Inficon Holding AG

SIX:IFCN

Earnings Call Analysis

A Steady Growth Despite Challenges

In the third quarter of 2024, INFICON reported sales of $172.2 million, representing a slight growth of 1.3% year-over-year and a more robust increase of 3.1% compared to the previous quarter. This steady performance occurred in an environment characterized by fluctuating demand across its end markets, highlighting the company's resilience. The growth was primarily driven by strong performances in the Semi & Vacuum Coating and Security & Energy sectors, which saw year-over-year increases of 27% and 31%, respectively.

Improved Financial Metrics with Strong Margins

A key highlight from the earnings call was the gross margin improvement, reaching 47.4%, an increase of 104 basis points compared to the previous year. The operating income margin also rose to 20.3%, up from 19.9% a year ago, reflecting effective cost management strategies and operational efficiencies. Operating cash flow reached a record $46 million, demonstrating strong cash generation capabilities.

Sector-Specific Developments

INFICON experienced contrasting fortunes across its various markets. The Semi & Vacuum Coating sector stood out with significant growth, while the Refrigeration, Air Conditioning, and General Vacuum markets faced declines of 11% and 29%, respectively. The latter's downturn was mainly attributed to weaker sales in Asia and the Americas. However, there were positive sequential improvements, particularly a 6% increase in the General Vacuum market compared to the previous quarter.

Navigating Global Market Trends

Regionally, Asian markets performed well, achieving nearly 16% growth, contrasting with declines of approximately 8% in other regions. INFICON's management indicated optimism for future growth, especially with anticipated demand increases in the semiconductor market. However, they noted that the timing of this ramp-up remains uncertain, with expectations leaning towards 2025 for significant acceleration.

Guidance for the End of Year and Beyond

Looking ahead, INFICON has adjusted its revenue guidance for 2024, projecting total sales to be between $660 million to $670 million, with an operating income margin forecasted at around 20%. This updated outlook reflects management’s cautious optimism amid the mixed signals in the semiconductor ecosystem and global economy.

Investments in Innovation and Capacity

INFICON continues to prioritize research and development, with R&D expenditures amounting to $13.9 million, equating to approximately 8% of sales. Additionally, the company plans to invest around $30 million in capital expenditures for the year, focusing on enhancing production capacity to meet future demands, particularly as the semiconductor industry is poised for a revival in the coming years.

Strategic Focus Amidst Industry Headwinds

The management underscored a commitment to innovation, with products such as the APX mass spec and ELT Vmax leak detectors showing promising market dynamics. While there are ongoing pressures within the automotive and refrigeration sectors, INFICON believes its strategic investments and strong product offerings position it favorably to capture market share and deliver sustained growth.

Conclusion

Overall, INFICON navigates a complex landscape showcasing both challenges and opportunities, with strong financial metrics and a proactive approach to investment and innovation. Investors should keep a close watch on the execution of its strategic initiatives and improving market trends as the company aims to capitalize on the anticipated semiconductor ramp-up in 2025.

Earnings Call Transcript 2024-Q3

[Bernhard Schweizer]

It's 9:30 by my watch. So hello and welcome, everyone. My name is Bernhard Schweizer, Investor Relations Contact at INFICON. I have the pleasure to host this web conference.

Thank you for joining the INFICON conference on its Third Quarter 2024 Results. With us today are Oliver Wyrsch, CEO of INFICON; and Matthias Trondle, CFO of INFICON. 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 Q3 2024 results, together with the link to the accompanying visuals for this conference. All documents are all available for download in the Investors section of the INFICON website, www.inficon.com.

As participants, you can post questions either in writing, using the chat function in MS Teams. We will read out your questions and managements will answer them during the Q&A session. Or you can add yourselves to the queue of people wishing to ask questions by clicking on the, I 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 assumptions on plans and expectations of our managements 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, Bernhard. Welcome, everyone. I'm really happy to have you all here today. Let me jump right in.

We have the usual split. I will first talk about the big picture, the different markets and our expectations, and then I'll hand over to Matthias Trondle, our CFO, for more details on financials.

And with that, I will jump right in. Q3 2024 results, we're really happy to announce we have a steady profitable growth after a strong 2023. Record sales in Semi & Vacuum Coating as well as Security & Energy.

When we look at the specific numbers, sales growth to USD 172 million, that's a plus 3% versus previous quarter, and slightly up year-on-year by plus 1% after a strong 2023. We have slower momentum in General Vacuum. As you remember, we had a large backlog last year that now is normalized. And at the same time, after we have a decrease, we had sequentially an improvement again.

And when you look at RAC, there is a smaller quarter in Q3, but we had a stronger quarter in Q2. So for the full year, roughly flat. This is coming mainly from the Automotive and especially U.S. and Europe.

When we look at the specific records, Semi & Vacuum Coating, plus 27% year-on-year, plus 7% quarter-on-quarter. And in Security & Energy, plus 32% year-on-year and plus 2% quarter-on-quarter.

