VAT Group AG

Ladies and gentlemen, welcome to the VAT Q1 2024 Trignate Conference Call. I am Alice, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Urs Gantner, CEO. Please go ahead, sir.

Thank you. Ladies and gentlemen, good morning and grüezi miteinander. Welcome to EAD's Q1 2024 Trading Update Conference Call. With me this morning are CFO Fabian Chiozza and our investor relations team with Michel Gerber and Christopher Bickley. After my introductory remarks, we will start the Q&A session. The call-up moderator will take your questions in order you enter them. Good to see and hear you so soon after the full year results event on March 5th. It was enlightening to meet some of you on our roadshow and it is good to see you engaged with VAT. As you can also see from our press release this morning, we are also happy to share good news on VAT's business development. Compared to 12 months ago, where we were in the middle of the semi-market downturn. We have seen consistently strong order flow in Q1, which continued from Q4 last year as we see demand return for wafer fab equipment and therefore increased demand for VAT products. Our customers have reached more balanced inventory levels, which drive renewed orders. The increasing demand for leading-edge chips and the accompanying technology inflection is driving a requirement to invest in new manufacturing technologies. And finally, we see no slowdown in investments in China, where the drive to establish a global mature node leadership is relentless. We remain positive for this year and next year and expect the trends we saw in Q1 to intensify in the course of this year. while at the risk of sounding like a broken record. As we told you at our full year result, there are three key messages and drivers for VATS business. First, we have spent 2023 preparing for the upturn and we are ready to benefit from the expected order flow. Second, we are on track to deliver on our ambitious midterm targets by 2027. which means we have significant organic growth ahead. And third, we strongly believe in the $1 trillion semiconductor industry ahead, which will require considerable investment in leading-edge equipment. Let's talk some numbers now. Our first quarter 2024 orders amounted to 236 million Swiss francs, of the market. Group net sales have decreased from Q1 slightly to 199 million Swiss francs, which is above the midpoint of the sales guidance we communicated at full-year results back in March. We noted a number of questions on our investor marketing on why our guidance might not line up with the orders, so just a reminder here. Orders do not all get executed during the immediate next quarter. Some orders are distributed over multiple quarters, especially in ADV-related project business. FX remains a key topic for us. We are selling valves to our customers in US dollars, euro, and other currencies, while our costs are largely in Swiss francs. On a constant currency base, our sales were negatively impacted by 7%. We maintain a healthy order backlog of approximately 324 million Swiss francs, which equates to a book-to-bill of approximately 1.2. This is slightly higher versus our relation of 1.1 reported at full-year results. However, we are still in rebuild mode for our order book, which was 22% higher in the same quarter in 2023. Across the three businesses, we saw the following performance. In semiconductor, orders were up 162% versus last year, demonstrating the acceleration of demand we have been seeing over the past quarters. I want to remind you that we are talking about a gradual sequential growth. And note that orders grew in comparison by 7% over Q4. So we are only at the beginning of this bracket. We continue working closely with our semi-customers to prepare for the anticipated ramp phase, ensuring that we are ready. We are in the process of developing new products, both in our valves and adjacency business, and receiving promising feedback. Our spec wins rate continues at a high rate. The advanced industrial business unit showed a declining order intake of manufacturing down 29% versus Q4 2023. Please remember here we told you about some significant project wins. Solar business and coating bookings decreased due to the market down cycle and customer overcapacity. At the same time, our R&D business saw double-digit growth. Our global service segment continued to see improving demand in the first quarter. With capacity utilization in semiconductor fabs slowly improving, service orders have been ticking up 11% versus Q4. This increase is driving demand from spares and repairs, with refurbishments still lagging somewhat. Looking forward to the second semester, 2024 and 2025, we maintain our outlook that market conditions will We continue to expect better sales, EBITDA, EBITDA margin, net income, and free cash flow in 2024. I can only repeat my statement from a month ago. 2024, and especially 2025, will be years where VAT will show our key qualities. We are seeing the first signs of the recovery in semiconductor coming through and With the strong demand for leading-edge technologies, we will benefit from the recovery. We are seeing value utilization rates rising and order flow increasing. Our customers right-size their inventories and are starting to pass orders through. Our ADV business continues to be selective on their business and show consistent wins in energy transition topics and in research vacuum applications, where we are truly delivering value-add to our customers with highly customized valves. Our global service business is benefiting from the 1.6 million installed base of valves as we deliver consumables and replacement parts in the first step, and in the second step, anticipate to help our customers with refurbishment and repairs. Our Malaysia Factory 1B will help us both deliver for our customers and manage our exit soldiers. Sourcing from best-cost countries is ongoing as planned to provide expected productivities and economies of scale in global supply chains. We are selectively hiring again after terminating short-time work in Switzerland and preparing for the ERP implementations. We are optimistic about the coming quarters and for the second quarter of this year. We are guiding to sales 235 to 255 million Swiss francs. This concludes my prepared introductory remarks and we are now turning the call back to the operators for the Q&A session.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. You will give a turn to confirm that you have answered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to choose only answers while asking a question. Anyone who answers the question may press star and one at this time. Our first question comes from the line of Olivia Honeychurch with Jefferies. Please go ahead.

