VAT Group AG

over to Urs Gartner, CEO, Pliska Hetzer.

Good morning, ladies and gentlemen. Thanks for joining this webcast on our Q2 and half year 2024 results. We have done things a bit differently this year, but not publishing preliminary key figures earlier, but by speeding up our closing process and delivering final results a week earlier. We now are one of the first companies reporting in the sector. Today, I'm joined on this call by our CFO Fabian Diozza. Also here with me are Michel Gerber and Christopher Wickley from our IR and sustainability team. Let's move the slide to the agenda. For today's agenda, we have scheduled the following four parts before opening for Q&A session. I will start with the highlights of the Q2 and half-year results, and then Fabian will go through the results and financials in more detail before sharing some of our 2024 sustainability efforts. I will then conclude with the look ahead, followed by the usual moderated Q&A session. Move to slide four. We have a lot of ground to cover. before we start with the business review. I want to share some observation I made during last week's Semicon West trade fair in San Francisco. The VAT team had a great set of meetings with our largest customers, and you might have seen already some commentary and feedback from the event. Aside from presenting our products and meeting It's a chance for the industry to come together and discuss some of the challenges that face us all. The one thing I think remarkable in the industry is our collective focus delivering on the promise of the $1 trillion US dollar semi-industry, continuing to push the boundaries of R&D beyond what is physically possible, and at the same time ensuring that the core product, the chips, remains affordable. We are facing as an industry some real challenges, like ensuring that talent is nurtured. We have set net zero targets for the industry and we are establishing a new normal for our supply chains, especially after COVID. Finally, geopolitics are impacting where and how we will be manufacturing as an industry. The level of cooperation in the industry is astonishing and I believe unique to the semi-space. We have established various forums to address these topics. We have spoken to you previously about the Semiconductor Climate Consortium and Energy Collaborative, for which VAT was a founding member. We have also introduced a comprehensive workforce development program, which includes both raising awareness at a young age, but also rescaling and upscaling training to cheap workers. Finally, the Semi-International Policy Summit, SIPS, serves as a platform driving alignment across industry, government, academia, and civil societies. Let's move to slide five. On slide 5, that's available on our website, and we will look at an overview of the half-year key figures and the segment breakdown. Valve's, our largest segment, accounted for about 81% of our sales, which is up from 79% in total a year ago. Global services grew as well, proportionally less so, which explains the somewhat smaller share in H1 sales. As we communicated back in March with the full year 2023 results and reiterated in April with our Q1 2024 trading update, VSE's markets have seen continuous recovery since Q2 2023 with sequential growth in order and sales and with our book-to-bill ratio remaining above 1 for this period. We achieved sales of 450 million Swiss francs flat compared to our H1 2023 sales. Our EBITDA margin increased by 0.9 percentage points over H1 2023, standing at 30.1%. We achieved 48 backwinds in H1 alone, 17% higher than last year. Fabian will give you a deeper dive into the numbers, so he will focus on discussing some of the key observations in H1 2024. Next slide. Borders have been up this half year by 74% compared to last year and are up sequentially 50% compared to the first quarter of 2024. This has been mainly due to the order recovery of 140% in the semiconductor business unit compared to last year, which has also increased 23% over the last quarter. Sales and orders from customers in Asia, especially in China, have remained strong. Regionalization remains a key topic and a driver for demand from the region. Utilization rates are on the rise across logic and DRAM fabs, And we are hearing indication that NAND utilization rates are slowly creeping up as well. And yet, despite all the good signs, there are still areas where semi-markets are recovering more slowly. Consumer electronic sales are running slower across the world as economies are grappling with residual post-COVID inflation. Some industrial and automotive chip makers are still seeing slow demand due to high inventory levels at their customers. Our ADV business saw a decline in orders of 23% versus Q2 2023. For energy transition applications, solar remained sluggish, while our sales of valves to nuclear enrichment and fusion continued at good pace. Some end markets in the industrial and scientific instruments business remained muted as well. The global service segment has continued to see improving market conditions. Chip fabs are seeing higher capacity utilization levels, with certain customer fabs reporting over 90% utilization, which in turn increases demand for consumables and spare parts. Sales of replacement gates have grown strongly at 40% plus over H2 2023, while spares and repairs are showing a slower growth that is in the 20s, but also was posted sequential growth. Six-month orders are up 37% versus the same period last year. While demand related to logic tools was stable, demand increased for the service business from memory manufacturers. In the retrofit and upgrades business, VAT is currently engaged in qualification activities with FAB customers who are creating capacity in anticipation of strong demand. Finally, for the group, sales of 450 million Swiss francs for H1 are flat, at less than 1% below the levels of last year. Last year's numbers benefited from a strong order book that we were able to execute during the order slowdown, whereas the sales for H1 2024 are effectively the conversion of orders received during the last six to 12 months. Sales to our customers across SEMI include both our top OEM customers as well as our emerging Asian OEM customers. On profitability, the EBITDA margin for H1 2024 was at 30.1% versus 29.2% last year. We have maintained our efficiency measures from last year But with a focus on getting ready for the ramp, we continue to execute our CapEx plans and R&D at strong levels. Our plant 1B in Malaysia remains on track to open at the end of this year. I was there just a few weeks ago, and the space and capacity we have available are exciting. Our innovation center here in Haag is progressing according to plan as well. and is on track for opening early in 2025. Who knows, we might even meet you there for our annual media conference. We have mentioned several times our ERP implementation to you in the past, and this continues to be a focus. It's the actual transition to be completed in the coming weeks. The good news is we have successfully done this two of these implementations in the past, in Malaysia and in Romania. The good news is that clients have commented that these transitions have been completely unnoticeable to them. And there is no bad news. We are working with the same protocols for the transition in Switzerland. We know that there could be shortfalls which we have catered for, and our sales guidance for Q3 sales is taking all this into account. From our perspective, we believe that the semiconductor investment ramp is imminent, and as previously stated, we must maintain a high degree of readiness. Our close dialogue with customers gives us good visibility on what we can expect in the coming quarters. We have started to hire again, both HEMS workers and full-time employees, our employee count increased just shy of 3,000 at the end of H1 2024, a plus of about 12% compared to the end of 2023. So, for the rest of 2024, we confirm our expectations of higher overall results. The degree to which we will be above last year's results will ultimately to the latest tools to manufacture the most advanced chips. There are several promising data points, such as new releases of smartphones later this year, or memory manufacturers' announcement of increased CapEx in 2025. Let's talk about Outlook a bit later. And let's go to slide number seven. Chart number seven gives you an overview of the segment and regional breakdown. I don't think there are any surprises here. On the left-hand chart, we reiterate that about 80% of our total business comes from the semiconductor market. Compared to last year, ATV is lowered by about six percentage points at 15% of sales. We have always said that ATV is a bit lumpy and often driven by large projects. While the nuclear enrichment and fusion project business is running well, the solar and scientific instrument businesses are underperforming. Especially the latter was expected to recover post-COVID overordering, but this recovery seems to be delayed into 2025. The regional split shows a very similar picture to what we showed you one year ago, confirming that we continue to develop very much in line with the global wafer fab equipment split. Around two-thirds of our business come from Asian customers, one-fifth from the US, and a similar number from our European customers. To preempt the question, Direct sales to domestic Chinese customers were around 28% of group sales during the first six months of the year. Let's go to slide A to the market trends. I've covered some of these points already in the previous remarks, but wanted to recapitulate some of the developments in our key markets. Our largest end market is the semiconductor market. Memory manufacturers are seeing higher demand for DRAM driven by the introduction of HPM and have been able to sell down inventories. NAND still is recovering slowly but steadily. The logic market is seeing an increased demand for leading-edge chips, again fueled by AI applications. This is visible also in the PC and desktop market where major manufacturers have presented their new models which incorporate AI function as a new feature. At the same time, WFE's spending in 2024 has not seen a significantly higher pickup versus H2 2023. While 2023 was about the recovery of a truck's 2024 to date is a normalization of spending patterns. Our customers had built up significant inventories, which they have been managing down over the course of the last year. The current levels look normalized, and we are seeing a good run rate of sales that corresponds with replenishing these normalized inventory levels. Finally, with the introduction of EUV, there is also a notable shift in the wafer fabric and spent towards lithography, which used to make up 15% of WFE and now is closer to 30%. In solar, overcapacity continues to dampen orders from customers. Our energy transition customers continue to work closely with us and fusion and uranium enrichment projects continue to drive demand for our valves. The impact of recent elections with left-wing swings in UK and France must still be assessed, but nuclear power was not key policy for the parties involved. For industrial and scientific instruments, the expectation were to see a recovery in 2024. Our conversation with customers indicate that they are not yet seeing the demands they were expecting. Finally, consumer and end-user market demand for products such as smartphones and EVs are still volatile. Macroeconomic data on inflation and consumer spending has been mixed in H1, but the presentation of AI-enabled smartphones in the past month does show that technology is progressing for consumer application as well. This concludes my initial remarks for the H1 review, and I would like to hand over to Fabian for a more detailed look at the financials.

