Hello, and welcome to the Melexis Q3 2023 results call. My name is Natalie, and I'll be your coordinator for today's event. Please note that this call is being recorded, and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask a question at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero, and you will be connected to an operator. I will now hand you over to your host, Marc Biron, to begin today's conference. Thank you. Thank you. Dear audience, thank you for joining the Melexis earnings call regarding the Q3 of 2023. As always, I will start with the business update, after which our CFO, Karen Van Griensven, will comment on the financials. We will answer your question afterwards. Sales in the Q3 of 2023 came out with an increase of 5% compared to the previous quarter. During the Q3, we observed that the order behavior of customer is coming back to a more historical pattern, converging into a normalized order book. For the last quarter of the year, we expect limited growth because of your usual end-of-year inventory adjustment. The best performing product during Q3 were our motor drivers, our magnetic sensor, and our pressure sensor product. A trend clearly driven by electrification and the need for more comfort and more safety. The embedded motor drivers benefit from the gradual decarbonization of the car because they contribute to extend the range of the car. They are extensively used in thermal management application, in cabin, and also in the powertrain. The other outperforming product are used in application, increasing the comfort and the safety level of the car. Our magnetic sensor can be found in e-steering and e-braking application, while the pressure sensor growth is driven by the Tire Pressure Monitoring System, TPMS, and this TPMS is ramping up at different OEMs. The size of the product, as well as its very low power consumption, are unique feature that explain the success of the TPMS. The high safety level and the unique magnetic operation of the magnetic sensor are the main reason for the high demand of this magnetic sensor, especially in the e-braking system. We also had a very important success in Q3 with our temperature sensor because of a new business in smartwatches and also new business in smartphone. The contactless temperature measurement and the very high accuracy of the device create a lot of attractiveness for the Melexis temperature product family. In the Q3, we also launched in the market new product, for example, the new current sensor, which is a perfect fit for the EV battery management and also for the power distribution system. We have also launched two ultra-low power Hall effect switches, which are ideal for IoT, industrial, and white goods applications. Before I give the floor to Karen for the financials, I would like to remind our Capital Markets Day on the 14th of November. We will be happy to welcome you in Ieper, in Belgium, where we will present our strategy, our long-term financial targets, as well as the product and application that will fuel our growth in the future. Thank you, Karen, I'll give you the floor. So thank you, Marc. So welcome, everybody. So as mentioned already, we came out with EUR 248.6 million in the Q3, so 13% increase versus a year ago and 5% versus the previous quarter, with a 3% negative impact of the euro/US dollar versus a year ago, and no impact of the dollar versus the previous quarter. The growth result was EUR 114.5 million or 46.1% of sales, an increase of 16% compared to the same quarter of last year, and an increase of 3% compared to the previous quarter. R&D expenses were at 10.7% of sales, G&A was at 4.8% of sales, and selling was at 2% of sales. The operating result was EUR 71.1 million or 28.6% of sales, which is an increase of 16% compared to the same quarter of last year, and an increase of 5% compared to the previous quarter. The net result was EUR56.8 million or EUR 1.41 per share, an increase of 16% compared to EUR 48.8 million or EUR 1.21 per share in the Q3 of 2022, and an increase of 9% compared to the previous quarter. If we look then ahead, so Melexis expects sales in the Q4 of 2023 in the range of EUR 247 million-EUR 251 million. For the full year, Melexis expects sales to increase around 15%, a gross profit margin above 45%, and an operating margin above 27%. which was previously around 27%. And all of this taking into account a euro-US dollar exchange rate of 1.05 for the remainder of the year. So operator, I would like to now open the Q&A session, so please go ahead. Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Thank you. Your first question goes to Marc Hesselink from ING. Your line is open. Please go ahead. Yes, thank you. Maybe the first question is on supply and demand. You shared that number in the past about how much bigger the demand is versus supply. Can you maybe share that again, and also how you expect supply to ramp up over the course of 2024? And my second question is on pricing. We've seen most of your businesses have long-term agreements, but maybe you've also seen some price pressure in the business that's not on long-term agreements. So maybe can you talk around that and how you see that maybe impacting long-term agreements over the more longer term? Thank you. Yeah, good, good morning. On the first question about supply and demand, I think what we mentioned during the previous quarter is still valid. I think for a large part of the business, there is a better balance between supply and demand. But we still have some pocket of business or some pocket of product that are still under allocation or under stress. I want also to mention perhaps that it's given the lead time, which is, let's say, nine months, before between the order of the wafers and the delivery to customer. Yeah, it's not because we don't