VAT Group AG (VACN) Earnings Call Transcript & Summary

Okay. Good morning, everybody, to the presentation of VAT's full year 2022 results. As you know, we have presented the high-level results already at the beginning of January. So today, we have published the annual report, where you'll certainly find lots of additional details. And I'm sure that on this busy day with several Swiss companies reporting on the same day also in the space we are operating in that there is a lot of interest in what we have to say not only about what happened last year, but most prominently, so what we expect this year and probably next year. As usual, we will have first the presentation by Mike Allison, our CEO; and Fabian Chiozza, who is our CFO, followed by a Q&A session. where I take as usual questions from the room, from the webcast and also from the phone. We try to keep this short. We know that the next meeting for you will be half past one, not so far from here where we are now, but we still like to also feed you a little bit so that you're not all hungry when you arrive at the next location. So after that, we cordially invite you for a small buffet launch, but I guess you're now more interested in what Mike has to say. And with that, I would hand over to you.

Good morning, ladies and gentlemen. Welcome to this wonderful historic venue here in Zurich, quite a contrast from changing the world with vacuum solutions. But I think Fabian remarked in that this morning was the old paintings in the wall and then the future of digitalization on the slides. So I think that's a good way to frame the start. It's great to see you all in person again. The agenda this morning, I'll cover some of the highlights and a quick review of 2022. Fabian will give you the financial numbers from the full year. And then we'll look a little bit into the future on what 2023 is going to bring us and then finish with Q&A. So 2022 for VAT, I think, an outstanding year. Really, I think, framed by our tremendous innovation and spec wins that drove our success, but also to flawless execution from the VAT team. And I would like to thank our global workforce, delivering this level of performance through some of the toughest supply chain crisis as we've had and really not missing a beat with any of our key customers is something that is really propelling our success and is one of the fundamental building blocks of allowing us to get that customer trust to keep growing our market share. So really, really important. And that allowed us to grow our business in all of our main sectors, semiconductor service and advanced industrials and also led to records across the whole group in sales, EBITDA, EBITDA margin, free cash flow and so on. We put a lot of work into mitigating the high inflationary environment that we're in. We didn't pass that on to our customers. We shared the burden there. We worked very hard at our own productivity and cost to try to ensure that we were really partnering with our customers in this tough time. And it's -- again, it's that type of partnership that gives them trust to continue growing the share of wallet with VAT. One of the other backbones of last year was the ramp in Malaysia. Those guys did an amazing job ramping a factory to over CHF 250 million and also implementing our first major site with our new ERP system. Again, for those of you have seen that. It's not an easy task to change your processes midstream and implement a next-generation ERP system. So really incredible execution there. A little bit of a downer ending the year with dropping order intake, but we are a semi company. There is a semi cycle. We're coming hard into it in the first quarter, and I'll touch about -- more about that in the second part of the presentation. Our high-level numbers, strong order intake, a little bit down in 2021, where we really started growing fast through the cycle. Record sales up 27% at CHF 1.145 billion, and again, record EBITDA performance. The EBITDA dropped a little bit in the second half. Fabian will show you that. That was, I think, to be expected on certainly, the inflationary challenges we saw. Record free cash flow, up 17%. With that, we're proposing a dividend of CHF 6.25, and as you see, our leverage dropped to 0.1x by the end of the year. The split of our business, 81% in products and 19% in our service business. And I really would like to highlight the service performance even in a semi upturn, we managed to get that to 19% of our total revenue. My target was to get to the 20%. We're pretty close to that. And that really is a profit driver for VAT. More than 75% of our sales are coming from the semiconductor cycle. So you would expect when we see the cyclical correction that does have a sizable impact on our business. You'll see the regional breakdown about 62% of our product going directly to Asia. So it's a major part of our business as is China with about 20% of our sales. Just to summarize what we saw in 2022. In semiconductor, we had really strong investments across more sectors. WFE CapEx was up about 10% to around CHF 95 billion. And we also saw very high utilization rates in the semiconductor fabs, which really propelled our service business to record sales levels. Last year, we saw strength in all sectors of semiconductor, the advanced logic and all aspects of the memory business. So a very healthy year. And we also saw strong sales into the mature technologies, probably one of the biggest ever years of investment we've seen into the trailing edge fabs. So that probably helped some of our competitors actually last year because their share is higher at the very lagging edge, but still with our growth numbers, you can see that we're doing extremely well on the leading edge, and that's a strong indicator for how VAT will perform in the future. In the display business, really no signs even in 2022 that this business is recovering, very muted investments in LCD and also not too much happening in the OLED business either. So looking into '23, you'll see later, we don't expect much recovery there. Solar had a good year. It's a pretty small part of our business, but it still had a great year. We gained a lot of share in that sector. It's pretty much now a China story. And we are seeing a bit of investment starting in the heterojunction technology, which we think will flow into 2023. Our Advanced Industrial business, which we highlighted at the Capital Markets Day had a fabulous year. We saw a lot of investment going into e-beam technologies. Coating was pretty flat due to the muted sales of smartphones especially. And the research environment overall was pretty robust. So we saw a good year in our advanced industrial market, and we do expect that to continue into '23. We talked a lot about adjacencies in the Capital Markets Day. We did end the year a little bit higher than we forecast at around CHF 100 million. And I think you can see that's fully on track to hit our 2027 target of CHF 300 million. It's a huge focus of VAT. I've really beefed up significantly the R&D teams around adjacencies. We're really extending the reach beyond just our valves and basic components into all aspects of the vacuum chamber. And we're uncovering a lot of very interesting themes that we can expand into '25 and beyond. And I think you'll see a constant stream over the next 5 years of new products that will continue VAT's growth in '25 and beyond. Don't forget the adoption period of these technologies is very long. It's around 3 to 5 years to get spec-ed into the OEM on their very early development tools through to the shipment to customers for beta testing. Some of those beta tests can last more than a year. So until you really get traction in the market, it takes 3 to 5 years, but really positive progress on our motion components and our modules business. Looking at the market and how we performed in that market, you'll see wafer fab equipment year-on-year growth was about 9%. The component sector that we're in grew about 18%. As a company, we grew 27. Our semi business corresponding to this critical subsystem market was up 34%, our valves slightly below that at 28, but our adjacencies, you'll see grew at 39%. But overall, semi was up 34%, which is not too far behind double the growth rate of the critical subsystems market. So I think you can see this share performance at the leading edge is really propelling the company forward, and I think demonstrating that our focus on innovation and getting the right account team structures across the whole semi universe is really paying off. We pretty much now have key account teams in every one of the top 10 OEMs. And by key account team, I mean, salespeople, applications people and design engineers working with the customer on next-generation platforms. And that gives us tremendous insight into what they need, but also where the problems are and it's the problem understanding that fuels our adjacency business. You can also see our service business grew 24% and our Advanced Industrial, 13%. So overall, a very I think very positive growth performance from the whole team. So with that, I will pass on to Fabian, who is going to talk about our results in more detail, and then I'll finish with an outlook.

