Jenoptik AG

XETRA:JEN

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Jenoptik conference call regarding the results of the first 9 months 2022. [Operator Instructions] Let me now turn the floor over to your host, Dr. Stefan Traeger. Please go ahead.

[Stefan Traeger, executive]

Thank you very much, and a very good morning from our end here in lovely Vienna. Great pleasure to have you with us for our Q3 earnings call. With me today, as always, is our CFO, Schumacher, who will guide us through the numbers in more detail. Before I hand over to Hans-Dieter, just a quick reminder on sort of the major events that we've seen, in particular, in Q3.

For us, very important in Q3, we had a nice groundbreaking ceremony for a new high-tech fab which we are going to build in Dresden for our semicon customers. We're going to invest a significant amount of money into expanding our production capacity, in particular, for the real high, high, high-end applications in semiconductor manufacturing. In a way already in Q2, but really at the end of Q2, we managed to close the sale of VINCORION. It's great to see that this somewhat lengthy process came to an end in summer, and we're now sort of almost done with it. We have certain factors still going on to do with the earn-outs of VINCORION up-wise in connection potentially in Corona. I think we're going to talk about that later in the presentation. But by and large, the whole process is now done and dusted, and so we are that for probably the last time wishing a very good luck to our former colleagues of VINCORION.

Not on the page, but at least equally important, we can disclose that we have just very recently actually signed a settlement agreement to end our engagement in a project aiming to automate certain production of e-cars in a factory near Berlin. I think those of you who follow us more closely are aware of what I'm talking about. Again, we have just recently signed a settlement agreement to end our engagement in that project. We had to accept certain discounts versus the original project value, but in return, we've got to a point where we can hand over the project as it is as of today without further claims or liabilities towards our customers. So our customers signed a way for any further claims or liabilities and the financial impact of that settlement agreement, we have essentially booked in Q3, and you will see that when we talk about the financials, in particular, on our NPC companies in more detail.

We have seen a very strong momentum and an ongoing strong momentum, in particular, in the semicon equipment business. We know that always a discussion point in the semicon, obviously very important for us, what we can tell at this point already is, at least in our funnel and in our books semicon is still going very strongly, and indeed, is a major driver of the order intake and of course, of the revenue of Jenoptik at the moment.

In total, we were able to post strong organic growth of almost 12% for our continuing operations. With that comes a significant increase in profitability. On a comparable basis, if you want like-for-like, excluding certain one-off effects that we had in the prior year to do with the variable purchase price effects in M&A transaction, again, those of you who follow us a bit more closely, you'll remember, there were several million or actually a significant number of millions in last year's P&L from that one-off effect.

If you exclude that, we managed to significantly increase our profitability, again on a comparable basis of up to now almost 17% EBITDA margin after 9 months, which for Jenoptik is a very strong EBIT margin expansion. You all know that Q4 traditionally is most profitable for Jenoptik. This leads us to 2 things. Firstly, we specify our guidance for the full year in terms of sales. We now do expect the sales come in, in the upper half of the range given in our guidance, which we just increased in summer. Just to remember, all of us to that or to remind all of us that we increased the guidance in summer to EUR 930 million to EUR 960 million in sales, and we are now saying we expect to come in, in the upper half of that corridor, and we can fully confirm our EBITDA target for the year despite the fact that we have certain one-off effects, in particular, in Q3. We can fully confirm our EBITDA guidance of 18% to 18.5%. Besides that, I'll hand over to Hans-Dieter who will explain the numbers in a bit more detail.

[Hans-Dieter Schumacher, executive]

Thank you, Stefan. Thank you very much. Good morning to all of you from my side as well. Please follow me to the figures of the group for the first 9 months concerning the continuing operations. Here, you see the order intake on the left side and the order backlog on the right side for the group, and we are very happy to report more than 30% -- 32.1% increase in order intake for the group, obviously, mainly driven by the really good running -- still good running semi business in Advanced Photonic Solutions, including also biophotonics, life science, health care business and, of course, contributed by the former Jenoptik Berliner Glas Medical and SwissOptic acquisitions.

If you take this into account, it has -- they contributed EUR 156.1 million from the increase, but it's still then really more than double-digit increase in the order intake. So still supporting our outlook for the rest of the year and even the start in the next year, very promising. Our book-to-bill ratio with 1.27, still very high, taking into account our revenue growth.

On the right side, you see that the order backlog even grows more than the order intake by 38% reaching roughly EUR 750 million, EUR 749.8 billion, which is an all-time high for this time in the year. So it's a really good pace for the weeks and months to come. We are thinking because we have so huge pressure on our operations, people and volume-wise, that we will convert 33% of this into revenue to the year-end. A very promising development.

If we then go to the revenue development, you see the EUR 250.7 million in Q3. It is clear above the prior year from EUR 190 million, so totaling to EUR 698 million after 9 months, which is an increase of 34.4%. If we take into account the contribution of Jenoptik Medical and SwissOptic's Group with EUR 117.8 million in this figure, it's still an organic growth of 11.9%, which is also double-digit growth, driven by Advanced Photonic Solutions in their core business and in the additional businesses we acquired, and the Smart Mobility Solutions is even growing -- is also growing in order intake side and in revenue side. The revenue of the Non-Photonic Portfolio Companies is a little bit lower than prior year. The main impact is really the correction we made with the agreement we've settled with our customers is some, which Stefan Traeger just reported to you.

