Comet Holding AG (COTN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Comet First Half 2022 Results Conference Call and Live Webcast. I'm Sabrina, the chorus call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ulrich Steiner, Head of Investor Relations. Please go ahead, sir.

Thank you very much, Sabrina. Good morning, ladies and gentlemen. And welcome also from our side to our first half 2022 results webcast. The documents, including the presentation that will follow have been available on our website since 6:30 this morning. With me on the call today are our CEO, Kevin Croftonto; and our CFO, Lisa Pataki. Before they present their assessment of the first half of the year, I would like to draw your attention to the disclaimer on Page 2 of the presentation. With that, I would like to hand over to our CEO. Kevin, please.

Ulri, thanks very much. Really appreciate it. Good morning, everybody. It's really nice to be here, in a position to be able to talk to you again. We're going to -- a fairly straightforward agenda. We're going to talk about what's happening in the business, of course, and what's happening from an industry overall perspective. And then we'll jump into the financial results, with Lisa we'll cover. And then after that, I'll give a very brief outlook for the rest of the year and perhaps beyond that. And then, of course, we'll go into Q&A. So next slide, please. Well, everybody -- first of all, I have to acknowledge a great performance in my opinion for the team at Comet. I think the team has done a really great job staying on plan for the first 6 months of this year. And hopefully, you'll agree with me now that you've seen the results from this morning that we delivered very solid results. You can see here that our net sales have increased on a year-over-year basis of almost 8% to CHF 267.5 million. There are, of course, very different market conditions that are going on during this first half. I'll get into that in a few minutes. But suffice to say that the semiconductor industry is continuing to flourish, and that is the primary driver for all of the divisions in the company at the moment. Yes, we've had some, what we would consider, temporary adverse input costs coming into the company. And as, you know, we've had a one-off cost for our pursuit of our legal case against XP Power, which, as you know, we prevailed. Those particular costs have turned into a situation where we actually delivered an EBITDA performance adjusted for the court case itself of roughly 17.4% versus 17.8% in the first half of 2021. And as you can see on the right hand side, our EBITDA margin actually was 14.1% on a reported basis. However, in making those adjustments, again, we reinforce 17.4%. And that's 0.4% change is really into -- as a result of input costs, which we'll talk about later. Incoming orders was very solid. You can see it's plus 23%. We have a very good backlog of more than CHF 300 million in backlog. It's up 69% versus the same period last year. And overall, we've got a book-to-bill in the first half of 1.23, which, of course, tells you that we've got a growing business. We're very confident where we sit at the moment, and as a result, we have narrowed and raised the bottom end of our overall guidance. So hopefully, that was received well by you as our investors and shareholders. My opinion and the opinion of the management team is that we are very well prepared for any outcomes that might occur from an economic scenario. We've got a great balance sheet. It's quite strong. And I would say we're in very good shape. If you can go to the next slide, please. So I mentioned a few minutes ago that there's a difference going on in the various serve markets about what those segments are doing. Starting with the left hand side, the semiconductor device industry continues to flourish. I think the downside, of course, is that the supply chain shortages persist throughout the industry. It doesn't affect just Comet or our peer companies, but it affects our customers and it affects our customers' customers. Nevertheless, what we can see right now that the RF Subsystems' compounded annual growth rate is sitting at about 12.4%. This is according to VLSI, which, of course, now is called TechInsights. There's been a lot of talk about what's happening in the semi space. I would maybe reserve for the Q&A when we talk about what's happening at the device level or at the wafer fab equipment level. But suffice to say that we expect very strong outcomes this year as well as next year. The automotive industry is -- I would say from our perspective, from a Comet perspective, the overall growth is softer than we expected, and this is pretty much driven by the supply chain challenges that we see going on around the world. Nevertheless, figures would be good if they would be in that mid single digit range throughout the 2025. So overall, it's probably a good opportunity for us as a company. Aerospace industry continues to recover with the exception of China. That's still an issue. We don't think -- and we've been saying this for probably 2 or 3 conferences now, we don't expect to return airline traffic, for example, back to the 2019 levels until 2023 or 2024. That's in our guidance. It's in our plans. It's in our multiyear plan as well. Nevertheless, there still will be about a 5% growth on an annual basis. Security. Well...

Excuse me? Excuse me?

Yes.

This is the operator. We are receiving bad audio from the speaker's feed. So we have to reconnect the line just one second, please.

Ulri, can you hear me? Can you hear me?

Yes. So please -- Mr. Croftonto, Please go ahead.

Okay. Where did I get interrupted?

The aerospace industry.

Okay. Let's move to Slide 7, please, guys. Okay. Relative to execution, the divisions continued to execute to their plans. I think that the teams have done an incredibly good job to address all of the challenges that have occurred, both from a supply chain perspective as well as from the geopolitical scenario as well. You can see here on the left hand side -- hopefully, you all also saw in our press release, we formally launched the Synertia generator, RF generator platform during Semicon West 2 weeks ago. That was a very well received activity. Many of our key customers actually came to a private session to view the product to understand the development behind it. And I have to say universally, we have very, very positive comments. And yes, I believe that will drive at least further interest into the Tier 1 customers that are ultimately our end target. Matchbox transfer to -- volume production in Penang is ahead of our internal plan. As you may recall, we said that we would fill that factory to 60% by the end of this year. It's actually going to be substantially more than that. And of course, that means that there's upside on the EBITDA margin as well. And we have made a decision to go and consolidate all of the 4 locations that we have in San Jose, California, into one single site. We expect to start that move in late this year and have it completed in 2023, generally, in the first half of '23. And of course, that means efficiency gains for the company and it would offer a much better work environment for employees and a good experience for our customers. In the middle section there, IXS. I guess I would have to admit that I was disappointed in the IXS results overall. However, it was driven purely by the zero-COVID policy in China, which required a complete shutdown for 6 weeks and impacted that team's ability to go and do installations and, of course, then to generate revenue and further profit. As a result, that revenue shifted into the second half and we do expect that they will make that up in the second half. But I do and would have expected it to be a better performance overall. And we'll see that come through in the second half. On the right hand side of this slide, we talk about growth momentum in all segments. Well, I can say that we do have pull in every sector that we serve. We will have supply chain issues that will continue to move revenue around. It does shift some revenue from first half to second half. But I can say that within IXM, the businesses being quite strong, and the adoption of new technologies that we launched in 2019 and 2020 remain at pace. So I would say IXM is in very good shape. And I think you would say, yes, very good results at the margin level. So if we can have the next slide, please. In summary. The slide says it all from my view. And we're moving ahead with our plans. And we have done a really great job of managing the ecosystem that we face. You will see [Technical Difficulty] second half. We did move some in Q1 into Q2, and you can see those as well. But I will say the second half is going to be twice full. The semi cycle is going to continue. All of our customers [Technical Difficulty] for increased revenue. In fact, if you read between the lines, between Lam Research's announcement yesterday, you would see they also are quite bullish about their future. We got some one-offs that, in fact, affected our [Technical Difficulty] in a few minutes. Already we shifted [Technical Difficulty] zero COVID policy in China because we are seeing some supply chain restrictions. Nevertheless, I'm confident for the year [Technical Difficulty]. With that, I'll turn it over to Lisa. And Lisa, if you can go into the financial results, that would be great. Thank you.

