Inficon Holding AG

SIX:IFCN

Earnings Call Analysis

Company Expects H2 Growth and 20% Operating Income

The company anticipates a softer performance in the first half of the year, followed by growth in the latter half, mainly bolstered by an upturn in the semiconductor market. Despite uncertainties and risks, they maintain a solid order book with opportunities in specific markets. Guidance for the year is set at $650 to $700 million in revenue with an expected operating income around 20%.

INFICON Weathers Economic Headwinds with Strong 2023 Performance Across Key Markets

During the earnings call, INFICON celebrated a potent performance for 2023, marked by a 16% surge in sales totaling $674 million and commendable growth across all operational regions. The high-tech instrument provider secured a book-to-bill ratio close to 1 and recorded an operating income leap to $135 million, a 21% year-on-year enhancement. Notably, the General Vacuum and RAC & Auto segments saw approximately 30% growth each, outshining the semiconductor sector's steady 2% year-on-year growth. The Security & Energy segment wowed with a whopping 50% growth .

Optimism in Semiconductor and EV Transition Despite Slowdown

The outlook for 2023 was cautiously optimistic, expecting a rebound in the semiconductor sector in the latter half. Leadership highlighted INFICON's strong market position within this segment. Despite a slowdown in the growth rate of Automotive, driven partly by evolving consumption trends and electric vehicle (EV) adoption rates, the company remains confident in the potential of sustainable technologies like new refrigerants, which dovetail with the EV revolution .

Robust Financials and Streamlined Operations Fuel Record Cash Flow

INFICON's financial results included a spellbinding operating cash flow of $118 million and gross margins nimbly climbing in the second half of the year, partially offsetting supply chain and inflation challenges. Asia emerged as a standout, propelling the General Vacuum segment and contributing significantly to a record-breaking Q4 in 2023. Sales in all regions exhibited robust growth, with profits escalating by 9.8% in Q4 to $32.5 million. Meanwhile, operating expenses reflected strategic investments in IT, service, and digitalization, aligning perfectly with an era starkly focused on innovation .

Guidance Points to Growth with Cautious Optimism for 2024

Peering into 2024, the executives guided sales to range between $650 million and $700 million, maintaining an operational income margin around 20%. This projection springs from the blossoming momentum across various markets and the anticipated Semi market uplift. To acknowledge shareholders’ loyalty, a dividend payout increase to CHF 20 was proposed, marking an 11% raise and a significant $56 million disbursal, mirroring confidence in the company's sustainable and progressive trajectory .

Earnings Call Transcript 2023-Q4

[Bernhard Schweizer]

Good morning, and welcome everyone. My name is Bernhard Schweizer, Investor Relations contact at INFICON. I have the pleasure to host the Microsoft online webcast of our live conference here in Zurich. Thank you for joining INFICON on its Fourth Quarter and Full Year 2023 Results.With us today are Oliver Wyrsch, CEO of INFICON; and Matthias Troendle, CFO of INFICON. The management team will first present the results and then take questions. During the management's prepared remarks, online participants are kindly asked to turn their Microsoft and cameras off. You should have received by now a press release on the Q4 and full year results, together with the links to the accompanying visuals for this conference, the link to the annual report and the invitations to the AGM. All these documents are available for download in the Investors section of the INFICON website. We are broadcasting this live conference via MS Teams. We just ask online participants to post their questions either in writing using the chat function in MS Teams.We will read those questions out and management 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 Hands icon. The live audience, of course, here 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 the INFICON website, and then we take a couple of pictures for our social media communication channels. 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 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 turn over now to Oliver Wyrsch. Oliver, please.

[Oliver Wyrsch, executive]

