VAT Group AG (VACN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the VAT Full Year Results 2020 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Mr. Mike Allison, CEO of VAT. Please go ahead, sir.

Yes. Good morning, ladies and gentlemen, and thank you for joining our webcast on our Q4 and full year 2020 results. Due to the persisting COVID situation, we can't meet you in person. But we hope this situation is gradually normalizing and that we can get together on our half year results, which is in August 5 later this year. We have pre-released our high-level numbers on January 14. And you'll see that the final numbers we show today are well in line with these preliminary and unaudited numbers. Today, I'm joined on the call with our Head of Communications and Investor Relations, Michel Gerber, who will do the second half of the presentation. And I've also got our COO, Thomas Berden. I can also confirm this morning that our new CFO, Fabian Chiozza, will start with his first week in April. So let's go to the agenda. We're going to cover 3 parts. I'll start with the highlights of Q4 and full year results. And then Michel will go through the financials in more detail. I'll then conclude with a look ahead, followed by the usual moderated Q&A session. Okay. Let's go to Slide 3 from our presentation. So VAT finished the year 2020 with very strong business execution in the fourth quarter, not only capturing the ongoing market recovery in our semiconductor business, but also by achieving a record quarter in our Global Service segment. Order intake recovered strongly from the lower levels we saw during Q3 2020, and all business segments reported a sequential double-digit increase in order intake. This strong business execution in the fourth quarter led to record full year numbers for EBITDA, EBITDA margin and free cash flow. These records were all achieved despite a strong FX headwind. Adjusting the sales number for the negative FX development in 2020, another record sales level would have been achieved as well. The swift implementation of protective measures from our employees, suppliers and customers to combat the COVID-19 pandemic allowed us to operate all our production facilities without interruptions with the exception for a very short period in the spring of last year when our Penang facility in Malaysia had to shut down for about 2 weeks. The business continuity we showed to all our customers is a really important success factor for VAT, and we'll go on to leverage that in our business development. A big thank you goes out to our fully engaged workforce who was dealing with the many challenges and uncertainties during the pandemic and dealt with it in a fantastic way with huge additional efforts. The market assumptions for 2021 remain positive, and we expect the COVID-19 pandemic to fade out over the year, allowing our general vacuum business to get back to strong growth, while the semiconductor-related activities are expected to continue the positive trend and fuel growth for both valve and service businesses. Display is expected to remain negative during 2021, but we see strong growth in Solar. As a result, our sales, EBITDA, EBITDA margin, free cash flow and net income are all expected to be higher in 2021 than in 2020. Last but not least, we continue to increase our market share across all our segments from 49% to 55%, a really fantastic development and which I'll comment on later. Moving now on to Slide 4. It gives you an overview of the full year key figures and the segment breakdown. Valves, our largest segment, accounted for about 80% of our sales, up about 25% year-on-year based on the strength of the semiconductor equipment market. The EBITDA margin on Valves increased by 4.6 percentage points to 32.3%. Global Service sales achieved a record level in 2020 as the upgrade business that restarted after the first half of the constraints we had with the pandemic, that continued to be strong and grew in the region of 24% for the whole year. The service full year EBITDA margin remained flat, albeit at a high level, as investments in the sales channel and new product development offset gains from higher volumes. Industry remains the smallest piece of the company and mainly serves the automotive industry with precision membranes used in the manufacture of fuel injection systems. Net sales were down 17% in 2020. However, the EBITDA margin increased about 6 percentage points to 16.4%. Starting in Q1 2021, VAT will integrate the activities of the Industry segment into our general vacuum business unit and report it