have supply constraint at Melexis level, then the customer is not yet not in constraint anymore because there is this delay. I mean, we need time to move the product from the supply chain to the customer. In term of pricing, your second question. As you mentioned, indeed, yeah, part of the business is protected by LTA, the long-term agreement, that has been defined for 2023, 2024 and 2025. And but it's also, as I mentioned, let's say for the supply chain and also for the order behavior, which is coming back to normal. There is also, let's say, kind of usual price discussion that is coming back also from part of the business. But I would say, yeah, we were well prepared in the past for such a discussion, and we are preparing the same way for the discussion of today. Then I would say we are confident because we know how to deal it, because we have dealt with this kind of discussion in the past. Okay, thanks. Maybe the second part of the first question, the supply increases that for 2024, can you- Sorry, I forget it. Yes. Yeah, we have together with our supplier, we are working to increase the supply, and I think you have realized that the supply is increasing, let's say, quarter after quarter. And for the part of business which is still under constraint, that the supply will continue to increase gradually in 2024. Okay, perfect. Thank you. Your next question comes from Robert Sanders, from Deutsche Bank. Your line is open. Please go ahead. Yeah. Hi, good morning. You sound pretty bullish on your TPMS opportunity. Can you just talk a bit about what your market share goals are and where your share is today, and how your solution compares to the likes of Infineon, NXP, Schrader, et cetera? And I have a follow-up. Yeah, I think you mentioned in your question the competitor, and I confirm those are the competitor. Yeah, I would say it's not that we are really bullish in the answer. This is just a fact. Let's say, we have some application ramping up at some customer, and this is the result of the ramping up. It's I mean, we have the TPMS, it's the second generation of TPMS, and we have this product, let's say, available, this version since 3-4 years, and now it is ramping up at different customer. Got it. And in ambient lighting, you didn't mention that as being strong. Is there some digestion in ambient lighting and are you still supply constrained in ambient lighting? Yeah, I think indeed, we did not mention it because it did not grow a lot, let's say, in Q3 versus Q2, but it's supply constrained. ... And are you losing share because you are supply constrained and others are, like Elmos are not, or you don't recognize that statement? Yeah, we still have much, much, much more order than what we can supply. Okay. So when you say pockets of the business under stress, it's still quite a large part of your business that is still supply constrained? I think no, from percentage-wise, it's not, it's not a lot, but indeed, it's correct that the Linear RGB or the ambient lighting is part of them, yes. Got it, and just last question, just on the destocking, we've seen some other companies like u-blox see quite major destocking because their lead times normalized. Have you seen the destocking effect or what you call normalization in the backlog, mainly in the products where lead times are kind of back to normal, or is it just, do you think customers have over-ordered in the past and are now prepared to kind of normalize their inventory? No, I think it's a bit. It's global across the different product portfolio. Got it. Okay, thank you. We have another question? Just to make sure we are still online. Can you hear me? Yeah. Yes. Hello? Yeah, yeah, we are. We hear you. Okay. Okay, I don't know. I didn't hear anybody calling for me, but I'm online, so I was trying because of the quiet line. So it's François Bouvignies from UBS. So I've two quick ones. So in your remark, Marc, you talk about, you know, challenging geopolitical environment and softer electric, softer EV demand. You also talk about orders, you know, normalization. Now, the question is, when you look at your numbers in terms of revenue growth, it's actually growing still mid-teens, I mean, this quarter and next quarter. So when you talk about the orders and softer EV demand, does it mean that we will see that at a later stage? Because it doesn't seem that we see anything right now. Your demand is still fairly strong. Your revenues is very strong. Or when you say that, is it already impacting your revenues? So in other words, what you are seeing on the order behavior and EV demand, is it something that we should forecast to impact a bit at a later stage, let's say 2024? Is it fair to see it that way? We will not comment about 2024 because usually we always go give this comment, it is- No. Yeah, I'm not asking for quantification guidance. I'm just talking about the mechanical around it. Because if you said that there is nine months lead times between what your order and your shipments, if you see the orders changing right now, it would mean, based on what you said, that we will see the impact nine months later. Do you see what I mean? Yeah. No, I think you could see it, the comment. You could see it in the fact that, yeah, we could have been, I think, better in Q3 and also in Q4 without all the headwind that you mentioned. I think there is for sure, yeah, some geopolitical challenge. As I mentioned, and I think it's public that the EV growth is still growing a lot, but let's say slower than anticipated. I think it's clear, for example, in Belgium, that Audi has postponed, let's say, the release of the EV production in Brussels. It's also clear that Tesla is reducing their price in order to keep the demand as high as possible. I think all of this make... create the fact that we could have, we