Thank you very much, Bernhard. Good morning, everyone. Really happy to have you all here. Welcome to our analyst media conference Q4 2023.Quickly about our agenda. We have 2 parts. As always, first, I will talk about a couple of key messages, figures 2023 and then about target markets and a bit about the outlook per market and in general. After me, Matthias Troendle, our CFO will take over and give you a few more details on the finance. Quickly about INFICON. Many of you know us well, as a brief recap, we're around for over 50 years, IPO in 2000. We started out with 3 core competencies. This is vacuum control products, measuring vacuum, the pressure, leak detection in all shapes and forms, and then more sophisticated sensors that understand gas and analyze the gas.Based on this, we have further expanded continuously our capabilities internally and externally with acquisitions and organic. Based on this foundation you see here, we also develop in another direction on one side, you see the big base historically has always been smart sensors. Many of these sensors that are more sophisticated use a lot of machine learning and data analytics, already for 2 decades at least. If you imagine one of the recent launches, you see it later in the presentation, where we create a plasma, and then there's some gas in there and it changes the color, you need to translate that into a gas mix. It needs artificial intelligence, data analytics, depending on what kind of mix you use. We have many of these sensors in the smart sensors that need relatively sophisticated analysis. And based on this, for over 2 decades, we have also a software that aggregates all information around the tool and builds that together in a picture of what's happening inside of the tool.We take data from our sensors, from other sensors, from the tool, from pumps, and it will tell you the health of the wafer over time, also over several steps. And with the next thing here, this is something we do for 6 years, 7 years. We also aggregate all the data of all the tools, of all the sensors and can tell you in a digital twin of the fab, how to optimize your fab, regarding the schedule, yield, cycle time and so on. This is obviously something that is going through on all different levels here, you see a lot of sophisticated data analytics or AI.But now I jump into the 2023 results. Strong growth in all end markets and all regions. Book-to-bill nearly 1; record profitability; margin impacted still by supply chain and broker costs; some good improvements in the second half of 2023. The sales increased 16% year-on-year to USD 674 million with the growth across all regions and end markets, but in particular growth in General Vacuum and RAC & Auto of approximately 30% each. Semi, we all know there was a bit of a down cycle depending on the subsegment of Semi last year. Semi for us developed stable with plus 2% year-on-year. Then you have Security & Energy, our smallest segment, showed very good growth with nearly 50% plus year-on-year. The order intake, as I mentioned, was stable throughout the year with a bit ups and down, the book-to-bill close to 1 for the full year.Regarding operating results, we improved the operating income to USD 135 million. It's a record high of 20%, and the increase of 21% year-on-year. Gross margin improved slightly and recovered in particular in the second half, the broker cost reduced, but we are still impacted with some cost inflation, particularly in the first half of the year and also some supply chain disruptions. In there is also quality issues from our suppliers, particular for the more sophisticated products. But it has massively improved over the course of last year. Record high cash generation of USD 118 million operating cash flow. We continue to invest in R&D and also in production capacity.If you look at the regions worldwide, we see growth in all regions year-on-year, with a record quarter in Asia in Q4. All regions grew between 14% and 18%, with an average of 16%. If you look at the gross margin in general, how we see it, when you drill a little bit further down, you see one part semiconductor, that's just a few of our key segments that we work with separately or address in a separate product portfolio in several channel, Leading Logic, of course, in there, ICAPS, memory, to name a few. And then you see on the other side, other high tech industries where vacuum measurement and software is used. Battery & Auto, certainly interesting, particularly last year, also Solar, but also HVAC/Refrigeration, interesting segment, different gases and the security environment. I mentioned something about that already, I'll get back to this. So that's a few markets that we isolate and see good growth and interesting growth -- growth rates even compared to semiconductor, some of them are above, but many of them are also cyclical.So now when we jump into our reported end markets, we start with semiconductor. Again, stable semiconductor sales in 2023, good growth opportunities for sure, midterm and long-term, and particularly in the second half of the year, we see a likely uptick when the Semi cycle comes back up. And important to note, in most of the product segments or the most of the subsegments, we are #1 with a strong position and also further expanding our position continuously.And when you look at the subsegments, memory was certainly the slowest segment last year. We all have seen that. Also for us, we see positive signals there, and we are optimistic for this year. Most of the submarkets when we analyze them, we talk to our customers and we [Audio Gap] in Q1 in particular, still a bit of a mixed picture with many of how this will start out. We all think there's going to be a big year in 2025, and somewhere in the back end of the year, a transition into this with an uptick. We do ongoing close development with our customers. There's a good pipeline of prototyping, testing, design-in wins, where we know we have a good feel of what is coming next in terms of our opportunities. I believe we're pushing the envelope on many of our technologies, and I'm really optimistic when I look into the future. What you should also note is that because of the complexity of the nodes, more sophisticated sensorization is needed and more sensors and more high-value sensors are generally used. Plus of course, there is still the semiconductor government-sponsored initiatives ongoing, that adds an additional strong dynamic.And I jump into the next segment. Automotive, Refrigeration, Air Conditioning. Strong position in the market, #1 with a strong growth last year of nearly 30%. And we are developing the market for battery further, but there's a few other markets in there that are also interesting in the HVAC/Refrigeration area. The most notable one is, of course, new mobility, EV transition, where traditional auto is slowing. This has continuously been growing. I would think this year this is going to grow a little bit slower. The growth is going to be slower, there's still going to be growth, but the adoption rate in the West has slowed down and the consumption in China is a little bit down. There's still growth, but I would think this is a less growth potential for this year compared to last year. In addition in there is HVAC and Refrigeration, driven through new refrigeration regulation. So we need to support new sensor technology to identify this refrigerants. This is driven through sustainability regulations.It's been an ongoing trend, and it combines a little bit also with the EV transition, where, of course, every EV needs also HVAC. And on top of this, we have a service tools business, the handheld after-sales service tools, which has been developing very nicely also through geographical expansion and new product mix. Also here, I see a strong R&D pipeline, I see when we talk to the customer about their next generation of the products and that we are designed in there, and that there's going to be a strong future growth.Jumping to the next market, General Vacuum. This is the broad market for us. There's many different subsegments in there, many of them I mentioned earlier. We address this through a multi-channel, multi-brand strategy and have a number of long-term partners in there. There's also private labels in there. We had growth in all regions last year, but especially in Asia and America. We believe we're #1 full liner in terms of instrumentation for vacuum, and we remain in this position. And this has also shown last year, this resilience and how we could establish or expand our foothold in the market. The expectation for this year is rather flat after really a tremendous growth the recent years, and in particular, last year.One big driver in there was Asia or China. It opened up in beginning of the year, as you remember, and particularly in Q2, then it really picked up speed, and we reduced a lot of the backlog, the supply chain normalized, there's a lot of that dynamic in there for last year. But this year, we look cautiously optimistic also into the future, but we would not think that it's easy to repeat such a sales growth. Also here we have a number of new partnerships, new channel partners that we develop where we're quite optimistic that we can go and expand the market share. Last segment, Security & Energy, smallest segment. Very strong growth in 2023 of nearly 50%. As you know, these markets are driven through -- largely through government initiatives and new policies. So they have a bit their own dynamic, bit outside of the other markets. And we have also launched the flagship product, New, as you know, the HAPSITE, which now allows to go into new submarkets with new applications. This is still developing.Currently, this is actually still shipping the orders that came in for the traditional applications. And you also see that it is not entirely a straight line growth. If you look at the different quarters, this is also where we had some supply chain issues regarding availability and supplier quality. But we are optimistic for this year that this will continue. We expect here a growth for this segment as well. And with this, I conclude on the end markets. Quick note on sustainability. We're committed to sustainability. We follow a smart follower strategy. We have always our [ fields ] out to understand what's next regarding regulations or what can you improve on your product. We work with our customers together to pilot programs such as circularity and so on. There's a lot more of this information obviously going to be public shortly with our annual report and sustainability report.And most notably progress is in the last 5 years, we reduced continuously the energy consumption per net sales, and we also reduced our CO2 to 500 tonnes recently, which is a very low number we believe. We also worked on waste quite a bit and have in various locations, different local initiatives such as mobility and packaging and energy saving. That brings me to the expectation for 2024. We expect a softer first half and growth in the second half. We have a solid order situation. There is uncertainty. There is risk. And at the same time, we see also growth potential in select markets. And in particular, of course, in the second half, we expect a semiconductor upturn. That gives us a guidance of USD 650 million to USD 700 million with an operating income around 20%.Just 2, 3 more pictures about us, a couple of product highlights. So you see a bit more of what we're doing. You have product launches, leading-edge product launches in all the different competencies. You see most notably, the reference gauge here where we won the R&D 100 Award. It's a scientific reference gauge for people to calibrate with. Then you see a smart manufacturing down here, combined with sustainability, optimizing your fab. We go into new segments with this combustion gas analyzer handheld or you see here what I mentioned earlier, this AI smart sensor that creates its own plasma and then looks at the color, it's a bit like Northern Lights, but you do this inside a vacuum chamber. Around battery, this is the next-generation product. We know that this is what our customer wants. We're launching this, and we launch this with our OEM customers. So more smart software to optimize precision and speed, and of course, also gauge traditional gauge business, the new Trigon, a really exciting new generation.To give you a few. Last, but not least, display is still also a business that we're interested in. It comes in cycles. We have something here developed with these smart sensors, these crystals that nobody has, where you can measure magnesium, which has always been one of the hardest problems still prevailing in the realm of OLED. Then here a few pictures. I invite you all to follow our social media. We try to be up-to-date there and give you a glimpse of what's going on with us. Don't want to go through all of these, but most notably, we're very proud to have received the TSMC recognition for production support and sustainability last year.And with this, I conclude my part. I would like to hand over to our CFO, Matthias Troendle, for more details on the financials.