within the Valve segment. For the group, orders, sales, EBITDA and EBITDA margin, free cash flow were substantially up in 2020. The record free cash flow of CHF 147 million also allowed the Board of Directors to propose to the AGM of May 18, 2021, an increase of the dividend per share of 12.5% to CHF 4.5 per share. This equals a payout ratio of 94% of free cash flow to equity and is in line with VAT's dividend policy and a sign of our confidence in the positive market development in 2021. Moving to Slide 5. Here, you will see the split of our revenues into different market segments. We highlighted this chart at our recent Capital Markets Day, and you can see about 70% of our business is generated in semiconductors. With the Display and Solar and Advanced Industrial business accounting for 11% and 13%, respectively. From a geography point of view, more than half of our products and services end up in Asia, about 1/3 in the U.S. and the rest in Europe, reflecting the global semiconductor footprint. Turning now to Chart 6 and coming back to our market share gains in 2020. As I mentioned earlier, we continued to grow our market share across all industries by 6 percentage points from 49% to 55%. And our market share in semiconductor reached 70% for the first time. There are 4 key reasons for the success in this market share growth. First of all, we are the clear technology leader in an industry where rapid innovation is absolutely critical to success. Second, we continue to invest heavily in this technology leadership and a record number of new spec wins in 2020 will allow us to grow our market share further. Third, we have a long track record of working closely with our customers to develop the products they need, and to deliver these when they need them. We're a reliable partner and a capital-intensive business where there is little room for error and the need for very fast, rapid product development. Last but not least, our increasingly global footprint and value chain makes us faster and more flexible and a more reliable supplier. I believe our performance through the COVID-19 pandemic shows that we continue to deliver even in difficult and unpredictable market environments. Moving to Slide 7, you'll see the market share versus the competition. And by now, VAT is about 10x larger than our next competitor. Mainly the result of our ability to capture more of the business that historically has been embedded within some of our OEM customers, and this is shown in the other category. We expect this trend to continue over the next years and are confident to grow our position further. What's also impressive from these numbers is the focus that we have in every segment and against every competitor. Our sales and applications channel is working in an increasingly efficient level to capture the bulk of all new opportunities. And I think we're all very proud here a VAT of the gains we've made in our market share. Okay. Slide 8. Before turning to the more detailed financial slide, let me quickly summarize the 2020 market development, putting VAT's performance into perspective. In semiconductors, the recovery in wafer fab equipment spend continued. Wafer fab equipment in U.S. dollars grew about 18% to roughly $63 billion. This growth was led initially by foundry and logic, but continued into NAND and DRAM and other sectors in the second half of 2020. Technology advances continued with investments into smaller sub 7-nanometer node sizes, and we saw the ramp of investment into 5 nanometers where VAT's products demonstrate the highest value to our customers. In Display, a fading LCD CapEx could not be offset by somewhat higher investments in OLED for flexible screens and mobile displays. We also saw technology challenges limit the penetration of large-format OLEDs into the market, and that led to the overall negative environment in 2020 for Display. Solar did show a market recovery, led by the investments in green energy. PERC remains the major technology. However, heterojunction continued to make advances by the end of the year. In the general vacuum segment, the R&D market made a solid recovery in the second half, where we saw record order intake in Korea, Japan and the United States. Other segments in general vacuum were mixed. Growth prospects continued in a variety of industrial applications, such as medical equipment and an increasing demand for large battery production for electrical vehicles. This concludes my initial remarks. And I'd now like to hand over to Michel, who'll give you a more detailed look at our financials. Michel?