Welcome to all of you that are listening on the call today, during which I know is a very busy earnings season and also a holiday season. In the first half of 2022, demand for Comet's technologies continued to expand, especially in the semiconductor market. We achieved high single digit growth in revenue compared to the same period last year while managing an even more constrained supply chain environment. These constraints were taken into account in our planning for the first half and when we issued our full year guidance. We also faced new challenges such as the COVID-related lockdown policy in China, which affected the timing of revenue recognition in our PCT and X-ray division. While our performance from our China businesses in the first half was lower than expected, we anticipate that revenue to shift into the second half. Backlog grew 69%, reflecting the underlying structural growth of the semi and electronics industries. Our book-to-bill of 1.23 reflects this trend and underpinned the difficulty to procure parts, leading to longer lead times to fulfill customer orders. Our top priority continues to be to meet customer delivery schedules. Doing so in an inflationary and constrained environment has impacted margins and tied up more cash, more so than in the prior year. Overall, we are satisfied with the performance of the group in a challenging environment. We have consistently said and reconfirmed that the lion's share of the growth will occur in the second half of 2022. We continue to be laser focused on achieving our plan for the full year. Given that context, let's take a look at the results of the first half of 2022. The company achieved sales of CHF 267.5 million, an increase of 7.7% compared to the same period last year. This high also surpasses on a consecutive basis the sales of CHF 265.4 million achieved in the second half of 2021. As Kevin mentioned, the underlying market demand in the semiconductor industry continues to drive sales. Group sales to semi customers is roughly 70%. We saw our strongest growth in Asia. Sales in Asia rose 35% and accounts for 47% of the group compared to 37% of group sales at the same period last year. We are pleased with this performance because it shows the tangible result since our strategic pivot in Asia with our production site in Penang, Malaysia, and subsidiary in Taiwan. Moving on to gross margin. Gross margin, on the other hand deteriorated by 140 basis points compared to the first half of 2021. This was not unexpected given the headwinds related to higher input costs, driven by inflation and scarcity of part, leading to extended lead time. These issues pressured margins by 130 basis points. The majority of sales in the first half were generated from backlog. These sales reflect customer orders prior to any price increases. We do remain confident that margins in the second half will outperform the first half. Our supply chain teams have and will continue to negotiate commercial agreement to pass through material cost increases related to part shortages. This will relieve margins in the near term, while price increases will take effect to combat structural issues related to inflation. Operating expenses in the first half were almost CHF 12 million higher than in the same period last year. CHF 9 million of this increase was related to the trial expenses incurred in the first half of 2022. As a reminder, Comet won a trade secret misappropriation lawsuit against XP Power in Q1 2022. XP was found guilty of improperly acquiring and using Comet's stolen trade secrets to develop its next generation RF generator and RF match network products. Excluding the one-time effects of the trial cost, operating expenses on an adjusted basis are 27.7% of H1 2022 sales compared to 28.7% in the first half of 2021. The remaining balance of the increase in operating expenses supplemented our research and development and sales and marketing resources. R&D represents roughly 11.7% of sales. Investments remain largely focused on medium and long term technologies supporting the semi and electronics markets. EBITDA performance for the group in the first half of 2022 was predominantly impacted by the trial expenses. Comet generated EBITDA of CHF 37.7 million and margin of 14.1% compared to CHF 44.3 million and 17.8% margin in the first half of 2021. We believe that looking at EBITDA on an adjusted basis provides more valuable insight into the operating performance of the group during the first half of 2022. Adjusted EBITDA, excluding the one-time trial impact, results in EBITDA earnings of CHF 46.7 million and 17.4% margin. At the adjusted EBITDA level, the company generated CHF 2.4 million more in the first half of '22 compared to the prior year. However, margins are lower by 40 basis points due to the multitude of challenges faced in the first half stemming from supply chain shortages, inflationary pressures, longer lead times and the COVID-related lockdowns in China. Additionally, EBITDA margin was positively affected by the strength of the U.S. dollar, resulting in 110 basis point margin contribution compared to the same period last year. This favorable exchange rate partially offset volume mix and cost impacts. The effective tax rate for the first half of 2022 was 12.7%, driven by the taxable profit mix generated from our international subsidiaries. We will continue to monitor the potential local tax changes of our subsidiaries, especially changes in corporate income tax in the United States and within the OECD. For planning purposes, we continue to use 22% in our full year model. On a net income basis, Comet generated CHF 23.1 million, representing a net income margin of 8.6% and a return on capital employed of 16.9%. Now let's turn to the division results for the first half of 2022. The Plasma Control Technologies division, PCT, has once again achieved record performance in sales, capitalizing on the continued strength and demand within the semiconductor industry. Sales increased 19.3% from CHF 145.4 million in the first half of 2021 to CHF 173.5 million in the first half of 2022. PCT recorded robust sales growth in the Asia region, apart from China, and with its top customers. PCT demonstrated operational flexibility in the first half as it managed a complex supply chain, rising input costs and capacity reallocation activity. The Shanghai production facility was shuttered and ramped at lower capacity in the second quarter. Nevertheless, our teams were exceptionally quick to start up lines in our facility in Penang, Malaysia, and partially caught up on demand once factories opened in China. The Penang, Malaysia factory operated at roughly 60% capacity by the end of the period. On an adjusted EBITDA margin basis, PCT returned 25% margins in the first half of '22 versus 23.9% in the comparable period last year. Note that the onetime effect of the trial fees is taken into account in the PCT result, lowering actual margins to 19.8%. Now let's turn to the X-ray division. Both businesses posted sales growth in the semi and electronics markets, reflecting the strategic pivot to target these industries with existing and new innovative technologies. Growth in this segment partially offset lower volume sold through traditional end market customers due to supply chain-related challenges. Let's first address the X-ray systems business, IXS. IXS continued to focus on its realignment strategy, achieving sales growth from the semi and electronics market while also managing the cost base at reasonable levels. IXS achieved first half sales of CHF 60 million, CHF 10.2 million lower than the first half of 2021. The IXS business was most severely impacted by the COVID-related lockdowns in China as system installations were prohibited at customer sites. These sales are expected to be recovered in the second half. IXS EBITDA margin deteriorated in the first half due to lower volumes, longer lead times for certain parts, higher input costs and inability to install systems in China. These factors prohibited the division from breaking even as of June 2022. IXS posted a CHF 1.6 million loss in the first half of 2022 compared to a profit of CHF 4.5 million at the same time last year. Nevertheless, the realignment strategy remains the same. We expect results to materialize and add to the profitability of the division in the second half. The X-ray Modules division, IXM, achieved sales of CHF 41 million, a 9.9% increase compared to sales of CHF 37.3 million in the first half of 2021. First half growth was primarily accomplished through new product adoption, ION modules for security applications, MesoFocus and FXE product lines targeting the semiconductor, electronics and battery markets. New product sales account for close to 11% of first half total sales. IXM earned EBITDA margin of 15% in the first half of 2022 compared to 15.8% at the same time last year. Margins were temporarily affected by supply chain challenges and lower fixed cost absorption. In addition, IXM maintained investments in R&D as it continued to transform the product portfolio to target the semiconductor and electronics industries. In summary, customer demand, especially in the semi industry remains strong. Each of the divisions navigated through a multitude of challenges from part shortages leading to extended lead times, working off backlog at higher input costs and adapting to production constraints associated with COVID-related lockdowns. All in all, the divisions performed within our internal plans and are poised to execute at higher volumes in the second half. Finally, I'd like to provide a few comments on the balance sheet and cash flow metrics. Comet generated CHF 3 million in free cash flow compared with CHF 15.3 million in the first half of 2021. The strength of the balance sheet has allowed Comet to take calculated inventory positions in order to secure component parts necessary to meet customer demand. This is reflected in an increase to net working capital of CHF 9 million as of the June '22 balance sheet date and remains within our target of 20% net working capital as a percent of sales. Capital expenditures totaled CHF 6.9 million and represented 2.6% of sales in 2022, which is consistent with the level of capital expenditures in the first half of 2021. First half capital expenditures have been largely focused on capacity expansion and digital efforts at our Flamatt, Switzerland site. Second half CapEx will increase. As Kevin mentioned earlier, Comet has negotiated plans to consolidate the San Jose, California locations from 4 sites to one site. This single site provides an innovative workspace for our employees and offers an efficient and secure collaboration facility for our customers. The lion's share of the build out activity will occur in the second half of this year and in the first half of 2023. We still expect that our CapEx expenditure in 2022 will be in the targeted range of 3% to 5% of sales. Balance sheet continues to remain flexible and strong at June end 2022 with a cash position of CHF 87.8 million. Comet's increase in net working capital of CHF 9 million and higher dividends of CHF 27.2 million paid out in May 2022 versus CHF 10.1 million in the prior year drives the decrease in cash balance from December 2021 to June end. Comet has a net debt position of CHF 18.5 million as of the June 2022 balance sheet date. In addition to the cash usage within the half, the new facility in San Jose has been recorded as a right-of-use asset and a noncurrent lease liability on the balance sheet for the full amount of CHF 27 million. This is according to lease accounting standards under IFRS. Comet's balance sheet continues to be strong and allows us the lever to manage through this challenging environment. We will continue to allocate capital to strategic projects focused on business growth. Ultimately, our goal is to maintain a healthy and flexible balance sheet. In summary, Comet executed within plan, while seriously managing multiple challenges in the first half. We expect that the actions taken thus far will culminate in both sales and profit growth in the second half. I would like to take a moment to thank our Comet employees, our customers and our suppliers for your exceptional effort to achieve growth in the first half of this year. And as Ulri mentioned, additional details of Comet's half year 2022 performance can be found in the half year financial report published on our company website this morning. That concludes my prepared remarks. Thank you for your time today. And now I'll pass it back to Kevin.

