VAT Group AG

Ladies and gentlemen, welcome to the VIT Q3 2025 Trading Update conference call. I am Sandra, the course call operator. I would like to remind you that all participants have been listened only mode and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Urs Gamsner, CEO. Please go ahead, sir.

Thank you. Ladies and gentlemen, good morning and welcome to VATQ3 2025 Trading Update conference call. With me this morning are CFO Fabian Fiocza and Michel Gerber from Investor Relations. After my introductory remarks, We will have our regular Q&A session, and the call operator will take your questions in the order you enter them. Another quarter has passed, and I can say that it developed quite in line with the expectations we shared with you during our Q2 webcast on July 29. For me, the following six topics, on which I will elaborate in more detail during today's call, are important when analyzing VAT's performance over the last three months. Our Q3 orders showed the flattest development we anticipated, while sales in the quarter were supported by the execution of our still sizable backlog. Adverse FX impacts did not have the same negative impact in Q3 as in Q2. However, on a nine-month basis, the headwind is still strong. Among our business units, Advanced Industrial and Global Service had a pleasing development confirming our expectations for these two areas, while order activity in the semiconductor business remained muted. The market conditions and our expectations have not changed fundamentally over the last three months. The rest of 2025 and at least the first over the later course of 2026, stronger growth is anticipated. It is worth noting that our operational performance in 2025 is outstanding. It will be a record year in terms of factory output and adjusted for ethics in sales. And we are achieving this without critical disruptions and in short lead times. It proves that we are ready for the expected growth ahead. Lastly, you have seen in the media release this morning that while we confirmed the majority of our results outlook for 2025, we had to abandon our previously given guidance for higher orders and a higher APDR margin as the softer than anticipated semi-business and the persisting ethics challenges became too big a hurdle to cross. For the FPGA margin, we now expect it to be at the lower end of the margin corridor band of 30 to 37%. So let's quickly go through some Q3 and 9-month numbers before we share with you our expectation going forward. Let's start with the orders. Our third quarter orders amount to 238 million Swiss francs. 4% lower sequentially and 8% down year-on-year. Ethics suggested that declines would have been substantially less with minus 1% quarter-on-quarter and minus 2% year-on-year. For the nine months ended in September 2025, we generated over 727 million Swiss francs of orders, down 5% reported, but only down 1% on a constant ethics comparison. Ongoing uncertainties surrounding global trade tariffs, geopolitics, as well as some semi-industry-related issues prevented certain investment decisions and therefore negatively impacted VAT's semiconductor business. And looking at these numbers, one must bear in mind that positive developments in the leading-edge space like Kate AllAround or HPM Memory were masked by lower-based self-equipment investments in the more mature or lagging technologies. It is estimated that fast capacity utilization in leading edge applications has recovered to over 90% already, with new capacity additions becoming necessary. In the lagging edge areas, however, current utilization rates are estimated to still be only between 50% to 70%, requiring not only smaller service and maintenance efforts, but also a little addition of new capacities. After this overview in order, let's now move to the sales numbers. The third quarter group net sales were reported at 258 million Swiss francs, down 9% sequentially as reported, and down 6% on a constant ethics basis. Year on year, however, reported sales increased by 23% and 32% at constant ethics. For the first nine months of 2025, group sales amounted to 815 million Swiss francs, a plus of 24% compared to 2024 and the result of our strong order backlog execution in 2025. On a constant ethics basis, the growth would have even been around 30%. However, when adjusting for the negative ERP implementation impact during Q3 2024 of approximately 22 million Swiss francs, the year-on-year increase in sales would have been 12% for the third quarter and 20% for the nine-month period. Let me give you now a brief deep dive into our different businesses. When looking at how our group order and sales numbers are composed, we see both a positive development in our smaller business units, advanced industrials and global service, and at the same time as luggage performance in our semiconductor business. In advanced industrials, the third quarter saw orders and sales increase by 29% and 11% sequentially, and by 20% and 80% year-on-year. These good results were driven to a large degree by government-funded research projects, but also by coding applications and general industrial markets, mainly in China. scientific instrument markets continue to consume their inventories. While some of the orders, especially in research, are project related, this never-the-less shows the strong market position of this business unit and its ability to win business also in competitive areas. The semiconductors business unit posted Q3 orders of than in the same period a year ago. Sales, however, increased by 16% year-on-year, driven by strong backlog execution despite the increased market uncertainty. This uncertainty is also reflected by our customers' demands for shorter lead times for VAT products to manage the expected future ramp in FAB investments on short notice. Sequentially, orders and sales in the semiconductor business unit were down 13% and 17% respectively. In the global service segment, Q3 orders were up 33% year-on-year and 90% sequentially, as