VAT Group AG

Ladies and gentlemen, welcome to VAT Half Year 2025 Results Conference Call and Live Webcast. I am Valentina, 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. Webcast viewers may submit their questions in writing via their relative field. 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 Urs Gantner, CEO. Please go ahead.

Good morning, ladies and gentlemen, and thank you for joining this webcast on our Q2 and half-year 2025 results. Today, I'm joined on this call by our CFO, Fabian Piozza. Also here with me is Michelle Gerber from our IR and sustainability team. For today's agenda, we have scheduled the following three parts before opening for a Q&A session. I will start with the highlights of the second quarter and half-year results 2025, and then Fabian will go through the financials in some more detail. I will then conclude with a look ahead and share our expectations for the remainder of the year. Here on slide three, you see the usual forward-looking statement reminding you of the many inherent unknown risks that exist. still faces many geopolitical uncertainties affecting many areas of our daily life and making the business environment challenging to say the least. Our main business, the semiconductor industry, is no exception in this environment or even one of the major industries in focus. Despite all that, I'm proud to say that VAT has again delivered a very solid set of results given the circumstances like the unresolved situation around global tariffs or the substantial strengths of the Swiss franc against all our major trading currencies. And I'd like to express my sincere thanks to our colleagues, our customers, and suppliers who have made this possible. One major factor I would like to highlight up front and that we have now mentioned prominently also in our media release is the sizeable negative FX development and we have experienced in the first six months over the year and in particular during the second quarter. The Swiss franc as our functional and reporting currency has strengthened against all our trading currencies. Over the last three months, the US dollar to Swiss franc rate has dropped 10%. Since the start of the year, the drop is even 13%. While our financial hedging activities absorb the balance sheet revaluation losses, we ultimately report in Swiss francs and therefore we decided to highlight also the business development at constant currency rates to highlight the company performance. Fabian will go into more details on this in his part of today's presentation. What were the highlights of the first six months of 2025? Order-wise, the market remains in a healthy condition, and we are about to see another record year regarding wafer fab equipment. Besides ethics, one important observation why our orders in semiconductor did not grow year on year is the fact that our customers are not ordering long ahead, as the years where different shortages dominated the global supply chains. Meanwhile, global supply chains have become again more reliable, so we see fewer advanced orders just to secure delivery. In sales, however, we saw a year-on-year increase of 24% in reported numbers, driven by semiconductors, followed by global services, and a flat development in advanced industrials. In half year one, 2025, we achieved a new record in total factory output with 60% year-over-year growth in our Malaysian site. I want to thank our global operations team for this fantastic result. The same applies for our EBITDA number, which is up 22%. And had it not been for ethics adversity, the EBITDA margin would also have increased nicely compared to the reported decline year on year. So these are the external factors that have impacted our performance. With our internal efforts, we continue to fuel our innovation pipeline and again, increase the number of specification wins substantially over half year one, 2024. I am proud to see that 20% of these wins have been achieved in our adjacent businesses a testament that the strategic direction is alive and our share of wallet is increasing. Ultimately, what do we anticipate for wave repair equipment, our major sales forecast indicator? Here, nothing has changed in the underlying growth drivers, except for some question marks around the timing of the anticipated next investment ramp. Wafer Fab equipment has plateaued at a record level just north of 100 billion US dollars per year. Technologies are progressing and additional capacity will need it on the roadmap towards the 1 trillion US dollar industry. The construction of more than 100 new fabs around the world is laying the foundation for future growth in wafer fab equipment. VAT is ready to master the next trend and to serve its customers adequately. So let's turn to slide six of the presentation that's available on our website and look at an overview of the half-year key figures and the segment breakdown. BALPS, our largest segment, accounted for about 84% of our sales, which is up from 81% a year ago. Global services consequently declined to 16% as the retrofit business showed weak development year on year half year one. Our highlights in the first six months of 2025, besides the record number in spec wins, was a 24% growth in sales on strong backlog execution, an educated is up 22% year on year, and last but not least, a very solid free cash flow development. Here on slide seven, I would like to briefly remind you of the directly linked to the semiconductor industry, with the remainder catering to many advanced industrial applications, a business that saw flat sales development in half year one 2025 versus half year one 2024. Geographically, we now have 74% of our products and services being delivered to Asia compared to a year ago and this number amounted to 63% as a percentage of group sales. Our direct China business accounted for about 35% up from 30% a year earlier. As elaborated on numerous occasions and the last time during our Capital Markets Day in May, innovation is a key success factor and differentiator for VAT. In the first six months, we spent around 31 million Swiss frames on R&D, representing about 7% of group sales and 9% of our semiconductor sales. The success and effectiveness of our accelerated R&D spend is demonstrated by the increasing number of specification wins, growing by 27% year on year. Another area where we measure our success is in the market are our adjacencies. Not only do they represent 20% of all spec wins, but they also continue to grow fast in sales volume. At 45 million Swiss francs in the first six months of 2025, they are 45% higher than a year ago. Adjacencies represent just over 8% of group sales, and still are at some distance compared to the 15% we expect by 2027, but the trajectory is pointing in the right direction. So, to wrap up my initial comments before handing over to the financial deep dive. Overall, the semiconductor industry is firmly on track towards the US$1 trillion-plus market by 2030, as the adoption of artificial intelligence continues, requiring more advanced and energy-efficient chips. The technological advancements to achieve this goal continue, and investment conditions for additional leading-edge manufacturing capacity remain strong, driven by the hyperscaler. Consequently, wafer fab equipment spend is at record levels, despite geopolitical and macroeconomic uncertainties, just north of the 100 billion US dollar mark. Apart from the leading foundries and ITMs, China contributes the most to this record wafer fab equipment spending. China continues to invest heavily in its self-sufficiency in ship manufacturing and the domestic OEMs gain more share. Finally, our large customers sentiment remain positive and a more pronounced ramp is generally expected. This is witnessed by the demand from customers for ever shorter lead times compared to the last couple of years. This concludes my initial remarks for the half year one 2025 review. And I would now like to hand over to Fabian for a more detailed look at our financials.

