a leading position, sales were also up to double digits. Sales for beyond automotive applications were 12% of total sales.

We have mainly outperformance in cooling fans for consumer appliances and data centers. While today, these applications are a small part of our sales, those show important growth opportunities for the future.

To capture these opportunities, we continue to launch dedicated new products for beyond automotive application. In the second quarter, we have added a temperature sensor, which enables high accuracy and cost-effective solution across household, industrial and AI-driven applications.

We have also leveraged our Triaxis technology to launch a magnetic position sensor for joystick and human machine interface applications. This innovation allows for accurate operation even in applications with high magnetic interference.

This makes it a unique feature for joystick and steering system in heavy machinery, medical device and automation equipment, where safety is critical. We have also secured design wins in China and Europe with a good mix of application in all types of powertrain, but also outside the port train, for example, in braking and lighting application.

I also want to highlight a design win for our inductive position sensors in sophisticated service robots. We are very excited about the high number of sensors and a high number of drivers needed in the robotic market, which is a great potential for Melexis in the coming years.

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

Thank you, Marc. And hello everybody, please.

So sales for the second quarter of 2025 were EUR 211.6 million, and the euro-U.S. dollar exchange rate evolution had a negative impact of 2% on sales compared to the same quarter of last year and a negative impact of 3% of sales compared to the previous quarter.

The gross result was EUR 82.6 million or 39.0% of sales. While volume growth will support margins as it returns, we are not waiting for this and are taking improvement actions amongst others, we are planning to bring innovative, higher-margin products on the market, resolve cost of yield issues, diversify our supply chain and optimize our operations organization and this by concentrating competencies and moving final testing closer to our customers.

All of these should lead to better gross margins. In addition, we are closely managing fixed costs to be stable during this time.

R&D expenses were less 13.6% of sales. G&A was at 6.3% of sales, and selling was at 2.3% of sales.

The operating result was EUR 35.7 million or 16.8% of sales. The net result was EUR 37.8 million or EUR 0.94 per share.

Furthermore, the Melexis Board of Directors decided on an interim dividend of EUR 1.3 gross per share, which will be payable as from October 15th. Moving to the outlook.

Melexis expects sales in the third quarter of 2025 to be in the range of EUR 210 million to EUR 215 million. And for the full year 2025, Melexis expects sales to be in the range of EUR 835 million to EUR 845 million with a gross profit margin around 39% and an operating margin around 16%.

And all taking into account a euro-U.S. dollar exchange rate of [ 1.17 ] for the remainder of the year.

And for the full year 2025, Melexis now expects CapEx to be around EUR 40 million. This concludes our remarks.

We can take your questions now. So operator, please go ahead.

Maybe just -- it's Philip Ludwig again. Thank you, Gary?

My question is regarding your guidance. Firstly, on your revenue, you are not indicating any significant upward movement in your sales, though you say that the inventory correction in the automotive market seems to be ending at this point.

Is there a reason why you don't see more positive momentum on the sales? What are you hearing from the customers at this point in terms of the improvements that are likely to happen in the end markets in the second half of the year?

And my second question is on the margin. The same question on the margin.

I mean, when we go back and look at Melexis margin in the past, you've had much higher gross margin. And the leverage that you're seeing on the gross margin into the second half of the year fairly small.

Can we talk a little bit about -- I mean, at these revenue levels, you've had higher gross margins before. So why is your gross margin is more muted at this point?

Yes, about the revenue. Q1 this year, Q4 last year was probably the bottom of the cycle.

Now we start to get out of this bottom and the trend looks good. But also there are a lot of uncertainties.

And we also received a lot of short-term orders, as I have mentioned in the introduction call. It's why the visibility remains quite short term due to this customer order patterns.

It's why we gave this -- we gave this outlook based on what we know today.

Yes. And coming back on the gross margins.

Here, I can say that for Q2, we have next to, obviously, the -- yes, that we don't leverage on our operating cost completely because sales are still relatively low. So that operating leverage is missing.

But next to that, we also have quite some nonrecurring also in this quarter, the cost related to amongst other cost of yield -- cost of yield is trade improving, but it's still strongly impacting today. Also the valuation of the dollar impacting our -- yes, our profit.

And we also had some nonrecurrent costs due to due to the optimization of our operations organization in this quarter, So, therefore, there is at least 4% impact from these costs, which are, not structural.

