VAT Group AG (19V.F) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the VAT Q3 2025 Trading Update Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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, sir.

Thank you. Ladies and gentlemen, good morning, and welcome to VAT's Q3 2025 Trading Update Conference Call. With me this morning are CFO, Fabian Chiozza; and Michel Gerber from Investor Relations. After my introductory remarks, we will have our regular Q&A session and the call operator/moderator 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 expectation we shared with you during our Q2 webcast on July 29. For me, the following 6 topics on which I will elaborate in more detail during today's call are important when analyzing VAT's performance over the last 3 months. Our Q3 orders showed the flattish 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 9-month basis, the headwind is still strong. Among our business units, Advanced Industrials and Global Service had a pleasing development, confirming our expectations for these 2 areas, while order activity in the semiconductor business remained muted. The market conditions and our expectations have not changed fundamentally over the last 3 months. The rest of 2025 and at least the first quarter of 2026 is still expected to be muted, while only 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 FX in sales. And we are achieving this without critical disruptions and with short lead times. This 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 EBITDA margin as the softer-than-anticipated semi business and the persisting FX challenges became too big a hurdle to cross. For the EBITDA 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 months numbers before we share with you our expectation going forward. Let's start with the orders. Our third quarter orders amounted to CHF 238 million, 4% lower sequentially and 8% down year-on-year. FX adjusted, the declines would have been substantially less with minus 1% quarter-on-quarter and minus 2% year-on-year. For the 9 months ended in September 2025, we generated over CHF 727 million of orders, down 5% reported, but only down 1% on a constant FX 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 Gate-All-Around or HBM memory were masked by lower wafer fab equipment investment in the more mature or lagging technologies. It is estimated that fab capacity utilization in leading-edge applications have 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 orders, let's now move to the sales numbers. The third quarter group net sales were reported at CHF 258 million, down 9% sequentially as reported and down 6% on a constant FX basis. Year-on-year, however, reported sales increased by 23% and 32% at constant FX. For the first 9 months of 2025, group sales amounted to CHF 815 million, a plus of 24% compared to 2024 and the result of our strong order backlog execution in 2025. On a constant FX basis, the growth would have even been around 30%. However, when adjusting for the negative ERP implementation impact during Q3 2024 of approximately CHF 22 million, the year-on-year increase in sales would have been 12% for the third quarter and 20% for the 9 months 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, a sluggish 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 18% year-on-year. These good results were driven to a large degree by government-funded research projects, but also by coating applications and general industrial -- industrial markets, mainly in China. Scientific instruments markets continue to consume their inventories. While some of the orders, especially in research are project related, this nevertheless 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 CHF 145 million, 22% less 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' demand 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 9% sequentially as fab utilization rates continue to improve, and initiatives by fabs to increase ramp readiness continue. Q3 sales were up 13% sequentially and 57% year-on-year. As mentioned earlier, the improvements were driven by leading-edge fabs where capacity utilization rates were above 90% and increasing. When it came to lagging edge fabs, however, business remained subdued as low utilization rates of between 50% and 70% typically entail minimal investment requirements in consumables and spare parts. Upgrades and retrofits also saw improved results with accelerating momentum towards the end of the 3 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 investments 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 fab equipment spend. Some of the earlier anticipated even higher growth in investment has been offset by a decline in the amount of capital spend in more mature technologies and node sizes, 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, fabs are moving rapidly to build high-bandwidth memory capacity, announcing the partial conversion of existing DRAM capacity but with limited green-fielding at this stage. VAT will only see a larger contribution from HBM once green-field 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 have 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% to 75% utilization rates. Overall, global wafer fab equipment is expected to grow by around 5% overall in 2025, putting it within a range of between USD 105 billion and USD 110 billion and wafer fab equipment is forecast to achieve record levels in 2026 and 2027. As the undisputed market and technology leader in vacuum valves, VAT is uniquely positioned to outpace the anticipated market growth in 2025 and beyond. With its high market share in leading-edge applications, VAT expects to benefit extraordinarily from the upcoming more than 100 new fabs, green-field investments accompanying the ongoing technology shift. In addition, VAT 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 domestic 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 IDMs and the digestion of some of the capacity produced and installed over the last couple of quarters may lead to increased swings in the China business. Overall, while the Chinese wafer fab 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 CHF 70 million to CHF 80 million. As you have noticed, we no longer expect orders in 2025 to exceed the CHF 1.033 billion achieved in 2024. This is mainly due to the substantial FX 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 CHF 225 million to CHF 245 million. Now before turning the call over to the operator for the Q&A, let me share the impressions I got when attending SEMICON West in Phoenix last week. VAT 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 we conducted last week at SEMICON West. The market conviction of the USD 1 trillion semiconductor market by 2030 has not been questioned by any of my contacts. Rather the opposite was the case, as some now expect these numbers to be even higher on the back of AI-related semiconductor needs. A key driver for reaching the USD 1 trillion is the ongoing technological development, which not only is driven by the hunger for even more performance 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 a 10,000x EEP improvement is necessary to power the estimated semiconductors in 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 USD 1 trillion 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 2 of our wafer fab equipment outgrow drivers. Leading-edge technology will continue to see faster growth than the overall wafer fab equipment spend and the overall percentage of vacuum-related investments is set to increase. While the current market conditions remain mixed, I sensed great confidence during my stay at SEMICON West in an 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 operator-assisted Q&A session. [Operator Instructions] With that, I will hand over to the operator, Sarah for the first question.