Thanks, Urs, and also from my side, a warm welcome to all of you who are joining us on this webcast today. As Urs has already mentioned some of the financial highlights in his introductory remarks, let me directly start with the order intake. Now when you see the order development of the second quarter and half year in 2025, the order patterns describe, on one hand, the continued good market demand However, geopolitical uncertainties made the timing of certain investment decisions more difficult. Larger investments, especially in the most advanced technologies, have not been fully triggered yet. We expect an acceleration of these investments now rather towards the end of 2025 and into 26. The recent CapEx confirmation for 2025 by a large chip manufacturer supports this view, And we expect other players to follow with similar statements. In addition, and as Urs has already mentioned, the fast devaluation of most of our trading currencies against the Swiss franc had a substantial negative impact on our report's numbers, masking to a large degree the still very healthy market environment. Reported Q2 orders, for example, were up only 3% sequentially. However, on a constant currency basis, the growth would have been 10%. Year-on-year, the order intake was down 9%, a constant currency. It would have been virtually flat. The negative impact, especially of the US dollar devaluation against the Swiss franc, was less pronounced when we a constant currency stay again would be flat. When we look at the order book, we see a 15% lower level compared to June 24 and 13% lower versus the end of Q1. As described already shortly by Urs, this is testimony of our strong production and therefore order book execution capabilities. On slide 12, we want to put the current result in historical context. Here we see the development of orders and sales since the first quarter of 2021. At the peak in Q4, the book-to-bill ratio stood at a staggering 1.7 times. In Q1 2023, it was 0.6 times, however, impacted by several special effects. Nevertheless, with our book-to-bill of 0.88 times in Q2 of this year, we are at about the midpoint of the peak to trough range or the next up cycle if you want. However, and again reflecting the uncertainties in the market, the book to bill ratio remained for the third quarter in a row below one. Moving to slide 13. On this and the next slide, I would like to show you the order and sales pattern of our three businesses, semiconductors and advanced industrials that together formed the reporting segment valves, and our service business representing its own reporting segment, Global Service. As you have heard, the valve segment accounts for about 84% of group sales and Global Service represents the rest. Together with the semiconductor business unit embedded in the valve segment, VAT's business related to semiconductors accounts for about 80% of group sales. In valves, Borders were down both in semiconductors and advanced industries in the first half of the year compared to the same period in 24 by 3% each. In semiconductors, it was primarily because of the global uncertainties resulting in slower investments in the next technologies. In addition, we see customers demanding shorter lead times as the supply chain has substantially stabilized over the last two years. Nevertheless, they expect their suppliers to be ready whenever a faster ramp materializes. However, comparing the order intake in the second half of 24 with the first semester of 25, as shown here on this slide, the decline was more pronounced, mainly the impact of the FX movements. Advanced industrials had lower orders largely due to the often project-related nature of their business. Sales in the first half of 2025 were up 35% for semiconductors as the order box execution was strong and flat for advanced industrials. Compared to the second half of 2024, however, sales were up nicely in both businesses. As shown on slide 14, segment global service observed a very strong second quarter with orders up 23% sequentially and sales up 12% quarter-on-quarter, whereas all subsegments contributed to this quarterly improvement. For the first six months, orders were still down 5% year-on-year. Sales, however, increased by the same percentage amount. This development in sales reflects higher semiconductor fab utilization rates, which have benefited our consumables and repair business. Subfab activity also increased while the upgrade and retrofit business was significantly down year on year, with some acceleration observed in the second quarter. Turning now to our profitability, starting with gross profit and the gross profit margin. Overall, our gross profit for the first six months grew 22% year on year, which is slightly less than the reported 24%. Nevertheless, the gross profit margin remained at the high level, 65% compared to 66% a year earlier, despite adverse FX movements and increased sales from inventory. This solid gross profit margin is the result of our relentless focus on operational excellence, coupled with the disciplined execution of our operating flex model, allowing us to adjust our cost base quickly to changing market environments, both in up and down cycles. Moving down the P&L to the EBITDA line, we achieved EBITDA growth of 22% to 165 million Swiss francs. At constant FX rates, our EBITDA would even have gone up 33%. Again, a display of how challenging the FX situation was during those past months, and in particular, the last quarter. The reported EBITDA reflects, on the one hand, our top line growth in combination with operational measures, focused on productivity and cost improvements, as well as continued investment in capacity and capabilities ahead of the anticipated technology transition. The net foreign exchange impact, including hedging and balance sheet revaluations on EBITDA margin was negative by 1.6 percentage points for the first semester of this year. resulting in an EBITDA margin of 29.6% or 31.2% at constant FX. EBIT for the first six months of 2025 increased 25% to 142 million Swiss francs. The EBIT margin remained largely flat at 25.4% versus 25.3% a year earlier. Let's now get to the bottom line with some of the other financials on chart 17. Depreciation and amortization increased slightly the result of our growth investments in the previous years, mainly in Malaysia and the new innovation center here in Hague. As a percentage of net sales, depreciation stands at 4.1% compared to 4.8% a year ago. The sharp swing in our finance net results from a positive 1 million Swiss franc Tax rate for 2025 increased slightly to 18.5% based on additional tax expenses related to the global minimum top-up tax in Switzerland and profit shifts between Switzerland and other group countries with a higher tax rate. Based on the global comprehensive tax calculation at year-end 2025, full year rate expected closer to the full year 2024 level. As a consequence of the above, net income grew less than EBITDA or EBIT, still showing an increase of 12%. Our free cash flow generation is shown on chart 18 and is one of the highlights of the first six months of the year. At 51 million Swiss francs, it is 93% up year on year, and the free cash flow conversion rate as a percentage of EBITDA has gone up from 20% after six months in 24 to now 31%. This is the result of the substantially higher EBITDA, our appropriate capex, and the very modest growth in our trade working capital. Actually, when you measure trade working capital percentage of sales, it declined by nearly five percentage points from 36% of sales to 31%. When it comes to leverage toward 19, we continue to demonstrate our conservative views on leverage and capital structure, despite our significant investment appetite. Net debt amounted to 262 million Swiss francs compared This translates to a net debt to EBITDA leverage ratio of 0.8 times and is in line with the normal seasonal pattern that includes the dividend payment in early May. As a reminder, we distributed 105% of the free cash flow 2024 in form of a dividend of 6.25 Swiss francs per share to our shareholders. we retain a very healthy balance sheet to allow us to self-fund our R&D and growth initiatives in the years to come. Summarizing the half-year 2025 financial performance, we can say that these results were strong given circumstances confirming VAT's leading market position and execution strength. Unfortunately, the harsh FX environment has also masked our performance. Overall, During the first six months of the year, we achieved a strong backlog execution coupled with continued readiness preparations for the expected market growth. VAT battled the adverse FX developments and mitigated those to a certain extent through financial hedging activities. However, it is clear that any further strength of the Swiss rank requires close monitoring and the acceleration of our natural hedging efforts and other initiatives. We have so far well monitored and actively managed the tariff uncertainties and can state that we had no material financial impact in the first half of 2025. We continue to invest in R&D and production capacity, two key elements for ongoing business success. Our factory 1B in Penang was completed The same happened at the Innovation Center in Hague and the new factory in Romania, our internal supplier, started operations late in the second quarter. Last but not least, the ERP transformation was fully and successfully concluded in all our production hubs. Service and sales organizations will be migrated on the new ERP over the course of this and next year. Looking ahead for the rest of 2025 and into 2026, the following finance priorities apply. We continue our discipline cost and capacity management, closely monitoring customer requirements, especially on lead time development to assure brand readiness. We further drive the flexible operating model in light of the persistent uncertain geopolitical and macro developments. As demand accelerates, we will increase factory output in Malaysia, introduce additional automation and capacity increase in HART, and harness full benefits of new Romanian factory, a key internal supplier for many VAT components. And lastly, we will monitor and align topics requirements with fitness This concludes my financial remarks, and I now hand back to Urs from some insights into how we see the market developing and why you're strongly going to participate in the expected growth.

