Sensirion Holding AG (SENS) Earnings Call Transcript & Summary

All right, I have just unmuted. Good morning, and a warm welcome from my side. My name is Heiko Komaromi, and I will moderate you today to the half year results of Sensirion for the year 2023. As always, by my side, we have our CEO, Marc Von Waldkirch; and our CFO, Matthias Gantner. The agenda looks as follows: Marc will start with a review and highlights from the first half year of 2023 and give an outlook about the strategy. And after that, Matthias Gantner will follow up with the deep dive into our financial results of this half year, followed by a further outlook [ from ] Marc. And then at the end of our session, you will have the opportunity to have roughly 30 minutes Q&A session with all the attendees. [Operator Instructions] Without further ado, I hand over to Marc, and by that we start our session.

Thank you Heiko for the introduction and also from my side, I have a warm welcome to this earnings call today, and thank you for your interest in Sensirion. And let's start first with a short executive summary. After 3 very successful years, Sensirion is actually hit by pretty strong headwinds in the first couple of months this year and this mainly in appliance and consumers. And I think that's also one of the very important key points today. If we have a look into the breakdown of markets, we see 2 different contradicting -- contrasting categories of mark. On the one hand side, we have medical and automotive. They have again achieved some growth. And on the other hand, we have a very significant drop of sales in appliances and in consumer markets. And I'd like first to spend some minutes to explain you again. We have already done that in our profit warning call in beginning of July. But again, I'd like to give more light into the reasons and the effects to describe why we have the significant drop in revenues in appliances and consumers. I think the revenue drop there is -- can be explained by 3 different aspects. They are combined to each other. On the one hand side, what we have seen, and this was not foreseeable at the very beginning of the year, is that our OEM customers in these 2 affected markets, they see a significantly lower end consumer moods to invest into all these kind of table-based air quality sensors, air purifiers and so on. This is definitely also, this generally lower-end consumer demand is definitely also driven by inflation aspects or the weak economic situation in China. On top of that, there was also an effect which amplified this revenue drop due to the pandemic-related overconsumption of products in these categories. So during the 2 years of pandemic, the people are highly concerned about the air quality in their residential rooms. So some of them, and this is our interpretation today. Some of them, they decided earlier to invest into new air purifiers and all this. And this increased the sales in the last 3 years and the people are now missing to invest into new air purifiers this year. So it has to -- it will take some time to come back to a normalized situation where you have a better evaluating situation between those consumers they have already bought one and those they are now in the moment to buy a new one. So you have the kind of an overconsumption of end consumers in the last 2 years, pushing the sales at that time, and now they are missing. So we are now at the opposite situation compared to last year. And the third element, this is the well-known destocking effect, which is not limited to appliances and consumers only, but definitely also in these markets, combined with the [ '21 ] effects, we have the destocking effects. Unlike many other electronic companies, we were able to deliver all the orders in the last 2 years. So 2021, 2022, definitely, we had some slightly large lead times at that time. But at the end of the day, there was no backlog at all. So we could actually fulfill all the orders placed by our customers in these 2 years. That's a tremendous achievement for the company and is also extremely important to establish or to maintain the very close customer relationship we have especially with all the single-sourced customer. So we are deeply convinced that to do so and to do this great results in terms of delivery capability during the allocation phase is the extremely important fundament -- a foundation also for the long-term relationships with our customers. Short-term, this is a drawback to be honest. That means we cannot work on the backlog today because there is no backlog. And compared to some other electronic companies, this is what -- definitely also was not a good point to stabilize and to balance the revenues of last year to the ones we are commenting today. I think it's, again, for me, very, very important to highlight the [ trends ] [indiscernible] the reduction we are discussing today. It's driven by reduced volumes only. There is no customers or any other kinds of businesses we have lost in the meantime. So all the customers are still with us, all they are even working on new designs with us. But what they have done is just to place significantly lower numbers of orders in the last couple of months. If we have a look at the mid- and long-term view, then we are and we keep to be extremely optimistic. And on the one hand side, this is based on the fact that we see that all these mega trends of health, of climate change, of energy efficiencies, they're even stronger compared to the very same mega trends 2 or 3 years ago. And a lot of them are supporting the use of sensors for their respective applications across all the markets, not just appliances and consumers. Secondly, if we have a look at our pipeline of our new projects were design wins are already -- given or granted by our customers, and we are now working on the designing process together with our customers. Also, this gives us a very good visibility about the opportunity in the next couple of years. It's not fully clear when the start of production will be, this month or another month. But at the end of the day, these projects are very concrete and are already in the pipeline, and we are working on them. This brings us also to a kind of a contradicting management situation we are in. On the one hand side we have revenue drops, and as explained. And secondly, we had the full pipeline of R&D projects for the future growth the next couple of years. And based on this kind of trade-off, we have decided, together with the Board to continue to invest into R&D resources in order to support these mid- and long-term initiatives. And as a drawback to accept to have a higher volatility of our EBITDA margin. And this exactly is also the reason why we have the significantly lower profitability and compared to last year. On the one hand side, anyway, our businesses, our products are based on a pretty limited number of variable costs and a pretty high R&D contribution. That means whatever we have, any short-term changes of the revenue of the top line, this will overproportionately hit the EBITDA in positive ways, but also negative. In the last 3 years, we have seen the opposite. That means our revenue top line increased significantly and the EBITDA grew up to high levels than -- or even higher than 30% compared to our midterm guidance of 17%, so almost a double of the levels we have indicated by our midterm guidance. This year, we see the very same effect just with the other sign, that means in the negative way. And this combination of low variable cost contribution to our products which brings us high volatility on EBITDA compared to the top line development, combined with the fact that we have decided to continue to invest into additional R&D resources to support the full pipeline of R&D projects. This resulted actually in this significantly lower EBITDA levels we are indicating. We have already indicated in July. In terms of full year guidance, we have already given you an update in July. We confirmed these expectations in terms of top line and gross margin again today. In terms of EBITDA margin, we are slightly more cautious compared to the July indication. There's actually 2 reasons for that. On the one hand side, we like to emphasis and to address again, the EBITDA margin is highly depending on the top line development. Definitely we have on the top line, this kind of range and this has also -- to be