If we then go to the next slide, please. You see the earnings, the EBITDA figures and the EBIT figure. And here you see some information on a like-for-like basis. You see, first of all, reported, if you compare the reported figure this year, EUR 117.8 million EBITDA with the EUR 109.7 million last year. It's only an increase of 7.4%. And the margin is coming from 21.1% to now 16.9%. But please remember, together with all of us that in the prior year, we had this onetime effect from the earnout in connection with the acquisition of TRIOPTICS and INTEROB included the EUR 25.6 million. You see it here in the lighter green below. And then you can see, if you take this into account, then we have on a like-for-like basis, an increase in the EBITDA margin from 16.2% or EUR 84.1 million to the 16.9% or EUR 117.8 million, which is even more than sales with 40.1% increase in EBITDA.

This is the underlying profitability of our businesses today. The EBIT is a little bit burdened by the one-off effect in the prior year, but also because of higher -- much higher purchase price allocation impact than in the prior year. They are now at EUR 20.4 million compared to EUR 12.8 million in the last year period. As already mentioned, we assume a little bit more than EUR 27 million at the year-end. Purchase price allocation impacts on the EBIT, so we made the same calculation here. So the reported figure is 7.9% below prior year with EUR 68.4 million compared to EUR 74.3 million. If you only take the one-off out, the EUR 25.6 million, then it's a 40.5% increase and the EBITDA margin is at 9.8% compared to 9.4% also better, and we did not correct here the PPA impact. So around 10% EBIT margin, including the higher purchase price allocation impact is as we both think not so bad after 9 months.

Then our P&L, our income statement in a little bit more detail. As promised, we delivered. The gross margin is now better than prior year after 9 months with 34.1% compared to 33.3%. As discussed with you, we had at the beginning of the year a little bit pressure on the margin because of price increases on supply and the supplier side. We did [ venture ] with own price increases and efficiency gains throughout the year. And now we can show you that the gross margin has improved a little bit. This is something which was very, very important for us to see this development. Functional costs are up, of course, driven by the acquisitions. We added more -- much more than 400 people to the organization, which brought a lot of costs with them. And in addition, we have some projects running in M&A cost spending. So all in all, an increase in the functional cost but less than the revenue increase. This is clear.

So the EBIT figure I have already explained. Financial result is a little bit better than prior year taking into account, by the way, in the EBIT, below the EBIT -- above the EBIT figure, you see the other operating results, which are much, much less than prior year because of the one-off effect there you see the impact of the one-off effect, I just mentioned. The EBIT I have explained, the financial result is a little bit better than prior year. This is something which has to do with our ability to take out the adjustments for the rating of the bank accounts where we have worked for and cheaper financing costs. We have an earnings before tax, even taking into account that in prior year, there you see the EUR 25 million, which is close to the EUR 69.4 million prior year. It's EUR 64.8 million.

And now as already discussed with all of you throughout the last month, our tax rate is now at a, let me say, at a normal level for a German headquarter company with 28.7%. This has something to do with a regional profit distribution and mainly driven by deferred tax expenses because we are now utilization and utilization of our tax loss carryforwards. So meaning we have not a longer tax assets, which we can count on. So we should now -- you should now calculate this tax rate for the future of Jenoptik now. This is the few messages because it's an impact on the earnings after taxes and then the earnings per share.

We have, by the way, for you a calculation taking in the prior year the one-off impact because they have not been tax relevant. We have not paid taxes on this. If you deduct this in the prior year, it's not EUR 1.12 per share. Earnings per share is EUR 0.68 compared to the EUR 0.71. So it's also there an improvement. And let me say one word to the discontinued operation. It's a disappointing result of minus 4.8%, no doubt. That is clear after the first 6 months when we closed the deal with VINCORION. VINCORION has still a negative EBIT reported. And in addition, in the Q3, we booked now the earn-out adjustment because we see the development of VINCORION, which is very, very poor and disappointing. They are much below their own budget and targets. And we, therefore, took out all our expectations that we can get an earn-out this year.

So we corrected it by EUR 1.9 million. It's in this minus EUR 4.9 million in combination with the losses after 6 months. We have the chance to regain it next year if the development has been going better, and we still have the opportunity to get an earnout for the next year, which we did not take out of the books. This is the message at this line here.

Then if you then join me, please, to the next slide, the free cash flow development of the group, and we are coming from the earnings before taxes for the group, and you see we have 2 major big impact on the free cash flow development. This is the increase in working capital because we did do some extra buys from our supply chain, so to speak, to be able to deliver and to avoid high prices. So meaning we increased significantly our inventories throughout the first month of -- 9 months of the year. And you all know that the Q4 will be an overwhelming quarter with very high revenues and very high profitability and very high free cash flow.

This is the 1 aspect. And you see it in the line cash flows from operating investing activities, we also are investing much more than in the prior year. So both the working capital increase and the increasing spending for investments, put a little bit pressure on the free cash flow. But nevertheless, we managed it to be better than prior year with -- at the continuing operations at EUR 28.4 million compared to EUR 11.1 million. Yes, it's not a huge percentage of -- in the cash conversion rate. We know this. But it at least a signal that we already improved it after 9 months, and we promised to you, and we say to it that in the quarter 4, we will be much better in the quarter 4. So in total, we still are aiming for more than 50% cash conversion rate in the free cash flow for the whole year.