Thanks Urs, and welcome to all of you who are joining us on the webcast today. Let's start on slide 10 with a quick recap of our key figures, as Urs has covered the highlights already. Our results reflect the overall normalized market conditions in age 124. We have recovered off the 23,000 operating under normalized conditions. So look at these numbers as a normalized base as we have gone through the recovery, and we are still preparing for an industry-wide ramp. There are 40 messages I want to demonstrate to you in this section. Milordas are up considerably versus prior years sales are flat. This is due to the strong order book we had last year and that we were able to execute on. In the past three quarters, our book-to-bill has remained above one, which means we are rebuilding our backdrop. Our planned ERP implementation in the third quarter had a limited impact in the second quarter on the current business, and we expect a small reversal of these effects in the coming quarter. During the second quarter, the pending ERP implementation has boosted sales by around 8 million Swiss francs, or about 3-4%. We have been coordinating with our customers to deliver their requirements ahead of the planned production shutdown in early August. This is nevertheless important to better understand our Q3 sales guidance, on which we will elaborate later. Profitability remains a focus for VAT, but we are in a phase where we still must invest in anticipation of substantially higher customer demand in the next industry-wide ramp. VAT achieved an EBITDA margin of 30.1%, quite high investments into R&D. The cash flow of 26 million Swiss francs, down 29% year-on-year, reflects the still high capital expenditure related to the new plant 1B in Malaysia and the new innovation center in Switzerland. Most of these projects are expected to be largely finalized by the end of this year. Copics in the first six months amounted to 40 million Swiss francs, or 28% more than a year ago. Let me take you in detail through our results. Chart 11 shows the development of orders in the second quarter and half year. Our customers have managed to reduce their inventories in the past quarters and current order patterns are what we believe to be the regular run rate. Thus, we have seen continuous sequential orders and sales growth since Q2 2023. Due to 2024, we achieved orders of 271 million, up 15% over Q1. Main contributor was the semiconductor business, where orders increased 23% quarter on quarter. This amounted to 251 million, which was up 27% on last quarter, and in the upper half of the sales guidance we communicated to the market at Q1. Versus 2023, group orders for H1 of 507 million Swiss francs surpassed H1-23 orders by 74%, again with a significant increase in the semi-business of over 149%. Versus H1-23, our sales were flat, demonstrating the importance of a strong order book in a downturn. Our order backlog in H1 has seen small growth, 7% and 2% respectively versus both previous quarter and the same period last year. The ethics impact in our six-month sales amounts to approximately minus 4%. We've been talking about the ERP implementation a lot with you for a good reason. Keeping customers in the loop has been important for us, and we have had a close discussion on ensuring that all our customers receive their required orders during this downtime. At the start of August, we will effectively have two weeks in which we will not be able to produce anything in Switzerland. Thus, we have been pre-producing and selling our valves and other products ahead of this downtime. We believe that approximately 20 million Swiss francs of orders and approximately 8 million Swiss francs of sales in the second quarter were placed related to this pre-shipping. Including these adjustments, our book-to-bill was still above one times for the quarter. Our sales in Q3 will naturally be affected, and this is reflected in our guidance. On slide 12, we want to put the current result into historic context. Here we see the development of orders and sales since the first quarter of 2018. As you can see, we have increased orders and sales since the trough at Q1 2023, which compares very similarly to the trough levels in Q1 2019. Our book-to-bill has been increasing steadily since Q123 when we hit the low of 0.6 times and currently is running at 1.1 times, slightly down versus the previous quarter where it was at 1.2 times. Looking back at history, you can see we are only at the early stage of the next up cycle. Let's move to profitability. Chart 13 shows the development of net sales and EBITDA. We recorded a gross profit of 298 million Swiss francs in the first six months of 24, which is an increase of about 6% on 23. This equates to a gross profit margin of 66% and an increase of 4 percentage points compared to a year ago. Note, our gross profit is calculated as net sales minus the costs of raw materials and consumables, and the change in inventory is finished goods and work in progress. Thus, the coming ERP implementation in Switzerland has had an impact here. We have had a substantial build-up of inventory in semi-finished and finished goods, which we were able to capitalize, increasing the gross margin. We expect a counter-effect in the second half of 2024, as we will sell down these excess inventories. The BDA for H124 increased by 2% to 135 million Swiss francs, while the margin increased 30.1% versus 29.2% a year ago. This increase can be explained by the contributions of our operational measures introduced last year. The margin still reflects our high R&D investments, as well as the hiring of additional staff for the expected rank. On slide 14, putting this performance into historic context again, we see the sequential EBDA margin development since H1 2018. As you can see, we have constantly improved our EBDA margin since the last downturn in the first half of 2019. The current margin result represents a step off the trough margin recorded last year. At 30.1%, we are 5 percentage points higher than the last trough level. So based on this, we wanted to provide our outlook that year-end headline EBTA margin would likely come out at the lower end of our communicated EBTA margin range of 32 to 37%. Note, this is again with the caveat of FX rates. Our range communicated at the capital market state 2022 was defined at the US dollar to Swiss franc of 0.9521. Our efficiency programs, including, for example, the ERP implementation, will help get the