Inficon Holding AG

SIX:IFCN

Earnings Call Transcript 2022-Q1

[Bernhard Schweizer]

Good morning, everyone, and welcome. By my watch it's 9:30, so about time to start. My name is Bernhard Schweizer, Investor Relations contact at INFICON. I have the pleasure to host this Microsoft Teams webcast of our Q1 -- may I ask participants to switch off their microphones, please? Thank you.

I have the pleasure to host this Microsoft Teams webcast of our Q1 2022 results conference. With us today are Lukas Winkler, CEO of INFICON, and Matthias Troendle, CFO of INFICON. The management team will first present the results and then take questions. [Operator Instructions]

You should have received by now a press release on the Q1 results, together with the link to the accompanying visuals for this web conference. All documents are available for download in the Investors section of the INFICON website.

[Operator Instructions] I would also like to inform you that we record this web conference to archive the audio file later on, on the INFICON website.

The oral statements made by INFICON during this MS Teams session may contain forward-looking statements that do not relate solely to historical or current facts. These forward-looking statements are based on the current plans and expectations of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations as well as future results of operations and financial condition. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Having said all that, I would like to hand over to Lukas Winkler now. Lukas, please.

[Lukas Winkler, executive]

[Foreign Language] And good morning, everyone, and thanks for joining us today to review our results for the first quarter of 2022.

The last 2 years, we talked about COVID-19 issues. Now we added 2 more crises, the war in Ukraine and the inflation risks. All 3 elements increase the uncertainty going forward.

Strange but true, we see a record order intake in the first quarter of 2022 and published the second-best quarter result this morning. So we had a good start into 2022, despite the just mentioned 3 crises. And on top of that, our single biggest nightmare is actually the global supply shortage. So let's talk about our first quarter results before we go into the guidance.

We had sales growth in all markets except the RAC, automotive and refrigeration market. And we reported new quarterly sales records in Europe and Americas.

Bernhard already mentioned that you can see the same PowerPoint presentation also on the Investor Relations tab on our website.

On Page 3, where we start with, you see the key figures for the reporting quarter. In total, our revenues were organically almost 15% above last year's first quarter and we finished with sales of USD 138.3 million, which is, as I said before, our second-best quarter. Compared to our best quarter, which was actually the last quarter of 2021, sales decreased approximately 4%.

With a book-to-bill ratio far above 1, it's needless to say that this represents a new quarterly all-time high quarter intake as well. At the current sales level and sequentially improved gross profit margins, slightly increased overhead expenses, we finished the quarter with operating income of USD 27.3 million, almost 20% of sales compared to $24.6 million, which was exactly 20% of sales for the same quarter a year ago.

With an average tax rate of approximate 20%, net income reached USD 21.2 million or 15.3% of sales. Just currently (sic) [shortly], we will review the detailed figures later on. Now I will go through the different -- the 4 key markets first.

So on this slide, #4, you see the sales breakdown into our served 4 key markets as well as the regionally quarterly sales trend. The pie chart on the left side shows an increased contribution from the Semi & Vacuum Coating market, primarily at the expense of a reduced contribution from the Refrigeration, Air Conditioning & Automotive market. Semi & Vacuum Coating market again represent more than 50% of the overall INFICON sales.

Asia remains the most important sales region for us but did not reach the record level at the end of last year. On the other hand side, in Europe and Americas, we achieved new quarterly sales records.

Now let's do a quick analysis market by market. I'll start with the smallest one, which is the Security & Energy market, where we had a 35.2% higher sales compared with the same quarter last year, but 11% sequential decrease and reached USD 5.1 million. The security side of this market remains depressed, and we only sold a few HAPSITEs to a handful of customers.

As mentioned before, the largest potential customer, the American Department of Defense, is testing successfully our new generation of HAPSITE products. First, larger orders are expected before year-end. And we got first orders for this new product from a police department in Europe.

