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.