The orders that were up in Q2 are again below 1 in book-to-bill. This is not untypical for Q3, as the first summer months of Q3 are always a little bit slow. We'll have to then look forward into the future when different markets will pick up and in what shape or form, specifically the semi market, I will get back to this.

Regarding operating results, we have an improved operating income of USD 35 million or 20.3% compared with 19.9% in Q3 '23. This is an increase of 0.4 percentage points.

Gross margin also strengthened by plus 1 percentage points. And this shows through the improved supply chain quality, but also, in particular, the systematic cost management we are doing during this period where the ramp, especially for semi hasn't come yet and the other markets are trending, in part, sideways, but with also some positive signals. At the same time, though, we have to be quite strategic of how we invest and how we time our investments.

Operating cash flow as well a record with USD 46 million. Regarding organization, we continue to invest in R&D. That's key for us with 8% of our sales and also continue to invest in CapEx. Especially, we are making sure that our production capacity is ready for the semiconductor ramp. We expect full year CapEx to be around USD 30 million.

Having said this, I move into the global markets. You see an interesting trend, in particular, in Asia going upwards, whereas Europe and North America going more sided, specifically in the Q3, even a bit down. We will expect positive trends there again, but it's at the moment rather flat tendency in these 2 markets.

If we then go into the specific target markets, Semiconductor & Vacuum Coating as the first market, we have a very strong position. I believe, some of it is driven by product innovations, and product designing wins, the new applications. We have a couple of really strong products out there. While the market is not so dynamic, we have been able to gain market share.

We have record sales in Q3, increased in year-on-year and quarter-on-quarter. The key topic here is probably when the ramp will accelerate, we'll see some positive signs.

For the year, we expect a flat/growth scenario. At this point, we are ahead. And we also believe actually that the fourth quarter should be solid. So the continuation of the current with not so much acceleration yet.

Most submarkets, we always, as you know, look at several submarkets here, are positive. But it's a mixed picture still, especially regarding this ramp. I think what is specific is that logic has a slightly positive tendency, leading logic. But the mature edge that was very strong last year, has slowed down a bit, that's mainly due to Automotive.

And then there is several different tendencies of the big players in the market, as you all know, that not all point in the same direction, but we all believe 2025 will be an improvement.

What is important here is that we, especially in the years that are a bit slower, continue to invest in innovation. We work very closely with the large accounts together on the next innovations, a lot of prototyping out there, a lot of new products being tested and implemented. And I think here, as I mentioned before, we've been able to make extra wins even in this difficult environment and that's why we can show strong numbers.

I would highlight, in particular, the new mass spec product line, APX for memory, for harsh processes in logic that is strong and also the UL product line, the leak detector with new software for more sensitivity and easier use, reduced total cost of ownership that are really quite exciting and our customers are excited about.

If I then move to the next target market, Automotive, Refrigeration and Air Conditioning, strong position. Also here, #1. We had a strong Q2 and a bit slower Q3. It is not untypical for some parts of this market to be a bit slower in summer. Overall, though, we expect a flat development this year after a 30% -- an almost 30% growth in 2023, so we're stabilizing on this high level.

And I believe we are gaining market share as well because some markets really have slowed down, if you look at the EV battery market, due to the automotive market overall has been slower.

Consumer battery has been more resilient. And then, of course, RAC has its own developments with specific regulations driven through new refrigerants that are required and implemented and then also smart manufacturing applications.

In particular, here, I would like to outline the smart manufacturing product for leak detection in Automotive, the ELT that has been very strong, and I believe we have made market gains as the market is decreasing and we are actually developing really well. And then also the handheld Stratus product lines to just name 2 that I believe have created growth.

We then go to General Vacuum. It's a slower year. You'll remember last year, we have grown nearly 30%. A lot of this was a big backlog that then was reduced during the course of last year. It's normalized now. Nonetheless, it is not very dynamic yet.

While we did have a quarter-on-quarter increase of 6% across all regions, many of our larger private label distribution partners still don't see so much positive dynamic. This year the general macroenvironment isn't very strong for it. So we are optimistic for the future for sure. But at this moment, this is a little bit of a slower development than maybe we would have hoped for. I think the general macroenvironment is also something that we're watching closely here to see what happens next.

One more important point here is that the big driver was also solar and solar goes for a consolidation phase as well this year. It will come back, no doubt. This is a key technology for the energy transition and that will happen in the course of next year, most likely.

With that, I go to the last target market, Security & Energy. Very strong position, good growth driven through product innovation here at the HAPSITE that drives this forward. We had a number of large orders, specifically from U.S. DoD, but also across NATO. And the pipeline is strong as well. So we work through the backlog.

This is always a little bit a different cycle than the other markets and helps us a lot in these times to be independent of a bit more sluggish other submarkets that we have. So we continue to execute also here a sales record quarterly with an increase of plus 33%.