So we know that the working capital is an issue. We are working on this. Our working capital ratio is still very high in the investments. So we will see an improvement in the Q4 in this figure.

Having said this, I'm happy to hand over again to our CEO, to Stefan, who will lead us through the 9 months of our division. Stefan?

[Stefan Traeger, executive]

Yes. Thank you, Hans-Dieter. As always, we're going to start with our Optics business, the Advanced Photonic Solutions division, which has again shown a very positive operational development in the third quarter. But we're also very happy with the performance of the acquired businesses, in particular, in Jenoptik Medical, formerly known as Berliner Glas Medical and the SwissOptic Group, who contributed almost EUR 118 million to the sales of APS in the first 3 quarters of the year. So revenue in total is up by more than 50% at APS.

But if we strip out the acquisition effects, the organic revenue growth is still at 18%, which is a very strong result. Again, there is also a testimony, I think, of what we can do operationally in our factories and with our people who are really working very hard in managing all the growth that we see in this business. Not only is the sales up, which is, of course, a result of the very strong order intake that we have seen in the last quarter and so -- in the last year, 2 years, actually, for that business. But even order intake is still growing, if you want, through the roof.

Order intake is up by 43.5%, so a bit more than 40%, very strong order intake development. And again, both organically as well as with the acquired businesses. You do see that order backlog is at an absolute record high level with an order backlog which is higher than 9 months' worth of sales in this business. And that is what leads us to say that at least for the foreseeable future, for say, up until summer next year, this business is essentially booked out and full with all force.

You do see that the EBITDA margin seems to be down from last year. But I think, again, those of you who follow us since a while are fully aware of the onetime effect that we had last year in the P&L of those businesses that are booked together in the Advanced Photonic Solutions division. Operationally, the performance of the business is very strong and with EUR 123.5 million EBITDA out of the EUR 529 million sales, we posted a very strong margin, which is clearly above fleet average for that business. So very happy with the development in our core Optics business. That's for sure.

If you follow me up to Page #13, you can see the development of our Smart Mobility Solutions business. Here, we're also very happy, in particular, with the order intake. The order intake is up 18.4% and to now it's had over EUR 100 million after 9 months. This development on the order intake side, you do see that revenue or sales are now up by almost 5%, indicating that SMS has managed to catch up more and more sort of the challenges that they had, particularly in the first quarter. So we're now already ahead of last year also in sales, and we do expect the Q4 for Smart Mobility Solutions to be very strong, both in terms of sales and in terms of profit. We're very confident that we see Smart Mobility to post the growth that we expect from the business at the end of the year.

And not the more -- probably even more important, the margin expansion is as 11.1% margin after 9 months. You're well in the corridor of achieving the EBITDA margin that Smart Mobility typically has in sort of -- in the fiscal year. And again, you do know that Q4 is typically the quarter in which Smart Mobility basically cash in a lot of makes but post the profit from a lot of projects we are running.

Besides that, if you go to Page #14, we come to the business group that is under pressure since quite a while. I think we've discussed that at length. Order intake in our nonportfolio companies and the companies that are exposed to the automotive business, namely INTEROB, HOMMEL ETAMIC and Prodomax order intake is down. Now that does vary from business to business, and I'm pretty sure we will talk about that a bit more in detail in the Q&A session.

There are subtleties and differences between the business activities in the group. Prodomax, our business in North America, actually do with automation is still going good. We're happy how Prodomax is developing here. At the very moment, at least, we do see growth in margin expansion in Prodomax to close to almost prior crisis levels. So happy with that. On the sort of negative end of the scale, that's INTEROB, obviously, but we are very -- actually very happy that we could find a settlement agreement. At the end of the day, it's probably better to stop the bleeding by a dozen cuts. And so we stopped the bleeding here and get out of this project and take the hit now. And going forward, we can build up from a fresh start, if you want. And HOMMEL ETAMIC, sort of in the middle here.

As a result, you see that EBITDA is actually negative after 9 months. And again, that's a significant part due to this hit we took in the third quarter in our INTEROB business in relation to the project that we ended, a project in -- for the factory in a Berlin. If you take it all together, then again, we are very positive about this year. We specify our sales guidance. I do expect sales to come in, in the upper half of the existing range of EUR 930 million to EUR 960 million. And we fully confirm our margin guidance of 18% to 18.5% of EBITDA. And obviously, we're well underway to make our midterm guidance.

There was a question there at this very moment. We're fully behind that midterm guidance as well, and we expect development in the rest of the year to be very strong operationally. And at least for the first half of next year, we see still a very good business. Obviously, it's hard to predict what happens in H2 of 2023, where we now need to manage 2022. And again, we do not want to give any sort of guidance on 2023 at this moment. But we can say that at least our semicon business, in particular, and from other businesses, we still have a very strong order book, which makes us confident, at least for the first half of next year, and then we have to see what the second half is going to be.

With that, thank you very much for your attention. Thanks for being with us today, and we are looking forward to a lot of questions, which I'm sure you will have.

[Operator]

[Operator Instructions] And the first question comes from Adrian Pehl.