On the energy side of this market, we continue to gain market share in the U.S. gas distribution and landfill monitoring markets. The IRwin, this yellow product that you see on the lower right side, portable infrared-based multisensor device, starts to become the preferred instrument for the service providers in the U.S. market.

In Europe, the Fusion, our Micro-GC based unit, increased its acceptance in the biomethane gas applications, especially in France and Italy. Overall, we expect the full year 2022 sales to be above the previous year's performance.

Now moving to the Refrigeration, Air Conditioning & Automotive market on this Slide #6, where sales decreased 6.4% year-over-year as well as 5.7% sequentially and reached USD 23.1 million. We experienced a stable refrigeration market, a very dynamic lithium-ion battery testing business and a continuation of a weak traditional automotive market.

Industry 4.0, digitalization needs and (sic) [are] fully automated and, therefore, operate independent quality inspection applications in conjunction with tighter specifications are the main driver in the market for refrigeration and air conditioning manufacturers.

The e-cars drive the need for more lithium-ion battery capacity and the need for safe battery devices are asking for better quality inspection instruments such as our new INFICON ELT3000 lithium-ion battery leak detector. Since new giga battery production sites are planned and built in all regions around the world, we expect this market to be the main growth driver over the next few years in this market. We expect to end this year with a 3-digit million dollar figure by the end of December 31.

Now let's go to the Semiconductor & Vacuum Coating market, which includes solar display optics and, of course, all the semiconductor applications on Slide #7, where sales increased almost 16 -- actually almost 17%, but decreased 7.6% sequentially and reached USD 71.6 million, with the major contribution coming from the semiconductor device and the equipment manufacturers.

All major players in the supply chain of the chip making industry continue to invest the latest state-of-the-art technologies for analog, logic chips as well as memory devices. China semi initiative continues. Unfortunately, the U.S. trade and technology restrictions remain in place, and we need -- still need individual U.S. export licenses for our U.S.-made instruments to serve certain listed companies such as SMIC.

On the other hand side, local Chinese equipment manufacturers continue to grow and we gained market share with our European-based products. Semiconductor market will remain the most attractive growth opportunity for INFICON, not just from a financial point of view, but also technology-wise. If you can develop and sell products for advanced semiconductor applications, then you can use the same technology to serve many other markets as well.

We continue to work very closely with OEMs and end users to develop new sensors, solutions and methods to assure high-quality chip productions. Unfortunately, supply shortages and capacity bottlenecks prevent us to generate more revenue, especially to semiconductor customers.

The dependency from single sources for critical electronic components alarmed the global economy and even governments. Therefore, government incentive programs have been put in place to support initiatives to produce the critical parts locally.

The high number of announced new fabs in all major regions of the world as a result of the current supply shortages and the government incentive programs represent a huge growth opportunity for INFICON and will keep us busy for the next years. So 2022 is expected to be another record semiconductor year and will be limited only by our ability to produce, ship and install high enough quantities on time.

Finally, we had a good start into 2022 in the General Vacuum market on Slide #8. Sales of USD 38.5 million, which reflects a year-over-year increase of 17.2% and 4.6% above the last quarter of 2021. Chinese customers as well as sales to our European private label distribution partners represent the majority of the growth.

We sell our analysis, measurement and control products for many different industrial applications through private label partners, primarily vacuum pump manufacturers and via direct sales channels to industrial OEMs and distributors in order to reach and serve smaller customers around the world. We expect a successful year 2022, but with increased uncertainty in China based on the recent lockdowns in Shanghai.

Let me close my part of the presentation with an outlook for '22 on Slide #9. Despite the increased uncertainty due to the 2 additional crises, we maintain our full year guidance for this year since we do not see any impacts in our order book.

Sales is expected to be between USD 550 million and USD 600 million, with operating income above 20% of sales. Our main concerns are the availability of certain components, mostly electronics. Our capacity addition programs are on track, and we will soon have a 50% higher manufacturing capacity available.