[Operator Instructions] Our first question comes from Meihan Yang from Goldman Sachs.

I just have two questions. So first of all, on your comment on China, 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?

Yes, as I pointed out, China is a very dynamic market, but it's a 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 wafer fab equipment tool from the Western OEMs. And yes, of course, lithography is critical applications, and they benefited quite a bit in the last years. For us, for VAT, it is even more important how our customers in China are developing and growing, and they are gaining share 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, it would go down. But it's mainly driven then or mainly impacted for the Western OEMs. So the domestic OEMs will grow 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, domestic, the Chinese OEMs will win more share in the overall wafer fab equipment 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 half '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 depo and edge tool. 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 and memory is always -- has always been a good field for VAT in the past. Just remember what happened in 2017, we saw the flash growth. So we've had a big portion in that because our customers, of course, they have big portions 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 investment in memory or logic. In the end, they need deposition and edge tools where we are qualified. Often, we don't exactly know where our products will be used, but any time there is wafer fab equipment and expansions, VAT will benefit.

The next question comes from Sebastian Kuenne from RBC Capital Markets.

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 if you see overall China going down next year, but your 35% direct sales to go up and the business you do indirectly with Western OEMs must be collapsing in that calculation. So maybe can you give us the split a little bit. And 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 would you do to reach the low end of your 30% to 37% margin guidance? And how big the risk is that you may be somewhat below the 30%?

Thank you, Sebastian. So to your first question, so our direct share in China today is about 35%. But of course, as a relative number, it's always depending also on the other. And if the others are growing -- growing faster than the China market, it can be, of course, impacted. But I think, yes, we still think that China share also next year will be around 30%, because the China...

Sorry, my question was not on the -- sorry, 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. The Western OEM delivering to China, right? So we have 35% is our direct business into China, and we estimate that about 10% is additional that goes through our Western OEM into China.

Understood. Okay. But that means the Chinese OEMs are larger than the Western OEMs, the business that the Chinese OEMs do in China is bigger than the Western OEMs in China.

Yes, sir. Definitely.

Okay. Yes. And then on margin, sorry.

Yes. Fabian speaking. So you're right. In the first 6 months, we had headline EBITDA of 29.6%. And with the communicated full year margin now, we expect to slightly boost that up into the second half, whereas you're also right that the operational leverage is certainly not helping. We have 2 key drivers that do help. A, on the personnel expenses, which usually has -- is a seasonal pattern where 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.

Yes. So how big is the risk that you drop below the 30%? Or is there -- are you confident to be above the 30%?

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

The next question comes from Jörn Iffert from UBS.

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 litho share for DRAM or also that machinery for etch and deposition is merging. Is there anything you would have in mind here? To start with the first question, please.

