LEM Holding SA (LEHN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Half Year Results 2022-2023 Conference Call and live webcast. I am Sandra, 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 Frank Rehfeld, CEO. Please go ahead, sir. Please hold the line. The conference will start shortly. Thank you. Hold the line the conference will start shortly. Thank you.

Thank you. So with this, I suggest we are going to start. Good morning, ladies and gentlemen, also from my side. Thank you very much for joining here in Geneva, our half year result presentation and for sure, also on the webcast. Today, we would like to introduce basically our half year results of the financial year '22-'23. My name is Frank Rehfeld. I'm the CEO of LEM, and I'm obviously together with Andrea Borla, our CFO, to do this first part of our Capital Markets Day. For those who are not yet familiar with them, LEM is providing sensors for measuring electrical parameters, current voltage and energy and with those help our customers in society to transition to a sustainable future. Now the program for today or for this first hour here is basically our standard program. You see the agenda here. Basically, after my opening remarks, I would like to go a bit deeper in the business performance, Andrea is then introducing the financial results, and I'm going to outlook what -- outline what we are expecting for the future. You could probably agree that we are currently living in rather challenging times since multiple, let's say, effects come together. We talk about the ongoing semiconductor shortage, we talk about the sanitary crisis that is still affecting the travel situation to and from China as well also as the supply chains are affected by lockdowns. We talk about increasing inflation, we talk about the Russian Ukraine war that affects the energy availability and we talk about the U.S. Chinese conflict. Despite those rather challenging circumstances, we managed to do our best ever quarter with sales of more than CHF 100 million, and then therefore, can report record sales for the first semester. The main drivers for this amazing results were our Automotive and our energy distribution business and the main growth regions were Asia, mainly China there, and the Americas. The 7.8% top line growth in constant currency is almost 10%, allowed us to further improve our gross margin, resulting also in a record profitability. Our order book starts to go back to more normal levels after we saw a continuing lengthening of our order book during the last 24 months. So how does the overall economic environment look? You can basically see here, based on the IMF, the manufacturing, purchasing -- the manufacturing PMI, the manufacturing Purchasing Managers' Index of the most important economies plotted throughout the last 18 months until August 2022. Not surprisingly, referring to what I just said. The accumulation of challenges, we see a downwards trend in almost all economies. Meanwhile, the October PMI for the Eurozone is in the red, the U.S. is just slightly above 50%. China is below. India, Australia and Switzerland are nicely above the 50%, which indicates growth. But however, I cannot prevent the global PMI to be negative. So let's see whether the global growth expected by the IMF forecasted for 2022 of 3.2% can really eventually be realized. Now we've been announcing for our full year results, '21-'22 in May that we are going to change our organizational setup and that we will report in the future regions and businesses rather than the segment industry in Automotive. This change has been implemented as of 1st of April. And to remind, again, the background of this change was really to increase LEM's nimbleness and to speed up the organization by powering the regions to execute faster within a given framework of our global strategy. We've been possibly seeing that we are now reporting basically 4 regions, U.S. and EMEA, Rest of Asia and China, and rest of Asia, mainly we're talking about Korea and Japan. And 5 businesses: automation, Automotive, renewable energy, track and energy distribution and high precision. Now with that, let's move into the half year 1 business performance in more detail. Following the structure, I've just been mentioning, again, you see here the development of the 5 businesses in comparison to H1 '21, '22, 7.8% growth are mainly contributed by Automotive and our strong performance in China and the U.S. Energy distribution, high precision where the DC meter is allocated to has been continuing to also drive our growth. Our automation business was not significantly growing and I explain later in greater detail what the reason for that is. We also see here already the first slowdown in the markets. The renewable business, you see here, looks weak. However, was strongest impacted by the semiconductor shortage. Without that, we would have probably seen here also a double-digit growth rate, driven in particularly by the demands from China. Our traction business has been impacted by the stop of the activities in Russia in Q1. There, we still have a strong business pipeline. However, we missed the turnover of Russia, and that led actually the business to shrink. On this page, you basically see the distribution of the businesses relative to each other. With the organizational change, we've tried to report the business in a way that is meaningful for us and for you, obviously, while keeping the size reasonably balanced to each other. You can see here that all businesses except track, have received a push in Q2, while Shanghai lockdown had important -- had an important impact on our global supply chains in Q1. And again, also our rolling stock and trackside business reported here has been actually seeing a less negative development in Q2. Now please allow me to say a couple of words for each business, starting with our biggest business, the