Market-wise, as I mentioned before, we see an ongoing strong dynamic from various parts of the world. In a descending order, I would like to highlight a few trends. Semiconductor market is still going strong globally. The e-car trend will continue, and for the next few years, we will see an exponential growth for new lithium-ion batteries. Alternative energy solutions are becoming more prominent. Best growing Chinese vacuum applications, our main driver in the General Vacuum market, unfortunately, with some hard-to-predict impacts from the Shanghai lockdown. And last but not least, we expect the new HAPSITEs to be the favorite of the new American DOD program.

With that, I'd like to turn over to Matthias who will give you more details about our financial performance. Please?

[Matthias Tröndle, executive]

Thank you, Lukas. Good morning, everyone, also from my side, and welcome to our Q1 conference call. I will cover our Q1 financials and also briefly comment on our guidance and expectations.

My commentary starts with Slide 11. As you've seen from our press release, we achieved revenue of $138.3 million in Q1 2022. This compares to $122.7 million in Q1 of last year. This represents an increase of 12.7%.

Taking into account the negative currency impact, which is mainly driven by the strong U.S. dollar, of minus 2.2% or $2.8 million and a small contribution from acquisitions of 0.3%, we achieved an organic growth of 14.6%.

Mr. Winkler has already commented the details of the individual end markets we serve. The highlights are that sales in all markets, except RAC, did increase and that these markets did grow by double digits. The sales in Semi & Vacuum Coating market increased also clearly by 17% or about $10 million and the Security & Energy market increased by 35%.

Compared to Q4 last year, sales to the General Vacuum market did increase by another 5%, while the other markets showed a decrease, ahead of all Semi & Vacuum Coating market, which declined by 8%, but still achieved its second-best figure to date.

With that, the first quarter of 2022 showed a 4.3% decrease and reached, after Q4 last year, the second-best quarter in terms of sales.

Now let's turn to the regional distribution of sales compared to previous year. We had the highest growth in North America with 20%, followed by Europe with 13%. Both America and Europe showed strong growth in Semi & Vacuum Coating. Asia showed also an increase of sales in 10%, driven by the General Vacuum market, but also in the Semi market.

Let's go to the next slide. Gross profit margin reached 47.1% in Q1, down 294 basis points versus Q1 last year and improved 41 basis points compared to previous quarter Q4. The higher volumes partially offset by rising material prices, increase in broker fees, freight and duties have been the main drivers for that.

On the cost side, we did spend $11.5 million on R&D in Q1, a decrease of 5%. As a percent of sales, these expenses decreased to 8.3% in the first quarter from 9.9% in the previous year. Some less external spend and some favorable FX impacts did drive this decrease, while we have unchanged focus on our research and development projects. In SG&A, the expense level showed $1.6 million increase. Personnel expense, due to increased headcounts, have been the main drivers for that.

Let's go to the operating profit. For the first quarter, we achieved an operating profit of $27.3 million or 19.8% of sales after $24.6 million or 20% in Q1 last year. This corresponds to an increase of around 11%.

The income tax expense for the first quarter was at $5.3 million, which represents an average tax rate of 19.8%. Net profit, therefore, as a result, reached $21.2 million or 15.3% in Q1. This compares to $19.6 million or 16% in the prior year, an 8.2% increase in absolute numbers. Consequently, we see nearly the similar development in earnings per share. This also went up by 8.1% and stands at $8.66 in Q1.

Now let's move on to the balance sheet. Our net cash reached $51.6 million, which is with $3 million slightly lower than end of last year. Modest inventory turns and DSO, days sales outstanding, finished at a similar level compared to Q4.

Our working capital, which consists of accounts receivables, inventories and accounts payables closed at $162.6 million or 29.4%, and with that, has been about $11 million higher than end of last year. The majority of that increase is contributed (sic) [attributed] to a $10 million increase in inventory due to the higher business levels.