reflected in terms of the EBITDA. And secondly, we have also address -- we are addressing now the weaker dollar compared to the level we had at the moment of our [indiscernible] in dollar. But I come back to this full year guidance again at the end of the presentation. Now I'd like to focus shortly on all the 4 markets after this introduction words. In automotive, I think this is 1 of the 2 markets they achieved a good and stable and resilient growth. We have seen that there is a pretty resilient demand of all the products in our existing business in automotive still to-date. On the one hand side, the growth was actually contributed by additional projects in the module business. So in the Tier 1 business where we are serving the OEMs directly and they actually -- some of the projects already were there 2 years ago. They now contribute to the growth of the automotive markets. And this was mainly products for OEMs here in Europe. In medical markets, this market was -- could we flip the slide, thank you. This market was again influenced by these one-off of last year. The one-off of these CPAP replacements came to normality. That means there is no further one-off in the results of first half of the year. All in all, we had a decrease by 13%. If we adjust these figures due to this one-off of last year, then we had a significant growth of 44% in our existing core business. There, this was mainly driven by some short notice and demand of China. I'd like also to be very honest on that. We are not convinced that these level will continue in the next couple of months. Also in medical, we expect some destocking effects, which will be likely to hit the revenues of the second half of the year. So the 44% is probably not a full number, a sustainable new level. Then some words about appliances or industrial. Industrial is actually a pretty broadly diversified market basket. One of the main core aspects here is appliances. I have already commented the effects there air purifiers, refrigerators and all this stuff. On the other hand, we had also -- we have also in this markets heating ventilation, the air conditioning business. We have a semiconductor business and then some other industrial applications. What we have seen beyond the appliances is a significant drop. We are seeing a pretty stable situation in gas metering. But also a weaker situation in semicon industry. This is also reflecting volatility of the semiconductor markets today. And last but not least, the consumer markets There, we have more or less the same situation as in the industrial markets with one differentiator that means consumer is significantly less, broadly diversified compared to industrial markets. So here, we see the full picture of the volatility of consumer's demand at the moment. But more or less the picture within appliances and consumer seems to be very similar with all these effects I have explained at the very beginning. Before handing over to our CFO, to comment the figures, I'd like to give you more comfort and also more insight into the mid- and long-term outlook. I have already explained before that we are very optimistic about mid- and long-term view, thanks to the mega trends but also thanks to the facts that we have a lot of exciting new projects only awarded by our customers or very close to be awarded by our customers. But I'd like to give you some more light in today. On the one hand side, we have one growth driver, which is very well aligned to the -- our growth strategy we have already presented in March 2021. So there is no significant change in that. This is the fact that in the environmental sensor region, that means all beyond the humidity and temperature, we have introduced a very first generation of products between 2018 and 2020. And now we are working on the second or even the third generation. All these internal projects, they are developing extremely well. So in carbon dioxide has both at the second generation, you see here in the middle of the 3 figures the [indiscernible]. This product is already in the market for the last 2 years. Now we are working on an even smaller miniaturized version for CO2 measurements. In particulate matter, we are very close to launch the product, which is significantly more miniaturized in the second generation and the very same taking slightly longer is about formaldehyde. What is now the indication for you about all these projects? We have learned already in the last 20 years in humidity and temperature, that whenever we can miniaturize a product by keeping the performance and simultaneously in semiconductor industry also by miniaturizing also by -- to be able to cut costs. You can drive market overproportionately because we can enable and open up new applications, they are not open. So as long as we are talking about more [ bulky ] or more costly sensor solutions. So for example, in carbon dioxide, we started first with this business card sized, the CO2 sensors, we are now on sure cube level. And our next step is actually our ambition. This is a very ambitious goal, which is not existing in the market to bring down CO2 measurements to chip level only. And by doing so, we can also drive new applications. They are not that part of that business growth today. And this is already our growth or success stories about humidity in the last 20 years. And the very same is now already ongoing with CO2 particulate matter and formaldehyde. There is a -- also another midterm opportunity. That's about this kind of new -- a completely new product family of gas leakage sensors. This was already part very shortly summarized in our market capital slides 2 years ago. but now it's reality. That means we see an additional popping up new markets of gas leakages for a new category of coolants in air conditioners. The coolant industry or the air conditioning industry, they are forced to replace the old coolant to a new one because of the GWP effect, that means the effects to the climate change or their global warming. That means from [indiscernible] in the U.S. market from the 1st of January 2025, they can only use the new one. The drawback of the new coolant is that, that they are pretty flammable. So for -- starting from minimum volume of coolants used in the air conditioners they have to introduce a gas leakage sensor. This is exactly the point, we came in. So this is a new market emerging now because in the old, with the old coolants, with the old air conditioners, it was not need to have any kinds of gas leakage sensors on board, now it is. We are very attentively working on solutions that is [indiscernible] of this kind of module based on chip technology we have inside -- in-house, and we expect to have the very first production starts at the end of 2024. So be prepared for this significant change in the U.S. market starting in 2025. And last but not least, I'd like to summarize the again, that we have also a long-term, but this is definitely not mix. This long-term orientation that means this complementary business area for sensor-as-a-service, where we are moving from being or serving only as a kind of a hardware supplier to our OEM customers more to a full solution provider where we are selling. At the end of the day, we are selling data coming out of our sensors and not just the hardware. There, we are working on the very same 2 aspects of methane leakage detection, which is heavily supported by the mega trends of climate change protection and secondly, about condition monitoring which is more close to the Industry 4.0 mega trend. On the last slide for your reference that I -- for the sake of time, I don't like actually to dive into all the details there, but definitely for your reference, as always the strategic achievements. I think I can summarize this slide in a way that we -- I'm very positive about the strategic achievements and progress we have made in the first 6 months of 2023 despite the fact that in the running business, we have a significant drop of revenues. But this is -- as a parallel on the one hand side, we are fully focused on our strategic development of the company, which are absolutely according to plans. And secondly, these headwinds we have to cope with in terms of develop -- top line development in this year. That brings me to end of these comments business-wise, and I'd like to hand over to Matthias to comment the financial figures in details.