Thank you, Fabio, and I'd also thank the whole finance team to guide us through this very difficult environment. As we just had our capital market day on May 20, when we described our detailed mid-term strategy, let me in the next couple of minutes focus on the rest of 2025 and our market expectations. We are globally in close contact with our customers and look closely at the mark research done on waiver of equipment spent. In our discussions with our customers, Everyone acknowledges that the technological transition to two nanometer or gate all around is happening, and this will require substantial investments in new capacity, but also upgrades of certain legacy sites. 2026 will be the year when products agreed with this new transistor technology are released. A big question mark, however, remains around the timing of the accelerated trend. Most of us expected it to materialize during 2025. However, the geopolitical uncertainties have put a brake on this, slowing down the wafer fab growth trend. However, 2025 is still expected to be a record year, and the more than 100 fabs in construction build the foundation of this future growth. For 2025, the wafer fab equipment market consensus is around 105 billion US dollars, currently about the same level as at the time of our capital market day. For VAT, it signifies ample growth opportunities as the vacuum-related content in wafer fab equipment is growing faster than the overall wafer fab equipment especially from 2026 onwards, and that the leading edge technologies are outpacing the lagging edge ones. In addition, the position and edge technologies continue to gain share with the invasive equipment, partly driven by the developments in China. In a nutshell, and you know this slide from our capital markets day as well, Our growth drivers remain unchanged, and as they anticipated, technological advancements favor our leading innovation and market position. As a result of this, and as I elaborated during our remarks already, I summarize. The trend towards the expected $1 trillion US semiconductor market is alive and kicking. We expect VAT to outgrow wafer fabric 2025 to 2029. Our growth is accelerated by increasing demand for logic, memory, and packaging technologies, and is further driven by emerging AI applications. Vacuum-related paper-fab agreement is expected to grow 1.5 times faster than the overall. And last but not least, B&T's backwinds in valves and in particular in adjacencies are paving the way and driving the share of wallet increases. And most importantly, B&T is poised to capture all growth opportunities with our installed capacities and capabilities. At the same time, we have a proven flexible model that makes us very resilient during economic downturns. So for the rest of 2025, we expect that the overall business trend continues at the healthy level. We already mentioned geopolitics and the uncertainties over where and when the semiconductor investment will accelerate to the next level. It is expected that 2025 will be another record year, but it is not expected that the ramp to the next level starts in 2025. However, with the shift in WaferFab equipment technologies towards more leading-edge and more vacuum-based equipment, VAT will benefit and outgrow the market based on the share of wallet gains reported as spec wins in the last years. Looking at our individual businesses, semiconductors is benefiting from the technology transition, related investments in leading applications, ongoing solid demand from Chinese OEMs to support self-sufficiency, and increased hyperscale investment programs announced for 2025 and beyond to support AI applications. The advanced industrial business is expected to pick up in half-year due to demand for scientific instruments and industrial applications. We also expect larger projects, mainly in the field of R&D, to begin. And last but not least, global service activities are anticipating higher demand only to higher capacity utilization overall and upgrades and retrofits of existing VAPs. Tariff-wise, we estimate that there are no material negative direct financial impacts of global tariff announcements. Therefore, the bottom line is that we still expect higher orders, sales, ABTA, ABTA margin, and net income and free cash flow in 2025 versus 2024. For Q3, we expect sales between 255 to 285 million Swiss francs. For the full year, we feel confident with the current consensus in the market. With that, I would like to conclude our remarks and hand over to Michelle for the Q&A.

