Inficon Holding AG

SIX:IFCN

Earnings Call Transcript 2023-Q2

[Bernhard Schweizer, executive]

Good morning and welcome everyone. My name is Bernhard Schweizer, Investor Relations contact at INFICON. I have the pleasure to host this Microsoft Teams webcast in our Q2 and Half Year 2023 Results. With us today are Oliver Wyrsch, CEO of INFICON and Matthias Troendle, CFO of INFICON. The management team will first present the results and then take questions. During management's prepared remarks, online participants are requested to turn off their microphones and cameras, please. [Operator Instructions]You should have received by now a press release on the Q2 and half year 2023 results, together with the links to the accompanying visuals for this conference and the full half-year report. All documents are available for download in the investor section of the INFICON website, www.inficon.com.I would also like to inform you that we record this web conference to archive the audio file later on the INFICON website. The oral statements made by INFICON during this MS Team 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 now to Oliver Wyrsch. Oliver, please?

[Oliver Wyrsch, executive]

Thank you very much, Bernard and welcome everybody to today's earnings release. I'm very happy to have you all here participating today and we'll now jump into the presentation. We, as usual, split this into two parts. First, I will talk about the key messages, the markets and the expectations for 2023. And then our CFO, Matthias Troendle will give you a few more details around the financials.First of all, the highlights. We are very happy to report strong growth in the second quarter 2023, record high sales and year-on-year growth in all end markets and all regions. The supply chain has improved, but we still have impacts slowing down and affecting our margins.If you look at numbers, we grew year-on-year 22% to USD171 million. The strong position of Inficon in a diverse set of end markets in semi and outside of semi conductor supports us in this volatile times. And you can see that's what also supported the growth across the regions and end markets. We were able to grow also the operating income by 33% year-on-year to USD33 million. The gross profit margin is still impacted by cost inflation, particularly still chip broker cost and also some quality issues. Despite the improvements, the supply chain is still the bottleneck, but it has improved and gave us this opportunity to also increase the shipments.We were able to defend the profitability and improve it against the headwinds also in Q2 with 19.5% of [ inc ]. The order intake as expected reduced a bit, but much less than expected, it's still on a high level and it's just under a ratio of one book-to-bill in Q2.Regarding investments, we continue our investments in R&D and production. R&D is 7% of sales. This is mainly a little bit lower because the sales growth was higher. Regarding CapEx, we had a slower start in the first half of the year, that's only a time, a topic regarding the different investment plans, we expect USD30 million for the full-year.Now when we look at global markets, you can see that all markets have a strong growth. Year-on-year, we grew in Asia 18%, in Europe 23% and in North America 31%. We are happy to see that Asia continues the growth trend after China in particular came out of COVID end of last year and we saw some good growth in Q1. And also that Europe and North America continued to have good growth.If you look at the end markets in more detail, you can see in Semiconductor & Vacuum Coating that even though the semiconductor market is softening short-term, this is not the easiest year due to the cyclicality, but we see good growth opportunities short-term and especially mid and long-term. We were able to grow in Q2 year-on-year by 10%. In this segment, in spite of the weakening market for us, this is explained through the semiconductor market for Inficon being a bit more diverse. We look at several sub markets five to 10 that each one has a bit of a different dynamic. The weakest one certainly is memory as we all know. This year, a bit more struggling is the cyclical dynamic, which towards end of the year is likely to improve. Other markets have been totally unaffected, the leading edge, ASML, EUV, this has been basically unaffected by this year's cyclicality. And then we have a number of markets in between, the trailing edge, chip makers have been more or less flat to even a little bit growth for the different product lines that we have.The mid and long-term opportunities we see as very strong, mainly through the R&D pipeline, where we have a lot of interesting new products in the works. This slower years help us also to work with the customers a bit more on R&D development and that's also what we see. So, we have a number of products already in testing at the customers, which give us further confidence that these are going to be strong products for the future.If you then look at the Automotive, Refrigeration, Air Conditioning market, we see here a strong growth. We were able to grow Q2 year-on-year by plus 40%. A big driver is the battery testing in this segment, but we have to say that all product lines except maybe traditional auto have shown very good growth, driven through automation in RAC, of course, but also through the ability to ship more from the backlog or from the orders through an improved supply chain. But then also Asia, in particular China, has shown a lot of positive dynamic that supported this growth.Also here we have a number of interesting new products in the pipeline. We have a few products that we launched that you have seen also in our press releases. So, there's a lot of good dynamic also here mid and long-term. If you look at General Vacuum market, that is a market that has many smaller sub-markets, which are really very different. Overall, very positive development here. We were able to grow 23% year-on-year in the Q2 of 2023. We have markets in there like solar that have a very strong dynamic and then on the other end of the spectrum, markets that are a little bit slower, if you look at general industrial application and then a lot in between. Driven is this growth also again through the supply chain that improved and also through Asia and China.If you look at our fourth market, Security & Energy, you see here a significant growth of 128% versus Q2 2022. This is a market that is cyclical through government programs. We were slower last year. We have launched the New HAPSITE product, one of our flagship products, which has seen a lot of interest. We have a very strong order pipeline, we received a lot of big orders already. We are very optimistic also for the future. And now through improvement in the supply chain, we were also able to ship a lot more in Q2.It is probably our most complex product, therefore also more affected through supply chain disruptions. So, we are also little bit cautious of how this continues. It is not always going forward. We had a couple of step backwards here also in the supply chain, but a general trend is positive regarding supply channels in this space. And we see also for future growth here in particular around the HAPSITE product.With that, I'm coming to the expectations, 2023. Given the strong order situation, the growth in selected markets, we are remaining mostly optimistic for 2023. There is risks, there is some sectors that slow down, but with the increased optimism, we also increased the guidance and raised it to USD610 million to USD640 million from a prior guidance of USD570 million to USD610 million. The operating income will stay at the same level regarding our guidance at around 19%.And with this, I'm at the end of my part of the remarks and I would like to hand over to our CFO, Matthias Troendle, for more detailed financial information. Thank you.

