Inficon Holding AG

SIX:IFCN

Earnings Call Transcript 2021-Q4

[Bernhard Schweizer, Partner, Sensus Investor & Public Relations GmbH]

Good morning, and welcome, everyone. My name is Bernhard Schweizer, Investor Relations Contact at INFICON. I have the pleasure to host the Microsoft Teams session of our live results conference here in Zurich. Thank you for joining the INFICON Conference on its Fourth Quarter and Full Year Results. With us today are Lukas Winkler, CEO of INFICON; and Matthias Tröndle, CFO. The management team will first present the results and then take questions. During the management's prepared remarks, online participants are kindly asked to turn their microphones and cameras off.

You should have received by now a press release on the Q4 and full-year results, together with a link to the accompanying visuals to this Web conference and also the link to the annual report. All these documents are available for download in the Investor Relations section of the INFICON website, www.inficon.com.

We are broadcasting a live conference via MS Teams. With this, I ask online participants to pose their questions, preferably in the chat function in MS Teams in writing. This would be the second icon on the top-right hand menu. Management will then read out your questions and answer them after their prepared remarks. The live audience, of course, here in the room will be able to ask questions orally.

I would also like to inform you that we record this Web conference to archive the audio file later on on the INFICON website. The oral statements made by INFICON during this MS Teams session may contain forward-looking statements that do not relate solely to historical or current facts. These forward-looking statements are based on the current plans and expectations of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations, as well as future results of operations and financial 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, I would now like to hand over to Lukas Winkler. Lukas, please.

[Lukas Winkler]

Okay. Good morning, everybody. Thank you for joining our conference this morning. It looks like we have a little small screen here live. I have to apologize for that. A few weeks ago, I would have made a funny joke and maybe even made the remark about the sudden death of the COVID-19 pandemic. But given the circumstances in Ukraine, it probably would be out of place. But let me make at least one remarkable remark. I've been here probably 15-plus times in this

[indiscernible]

(00:06:00), and presenting the annual results and we always had good and nice weather. And that's a fact, that's not a joke. Even today, it's beautiful out there. It's a lovely cold morning.

With that, let me just jump

[indiscernible]

(00:06:18). Probably need some technical help here. How do I go to the next slide?

[indiscernible]

(00:06:31)?

Thank you. Let's start with the fourth quarter 2021 with a new record quarter and we had in – growth in all regions and in all markets with the exception of security and energy market, which actually last quarter of 2021 was behind the last quarter of 2020. The sales growth was primarily driven by two facts: semiconductor market and China. Those two facts generated this huge growth that we had in the last quarter of last year.

Book-to-bill ratio was again above 1%, which means that we have, of course, also a record backlog, which is on one hand side, very nice to have. On the other hand side, it's a pity that we had to increase our lead times and our customers don't like that and they have to suffer unusual high delivery times from INFICON. The organic growth rate was close to 25% above the last quarter of 2020, which again shows the very healthy market and also our healthy market position in those target markets.

Can I please ask you to mute yourself? Otherwise, we might get some disturbance here in the room. Thank you very much.

The gross profit margin suffered and it was a little bit below the last quarter of 2020, primarily driven by the fact that we have to pay very high premiums to get our materials in order to be able, at least, to deliver certain products, especially the brokerage fees that we have to pay to get electronic components went through the roof. Nevertheless, we ended the last quarter with a new record level also on the operating income side, and finished with a 21.5% of revenue.

Now, let's move to the full year figure. Here, we clearly can say all markets and all regions contributed to growth, although our smallest market, you will see that later, did only contribute a little bit to the growth overall. Semi and vacuum coating market, I really have to say, it was primarily the semiconductor market, not the vacuum coating market that actually did contribute to the growth. And if I have to highlight one region, it's clearly Asia again, and inside Asia, it's primarily China.

Overall, we, for the first time, reached $500 million. I still remember

[indiscernible]

(00:09:49) probably heard the term 10 years ago that we like to reach $500 million by 2020, Michael is smiling. Now, with one year behind the schedule, we reached the $500 million, and that's a good – I think it's a very nice milestone that we reached. And even on the bottom line, we reached $100 million operating income, which was a target 10 years ago as well. Now, finally, we can say, yes, we reached this very important kind of landmark and target, now we can focus on the next big step forward.

What I have said for the last quarter of 2021 is almost true also for the full year as, again, driven semi, in China, gross profit margin a little bit higher, but really not much. And given the growth, we expected better gross profit margin. But as I said before, material supply issues made it impossible for us to improve our gross profit margin. Of course, we had higher overhead costs as well, driven by more people. We now have more people in R&D, in sales as well as marketing, and we had to accrue for higher bonus expenses given the fact that we reached a record year. On the net income – on the operating income side, as I mentioned, the 20% has not been reached yet, but at least we reached $100 million. And so next time, we have to hopefully talk about the 20%-plus on the operating income side.