With that, I come to the expectations of 2024 and beyond. We are optimistic for the upcoming quarters. Specifically in selected markets, we see good dynamic, positive growth. I mean, most notably, you can see it in the overall Semi & Vacuum segment. There is global uncertainties and most specifically the timing of the semiconductor ramp or the acceleration of it is not exactly clear regarding timing and extent. We would expect this to start in 2025. You see first signals from our customers when we work together on planning.

However, also, they see these uncertainties. So this timing, this might shift back and forth a little bit. So in spite of a lot of positive signals, we would still think there is a high likelihood that we have another 1 or 2 quarters that is more sideways movement overall. Therefore, also because we don't see this acceleration yet, we have updated our guidance on sales to USD 660 million to USD 670 million for 2024 and an operating income that is unchanged of around 20%.

A few more highlights just on the products that you also see the specific pictures. We update this on all our channels, but maybe 2 or 3 things I would like to highlight here. You see in the upper left corner, the Transpector APX that I mentioned earlier that we launched as a family 2 years ago and continuously add different variants. This is really for the latest, most complex nodes and also specifically for applications in memory and has made very good traction. It's one of our drivers, specifically now, in this a little bit slower times in the industry.

Then the ELT max (sic) [ ELT Vmax ] right next to it. This is the smart manufacturing leak detector for automotive that we launched yesterday -- last year in several variants, now also have expanded and upgraded further applications and has shown very positive development in the market.

And on the upper right side, the SMARTâ€Spray as one of the upgrades and expansions to our semiconductor leak detection portfolio, which has the customers quite excited actually and has also seen very positive dynamic. More is available on our website. But just for now this much.

Stay in touch with us. Here, a couple of updates, as always, from our social media channels. I think one thing I would like to highlight here is the Lam Research - Supplier Excellence Award for innovation, where we are very proud of. This was many years of working together with Lam as an innovation partner, a great partnership where much more is to come in the future. So we are very excited about this, among other things.

And with this, I would like to close my section of today's prepared notes and hand over to Matthias Trondle, our CFO, for more details on the financials.

[Matthias Tröndle, executive]

Thank you, Oliver. Good morning, everyone. Welcome to our conference call for the third quarter. As usual, I will cover the financials for Q3 and also quickly comment the guidance we gave.

So first, let me start with the highlights for Q3. The order ended lower than second quarter with a book-to-bill below 1. Our sales did grow by 1.3% versus last year and by 3.1% compared to the previous quarter. The gross margin improved and reached 47.4%. And we achieved an improved operating income margin of 20.3% in the third quarter.

From a balance sheet point of view, CapEx reached $5.5 million, lower -- little bit lower than last year and slightly higher than in Q1. Cash flow reached a new record level and net cash made a big jump in the third quarter. And our equity ratio closed with a strong 65%.

Now, let me go a little bit more into the details. As you have seen in our press release and as Oliver commented, we achieved sales of $172.2 million. This represents an increase of 1.3% against Q3 last year and an increase of 3.1% against the previous quarter.

Oliver did already comment the end market developments. We can say that we had 2 new quarterly records in 2 markets, let me say like this. In the Security & Energy market, we had a plus of 31% and in the Semi & Vacuum Coating market, we expanded by 27% compared to Q3 last year, respectively, 7% compared to Q2 for semi.

In the other 2 markets, we saw decline in Refrigeration, Air Conditioning and Automotive. Sales decreased by 11%. And in the General Vacuum market, sales dropped by 29%, mainly coming from weaker sales in Asia and in Americas. However, compared to previous quarter 2, sales in the General Vacuum market improved by a further 6%. Compared to previous quarter Q2, total sales did increase in all markets except Refrigeration and Air Conditioning.

Looking at the regional sales distribution on the right-hand side. Asia gained almost 16%, while the other 2 regions had a decline of approximately 8%.

The gross profit margin reached 47.4% and increased by 104 basis points compared to last year Q3 and ended also higher by 30 basis points than -- compared to the previous quarter 2. Favorable mix at slightly higher volume as well as lower broker cost and an improved supply chain have been the main drivers for that.

Let's move on to the operating costs. In total, the total operational costs did increase by 3.7% compared to a year ago, while SG&A developed more or less flat with $32.8 million. Our R&D spend reached $13.9 million, which is an increase of 13.1%. As a percent of sales, R&D expense increased to 8.1% in the third quarter. Additional headcounts, project material costs to support our development efforts did mainly drive this increase.

Coming to the profitability for the third quarter, we achieved operating profit of $34.9 million or 20.3% after $33.7 million or 19.9% in Q3 last year, an increase of 0.4 percentage points and above the 20% mark for the fourth time in a row.

Compared to previous quarter, as I said already, the result did increase by 3.7% in absolute numbers with a slightly higher profit margin.

