Inficon Holding AG

SIX:IFCN

Earnings Call Transcript 2022-Q3

[Bernhard Schweizer]

Good morning, everyone. My name is Bernhard Schweizer, Investor Relations contact at INFICON. I have the pleasure to host this Microsoft Teams webcast of our Q3 results conference. With us today are Lukas Winkler, CEO of INFICON; and Matthias Troendle, CFO of INFICON. The management team will first present the results and then take questions. During management's prepared remarks, online participants are kindly asked to turn their microphones and cameras off so we have a full view on the presentation. Thank you. You should have received by now a press release on the Q3 results together with the links to the accompanying visuals for this web conference. All documents are available for download in the Investor section of the INFICON website, www.inficon.com. We ask online participants to post their questions in writing using the chat function in MS Teams. This should be the second icon on the top right-hand menu.

Alternatively, you can of course also add yourselves to the queue of people wanting to ask questions orally by clicking on the I Raise my Hand icon. I would 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 solely relate 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 Lukas Winkler.

[Lukas Winkler, executive]

Thank you, Bernhard. Greeting and good morning, everyone. Thanks for joining us today to review our results for the third quarter of 2022. A year ago we talked about the rebound after the COVID crisis in our industrial activities. Now the focus changed more to the unstable global geopolitical situation in the Ukraine and other parts of the world as well as just released U.S. export restrictions for high tech products sold to China. This represents a new strong signal from the White House towards the Chinese government. 2 things did not change. First of all, we still suffer from supply chain issues for certain materials and that still limits our ability to ship more. And secondly, we still enjoy a very high order intake with now more than 10 consecutive quarters with a book-to-bill ratio above 1. In total with revenues of approximately USD 144 million, we reached almost the same level of our record quarter, which was Q4 as of last year.

Slide 3 shows the key figures for the reporting quarter. Organic sales growth compared to the same quarter a year ago was almost 25% if you add the negative impact from foreign exchange rate changes. The sequential increase versus Q2 '22 was 2.9%. As already mentioned, the book-to-bill ratio was again far above 1. Both a record high backlog and far too long lead times puts even more pressure on us to increase our manufacturing capacity and solve the material shortage situation. While we are on track to install a much higher internal capacity, the situation on the material supply side did not change much compared with 3 months ago. We expect the third quarter gross profit margin reflecting the low point. For the last quarter for the year, we foresee a slight improvement based on expected higher sales level, the better capacity utilization and the first impact of the recent sales price increases.

With our overhead cost under control, we finished the third quarter with an operating income of $25.3 million or 17.6% of sales compared to $22 million or 18% of sales for the same quarter a year ago. Net income reached USD 17.8 million or 12.4% of sales. Matthias will review the number with you in more details later while I'll highlight out some important developments in our target markets first. On the next slide, you can see the sales breakdown into our served 4 key markets as well as the regional sales trends. The pie chart shows an increased contribution from the Semi & Vacuum Coating market with a slight lower, but stable contribution from all other markets. The trend chart on the right-hand side shows increased sales to customers in North America while Asia and Europe did not change much also influenced by the weakening currencies in Europe, Japan, Thailand and Korea. China remains the largest contributor in Asia.

Now let's do a quick analysis market by market and starting with the smallest one. In Security & Energy market on this slide, sales decreased 11.3% year-over-year and reached with 9.5% sequential decrease sales of USD 4.7 million. Sales to customers in the security market started to be above the revenue from customers in the energy market since we just started to ship the first HAPSITE to the U.S. DoD as a part of the large order that we booked in July to support the so-called CALS program in the U.S. This program will keep us busy for the next 12 to 18 months. This success story enabled us to position HAPSITE as the preferred mobile warfare agent detector to customer outside the U.S. as well. We see first successes for the new HAPSITE in Europe and Asia for this unique portable regulatory instrument.

On the energy side of this market, we continue to see the long-term opportunities for projects for alternative and environmental friendly energy sources, but the short-term political focus changed to the more urgent immediate energy situation for the coming winter period. Therefore, we expect some reprioritization of certain projects especially in Europe. On the other hand side, for the last quarter of the year, we expect larger HAPSITE segments to the U.S. DoD as mentioned before to support the CALS program. Now moving to the Refrigerator, Air Conditioning & Automotive market on this slide where sales was USD 26.9 million, which is an increase of 11.2% year-over-year and 12.6% sequentially. We experienced a stable market, a strong lithium-ion battery testing business, very dynamic aftersales service activities and the continuation of a weak traditional automotive market.