That's great, Lisa. Thanks for those results. Ines, if you can then move to the next slide, please. Thank you. Okay. So from what I can tell and from what we can see right now, the served markets are quite strong. They are on a growth path, in particular the semiconductor space. All of our equipment customers have big expectations for the remainder of '22 and for '23. We met with all of our key customers during Semicon West as well as multiple market leaders in this space. All are projecting a positive 2023 outlook. And as I mentioned earlier, those customers are looking for quarter-over-quarter increases in revenue for the next 4 quarters. As a result, the wafer fab equipment spend is going to be quite high. It's probably going to exceed CHF 100 billion, which of course, portends quite well for all of our businesses that are in the semiconductor and electronics space. On the automotive side, the EV transition continues, and I believe and we expect that more than half of the world's production will convert to EV by 2025. And yes, we do see some easing in the supply chain, although I don't think that we'll see real improvement until late 2023. I think we've been consistently saying that for the last multiple meetings. Aerospace sector will continue to recover. Most industry experts expect that they will have a consistent increase in capacity as demand ramps. And we'll start to see that pull through in China, in particular, during the last half of this year and into next year. Security. Well, security seems to be quite choppy at the moment. But nevertheless, long term increase in security requirements for -- whether for border inspection, for baggage inspection, et cetera, oil and pipeline, we're going to continue to see that improve during the course of time as well. So different fundamentals, different market growth dynamics. Quite strong on the semiconductor side and electronics. We'll start to see a pull through on the automotive side, whereas the aerospace and security markets will be a bit slower in their overall recovery. If you go to the next slide, please. So what does that mean for us? Well, in our case, it really hasn't changed. And I believe that many of you have seen a form of this slide in the last multiple meetings. Our focus is exactly where it was 2 years ago, a year ago, even 6 months ago. The PCT team has to keep pace with the demand that we see from our customers. We have to continue to have the Synertia variants go across into beta testing. I'll remind you that we have never put in our plans to have a large percentage of revenue until 2024 and 2025. So it's essential that we stay focused on getting our variants into beta testing and, of course, converting that to market share and revenue. And then further ramping the Penang plant will have a very big impact and positive impact to our EBITDA margins as well. For IXS, as Lisa just said, we've got to continue to stay focused and continue the transformation of that business. And that really means continue to grow our share in semi and in the electronics space, where we know that we can get much higher prices, much higher margins for equipment that, in many cases, we'd be selling at a loss or at least a barely breakeven position in the aerospace and automotive sector. So that focus on high-quality business is extremely important to the company and to IXS. We will show a positive EBITDA for that business during the course of this year as a whole year roll-up. For IXM, just continue to grow share in its traditional serve markets, continue to put these new products that we've launched over the last 2 years into the marketplace, continue to pull -- or push for that adoption. But more importantly, I think, is continue to evolve that business to focus on semi and electronics and the battery space as well. And the last one on this slide says strengthen the presence for IXM in the Asian markets. Specifically, what we're talking about here is in Japan, in Taiwan and in Korea. And I think that there's a tremendous opportunity for growth there for IXM. So no real changes in our priorities. We have to stay focused. We have to continue to do what we say we're going to do and execute. So the next slide, please. So ultimately, what this means: we'll continue to see quarter-over-quarter increase in our sales throughout the second half. You'll see positive growth H2 to H1. We did narrow our guidance, as many of you have already signaled. We raised our lower end from CHF 570 million to CHF 580 million and a range of CHF 580 million to CHF 610 million. And our EBITDA margin guidance remains the same, 21% to 23%. So I would just stress our book-to-bill ratio of 1.23 supports this business. I already mentioned that we have more than CHF 300 million in backlog, which obviously implies that we have a great position for delivering a second half. We just have to stay focused. We have to make sure that we perform from an operational perspective. And then if I think about our long term, we're going to continue to invest as a company into our culture, into the efficiency of the organization and be positioned for growth, because our current view is we do expect to have substantial growth through the 2025 and beyond period. And we need to do that with a focus on ESG goals as well, which you'll see us publish at the end of this year. And we got to be nimble. Lisa already mentioned that we have a good balance sheet. We've got a lot of resiliency that we've proven in the company. We have to be ready to address any macro or geopolitical industry challenges that come across, and I'm sure that we can do that as a company. So with that -- those were our prepared comments. I will now move us over into Q&A, if we could, please.

