Inficon Holding AG

SIX:IFCN

Earnings Call Analysis

INFICON Sees Improved Margins and Sales Growth

In Q2, INFICON achieved sales of $167 million, up 8% from Q1, and reported an improved operating income margin of 20.2%. The gross margin increased to 47.1% due to lower broker costs and supply chain improvements. Sales surged in Security & Energy by 14% and Semi & Vacuum Coating by 29% compared to Q1. However, General Vacuum sales dropped by 22.5%. INFICON maintained a strong balance sheet with an equity ratio of 64% and updated its full-year revenue guidance to $660-$690 million with an operating income margin of around 20%.

Improved Performance Amidst Challenges

In the second quarter of 2024, INFICON reported a total revenue of $167 million, which represents a slight decline of 2.3% compared to the same quarter last year, largely influenced by unfavorable currency effects. However, sales showed resilience, as they increased by 8.3% compared to the previous quarter. Notably, the company achieved increased profitability, with a gross margin of 47.1%, marking a 2.1 percentage point improvement year-over-year. This performance highlights INFICON's ability to navigate market fluctuations effectively.

Segment-Specific Insights

Sales growth varied significantly across different markets. The Security & Energy market experienced a remarkable 14% year-over-year increase, alongside a 2.5% growth in the Semiconductor & Vacuum Coating market. Refrigeration, Air Conditioning & Automotive sectors grew by 8.5%, while the General Vacuum market faced challenges, suffering a substantial 22.5% drop mainly due to weakened demand in Asia and North America. Despite the decrease in General Vacuum, other segments demonstrate strength, indicating a diversified revenue base.

Healthy Financial Metrics

INFICON's operating income margin reached 20.2%, illustrating a slight increase from 19.5% in the previous year. The company's net profit increased to $26.5 million, up 7.1%, with a competitive tax rate of 18.8%. The strong operational metrics, showcasing solid cost management in research and development ($13.1 million, up 2.8%) and SG&A expenses ($32 million, up 3.3%), reflect INFICON's strategic focus on maintaining profitability while investing in future growth.

Balance Sheet Strength

The balance sheet remains robust, with a net cash position of $14 million following a $55 million dividend payment in the second quarter. The equity ratio increased to 64%, underscoring overall financial stability. Operating cash flow was healthy at $19 million, although slightly lower than the previous year's $26.5 million. Continuing to manage working capital effectively, the company's accounts receivable and inventory levels were favorably reduced.

Guidance for Future Growth

For 2024, INFICON has reaffirmed its revenue guidance, expecting total revenues to be in the range of $660 million to $690 million, with an operating income margin around 20%. Aligning with this guidance, the management emphasized optimism over an expected market upturn in the semiconductor sector during the second half of the year. However, they acknowledged uncertainties due to geopolitical factors, making it a year with both opportunities and risks.

Market Dynamics and Strategic Positioning

Looking ahead, INFICON is well-positioned to capitalize on growth in the semiconductor market, bolstered by investments in R&D, which comprises about 8% of sales. The company is also focused on enhancing production capacity to meet anticipated demand increases as they navigate potential opportunities stemming from government incentives and technological regulation changes. Specifically, the firm remains committed to its core markets while also expanding its presence in evolving sectors such as electric vehicles and renewable energy.

Conclusion: A Mixed Outlook

The recent earnings call paints a picture of a company effectively managing through fluctuations in various market segments. With solid operational results, a healthy financial position, and clear growth strategies in place, INFICON is strategically geared for a potential uplift in demand, especially in semiconductor and security markets. However, ongoing uncertainties present caution, and investors should remain vigilant to broader economic impacts as the year progresses.

Earnings Call Transcript 2024-Q2

[Bernhard Schweizer, executive]

Hello, and welcome, everyone. My name is Bernhard Schweizer, as you probably know, Investor Relations contact at INFICON. I have the pleasure to host this Microsoft Teams conference, and I do hope that you are hearing me now clearly.

Thank you for joining the INFICON conference on its Second Quarter and First Half Year 2023 Results. With us today are Oliver Wyrsch, CEO of INFICON, who is calling in from California; and Matthias Troendle, CFO of INFICON joining from [indiscernible]. The management team will first present the results and then take questions.

During the management's prepared remarks, online participants are kindly requested to turn their microphones and cameras off. You should have received by now a press release on the Q2 [ 2023 ] results together with the links to the half year report and the accompanying visuals for this conference. All these documents are available for download in the Investors section of the INFICON website, inficon.com.

As participants, you can post your questions either in writing using the chat functions in MS Teams. We will read out your questions and management answers them during the Q&A session or you can add yourself to the queue of people wishing to ask questions by clicking on the Raise My Hand icon. 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 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 conditions. 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, and my apologies again for the delay, I would like to hand over now to Oliver Wyrsch. Oliver, please?

[Oliver Wyrsch, executive]

Thank you very much, Bernhard. Welcome, everybody. I'm very happy to host you today in this Q2 presentation. And your best greetings from the West Coast. I'm currently traveling here visiting some customers and our team. But nonetheless, we dive right into our Q2 presentation.

Quickly on the agenda. As always, I will start out with the key messages, the figures for Q2, a review of the target markets and our expectations for 2024. After me, our CFO, Matthias Troendle, will give you more details on the financials.