could have had a better Q3 and a better Q4 without those, without those headwind, but at the end, we are still growing. Okay, so you're already seeing that this quarter and next quarter. Can you quantify at all or, I mean, any help around that, what would have been without this slowdown, the growth rate, for example? No, it's difficult to say. It's difficult to say. Okay, fair. The second question is on China. So we know China has been pushing hard on the semiconductor side of things in many different areas. One thing that is very difficult is on the magnetic sensor side. I mean, do you see any local Chinese competitors developing some solution? And maybe if you can tell us, you know, your exposure to the Chinese local market would be great as well. Yeah, that's kind of the China situation, local competition, if you see that ramping up and the size of local China, please. Yeah, but first, in general, there is indeed competition in China, but it's not only in China. I mean, we have competition everywhere. It's correct that the competition is a bit magnified in China, but it's not that we don't know how to deal with competition. We have competition in Europe, we have competition in the U.S., and also in China. And as you mentioned, I confirm that the competition in China is probably magnified. But as usual, our answer to the competition is innovation. I mean, we launch between 15 and 20 new products every year, which are always innovative products. And yeah, the strategy of Melexis is to avoid, let's say, the price battle and focus on the innovation, which is also the case in China. To answer your initial question about competition, yes, we see, I would say, more and more competitor in China, or also for magnetic. But those are, let's say, basic products, and via or thanks to our innovation, we can bring more value to the customers, also with our magnetic products. But it's correct that the simple products are under competition in China, but it's not our core business. Let's say, our strategy is to bring innovation. Very clear. Thank you. And the size of local China's percentage of revenues, can you help us quantify it? Overall, for Melexis, it's 25%. Okay, thank you. We'll take our next question from Janardan Menon at Jefferies. Your line is open. Please go ahead. Hi, and good morning. Thanks for taking the question. My first question is on gross margins. Your gross margin has been running, you know, quite strong right now, and you've guided for more than 45%. But to get to the 45%-46% range, it would imply a gross margin decline quarter-over-quarter. So I'm just wondering, is your guidance conservative for the full year at 45+? Or I mean, what I'm saying is, you know, you-- could you have guided even at, does 45+ mean also 46+? Or is there any specific gross margin headwind that we should expect into Q4? Or any reason for gross margins to decline into Q4? Well, in general, in this year, gross margin is certainly in the Q1, because of inventory effects, is actually artificially high. So we know it will come down shorter mid-term to more normalized levels. What it will be in Q4 is difficult to predict exactly, but the general trend will be that it will be down from the levels that we see today, because of the inventory effect that will gradually fade out. So, yeah. Understood. And you know, given that you referred to some you know, inventory normalization, correction, et cetera, should we also expect any kind of effect from underutilization at your testing facilities in the next 1 or 2 quarters? Well, the machine is running quite stable for the moment. I don't expect major impact from that for the time being. No. Okay. And then just going on to your comment and your opening remarks on, you know, you're seeing some normal end-of-year inventory adjustments into Q4. Is that more in the channel? Is that at your sort of direct customers? And you know, what is the level of confidence that that is only gonna be a Q4 phenomenon, and it is truly just an end-of-year seasonal situation, and it will not continue into the first half of next year? Yeah. It's what we see, these, those adjustments and in the channel and in our customer on our Tier 1. I would say in the channel for the distributor, we see that the inventory is stable, even decreasing a bit. For our customer, we see that the inventory is growing and now stabilizing, but it has grown during the previous months and quarter. We see indeed that they are adjusting their inventory toward the end of the year. This is why we really see the effect on those two inventories. Understood. And just a last question from me. On the You know, in the last couple of years, you've always said that, you know, you are deprioritizing adjacent markets because the demand from automotive is so strong, that you can't fulfill automotive demand, and you are sort of giving higher priority to automotive. Given that that situation may be changing a little bit, which is automotive chips are coming out of shortage in most cases or in many cases. And you did get this pickup in adjacent markets in Q3. Can we expect that if the automotive side does weaken more than you expect, let's say, in the next six months or so, will you be able to cover that slack by shipping more into adjacent markets? What I'm trying to say is adjacent demand strong enough based on your new, new design wins, like the smartphone win, et cetera, to compensate for that weakness right now based on your current visibility? It's difficult to answer because, yeah, we don't know. The weakness that you mentioned, we don't know what is the level of the weakness, but it's correct that the capacity being increased and indeed some adjustment that we in the inventory that we see, it's correct that then we can give more volume to the adjacent. And for