[Matthias Tröndle, executive]

Thank you, Oliver. Good morning from my side, and welcome to this new location, probably after more than 20 years, a different location. Probably still South from [indiscernible]. I just confirm this balanced, most probably since IPO, we have been in the other location. Now we are in the new location and hopefully, this is a good event and a good sign. So welcome from my side. I cover the Q4 as usual, the fiscal year results, the dividend proposal and as well the 2024 expectations.First, let me start with the highlights for Q4. The book-to-bill ratio for Q4 was below 1, but orders improved compared to previous quarter 3. Our sales did grow by 9.5% to $174.5 million and reached a new record. The gross margin improved and gained 0.5 percentage points, and we achieved an operating income of $38.2 million and 21.9% of sales, our best results so far. From a balance sheet point of view, CapEx have been somewhat lower than last year. Cash flow and net cash made a big jump in Q4, and our equity ratio shows a solid and slightly improved 65%. We take a look to the full year. I can say, I believe or I know it's a record year in terms of sales, operating income and cash flow. CapEx ended lower. And in 2022, as you might know, we had a very high spend.Okay. And talking sustainability, Oliver mentioned already a few points, but I think we can say our CO2 emissions have been reduced again. I think it's the third time in a row, where we could reduce in absolute values, not as a percent, but really in absolute values, which is, I believe, a good step forward. We have now 100% certified energy, green electricity in our main factories. And it's -- what is also important, I believe it's that we could attract more than 90 new people as our employees. Now let me go a little bit more into detail of Q4. As mentioned in this morning's press release, and I just mentioned earlier, we had revenues of $174.5 million in Q4, an increase of 9.5%. Taking into account, the small foreign currency impact, we achieved organic growth of 8.3%. Oliver did already comment the development of the different end markets.I think we can point out that 2 markets showed a very strong growth in Q4. General Vacuum expanded by 35% and Refrigeration, Air Conditioning, and Automotive did grow by 13%. Semi & Vacuum Coating, developed nearly stable with minus 2%, but recovered from previous quarter levels and did grow about 16% versus previous quarter. Security & Energy dropped by 6%. With that, the fourth quarter was at record high level of $174 million. The regional distribution, which you can also see here, shows that we had growth in all regions. The highest growth was in Asia with 18% and Europe showed a growth of [ 3% ] and North America gained 1%. The gross profit margin increased by 12% in absolute numbers and reached 46.7% in Q4, up 54 basis points compared to last year Q4 and also higher by 32 basis points compared to previous quarter. This represents the best gross margin level since Q1 [ 2022 ].The positive impact of higher volume, lower freight and duties and also lower broker cost was only partially compensated for by higher material prices in certain areas and some inventory-related cost adjustments. What happened on the -- to the operational costs. We spent $11.4 million on R&D in Q4, a slight decrease of 2.6%, while we had some unfavorable foreign currency impacts. The SG&A, the cost level did increase to [ $31.8 million ] or 14%. Personnel expenses due to increased headcounts, higher performance related compensation expense and some cost for initiatives in IT and service and big digitalization and other areas are here the main drivers. The operating profit for the fourth quarter was $38.2 million or 21.9% of sales after $33.9 million in last year's Q4. This corresponds to an increase of 12.7%. The income tax expense for the fourth quarter was at $3.1 million, which represents a tax rate of 8.8% compared to 8% in last year. And the net profit, therefore, did grow by 9.8% in Q4 and reached $32.5 million or 18.6%.Let's move to the balance sheet. Our net cash reached $44.4 million, which is about $42 million higher than end of last year and $28 million higher than end of third quarter. The turns for inventory decreased slightly to 2.4 and the DSO ratio averaged 51.6 days, a better level compared to Q4 last year and also previous quarter. Our working capital reached $225 million or 32.3% of sales, a slightly better ratio than last year and last quarter. The operating cash flow, which you can see on the right side here developed very well, improved clearly, and reached $38.9 million, the best level ever. And the balance sheet shows a solid structure with 65% equity ratio. So those were the comments on the balance sheet and Q4 results.Now let me briefly discuss the full year results. Revenue for the full year reached $673.7 million after $581.3 million in the previous year, which corresponds to an increase of 15.9%. As you can see on the chart and as Oliver mentioned, we were able to grow in all end markets and in all regions. Asia, our largest region did grow by 18%, reaching $326 million or about 48% of our global sales. This increase was mainly driven by strong sales in General Vacuum market and RAC market. North America did increase by 14% with strong growth in Security & Energy, especially after we had a really successful year in terms of HAPSITE shipments and in General Vacuum and RAC. And Europe did grow by 15% here, all markets did grow, the strongest one was RAC market. The gross profit margin reached for the full year 46%, showing a mini increase of 8 basis points compared to the previous year. The second half of the last year did improve [ nearly ] versus the first half and the improvement was about 1.1 percentage points, thanks to lower volume and also to higher volume and lower broker costs.Turning to the costs. We spent $48.5 million on R&D for the full year, an increase of 6.6%. The increase was influenced by unfavorable foreign currency impacts while our development efforts still continue to be high. In SG&A, cost did increase by close to 15%. Here, as in Q4, personnel expenses and increased headcounts and higher performance-related compensation expense have been the main drivers. The operating profit, therefore, reached record high at $135.2 million or 20.1% of sales after $111.6 million in previous year, a growth of 21.1%. Year-on-year, the tax expense increased by approximately 25%. Tax rate is at 17.9% comparable to 17.2% last year. And as a result, the net profit reached $105.7 million or 15.7%, which compares to 15.2% last year.Also here, quick view on some balance sheet data. Cash flow for the full year increased to $118.3 million or 17.6% of sales from $45.7 million in the previous year. Here, the higher net income had, of course, some positive impact, while the working capital did grow only moderately. The capital expenditure were at $25.2 million last year after the record level in 2022 of $35 million. And the working capital and equity ratio I've already commented.So now let me go quickly to the outlook. Oliver shared already with you and based on the order situation and the expected upturn in second half in the Semi market and the business momentum, in the other end markets, we are mostly optimistic for the current year and we expect sales between $650 million and $700 million, and operating income margin of about 20% for the current year. Now let's go to the dividend. In the last 2 years to 3 years, as you know, we have invested significant amounts in additional capacity to support our growth. And we are working -- and we are working the next expansion needs, the required investments and growth opportunities. Due to that, the Board has decided to propose to the shareholder at the AGM on April 4, a distribution of CHF 20. This is an 11% increase and represents approximately 53% payout, also means we will return about $56 million back to our shareholders. The payout will take place April 10.With that, I would like to close the presentation, and we are now ready to your question -- for your questions.