But then why is it not improving in the fourth quarter because you have given guidance for the second half?

We are working on indeed cost improvements. But, as we mentioned, before there is a lot of volatility today in the market.

It is our best estimate today from today's point of view.

I was just going to your comment that the demand improvement that you saw in the second quarter was coming mainly from China and -- is the lack of U.S. improvement because of tariff concerns, or is it because of the big beautiful bill, which may be restricting restricting EV sales in that market?

And given that the EU and the U.S. have signed a trade agreement, do you think that, that clarity will lead to some improvement in your orders from your automotive customers going forward?

It's indeed that the improvement is coming mainly from Asia, China and EMEA. It's also our biggest market, the U.S.

-- the pure U.S. is 5%.

The [indiscernible] is 8% to 9%. And the improvement is coming from our big booster or big engine, I would say.

And to come back on your question about the impact on the tariff, I don't see the impact in -- when we discuss with customers and when we discuss about the -- let's say, the origin of the order the tariff aspect has never been mentioned. And I do believe on the result of Melexis, the tariff has limited influence.

Understood. And my follow-up is just on the robotics service -- robotics design win.

When does that go into volume production? And would you regard the volume as significant?

Or is it still quite early stage, small volumes?

Versus the volume in Automotive, it's still very small volume. I think we are at the beginning of the ramp-up, I would say.

Then it will remain low volume versus the total Melexis result because the robotic market is still small. But when we look at all the outlook, let's say, of the robotic, it will, for sure, increase in the next years, but it will take -- I mean it's not for -- it's for '26, when I say the next year, it's multiple years, let's say.

But I think it's very important that we are well positioned in this market today in such a way that we say we can enjoy the growth in the future.

My first question is on your full year guidance. I mean you didn't provide any guidance for the full year before because of the lack of visibility and now you win in [indiscernible].

So it would imply that the visibility is improving, I guess, if you are -- you feel comfortable about guiding the full year. But at the same time, I mean, Marc, you said that there is some short-term orders, short-term delivery and visibility.

It didn't seem very clear when I listened to you. So why did you state the guidance when one makes you feel confident about the visibility and further guidance now to get [ 1 ] again?

Is it because the lead times are increasing? Or anything you could share behind this confidence?

I think one aspect is that now we see that we are out of the bottom of the cycle. There is a kind of trend, let's say, it's easier to see, to give the guidance when when there is a trend.

And today, even indeed, the order book is as much limited visibility, but let's say, 4 months visibility for a big part of the business, then I think those 2 combined give us confidence to give a full year guidance.

Yes. And we have also -- we gave guidance on the first half year.

So half year's guidance, we have continued to give. I mean, we just continue to give guidance now on the second half.

Of 6 months, yes.

And what's the bottom, the trend you're talking about, Marc? I mean, what's the data you're referring to?

What makes you feel it's a bottom?

Because as we mentioned in the Q2 is better than Q1. And yes, what we guide for Q3 is indeed better than Q2.

I think the ordering behavior of the customer, I think we don't have push out anymore. I think I mentioned it already last quarter, but it's still the case.

There was really 0 push out. And on contrary, we have short-term orders.

Yes. Maybe to add.

Position sensors, our biggest product line, with also longer lead times, we now see the first signs of recovery in that product line as well.

Makes sense. And maybe just my follow-up would be on the Q2 performance, which in fact was quite encouraging.

And you mentioned China. I think China, you called a negative last quarter.

So what was your performance in China this quarter? And any insight as to why it's recovering all of a sudden?

I mean, I would assume if you have an inventory correction happening in China, it's more than one quarter. So I was surprised to coming back so quickly.

So can you, one, give the China growth number? And any insight as to what is happening.

First of all, if you -- indeed, you refer to the quarter-to-quarter. If we look at the year-to-year China is the only region which is growing year-to-year.

All the other regions are still negative, but China is clearly positive year-to-year. Yes, it has always been driver for the growth.

Then you refer to the backlog or to the inventory, we have never received a huge push out from China, also in Q4 last year when we have received a lot of pushout from our customers. Yes, they did not come from China.

They came from other parts of the world.

Yes. I just had one follow-up on China and Europe, where you had a stronger design win activity.