So a very warm welcome again also from my side. I'm glad to be here in person for my first results presentation and to add a bit more color into these record numbers that Mike has already alluded to. Besides the very solid harnessing of the market growth opportunities, we were also able to translate our top line into bottom line profitability. We reached a CHF 400 million mark on EBITDA, 35% in a very challenging market environment, and I'll allude to that a bit later in my remarks. Net income also reached a record high with an increase of 41%, so also there, a very solid translation into bottom line. Free cash flow at CHF 228 million, an increase of 17% considering the investments which we made into our trade working capital and the ongoing front-loaded programs into investing ahead of the curve into our infrastructure. Last, but not least, a leverage of 0.1 almost cash positive. On the order intake, I think the Q4 order number slowed down substantially compared to the third quarter, about a 20% drop and a 43% drop year-over-year. Now we have to remember that the Q4 2021 number was biased by some one-off effects. At the time, we quantified that at around CHF 100 million. And the Q4 number in our reading also has about CHF 20 million of preordering in this CHF 249 million on the back of the price increases, which we again announced to our customers in the fall of last year. The full year order intake, as Mike said before, this was basically flat year-on-year, thanks to the strong demand that we have seen in the first 3 quarters of 2022. Our order backlog stood at CHF 518 million at the end of 2022 and will help us now to mitigate the weaker order intake into 2023. We have seen 8 consecutive quarters of positive book-to-bill, whereas now the order momentum obviously came down in Q4 and leading to a book-to-bill of 0.86%. Our expectation for the beginning of 2023 are that orders will remain lower than sales as we execute on the very still sizable order backlog. Let me talk a little bit about our P&L. We had a 27% growth in our top line, which we translated into 0.8 percentage points growth of our EBITDA. That's almost a 40% conversion rate. Full year FX impact on our EBITDA were at 0.1 percentage points. The EBITDA was definitely earmarked by the top line growth, but also the strong operational leverage that we have alluded to before and at the same time, also further focus on our continuous improvement and operational excellence programs. And these efforts are especially required now as we saw the EBITDA in the second half already reducing to slightly compared to the first half of last year. The reduction in the EBITDA in the second half is a consequence of, I would say, 3 key drivers. First of all, we have seen already in the first half of 2022 that the material costs are constantly rising. And the P&L effect has a certain lag from the time that you put. So the effect of the price increases was actually then sinking in with the increase in the material cost. On top of that, what we have seen is a continued increase into the second half of 2022 of distribution costs, but especially energy costs. And these are also expected to continue into the first half of 2023. So therefore, we have -- we really have to ensure is that we keep the balance between reducing our cost base to react to the lower demand environment, but at the same time, also continue to invest into our infrastructure and remain fully capable to capture the rebound, which we expect to happen as of 2024. If we look at our sustainable value creation as an economic profit over the cycle, VAT continues on a very favorable path. We concluded the year with a return on invested capital of 57%. That's another increase of 3% over 2021. And also the cash return on invested capital remained above 40%. With these numbers, we are well ahead of our midterm target of 45% plus ROIC through the cycle. We do expect obviously a correction in 2023 as we will continue to invest into future growth opportunities. Now let's turn to some other financials below the EBITDA. Here, I would like to highlight the depreciation and amortization, which on a normalized level was flat on 2021. The increase in 2021 was due to impairment losses that we had booked back then on R&D projects. We had an EBIT of 31.4%, which is 2 percentage points higher in '22 compared to '21. And then we benefited in addition from a finance income, which reduced the finance net by 58% and we also benefited from a very low effective tax rate of just 13.9%, which then translated into a net income of 26.8%, which is almost 3 percentage points higher than 2021, and also helped us to achieve an EPS of 10.23%, which is obviously also a new record level. Free cash flow reached also another record level, as I said before, despite the investments into trade working capital and CapEx. We closed the year with investments of CHF 66 million. That's a 5.8% over sales and confirming the guidance that we have given earlier on that we will see front-loaded investments in '22, '23, and the remainder then also in '24 before we return to the 4% to 5% range that we have communicated and confirmed again in the Capital Markets Day. So for us, it is very crucial, as Mike said before, to now continue to invest ahead of the curve into our infrastructure, getting Malaysia 1B ready. We will start next Monday with the construction of the new innovation center in Haag and this will ensure our growth capabilities going forward. Trade working capital, last, but not least, close to 26% ahead of the long-term target of 22% to 24%. And I think that is just again, an evidence of the still persisting supply chain challenges, but also the effect of a normalization which we now see after the go-live of our new ERP in Malaysia in September, October last year. We achieved the lowest ever leverage since the IPO of just 0.1, that's a reflection of a reduction of the net debt to just CHF 37 million. And if you look at the gross debt, this is basically the CHF 200 million bond plus some lease obligations. We have a very solid balance sheet with an equity ratio of 61%. And this also provides us now the flexibility to invest into future growth. Summarizing the achievements of 2022. As we have seen earlier on, we continue to fully capture the strong market conditions in both the semiconductor, but also the advanced industrials environment based on our innovation, market leadership, but most notably, also our execution skills in a still very demanding and challenging environment. We also had successfully refinanced the outstanding bond and our U.S. dollar RCF towards the end of the year and have now not only a very attractive new financing in place, but it also provides us full flexibility as we continue to scale the business. From a, let's say, financial perspective, the priorities for 2023, as I said, are the execution of our cost management initiatives together with my colleagues of the management team. We will relentlessly drive this operational improvements, our operational excellence programs to safeguard the margin profiles and also retain this rebound capability at the same time. We will continue to invest through the cycle to ensure future growth. Therefore, CapEx will be in the range of CHF 80 million to CHF 85 million in 2023, driven by this 2 large infrastructure projects. Last but not least, as Mike also mentioned, digitalization is on top of our agenda. And therefore, we will have a big focus on the deployment of the new ERP system also now in Switzerland during 2023 after the successful rollouts in Malaysia and Romania. And already this year, we start to harness the fruits of some digitalization initiatives that we have started last year already on the back of this new infrastructure that we have in place, which will also help us now, not only to drive productivity gains in our operations, but also to then gradually reduce the net working capital that we have in the system. And with that, I hand back to Mike for some final remarks.