[Operator Instructions] The first question is from Michael Foeth of Vontobel.

Yes. 3 questions from my side. I was wondering if in terms of the guidance you would be able to sort of walk us through your assumptions for reaching the midpoint of your sales and margin guidance a little bit. It seems to assume substantial improvement, obviously, in PCT and IXS. And also in terms of the margins, I would be looking at 30% plus EBITDA margins in those -- in PCT and IXM. So yes, if you could just help us out there a little bit more quantitatively and tell us if those assumptions are realistic. The second question would be regarding your scenario for the semiconductor equipment market. You said that you're expecting sequential growth in the next 4 quarters. Everybody is saying that 2023 will be another growth year. Somehow it sounds very optimistic considering the sort of weaknesses or comments around weaknesses in consumer-related segments and potential slowdowns in CapEx there. So maybe if you can just put that into perspective a little bit with your scenario. And then finally, just to technically -- the XP litigation, when do you expect to book the benefits from that? And how much do you expect to book there?

Maybe I'll start with the guidance a bit on the XP, and then hand it over to Kevin. Does that work?

Yes. Okay.

So I think on the guidance assumptions for the midpoint, I think if you -- one of the things that we talked about was the fact that our backlog is higher versus the first half by 69%. So really, what we're seeing is that a lot of the sales that will be derived in that second half are already in the books. We're seeing very strong order books, and we also see that our ability to produce and the capacity is there. So we're feeling quite confident about our line of sight towards the second half. Obviously, a bulk of that will come from the PCT division. We also will see an increase in the X-Ray Systems business as we will see the installs that should have occurred in the first half, they will be postponed into the second half. And then from a margin perspective, I'll touch on a few points and then Kevin can obviously fill in there. But really from a margin perspective, there's a few dynamics that were at play in the first half that will not repeat in the second half. So from an operating performance perspective, most of the sales that were generated in the first half came from backlog and price increases that had been negotiated. Those will turn into revenue in the second half. So we do expect a pick up from price increases. That will be on the PCT side, but also on the X-ray side. The second thing is, is that really the mix of the production that will happen in Penang will be much more significant in the second half. We will -- we plan to do more drop ships in Asia that will lower the logistics and freight costs between San Jose and Penang. So we do expect efficiencies coming from that arena. And then finally, this trial. We had the trial in March. It was CHF 9 million in expenses. We will not have a trial in the second half. That will not occur. There's no plans for any legal expense in the CHF 9 million range in the second half. So I think with all of those factors combined -- I mean, for us, it's really about focus and execution. And then just to touch on the XP Power case quickly. The jury did award Comet USD 40 million in compensation and damages. The reality, though, is that that's a gross number. And for -- in the United States, the judge needs to enter that verdict into the docket. And we don't expect that to occur within this calendar year. So at this point in time, we have recorded that as a contingent asset and it's in the notes of the half year financial report, but it's not taken into account in our guide for the rest of the year. So Kevin, I'll hand it over to you, if you want to fill in.