If you look at the overview of the Q2 2024 results, we can see an increased sales and profitability. Except for one market, the General Vacuum market, all markets have grown year-on-year and quarter-on-quarter. And what is also important to note is that the book-to-bill is back above 1. Specifically, if you looked at the sales, they grew to USD 167 million, plus 8% versus previous quarter and nearly flat year-on-year. There is a new quarterly record in Semi & Vacuum Coating, plus 3% year-on-year, plus almost 30% quarter-on-quarter. You see the dynamics there, which is certainly exciting when we look forward in the Semi outlook also.

And then the second market that also had a quarterly sales record is the Security & Energy, plus 14% year-on-year, plus 8% quarter-on-quarter. There's a slower momentum in General Vacuum. It's a pretty broad business, I will talk some more about it, minus 22% year-on-year in Q2. The main slowdown is coming from Asia. If you look at the order intake, it improved nicely as we were hoping for and expecting based on our guidance as well previously. So Q2, the book-to-bill is above 1 and this is the best one, the best order intake since Q3 2022.

If you look at operating results, an improved operating income of USD 34 million or 20.2% compared with 19.5% in Q2 2023, so an increase of 0.7 points. Gross margin strengthened by 0.1 points. Lower broker costs helped improve supply chain quality and availability. Our operational excellence showed further progress. And our systematic cost managed during this between time before the ramp also showed the expected effects, while of course we are preparing for the ramp and make sure we have the capacity available as soon as Semi will truly start to pick-up. Operating cash flow, solid at USD 19 million.

If you look at our organizational topics regarding R&D and CapEx, we continue to invest in R&D. It's currently at 8% of sales and into the production capacity with USD 16 million for the first half. As noted before, we expect CapEx for the full year around USD 30 million.

If you look at the global sales, as you can see, we have the usual split of half of our revenue in the West and half in the East. When you look at the different markets, you can see, in particular, in Asia, a very positive dynamic in this quarter. Also in U.S., while Europe and that's also the general economic situation, a little bit is less dynamic and basically flat in the comparison.

If we now look at each of our target markets in a bit more detail, first of all, our biggest one, Semiconductor & Vacuum Coating. We continued to have a strong position that we further build out in the markets. Record sales in Q2, of course, small increase, but I think important and significant in the current market environment and cycle where we are. We expect growth to further pick-up in the second half of this year. When exactly and how exactly the ramp for each of these submarkets will take place? It's hard to say, but we have definitely the indicators that the pick-up has started. If you look also in comparison to the first quarter with a plus of nearly 30%, you can see the dynamic there and we can see it also in the orders.

If we look at market expectations for this year, unchanged. First half of the year, we expected it to be soft. In the second half of the year, we expect it to strengthen. When we look at the different submarkets, Memory was the slowest submarket last year with the biggest downturn that we could see. This shows improvement. Inventory levels have improved the DRAM and 3D NAND show improvement, not exactly the same level, of course. And then logic, certainly leading logic, you can see a good dynamic. We can see big and small OEMs showing good signs, while, of course, they have different dynamics. The biggest tool. They had a massive growth last year and they're flattish this year and some of the other OEMs have a slightly different dynamic. But all in all, positive.

I think noteworthy is that the mature edge also business around industrial and automotive is a bit slower, while they have been last year showing growth for us. And that is something also connected with the EV market that is a bit slower this year, but more about this when I get to the specific market. We continue to make investments in leading edge technology. We continue to work closely together with our key accounts to develop the next generation of products. I'm excited about this pipeline as good stuff happening. Please note also whenever there is a bit of a slower year then there is more time to do these R&D projects, and that's certainly also true in the current times.

And with that, I would go and move on to the next market. Automotive & Refrigeration, Air Conditioning, Also here, we continue to build out our #1 position in the market. Good growth with 9% year-on-year. It's mainly in Asia and Americas after a massive growth last year, as you might remember, it's around 30%. It is good to see this development. This market this year is slower. There's a consolidation, in particular in the EV battery market ongoing. This is a temporary development we believe, because the transition will be ongoing, but the adoption and several policies, and specifically, the overcapacity in China has given impulses to slow down these markets temporarily this year.

All in all, we remain very optimistic about this market, not only battery of course, but also other markets in refrigeration with new regulations in that area, including also our after-sales service handheld products grow nicely continuously. Also here, we believe we have a very strong set-up of products and also an exciting pipeline of new products that are coming into the market step-after-step. Outlook for this year, again, that's flat-some growth.

If we then go to General Vacuum, that is the market that is slower this year so far and Q1 was actually quite strong, which shows again there is diversification that INFICON has where we balance this out a bit through the different submarkets. Asia is slower than last year, in particular. This is also the general economical situation, whereas some of our other markets are very targeted on high-tech markets that have often very specific dynamics, government incentives, other strategic priorities that are pushed through investment programs.

We remain in general market, the most complete full line regarding vacuum instrumentation and #1 position. I believe we have a strong set-up through our multi-brand and multi-channel partnerships and channel strategy. So we look optimistic forward, but this year we expect it to stay slow. Again, much will depend on how the different region will develop in the general economical development.

Now maybe the last market to finish off, Security & Energy. We could show in recent quarters, very good growth. As you might remember, still a year ago, we were constrained through the supply chain. These are pretty complex market in comparison to the rest of -- complex products in comparison to the rest of our portfolio. Hence, the supply chain did give us some troubles at time, first, availability, but also some quality issues from our suppliers. This is not fully gone away, but largely. So we are now able to ship on a very strong backlog and also good order entry.