The tax expense for the third quarter was at $7.1 million, which represents a tax rate of 21.2%, which compares to 20.9% in last year, slightly higher. As a result, the net profit develop stable and reached $26.3 million or 15.3%.

Now, let's move to the balance sheet. Our net cash reached $51.5 million, which is about $7 million higher than end of last year. And compared to Q3 last year, the net cash made a big jump with a plus of $29 million.

The turns for inventory ended at 2.3 and the DSO ratio improved further to 48.7 days, and with that, the first time for many years, actually below the 50 days level. Our working capital closed at $221 million or 32.1% of sales, and with that ended about $4 million lower than end of last year. The reduction is mainly due to good collections, a lower DSO with a decrease in accounts receivables.

Total cash flow, which you can see here on the bottom right, reached a strong record high $45.9 million and increased by $8.3 million versus Q3, respectively $7 million versus end of 2023. And the balance sheet shows, as I already mentioned, a solid structure with a 64.7% equity ratio. Those were my comment on Q3 results, quickly on the outlook.

Oliver already commented the assessment for the end markets and the expectations. There were mixed signals and to the extent and the timing of the next semi cycle and also certain risks in the macroenvironment and global environment, but we are optimistic. We updated and narrowed the guidance and expect revenues of $660 million to $670 million for the full year 2024 with a midpoint of $665 million and an operating margin of around 20%.

With that, I would like to close the presentation. The next events -- so the next event is our Technology Day, actually November 14, and then we see again in March next year for our Q4 and full year results. So we are now ready to take your questions.

[Bernhard Schweizer]

Thank you, gentlemen. We have the first question coming from Jorn Iffert.

[Joern Iffert, analyst]

If you allow me 3 quick questions. The first one is with all the product innovations you are having in semiconductor end markets, how do you see yourself positioned for the CapEx split between lithography, deposition and etch? Does it matter for you with innovations coming up or not really? Would be the first question, please.

[Oliver Wyrsch, executive]

So maybe I need to ask a little bit for a clarification. So you're asking if the product portfolio is ready for the innovations in these 3 different semi processes. Is that correct?

[Joern Iffert, analyst]

Yes. And I mean, with all the innovations you have shown, do you care about if litho, etch or deposition is growing fast or less fast? Or is it you have the same exposure to all 3 sub-technologies at the end of the day?

[Oliver Wyrsch, executive]

Yes. Let's take the example of the APX mass spec. This is a product family. It has variants for different applications. These are often minor, though, because that is maybe sometimes a little bit the plumbing different, the configuration of the sensor a little bit different. But with that, they adapt to all these different applications. They are used in all of those and then also the other semi processes. So we are definitely ready for the next ramp.

As I mentioned before already, we typically try to work with our customers on 1 or 2 technology steps in the future. So what is coming in the next ramp is definitely already ready from our side product-wise.

[Joern Iffert, analyst]

Okay. The next question would be, please, on China. Can you clarify what China was growing for you in Q3 in semi? If this was the main contributor? And given all the news flow from Lam Research, ASML and others, China is very likely down next year on semi CapEx, but you also have exposure to chip producers in China. So how do you see the pull forward demand risk for INFICON in China and having an early view in 2025?

[Oliver Wyrsch, executive]

Yes. I mean it remains difficult to understand exactly where the China economy will go specifically, right? There is, I think, different big trends and then the government policy that you need to try to understand to understand where it is going. For us, the key sectors are, of course, focus sectors for China and the government. So there is a slightly different dynamic there. It's much better because there is specific investments and push, namely -- most namely, of course, the semiconductor sector, but also battery solar and so on.

So what we have seen in Q3 is not only China, it is beyond China, it's also in Asia. I mean, you know Taiwan has also a good dynamic. Actually also Korea has one and then Japan as well. And then there's Southeast Asia, which is a little bit more spread out and it's a bit more back end. But then there's also specifically North America was dynamic and a little bit in Europe. So this is -- it's a bit widespread. You could be excited about it, honestly, for semiconductor and it is a record quarter. But we just don't see this acceleration yet overall.

Now back to your question regarding China for next year. We get quite positive signals actually from our customers in China. We've just been there about a month ago and talked to customers. Look, not everybody is ramping up fast, but many have actually quite aggressive plans and I'm talking here chip makers and also toolmakers. But there is some that struggle as well, right, maybe where the market position and the financing isn't that strong.

But there's plenty of them that are quite bullish about next year. What truly will materialize, we'll have to see. We have been a couple of times a bit surprised in how China develops and specifically how the semiconductor industry in China develops. But I would look at it optimistic at this point from what I have, even though it's mixed.

[Joern Iffert, analyst]

And on China, sorry to follow up here before I go to the very quick last question. How big is China of your total semi sales right now? And how is the split between the OEMs and the chip producers for the quarter, roughly?