FAB utilization rates continued to improve and initiatives by FAB to increase ramp readiness continued. Q3 sales were up 13% sequentially and 57% year-on-year. As mentioned earlier, the improvements were driven by leading-edge FAFs where capacity utilization rates were above 90% and increasing. When it came to lagging-edge FAFs, however, business remained subdued as low utilization rates of between 50% investment requirements in consumables and spare parts. Upgrades and retrofits also saw improved results with accelerating momentum towards the end of the three months, with several projects in both the leading and lagging edge areas. Let me now give you our view into the future. When looking at the remainder of 2025, we expect investment in semiconductor equipment to continue at this constant level in the absence of a semi-ramp. The installation and upgrading of new manufacturing tools related to leading-edge logic chips and high-performance memory chips require significant capex. This trend is unchallenged and 2025 will be another record year in wafer fabric and spend. Some of the earlier anticipated even higher growth in investment has been offset by a decline in the amount of capex. particularly in China. Looking ahead, leading logic chip manufacturers have committed to or confirmed extensive CapEx plans. The timing, however, indicates that this will be a 2026 story. In memory, apps are moving rapidly to build high bandwidth memory capacity. announcing the partial conversion of existing ERAM capacity, but with limited greenfielding at this stage. EIT will only see a larger contribution from HPM once greenfield investments are also being executed, something that is now expected to happen over the course of 2026. Mixed signals prevail for NAND capacity expansion investments that has been further postponed by major players. The recent memory rally is triggered by higher average sales prices and less by heavy investments in additional production capacity. Market research indicates that memory fabs are still running at only around 70-75% utilization rates. Overall, the local wafer fab equipment overall in 2025, putting it within a range of between $105 and $110 billion U.S. dollars. And wafer-tapped equipment is forecast to achieve record levels in 2026 and 2027. As the undisputed market and technology leader in Mecklenburg, VAT is uniquely positioned to outpace the anticipated market growth in 2025 and beyond. With its high market share in leading edge applications, P&P expects to benefit extraordinarily from the upcoming more than 100 new fast greenfield investments, accompanying the ongoing technology shift. In addition, P&P expects the healthy demand in its direct business with Chinese OEMs to continue. China is still working to become self-sufficient in chip manufacturing. However, contrary to the Western landscape, the market dynamics there are more volatile and the competitive situation among OEMs is in constant flux, requiring VAT to closely monitor such changes and adapt at fast pace. In addition, the speed of qualification of new OEM tools at the Chinese IDM and the digestion over the last couple of quarters may lead to increased swings in the China business. Overall, while Chinese WFAP equipment is expected to go down slightly in 2026, the domestic portion is still growing in 2026 and with that our direct business in China. On this basis, and despite persisting FX headwinds, VAT expects higher results for sales, EBITDA, net income, and free cash flow in 2025. CapEx is now forecast at 70 to 18 million Swiss francs. As you have noticed, we no longer expect orders in 2025 to exceed the 1.033 billion Swiss francs achieved in 2024. This is mainly due to the substantial ethics headwind, but also related to the lower than expected order activity coming from our semiconductor customers and changed order patterns compared to previous years. For the final quarter of 2025, we expect sales of 225 to 245 million Swiss francs. Now, before turning the call Over to the operator for their Q&A. Let me share the impressions I got when attending Semiconvest in Phoenix last week. B&G remains the global market and technology leader for vacuum valves and solutions, a position that will grow even stronger in the years to come. This assessment of our position has been confirmed during all the customer meetings The market conviction of the $1 trillion semiconductor market by 2030 has not been questioned by any of my contacts. But the opposite was the case, and some now expect these numbers to be even higher on the back of AI-related semiconductor needs. A key driver for reaching the $1 trillion is the ongoing technological development, which not only is driven by the semiconductors, but equally by the need to further and massively review the energy efficiency performance, or EEP, in future chip generations. Over the next 15 years, about 10,000 times EEP improvement is necessary to power the estimated semiconductor system use. This is about the same efficiency improvement as the one we have seen over the last 15 years. Another aspect for the confidence in an increasing wafer fab equipment spend is the fact that even with the more than one of the fabs coming online until 2028, they will most likely not be sufficient in capacity to fully satisfy the one trading goal. Additional new fabs are therefore expected to be announced in the future. When discussing these trends with our customers, I have also got very strong confirmation for two of our wafer fab equipment outcrow drivers. Leading-edge technology will continue to see faster growth than the overall wafer fab efficiency spend, and the overall percentage of vacuum-related investment is set to increase. While the current market conditions remain mixed, I sensed great confidence during my stay at Semiconvest in accelerating market growth over the course of 2026 with a more favorable impact for VAT than in 2025. With that, I'd like to hand over to Michel and the operator for the Q&A.