So this is a strong position for us as well, unchanged #1 position. I believe we are building this out with new applications and the new product launches we made, most notable, the new HAPSITE generation, of course, but also others. And for this market, we expect continued growth throughout 2024. And I believe with this growth of Q2 of another 14% after a strong 2023 and a new quarterly record, we could show that this is performing well and we can now nicely execute after the supply chain has been very much improved.

And with this, I move on to our expectations for 2024. As stated before, we expected the first half to be soft. One of the key factors there is certainly the Semi dynamic, as noted before. And in the second half, we see positive signs. I think what we expected has been materializing so far. It is still a year that is with a lot of uncertainties. I think this comes from geopolitics, trade war, economical situation in different regions. So there is enough uncertainties and risks that there could be more growth or less growth. We will have to see how it further develops. In general, we remain mostly optimistic. And again, we see good signs that the expected Semi upturn is materializing over time, while we don't know exactly its shape. So with this, we are able to update the guidance for 2024. Unchanged midpoint and the sales at USD 660 million to USD 690 million and an operating income approximately around 20%.

And with this, I finish as always, with a few highlights here. Do connect with us, join us online. You'll see a lot of updates and insights of what's going on at INFICON. I think one thing that is exciting specifically here is that the Semiconductor Superhighway was opened up and introduced by Senator and Majority Leader, Chuck Schumer, in our facility in Syracuse. This is a long partnership with all the different organizations in New York and New York comes back and becomes even bigger in terms of semiconductor importance and manufacturing and R&D and INFICON is right in the middle of it for more than 50 years. So we're very excited about this topic, but there's a lot of other things also going on, developing the market in China, R&D collaboration with different institutes from sustainability to space to robotics and so on. So a lot of great stuff happening. And again, if you're interested, join us online.

And with this, I would like to conclude my prepared remarks. And I'd like to hand over to our CFO, Matthias Troendle, for more details on the financials.

[Matthias Tröndle, executive]

Thank you, Oliver, and good afternoon. This time, not good morning. This time, good afternoon to everyone, and welcome to our second quarter call. As usual, I will cover the Q2 financial performance, comment on the guidance and also comment a little bit on the half year results.

Let me first start with the highlights for Q2. The order situation improved compared to previous year, but as well also compared to previous quarter and the book-to-bill was above 1. Our sales showed a slight decline versus Q1, but did grow by 8.3% versus the first quarter of this year. The gross margin improved and reached 47.1% and we achieved an operating income margin of 20.2%. From a balance sheet point of view, the CapEx reached $4.8 million after a record $11.7 million in Q1. Cash flow ended with a solid $19 million and net cash ended at $14 million after the $55 million dividend payment we had in Q2. And our equity ratio increased to 64%.

Now let me go a little bit more into the details. As you have seen, we achieved sales of $167 million. This compares to $171 million in Q2 last year and represents a slight decrease of 2.3%. Taking into account a negative currency impact and a small contribution from acquisitions, we posted an organic decrease of 1.2%. Oliver did already comment the end market developments, I think we can report that sales have increased in all markets, except General Vacuum. We had new quarterly records in 2 markets. In the Security & Energy market, we had a plus of 14%. And in the Semi & Vacuum Coating market, we expanded by 2.5% compared to Q2 last year and strong 29% compared to Q1.

Refrigeration, Air Conditioning & Automotive sales grew by 8.5%. And in the GV market, General Vacuum market, sales dropped by 22.5%, mainly coming from weaker sales in Asia and North America. Compared to previous quarter, Q1, sales did increased by 8.3%, mainly coming from Semi and Refrigeration, Air Conditioning & Automotive. Looking at the regional sales distribution, Asia surged by nearly 18% and the other regions were roughly flat compared to Q1.

Let's go to the next slide. The gross profit margin reached 47.1% in Q2 and increased by 2.1 percentage points compared to last year Q2. Lower broker costs and improved supply chain, lower freight costs and a more favorable mix have been the main drivers for that improvement. So what happened to our operational costs? Both R&D and SG&A costs did increase only slightly and respectively moderate. We spent $13.1 million on R&D in Q2, an increase of 2.8%. In SG&A, the cost level did increase to $32 million or 3.3%. Here, costs for additional headcount and several other initiatives we have started and which are ongoing have been partially compensated by some lower performance-related expense. The operating profit for the second quarter reached $33.7 million or 20.2% of sales after $33.3 million or 19.5% in Q2 last year, an increase of 0.7 percentage points and above the 20% mark for the third time in a row.

Next slide, please. The tax expense for the second quarter was at $6.2 million, which represents a tax rate of 18.8% and is slightly lower than Q2 last year. The net profit, therefore, did grow by 7.1% and reached $26.5 million or 15.9% in Q2. This compares to $24.8 million or 14.5% in Q2 prior.

Now let's move on to the balance sheet. Our net cash, as already mentioned, reached $14.1 million, which is about $30 million lower than end of last year and about $29 million better than Q2 last year. So there was some improvement mainly coming through good cash flow. And also it was some reduction compared to the end of the year because we had this dividend payment in April of about $55 million. The turns for inventory are stable at 2.4%. And the DSO, days sales outstanding, had 50.2 days better level compared to Q4 last year.