Thanks, Mike. Welcome all of you and who are joining us today on this webcast. So let's start on Slide 10 with a look at the key financials. Mike has already touched on the good top line and EBITDA development, and I'll show you a bit more detail on that in a moment. A highlight in 2020 was clearly the free cash flow generation, reaching a new record level of CHF 147 million, and this despite a substantially higher CapEx bill and investments in trade working capital. This achievement on the free cash flow side, on the cash flow side in general, allowed VAT to reduce its leverage, which at year-end stood at 0.6x compared to 0.9x a year earlier. These 2 aspects, the lower leverage and the good free cash flow generation, allowed the Board of Directors to propose to the AGM of May 18, a 12.5% increase in the dividend to CHF 4.50 per registered share from CHF 4 the year earlier. On Chart #11, we show the development of orders in the fourth quarter and full year, which reflects the strong VAT business execution Mike mentioned earlier, in addition to the market recovery in the semiconductor that continued in the fourth quarter. Q4 orders are up 34% versus the Q3 2020 order level and 19% higher than in the fourth quarter of 2019. The full year order backlog was up 17% compared to the end of September 2020 and 27% higher than a year ago. This development supports our positive expectations going into 2021. Turning to Chart 12. Here, we can see the development of orders and sales over the last cycle. We reached the bottom of the cycle in the first half of 2019 and since then we've seen a steady recovery trend. As you can see, the book-to-bill ratio has been at or above 1x since Q1 2019 with the exception of Q3 2020, where we had a knock-on effect from certain preorders in the first half of 2020, coupled with substantial sales growth in the quarter. In Q4 2020, the book-to-bill ratio recovered to 1.12x and the full year book-to-bill stood at 1.05x. Chart 13 shows the development of net sales and EBITDA. Full year sales are up 21%, which was a major driver of an EBITDA margin expansion of 4.4 percentage points on improved absorption of fixed cost. At the same time, we were able to capture additional margin gains, thanks to the efficiency and cost reduction programs we have been running for the last 2 years. Making internal processes faster and more efficient means we can adapt to changing market conditions more quickly, avoiding the higher costs traditionally associated with rapid adjustments of production volumes. This is allowing us to make a very substantial investment in our future. For example, the implementation of a new ERP system, increases in R&D spending and even more critical to make the people investment in Malaysia without negatively impacting EBITDA. For VAT, perfect execution of the Malaysia ramp with high-quality and high predictability is essential in making this transition successful. The record EBITDA margin of 31.4% is even more impressive when taking into account an FX headwind that affected the margin by about 1.2 percentage points in the full year 2020. On Chart #14, you see the sequential EBITDA margin development since H1 2018. As you can see, we have constantly improved our EBITDA margin since its cyclical trough in 2019. During the second half of 2020, VAT recorded an EBITDA margin of 32.8%. And even the 31.4% shown for the full year of 2020 would have been close to the 33% target communicated at the time of the IPO if adjusted for the FX headwind. With this development, we are very confident about our 30% to 35%, and for the EBIT margin between 20% and 25% that we communicated to you at our recent Capital Markets Day. Slide #15. When talking about value creation, we closely look at the return on invested capital and the cash return on invested capital. With our prudent approach to CapEx and our capital-light model, we balance the invested capital with the current and the future expected earnings. With 70% of our material costs being purchased externally, we can maintain the invested capital at the low level. This allows us to achieve returns on invested capital and cash flow returns on invested capital that are substantially above our weighted average cost of capital, which we placed at 10.9%. This is the same level that the external auditors used during their 2020 impairment testing. Let's now turn to some of the other financials on Chart 16. Depreciation and amortization are down in 2020, reflecting the reduced CapEx in 2019 and a special charge we took in 2019 in Switzerland for some obsolete machinery. The combination of lower depreciation and amortization with higher EBITDA means EBIT is up more than 63% in 2020. Net finance cost amounted to CHF 16 million in 2020, about twice as much as a year earlier, reflecting foreign exchange losses on the reporting of loans and bank balances. The effective tax rate for 2020 was 17% compared to 25% a year earlier when we were required to book additional deferred tax liabilities following the introduction of new tax regulations in Switzerland. The effective tax rate was also positively affected by some recognized loss carryforwards outside of Switzerland. So taking that all together, net income for the year 2020 increased by 78% to CHF 134 million. On Slide #17, you see the cash flow generation. As I said at the beginning of my remarks, free cash flow reached another record level in 2020 despite higher CapEx of CHF 26 million compared to the CHF 18 million a year earlier and additional investments in trade working capital to support growth. This trade working capital increased by about 34% and this now represents 24% of net sales and above our medium-term target level of 20% of sales. At 68%, the cash conversion rate, measured as free cash flow as a percentage of EBITDA was slightly above the range of 60% to 65% communicated at our Capital Markets Day for the period between 2020 to 2025. Slide #18. When it comes to leverage on Chart 18, there's a noticeable improvement in the net debt compared with 2019. While the gross debt increased towards the end, our cash position more than offset this. And as a result, CHF 128 million net debt was 11% lower than at the end of 2019. With this, we have very sound liquidity position available, which gives us additional financial flexibility during uncertain times. Our leverage of 0.6x net debt-to-EBITDA was at the lowest level since the IPO in 2016 and below the target level of onetime average over the year. Overall, we have a strong financial position to support our aim of generating sustainable, profitable growth going forward. When summarizing the 2020 financial performance, we state that VAT captured the full potential of the cyclical market recovery, increasing its market share further. VAT achieved record levels in EBITDA, EBITDA margin, free cash flow despite COVID-19 and FX headwinds as well as increased spending in innovation and technology, and therefore, is well positioned for future growth. VAT can propose a dividend increase of CHF 0.5 to CHF 4.5 per share, representing the 12% increase I mentioned earlier on the payout ratio of 94% of free cash flow through equity. For 2021, the following financial priorities have been set. Continue with the ERP introduction that started well during the first factory introduction in Romania in 2020, remain cost and productivity improvement focused and monitor the development of trade working capital closely and keep a disciplined CapEx approach. This concludes my financial remarks, and I now like to hand back to Mike.