Yes. I think you covered the margin side quite well, Lisa. So -- and you already covered the XP case, which is a contingent asset at this point. Let me try and address the market question that you asked, Michael. I think there's a lot of angst about what's happening on the consumer side, which is definitely one to watch from an industry perspective. But I think it's fundamental that we all understand that in the semi industry today, it's not necessarily a consumer-driven market the way it was 10 years ago or even 5 years ago. We're becoming more and more data-driven and high-performance computing in general driven as an industry. And that fundamental shift has continued to drive demand on the device side, which really, really underpins an overall growth cycle that continues unabated to this day in the industry. Yes, there has been some adjustment in perhaps the announcement that you see from Micron or TSMC or SK Hynix or Samsung. But I would reinforce to you that they have adjusted their CapEx view based on what the supply chain can perform and what it can supply, meaning what equipment can they buy from the Lams, the Applieds, the Tels, the ASMLs. What can they really spend on that and expect from a delivery perspective in their supply chain. And so a lot of this leveling out that you see across the industry has something -- some demand-driven activity, again, on the consumer side. But fundamentally, it's an adjustment of CapEx spend based on what the industry at the wafer fab equipment level and below can support. What we do know for a fact is that our customers have not had cancellations. We know -- and I would just refer you to Lam Research's recent earnings announcement. They've seen no cancellations. They have guided quarter-over-quarter increase, as they do in their methodology, for the next 6 months. We know that -- our customers have told us that they will take whatever we can deliver. They don't believe that there's any stall that's occurring at this point. And we do know that their lead times are in the 14-month range at the moment, for all of the customers that I mentioned and more. So from my view, Michael, and from an industry view, you might see some ASP drops that are occurring at the device level. I would say at the equipment and at the subcomponent level, it's probably -- if I would refer you to, say, the 2015 scenario, where, yes, we saw ASPs drop at the device level, but we saw virtually no change whatsoever in wafer fab equipment spend and, of course, at the lower levels in the subcritical and critical supply chain as well. So that's -- maybe that gives you a little bit more color behind why we're quite confident in what things look like for '22 and '23. Yes, there might be some flattening in '24, but then there's another kick that comes in '25 as well. I think my last point. I should have mentioned is that we do know for certain that there are still some 27 or so brand-new 300-millimeter fabs that are expected to be built over the next 2 to 4 years. We also know that there's some 60-plus fab expansions at the 200-millimeter and below wafer size. So that's quite a push from an industry perspective. And we have the CHIPS Act, which finally looks like it's actually going to be going through in the United States, plus the equivalent in Europe. And of course, China continues to invest in their own infrastructure. So I think those inefficiencies, by the way, will drive capital equipment expenditure as well. Hopefully, that gives you a bit more color.

The next question is from Michael Inauen of Stifel.

I have also a couple of questions. First of all, on the industry, Kevin, I just looked through what Lam said yesterday, and it looks like they have reduced their wafer outlook more to the low to mid-$90 billion range for 2022. I mean would that actually change something in your assumption for 2022 and 2023? They said it's only due to supply. I guess you referred to this already, but just making sure that if it would be a drop to $90 billion, that wouldn't really impact your numbers. So that will be the first question. And maybe you can also give us a bit more details on the IXS. I mean, how much revenues are we talking about that you could really book? And maybe a third one, just quickly on the XP. I'm a little bit confused just here with the litigation costs. So your full year guidance, what does it actually include here on the litigation side? I mean, is it including this CHF 9 million? Or are you adjusting for it? Because if you are not adjusting it, then it's a pretty steep what you have to reach in H2? And maybe just a last one. It has nothing to do with your numbers now in H1. But there's always a discussion also with investors on the exposure committed into foundry, logic, memory. And obviously, we have discussions what part would suffer most in a downturn. So maybe you can help us a little bit in understanding what's your real exposure here in these different areas?

That's great, Michael. Let me -- Lisa, I'll handle the market-related questions, and if you can swing back on to the question about XP Power.

Yes. Sure.

Okay. So back to Lam's earnings announcement. Actually, just to be clear, they said -- in the mid-$90 billion, I think, is how Tim positioned what they see as the wafer fab equipment spend. They're the first ones to actually -- that I've seen say that lower a number. KLA sits at $102 billion, I think, at the moment. SEMI, the worldwide organization, the Semi Equipment and Materials Industry Association, projects $101 billion. If I remember correctly, Dickerson from Applied Materials has been sitting at around $99 billion still. So I think everybody is bouncing around that $100 billion level. Even if it were to drop, as you just mentioned, down into the $90 billion range as a forecast, it's still quite a strong industry. And I would just reinforce that, as Tim said yesterday in his comments, Tim Archer in his comments, the intensity -- the capital intensity associated with plasma etch and plasma deposition processes continues to grow. So as a percentage of the spend that's going on for wafer fab equipment, more and more is going against etch and deposition technologies, which, of course, is a good situation for a company like Comet, for example. So it would have to be a significant drop -- a really significant drop in wafer fab equipment spend for there to be an adverse impact to a Comet, for example, again, because of that offsetting increase in complexity, which is driven -- which drives investment in plasma-based technologies. I hope that gives maybe even a bit more spin on what your question was, Michael?

Yes. Sure.

And did I miss -- there was another underlying question you had there. I can't remember. Yes, your question was...

The memory. Yes, memory's exposure.