[Bernhard Schweizer]

As we have well over 60 people joining in the online webcast, I would like to start with a question that Marie Ganneval sent. And it reads, oops, now it just disappeared. There it is. Could you give a little bit more color about the logic behind the acquisition of FabTime and its link with all of your existing software offering around FabGuard? Is this software tailored for the semiconductor production or can it also be used in other industries? Is it complementing your existing customers or does it open doors to new ones?

[Oliver Wyrsch, executive]

Thank you. Who asked the question?

[Bernhard Schweizer]

Marie Ganneval.

[Oliver Wyrsch, executive]

Okay, thank you very much, Marie. Yes, good question. I'm glad that you talk about FabTime. So obviously, as I mentioned earlier, we try and organically also to find interesting technologies that we add and then translate throughout the world through our close customer interactions. This is an example of this. We found a company that has some true substance around cycle time management in semiconductor fabs. It's something that we don't have in this shape or form that's truly the experts, these guys. We will -- closely integrated, it's relatively compatible already with the current platform that we do and believe relatively quickly, we can then bring it to new customers. But they also have a few customers that we didn't have in that shape or form or that penetration yet.So it's synergistic also on that side. It's generally focused at the semiconductor fabs, but we always look with our software solutions that we see other things, other applications outside of the semiconductor industry. Of course, some of this software is so sophisticated and so specific to the semiconductor fab that it will need some translation and some adaptation. And truly it's really used mostly in the semiconductor fab to that degree of detail. I hope it answer like this -- the question that Marie had.

[Bernhard Schweizer]

There's one more question from [ Christian Brown ] from [ Finance and BHF ]. and his question concerns production capacity in Semi. You had bottlenecks in 2021 and 2022, and therefore, you have added new capacity since. Do you now have sufficient capacity for the new Semi cycle or are new bottlenecks to be filled?

[Oliver Wyrsch, executive]

All right. Thank you, Christian, for this question. Certainly, I think one of the key things, and I think about the future, I don't think so much about maybe the next quarter or 2, but rather how do we capture the next upcycle in the semiconductor, which is, of course, Q3, Q4 this year and particularly next year. No, we don't have enough yet, but we're definitely planning on further expanding. We have those significantly increase the recent years, right? So we probably don't need a step like that. We did grow tremendously as well same time. So when we now project for the future and talk with our customers on the next cycle and their requirements, we will continue to invest in the usual CapEx range also for this year. Yes. For the room, a question now from the room. Yes, please.

[Unknown Analyst]

Can you make some comments around the different dynamics in semiconductor, in fab optimization products, and the equipment that goes directly to the equipment manufacturers? What are you seeing there right now? And I would expect a different dynamics in the [ 2 sectors to come ].

[Oliver Wyrsch, executive]