Thank you, Urs. We now start the operator-assisted Q&A session. As a reminder, like every quarter, please limit your initial questions to two to allow the other callers who wish to ask questions to do so as well. Follow-up questions may be possible later in the Q&A should time allow it. With that, I will hand over to the operator, Soro, for the first question.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one 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 and two. Questions on the phone are requested to disable the loudspeaker mode while asking a question. Anyone who has a question may press star and one at this time. Our first question comes from Mei-Heng Yang from Goldman Sachs. Please go ahead.

I just have two questions. So first of all, on your comment on China, so you said you expect a slight decline in the China WFE, but overall, this is kind of in contrast with the ASML comment when they expect a significant decline in China sales. Can you elaborate a bit more on the confidence on a healthy China demand in 2026? Thank you.

Yeah, as pointed out, China is a very dynamic market. but in the clear goal to get the self-sufficiency rate up as fast as possible. Having said that, so in the past years, China was certainly buying a lot of waiver of air equipment from the Western OEM. And, yes, of course, lithography is critical. For us, for V&T, it is even more important how our customers in China are developing and growing, and they are gaining shares year over year for their domestic market. And this is why we are so confident that our direct business in China is going to grow also in 2026, even if the overall wafer fab equipment in China where we keep a very high share.

Got it. So just to clarify, you mean the domestic market share that you have would grow, or is it more the OEMs would take market share from the foreign OEMs?

Yes, so the OEMs, our customers, the domestic, the Chinese OEMs, will win more share in the overall base for federal treatment in China.

Okay, got it. And the second very quick question is, how much exposure do you directly have to the memory CAPEX expansion? I know it's more second of 26 story. How worried about you are in terms of the latest U.S. restrictions on the foreign memory OEMs expansion in China?

I'm very happy if the memory expansion will start because memory expansion means they will need a lot of depth and edge tools. And here we have a very high share on Western OEMs. And if there are restrictions that they cannot deliver into regions on this planet, then they will invest on other places. So for us, it doesn't matter where the investment takes place at the moment. Most important that the investments take place. on that business as well. So in the end, we always mentioned also in the past, we are kind of agnostic to if it is an investment in memory or logic. In the end, they need the position and edge tools where we are qualified. Often we don't exactly know where our products will be used, but any time there is a way for that equipment and expansions, we achieve a benefit.

Thank you very much, very clear.

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

Hi, good morning. Yeah, I have a follow-up on China as well. Could you give us maybe the split between the business you do with local OEMs and Western OEMs? Because you see overall China going down next year, but your 35% direct sales to go up in the business you do indirectly with Western OEMs must be collapsing in that category. So maybe you can give us a little bit. My second question is on margin. If the exit margin in Q2 was somewhere between 29 or 28, 29%, then operating leverage now goes against you in the second half of the year. So I was wondering what you do to reach the low end of your 30 to 37% margin and guidance and how big the risk is that you may be somewhat below the 30%. Thank you.

Thank you, Sebastian. So, to your first question, our direct share in China today is about 35%. Of course, that's a relative number. It's always depending on also the other and if the other are growing fast. the China share of the next year will be around 30%.

Sorry to interrupt. My question was not on how much direct sales you have, but what the split is within China that goes to local OEMs and Western OEMs.

There is no Western OEM. direct business into China, and we estimate that about 10% is additional that goes through our Western OEM into China.

I understood. Okay. But that means that the Chinese OEMs are larger than the Western OEMs. So business that the Chinese OEMs do in China is bigger than the Western OEMs in China. Yes, sir. Definitely, yeah. Okay. Thank you. Yeah, and then on margins, right?

Yes. Hi, Sebastian. Fabian speaking. Good morning. So you're right.

In the first six months, we had a headline EBITDA of 29.6%, and with the communicated full year margin, we expect to slightly boost that up into the second half.

But you're also right that the Operational leverage is certainly not helping. We have two key drivers that do help. A, on the personal expenses, which usually has a seasonal pattern when you build up your vacations and other accruals in the first half, and you reduce them in the second half.

And secondly, we had quite some adverse hedging effects in the first half, which do not repeat into the second half.

At the same time, also remember that we continue to invest for the anticipated ramp and also harness future business opportunities. And as such, the cost absorption is obviously suffering from the softer sales in H2, which ultimately demanded us to reduce the outlook slightly down.

Yeah. So how big is the risk that you drop below the 30 percent? Are you confident to be above the 30%?

Yeah, you know, I usually don't go into too much detail of the P&L and the Q3 trading update. What I can say is at a life-for-life basis, mostly constant FX, I'm confident that we will reach the communicated level by the end of the year.