As usual, our first quarter is a little bit low in cash flow due to payouts of performance bonuses and other provisions. And also as a consequence of this working capital levels, our operating cash flow, which you can also see here on the bottom right for Q4, ended a little bit lower, about $5 million and reached a level of $8.5 million. The balance sheet shows a solid structure with 70% equity ratio and no long-term debt. Those were my comments on the balance sheet in Q1.

Let's have a final look to the outlook. Mr. Winkler had already gone into the details and the assessment of our end markets. Due to the current geopolitical situation, the ability to forecast is generally somewhat limited. Nevertheless, based on our order book, order intake and the overall business situation in our end markets, we are quite positive for the start of the year. We expect sales between $550 million and $600 million and operating income of over 20% for fiscal year 2022.

With that, I would like to close the presentation, and we are now ready to take your questions.

[Bernhard Schweizer]

Thank you, Matthias. We have 3 people wanting to ask questions. Now 4 people actually. And I would like to suggest that we start with Marta Bruska and just go down the line. Marta, please.

[Marta Bruska, analyst]

Actually, I wanted to ask with regard to the EBIT margin development. So the EBIT margin came in at 19.8%, only 20 basis points below the Q1 of the last year despite the fact that the gross margin had declined nearly by 300 basis points. That seems an extremely resilient result versus the historical trends. When I had a brief look through the model you had in the past, a decline from 51% in gross [ sales ] from 48%. That was accompanied by even stronger decline in EBIT margin by 400, 500 basis points.

So I was just wondering what gave you this super resilience this time and what are some of the key areas to have improved that, helped with that? And that's probably a sustainable also when the gross margin is improving going forward. Would you agree with that? And then I have two more, please.

[Lukas Winkler, executive]

I'm not 100% sure if I really understood your question properly enough, but let me try to explain in my way.

I think the result of the operating income close to 20% is driven by 2 facts. One, certainly the top line growth, which was positive compared to Q1 as of last year; and secondly, by the gross profit margin that had unfortunately a negative trend. And, so what, I would call it, stable overhead expenses in terms of overhead and R&D.

And as a result of that, and I always explained it the way that we have a leverage effect. I think this is the major driver of the bottom line. Unfortunately, heavily influenced by a negative trend in gross profit margin, primarily based on the impact from brokerage fees that we have to pay to get our electronic components that had the single biggest impact on the gross profit margin.

If you run a factory at the capacity level, you would expect that you have a higher gross profit margin. That's what we expected as well. So therefore, the brokerage fees that we have to pay had a huge negative impact on where we landed at the end of the day. And I think the result of still being close to 20% is based on that leverage effect with stable overhead cost. But unfortunately, not a good positive trend on the gross profit margin side.

[Marta Bruska, analyst]

Okay. I mean just referring to the fact that in the past, you also had quarters when you recorded growth but a decline in the gross profit margin and you have seen a much stronger hit on EBIT. That's what -- but maybe I'd take that off-line to more. I thank you for that, that was a good start explanation.

And I also wanted to ask how big is your food packaging business at the moment?

[Lukas Winkler, executive]

It's still in a single -- small (sic) [low] single-digit figure numbers in the first quarter of this year.

[Marta Bruska, analyst]

And with regard to the slowdown in the refrigeration market this quarter, what was that driven by?

[Lukas Winkler, executive]

Primarily by the fact that the traditional automotive market is still not very attractive. And only for lithium-ion battery, we can grow. So we had a declining trend for traditional car manufacturers compensated luckily by the increased contribution from lithium-ion battery application. And a good service -- aftersales service activities, but somehow reluctant, I would call it reluctant behavior of refrigerator manufacturers to heavily invest in new ways of how the quality assurance can be made with more automated-based and digitalized kind of methods.

So this is currently a trend that we see in all areas around the world for refrigeration, air condition manufacturers. They like to get away from operator-dependent quality inspection activities to more operator-independent. But it'll take some time, and that's where we exactly are currently. And we believe that once these new methods are well established, we will see a next wave of probably further investments for those quality inspection solutions.

[Bernhard Schweizer]

Thank you for your questions, Marta. I suggest we continue with Jorn Iffert.