Our working capital, which consists of accounts receivables, inventory minus accounts payable, closed at $219 million or 32.8% of sales and with that ended about $6 million lower than end of last year. The decline is due to good collections, lower DSO as a consequence and with a decrease in accounts receivable and also lower inventories. Our operating cash flow reached a solid level of $19 million, but could not reach the relatively high level of last year in Q2 with $26.5 million. The balance sheet, as already mentioned, improved and we had a solid structure with a 64% equity ratio.

So those have been the comments for our balance sheet and Q2. Now here is the guidance and outlook picture. Oliver has already commented the assessment for the end markets and the guidance. Based on our order pattern, the improved supply chain situation and the expected semi upturn, we have updated and narrowed our guidance and expect now revenues between $660 million and $690 million for the full year with an unchanged midpoint sales target of $675 million and an operating income margin of around 20%.

Finally, let's go to the next slide. I want to quickly give some comments regarding our half year results for 2024. And here, you see some latest information, some high level information also with some history. Net sales for the first 6 months in the current year reached $321.2 million compared to $329.2 million in the same period of last year. This represents a 2.4% decrease or adjusted for currency and acquisition effects, a minus of 1.4% organically.

In the first half of 2024, the sales development in the end market was mixed. Security & Energy surged by 29%, Refrigeration, Air Conditioning & Auto increased by 8%. In the largest target market, Semi & Vacuum Coating, the sales decreased by approximately $9.5 million or 6%, mainly driven by the low first quarter of sales in Asia. Sales in the order-based General Vacuum market decreased by 9.6% to $81 million, heavily influenced by lower shipments to Asian and American customers.

If we -- yes, the gross profit percentage margin for the first 6 months increased to 47.4% and we gained 2 percentage points compared to H1 last year, mainly due to the mix less broker costs and improved supply chain situation. With a moderate operational cost expense increase, this did result in an operating income of $65 million or 20.2% after $63.3 million or 19.2% in the last year. The operating cash flow developed nearly stable compared to the first half of 2023 and reached $41 million and the balance sheet again shows 64% of equity. As mentioned in our press release and mentioned earlier from Bernhard, the complete half year report 2024 with more details and comments is available in our Investor section of the INFICON website.

With that, I would like to close the presentation. The next events you see here. This year, we have our Q3 conference call in October, and then we have our Technology Day in November scheduled. And that's it for now. We are now ready to answer your questions.

[Bernhard Schweizer, executive]

We have first questions from Jorn Iffert, please.

[Joern Iffert, analyst]

I will take them one by one, 2 to 3 questions, please. The first one is in Semi. Pretty surprised to see absolute record Semi sales for you now in the quarter, while your analog customers, which are also reflecting a high portion of pretty weak results in Q2, STMicro, for example. At the same time, logic and foundry CapEx is down this year somewhat. So is it only explained by pre-ordering from China? Is it a special SKU on the higher end where the Chinese have concerns not to get the product in 12 months because the [ anti-list ] is enriched or how do you think about this momentum in this record sales?

[Oliver Wyrsch, executive]

Yes, I'll take that one. Thanks, Jorn, for your question. Yes, Semi -- I mean, first of all, I have to say, it's a 2% growth year-on-year record. So I think it's significant because we're all waiting for the ramp. Otherwise, I would say, it's just a solid set-up or a solid step. It is broader, but it is not across all of our product lines. So interesting enough, as you know, we have products that go into the fab early and then later and at different times of the projects down to maintenance products at the very end of the building cycle or selling cycle for a fab. So we only see really a partial dynamic already. And in the other segments, we see at some no indications yet of a ramp, and on some we see a bit of an improved order behavior. This is now product line.

So if you look at the geography, Asia is the most dynamic and it's not only China, clearly not. I mean, if you look at the foundries, the top 2 foundries, Taiwan and Korea, they have improved for us. There is an improved CapEx spending, while maybe in Taiwan not as pronounced. It wasn't also such a ramp down last year, but it's an improvement. Also when we look at the Q2, you see some of it in the numbers and increased CapEx spend for this year. But in particular, also in Korea, I think we see good dynamics. Some of it is driven by HPM by memory, some of it is leading logic.

You mentioned STMicro, yes, this is for us the mature node segment. This was strong last year. I think a lot of it is also auto that drove it and some new energy topics. We saw this also in other product lines. This is clearly lower this year. They are bit in a mixed situation. I think there's positive signals. I think sequentially, they're improving, as we see this year making every quarter a bit of a step, but they're certainly down in general versus last year, while not maybe dramatically in comparison.

If you look at the OEMs, I mentioned quickly, the biggest 2, they had massive growth last year and this year are more on a lateral move or development. But then there are some others that are recovering from a downturn last year. And then there's also in China OEMs I think continued strong dynamic. What is maybe interesting is that there is still some inventory in some places that we're just about to eat up. I think Q2 was about when we finished up with it, the last remnants of this of inventory for our products at the customer.

I hope this helps a little bit to illustrate the different sub-dynamics in the submarkets.

[Joern Iffert, analyst]

Yes. Just to follow-up here, please, did I understand this correctly. So the growth, I mean, quarter-on-quarter and year-over-year, it was normality, but it's quarter-on-quarter it's broad-based, it's not only China?

[Oliver Wyrsch, executive]

Yes.

[Joern Iffert, analyst]

Okay. And then on the SKUs, the product line, you say that it's the OEM products we're recovering now at the moment, it's not the end user yet.