Good morning. Thanks a lot for taking the question. On the outlook for the rest of this year, you said on the previous conference call that you're expecting orders to grow sequentially through 2024 from the underlying level in Q4 of last year. Is that still the case, despite the lumpiness that we're seeing in the ADV division? And if so, is there any particular quarter that you'd expect to see a sharpened section? I have a follow-up afterwards. Thanks.

Yeah, we still strongly believe and see that the order flow grow, particularly, of course, in semiconductor. We see that. And as we mentioned as well, the ADP business sometimes is more project business, but that can have an impact quarter over quarter. But overall, it will be a low double-digit, gradually more fintech growth.

Great, thank you. And then my follow-up is around China. Your narrative around spending here has improved in the last couple of quarters. You were previously saying you expected strength to last only for H1, but last quarter was saying you're expecting it to persist for the whole year. Is there any update to that narrative? Do you still expect Chinese spending to last for the whole of 2024, or is there a slight shift in your expectations?

No, we see actually ongoing strength even through February where there were big holidays in Asia and China. We saw the continued strength and we also expect that this is continuing over the course of this year and even going into the 2025. That's great.

Thank you.

Our next question comes from the land of DBS in Myanmar with Bank of America. Please go ahead.

Yes, good morning. Good morning, and thank you so much for taking my question. I wondered if you could maybe just talk to us through in your conversation with your main customers, how they see the recovery in the market, and specifically, you know, we start to see at that point suggesting that memory pricing is starting to really rally very aggressively. SSD prices are actually apparently, you know, being increased by 25% sequentially in Q2. When do you expect that to feed through to orders to your customers and to yourself? Presumably part of the order intake strength you've seen in Q1 is reflective of that. I just wondered if you could give us a bit more color. Thank you. And I've got a follow-up.

Yeah, very interesting. We usually break up a little bit, but I think we catch the question pretty well. So in the end, we see quite a lot of investments or investments see the utilization of the FABs first going up. And some of the end customers of the IDMs reported that they are kind of even sold out for this year for some of the applications. And it also already shows that the investment cycle will start often. It is related to AI applications. And this, of course, will drive the demand also for the equipment. plan now, they updated the build plan, what's going on in the second half. So certainly first utilization had to go up and together with inspection points and technology, our customers, the OEMs, our main customers, they will pass through the orders to the component suppliers.

Got it, thanks very much. Second question is on the adjacencies and motion components. Any change in your views as to the contribution from this sort of growth opportunity to your 2027 targets? Or is it still, I think, about 30% of your guidance?

Yeah, well, I think the agents product, that's a multi-year story, right? So we started with the spec points a few years back, qualification on the latest generation tools. And now, of course, we are, with the ramping coming, we build certain benefits. that these products will have a higher share overall. We keep working on that, also on new spectrums, on adjacent products, and that's kind of a roadmap for the next five to ten years again. So in 2027, it will be roughly 15% of adjacent products, what we call adjacent modules, as you know, and the motion component combined.

Brilliant. And can I squeeze in a quick follow-up? How critical is lethal and in particular high RNA to the growth in adjacencies?

Well, for us, it was a fantastic moment when lithography went into vacuum system, right? So the older lithography system did not use any vacuum. And now with the UV, there is a huge vacuum system required. And so we have, of course, a sizable we will benefit as well.

Thank you so much.

The next question comes from the line of Craig Abbott, Capital Shibre. Please go ahead.

Yes, hi. Good morning, gentlemen. Two questions, please. One on FX, to maybe be a little bit more specific here. If I understood correctly, I think you said constant currency adjusted was been minus 7 in Q1. I just wondered also what your assumptions are behind your sales forecast for Q2, because obviously we've seen some softening in the Swiss front. And secondly, I just wondered, obviously the next earnings report will be with the H1 results, but are there any margin headwinds or maybe tailwinds besides the top line growth and order development that we should be aware of as we're mapping out our assumptions for the first half? Thank you.

