Ladies and gentlemen, welcome to the INFICON third quarter 2019 results conference call. I'm Andrea, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing Star and One on your telephone. For operator assistance, please press Star and Zero. The conference must now be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Lukas Winkler, Chief Executive Officer of INFICON. Please go ahead.
Thank you, Andrea. Grazie, good morning, everyone. Thanks for joining us today to review our results for the third quarter of 2019. Sales of the first three quarters of 2019 have all been within plus minus $2 million at the stable level. The expected upswing or rebound in the semiconductor market did not start yet, and the U.S.-China trade conflict, as well as the general economic uncertainty, had some impact on our results. You can find the PowerPoint presentation, as always, on our investor relations tab on our website that supports our conference call. I'd like you to turn to slide number four, please, where we start with the key figures for the reporting quarter. We closed the third quarter with decreased sales year-over-year in all our target markets and all sales regions except the Americas.
Total quarterly sales reached $93.2 million, which is 8.1% below last year's third quarter and 3.5% below the second quarter of this year. With a gross profit margin at about the same level as a year ago and lower operating expenses, we finished the quarter with operating income of $16.3 million after exactly $20 million a year ago. Sequentially, compared to the second quarter this year, we increased our operating income margin from 16.3% to 17.5%. Matthias Tröndle will review the detailed numbers later while I now go through all our target markets, and I'm going to start with the smallest one on slide number five. Oh, I'm sorry, we go first to the breakdown on slide number five, where you see the four markets that we serve.
The pie chart on the left side indicates only minimal chart changes and has been as stable as the quarterly sales level in the three first quarter of this year. On the other hand side, the graph on the right side shows the sales fluctuations in Asia, while the contributions from Europe and America have been relatively stable during the last two years. Now I will go through the four key markets and start with the smallest one, the security and energy market, on slide number six. Sales decreased more than 18% year-over-year and 6% sequentially, and reached $6.3 million. The main contributor was still the HAPSITE, our main portable on-site chemical warfare detection instrument. With decreased activities in Europe I'm sorry, with increased activities in Europe, geographical breakdown has been more balanced than in the past.
Overall, the spending for security applications were lower than a year ago, but has been slightly offset with increased sales to the energy and environmental market. Looking ahead, we have become less skeptical than at the beginning of the year, and despite the ongoing geopolitical uncertainties, we experienced a positive order momentum for all existing and new applications. Now, moving to the refrigeration, air conditioning, and automotive market on slide number seven. With sales of $20.1 million, which represents a sales decrease of 5.6% year-over-year, and a surprisingly high decrease of 13.7% compared to the second quarter of this year. All regions were weaker than a year ago, and for the first time in three years, we experienced a sales slowdown in the RAC and automotive market.
The sudden weaknesses came as a surprise, but indicate clearly the economic uncertainty around the world, combined with the trade conflict and the change in the automotive market towards e-mobility. RAC device and automotive manufacturers became more reluctant to invest in new capacity given the unstable outlook of the world economy. Even the e-car battery manufacturers became more cost-cautious as it is expected that the price for batteries needs to go down in order to be competitive. Nevertheless, as the preferred number one supplier in this market, we are able to keep our high market share and expand into new sophisticated leak-checking applications, such as the rechargeable battery test market for small batteries to be used in mobile devices, phones, wearables, and wireless earphones, and so on.
For our line of handheld battery-powered after-sale service products, the distribution strategy, in conjunction with a multi private or wide label brand strategy, pays off. We are on the way to gain market share globally. We still expect to finish the year 2019 on a new record level. Let's go to the semi and vacuum coating market, which includes solar display optics and semiconductor applications on slide number eight, where sales decreased 9.5% year-over-year and 3.8% sequentially to $40.1 million USD. Investments in new capacities, mostly memory chips, in certain countries in Asia have been reduced, postponed, or sometimes even canceled. On the other hand side, sales for new technologies such as the EUV lithography or new software solutions to enhance quality and efficiency to logic device manufacturers in the U.S., Europe, and at least one Asian country increased.
