Good morning, welcome, everyone. My name is Bernhard Schweizer, investor relations contact at INFICON. I have the pleasure to host this Microsoft Teams webcast on our Q2 and half year 2023 results. With us today are Lukas Winkler, CEO of INFICON, and Matthias Trondle , CFO of INFICON. The management team will first present the results and then take questions. During management's prepared remarks, online participants are requested to turn off their microphones and cameras, please. During the following Q&A session, participants are then invited to turn their microphones and cameras on when asking questions. Online participants can add themselves to the queue of people wanting to ask questions by clicking on the I Raise My Hand icon. Alternatively, you can also use the chat function in MS Teams
You should have received by now a press release on the Q2 and half year 2023 results, together with the links to the accompanying visuals for this conference and the full half year report. All documents are available for download in the investor section of the INFICON website, www.inficon.com. I would also like to inform you that we record this web conference to archive the audio file later on the INFICON website. The oral statements made by INFICON during this MS Team 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 hand over now to Oliver Wyrsch . Oliver, please.
Thank you very much, Bernhard, welcome, everybody, to today's earnings release. I'm very happy to have you all here participating today, we'll now jump into the presentation. We, as usual, split this into two parts. First, I will talk about the key messages, the markets, and the expectations for 2023, then our CFO, Matthias Tröndle, will give you a few more details around the financials. First of all, the highlights. We are very happy to report strong growth in the second quarter, 2023, record high sales, and year-on-year growth in all end markets and all regions. The supply chain has improved, we still have impacts slowing down and affecting our margins. If you look at the numbers, we grew year-on-year 22% to $171 million.
The strong position of INFICON in a diverse set of end markets in Semi and outside of semiconductor supports us in this volatile times. You can see that's what also supported the growth across the regions and end markets. We were able to grow also the operating income by 33% year-on-year to $33 million. The gross profit margin is still impacted by cost inflation, particularly still the chip broker cost and also some quality issues. Despite the improvements, the supply chain is still the bottleneck, but it has improved and gave us this opportunity to also increase the shipments. We were able to defend the profitability and improve it against the headwinds, also in Q2, with a 19.5% of inc.
The order intake has, as expected, reduced a bit, but much less than expected. It's still on a high level. It's just under a ratio of one book to bill in Q2. Regarding investments, we continue our investments in R&D and production. R&D is 7% of sales. This is mainly a little bit lower because the sales growth was higher. Regarding CapEx, we had a slower start in the first half of the year. That's only a time topic. Regarding the different investment plans, we expect $13 million for the full year. When we look at the global markets, you can see that all markets had a strong growth. Year-on-year, we grew in Asia 18%, in Europe 23%, in North America 31%.
We are happy to see that Asia continues the growth trend after China in particular, came out of COVID end of last year, and we saw some good growth in Q1, and also that Europe and North America continue to have good growth. If you look at the end markets in more detail, you can see in the semiconductor and vacuum coating that even though the semiconductor market is softening short term, this is not the easiest year due to the cyclicality, but we see good growth opportunities short term and especially mid and long term. We were able to grow in Q2 year-on-year by 10% in this segment, in spite of the weakening market. For us, this is explained through the semiconductor market for INFICON being a bit more diverse.
We look at several sub-markets, five to 10, that each one has a bit of a different dynamic. The weakest one certainly is memory, as we all know. This year, a bit more struggling. It's a cyclical dynamic, which towards the end of the year, is likely to improve. Other markets have been totally unaffected. The leading edge, ASML EUV, this has been basically unaffected by this year's cyclicality. We have a number of markets in between. The trailing edge. Chip makers have been more or less flat to even a little bit growth for the different product lines that we have. The mid and long-term opportunities we see as very strong, mainly through the R&D pipeline, where we have a lot of interesting new products in the works.
These slower years help us also to work with the customers a bit more on R&D development, and that's also what we see. We have a number of products already in testing at the customers, which give us further confidence that these are going to be strong products for the future. If you look at the automotive, refrigeration, air conditioning market, we see here a strong growth. We were able to grow Q2 year-on-year by +40%. A big driver is the battery testing in this segment, but we have to say that all product lines, except maybe traditional auto, have shown very good growth, driven through automation in RAC, of course, but also through the ability to ship more from the backlog or from the orders, through an improved supply chain.
Also Asia, in particular, China, has shown a lot of positive dynamic that supported this growth. Also here, we have a number of interesting new products in the pipeline. We have a few products that we launched, that you have seen also in our press releases. There's a lot of good dynamic also here, mid and long term. If you look at the General Vacuum market, that is a market that has many smaller sub-markets, which are really very different. Overall, very positive development here. We were able to grow 23% year-on-year in the Q2 of 2023. We have markets in there, like solar, that have a very strong dynamic, and then on the other end of the spectrum, markets that are a little bit slower, if you look at general industrial application, and then a lot in between.
Driven is this growth also, again, through the supply chain that improved and also through Asia and China. If you look at our fourth market, security and energy, you see here a significant growth of 128% versus Q2 2022. This is a market that is cyclical through government programs. We were slower last year. We have launched the new Hapside product, one of our flagship product, which has seen a lot of interest. We have a very strong order pipeline. We received a lot of big orders already. We are very optimistic also for the future. Through improvement in the supply chain, we were also able to ship a lot more in Q2. It is probably our most complex product, therefore, also more affected through supply chain disruptions. We are also a little bit cautious of how this continues.