Yes, macro exposure. Well, you've got to have intestinal fortitude in this industry. We're becoming more and more aligned to the gross semiconductor industry in all 3 divisions. We're headed in that direction. And in 2025, I'm sure that our sales at Comet will be in that probably 75% or higher range of dependence on semiconductor and electronics. Now we -- honestly, we don't know exactly what percentage of that business is memory and how much of that memory is DRAM versus NAND. We don't know how much of that percentage is going into logic or foundries. I think what I would suggest that you do is that you would take the aggregate percentage breakdown of Lam Research and Applied Materials, take their aggregate, mush it together, and that is probably a very good facsimile for what Comet's exposure is to those markets. Because we -- when we ship our match assembly or we should that kind of -- or we ship a generator, all we know is it's going on a platform within those customers and within the Tier 2 customers. We don't know exactly, we don't know, what application that would be going for in a particular fab. So for instance, it could be going to Micron, but we all know that Micron -- so it goes through like a Lam Research to Micron, but Micron has a very big business in NAND memory. They have a very big business in DRAM as well. We would not know exactly where that next piece of equipment goes. We just don't. I'm sorry to be so vague, but that's how I would approach that problem.

No, no, it's clear. It's clear. I would have expected that answer, but it's good to hear through you.

All right, Michael. I'll jump in on the XP question. Because I want to make sure that everyone does understand how baked that particular onetime expense into the guidance. So we spent -- for the March trial that happened in the first quarter, we spent CHF 9 million. So that's reflected in the first half results, that gets used to the EBITDA margin that we presented. If you walk that back up, I think the basis that makes sense to start from to walk to the second half is 17.4%. So really that -- we're not going to see that CHF 9 million occur in that second half. So the apples-to-apples comparison is the 17.4% that walks up to what we need to hit to make the guidance for the second half. So I hope that helps just to provide a little bit of color about how we included that into the guidance. And I think you had a question on the IXS.

Yes. Correct.

Do you might repeating that?

Yes. How much revenue -- how of the impact actually on revenues in H1 that you couldn't book?

Yes. I'm not going to go into exactly that amount. But you can consider that China represents a fairly significant market for the IXS business. What was different about this lockdown versus the lockdown prior to this particular one is that neither the customer could go to their site to install, nor our customer services people. So it really did -- we just couldn't take any revenue recognition on those particular systems. But we do expect that we'll be able to pick that up in the second half.

Yes, I think we can go a little bit further out on a limb on that. It's a near double-digit million move between first half to second half.

Yes. Okay. That was -- yes, that's about what I -- actually, I had higher in my estimate. Can I just add one more question? Sorry. I don't want to take everyone's time here. But we are obviously -- I think the sales side also investors, we're obviously trying to work in, I would say, certain scenarios that would happen in an unsure environment that we are now in. I was just wondering if you can give us a little bit of a feeling how much of a revenue downturn you would need to see until the margin would be really impacted. I mean, in the last semi downturn, Comet was a different company, but the margins dropped significantly, obviously. So what would -- maybe it's easier to say what would happen if you would see a 10% or 20% drop on revenues? What would actually happen on the EBITDA margin?

Yes. I mean, we would have to, I mean, obviously, remodel those out internally. We have -- we work with several scenarios to test our efficiency and our flexibility. But -- I mean, I'm not going to go into detail on that at this point in time. But the bottom line is that I think we feel quite comfortable at the moment with our cost base and with the flexibility we have on the balance sheet.

Michael, I'd like to kick in on that. It all comes down to what mix are we talking about. A 10% downturn in revenue. In which divisions are we talking about or across the board? Because that becomes an interesting modeling exercise. And is it 10% or is it 20%? Or is it, God forbid, even 30%. I would -- based on what I know of our business model, a 10% drop, if it's a peanut butter spread, it's probably not a -- it's not a significant impact to overall EBITDA margin performance. You'd start to see a deterioration of that when you get into that 20 percentile range. And yes, we've modeled that, of course. But again, you have to make an awful lot of assumptions on what mix, what products, what division.

Yes, of course. I also try to, obviously, model it. It's, of course, very difficult. But I think it's just...

Good. You can share your results with us.

Yes. Yes, we can do this offline.

The next question is from Harald Eggeling from ZKB.

So one follow up. Do I understand the new guidance is 21% to 23% adjusted EBITDA?

No, it's 21% to 23% bottom line EBITDA.

Reported EBITDA, okay. Okay. Then one question to the order intake momentum. It obviously decreased from 1.4 to 1.08. Could you please walk us through this decrease? And what would be your expectation for the second half on this figure?

Yes. I think that I should take that question. First of all, I have to tell you, in my opinion, a 1.4 book-to-bill ratio is not a healthy book-to-bill ratio for the industry or for a company like Comet. I would expect -- for a healthy environment in the critical subsystem area a book-to-bill that's in the 1.1 range on an average aggregate level, I would consider that quite a healthy nominal book-to-bill ratio. So we -- and as you do know, you've done the calculation I'm sure, you can see that our sales have increased quarter-over-quarter. So our net order book has increased quarter-over-quarter, even though the calculated book-to-bill would be lower than what we saw in Q1. Still a 1.23 for the first half is quite strong and maybe stronger than you would like to see. It basically means you're having trouble keeping up with overall demand from our customers. There is some mix -- divisional mix related activity there. We've talked about the China COVID situation, the zero-COVID policy. Lisa already mentioned that people couldn't get into the fab -- our customers couldn't get into the fab to actually do installations. However, what really also happened is their ability to place orders never -- it was actually ground to a halt for nearly 1.5 months as well. So I wouldn't be too concerned or I wouldn't see any red flags at all about the slightly lower book-to-bill ratio in the second quarter. It's still quite strong and it's quite strong for the business overall.

Yes, many things. So my takeaway here would be that you would see it at least stable or rising for the second half. Is that correct?

I would expect that, that will occur, yes.

Okay. And one question to Penang. My understanding is that you at end of H1 are at now 60% utilization, which was initially scheduled for the end of the year, right?

Correct. We expect that -- we expected making our plan to go into this year -- we expected that by the end of 2022 that factory would be about 60% full. We are ahead of that and expected to be substantially higher level of loading during the course of this year.