Yeah, thank you very much for the question. Look, on the FX, this 6% impact that we have elaborated on is zero over a year. On the guidance, this is assuming constant currencies based on the current year-to-date development, which we have observed. March inside, as we have commented earlier on, I think we are in preparation for the next ramp phase. In addition to that, we are also preparing our organization for the ERP implementation, which is going to happen in summer. So there is quite an increase in temporary staff, I would say 100 plus, with which we have added since the end of of 2023, which will lead into some front-loaded personnel investments. With regards to ethics, we have all observed certain strength of the U.S. dollar versus the Swiss franc, which in return does provide an opportunity for VAT as we sell about 60% to 65% of our product in U.S. dollar. At the same time, we also have a quite significant amount of hedging contracts which we entered in the past, which then obviously have a negative revaluation effect into the first half.

Okay, that's all very helpful. Thank you very much.

Our next question is from Michael Foode with Fontobo. Please go ahead.

Yes, thank you. Good morning, everyone. I have a question on the services business. I mean, this is still a bit slow now in the beginning of the cycle. Do you expect the growth to actually be faster than the product sales as the cycle matures? Or how do you see the cycle in global services in general shaping up? What should we expect?

Yeah, well, the service business is heavily dependent, of course, of the utilization rate of the fabs at first. And we see this upticking, and that's why we already saw that the OEMs, they are restocking their spares as well. So I see this also as they gradually grow over time. direct OEM business for the valves. Service business is also manifold, so we have the consumables, we have the repairs, we have the upgrades, and we also have the sub-fab business, and typically here the sub-fab business is not yet picking up, because here is still a kind of high inventory of the OEMs. But we see the consumables is running well, and also anticipate that repairs will come in again. Okay, thank you.

Maybe follow up just on that. Do you expect actually the total global services business as a portion of the total VAT business to expand versus the past cycle?

Or is that too... We see that on a healthy 20% level. and a profitable 20% level.

Okay, great. Thank you very much.

The next question comes from Jürgen Wagner with TIFO. Please go ahead.

Yeah, good morning. Thank you for taking my question. A follow-up on China. How much is China in total of your current orders and how much of that again is local China and then you mentioned the ramp up of your Malaysia facility. What ramp up costs should we model? Thank you.

So we reported in the full year results that last year our direct China business, so the business going directly to the OEMs into China was 25%. In the order book now it's slightly higher. Order intake from China was slightly higher than the in Q1, but I expect that this will also level out then over the year when the Western OEM also have higher order intake.

And then maybe I can compliment on the ramp-up cost for Malaysia. We have already running product qualifications there for quite a while. And now, as we see demand unfolding, then we will also switch on production in the new fab. So I actually do not expect any significant ramp-up costs that we would have to specifically point out here.

Okay, that's clear. Thank you.

The next question comes from Reinhard Michaelinauen, Zürcher Kantonalbank. Please go ahead.

Yes, good morning, everyone. Thank you very much for taking the question. I have actually just two questions, and I was wondering if you can give us a little bit more color on the development of Q1 DRAM versus SNAP, if you have seen any observations that would help us in assuming where we stand in the trends on those two technologies. And the second thing on AI, I know we have discussed it already just about a month ago in all your presentations, but I was just wondering also here, the whole HBM, so the high bandwidth memory topic that we're hearing about, new FAPs being planned also by SK Hynix just recently. Is there an additional upside actually coming from VAT from this topic, or is that something that you see developing as planned in your, I would say, midterm outlook? Thank you.

Well, thank you for that question. You are mentioning a lot of exciting parts in our industry where we are actually eagerly waiting for the RAM. So the DRAM and then the AI is driving now also the HPM and the DRAM. So everything together. the leading edge equipment. So we always have to distinguish now about this leading edge, what you're mentioning, this high bandwidth memory, the AI applications. And when we talk about China, it's more about the mature nodes, where there is also a high volume and a buildup of this ecosystem. And now coming back to the AI and HPM, this will drive the leading edge technology, where our share on the equipment is even higher. We were kind of modeling that, of course, already in the past. It's not that it's kind of creating an additional boost.

Thank you very much. And Urs, can you just maybe quickly refer to NAND and DRAM recovery? Where do you see it actually happening, and what's your expectation for, let's say, just for 2024? Will NAND recover quickly, or will it take some more time? I mean, it was down really heavily last year.

Yeah, well, we see in both in auto memory recovery, but first certainly will be the DRAM and the NAND will be somewhat delayed. And our estimate is that this will be going to the 2025.

Thank you very much.

As a reminder, if you wish to register for a question, please press star and one on your telephone. Star followed by one. We have a follow-up from Ms. Honeychurch. Check, please. Please go ahead.