Increased quality standards forced the use of highly integrated semi or fully automated solutions. In the lithium-ion battery, this is a must-have solution already. But even in the traditional still mostly mineral labor-based RAC manufacturers industry, the need for more reliable and predictable quality standards is ongoing and growing therefore eliminating the potential error of a human dependent quality inspection process with an automated solution is a new trend. Properly made and installed, it will increase the output quality while reducing the cost at the same time. E-cars drive the need for more lithium-ion battery capacity and the need for safer batteries drives the higher demand for our quality inspection instruments such as the unique INFICON ELT 3000 lithium-ion battery leak detector. We will end the year 2022 with a strong last quarter.

Now let's go to the Semi & Vacuum Coating market, which includes solar display optics and of course semiconductor applications, where sales increased 27.4% year-over-year and 1.3% sequentially. The total of USD 75.4 million is the second best quarter in this market ever. The semiconductor market remains strong while we do not see any improvement in the vacuum coating and display market. Chip makers continue to invest in the latest technology and with the new U.S. China export restrictions for those technologies, the importance became more prominent and has even been elevated to the political level as a new measure against the Chinese aggressive isolation tendency in the semiconductor industry. Despite first indications of a semi downturn, we continue to gain market share at equipment manufacturers and we add more value to chip makers for their most advanced process technologies.

The need for additional monitoring instruments grow with the miniaturization of the node sizes. Additionally, higher profitability requirements at existing fabs increase the need for more advanced software solutions. In all cases, INFICON is the preferred partner to work with and we continue to work very closely with OEMs and end users to develop next generation sensors, solutions and methods to assure high quality chip production. 2022 will be another record semiconductor year and we expect a good 2023 as well. Investments in OLED flat panel and optical coating technologies will remain flat. Finally, we had a solid third quarter 2022 in the General Vacuum market on this slide with sales of USD 36.8 million, which reflects a year-over-year increase of 9.9%, but a 1.1% sequential decrease mainly influenced by a weak euro in Europe, which represents the majority in this market. Chinese customers contributed the largest part of the growth compared with a year ago.

We sell analysis measurement and control products for many different industrial applications through private label partners, primarily vacuum pump manufacturers, and we sell INFICON label products via direct sales channels to industrial OEMs as well as through distributors and agents in order to reach and serve ten thousands of smaller and midsized customers around the world. We will end the year 2022 on a new record level as well. Let me close my part of the presentation with an outlook for the rest of the year on this slide. Despite the increased uncertainty due to political and other crisis combined with high inflation rates and ongoing supply chain issues, we are confident to reach new annual records. With a full order book, the final result depends heavily on how much and how fast we can get the missing parts to complete our manufacturing schedules and ship and install our instruments on time before the year end.

Market-wise we should foresee the semiconductor market will remain very dynamic with high but lower CapEx rates going into 2023. Our close cooperation with OEMs and end users for new advanced sensors and solutions generate new growth opportunities. The exact impact from the new U.S. export regulations are not clear yet, but we carefully observe the development in the market. The e-car trend will continue and the need for safe energy supply systems, mainly lithium-ion batteries, offers plenty of growth potential. Safety concerns around the world will trigger new HAPSITE potential as well. We are now -- we are on plan with our capacity expansion program and expect a strong last quarter of the year. Therefore, we narrowed our full year guidance to now USD 570 million to USD 590 million with an unchanged operating income margin of approximately 19% of sales.