[Matthias Tröndle, executive]

Thank you, Oliver. Good morning, everyone and welcome to our second quarter call. I will cover Q2 financials and quickly the half-year results and also comment on the guidance. So now let me first start with the highlights for Q2. Orders ended on a high level, but lower than first quarter, with a book-to-bill below 1. Our sales did grow by a strong 22.3%. The gross margin was at 45%, stable, nearly stable, I would say and we achieved a 33% increase in operating income to USD33 million or 19.5% of sales. From a balance sheet point of view, we have CapEx as Oliver said, our CapEx ended a little bit higher than in the previous quarter, but still a little bit lower than what we expect for the full-year. Cash flow clearly improved and net cash ended somewhat lower after dividend payments in Q2 and our equity ratio shows a solid and unchanged 58%.Now, let me go a little bit more into the details. As communicated this morning and we achieved revenue of USD171 million in Q2 of 2023, this compares to USD139.8 million in the previous year. This represents an increase of 22.3%. Taking into account a small negative currency impact of minus 0.3%, we achieved organic growth of 22.6%.Oliver did already commend the development of the various end markets. We can point out that sales in all markets did grow. The biggest changes have been in Security & Energy, which more than doubled with a plus of 128% and Refrigeration, Air Conditioning and Automotive with a plus of close to 40%. General Vacuum expanded by 23% and the Semi & Vacuum Coating market did grow by 10% compared to Q2 last year.With that, the second quarter ended with a new quarterly sales record. The regional distribution of sales, which you see on the table on the right side shows growth in all regions and we had the highest growth in North America and Europe with 31% and 23%, also Asia showed a strong 18% growth. The gross profit margin increased by 21% in absolute numbers and reached 45% in Q2, nearly unchanged and slightly down by 34 basis points, compared to Q2 last year. The positive impact of the higher volume and somewhat lower broker cost was partially compensated for by higher material prices and inventory costs.What happened to the operational costs? We spent USD12.5 million on R&D in Q2, an increase of 15.5%, as a percent of sales expenses decreased from 7.9% to 7.4% in the second quarter. Here, additional headcounts to support our development efforts and some slightly unfavorable FX impacts did drive this increase.In SG&A, the cost level did increase by USD230.9 million or 13.2%. Personal expense due to increased headcounts are the main driver, but also general cost increases like trade shows, meetings and travel have some impact here. The operating profit for the second quarter, here we achieved an operating profit of USD33.3 million or 19.5% of sales after USD25.1 million or 18% of sales in Q2 last year. This is an increase of 32.7% compared to our previous quarter, the result did also increase by close to 11%.The tax expense for the second quarter was at USD6.4 million which represents a tax rate of approximately 21.6%, due to the profit mix of our international entities slightly higher than Q2 last year and about 2 percentage points lower than in the previous quarter this year. The net profit therefore did grow by 24.6% and reached USD24.8 million or 14.5% in Q2. This compares to USD19.9 million or 14.2% in the prior year.Now let's move to the balance sheet highlights, our net cash ended at minus USD14.9 million, which is a USD17.4 million lower than end of last year, partially driven by the dividend payouts we had in the second quarter in April. The turns for inventory decreased to 2.5 and the DSO ratio, day sales outstanding had with 52.7 days, a similar respectively slightly better level compared to Q4 last year.Our working capital which consist of inventory, accounts receivables and accounts payables reached USD221.5 million or 32.5% of sales in comparison to 29.3% of sales in the previous year. The majority of that increase is contributed to a USD18 million increase in inventory due to our high business levels, partially compensated for by lower accounts receivables and better accounts payables.Compared to previous quarter, we made some robust -- the working capital ratio ended somewhat lower as both accounts receivables and also inventory for the first time since many quarters did slightly reduce. Our operating cash flow developed well, improved clearly and reached [ with ] USD26.5 million, the second best level. And the balance sheet -- the balance sheet shows a solid structure with a 58% equity ratio. Those were my comments on the Q2 results.Now, here quickly the outlook. Oliver did already commend the assessment for the end markets and our few. Based on our assessment, the order book, the order intake and the overall business situation we are mostly optimistic and we -- for the start of the year and we updated and increased our guidance to USD610 million to USD640 million and at a operating income margin of around 19% for the fiscal year.Finally, just a few words on the half-year results. We just closed the half year, we released the half year report which you can find on the webpage. And here just let me quickly comment, our net sales for the first six months of 2023 reached USD329.2 million compared with USD278.1 million for the same period of 2022, representing a USD51 million increase or 18.3% and an organic growth of 20.1%.In the first half, sales increased in all end markets. Also in the first half, all regions did grow compared to the previous year. The majority of sales did go to Asia where we reached USD157 million or 48% of our worldwide sales. The second largest region is North America where we had 25% growth rate and where Security & Energy sales tripled compared to last year and in Europe, we had 11% increase. We reached an operating income of USD63.3 million or 19.2% after USD52.4 million or 18.9% last year.Despite the slightly lower gross profit percentage margin, the sales growth a moderate increase in operating expense did result in that 20.8% higher operating income. The operating cash flow improved nearly to USD42 million and doubled compared to previous year period. Yeah, as mentioned, half year report is ready on the investor page, you can download if you want.And with that, I would like to close the presentation. We are now ready to take your questions.