Okay. Thank you, Michel. And I'll now look at the 2021 priorities, the market expectations and outlook for the rest of the year. So turning to Slide 21. Some of you may remember this slide. We showed it during our Capital Market Day last December. And it summarizes our midterm growth drivers. These drivers are accelerated and will push our expected 2021 performance higher. We will now likely see a record semiconductor CapEx spend, which could be as high as 70 billion this year, which is a first in the industry, and I think a really exciting milestone for us. The strong growth in the technology megatrends are transitioning the spending from a predominantly consumer base spend to technology infrastructure spend and also across other sectors like IoT. I think we'll look back on this COVID period and see it as being the real catalyst for the digital transformation of society and of industry. We're also seeing 5G continue to gather pace in 2021 and driving a higher demand for logic and memory chips into high-end handsets. Artificial intelligence and big data are also driving all the chip application sectors at higher rates. We've never seen such high demand in global chip demand from such a diverse set of end markets, and this gives us great confidence in the future. You've also seen the supply challenge in the automotive sector recently, which also means we will see increasing investment levels in the larger or more mature design rule nodes. As you add all these factors to the overall recovery in the world economies post-COVID, this should allow the chip sector to continue a positive growth trajectory into 2022. This strong market growth is cascading down to the wafer fab equipment markets and then on to VAT. The first growth dimension is the chip market, which we expect to grow at 8% CAGR over the next 5 years to 643 billion and then onto 1 trillion by the end of the decade. This translates into very strong wafer fab equipment CapEx growth, which is the second dimension of growth. And you'll see here on the center chart, the wafer fab equipment should grow at least 6% in U.S. dollars with the strongest growth coming at 7 nanometers and below, which is where VAT have the biggest competitive advantage. The sooner these new OEM platforms come to market, the quicker our share position will accelerate. The third dimension of growth is the increased use of vacuum steps. We see this accelerating with new processes such as EUV and ALD as well as more traditional etch and deposition steps. It's impossible to quantify the exact benefit to VAT, but with these 3 dimensions will allow us to outgrow wafer fab equipment by a few points, which we demonstrated already in 2020. Slide 22 talks about our investment and innovation. To capture these growth opportunities, VAT will continue to invest heavily in R&D and innovation. Our focus will be on the leading-edge technologies. For example, node sizes at 3 nanometer and beyond. In 2020, we invested CHF 41 million in R&D, representing 6% of our sales, and we increased the number of R&D personnel with a focus on new product adjacencies. This is going well, and we're on track to meet our midterm targets. Patent protection of our innovation is key for our future success, and we take this very seriously. We'll see an increase in patent applications during 2021. These R&D investments are resulting in a record number of new specification wins, which you can see here in the blue bars, and we surpassed 100 for the first time. This is a great leading indicator of our future success. And with these spec wins, we ensure that future production platforms are equipped with VAT valves, and our new adjacent products and our share position will continue to grow just as you saw in 2020. Moving on to Slide 23, and it's a look into 2021 and what's ahead. Obviously, with COVID pandemic still very present in our lives, we won't give a quantitative full year guidance at this point. However, these are the estimates we see in the market segment at this time. In semiconductor, we expect to see 10% to 15% growth, driven mostly by higher investments in foundry and memory. And these are driven by the transition to smaller node sizes of 7 nanometers and below. We will grow above this level as our share gains and adjacencies take hold. In services, we expect the market to grow in the region of 4% to 6% based on strength across all subsegments. As a result of our fast-growing initiatives, we expect to grow significantly faster than the market and expect our growth to be above 10% in 2021. In general vacuum, we see a gradual market recovery and expect 3% to 4% market growth. Once again, our share gains and movement into new products and sectors should secure a growth level above 10%. Display will have a challenging year as we come off the LCD peak, and we expect a minus 10% to minus 15% market reduction with only the mobile OLED sector driving investments. We have seen in recent months, the panel makers returning to a more profitable business situation, driven by increasing large set sales. And this is a result of the stay at home COVID situation. So there is some hope that we may see investments picking up in the second half of 2021, but it still will be likely a negative year. Some OEMs have reported flat to slightly down sales in 2021. So the situation can change quickly. We will work hard to offset the reduction with share gains, but we're currently still planning on a lower sales year. In Solar, we expect approximately 10% to 15% market growth. The majority of this is in China. And our share gains have been very promising there in the last 12 months, as you could see from the market share data earlier. Overall, we're very optimistic about the year ahead, and we'll continue to update you throughout the year. Moving on to Slide 24. Here you can see the latest detailed growth rates experienced in 2020 and the current estimates for 2021 from the various market research firms. In semiconductor, we expect CapEx growth to be strong across all chip segments for DRAM, NAND, microprocessors and foundry, all showing gains in wafer fab equipment growth. The legacy notes supporting automotive and IoT should also show strong growth as the supply chain works out some of the delivery challenges. So Slide #25, what does this mean for VAT for this year? Overall, we look forward to a positive business development in 2021. Continued growth expected primarily driven by ongoing strength in the semiconductor industry. Uncertainty from COVID pandemic remains, but is expected to fade over the year. Group net sales, EBITDA, EBITDA margin and net income expected to grow versus 2020. CapEx planned is around CHF 40 million. Free cash flow expected to be higher despite growth investments into working capital. For the first quarter, we maintained our sales guidance of between CHF 180 million to CHF 190 million. So far, 2021 has started on a strong note, especially in orders where we have seen a very noticeable acceleration in the first 2 months of the year with higher levels of activities not only on a year-on-year basis, but also compared with the fourth quarter of 2020. This already bodes well for the second quarter of 2021. And we'll update you at our next presentation in April on that development. With that, I will conclude the formal part of the presentation, and turn over to question-and-answer session. Thank you.