Yes. Thank you, Marc. So good morning, and warm welcome also from my side. I'm pleased to comment on the set of figures of first half of 2023. Also, they are not that impressive as we had this in the previous periods. So having a look at the key financial and just pick up here again, the topic of the strong hit on our profitability. I think with weaker course of business we experienced in the first half of this year. And the given cost structure Marc already elaborated on that a low portion of variable cost, the high level of optimization. And on top of that, also this cost stuff that we definitely and proactively spend on R&D and sales forces to empower and to lay the basics for the next growth steps for medium-term growth targets, means to drive these R&D projects and empower the sales forces where needed. This in combination definitely gives the strong hit on our profitability. So it ends with the EBITDA margin in -- with 8.7% in absolute numbers, it's CHF 10.7 million compared to the weak revenue with CHF 123.2 million recorded January to June 2023. So -- but all in all, you can be sure that we are very closely -- at these weaker metrics for this period looking on all these numbers. On the other hand, our worry lines, as Marc already mentioned, smooth out when we put our medium- and long-term growth opportunities next to them. We are really positive about that. So I think but does not relief us from really have a close look at the numbers as they are per to-date. On the numbers of H1 in detail, starting with the revenue. We recorded, as mentioned, the revenue was CHF 123.2 million. This is a decline of 25% overall compared to H1 2022 taking out the extra business or the onetime business that we booked in previous period. I think the decline comes down to 18%. Addressing the EBIT effect here, we calculate a minus of CHF 4 million for the top line. This is mainly dominated by a weaker U.S. dollar, but in general, the strong Swiss francs also bring negative impact from other currencies, Korean Won, Japanese Yen and Euro. About the gross profit. So out of the cost of goods sold, the adaptation of the variable cost components that we have in our added value chain that was initiated in time. So this relates mainly to reduce temporary and leased staff. On the other hand, the high automization limits the downscaling options, however. After periods with very high gross profit margin around 16%. Now we are back on this midterm 50 percentage range that definitely is also part of our midterm [indiscernible]. So the extra ordinary high utilization of our fab facilities, of course, is now gone. So we are back on a normal utilization or even in some areas, in an underutilization coming with weak course of business. Also here, we have to think that we just started up to fill up the fab in Hungary. So of course, also this with the effect of lower volumes in our production lines, this brings kind of underutilization here. Talking about the overhead, R&D, SG&A here -- we have this mentioned cost stuff further invest in new resources in additional projects teams definitely to follow and to work continuously on the midterm and long-term projects to cover all the mega trend topics that we want to address to definitely have the basics for further growth volumes. And in parallel, of course, we also had to reflect the worldwide inflation. When we look at the cost setup that we have in 2023. I think here, we also have to record salary adjustments higher than we had this in the prior periods. So with this top-down calculation, gross profit and overhead, of course, it ends up with this mentioned CHF 10.7 million EBITDA. And the lower chart here on this slide definitely illustrates again the strong impact on reduced volumes with negative leverage, this negative economies of scale that we have losing a lot of gross profit with a lower revenue and top line contribution. So looking at the P&L top down, what we haven't we addressed yet below EBIT we see the finance results here also, we have impact from FX assets that we hold on our accounts. This is mainly driven by that. that we have here unrealized and realized FX losses in the balance. So in the bottom line, we are down at the profit for the period down to a very low CHF 1.4 million, but still a positive result at the top line. Some words on net working capital and the bound capital in our company. I think we have mentioned that in earlier meetings already that we are definitely proactively building up inventory for all crucial components. And here, we talk mainly about raw materials wafers, where we kind of build up our own insurance for future shortages in the supply chain. I think as long as our main supplier for wafers is located in Taiwan, and you are all aware about the [ freight trial ] geopolitic situation we have there. We have taken started the initiative to build up our vehicle inventories to a higher level to take out the risk of shortages here. And this definitely comes not along with the risk of additional obsolete stock. I think we have a good experience in how the storage all this material and we see no additional stock for obsolete risk there. So talking about CapEx I think as mentioned, midterm, long term, we are still positive. So we continue with the refurbish and the expansion of our fab capacities according to the mid- and long-term plans. So in the first half of 2023, we spend around CHF 15 million for PPE. This is mainly allocable to the fabs in Switzerland and in Hungary, where we definitely want to get prepared for the next growth step. In terms of Hungary, we bring them in the position that we can transfer the more mature products to that new site and to have new spaces here to start ramp up and to do continuous development in the production phase already, especially here in Switzerland and to mature the products before we transfer them to other sites. So with this, more bound capital and the cash out for CapEx, I think based on a quite small operating or even negative operating cash flow, of course, the free cash flow then calculates in a minus close to CHF 20 million. And this is the impact of our continuous spendings that we have, that we proactively had because we see this period definitely as a bump -- and temporary bump. And so we continue with all our spending. This brings me already to the last slide, look or -- sorry, here another look on the cash flow just illustrated, okay, but it's just the calculation that we saw in the table. So last but not least, look at the balance with the reduced and smaller cash box that we have reduced by CHF 20 million. So the net cash is CHF 102 million as per end of June. So still a strong balance sheet. And this -- with this strong balance sheet, I think we have a good resilience. I think we can drive here all our projects, we can support our projects even in periods with weaker market demand on a continuous way. And I think also to train people to improve our running processes definitely to start in a better shape when the demand of the market picks up again. So looking at the balance sheet overall, I think apart from the mentioned change of cash versus PPE and inventories, all the other positions are more or less stable compared to end of year 2022. With this, I would like to conclude my remarks and hand back to Marc.