automation business that represents 34% of our global business. You see here the turnover plotted over the last 5 years. In term our automation business, you see that here in this development has been most severely impacted by the U.S. Chinese tensions as well as also the corona crisis. It recovered nicely in '21-'22 and we also saw a slight growth in the first semester '22, '23. We foresee this business will be most impacted by a potential recession and the signals are obviously in the air. However, I have no doubt on the longer-term potential, in particular, looking at the smaller drives. The Automotive business includes sensors for battery management, motor control and onboard chargers and represents 25% of LEM's total turnover. It had record sales and also record sales growth in the first 6 months of this financial year. Also here, we see first signals of a deceleration in the order book, believe, however, that the new energy vehicles, which is the highest percentage of the business you see here is potentially less impacted by a recession. In particular, in the world's largest market for new energy vehicles in China, the demand remains very strong and more and more Chinese players are also entering the European scene, probably also witnessing the one or the other Chinese vehicle now coming to Europe and even coming to highly competitive markets like the German market. Renewable energy. Now 17% of our business is including solar and wind market and not anymore like in the reporting before the DC meter and also our Smart Grid solutions that is not included anymore. It's really focusing now on solar and wind. And you see here also a nice growth story over the last 5 years that we also plan to continue. A particular short cyclical business with a product life cycle of less than 4 years, this is highly cost competitive and has an important volume potential for the future, since we obviously all expect that the amount of energy getting produced in the future is getting more and more moved towards renewable energy generation. As I already said, this market has been most severely impacted by our supply chain shortages due to the sheer volume of parts that goes into these applications. Energy distribution and high precision, today representing 14% of our global business and this contains the former high precision business that we reported separately still last year in industry and our Smart Grid solutions, UPS, Uninterruptible Power Supplies as well as the DC meter for fast charging stations. Whilst you see a negative trend in '19-'20 and '20-'21, similar to the overall top line development of LEM in those years, you see the impact of the restarting growth in '21-'22 that was mainly fueled by our DC meter business. The 20% growth between '21-'22 and the last basically semester indicates the hunger for DC meters for fast charging stations today in Europe and very soon also in the U.S. The readiness of charging infrastructures will be obviously a key enabler for the rollout of battery electric vehicles on a global scale. Our smallest business, track, contains LEM solutions we offer for trains, metros and trams for both rolling stock and trackside. It looks small with 10% of our total turnover. However, it's an important part of our portfolio for all those customers who see LEM as a one-stop-shop for their current measurement solutions. The rather long cyclical business has been impacted by the stop of our activities in Russia, as already mentioned. And the Russian business had really -- in its business, an important share in trackside. Our order book, however, gives us a positive outlook for the near-term future of this business, and therefore, we also remain there optimistic. Now projecting this business from a regional perspective, as you can see here, you see that in Q2, all regions have been growing. However, the main growth drivers are clearly in Asia, in there, in particular, China. And the Americas, you see that China now represents 41% of our total turnover. EMEA has been adversely affected by both the FX effect because of a strong Swiss franc and the rather weak euro, besides, obviously, the stop of our Russian activities. But despite the negative H1 performance in Europe, we are optimistic in the full year performance, in particular, due to the strong demand for DC meters to set up a charging infrastructure in the Eurozone. Overall, we believe LEM has a balanced exposure in the global market. Asia is the 58%, leading as the traditional key market where electronics gets manufactured. And this is obviously independent where eventually this electronics ends up in the different markets. So for sure also a lot of electronics produced in Asia gets then exported to the U.S. market, and we report that under Asia. Now important to also explain what we do on the front of new products. And I would like to introduce today 2 products from our recent portfolio extensions on the one hand, the HMSR DA, on the other hand, the TEMA4G, meter for traction business. So the HMSR, a product that we've been developing ourselves in our own development organization, that is going to be used, in particular, in robotics applications soon for the Japanese market. And I think it's one further step to develop our portfolio here for ICS. And the TEMA4G box here is actually a product that is used as a train energy meter and allow us to precisely measure the energy that is used in certain areas, certain countries in Europe and basically allows them to really differentiate what energy, for instance, has been used in Austria, what energy has been used in Germany because this device is equipped with 4G and also GPS and allow us with this also communication. It fulfills the newest railway standards and also has actually been shown in the InnoTrans in September this year in Berlin. And with this, I would like to hand over to Andrea.