[Oliver Wyrsch, executive]

Yes, I can only give you this roughly. We also don't report this in specific. But China remains to be around 1/4. It has upward trends at times. But this year, there's a bit of a shift between gen vac to semi. And that you see across all regions and also in China. So when you look at the split, our split is typically around 50-50. I think currently, chip makers are a little bit ahead of OEMs interestingly. And that is in China and that is also globally.

[Joern Iffert, analyst]

Okay. The last question, if you allow me, a very quick one and then I go back in the queue. The book-to-bill, early Q4, is this narrowing now 1 again? Is this what you're seeing already? Is this your expectations also? Is it still a gap between orders and sales even October, if I may ask?

[Oliver Wyrsch, executive]

Yes. So as -- if you go through the year, right, so we had a slow Q1, then we had a strong Q2 and then a slow Q3. Q3 is seasonal. That also that it is a bit slower. But yes, Q4 could be above again and then you're probably around 1. If that -- if you assume that, currently, we are nearly 1 book-to-bill. So I cannot exactly say how Q4 developed. So that's what I, a little bit, talked about in the expectations.

We believe it's still a couple of quarters this acceleration doesn't fully materialize. Specifically 1 to 2, I think it's going to be a bit mixed. And the same you see when you look at our customers' statements, right? Some are really quite optimistic and we see that too this dynamic and some are a little bit more wait-and-see and flat for a bit, right? We all agree at this point that next year, though, there should be an acceleration. I hope that helps.

[Bernhard Schweizer]

The next question comes from George-Samuel Brown.

[George Brown, analyst]

I have 2, if I may. Just firstly, how much visibility do you have on 2025 with regards to each of your end markets? And maybe again, specifically in semiconductors, how much visibility do you have on the ramp across logic and memory end markets in 2025? And then I have a follow-up.

[Oliver Wyrsch, executive]

All right. Thanks, George. Yes, I mentioned a little bit already now with Jorn on this ramp. Yes. So I mean that is the one key thing we all talk about in the industry, suppliers, customers, partners, and we're trying to find out when that is. Specifically, for us, it's important that we are ready for it. That is not so much a product. As I mentioned earlier, the product is there.

The capacity and the right capacity for the right product line at the right time is a bit the tricky bit. And we are basically ready now because we don't want to be late, right? So do you see also technically, we are -- would be able to run at a much higher sales at this point and we will be as soon the ramp come.

Now when does the ramp come? I think somewhere middle 2025 is still the consensus, roughly. Well, there is different scenarios discussed. Overall, I think leading edge, if we now go a little bit through the submarkets.

Leading edge is actually not gone down so much last year and has good development this year. I think there is always important to look at the specific companies. They have their individual struggles at times and/or some are really very strong. We work with all of them. We try to support all of them. So there is probably a further uptick expected. But I don't know when the acceleration truly comes there. That is really difficult to say.

In terms of memory, we have actually seen good dynamic. Although Q3 has profited from memory. So there, we have seen some improvement. That's the one, obviously, that dropped the most last year and we saw it in the respective product lines that are serving these customers. But there is a gradual improvement. But again, not really the jump forward, right, as you can also see in our customers' numbers.

I think the mature edge is the one that is rather going down a bit, a bit slower this year after last year being quite resilient and growing. Obviously, that's Automotive-driven to some parts. And then there is also some energy transition factors in there, right, such as solar that are not helping currently.

For me, what I see, when we look at Automotive, that also drives our battery segment, should pick up again next year. It's a bit hard to say. It's depending on policy, depending on geopolitics even to some degree of where the focus shifts and how much intensity there is for energy transition and sustainability and willingness. So I think next year will be an improvement and the same on the solar as well. But currently, it's still in a consolidation phase. Obviously, a large part of this is in China, but it is a strategic sector. So this will come back and will also be supported by the Chinese government and obviously, also in other places around the globe.

So maybe that overall for gen vac, outside of solar or maybe there's 1 or 2 high-tech sectors in there that have their own dynamics such as space and so on. But to look at macro is a good guide for that. We are typically able to grow a little bit more than macroeconomic data. But currently, it's not very dynamic, right, in each region.

I think there's positive signals, specifically in U.S. and China that maybe support some optimism, but there's still also question marks. So maybe to give an early outlook for 2025, more specific, we cannot do that yet. We normally do that in our full year presentations in March. I hope, George, this helps you a bit to give you some color on the different markets.

[George Brown, analyst]

Yes. That was super helpful. Just a second question, if I can. I know you have a fairly big customer in lithography for your sensors. They, obviously, just cut their EUV shipment forecast by around 20 units for next year. How should we think about sizing the magnitude of this cut for INFICON in 2025? I assume it's very, very small, but any details would be helpful.

[Oliver Wyrsch, executive]

Yes. Look, this we have discussed a few times around the customer structure, and I'm glad that you bring it up. Because it's important to stress that INFICON versus 10 years ago has really been able to diversify quite a bit in terms of customers. So this is one of our large customers, but he is -- they are among quite a number of others. And each one of those have their own dynamics. They go up and down.