Okay. Thank you, Fabian. So let's take a look at 2023. I'm sure there's going to be a lot of questions on what's happening in the markets. Let's kind of look at this from a layered approach. I'll try to predict some of the questions you're going to ask me in the session after this. If you start with the semiconductor market, we expect that to be down somewhere around mid-single digits, minus 6 at half year. A lot of that is pricing, okay, especially in the memory markets. Pricing is down significantly. So actual unit chip demand is probably still increasing year-on-year. Semiconductor CapEx. So the total CapEx we expect to be down about 15%. It certainly led by big reductions in memory. Now wafer fab equipment out of WFE, we expect to be down about 13%. Now you've then got to dissect the WFE equipment because parts of that are going to see growth like litho and some of the advanced technologies like ALD. But the more capacity-driven applications like etch and CVD expect to be done. Therefore, the vacuum WFE, which is a good proxy for things like etch and deposition, et cetera, we expect to be down about minus 20%. And that's where VAT plays. So we're factoring through this down cycle about a 20% reduction in the semicon business. Now the phasing of that was pretty complicated. And I think we've got to explain what's happening in the market. We started to see order intake drop in the fourth quarter and expect to see further drops in Q1, substantial drops. This is the inventory correction happening within the market. Our customers have some inventory. I would say, however, the inventory levels are reasonable, certainly below historic downturn levels. But the whole market is transitioning right now to a lower run rate in the vacuum WFE. So that means the slowdown in orders. Everyone is putting the brakes on. They're looking at the forecast for first and second half. There's also complexities happening like what's really going to happen in China. The U.S. guys are slowing down, especially the advanced nodes, but there's a little bit of confusion in the Japanese market as to what exactly is going to happen with the Japanese equipment. Are they going to be full embargoes or partial embargoes. So there's a lot of complexity. That's why I think the first half of 2023 is going to be a substantial shock in order intake. However, we go down first, but we're also going to come back first. So our current feeling is that we'll start to see reinvestments happening in early 2024, which means if that does happen, VAT will start seeing things flowing again towards the second half of 2023. So we're factoring at the moment, roughly a 12-month down cycle, it could be longer. The important thing is we are rightsizing the company to perform well at this low level. So if it's a little bit longer, it's not really going to be a big deal for us. We've got a very flexible operating model, and we can deal extremely well with that. So again, a fairly major shock in the semiconductor sector, hopefully progressing then through the second half of 2023. This display market really nothing exciting happening there. It's going to bounce around the bottom as it's been. So I don't expect any help from display. I do think solar will have a better year. Those investments going into the latest technology, heterojunction and also some enhancements on the PERC technology. But within that whole sector, I think fairly, fairly muted performance. Looking overall, I think I've gone into a lot of detail already on the semi business when that's likely to recover. Service, we already started seeing service order intake dropping a little bit in Q4. However, Q3 was a record order intake quarter for service. So we did expect it to be down a bit in Q4. And certainly, we also see our customers doing some inventory correction. They staffed up on spares pretty heavily during the supply chain challenges. They wanted to make sure they had no blockages to support the very high utilization rates of fabs. So we certainly expect service to drop back. We're still forecasting positive growth in 2023, but I think it will be definitely low single digits, nothing like the growth rates we've seen in '21 and '22. The programs we're running in service, however, look very positive for the future. And I think we're doing all the right things to harness growth as the industry comes back. Advanced Industrials, putting a lot of focus on that. We're using all our technology and innovation in semi to really target specific sectors like advanced instrumentation, e-beam technologies, et cetera. And we expect Advanced Industrials to have a very good