Thank you Gantner. The remaining slide is all about future. So I like to highlight first that short term, the visibility remains pretty low due to the geopolitical but also macroeconomic challenges. And all these destocking effects and all what we have discussed already before. We have already updated our guidance in July. So I'd like us to refer it again that the revenue is actually expected to be anywhere between CHF 235 million and CHF 255 million. So more or less, if you take in the base of H1, we expect to have a more or less flat situation for the second half of the year. And the annual -- that the gross margin should actually be stable as expected. There is no change even to the one. We have the guidance we have shared with you in March is [ not ] the exactly same guidance as March already. In EBITDA margin, I have already explained shortly before, we are slightly more cautious compared to the one that we have given you in the update of July taking into account 3 effects. First of all, that anyway, the EBITDA margin is highly influenced by the top line development. Therefore, this additional statement of depending on the top line development. Secondly, also to reflect the lower -- weak U.S. dollar situation and to reflect those H1 results. Longer term or midterm, we like definitely to highlight again and also to confirm fully our midterm guidance given in 2021 in March. I was asked several times in last couple of weeks about what is actually the base you can take to calculate this 10% to 15% growth rate on average for us over a cycle, 3 to 5 years. And we have shared this midterm guidance with you in March 2020. So I think it's fair to take the base of the full year results 2020. That would be [indiscernible] one-off of medical ventilator because it's not part of the core business and is anyway gone as expected already then. So the base is the 2022 results -- 2020 results to be precise. 2020 results without the one-offs. But we feel absolutely confident as to confirm these figures of 10% to 15% growth rate on average over the cycle. And also we'd like to confirm explicit again the average EBITDA margin of 17% and over cycle, definitely also reflecting the high volatility depending on the core or the nature of our business. That brings it to the end of this presentation today. And thank you for joining with us, and we are very open, very glad to answer your questions now.