Hi, thanks for taking the follow-up. Just on the 2025 outlook, I know it was discussed on the last call. You said today in your release that the market outlook is confirmed into 2025. Can we take that to mean that you're still expecting to reach your 1.5 billion per franc revenue target in that year? And if so, how should we be thinking about the build-up growth drivers there? Specifically, I'm thinking about overall WFE growth VAT's market share growth within that, and then higher content from your adjacency business. Thank you.

Yeah, from WFE, we are modeling for the 2025 that it will grow to the 110 billion range. There are quite different numbers out in the market, but in our model, we work with the 110 billion. So this will be roughly 10% plus growth compared to 2024. So that, and also for us, for me, this means that we might see some of the authors already kicking in then in the second half, Q4 2024. The other question about the 1.5 billion revenue target, of course, this was also calculated at that time with a effects of dollar to Swiss franc of 0.95. And if you take the current effects, then it will be roughly 1.3, 1.37, something like that, in that range. So we are on track to do that, but just corrected by the actual effects.

Great. Thanks a lot.

Okay, so I hear there were no more questions. Thanks a lot for your interest, and the next update will come.

Sorry to interrupt, sir.

We have three more questions.

I'll take them one by one. We have a follow-up from Mr. Simama, Bank of America. Please go ahead.

Yeah, sorry. Thank you for sending me in. Just wanted to double-check. Did you say double-digit order growth in Q2, or was that throughout calendar year 24?

Thank you. Well, the guidance for the Q2 was the 235 to 255, so this means roughly a 25% growth quarter or quarter.

No, no, I'm talking about... You mean in order.

Okay. Yeah. We expect the book-to-bid ratio still also to be beyond one. Also, the bookings will be in that range.

All right. Brilliant. Thanks so much.

Our next question comes from with Bloomberg Intelligence. Please go ahead.

Hi. Thanks for taking my question. I heard one on WRC spending estimates. How do you expect the spending in memory to trend versus the overall WFE spending for 2024? If you can share some later, it would be very helpful. Thank you.

Well, here we also relate on the numbers out in the market from the governors and other companies. So we have no other specific know-how about this forecast. That's helpful.

The next question comes from the line of Nate Laveridge with Octavian. Please go ahead.

Hi there. Thank you for taking my questions. Maybe the first one on the U.S. grants. I mean, we've seen that the U.S. is granting now slowly the money from the CHIPSAC. So I would like to ask, when do you maybe expect some of these grants turning into orders for you?

Yeah, all these subsidies all over the world, right? But in the end, they just create options in the different regions. And first they start to build the shelves, the fabs. And if there is no demand in chips, of course, they will not be equipped. At the moment, we see the demand coming, the demand rising. And, of course, it's impacting the whole industry, but it's more this kind of localization, regionalization. The overall market, as we mentioned, we believe it will grow to this one trillion US dollar and this will call for new fabs. And where the fabs are built, for us, it doesn't matter that much. For us, it's

What about the delays? I mean, we have seen also Intel saying they might delay the build-out of a fab. I think also TSMC was quoting some issues. Is this really material, or you continue to have the same assumptions also on the wafer fab equipment spend?

We still have the same estimate that for 2024, it is growth really to the $100 billion, and then the next year to the $110 billion. repurchasing equipment. So there's a lot of options they have in the market to fulfill the demand.

Perfect. And then as a follow-up question on the pricing, I believe that part of the reason why you had also big higher orders in Q4 was higher prices. Can you maybe speak about what was the pricing effect in Q1?

No, there was not a specific effect on that. one-off project in the ADV.

Okay, so there is no pricing effect in Q1.

No pricing effect in Q1.

We have another follow-up from Mr. Parker, Bloomberg Intelligence. Please go ahead.

Thank you for the follow-up. So for ADB, if you exclude these large orders, what was the rate of growth or decline in 1Q orders?

Well, ADB is kind of a project business. The whole setup kind is a project business. That's why it's hard to justify what is now a one-off and what is now a sequential growth. So overall, if we just level that out, we still see that... anticipated ATV wants to grow slightly as an industrial business can grow and it's not the same as a semiconductor where the growth rates are always double digit but also then the decline is double digit if the market is muted in ATV it's only about 18 to 20% of sales overall and I think it's kind of business of this 80% to 20% for VAT, and this is slightly growing as an industrial business can grow year over year.

Thank you. Gentlemen, that was the last question. Back to you, of course, in remarks. Okay.

Thank you very much for your interest in today's call. Our next results will be reported on July 18, 2024. during our H1 conference or webcast.

With that, thank you very much and have a good day.