[Adrian Pehl, analyst]

A couple of questions. First of all, a little bit of housekeeping here on this one. So I did see actually that your G&A cost was substantially above prior year. I was just wondering whether it could provide us with some insight on what happened here and what should we think of it actually going forward, the same as we go through for other operating expenses, but I did the math correctly. I suspect it has a little bit of a mix effect potentially. But on the -- and bring into the question, could you elaborate a little bit on the foreign exchange effect that you actually had in the quarter?

And the third question is when you were talking actually about Prodomax still doing good. I mean, is this the right time actually to think about disposal of this business at the moment? Maybe you could give us a broader update on what you've seen in terms of sellers or buyers' market. Obviously, you also want to engage into M&A to fulfill your longer-term targets. Is there any progress there?

[Stefan Traeger, executive]

Yes. Thanks very much, Adrian. And it was just I take the last question and Hans-Dieter will deal with "housekeepng" on G&A and other operating expenses. So in terms of a potential disposal of assets, obviously, we cannot sort of comment on particular individual discussions we may or may not have. But with respect to Prodomax, I mean, in a way, the business is going good, and it helps us. And we don't feel under pressure here to sell it. Why would we? I mean why would we give it away?

If, however, a good offer comes the whole way, we would certainly talk and we will certainly be very, very interested. At this very moment, we are not in -- I would say, advanced discussions when it comes to a potential disposal of Prodomax. But we also know that there's only a limited amount of time in which you can call the business noncore or at some point. Of course, the people might say, "oh, what's going on?" However, that's, to some extent, different with Prodomax because we kept Prodomax independent all the time, actually. They're always running, let's say, very sort of stand-alone company. They're always running under the name Prodomax, and we put up to the tackle and Prodomax a little sort of addition, a member of the Jenoptik group.

But quite frankly, if you take this off and somebody else puts its -- put hard competitive under the brand, I think nobody at Prodomax would actually care much. So Prodomax, no specific active advanced discussions when it comes to disposal of Prodomax. But we are fairly relaxed in that respect. You also did ask the proverbial M&A question. And that's probably the more important question at the moment because we were always saying that we want to continue on organic growth paths and want to add businesses to force of growth where it makes sense.

Let me just say that at the moment, we are maybe a bit more cautious than we have been in the last years in [ lower-end ]. Because quite frankly, also for us, the environment did change. Interest rates are rising, and we did leverage the company quite a bit in the past couple of years. Our focus at the moment is more on deleveraging our balance sheet, on making sure that we stay significantly below 3x EBITDA or markedly I hope at least definitely below 3x EBITDA in terms of adaptive company, and we do want to make sure that we maintain our investment grade in the markets.

So we're looking more to ROCE than to organic -- and organic growth at the very moment. Again, it doesn't mean that we are not interested in acquiring businesses if and when it makes sense. And more than in the past, I would say, if and when the price is right. Okay. And with that, I hand over to Hans-Dieter on the housekeeping items, G&A. I think on the FX effect, we have certain numbers we can sort of indicate that. We're not actually disclosing that in any way. But I just hand over to Hans-Dieter, so first question I've been on this G&A effect in Q3. And the second question to what extent FX effects have impacted our other operating expenses.

[Hans-Dieter Schumacher, executive]

Yes. Let me start with the G&A cost, Stefan. The G&A cost has been influenced by the new businesses, by the integration of the business. We had to buy IT line centers for the new acquired businesses because we did not get SAP and micro-optic sensors, for example, for hundreds of people. And in the new world, you have to buy them, to pay them instead of activating them in the balance sheet and depreciate them. So we are now passing them hard by pass-through to the businesses, which did not yet be the case in the Q3 in total.

So the year-end, we will see a better, clearer picture. The personnel costs in the admin has been at the level of prior year, even EUR 0.1 million -- EUR 100,000 less than prior year with EUR 8.5 million personnel costs in the admin. Now of this is EUR 8.5 million instead of EUR 8.6 million personnel costs. There, you can see that it is a good development in this end. The operational cost, the other operating income and other operating costs has also been influenced in the Q3 in the comparison in the prior year. We booked the earn-out from TRIOPTICS and INTEROB.

As we already mentioned, with more than EUR 7 million in Q3 stand-alone. And we took out an accrual in the business for restructuring costs, which equals to close to EUR 4 million, and this we did not do in this year. So this is the main driver there. The exchange rate impact is around -- in total, on the top line, and we have the same then on the cost side, it's a little bit more than 3% or 3.5% a year. So we have now headwind from the U.S. dollar, the Canadian dollar and the Swiss for mainly throughout the acquisition of SwissOptics, our hold are in Swiss is now much higher than in the past. So we are taking some extra profit, so to speak, from the development on the sales side concerning the development there. Yes.

[Stefan Traeger, executive]

Thank you, Hans-Dieter. So I think what we're just sort of indicating is that out of the year, well, anyway, I think I said just 12% organic growth, around 3% of that comes from FX effect in the sales side, but we also have, obviously, FX effect on the operating costs and stuff, so that in a way is well.

[Operator]

And the next question comes from Michael Kuhn.