Graphically, you can see it here the breakdown into our target markets, dominated now by the blue color, which represents the semiconductor vacuum coating market and then followed by the general vacuum market, a more industrialized

[indiscernible]

(00:11:42) automotive market and the small contribution from the security and energy market, which is 4%.

But more I think remarkable, I have to move to this side, more remarkable is the trend that we see on the bottom of the chart where you see the breakdown into the three large regions that we serve. Asia is now has reached the size of Europe and North America together. So that's a kind of impressive, pretty impressive move if you look at the trend starting in Q1 2019. Now, at the end of 2021, it really went up and through the roof. Again, the major contributor was China, but all the other Asian countries behaved very well as well.

Now, let's go market by market. I start with the smallest one. In security and energy market where we had a little bit better result from a sales point of view than the year ago. But nevertheless, it was a disappointing year for us, primarily due to the fact that we never reached a larger order from the US Department of Defense because we did work on a new product, and I have to move to that side again.

Now, the new product you see on your lower right side, with that product, we expect actually that the US Department is going to start reorder again. We already had the first discussions and they tested already, so technically we are ready. Now, we are just depending on the release of certain funds from the US government to actually go into the next round of investments for those warfare detection and portable instrument.

Now, having said that, at least, two positive elements that I like to highlight, and the positive elements are coming clearly from the energy market. On the energy side of this market, we did increase the revenue based on the fact that we finally get that breakthrough with our portable gas line monitoring device that people can carry and find leaks in those gas distribution pipelines that are buried underneath the streets.

We signed up an agreement with the largest US service provider. They switched completely to the INFICON product, so we will continue to grow that sector as well. And the second contributor to this energy – positive element on energy side is the bio methane market. We get a nice contribution to the top line based from customers in – primarily from France, but also from Italy where they now started to inject bio methane into the gas distribution system and they have to make sure that the bio methane has the highest degrees of 99.999% purity. Otherwise, it should not get injected into the grid that distributes the natural gas.

So, we expect for 2022 growth, primarily driven by the fact that the US Department of Defense should start reordering products again. And there are some programs that have been announced already, so I'm quite confident that 2022 will be better than 2021.

Now, going to the next market, the refrigeration and air conditioning and automotive market where we now have the COVID year behind us. 2020 was clearly affected by COVID-19, especially in the car industry. Probably you remember that car manufacturer stopped their production when the pandemic started, and so we suffered as well in 2020. Now, we are clearly in the post-COVID area, so there are some catching up effects that we have seen again from the automotive industry, whereas the RAC industry remained relatively robust, and the single biggest contributor in 2021 is now coming from the battery testing market for new lithium-ion batteries that e-car industry desperately need. And it – our knowhow that we have established in the RAC market as well as in the traditional car manufacturer markets, we were in the pole position to also get the number one position in the supply for our leak detection products to this very interesting and fast-growing lithium-ion battery testing market.

Why do they need to be tested? Very simple. A leaky lithium-ion battery filled with liquid electrolytes will catch fire immediately if it gets exposed to oxygen. Therefore, every battery package that will be built in into an e-car needs to be tested at least on two levels, and that's where we have our products. We are well positioned to gain market share. I do expect this tendency going on even for the next two to three years, because it's already clear that there is no new battery technology available, mass production, for the next probably three to five years. So, everybody needs to have enough capacity to build up the huge demand for lithium-ion batteries in the e-car industry.

The second growth driver is coming from our handheld after-service product market where we actually sell products that are not as expensive as a traditional INFICON product. We talk about prices around a few hundred dollars, not a few thousand, but they are used in 10,000s by the aftersales industry. And for the first time, we reached more than $20 million and we expect going to $30 million relatively quickly. And we have established a nice distribution network around the world to have access to all the local and regional wholesale distribution network so that everybody knows our products is going to use those handheld battery-powered aftersales products. So, overall, we have reached almost $100 million 2021, and 100% sure in 2022, we will have a three-digit million dollar figure at the end of the year.

Having said that, let's move to our largest market by size, but also by opportunities. It's a semiconductor and vacuum coating market, and I really have to focus on the semiconductor side because on the vacuum coating side, I do not expect huge growth. I'm happy enough if you can keep the normal trend that we have, defending our market share in optics business, and get our business out of the OLED display technology.