year, probably a similar type of growth rates that we saw in 2022. So really a mixed bag here. Again, we've adjusted very quickly our operating performance in our core factories. We still expect Malaysia to grow slightly year-on-year. So we're keeping a very high readiness within our Malaysia factory. And when semi comes back, the product transitions we've been doing into Malaysia means that is going to come back really hard. We expect it to double within a, say, 12- to 18-month horizon in that factory. So a lot of focus right now in getting a new ERP system running smoothly, getting maximum efficiency out of that plant. Now we are going to continue with the investment in Malaysia, too. And the reason for that is it's always the same. You always have a new factory in the middle of a downturn. There's nothing you can do about it. But the strongest companies invest through the cycle and look at what we achieved in '20, '21, '22 by having that capacity. We're going to do the same for the next cycle. But the other reason I want to keep Malaysia to fully invested is, I expect the supply chain in Malaysia to have a tougher time in this next ramp with the amount of companies moving into Southeast Asia. So we want to have the business continuity of having a new factory with fully qualified machine tools ready to support the outsourced partners that we have. So I think it's a smart strategy. We won't add any assembly capacity this year or probably even in the first half of next year, but we will invest heavily in getting the factory ready with the machine tool fleet to support a recovery in 2024. So one of the other areas I'm going to continue to focus heavily on during 2023 is our innovation and R&D. We're making no cuts to our R&D budget. In fact, we're progressing fully on the plan we laid out in our strategic plan. Spec wins are our life and blood, they drive our future. You can see we've been growing them across all our businesses. I would point out that in our market, our customers are consolidating the platforms. So the total number of opportunities might slow down a little bit over time. But our efficiency, our spec win rate is as high as it's been in the past couple of years and definitely over the 90% level. And that will continue VAT share gains over the next 5 years. And this win rate is also high in display and solar. Display, we've really cut back the team. We're focusing on the technology drivers in that sector. We're focused on the few large OEMs, but we've really downsized the team so we can use those resources in our semiconductor business. Advanced Industrial, I think we've got a more targeted strategy there, and we continue to gain with spec wins there. The spec wins there are focused mostly on higher-volume applications. That business was pretty tricky in the past because it's been very low volume, very high customized. We're trying to adjust it slightly to focus on the higher vacuum applications with more content so we can get a little bit more manufacturing efficiency. And our service business, yes, is strong. We're winning upgrade businesses. The memory fabs have been hit pretty hard in terms of their not just CapEx spending, but also their OpEx spending. So even although they want some of our upgrades, it's not running as fast in some cases, as we expected in the memory side, but it's going okay in the advanced logic side. And finally, on innovation, we're continuing with our innovation center. We've had all the initial planning permission granted and we start next week petty much with the demolition of one of our old buildings. And that should come on stream mid-2024. That's very exciting for our engineering population back in Haag. So overall, outlook, again, muted performance in semiconductors. It's going to be, again, a falloff in orders, revenue dropping slightly and then hopefully coming back up in the second half and into 2024. Good growth in our advanced industrial market. Service will be an interesting year. We've driven that business hard. We still expect to get some growth, but obviously, it depends on how deep spending is within some of our customer base. With that, we expect lower performance overall in the year in sales, EBITDA, EBITDA margin and net income, free cash flow. But you can see, we still plan to keep our capital expenditures at a rate so we can invest in innovation, invest in capacity and be ready to really take another step function leap in growth in the next 3 years beyond that. And for the first quarter, we expect sales of CHF 210 million to CHF 230 million. So that concludes the presentation, and we'll now pass it on to questions.