Thank you Urs. We now start the Q&A session and as usual you have the possibility to either ask your questions via the operator over the phone or send your question directly to me via the webcast chat. As a reminder, like every time, please limit your initial questions to two to allow the other callers who wish to ask questions that they can do so too. Follow-up questions may be possible later in the Q&A should time allow it. With that, I'd like to ask Valentina, our operator, for the first question from the phone.

The first question from the phone comes from Sebastian Kuhne from RBC Capital Markets. Please go ahead.

Hi, thank you for taking my questions. My first question is relating So everyone is probably happy with the organic growth that you delivered, but the lower US dollar is the new reality. So my first question is, how do you plan to protect your earnings in the second half? How quickly can you basically adjust contracts? My second question is, you still guide for a higher EBITDA margin for the year. so above 31.2%, you delivered 29.6% and probably in Q2 it was even below that. That implies that you probably need close to 33% margin in the second half to achieve your guidance. Is this done through mix? Is it more global services? Is it pricing? Is it cutting costs? What are the measures here? Thank you.

Thank you, Sebastian, for your two questions, which I will gladly answer. Let me maybe start at the latter one on the EBTA development into the second half. You're absolutely right with your analysis, and there we also see the second half. When you look at historical performance, we have always been geared towards a stronger performance in the second half here, and that seasonality also applies this year. This is on the back of our personal cost, how we incorporate inflation, wage adjustments, which are geared more to the second half year, but then also, for instance, all your vacation build-up happen usually in the first semester and then are consumed in the second semester. So these are let's say the drivers on the personal cost. Then on the operating expenses, we also had some one-off effects in the first half, which will not repeat into the second half. And then as you also hinted, the mix will also be more favorable in the second half. Plus, don't forget, that we also had a rather muted contribution from our hatching activities in the first semester, especially Q1 was actually pretty bad with the volatility that we observed there. Now, assuming a stable, even maybe slightly deteriorating development, I do expect that the hatching activity gains that are unrealized that you can also find in note 11 of our half-year report will also have a positive effect on the bottom line. Talking about your first question on that we have in place. Look, it is not a surprise that we have the current development where all major trading currencies are evaluating against the rather Swiss franc. I think that development is something which we have anticipated for many quarters already and therefore have also prepared ourselves. One testimony here is, as we have communicated, the new factory in Romania, which will help us to not only accelerate our best-cost country sourcing, but also reduce the exposure on the Swiss franc, then we have further ramp happening in Malaysia, which you can see also from the slide I have included in the capital market day. And last but not least, also now the completion of the ERP rollout, at least in the production hubs, gives us now the foundation also to shift some of the more transactional roles into service centers and then also reduce the ethics exposure. So overall, I think from both financial but also natural hedging activities, we have been prepared. We will now execute and also closely monitor how the situation unfolds. But again, I do expect that the certain situation will prevail. Last but not least, when you talk about contractual obligations or even a change of our contracts, so far we have not passed on any price increases due to the current FX situation and I also not foresee this in the near term.

Next question, please.

The next question comes from Yang Meihan from Goldman Sachs. Please go ahead. Hi. Good morning.

Thank you for taking my questions. So, the first one is you have basically reduced your CAPEX decisions. What are the main items that you're shifting to the right? Is it mainly a result of a slower ramp-up in the Malaysia facilities or Is there anything else? And I'll ask the follow-up. Thank you.

Good morning. Yes, absolutely right. We have the possibility to flexibly adjust now the build-out of Malaysia 1B, and as such, uh currently existing demand uh is sufficient for for the next quarters and uh therefore we were able uh also here to adjust the complex number

Got it. And on the global service orders, you have seen a very good sequential growth quarter on quarter. Given that you mentioned the FAB utilization rate is still elevated and you have some restocking activity. Do you expect the second half to be a further acceleration because you have still a few projects that are in the pipeline waiting for approvals?