Thank you, Mike. This is Michel. We now start the Q&A session. And this time, you have the possibility to either ask your question via the operator over the phone or send your question directly to me via the webcast function, and I will read them out. [Operator Instructions] With that, I'd like to ask the operator for the first questions from the phone.

[Operator Instructions] The first question comes from Sandeep Deshpande from JPMorgan.

Thanks for letting me on. I have 2 questions. I mean, firstly, in terms of the year, you're giving a positive outlook into the year, but you're not giving us guidance into how your revenue or EBITDA will perform. In the past when there were not downturns, you would provide this sort of guidance. Maybe you can help us understand what has changed at this point which is why you're not giving this numerical guidance or whether you will give it later in the year when visibility improves? And then my second question is regarding the CapEx and the growth. Is it that with the CapEx that you're going to be adding capacity in your Malaysian facility or somewhere else? And maybe you can help us understand what that capacity that you achieved that is -- is there a revenue -- specific revenue capacity you achieve? Or is this just tooling or whatever for particular technologies that you don't have?

Okay. Thank you. The first question regarding full year guidance. I think we've now demonstrated over the last 2 years a very strong track record and given quarterly guidance. There's a lot of variability in what can happen within the next 12 months. There's various growth estimates out in semiconductors, some are 10%, some are 20%. Display, I've seen Display forecast of 0, I've seen minus 15%. So there's a lot of variability still in trying to determine a full year forecast, that's why we've gone with an outlook on what we see today on the likely levels of investment across the different sectors. There's also factors like FX included. Last year, as you know, we saw a pretty substantial change in FX. So I think we've decided that we'll continue on a quarterly basis, but continue to give as accurate an outlook as we can for the markets we play in. The second question around CapEx and growth. Yes, this year, we will grow our output in Malaysia by about 70%. We'll get up to about CHF 170 million in output. So obviously, there's some CapEx required for that, some new technologies we're bringing in there. We're also spending more this year in automation. One of the lessons learned from the pandemic is the benefits of automation, things like automating our machine tools, automated logistics systems. These all help to deal with both the flexibility requirements of the industry and also when you have situations such as COVID. So some spending will go into automation. We continue to spend in our ERP system. We had the very first deployment of that in Romania in 2020, and we'll continue now into 2021 with the rollout in our other sites. I wouldn't say there's any massive single investment that I would highlight, just a lot of reequipping of modern tools, automated tools and ensuring we have the required upside potential for the market. Some of the estimates for CapEx spend recently have gone as high as 20%. So we've got to make sure we have the headroom in place to create that level of output. So we want to stay ahead of the industry with our investments. And the moment that looks like about CHF 40 million.

The next question comes from Daniel Regli from Octavian.

First question is about your sales outlook into 2021. Do you -- or can you give me kind of an indication what do you expect in terms of seasonality or growth in 2021 being rather front or back-end loaded? And can you maybe revisit your comments about your growth relative to the 10% to 15% expected investment growth in wafer fab equipment? And then a second question is on the market structure. Obviously, you have gained quite significant market shares during 2020. Was this partly driven by, let's say, COVID-related supply chain disruptions at some of your competitors? Or -- and maybe following this, would you expect this to kind of normalize during 2021? Or was this kind of sustainable market share gains?

Okay. Thank you very much. The sales outlook for 2021, when I kind of take an aggregate view over our customer base, the first half -- it looked like it was going to be first half loaded because we're seeing quite an increase, especially in Q2. We didn't have as much visibility at just -- at the end of the year into the second half of 2021. I think in the last few weeks what we've seen is an improving view of the second half of 2021. And we're starting to see that coming up to about the same level as the first half. So at this point, I would say we should see a fairly flat year at a high level, obviously, a high quarterly output level. But maybe a slight improvement in the second half. I think that depends a lot on the final memory numbers that we see within the market. But overall, it looks like the second half is beginning to fill up and a very positive outlook is developing there. As we said at our Capital Markets Day, our growth, we should be a couple of points above the final wafer fab CapEx numbers, again, driven by our market share and also driven by some of the adjacencies we're developing, which is going pretty well. Our market share trajectory should continue. We have a very, very systematic process in gaining share as you see when looking at our historical spec wins and the increases we're doing on a year-by-year basis. And these spec wins take 1 to 2, sometimes 3 years to get into high-volume production. So we are pretty confident from the gains we made in '18, '19 and '20 that, that will continue the momentum of share gain over the next few years. Now in some sectors, like general vacuum and solar, I think we did make some share gains due to our superior supply chain and manufacturing capability. We saw, for example, in China, we gained some solar market share solely on our ability to supply at that volume level. So I think the investments we've made in our production footprint are also enabling the share gain opportunities that are out there. So -- but I think in semiconductor, it's predominantly a machine that we've created to systematically grow our share across all the different semiconductor segments. And that really is a driving force for VAT into the future.

The next question comes from Sebastian Kuenne from RBC.

Sebastian Kuenne here. Two questions here. First of all, in the leading edge side of the semiconductor market, semiconductor equipment, you put the transfer valves and control valves and so on. How many competitors do you now have inside that equipment? Or is this now approaching 100%? Second question would be with this fast expansion that you currently see, what are the risks that you see in terms of suppliers keeping pace, raw material prices going up and so on. What risks do you currently address that allow you then to grow at a higher rate? These would be my first 2 questions.

Yes. Yes. Leading edge, we're doing very well. I think we communicated that at the Capital Markets Day. We see our spec wins gaining pace on all the latest industry platforms. Our control valve position is very strong. I never want to say 100%, but we have a very, very high percentage...

Above 90%?