It is not always going forward. We had a couple of step backwards here also in the supply chain, but the general trend is positive regarding supply channels in this space. We see also for future growth here, in particular, around the Hapside product. With that, I'm coming to the expectations 2023. Given the strong order situation and the growth in the selected markets, we are remaining mostly optimistic for 2023. There's risks. There is some sectors that slow down, but with the increased optimism, we also increased the guidance and raised it to $610 million-$640 million, from a prior guidance of $570 million-$610 million.
The operating income will stay at the same level regarding our guidance at around 19%. With this, I'm at the end of my part of the remarks, and I would like to hand over to our CFO, Matthias Trondle, for more detailed financial information. Thank you.
You, Oliver. Good morning, everyone, and welcome to our second quarter call. I will cover Q2 financials and quickly the half year results, and also comment on the guidance. Now let me first start with the highlights for Q2. Orders ended on a high level, but lower than Q1 , with a book-to-bill below one. Our sales did grow by a strong 22.3%. The gross margin was at 45%, stable, nearly stable, I would say, and we achieved a 33% increase in operating income to $33 million, or 19.5% of sales. From a balance sheet point of view, we have CapEx.
As Lukas said, our CapEx ended a little bit higher than in the previous quarter, still a little bit lower than what we expect for the full year. Cash flow clearly improved, net cash ended somewhat lower after dividend payments in Q2. Our equity ratio shows a solid and unchanged 58%. Let me go a little bit more into the details. As communicated this morning, we achieved revenue of $171 million in Q2 of 2023. This compares to $139.8 million in the previous year. This represents an increase of 22.3%. Taking into account a small negative currency impact of -0.3%, we achieved organic growth of 22.6%.
Oliver did already comment the development of the various end markets. We can point out that sales in all markets did grow. The biggest changes have been in security and energy, which more than doubled with a plus of 128%, and refrigeration, air conditioning, and automotive, with a plus of close to 40%. General Vacuum expanded by 23%, and the thin vacuum coating market did grow by 10% compared to Q2 last year. With that,Q2 ended with a new quarterly sales record. The regional distribution of sales, which you see on the table on the right side, shows growth in all regions, and we had the highest growth in North America and Europe, with 31% and 23%. Also, Asia showed a strong 18% growth.
The gross profit margin increased by 21% in absolute numbers and reached 45% in Q2, nearly unchanged and slightly down by 34 basis points compared to Q2 last year. The positive impact of the higher volume and somewhat lower broker cost was partially compensated for by higher material prices and inventory costs. What happened to the operational costs? We spent $12.5 million on R&D in Q2, an increase of 15.5%. As a percent of sales, expenses decreased from 7.9% to 7.4% in the Q2 . Here, additional headcounts to support our development efforts and some slightly unfavorable FX impacts did drive this increase. In SG&A, the cost level did increase by $230.9 million, or 13.2%.
Personnel expense due to increased headcounts are the main driver, but also general cost increases like trade shows, meetings, and travel have some impact here. The operating profit for the Q2 , here we achieved an operating profit of $33.3 million, or 19.5% of sales, after $25.1 million, or 18% of sales, in Q2 last year. This is an increase of 32.7%. Compared to our previous quarter, the result did also increase by close to 11%. The tax expense for the second quarter was at $6.4 million, which represents a tax rate of approximately 20.6%. Due to the profit mix of our international entities, slightly higher than Q2 last year, and about 2% points lower than in the previous quarter this year.
The net profit, therefore, did grow by 24.6% and reached $24.8 million, or 14.5% in Q2. This compares to $19.9 million, or 14.2%, in the prior year. Let's move to the balance sheet highlights. Our net cash ended at -$14.9 million, which is $17.4 million lower than end of last year, partially driven by the dividend payouts we had in Q2 in April. The turns for inventory decreased to two point five, and the DSO ratio, days sales outstanding, ended with 52.7 days, a similar, respectively, slightly better level compared to Q4 last year.
Our working capital, which consists of inventory, accounts receivables, and accounts payables, reached $221.5 million, or 32.5% of sales, in comparison to 29.3% of sales in the previous year. The majority of that increase is contributed to an $80 million increase in inventory due to our high business levels, partially compensated for by lower accounts receivables and better accounts payables. Compared to previous quarter, we made some progress. The working capital ratio ended somewhat lower, as both accounts receivables and also inventory, for the first time since many quarters, did slightly reduce. Our operating cash flow developed, improved clearly, and reached with $26.5 million, the second best level. The balance sheet shows a solid structure with a 58% equity ratio.
Those were my comments on the Q2 results. Now, here, quickly, the outlook. Oliver did already comment the assessment for the end markets and our view. Based on our assessment, the order book, the order intake, and the overall business situation, we are mostly optimistic, and for the started year, and we updated and increased our guidance to $610 million to $640 million, and at an operating income margin of around 19% for the fiscal year. Finally, just a few words on the half year results. We just closed the half year. We released the half year report, which you can find on the webpage. Here, just let me quickly comment.
Our net sales for the first six months of 2023 reached $329.2 million, compared with $278.1 million for the same period of 2022, representing a $51 million increase, or 18.3%, and an organic growth of 20.1%. In the first half, sales increased in all end markets. Also, in the first half, all regions did grow compared to the previous year. The majority of sales did go to Asia, where we reached $157 million or 48% of our worldwide sales. The second largest region is North America, where we had 25% growth rate and where security and energy sales tripled compared to last year, and in Europe, we had an 11% increase.