All right. Thank you both gentlemen, for this very nice explanation. We will now go into the Q&A session. And I will now go into the chat and read out the questions as you have put them in. So the first question from Mr. Miller is, the low margins are frightening investors. What measures could you take to reduce such sharp drops in margins in the future when volumes drop or are low. What can you do to anticipate such low volume periods and take necessary measures as flexible work time or short time work.

So thank you for this question. I think definitely work, we are taking anyway as a core part of our culture is, whenever we learn more. We like also to take the lessons learned to make it better in the future. And I think this is deeply established in our culture. And definitely, if it comes to forecast this was -- very honestly, this was not a good forecasting we have done at the very beginning of the year. We have already taken some lessons learned. We like also to make our forecast to more sophisticated. In the core, the forecast based line-by-line bottom-up approach based on the discussions we have with our core and OEM customers. And definitely, there is also a lot of other inputs like our own gut feeling. Our first and now is it actually brought to -- the effects of the result that we have to see that this was not even foreseeable this sharp drop in applying to consumers for all our big customers. So all of them are actually surprised in the very same way as we did. So there was and this kind of surprise for the whole business. And definitely, all these effects, as I have explained, was additionally amplified by destocking and over consumption last year. But I think we can say, on the one hand side, we can do it better, and we take out what we take our lessons learned about forecasting ways. And secondly, we have also to summarize that we are now in very extraordinary times. And I've been with the company for 17 years, most of the time, also part of the executive Board and I cannot remember any times in the last couple of years where we had the significant changes, not just the 1 now or negative side, but those are the 1 in the last 2 years on the positive side. So this moves is very short-term changes, which are not anticipatable and is actually phenomenal, which is probably also linked to the pandemic situation. And also in 2021 and 2022, I'd like also to highlight that again. We have noted all the time that some of these additional core business is very likely to be just to increase inventories, and exactly this is now where we are suffering from. But we definitely -- I can confirm that again, we like to do it better in the future. How can we react on cost blocks? I think there is another situation terms of variable cost blocks or operation close cost blocks, we have taken first decisions already January, February, that we have reduced our capacities with temporary lease with reduction of investment plans and so on. As we said, we have already done our homework. That is also reflected by the fact that the gross profit margin was more or less stable. In terms of sales and R&D we have 2 aspects, we are not that fast to react. On the one hand, in that's the main aspect we don't want to react because it's a completely [ online ] business. On the one hand side, with R&D and sales we are working on projects for the next years. If we are cutting resources there, we are not -- we definitely -- we can slightly but just slightly stabilize the EBITDA of short term, but we are jeopardizing the future opportunities. And on the other hand, the other effect that there is also some license fee. Whenever you are hiring new people or you decide to hire new positions in R&D and sales, let's say, mid of last year, where there was more than [ sunshine ]. It takes you more than half year definitely to get these very talented and very specialized R&D guys and from then, you have the impact from the cost blocks. So it takes you half up to 1.5 years to have the full picture on the P&L. That means you have no chance to react on short term without a hire and fire policy, which is definitely destroying the culture and also the branding of the company to attract those talents. In our review, also together with the Board, we came to the full conclusion that this is not the a good story for the company. We like to be a very -- and attractive employer to attract the best talent from all these adjacent universities and to have there also in R&D and sales, some kind of flattening the development of people and that means not to go into hire and fire policy that means. But on the other side, that we have these cost blocks growing in another way as our very fast and extraordinary fast ups and downs in top line. And the result of that is the volatility in EBITDA. But I'm pretty optimistic. It's very hard to say anything about future, but I'm pretty optimistic that this very strong volatility should be and remain extraordinary. And wherever we have the pandemic behind us, and the -- the outcomes of the pandemic, we should also come to more silent -- moderate [indiscernible].