We expect that the positive market trend will continue. The expected general rebound of the semiconductor market did not happen so far, and all the indications point to 2020 as the recovery year now. Nevertheless, we remain cautiously optimistic about INFICON's sales growth opportunities earlier on. New products, software, and services just started to generate first revenues, and the need for new EUV lithography tool continues to grow. Investments in new OLED capacity are discussed widely, but the business activities are still at a low level, stable at approximately 40% below last year's record investments. The China initiative for semi and OLED technologies experienced some setback due to the U.S.-China trade and IP issues. Unfortunately, defending our market position and the duties we have to pay will cost us a small single-digit $ million figure on the bottom line this year.
2019 will be seen as a challenging year. Looking ahead long term, the semiconductor market will remain the most attractive growth opportunity for INFICON. We had a sequentially improved quarter in the general vacuum market on slide number nine with sales of $26.7 million, which is 5% below last year's third quarter, as I said, 7.2% above the second quarter of this year, with growth coming from all regions. As you know, we sell analysis, measurement, and control products for many different industrial applications through private label partners, primarily vacuum pump manufacturers, directly to industrial OEMs and distributors. We gained market share with our direct sales channel as well as with private label products and get slowly into new applications such as sterilizations, life science, and analytical markets.
As a positive side note, we sold the first Contura S400 leak detector for food packaging applications to North America. Before I turn over to Matthias, I like to close my part of the presentation with an outlook on slide number 10. 2019 will remain a challenging year with market and geopolitical uncertainties, with a delayed semiconductor rebound, and an unknown outcome of some U.S.-China trade discussions. The list of the main challenges on this slide did not get shorter for the first quarter. We rather face new issues such as the cost pressure for e-car battery manufacturers. On top of that, the exact year-end shipment timing can have a large impact on our final annual sales recognition.
Special efforts will be needed, and we'll do our best and focus on reaching our ambitious, unchanged guidance of sales around $400 million and operating income of approximately 19% of sales. With that, I'd like to turn over to Matthias, who will give you more details about our financial performance. Please.
Thank you, Lukas. Good morning to everyone to our third quarter conference call. I will start my presentation with the Q3 financials and followed by the guidance for the full fiscal year. My commentary starts on slide 10 of the PowerPoint. Revenues for the third quarter of 2019 came out at $93.2 million compared with $101.4 million in the same quarter of last year. Total sales decreased by $8.2 million or 8.1%. Compared to one year ago, the US dollar did strengthen against some of our major currencies. Due to that, we had a negative exchange rate effect of -1%. Further, we had a positive impact due to acquisitions of 1.5%, which means we had an organic sales decrease of 8.6%. Looking at the end market developments, all markets decreased.
The semi and vacuum coating market had the highest decline due to a drop in sales in Asia and decreased by approximately $4.2 million or 9.5%. On a sequential basis, sales in the third quarter did decrease by 3.5% compared to sales level in previous quarter Q2. While the general vacuum market did grow by 7%, the overall decrease was driven by weaker sales to the semi and vacuum coating and the refrigeration, air conditioning, and automotive markets, which did drop by 4%, respectively 14%. Let's take a look to the regional performance. On a geographic basis, Europe and North America reached 29%, and Asia Pacific ended with 41% of total third-quarter sales. As you can see from the chart, Asia sales did fall by approximately 19%, and as just mentioned before, was mainly driven by the semi and vacuum coating market decline.