We reached an operating income of $63.3 million, or 19.2%, after $52.4 million, or 18.9% last year. Despite the slightly lower gross profit percentage margin, the sales growth and moderate increase in operating expense did result in that 20.8% higher operating income. The operating cash flow improved yearly to $42 million and doubled compared to previous year period. Yeah, as mentioned, half year report is ready on the investor page. You can download if you want. With that, I would like to close the presentation. We are now ready to take your questions.
Thank you, Oliver and Matthias. We now turn to the Q&A session. We will start with the question of Michael Foertsch. Michael, please.
Yes. Hi, good morning. Good morning, everyone. Three questions, please. The first one is on your comments on the semiconductor market. In your slides, you mention that you expect softening or decline in 2023, and in the press release, you said you expect at least stable sales in the coming months, so that's somewhat conflicting to me. If you can just clarify what you expect there. The second question would be on your comments about the memory market. You said that you expect improvement towards year-end in the memory market. Can you be more specific what indications you have that there will be improvement in memory? Finally, also on semiconductors, you mentioned products that you're testing with customers that make you confident for future growth.
Can you be more specific what products you're talking about? Thanks a lot.
Okay. Thanks, Michael, for the question. Let me see what I can give you answers for, and then maybe Matthias can also chime in. First, on the market, for Semi, we distinguish between the market and our own development, because generally, obviously, as we all know, the semiconductor market goes through a cyclical downturn this year. Therefore, we had it on the slide as softening and decline. We, as INFICON, have most of the subsegments in this market, though, less negative in our outlook. We see it flat or even growing, while also there in the subsegment of memory, we have seen 20% to 30% slower order intake.
That's the mixed picture we have there, but we need to clearly distinguish between the market or even the submarkets and the INFICON performance of the product lines and the aggregated INFICON performance. I think that's maybe where this confusion potentially came from. I hope this helps. Regarding memory, again, we also saw the beginning of the year, like some of our peers, a slower order intake in that specific segment. That can be OEM, and that can be also chip makers and our end users. We have, though, now seen selectively positive signs, and when we read the same reports as you read or even write, then we see, some first signs that, we could reach rock bottom now in Q3, and that there could be a pickup.
I have to say, I'm not more of an expert than many of you in this prediction of how the market exactly develops, but we have seen first signs and even first order pickup of some of our product lines. Maybe we go to the last point, where you had a question regarding new products. We typically will not release products in development yet. I can just give you a bit of a feeling. There's a lot of sensor technologies that we're working on. We have a couple of core technologies, as you know, pressure management or pressure measurement and the mass spec gas analysis. We built out this portfolio over some time with new technologies.
For instance, one that we have launched, the Quantus or the Aurora products in the optical space, and we have a few more new technologies in the works there, that currently are in this testing, and we think that in the next years, we'll be able to establish them as products as well. As you know, the semiconductor industry, while being moving really fast, is, on the other hand, also conservative in adapting new technologies. It takes its time to establish them in the new processes at OEMs or chip makers. I hope with that I can answer your question.
Yes, thanks. Thanks a lot, and, congratulations on the record sales.
Thank you very much, Michael.
Next in line is Joern Iffert. Joern, the microphone is all yours.
Thank you. Good morning, everybody. I would have three questions, please. I would take them one by one. The first question, coming back on the gross profit margin, 45%, is it another smaller setback? We hear from some other companies, chip prices are going down, so they get some support. It seems not the case for INFICON. Can you please clarify what exactly is happening here on the shipper chases? When you expect some release? This will be the first question, please.
Yes, sure. Hi, Joern, of course. Let's talk about gross margin a little bit. I mean, midterm, we have the strategy and see also the path back to 50%. We, short term, have the priority to reduce our delivery times, increasing capacity and satisfy our customer demands as a first priority. What does that mean on the other end? We will accept quality issues with suppliers when they ramp up, and the quality has been affected by that. We had a lot of supply chain disruptions, where some missing products led to line stoppages or slowdowns and things like that. It has all improved since last year, but it is still significant this year.
One of the bigger factors, as we talked about continuously over the last year, obviously, is the cost for the broker cost for chips. From that level of the $15 million-$18 million last year, we have been coming down. We talked in Q1 about maybe going to two third of that level. It has not gone away yet in Q2 as much as we would like. It's still more than 50% of that level. We had also some incidents of quality issues that have also produced more noise in the system and have also been affecting our gross margin. I'm optimistic on the profitability.
You see it also on the bottom line, but we will clearly prioritize right now to gain market shares, reduce delivery times, make our customers happy by shipping versus optimizing the cost too much on that end, if that makes sense.
Yeah, thanks for this, and if I may follow up on this, what is roughly the impact on your internal quality issues, productivity issues, on the gross profit margin in Q2, and what is the impact from really still higher brokerage costs? If you can quantify this in basis points, roughly. When do you expect gross profit margins really to increase quite significantly?
Yeah. Maybe Matthias, can you help me out a little bit?
Let me try to size it a little bit. The broker costs are in Q2 still in the range of about, yeah, 1.5% in that range. The inventory issues we suffered, and which are above normal level compared to previous quarters, are in the range of 0.5% to 0.6%. Give you the indication and the feeling.
Okay, you also mentioned quality issues in production.