All right. Thank you very much, Marc, on your explanation of our costs and savings. In the following, we have a question from the same gentleman, but I would like to combine it with the question after that. So the first question is, do we plan to make any special efforts to get new clients or new products for new clients, new areas? So how do we grow? And the next question, I think we can combine is that we speak about growth in midterm and long term, but would we already expect growth for 2024 or only for 2025?

Well, definitely, we do not -- we are not initiating any extra efforts to gain additional customers because hopefully, we are already approaching all the potential customers we like to gain for our products. So I have a deep conviction that we do have a very best in all the drivers, all the customers pay off from a business perspective, also worse support -- to support that means to do it now an extra effort, it doesn't make sense, especially we are in the OEM business. That means to have any time to discount initiatives in order to shortly trigger additional sales, it will not pay out because at the end of the day, whenever a car is sold at the OEM, we are selling a sensor for the car. Whenever a fridge is sold, we are do the very same with our sensors. So whenever we are reaching out our customers to trigger them to place more orders now, potentially, they can do it if they get a good discount. But at the end of the day, it's just for inventory. Our sensor is not that decisive in terms of cost at the car is significantly cheaper when we are lowering our prices. So it doesn't make sense to have a short-term initiative to give discounts in order to stabilize the top line. And new clients, daily we do our very best in order to reach out to all of these customers and also to get engaged in designing process but a project that it takes 2 years, at least. It's to come to start the production for all these customers. To 2024, 2025, we are very optimistic, but it's too early to give that in figures that there will be new growth next year. Definitely, what we have are new projects coming to production pace. This is already a pretty good visibility, which is not that good in visibility is about the economic situation and our running existing business, where we are suffering this year. But we are already optimistic for 2024.

Perfect. Thanks a lot, Marc. Following question from Mr. Reto Huber. He wants to get more insight in your explanations about the medical market in China. And he's interested to learn if we have gained new customers against who? So did we win? And why do we expect the inventory buildup there?

Well, no, this 44% core business growth in medical is not attributed to one customer, which was now -- is now on board and start to produce. There was definitely there's always new programs starting up, sometimes with existing customers sometimes with new ones. What we have also experienced is that during the pandemic, we served significantly more medical customers, especially also in China, and they were not used to be our customers before the pandemic. The reason for that was actually that we were willing also to support all these customers in the area of ventilation -- medical ventilation compared to our competitors, they were all located U.S. and the U.S. sensor manufacturer, they were not allowed to support any medical ventilator manufacturers outside of U.S. So this was a good chance for us to serve additional customers and we work with success and this can actually be stated now 3 years after this extra initiative 2020, that we could convert a lot of these extra costs during the pandemic to be or to become sustainable customers also after that pandemic. This definitely is supporting the base of our medical business but cannot be explained -- cannot explain fully this 44% growth in the first half of the year. And therefore, also my comment, I think this is more a kind of a fluctuation, which is also we are looking into a market and just 6 months than at the end of the day, already 1 or 2 orders, they are extraordinary, that means we are talking about some millions can influence this growth rate significantly. And is probably, you cannot tap that take this program but also to have the very same picture in the second half of the year over 2024. I'd like just to reduce there the expectations that the 44% is also not a kind of a sustainable growth rate driven by any extraordinary customers kicking in.