EBITDA margin back into the range. Clearly, significant pickup in sales will create the operating leverage we can benefit from most. On to the next slide. This is our classic slide to demonstrate that VAT continues to create value. We measure this based on return on invested capital and the cash return on investors' capital. For H-124, we achieved a ROIC of 32.5%, which is in line with the trough level in 23 and 2019. Our cash return on invested capital due to investments into capacity and work 7.9% versus 31.3% for the year 23. Comparing this to the WAC of 14%, our cash returns remain around 15% above WAC, confirming that we are creating economic value while investing further. I expect this number to look again even better as our free cash flow improves in the coming quarters. Let's now get to the bottom line with some of the other financials on chart 16. Depreciation and amortization are about the same level as during the first six months of last year, yielding an EBIT of 114 million Swiss francs and the corresponding EBIT margin of 25.3%, which is slightly higher than the 24.6% recorded a year ago. Net finance costs were around plus 1 million Swiss francs compared to minus 11 million in age 123. Evaluation gains on cash balances and intercompany loans contributed to the overall positive result. Effective tax rate for the first six months of 24 was 18% compared with 16% a year earlier. Taking all that together, net income amounted to 94 million Swiss francs, 12% higher compared to the first six months of 23. Slightly higher EBITDA and the positive financial results more than offset the slightly higher depreciation and tax rates. EPS, thus, is 3.14 per share for this period. Our free cash flow generation is shown on chart 17. Our free cash flow in age 124 amounts to 26 million Swiss francs, down 29% to 23. Major impact here was COPX, which amounted to 40 million Swiss francs in age 1-24, up 28% compared to 31 million in age 1-23. Our capacity expansions in Malaysia and the new Innovation Centre in Switzerland continue with focus to meet expected higher demand in 24 and beyond. As a percentage of net sales, our trade working capital was at This is due to the already explained inventory buildup ahead of the ERP change in Switzerland. We expect this ratio to decrease during the rest of the year. At 20%, the cash conversion rate measures as free cash flow as a percentage of EBITDA showed to usual seasonal lower level. Our goal is a return to the target band of between 60% to 65% EBITDA. When it comes to leverage on chart 18, We continue to demonstrate our conservative views on leverage and capital structure, despite our significant investment appetite. Net debt amounted to 231 million Swiss francs compared to 198 million one year ago. This translates to a net debt to EBITDA leverage ratio of 0.8 times. This is in line with the normal seasonal pattern and includes the dividend payment in May of each year. As a reminder, We distributed 103% of free cash flow in 2023 in the form of a dividend of 6.25 Swiss francs per share to our shareholders. This means we retain a very healthy balance sheet that allows us to self-fund our R&D and growth initiatives in the years to come. And summarizing the half-year 2024 financial performance on slide 19, we can state that Investment conditions are expected to continue to show gradual improvement during the second half year 24, with order and sales figures grinding higher. 2025 is expected to be a strong year. ADV is expected to grow orders and sales, especially as investments return in some core end markets. However, the visibility here is somewhat blurred. Global service is expected to continue its growth, driven by higher FAB utilization and higher demand for upgrades and retrofits, driven both by ESG needs and upgrading older FABs to manufacture newer chip lines. For the rest of 2024 and into 2025, the following financial priorities apply. Successfully complete the ERP implementation in Switzerland and manage our inventories of raw materials, semi-finished and finished goods. It is important that our clients provide us with the same feedback as for Malaysia and Romania. We did not realize you completed an implementation. Maintain a disciplined approach to COPEX, expected around 70 to 80 million Swiss francs in 2024, driven by the second Malaysia plant and innovation center in Switzerland. build on our improvement program Darwin to drive productivity measures. Thus, we expect higher sales, EBITDA, EBITDA margin, net income, and free cash flow in 2024 versus 2023. Ethics headwinds will continue to prevail, especially with geopolitical risks remaining. This concludes my financial remarks, and I look forward to any questions in our Q&A session. Let me now turn to another important topic at VAT, ESG. In April, VAT published its third sustainability report. In line with the new Swiss regulation, we provided the report to the AGM, and it was subject to a consultative vote. The report was signed off by 94% of the votes. I'd like to show you some of the highlights on slide 21. Over the course of 23, we continue to work on improving our ESG credentials. We believe that our long-term business success is subject to our integrating ESG targets into our strategic and operational planning. This is not only a question of ecological goals, but also enabling our employees to grow and develop, as well as having a positive impact on the communities in which we operate. Our improvements reflect the clear focus of our board of directors and executive management in translating our measures and targets into everyday results. Amongst the improvements reflected in the report, we highlight the better data quality and availability. We can demonstrate the decrease of our scope one and two greenhouse gas emissions by 45% versus 23, and the group-wide increase of the renewable energy proportion to 68%. This was achieved by our solar array installed in Malaysia and sourcing electricity from renewable resources. Our employee engagement score has increased for the seventh year in a row, and our accidents have reduced by one third. Finally, we continue to make strides in diversity inclusion hirings, with 24% of our new hires being female. To highlight the importance of sustainability in our overall corporate strategy, VAT has also formed a proper sustainability committee on board level, replacing the previous more informal sustainability council. With that, I would like to hand back to Urs.