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

[Matthias Tröndle, executive]

Thank you, Lukas. Good morning, everyone, and welcome to our third quarter 2022 conference call. I will cover Q3 results and also comment quickly our guidance for the full year. As always, let me begin with our revenue segmentation on Slide 11. Revenues for the third quarter of 2022 came out at $143.8 million. This compares to $122.2 million in our third quarter of last year. This represents an increase of 17.7%. Taking into account the negative currency impact, which is mainly driven by the strong U.S. dollar of minus 6.9% or $8.5 million, we achieved an organic growth of 24.6%. Mr. Winkler did already go into the details of the individual end markets. The highlights are that all markets except Security & Energy increased and they increased with a double-digit growth rate. The Semi & Vacuum Coating market increased significantly by 27% or about $16 million and compared to Q2, the General Vacuum market developed somewhat stable and all other markets also showed some growth.

And last, but not least, Refrigeration, Air Conditioning & Automotive had the best quarterly sales performance ever. With that, the third quarter of 2022 showed a sequential 2.8% sales increase and reached the second best quarter in terms of sales, only a few hundred thousand U.S. dollar away from our record level in Q4. Now let us turn to the regional distribution of sales. Compared to previous year, we had the highest growth in North America with 40% plus followed by Asia and Europe with 12% and 11%. North America had growth in all markets predominantly in Semi and Refrigeration, Air Conditioning. Both Asia and Europe showed strong growth in Semi & Vacuum Coating and in the General Vacuum market. Let's go to the next slide. Our gross profit margin reached 45% in Q3, down 183 basis points versus Q3 last year and down 35 basis points compared to previous quarter. Higher material prices, increasing broker fees and higher freight costs have been the main drivers for that decline.

What happened on the cost side? We spent $11.4 million on R&D in Q3, an increase of 5.6% as a percent of sales. Expenses decreased to 7.9% in the third quarter from 8.8% in the previous year. Higher project related cost and personnel related cost partially compensated by some favorable foreign currency impacts did drive this increase. In SG&A, the expense level showed a $3.6 million increase. Personnel expenses due to increased head count, general cost increases and factors like reviving trade shows and travel are the main driving elements partially compensated also here by some favorable foreign currency impacts. The operating profit for the third quarter therefore reached $25.3 million or 17.6% of sales after $22 million or 18% in Q3 last year. This corresponds to an increase of 14.9%. The tax expense for the third quarter was at $6.6 million, which represents an average tax rate of about 27%.

The tax rate did increase versus previous quarter especially mainly due to the profit mix of our various international entities. The net profit therefore reached $17.8 million or 12.4% in Q3. This compares to $16.8 million or 13.8% in the prior year, a 6% increase in absolute numbers. Consequently, we see similar development in earnings per share. This also went up by 6.3% and stands at $7.30 in Q3. Now let's move to the balance sheet highlights. Our net cash position reached $0.8 million compared to $54.6 million at the end of last year and for a better comparison net $40.9 million in the third quarter of last year. What did drive this? Like in Q2, there were basically 2 main reasons for the decrease. One is our working capital and as a consequence, a lower operating cash flow. And 2, our CapEx/investment program. First of all, our working capital closed at $181 million or 31.5% of sales with about $30 million higher than end of last year.

The increase was entirely due to the $31 million increase in inventory resulting from the high business and order volumes as well as the various supply chain issues with corresponding availability and bottlenecks accelerations. As a consequence of the increased working capital level, our operating cash flow, which you can see in the bottom right of that chart, reached a level of EUR 11 million similar like in Q2, but lower by about $11 million against our second best cash flow performance from Q3 last year. The turns for inventory decreased slightly to 3.0 and the DSO for AR finished slightly better at a similar level compared to Q4. As a second driver and as communicated last year or during 2021, we continue to invest in our capacity meaning mainly building and machinery and equipment. After $9.5 million in Q2, we had another $9.7 million of capital expenditures in Q3. For the last quarter of the year, we expect somewhat declining and lower figure here.

The balance sheet shows a solid structure. We have currently a 60% equity ratio and no long-term debt. Those were my comments on the balance sheet and Q3. Finally, I come to the outlook. Mr. Winkler has already gone into the details on the assessment of our end markets. We consider the further development of our business to be quite positive despite the situation on the supply market and all the geopolitical and trade policy uncertainties. Based on our order book, order intakes and the overall business situations; we are quite positive for the closing quarter. We have narrowed the top line range a little bit and expect now sales between USD 570 million and USD 590 million and an unchanged operating income margin of around 19% for fiscal year 2022.

With that, I would like [Audio Gap] and we are now ready to take your questions.