Yes. As you -- as some of you might know, we have about 50%, 50% of our business in Semi going to OEMs or going directly to chipmakers. Chipmakers, TSMC, Samsung, Intel, such ones, and then OEMs would be Applied, Lam, [ RO, TEL ] and such. So software we, such as also sophisticated smart sensors, we often supply directly to the chipmakers, because in the end when they want to optimize the recipe in R&D or on the production floor, they don't buy this through the toolmaker, they typically buy directly from us. So it's true, the time -- there's a time lag between the two, typically, when there's a CapEx [ in there ]. So OEMs would rather be gauges and long-term design being sensors, whereas the other ones are more application-specific or process-specific, and even if there's an incursion, they would add additional sensors.Right now, what we see, yes, if you almost have to break down even the 2 segments. So in the OEMs, this is things that are public. ASML [indiscernible] had a big growth year last year, particularly ASML, a little bit more flatter this year. The dynamic there was some of China, specifically for ASML, a lot of EUV tools, maybe some hoarding, I guess. So it's a bit flatter there. When you look at others, specifically the one that are more focused on memory, they had a [Technical Difficulty] year and they're coming back. We see the right signs in pricing and inventories that it's going to happen. How soon will this happen, this is still a question. It will happen and it should in the second half, that's what we all say roughly.If you look at the chipmakers, if you look at the big ones, Samsung invested through the period, maybe also to go and push on the leading edge zone. TSMC reduced a little bit, but we have the opportunity also to offer our sensors when they have incursions or instabilities in their processes to help them even in years where they have less CapEx. And then Intel has its own dynamic and I believe this year will probably come back with more investments as it has done last year. Then you have the mature edge. There's quite some software and simple sensors going into this segment. This is automotive ICAPS type chipmakers. This would be NXP, TI, STM. I believe they had good growth last year, 5% to 10%, something like that, somewhere flat. But there's rather a little bit of a slowdown for this year in this segment. I believe overall, we'll still have growth, but this segment is going to be a little bit slower. So I hope this answers the question. I tried to paint the bigger picture. Yes.

[Bernhard Schweizer]

There is another question relating to software and Semi. [ Felix Collier ] would like to know, if there is a revenue figure that you can share with us regarding the software business. How much revenue do we generate with software.

[Oliver Wyrsch, executive]

Yes. So we obviously don't publicize a number, but you can think this business about being 5% to 10% of our revenue. It's fluctuating as well. It has its own cycles, right? I just mentioned, the mature node. It has a lot of business in that area as well. We get out of the existing fab, more output just with software without CapEx, there's still logic there, but it also goes in leading edge fabs. Sustainability is a big topic. Optimizing processes, it's good for sustainability. What I mentioned just now, the 5% to 10% is software only, if you want to call it like that. Obviously, all these smart sensors, specifically the ones with this AI crunch a lot of data and they do it on the chip itself. Many of them have their own IPC, their own fast chip right on the sensor, and obviously, this software is outside of that. It's on top of that. Yes, please.

[Unknown Analyst]

Yes. Just 2 quick questions, product-related. You mentioned ICAPS, mature edge, and also the memory plays, of course, that might recover towards the end of the year. Big topic, in my opinion is high bandwidth memory, and particularly, I would say SK Hynix or Micron also. And I think you made some inroads with Micron some time ago. So I was just wondering if you can give a little bit of a view on what role INFICON will play in that high bandwidth memory area. And the second question is a bit more related to HVAC. You mentioned some regulatory changes there. I was just wondering, how does the move from A3L to A2L refrigerants support your sensor technologies in that business, maybe just broadly?

[Oliver Wyrsch, executive]

Good question. So, yes, high bandwidth memory, this is part of the AI hype or the AI dynamic right now. I mentioned often when I was asked about -- I'm a computer scientist originally, I studied here in Zurich, and we did the machine learning at the time as well. The nodes were just [ 50 ] and not billions and billions. But the math hasn't necessarily changed. But the hardware did, right? And you also see when there's a gold rush, you best be the guy that sells the shovels. So that's what we see with NVIDIA, I guess. No doubt there's been progress and we also are part of this.I don't know if it's going to be a big leap, where it's really a paradigm change. I see it as a continuum that accelerates. So, by the way, I explain all this. Same with the hardware there, right? Of course, these memory chipmakers are focusing now on this AI opportunity. You need more memory, fast memory, more integrated system on the chip. These trends have been around, they're intensified and certainly get a big boost. But we have been actually working on this type of technology already for a while with them. You need to remember, we normally look 3 years to 5 years ahead with our customers. That's my aspiration also for us, our company, that we would also talk at least about the next design events, but rather about the future beyond that, ideally a little bit of a mix.And there, these topics have been there already. So to -- so each one of the mentioned ones are customers of ours. Just recently, I'd say maybe the last 3 years to 7 years, memory customers started to be more interested in sophisticated sensors. They always had the more simpler one, pressure sensors, for sure. But now they get more interested in very complex sensors, right, where you have big stacks and you drill down selective edge or you need to understand your plasma much better or you want to add more sensors, also the one I showed today are plasma sensor, self-plasma gas analyzer, where you add more sensors across. So this has been an ongoing dynamic. I hope this helps with the explanation. Thanks.Then the second part on the HVAC regulations, yes, I think this has been one of the drivers for a couple of years already, but really last year, there was a lot of dynamic in this. And you see it in our HVAC, RAC & Auto numbers. There is a lot more interest in measuring new refrigerants, faster difference, more automation. So this dynamic -- this business has shown much more dynamic than we expected last year also at the beginning. And again together in combination with the EV transition, it's often -- it's a bit one cluster, right? This is similar suppliers that work together and our teams are also working rather closely together. Hope this helps. Yes, please.

[Unknown Analyst]

Two questions. You mentioned book-to-bill ratio was below 1 in Q4, I was wondering by how much. And the second question -- second question is on General Vacuum. I mean, that has been one of the very positive surprise in 2023, to be honest. Also, given the macroeconomic picture, we hear from other companies, you mentioned a flat market outlook, but how do you explain this acceleration pros and now this resilience on this high level looking into 2024 in this General Vacuum?

[Oliver Wyrsch, executive]

Would you expect it to be slow this year?

[Unknown Analyst]

Yes. I would expect it to be flat.