Thank you, Fabian. Let me now turn on slide 23 to the shorter-term expectations for our market. When we were at the Semicon West event, market outlook discussions revolved around the same few topics every single time. First, how we in the industry were dealing with the overall impact of demand for AI-related products. Second, the introduction of major chip production tech developments like UV, gate all around, atomic layer deposition, and high bandwidth memory. And third, the timing and the shape of the market ramp. Overall, the first and second topic and their developments are feeding into the third topic. AI is providing to be a key growth driver. On the one hand, requiring equal or better computing abilities at lower power output, but also driving demand for more and faster memory. This in turn is driving demand for new manufacturing technologies to produce these advanced chips as we continue to drive node sizes down across the industry. And yet, wafer fab equipment spending is not expected to accelerate strongly this year. There is a lot of uncertainty in the equipment market. One of the factors is the geopolitical risk Overall, with largely depleted inventories at our customers, the current market is showing what we would call normal run rates, rather than a ramp phase. The current consensus is that wafer fab equipment spent in 2024 will reach around 90 to 100 billion US dollars, accelerating in 2025 to 110 to 120 billion US dollars. For semi-market, we expect demand overall to grind higher in H2. With wafer fab equipment estimates forecast to be around 100 billion US dollars this year, we expect sales and orders from our semi clients to grow over the levels in 2023. In advanced industrials, overall business should be flat for the remaining half year. While some areas have performed very well, Others have been lagging. These end markets are likely to start ordering towards the end of year again, with sales recognition coming through in 2025. For the service market, we expect the current higher capacity utilization in the fabs combined with the normalized inventory levels of spares and consumables will lead to higher orders and sales in this segment. Move on to slide 24. Wafer-fab equipment spend is a topic that I want to address here. Wafer-fab equipment spend is a measure that captures the industry-wide front-end investment in semiconductor manufacturing equipment. Unfortunately, and as you have noticed yourself, the numbers from the various data providers vary widely and change drastically even as we approach the year end. The consequence, we at VAT do not manage our company and financial planning and analysis based on this number. Nonetheless, I think it serves as a good indication of potential future market development. Looking at 2024 and based on the consensus of multiple sources, the 98 billion US dollars representing a growth of approximately 3% change over 2023, reflect our current expectations of the 2024 market very well. Comparing, however, the high and low end of the 2024 estimate, you see a huge spread of 26 billion US dollars. There is a clear consensus, though, that 2024 equipment developed. Some of the uncertainty factors remain on the timing of a NAND recovery, the geopolitical developments driving the speed of onshoring, the continuation of Chinese subsidies for the domestic chip industry, and the adoption of new production technologies such as the two nanometer nodes, gate all around, and HPMs. We have updated slide 23 The great news is that despite some lack of visibility on the exact timing of the ramp, we continue to see great opportunities ahead. There are over 100 fabs that will come live over the next two to three years. 22 are presently in qualification runs with 14 equipment. Two-thirds of all are either under construction or in the planning stage now. These numbers give us confidence that the demand for VAT products continues to be out there. We go to slide 26. R&D remains core to VAT, to the VAT story, and our R&D spend ensures that we remain at the forefront of technological developments in our markets. We were able to achieve 48 spec wins in this half year, which represents another 17% growth the end of the first half. As usual, this represents products that will be turned into sales in the coming years, which demonstrates we continue to win new business. Two out of three spec wins are in the semi-business. One quarter of the spec wins relate to adjacent products. And while R&D will impact our bottom line, in the end, this is making VATs We increased our R&D spend in H1 2024 by more than 12% on H1 2023, but remained with our stated R&D guidance band. Finally, coming to the outlook, so for VAT and the rest of 2024, we expect that the trend will continue similarly. We mentioned geopolitics and the uncertainty over where and when the semiconductor investments will be made. We showed you why we believe in a strong ramp in the future. As a consequence, and communicated earlier, VAT expects sales, EBITDA, net income, and free cash flow to be higher versus 2023. We now expect full year 2024 EBITDA margin present target band. This obviously is still dependent on continued sales and subject to the usual habits that we set this band at the 2022 capital markets day and based on a USD Swiss franc rate of 0.95. For the third quarter, we expect sales between 235 to 255 million Swiss francs. This includes planned lower output from the production ramp, which is the result of the ERP implementation. With that, I'd like to conclude our remarks and hand over to Michel Gerber for the Q&A.