[Bernhard Schweizer]

Thank you, Lukas. Thank you, Matthias. We are now ready to take your questions. I see that we have first question on the list from Jorn Iffert.

[Joern Iffert, analyst]

If I may start with 2 questions, please. The first one would be I mean you have expanded now your capacity by more than 50%, but we are likely going in a quite severe semiconductor downturn in 2023 where semi wafer equipment CapEx could be down 20%, 30%. Can you give us some insights how flexible your cost base will be? What is your head count planning now for the next 1, 2, 3 quarters to get a feeling what is happening to your margins when sales would decline significantly in 2023? And the second question, please, on China. Very tough to get the exact impact. But can you give us roughly the exposure you have in semiconductor to China, in particular to the more leading memory edge for example, which could be impacted by the restriction. If you have a rough range what you think about could be the negative impact from the incremental restriction.

[Lukas Winkler, executive]

Let me go with the second question first. The Chinese -- or the new U.S. regulation to avoid certain technologies from being exported into China. How is the impact from INFICON point of view? As you know, we are affected in currently just one way and that's with our products that are made in the U.S. that could eventually be shipped to Chinese semiconductor manufacturers. And here we are primarily serving chip makers and not equipment manufacturers and the chip maker market currently for INFICON is a small one compared with the equipment maker market or at least from INFICON point of view. And even the competition is tougher on the chip maker side than on the equipment manufacturer side and the impact that we see currently for the potential threat that we see with new regulations are somewhere in a high single-digit million dollar figure maximum for 2023 or at least for the foreseeable future.

Now having said that, we do not know yet exactly how these new regulations will impact other technologies or if the U.S. government even will start to put pressure on maybe the European government to put similar legislation in place. That would dramatically change the way we look at the potential in China, but that's currently not the case. So the products that we make in Europe are not affected by the U.S. regulations and therefore, we will continue to gain market share in the equipment manufacturer side of the market in China and that's the bigger one. So therefore, currently the impact is relatively small. Having said that, we don't know exactly if the regulation might change again. There was just a small change that has been added 2 days ago. I'll give you an example. Now we can continue to serve so-called foreign transplants in China meaning that those fabs that are owned by non-Chinese like Intel, Samsung, Hynix.

We can continue to serve them even with products made in the U.S. and that's already a first kind of relief of those regulations. There might be other changes coming in the near future, we simply don't know yet. Now you mentioned that we added capacity. Yes, we did. And how does it cope with the fact that maybe there will be some or there will be some semi downturn. Currently we are not very much concerned about that yet for 3 reasons [Audio Gap]. One is that we enjoy a huge order backlog into the semiconductor market especially in the semiconductor equipment manufacturers market. We still gain market share especially in China as well because there we are seen as a European manufacturer not American manufacturer. And last, but not least, even if the downturn will be as severe as eventually 20% or maybe 12%, I don't think that will limit us from even producing more revenue in 2023 compared with 2022. As I mentioned before, we are well positioned in the new applications.

We are well positioned with software. We are well positioned with most advanced processes. And those are all the areas where we do not expect a big reduction in CapEx because it will help the chip makers to become more productive and to have this very advanced semiconductor process under control. On top of that, the top of the notch manufacturer will continue to invest in so-called EUV based technologies and that's one of the areas where we do not expect a big weakening in the market. The biggest weakening will come from the memory side and our exposure in the memory market is relatively small compared with our exposure into the logic analog and foundry business. Now flexibility, we are working with a lot of temporary workers currently not because of the issue in semiconductor, but we simply don't get enough fixed workers so we have to rely on temporary workers and so we have a relatively high flexibility in terms of head count. We have a relatively low flexibility if it comes to fixed cost in conjunction with our additional capacity especially with calibration tools.

[Matthias Tröndle, executive]

The thing is on the capacity and the machinery equipment, depreciation periods are typically in the range 8 years and above; in building, it's more 20 years than 8 and in machinery, it's 8 years and above usage. So the depreciation impact of eventually not used capacity in there is not really huge I would say.

[Joern Iffert, analyst]

If I may just follow up on China. Can you just remind us your China semi exposure overall? Is it correct around $30 million, $40 million?