Probably in that range. Transfer valves, we're gaining a lot of share in transfer valves, again, as we pointed out in the Capital Markets Day, and that share is growing from probably mid-60s. We had in the previous generations, up towards 70%, 80%. So again, it's the reflection of the higher particle performance specs, the precision and also the integration required into the advanced modules that we're supplying. So that leading edge position is very favorable for us. The second question around risks. Yes, we are seeing a tightness in the supply chain without a doubt, and that's a broad range of challenges from material shortages to electronic components. I wouldn't say there's one area that we are in crisis on, but it's just a constant fight to keep an increasing demand situation at bay. We've got a very strong purchasing team here. We've got some great material contracts in place. We've also got some nice hedging in place, thankfully against things like aluminum prices, which have increased dramatically in the last year. Aluminum is in quite short supply. A lot of aluminum smelters around the world shut down with the aviation industry at a standstill. And that isn't coming on fast enough. So we've got adequate supply in the short term, and we're working with those manufacturers to ensure that they start ramping again. Electronic components is probably the most unpredictable one. Shortages appear without much notice. So again, we're taking appropriate actions in inventory, stocking up at a higher level in some of the critical components. I think Thomas and the operations team are working very hard to work on various upside scenarios for the company. Our business, it's so important to focus on the scenario planning. You've got to always have a plus-20%, plus-30% upside plan, and that's what we do on a daily basis. So I think at the moment, we're doing pretty well. We've got good visibility into the end of this quarter and into Q2. And we're now starting to look at the second half of the year and ensure that we put appropriate measures in place to harness any upside if it should come.

The next question comes from Jörn Iffert from UBS.

And the first one would be, please, what are you hearing with your industry context regarding new fab builds? I'm not speaking about upgrades with an existing fab, but with the new fab builds over the next 3 to 4 years. What is your view here? And the second question would be, please, on the subsidies, we are seeing for the semi sector in various continents. Do you think this will be just a reallocation of existing CapEx plans? And if so, is this neutral for you? Or would you say it's better when more CapEx is spent in Asia versus the U.S. for any reason?

Okay. The first one, new fab builds. Yes, I think you've seen the CapEx numbers and how quickly the CapEx numbers can change. I mean we gave at our Capital Markets Day, a fairly, I'd say, balanced view of CapEx over the next 3 to 5 years and talked about an $80 billion CapEx. We could potentially see $70 billion this year already. So the situation changes pretty rapidly in our industry. And I think, as I mentioned, the shortages across the board means we're going to see an increasing amount of CapEx spend, not just at the leading edge, but also at the, let's call, the more mature technologies. There's a lot of wafer fab builds happening. We don't follow the individual builds as closely as, say, an equipment maker would. We follow much closer the equipment makers' outlook from a revenue perspective. But I think last I saw, there's something like 13 to 15 major new fab builds out there. And I think that will continue, but the expansion of existing ones will continue to happen as well, especially in the mature technologies. And the challenging thing there is going to be -- there's already -- most of these fabs have benefited from the IoT and automotive sectors growing and they're pretty much at full capacity. So there's going to be a lot of interesting decisions on what these mid-level technology players do. Do they try to extend existing fabs? Or do they build new ones? So we could see some pretty substantial CapEx numbers coming in from the mid-tier. I think also a big part of TSMC's 28 billion is getting pushed into this mid-sector, so it's not all for the leading edge technologies. Subsidies, that's a tough question. I hope it doesn't add to too much overcapacity. That can happen when you see too much government intervention with subsidies. One of the OEMs last week talked about a regionalization of some of the capacity and maybe more investments in the U.S. I think that's likely. We probably will see people like TSMC moving into the U.S., maybe further investments in the U.S. There's been rumors of Samsung building additional footprint in the U.S. So I think some of that will happen, but the spend will predominantly remain in Asia. In the next 5 years, we're seeing about 10 billion going into China, now in a fairly sustained level. For us, it doesn't really make a lot of difference where that spend happens. The technology, say, for example, a TSMC fab, the equipment is predetermined in Taiwan for that technology node, so where they build it really is irrelevant to us. It may have a slight benefit being in U.S. and Europe in the aftermarket. We probably harness a higher percent of market share in the aftermarket. But other than that, the actual product portfolio wouldn't change at all.

Okay, thank you. So next question is from the webcast. It's [indiscernible] and he would like to know how our capacity situation is, what our full production capacity is and whether we need to accelerate some investments in real capacity. And his second question is about recruiting new qualified employees. How difficult this is and how we see wage inflation, for example, in Malaysia, and in the countries where we operate.

Capacity for us is in a pretty good place. I mean, we have the buildings and machine tool footprint to take us up beyond 1 billion. So we're still operating in a pretty good position right now with plenty of headroom. So the main challenge for us is material supply and people supply. And we focus a lot of our efforts in simplifying the production processes. So when we do hire people, we can get the time to contribution down to a minimal possible time. And we have to ramp pretty quickly. I mean, between the start of Q1 from January through to March, we need about a 20 million change in output between the start of the quarter and the end of the quarter. So the flexibility we have is pretty high, but it does require very fast reaction and hiring of employees. So I think overall, capacity, we're in a good place at the moment. We won't have to make any further decisions on new factories until maybe 2023. In terms of new employees, we now have the benefit of ramping Malaysia and Haag, so it simplifies things compared to the previous ramps. A big percent of the growth this year, as I've already said, comes from Malaysia. We will add about 70 million of output this year alone in Malaysia. So that takes a little bit of the burden off our facility here in Switzerland. The one caveat to that is with an increasing amount of spend going to the mature technologies, we may see some of our legacy products, which are predominantly in Switzerland, growing at a faster rate. And in fact, we're seeing a little bit of that now with the increase in Q1 and first half of Q2 coming in Switzerland. So we are ramping pretty heavily here in Switzerland. Wage inflation, I would say, is pretty much what you would expect to see anywhere in the world. Malaysia tends to have higher inflation, obviously, than Switzerland. But I wouldn't say it's abnormal compared to the industry at large. And I think we're dealing with that as best we can. But we haven't had any major issues in hiring people today. Some of the unemployment created with COVID, especially here in Switzerland as men -- we've had pretty good access to bring people in quickly, and we're on track for a ramp.