[Michael Kuhn, analyst]

Few from my side, mostly follow-ups, I would say. Firstly, once again, let's say, on the underlying development, if you look at Advanced Photonic Solutions and strip out the consolidation effects, could you tell us what the underlying margin development for that business was really a small clean number, so to say? And maybe the same again for, let's say, underlying cost inflation. You obviously mentioned administrative comes down year-over-year. But let's say, if you look at the overall cost trend, what do you see there right now? And do you see the risk of rising inflation into next year?

And then a second one on the semi business. You obviously mentioned strong order intake and backlog and also mentioned that the big question mark is the second half of 2023. Is there any early conversations you have with your clients about that time frame? And what would you say what you're feeling to be into the second half of next year and maybe beyond in terms of client behavior? And then very last question on the settlement cost for the project near Berlin, let's stay with that wording. Have you explicitly quantified them? Maybe I missed that, or can you quantify them? That would be helpful.

[Stefan Traeger, executive]

Thank you very much. I can take the last one first because that's relatively easy. We can't quantify -- do quantify it, but we cannot disclose that because we have an NDA, so we cannot talk about it. But it's sort of, let's say, a mid-single-digit million figure. And that's probably further than I should do anyway. But it's a significant number. But as I say, we cannot disclose details for NDA reasons.

The first question has been sort of stripping out the extraordinary effect. And I think, again, if you go to Page #12 of our presentation, you can see the number. The prior year effect after 9 months of this onetime more from sort of the tailwind that we had last year from additional one-off bookings have been EUR 25.6 million. Now I realize you probably all actually if you can strip out the profitability of -- or the profit of the Jenoptik Medical and Swiss loss out of the -- SwissOptics rather, are more than 23. But here, I need to disappoint you a bit. We do not disclose that number.

But sort of indicatively, it's not as if the Berliner Glas and SwissOptics is higher than the average of APS. So that shows that the underlying business is continues to be very, very profitable. You then asked for client behavior. Obviously, that's in a way, a question that's easiest to ask than to answer because, I mean, it's a lot of crystal ball at the moment going on. We do see very different reactions in the different marketplaces. But in the core semi business, which I think what you asked -- or yes, one -- in particular, our biggest customer here is continuing to push us for more, more and more delivery.

And I think that, to a large extent, it's due to the fact that the backlog of our very, very important customer is a public one because public figure, you can look at -- everybody can look it up, and they have, I mean, an unbelievable order backlog, which does -- of course, our customers push us for building capacity, building out capacity, making sure that as much as we possibly can, we can deliver more into the Netherlands.

Now anything beyond 9 months or so, then it really becomes crystal ball trying to explain or understand or more speculative, which is obviously a tough thing to do. But from my personal perspective, and really that's -- really just our gut feeling here. I mean there is a big debate going on to what extent the U.S., China and all the discussion about China impacts our business going into the future. And we don't see that much because actually, in a way, we see the opposite because as sad as it is, but if homeshoring is really a big trend, and it clearly is a trend, the U.S. chip is buying back the European chip back a and all of that point into that direction.

Then it means that even more machines are needed to fill all the factories that are currently being built in the Western Hemisphere, and that's obviously good for us. And as that gives you at least an indication. We have a clear picture until next summer and let's see what the second half of next year brings. But at the moment, I do not have any indications that we had a slowdown here.

[Operator]

And the next question comes from Malte Schaumann.

[Malte Schaumann, analyst]

First one is on -- maybe a follow-up to the last one. Maybe a bit more diversified picture, so to speak. So I mean when we talked lastly in August, I think you mentioned that TRIOPTICS, for instance, which is a bit lower to consumer products, the order intake or the dynamic in order intake was a bit slower. Maybe you can a little bit on that as well. And maybe then similarly, both do you see other trends maybe in more consumer-oriented medical life science applications have remove or to removal kind of stuff where your customers potentially become a bit more cautious? Or is everything pretty -- on a pretty good level so far in the [ Medical Applications ] as well?

[Stefan Traeger, executive]

I know you put the finger in the right sort of point in the business or did. Yes, you're right in poking in those advise here. TRIOPTICS order intake is so much slower, because yes, you mentioned it because of the exposure to more to the consumer business. It's not as if it's forming of a cliff here in any way, shape or form. So going good, but it's not, from an order intake perspective, the dynamic became somewhat weaker, obviously. So again, TRIOPTICS not to worry anybody too much. It's not as if TRIOPTICS is becoming a problem child here.

But it is the dynamic in the order intake has slowed down somewhat. There is still a very high order backlog, which the guys need to flow through. But again, in the order intake side, it's becoming somewhat weaker. We do see the effect in the medical business. And even more, you will remember what we have had when COVID hit that medical downturn was very quick and very fast and very deep, not quite as dramatic, but it is visible. In the medical business and laser bar business for hair removal applications and the 2 removal applications and similar aesthetic procedures, we do see quite a significant slowdown actually. At the moment, Obviously, people -- there was quite some order or overordering going on coming out of COVID and now people go into breaks again. So those are the particular areas where we see in APS a slowdown and that's offset -- more than offset by the continuing strong growth in semicon.

[Malte Schaumann, analyst]

Okay. Are you -- in these areas still have a high order backlog? Or is there kind of a more near-term with that in certain areas suffer from underutilization?