[Joern Iffert, analyst]

The first one would be please on your semi end markets, also looking into 2023. Who knows where semi-wafer equipment CapEx will land. But can you talk about your prospects with the end users with the TSMCs, Samsung, what you would expect and what you're seeing currently in terms of dynamics? And for example, semi-wafer equipment CapEx would be down in '23, do you still see prospects here with the end users? So what is the confidence that is here?

This will be the first question, then I would take two others afterwards, please.

[Lukas Winkler, executive]

I mean, this is looking into a crystal ball, of course, a little bit. But what we can refer to is just what we see on the front side of the business at the end users, talking to the customers that are on top of what the current technology is actually be able to provide. And there, where we see the majority of the spending going on with the 2 customers that you mentioned, they all work on 3-nanometer and they're even eventually going to 2-nanometer over the next few years, and that requires a quite large investment.

So momentarily and currently, we do not foresee any kind of weakening demands coming from the top-notch customers for different purpose -- various of reasons. One, certainly the technology that drives the business. Secondly, the demand of the chip itself. Last but not the least, as I mentioned before, everybody wants to get -- become more independent from a single source. So everybody is looking for a kind of a local source for certain critical components. And you have seen the announcement from Intel building up a fab in Germany. TSMC doing one in Japan as well as in the U.S. And eventually in Europe, it's not clear yet. Samsung, investing heavily in U.S., adding another factory there.

And of course, on top of that, do not forget the Chinese initiative. They will continue to invest heavily. They changed a little bit their behavior of not necessarily going to the top-notch technology, meaning going below 10-nanometer, because they realized that this would be probably a fight that is not very -- doesn't make sense currently and try to convince the U.S. government to give up the technology issues. So they focus on line with that are above 40 nanometer but like to expand that business and continue to provide, if possible, local supply to the local Chinese customers.

So for the next -- and you talked already about 2023, I don't think that we will see a slowdown over the next 1 to 2 years at all.

[Joern Iffert, analyst]

And second question would have been on your gross profit margins. You elaborated the brokerage fees had an impact. Can you tell us how big the impact were? 100, 200 basis points? And what are your key actions to improve the gross profit margins over the next couple of quarters? And roughly, what is your best guess where gross margins are ending for 2022?

[Matthias Tröndle, executive]

Let me try to give you some insights. So the brokerage fees it show in Q1, also some increasing trend. We have had it already in previous quarters, even now and then, but it seems like increasing. To give you a feeling, it's in the 2 percentage points area of impact in gross margin and bottom line. So it's a real substantial amount. We have, of course, a couple of actions and initiatives in place to limit the negative impacts, including, of course, price agreements, respectively, the shared paying agreements on these kind of critical components and critical supplies.

[Lukas Winkler, executive]

And don't underestimate also our investment program to add capacity. Some of the money is going into more automated calibration, testing and even some welding and leak detection applications that the -- then we can use the installed tools 24 hours per day and not just on 1 shift. That helps also to offset a little bit the price pressure that we see from the supply side to have a more efficient in-house manufacturing developed over the next few months.

[Joern Iffert, analyst]

And what is roughly the best guess of gross profit margins are trending? Do you think Q1 was the trough?

[Lukas Winkler, executive]

Certainly, we hope so. Also, I don't think that we have seen the worst yet because now with the Shanghai lockdown and some rare material coming from Russia, we might even have another round of unexpected bottlenecks over the next few months.

[Matthias Tröndle, executive]

I would say realistic gross margin, at least for the next 2 quarters, could be between 46% and 48%, something like that, yes.

[Joern Iffert, analyst]

The last question, if I may, on the R&D spend, when you adjust for the factors you mentioned that maybe R&D was roughly flattish. Why is R&D not growing given all the opportunities you're having? Is your current engineering capacity enough to exploit all the trends? Or how shall we think about it?

[Lukas Winkler, executive]

In general, you never have enough R&D resources. If you would have enough, something is wrong, but that's a general statement.