Okay, understood. Thank you very much.

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

Thank you, and good morning, everybody. The first question would be, please, on technology trends. Is there anything happening out there which could be adverse to the VAT prospects, like, for example, you have a higher ISO share for DRAM, or also that machinery for action deposition is merging? Is there anything you would have in mind here? Let's start with the first question, please.

Yeah. Hello, Bjorn. The technology shift is certainly something that is helping the EAT. By the way, this is the opposite. It's not going away. It's more and more going into the back. And, for example, with the advanced packaging, as a pilot growth driver, just during the more than in the past. The LITO share is not increasing. I think there was a kind of a shift in LITO in the past because of China buying a lot of LITO tools. So the portion of LITO in the last years was higher than what's normally required. This will be about LIDL, there was a very high share in UV and I think more UV will come now going forward as well. This will also help UV means bank-related tools and UV means non-bank-related tools. So I don't see the adverse movement but still what we communicated also during our capital market stage This should fuel our story.

Okay, thanks. And the second question, maybe also a broader industry question, but from your perspective, what you heard on the Semicon in your conversations, we have a material increase in the average selling prices for DRAM and NAND. At the same time, utilizations are still, according to market diligence, around 70%, 75%. I mean, How is the industry or how are your contacts or your conversations you had last week, how are they explaining this difference? Because usually the higher average selling price should indicate that really supply is tight, which seems not the case.

Your question goes around the pricing, DRM and NAND pricing versus the lower capacity utilization. Is that correct?

Yeah, exactly. Look, I mean, because the average selling prices which went up materially for DRM and NAND would indicate that supply is tight, that there's not enough supply currently. But at the same time, it seems utilizations, according to your market diligence, of these FAB 7075 events, which is not indicating that there's not enough supply. So how do you explain this mismatch currently?

That's really hard to explain. Sometimes things are happening in such a dynamic market. I don't have probably the real explanations here. I still just see that, of course, some of these... players, they have some pricing power, and if new technologies are coming in, they are becoming more and more of the single sources in certain technologies, and this might have also an impact on the pricing. But other than that, it should also, I guess, have... During semi-country, we're less discussing things like this, so for us, a lot of discussions go around this... How can we solve the industry or the AI problem, our upcoming problem? The power consumption, that's huge. And to have a 10,000 times lower power consumption for the next generation of chips, that's kind of in everybody's mind. And how can we solve that? We need new materials. There is no sizes going down. a lot of challenges to come, which nobody knows how to solve today. But as an industry, I feel that they are getting closer and closer and collaborating even closer than in the past to overcome these challenges. These were kind of the main spirit at the Semicon. It was an event I took place, at least, and that's about the theorem and pricing. Thank you very much.

The next question comes from Menon Gennard from Jefferies. Please go ahead.

Hi, good morning. Thanks for taking my question. I just wanted to ask you about your order expectations into Q4 and also the sales progression that you expect in 2026. In your first half results, you had talked about how or you're slightly more bullish or optimistic about orders in Q4 and the book to build will go above 1. Is that still your expectation for your Q4 orders? And if so, is that sort of coming from gate or round HBM kind of areas where you talk more positively? And, you know, you've said that you're getting signals, which is you have said that previously as well, that the industry – will start recovering from the second half of 2026. In your discussions in the last, say, five, six weeks, including at Semicon West, have you got more confidence that that trend will come through? And if so, is that mainly a non-flash-driven upside, or is that more broad-based? Thank you.

Thank you for these two questions. Let's talk a little bit about the second one. Definitely, we see a way-for-fair equipment overall is always a very good proxy for VAT, all that has been. And as I mentioned, there will be a record here in 2025, and we also expect that also next year there will be another record, not a jump of the 20 percent, but I And the shift is very important. It's more towards the leading edge where I explained that the leading edge means more vacuum-related system where we will benefit as well. So with all the discussion with our customers, everybody expects that the Q1 will be kind of the low point of 2026, and from there they expect a gradual improvement towards the record year by end of 2026. So it is kind of the consensus and it's not only one customer, I think this was kind of everybody sees And underlying, of course, it's not only this one trillion story. It's mainly the facts that are built, and they need equipment going forward. So your first question for the very short view on Q4, I think I can confirm that we expect

And if I might have a small follow-up, I mean, with a backlog which is running like 34%, 33% down and probably not changing too much in Q4, do you still think that VAT can grow next year and close to where consensus is right now, et cetera? Is that possible? And will the orders come in strongly through Q1, Q2, Q3 to get you to that growth trajectory?

Yeah, this is our expectation that the orders will come in and later Q1 and then Q2. Understood. Thank you.