As the Group CFO, I'm very pleased to present attractive financial results for the first half year '22-'23. Let me summarize the financial highlights in 3 points. First of all, despite this rather slow start in Q1 due to the lockdown in Shanghai, the increasing sales have been the key driver in achieving a very high profitability for the first 6 months. Second, on the balance sheet, LEM continues to have a strong balance sheet, which is reflected in a healthy equity level and this despite record high dividends payout per July 2022. And the third point, third highlight, both the operating as well as the free cash flow experienced -- developed very, very nicely. So let's go a bit more in detail. We start with a first element from the profit and loss statement, the gross margin. And here, you can see that the gross margin in absolute value increased by CHF 8 million from CHF 85.6 million to CHF 93.8 million. And in respect of the gross margin in percentage, you can see that we've gained 80 basis points. So what are the main causes for this positive development? Both sales price increases and scale effects helped to drive the gross margin upwards. Those improvements were, however, somehow dampened by higher input costs. We expect the material cost to further rise during the coming months and in the second half year, and so we are forced, and will be obliged to continue to pass on those cost increases to our customers. This will allow ourselves to defend the gross margin also in the future as we have done that in the first 6 months. Our 2 low-cost locations, one situated in China in Beijing, and the other one in Sofia in Bulgaria, they cover today 81% of all sensors produced by LEM. The construction of our future Malaysian site, we announced that in Penang, is progressing well, and we are expecting starting production sometimes early 2024. The percentage of our low-cost location is, therefore, expected to further increase in the future. Another element on the P&L is the SG&A, and they increased by CHF 3 million in the first 6 months compared to previous year. And they are mainly related to increased consulting expenses, investments in information technology, be it here in Meyrin at our new head office and also other sites and also various other recruitment activities. Overall, though, the personnel costs remained basically at the same level as last year. We are currently working on several automation and process improvement initiatives, and they will allow LEM to grow the SG&As under proportionally during the coming years. The R&D expenses, as you can see from this slide, increased by CHF 1.5 million. And this is again confirming LEM's willingness of not jeopardizing LEM's future growth by optimizing the short-term profits through simple R&D cuts. We focus not only on renewing our current product portfolio, but as well on developing new product families, addressing new markets and applications. During our today's Capital Markets Day, we will also provide you a glimpse into our R&D roadmap, and we will present to you also our major growth pillars. We're also very pleased and happy to have a new CTO joining our organization starting last week, November 1, Ms. Verena Vescoli, who is also amongst us. She has the role of the CTO and will drive all this R&D roadmap for the coming years. Going forward, R&D expenses are expected to remain in the ballpark of 8% to 10% corridor. During the first 6 months of the year, LEM suffered mainly from the euro devaluation, which resulted in a CHF 2.5 million exchange loss. The gains we realized in the hedges compensated only marginally those losses. As LEM also has very limited third-party debt, the interest expenses remained modest for the first 6 months. The main element in the line financial expenses actually relate to expenses on our lease liabilities. And again, lease liability mainly related to our new head office here in Geneva. In respect of taxes, the first half year tax -- effective tax rate is at 17.6%, which is close to 2 percentage points higher than last year. However, last year's result included a tax credit, a substantial tax credit in France, which this year is booked into R&D expenses. So if we exclude last year's effect, and we compare apple-to-apple, the tax rate would be at very similar between last year and this year's tax level. And this actually reflects the very realistic tax rate with the current profit mix. Also important to note is that we continue to benefit from the HNTE tax status in China, which result in our reduced tax rate in China of 15% instead of 25%. And here, you find the full profit and loss statement for both the half year on the rather left side of this column of this table and the Q2 also on the right side of the table. And as you can see out of this table, you can notice that LEM accelerated during the Q2 with quarterly sales of CHF 107 million. This has been a historic record level of CHF 107 million. And again, this important sales growth is resulted also in an important level of EBIT, which we realized CHF 26 million of earnings before interest and taxes, and the net profit of CHF 20 million, those are really record results. And this is reflecting a very, very good momentum we experienced during the recent summer months. Moving on to the balance sheet. What are here the key points on the balance sheet for end of September 2022? The equity ratio dropped by 10% point compared to end of March 2022 from 53% to 43%, but this is, again, the main consequence of the dividend payout in July. The second point to underline is here the net working capital increased by CHF 5 million, and this is very much in line with the very strong increase of our business activity in the Q2. And the third key highlight of the balance sheet is that per end of September we have net debt of CHF 56 million, which you can see again on this table. This consists of CHF 23 million cash on hand and close to CHF 80 million financial liabilities. We plan to reduce the net debt in the next 6 months through the free cash flow we're going to generate in the coming half year. Talking about cash flow, free cash flow. Here, you find the overall cash flow statement. Both the cash flow, as you can see, cash flow from operating activities as well as the free cash flow have increased substantially compared to previous year. Having said that, when including or when excluding last year's nonrecurring tax payment we have done last year, the cash flow remained pretty stable compared to last year. So in summary, we are very pleased with this LEM first half year results, especially considering, again, the relatively slow start during the months of April and May. And this strong performance is reflected in continued sales, profitability, balance sheet and cash flow improvements. You truly now wonder where -- what the future will bring to LEM for that, I'm very happy to hand back to Frank.