But as I said, I do not expect huge progress on vacuum coating size. But the semiconductor market shows a number of quite interesting growth opportunities for us, driven by the demand itself, driven by technology changes. People are now going down to 7-nanometer, 5-nanometer, so they need to invest in very expensive EUV lithography tool, driven by process changes with new chemicals, driven by geopolitical announcements that everybody around the world, the US, Europe as well as Asia, announced government subsidies to push on establishing what they called a regional semiconductor industry to get more independent from the others.

Everybody is fully aware of the situation that today one of the most critical supplier, TSMC, is located in Taiwan, and Taiwan is another hot spot from a geopolitical point of view that nobody wants to have a critical situation soon. So therefore, big players such as Intel, Samsung, TSMC announced investments outside of their home territory, and that's where we get our tailwind as well.

The second element that contributes to these growth opportunities is the fact that we still gain market share, especially in the market for pressure measurement products. And here, we actually get some tailwind based on the fact that there's a huge growing industry for equipment manufacture in China, and they prefer non-American products. So our market share for our pressure measurement products in China is much higher than outside of China, just based on the fact that the products are made in Europe and not American technology.

And the second part is coming from the new products. We're still looking for expanding our coverage in the semiconductor market on both sides, on the equipment manufacturer side as well as on the end user side with new ideas. Those of you who attended Technology Day probably have heard the first time about this xPart technology. It's kind of a special coating that we offer and that business will contribute double-digit figure for the first time in 2022 as well. And then we have two more technologies that are more targeted to the end user market, monitoring those advanced manufacturing processes where we have three key customers already doing tests. And I expect some not double-digit probably, but close to double-digit figure coming from those new products as well in 2022.

So it's a combination of market share gains, market drivers itself, and new products that why we are so confident that 2022 will be another great year and I think it would even go into the year 2023, not stopping by the end of 2022, because the bottlenecks are still out there. And as you know, building up a new fab takes more than just one year. Therefore, I'm pretty convinced that we will have a growing semiconductor market for the next 24 months.

Now, last but not least, in the general vacuum market, I would call it now more post-COVID area, we profited from a rebound in the business in Europe, especially with our private label partners that we had. And again, China is really at the top list of the growing markets that we serve around the world. So, those elements, the European private label market and especially the American general vacuum market did contribute the most to our top line in 2021. And I expect a continuation of that now having already two months of 2022 in our box, we see already that there is no change in the dynamics compared to the year 2021. So, overall, again, 2022 will be a good year for our general vacuum products that we sell to that market.

Now, I will stop my part of the presentation with this outlook slide. And if you read all the lines below the title, you see all the good reasons from the market point of view why we will have a good year on market-wise. But now comes the big but, the success of what we can reach by the end of the year heavily depends on our own capabilities to fix the bottlenecks that we have as soon as possible. We're working very hard on expanding buildings, changing setup in the buildings, adding new processes because the volumes are much higher, so we need the new – especially for the products that are a little bit bigger, and think about leak detectors where we have to also some physical kind of challenges because those products are quite large. We work hard on adding new tools to be able to calibrate all the products that need final calibration. And as you know, the calibration is part of our IP. We have to build our own calibration tool. You cannot buy them, so they need to be designed and built and fitted out with software algorithms.

And last but not least, we are working very, very hard on fixing material shortages that we had. This is probably, by far, the toughest part of the expansion program because we depend on others. We cannot just influence it directly. And this is also where we suffer the most. It's really coming from the supply side. And inside the supply side, it's primarily electronic parts, although it's kind of a – I will call it, the snake that bites its own tail. So we supply the electronic industry, but we depend on them as well.

I can give you at least one example. I have one large customer, not telling the name, who insisted on using computers that have his chips built in. Now, we do not get the chip, so we cannot ship the product. So this is kind of the – as I said, the snail or the snake that bites its own tail. And so, then the question is always who should influence whom and who should suffer because there is a limited product available. So people talk about allocation. And, unfortunately, this is the sad thing about it, there is this industry in between, they call themselves broker. They make a ton of money just by holding some of the electronic components and then reselling it not just 10% more. We are talking about factors. To give you an example, we have reached now for the first time factor that has three digit, so it's a hundred times more expensive than two years ago.

With that, let me just make one final comment. This is also why we have kind of a broad range on the guidance between $550 million and $600 million, depending on ourselves, not depending on the market. And on the operating income side, at least we should see the 20% on the bottom line. If we don't reach that, I would be very much disappointed.

With that, I like to hand over to Matthias who can explain you all details in our financial numbers. Thank you very much and we take your questions later.

[Matthias Tröndle]

Thank you, Lukas. Yeah. Good morning, everyone. It's a sunny day, and after two years, again, a physical meeting. This is also very nice, I would say. So, on my agenda for items this Q4, the fiscal year results for FY 2021, the dividend and the outlook I would briefly comment.