Yes. Thank you, Mike. So we'll now start the Q&A session. The usual spiel, I take first a couple of questions from the room [Operator Instructions] when we have exhausted the first round of question here I go to the phone where we have some preregistration for questions as well, and then maybe there are some over the webcast. So we will go first to Michael.

Thank you. Michael Foeth, Vontobel. Actually, I have a question regarding your outlook for adjacencies. I'm not sure you mentioned what your expectations are there if you expect growth in 2023 despite the downturn or not? And the second question would be, today Applied announced new tools for patterning solutions that should reduce reliance on lithography. I guess that's a sort of a long-term story, but any impact or favorable impact that, that would imply for VAT?

I'll start with the second part first. The -- yes, very interesting announcement from Applied. I would say it's an etch technology and is based on one of their existing edge platforms. So obviously, that's business we already have. So I don't yet know is it going to be a substantial incremental growth on top of that. These technologies take time to come to market. I mentioned before the adoption time is typically in the 1 to 5 years. So I wouldn't expect a big rush in this. I think it took everybody a bit by surprise. Obviously, they've been working with partners on it for quite a long time. So very interesting. And it certainly -- the capital cost of EUV is a challenge for the industry. So anything we can do to create more efficiencies going to help. But I think it's just another example of more vacuum applications. And I've mentioned this before that one of our vectors is the percent of equipment on the vacuum. So yes, it's good for us. But I don't really yet know how much -- or how long it's going to take before this becomes a high-volume application. Adjacencies, good question. I think the adjacencies are really focused mostly on the leading-edge platforms. That's where we've had the majority of the spec wins over the last 3 to 4 years. So I would expect us to have flat to small growth rather than the same decline that we see in our volume business. But what I would say is we've seen, I think, tremendous interest from our customers and some big opportunities to further accelerate some of the opportunities for, especially motion components, I think they're seeing what we're bringing to market and the operational performance we have on these versus some of the smaller suppliers. Now whether or not that will hit in '23 is probably doubtful. But certainly, beyond '24 and '25, it looks extremely good. So I think it will help in the downturn, the overall adjacencies, but not enough to significantly offset the volume reductions on the key platforms.

Then the next question we take from Jorn here in the front row.

I'm Jörn from UBS. Two questions, if I may. The first one is, Mike, you mentioned sales are somewhat down, orders may be significantly down near term. So I mean, can you maybe quantify it a little bit more? And also, are you considering also short time work again to have some cost efficiencies in the first half. And the second question will be, please, you mentioned in the presentation, I'm not sure if I understood this correctly, there is some platform rationalization happening at customers, which may result in a little lower design wins. Just to double check, if I understood this correctly, maybe if you can elaborate on this one again.

Yes. I'll address the second part, maybe you can touch on the first part, Fabian. The platform -- yes, I mean, look, everybody is looking for cost down in the market. And when you think some of the larger OEMs operate with 10 platforms, it makes a lot of sense, at least for the -- we call it the waiver path portion of the tool, the part where you load the waiver goes into a load lock, goes into a transfer chamber. That's a really common architecture for most tools. So what our customers are doing is trying to standardize the basic part of the system, the handling part of the system and then put their design effort into the chamber that sits around this main transfer chamber. So yes, there are heavy consolidation of platforms. What that means for us is the design wins are bigger, right? So instead of supporting 10 platforms, the future will go to 5 platforms, there may be 3 platforms. So our volume is going to increase for these 3 platforms dramatically. So that's good from a cost standpoint. It's good from a productivity standpoint. It's going to give us supply chain and manufacturing efficiencies. And it also gives us an opportunity to work with our customers on more efficient design than cost for them. So I think it's a win-win, but it does mean that these decisions are becoming pretty big. If you think about a volume platform might be CHF 60 million to CHF 70 million per year, for example, between the transfer valves and motion components and stuff. If you double or triple that, these platforms start to get pretty meaty when it comes to design wins. So we have to put even more focus to make sure that the VAT captures that.

If you look at the history of VAT, we have always been in a cyclical business. And therefore, we're not only prepared to execute our down cycle protocol, as I recall it, but we have obviously already started to do so in the fall of last year. And if you just recall the flexible operating model that I talked about at the Capital Markets Day, these are the levers that we now apply. So there, we built our cost-down initiatives on the fact that we have a high variable cost share. We also count on the -- in outsource ratio. Remember that we have about 75% of our components outsourced, which helps us now to flexibilize as we see this lower demand unfold. And last, but not least, we were operating throughout 2022 with temporary workforce even above the 25% that we have as a long-term target. And so we have started already in Q4 to define the first wave of adjustment. And I would say up until today, we have already reduced about 50% of our temporary workforce in Haag. We, therefore, have still further waves to come as the demand is continuing to drop. So at this point, it's way early to call for short time work in Switzerland. But obviously, we have our plans ready for different scenarios. And as we see now, the cycle unfold also the depth of it and the, let's say, the extension of it, we will then react accordingly and adjust our cost base to come out of this year at the lower end of the margin band that we have communicated.

Okay. Next question from Serge.

Serge Rotzer from Credit Suisse. I have a question about the spec win rate. I'm a little puzzled here, probably I make a mess. But back at the Capital Markets Day, you said that the spec win rate was up to 95%, while you increase your market share target. And now you wrote that the spec win rate was down year-over-year. Can you help me to sort this out?

Yes, I think what you're seeing here is the graph I showed is the total number of spec wins. We normally don't publish a spec win rate because it's pretty close to our customer -- well, yes, it's too close to our customers basically to give a win rate. So what we said at Capital Markets Day is from that absolute number of spec wins, we expect to see somewhere between 90% and 95% win rate, okay? So it's a slight difference.

Okay. Got it. And the second one the Q1 guidance, sales guidance, is this all coming from out of the backlog? And where are the uncertainties for the range because we're already in March? So your visibility has to be already quite good, I believe. Can you say something? I know it's a little bit crystal ball thing, but probably can give us a feeling what is driving the upside and what's driving the downside here as the market is quite volatile currently?