Thank you very much, Andrea. So outlook for the financial year '22-'23. Now referring to my introductory statements about the today's economic situation, I personally do not foresee that within this decade, the situation is really getting simpler. Inflation is going to continue and going to accompany us for the foreseeable future. I do not see in a near end of the Russian Ukraine war. We probably have to expect further corona waves and the U.S. Chinese conflict will rather further escalate and will, in particular, for the semiconductor industry, put substantial hurdles for the free flow of goods and also the knowhow. Our LEM's trajectory is influenced by the semiconductor shortages that will also hamper our growth in 2023 and also LEM will not be immune to a potential recession. Nevertheless, LEM's business is located in the sweet spot of sustainability and profits there from the mentioned megatrends here. In addition, we believe that we are both well prepared as well as potentially less affected with our business setup to also weather difficult times. We, therefore, expect a sales result for the full year between CHF 390 million and CHF 400 million, and the EBIT margin above 20% if there are no significant further lockdowns happening in China. With this, I would like to thank you for your attention. And I would like now to open the Q&A, not to forget to remind you that after the Q&A, we basically are going to start the Capital Markets Day, 11:45, latest here at the very same location. We have for the Q&A, our helpers that Andrea has been mentioning, already who can basically then give you a microphone. And please do me the favor and shortly mention your name that we can basically also know where you're coming from. Thank you very much.

Hello, I'm [ Thomas Nelson ] from Denmark, [ Upstream Invest ]. Now you say the growth is limited by supply of chips?

Right.

Is that to understand that the growth is not really limited by demand, but more by chip supply?

Exactly. I mean, we will talk about that in the Capital Markets Day a little bit more intensively. What we see in terms of market growth and market expectations in the future. But our today's situation and that already is valid actually for the last financial year, we are limited in our growth today by the availability, in particular of semiconductors of several suppliers in this area exactly.