So, let's start here with sales. As you've seen in the press release and as Lukas already mentioned, our revenue for the fourth quarter was $144.5 million, which compares to $116.9 million in Q4 last year. This represents an increase of 23.6%. Taking into account the negative currency impact and the small contribution from acquisitions, our organic growth was 24.6%.

Lukas did already go into the markets. We can highlight that the sales in all markets, except security and energy did grow in Q4, especially in the semi and vacuum coating market had a strong increase of about $25 million or 48% compared to Q4 last year. Compared to Q3, we had an increase of 18.2% and all market showed growth. Also here, the semi and vacuum coating market did stand out with about 31% increase. With that, the fourth quarter was our record sales quarter in history.

Now let's turn to the regional – yeah, I was too fast, sorry, so the regional sales distribution. Compared to previous year, we had the highest growth in North America and Asia with 33% and 31%. Those regions showed a strong growth in semi and vacuum coating. Europe showed a slight increase of 3.7%.

On the next slide, we see some other financial data. The gross profit margin reached 46.7% in Q4, slightly down by 44 basis points and nearly stable compared to previous quarter Q3. The positive impact of the higher volume was partially compensated for rising material prices, partially strong increased broker fees, freight and duties.

So what happened on the cost side? We spent $11.5 million on research and development in Q4, an increase of 8.5%. Additional headcounts, higher bonuses and higher internal and external costs related to our development efforts did drive this increase.

In selling, general and admin, the expense level increased to $24.9 million or 7.8%. Higher commissions and performance bonuses, plus additional headcounts partially lowered by slightly favorable foreign currency expense have been the main driver for that increase. As a result, the operating profit for the fourth quarter achieved $31.1 million or 21.5%, after $21.5 million or 18.4% last year Q4. This is an increase of around 45%. Compared to our previous quarter Q3, the result did improve by 41%.

The tax expense for the fourth quarter was at $4.2 million, which represents a tax rate of 13.8%, due to the profit mix of our international entities lower than last year's Q4 rate. The net profit, therefore, reached $26.3 million or 18.2%. This compares to $17.1 million or 14.6% in the prior year, a 54% increase in absolute numbers. A similar increase we see in the earnings per share, this went up and stands at $10.76 in Q4.

Now, let's move to the balance sheet. Our net cash in Q4 ended at $54.6 million, which is about $14 million higher than last year. Our operating cash flow, which is here on the bottom corner, developed more or less stable and we reached a level of $19.8 million, representing about 14% of sales.

The inventory turns reached 3.2, better by 0.4 turns compared to last year, and slightly – also slightly better than Q3. Working capital which consists of accounts receivables, inventory minus accounts payables closed at $151.8 million, clearly higher than last year, $18 million increase in account receivables due to the record sales in Q4, and about $14 million higher inventory levels are the main reasons for that jump.

The DSO ratio increased slightly and ended at 52.4 days, but still payment morale and behavior of our customers is still very good. The balance sheet shows a very solid structure of 69% equity ratio and no long-term debt. And with that, I – my comments for the balance sheet in Q4 are finished, and I switch over for the full year.

So revenue for the full year in 2021 reached $515.8 million or after $379.8 million in the previous year, which corresponds to an increase of 29.7%, or around $118 million. Excluding currency effect of positive 2.5% and the minimal contribution from acquisitions, this represents an organic increase of 27%.

As already commented by Lukas, also here and you can see it in the chart, we are able to grow in all end markets and the vacuum – semi and vacuum coating end market had a plus of 37% and the strongest growth. All end markets – in all end markets, except for security and energy market, we also did reach new annual highs.

Now, let's take a look to the regional development for the full fiscal year. Asia, our largest region, did grow by 44%, reaching $284 million and about 48% of our global sales. This increase was mainly driven by strong sales in semi and vacuum coating where we had a growth of nearly 50%. In North America, with a 25% share, did increase by 22%, and all markets did well. Europe has now a share of 26% and – of global sales and did grow by 15%.

Next page, the gross profit for the full year reached 47.9%, showing an increase of 62 basis points compared to previous year. Also here, higher volume was partially compensated by the rising material prices, increased broker fees and logistics costs.

Turning to the costs, we spent $47 million for the full year on R&D, an increase of 20.5%. In SG&A, similar picture, a little bit lower, but cost increased by 14.2%. Here, we had, again, a higher variable compensation, more headcounts and some unfavorable foreign currency impacts as the main drivers for that increase. The operating income as a result reached $100.4 million or 19.5% of sales after $61.9 million in the previous year.