[Lukas Winkler, executive]

It depends on how you measure it, which period you take. And if you look at the current business or future business, that's probably not completely wrong.

[Bernhard Schweizer]

The next question comes from Michael Foeth.

[Michael Foeth, analyst]

Actually more or less add-ons to what Jorn just asked, I just wanted to clarify. So you are saying that you can generate significant revenues through market share gains and new product categories. So would it be correct to assume that if the semiconductor market was to remain stable for example, you would generate an additional 20% plus revenues on a like-for-like basis?

[Lukas Winkler, executive]

If it's exactly 20%, I have never -- I will not comment that figure, but the trend is certainly true. Yes, we are concentrating on fast advanced or most advanced processes which will not go down as much as others and we are still gaining a lot of market share and we are adding new sensors that are capable to monitor even more processes in the semiconductor industries even those where we had no solution in the past. So we call it we like to share the size of the wallet at our customers not just getting a higher share of that wallet. That's the target as well. But we even increased the size of the wallet itself by adding sensor solutions that are capable to measure even more complex processes in semiconductor industry.

[Michael Foeth, analyst]

Okay. And the second question would be regarding your exposure, you mentioned your exposure to the memory segment is obviously much less than to advanced technologies. But if your large American customers on the equipment side are suffering from restrictions to sell to China, can you compensate part of that by selling directly to Chinese equipment makers or would that be a wrong assumption?

[Lukas Winkler, executive]

I think it cannot be compensated completely, but we certainly can compensate parts of it. And so there will be a certain impact, we are 100% sure about that, but it might be not as strong as the overall impact on the pure American equipment manufacturers.

[Michael Foeth, analyst]

Okay. So your business to Chinese customers is benefiting if the U.S. guys basically can deliver less. Is that correct?

[Lukas Winkler, executive]

On the equipment manufacturer side, absolutely true, yes.

[Bernhard Schweizer]

The next question comes from [ Helena Carlin ], AWP.

[Unknown Analyst]

I have some questions about 2 different topics and the first one is the whole energy topic. I know INFICON is not an energy intensive company, but have you been able to save energy so far? And I want to know what you will do if there really is the event of a power cut.

[Lukas Winkler, executive]

Let me take the question and some detailed numbers maybe Matthias has. We did a lot to reduce the amount of energy that we need especially in those areas where we added capacity. At the same time, we also invested in energy savings appliances, energy savings equipment, also using heat pumps and recovery system and so on. So our overall energy consumption will go down. Having said that, it does not impact all the energy sources. We will have increased electricity use, but we use less whatever it is gas or wood chips or some other heating kind of sources. So therefore, the electricity will go up, but the overall consumption will go down assuming a similar production volume as we had in the past.

If the production volume goes up, then we will use a little bit more energy in absolute terms anyway. Secondly, it comes to what did we prepare in order to have some cushion. Since we cannot afford certain equipment having not been powered up, we prepared some emergency situations in at least 2 of our larger production sites by adding a backup system powered with, I believe, diesel so that we can fully run at least 2 of our 3 main manufacturing places independent from external energy consumption. But we also have to cope with the fact that the gas prices go up and I think here, Matthias, you might can add some indication of how much that eventually could be for the next year.

[Matthias Tröndle, executive]

Yes, I can do this. First, I confirm you're right. We are not very energy intensive, which is good in these circumstances and these times. Second, when you take a look to our footprint, there's a big footprint in the U.S. and quite a few in Europe. So Europe is more exposed on energy price increases than the U.S., which is also good for us. So about 50% of our energy is more or less used and coming from the U.S. So there's not so much exposure in there. But especially in Germany and in other European companies of course we see this and our latest analysis basically say that there is most probably an increase between 80% and 100% in our energy cost. This is what we expect for next year assuming the rules and procedures, which are currently under discussion or even agreed upon will be in place. But as I said, fortunately we are not so energy intensive. You also see this in our CO2 consumption when you take a look to the annual report, it's relatively low and from that point of view, it's helpful I would say.

[Unknown Analyst]

Okay. The second topic that I want to discuss would be the prices. So do you pass on the increased raw material and energy prices to your customers and if yes, how has this affected the sales and when do you expect recovery?