[indiscernible] from Vontobel. My question will be around your order intake. So you -- so we saw a decline year-over-year, but the volume still remains substantial. Can you maybe explain some of the trends in the segments? So you mentioned the biggest slowdown kind of was in automation. And maybe as what you saw in October, which was, for example, looking at exports out of China was rather weak. So if you could elaborate. Right?

So I think here, it's important to understand where we come historically in terms of order book from we typically had a visibility of an order book that was about 3 months long. Now in the last 24 months, we saw a substantial increase in our order book that was connected to the shortage of components, not only obviously from our side, but also on the side of our customers. So in order to basically get sufficient allocations of subcomponents, we ask our customers to place longer-term orders. So that led, obviously, to a substantial increase of our order book that was higher than our annual turnover substantially higher than our annual turnover, again, in comparison to what we had before, which was rather 3 months. We see now that this gets corrected step-by-step. And obviously, an important contributor to that is that there are some recessive signals in the market mainly in -- at the moment feelable in the automation segment, partly already feelable in the Automotive segment. With respect to China, when I understand your question correctly, we do not see at the moment any obstacles or hindrance. So China is working for us at the moment very, very well. And when you all keep our fingers crossed and are not getting affected by any lockdown and you're probably seeing the severeness of these sort of activities like Foxconn in Zhengzhou, the biggest producer of Apple phones in the world, that this obviously has been a rather severe effect. At the moment, things are moving smoothly, and we can also export without any limitations from China. And for sure, also satisfy the local market. And one should not underestimate what we do in China, and about 60% remains in China and 40% gets exported.

[indiscernible]. I have a follow-up question on what you just said, which is quite interesting. In particular, as many companies in the component business face an unexpected chart, destocking from the customer side. So you said that a customer's order for longer and more now this being corrected. Do you see the levels of stocks? Are they excessive on the customer side? Is there some further correction to come that could make the downturn a bit stronger than the underlying market?

Now since you have a lot of wood and good in your question, I must answer, yes, that could all happen. So for sure, it's very difficult to give you a very precise answer. Again, looking at the cyclicity of our business, we expect probably in the automation, which again, is our biggest business, a correction, and we see also some signs in Automotive. On the other hand, we have other trends like, for instance, our DC meter business, which is further going to grow, and we've just been actually also substantially investing the further capacity. So the reason why I say that we are rather optimistic with respect to balancing out all these effects is that the megatrends, in particular, also the infrastructure for the battery energy vehicles will help us to probably see less effects in our business -- in our global business, then when you are depending and spread around less segment. So I think we, as a company that really focuses on measurement of electric parameters have a huge application portfolio, and that helps us to balance these sort of effects to a certain extent out.

[indiscernible]. You mentioned before already thrice, in fact, that your outlook depends on the lockdowns in China, fingers crossed. But could you nevertheless give a bit more detail on the impact, notably on the production side?

Right. Now I think our production site is in Beijing. Every second LEM employee works in this site, for sure, we have also some sites distributed over the country, but for sure, the biggest number of employees is working there. And in Q1, in particular, in May, when we basically had this lockdown, the effect was less on our own production side, but actually on the supply industry. In the supply industry, when you look a bit on the structure of the Chinese market, in particular for high-precision components like -- that we are using, is focused around the Yangtze Delta. So basically, it's Shanghai and the hinterland of Shanghai. obviously, this lockdown had the effect that suppliers were not producing anymore, people could not go to their workplaces and that had an effect. And then, obviously, on the overall supply situation in China, but not only for us, but obviously for the whole world. Because obviously, components are not getting only delivered from there to the local market, but there's also a lot of export of -- in particular, also Automotive components from this region into the whole world. Now at the moment, I've been seeing that the Chinese government tries to adjust the way they see outbreaks and the severeness and try to limit the severeness to the economy. And with this, I have hopes that probably a lockdown of the order of magnitude like we've been seeing that in Shanghai is not going to come again. But again, that is hope. And I'm 100% sure that the Chinese government is very much aware about the importance of obviously keeping the economy running. So I'm optimistic that one tries to limit that. But again, it remains to be seen and therefore, to really exclude the any lockdowns, which today probably be a little bit too early.