The next question comes from Daniel Shafai from Citigroup. Please go ahead.

Hi, good morning. I just had a general question on valve inventory. How high do you see this at customers right now, and is there any difference, particularly in China?

Thank you for that question. So inventory levels with our large customers are well under control, so we have consignment and adjust here inventories based on the market outlook. China, as I mentioned before, China is a little bit different story. They are in a growth mode and they have to expand their portfolio quite a bit. So they are coming out with new applications, new tools almost quarterly. higher than with the Western OEM and this can – there is a tendency that, of course, there is a higher inventory in China, which is also impacted, of course, if they have a qualification and the qualification of a new tool takes longer, that the outflow of the inventory is slower and this can be the disruption. with that is a very volatile environment at the moment in China. Every of these customers want to qualify the tool. If they fail, it can take a little bit longer. So then we have to be very, very fast to adjust how we act in China. So it's interesting, but not easy to forecast at the moment in China. it is clear that they will grow their self-sufficiency rate. And it's also clear they will see the same challenges as the OEMs in the West a few years back. Because there's no time reduction. It's not just something I can buy a tool and it works. It's a lot of know-how they have to build up. But yeah, they learn fast. I'm really excited about that.

Okay, thank you. And just on margins as well, last time around you were pointing to more or less stable gross margins. Now you took down the EBITDA expectations. Just trying to understand where do you see now gross margins? Is that still the case or did that change now? And how much of that is OPEX moving around? That would be great if you could do the moving parts here.

I do expect gross margins in the second half below the first half, predominantly on the ongoing reduction of inventories, which will then also have a positive effect on our trade working capital, but ultimately also on the free cash flow. So that is one element. And the other one, which is also reducing gross

reduction or the weaknesses on all the major currencies against the Swiss franc.

And on the bottom line, we mitigate these effects, A, via cost discipline in our personal and operating expenses, and B, via higher hedging gains anticipated in the second half than the first half.

Thank you.

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

Yes, good morning. Two questions also. First one, you know, you're telling us as before that you're not expecting material impacts from the tariffs this year, but I'm just wondering how confident you are that this will likely continue into next year, particularly as your U.S. share of sales I reckon would be set to increase given the significant amount of investment taking place there? That would be my first question. Thank you.

Yeah. Everybody hopes the tariffs, of course, will be changed and go down. This is the expectation. But if not, our U.S. content that stays in the U.S. is not that high as you might anticipate. So it was a half year. It was for it's even been down to 7% now. So that's not marginal. Of course, we have large U.S. customers, but they operate globally, and their operations is mainly outside of U.S. Craig, let me maybe compliment that. So we have 7% of VAT sales where we are importer of record, and as such, these sales are subject to potential tariffs. Now, as we said earlier on, we are working closely with our customers to find solutions in order to offset these effects, and as such, we do not expect any material effect on our financial performance, not this year and also not next year.

Okay, thank you. And secondly, a technical issue, if I did my math right, the order backlog for both divisions, it appears in my numbers at least, that it declined more than would have been implied. So I'm just wondering, was this solely due to FX or were there some cancellations? Thank you.

Yeah, it was the first, not the latter. So that is due to FX.

Okay, thank you.

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

Yes, good morning. Thank you for taking my questions. I've got two, if I may. First, high-level question. So we think NEN WFE this year is up 75%. I think that's quite clear from LAM results in particular. I think it's one of your important customers. But not exclusively. Next year, we predict it's going to go up another 20%. How do you reconcile those comments you made earlier where subutilizations are 60% to 70% in NAND? One of your top customers clearly growing, you know, very strongly this year with NAND WFE or NAND upgrades. I don't really understand how you don't see it. Is it because they put too much inventory? Or what are we missing in that? What's the delta? And then I've got a follow-up on China. Thank you.

Yeah, well, the big delta here is that on these NAND upgrades, on these great U.S. customers with a high share in the NAND, they do upgrade, and it's not vacuum-related system. So they do upgrade, but there is no vacuum system involved in these upgrades. Okay. It's more about it. It's more about that they, of course, increase the layers, but they don't need more chambers at the moment or upgrades in the system. Okay, interesting.

Thank you. The second question on China, I think it was a question that was mentioned earlier. I'm a bit surprised by what you said. You said China, if I understood correctly, China is 40% of sales, and of that, around 30% is with China domestic semi-caps. and 10% is with international EMTs. Is that right? Do you understand that correctly?

No. Sorry if this was not clear enough on that, but the overall China business for VAT is 35%. So 35% of VAT business, not only semi-overall, goes directly into China. And then we estimate that Through the Western world, Western OEM, there might be another 10% going into China additionally. So if you sum it up, it would be probably now 45% of the VAT business exposed to China. But direct, and this is what we can calculate or see in our books, direct business in China is going. with Chinese customers.