Thank you Urs. We now start the Q&A session and we will have our call run for more than an hour, so all the questions you might have we could possibly answer. What I really like to remind you is, as usual, that you should limit your initial questions to two, to allow also the other callers who wish to ask a question to do so. Follow-up questions may be possible later in the Q&A, should time allow. I would now like to ask the operator for the first questions from the phone.

Anyone who has a question may press star and 1 at this time. The first question comes from Olivia Honeychurch, Jefferies. Please go ahead.

Good morning. Thank you for taking the question. I've got a couple, if that's OK. The first is around quantifying the impact of the ERP in Q3. So you said that that led to 8 million Swiss francs of advance shipments in Q2. If we assume that all of that was pulled in from Q3 and therefore add that 8 million back to your Q3 guidance for revenue, that would imply 253 million in sales, which is broadly flat versus Q2. So I'm just wondering if you can talk about what might be behind that lower than expected growth in Q3, or is there also an ERP role on effect to be had, i.e. are you also seeing some customers delaying shipments into Q4? I guess I'm really asking what is the hit to Q3 revenue? Is it 8 million or is it actually higher than that? Thank you.

Hello, Olivia. Thanks for the question. The first part of the question was pretty hard to understand, but I think the question goes around the Q2 versus the Q3. Well, the guidance remains flat, and as you know, there is kind of a balancing now in Q2 and Q3. So we had this pre-built in Q2 of roughly 20 million, and part of it we already shipped. So this was then already booked, of course, in Q2. So if you would balance out that, we will see also even a growth now also in Q3. Not a huge growth, but balanced out there will be a growth from Q2 to Q3. So DRP certainly has an impact now. on the numbers Q2, Q3. That's correct.

Maybe to give you a bit more color on that, Olivia, take a 85 million given months there.

You have about 25, 30 million out of Malaysia, then the rest is coming out of Switzerland, also with some

say maybe 10% service business, and from that we have about two weeks of production outage, which we have partially already covered by shipments in H1, and then the remainder to be happening in Q3, also from inventories that we have built in the meantime.

Okay, that makes sense. Thank you. My second one was around your order expectations. You've now explicitly said that you've seen inventory levels that your customers fully normalize, and I noted that you added the new wording in your release statement around customers now moving into order replenishment territory. So I'm wondering, is there scope for your order trends over the next couple of quarters to exceed your previous guidance for order growth, which you said on multiple occasions will be low double-digit sequential growth.

I think what we can mention here is that compared to the last year, a very important factor is that the lead times are much reduced now. So during the COVID time, had and so the visibility was in orders and what's coming was much better so marketers expect lead times let's say normal 8 to 12 weeks and this turns then in 2 to 3 months a quarter that's why the visibility in orders is not that high anymore but of course it's very important to stay very close to our customers we have weekly alignment meetings with our key clients so that we know what's coming on. But of course, it's not yet in the order book. And with this discussion, we know that there will be sequential growth over the next quarters as well. Then also going into the 2025, where the industry anyway expects finally the rent coming. So the lead time is a very, very important element in this equation now. orders are coming closer to sales.

So just to clarify, no change in your outlook for low double-digit sequential growth going forward in orders?

Can you say it again?