The next question from the phone comes from Michael Foeth from Vontobel.

Michael, I was just wondering if you can remind us in terms of your growth plans step-by-step. How your expansion into adjacent applications will work over the next 5 years, and how that might impact 2021? I guess it's probably ramping rather slow. And then I just have a financial question on -- regarding your tax rate, which was down what your expectation is for 2021. If there is any guidance you can give us on that, please?

Okay. Adjacencies, yes, we highlighted in the Capital Markets Day that by -- over the next 5 years we would add about 150 million in sales in adjacencies. And that was predominantly coming from our motion components, our advanced modules and also some of the flow valves. I think that's flowing pretty well. These tend to have fairly exponential curves because you start with develop the product, you do a spec win. So you work with the OEMs to get that in the platform, and then it takes probably 1 to 2 years until we start to see volume happening. And a good example is our motion component business. Our baseline, today, we do about 15 million in motion component sales in 2020. We'll grow that this year by approximately 10 million. ut the number of spec wins, if you look in 2018, I think we had 2, then it went up to -- sorry, in 2019, we had 2; in 2020, we had 6; and this year, we've got a funnel of 13. So fairly exponential opportunities and a fairly exponential growth curve when it comes to harnessing the sales from these adjacencies, but we're very confident, for example, in this motion component business that we'll get it to a 60 million to 70 million type of business over the next 5 years. But that's the profile you should expect on that. And you see that also in our valve market share that it's a fairly exponential curve. You win all the spec wins and gradually, they come through to market. But I would say, overall, our adjacencies are on track, and we're working really hard in bringing the technologies to market and adding the competencies that we need. In some cases, we have to bring in new skills like software controls. The VAT has some level of competence, but we're having to expand that to ensure that we can play at a high level within these new markets.

Okay. Second question, Michael, was about the tax rate. We were at 17% this year, after above 20% a year ago. You remember that was due to the implementation of the tax reform. So when we look at today's expectation for the full year, we definitely would expect that we will again be at the lower or below, even a little bit below the lower end of our guidance, midterm guidance, which you remember is between 18% to 20%.

The next question comes from Robert Sanders from DB.

Maybe the first question is, you mentioned that there's been a notable acceleration in Q1 on order intake versus Q4, which bodes well for Q2. Does that mean that your order intake is already as of today, March 4, higher than the whole of Q4? And I have a follow-up.

Yes. Unfortunately, it's not higher today. That would be a big number. What we're seeing is in relation to the same point of Q4, we're already at a higher order intake than we were after the second month in Q4. And as you know, we had pretty strong order intake in Q4. So we're expecting a very healthy number in order intake, which predominantly gets shipped in the second quarter.

Got it. And Mike, just 2 other very quick questions were just the -- your OEMS, are you seeing constraints because, obviously, ASML, for example, is maxed out. And I assume some of the other OEMs are struggling with to meet the demand. Have you seen any of that? And then the last question would just be, what's your outlook for NAND alone in '21, given, I think, that's your largest end market [indiscernible]

Okay. Yes, the -- I think we will get, especially in the second quarter, a supply-constrained output in the industry in general. There are too many supply chain bottlenecks. I'm not talking about bottlenecks in VAT, I'm talking about the industry at large. There are constraints to how fast the industry can ramp. So I think that also helps fill out the second half more and linearize some of the requirements. I haven't heard any specific issues. I did also read about the EUV constraints on some of the high-end optics. I think like -- a bit like I mentioned earlier, the supply chain always has bottlenecks, and you've just got to work them down. And I think our customers are probably doing the same thing. But I think, as I said, that's what gives me confidence that the second half will fill up because I don't think the industry can fully meet the demand that we're seeing for Q2. The second question on NAND investment. I don't have a number specifically for this year. The number's moving around a lot. We are seeing a very positive development in the [indiscernible] growth, as you probably saw in Micron, Samsung's numbers. The number I keep hearing about is over a 5 year period, about 70 billion in total CapEx required to keep the [indiscernible] growth rate running over 30%. I think, though, you're always going to have -- so that's a median of, say, around 15 billion per year. But I think you're going to see big pluses and minuses around that because NAND is the most volatile segment. So I would expect somewhere between 15 billion and 20 billion of spending for NAND this year. But we don't follow it that close. As I mentioned, we try to just work with our OEM customers and other industry forecast to try and get a more revenue-based outlook. It's just too complex for us to try to track every single NAND investment to that level of detail.

The next question comes from Jürgen Wagner from Stifel.