Year-on-year, the tax expense increased by approximately 82% to $19.3 million, which gave us then a tax rate of 19.4% on average compared to the low 17.7% in the previous year. The net profit reached $80.3 million or 15.6%, which compares to $49.3 million in the previous year, an increase of 63%. Earnings per share reached $32.87, going up about the same level as the net income.

Also here, let's take a quick look to some balance sheet data, some we have already seen. So, the operating cash flow for the full year increased to $85.1 million or 16.5% of sales from $50.5 million in previous year. CapEx, capital expenditure were $30.3 million, substantially higher than more than doubled due to heavy investments in capacity, buildings, machinery and equipment. The working capital, I already commented, closed at $151.8 million, and the equity ratio ended at 69%.

Now, let's move on to the next item which is the dividend or the distribution. As you know from our earlier communication in Q3 and also from the CapEx data we typically share on a regular basis, we invest substantial amounts in 2021 and also in the current year in our growth, with additional capacities and we still foresee a higher distribution to our shareholders. The board of director has decided to propose to the shareholders at our AGM end of March a distribution of CHF 21 per share. This is about 30% increase compared to last year and represents roughly 70% payout.

CHF 3.10 will come from the remainder of the capital contribution reserve and will be free of tax reduction and CHF 17.9 will be as a – will be paid out as an ordinary dividend. This also will – this also means that with that, we will return approximately $56 million back to our shareholders. The payout is expected to take place on the 6th of April.

Now, as a last item, right, quickly come to the outlook. Oh, come on, here it is. It's too slow or I'm too fast. Yeah. Outlook, Lukas did already go into the detail of the assessment and our expectations of the end markets. Based on our order book, our order intake and the overall business situation in the end markets, we are very positive for the start of the year. Also, we must say that due to the current geopolitical situation, the forecast is generally somewhat a little bit limited and difficult. Nevertheless, we expect sales between $550 million and $600 million and an operating income of over 20% for fiscal year 2022.

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

[Lukas Winkler]

We will start with the audience, privilege of being present, so

[ph]

Michael (00:38:15), please?

Yes. Thank you and congratulation for reaching $550 million target.

[Lukas Winkler]

Thank you.

And the question would be what are the ambitions now going forward, the next five years? And the second question would be, you mentioned that you expect growth in security and energy, and also growth for your Hapsite products from the US Department of Defense. Now, given the geopolitical situation, the crisis in the Ukraine war, unfortunately, generates general demand for those products. Do you expect any – what have you received? Are there any indications that you will get more demand for Hapsite products relating to that uncertainty?

[Lukas Winkler]

No. Direct, as a consequence of the situation in Ukraine, we haven't had any additional inquiries and the plans that we have with the US Department of Defense are long-term plans. They work on their new program where we will be a part of it and there is probably – they might accelerate one of the other project. But you're asking, did you already received some additional requests? The answer was clearly no.

Now, to your first question, what is our next ambitious goals? We're not ready yet to disclose that, but we have some meetings planned to discuss about what should we disclose or should we talk about what will be our next big milestone.

Thank you. Maybe just one add-on on the financials, in your guidance for over 20% margin, what's the underlying gross margin assumption? Will it remain under pressure

[indiscernible]

(00:40:05) coming from higher sales or will the gross margin be positive?

[Lukas Winkler]

Not in 2022, maybe a little bit depending on the product mix, but not based on the pricing pressure. I believe that we might not even have seen the worst, in certain cases. We see some really relief in some mechanical components, but we do not see any relief yet from the electronic side of the business.

Thank you.

[Lukas Winkler]

You're welcome. Yes. Going to the next one...

[indiscernible]

(00:40:42) margin discussion, where do you see the biggest change in the fixed cost because you are installing new capacity, so you should have fixed cost high? On the other hand, you have

[indiscernible]

(00:40:55) top line guidance is – will grow at 7% to 17%. So could you help on that, is it 20% plus a 7% growth or is it already targeting 17% or let's say midpoint is 7.5% or something like that?

[indiscernible]

(00:41:14)?

[Lukas Winkler]

We have not even discussed about all these details, but what I can tell you is that the impact on the fixed cost might not be that dramatic. The fixed cost, there will be some increase, but based on the fact that we invest in buildings as well, not just in equipment and usually investments in buildings have a longer depreciation rate. Matthias would know the details better, but I think we are talking about 20 to 30 years for buildings. And for tools, we only talk about maximum of 10 years. So, therefore, the impact – there will be an impact, but I don't expect a huge impact from an addition of the fixed cost.

So, can you remind me of the CapEx for this year

[indiscernible]

(00:42:01) capacity grows?