No, I think it has also to do with some timing effects. As you know, we finished a huge R&D program of developing this new HAPSITE product. And usually, projects are more expensive at the end of a project than at the beginning when you have to invest also in tools, in material, in prototypes and testing and so on. So that is one effect.

Second effect clearly has to do with -- I mean this is just a one quarter that you now currently see. And typically, what also happens is that the R&D departments, they clean up everything by the year-end so they can start at zero in January. And so whatever they have got to turn in as a expense usually shows up in Q4, but not in Q1. So I think it's more a timing effect and not necessarily a part of, do we miss any opportunities.

[Matthias Tröndle, executive]

And on top, I would say, the R&D costs are always somehow impacted by these project costs. So they could be, they could not be. So you can have some external support and special R&D material you might need. So there are always some pickups and going down. And I would not agree that we don't invest anymore. And I believe that's a good number. You see here the $11.5 million. And as I said, we are still working with full pace on all these projects to develop further.

[Joern Iffert, analyst]

Okay. And then very sorry for my last question, sorry to extend it, but, Lukas, there is a news that you are stepping down. You want Matthias now to sort out the downturn in '24? Or what is exactly the rationale and if you are still young and dynamic? Just some words would be appreciated.

[Lukas Winkler, executive]

This is a long-term planning step. And unfortunately, biologically, I'm not getting younger. And so now it's the time to hand over to the next generation who can take care about the next 2 decades. And as you mentioned before, it is guaranteed that over the next 5 to 8 years, we will have a downturn somehow. But we are prepared for that. And even the next generation of managers are prepared for that. So I'm actually looking forward to enjoy a little bit more time. But of course, I'm not completely disappearing out of what I'm doing currently.

[Bernhard Schweizer]

Thank you for your questions, Jorn. We now continue with Martin Comtesse. Your questions, please, Mr. Comtesse.

[Martin Comtesse, analyst]

I would have three questions, but I'll take them one by one, if that's okay.

The first question would be on your growth in North America, which was surprisingly strong, I would say, twice as high as in Asia. Can you just give us a little more color around where that growth has come from and whether this is already from domestic investment programs? And also, is it fair to assume that, that growth has actually even helped you on the gross margin because the whole tariff topic was -- yes, it's not an impact by growth in North America? That will be the first question.

[Lukas Winkler, executive]

Let me start with the second part. I'm not sure it's a consequence of the newest policy or tariffs. At least, we don't think that we have seen a big impact on that. I think it's more an issue of which markets are behaving well and which are less. And we see that in -- as I mentioned in my remarks, we've got some nice successes with these monitoring devices for landfill and gas pipelines. That's a part of the growth.

Then we had some growth also in the semiconductor market, end user related with some software packages that we have sold. And -- does it really had an impact based on the U.S. policy? I don't think so. But as I mentioned, those 2 elements. And of course, the General Vacuum market behaved well as well, but here we talk about thousands of customers. So I cannot single point to one or the other application, but I can clearly see 3 applications contributed to the growth. One is this semiconductor end user. The other one is landfill and gas pipeline monitoring. Those are the drivers. And I don't think that the policy had a big impact on that.

[Martin Comtesse, analyst]

Sorry, I meant with the policy more that because you were growing faster in the U.S. than you were in Asia, that should have normally helped your gross margin, no?

[Lukas Winkler, executive]

Oh, you mean on the gross margin? No, I don't think so. The only impact it could have is on foreign exchange rates because most of the products that we sell into the U.S. are also U.S.-based, not all, but some of them. And there we had no impact.

In Asia, our traditional major customers are chip end users, and they have an above-INFICON gross profit percentages, whereas equipment manufacturers and private label distribution partners usually have a below-INFICON gross profit margin in general.

So therefore, I don't think that the U.S. growth did contribute to the improved gross profit margin.