Yes, Jörn. The technology shift is certainly something that is helping VAT quite a bit. It's the opposite. It's not going away. It's more and more going into vacuum, for example, with the advanced packaging as quite a growth driver. Just during SEMICON West, new tools launched and tools also need more vacuum than in the past. The litho share is not increasing. I think there was a kind of a shift in litho in the past because of China buying a lot of litho tools. So the portion of lithography in the last years was higher than what's normally required. This will be balanced out in the years to follow. But also, if you talk about litho, there was a very high share in EUV and I think more will come now going forward as well. This will also help EUV means vacuum-related tools and EUV means tools. So I don't see the adverse that -- movement but still what we communicated also during our Capital Markets Day, more leading edge means also more vacuum-related tools. So this should fuel our story.

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 prices should indicate that really supply is tight, which is not the case.

Excuse me, this is the operator speaking.

Sorry we have a very quick issue here.

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

Yes, exactly. Look, I mean, because the average selling prices, which went up materially for DRAM and NAND would indicate that supply is tight, but there's not enough supply currently. But at the same time, it seems utilization according to your market diligence of these fabs is 70%, 75%, which is not indicating that there's not enough supply. So how do you explain this mismatch currently?

Yes, it's really hard to explain sometimes things what's 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 they -- and if new technology is coming in, they are becoming more and more of single sources in certain technologies, and this might have also an impact on the pricing. But other than that, it's just also, I guess, I have. During semicon, we were less discussing things like that. So for us, a lot of discussions go around is how can we solve the industry or the AI problem or upcoming problem. The power consumption, that's huge and to have a 10,000x 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 node sizes going down and 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 -- in the event I took place at least and less about the DRAM NAND pricing.

The next question comes from Menon Janardan from Jefferies.

I just wanted to ask 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-bill will go above 1. Is that still your expectation for your Q4 orders? And if so, is that sort of coming from Gate-All-Around HBM kind of areas where you talked more positively? And you've said that you're getting signals, which is you had said that previously as well that the industry will start recovering from the second half of 2026. In your discussions in the last, say, 5, 6 weeks, including at SEMICON West. Have you got more confidence that, that trend will come through? And if so, would -- is that mainly a NAND flash driven upside? Or is that more broad-based?

Thank you for these 2 questions. Let's start with the second one. Definitely, we see wafer fab equipment overall is always a very good proxy for VAT, always has been. And as I mentioned, there will be a record year in 2025. And we also expect that also next year will be another record -- not a jump of 20%, but maybe around 5%, 6%, 7-plus percent growth next year. And the shift is very important that we see it's more towards the leading edge where I explained that 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 gradually improvement towards then a record year by end of 2026. So this is the kind of the consensus, and it's not only one customer. I think this was kind of -- everybody sees the development of the business in 2026 like that. And underlying, of course, it's not only this USD 1 trillion story. It's mainly the fabs that are built and they need equipment going forward. To your first question for the very short due on Q4, I think I can confirm that we expect the book-to-bill around 1 for Q4.

And if I might have a small follow-up. I mean, with the 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?

Yes. This is our expectation that orders will come in, in late Q1 than Q2.

Next question comes from Daniel Schafei from Citigroup.

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 your question. So inventory levels with our large customers are well under control. So we have a consignment with most of the large customers. So we have a clear alignment and adjust year 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. So they are coming out with new applications, new tools almost quarterly. And this also means that the inflow in new products is certainly higher than with the Western OEM. And this can -- there is a tendency that, of course, there is higher inventory in China, which is also then 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. This is what I also meant 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 there, 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, but 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 this node sign reduction is not just something I can buy a tool and it works. It's a lot of know-how they have to build up. But yes, they learn fast and reached there.

Okay. 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 give us 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 profit margins is obviously coming from the 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 personnel and operating expenses and b, via higher hedging gains anticipated in the second half than the first half.

The next question comes from Craig Abbott from Kepler Cheuvreux.

Two questions also. First one, you're telling us as before that you're not expecting material impact 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.