[Lukas Winkler]

Yeah. We do. And this year, we probably will be around $20 million to $30 million again, certainly above $20 million, maybe not above $30 million.

[indiscernible]

(00:42:17)?

[Lukas Winkler]

No.

I'm kidding, because...

[Lukas Winkler]

No. We will not...

[indiscernible]

(00:42:22).

[Lukas Winkler]

No. It will be not, exactly. The hurdles are much higher, clearly higher than last year. So in order to get the same level of bonus, you have to have – we have to deliver a huge progress on the growth side.

[indiscernible]

(00:42:39). But also another question, as

[ph]

Michael (00:42:42) asked about the effect of

[indiscernible]

(00:42:44) wondering about this vessel, which took fire from VW and now they say that it could be because of the EV cars. And so I'm wondering – so for your testing, battery testing with your production, do you see new applications for your battery testing, for example, for transportation to avoid fires on trains, vessels.

[Lukas Winkler]

There are already certain ideas around that, that – to have devices made to monitor certain transport vehicles, but they are not ready to be installed. It is also technically not so easy. You have to detect so-called electrolytes and detecting electrolytes in an atmospheric pressure surrounding is technically not that simple because they usually disappear very quickly, yeah, and the vessel – evacuate the vessel to find those molecules might be a little bit an overkill. But I know that at least some areas around can those containers be monitored with a certain simplified version of what we sell to the equipment manufacturers.

Thank you.

[Lukas Winkler]

You're welcome. Going in this sequence.

Thanks. Just briefly your overall view of the semiconductor market, I mean, we are discussing about so much CapEx in the whole industry. And you said yourself, you don't expect it to go down or decreasing in 2023

[indiscernible]

(00:44:25) longer term. And just to add the second question, in the past, we always have this difference between your OEM clients and your end user clients, and I was wondering is this still true in the current situation that we have so much new fab needs. And probably lastly

[indiscernible]

(00:44:46) situation, is it – is the trend still the same that you're seeing more revenues with end users three, four months later or has it changed with the current situation.

[Lukas Winkler]

No. This kind of time delay between what we see on the equipment manufacturer side and usually a little bit later comes the end user base is still the same. But we've increased market share especially on the pressure measurement side. The shift – there's a lot of shift between – the majority went traditionally to the end users, now has shifted towards the equipment manufacturers and probably expecting the year 2022 kind of a half-and-half of the business. So, 50% to end users, 50% to equipment manufacturers with still a growing tendency on the equipment manufacturers side based on the fact that we had majority of the design wins in China. So, that helps because they don't like to buy American products.

And they're already build into the equipment, whereas for example, in other – just an example, so, you said

[indiscernible]

(00:45:59) and they're building their equipment or you sell to someone else and they don't build the equipment and then

[indiscernible]

(00:46:05).

[Lukas Winkler]

No. No. It goes into the equipment...

Yeah.

[Lukas Winkler]

...but to a competitor of – to a Chinese competitor of

[indiscernible]

(00:46:15), very simple. And so, my overall view, this is my personal view. It's not based on scientific facts. I expect the next kind of downturn in the semiconductor not before 2024 or 2025. There will be one. It's almost clear there will, because we build up now capacities, and we will have a overcapacity situation in a few years. But I always have to remind everybody the last three semiconductor crises never lasted longer than 12 months. So, even if we are going to have some kind of, let's call it, semiconductor downturn, it might not last very long. Yes, please.

If I understand you correctly, your supply constrained in many areas, so is my judgment correct that where you end up in terms of top line depends on your ability to deliver?

[Lukas Winkler]

Absolutely, absolutely yes.

Okay. And maybe just to give you a bit of a feeling, if you could deliver everything, where would you end up in terms of net sales?

[Lukas Winkler]

Above what we guided, clearly above.

Clearly above.

[Lukas Winkler]

Yeah.

Other questions?

[Lukas Winkler]

We have to read them? I think there's a couple of questions – there's a question about pricing power. I have two hearts in my body and one hand side, I don't want to destroy a good relationship with customers. Also, we probably could increase prices dramatically and they still will buy it, but some of them have memories like elephants. And once the prices are coming back to normal level, it might then go to a – to the competitor. So, we are trying to find a share the pain deal with customers, but also share the win deal with customers.

I'll give you an example, I mentioned before we paid quite high brokerage fees for certain electronic components. Now, we're in discussions with some customers, how do we deal with that? We still want to deliver products because otherwise we would simply say, sorry, it's too expensive. We cannot put money on the products and ship it. And so we ask them to what's the best deal to share the pain? They share a pay – do they share a part of the initial brokerage fees or do we have a temporary price increase until the situation comes back to normal supply situation or do we talk about the permanent price increase over a long period of time?