Yeah
-profit margin, or did I misunderstand this?
Yeah, no, then maybe let me clarify this. I mentioned quality issues from our suppliers.
Ah.
You need to understand, some of them had dramatic increases of their capacity, and some didn't fully stabilize the new product lines in terms of quality or output, right? Both is a bit interlinked. The quality issues that affected us, was mostly caused by supplier quality issues on the parts that they shipped to us.
Maybe, Joern, to add little bit information on this broker cost. What we believe, let's say in Q4, that they should decrease further. That in Q4, the level of broker cost should be much lower than in Q2. That's what we assume and what we have in our forecast. But what we also should consider is that we still have some of these higher-priced products and chips in our inventory, so we sell it as we go, right? So even if today, all the broker costs will stop, we still have some two to three months to realize these costs into our P&L, right? Just for explanation, because that's sitting in the inventory.
Yeah.
Yeah. Maybe to comment on the other half of the equation regarding the price realization. The process there is also dragging out a little bit, mainly because of the backlog. The renegotiation happened, right? We talked about that already last year. Since we have this significant backlog, this just drags out. When you ship more, you get closer to the new price level, but it's a bit of a blend now, right? Some have reached it, some haven't yet. Another factor that will play into this.
Okay. Thanks for this. The second question is a really quick one. Can you remind us on your total solar sale exposure, and what is roughly your growth rate assumption here for the next one or two years?
Yeah, Joern, as you know, right, from discussions, we're currently working out more details on our strategy. As I mentioned before, we have been working last year quite a bit on the long-term strategy, breaking it down to different markets. While we have a very clear picture on semiconductor and the sub-markets there, a couple of other key strategic market like battery, on solar, we don't have the clarity so much on where it's going and how the dynamic is. It's also a market that we serve mostly indirectly through OEMs. We could probably say it's some mid-single-digit market, bit on the higher side, maybe, of that. Matthias, what would you estimate?
Yeah.
Make sense?
Yeah, makes sense. Yeah.
Okay.
Certainly one.
Yeah
Has dynamic, we were further going to target with more product lines. Give us some time there to refine our strategy. It's a bit of a moving target as well, right. While the West starts to work on supplying their own energy transition products more than from China, there's some shifts in there, but certainly an interesting market for us, that is currently part of Genvac.
Maybe really the last question, quickly, if I may? In the semi segment, you mentioned you have five to 10 different sub-end markets. With the new products coming up, is this increasing the number of sub-end markets, that you have a couple of adjacencies, that we speak about 10 to 15 sub-end markets over the next five years, or is it more innovations in existing STUs and product lines, reciting some replacements and productivity improvements for your customers?
Yeah. Yeah, good question. This is both. We currently, of course, look with highest priority at applications and channels and customers that already exist, and want to expand our capabilities there. For new applications, one of the things are, of course, new process types, that you need different, more sensitive sensors or more sophisticated data analytics. That's one part. Another part is also to look more into the general value chain of semiconductor and look at the needs of players in there that maybe support current customers. One example could be in lithography, you have a lot of tools around that support, for instance, an EUV tool.
If you think about how you look at the mask, how you measure contamination, how you clean it, and so on, there's different pockets like this that we're also looking at. You could look at more of the front end of the back-end market. There's a lot of dynamic there. Just to give you a little bit of a flavor of, in places that we are working on.
Thanks very much.
Mm-hmm.
Thank you, Joran, for your questions. The next questions come from Emrah Basic. Emrah, please.
Hi, good morning. Just two quick ones. Your guidance for the full year, does it already price in a potential improvement towards the end of H2 in the semi segment, or is there some upside on your guidance?
I mean, generally, we, of course, try to do the guidance with the best knowledge and then be in a realistic scenario. That's where we are right now. Of course, there's upside, but there's also downside. This is a bit more difficult year. That, of course, has been now a bit cleared up through the last couple of months, but it's still a bit unclear how the semiconductor market will behave in Q3 and Q4, right? There is this notion that rock bottom is in Q3, and we have an improvement in Q4. We all don't know exactly how this is gonna play out in the end. It will come, plus or minus a quarter, probably. We have the same insecurities a bit on how this will play out.
Maybe one thing to note is that Q3 is historically seasonal, a slower quarter for INFICON, and then Q4 is a very strong quarter historically. We have also this up and down swing a bit, coming in the second half, which is adding a bit more to the uncertainty of where it exactly will play out. Again, we stand by our guidance, $610 to $640. That's what we currently see as realistic.
Okay, perfect. Thanks a lot. The second one would be, the outlook for your General Vac, it changed from, flat, to, growth versus the last quarter. I'm not sure if you already did, but if not, could you maybe add some color on the change in dynamics for, over the past couple past few months?
Yes, of course. Versus beginning of the year, where we were a little bit more pessimistic and maybe also saw some larger economic downturn or even the recession in some of our markets. We haven't seen much of this at all. Of course, there's a big backlog play in there as well. We also have seen good orders, particularly also in Asia, but also in other markets. This all shows us that there is a bit more potential there than we originally thought, and I believe some of these sub-markets, the smaller ones that are in Genvac, the way we track them, and I need to again emphasize that some of them we track indirectly through OEMs and more sometimes complicated channels.