sure, it's a goal, it's a goal of Melexis to balance one with the other. That we have indeed, we are working now indeed to move some capacity to our adjacent. And we see that, yeah, in some, it's in some application, the adjacent application, we see some traction of those application. Understood. You mentioned the temperature sensor, but we see it in also other domain. Understood. Thank you so much. Thank you. We'll now move on to our next question from Ruben Devos at Kepler Cheuvreux. Your line is open. Please go ahead. Yeah. Yes, good morning. I've got just one following up on the temperature sensor, which you just mentioned. I believe, you know, this will be included in the Pixel 8 Pro smartphones. Could you talk a bit more about the prospect that this could potentially be included in other high-end smartphones as well, in your view? And given the expected volumes of the Google Pixel smartphones, it appears like this could be somewhat of a meaningful contributor to your sales. Could you talk a bit about how material this could be for you? Thank you. Yeah, the Google smartphone is I mean, it's not, let's say, the most popular smartphone, and there are much more popular smartphone. It's also on the high-end version of the phone. Then, yeah, I think it's a good success from Melexis, because we have proved to the market that we have a product which fit the smartphone requirement. In term of volume, it is not fantastic. I mean, it's for sure good volume, and for sure, we welcome those volume. But it's, I repeat, those are not as popular as phone as other phone. But for us, it's really important that we have proved to the market that we can make it, and the chip is fully compatible with the expectation. Okay. And then just more generally, I was wondering, like, if you think about maybe the sales, new car sales these days of, let's say, 50% for battery electric vehicles and 85% other, how would you think about your split in automotive? Yeah, with your share of sales. It's difficult to answer because we have many products that are agnostic to the split between ICE and battery car. We have, let's say 50% of the product is agnostic to this. And then the other 50% is indeed split between battery and ICE. I don't know, Karen, if you know the split, but I don't know exactly how we could mention the split. Between, uh- [crosstalk] ICE, yeah. Well, the majority is indeed agnostic, and, yeah, we go more and more to an equal split in what is specific. And where gradually, EV is taking the upper hand, so it's a gradual process, but it's the minority of our business that is... So all in all, we are not very sensitive to the, to the move, to the speed of the move to EV or ICE in general. Yes, I can add that from a design win perspective, it is clear that the very vast majority of the design win are for either the agnostic or the battery powertrain. But yeah, there is very, very limited number of design win for ICE, because clearly the OEM focus their development on the electric car, and they don't develop a new application or almost no new application for the ICE. Okay, thank you. And if I just can come back on the temperature sensor very quickly. You mentioned it's not, you know, they don't really have high market share, Google, within the overall smartphone market. Yes, indeed. But do you see there's any possibility of you also making inroads into, you know, selling to other handset manufacturers? You've had this win, it's a niche feature so far, but do you see more opportunity here? I think we are working on different opportunity in the smartphone, but also in other wearable. And we believe indeed that this temperature sensor can add value on those wearable. But for the time being, from the smartphone perspective, except for Google, I mean, I don't have anything to mention. Okay, thank you. Thank you. We'll move on to our next question from Guy Sips at KBC Securities. Your line is open. Please go ahead. Yes, thank you. Can you update us on the situation in the Malaysian factory? So, is it still... Are you still working on a EUR 70 million investment, and that the new building is expected to be completed by the end of this year? Or are you speeding it up and trying to get it finished earlier? What's the situation over there? Thank you. We are, we are still on plan. That means that production will be ready by year-end. We'll move early next year into the production facility. The office building will be finalized in Q1, so that will be still part of the investment in for next year, but the majority will be done by the year-end. Yeah, as was planned in the beginning of the year. It's still the EUR 70 million in the next 5 years that is expected? The overall investment, yes, that's in that range, yeah. Of which half is more or less the facility. Okay, thank you. It's good news in general. I think that we managed to do it, to have a speedy execution in Malaysia. Indeed. Good. In return, we'll get more capacity. Yeah. Once again, if you'd like to ask a question, please press star one now. There are no further questions, so I'll hand it back to Mr. Marc to conclude today's conference. Thank you. Thank you. Well, to close the conference, I would like to thank you for the question. I'm looking forward to discuss again in February. But before that, I would like to remind our capital market days on 14 of November. And again, we'd be happy to welcome you in Ieper, in Belgium, and to listen to our long-term strategy, long-term financial target. Also, we'd like to present the product and the application that will grow our future. And of course, we could have take the opportunity, let's say, to discuss during the break or during the lunch on a more informal way. Thank you. This concludes this call. Thank you for your participation. You may now disconnect.