[Martin Comtesse, analyst]

Very clear. The second question would be you already mentioned that the strong growth in China in General Vacuum is at risk due to renewed lockdowns. Can you just help us understand the current situation there? Is it mainly the supply chain? Or what are you exactly struggling with?

[Lukas Winkler, executive]

Our major sales service and application office is in Shanghai. And all of our engineers are actually now locked in their apartments. So we cannot go to customers. We cannot do services on site. We can help them over the phone and via video conferences, but we are very limited if it really comes to demonstrations and really help them on their solutions.

So therefore, I see an unclear impact there, let me call it that. I hope it will be soon over, but we simply don't know it. But the major impact will come from the fact that we really need to stay in Shanghai and they cannot travel. They cannot go to customers. They cannot do demonstrations and their problem solvings on site.

[Martin Comtesse, analyst]

And the last question would be on the operating cash flow. It was down, you mentioned EUR 5 million year-on-year, mainly due to high inventories and accounts receivable. Is this something you expect to reverse in the course of the year? And is it right to assume that it's mainly because of unfinished goods that sit on your warehouses at this point?

[Matthias Tröndle, executive]

The expectation is that this will reverse in the next quarters. And as I tried to comment a little bit, typically, our Q1 is very low. We even had some years ago a Q1 where we had negative cash flow. And this is mainly driven by our payout schedules of variable pay, performance bonuses and so on. This mostly happens in Q1. So there is always a big impact on our cash and cash flow situation.

So on this line, it has been basically 2 impacts. One was inventory increase and working capital increase and in parallel payouts. And this did result basically in a little bit lower cash flow for Q1. But there should be no worries on this number. I still [ speak ] very well. And I really assume and expect that Q2 onwards, we will see here better results again.

[Lukas Winkler, executive]

And I'd like to add one element. We had, even in the first quarter, still a very high CapEx investment, payout close to double-digit figure, as far as I remember. That's also a part that we expect probably was to peak this year and might go down over the course of the next few quarters because we are almost finished with the capacity addition programs.

[Martin Comtesse, analyst]

Can you give us -- on that capacity extension, do you think -- can you say when it's going to be finished and when you're running on full capacity approximately?

[Lukas Winkler, executive]

Approximately by midyear, we should be done with all the major investments. From Q3 on, we should run at -- we'll be able to run at a higher capacity.

[Bernhard Schweizer]

Thank you, Martin. The next questions come from Harald Eggeling. Are you there, Harald?

[Harald Eggeling, analyst]

Do you hear me now?

[Bernhard Schweizer]

Yes, we hear you. We don't see you yet, but we hear you.

[Harald Eggeling, analyst]

Yes, sorry. What is, from your point of view, currently, the 2 biggest challenges in the supply chain? And do you expect this to change during the course of the year?

Second question is regarding the phasing of sales and EBIT. With your comments, I interpret that we might see a rather back-end loaded 2022 or even Q4-loaded 2022?

[Lukas Winkler, executive]

I'll start with the second question. Your assumption is probably right. We expect a back-end loaded full year. So second half will probably be above the first half or certainly be above the first half, if nothing goes wrong under the current circumstances. Net debt -- let's go to the 2 major challenges. Supply chain-wise, one, clearly, electronics, that is by far the biggest headache that I have. And secondly, the uncertainty about the supply chain. That's my second headache, because we do not see any light at the end of the tunnel. And those is even more annoying than just having an issue. But when you know that the issue will be solved in a few months, then it's okay. But we do not even know if it will solve or not.

[Harald Eggeling, analyst]

Okay. And one follow-up, please, if I may.

[Lukas Winkler, executive]

Sure.

[Harald Eggeling, analyst]

Regarding your sales or service hub in Shanghai, what is currently the annual run rate of loss of revenues we are talking about?

[Lukas Winkler, executive]

We don't know what is actually -- what's really lost because the lockdown just started. We had a pretty good start into '22 in China, with a huge order intake and also a huge backlog. So we are behind the installation that we should run. And now we might get even more behind because we cannot go to customers.