Yeah, in the service business, certainly we expect that we will see growth in the second half year as FAB utilization is going up. So today the situation is that in the leading edge and the leading technology, the big foundries and ITMs globally, they are running on quite a high utilization level, while the lagging nodes are only up to 50% to 70%. especially in the Q2 pickup in the service business and we anticipate that this will continue like that to the end of this year.

Got it. Thank you very much.

Thank you.

Next question, please.

The next question comes from Joanne from UBS. Please go ahead.

Thank you. Good morning. Just two questions, please. The first one is on the other trends and new technology platforms. High bandwidth memory is more or less in a full swing. Micron is already generating I think 15% of its sales with high bandwidth memory products. Is this not visible really in your other intake because other legacy platform investments are slowing down somewhat currently? This would be the first question, please. If you allow me the second question, I mean, China was growing very strongly year over year, I assume also sequentially. When you go into 2026, would you say that China is becoming more flattish and the growth must come from outside China, or how do you view this?

Let's start, it's always good to start with the second one because this keeps in mind So China certainly had a huge growth and you know that China wants to increase the self-sufficiency rate in the chip manufacturing, but also in the equipment. And still today, the share of the domestic OEMs is rather low and this is going to increase. So even if the wafer fab equipment in China in total would be on a constant level in 2026, the share of the Chinese OEM will grow. This is certainly one of the growth vectors we see in VAT as well. So for 2025 to 2026, we see growth rates in the 45% going forward as well. So China, an interesting market for everybody since besides the leading foundry, this is the biggest investment field in wafer theft equipment. Having said that, so you're mainly focusing also on other leading technologies like the HPM. That's certainly something that's in full swing. And also then together with the AI-driven new logic, certainly there will be investments needed and certainly also good if there is competition out in the market. So as soon as there is competition and with the HPM there is competition still in the market, there will be investments to gain the leading position. Where in the logic, of course, there's a clear number one and there we rely on the investments done globally and in the different regions. legacy products, I think there is enough capacity out there in the market, so certainly the leading edge is the big investment cycle going forward.

If I may, just to follow up on this one, I mean, would you have expected one or two years ago that high bandwidth memory is incrementally more visible in an order intake acceleration for the group, and don't you see the risk that gate all around, for example, then having more or less same destiny in your order intake, that this is growing nicely, but other legacy nodes are maybe seeing lower investments, that it's not becoming so visible in your order intake?

Well, in general, our order intake, of course, we are a part on a machine, like qualified on a wafer fab equipment machine, and we are not delivering to the companies you mentioned, like a micron, so we are delivering to the OEMs globally for deposition and edge tools, and Mainly, and of course, also the UV tools. So this is where we see who is growing, and it doesn't mean that our product is particularly down for an HPM technology or a gate-all-around technology. It's more for this, as I always say, it's deposition, lithography, and etching. So, and if you see now on the three big IDMs, so one is certainly investing a lot and let's say the other two are kind of muted. One is certainly down and the one is kind of flattish with some positive signs of recovery in the future. And today everybody, the main investments are done in China and with the leading foundry and going forward, certainly also the others will pick up again. And then we see the cycle going up. Thank you very much.

Thank you.

I'll now go over to the webcast questions. The first one is from Thomas Jager at Mirabeau Asset Management. But I think Fabian, you already answered this question. Thomas wanted to ask, are you able to increase selling prices in H2 to compensate for the soft US dollar Swiss franc? I think the answer here is clearly no. You could potentially do price increases for raw materials like we did at the beginning of 2022, but these FX things are not something that we can sell to our customers. The next question that we have is from Pirakash Vivekanthanam from Skobar. What is the current run rate of the production capacity level overall in HAWK and in PENOM?

We were able to increase the output in Malaysia significantly, as Urs has also mentioned, about 60% year-over-year growth. When we look at the run rate of Malaysia 1A, we are right now just around 500 million, which reflects about 90% utilization. And in Switzerland, utilization levels are somewhere around 65%. So also here we have sufficient search capacity available in both locations.

Thank you. And then maybe the last one here from the webcast, it's from Christoph Grau from AVP. I think partly we answered that already, but maybe you can add some more flavor. Can you say something about the situation in China? What opportunities do you see in China? I think that's the part we already answered. How do you assess the risk in relation to the escalating conflict between China and the USA?

Yeah, I think China is a very interesting field. China is achieving self-sufficiency. A lot of investments ongoing also on reducing node size. So currently, a lot of activities going on the 7 nanometer technology. China OEM, China fabs are on a trajectory of technology today. It's not about the high volume. This was in the past, the mature edge, so they have enough capacity, but it's all about now achieving also the seven nanometer leading edge logic chips. And of course also the leading edge memory chips going forward. So there's a technology trajectory. which is very interesting for both the supply chain and component suppliers, SVAT, but also others. And this will continue over the next year. This is not something that can be solved within just a quarter or a year. If you look back how long it took also the, let's say, the Western world to come to the 7 nanometer, 5 nanometer, it's like a decade with the FinFET technology. And I anticipate personally that China will be faster, but still there is a few years to go until they will be on this level as the others are today and driven by technology. And this kind of reduces also the risk for our technology because they need this technology to achieve their goals. On geopolitics, well, I'm not a politician, so we have to be compliant, but the rules are out there in the market. We will be compliant, but also here, I do not anticipate today that we will have a big impact on our business.