[Bernhard Schweizer, executive]

Thank you, Oliver and Matthias. We then now turn to the Q&A session and we will start with a question of Michael Foeth. Michael, please?

[Michael Foeth, analyst]

Three questions, please. The first one is on your comments on the semiconductor market in your slides. You mentioned that you expect softening or decline in 2023 and in the press release, you said you expect at least stable sales in the coming months, so that's somewhat conflicting to me, if you can just clarify what you expect there? The second question would be on your comments about the memory market. You said that you have -- you expect improvement towards year-end in the memory market. Can you be more specific what indications you have that there will be improvement in memory? And then finally, also on semiconductors, you mentioned products that you're testing with customers that make you confident for future growth. Can you be more specific what products you're talking about?

[Oliver Wyrsch, executive]

Thanks, Michael, for the question. So let me see what I can give you answers for and then maybe Matthias can also chime in. First on the market, so for Semi, we distinguish between the market and our own development because generally, obviously, as we all know, the semiconductor market goes through cyclical downturn this year. Therefore, we had it on the slide as softening and decline. We -- as INFICON have most of the sub segments in this markets, though less negative in our outlook. We see it flat or even growing. While also there in the sub segment of memory, we have seen 20% to 30% slower order intake. So that's the mixed picture we have there. But we need to clearly distinguish between the market or even the sub markets and the INFICON performance of the product lines and the aggregated INFICON performance. I think that's maybe where this confusion potentially came from. I hope this helps?Then regarding memory, again, we also saw at the beginning of the year like some of our peers, a slower order intake in that specific segment that can be OEM and that can be also chip makers or end users. We have though now seen selectively positive signs and when we read the same reports as you read or even write, then we see some first signs that we could reach rock bottom now in Q3 and then there could be a pickup. I have to say I'm not more of an expert and many of you in this prediction of how the market exactly develops, but we have seen first signs and even first order pickup of some of our product lines.Then maybe we go to the last point that you had a question regarding new product. We typically will not release products in development yet, I can just give you a bit of a feeling. There's a lot of sensor technologies that we're working on, we have a couple of core technologies as you know, pressure management or pressure measurement and the mass spec gas analysis, but we built out this portfolio over some time with new technologies, for instance, one that we have launched [ Qantas ] or [indiscernible] products in the optical space. And we have a few more new technologies in the works there that currently are in this testing and we think that in the next years we will be able to establish them as products as well as you know, the semiconductor industry while being moving really fast is on the other hand also conservative in adoptive -- in adapting new technologies, so it takes its time to establish them in the new processes at OEMs or chip makers.I hope with that I can [Technical Difficulty] your question.

[Bernhard Schweizer, executive]

Next in line is Jorn Iffert, the microphone is all yours.

[Joern Iffert, analyst]

I would have three questions please, I will take them one by one. The first question, coming back on the gross profit margin, 45% is another smaller set back. We hear from other companies chip price are going down, so they get some support it seems not the case for INFICON. Can you please clarify what exactly is happening here on the chip purchases and when you expect some releases will be the first question please?

[Oliver Wyrsch, executive]

Hi, Jorn, of course, let's talk about the gross margin a little bit. I mean, mid-term we have the strategy and also the path back to 50% be it short-term have the priority to reduce our delivery times, increasing capacity and satisfy our customer demands as a first priority, what does that mean on the other end, we will accept quality issues with suppliers, when they ramp up and the quality has been affected by that. We had a lot of supply chain disruptions where some missing products led to line stoppages or slowdowns and things like that. It has all improved since last year, but it is still significant this year.And one of the bigger factors as we talked about continuously also last year, obviously, is the cost for -- the broker costs for chips from the level of the USD15 million to USD18 million last year, we have been coming down. We talked in Q1 about maybe going to two-third of that level, it has not gone away yet in Q2 as much as we would like, it's still more than 50% of that level. We had also some incidents of quality issues that have also produced more noise in the system and have also been affecting our gross margin. So I'm optimistic on the profitability, you see it also on the bottom line, but we will clearly prioritize right now to gain market shares, reduce delivery times, make our customers happy by shipping versus optimizing the cost too much on that end, if that makes sense.

[Joern Iffert, analyst]

And if I may follow-up on this, what is roughly the impact from your internal quality issues, productivity issues and on the gross profit margin in Q2 and what is the impact from really still higher brokerage cost, if you can quantify this in basis points roughly? And when do you expect gross profit margins really to increase quite significantly?

[Oliver Wyrsch, executive]

Yeah, maybe, Matthias, help me out a little bit.

[Matthias Tröndle, executive]

Let me try to size it a little bit, so the broader cost into two still in the range of about, yeah, 1.5% in that range. The inventory issues we suffered and which are above normal level compared to previous quarters in the range of 0.5% to 0.6% if you -- the indication in the field.

[Joern Iffert, analyst]

But you also mentioned quality issues and production you have impact gross profit margin or did I misunderstand this?

[Oliver Wyrsch, executive]

Yeah, no, then maybe let me clarify this. I mentioned quality issues from our suppliers. You need to understand some of them had dramatic increases of their capacity and some didn't fully stabilize the new product lines in terms of quality or output right, both is a bit interlinked, the quality issues that affected us was mostly caused by supplier quality issues on the parts that they ship to us.