Just trying to clarify that you're not changing your expectations for the time being around order growth as being low double-digit sequential growth over the next few years? No, there's no change, no. Okay, that's great. Thank you.

The next question comes from Jorn Ifrit, UBS. Please go ahead.

Thank you. Hopefully the first question only counts as half a question because it's a follow-up. With the 20 million orders pulled forward in the Q2 due to the ERP shutdown, is this part of your guidance that we really should take the 200,000 71 and then multiply it with low double-digit growth for Q3, or shall we adjust for the 20 million?

No, you have to adjust that, Jorn.

Okay, thanks. This was half a question. Second question, please, if I may ask. Look, on the mixed edge deposition lithography, How do you think this is developing in 2025 versus the mix in 2022, when we had the last semi-capex peak? Is there much more lithography in 2025, like DUV, which is not so favorable for you, or is it relatively balanced versus 2022, if I may ask?

We love DUV, right? Everybody loves it. It's such a fantastic technology. Yeah, but you're right. There was, of course, a huge shift in last year. to 28 or close to 30% in that range. I think this will be probably quite similar now also this year. And then as soon as the 2 nanometer and also especially NAND is kicking in, so there will be more etching and deposition tools required. So this will balance out then again this hype in lithography what we have seen in the past. So I expect this will go back, but there of course there are official numbers from the obvious companies where you can also see what they expect. We expect it's going back in percentage, but certainly stay beyond the 20%. Okay, thanks.

And then really the last half question, just incrementally, you have answered this so often, but China entity list. Anything else incrementally you can add here also from the Cinecom? What is the industry view and your view?

Well, of course, China is a very challenging business, but also offering huge opportunities for us as well. I think China is, meanwhile, also, they always call it like a run rate. They did build up capacities to build also tools, and they are currently on this run rate, and we can expect that this will until they have built out more capacity. I'm talking more about the wafer fab equipment manufacturer, not on the chip side. So our clients are wafer fab equipment and only in service business we go to the fabs directly. So I see there is kind of a huge move. So they are all coming up to 28 billion last year. This year will be roughly the same. Latest numbers I have seen, this will also stay quite stable over the next year.

Thank you very much.

In percentage, of course, it's going back since we expect that the others will grow. Thank you very much. Thanks a lot.

The next question comes from Sebastian Künne, RBC Capital Markets. Please go ahead.

Hi, gentlemen. My first question is regarding the pricing level for consumer electronics. When I look at the retail price for GPUs and memory, they're all trending down still. Could you give us a bit more indication of what you see in the lagging edge of the market, everything outside AI? And the second question is, again, on China. So you mentioned overstocking of equipment there. I think it's the first time that anyone mentions it. I think even ASMR hasn't mentioned it. Does that overstocking also apply to components, so vacuum components? And if so, I mean, I think China must now contribute about 45%, maybe 50% to your revenues if you include the OEM exposure. What makes you so confident that Chinese demand can remain flat this year? This is the question. Thank you.

Let's start on the China, and then maybe we can conclude on China. I know it's a hot topic. for everybody. So for us, of course, we always see, as you know, China for the semiconductor market and for the rest of the industry. And in semiconductor, we deliver directly to the OEMs. And for these Chinese domestic OEMs, there is no overstocking of tools and there is also no overstocking in components. I think they are now on this run rate and they are even forced to deliver more if they could. But of course they also have to build up all this expertise, capabilities for all these different, for these hundreds of process steps to serve the domestic market. So yes, that's why I say it's quite a steady flow into China. And there's not an overstocking. For sure, I don't have numbers on that. For the Western wafer fab equipment tools, of course, the fabs in China, of course, they did buy whatever they could. And I expect they will do that also going forward since trade restrictions might change in the future as well. Nobody knows. There's nothing carved in stone. but this is something that can be expected. On the pricing, on consumer electronics, well, for us, what we track is more the quantities. It's much more important to us than just the pricing because the quantity of semiconductor chips produced kind of equals then in the number of equipment that is used. And, you know, we are... providing the equipment manufacturers, and this is something we are tracking. That's tracking on the pricing on consumer electronics. Maybe this is an indirect impact to our business.

Understood. A follow-up on the Chinese question. Because you write in your presentation that there's overstocking of tools, so you seem to have some... Also, we can hardly hear you. Sorry, yeah, in your presentation, you do write that there are some overstocking of tools anticipated to be restricted in the future. So you do seem to have a thought of the overstocking there, right? It's on page 24.

Well, as mentioned, it's certainly not the Chinese OEM.

It's not the Chinese OEM, OK.

Thank you very much.

Okay, we now take a question from the webcast. It's from Nicolo Pinola, and he asks if we can shed some light on the achievement of the solid EPTA margin, whether this is just the capitalization of the inventory bill, or whether we have any other measures we took on, be it pricing or just operational excellence or so, or any changes in the competitive landscape.

Let me address that question. Thank you very much for it. So from the, let's say, four percentage points increase in gross profit margin, we can allocate about 50%. of it to the inventory build, which will then also reverse into the second half. But we still have a very two percentage points improvement on a normalized level, thanks to all the operational excellence measures that we are driving on the one hand side, but also a favorable mix on the other hand. As usually, pricing in our industry tends to be very stable, so that is not a significant contributor here. Neither is any change that you make reference to in the competitive landscape.

The next question comes from Sandeep Dashpande, JP Morgan. Please go ahead.