Thank you, Urs. So we now have no webcast questions.

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

Good morning, gentlemen. Thanks for taking my question. I just wanted to go back to a comment you made earlier. I was a bit surprised by that. You said you're comfortable with the consensus out there. Presumably that's a constant currency, or are you comfortable with the absolute consensus out there for revenues for the full year?

Yeah, we are confident with the absolute about what's out there. Of course, seeing today's currency, how it is today, nobody knows how this will develop until end of the year.

Okay, so you would expect that to snap back very materially in the fourth quarter, presumably? Can you say again? You would expect a pretty substantial snapback in Q4, effectively? Yes, that's correct. Okay, understood. And the other question I wanted to ask you, so I mean, we see across the Semicap landscape, you know, two customers of yours, maybe not the most important ones, which are either seeing, you know, weaker orders or seeing some sort of push outs from leading edge logic foundry customers. Are you not worried that this is going to impact you in the second half on your orders or are you seeing strength elsewhere? either from China semi-caps or perhaps from those net upgrades which have been delayed compensating for it. Thank you.

Yeah, first of all, of course, all our customers are important, so there's not less important customers. Yeah, but in the end, I always say we are kind of agnostic to what technology is ramping. And if one technology is kind of a little bit pushed back, then maybe other investments are done. And if one, for example, less in lithography is invested, then it's even better for VAT because there is edge and deposition growing. So that's the beauty I see for VAT, that we are qualified on all these leading edge tools, but also, of course, a lot of lagging technologies. So we can balance and we have to adjust. And this is also what we mean when we say we have to have very shortened times because we have to adjust our operations very fast and flexible to what products are needed in the market.

And Didier, let me maybe just compliment your question around the growth pattern in the second semester. What would we reiterate is that we feel comfortable with the consensus. Consensus, to my knowledge, sits around 1.1 billion-ish which represents about an 18 to 20% growth year over year. When we talk about a current FX, then I mean the year-to-date average, but as you know, the actual rate sits well below the average. So obviously, if we assume now stable development, we already have some further negative effects coming in, the Q3 and then also the Q4. So if you take the current achievement in the first half and just annualize that, you basically already land well in the consensus, which would imply that even a sideway development is providing us this discomfort to hit the consensus. Okay, clarity.

No, no, that's very, very clear. Thank you. Next question, please.

The next question comes from Nabil Aziz from Rothschild & Co. Redburn. Please go ahead.

Hey, guys. Thanks for taking the question. So just in kind of sympathy with that, in previous quarters, we had the impression that the gate wall around ramp inflection for VAT likely falls in kind of the November-December timeframe. Is there any change to that view? It sounded like in the initial comments that you felt that could be more 1Q26 skewed. So any color that you've got on your expectations and whether that's changed since 90 days ago would be great. Thanks.

I think it's still about the same, what we mentioned in our capital market state. I think in the gate all around, there is a clear roadmap that the first product will come out next year. I think in the end, the IDMs and foundries, they also need their customers to switch them to the next level. This is driving that. But what we hear today is also that there will be the first smartphones and data centers being equipped with new technology. So that's a positive sign. This is the investment with all the hyperscalers we be here. So this is all confirmed since our capital markets day. Nothing changed there. What has changed compared to the capital markets day is the investment cycle in the NAND that we hear that is more upgrade today and the capacity expansion is further pushed out there. Okay, great.

And then just as a follow up, just on order intake, just had a question about the order momentum at the start of the quarter versus the end of the quarter and how that looks, you know, kind of the start and the end and whether there are any sense of any order cancellations or push outs. Thanks.

No, I think that's always a very good indicator indeed. If you have more push-outs than pull-ins, then of course there's the market slowing down. But today we do not see, we track that closely. We do not see any alert that there is more push-outs than pull-ins. Even in some regions there is more pull-ins and then sometimes you have push-outs. But I think it's a well-balanced today. We are confident that... business will evolve as we elaborated today.

Okay, great. Thanks.

The next question comes from Michael Furt from Von Tobel. Please go ahead.

Yes, good morning everyone. I have two questions. The one is on free cash flow, strong free cash flow in the first half of the year. What can we read across from that into the second half? Will the network capital intensity remain as low? That would be the first question. And the second question is relating to NAND and the importance really that NAND has for or the NAND volumes have for your business when you compare it to the last cycle. What is actually your expectations that NAND will bring in terms of additional or incremental sales volumes to VAT? Thank you.

So I take the second question on the NAND and then hand over to Fabian for the fleet cash flow and the state working capital. So of course, NAND has historically been a very, very important field for our growth because our share on these tools were very prominent on our customer side. But in general, if you look at the technology behind what is the request for NAND, DRAM, or logic, it's always the same manufacturing tools. It's always deposition and etch. That's why I'm always focusing on kind of the application instead of the device and the market behind that. For us, the NAND will be, of course, another boost, and it will be a boost in wave of web equipment, again, So the NAND portion of NAND was in the 2017-18 pretty high when the 3D NAND came into the market. Meanwhile, Logic has a dominant portion and dominant share in the wafer fab equipment. So for us, as I mentioned, this can be a kind of agnostic, but in the end, all these devices need the position and edge tools. But having said that, yes, of course, everybody is looking for a NAND. lifted. This will just boost then the business and will be also then kind of the next growth to the next plateau. I'm talking more about this plateauing now with wave of equipment. So we are now in the third year around the 100 billion. Consensus is 105. Next year probably going to the 110 billion. So still kind of a plateau with 5% growth. And if NAND will kick in, Of course, then we see this close to the 125-ish way to have equipment market.