Yes. I mean remember, there is a time lag between us shipping to customers and our customers' revenue system. So our customer revenue for this quarter, we shipped a large percent of that back in Q4. Also, when you hear our customers releasing results, they're also running very large deferred revenue backlog. So again, that's stuff we've already shipped. So trying to triangulate exactly how that translates into us for orders and sales in the first 2 quarters is really difficult. The other factor I alluded to is the China market is kind of chaos right now. Because we see the Japanese running to ship as much as possible ahead of potential sanctions. We also see the Chinese OEMs not quite sure. Are they going to be able to get the litho equipment. So how much should they invest in etch and CVD and the other vacuum technology. So it's a really complex picture. We're seeing a huge amount of reshuffling of business as well. So the OEMs, maybe who were planning to ship to China are now trying to ship somewhere else and manage that backlog so they can hit their revenue guidance. So a really confusing picture. But overall, I think the guidance we provided was only 1 month to go to the end of the quarter, so that's pretty solid. But visibility is pretty low. I'd measure it in kind of months at the moment, 1 to 2 months as to what our customers are doing. And again, orders are going to fall sharply in the first quarter, possibly into the second quarter and then start recovering as we rebalance the whole inventory situation. But one other point, inventory with our customers is pretty reasonable. It's certainly way below historical highs, and our own field consignment inventory is also at reasonable levels, way below what we had in 2019. So the balance right now is better. And there's still a lot of supply chain constraints. Things like raw materials have improved, they're pretty okay. But electronics is still a huge challenge across the industry.

Okay. So I think after this first round from the room, we now go to the participants on the phone. Operator, please?

The first question from the telephone comes from the line of Didier Scemama.

Didier Scemama, Bank of America. First of all, Mike, absolutely gutted to see you leave. I wish you the best in your next challenge. Maybe a couple of questions. First, I think you told us earlier on that we expected you TAM to effectively decline 20% in '23 for the semi division. In terms of share gains, especially in restore but also in your core business, how much do you think you can offset the 20%. So how much can you outperform the 20% drop? And then a question for Fabian, I think you sort of talked about it. I just wanted to understand if you were to hit the lower end of your EBITDA margin target for the year, would that come mostly from the lower effects of scale to the top line? Or would that also come from gross margin?

Okay. I'll take the first part. Yes, I mentioned that we're planning WFE to be down 20%. Now again, that is the market. We also have this timing effect where we get hit faster in the first half of the cycle versus the recovery part of the cycle. So it's -- we'll see some offset from our share gains and also from adjacencies. But overall, I think the component side, so the critical subsystems part will be down below the WFE number -- vacuum WFE. So I expect it to be slightly deeper overall than the 20%. Now that's just in our semi business, but then we'll have some offset from service and also from advanced industrial. So that's what we're seeing at the moment, roughly somewhere around the 20%.

Okay. And then on the question of the 32% EBITDA margin. You have seen in the growth over the course of the last 3 years that we had quite a benefit from the operational leverage. And that will certainly also be a key driver as we now delever the business. Besides that, I highlighted before that we will continue to invest into our structure. So I would say that that's certainly a counter impact of us reducing the cost structure to adapt to the changing top line. On the gross margin, do not confuse that with the gross profit that we report. The gross profit also includes the inventory changes. And as we will now go into this downturn, we will heavily reduce the inventory which will, hence, again, exercise a pressure on the gross profit, but that has nothing to do with the gross margin. So on the gross margin, I would see us rather stable as I said before, we are now driving this efficiency improvement and cost saving programs. And with the combination of a carryover effect of the price increases which we placed last year, new price increases, which are coming in, but also a focus on the saving initiatives, especially on the supply chain side and eventually a bit of help from reducing inflationary pressures on some of our key commodities, I'm pretty confident that we can keep the gross margin or maybe contribution margin as you might also look at it pretty stable.

The next question from the telephone comes from the line of Timm Schulze-Melander with Redburn.

Yes. I just wanted to maybe follow on from Didier's question there on margins. So a question for Fabian, just EBITDA level. If we look back historically, at least the last few years, as you say, the margins have been pretty decent and very stable through the year. But the last time that wasn't the case was 2019, and particularly in the first half, you saw a pretty serious or pretty significant erosion in profitability. Could you maybe just sort of run through what the -- how reasonable a guide the first half of 2019 is for what looks like maybe cyclically is going to be a rerun here?