They have been, they have shown much more dynamic than maybe could have been expected from the general economic dynamic. It seems that there's a couple of markets that have, through energy transition, government sponsorship, and so on, just a higher dynamic than the general markets. This compounds together and shows then in the end, a very nice Genvac dynamic. Please also note again that the supply chain has significantly improved in terms of how we can deliver versus a year ago. We are just also able to ship more.
Okay, perfect. Thank you very much.
Sure. Certainly.
Thank you, Emrah. Now we hand the microphone over to Marta Bruska. Marta, please.
Good morning. Thank you for taking my questions, and congratulations on the fantastic result and the guidance rise. I would like to just clarify a few things, actually. I do understand the issues you discussed with Jeroen on the gross margin. That was very helpful. I would just like to ask, you know, despite that, actually your gross margin was up 150 basis points year-over-year, and even up sequentially 50 basis points. It doesn't seem like, you know, your issues in the production were that significant after all, or how did you manage to... You know, what is the main driver of that strong operational performance? If you can give us some additional detail, please.
With regard to the costs, speaking of operational performance, we basically see no increase quarter on quarter, neither in research and development nor in general, admin expenses, despite the inflation. I was just wondering, you know, what's your outlook for the remainder of the year? I have one more please.
Thank you, Marta. I will maybe do it this way, that I will answer the second question first, and then I will turn to Matthias on the gross margin topic. Regarding SG&A and R&D, general topic, is, of course, that our sales are a bit more volatile than maybe our long-term plan to build up this two organizations. A lot in SG&A is driven through building out our sales network, and as you know, a large part of it is actually application engineering and service engineering. There's more strategic consideration there, typically, where to place a service center, where to place an application center. On the R&D side, same thing, where do we wanna build a new capability?
Where do we find a specific scientist group that we would like to take on board? This is kind of an independent dynamic, so we have built this up. In the meantime, while the dynamic on the sales is driven a lot by supply chain, market orders and things like that. The strategy has not changed for us. We are committed on building out R&D, and we are also committed on building out our sales network globally further. When you look at these opportunities that we see really in many of our sub-segments, we are trying to be very strategic about where we wanna go there for future. Again, the dynamic is a very different one versus this quarter to quarter, this year in particular, volatility of our sales output, if that's helpful.
Absolutely. Thank you very much.
Thank you.
Yeah. maybe to add a few words or comments on the gross margin.
The EBIT.
On the EBIT, okay. Maybe rephrase it again or tell me again, because I was.
Yeah, it was just like the, you know, the gross margin, yes, was down, right.
Yeah
The EBIT margin was up 150 basis points and also, you know, year over year and sequentially up 50 basis points. Your profitability has actually increased.
Yeah
In the margin on the operational level. What was the some of the key?
Yeah
... Contributed that?
Yeah, we tried already a little bit to phrase it or to explain it, but on the one hand side, it's volume driven, right? Our performance and our profitability. We had more than $30 million of sales, which helps a lot on the gross margin in absolute terms and in parallel. Yes, our SG&A and R&D costs did also increase as we just discussed, but of course, they did increase a little bit more moderate than the sales and the gross margin, which then brings, of course, all these volume impacts. At the end, you end up really with a higher profitability, right? These are really the main reason in there.
What is in general always important, normally, I don't like to tell it, because sometimes it's meant to be a kind of excuse if you don't know it. Bring in the mix, right? The mix is always a nice topic, but it's really the case that mix is impacting us a big order somehow, sometimes positive, sometimes negative. We have product lines and products where we, you know, where we reach maybe 80% gross margin and others where we only have 20%. At the end, sometimes it's really depending how it comes together, who's shipping what, where do we have continuous production, continuous flow, efficiency gains and no disruption, and then the result comes in, right? As it is.
That's the nature, and it would be easy if it's only always this nice discussion, broker cost and inventory and scrap, then I would be maybe unemployed, and you don't need any finance people anymore. It's a little bit more, and it's a little bit more complex, right? That's what I want to say. Sometimes you have drivers which are changing over the periods and over the quarters, right?
Yeah. I would also emphasize, maybe to tie back to what I said in the markets. This year has been a bit more intransparent of what each sub-market does for us, really almost behaving independently and almost on a different universe, some of them, than others, positive and negative, which really made it for us more difficult to understand where does cross margin and profitability go because of these sub-markets and our sub-product lines behaving quite different, right? The whole supply chain dynamic and so... This has been a bit shaking up and down.
I think, though, the general corridor is clear and our aspiration also, so we'll get through this little bit intransparent year, and I think we'll have, in future, probably a bit more clarity, particularly if I believe next year, we all believe semiconductor will stabilize and improve across the board. That already will be simplifying the task.
All right, just to clarify, this year, growth year to date, nearly 20%. For you, it's predominantly a volume driven?
yes. I mean, the... Maybe the question is, are you talking now rather markets or rather financials? because if you talk market...
No, no, it's the revenue increase, right, year to date?
Yes.
I would just like to split that in terms of pricing and volume, if that's possible at all, please, roughly.
I would say it's a mix. On the one hand side, we really assume what I said earlier, that all these special costs will smooth, right? Fade out slowly, right? These broker costs and so on, and we will have some relief. That's what we assume. On the other hand, the volume will also help, of course, to increase margins, whether it's gross margin or operating income margin, this will help.
No, no, I just wanted to know, with the growth you delivered, right, for the H1, 18.4%, how much of that, roughly, was volume, and how much of that, roughly, was thanks to pricing?