Serge Rotzer from Credit Suisse. Question also on backlog and order intake. Can you give us a feeling about the size of the backlog and especially about the lead-times. When you will have worked down this current backlog, is it in the next 3 months, for next 6 months? Or when is your visibility ending?

I mean the visibility still goes basically all of magnitude 9 months. And similar to what we already said last -- in our last publications, we could easily do 10 probably even 15% more in terms of turnover, if you would have all the components available.

Okay. Then on the run rate of the order intake, I think Andrea Borla mentioned that this is now a more normalized run rate. So should we expect that you can keep this level going forward? And in addition to that, how much is now destocking postponements, cancellations together a little bit better feeling when this is a normal run rate?

I think that's a very good question. And probably even our customers are not always 100% sure because obviously, all these levels are fluctuating. I think I expect in the longer term that the book-to-bill levels are going further down and even further down to what we see again to the level that we know from before, rather on a sort of 3-month outlook. But at the moment, there is still quite some, let's say, effects from the past shortages and the long-term orders that our customers have given us. So we will probably not keep this book-to-bill easily forever, but rather see a further sort of decrease step by step. So as I think.

But a follow-up here, sorry, I have 2 follow-ups. You mentioned that you expect further increase in input prices. And you flagged also price increase, but we have a certain time lag. So when will you increase prices? And do you feel the higher input costs directly. So what does -- tell me about the margin for the next quarter or 2?

Do you want, Andrea?

So what we said in the first half year will happen also for the future. So our ambition is to at least compensate raw material price increases with sales price increases. Now we do not have, let's say, hey, 1st of January, all customers will have X price increase. This is a very much face-to-face individual negotiation with the customers. And so we have price increases throughout the year. But what we can really underline is our commitment to defend our overall margins and further increase through sales price increases.

And then the last one, probably, 50 years of LEM, congrats. So you are now brave enough to also give us a midterm target probably in the later that day? Or do we stick to this unofficial CHF 500 million?

We will -- sorry, we will have, let's say, at the end of the Capital Markets Day in the -- let's say, in the summary, we will give you some, let's say, rough guidance about, let's say, the rough ambitions we have on the top line and in respect of profitability as well. So you see that in the late afternoon.

Michael Foeth from Vontobel. Just 2 for me, a follow-up on what [ Serge ] asked regarding your guidance on the profitability, your sales guidance suggests that the second half is expected more or less in line with the first half, but your margin guidance, I think, could be taking a bit misleading because it allows for a lot of downside on the margin. Is there a reason why you're not confident enough to increase the floor of your guidance to, let's say, above 22% or something like that, because with that guidance, it could really drop well below 20%?

No, again, it depends very much where we will end up on the total sales. We gave now a certain bracket of CHF 390 million to CHF 400 million sales. If you are rather on the down end of CHF 390 million, meaning that the second half of the year will be actually lower than the first half year. Then of course, the pressure on the EBIT margin will be more important. Whereas if we are, again, having a similar level of sales in the second half year as in the first year, first half year, then again, we will probably have also a high level of EBIT margin. But again, we don't want to give now precise EBIT margins forecast when they really depend very, very much on where the top line is ending.

And another question regarding your track business. Without that effect from the cessation of business in Russia, would it still have been negative to growth? Or would it be positive?

No, we would have seen positive growth numbers. Exactly, yes.

[indiscernible] We've seen the sales up for the first half year, 7.8%, and you mentioned price increases. So how much of this increase is due to price increases?

Again, we will not give you exact numbers, but you can get, let's say, the message is that a certain part of it, a couple of percentage points of that is to price increases. But again, at the same time, you cannot say the volume impact is then only the delta. It is -- we have a constant price erosion due to mix changes as well. So of course, the volume impact, the volume increase per se is also pretty important.