[Matthias Tröndle, executive]

Maybe, Jorn, to add little bit information on this product cost and what we believe let's say in Q4 that we should -- should decrease further I think Q4 the level of progress should be -- should be much lower than in Q2, that's what we assume and what we have in our forecast. And -- but what we also should consider is that we still have some of these higher-priced products and chips in our inventory. So we sell it as we go, right? So even if today all the broker cost will stop, we still have some two, three months to realize these cost into our P&L, but just my explanation because that's sitting in the inventory, yeah.

[Joern Iffert, analyst]

Yeah.

[Oliver Wyrsch, executive]

Maybe to comment on the other half of the equation regarding the price realization, the process there is also dragging out a little bit, mainly because of the backlog, the renegotiation happened, right? We talked about that already last year, but since we have this significant backlog, this just drags out, when you ship more you get closer to the new price level, but it's a bit of a blend now, right, [ somehow reached it ], haven't yet, another factor that will play into this.

[Joern Iffert, analyst]

Second question is really a quick one. Can you remind us on your total solar cell exposure and what is roughly your growth rate assumption here for the next one or two years?

[Oliver Wyrsch, executive]

Yeah, Jorn, as you know, right from discussions, we currently working out more details on our strategy. As I mentioned before, we have been working last year quite a bit on the long-term strategy, breaking it down to different markets. So while we have a very clear picture on semiconductor and the sub-markets there and a couple of others key strategic market like battery on solar, we don't have the clarity so much on where its going and how the dynamic is, it's also a market that we serve mostly indirectly through OEMs. So we could probably say it's some mid-single digit market with on the higher side maybe of that, Matthias, what would you estimate?

[Matthias Tröndle, executive]

Yeah.

[Oliver Wyrsch, executive]

Makes sense?

[Matthias Tröndle, executive]

Yeah, makes sense, yeah.

[Joern Iffert, analyst]

Okay.

[Oliver Wyrsch, executive]

So certainly one that has dynamic and we will further -- going to target with more product lines. So give us some time there to refine our strategy, it's a bit of a moving target as well, right, while the West starts to work on supplying their own energy transition products more than from China. So there is some shifts in there, but certainly an interesting market for us that is currently part of Gen Vac.

[Joern Iffert, analyst]

And then maybe really the last question quickly, if I may. In the semi segment, you mentioned you have five to 10 different sub-end markets, with the new products coming up, this is increasing the number of sub-end markets that you have a couple of adjacencies that we speak about 10 to 15 sub-end markets over the next five years or is it more innovations in the existing SKUs and product lines reciting some replacements and productivity improvements for your customers?

[Oliver Wyrsch, executive]

Yeah, good question. This is both. We currently, of course, look with highest priority at applications and channels and customers that already exist and want to expand our capabilities there. For new applications, one of the things are of course new process types that needs different, more sensitive centers or more sophisticated data analytics. That's one part, but another part is also to look more into the general value chain of semiconductor and look at the needs of players in there that may be support current customers. One example could be in lithography, you have a lot of tools around that support for instance in EUV tool. If you think about how we look at the mask, how you measure contamination, how you clean and so on, there's different pockets like this that we're also looking at or you could look at more of the front end of the back-end market, there is a lot of dynamic there, so just to give you a little bit of a flavor of in places that we are working on.

[Bernhard Schweizer, executive]

Thank you, Jorn, for your questions. The next question come from Emrah Basic. Emrah, please.

[Emrah Basic, analyst]

Just two quick ones, your guidance for the full-year, is it -- does it already price in a potential improvement towards the end of the second half year in the Semi segment or is it or is there some upside on your guidance?

[Oliver Wyrsch, executive]

In general, we of course side try to do the guidance, we have the best knowledge and then be in a realistic scenario, so that's where we are right now. Of course there is upside, but there's also downside, this is bit more difficult year, that of course has been now a bit cleared up through the last couple of months, but it's still a bit unclear how the semiconductor market will behave in Q3 and Q4, right? There is this notion that rock bottom is in Q3 and they have an improvement in Q4. We all don't know exactly how this is going to play out in the end, it will come plus-minus quarter probably. We have the same in securities a bit on how this will play out. Maybe one thing to note is that Q3 is historically seasonal, a slower quarter for INFICON and then Q4 is a very strong quarter, historically. So, we have also this up and down swing a bit coming in the second half, which is adding a bit more to the uncertainty of where it exactly will play out, but again we stand by our guidance, so USD610 million to USD640 million, that's what we currently see as realistic.

[Emrah Basic, analyst]

And the second one would be the outlook for your General Vac changed from flat to growth versus the last quarter. I'm not sure if you already did, but if not, could you maybe add some color on the change in dynamics over the past couple of -- past few months?

[Oliver Wyrsch, executive]

Yes, of course, yeah versus beginning of the year where we were little bit more pessimistic and maybe also saw some larger economic downturn or even the recession in some of our markets. We haven't seen much of this at all. And of course there is a big backlog play there as well, but we also have seen good orders particularly also in Asia, but also in other markets. So this all shows that there is a bit more potential there than you originally thought. And I believe some of these sub-markets, the smaller ones that are in Gen Vac, the way we track them and I need to again emphasize that some of them we're tracking directly through OEMs and sometimes complicated channels.They have been -- they have shown much more dynamic than maybe could have been expected from the general economic dynamic. It seems that there is a couple of markets that have through energy transition, government sponsorship and so on, just a higher dynamic than the general markets. So this compound together and shows then in the end a very nice Gen Vac dynamic. Please also note again that the supply chain has significantly improved in terms of how we can deliver versus a year ago. So we were -- we are just also able to ship more.