If you look at leading edge chip makers, as an example, or you look at the mature edge automotive or the ICAPS in general, there is quite some individual dynamics there. And for us also, this partner in Dutch is a great partner. We work together and developed already the next generation again, which really has a very optimistic outlook in general. But on short term, they're slowing down a little bit.

We have been through the planning, seeing this already. So for us, we adjusted to this. But it is not a large impact on our general business. It's certainly good to see if they accelerate again and we will also show how the semiconductor accelerates. But at this point, I think they're going a little slower than expected maybe earlier.

[Bernhard Schweizer]

The next questions come from Nejc Lavric.

[Nejc Lavric, analyst]

Maybe on the first point, I mean, we see China ordered a lot of tools in the past 2, 3 years, especially in the lithography. Is there some risk that next year your semiconductor sales might even fall, assuming that the fabs are not yet equipped, they're still being built and you might see actually next year slightly lower. So maybe that's my first question.

[Oliver Wyrsch, executive]

Yes, Nejc. Yes, the risk is there. I mentioned earlier, there's uncertainties, but there is equally also an opportunity for good growth. And as I mentioned before, when we talk to the customers, they're quite bullish really. I mean it's still the -- the plan is still that China can increase the local sourcing of chips and there is still a long way to go how far they can go with this.

At the same time, it's not easy to build up semiconductor fabs or also semiconductor OEM companies. So they have their struggles, but we see really great progress. I have to say, we are impressed, and we work with these partners together they make good progress. So I would be cautiously optimistic really for China. Even though, yes, a lot of uncertainties, specifically also trade war-related topics, right? We have also an election upcoming. There's a few things that I cannot -- I'm the wrong person to tell you what truly is going to happen. I think a lot of people have question marks and we just need to think in scenarios there.

What I find important is that we're very entrenched with these customers too as well. We work there together on plan longer term. Specifically, also this capacity requests they have continuously now, the ones that are really bullish. So I think we have a very strong position in the market. And whatever will happen to the market, I think INFICON is in a very good position that I'm convinced and that I can tell you that we are sure about that.

[Nejc Lavric, analyst]

Okay. And maybe when we look at your Automotive, Air Conditioning and Refrigeration end market, I mean, can this even get worse considering that you mentioned overcapacity a bit in the past and you're saying there is continuous weakness. I mean, is there any sign of stabilization? Or how should we think about this end market going forward?

[Oliver Wyrsch, executive]

Yes. I think we went through rock bottom there. The timing, though, is difficult to say, right? That is about the EV adoption, specifically also in the west and that's a bit hard to predict. But with certainty, we can say that it is going to come back. Now when and how, that is a bit the difficulty.

Hey, we're working hard currently with these guys to develop new products. You've seen especially the ELT VMax product line. We've made several launches last year. It's very strong. So you could probably not perform this well without being able to make developments in the market share as we do currently because the market is definitely lower than last year?

And so if you look at the full year, year-to-date, we're roughly flat to last year and last year, we grew nearly 30% in this market. So I'm really quite optimistic there. But regarding the timing, yes, next year should really show an improvement. That is our expectation.

[Bernhard Schweizer]

I don't see any further questions at this moment of time. [Operator Instructions] Yes. Here is Jorn. Jorn is back with another question.

[Joern Iffert, analyst]

A quick question on the follow-up on the Auto one with leak detection for battery testing. How do you see exactly your market share developing here? Do you lose some market share?

[Oliver Wyrsch, executive]

No, no, we're gaining. Otherwise, we wouldn't be that resilient in a shrinking market. But you need to also distinguish the segments. I mean, Automotive has a couple of sub-segments, right? It's not only battery, its traditional Auto as well. And then there's -- when you look at traditional Auto, you can look at certain things that will stay such as air bag testing, light leak detection, all of this versus maybe motor block and tank.

So that is one area, but the other is consumer batteries as well, which has been more resilient than automotive batteries. So that will be smartphones, laptops, small button batteries up to bigger ones. This has been anyway stronger. But I think on the Automotive, we have been able to gain market share.

The competition really is now much more local in China. We've seen others from the West losing a bit of foothold. We are #1 globally anyway in that area. But the fight is really there. And that's why, among other things, we opened up the Guangzhou Application Development Center, where we make the fast iterations, the fast adoptions straight with the key customers that we have there. And this has proven to be quite successful. We're thinking about duplicating this and have already started to further invest in this.

[Joern Iffert, analyst]

Okay. And the second follow-up, please. I mean, given that you are sitting on the tables with your customers to discuss platforms and technology, I'm sure you have some visibility. Can you tell us what is roughly the wallet share increase you are seeing for high bandwidth memory and gate all around versus the previous legacy technology, which was mainly used as these technology are progressing and accounting for higher share now of customer spending? Or is this not really where you have exact visibility on?