That's weird because LAM, EMAT, TEL, all these companies have got China exposure around 30% to 40%. How can it be only 10% for you?

Well, it's our estimate on, of course, what's the share of wallet on these tools, what is going into China. Okay. All right. Thank you very much. And then, of course, there is also a sales portion in all the businesses as well.

Yeah.

No, makes sense. Thank you.

The next question comes from Martin Jungfleisch from BNP Paribas. Please go ahead.

Yeah. Hi. Good morning. Just another follow-up on China, please. Sorry about that. I think at H1 results, you mentioned that you would expect China to grow 4% to 5% next year. Is this something you would reiterate today, or is it, you know, given your positive comments this morning, is it, you know, would you say it's more digitizing the digits now?

That's the first question. Yeah, I can take that question. We do expect roughly the same growth rates also into next year, so there is no change.

Okay, thank you. And the second question is really under Q4 guidance. I mean, do you expect revenues to be brought down 10%? If you assume fetish development and ADV and services, I think this would imply semi-valve to be down 15% sequentially. Is this some of the correct assumption? Are there some other moving parts in services or ADV as well?

Can you say it again, please?

Yeah, your guiding Q4 revenue is down 10% broadly, right? This would imply probably semi-versely down 15% if you assume flat-ish ADV and services development. Is this a correct assumption, or is there some moving parts within services for ADV as well for the fourth quarter?

Yeah, it sounds about right. With ADV, of course, it always can be also project business in one quarter or move to the other quarter, have that kind of an impact. But I think your assumption is about right, yeah.

Okay, great. And then maybe just to follow up on the backlog, would you also expect Q4 to still benefit from backlog, or would you consider the backlog now to be more or less normalized? Yes.

We are working down the back dog, and with the earlier comment that Urs made on expect the book to build, this will then also be replenished accordingly.

All right. That makes sense.

Thank you very much.

The next question comes from Nate Lovridge from Octavian. Please go ahead.

The first one, you mentioned that this weakness could continue or flattish sales going into at least Q1 next year. Now, you've had quite a high base in Q1 this year, and you also have probably mid-single-digit FX headwind there. So this would imply, actually, that in the following quarters, according to your guidance, you'd have to grow more than 20% at least. So my question is, How did this seasonality change? Because we used to have maybe stronger H2s. I mean, this year, this clearly was reversed. What explains that, and how can we expect that for 2026? Thanks.

The comments that were made before were of sequential growth.

So Urs was not referring to year-on-year comparisons, but more quarter-over-quarter. But we do expect now kind of a sideways development into Q1 and then a pickup into Q2.

Okay. But it is a fair assumption that in Q1 next year you might be missing 50 million if we go sideways and you have the FX effect. Would that be a reasonable assumption?

Year over year. Yeah. Year over year, yeah.

Yes. Okay.

And maybe then on my second question, when... Just to remember, I think this is important for everyone. You remember that we had this massive ERP changeover last year where we started to build safety stock in the first half of 2024.

So you would have to normalize that out.

Okay. Thank you. And on my second question, when it comes to the whole value versus volume debate, I mean, clearly 70% to 75% utilization rates are not going to change overnight. And when I look at some of these projections for how many chips you need for one gigawatt expansion, we get to maybe half a million, while the smartphone sales are really above the billion. So, you know, what makes you so confident that, even though there will be leading-edge investments, that this will really translate into volume for you? And do you have some sort of visibility there on this repurposing of existing lines? Because it seems to be a pressing issue. Thank you very much.

Yeah, good question. What we also mentioned is that in the leading edge, the utilization rate should be beyond already 90%. And there, if you come with how much chips will be needed for the new data center and a future data center, of course, there is a lot of leading edge also required. And here, the investments will take place going forward. I think that's important to notice, not only at the end, And HBM, it's also very important, but the shortage, not yet the shortage, but the main investments will come with the leading edge. And as I mentioned, there are more than 100, I think it's 125 in construction, and they have to be equipped over the next years. So that makes us really positive. that these investments will come. And also during the Silicon West, there were clear statements that what is now in planning, that it's not enough. It's not yet enough to come to this one trillion by 2030. So there must be these investments coming. Also the hyperscalers, they committed to these investments. So there's a lot of positive signs. It's always challenging in the short term. But in the long run, I think all the vectors show that this is going to happen. Okay. Thank you.

The next question comes from Michael Furth from Frontobel. Please go ahead.

Yes. Hi.

Good morning, gentlemen. Just two questions from my side. The first one is on the global services business.