[Bernhard Schweizer, executive]

Thank you, Emrah. Now we hand the microphone over to Marta Bruska. Marta, please.

[Marta Bruska, analyst]

Thank you for taking my questions and congratulations on the fantastic results and the guide -- guidance, right? So I would like to just clarify a few things actually. So, I do understand the issues you discussed with Jorn on the gross margin that was very helpful, but I would just like to ask you, despite that actually your gross margin was up 150 basis points year-on-year and even up sequentially 50 basis points. So it doesn't seem like your issues in the production whether that's dividend after all or how did you manage to -- what is the main driver of that strong operational performance. If you can give us some additional detail please. And also with regard to the cost, speaking of operational performance and we basically see no increase quarter-on-quarter neither in research and development nor in general admin expenses despite the inflation and I was just wondering what's your outlook for the remainder of the year and then I have one more please.

[Oliver Wyrsch, executive]

And I will maybe do it this way that I will answer the second question first and then I will turn to Matthias on the gross margin topic. So, yeah, regarding SG&A and R&D, general topic is of course that our sales are a bit more volatile than maybe our long-term plan to build up this two organizations, a lot in SG&As is driven through building out our sales network and as you know, a large part of it is actually application engineering and service engineering. So there is more strategic consideration there, typically where to place a service center, where to place an application center. And on the R&D side, same thing, where do we want to build a new capability, where do we find the specific scientist group that we would like to take on board. So this is kind of an independent dynamic, so we have built this up.In the meantime, while the dynamic on the sales is driven a lot by supply chain market orders and things like that. So the strategy has not changed for us, we are committed on building out R&D and we are also committed on building out our sales network globally further. When you look at these opportunities that we see really in many of our sub-segments, we are trying to be very strategic about where we want to go there for future. But again the dynamic is very different one versus this quarter-to-quarter this year in particular volatility of our sales output, if that's helpful?

[Marta Bruska, analyst]

Absolutely. Thank you very much.

[Oliver Wyrsch, executive]

Thank you.

[Matthias Tröndle, executive]

Yeah, so maybe to add a few words or comments on the gross margin.

[Marta Bruska, analyst]

EBIT, EBIT.

[Matthias Tröndle, executive]

On the EBIT, okay, in the EBIT, okay. So maybe rephrase it again or tell me again because I was...

[Marta Bruska, analyst]

Yeah, it was just like the gross margin, yes, it was down right but despite that the EBIT margin was up 150 basis points and also year-on-year and sequentially up 50 basis points. So your profitability has actually increased in the margin on the operational, so what was the some of the key levers considered?

[Matthias Tröndle, executive]

So, yeah, we tried already a little bit to phrase it or to expand it, but on the one hand side it's volume driven, our performance in our profitability. We had more than USD30 million of sales, which adds a lot on the gross margin in absolute -- in absolute terms and in parallel. Yes, our SG&A and R&D cost did also increase as we just discussed, but of course keep increase a little bit more moderate than the sales and the gross margin, which then brings of course all this volume impacts and at the end you end up really with a higher profitability, but these are really the main reason. And what is in China were always important, normally, I don't like to tell it because sometimes it's meant to be a kind of excuse if you don't know it, so bring in the mix, right?So the mix is always a nice topic, but it's really the case, the mix is impacting us every quarter somehow sometimes positive sometimes negative, we have product lines and products where we reach maybe 80% gross margin and that's where we only have 20%. And at the end sometimes it's really depending, how it comes together, who is shipping what, where do we have continuous production, continuous flow efficiency gains and more disruption and then the result comes in, right, as it is, that's a nature. And it would be easy, if it's only always this nice discussion broker cost and inventory and scrap, then I would be maybe unemployed and you don't need any finance people anymore. It's a little bit more and it's little bit more complex, right, that's what I want to say. And sometimes you have drivers which are changing over the periods and over the quarter spent.

[Oliver Wyrsch, executive]

Yeah, I would also emphasize maybe to tie back to what I said in the markets, this year has been a bit more in-transparent of what each sub-market does for us, really almost behaving independently and almost on a different universe some of them than others, positive and negative, which really hasn't made it for us more difficult to understand where does gross margin and profitability go because of the sub-markets and our sub-product lines, behaving quite different, right in the whole supply chain dynamic and so. So this has been a bit shaking up and down. I think though the general corridor is clear and our aspiration also. So we will get through this little bit in-transparent year and I think we'll have in future probably a bit more clarity, particularly if I believe next year we all believe semiconductor will stabilize and improve across the board that already will be simplifying the task.

[Marta Bruska, analyst]

Just to clarify, so this year growth year-to-date nearly 20% for you, it's predominantly a volume driven?

[Oliver Wyrsch, executive]

Yes, I mean, maybe the question is, are you talking now for other markets or rather financials because you can talk market...

[Marta Bruska, analyst]

[indiscernible] no, no, is there a -- the revenue increase, right, year-to-date, I would just like to split that in terms of pricing and volume if that's possible though [ roughly ]?

[Matthias Tröndle, executive]

I would say it's mixed, on the one hand side we really assume what I said earlier that all these special costs will smooth right and fade out probably, right? These broker costs and so on and we will have some relief that's what we assume. And on the other hand, the volume will also help of course to increase margins whether it's gross margin or operating income margin, this will help.

[Marta Bruska, analyst]

No, no, I just wanted to know with the growth you delivered right for the H1 18.4%, how much of that roughly was volume and how much of that roughly was -- thanks to pricing?