I was just thinking about like at this stage, what would be the usual conversion into sales if you look at the entire sort of design win activity you've had in these regions because I mean, they've been quite positive for a few quarters straight. Just curious about the usual conversion into sales and thinking about the visibility maybe a bit more longer term, apart from the order book?

That's my first question.

Yes, the design wins, it's a kind of trigger for the long-term business development. The way we record the design win is when we received the first purchase order and it's really the start of the ramp-up of the business.

It's why -- it's give, let's say, an early indicator of the new business. But the total -- at the corporate level, there is for sure business which are going down.

And we know that in automotive, it's yes, when we have a business, it's for a very long time. It sometimes is difficult to estimate or to assess when the business is going down.

And on the other hand, there is the new business which is coming from the design win. It's difficult to answer your question because there is multiple parameters that enter in the equation.

And yes, we just know that the objective, let's say, is to grow the pipe of opportunity quarter after quarter. And we see that this type of opportunity is growing quarter after quarter.

And at the end of the sales process, the opportunity is transforming design win, and then the design win is the start for the ramp-up of the new business.

Okay. And maybe more short term, like obviously, apart from maybe the order book you're seeing Q2 being better in Q1, Q3 guided to be higher than Q2.

Like do you have any sense of how much inventory is still sitting at the distribution or OEM level in these regions like EMEA and China?

Yes. At OEM, yes, I will answer OEM later.

But at our customer, let's say, and which is more the Tier 1 and the distributor, we see that the inventory at the distributor is quite flat since more than 6 months, then it seems that the distributors are managing their inventory in a healthy way. For our customers, we have seen in Q2, again, a reduction of inventory versus Q1.

We have interviewed our main customers. and there is clearly a reduction of their inventory.

Coming back on the OEM because your question was the OEM. Yes, if we look at the the data from the marketing -- the market firm, the inventory in China, the car inventory in China is quite stable.

It's usually increased towards the end of the year. But yes, now we are at the middle of the year, then the inventory of today is very similar to the inventory of the previous year in China.

I was just wondering if you could talk a bit more about your localization strategy in China. Are you seeing Chinese OEMs now preferring European vendors over American analog sensor companies.

I know that today, the largest players in China are actually American, not European. So do you think that's going to change?

Yes. In terms of localization, since the beginning of the year, we have -- we are producing in OSAT then the OSAT is the assembly house and the test house then for some products we assemble and we test in an OSAT in China as an example, the lighting products but also some latch and switch.

And this is ongoing since 6 months, I would say. In terms of wafer supply, we have taped out our first product in a wafer up in China and tape-out means that the design has been done we have now that the wafer are under process in this wafer fab.

And this is the second step of the localization is to be able to process wafers in China. And this is, I would say, ongoing.

And the first production from this wafer fab is planned, I would say, mid next year. We will have a production outside this wafer fab.

This is in terms of localization, where we are. Yes, your question was also about, is there some opportunity, let's say, for a European company given the trade war.

I would say, yes, it's probably less massive than what you think. But we have indeed some customers -- some Chinese customers that are coming to Melexis in order to have, let's say, European supplier.

It means that, indeed, I think -- and from a localization perspective, and from a customer perspective, I really do believe we are doing the right things in China. I think we have positive feedback from the customers.

I was in China in June, beginning of June, visiting different customers also robotic customer. I think we have a -- we have a good image in China.

We have a good position in China. We have a lot of design win in China.

I do believe we will benefit, let's say, from this China situation.

Just a quick follow-up on the robotics opportunity. Can you just give us an idea of like how much content they could be per humanoid robot or just an idea of the scale of the business, whether it's tens of millions yet or not yet?

Or could it be larger? That would be a good thing.

Yes, the content is very big, I would say, for Melexis as big as in a robot than in a car. Of course, the number of robots is much smaller for the time being.

But there is some analysis that show that in 2040 -- okay, it's not tomorrow, but in 2040 or between 2035 and 2040, we'll have as much as robots as a car. And to come back on your question on the number, yes, there is, for example, a position sensors in the joint of a robot we have up to 46 position sensors per robot and the parallelism is very big.

Because there is multiple joint but you need to move all the part of the robot. And in every moving part, you have a joint and in the joint, you have position sensor to measure the position and the driver to drive the movement.

It's why in terms of multiplication, it's very big. But for the time being, we have a limited number of [indiscernible].