[Stefan Traeger, executive]

Yes. In both -- yes in both cases. Yes, definitely in TRIOPTICS. We still have a high order backlog. We also have high order backlog -- still a significant order backlog in medical. I can't really quantify it at the moment from the top of my head, but medical milestones fairly quickly because it's a high fast turning business in a way. But I think they still have a good backlog. I don't think we will run into any underutilization in the factory in the next couple of months, and we have to see how that develops in the first half of next year. So this year, they still have enough order backlog and for next year, we need to see.

[Malte Schaumann, analyst]

Okay. Fair enough. Then a follow-up on the G&A costs. I understood that you had some kind of a one-off in the third quarter. How should we then specifically think about the fourth quarter would then come back to 16-point something we had in Q1 and Q2? Or will it be even lower because you kind of pulled in -- put forward some costs to the third quarter?

[Hans-Dieter Schumacher, executive]

It will be on the level like in Q1 and Q2. It should level off actually. Yes.

[Malte Schaumann, analyst]

Okay. And then my last question would be on the component's shortage, your supply chain. Is there anything the new you're seeing that could potentially block [ seconds ] of sales or whatever?

[Stefan Traeger, executive]

Not necessarily. I mean, I am today not might be in a better position to answer that. But I think the risk shifted somewhat from supply chain to installation at customers, in particular, in China. That's for like the guys at TRIOPTICS, that's an issue. You know that we have to ship the machines to China and then they need to be installed, and we have our service force there installing it. But of course, if they run into lockdowns again and again, then we cannot go to the customers. I mean I don't even have to mention Foxconn here, but we all aware of that. So if there -- to me, the bigger risk for our sales guidance for the year, the last couple of weeks that are left is less on the supply chain, more on the -- are we able to commission the product, install, train the customer, get the [ IHW ] certificate signed so that we can actually revenue recognize under IFRS, in particular, in China. I think that's the biggest risk we have at the moment.

[Operator]

And the next question comes from Lasse Stueben.

[Lasse Stueben, analyst]

Just a few additional ones for me. Please correct me if I'm wrong, but rise in Advanced Photonic Solutions, I'm stripping out the order intake that you've got in from BG Medical and SwissOptic, it looks like underlying, the order intake declined in Q3. Please correct me if that's incorrect. But if that is the case, what's the reason for that? And the second question, the margin in Smart Mobility in Q3 was much, much better. Is there anything particular behind that? Or is that just normal lumpiness of the nature of the business?

And the final question would be, you mentioned that you're being pushed by your big customer in semis for more delivery. Again, in this vein, are you worried about ending up with excess capacity in this market if the cycle turns also for that customer? Or are you fairly relaxed on that?

[Stefan Traeger, executive]

On the first one, organic order intake Q3, I think for APS still has been positive in total. So Q3, I think still has been positive. But we're double tracking it as we speak here. But again, I think it should be still a slightly positive number in terms of order intake in Q3. I will say, though, that I'm not quite sure actually in Q3. Let's stop on check on -- you're talking specifically about the isolated quarter; we'll double check on that to make sure that we're not giving you any wrong number here.

Overall, though, I mean, of course, the dynamic in the order intake for the business has slowed down and will slow down in the coming months, simply because the comparator becomes more and more challenging, right? I mean the Q3, Q4 and then Q1, Q2 last -- this year, order intake for this business has been so strong that the comparators are to grow versus those strong order intakes in Q4, in particular, will be quite a challenge. So we will get closer -- over the next months, the order intake in APS will get closer and closer organically to last year's figure and at some point, months over months is the dynamic slows down, that's for sure. And again, to sort of tracking here the isolated Q3 number.

[Hans-Dieter Schumacher, executive]

Impact is coming from TRIOPTICS, which is in the APS business, which has less order intake than in prior year, and much less order intake is equal to APS below but it's not driven by them. It's by TRIOPTICS.

[Lasse Stueben, analyst]

Okay, It's just TRIOPTICS?

[Hans-Dieter Schumacher, executive]

Yes. Because of the business is sure.

[Stefan Traeger, executive]

Yes, you calculated it to be correct. And again, I mean it does show that we had such a high order intake, in particularly, in Q4 last year. I mean it's too early to call the Q4 here. But I would -- personally, I would say, I mean, Q4 last year was so phenomenally high in terms of order intake. To beat that one more time in Q4 this year will be a challenge. In terms of margin SMS, I don't think there was any particular -- looking to answer here of any particular development, Q3 margin SMS, no, I don't think so.

[Hans-Dieter Schumacher, executive]

No. We had a good development in Q3 and Q2 stand-alone, like always to Q3 and Q4 because they finished projects, and the final calculation for this.

[Stefan Traeger, executive]

Yes. And in terms of like versus last year, the first 9 months, I mean, basically almost like at the same level, give or take. Now of course, the million-dollar question, our biggest customer and to what extent are we fairly relaxed or not. I mean I think the first and most important segment is we are never relaxed about things like that. We shouldn't be relaxed about it. But there's also no point in panicking because again, there is a lot of good reasons to believe what our customers are telling us, and they are saying that there is no end in sight, if you want, driven by all the things that, for example, ASML, but also the other customers in same area are discussing with you all the time, things about the impact of ever more chips being -- digitization basically in our everyday's lives and think about discussions about home shoring and new businesses already mentioned the U.S. CHIPS and Science Act and the European Chips Act.