Thank you, Marc. On the topic of gas leak sensors, you explained the situation about the U.S. and the change and what's driving the adoption. Now the question is if we are also benefiting from the spread of next generation of heat pumps in Europe and worldwide.

That's a good question. I think it's not yet that concrete, but definitely heat pump is one of the business we are looking into. It's also depending on the [indiscernible] there and the way how they are done. But definitely heat pump is one of the topics we are looking into and we are also engaged with some customers but it's not yet so concrete that we can say, okay, we are very close to start the production for this respective projects.

And a concluding question from him is, why do we have administrative costs increased by 14%. So did we have any one-off expenses there?

You comment on that?

No. No extraordinary positions there. I think, yes, as mentioned, the one is, of course, salary adjustments. The other is definitely also in this period, bringing in the basic setup of the fab Hungary strengthening also administration forces in the U.S., where we also in parallel strengthened our sales force especially. So this is SG&A overall. I think here, we have now a much more better set up just to support A2L business and projects -- prospects to follow up there. I think that's the driver in that.

Thank you, Matthias. Now some questions from Mr. Sandeep from JPM. What our end markets showing since we lowered the guidance. So has any end market of ours shown any improvement since the profit warning.

No, I don't think so it's more or less a stable situation. Also due to the fact that between our profit warning in July. And today, this is what's actually more or less summer seasonal, holiday season. So in a lot of other company as well. So I think there was no significant change in the meantime. More or less, we can take the very same conclusion as we have already shared with you in July.

Thank you. I think we addressed this, I still read it out. Given the slower growth rate, are we going to keep the growth of operating expenses at the same trajectory? Operating expenses all in all. So I think...

Definitely what we are doing is that, again, we like R&D, but also sales and slightly linked to that also from administrative support is not on short-term adjusted due to the top line development, what we are doing, and we have done already for more than 20 years is actually to adjust these expenses according to the opportunities we see short-, mid- and long-term. And there, we are optimistic, and this is reflected by the fact that we have continued to expand the R&D spendings. They was also other times, for example, in 2020. We had this chunk thanks to the one-off of medical ventilators. There we have seen that it doesn't make sense now to hire a lot of people, but to be more cost because there was not a concrete number of new projects we had actually a support. And secondly, we're not that's fully clear about the situation. Therefore, we have not invested or converted this additional top line into R&D immediately and this results in a very high EBITDA margin. Now it's the opposite, that means we have this weakness of the top line. But on the other hand, we see that we have this good portfolio or pipeline of R&D projects to be supported. And therefore, we also -- now we decide to do it according to the pipeline and not according to the top line.

Another question. I'm sure you have addressed, any early look into the '24 trends for 2024? Or how about the visibility. Maybe a short one...

I think again, unfortunately, I like to have -- in a different way, but it is as it is. That means that the visibility remains low. That means we have to separate probably the forecast for next year, the preview. I mean, on the one hand side, we have the existing business there. It's really very hard to say how long does it take to overcome this destocking effect and how long does it take in different parts of the world and to come back to end consumer moves where the people are willing to invest into air purifiers new appliances and so on. And I think this is extremely hard to predict already today. Therefore, there we have a lot of visibility. On top of that, we have all our growth projects. And there, we have better visibility to the -- to the extent that we see that these projects are real, the people are on -- they -- also customers are really working on them very hard. The only visibility litigation we have there is about exact date, the start of production will start take place and also about the steepness of the ramp-up. And also, this will heavily influence that the quantitative top line of next year. And therefore, it's now too early to predict to date. But in general, the fundamentals that means new projects, they are absolutely concrete. And there we have a good visibility about.

Thank you. Concluding question for him. How much of the revenue in the first half of '23 was based on products and our products that began shipping last year, so new products.