Oh, pricing. Oh, okay, understand. Yes, as I said, the price realization, even though this negotiation have taken place largely last year, beginning of the year, because of the backlog, there was quite some delay there. The way we look at it in the management is to really push it in terms of reducing delivery times, increasing capacity, and really deliver. That's the only way. Also helps a lot of other things, right? Makes customer happy and reduces inventory, and I believe we have seen good progress in Q2. How big the part is of pricing versus volume? There is certainly a strong volume increase in there, but there is a pricing effect that been already realized, but not the full one.
I think the full one, we could say, is gonna be above 5%, maybe 7%. Again, now comes my disclaimer here. Many sub-markets, many key accounts, many product lines, all moving at a different pace and all sometimes stopping and going this year. There's a big mix here. We certainly are not at the end of the price realization, so I would believe there's a significant As you can see from the rough numbers there's a significant growth in there, and we know we gained market share in some sectors that are also known, where we attack and where we move fast with products and new applications.
Fantastic. That's very helpful. Thank you so much, and congratulations again.
Thank you very much.
Thank you, Marta. Next in line is Michael Schütz. Michael, please.
Right. Can you hear me now?
Yes, we do. Yep. We could hear you before, Michael. Try again.
It's mute, so...
This looks better, Michael. There you are. Still don't hear you, though. We could hear you before.
Can you hear me now?
Yes, we do.
Okay.
Yes, we can.
There seems to be a kind of a delay in this mute on and mute off. Just a clarification to your guidance. I mean, your upper end of the guidance is $640 million. The first half sales was $330 million, so that leaves $310 million for the second half, which is about two times 155, something like that. With $155, which is significantly below the $171 you made in the Q2 , my question would be: What do you expect to be much weaker than in the Q2 ? What was extraordinary in the second quarter, maybe extraordinarily positively?
I mean, is there some catch-up of delivery or, I mean, what do you see or where do you see most changes in Q3, Q4 versus Q2 ? Maybe also on this operational leverage. I mean, you guide for 19% EBIT margin on a lower, basically, top line in the second half. The dollar is also weaker. I guess that would be slightly negative for your margin normally, with some expenses in Swiss francs. Is that improvement basically underlying improvement coming from the gross margin then, as you mentioned in the fourth quarter, or is there some other elements?
All right. I will try to give you a bit the bigger picture. Maybe Matthias can then give a bit more flesh on the bone on the specific financials. Guidance, yeah, again, what I just mentioned before with Marta's question. It is a bit of a difficult year to understand all this separate sub-market dynamics. Yes, in Q2, a lot of positive has compounded, right? If you look at Hapside and the shipment, that certainly worked because of the supply chain being better or does we anyway have there. Then we had Chainmag, maybe solar in China, totally independent, also worked really well, and we were also able to ship. There's 20 markets in between.
This is a bit the picture we're looking at, and we had quite some discussion to find out what is a realistic guidance here. What we do know is that we had to increase it to this level. What we don't know is if will we have another quarter like Q2. I think generally, as I mentioned, Q3 is normally a bit slower, right? Because of mainly vacation times and things like that. It's a seasonal topic. Q4 is always very strong. It's often our strongest quarter. How will it play out, though, exactly, specifically with the semiconductor market still being in slowdown? How much delays will we have from the customer? I can tell you one example. Arizona TSMC fab, right? Massively delayed. Just came recently as a news to us, too.
The things are produced, they're on the dock, they're ready to ship. We're not gonna make revenue on this this year, right? We'll have to reassign part of the product, potentially, but we have this kind of playing field where we are in the middle. We are mostly optimistic, right? We are more optimistic than at the beginning of the year, that you can see by the raised guidance. We also still have so much volatility there that it is a bit hard to say. I would say that the same context, of course, goes also for the operating guidance. We have seen so much up and down, month-on-month, in the different markets. It's still, I believe, a good solid guidance level to shoot for. Yeah. Again, there is upsides for sure.
There is, though, also downside because of this dynamics. Maybe, you can give a bit more on the-
Yeah.
Specifics on the financials
Yeah. Just let me use Oliver's word, playing field, right? I would agree that the playing field is special, right? Yes, we have some pressure on the Swiss franc, as you said, that's correct. We have some exposure on the Swiss franc side, we also discussed earlier, the gross margin, the program. Hopefully program costs are easing over the next six to nine months. We have some pricing positives and so on, there is still a lot of volatility in there, whether it's our production ability, whether it's the supply chain and so on. Also, I must emphasize and really say, we didn't say 19, we said around 19. This gives some room, right?
It doesn't mean we stop at 19 or something like that. Please also give us a chance to update our guidance also in October, right? We have another quarter, and as we go, and that's what we always did, we of course update, right? When we have news, we have new insights, maybe new information from customers, from markets and so on. As we go, of course, we update, right? We would be more, definitely, more than happy, right, to even to increase and maybe bring positive news. We don't know yet. It's always tough to do the assessment at the end of the day because there are so many influence factors in there, and that's today the best of our knowledge.
Yeah, we are happy to improve, and we work on it, and we will share the news if we have some.
Yeah. I mean, the very strong point here that Matthias is making is also that Q3, probably more than other quarters, will hopefully create some clarity. Talking about semiconductor, is it bottoming them out? Is the Q4 going to improve or not yet? A couple of these things we will know next time when we meet for an earnings release in October. I believe then definitely we will, we'll be able to give you a better update. That is an important point to consider. It's a bit exceptional this year in that sense, I would say, the span from now till end of Q3.