[Oliver Wyrsch, executive]

Our pricing, understand. Yes, so as I said the price realization even though this negotiation have taken place largely last year, beginning of the year because of the backlog, there was quite some delay there. The way we look at it and the management is to really push it in terms of reducing delivery times, increasing capacity and really deliver, that's the only way, also helps a lot of other things, right, makes customer happy and reduces inventory. And I believe we have seen good progress in Q2. Now, how big the parties of pricing versus volume, there certainly a strong volume increase in there, but there is -- there is a pricing effect that I've been already realized but not the full one. I think the full one we could say is going to be above 5%, maybe 7% but again now comes my disclaimer here many sub-markets, many key accounts, many product lines, all moving at a different pace and all sometimes stopping and going this year, so there is a big mix here.We certainly are not at the end of the price realization. So I would believe there a significant, as you can see from the rough numbers there, there is a significant growth in there and we know we gained market share in some sectors, that are also known where we attack and where we move faster products and new applications.

[Bernhard Schweizer, executive]

Thank you, Marta. Next in line is Michael Foeth. Michael, please?

[Michael Foeth, analyst]

Can you hear me now?

[Bernhard Schweizer, executive]

Yes, we do. Yeah. We could hear you before, Michael. Try again.

[Oliver Wyrsch, executive]

This looks better Michael.

[Bernhard Schweizer, executive]

Carry on.

[Oliver Wyrsch, executive]

Still, we can't hear you.

[Bernhard Schweizer, executive]

We could hear you before.

[Michael Foeth, analyst]

Can you hear me now?

[Bernhard Schweizer, executive]

Yes, we do. All right, we can.

[Michael Foeth, analyst]

Seems to be kind of a delay in this new tone and new tough. Just a clarification to your guidance, I mean your upper end of the guidance is USD640 million, the first half sales was USD330 million, so that leaves USD310 million for the second half, which is about 2 times on the USD55 million something like that. So with the USD155 million which is significantly below the USD171 million you made in the second quarter. My question would be, what do you expect to be a much weaker than in the second quarter, what was extraordinary in the second quarter, maybe extraordinary positively. I mean is there -- is there some catch-up of delivery or I mean, what do you see or where do you see most changes in Q3, Q4 versus the second quarter? And then maybe also on this operational leverage, I mean you guide for 19% EBIT margin on a lower basically top line in the second half. So the dollar is also weaker I guess that would be slightly negative for your margin normally with some expenses in Swiss francs and so. Is that improvement basically underlying improvement coming from the gross margin then as you mentioned in the fourth quarter or is there some other elements?

[Oliver Wyrsch, executive]

All right. I'll try to give you a bit -- bigger picture maybe Matthias can give a bit more flesh on the bone on the specific financials guidance. Yeah, again what I just mentioned before with Marta's question, it is a bit of a difficult year to understand all this separate sub-market dynamics. And yes in Q2 a lot of positive has compounded right?If you look at HAPSITE and the shipment that suddenly worked because of the supply chain being better, orders we anyway have there and then we had Gen Vac maybe solar in China, totally independent also worked really well and we were also able to ship and there's 20 markets in between. So this is a bit picture we're looking at and we had quite some discussion to find out what is a realistic guidance here. What we do know is that we have to increase it to this level.What we don't know is, if will we have another quarter like Q2, I think generally as I mentioned, Q3 is normally a bit slower, right, because of mainly vacation times and things like that is a seasonal topic. And then Q4 is always very strong, it's often our strongest quarter. How will it play out or exactly, specifically with the semiconductor market still being in slowdown, how much delays will we have from the customer, I can tell you one example.Arizona, TSMC fab, right, massively delayed just came recently as a news to us, two things are produced, they're on the dock, they're ready to ship. We're not going to make revenue on this, this year, right, we would have to reassign part of the product potentially, where we have this kind of playing field where we are in the middle. We are mostly optimistic right and we are more optimistic than at the beginning of the year that you can see by the raised guidance, but we also still have so much volatility there, that it is a bit hard to say. And I would say that the same context of course goes also for the operating guidance which just we have seen so much up and down month-on-month in the different markets. It's still -- I believe a good solid guidance level to shoot for. Yeah, again there is upside for sure, there is still also downside because of these dynamics, maybe you can give a bit more on the specifics on the financials?

[Matthias Tröndle, executive]

Yeah, just let me use Oliver's playing field, right? So I would agree that the playing field is especially, right, yes, we have some pressure on the Swiss franc, as you said, that's correct. We have some exposure on the Swiss franc side, but we also -- we discussed earlier, the gross margin, the program hopefully broker costs easing over the next six to nine months, we have some pricing positives and so on. But there is still a lot of volatility in there, whether it's our production ability, whether it's supply chain and so on. And although I must emphasize and really say, we didn't say 19, we said around 19. So this gives some room right, so it doesn't mean we stopped at 19 or something like that. And please also give us a chance to update our guidance also in October, right, we have another quarter. And as we go and that's what we always did, we of course we update, right and then we have news. We have few insights maybe new information from customers, from markets and so on and as we go, of course we update, right? And we would be more definitely more than be right to even to increase and maybe bring positive news. We don't know yet. It's always tough to do the assessment at the end of the day because so many influenced factors in there and that's today the best of our knowledge. Yeah, we are happy to improve and we work on it and we will share the news if we have.

[Oliver Wyrsch, executive]

I mean the very strong point here that Matthias is making is also that Q3 probably more than other quarters will hopefully create some clarity, talking about semiconductor, is it bottoming them out, is Q4 going to improve or not yet, a couple of these things we will know next time when we meet for an earnings release in October. And I believe then definitely we'll be able to give you a better update, that is an important point to consider. It's a bit exceptional this year in that sense I would say the span from now till end of Q3.