Europe developed more or less stable, and North America did grow by approximately 8%, thanks to higher sales to the semi and vacuum coating and the refrigeration air conditioning automotive market. Compared to previous quarter, Q2, sales did increase in Europe by 2% due to higher semi and vacuum coating sales, while the other two regions did decline. Let's go to the next slide. The gross margin for the third quarter of 2019 reached 49.6% and ended nearly on the same level as last year. Compared to previous quarter, Q2, the margin increased by 120 basis points. Moving on to our operating expenses. R&D expense in the third quarter reached $8.8 million and increased by 11.4%. The number and the increase is mainly driven by the acquisition impact, as well as some favorable FX impacts. As a percent of sales, this represents 9.5% after 7.8% in the last year.
SG&A, selling, general, and administrative expense in the third quarter was $21.2 million or 23.7% of sales, a decrease of $1.2 million or 6%. The decrease in SG&A expense is influenced by lower variable compensation and commission spend, as well as some favorable foreign currency impacts. Now let's turn to the bottom line. For the third quarter of 2019, we achieved income from operations of $16.3 million or 17.5% of the sales. This compares to $20 million or 19.7% in last year's third quarter, which means the result did decline by roughly $3.7 million or 18.5% compared to last year. The decrease is mainly driven in the combination of lower sales volume and therefore lower gross margin contribution, while the cost did decrease slightly. Let's go to the next slide.
For the third quarter of 2019, we recorded tax expense of $3.6 million, which represents an average tax rate of about 22.7%, slightly 1.6 percentage points higher due to our profit mix in the different countries. Net income for this year's third quarter reached $12.4 million or 13.3%, compared to $15.3 million or 15.1% in the same quarter of last year. The decrease of 19% for both net income and earnings per share is more or less in line with the operating income development. Let's move to the balance sheet. Our net cash position in Q3 was $29.2 million. This compares with $62.3 million at the end of last year, which means a decrease of about $33 million.
This decrease is due to the $54 million dividend payment we did do in April this year, which is partially compensated, of course, by new cash flow generation in these last months. The operating cash flow, which you can also see on that slide, did increase from previous quarter level and reached with close to $50 million a solid level. For the third quarter, our DSO, days sales outstanding, was due to some higher accounts receivables levels with 52.7 days, a little bit above the level at the end of last year. Inventory turns did decrease and reached 2.9, while the working capital level increased, driven by our higher AR and inventory numbers. On a sequential basis, both inventory, AR, and therefore working capital level did decrease slightly. On the balance sheet graph, on the left side, you see the structure and composition of our assets and liabilities.
The equity ratio reached close to 66% in Q3 after 75.9% in Q4 and 71% one year ago. No material long-term liabilities and the net cash position of $29 million confirm a solid balance sheet structure. With that, I covered our current quarter result. I conclude my portion of today's call with our guidance. Mr. Winkler did already give some comments and insights to our view of the various end markets and the various internal and external challenges we see. Based on our assessment and, of course, with strong effort and focus on achieving our outlook, we confirm our previous guidance for the year. We expect sales of around $400 million with an operating income margin of around 19%. The last slide shows our corporate calendar and the upcoming dates. This concludes now the formal part of the presentation, and we are ready to take, as usual, your questions.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Joern Iffert with UBS. Please go ahead.
Good morning, gentlemen, and thanks for taking my questions. The first one would be please on the guidance. It would imply that you have the strongest quarter ever in the history of the company in Q4 if you come close to it. Can you give us some more clarity? Book-to-bill, you said it is above one, but where is it? Is it 1.2, 1.3? Also, if you can comment on the order backlog and the sales recognition, you stated what is behind it, what is the effect for Q4. Second question would be, please, you also mentioned some delivery delays or there were some delivery delays happening in Q3. What is the magnitude here? How much of this do you expect to materialize in Q4? The last question is on Europe, general vacuum is improving. Where exactly is this coming from?
How sustainable do you think it is, and what is this reflecting? Is it macro stabilizing or any specific things? Thanks very much.