I would rather like to compare maybe the 2021 results with what we expect now for 2023. Back in 2021, we had about CHF 900 million of sales and an EBITDA margin of about 34.22% exactly. And comparing this now to what we expect for 2023, I believe we have here 2 effects that we have to take into consideration. First of all, I expect a further increase of the gross profit on the back of the price increases that we have implemented since the end of 2021. On the other hand, we have some counter effects with the inflation, which started to kick in earlier in 2022. That still remains us with a positive upside on the gross profit. Now to offset that, we have always to remember that VAT is just coming out of a very significant investment into our infrastructure as we have also explained to you at the Capital Market Day. We are preparing the company now for the CHF 2 billion market in 2027. So that means we will continue to invest into our infrastructure, which means we will continue to invest into R&D and engineering. And this will definitely consume some of the benefits that we have on the gross profit side. On the other hand, we are ramping up Malaysia, as Mike has said before, to be able to double the output once we rebound. And given the scarcity of skilled labor in Malaysia, we will certainly not make any compromises here, but really go through this cycle with a workforce that is ready and also to capture the rebound whenever it starts. Last, but not least, if I look at the OpEx side, there, we have made significant investments, especially into our IT infrastructure with the ERP, which is being deployed. We talked to you a year ago that we had to also restate our books as the investments that you make into an ERP deployment, you can't capitalize them anymore as long as the ERP is cloud-based. So all of that is in our P&L. And adding to that, we're also investing into digitalization. We're also investing heavily into the IT and cyber security. And last, but not least, you also have, if you compare the baseline that we have now to be '21 or even 2019, what you're referring to, you have a different environment with regards to your operating cost beat, energy, also distribution. And therefore, we will definitely see quite a significant increase of these costs that we have to cope with as we now reduce the top line.

Okay. If I could just have maybe just slipping 1 follow-on and maybe just a bit of housekeeping here. Then if we look at your personnel expenses and other expenses, just in the context of the comments you've just made, the run rates we had in the second half of 2022, we should expect those to grow then in '23 in the first half and in the second half, just as a consequence of your comments.

In general, I would say, yes. With the correction of the variable cost elements that we have in there in our direct labor and then also, I would assume a flex of about 52% to 55% on our indirect labor. But the investments that we made, maybe in the white collar in the overhead, that will definitely stay and we even continue during this year to add very specific strategic positions that will help us then to prepare for the 2027 targets. Okay.

Thank you. I think we have Sebastian on the line, operator?

The next question comes from the line of Sebastian Kuenne with RBC Capital.

I have a couple of questions on the market development mainly. You are quoting VLSI Research on the expected drop in vacuum in WFE. And could you explain to us why you and the organization are assuming that vacuum business drops fast because in the past it was always the argument that vacuum content is increasing as we go down the nodes, now vacuum is also going into memory. So why is this drop now sharper then for general WFE. That would be my first question. Yes, maybe we start there.

Yes. Okay. That is pretty simple. When you look at total WFE, you've got a big amount of spend still going into litho, especially the deep UV part of litho and that's not vacuum based. So I think when you look at SMLs guidance, they're pretty flat year-on-year once you take out the deferred revenue and so on. So if you then look at the main impact on the memory spending, memory is very heavily etch and deposition biased, and that's where the vacuum-based WFE goes into and that's where we're seeing the very big reduction. So it doesn't change our thesis that the percent of vacuum equipment is growing year-on-year. It's just you see a harder reduction in vacuum volume equipment in the downturn because of memory and because of the investments into technology, mostly litho, inspection and some new technologies like ALD, although ALD is a vacuum-based technology. But mostly because of the litho, when we look at our models is impacting the vacuum equipment. Is that a -- is that okay?

I would have thought litho and vacuum goes in line with litho etching goes all in line, if you need a lithography machine you need all the other adjacent machines as well. Wouldn't that be logical?

No. There's also a lot of upgrades done. When you're upgrading from 1 technology node to the next, litho is the obvious expenditure as is inspection because you're trying to get maximum yield from your existing process. So you typically see that accelerating a bit in the downturn.

Understood. My second question goes a little bit in the same direction. So we had ASM yesterday or the day before speaking of mid- to high-teens drop in wafer fabrication equipment, so 14% to 19%. And then they say they probably outgrow the market because of the new ALD technology. And it seems to divert a little bit from your market view. Could you maybe explain why there are so many different views on wafer fabrication equipment outlook? Is it just the uncertainties surrounding U.S.-China or uncertainty surrounding consumer-driven demand or destocking? What's your explanation for that?

Yes. I think it's really fully dependent on segment. I mean ALD is an emerging technology. It's heavily utilized and advanced logic especially as you progress from 5 to 3 to 2 nanometers. So their growth is quite exponential in that area as it replaces some of the old CVD steps. So they have a very nice development in the very advanced design rules. Litho EUV is another example of where you're seeing a new technology coming to market that's again driving this 5, 3, 2-nanometer transition, the big volume investments where you're filling out capacity, again, there's a lot of deposition and etch equipment. And you can see if you just look at all the major OEMs and plot where their businesses and which sectors they lean towards, you can get an idea of the impact. And the impact on some of them is pretty substantial, 20%, 30%. And so you've really got to look in detail at each segment, each technology to figure out an overall balanced view of the industry. And then you've got to take the supply chain. And again, we come down much faster. We correct on inventory and then we start coming up faster. So there's an additional layer of complexity when it comes to the supply chain.

Okay. My final question is a little bit to get a little bit color on your Q1 and Q2 comments. If I had to split that drop in demand into underlying markets for consumer-driven developments, then U.S.-China conflict and delays in deliveries. And finally, maybe the cyber attack on MKS which also delayed then deliveries to their customer and therefore, delays new deliveries, I would assume. If you had to bring these 3 components and would say what had the strongest impact, the most severe impact and which was the softest, how would you rank those? And maybe there's other effects that I haven't seen.