Can you give some more granularity on whether that is more geared towards spare parts or retrofits, and how do you expect that to develop in the coming two quarters?

And the second question is regarding technology. You briefly mentioned that the energy problem and the need to, you know, to improve technology to bring down energy efficiency. And I was just wondering what specifically VAT can actually contribute to those efforts. Thank you.

Thank you for this question. So coming to the global service, I think the big change and the growth we had in spares and repair and in the retrofit business, it was a big growth. And of course, with utilization rate going up, then also the consumable part, like the gates, is also picking up quite a bit. So that's kind of where we have seen the growth. So your second question is on this. energy efficiency. So this is all around this gate all around story. So this new, you know, since 10, 12 years there was the FinFET transistor now in the market and getting all the node size reduction were made with the FinFET technology. Now this gate all around is get launched and this is also now the first generation coming. We expect that the first products coming to the market next year, 2026, maybe the first smartphones And here, to produce these new chips, there are more than 2,000 steps required. And a lot of them are these leading edge step, like the ALD, ALE, or special edge applications. And here, new tools are required. So the processes are becoming much more complex. So chamber-to-chamber matching is something. They must be faster. more so matching from from one wafer to the other so that's kind of the challenge the industry has they bring in new materials as well and they have to run different temperatures it's not always getting hotter sometimes it's getting much cooler so you're going to the cryo temperature as well so it's a lot in the move from the technology side where vat all of these challenges.

Okay, thank you. And maybe just one word on the outlook for the services business.

Service business is in the long run, of course, set for growth. The more the market, the more kind of our market, addressable market is growing as well. Of course, it's always overlaying about the utilization rate as well. but the service business is also set to outgrow the market as well. Okay, thank you.

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

Yeah, hi. Can you hear me?

Yes.

Yes, thank you for taking my question this morning. My question is about supply and the lead times. I mean, you are indicating that you think that based on what the trends are seen in the industry, things will pick up later next year, particularly maybe by end of Q1 into Q2 or something like that. But how quickly can you react to the change if that happens in terms of your orders and in terms of what customers want you to ship? and do you have to prepare the supply chain for it, and how quickly you can react to any significant change. And the second related question to the supply chain is that when we look at the supply chain and the issues associated with rare earths, et cetera, do you see any issues for you involved with rare earths?

Okay, that's – an interesting question on the supply chain. So certainly VAT we had in the past year, so during COVID when the rain was coming and all the shortages in materials, elastomers, aluminum, there were shortages everywhere. This is solved now. So we came down to lead times to four to eight weeks today, and this is also reflected then in the order pattern from our customers. We have, of course, a capacity, so we invested ahead of the cycle. This was always a message we placed as well. So we have expanded our capacity in Malaysia. We just opened up our Romania factory in June. So we are ready and set for the growth as well. So we have a ramp of capability of around 30% per quarter. This is what we have in our system, and this is also what the market is expecting from us. From the reverse, that's not something that is material to us, fortunately.

Thank you.

The next question comes from . Please go ahead. Yeah, hi there.

Morning. Thank you for taking my question. I have two. I just want to come back to this question around bookings and visibility where I think we're all having a bit of problem kind of squaring the circle. This inventory adjustment, and you talk about bookings inflection and sort of Q1, Q2. I've got a two-part question there. Number one, is there any impact that you are still seeing from the buffer stocks you built when you did the ERP transition? And when you look at the B stocking that you expect, can you give us any color by application? within your dep and etch exposures, just where that might be concentrated, and then add a follow-up. Thank you.

Okay. Thanks for that question. Well, there is no buffer stock anymore from this previous, from last year. So this is sold out, executed on the dep and etch. So As I mentioned, we have consignment agreements with our large customers, and there, of course, we see what is in the pipeline. So it's not always related then to the dashboard edge. I think it's more related to individual customers, and, of course,

Okay, but so this is not concentrated in etch or PVD or some CVD, PE-CVD application. This is across the board, depth and etch, with maybe some concentration by a customer, which for understandable reasons you can't discuss. Is that broadly the right way to think about this?

Yes, yeah. Just think about how the architecture is such a tool. It always needs a vacuum system with a lot of valves to stop down and went and transfer of wafers. And the architecture is kind of similar to a deadwood and etched tool. And this is now even more obvious with the new tools. If you are following that, so in the past there were a clear depth tool, a clear edge tool. Today there is all consolidated in one platform as well. So they have chambers on that edge, another ALD, and they just mix that up at all. So it's to follow and actually on which application and which tool our products will end up.