So at least in the foreseeable future, we don't see any sort of major downturn here. And of course, it's hard to discuss and how to foresee what's in 2025. That's hard to say. But for now, again, in the semi business, one is always on the go. That's the nature of semi. You need to run fast to stand still, basically. But yes, we don't see any particular major negative trends coming our way at least in the foreseeable future. And I would like at least sort of answers your question, at least as much as we possibly can at the moment.

[Operator]

And the next question comes from Martin Jungfleisch.

[Martin Jungfleisch, analyst]

I have 2, please. The first one on cost and margins a bit. So to my knowledge, the negotiations with the IG Metall has not been concluded yet. Therefore, been some smaller strikes this week, assuming that the 8% wage hike as demanded by the unions will go through, how would that impact your planning for further margin expansion next year? And to extent what you expect you could pass on those costs to your customers also in light of the competitive environment? And the second question is mainly on the Non-Photonics divestments. If you could provide an update on the progress of the divestments in Prodomax, I think you already discussed the Prodomax just on the other one, mainly on INTEROB.

[Stefan Traeger, executive]

To the first question, the standard line of any Board member in these days is -- has to be -- we will not comment on ongoing tariff discussions between the unions and the Deutsche Tariff partner, we will not comment on that. We, in our planning, made a certain assumption. We are building our budgets at the moment to occur for next year. We do make certain assumptions. But here as well, we better not disclose that. And obviously, as I say, we cannot comment on the ongoing negotiations for the tariff agreement.

On the non-photonics, so yes, we -- when it comes to INTEROB, we are in discussions. Nothing where we are very close to signing a deal. I think that -- and I hope that the settlement agreement that we just achieved. And again, we cannot disclose all the terms of this agreement, but essentially, the important part of the sentences are used has been that the customer signed away any further claims and liabilities. And I think it goes without saying I should make any discussions about INTEROB, a bit easier whether we can -- somebody else is interested in acquiring this business or we can use it for other purposes or whatever. But I think first things first, we now signed this agreement, which is a big relief in those discussions.

[Hans-Dieter Schumacher, executive]

Stefan, maybe I can support for the first question a little bit. As you already mentioned, our high order backlog for the first month and the next year, at the moment, we are looking into a year with growth next year as well and the profitability. We will be able to compensate the increase in the cost this we can already say that because we will pass it at least partially through price increases, and we will gain from our efficiency processes. So in our planning status at the moment, we are optimistic that we can do look into a good -- into another good year under this aspect at least.

[Stefan Traeger, executive]

And for legal purposes, this is not meant to be a guidance for next year or this year...

[Hans-Dieter Schumacher, executive]

I just want to skip any figure about I said in overall and said in this session.

[Stefan Traeger, executive]

We will see further margin expansion as it is and like it indicates.

[Operator]

And the next question comes from Craig Abbott.

[Craig Abbott, analyst]

A couple of many questions I might have, please. First of all, getting back to the events for photonics division, both TRIOPTICS and Medical Optics activities, your quick, please. Your earlier comments regarding the slowing in medical, I just wanna be clear. Are we talking only about the legacy medical activities or also BG Medical? And that my first question there. Do you think that's a question -- Do you want to answer that first and I'll go to my remaining 2?

[Stefan Traeger, executive]

Yes. Yes. Yes. Thank you very much for that question, Craig. Thank you very much, actually I -- Yes, it's only the legacy business, not the BG Medical. Thank you for helping me to clarify that.

[Craig Abbott, analyst]

Okay. Quite important, I think. Okay. And then on the TRIOPTICS, I mean, clearly, now a second quarter in a row, it sounds like, obviously, the book-to-bill is trending below one, although you don't disclose that figure per se. And this continues, obviously, that we get at least a modest decline in revenue perhaps in '23. And on that kind of basis, I mean so we concerned about how severe an impact that might be on the margin in that business? That's the second question. I have 1 more remaining.

[Stefan Traeger, executive]

Okay. And I'll take the second one. Yes, there are below 1 in terms of book-to-bill. The task of that business is going to be to get orders now for the next year, for 2023. At this moment, again, we're always concerned and always alert, under pressure, however you want to call that. But at this moment, there's nothing where we're saying, oh my God, it's very sort of severe because they still have a good order backlog. But we're -- let's just say, we are managing it very closely at the moment. I think that's probably the best way to describe it.

[Craig Abbott, analyst]

Okay. And my final question is you could bear in mind your earlier comments about your focus now is very much on deleveraging. I just wondered; I know this is obviously quite early as you have a fourth quarter. But just directionally, how might does or might doesn't impact your dividend payout policy?

[Stefan Traeger, executive]

Too early to tell.

[Operator]

And the next question comes from Peter Rothenaicher.

[Peter Rothenaicher, analyst]

Firstly, on the pricing situation in your semiconductor business. So in particular, with your big customer, you mentioned that you are also able to pass on higher prices or higher cost. To what extent has this already been reflected in the realized sales now in the third quarter? And what upside potential does this mean for the upcoming quarters?