[Oliver Wyrsch, executive]

Okay. Yes, it's a good question. So maybe in flat, you have a little bit plus, a little bit minus. Honestly, it's hard to say. Why is it hard to say? We work through so many different channels and so many different channel partners and often we don't know the end customer exactly, right? So we know as much as this channel tells us. So it's not always 100% easy for us to say. We, of course, have estimates and discussions about how is this year going to go. When you activate this, this is where we land. And why it was last year so fast was maybe a question. So the big thing was zero-COVID stop opening up in Q2. There was a massive dynamic in this high tech sectors, specifically the state sponsored one in China that helped us.The supply chain helped us. Q2, Q3 had really a lot of dynamic. Last year was also a solar year. We have this segment also in Gen Vac. We also see other similar companies had similar dynamic with solar, which is also China. This year, there's a number of uncertainties specifically regarding China, but also regarding macro across all regions. But overall, we see mostly optimistic. There is rather a flat plus dynamic, if you look at the general macro dynamics. In spite of all the difficult, maybe structure in China or also a slower Europe or Germany that struggles, but all in all, it's -- we can cautiously be optimistic. And now one more question you had asked at the beginning, the book-to-bill of Q1 -- Q4, I think was close to 1. Maybe the CFO can give a little bit more.

[Matthias Tröndle, executive]

[ Most likely below 1 point ].

[Oliver Wyrsch, executive]

All right. There you go. So it's -- this is a close number. Please, who's next? Yes.

[Unknown Analyst]

Maybe 2 or 3 questions from my side. The first one, you have accelerated the software offering significantly, I think over the last 3 years to 5 years. Do you see actually customers do specifically ask, okay, look, I don't only want to have your components and tenders, I want to have the software that you provide more and more solutions. If you can tell us maybe the project revenue run rate you have today, and we have the system sales worth maybe 3 years, [ 4 ] years ago, that you have a little best giving for the close traction would be the first question. I'll do it one by one.

[Oliver Wyrsch, executive]

Cool, we'll do it one by one. Yes. Software has a different sales than that. We typically talk to different people. On the customer side, it's more fab managers, operations managers, IT managers. It takes typically longer because you go and upgrade a whole fab, you need to plug it into the MES and the ERP. And sometimes there's other rollouts over several fabs and over several product modules. So you need to think of our software offerings as product families with a lot of sub modules. So they pick and choose and build into their landscape over time. So the cycle for selling to a new customer, that can be 2 years, 3 years. But when you then get the momentum, then you are in this pace, where you add all the time either another fab or more modules and then it runs over time.And it starts with NRE, so meaning, you need to configure it, and then you need to plug it into all the systems. This needs interfaces and configuration. It also needs also data cleanup, because we then truly use the data and then for steering the scheduling or the reports or whatever. And then over time, this will translate into subscriptions. So I would say, the big year was really last year when a lot of the ICAPS, the automotive chipmakers didn't have enough capacity still or maybe you could even go 2 years back, I should probably say in 2022, and they really got a big interest in our software solutions through that. And then we could relatively fast gain a lot of market share, particularly in Europe. In U.S., we are relatively proliferated already.I think Asia is a bit more complicated for us. And so we -- Japan is a market with a lot of legacy or mature fabs. That's certainly an interesting market. The others are a bit more complicated. China is less a software market. I think they're not there yet and it's also a bit more tricky with the technology protection. Does that help with your question?

[Unknown Analyst]

Yes. The second and third question, more technical. The second one is capacity expansion, because you were really suffering from this in 2021, not having enough capacity.

[Oliver Wyrsch, executive]

[ 2000 ].

[Unknown Analyst]

I mean, you also said CapEx to remain relatively flat, in 2024 finance, such a great result. How are you adding capacity? Where are you adding capacity, and what is the total sales capacity you will have maybe end of 2024?

[Oliver Wyrsch, executive]

Right. I don't think we have precise answers to all of this. We kind of worked this out still with the customers, when and how much. But we think with the program that we will run this year, which should be a similar kind of CapEx rate around the 30s I would think, right, that's what we modeled. And that we then will be ready for the next [ semi oxide ], meaning 2025, 2026, something like that, that's now starting in the second half of this year, with a little bit extra, right? What is always important with these Semi cycles, you don't scope it for being able to do the peaks, you need to go over the peaks. So you can go through this very volatile, yes, dynamics. Then there's also supply chain issues. There's inventory. You normally get a little bit through the grinder there. So we think we can do this with a usual size of CapEx. That's what we currently plan.

[Unknown Analyst]

And the last question, if I may. The cash flow was very strong in 2023. I mean, is this the normal conversion rate we should think of, of EBIT? Or is it 70% or so on the equity free cash flow, what we expect in '24, '25?

[Matthias Tröndle, executive]

I think 2022 was terrible, number one, because we had $55 million inventory increase in the last year, we had huge rental capital increase, and this did really impact our cash balances, amongst a few other things. And now in 2023, what really happened was, we had a record result in terms of net income, which is one of the key drivers in cash flow, and we only had a very moderate increase in inventory. And this was the key, right, why we achieved [ $118 million ], because net income was around $100 million, plus a few other items and this is working.So in situations, right, to come back to your question, situations where we don't have these huge swings, right, in inventory or in other areas in the balance sheet like could be accounts receivables or maybe if there would be a dramatic change in payment behavior, right, this would also be of impact to accounts receivables and then impact the cash flow, but I don't assume.So I still believe DSO will be okay and under control, and no surprise. Under normal situation, I can confirm, yes, this should be possible to be repeatable, right? It's mainly based on net income and if we are able to manage the balance sheet, then we should be able to generate good cash flows, right? And yes, that's -- so if you add both together, 2022 and 2023, you have also a good number, right, in average, because '22 was very extraordinary. It's a -- this inventory increase was raised.

[Oliver Wyrsch, executive]

No questions?

[Unknown Analyst]

Yes, maybe following up to the CapEx plans or the expansion that you announced. Is there also OpEx involved in there? Are there like additional...