Okay. Thank you very much.
Hope that is helpful, Michael. Thank you.
Thank you.
Thank you, Michael. Seth Schwartz joins us with his questions. Seth, please.
Yes, good morning, everybody. Thank you for taking me. Probably the first question is the run rate of the orders? You believe that this remains stable going into the second half, or do you see up or downside on the current run rate? You mentioned that the book to bill is slightly below one. This tells me that orders probably have been around 300 in the first six months. Is this assumption correct, or I'm totally wrong?
No, you're not totally wrong. It's, obviously, we don't, we don't communicate order numbers. It has been above one in Q1, clearly, and in Q2, not much below one. Hence, calculations, there is a little bit of a range that you could probably calculate, but things are developing really positively. I think you could say it's one-ish around the first half, right? With a little bit of plus on it. We see for the second half, not necessarily a slowdown on orders, but here comes the big but, the same disclaimer: we still don't know how the semiconductor market is behaving. The other markets, they have a good dynamic.
Some general economical drivers that we all know, nobody or I don't know it better than others, how they will develop. There is some risk there, but generally, the other three markets, they have a good outlook, as you know from our presentation. The semi is the tricky one this year, but also, given the great order situation, there is not much to worry for us at INFICON. I think there is some uncertainties on some product lines and some key accounts and some products, yes, and some of them can be also bigger. Example, right, TSMC. The project isn't lost. The business, it will continue. The question is the timing, right?
We had delays like that, and they come sometimes sudden when the movement comes, and that's where our uncertainty also comes from a little bit. The supply chain, yes, it has been good in Q2, but I can tell you, not all months have been the same in Q2. And that maybe illustrates the volatility from month by month, when a certain product line, a PCB, a pump, a mechanical part suddenly doesn't show up on time, or it shows up in the wrong quality, and you have some slowdown there. That's a bit again, the complicated playing field where we try to find out what is gonna happen. Again, there's a good reason for optimism for the second half, also on the order side.
Okay, many thanks for the long answer. Very helpful.
Of course.
Second. No, just kidding. Second one, on China, surprisingly, you've mentioned very good demand in China, and contrary to many other companies, where they speak about delays and whatever, no recovery seen yet. It seems to me that China is mainly driven by solar and battery, right? I believe that you can confirm that. Do you see now, is it on the base effect, or is this continuing, or, what are the risk, upsides and downsides here in this China market?
I mean, simple, if you could ship more, we could also write a higher revenue. At this point, it's still mostly about that. Batteries is big. Everything around EV is big. I mean, there's different product lines that go in that space, and there is connected businesses. If you look at the chip manufacturing, more on the mature side, that are connected to the EV business, strong dynamic. Certainly there is interesting semiconductor business popping up there. Interest also for sophisticated sensor solutions and software. Solar is one in it, but there is really a large mix there, right? That for us, China is very broad. If you look at Genvac, China is a huge part in this, meaning many markets through, but of course, it has also the other few end markets in there.
I tell you, we do try to stay close to this, analyze it. I was just in China for a business review to better understand dynamics. Largest part of the markets where we participate, it's about doubling down, expanding, pushing, building up. We are in a strong market position while economically, in general, there are significant issues, obviously, in China. We haven't so far seen them affecting us significantly. I do hope this continues. I don't know how China will potentially slow down. I don't know how potential real estate issues will play in. That's I'm not the right person to ask. At this point, we're really quite optimistic of what we can achieve, particularly short term in China.
Okay, good. Very good. The last one to Matthias. I have to bother him again on this margin story. Taking last year, you know, you did $300 million sales. It's the same number you guide for this year for the second half. Last year, you did a gross profit margin of 45.5% around in the second sixth months. It's about the level we have seen so far. You said we don't see any improvement here, but you achieved a margin, EBIT margin of 19.4%. It looks that the setup is the same like last year, the second half, but you are cautious on the margin.
Therefore, my question different now, what is different to last year that the margin could go to 19% instead of approaching 19.5% in the second six months? You already mentioned head and tailwinds, what is different then to next year, where do you see the downside and then on the fixed costs?
Yeah, I already tried to give some insight about what are the drivers. I'm not sure I have many more, right, to give it to you? There are really a lot of dynamics in there and influence factors in there. Some you know, some you are surprised. Like for example, last year, we had much higher freight costs, right? Compared to the previous year, they did burden us with about, I don't know, 0.5% to 1%, yeah, of the margin, to give you 1 example.
This is fortunately also easing and getting better, we don't see these big differences anymore compared to the previous year periods, it's really moving, right? It's really moving. I cannot tell you exactly this and that. It's a mix of different influence factors and also a mix of different actions we have, right? As Oliver said, right, we work on many different areas and try to push, whether it's, for example, maybe not directly P&L related, but the inventory re-reduction, right? Improving some balance sheet items. On the other hand, we have these pricing initiatives.
We work with the brokers, we work in the production efficiency, which is really something which is very often underestimated, how it could impact your profitability and your outcome, when you don't have enough absorption in your overhead cost and so on, because you have some disturbance in the supply chain. That's really many points which can influence, right, on that one, right? It's, yeah.
Okay, I hear you. I hear you.
It's okay.
Probably, seasonality is always important, also in relation to the margin, you know. Do you expect the same seasonality again in 2023, like the previous year? Weak-ish Q3, very strong Q4. This still remains the same, huh?