[indiscernible] You haven't talked about market share developments and looking at the excellent result of the Automotive division is the hypothesis correct, that through the convergence of soft and hardware and that it becomes more difficult for peers, for smaller peers to be successful and to continue to challenge you, i.e., do you grow organically automatically for the complexity increase? And maybe you could elaborate on the difference between the shunt technology and in-use technology, whether you were able to further win market shares there as well, especially in Europe?

So it's a very, very good question. And I'll tell you what, we will have to spend quite some time on this also throughout the Capital Markets Day because the question that you ask is for sure, probably putting a couple of different aspects. We talk on a global current sensing market, and you will see me talking about that in the first section of the Capital Markets Day that we have is about 20%. And the LEM market share in the Automotive area is in the same order of magnitude. Also Automotive breaks down into further submarkets because we talk about battery measurement, we talk about motor control, and we talk about onboard charging DC/DC converters. So also the -- let's say, market shares are there not exactly the same. Now you've been mentioning with Automotive, probably one of the most challenging businesses. On the one hand, there is a lot of growth potential in this market, and we expect that this market is about to double. On the other hand, we see that the pressure to reduce cost for electrical vehicles, and that is the majority of the turnover that we indicate here is huge because obviously, an internal combustion engine vehicle that has been cost reduced over 100 years, now needs to compete or vice versa, the battery energy vehicle car has to compete with this ever cost-reduced combustion engine vehicle. And most BEVs are today cross-subsidized by the business from combustion engine cars. So obviously, this bill of materials of the OEMs need to go down, and there are only 2 ways to bring them down. On the one hand, it's battery cost. On the other hand, it's power electronic costs. So we will see a lot of cost down in the area of Automotive and the opportunities to integrate to compact solutions here is one of the key topics we have on our agenda because we will also see there certain, let's say, applications merging. You've talked about shunt, those who follow LEM longer probably remember that in the past, we've been talking about market shares of 60 or around 60%, 50% to 60%. Now the market has not been changing. What has been changing is to why -- what we see as a total available market for LEM. Probably the big change is that the area of smaller drives that today is basically done very often with integrated current sensors. So basically semiconductors that have the full functionality of a current sensors that these are products that can be used there and that have at least in a lot of applications, even a better performance than shunts. So therefore, we see here the opportunity that ICS can replace shunt. And with this, it opens us a completely new market segment that we were not able to address in the past. Therefore, we were also not calling, so to say, our total available market. Another market extension happened towards the whole DC metering business. Also there, obviously, LEM didn't have a product at all. This was not a market DC meter itself was not a market. And we see now accompanying the infrastructure growth that this becomes actually a very, very interesting market, and we had rather conservative estimations in the very beginning about how this market might develop and see now in Europe and really steep, steep growth, and we see coming from the Biden Administration also now infrastructure investments in the U.S., where with the market leader position that we have here in Europe and can also basically concur and enter in the U.S. market. Right. So hopefully, that was my giving you a bit an overview how we see this market sort of developments?

Yes, I have a question,[indiscernible]. You mentioned the competition between the U.S. and China on the topic of the chips. Is it affecting you? Or do you have a reflection at LEM on this topic?

So I think it's a very, very good question. Thank you, [ Remy ]. Now what is the situation in the Chinese U.S. fractions are more impacting smaller technologies. So talking about smaller technologies. When you look at the semiconductor market, you basically talk about chips that are used in mobile phones that are technology wise, let's say, 10 nanometer and smaller. And the chips that we are using, and we are using chips where you talk about mixed signal here, where basically analog and digital parts are combined. And then what we do mainly with our chips is to basically measure a magnetic signal based on a whole sensor and basically then translate that into an electrical signal. So basically, you have analog and digital parts. And this, again, doesn't make worth an investment or, let's say, to go structurally into whatever, 10 nanometers. So what I want to say is there's a lot of investment happening in the smaller areas, less investment happening in the bigger structures. On the other hand, a lot of -- in particular, also Automotive players need this sort of mixed signal structures. So the Chinese U.S. fraction is rather on smaller stuff and not so much on bigger stuff. So therefore, we are rather not affected with respect to that. Long answer, but I think it's important to see also that also the semiconductor market is not a homogeneous market. And that really these billions that today get now invested are rather going into smaller structures. And with this, also not easing really the situation for us. What further questions are in the room? I need to look the watch.