[Oliver Wyrsch, executive]

Yes. That's a hard thing to say, especially globally. I think one good indicator that we also look at is the numbers that TSMC reports. Of course, that's their own perspective, but they have such a large share in foundry. If you just talk now about logic, of course, mainly. And then on memory, there's a couple of winners there and a couple -- a little bit losers, so if you -- for a cycle, I guess, or for a little bit. So if you look at the ones that drive this -- the share is really increasing quite a bit.

But I've been repeatedly saying that while AI is a driver, it's also been a little bit overhyped last year, I feel. It's for me, as a computer scientist by education, not something that happened last year. It's more of a continuous thing. I also have been following NVIDIA for a long time. Of course, there has been a couple of leap forward, but this is a gradual thing. So I don't think this is a big jump.

Of course, there is more intensity about HBM now and more complex memory structures, which help us. That's also why memory has been actually quite interesting even in the most recent quarter for us business-wise and it continues to be. There's more sophistic [ sensorization ] discussions than ever before happening right now for the next generation. So we are optimistic. To give you a share, I don't think I can give you something that is tangible enough, honestly. It certainly is increasing.

[Joern Iffert, analyst]

Okay. And the last question, if I may, as I think there is no other in the queue right now. Customers want to reduce complexity. You see that your neighbor is offering more modules, for example, helping the customers reduce complexity. What can you do as an INFICON helping the customers reduce complexity?

[Oliver Wyrsch, executive]

I think we're doing this continuously actually, right. We once maybe been a sensor hardware supplier. But now really growing into data analytics with a very sophisticated software package that creates a digital twin of our factory. We run 60 factories. I've just been in Japan at the customer, Automotive that for 6 years, runs the entire fab fully automated with overhead transport system and including the reticle management with our software. What they could do, they could reduce their WIP by 30% and increase their output.

I think we're doing a lot in terms of improving productivity of semiconductor fabs. And that's the discussions that we are having. And we have them at a very good level at the customer where we can strategically work together on doing that. So I think the evolution or the leap forward has happened already for INFICON. I think it's now about executing and truly go after all these opportunities there.

Still there is a little bit discussion to be done for our positioning that truly everybody understands what we can do and that we can do it from small sensors and small data gathering through that, aggregating all this and then bring a factory to the next level in a smart manufacturer way, increasing yield and productivity. But we are working on this constantly. And you also hear how we are changing our storylines and how we try to create more awareness around that and trying to position us in this very strong new environment. I think there is tremendous opportunity around this.

So we're not in the habit of making large announcements, but we certainly have very tangible plans for the next 5 to 10 years, how we dramatically grow our business through that. And you see it now through some innovation wins in difficult times. But there is constantly more going on. The discussions I have are really extremely positive, even though it's currently a little bit of a, let's say, boring time, right? We're all a bit waiting for this acceleration.

But when I visit customers, we don't talk about this quarter or next quarter or even not too much about the next ramp, unless it's about production capacity planning. But mostly, we talk about the next 5 years and beyond that, hey, what can we truly do when we tackle on big challenges. And big challenges are labor shortages. How are you going to build all these fabs with current labor requirements? You can't. It's impossible. And you have also a generation that phases out of the workforce. So you will have a negative trend in a sense on the workforce.

We can help with that. We can increase productivity to the degree that you can work or run a fab with much less headcount. I think we have big stories there. We can very well compare with our friends across the river here with our story. I think it's a really big story. And -- but for the next 5, 10 years, I see plenty of things to go after and we're really truly excited about that, I have to say, and so are our customers.

[Bernhard Schweizer]

I see that Nejc is rejoining our discussion, too.

[Nejc Lavric, analyst]

Maybe as a follow-up on that, I mean, it seems that you're winning market share. Could you maybe provide more details in which segment? Is it more with OEMs? Is it more end manufacturers? And also with which technology? Is it gas analysis? I mean a bit more understanding on that end would be very helpful to also understand next year and the year after.

[Oliver Wyrsch, executive]

Nejc, that's a pretty big question. I think it's a very good one, of course. So I can give you a little bit color, but I will not be able to go through the different product lines one-by-one. And so -- I mean, one big push is certainly the advanced sensors measure things that currently aren't measured, controller process and not check only for air leaks. Controller process means endpoint measurement, for instance. So there is -- we just have really good new solutions that currently are going into HBM or that some of them are in early stages. And I feel that they are getting very positive feedback out in the market.

And for some of those, there isn't really an alternative or very trivial ones or simple ones. So that is not -- it's not even so difficult competition in that sense, right? So it's basically opening up new application, being more sophisticated when the technology node just demands much more process control. So process control certainly is one. And that is with OEM and it is with chip makers. The sophisticated sensors always go directly to the chip makers. I think we talked about this situation earlier that they, of course, know the recipe best and they also know best what they want to measure to optimize it or improve yield or whatever it may be.