[Oliver Wyrsch, executive]

Yes. Yes, OpEx is different components, right? R&D maybe might be one component, SG&A. So maybe a word about each one. R&D for us is a long-term thing. So we look maybe at 10 core technologies that we really want to be at the forefront and push the envelope there. The guidance always has been at INFICON, if you find a fantastic scientist, hire this person. And we want to go and continue this and we have been continuing. What I show with this little anecdote is that this is almost independent of what we do, quarter-by-quarter, right?So you have a fluctuation of percentage of sales for the R&D. But in general, the idea is still be leading edge in these top technologies, work together very closely with customers and push it forward. For me, frankly, the R&D could also be a little bit higher, right, but we grew a lot in recent years. So this is just not the thing that we directly connect. And on the other end if you look SG&A, we're trying very hard to be lean, have a small overhead. You can see that how we interact also with you. We try to put everything in R&D that we can. In SG&A, still also another important part. The sales team for us is not a lot of salespeople. Yes, there's still comps. There is, of course, a little bit for the [ diffuse ] market. But the key part in there is actually application engineers.What is an application engineer? Application engineer normally lives next to a customer. They go every day to lunch with the customer. They have a batch, they work in there and optimize our product with the customer, either in R&D for the next generation or on the production process. So we have people in Korea or in Taiwan or Oregon or wherever that might be, that work like this. And that's a relatively large group. I think we even publish it in the sustainability report. Total is 400-plus, but the application engineers are around 150. So it's a relatively large group. And then the next largest group is actually service technicians, working together with the customers. So I explained that, we make, of course, investments there. Application engineer is also a part of the innovation and a part of customer satisfaction. It's part of the customer proximity. And I believe, our very unique intimacy with the customer comes largely through this application engineers. So we'll continue to invest there too, right, depending on...

[Matthias Tröndle, executive]

Maybe I can add, because I also mentioned this in my comments. Of course, we also have some of these initiatives started last year, especially digitalization, IT, security. We just opened this Guangzhou application center right in China, where we invest a little bit more. You need to read the press release in [ January ] about Malaysia, right? And so there will be some extra cost on top, but not huge amount, I can say. But there were also some of these initiatives will drive a little bit the expansion.

[Oliver Wyrsch, executive]

Yes. Also this innovation center in Taiwan, this is always a blend between R&D and application engineers.

[Matthias Tröndle, executive]

Yes.

[Unknown Analyst]

Just maybe a quick follow-up essentially on that one. When I just try to understand a bit your guidance better, if I take the midpoint and what you say, it's more or less the same year as last year, which is already pretty cool, of course. But I would assume that on the gross profit margin, you're probably still not really happy with that number. So I would assume you're pushing to bring that up this year and maybe SG&A also up. Is that the way I have to calculate to get to your 20% EBIT margin? Because I think there must be some changes, otherwise, you would -- if you have an increase in gross profit margin, which I would anticipate and SG&A stable or going with the revenue development, you should have a higher EBIT margin.

[Oliver Wyrsch, executive]

I would say roughly yes, but maybe the CFO can give you a little more color.

[Matthias Tröndle, executive]

The CFO [indiscernible] roughly last year. I think it's good approach, but not to be serious. I think that in both lines, right, whether it's OpEx or whether it's gross margin, there are always -- there is always a bandwidth in that, right, and depending on customer mix, still the old story, the product mix and the markets reserve, there were really huge differences. Earlier we've talked about the software business. Software business, we do 80% gross margin, right, and not trendy with other products. So it's also there.There is a bandwidth of maybe 1 percentage points plus or minus right, and the same is valid for SG&A, right. I just said right, IT, digitalization, we spent a hell of money in security aspects, right, last year, and we will continue to do this, right? And we have other ideas, right, and other needs we need to do, which are on the plus side. On the minus side, in terms of CFO thinking is, and as I explained earlier, we spent a lot in variable compensation last year because we had a very good year. So this will also normalize a bit. So we believe with the normalization of the variable compensation and some of these investments, we should see not a huge increase in SG&A. But as usual, right, we say we pay as you go.As a principle, we take it very often and we look what's going on the next 3 months, 6 months, 9 months, do we have strategic investments, do we have maybe good people which we can hire, right? Then it's a strategic investment for us and we do it, right, regardless of whether Q1 is good or at 10% or 5% increase, whatever, right, then this is a different...

[Oliver Wyrsch, executive]

Maybe just to -- most of you have probably heard this answer already, but just to make sure, gross margin, I always try to suggest that you rather look at our EBIT, why? We have products that go from 40% gross margin to 80%, almost 90%. Now when you have these many submarkets, right, 20, 30 submarkets, each one has a different dynamic and they feed a little bit into different product margins, it's not a good indicator of how healthy INFICON is if you look at the gross margin. But our aspiration is this EBIT targets they all have is sub-business. And we try to push that. And I believe you see some good positive indicators there.But again, we will always go with this strategy. And we luckily with our investors in this position that this is also supported, we will invest in the long-term. So if this super brilliant scientist comes along, we hire this person. If we have the digitalization thing, we do that. So this will go and further skew your numbers over the quarters. But again, the gross margin from 40% to 80%, that is a big mix problem there, right?So last year, there was also good business with gauges. Gauge business has been growing the last 3 years, 4 years tremendously. It's an OEM business, very little SG&A sales channel cost, but goes really fast as soon as you designed in, and then it runs and it scales up with the customer, the toolmakers, for instance. Hope this helps. Who's next? Is it [indiscernible], we flip around a little bit. We have somebody in the back.

[Unknown Analyst]

[indiscernible]. My first question, you mentioned there are quite some interesting projects in your pipeline products. Could you maybe explain, are these more the new generations or you may be addressing some new subsegment or [indiscernible] that you haven't really sold?