Fantastic. And then on the free cash flow pattern in the second half, and you remember my statements also in the capital markets there, we have put quite some focus on our inventory development, which has... definitely been burdened by the ERP transition during the course of 2024 and now into 2025 as we reduce these inventories, but also leverage the benefits of our ERP. We can now gradually work down the trade working capital towards the mid-term target of 26%. So we already achieved now a bus stop after six months at 31%. And I do expect that we will drive this down below 30% now at year end. And this will be one of the key contributors to our free cash flow in the second semester. Asking about full year cash flow, I currently expect that we will be within the communicated range of 60% to 70% conversion. So, I would say in this year, somewhere in the lower part of this guidance. Okay, very clear.

Thank you.

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

Yeah, hi. Thanks for letting me on. I mean, I just want a clarification on one of the earlier questions. We have seen some changes happening with the semi-cap industry in the last three months, possibly because the end customers are getting more cautious associated with tariffs or whatever. The cycle improvements are less than before. So have you not seen any change from how your customers, which are mainly the semiconductor equipment suppliers, are behaving in terms of what they are saying to you in terms of the second half of the year or potentially into 26th? And my second question is about China. I mean, China, as you've said to a response to an earlier question, will increase as a percentage of your sales going forward as those companies become more important, the Chinese semi-caps become more important. The question is, does this have an impact on your margin in the future?

Yeah, of course, we do not talk about margin on an account level. So, China business is generally a very interesting business because it's a growth business as well, technology-driven. That's interesting for Western companies, SVAT, but also others are benefiting from this situation. So, overall, you mentioned the Semicap changes and how our customers are behaving. Certainly in the long run, everybody sees this one trillion market to come. The technological advancements, they have to come. And this is not only about to have a better product, have a higher computing power. It's also reducing the energy needed for the chips, especially for the AI application. So in the long run, everybody is very positive that this is going to happen. On a short note, as always, a little bit cautious at the moment with all this geopolitics behind how they have to set up, everybody has to set up the supply chain, where to produce, where to ship, and all these uncertainties in this market driven by more politics than the market itself. I think this created some cautious in the order patterning, and that's what I also say. the lead times must be very short if we have to be prepared that we have to deliver very fast going forward.

Yes, and maybe just to overlay Urs's statement on the mix effects. Yes, we currently do see some benefits from that exposure which we have going forward. I would see the effect on the gross profit not to be significant and on the bottom line with the growth and operational leverage kicking in, you will not observe any things out of this mixed changes.

Thanks, Fabian. Just one quick follow-up on my earlier question on what you're seeing in the market. You've said that you're fairly comfortable with where the consensus is standing for the year on the revenue, but you've also made a new comment that NAND is being pushed out a little bit. So something else is contributing to that trend into the second half of this year. So what are the end markets which are contributing to that trend?

So basically, we were not expecting a lot of investment in NAND this year. It's always said that there will be upgrades in the NAND, and upgrades doesn't mean that there's a lot of capacity build-out. So in our model for this year, NAND was not that prominent as other technologies. And of course, we also see now for the second half of year that, as you mentioned, that GSE is growing with the FAB utilization going up. And also we see we have a nice order backlog also on the ATV, which we want to execute in the second half of the year. Thank you.

The next question comes from Craig Abbott from Kepler-Chevreau. Please go ahead.

Yes, hi. Good morning. Well, my earlier question about the sales trending for next few quarters has been well addressed. Thank you for that. But looking also at the order book trends and book to bill, I mean, you said in your initial comments that you expect nevertheless still to see that acceleration towards the end of the year. So I just want to get a feel for how you're thinking in terms of book to bill. You said the 0.88 is about midway through the typical trough to peak range. I mean, are you expecting that to get back toward that one times or higher book-to-bill ratio as we head toward the end of the year? Thank you.

Yeah, I think in Q3 still, probably the book-to-bill will be below one, and then in Q4, we expect that it will be really often below one, again, upper, yeah. Sorry. Q3 is below, and Q4, it will be above. Clearly, we are above the one again. Sorry for the confusion.

Okay, no, that's very helpful. Thank you.

The next question comes from Nate Slavrich from Octavian AG. Please go ahead.

Hi, thank you for taking my question. My first one is rather, I would say, me term, and it's on the EBITDA margin. I mean, you seem quite confident to come back above 30%. But if we look at some of the facts, I mean, one, you have a product mix headwind. You have FX headwind. Your R&D is at 7% and you're going to hire 100 people for innovation hub. In H2, you're going to have a negative effect from work in progress. You're expanding your capacity and you've technically lowered the Q3 sales guidance. and you're still expanding your capacity. So my question is, how confident are you that we might go above 30%? Or if I look at some of the estimates going forward, I mean, we are at 36% in three years. I mean, this seems not to be materializing. So maybe the first question, you know, how confident you are on the margin and at what point will you decide on cost cutting at the current 40% spare capacity?