So this is what we are currently in discussions. What we, of course, did our list price, but that was not went up, but most people don't pay list price, but the list price is usually an indicator for the next negotiations on new net prices. So overall, there is a tendency of going up with prices in the neighborhood of 3% to 6%, but that's more inflation related and not related to the current supply crisis that we have.

Then there's another question, let's see, elaborate an expectation for cost inflation in? Well, yeah, there is cost inflation, we just talked about it. The single biggest pressure is coming from the US. The US, we are faced with the fact that we have a hard time to find new employees. It's much tougher than in Europe for the number one, bottleneck actually, currently in the US is not material, it's people and they are paid by the hour, people in the factories. And if they can make $0.50 more per hour, they probably move to next neighbor company. So therefore, we have to play the game and increase our base salaries as well.

So we are faced with the fact that on the labor side, there will probably be an increase on our US operations of about 5%. It's not as much in Europe, and the price of pressure in actually, Liechtenstein in Switzerland is much, much, much lower. We're seeing the biggest price pressures coming from the material side, as I mentioned before, because everybody has to cover their costs as well. And our negotiation power on the purchasing side is clearly not as huge as we wanted to have it. And on the electronic side, we have almost no power – purchasing power, I mean.

There are more questions. We have to scroll it down.

[Bernhard Schweizer, Partner, Sensus Investor & Public Relations GmbH]

I see that someone is holding his or her hand up. We will – presently no.

Yes. Hello?

[Bernhard Schweizer, Partner, Sensus Investor & Public Relations GmbH]

Yeah. Please speak up.

Yeah. Okay.

[indiscernible]

(00:51:44). Assuming that there would be no supply chain issues at all, no geopolitical issues whatsoever, a normal world, everybody could deliver what you want, how would your guidance look in that world for this year?

[Lukas Winkler]

As I mentioned before, we would certainly be above the $600 million top line. And assuming we have already installed all the additional addition and find the people and have the material, the market dynamics on the – on our order intake book, they point clearly towards above $600 million top line growth.

Okay. And what would your maximal capacity be at above? I mean, you are about to increase your capacities, but what would your maximum output be at the moment, and how will it develop over the next years?

[Lukas Winkler]

At the moment, it's very limited. But when assuming, again, ideal world, everything installed, no problems with supply anymore, I think our base capacity will be closer to the $700 million. But also, again, based on the current shift pattern, in most production sites that we have, we work on a kind of 1.5 shift pattern. So that the machineries are running 24 hours, but they have the main shift producing products and then they have two smaller shifts, making sure that the tools are always filled with products to be calibrated. Most of the calibration and test times take more time than just minutes. So we have to make sure that all the tools are always loaded overnight. Therefore, we are working on a kind of 1.5 shift model. And they would not have to go to two shifts because the bottlenecks, again, would then be the tool, so we have to install first the new tools first.

Okay. So the bottom line, max will be $700 million and presumably that would then be involving extra costs as well because getting through the capacity limit is always a bit tricky.

[Lukas Winkler]

Yeah. And it's not just tricky from an equipment point of view, it's also tricky from a space point of view. So we added space in Cologne. We added space in Liechtenstein, turning actually office space in production space. And we added space in our ceramic production site in Finland. Finland is currently the bottlenecks for certain products, and in other cases, it's more the electronics components that are the bottlenecks.

Okay. And now, given your expansion CapEx plans, how will that look in two years or three years?

[Lukas Winkler]

Assuming what I have said before that we might expect some flattening in the semiconductor market in 2024, 2025, I don't expect that we will go above $30 million in CapEx in 2024, might them go down to more normal levels that we used to have, which are – which used to be between $10 million and $20 million.

[indiscernible]

(00:55:31) kind of capacity expansion is basically planned? $700 million is now the absolute limit, what will the absolute limit be in two or three years?

[Lukas Winkler]

We don't know that because we really carefully watch what the semiconductor industry is doing. And if we see that they that – what we predict now is not going to take place, let's see, no flattening out, then we have to go into maybe a next round of CapEx, but it's too early to predict something like that. Our markets are too fast changing if we can rely on plans that look beyond the three-year horizon.

Okay. Good. Thank you.

[Lukas Winkler]

Thank you very much. I'm not sure how to get – who has another question from the MS Teams' audience, just please ask. I think I see somebody

[indiscernible]

(00:56:30-00:56:06) guest.

Yes. Thank you. It's

[indiscernible]

(00:56:38). Basically, I have two questions. The first one would be on the automotive end markets. Could you please remind us how much automotive exposure you have? And in your guidance, is there any broader or longer production stoppage priced in? This would be the first question.