Thank you, Joern. Let me summarize the question 1 and 2 together because they belong together. Everything that we have not shipped in Q3, we'll of course ship in Q4. That helps achieving the strongest quarter, as you mentioned, and we'll have to do whatever it takes to ship what we have in our backlog. We have a pretty high backlog, unusual high backlog. The trend on the order side looks positive as well. With some help of, let's say, last minute sales recognitions, and that usually includes installation and includes also a sign-off from the customer side, and that can easily make a swing of $3 million plus minus. Assuming that we will be able, and if you attack it early on, that's what we do right now, so that we don't have to fear the last minute changes.
We are approaching it already in the next few weeks. In order to be prepared to have this last minute sales recognition, not necessarily as we usually have, that we early enough would know if we can make it or not. As you said, it will require a lot of efforts, but we do our utmost best to get there. The trend looks positive, our backlog is quite high, and we have some leftovers to be shipped from Q3, so that all helps to get to a very strong last quarter. On the Europe side, I think it's a combination of several levels. We have been able to gain back some products that we lost a few years ago. We see some catch-up effects from early in the year.
We see some fulfillment of larger projects that we did in Q3 with some bulk shipments in the general vacuum market only. The combination of all led to this increase in Europe in the general vacuum market. Can that be seen as a trend already? I have my doubts. I would hope so, but I see it more or less a stabilizing element, not necessarily as a changing trend.
Okay, many thanks for this. May I come back to the guidance for Q4? Where do you expect the strongest sequential improvements, in which one or two divisions? Is that really SEMI or is it also e-mobility?
No, these both. Clearly, SEMI will have the single biggest impact and probably in absolute terms anyway. In relative terms, it might also come heavily from security and energy.
Okay. Many thanks.
You're welcome.
The next question comes from the line of Marta Bruska from Berenberg. Please go ahead.
Hello, good morning. Thank you for taking my question. I have three of them. Firstly, I would like to ask, with the 120 basis point improvement in your gross margin, when does it come from? Is it mainly from the improvement in the situation with the Chinese tenders, or is that the product mix? Secondly, if you could please give us some more insight on the EUV situation, how does it currently develop? We had some positive comments yesterday from ASML. Can you maybe disclose how your contact per machine is developing? Thirdly, on the OLED applications, how big of the share, if you could remind, of the semi and vacuum coating end markets is OLED at the moment? Thank you.
I think I hand over the first question to Matthias regarding the gross profit improvement.
Yep. Let me try to answer your question. The majority of the increase in the gross margin is driven by the product mix, so there have been more shipments in some areas which have a more favorable contribution. Nevertheless, there was also some smaller impact on the headline pricing pressure. It's a combination, but more focus on product mix.
Okay. The EUV part of the question, let me answer that. As you know, we are the sole supplier for that piece of instruments that we ship to the main customer in this market. We are glad that the customer actually is looking forward for the last quarter as well and increased the guidance, because we simply follow their trend. The content per tool did not increase because we still keep the same amount of content that for the current product generation, I have to say. For the next product generation that we work on, it might change, but for the current product generation, the content per tool did not change. The trend is clearly looking in the right direction, and we are glad that our customer confirmed the positive trend. On the OLED side, unfortunately, the news are still very mixed.
There's a lot of capacity in the market for normal OLED displays, and the flexible applications or the application that would require flexible displays did not start yet. Therefore, I do not expect huge rebound in the market in 2019. It will be depressed throughout the whole year. Our experience is it is probably down approximately close to 40% from the record year last year now. Having said that, it doesn't mean that we are not working on some new applications because, as I mentioned before, eventually the flexible displays might work. Once they work, new investments will be needed, but it's unclear as of today how those new investments will start to materialize.
Okay, thank you. Could you give us a bit of an indication how big OLED is in terms of the sales at the moment for you?
Oh, phew. Relatively low. I believe it went down to I would have to figure out the number. As I said, it's about 40% below last year's. It's probably below around the middle single-digit figure overall. Yep, that could be. It was close to 10% last year. It's probably somewhere close to half of it.
Thank you very much.