Hi, good morning. My question is, you've talked about the adjustments because of the output ERP and other points in the third quarter. How do you see the trajectory now because of that into the fourth quarter and the full year?

Good morning.

I do expect that we return to normal operations towards the end of Q3. So into Q4, we will be fully back to the normal run rates. And here I would just add a bit of color. We are currently operating in Malaysia. about 70% to 75% of capacity, and in Switzerland it's about 70%. So here we have certainly enough headroom to ramp. We do have also the staff in place, and as Urs also said before, we're taking this investment ahead of the curve very seriously and are preparing ourselves for a strong Q4.

And my second quick follow-up on that is based on what you are hearing from your large Semicap customers, they are preparing for a big 25. And so do they already have inventory by the end of this year of the parts that they need from you or you will continue, you know, you expect significant growth next year as well then on the back of that?

Certainly, we are checking with our customers, as mentioned, weekly what their outlook will be. Also, they have kind of visibility for the next quarter. So, it's just that we do a lot with these customers also through consignment, and this helps a lot also to buffer them that they are ready for a ramp as well. And yeah, for us, the inventories did quite normalize over the last year. As you may remember, after 2022, with this huge ordering, they had a lot of inventory as well. And now it's kind of normalized as well. So it's going back to a run rate. And of course, if we see that it's picking up, the whole inventory level will also be adjusted always on the expected run rates as well. So this is a kind of a, at checking and adjusting on a weekly and monthly base with our customers, but also important with our suppliers as well.

Thank you. The next question comes from Tim Schulze-Wenander, Redburn Atlantic. Please go ahead.

Hi, good morning. Thanks for taking my questions. Just very quick ones, please. First of all, just a clarification on ERP. I think you've said it's a two-week implementation. But I think Fabian, you also just said you expect normal operations at the end of Q3. Maybe you could just let us know when do you expect to start and finish that implementation, please?

Yes. Hi, Tim. Good morning. So the changeover is happening early August, which triggers production outages for about two weeks. And then you gradually...

ramping your production back up, get people back on board, having them work with the new system processes, etc. And what I said is that I do expect that after about four weeks or to six weeks, we should be back at the run rate that we have seen prior to the changeover.

Okay, super clear. That's very helpful. Thank you. The second question is on China. I know it's a hot topic. I just want to focus very specifically on the aftermarket business. So in that China aftermarket business where you supply non-China OEMs, so... Is there anything that has changed in that part of your business, or is the supply and the flow of spares, consumables, upgrades, like everything that's aftermarket, is that still running normally with your non-China OEMs in China?

Well, of course, with our non-China OEMs, what we deliver there, we if you deliver to a non-Chinese OEM in the aftermarket. So we go through them, so we work with our OEMs, and then of course they decide where they go. And yes, today I'm sure our products still flow into China. We have seen mainly the pickup as well in the aftermarket, not in China, because in China they are building up now the capacity So there is not yet an aftermarket established. This will come then in a few years. So a service business is always lagging three to five years behind. And the first years anyway, it's always going through the OEM. And when the tools are out of warranty, then the aftermarket gets established.

Very clear, very clear. And maybe just one last quick one. In the risk factors, you talked about the sustainability of China government incentives. Is there anything you've seen or any news flow or anything that's caused you to question or doubt the durability of those incentives? Thanks very much.

Yeah, of course, it's more of a political question. I can't read their minds. I expect that... They will not stop. They have a clear roadmap, a long-term roadmap. This will continue. They want to build up the semiconductor industry locally. I do not expect at all that this will stop. It will be a big surprise probably this year. All right. Super helpful. Thanks very much.

The next question comes from Craig Abbott. Kepler Chivre, please go ahead.

Yes, good afternoon, everyone. Thank you. Yeah, just one question. I realize this is very high level generalized, but looking at the kind of revenue growth potential in 25, if we start as a base for 24, assuming whatever, sales around that 1 billion level, maybe a bit more. And looking at the sort of midpoint of the WFE CapEx outlook you gave us for 25, let's say high teen growth or so, I'm just wondering what your current thoughts are in terms of the sort of correlation potential for what kind of revenue growth VAT might be able to generate if that all comes through as expected in 25 versus that underlying WFE CapEx growth that is expected. Thank you.

Of course, it's always thanks for that question, a very interesting one, and going deep in our modeling, how we model the markets and the growth. In the end, it will depend, of course, which technology is built with RAM and what kind of market we certainly want to outgrow and with newer technology going to market our share of all it will be will be higher and this will certainly be even benefit from from that as well and then of course it also here Fabian Pasing always raises his finger FX of course will also be a big driver as well this might be and not in favor to us. If it's different, of course, we take that, but this will also play a certain role. But in general, a normalized or with a constant ethics rate, we will outgrow that our ambitious and with our initiatives, we will outgrow the market if the new technology goes into the market.

Okay, thank you. Very helpful.

The next question comes from Robert Sanders, Deutsche Bank. Please go ahead.

Yeah, thanks for taking my question. I just had a question regarding the Malaysian expansion. You've obviously got 1B opening at the end of this year. Are you going to ramp that at full pelt to get to the feasible capacity? And what kind of standard cost reduction could that give you per valve? Or what could it do to your EBITDA margin by 27, for example? Thanks.