Then we have Automotive. I think we have a strong #1 position, but we really pushed forward and the competition shifted there. This competition is much smaller, but it's quite agile and it's in China. So that's why we take the fight there, and we took the fight there. And I think we have really positive momentum now, in spite of trade war difficulties and all the other things. In the end, it's still about the right solution and total cost of ownership, which is better. So that will be 2 examples to mention.

Maybe a third one is really the software portfolio. Look, we're continuously building this up. We have a pretty big data analytics and AI team by now. We're doubling down on this vision that I just mentioned earlier about smart manufacturing. We made an acquisition also earlier this year around cycle time. We continuously look also on inorganic growth there, while we also have a very strong R&D team. And there, we definitely have a very strong position.

Look, there's competitors that tell me openly, they say, wherever we go, you are already. Yes, it's because we sold a lot of software in the last 20 years with software and then gradually went up the value chain to create digital twins of tools or entire fabs, the example I mentioned earlier from a customer I just visited last week.

Yes, I hope this gives you a bit of color. But I have one better for you, Nejc, and I think you are signed up for it. Come to the Technology Day in November. We'll tell you more about these visions, which I find really quite exciting. So more to come in that sense.

[Matthias Tröndle, executive]

Maybe let me just add to this question about the market share, right? So you cannot assume there is a button on the laptop, right, and you press F5 and you get your market share calculation. It's really difficult. Even if you take a look to the, let's say, global or total markets, right, it's hard to assess at the end of the day what's really your market share.

Not all information is public. And there's a lot of -- as Oliver explained with lot of individual examples, with customers, with projects, with technologies where we get, of course, some feeling, right, and feedback from customers, but it's really hard to assess. And if you go even more down, right, into sub-segments, then it's getting even more difficult, right?

So it's not something there is a database and you access and you pay for it and then you know where you are. It's a lot of different data elements and data sources you use to basically come to a conclusion. Where are you? Did you gain? Did you lose? What's the competitive -- or competitor doing? And yes, that's just to explain little bit. It's not like in the balance sheet, I have a huge advantage in that one, right? So there's debit and credit and I push the button and I know the numbers with 2 digits. It's a little bit different on the marketing side.

[Nejc Lavric, analyst]

Okay. And my final question, if I may. I mean, you used to have lower gross margin. You had this chip broker cost and some supply chain issues. I mean I'm assuming that this is now largely gone. You don't have this problem anymore. And in terms of maybe other headwinds, tailwinds on your margin, maybe more on the operating margin, maybe just a brief overview.

[Oliver Wyrsch, executive]

Yes. Look, I mean maybe Matthias can then give more specific numbers. I think one main factor, what is important now to know is, we are now ready for the ramp because we wanted to be ready, because we all thought it's happening now. So the cost structure that we're currently running, which I think we also improved year-on-year nicely, it is, however, built for a much bigger business and it is going to come, but the timing of it is only the question, right? So that is maybe one key thing to think about when you think about the current state. It's a bit of this in between state. So --

[Nejc Lavric, analyst]

How much is a much bigger business? I mean, what would this be in terms of revenue?

[Oliver Wyrsch, executive]

I don't know what the semiconductor ramp can do to a business, 10%, 20% overall, I don't know. It depends, right? I think you guys got good numbers there as well. But some product lines, it's 30% more, right, where we have the capacity ready because we had this growth. And if you look at 3, 4 years, I think 2 key product lines of our top 2 sensors, they are 5x and 4x, the capacity versus 3 years ago. So that's not happening everywhere, right? But so -- and that's a mixed message.

But we're not going to go and risk banging our heads like during the COVID supply chain crisis, right, where we so struggled to ship and also get product and we all remember these times 2 years ago. So we want to go and really be an enabler of the next ramp when it happens. And that is in the model, right?

So at the same time, when I say strategic cost management, this is not just a word or a bullet on a slide. This is something systematic that is important to me and we started to strengthen in the last 2 years. So we want to spend the money where it should be spent and where we shouldn't be spending it, we aren't. So that is just a little bit of a change of course also. And I can say this today, but it will materialize over time, obviously. Hopefully, an even prettier opening for you to look at. All right.

[Bernhard Schweizer]

Thank you, Nejc. Ladies and gentlemen, any further questions from the audience? As there are no further questions, I would like to turn back to management for their closing remarks and farewell then.

[Oliver Wyrsch, executive]

Yes. Thank you very much, everybody, for the interest. I see it's a big crowd that joins us for these quarterly earnings releases. It's good to see great questions, good discussion, good inputs. We're looking forward to see many of you at the Technology Day in November and then, of course, for full year earnings release next year in March.

And with that, thank you very much. Have a wonderful day.

[Matthias Tröndle, executive]

Thank you very much.