Yes. Well, everybody hopes that tariffs, of course, will be changed and go down. This is the expectation. But if not, our U.S. content that stays in U.S. is not that high as you might anticipate. So it was at half year, it was -- it went 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 complement 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. 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 they declined more than would have been implied. So I'm just wondering, was this solely due to FX? Or were there some cancellations?

Yes. It was the first, not the latter. So that is due to FX.

The next question comes from Didier Scemama from Bank of America.

I've got two, if I may. First, high-level question. So we think NAND WFE this year is up 75%. I think that's quite clear from Lam resource 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%. So how do you reconcile those comments you made earlier where fab utilizations are 50% to 70% in NAND. One of your top customers clearly growing 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.

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

Okay. Interesting. And second question on China. I think it was a question that was mentioned earlier, and I'm a bit surprised by what you said. You said China is -- 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 OEMs. Is that right? Did I 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 into -- 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 -- is 35% with Chinese customers.

That's weird because Lam, 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.

And then, of course, there is also a sales portion in other businesses as well.

The next question comes from Martin Jungfleisch from BNP Paribas.

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 -- given your positive comments this morning, is it -- would you say it's more mid- to high-single digits now? That's the first question.

Yes. I can take that question. We do expect roughly the same growth rate also into next year. So there is no change.

Okay. And the second question is really on the Q4 guidance. I mean you expect revenues to be broadly down 10%. If we assume flattish development in ADV and services, I think this would imply semi valves to be down 15% sequentially. Is this somewhat a correct assumption? Or are there some other moving parts in services or ADV as well?

Can you say it again, please?

You're guiding Q4 revenues down 10% broadly, right? This would imply probably semi valves to be down 15% if you assume flattish ADV and services development. Is this a correct assumption? And would you -- or is there some moving parts within services or ADV as well for the fourth quarter?

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, yes.

Okay. Great. And then maybe just a follow-up on the backlog. Would you also expect Q4 to still benefit from backlog? Or is that -- would you consider the backlog now to be more or less normalized?

We are working down the backlog and with the earlier comment that Urs made and expect the book-to-bill of this will then also be replenished accordingly.

The next question comes from Nejc Lavric from Octavian.

On the first one, you mentioned that this weakness could continue or flattish sales going into at least Q1 next year. Now you 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 would 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?

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 CHF 50 million if we go sideways and you have the FX effect, would that be a reasonable assumption?

Year-on-year.

Year-on-year, yes.

And maybe then on my second question. When...

Nejc, Nejc, just to remember, let me just -- 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. 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 1 gigawatt expansion, we get to maybe 0.5 million while the smartphone sales are really above the 1 billion. So 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.

Yes. So a good question here. I think what we also mentioned is that in the leading edge, the utilization rate beyond already 90%. And there, if you come with how much chips will be needed for us and a 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 note is not only that the NAND and HBM. It's also very important, but the shortage not yet the shortage, but many investments will come with the leading edge. And as I mentioned, there are more than 100. I think it's 120 fabs in construction, and they have to be equipped over the next years. So that makes us get really positive that these investments will come. And also during the SEMICON West, there were clear statements that what is now in planning the fabs. It's not enough. It's not yet enough to come to this USD 1 trillion by 2030. So there must be this investment should come in. 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.

The next question comes from Michael Foeth from Vontobel.

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 retrofit? And how do you expect that to develop in the coming 2 quarters? And the second question is regarding technology. You briefly mentioned that the energy problem and the need to improve technology to bring down energy efficiency. And I was just wondering what specifically VAT can actually contribute to those efforts?

Thank you for these questions. So coming to the Global Service. I think the big change in the growth we had in spares and repair and in the retrofit business, it was the big growth. And of course, with utilization rates going up then also the consumable part like the gate is also picking up quite a bit. So that's kind of where we have seen the growth. To your second question on this energy efficiency. So this is all around this Gate-All-Around story or this -- 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 come into the market next year, 2026, maybe in the first smartphones. And here, to produce these new chips, there are more than 2,000 steps required. And a lot of them are this 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, chamber matching is something they must be faster, more matching from one wafer to the other. So that's kind of the challenge the industry has. They bring in new materials as well. They have to run different temperatures. Not always getting hotter, sometimes it's getting much cooler. So going to the cryo temperature as well. So it's a lot in the move from the technology side where VAT as a component and subsystem supplier supports the industry to overcome all these challenges.