How much did we lost already in Q1? Not that much, I would say, because we have been limited by supply chain anyway. Moving forward, as I said, this is a part of my 2 challenges. We simply don't know it yet. Will the lockdown continue for 2 more weeks or 2 more months, that can make a big, big difference. If it will continue for 3 more months, then certainly, China for us as a market will have an impact on the overall INFICON performance.

[Harald Eggeling, analyst]

Okay. So the major downside would simply be that we might see -- if we see again another lockdown in Q3 or Q4 in Shanghai, right?

[Lukas Winkler, executive]

That will be a complete disaster. Absolutely.

[Harald Eggeling, analyst]

Okay. And for rough ballpark figure, would it be correct to assume that on an annual basis roughly USD 40 million sales are at risk?

[Lukas Winkler, executive]

If we have a very long lockdown overall in China, it certainly will be double digit. How high? Maybe $20 million to $30 million might be a best guess.

[Matthias Tröndle, executive]

The best guess for the worst case.

[Lukas Winkler, executive]

Yes.

[Bernhard Schweizer]

Do you have any further questions, Harald? No, I don't think so. I do not see any written questions. No one has his or her hand up. So thank you, ladies and gentlemen, for your questions. Lukas, Matthias, any closing -- there is Emrah Basic with an additional question.

[Emrah Basic, analyst]

Sorry for the late add on. Just a quick one on the electric battery part. So I mean I don't know if I read somewhere that you announced a new battery testing or leakage solution last year. Is that true? If so, how is it developing?

And just in terms of this new growth potential, do you see already like some strong commitments due to all these giga factories being built up? And who are your customers there? Is it still just the carmakers or is it also battery makers, such as LG, Samsung, CATL, et cetera?

[Lukas Winkler, executive]

Starting with the second part of the question, we are only talking to the battery makers. We are not talking to the car manufacturers. We only talk to the battery manufacturers.

So having said that, the market for lithium-ion battery testing, and we are just talking about the testing, so we are not an integrated part of the battery, we are an integrated part of the manufacturing process at the end of the assembly line and during the assembly line of making lithium-ion batteries.

There you have basically 2 steps or 2 different time from a stage point of view where our instruments should and can play a critical role to the quality of the lithium-ion battery. One is that's the new product. When we test the smallest unit of a full battery package, that's still at the beginning of the development because we are measuring directly if there might be a hole in the smallest unit so that certain electrolytes might be released. And those electrolytes, if they are released, catch fire immediately.

So that's the initial part of the testing that we do. And here our market penetration is still relatively small. But we are the only one providing such an instrument, and it's at the beginning of a growing trend, and we already sold a couple of systems and continue to be very successful, as I mentioned, with the battery manufacturers, not with the car manufacturers. And we are talking about larger battery as well as small batteries for mobile devices, not just for e-cars, but also for mobile devices.

The second element of this quality inspection program starts when all these small units are packaged into larger modules. And those modules, again, need to be hermetically sealed. And for that quality inspection step, we use a traditional leak detection inspection system that we already have available for the last few years. That's currently the biggest part of the market because every single individual lithium-ion battery manufacturer has now realized that they have to do a final integrity check at the end of the assembly line. And here, we talk to, you mentioned a few of them, the big guys. And there we sell hundreds of systems over the next few years. And this is the single biggest growth driver currently. Might that be replaced by even selling more systems to actually check the leak integrity of the small unit that I mentioned before.

[Bernhard Schweizer]

Are there any additional questions? Anyone? If not then, Lukas, Matthias, any closing remarks?

[Lukas Winkler, executive]

I simply like to thank you and hope that you do not have any supply shortage problems like we have with whatever supplies you need. And therefore, I just like to wish you very nice spring time and talk to you again, either in person and, if not, at our Q2 earnings call at the end of July, I believe. Thank you very much. Have a great day, and enjoy the weekend.

[Matthias Tröndle, executive]

Thank you. Bye-bye.

[Bernhard Schweizer]

Bye-bye.