[Oliver Wyrsch, executive]

No. Actually, interesting enough, it's more the end user products. That is -- but also a little bit a problem of the buffer effect of some inventories. We had still a lot of inventory build-up last year when we then started to really reduce the backlog after the supply chain improved. And in some areas, the planning was a little bit off the mark of our customers. I mean, that can happen. The delivery times came down dramatically. And then you had this whiplash effect. So we're still eating through some of the OEMs' inventories in some places. And actually, the end user products, they are the ones that show most dynamic development most recently.

You also need to know that there is a good amount of product innovations. When I talk about a strong pipeline, there is also a strong pipeline about new sensors, more complex sensors, sensors for new applications. So when you are going to develop your next technology node, you're going to work on this. And as soon as this comes slowly online, if you look, for instance, at the foundry in Taiwan, then this starts to ship in higher volume. So we see good dynamics. But it's also, of course, in China, pretty broad-based. I believe they are committed on this semiconductor industry development. It's solid. Of course, it's state-sponsored also, but we also see a good dynamic there.

[Joern Iffert, analyst]

And if you allow me a second question on General Vacuum. Of course, the negative surprise in the quarter. And when you look on the SKUs here again, is it broad-based weakness you see? I know you highlighted more on Asia and America, but is it on the SKU is a broad-based weakness or is it a special range of SKUs? And what is really your best guess, which end markets are weakening here suddenly incrementally versus Q1 because we had macro weakers now since 1 or 2 quarters. So it's difficult to explain this general market weakness, I assume?

[Oliver Wyrsch, executive]

Yes. It's important to note that solar is also part of General Vacuum. And of course, solar had a very high dynamic the last years and goes through a consolidation this year. And that's also what we see specifically why you would say in Asia it's slow and specifically also in China it's slow. I don't think this is a long-term effect, but the consolidation is a fact and we see it. And then I think there is some sluggishness in the general economic development and that we also see in China, except for these high-tech markets that seem to plow on no matter what. So there's a bit of a mixed picture.

As always, I have to say, for this market, about half the revenue goes through channel partners, private label distributors and we do not have the full transparency there. It might be even a 2-step process. These channel partners sell into OEMs. So it's not as transparent to us what's going on. I think we should expect for this year a roughly flat development in general of where we are right now for the second half. There could be upside potential if you think that the dynamics increase more broadly. We see it also outside of Semi that we have positive momentum, but it would be hard for me to go and give evidence that we should expect this to be really dynamic upwards.

What we need to note also, we come from a high level. I think in general, that's important to note for all INFICON sales. We did not have a downturn last year. And we're basically stabilizing on a high level, while some are slowly recovering or let's say, we are actually growing even in 3 markets of 4, while we have grown last year. So if you look at Gen Vac, a big effect was China opening and the second one was the supply chain allowing us to ship. So we burned through the backlog last year. We grew nearly 30%. Now this has kind of rebalanced a little bit. I don't think this is necessarily the level that we should expect also for future, but it is a bit of a rebalancing based on a big growth step last year. So maybe that's bit more context around this.

I would not see any kind of larger risks or worries that we lose our position, none of this. This is really what we see when we work together with our channel partners there. That's the general dynamic in the market. As you know, also is, of course, the general industrial picture is pretty mixed. There's some positive dynamics, there's some negative dynamics. That's what we're hearing there too.

[Bernhard Schweizer, executive]

The next questions come from Nejc Lavric.

[Nejc Lavric, analyst]

Maybe as a follow-up on the General Vacuum. So you do have quite some private label business there and probably one of the customer results of Pfeiffer Vacuum simply because of the historical development. So my question is, how much is there also the issue of inventory at your private label customers maybe that kicked in now, but in Q1 you still had a backlog that you were converting?

[Oliver Wyrsch, executive]

Yes. I think maybe also Matthias needs to add here. But I think in general, there is not so much inventory topics there left. We certainly had it last year backlog then shortening of delivery times and then inventories to go through and the rebalancing of the planning and the ordering patterns. I think in this area, this is largely done. Maybe there's a little bit left in China where it was more extreme. You need to remember it was much more pronounced through the COVID lockdown and then the sudden opening and then they're warming up, it was more of a volatility in that sense. But I wouldn't say there's too much left for these channel partners. I think if you look at some of those that you can guess who they are, then you see that their General Vacuum technology business is a bit slower this year. And just always calibrate with the backlog reduction last year, that's important to know.

[Nejc Lavric, analyst]

And you mentioned before the over-capacity, I think you were referring to the Automotive, Refrigeration & Air Conditioning, but not for General Vacuum, right, just to clarify?

[Oliver Wyrsch, executive]

Yes, good that you asked. No, actually, I do refer to that too. So I would say, one big effect of over-capacity that you would see in China that is calibrated this year is in solar. And solar we report as part of General Vacuum. And that's certainly quite significant versus we had continued growth in particular last year. And then the other one is around battery manufacturing in the EV manufacturing. And you also see that most pronounced in China, but also outside of China.

Automotive dynamics, I think we hear it out of the market. It's a bit of a mixed picture currently. I don't think long-term or mid-term even, but it is about an adoption rate. It's about geopolitics, trade war. It's about re-arranging your supply chain. There's government incentives that sometimes are not helpful. So there's a mixed topic there and of course the over-capacity that plays into this.