Yeah, well, as you mentioned, we are investing ahead of the cycle, right? And we started already qualification of our machining in our 1B. I think that's the most important because we also want to kind of safeguard the whole supply chain in Asia. So if the ramp is coming, we want to deliver. So we kind of qualify already 1B in machining. And then we will gradually increase, of course, capacity and build out the clean rooms when it's needed. So the capacity in Malaysia will be one billion, so this will be our two billion story, which we want to achieve by 2027, 2028 timeframe. So over the next years, we will gradually increase the output and capacity in the 1B. But we already started. Qualification of machining always takes time and it's also close collaboration with the whole industry. There is a copy exact in the market and so we follow the rules in the market and that's why we started up early.

And is there a particular standard cost reduction that you're targeting in Malaysia versus Switzerland?

Look, what we have commented before is that labour rates in Malaysia are about the factor three to three and a half, blended cost lower compared to Switzerland. And if you just take now a standard product, say you have over 100 Swiss francs of sales, then your labor content in that is between 10 to 15%, and that is where you can apply this labor cost benefit. So overall, I think the contribution is rather small, given that we use also the machinery, equipment, etc. that we have in Switzerland, so there you do not have a benefit. Overall, I think where we definitely will see our operational leverage kicking in, Dennis, is definitely with the volume, plus also just complementing to what Urs has said, is that we have a nice BCP opportunity with Malaysia 1B on the one hand side, and on the other hand, we can also accelerate the build-up of our supply chains and could just play then with the in-outsource ratio in case of the external supply chain not being able to cope with the expected growth next year. So overall, I think that gives another comfort for us, but especially for our customers as we prepare for the next ramp.

Thanks for that. Just one quick follow-up. On adjacencies, how should we think about the ramp from below 100, I guess, this year to 300 and above in 2070? Is that going to be sort of linear growth? Is it more back-end loaded? Just so we understand. Thanks.

It depends on the technology going in. It's quite linear growth on leading-edge equipment going to market.

Great. Thanks a lot.

Thank you for taking my question.

Maybe just as a follow-up on the adjacencies, you mentioned two or three times you have substantial R&D investment, significant R&D investment. Can you maybe provide more color on that? I mean, is it just the higher personnel count that you will use for the Innovation Lab or are you developing some new applications that are experiencing high demand and of course if you could quantify some of these movements would be great.

Yeah, well of course R&D that's in the DNA of EAT, so I always say actually we started, our founder was really an engineer and tried to solve CERN, for example. So that's in our DNA and I think with WALS, of course, we set a few years back already the standard, but there's nothing finished, right? We also see that we have continued R&D going forward here. So there are issues in the market, for example, the PFAS and also in ESG to make it more environmentally friendly. So there is a lot of, also here, innovation ongoing, even in our core products. Apart the core products, yes, we have also the adjacent product, as we mentioned, and then looking ahead in the five plus years, our R&D team is also working on, we call them the Horizon 2 products, products that it is not yet in the market, but we anticipate there will be inflection points coming, and we are preparing for let's say the next generation on the gate all around technology or even the CFET technology coming then in the five plus year.

Maybe more specifically on the advanced modules and motion control. I mean, you did say last year that the sales was down with the market. I mean, could you maybe say more to that this year?

Yeah, so this is kind of why it was down because we always have this adjacent product qualified on the latest generation of wafer fab manufacturing tools and basically on all in the edge deposition and also lithography and especially edge and depth was quite muted last year in the leading edge so it was more the eye caps growing and that's why we saw the decline As mentioned already before, as soon as we see that this two nanometer and beyond, it will be invested for the two nanometer and beyond, our adjacent products will kick in. But we keep working on that, and as I also mentioned, 20% of the spec wins we have done in half year one was for adjacent products.

Okay, and then maybe again, a question on China. I was maybe a bit surprised because recently I also read from the same organization that the wave fab equipment for next year could be down for China. So my question to you would be, you think that the wave fab equipment projections reflect the risk that maybe China won't really grow? And why would it come to such a change? Because it's somehow contradictory that they have kind of announced higher than expected subsidies to support their industry. And yet now we are seeing that second company, or you guys are also highlighting that China might be overstocking. So it almost appears that there is a risk of overcapacity.

I always mention that if I talk about China, I talk about the Chinese OEM. And with our Chinese OEMs, there is no overstocking. And the government in China, they have to invest because they have to develop all the process steps for the wafer fab equipment. And I think that that's canceled the one with the overstocking. That's not what we see. And in China, of course, it's mainly what is now installed is more mature technologies. And they have to work also on the leading agency. They are behind that, and that's why they will invest a lot in achieving also the 7.5 nanometer technologies. They are not yet there. That's why they have to invest in these technologies. So the investments will not stop.

Okay, so the wafer fab equipment projection for next year assumes growth in China.

I would say that this will be stable on a very healthy level and in kind of the percentage from the total wave of equipment, it will go down because the others will grow.

Okay. Thank you very much.

The next question comes from Didier Chemama, Bank of America. Please go ahead.

Hey, good morning, gentlemen. Thank you so much for taking our question. I've got a few. Just wanted to clarify a little bit the impact of the ERP implementation on your Q3 guide. Is that, if you take 250 million as sort of the base assumption, is that sort of the two-week disruption on that basis or is it just on the Switzerland portion of revenue? Related to that, also, you mentioned that you will start the implementation in August. Should we expect an additional disruption to Q4? And I've got a follow-up on China.

Thank you. Hi, Didier. I can just repeat what I said about 10 minutes ago. So the effects of the changeover are included in the guidance that we have established to the amount that I have said before and in Q4,