VAT Group AG

Ladies and gentlemen, welcome to the Q3 2024 Trading Update Conference Call. I am George, the Chorus Call Operator. I would like to remind you that all participants will be listening on remote 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 one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Urs Gartner, CEO. Please go ahead.

Thank you. Ladies and gentlemen, good morning and welcome to VAT's Q3 2024 Trading Update conference call. With me this morning are our CFO, Fabian Chiozza, and our investor relations team, Michel Gerber and Christopher Bickley. What a quarter. We have three topics today to cover. First, Q3 results, then the outlook 2024 and beyond, and the progress in our ERP implementation. I want to share what's important to us upfront. First, the ERP implementation for Switzerland has started to plan. Fabian has always used the analogy that this is an open-heart surgery. This operation went well, and we are currently recovering and training to restore all functions. In August, we have had to shut down manufacturing completely in Switzerland and have reached somewhere above 80% of our pre-shutdown output by end of September. We are still seeing certain challenges in the interfaces between the new solution and our legacy systems. To give you an example, finished products couldn't get shipped in due time and therefore impacted revenue recognition due to stranded documentation. We are confident It just takes a lot of manual work around at the moment. Secondly, despite these challenges in ERP, our customers have only seen a limited impact. We pride ourselves as being customer-centric, and this implementation project has proven that our team is there for our customers first and foremost. Our close cooperation with our customer has ensured that there was sufficient people available to cover short-term requirements. Many have gone through ERP implementation themselves and appreciate our transparent communication. And thirdly, we have seen further promising business development throughout Q3. Our order flow in our core market shows that despite some of the headwinds, So orders with semiconductors customers are trending sequentially up. Remember, at Q2, we already reported some pulled forward orders. More importantly, visibility on Q4 orders is high and provides comfort that we can achieve over 1 billion Swiss francs of orders for this year. So now let's go to some numbers. Our third quarter orders amounted to 259 million Swiss francs. 4% lower than in Q2, but 58% up on last year's Q3. For the nine months ended in September 2024, we generated over 766 million Swiss francs of orders. That is up 68% year over year. We are confident in a further acceleration of these markets to come. Group net sales were reported at 209 million Swiss francs. Comparing this to last year, net sales are roughly flat and 16% down versus Q2. To put this number in context, we had around 8 million Swiss francs of sales advance from Q3 into Q2. And in early August, we had production at our Swiss factory close for two weeks for the ERP changeover, which equated to approximately 20 million Swiss francs of missing factory output for this quarter. We discovered at the start of this month that we would be falling short of the guidance by another 22 million Swiss francs due to the shipment issues which triggered the October 8 press release. Transparency with you is important to us and we wanted to share this as soon as possible. This shortfall does not trouble us. We will recover sales in Q4 and the market environment as well as order flow is steadily improving. I can see you mentally adding up numbers here, and let's address all the factors as to why sales have been down this quarter. In addition to the missing sales due to ERP and the pull forward, ATV and global service businesses have seen sluggish sales to date. We will touch on this later on this call. Our order backlog continues to build strengths, reaching 348 million Swiss francs. The book-to-bill ratio in Q3 was approximately 1.2x, and we have had now consistently a book-to-bill above 1x since mid-2023. Across the three businesses, we saw the following performance. In the semiconductor business unit, orders continued to grow sequentially quarter on quarter, a clear sign that investment activities have remained strong, especially in Asia, and therefore our OEM customers or order books are filling up. While end markets still grind higher, everyone is preparing for continuous growth into 2025, which will be driven by leading-edge tools being rolled out in logic and the demand for high-end memory chips like HPM. Borders in semiconductors for Q3 came out at 186 million Swiss francs, and net sales amounted to 144 million Swiss francs. In our advanced industrial business unit, end markets continue to result in sluggish business developments. While some areas are seeing increased demand, like industrial applications and metrology, other areas like scientific instruments and solar remain subdued. Demand infusion remains strong, both in the privately and public-funded initiatives. Ultra-high vacuum will play an essential role in future fusion reactors. Orders in ADD in Q3 amounted to 32 million Swiss francs. On the back of the strong project pipeline in research and energy transition, we generated sales of also 32 million Swiss francs in Q3. EIT's global service segment experienced a rebound year-on-year from 2023 levels. Semiconductor fab utilization rates continue to rise and inventories are operating at normalized levels. Year-to-date orders are up 39% compared to 2023. Nonetheless, order intake declined quarter over quarter despite overall higher average chip fab utilization rates, especially in Asia. Given the ERP implementation, consumables and spares were pre-ordered in Q2, resulting in lower demand Q3 orders and sales. Anticipated upgrade activities have not materialized yet, which we still expect to pick up based on HPM capacity buildup and advanced logic later in 2024 and into 2025. The global service segment reported Q3 orders of 41 million Swiss francs and sales of 34 million Swiss francs. On the ERP transition in Switzerland, we have shared the situation. We have shared what the situation was on October 8th in the press release. This is our first and foremost priority as an organization. We have appointed a task force that meets daily to track and resolve all identified issues. With regards to the next steps. First, we need to recover all outstanding revenues Q3 shortfall we have been speaking about. This will take up most of October. Secondly, I have been speaking about the order visibility on Q4. Customer order flow continues to gain momentum and order backlog continues to build. Now there are still some remaining issues with the order loading, and it's important that we get our output up over the course of the last quarter of 2024. We have reached over 80% and 100% will be reached by end of October with the aim to add another 20 to 30% during November. Right now we are working on getting some bottlenecks resolved. This happens week by week. So we are in the midst of the hypercare phase from the surgery with over 1500 employees working with and in a new system. I'm confident that we will go through a steep learning curve and finally get the benefit of this new integrated ERP system. Despite these challenges, we are providing an ambitious sales guidance of between 270 to 300 million Swiss francs. Note that at the top end, we would surpass the highest quarterly sales result ever Based on these factors, VAT continues to expect higher sales, EBITDA, EBITDA margin, and net income. On delayed collection of invoices following the ERP implementation, we expect free cash flow levels similar to 2023. We are very excited for 2025 and beyond. Client activity, both around spec wins and orders, promise that we are heading in the right direction. Market research, on average, expects 2025 waiver web equipment to reach record levels somewhere above $110 billion. There are a few positive factors playing in here. First, memory capex is in a cyclical recovery. HPM demand is rising rapidly and the capacity is stretched. This will result in both upgrades business and new greenfield fabs that will be equipped next year. Secondly, leading edge logic remains promising with 200 logic fabs equipped in 2025. We have spoken of the around 100 fabs that are coming online in the next two years. And third, China has seen a strong focus on the semiconductor industry in the past quarters as they build lagging-edge supply chain, and the proportion of self-sufficiency is to be increased. We expect demand to persist further into 2025. And finally, our customers have managed down excess inventories and are ready to provide tools to the chip manufacturer. are significantly higher versus 2024. This concludes my prepared introductory remarks, and we are now turning the call back to the operator for the Q&A session.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star N1 on the telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star N2. Questions on the phone are requested to disable the loudspeaker while asking a question. Our first question comes from Olivia Honeychurch and Jefferies. Please go ahead.