I think refrigeration, the part that is not connected with auto, you need to know that a lot of refrigeration air conditioning -- of course, air conditioning is connected with the automotive business directly. You need a lot of air conditioning for specifically EV around the battery also. So that is slower, but the general market around refrigeration and air conditioning is actually pretty good, I would say. It's not as dynamic as of course last year, but in general, that is rather a positive outlook moderately. I hope that helps.

[Nejc Lavric, analyst]

Yes. And maybe then as a second question on your margins. I mean, we had a very strong Q1. Q2 is also above the 20%, you guided for approximately 20%. Can you maybe give a few words on that? I mean, you say that supply chain now normalized, the brokerage costs are largely gone. So is this the gross margins we should be looking at going forward or is there still some potential considering you're also investing for the ramp-up?

[Oliver Wyrsch, executive]

And that -- I mean, you almost answered your own question. Absolutely right, Nejc. So why are we cautious there? I mean, of course, there is uncertainties in the second half. There's risk. We really don't know specifically Q3 could be, again, a little bit of zig zag development to explain the zig zag development. We had a big Q4, a smaller Q1, a bigger Q2, Q3 could again go a little bit down and Q4 again be big.

So where exactly we'll land on this? Even though, we know the general industry dynamics are positive, the timing of it is difficult to say exactly. So that is the general picture. But yes, we are in this balanced act of managing costs, making the strategic investments in general in R&D and so on, but also preparing for the ramp. So you take on headcounts and we would expand our production and some of it is short-term some is mid-term. So in this mixed bag, it's a bit hard to say there's only upside. Of course, if you say we plow through, the ramp is coming, there is upside, I would say, absolutely. But there is for all these reasons I just mentioned, also downside.

Matthias, I don't know if you would like to give some more color also from your perspective.

[Matthias Tröndle, executive]

Yes. I think what was said makes absolutely sense. There are risks and opportunities. Of course, we also would like to deliver a little bit more, but it's really around balancing investments, people, some of the initiatives versus what is the, I would say, the kind of seasonality of income, of orders, of delivery, can we deliver in an efficient way and we'll have no obstacles in front of us, then maybe there is some room in the margin. But it's -- again, it's around balancing and maybe also managing the seasonality in sales and orders and getting the material. That's tricky. And as Oliver said, in some areas, we do investments and we don't yet have the sales and the income from that. So that's our job basically to find the right mixture between get ready and being able to deliver and basically work on the orders we get.

[Oliver Wyrsch, executive]

I mean, maybe one more additional remark here just to remind everyone. I think you probably all know is that the mix that INFICON has a higher impact than in other businesses potentially in comparison as we have product lines with 40% gross margin and others with 80% and everything in between. We always look at the operating income, which -- where we have a target for. They're just different businesses. If you think that an OEM relationship versus maybe a sensor relationship with chip maker where there's a lot of application engineering in there and there's a whole different P&L, we don't know exactly how these product lines will pick-up. Some are a bit buffered through this inventory effect, some of our end customers have a little bit of delay or more delay than others in this ramp. And so through this mix confuses it a little bit as well if you look at the gross margin only.

[Bernhard Schweizer, executive]

The next questions come from Michael Inauen.

[Michael Inauen, analyst]

Yes. I have a pretty or not maybe pretty, but a detailed question on the Semis business. I mean, I was just looking at the latest mid-year wafer fab equipment forecast of semi industry body that you probably also have looked at. And I know, Oliver, you're talking about a pick-up in demand and the wafer fabrication equipment forecast also goes for clearly above $100 billion in the next year. But when I look at the mix, at least what Semi says, like 55% jump in NAND wafer fabrication equipment and logic and DRAM probably around 10% or a little more and mainly also in leading edge. I'm just trying to understand how such a scenario, I mean, it's still a scenario, yes, but how would such a scenario translate actually in your revenues in your Semi and Vacuum business? Because for me personally, it's a bit difficult to actually translate these numbers into your revenues. So I'm just trying to understand, if I read this outlook, what would that actually mean for your Semiconductor business? Because NAND is probably not your biggest exposure, because you didn't have this drop last year. So maybe you can just shed a little bit more light on that at least for me.

[Oliver Wyrsch, executive]

I'd be honest with you, it's also hard for me to translate it a bit. And with all these buffers and translations that go in between of what we did in the [ MCS ] orders and then you have the regional dynamic and then you have the geopolitics and then you have the state-sponsored dynamic. So a bit hard to see. I mean, I can describe what we see currently, what we believe is going to happen, maybe this will help.

So also a little bit to our surprise is that the end user business with the chip maker picked up much faster and much sooner. Sometimes you would say it should pick-up the other way around, OEMs first. What are you going to order when you build a fab? You're going to order your big equipment first and that's when we see the orders through the OEMs. Yes, there's multiple complications in this, this time and there is an inventory, there is some growth patterns that are different.

Again, the big 2 OEMs, they grew last year 30% and this year they are flattish. They just moved in their time in terms of the cycle. They are somewhere in the same cycle, but through delivery times and also inventory, they are shifted. And then I believe you have good market penetration built out through further products that we developed where there's also new applications in there, especially for the leading edge nodes where there was an early pick-up. And then there's also in China a good dynamic on a broader basis. They buy sophisticated sensors also for a little bit more mature nodes. I would not even call them fully mature nodes. They just don't go to the absolute leading edge. But the investment is solid and the building up of the industry has momentum and has the broad foundation.