Okay. And maybe just 1 word on the outlook for the services business.

Our service business is in the long run, of course, set for growth, the more valves are in the market, the more kind of our market -- the 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.

The next question comes from Sandeep Deshpande from JPMorgan.

Can you hear me?

Yes.

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 are you -- 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 supply chain. So certainly VAT we had in the years -- in the past year. So during COVID and the ramp was coming and all the shortages in material elastomers aluminum, there were shortages everywhere. This is solved now. So we came down to lead times to 4 to 8 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-up 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 rare earth, now that's not something that is material to us. So yes, fortunately.

The next question comes from Timm Schulze-Melander from Rothschild & Co Redburn.

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. Can you -- this inventory adjustment and you talk about bookings inflection in sort of Q1, Q2, I've got a 2-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 destocking 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 I had a follow-up.

Okay. Thanks for that question, Timm. Well, there is no buffer stock anymore from this period 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 dep and edge. I think it's more related to individual customers. And of course, I cannot talk about that in more detail.

Okay. But so this is not by -- this is not concentrated in etch or PVD or some CVD, PECVD application. This is across the board, dep 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. Yes. Just thinking about how the architecture of such a tool, it always needs a vacuum system with a lot of valves to stop down and when the transfer of wafers, the architecture is kind of similar to a depo and edge 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 dep 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 mixed that up at all. So to follow then actually on which application and which tool our products will end up.

Okay. All right. And then on the factory space, you just talked about Malaysia, you talked about Romania. Just as you go through the next 2, maybe 3 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?

So far, our Malaysia factory is set up for high-volume manufacturing, especially for the semiconductor business. So with more and more the leading edge coming in, these qualified products will be produced in Malaysia and Malaysia is set for growth in the coming quarters. Also 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 supplier and they are delivering, especially stainless steel and weldings out of Romania to our factory in Switzerland and also from Malaysia. Then it is in Switzerland. We keep a lower volume, high mix portfolio, so mainly also for our Advanced Industrials business and a lot of the legacy and also use, of course, the expertise here to -- 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. For example, a good example is our newly launched ALD valve. This will be a 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.

The next question comes from Oliver Wong from Bank of America.

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're -- whether you have any contingency plans or any planning around new policies related to that?

Yes. Thank you for that question. 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 has no impact on our products. So -- and we work also, of course, we will be compliant whatever will come up. So we are in close contact here also with our Swedish regulators. But so far, our products, valve products are not deemed for any sanctions.

The last question for today's call comes from Nigel van Putten from Morgan Stanley.

Just a quick follow-up on sort of the expectations of orders into the second half. We've also certainly picked up, I think it's 1 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 will be my first question.

Yes. So the feedback is not only from one. So we talk to all of them and they see the same pattern in the wafer fab equipment and with their customers and the end users. So in the end, they need all this edge, dep and tools, leading-edge tools for the 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 OEMs are telling us and the Chinese because China is kind of a different story. They have their own dynamics today, as I mentioned, with any momentum for self-sufficiency, try to increase self-sufficiency rate. So they have a little bit different, but all the Western world is quite similar.

Got it. Yes. Actually, my second question was 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 a 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.

Of course here, we have the same numbers from the market intelligence what's out there. So China wafer equipment certainly was growing quite a bit in the last years up to 40% of wafer fab 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 a mid-high-single-digit growth in the next year as well. I think even more important is that 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 OEMs to overcome these challenges. So this means that it's a very dynamic market, and it's hard to predict where they succeed and where they fail and how this will then also what it means to the time line of their self-sufficiency rate going forward. So we have to be very close to these markets in the Western 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 equipment, the sheer number of this 35 billion to 40 billion in China probably will remain on that level. But as I mentioned before, for VAT, for us, it's important and interesting that the domestic portion of the wafer fab equipment is growing in China.

Ladies and gentlemen, that concludes today's question-and-answer session. I would now like to turn the conference back over to Urs Gantner 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 3, 2026 for the presentation of our full year 2025 results. Thank you, and have a great day.

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