It's very likely, even though many things you could say are totally different, I think the largest part of the drivers why this happened, for instance, vacations, and also the dynamic of the customer and maybe at INFICON, this is similar. Yes, I would say Q3 will be a bit slower, Q4 should be strong. That is the typical dynamic at INFICON, and largely, that should remain the same this year.
Okay, many thanks. Enjoy your summer holidays, bon voyage, and all the best for the future, huh?
Yes. For sure.
Yeah. Thanks.
Next is Serge. Next in line is Daniele Scilligo. Daniele, please.
Yes, hello. I have two questions, and maybe you would appreciate that from an investor point of view, we have more a midterm view on where the journey goes, so maybe a bit more clarity on where the midterm journey goes. You spoke about gross margin target of 50% midterm. Can you attach maybe a timeframe, a year number on it, and then maybe also discuss where the EBIT margin will be? We have a very simplistic model. You have the gross margin. If the costs are fixed, EBIT margin should be at 24%. Is there something that would hinder going the margin to that level? That's the first question.
I mean, what we generally don't do is giving such a longer term information. We can say that, of course, we have, through the strategy that we developed long term, certain targets that we wanna achieve, and they are also profitability targets. I also have to tell you that, generally, our strategy is more focused on growth, gaining market share, occupying new spaces. If you think about all the software opportunities or new technologies in sensor, that we try to push forward, that this will come secondary versus the priority of really going after this significant list of opportunities.
That having said, that's why we would technically not like so much to tie us in on that, while we see a lot of updates and new dynamics now in many of these markets. If you look at battery, how this market behaves and how it takes leaps and bounds forward, suddenly, we would like to develop three other product lines. We add more R&D, we add an innovation center, this will always make more sense than the push for the gross margin. Having said all that, it's still, of course, an important part of our strategy and our, also our operational focus. I know I don't give you the number that you maybe look for, but maybe Matthias can narrow it a bit more for you.
Thinking long term, it is probably better to go and look at our products and markets. We will also do, again, a technology day, or, many of you visit us sometimes here in Balzers, to get a feel of what is really behind this. There is substance there, really.
From what you just said, if the market stays dynamic, you won't reach 50% gross margin?
Let me answer the other way around. Our ambition, right, is really to go into the direction of 50%, whether this is in two and four or one year, we don't know, right? Or we don't discuss this here right now, but that's really our ambition, right? And we had times where we have been between 48% and 50%, and that's a range we wanna achieve, and our ambition to 50%. And also our ambition on the operating income margin, I would say, is to be above 20%, 20 and above.
That's something which is, I think, what we can say in the moment. Whether this is at the end a little bit higher or on your range, we don't know yet, because we have also other, as Oliver said, other initiatives and priorities. It's not just volume growth and operating expenses are stable. That's not the case, right? We have many other initiatives which are of importance for us, for sustainable growth, for developing maybe new markets and regions, like development centers or service centers somewhere in the world, to be close to the customer and to generate business and to get a good customer relation and to keep a good customer relation.
It's not just, this one is fixed and the other is simple, and then you are at 24%. As I said, above 20%, I think is a good goal and ambition from us.
Maybe one thing to add here also, when you look at, maybe an INFICON 10 years ago, we're very committed to a growth path. As you can hear from the statements, right? Where maybe 10 years ago, 15 years ago, there was more of a focus of giving back to the investors. Now, also, this year, this decision, we need further expansion. We see the markets. We put it in there. I think this is a super exciting time in semiconductor, the sub-markets of semiconductor, and a couple of other key markets in new energy, new clean energy areas, where we see opportunities are already in there, entrenched. We go after them. It's the next five, 10 years, I think, real cool stuff is happening.
We see it, we feel it, and that's why we would like to have the freedom, and so far, our investors gave us the support for that, to go after that first. Don't ever forget to also work on profitability.
Mm.
That's for sure.
Okay, and maybe one question on this growth. You spoke about a decent market that could extend your addressable market. Are we speaking about smaller things, or could they be transformational in how your addressable market would look like in five years?
Yeah. There is some transformations possible, right? Specifically when you look into how software in a semiconductor fab behaves or what you can do with data analytics or machine learning. We are in machine learning for 25 years, you could say, when we did the acquisition of our FabGuard group and then built it out from then on. Of course, there is more and more opportunities there. For instance, this acquisition we did in 2018 with the Final Phase Systems. We see more opportunity there, and there will also be more transformation, and the speed will pick up. We've seen that the last two, three years, how this transformation affects more and more and changes more and more. That's one of the examples, but I can also say there's many markets where it is really add-on variants, developing new applications.
If you look at a leading semiconductor fab, we are entrenched, we are the leader, but we want to develop new mass specs, new different sensors, that maybe measure a process better or a process that comes up in a different way or solves a new problem. That's then more an incremental approach. So we have the both going in parallel. We do look also at a couple of new markets, and we do look at a couple of targets. So there is an interesting pipeline that we are working on.
Okay. Thanks a lot.
Sure.
Thank you, Daniele. I see no further questions at this moment, so I would like to invite management for any closing remarks.
I would like to thank everybody for participating today, for the interesting discussion, and I'm looking forward to see you soon again at the next earnings release in October, where we hopefully can give you some more clarity on some of the questions. Looking forward to meet you all there again. Thank you very much. Have a wonderful summer and a great day.
Thank you.
Thank you.