[Bernhard Schweizer, executive]

Thank you, Michael. Now Serge Rotzer with his questions. Serge, please.

[Serge Rotzer, analyst]

Probably the first question is the run rate of the orders, you believe that this remain stable going into the second half or do you see up or downside on the current run rate, because you mentioned that book-to-bill is slightly below 1, so this tells me that orders probably have been around 300 in the first six months, is assumption correct or am I totally wrong?

[Oliver Wyrsch, executive]

Yeah, no, you're not totally wrong. It's -- obviously, we don't communicate order numbers. It is been above 1 in Q1 clearly and in Q2 not much below 1. So hence calculations, there is a little bit of a range that you can probably calculate, but [Technical Difficulty] really positively. I think you could say it's one-ish around first half right with a little bit plus on it. And so we see for the second half, not necessarily a slowdown on orders spot, comes a big, but the same disclaimer. We still don't know how the semiconductor market is behaving.The other markets they have a good dynamic, some general economical drivers that we all know or nobody or I don't know it better than others, how they will develop? There is some risk there, but generally the other three markets, they have a good outlook as you know from our presentation. And the Semi is the tricky one this year, but also given the great order situation there is not much to worry for us at INFICON. I think there is some uncertainties on some product lines, on some key accounts, on some products yes and some of them can be also bigger example right, TSMC. The product is -- the project isn't lost, the business will continue, the question is the timing, right, we had delays like that and they come sometimes sudden when the movement comes and that's where our uncertainty also comes from a little bit. And then the supply chain, yes, it has been good in Q2, but I can tell you not all months have been the same in Q2 and that maybe illustrates the volatility from month-by-month when a certain product line, PCB, a pump mechanical part suddenly doesn't show up on time or it shows up in their own quality and then you have some slowdown there.So that's a bit -- again the complicate the playing field where we try to find out what is going to happen, but again there is a good reason for optimism for the second half also on the order side.

[Serge Rotzer, analyst]

Second, no, just kidding. Second one on China, surprisingly -- surprisingly you mentioned very good demand in China, contrary to many other companies where they speak about delays and whatever, no recovery seen yet and it seems to me that China is mainly driven by solar and battery and I believe that you can confirm that. And do you see now is it only a base effect or is this continuing or what are the risk upsides and downsides here in this China market?

[Oliver Wyrsch, executive]

I mean, simple, if we could ship more, we could also write high revenues, at this point, it's still mostly about that and batteries is big, everything around EV is big, I mean there is different product lines that go in that space and there is connected businesses. If you look at chip manufacturing more on the mature side, that are connected to the EV business, strong dynamic. So certainly there is interesting semiconductor business popping up there. The interest also for sophisticated sensor solutions and software, solar is one in it, but there is really a large mix there right? For us, China is very broad.If you look at Gen Vac, China is a huge part in this, meaning, many, many markets through, but of course it has also the other few end markets in there. We have not seen much slowdown and I tell you, we do try to stay close this, analyze it, I was just in China for a business review to better understand dynamics, yeah, largest part of the markets where we participate it's about doubling down expanding, pushing, building up. We are in a strong market position while economically in general, there is significant issues obviously in China. Yes, but we haven't so far seeing them affecting us significantly.So I do hope this continues. I don't know how China will potentially slow down? I don't know how potential real estate issues will play in that I'm not the right person to ask, but at this point, we're really quite optimistic of what we can achieve, particularly short-term in China.

[Serge Rotzer, analyst]

And then the last one to Matthias, I have to bother him again on this margin story. So taking last year, you know, you did USD300 million sales, it's the same number you guide for this year for the second half, last year you did a gross profit margin of 45.5% around in the second six months, it's about the level we have seen so far. You said we don't see any improvement here, but you achieved the margin, EBIT margin of 19.4%. So it looks that the set-up, it's the same like last year the second half, but you're cautious on the margin and therefore my question different now. What is different to last year that the margin could go to 19% instead of approaching 19.5% in the second six months. You already mentioned head and tailwinds, but what is [indiscernible] next year, where you see the downside and then on the fixed cost.

[Matthias Tröndle, executive]

Yeah -- its -- yeah, I already tried to give some insight what are the drivers, I'm not sure I have many more, right, to give it to you, yeah and there is a lot of -- there were really a lot of dynamics in there and influence factors in there, some you know, some you are surprised like for example, last year we had much, much higher freight -- freight costs right compared to the previous year and they did -- they did burden us with about 0.5% to 1% of the margin, to give you one example. This is fortunately also easing and getting better and we don't see these big differences anymore compared to previous year periods and it's really -- it's moving right, it's really moving. I cannot tell you exactly this on that, it's a mix of different influenced factors and other mix of different actions we have right. And as Oliver said, while we work on many different areas and why to push, whether it's for example maybe not directly P&L related, but the inventory reduction, right and improving some balance sheet items.On the other hand, we have this pricing initiatives, we work with the progress, we work and the production efficiency, which is really something which is very often underestimated how it could impact your profitability and your outcome when you don't have enough absorption in your overhead cost and so on, because you have some disturbance in the supply chain. So that's really many, many, many points which can influence right on that one, but its, yeah.

[Serge Rotzer, analyst]

But then probably seasonality is always important also in relation to the margin, so do you expect the same seasonality again in 2023 like the previous year? So weak-ish Q3, very strong Q4, this still remains the same?