You mentioned your scenario planning for your installed capacity. How quickly could you ramp, actually, in case memory CapEx would accelerate in the second half more than you or your customers are currently expecting? And the second question, a follow-up on your visibility. We saw that your OEM customers have reported rising inventories. How do you see that developing further this year?

Okay. The first question around scenario planning. We plan that we can ramp our business roughly 20% to 30% per quarter. That's, I'd say, 30% is an absolute max just because of the material constraints. But 20% is, in fact, what we will do this quarter. We will see a 20% growth just in this quarter. So that's the typical number you should expect to see. The inventories in our OEM customers. Well, I would expect some of that because if you just extrapolate our order intake in the fourth quarter with our projected revenue in the first quarter, and then I also mentioned strong order intake in the first quarter, you can see that there's a lot of pent-up demand in Q2, and we could see a pretty strong Q2. So it's probably why the OEMs are seeing increased inventory as they get ready for a very strong end of Q1 and a pretty robust Q2. So I expect that's what they're seeing. I don't have any further examples beyond that.

We have a follow-up question from Mr. Daniel Regli from Octavian.

Again, on the market structure, I just wondered what happens to this, let's say, smaller tail of competitors where you obviously gaining market share from? Are they just getting smaller? Or is there kind of a consolidation going on in this segment of the market? And if so, how far are you willing to play an active part in this kind of consolidation?

Yes. If you look at the list, we show of the competitive base, you'll see that very few of them are small niche players. They're generally all parts of large corporations, so consolidation there can be quite difficult. For us, I think I could almost rule out any consolidation of VAT-led consolidation because our market share position would not allow us to acquire further valve companies. Yes, so we may see some consolidation across the suppliers. There's a couple of smaller niche Japanese players. There's a couple of small Korean niche players. We're pushing them down to the sort of lower levels of technology for sure. So they will try to compete on price and probably stay within those niche areas. But so far, we haven't seen any consolidation happen. I'm more interested in adjacencies for VAT than I'm about -- trying to consolidate valves. I mean, we're -- as you can see, we're doing an incredible job with driving shares. So that's -- organic growth there is our #1 priority.

The last question for today's call is a follow-up from Sebastian Kuenne from RBC.

Yes. I have a few follow-ups. So adjacent -- or adjacency business, the margin potential that you have, can you confirm that this is similar to the valve business for new equipment? And then battery production, you mentioned, vacuum is needed in production, but is it lower vacuum? And does this business, therefore, have more competition? And is this becoming a mass business for you, like a large scale business? Or does it remain a niche? And finally, if I may, selling into China, are there currently any restrictions? And what business do you see in the ramp-up of Chinese semiconductor production?

Okay. Yes, adjacencies, I would say, at the moment, we see similar margins that we see in our valve. I haven't seen any major changes there. What we are trying to do though is drive as much content, especially digital content into things like our motion components and some of the new flow valves we're generating. So that gives us potential, I think, to push margins a bit higher on some of these. But we're also in the growth mode, the share gain mode, and we're not the #1 in some of these markets yet. So it would be interesting to see how that margin profile develops. But at the moment, it's looking pretty good. I think we've chosen these adjacencies carefully, that they do have the right margin potential for us. Battery is an interesting one. We're at the very start really of a major transition in the lithium-ion battery market. The cathode drying today is done in batch ovens. And -- but they're moving from, I'd say, a -- from a batch processing mode into large serial in-line production systems. So there's a huge amount of technology changes happening in the manufacturing of batteries. They have to reduce the cost, they have to improve the battery efficiency, so there's a huge amount of changes happening there. Now we'd like to be getting more involved. COVID is a huge restriction. I would say that the biggest impact we're seeing in COVID right now is the ability to do business development in sectors where we don't have a footprint. In the sectors we play in today, we know the people, you can pick up the phone and call them, you can still transact as normal, but trying to do business development in these new sectors is extremely difficult. So our progress in battery is still very limited right now. We are working with 1 Korean and 1 Chinese to look at the specifications for their next in-line systems. They are fairly simplistic vacuum systems, but there's no question it's going to be high volume. So the biggest question for VAT right now is can we capture this? Yes, I would imagine it's going to be a $50 million to $60 million type of segment. It's an interesting one for us to be in, but we're very early in that journey, and there's tremendous technology changes happening in that area. So we'll continue to update you as we get more visibility into it. I'm hoping that as COVID restrictions get reduced in the second half of the year, our ability to travel and visit potential customers will increase dramatically. The third point, China, really no restrictions for us. We're doing extremely well. We're gaining share. We have a great position in the Chinese market. We're not seeing any specific competition at the high-end. Even at the mid-end, industries like solar, we're really doing extremely well in market share there. So I really don't see any challenges at present in China. So thank you very much. That ends the Q&A session. Thank you for joining today. I hope it gave you a good overview of the progress of our business. I think, in summary, we're looking at a very positive 2021. It's evolving on a day-by-day basis. And as we see changes to the market, we'll continue to update you. The next market announcement is in April 15, we'll give you a further view. By then, we should hopefully get a little bit more insight into the second half of the year and update you on how that's progressing. So thank you very much. And with that, I'll end the call.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.