[Lukas Winkler, executive]

I have to -- let me take that question and have it 2-folded. First question no, we did not just pass everything to our customers. But we certainly just have or just finished a global price adjustment around considering of course certain increased raw material as well and we rolled it out just recently. And the impact, you can see certain small impacts already in the last quarter of 2022, but the big impact may be seen in 2023. Just give you some indication that the price is of course very much between different product lines. I mean we have not been the first company to increase prices so the price negotiations are a little bit easier than if you are the first one and some of the price discussion actually went through relatively smoothly in exchange of being capable to ship, that's more important for many, many customers.

And so therefore, our price adjustments will probably end up somewhere in the high single-digit percentage figure overall. But the big impact will be seen starting as of next year not this year yet. But the price adjustment was not just based on higher material price. There were several impacts like duties, like energy prices, like inflation, labor inflation and so on and so forth. And so the price adjustments are made as a permanent kind of increase and not just temporarily that we did. We did let's say bite into the apple for most of the increased material prices and you can see the impact on our gross profit margin, which is really low and we expect Q3 might be the low point. And therefore, we did not pass most of the increases directly to our customers, but now we have established a traditional permanent price adjustment for the coming periods.

[Unknown Analyst]

And when do we expect a recovery of the markets?

[Lukas Winkler, executive]

We see some easing, let's say, in certain material categories and the most severe one for us are electronics anyway as we pay the highest amount of brokerage fees. It's not over yet, but at least some first indications are visible. So I think somehow within the next 3 to 6 months, we should have that situation behind us.

[Bernhard Schweizer]

Any further questions? I still see Jorn has his hands up still. Is there a follow-up question from your side, Jorn?

[Joern Iffert, analyst]

Yes, maybe to have a follow-up question on your end markets, lithium battery testing and also existing end market security with the HAPSITE orders. I mean when we go in the kind of global recession, what is the contribution from the potential growth markets. So what kind or what percentage of your revenues should grow even in a recession in 2023?

[Lukas Winkler, executive]

We already mentioned both. So the HAPSITE revenue will not be affected by any recession. That's a typical U.S. program that we are part of, will continue anyway and they take whatever we can manufacture. That's why I said probably be 12 to 18 months. Keep that in mind. So full 2023 will have no impact from any recession on our security business. And we don't think that the trend in the e-car mobility will be impacted heavily by a certain recession because there's still not enough capacity in the market to make all those lithium-ion batteries for the new e-cars. So therefore, the battery market will continue to grow as well despite certain recessionary tendencies in the market. So therefore, those 2 markets will grow and both markets I have to say luckily, they have above INFICON average gross profit margin.

[Bernhard Schweizer]

Are there any further questions? If not, then thank you all and I would like to hand over to management for any closing remarks.

[Lukas Winkler, executive]

I take the closing remarks because this will or is actually my last meeting or telephone conference with you guys and I calculated, I think it was the 60th over the last 19 years so that's why I'm kind of sitting very comfortable in those chairs here and being very relaxed. And I'd like to thank you all of you for being with us for this long period of time. And as I mentioned already before, my successor will be very well prepared to take over. We start introducing him to the financial community as of today as you might see him before year end and from next year on he will take over. Luckily I have to say an experienced CFO to my left side, Matthias, will stay with the company and support Oliver in all his activities, even in the communications with you guys. And I simply like to thank you and I hope to see you in other place in other part of the world anyway maybe having a glass of beer or a glass of wine. Actually my assistant just brought me one so I can take the glass. Thank you. Cheers! Having a great day and see you somewhere. Thank you.

[Matthias Tröndle, executive]

And before we close this call so also Lukas was faster than me. This was his last call as the CEO. He goes now to a different journey. And I counted and I'm a finance guy, this was probably his 80s quarterly conference call and probably had thousands of Investor Relations calls. But yes, I want to give you a big thank you for your leadership in the last 18 years as CEO. We wish you all the best. You know this. But all the best for your next journey, the next part of the journey. And it was always a pleasure with you working and for that, Cheers and all the best.

[Lukas Winkler, executive]

Cheers Matthias. Thank you. Cheers to all. Thank you. Bye-bye.