Thanks for this exhaustive question, Nage. Look, as I have explained before, the second semester is always stronger than the first one. I think these seasonal patterns are inherent to our operating model here at VAT. And then again, as I have also stated in my priorities for the second half. We are not sleeping. So disciplined cost spend in line with demand development is part of our bread and butter, is part of our operating flex model. And as such, again, I feel very comfortable but also confident that we will see these increases in the bottom line for the second semester.

All right. And there's my second question on the adjacencies. I mean, you've been saying now for, I believe, two years that the adjacencies are 20% of spec wins and your guidance is 10% to 15%. Why is there a gap there? I mean, shouldn't at some point this 20% be also representative when it comes to the revenue. And also thank you very much for providing the numbers on the sales. Thank you.

Yeah, welcome. So we are very transparent here as well. And of course, a spec win is a win on a machine that goes to the market in the future. And in semiconductor, of course, our spec wins are mainly in the leading edge. And so it takes time. from a spec win until it is qualified and also in the market. And there is an inflection point that these tools are going into the market itself. So for us forward-looking, of course, we measure the spec wins because this is in our hand. This is how we can drive our R&D and innovation roadmap. And then we also have to be patient until this technology then is qualified in the market and goes into high volume. So there is always this gap. behind that. And if you look back now in the last three years, so a lot of the business also from Western OEMs were driven by also by China. So the share of their China business was very, very high. And here, of course, there were mainly also the lagging technologies going in and our qualified adjacencies did not yet get to the market in the last years with the leading edge going forward. So we are very positive I'm confident that the share of these adjacencies and the spec wins will materialize in the market. This is kind of the mechanics behind that. From a spec win to the high volume manufacturing, it's typically the three to five years. Always depends on what kind of products and what kind of tool.

Okay.

The next question comes from Nigel from Putin from August Stanley. Please go ahead.

Hi, good morning. A couple of good questions already asked. So I just want to double click on the views into the end of the year. It does imply that you're seeing fourth quarter up a little bit to reach that sort of 11, 1.1 billion growth rate. My question is really on 26, maybe some color there. I mean, this year, congrats on sort of that strong outlook. I guess it's 17% roughly. um but also helped by some lumpiness last year so you got a 39 growth in the first quarter and and the implied sort of midpoint of guide points to uh what is it 28 i think uh in the third quarter uh more into 26 you know you don't have those tailwinds because obviously sales have been quite flat this year so on my numbers to sort of grow 15 you would need sequential growth to pick up quite a bit Um, do you have any sort of confidence that will happen? I think at the capital market, say reiterated 20% growth over 25, 26 and 27. Um, or would that be more sort of towards the 27 where you see more of a pickup, uh, any, any color that will be helpful? Thanks. And then the follow up.

Yeah. Yeah. Very, very good observations and analysis. Uh, so we, we see that 20, that the start of 2026, certainly more of more flattish, uh, starting flash, but it will be very important to us that we see this technology shift happening as well. As I mentioned, we have a higher share of wallet on the leading edge tool. So this will certainly then to help us to outgrow the market. And even if the wave fab equipment is only going to the one only 110 billion, so it'll be a new record also in 2026. And the shift is more towards the leading edge. So we will outgrow certainly the market again. and we will be in the teens, then also in the girls next year.

In the teens, okay, thank you very much. And then, sorry. Yeah, go ahead.

One more before I go to the last question. We are already over the hour. Go ahead, Nigel. Okay, so if Nigel is no longer here, I have another question from the webcast and as I indicated, this will be the last question for today's call. There are actually two questions. One is how do we see the temp planning for EAT and then also

course we opened up here and the natural follow-up how are we feeling with the consensus in BCA for the whole year elaborated on the top line okay I can basically combine the two questions Michelle on the attempts we're currently sitting at about seven percent in operations here here in Switzerland And as I said before, we will monitor development and also then adapt the temp structure to the needs that we see fit up until the end of the year. On the EBTA consensus, circling back to the first question I answered where we talked about the EBTA in the second semester, when I look at the consensus, it would imply kind of a 36, 36 and a half EBTA in the second semester, which is definitely a bit too rich at the moment, given also the pressure that we will still experience from FX. And this being said, I think we should all be conscious about the hedging gains that we still have sitting in the balance sheet that we will recycle now into the second semester, that's positive. But we also have observed massive balance sheet revaluations, which aware the timing of the measures of such revaluations. If you have them within the semester, I think these are well digestible. If you have them, let's say, by the end of the year, then the hedging gains cannot compensate that. So bottom line is, I think the EBTA consensus is still a bit rich in the current adversities that we are observing, but overall feeling still very comfortable that we will see a significant step up in EBTA performance semester over semester.

Okay, thank you, Fabio. Thanks, everybody. Maybe just quick before I close the call, a little bit of housekeeping. You might have seen the out-of-office reply when you tried to contact Chris. He's currently out of action. He'll be back later in the year. So please, if you have any IOR questions or IOR-related matters, again, direct them directly to me. So with that, I would like to close today's webcast. VAT will be at a couple of conferences over the next couple of weeks. And then we will see you again with the trading update for the third quarter 2025 on October 16. And until then, we wish you all a relaxing and nice summer. And talk to you soon. Thanks. Bye-bye.

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