[Stefan Traeger, executive]

Look, I mean I just hope that the colleagues in the Netherlands are not dialed into this call here. Obviously, I cannot disclose the details of that relationship. And again, I will be absolutely clear or let me be absolutely clear. The relationship, in particular, with ASML, it's very good, very strong, it's very professional. But let's also be very clear, it's not a walk in a park position now, okay? These are -- It's a tough customer. And in a way, I think as they should, so it's tough with them. It's not as if we have coffee every now and again, and that's it. Tough negotiations, tough discussions with them. And let me just leave it there.

And we have reflected that in our models and in our figures. And we want to make clear, though, that the semicon for us is not only ASML. We also have other customers in the chemical arena, and they are very, very important. Applied Materials is the biggest semicon company in the world. KLA Tencor, a very important customer for us. They're also very, very important, and we try our best to help all of these customers simultaneously in their quest to build more capacity for the whole industry. And obviously, they help us to digest the margin impact of costs coming our way, higher costs than in the past. And let me just -- allow me to leave it there, please.

[Peter Rothenaicher, analyst]

Okay. Then regarding Smart Mobility, how will you consider here the order pipeline? Is something big coming up again?

[Stefan Traeger, executive]

Yes. Not a particularly -- not a tender or project that's as big as those ones that we have typically published in the past at the very moment. I'm not aware of a very major mid-single-digit euros millions -- mid-single-digit million-euro projects and the like, but nothing like or collect or the famous North American deal, where we had multiple tens of millions coming our way over years. So at the moment, it's more like a steady business, I think. Does that make sense?

[Peter Rothenaicher, analyst]

And the last point would be expectation before your financial results. So to what extent will you be negatively affected by the strong rise in interest rates? So do we have to expect [ tiers ] for the upcoming years with strong deteriorating in the financial results?

[Stefan Traeger, executive]

Hans-Dieter is better positioned to answer that. But just in principle, I think we have a good coverage in terms of...

[Hans-Dieter Schumacher, executive]

Security interest rate.

[Stefan Traeger, executive]

Yes, we have security interest rates exactly. We have certain caps in our lines and fixed interest rates. So it's a mix of fixed and variable interest rates and the fixed interest rate is, to some extent, also and also the variable interest rates are capped. I think that's what -- I don't know if we can disclose more than that.

[Hans-Dieter Schumacher, executive]

Yes. But the percentage of the fixed interest rate is much higher than the variable ones and the variable ones we have because we want to pay back debt. Therefore, it doesn't make sense to make interest swaps or our businesses on top of it. And by the way, in the first 9 months of this year, we already paid back a significant amount of debt, and this is how we handle this. So I don't see a huge impact coming from the increase in interest.

[Stefan Traeger, executive]

And maybe just to indicate here, Peter, we sort of mentioned that earlier. It's our aim to be between 2 and 3x EBITDA when it comes to that leverage. So we want to be surely certainly below 3 at the end of this year already.

[Operator]

So at the moment, there seem to be no further questions. [Operator Instructions] And we have another question, it comes from Richard Schramm.

[Richard Schramm, analyst]

Yes. Just a very quick one, as a clarification on this in terms of case, the reason why you have gone out of this project. Was it a technical reason? Or was it just that calculation? And you saw that we are not making contracts here.

[Stefan Traeger, executive]

I have a tendency to say, Hans-Dieter can you please take that question. Look, I mean I think what we disclosed in the past already and as such, I'm not disclosing anything that's not in the public that ran already. The execution of this project is very challenging. We have seen, let's say, fluctuations in key parameters from a technical perspective.

Now one could say, okay, that's bad project management because if you have a good project management and a good contract upfront and you don't see feature creep that I just say feature creep, I'm not sure if I said that. But if I said that, I shouldn't have said it. And we do see -- so the execution of this project has been very challenging right from the get-go. And that led to this project being significantly under the water line when it comes to profitability. And we were bleeding their big time. And we're just -- at the end of the day, we are really glad that we managed to get out of it.

[Richard Schramm, analyst]

Okay. And -- but that's basically only growth of this kind in the portfolio at the moment of -- or in the backlog of the company. Or there's no other comparable project in this...

[Stefan Traeger, executive]

No, no, no. None of this size. Obviously, we have lots of projects in the company, and I cannot I just don't know any -- every individual project of the business. But in terms of major projects that we would discuss here in this round, no, that's the only one that I'm aware.

[Operator]

We did not receive any further questions. So let me hand back over to your host for some closing remarks.

[Stefan Traeger, executive]

Yes, thank you very, very much. Thanks for being with us today. Again, I think we are performing well in a challenging environment. It's not as if we're completely decoupled from what's going on out there. But I think overall, we have shown once more that we have a fairly resilient business actually. That is to do with our business model, and it has to do with the markets we're serving. We're lucky enough to be by and large in markets that are resilient against the crisis in some markets.

But we're actually even seeing tailwinds because of geopolitical developments, just to name the homeshoring in the semi environment. So overall, despite the fact that the world becomes a bit tougher, we are well underway. We've just specified our guidance to the upper end of the corridor in terms of sales, and we can fully confirm our guidance in terms of profit. And at least for the first half of next year, we are very confident that we will see also a very strong business. That's it. Thank you very much for your questions. Thanks for being with us today, and we're looking forward to seeing many of you in individual roadshows in the next couple of weeks. Thanks.

[Hans-Dieter Schumacher, executive]

Thank you.