Yes. This is always a figure I'd like also to have. It's not that easy to differentiate because the problem is that there is markets like automotive and medical, where you have the start of production, which is extremely slow. That means you have the time. Okay, let's start with a new project. And then in the first year, probably you ship not more than 3%, 4% of that longer-term run rate. And then it takes 3, 4, 5, 6 years, even to come to run rate or to give you an example, there is even one project in medical and automotive, we are still growing despite the fact that start of production was already 10 years ago. And this can happen. Definitely, the other can also happen that you have a kind more in appliances and consumer, you have immediate kind of heavy site function that is a set functions where you are starting from one day to lower and then it's easier to say. I think this year, the contribution of really new projects, that means projects, they are not yet part of top line last year was not that strong in the last couple of months. Definitely, there are some new projects kicking in but they are not yet contributing heavily to the top line. There is one exception. This is what I have highlighted is the OEM projects for European, OEM in automotive business, but also this was to be precise, already started last year, but it was contributing first time significantly on the top line in the first half of the year, also results and this result of actually the 13% growth rate of the automotive business.

Perfect here comes the next question. Leveraging on that, the question for Mr. Scalaris, if we see a momentum to continue out in H2 for the Tier 1 OEM business in automotive.

H2 business...

The second half of this year if the momentum...

So H2. Because H2 is also hydrogen.

No, no. Second half of year. So if this momentum in our Tier 1 business will continue?

I'm not that optimistic about the automotive business short term. I think also there, we still see some high levels of inventory. We see also there that automotive business, not our company, but the automotive business downstream they still benefited from backlogs, heavy backlogs. And our expectation is actually that the backlog comes to an end. That means it can be one of the scenarios that also automotive come to kind of a slowdown in the next couple of months. This is my [indiscernible]. Contradicting to that, I just read 2 days or 4 days ago, an article about expected numbers of cars to be produced in the next 2 or 3 years. This was actually not indicating what I -- what is my feeling. So also there, it's hard to say. But at the end of the day, I have the feeling in automotive, they are still not fully through the destocking and secondly, the backlog was supporting the sales of our cars, automotive worldwide in the last couple of months. And I think that's the only what I can say what the future brings, we will see.

The next question from Mr. Michael [indiscernible]. Can you split the increase in SG&A and R&D into an increase in FTEs and wage inflation.

Yes. The FTEs, I think, overall, I think we report on the FTEs with a quite foreseeable growth. But here, of course, you have to deduct and take out what we have adjusted with the operators in China, Hungary, when we look -- not Hungary, China and Korea. When you look at the FTE accounting itself. So I think for R&D, I think we have increased by at least around 30 FTEs in the first half year of 2023. And there is around plus 10 in no more hand in sales, I would say, and 5 in 10 in admin also or supporting functions.

Anyway, we can actually indicate this salary increases. And we are facing or we have faced an inflation situation in Switzerland is slightly more than 3%. And in the other countries, between 7%, 10% U.S., up to even 20%, 25% in Hungary. But on the other hand, you have also an exchange rate change in forint, in the Hungarian forint compared to Swiss franc, which is also reducing its effect. But this is more or less the numbers of inflation and also the salaries adjustments we had faced at the beginning of the year.

Thank you very much. And we have one last question from Mr. [indiscernible] concerning the trade-off between medium and long-term growth rate that we indicate between 10% to 15% per year and our targeted EBITDA margin of 17% over cycles, the question is, is there a lower bound for the EBITDA margin that Sensirion does not want to cross.

Midterm 17% is our guidance. So on average, we like actually to be on this level at least. All on top of that is highly welcome, but this is our benchmark. Short term, the fluctuation again is -- should not be limited to both sides to short-term reaction, which are not from a strategic value. That means, again, if we see -- we like to support strategic projects that make sense we'll do it despite of even lower EBITDA. On the other hand, then also this has been seen in the last 3 years, Whenever we have a good run of our top line, we are not going to throw the money out of the window that means just to reduce the EBITDA in order and to hire a lot of new people, just in order to limit the EBITDA on the positive side because it does make sense as well. Whenever you hire -- if you are hiring good R&D guys, they like also to do something relevant. Therefore, it doesn't make sense in both sides. Therefore, short term, no, we don't like to limit it. Longer term that will be 17% on average is our benchmark, and we keep that absolutely straight.

Very good. Thank you very much. I think it was a very good concluding statement. I don't see any further questions. And by this, we would like to thank you all for your attendance and your questions. And interest in Sensirion. If you have any more questions, you please reach out to us. As always, and I wish you all a wonderful day. Thank you very much.

Thank you for attending and have a good day.

Thank you.

[indiscernible] and good day. Bye-bye.