But again, I don't -- I want to stress, it's not only China. It is very much also Asia. It's the 2 big foundries. It is also memory. And it's also other things actually, display. As you might remember, we are the leader in display sensors as well with our thin film portfolio with the RGAs. There is a new dynamic in OLED. There is Paris Guide. There's a couple of dynamics that are coming. That is a little bit further on the horizon. But there is a broader dynamic there at a number of submarkets.

So if you talk about memory, yes, historically, maybe the memory exposure was not as high. But as I mentioned before, the last 5 years, we really increased it quite a bit. It's just because it's almost a bit of a barrier. It looks to us. Maybe it's almost a similar barrier, not that we want to compare ourselves with this technology like with EUV that they move slowly into EUV on the technologies, they also need more sophisticated sensor and a lot more sensors to stabilize their process and manage their processes.

So yes, we didn't have a downturn last year, but we did have a pronounced downturn on our memory business. It's just we are not that focused. It's much broader. Software also goes into places where the business models are a little bit different. If you look at STM and so on, the second tier, NXP, TIs, they have a different kind of model and we sell software that has not so much direct connection with maybe how much wafer that you ship or trying to build out our new factory with. So for us, there is again a number of complication factors.

I cannot fully answer your question. If I could, that would also make me happy. And maybe we can continue the discussion and figure it out together. I was just trying to paint you the picture as I see it. And maybe looking into the future, I would expect the dynamic of the chip makers to continue, actually further gradually improve. There is going to be some kind of a hockey stick uptick probably at one point of time. We would expect that when we step into the bigger CapEx steps. And on the other hand, OEMs, I would think the dynamic will increase.

Again, there's a little bit of a lateral movement for not insignificant part of the markets because they grew a lot last year. So that will be probably later in the year when we see these orders improve on that end. So interesting enough, this time, OEM is a little bit behind the direct chip maker revenue.

[Michael Inauen, analyst]

That's interesting. Yes, really good to understand. And just a second one, it's hopefully a short one. Just trying to understand a bit the operating leverage from Matthias maybe, because what we have seen in the last year is obviously you have invested a lot, you have built-up capacity. Even with very high revenues, the EBIT margin stands around 20%. That's a bit of a ceiling. So assuming that the next, let's say, 1 to 2 years would offer you good growth, particularly also in the Semi business without putting out any number, obviously, I mean, it's my job to put something in the model. But is there a chance that you more or less finished your big investments that revenues go up and then you will basically harvest on the margin as well? I mean, that we will see something that goes closer to maybe something on a 25% range or at least above 20%? So I didn't say not to put out a number.

[Oliver Wyrsch, executive]

Maybe I can start and then Matthias can give you some more sophisticated financial insights, just on the general picture. I mean, first of all, I would say, we have improved. There's -- we're working on it. As we stated several times, we will always go and invest in R&D more. You see there's headcount increase in that. There's headcount increase also in accessing new markets. There is application centers we offer to speed up innovation and customer collaboration, which is both of it combined. If you look at our Guangzhou thing or Taiwan application center or innovation center and then there's more of this plant. So yes, there is upside potential.

What you need to see right now, we are in a spot where we have to invest for the future. Yes, we are also a little bit cost management, but we are not cutting into the structures to a degree to damage anything. We're just being smart about how we currently manage our cost. But of course, as soon as the ramp truly starts, this will pick us up again. This is not the moment maybe that you should compare with another moment when we have been an absolute steep ramp. So the profitability goes through the cycle as well is what I want to try to explain as a bigger picture.

So the general trend is upwards. But please note, we will always go after new growth opportunities before we deliver profitability. I think we all have talked about that a few times and I think we all agree that that's a good idea. So anyway, we'll go over to Matthias to maybe give a little bit more fleshed out answer on the...

[Matthias Tröndle, executive]

Yes, I think it's absolutely correct what you said. And there were some important influence factors, of course, yes. And yes, first of all, we are happy that now it's the third time in a row that we are above 20%. So we made this step, which is good. We had a long time to reach the 20%. And of course, we try to improve a little bit further. Volume might help and will help, for sure. Also some -- getting some more efficient processes in the operations will also help in doing this. But as Oliver said, I think this is also an important aspect that these investments which are going on and maybe future initiatives which we have in mind, will of course have some slight impact on that one.

So yes, we want to grow on top-line, we also want to grow on the bottom line and take the leverage from higher volume. But we really carefully need to manage all this spending, investments getting ready for the future. I think that's the key for us. And we have a few projects on our list and have few ideas what we want to do and also a few requirements what we need to do, because we came from -- and you know it, we came from $400 million plus/minus for many years. Now we are more $650 million, $660 million, $670 million. We need to do some investments in people, infrastructure and so on.

And yes, we did do a lot of investments in capacity building in '21 and '22, but still, we have a week. Oliver and I have discussions about initiatives and requirements, CapEx requirements where now maybe some facilities are aged. So they have maybe done the last investment 10 years ago, 15 years ago, we want to grow in certain areas. So we need to continue to spend some CapEx for sure. But it's not over. We spent $60 million and now we go back to $10 million, this doesn't work. So we really need to -- I think we need to expect also for the next 2 to 3 years quite a reasonable, I would say, a reasonable CapEx volume which then also will generate of course some depreciation expense.

[Bernhard Schweizer, executive]

We have next questions from Michael Foeth.