You're welcome.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question comes from the line of York Runne from AWP. Please go ahead.
Yes, good morning. This is York Ruhnne. Could you give us a little bit more information on new products, especially in general vacuum and industry?
Okay. I try to do it. Interestingly, you asked about new products in the general vacuum market, although most of our new products actually go into semiconductor market. Nevertheless, we have at least two products out there in the general vacuum market that we now generate to make more revenue than we used to do. One is with the, I mentioned it in fall, the leak detector for food packaging, where we expanded now our distribution network into the U.S. and now got the first orders, which I'm very happy about that. The second product that we finally got some breakthrough is a leak detector for gas pipelines, where we have signed up a nice contract with the number 2 service provider in the U.S., who does provide those type of services for the gas distribution providers.
We are lucky that they now picked INFICON as their instrument provider, and they slowly are going to replace all their instruments with one of INFICON. It's called the IRwin, the yellow box. Finally have been able to get into the U.S. market with that product as well. Other products that might be of interest that goes more into the industrial part are the leak checking applications for small rechargeable batteries. As we talk about batteries that go into ear plugs and small wearable devices, but also into mobile phones. They are all lithium-ion based or kind of, therefore, relatively dangerous if they get exposed to air. We work very closely with one of the largest battery manufacturer, rechargeable battery manufacturer, I have to say, to work on new solutions. We got now our solutions patented.
We got some first successes, and we expect that this business will grow in the next two, three years as well. Those are the main new products for the more industrial market. Most other new products go into the semiconductor application.
Okay.
The next question comes from the line of Remo Rosenau from Helvetische Bank. Please go ahead.
Yes, thank you. Good morning. For this very strong fourth quarter you expect, the execute on the old backlog is crucial, right? However, you also said that the trend on the order side looks good, promising. That, however, is more relevant for 2020, right? Could you elaborate a bit more on these trends or the positive trends on the order side? If that is also mainly happening on the semiconductor side, and within that, where exactly? Hence, is the conclusion fair that you should see a good start into 2020 stemming from that order trend?
I'm not looking that far yet. We focus on achieving the guidance in fourth quarter first. Let me give you at least two information regarding what you've asked for. Yes, we have a relatively high backlog for those products where we have a very long lead time.
There it's all about fulfillment, shipment, and getting the sales recognized and getting the sign-off from our customers. That's at least as important. That's especially for those products that have a very long lead time. Some of them, let's say they go in two main markets. One is the semiconductor market, mostly to end users, not to the OEMs. Secondly, they go to the emergency and response market. Again, end-user related, so we have to wait sometimes for the sign-off. On the other hand side, we see the order trend, especially for those products looking to the right direction, where we have a relatively short lead time, talking about two to three weeks. Everything that we book now as order will get shipped this year.
That trend we clearly see from the OEM market coming from the semiconductor OEM side, not the end user side, meaning the guys who make the equipment. Those products have a relatively low lead time, which is good because that means we can already turn them into revenue if the trend goes on as we see it right now. Those two groups of products have different characteristics, and luckily, the positive order trend is more on those products with short lead times, and we have a huge backlog that needs to be shipped for those products, which have a longer lead time. If we ship everything, and you ask now about Q1 next year, if the backlog will be gone, then we have to build up backlog first, of course.
That is too far out to give you some indication how Q1 is going to look like next year.
Okay. As the orders are strong on the short lead time projects, we should not get overexcited on the start of 2020 yet?
No, not yet. That's too early.
Okay. To be very clear on the fourth quarter, to make it quantitative here, in order to reach your guidance, you must have sales above $110 million, which is almost 20% above the previous quarter, well, Q3, and above the previous year, and a margin of around 23% operating margin plus. That is right, correct?
Yes.
Okay, good. Thank You very much.
You're welcome.
The next question comes from the line of Rolf Renders from Helvea. Please go ahead.