Yes, because I think we have a couple of questions on the phone 3, if I hear correctly, and then one on the -- whatever. So I suggest that we take those 4 questions left because then otherwise time is running out, and we want to stick to our agenda.

The first question from the phone comes from [ Dominik ] [indiscernible].

Well, you've talked obviously a lot about China, also the impact of the lockdowns, traveling restrictions, et cetera. I'd be interested a bit in how you see the environment there to -- for you to evolve a bit more longer term? I mean will it become more difficult maybe for you to operate there in China as a result, maybe also of the politics, internal politics, also maybe this -- what we hear about tensions between formers in China and local people, experts no longer going there. If you could a bit elaborate on that. I mean, obviously, you have big exposure in China? And maybe then just a further question about the Penang investment. I mean, is this also maybe happening to reduce a bit your exposure there in China, I mean to diversify your business more?

Yes. So China is a very important market for LEM. You've been addressing that exactly the right way. And we expect that the Chinese market is going to further grow. And the importance of the Chinese market for LEM is not going to get reduced. So we have -- let's say, we bet fully on China as a market for us and it's a growth potential for us. When you see today that 9 out of 10 inverter suppliers for the solar business are Chinese companies. When you see that 50% of the global market for electrical vehicles is China, I'm deeply convinced that we will not have a sustainable future without China. So I'm deeply convinced that to further look in China as basically an important contributor also to our business growth is the right strategy. There are, for sure, challenges at the short term, I would completely agree. But I would probably also say that also we in our democratic world have, at the moment, a couple of challenges that we need to solve. Now the second part of your question was referring to Malaysia. And yes, very clear. Malaysia has the function of allowing us to further grow and to basically reorganize and optimize our footprint a little bit better. We basically have today more than 60% of our production volume coming out of China. And in the future, we would like to organize our footprint in a way that we do China for China out of Beijing and that we do the export, the Asian export business out of the Malaysia plant. Our Malaysia plant is making good progress. We are really seeing how that is growing and the time line that we have in mind is that by the end of 2023, we get ready to produce and later start shipping out of Penang beginning of 2024. Does this answer the question?

Yes, maybe just on -- I know it's a sensitive question. But obviously, I mean, I don't know when you last traveled to China, personal, is all these personal contacts. I mean, having these interactions direct interactions. I mean, has this become more difficult? I mean or do you cope with that well?

Now for sure, the situation with respect to the zero COVID strategy in China is also a stretch for us as an organization. And that's true that I personally have not been to China in the last 3 years, which is for sure something I regret very much. On the other hand, you will see that later. And LEM has established its foothold in China in 1989. And we have there a rather strong team that is able to run the activities and run the operations there in a very safe and resilient sort of way. Still, for sure, we want and we need to trouble to China to discuss strategy, to discuss market developments, to discuss some new opportunities, not only over teams in the future again. So we are all longing to find this opportunity again. And I'm convinced that as soon as also traveling within China gets a little bit easier we will also eventually go. When you see we are also still in a situation, I've been meeting with quite a lot of Chinese who actually have been going through this quarantine -- 14 days quarantine in this last 9 or in this last 3 years and 9, 10 times. And we basically just take the luxury assumption that this is unbearable. But let's be honest obviously, other people take this, and I'm convinced that we are also going to move into this direction in the midterm, independent, what sort of quarantine regulations are applying because I think it's important to keep this personal context. You're completely right.

So in order to keep the time schedule, the time plan, we will close here with the Q&A. Of course, you will have the opportunity you physically to raise questions during the breaks, more happy, very happy to respond to those questions. And also for the people on the phone, on the webcast, of course, you're very happy to call us to write to me, to Investor Relations, and I'm more than happy to answer any questions you would have. So with that, we close the presentation of the half year results, '22-'23. And we directly move and hand back to Frank to start the Capital Markets Day with a strategy update.

Thank you very much.

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.