Okay. And could you please remind us what the sales level of Penang would be at 100% utilization? And also scheduling. Probably what was the average utilization H1 and where would you see the utilization at the end of this year, please?

I'll do the color. And Lisa, if you want to do the specifics. Just as a reminder. At the end of last year, that factory was approximately 20% loaded with the existing capacity that we had in place. At the end of this year, 2022, we will have invested further in capacity. So it's now not an apples-to-apples comparison. We will have increased our overall capacity capability during the course of this year, and we expect it to be extremely high utilization even at that capacity level. I would assume certainly more than 80% loaded. Of course, we have an internal target that's higher than that. But I would -- from an analytic perspective, I would assume it's going to be at least 80% full. On the revenue level -- I don't recall that number, Lisa. But I would [Technical Difficulty] I would expect it to be in that CHF 50 million range.

Okay. So CHF 50 million at 100% level, right?

No, it won't be 100% loaded, because we'll be continuing to add capacity.

Yes. I mean, I think one of the things -- one of the data points that you can use is, at the half year report, we have the sales by the region. And you can see that Asia has increased quite significantly from the same time prior year. And a good way to think about that is that the majority of that increase is coming from Malaysia and Taiwan, as I mentioned in the prepared remarks. You can really think about that as Malaysia.

Okay. So inherently, we are probably speaking of plus 50% higher absolute revenues from Penang incrementally in H2, probably?

I think that's a fair view, Harald.

Okay. And 2 questions, please. First one is gas exposure for your Hamburg operations. What is your view on this? How it might develop? And the second point is your personal geopolitical view, U.S.-China? And also the impact from the U.S. CHIPS Act on Comet, please? And then I would be finished.

Gas reliance for our Hamburg facility, we don't have an issue there to be concerned about. We don't have an issue. So I'll just leave it at that. On the question -- sorry, the question as it relates to -- Harald, can you repeat the last part of your question one more time, please?

Yes. I was simply wondering what your geopolitical view is on U.S.-China tensions. And now that the CHIPS act obviously is advancing, so what would you see the impact on Comet probably to be?

Yes. Well, it's going to be an interesting show in November. The Republicans are likely to take the House. They may take the Senate. And the -- I think that will only exacerbate the China-U.S. relations. But historically, they've been on a decline for many different administrations for many decades. So I don't anticipate that, that situation will get better at all. My biggest worry for Comet and for the industry is that the U.S. government changes the de minimis ratio down to that 10% level. It's currently at 25%. Which would have an adverse impact on just about everybody in the industry and we would have no ability, for anybody, to ship into China. That is something that I think we should be watching as a concern. On the other hand, the CHIPS Act and the European equivalent act does trigger investment in fabs. It does trigger investment in wafer fab equipment. And that will be a benefit for Comet, assuming we hold our share positions or gain share positions within our targeted customers. So there'll be some inefficiencies because of those acts, but that will be a better environment from a Comet view. I think also because -- now I'm going to give you the other positive side. If the China situation deteriorates between the U.S. and China and there is no change in the de minimis ratio, then I believe that's quite an opportunity for Comet, because the Chinese government and the Chinese semiconductor industry will continue to move further and further away from U.S. equipment manufacturers and U.S. critical supply manufacturers. So that would be an opportunity for a company like Comet. It would be an adverse impact to a company like MKS or AE as an example. Hopefully, that gives you a little bit more color, Harald.

The next question is from Sebastian Vogel of UBS.

Can you hear me?

Yes, we can.

Perfect. Great. And if I can ask a few questions. And the first one with the price increases that you have alluded to over the course of the penetration. Can you be a little bit more specific at what sort of level [Technical Difficulty]?

Lisa or Ulri, can you re-verbalize that one, please?

We have a very bad line, Sebastian. Can you probably repeat a little bit more slowly?

Of course, yes. I was asking on the price increases. If you can give a little bit more granularity what sort of price increases you have put into the margins, sort of by what [Technical Difficulty] to kind of understand when they become effective for your top line?

Okay. So the question, if I got it right, is you're asking what is the magnitude of the price increases that we're expecting to see during the second half? And when do they actually take effect? I think Lisa -- to reinforce what Lisa said in her comments. The negotiated price increases will only be in effect at various times during the second half of this year. They're not retroactive. They're not looking backward to first half results at all. It's just going to be a look forward. In the -- we have been trying to be very careful with how we pass on price increases. We try to make sure that we do what is reasonable. In other words, purchase price variance pass-through as a price increase. That has been a widely accepted practice by our key customers. We have not gone after a margin play there. We're just looking for being at an even keel position where we were prior to these exorbitant price increases that have been coming through. So it's virtually a pass-through, Sebastian. The magnitude, it depends upon the division, of course, and it depends upon what products we're talking about. But it's in that 3-ish percentage range -- ish.

With regard to growth in PCT or other things, when look at sort of the accel rates in the end of Q1, how do you see that growth comparing the sort of average growth what you have seen and what you have then, of course, reported?

It will continue. The team -- the PCT team has done an incredible job managing -- it sounds like a broken record I know. But they've done an incredible job managing the supply chain. They've done a great job shifting production out of China into Malaysia faster than we had expected, because of the China lockdown was an adverse impact to PCT as well. They've done an incredibly good job catching up on demand needs from San Jose and Malaysia to deliver into our key customer. And as a result, there is really great momentum, particularly in Q2 of this year. We believe that momentum -- we know that momentum will continue. We expect strong growth second half to first half for PCT. You've seen the results here of PCT at CHF 70-some-odd million. I expect that to be something that we are looking down at, at the end of the year, for sure, as a second half result. Our customers have been very clear that they are constrained by RF power systems, not just from Comet, but from other vendors as well. And they will take everything that we can deliver collectively and more. So the demand is there. The order book is there. It's actually, can we execute and deliver. So you should see continued growth in revenue from PCT quarter-over-quarter, and in our case, month-to-month to be precise.