And I could add also that a robot, it's a kind of electrified moving part. It's a bit like a car of today.

It's also an electrified moving part, the drone, the same. And the robot is electrified moving part and all the all the opportunity linked to the electrification exist also in the robot.

First question is a follow-up on the guidance [indiscernible]

It's a very bad line.

Can you hear me again?

It's not great, but let's try.

Okay. So the first question is a follow-up on the guidance.

You guidance for the third quarter. Does it also include an expectation for these short-term orders?

Yes, I think it's indeed -- the guidance includes everything, yes.

Because in the last quarter, you actually had a -- you beat your own guidance a bit given those short-term orders. But I mean, I guess that -- I mean, the visibility on that is even lower than usual, but you already take some into account that, that will continue to happen, I guess.

Yes. Yes.

Okay. Then the second question is on the gross margin.

So you gave multiple short-term reasons why it's now under pressure. But if you look further out, is there any reason why you would not go back to, let's say, your usual gross margin of 45% whenever the volumes come back whenever you have to solve your yield issues?

Are there any structural reasons when it would not come back? And what kind of time line would you -- do you expect to come back to the messages you're taking?

When will it start to pay off?

Yes. Like I mentioned, 4% today is nonstructural.

That doesn't add up to 45% yet, but there is also operational leverage, and that will also help to get closer to the target margin when this will happen is very difficult because it depends on so many parameters. Like I mentioned, there is quite a bit of volatility in the market.

But yes, we stick to -- our targets is 45% gross margin, and this remains our target for today.

To complement, we are working hard on all those parameters.

Yes. Yes.

And maybe also to add we intend to grow with higher margin growth product as well is also important.

Yes. Good morning.

My first question is about the guidance for Q3 and the full year. If I take the midpoint, and I calculate that your second half sales will be about 5% higher than in the first half.

And if I translate that into U.S. dollar growth, it's about 12%, which is sort of a constant currency growth.

Is that 12% what you had in mind earlier in this year when you assumed significant growth in the second half versus the first half? Or has something changed?

Yes, we confirm your assessment or your calculation. Yes, I think at the end, if you look a bit longer term, the fundamental remains positive and the fundamentals that were positive at the beginning of the year, are still positive today.

We have a lot of product launches. We have a lot of new opportunities.

We have design wins. As I mentioned, we are successful in the growing market, then the fundamentals are the same.

And at the end, we should reach what was expected at the beginning.

Okay. That sort of suggests that, indeed, underlying, you think not much has changed.

But I then look at Q3, 2% growth versus Q2 at the midpoint and then sort of flattish in Q4. That doesn't seem a very strong uplift.

So has something changed with your view for H2 compared to what you thought at the start of the year?

Nothing has fundamentally changed, as I mentioned. I mean, fundamentally, the fundamentals are positive.

Indeed, in short term, there are some headwinds, but the long-term drivers remain intact. And indeed, we I think we are all facing the short-term headwind and the short term of, let's say.

Okay, clear. Good.

Then I have just 2 very small financial questions. What were the net interest costs in Q2?

And I noticed that the depreciation costs were up 19% quarter-on-quarter. Is the Q2 depreciation, the new normal, going forward?

Or was there an exceptional item in there?

So moving first to the -- what was it...

The interest.

The interest Yes, that's around a good EUR 3 million is interest. And your second question was on the...

Depreciation.

Yes. And, the depreciation is there is -- yes, that's -- that's been -- I don't have anything specific to mention there.

So your question is, is it the new norm?

Yes, indeed, it went from 11.7% to 13.9%. Small numbers, the delta is relatively an absolute number, small but ...

Yes, year-on-year, it's not a surprise because we are investing. We have invested last year, so year-on-year increase in depreciation.

It's not -- it's normal, yes. So yes, it is the new norm.

Okay. So close to 14% run rate a quarter.

That's it.

Thank you, operator. Thank you, Philippe.

Thank you, Karen also. Before closing, I would like to highlight the Capital Market Day that we will hold on November 5th.

More detail will be made available in the coming period. In summary, Melexis is progressively seeing sales trend improving, winning new business with innovation across product portfolio but also across geographies.

We are also supporting our customers by being able to deliver short-term lead times. We will report our Q3 results on the 29th of October, waiting for it or in the meantime, I wish you a good summer.

Thank you for joining the call, and goodbye.