[Michael Foeth, analyst]

Yes. Just 2 questions. One very quick one tying into Michael's previous question on the semiconductor industry. Maybe you can help us to understand what portion very roughly of the end user business is from software solutions from fab optimization software versus center solutions, if that's possible and how you see that develop into the next cycle?

And the second question is on a separate topic on Security & Energy. Did I understand correctly that you got new orders from the U.S. Department of Defense and what sort of size is that? How will they phase into the next quarters? And are there other significant orders worthwhile mentioning on the back of increasing security concerns maybe that you're seeing?

[Oliver Wyrsch, executive]

Sure. So I'll go one by one. The first on the software. A good thing is for us is software has a bit of a different cycle as well. It has also a very long sales cycle in general. If you compare this with some of our products with specifically the lower price sensors. So the software had a very good dynamic in the last couple of years. And last year was a bit of a transitional year where they had half of the business growing and the other one a little bit slowing. This was depending on different customer investment projects.

The thing is why I mentioned the sales cycle is there, it's sometimes 2, 3 years until you actually decide to move a fab. Often, it's not only one fab, it's a couple of fabs in stages. And then you go module by module. A little bit this is like an ERP implementation on the small scale maybe because of a very focused software products on the smart manufacturing part. And so the AF now in this year, again, an inverted dynamic where some of the product lines pick-up again and some of the slowdown and that is because the second tier fabs that we mentioned earlier, NXP, TI and STM and such, they have a bit of a slower year now when they grew last year.

When we look at the Tier 1 fabs, often, software is also bundled with sensors. So what you see in this dynamic, when I talk about end users, there is often software packaging going with the sophisticated sensors. It's a bit of different time. I explained to you a bit the portfolio that there are 2 big families. One is the digital twin of running a fab, the scheduler, the planning, all the reporting, optimizing maintenance and labor and maturity and all that. And then the other one is really analyzing what happens inside of a tool, what's the health of the wafer, what's the health of the tool, everything around our FTC and our smart FTC. And these 2 product families, they have a little bit of a different dynamic.

So again, when we zoom out, for us softer, no question, it's strategic, it's growing. We have big -- we see big opportunities. But it's also in these 2 years that have been showing such a mixed picture, a bit of a mix dynamic. I think the percentage overall stays the same between 5% and 10% of software only. And we need to always stress every sensor, specifically, the big one have a lot of software. The very big ones that we ship to the Netherlands has a big software part in it, for instance. We also shipped these big sensors to other places. But for instance, so there's always softer on the sensor, which we do not show and we do not track. This is for us part of the product. But there is -- I think 1/3 of the developers are actually working on sensor itself. And they have the respective dynamic of what I described before on sensors.

Again, with the smart manufacturing software, it's strategic for us and we see it very positive. You also -- maybe if you remember, we did an acquisition of FabTime this year. One of the reasons why I'm also now on the West Coast is meeting the new team and we're working on further growth topics. And how we can go and translate the different products for us, together with our current products into future growth. So working on this strategy continuously to build it up. So that's #1.

The other question, Security & Energy and orders. Yes, I think sometimes the confusion is a little bit and that's maybe because we communicated like this. We announced the one big order. I believe it was in, I'm not entirely sure, 2022. The first big orders when we launched HAPSITE CDT of, I believe it was $25 million. And then there was another $7 million, $8 million right after and so on. Actually, we're getting orders continuously.

So while this was maybe the biggest ever order and so on, that sometimes made more of a timing on the bundling thing. So these orders are coming in continuously. The backlog is strong. That's why we can ship like we do. That's why we grew like we did. It is a bit of an upcycle. I do believe that is a tech refresh program that is part of this dynamic, a tech refresh in the U.S. Department of Defense. And this is ongoing, but this will also slow down again. And then there's another wave of another tech refresh or another part of the Department of Defense that will have another cycle of a refresh.

If you ask in general, yes, I mean, it's a horrible security situation in general if you look at where we came to in the last couple of years in Europe, in particular, but also in other areas. And of course, there is more spending now in military budgets and we do see this in the orders for specifically the HAPSITE. Security & Energy though has also the other products, the energy products, I think the Fusion, for instance or the [ urban ]. They are all also part of this dynamic and investments into new energy.

Biomethane is one topic. There is hydrogen is a topic. It's a bit of a mixed bag. It's not entirely clear what will in the end be the general solution or most likely there will be a mixed picture. But actually, there is a good general dynamic there too. That's not high growth. That's not high volatility. It's a bit slow and steady. That part of security and energy. And we're optimistic for that part too. I think we have very strong products, very high sensibility, a lot of strong features, fast clean-out, mobility, all of that. A lot of accessories, a lot of application development. It's a bit of a different dynamic of the other markets, clearly, but I think we're making good steps forward in also these submarkets there. I hope that helps, Michael.

[Bernhard Schweizer, executive]

Are there any further questions from the audience? Then just add yourselves to the queue. If not -- as there are no further questions, may I ask Oliver to share his final remarks with us.

[Oliver Wyrsch, executive]

Yes, of course. Thanks everybody for joining today. Interesting discussion, as always. It was good to meet you all. And as you know, there's 2 dates on our calendar that you should pencil into your calendars. One is the Q3 and then the Technology Day that we do every 3 years in November. I'm very much looking forward to meet you all again in this or in any other event. So greetings from the West Coast in the U.S. It was great to have you all. And then I wish you a wonderful afternoon and see you soon.