[Oliver Wyrsch, executive]

Yes. Okay. Yes. So the both -- it's a short answer to this. So I tried with this launch highlight slide to show you a few examples of the things we launched. Obviously, there's a lot of incremental upgrades, a lot of software releases also that we have for all of our products and for the software products. Right now, honestly, in the segments that we are, we see midterm, fantastic organic growth opportunities. So this is a lot about addressing the next challenge, the next tech node. What is that? Yes. The smaller structure, harsher chemistries, there's different requirements. Also, a little bit further away from the front end, in the back end, or if you look in the fab, in the sub-fab.So in that cluster, there is actually a lot of opportunities. There is pockets or maybe ending up to maybe [ $10 million, $20 million ], which we try to address. And that is often a variant of the current product, be it software or a little bit of a hardware variant. At the same time, we do like to look bigger. That's why I showed this other slide of these other technology markets we try. INFICON, I think has always done that. I try to make the team work further in that direction and maybe get a little bit more steam into this, to look into the other segments outside of Semi too or maybe in Semi also a little bit, the ones that are further away from Leading Logic.And in there, we see also a number of new opportunities. I think a few I mentioned earlier, if that helps. We try to, in order to match our complexity, right, the question sometimes comes is, how can you be in so many applications, so many market segments and still manage your complexity. Actually what we are very regimented about is that the R&D is synergetic, and then the manufacturing is synergetic and in the end, the translation happens with these application engineers. So the first part is very synergetic. That's why we can actually address relatively different market segments. I hope this helps to give some color. Yes.

[Unknown Analyst]

Then maybe also a question for Matthias, your net working capital is still quite high. Could you maybe explain what were some of the reasons? Because if you look historically, at some point within [ 2025 ], I believe you mentioned it's around [ 32% ] based on your calculations. So could you maybe explain a bit, the dynamic there?

[Matthias Tröndle, executive]

Yes. So in the [ $225 million ] working capital we reported last year, the majority is really inventory, and I believe AP and AR, they are in good shape. The DSO did even improve a little bit, where we are, but we still have some homework to do and where we have some issues is on the inventory side. We are working on reducing it to bring it back to a more appropriate on more better level, yes. You did see the turns are at 2.4. That's not necessarily the value we want to keep, right? So this should improve overall over the course of the year. It's not easy always, right?Also inventory sometimes behaves like a big ship right in the ocean. You have to turn the steering, and it takes maybe 6 months, 9 months, 12 months until you really see a result. We had a little progress this year, but not the one we expect, and not the one we shoot for. So we are working on it and we want to bring it down and want to also increase as a consequence the inventory turns. That's our ambition.

[Oliver Wyrsch, executive]

Maybe just to add a note there. This is our aspiration, for sure. Two things are also important to us. And one is being able to deliver. And yes, that does mean sometimes taking on inventory, of course you optimize the supply chain, but it is a bit that too. And when you really boost innovation, and we have been picking up speed all the time, you add more product, you add more product variants. So to supply these, the inventory rather grows than it shrinks. So we try to balance the different factors there to get to a balanced result in the end. But I would agree entirely, right? We're not 100% happy where we are with the turns right now. That could be improved.

[Unknown Analyst]

Just a quick follow-up and apologize my focus on the short term. Interesting to see that we are ahead of a big Semi market recovery and also some Semi Vacuum peers of you guys for weaker Q1 2024 versus Q4 2023. I mean, do you read anything in this? What do you hear from your sales team? Is this normal volatility or do you really see that some customers are starting say, look, let's be on the break until we really see CapEx investment from TSMC, Micron -- sorry, TSMC, Micron, Samsung coming really through or is it something you should not really think much about?

[Oliver Wyrsch, executive]

Yeah, I think it's a number of factors, I would think. But also here, there are many experts also in the room that know at least as much as I do about the general Semi market, right?

[Unknown Analyst]

But what do you hear from your salespeople?

[Oliver Wyrsch, executive]

Yes, yes. So, I mean, first of all, don't forget that Q4 especially for some markets, and in particular for Asia this year is a bit of a sugar rush, how much we ship and then you have a little bit of a hangover in January, February. We have some of our businesses that work like that, especially the junky ones where you deliver a whole set of pallets for a project somewhere, and then it needs to go out in a certain cart, particularly you [indiscernible], it's always like that. That's one factor.But, yes, I think customers are a bit cautious. Maybe, if you recall last year, we always thought in the second half of the year, we have a Semi upcycle. Sounds familiar, right? So we were all kind of okay, when is this exactly coming? Some stuff came for us also. Q4 was a big improvement over Q3. And Q3 was still quite slow, at least in that area. And then we have this China dynamic that overlays it. I think there's a certain amount of uncertainty when exactly this is going to happen. I think Q1, when I read the different reports, talk to the customer, talk to my guys, it's a little bit the mixed picture of where we're going to go. But that is really very short term, like you said. More questions? Anybody online or...

[Unknown Executive]

There are no further questions from the online community at that time. No.

[Oliver Wyrsch, executive]

I think we had almost 70 online, Bernhard, right?

[Bernhard Schweizer]

Well in the 60s, yes.

[Oliver Wyrsch, executive]

Well in the 60s. All right.

[Unknown Analyst]

Can you maybe report on the security side, have there been any more orders from the Department of Defense or [ Department ] and so on? And has there been more development in that direction? And then also on your capacity comparatively, higher sales in Q4. So what could be the run rate for this year [ if this all happens ]?

[Oliver Wyrsch, executive]

Yes. We've kind of already answered or gave many of the answers implicitly there, right? So, yes, the orders continue from military, especially the DoD. There's a tech refresh going on. There's different subprojects. And yes, the security situation globally is helping that business as terrible as this fact is that we have such a much more insecure world. We also have new applications there that we address. Maybe an important thing to mention that only come over time. But then the actual quarter-to-quarter shipment rates is affected largely not by the capacity, we have the capacity to produce.We have the problem in the supply chain, specifically the supply chain quality, where we had a couple of stumbles. And that's why, for instance, Q4 was slower than Q3. This could have been higher. And we see growth for this year, specifically also, we believe that this untangles a bit better. We continuously improved supply chain. And also in that area, it's a bit more time lag to the other products regarding the easement of the difficulties. You also want to add? No. Good.Any more questions or does everybody need to run to the next event? It's a busy day, right? Good. Then I will wrap up. Thanks everybody for the big interest in our company. I really truly appreciate that, the support, the questions, the exchange. Thanks very much. See you soon. Have a wonderful day. Thank you.

[Matthias Tröndle, executive]

Thank you.