[Oliver Wyrsch, executive]

It's very likely, even though many things you could say totally different, but I think the largest part of the drivers why this happened, for instance vacations and also the dynamic of the customer and maybe at INFICON, this is similar. So yes, I would say Q3 will be a bit slower and Q4 should be strong, that is the typical dynamic at INFICON and largely that should remain the same this year.

[Bernhard Schweizer, executive]

Next is there -- next in line is Daniele Scilingo. Daniele, please.

[Daniele Scilingo, analyst]

I have two questions and maybe would appreciate that from an investor point of view, we have more a mid-term view on where the journey goes, so maybe a bit more clarity on where the mid-term journey goes. You spoke about gross margin target of 50% mid-term. Can you attach maybe a time frame, a year number on it and then maybe also discuss where the EBIT margin would be? We have a very simplistic model, you have the gross margin if the cost are fixed, EBIT, EBIT margin should be at 24, is there something that would hinder going the margin to that level? That's the first question.

[Oliver Wyrsch, executive]

Yeah, I mean what we generally don't do is giving such longer-term information. We can say that, of course, we have through the strategy that we develop long-term, certain targets that we want to achieve and they're also profitability targets, but I've to tell you that, generally, our strategy is more focused on growth, gaining market share, occupying new spaces, if you think about all the softer tier opportunities or new technologies saying sensor and that we try to push forward that this will come secondary versus the priority of really going after this significant list of opportunities.So that having said, so that's why we would technically not like so much to tie us in on that, while we see a lot of updates and new dynamics now in many of these markets. If you look at battery, how this market behaves and how it takes leaps and bounds forward. Suddenly if you would like to develop three other product lines, we add more R&D, we add an innovation center and this will always make more sense than the push for the gross margin. That all having said, having said all that, it's still of course an important part of our strategy and also our operational focus. So I know I don't give you the number that you maybe look for, but maybe Matthias can narrow it a bit more for you. But thinking long-term, it is probably better to go out, look at our product and market. We will also do again in Technology Day or many of you visit us sometimes here in Balzers to get a feel of what is really behind this, there is substance there really.

[Daniele Scilingo, analyst]

But from what you just said, if the market stays dynamic, you want to reach 50% gross margin?

[Matthias Tröndle, executive]

Let me answer the other way around. Our ambition, right, is we need to go into the direction of 50% whether this is in two in four or one year we don't -- we don't know, we don't discuss this year right now. But that's really our ambition, right and we at times where we in the past where we have been between 48% and 50% and that's a range we want to achieve and our ambition to 50% and also our ambition on the operating income margin, I would say is to be above 20%, 20 and above that's something which is -- which is I think what we can say, right, in the moment where this is at the end a little bit higher on your range, we don't know yet, because we have also other as Oliver said, other initiatives and priorities and it's not just volume growth and operating expense are stayed on, that's not the case, right?We have many other initiatives which are of importance for us for sustainable growth, for developing maybe new markets in regions like development centers or service center somewhere in the world to be close to the customer and to generate business and together a good customer relation and to keep a good customer relation, so it's not just -- this one is fixed and the other is simple and then you are at 24%. But as I said above 20% I think is a good goal and ambition from us.

[Oliver Wyrsch, executive]

Maybe one thing to add here also when you look at, may be an easy count, 10 years ago, we are very committed to a growth path. As you can hear from the statements, right, there may be 10 years ago, 15 years ago there was more of a focus of giving back to the investors. Now also this year, this decision we need further expansion. We see the markets, we put it in there, I think this is and it's super exciting time in semiconductor, the sub-markets of semiconductor and a couple of other key markets in new energy, new clean energy areas where we -- where we see opportunities are already in their entrenched, we go after them. And its -- the next five, 10 years I think real cool stuff is happening. We see it -- we feel it and that's why we would like to have the freedom. And so far our investors gave us the support for that to go after that first, we will don't ever forget to also work on profitability, that's for sure.

[Daniele Scilingo, analyst]

And maybe one question on this growth, you spoke about a decent market that could extend your addressable market, are we speaking about smaller things or could there be transformational in how your addressable market would look like in five years?

[Oliver Wyrsch, executive]

Yeah, there is some transformation is possible like, specifically when you look into how software in a semiconductor fab behaves or what you can do with data analytics or machine learning. We are in machine learning for 25 years, you could say when we did the acquisition of our FabGuard Group and then built it out from then on. And of course, there is more and more opportunities there. For instance, this acquisition we did in 2018 with the final phase systems, we see more opportunity there. And there will also be more transformation and the speed will pick up, we've seen that the last two, three years how this transformation effects more and more and changes more and more.So that's one of the examples, but I can also say this, many markets where it is really add-on variants, developing new applications. If you look at a leading semiconductor fab, we are entrenched, we are the leader, but we want to develop new mass specs, new different sensors that may be measured, process better or process that comes up in a different way or solves a new problem, that's then more an incremental approach. So we have the both going in parallel and we do look also at a couple of new markets and we do look at a couple of targets, so there is an interesting pipeline that we are working on.

[Bernhard Schweizer, executive]

Thank you, Daniele. I see no further questions at this moment. I would like to invite management for any closing remarks.

[Oliver Wyrsch, executive]

Yeah, so I would like to thank everybody for participating today, for the interesting discussion and I'm looking forward to see you soon again at the next earnings release in October where we hopefully can give you some more clarity on some of the questions and looking forward to meet you all there again. Thank you very much. Have a wonderful summer and a great day.

[Matthias Tröndle, executive]

Thank you.

[Oliver Wyrsch, executive]

Thank you.