The second one is on, yeah, the inflation costing and also your guidance. You mentioned price increases of 3% to 6% on average. If I look at the midpoint of your guidance, this implies plus 11% growth or something, then subtracting the midpoint of the price – pricing – price raises of 4.5%, I arrive at roughly 6.5% for the volume growth. So, first, is the math correct? And second one is, I mean, with all these topics, shortage of employees, material costs, the broker fees, potentially some disruption of the production rules was also making transportation more expensive. Would it then be the logical consequence that I would see incrementally lower profits on the new sales in 2022? Thank you.

[Lukas Winkler]

I certainly do not question your math capabilities, but your assumptions are wrong. I told you that our list price will go up, but nobody pays list price. 80% – above 80% of our customers have net pricing arrangements. But the list price might be an indicator for the next negotiation round, but the impact will then be one or two years later, or not the immediate impact. So the immediate price adjustments on our side are much, much lower than the 3% to 6%.

Nevertheless, we have not planned for production kind of stop overall in our guidance. We assume that we can continue to deliver and we have a higher priority on being able to ship versus avoiding brokerage fees. So the priority is really on the shipping side and not saving costs and not paying the brokers.

Having said that, I think your question was also around the inflation-based kind of facts, and I mentioned that already before. As I said, US, the single-biggest pressure on salary cost, and overall, a huge pressure on material costs all around the world. And the only thing that we now work on is really sharing the pain with some of our larger accounts, and they – some of them indicate, at least they are open for discussions, because they do not want to experience a disruption in their supply chain as well.

Our customers are under pressure, at least as much as we are under pressure in order to be able to ship the products and therefore the likelihood that somebody will bite the, I will say, the sour piece of an apple is going up and accept certain temporary price increases. But I think the final remark is really going back to what we said in our title for the guidance, the top line heavily depends on our ability to fix all the bottlenecks, not from the market side.

Okay. One short follow-up then. For the automotive exposure, if there would be one quarter of production stoppage, how much top line growth might this cost when the customers do not make the call-offs with you because production is not running?

[Lukas Winkler]

If you look at our exposure into the automotive market, which is I believe a little bit more than $30 million, but in the meantime, it's all about – close to $20 million is coming from the lithium-ion battery manufacturing. And the likelihood that they are going to stop their production is very small. The likelihood that the production of car assembly is going to stop is probably higher, but that has a smaller impact to our business than the market in the lithium ion battery manufacturing around the world, so, because everybody now installs new capacity to make lithium-ion batteries. And as long as they get their materials, I think they are more concerned of getting those rare earth materials which might have an impact on the capability of being able to make the lithium-ion batteries. But nobody's looking for a production stop on the lithium-ion battery side.

Okay. Thank you.

[Lukas Winkler]

You're welcome. Yeah. There's a question from the audience.

Yeah. Just a quick follow up from before regarding the capacity, you mentioned 50% increase over the next few years. Can you just simply assume that the maximum capacity from $700 million now will go up approximately $1 billion?

[Lukas Winkler]

No, not yet, because of what we already see are the first results of the capacity expansions. I think, as I said before, what we now add as capacity will allow us to go to a normal $700 million run rate and then we have to most likely add capacity again.

Great.

[Lukas Winkler]

Yeah. Follow up here.

Yeah. Few questions on the general vacuum, is it fair to assume that your growth in general vacuum is part of your growth, there is also semiconductor growth because some of the clients, I mean, large terminal for example, and some growth also in the semiconductor industry. So, my question is, as long as the semiconductor growth is stable

[indiscernible]

(01:02:56)?

[Lukas Winkler]

There is a little bit overlap, I agree, but it relates only to those products where our products are a component of a system that might go into the semiconductor industry. But our large European private label customers do not sell our products to the semiconductor customers directly, because semiconductor customers always have some specialties. They want to talk to the manufacturers and to have their separate interfaces. They have the special, I don't know, connectors or cables. So the likelihood that a private label product ends up in the semiconductor companies is relatively small.

But if they are part of a system, yes, that's true. The general vacuum market growth has some influence from the semiconductor market as well when we sell to the private label customers, because we don't know exactly where they will be used. But we know that some of the products are ending up being used in kind of an inspection tools for semiconductor companies as well.

No more questions? At least, I see nobody has raised their hand, and no questions from the audience.

[Lukas Winkler]

And I think there was a little bit delay of 7 minutes. Thank you very much for attending this annual

[indiscernible]

(01:04:36) conference and thank you for your patience, and it's almost guaranteed that a year from now, the weather will be nice again. Thank you.