Yes, good morning, and thank you for one or two questions. You mentioned in the opening remarks that you expect now 2020 to be the semi-recovery year. I always wonder, can this be predicted? If so, what are your indications for this confidence?
Okay, let me quickly answer that. As you know, the logic part of the semiconductor market is in good shape. I have just been in Taiwan yesterday. TSMC is booming. They primarily provide or make chips for the logic market, and they are actually the single biggest user of these new EUV tools. This part of the market has already started to show very nice positive tendencies. The recovery needs to come from the memory market, and the memory market, at least that's what we get indications from the memory market itself, is that the projects primarily from the two large memory makers, that they postponed from this year into next year. They did not cancel those projects. They only postponed them. We have now first technical discussions about where they might need some help once the tools are installed.
Those indications for me are the ones that let me assume that the rebound in the memory market will start next year.
Okay, great. You think it can be done?
Yep.
Good. Thank you. The other thing is, are there any extraordinary cost elements to be expected in Q4?
Oh, I would have to ask my CFO. I don't hope so. He might know more than I know. Matthias, you expect?
No, no extraordinary, no. We will reject all costs. No, just kidding. No, we don't expect any major upticks. As you maybe have seen over the last quarters, the cost basically did decline from Q1 to Q3, the operating expense, and I would expect for Q4 a similar level, and I also would not expect any major surprise in there.
Okay, that's great. Thank you for your time.
Once again, to ask a question, please press star and one on your telephone. We have a follow-up question from Joern Iffert from UBS. Please go ahead.
Yeah, thanks again. Just quickly coming back to the food and gas leak detection products, and you are now also distributing in the U.S. Can you roughly tell us what is the revenue you're expecting here for both in 2020 comparing versus 2019? The second question, sorry to come back on this, on the guidance. You said even for the products where you have short lead times, order intake is now improving, but what is giving you confidence that this is sustainable also into November, December? Is there any larger project on the customer side where you say, "Yes, given our experience, there should be orders for three, four quarters now for these product lines or for three, four months"? Some more clarity here would be appreciated. Then again, on the Q4 guidance, will it be relatively equally split to the revenues between October, November, December?
Do you really need a very strong December? Will the quality be skewed to December to make the guidance? Thanks.
Let me start with the first question, the revenue expectation for next year. We can simply give you a rough figure. We believe we can double revenue. The revenue is still single-digit million figures, as you know, but we expect to double revenue with those new contracts especially in the U.S. We expect 200% of revenue compared to this year. We'll still be relatively small. Coming back to the semi guidance. There is never a perfect confidence level that we have, but as you know, we are hooked up to the online system of the larger OEMs, the equipment manufacturer, and we get a weekly forecast about their needs for the next two, three months. Based on that, the order trend, if they stick to their forecast, needs to go up.
It's not guaranteed yet because we ship, as I mentioned, very fast, within two to three weeks, and the backlog is relatively low for those products. The forecast that we get from the equipment manufacturer, they are pointing towards the right direction. Last thing is how equally will it be distributed? I don't know yet. I have not looked into the detailed shipment plans. The only thing that I know is that we start early enough to make sure that we can recognize everything that can be recognized as revenue early enough, and don't have to wait for the last minute.
All right. Thanks. From the OEMs, the order books, the order indications they are sharing with you, is this linked both to memory and foundry and logic, or is it more skewed to logic and foundry?
We do not know that part because they use the same equipment.
Okay.
We only know that once they have shipped the tools, when our engineers see them showing up in the field. While they just give us the forecast, during that period, we don't know for what end product will be used because it's the same piece of equipment.
All right. Many thanks.
You're welcome.
For any further questions, please press Star and One on your telephone. There are no more questions at this time.
If there are no more questions, then I simply like to thank you all for your patience and for the interesting questions. We'll hear about the financial results at the beginning of next year. Until then, I wish you a good time and a nice day. Thank you very much.
Bye. Bye.
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