Understood. Last question on IXM. When can we expect to see the margins coming back again closer to this 28% level that we were used to in the past?

Yes. I think in our business case at the moment, that looks like to be in the mid of '23, late '23 time frame. It might drift into '24, but it's in our plan as a '23 target.

The next question is from Serge Rotzer of Credit Suisse.

I think a lot of the questions have been answered, but I come with the RF generator question. Back in January, you released one firm order and it's remained quite quiet since then. So I'm wondering, have you seen some more firm orders in RF generators from Tier 2 customers in the first 6 months? Or do you expect some more RF generators orders in the second 6 months of the year? And on that, probably you said that Tier 1 customers showed their interest. What does this mean in timing? Can you give us some flavor on Tier 1, Tier 2 and firm orders on generators?

Right. The direct answer is, yes, we've had additional orders from alternate customers on the current variant of the RF generator. There are additional beta sites going on with our current version of the generator, and we are expecting to deliver the next variant into beta testing late this year. That's consistent with what our objectives have been for the last 1.5 years that you and I have been having a dialogue. So we're on track there. And I think just to remind everybody on the call. The value proposition here for Comet is a couple of things. First, we think we are -- we believe, we think, we -- at least on the current data that we have, we can show that we provide more precise power control with less overshoot and undershoot performance. So something that is differentiated technically. But also more importantly, we believe that we have developed a platform that allows our customers to tap into the RF system -- and when I say tap into, we can actually access real-time performance data on how the generator is running and what plasma we are generating, which ultimately means that if we can control it, we can provide a better result on a wafer. That's the end game that we're talking about here. And we think that we have given our customers a platform that allows them to access data, manipulate real-time performance in a way that they cannot do with what is currently available in the market. And I would have to say, Serge, that when we had the private sessions with our customers and in one case with our customer's customer, they are absolutely intrigued by this ability to tap into an I/O situation within the generator. It is something that is, we believe, and at least the voice of the customers would indicate, is quite unique and something that they've been very hungry for, for years. So that's the value proposition that I want to make sure that we're all capturing here. And this was of particular interest to the Tier 1 customers. So we have been invited to talk to an IDM with this product. We have been invited by some of the R&D teams, which we had not been engaged with, within the largest capital equipment customers. And we believe there will be pull-through from that. The backdrop to this, though, Serge, is that everybody is still fighting the supply chain issues. And getting the attention of R&D teams to go in and test a new variant of a generator -- sometimes you don't get as much attention as you think you should, because they're spending more and more time making sure that the supply chain for what they're trying to deliver is actually able to deliver. So that's the yin and yang of it at the moment.

Okay. That's very, very helpful, Kevin. So I understood correctly that you are setting up beta testing with Tier 1 customers? Or is this still to come?

Yes, we've -- so Serge, just as a reminder. We have had one of the Tier 1s doing test of a beta unit really that started early this year. But it's been mostly done with their team on our site in San Jose, California as opposed to inside their development lab, which I think that entire situation is going to change now.

Okay. Got it. Got it. Well, a last one, a simple one. The fact that you are making now trading updates on a quarterly basis as you did after Q1. You expect that you will do this also for Q3. Is this correct, first? And then secondly, what kind of seasonality we should expect then for the second 6 months. You said that you see better -- improving results for H2. Is this already true for Q3? Or is it more back-end loaded, going into Q4?

Well, yes, we will continue to do the trading updates. This is a new practice within Comet that Lisa and I introduced and the Board supported in order to get more transparency into what's happening within Comet. We felt that we owe that to you all as both analysts as well as investors. So yes, that will continue. We've always said in every investor meeting that I've been involved in any way that our business plan for this year is and always has been back-end loaded anyway. So yes, it's going to be back-end loaded this year. I can reinforce that again. But you'll see incremental increase in revenue in Q3 and in Q4.

And bon voyage to you, Kevin. It's a pity that you're leaving the company, but I know that you will have good plans for your life. So bon voyage.

Thank you.

Other last questions -- we have received several webcast questions, which we cannot answer for time reasons. But we will answer them individually. Apologies from our side, therefore; we heard the line was not too good. But before we close today's session, I would again quickly like to hand over to Kevin for a few final remarks, if you like to make.

Yes. Thanks, Ulri. I appreciate that. First of all, thank you for you all on this call for indulging me and allowing me to make a few comments on my own behalf. This is my last official investor event as the CEO of Comet, and I want to tell you that I -- it was really a pleasure for me to meet with many of you. I want to thank you for your trust in myself and for all the interesting interactions that we've had over the last couple of years. I really appreciate it. And I'll definitely keep it as one of my most positive and favorite memories of my time here at Comet. And I want to also say thank you to you for your loyalty to the company. It's a great company with an incredibly bright future, and I know that your investment is going to be rewarded. So before I close this webcast, I want to say goodbye to you all. And then I want to hand this over to my successor, Stephan Haferl, and wish Stephan and the team really, really great luck and Godspeed. And Stephan, if I can hand it to you, that would be great.

Thank you, Kevin. Thank you very much. Ladies and gentlemen, I'm obviously honored to be appointed CEO of Comet effective 1st of September. First and foremost, I would like to thank you, Kevin, for your leadership and guidance over the past 2 years, but also like to thank you for bringing me up to speed on many issues during the short transition period, now, over the summer. And I look forward to meeting with all of you, starting with the UBS Best of Switzerland Conference in September, followed by other events such as the Investor Day in November. We will certainly have plenty of time in the next months, quarters and years to discuss the way forward with you. For now, I can -- from my side, only confirm what has been said today. We will continue to resolutely implement the focus strategy defined in 2019. And with that, I hand over to you -- back to you, Ulrich.

Well, thank you, Stephan. And thank you, ladies and gentlemen, for joining us today -- a little lengthier call than we intended -- to the presentation of our half year results. If you have any further questions, feel free to please contact our Investor Relations department. We look forward to staying in dialogue with you. Thanks a lot, and have a good day.

Thank you, everybody. Cheers.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.