Okay. All right. And then on factory space, you just talked about Malaysia, you talked about Romania. Just as you go through the next two, maybe three quarters, can you just talk about how you are going to be loading your manufacturing and where the production that you do do, how that's going to be balanced between those facilities and kind of how that will then work as we work through 2026? Many thanks. Thanks.

So far, our Malaysia factory is set up for high-volume manufacturing, especially for the semiconductor business. So with more and more of the leading edge coming in, these qualified products will be produced in Malaysia, and Malaysia is set for growth in the coming quarters. So here we have a record output in Malaysia this year, and this will grow also over the next years. Romania is kind of one of our internal suppliers, and they are delivering especially stainless steel and weldings from Romania to our factory in Switzerland and also through Malaysia. Then it is in Switzerland that we keep a lower volume, high mix, so mainly also for our advanced industrial business and a lot of the legacy. And also use, of course, the expertise here for innovation on completely new products to optimize manufacturing processes. I also think about doing more and more automation going forward in our facility here as well. A good example is our newly launched ALD valve. This will be high volume in the future. Still today, we produce it out of Switzerland. We do here all the qualification, optimization, and the innovation part before we find a new home for the production of this high volume valve.

Very helpful. Thank you very much.

The next question comes from Oliver Wong from Bank of America. Please go ahead.

Hey, good morning, guys. Thanks for taking my question. So in July, late July, the White House released its AI action plan. And one of the things that drew some attention was a comment on plugging loopholes, specifically as it relates to subsystems. I was wondering if you guys could maybe quantify the potential impact on further policy action there. and also on whether you have any contingency plans or any planning around new policies related to that. Thank you.

Yeah, thank you for that question. If somebody has a crystal ball out there, what happens in the next years, please call me afterwards. Certainly hard to say what will happen in the future. So far, all these actions have no impact on our product, So as we work also, of course, we will be compliant whatever will come up. So we are in close contact here also with our Swiss regulators. But so far, our products, our products are not deemed for any sanctions. Thank you.

The last question for today's call comes from Nigel van Boeten from Morgan Stanley. Please go ahead.

Good morning. Just a quick follow-up on sort of the expectations of orders into the second half. We've also certainly picked up on, I think it's one larger OEM that's gone out to suppliers with indications of the strong pickup in the second half. So is that the signal you're referring to as relevant and probably a good proxy for the market, or do you have these indications of a strong pickup from each and every one of your sort of major customers? That would be my first question.

Yeah. Yeah, so the feedback is not only from one, so we talk to all of them, and they see the same pattern in the waiver FAB equipment with their customers and users. So in the end, they need all these edge step and tools, leading edge tools for new FABs, and it's across the customer base that we hear this is going to happen. We always have to differentiate a little bit what the Western way ends up telling us and the Chinese, because China is kind of a different story. They have their own dynamics today, as I mentioned, with gaining momentum for self-sufficiency, trying to increase self-sufficiency rate. So they behave a little bit different, but all the Western world is quite similar.

Got it. Yeah, actually my second question is similar but on China. Considering there's sort of a little bit of uncertainty at least from what I pick up in terms of the memory side, which perhaps some more financial conservatism by the major memory makers, but then also there's the potential for them to go and invest more aggressively. Could you talk to the range of possible outcomes when you sort of see the China market as you stand here today, maybe for 26? I'm imagining it's a bit of a wider range, but can you maybe give us some numbers towards that? That would be helpful. Thanks.

Well, of course, here we have the same numbers as from the market intelligence out there. So China wave equipment certainly was growing quite a bit in the last years. 40% of labor self-equipment ended up in China with quite a high portion coming from the West. So the domestic portion will grow. So my estimate is that it will make high single-digit growth in the next year as well. But I think even more important is the long-term view and this trend that they want to have full self-sufficiency, they have to develop still a few applications they do not have on their soil. And certainly the biggest challenge will be on lithography, but also they have in the metrology and the inspection tools. But here we see a lot of efforts from Chinese unions to overcome these challenges. So it means that it's a very dynamic market. and it's hard to predict where they succeed, where they fail, and how this will end, also what it means to the timeline of their self-sufficiency rate going forward. So you have to be very close to these markets, the investment market, but also the Chinese market, to react very fast when they need something new. So it's hard to predict how it's growing, but in general, wafer-fab recruitment, The sheer number of this 35 to 40 billion in China probably will remain on that level. But as I mentioned before, for V&T, for us, it's important and interesting that the domestic portion of the wave effect is growing. Got it. This is China.

Ladies and gentlemen, that concludes today's question and answer session. I would now like to turn the conference back over to Urs Gartner for any closing remarks.

Yes, so thank you all for attending our call today. I'm looking forward to seeing you again next year in person at latest on March 3rd, 2026 for the presentation of our full year 2025 results. Thank you and have a great day.

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