That's a tough question to try to model that on the fly. The MKS situation obviously affects different customers on different platforms. It depends where they have spec wins and where they are. So that could delay some of our shipments. We're not seeing that impact at the moment. I'd say overall the volume-based memory shipments are having the biggest impact right now, and then the second one is definitely the China situation. We saw the impact in the second half of 2022 on that with the U.S. OEMs pulling back. And I think we'll see into the second quarter, the same happening with the Japanese OEMs as they make a decision fully on the sanctions against China. And then we'll see also in Q2 a reaction from the Chinese OEMs in how they rebalance their outlook based on the fact they're not getting the equipment they expected to get to fill the fab. So really quite tricky dynamics. I think the important thing to take away from that is it is uncertain. Therefore, we're sizing the company at a level we can keep up our commitments. As Fabian said, probably towards the bottom end of the EBITDA corridor that we telegraphed. But again, keeping our investments going, keeping the teams ready to rebound as this comes back. That's I think the maximum we can do at this point.

Next question from the phone before we possibly go back to the room here.

Next question from the telephone comes from the line of Mr. Robert Sanders with Deutsche Bank.

I just had a question on the module attach rate that you're achieving at the moment. And when I say module attach rate, I mean the percent of your valves that you're shipping that are part of modules and how you think that's going to trend? And then specifically on litho, I remember you saying that I think the e-model of EUV for, I think it's the 3600 would have a module of significantly more value adds. So if you could just remind us what it is the uplift you're seeing versus the prior generation.

Yes, the first one is quite challenging because we -- our valves are attached to modules, either we ship the module or the customer has outsourced that somewhere else. It's quite hard to quantify by specific platform and which platforms are shipping at this point. I think I'll just point you back to that adjacency chart that we showed the growth that we had in 2022, quite substantial above-market growth, almost 40%. So I think you can see from that, that we are winning a larger percentage of new platforms, and that is propelling the growth even into 2023. So it's hard to put a number against what percent of our valve ship with a module. We don't look at that as a company. But I'd say overall, I see no slowdown in our win rate in both the modules and the motion components. The second question, could you repeat the second question again?

Yes. Well, just on the next-generation EUV platform that I think is shipping next year, the e-model. I think you've talked about shipping a module to ASML rather than a pure valve and whether -- I think you talked about a significant uplift in content per litho machine.

Yes, yes. I can't go into detail, obviously, about the exact components we're shipping to ASML. What I can say is that based on their current forecast, we expect our business with them to significantly increase in 2023. And again, that's the type of thing we're trying to take into account when we look at our volume for next year. We've got significant reduction in certain platforms and we've got significant growth in other platforms. So trying to come up with an easy forecast is, as usual, quite challenging.

Got it. And maybe just on the inventory -- OEM inventory, you said it was quite lean. So does that mean that when things snap back, they should snap back quite fast because in the past, when you -- in 2019, you had quite a lot of excess inventory at OEM's. So you took quite a while long time to digest. But right now, just to confirm, from what you see on your consignment and all that, it looks quite lean.

Yes. I think it's in good shape, far better shape than it was in 2019. So I think the reaction time to the market turning would be quite fast in terms of order intake. That's why we're saying we expect to see, assuming the memory investments start kicking in again in the first half of 2024 that we would see business coming back in the fourth quarter of this year.

Okay. Is there a question here?

So you mentioned that China is now 20% of your revenue. If I remember correctly, it was around 10% in the past. And you also mentioned that now OEMs try to ship as much as possible before the sanctions. So what percent of that growth is actually just trying to ship as much as possible and what is maybe linked more to the actual underlying demand. And second, we've seen a lot of -- or some cyber attacks and also stealing of information. So have you experienced any of those? Or do you have any measures against that?

Okay. I'll take the first part and Fabian can talk about cyber. Yes, 20% of our revenue covers all the markets in China. And I mentioned before solar is predominantly China. So a big percent goes into solar. It's also becoming the largest advanced industrial market. So things like coating on a daily basis. This is normal business these days. And we have, therefore, really stepped up the game, both in terms of resources, the systems and processes behind. But the most important is your employees because these are the ones that still impose the highest threat to you as a company. And so we have -- every week now, we have trainings that each and every one of our 3,000 employees has to go through. They're short, 3 to 5 minutes, but it's all about the awareness and the perception. And I think there, we're really changing the ball game from what we did in the past. On top of that, we are now also going for an ISO 27001 qualification for information security. We have all the measures already in place, plus one of the threats that we have as we have so many suppliers, so many small and medium enterprise companies, some of them even close by in the Rhine Valley. We're also educating them and this is part of our supplier assessment that we also look at their cyber resilience we have also there a rating system. And we also educate them and bring them up to a higher level that we do not have an attack there, which ultimately also hurts us if we can't get the components or if someone comes to VAT through the suppliers. So I think there, we're really doing well, plus also in the constant exchange with our customers we also learn from the activities that they are doing. So it is -- and I can assure you, it is very high on the agenda. And yes, it's a constant topic that will also knock our way.

Okay. So in the interest of time. Thank you very much for joining. We close the call and the event here. And so next up is our Q1 trading update in April as usual, and then the half year results at the end of July this year. So I hope to see you all again then and hear you. So now we'd like to invite you for a quick bite here in the back. Thank you very much.

Thank you.