VAT Group AG (VACN) Earnings Call Transcript & Summary

Good morning. Welcome to the VAT Full Year Results Presentation today here in Zunfthaus zur Waag and online via webcast. It's a delight to see so many people in the room here today. Maybe 1, 2 organizational points before we hand over to management. We are doing a presentation followed by Q&A. And for those of you today here in the Zunfthaus, there's going to be a little lunch prepared afterwards on the second floor. It's a pleasure to introduce you to Urs Gantner, our CEO since the 1st of January; and to CFO, Fabian Chiozza, who you've also seen before, who will take you through the presentation that is both available online as well as on the desks here. So without further ado, I'd like to hand over to Urs to take you through the presentation. Thank you.

Thank you, Chris. I assume you all know, Chris, right? Thanks for the introduction. Also from my side, welcome. Thank you for joining us here. VAT has pre-released the preliminary figures, including orders, EBITDA, EBITDA margin already in January 11. And you have seen today, there is no big surprises and no deviation from the numbers we presented then. Today is my first earnings call and I want to get ahead of any questions about change. That's the most question -- the urgent questions I always get. As former Head of -- you know, I have been the former Head of the Semiconductor Solutions Group. I was part of the team that developed the VAT strategy since the IPO day back in 2016. The last update has been presented at the Capital Markets Day in 2022. And despite the slowdown in 2023, we are on the path and we anticipated -- we are on the path we anticipated. And I firmly believe we have the right strategy and the right team in place to execute on the ambitious targets. Our focus in 2023 has been on maintaining our ability to ramp and further accelerate our technology lead and product road maps. I also want to highlight that our executive and senior management team has -- is complete again. In November, we announced the hiring of my successor for the Semiconductor Solutions Group, Finn Felsberg, but we also have promoted several internal talents into leadership's role. For example, the new Head in Advanced Industrials business and the Head of Technology and also a Head of Global Sales, all internal talents. Today, as you have seen, I'm joined by our CFO, Fabian Chiozza, you all know; and our Investor Relations team, Michel Gerber and Christopher Wickli. So let's get going. So first, what we will cover today. First, I will go through the highlights for the fiscal year 2023. Then Fabian will go through the detailed financials. I will give you an outlook about 2024. And then we will conclude with a Q&A session. So let's turn to Slide #4 of the presentation that is available on our website. So the year '23 was interesting as we have seen 3 dynamics develop. First of all, it was geopolitics. Geopolitics have resulted in increased regionalization activities of chip manufacturing and supply chain. Second, our clients have been managing down their inventories, which are now on kind of a normal level again, and that's also confident that the year 2024 will be an upcycle for us. And third, there has been a shift in application, especially lithography has considerably increased in importance and the share of the total wafer fab equipment spend. As a result, VAT's market, especially the semiconductor business, has seen a change in investment environment. We have seen orders drop from the record levels we achieved in 2022 and gradually recovering during the year. Overall sales dropped by 23% compared to the record year. Also, our Advanced Industrial business increased revenue year-over-year by a remarkable 20%. On profitability, and I cannot emphasize this enough, we have proven that our business model works through the cycle and that we could deliver a very healthy EBITDA margin throughout the year and especially in the second half of 2023 where we crossed again the 32%. Innovation in semiconductor never stops. So Moore's Law continues. We have that discussion many years back that this is going to end, but we just see it continues. The technology road map we see from -- which you might know from Imec, goes into the next 10, 15 years, and there will be new transistors coming. So that's the driving force also for our innovation and we see that this also ended in many, many spec points. Our customers, they have to prepare their tools, and we have a record high in our spec wins. This gives us confidence in the growth in the following year. This is also why we have not stopped investing in capacity, investing in R&D capabilities through 2023. We want to be ready for our clients. That's the most important in semiconductor. And so I'm very optimistic about 2024 that we will turn that in a growth year. We expect the acceleration more in the second half, benefiting from restocking, from the positive tailwinds, requirements in new fabs. There are up to 100 fabs under construction nowadays. New technologies will kick in, such as Gate-All-Around technology, high bandwidth memory. And also, there is a huge focus on ESG coming, what we expect. So first thing for you to remember today, VAT is ready for the upturn. Slide #5 gives you an overview of our full year key figures and the segment breakdown. I will not spend a lot of time here since Fabian will then go into the details here. In Valves, our largest segment, it's about 80% of our sales. It's about on the same level as 1 year ago. This also means and indicates that the Global Service business decreased similar to the Valves business, mainly due to the very low fab utilization. That was a little bit of surprise, but the fab utilization, especially in memory, was that low that the customer started, the end users started to use the equipment they have, cannibalize their tools. And so the service business went down as well. Our free cash flow declined by 17% to CHF 189 million. However, our balance sheet remained strong. And this gives us the confidence to maintain our dividend level for 2023 at the same level. And we will propose to the AGM, CHF 6.25 dividend for this year. So unchanged to last year. Last point here, the 120. This is in my heart -- especially in my heart. This is the technology, the spec win. As mentioned previously, we have been using time to work with our clients. In a down year, our clients, they also have time to develop the new tools. So we generated 120 spec wins. They will not translate immediately in sales, but this is kind of the preparing for the uplift, upturn and the growth in the future. Technology is the differentiator for VAT. And we continue to innovate, delivering products and solutions for our customers. On Slide 6, you see the split of our revenues into the different market segments and regions. With about most of the service business geared towards the semiconductor industry, VAT has an exposure of over 75% towards this industry. As a result, VAT's business development is highly correlated with semi investments, wafer fab equipment spend and the fab utilization. Advanced Industrials now accounts for about 22% after roughly 20% a year earlier. So here, we see the growth in this business unit. ADV is where VAT is coming from. So we are very proud on also our roots and our legacy. And here, we are still engaging with customers as 60 years ago. So our first customers we had 60 years ago are still today our customers, and this is our ADV business. Geographically, 60% of our products and services end up in Asia. And the end use of our products will be even more pronounced in Asia since also our large European and U.S. customers ship a lot of their products to Asia as well. So really, Asia is the hub of this industry. Well, Slide 7 is one of our most important slides. You see our market shares developing of our core products. And we are pleased to report that despite the change in the overall market, we were able to maintain our high overall market share in our core products. Wafer fab equipment was flat, but for VAT, 2 factors were important. First, the leading-edge application did not grow as fast in 2023. And here, we have a much higher share than on the mature nodes. But the mature nodes and the lagging nodes, especially in China, did get a boost, which means huge opportunities in a space that has a lot of legacy components that might need upgrade -- to be upgraded and replaced for technology reasons, but also for geopolitical reasons. So the opportunities in both of these segments are tremendous for VAT. And we are looking forward working with our customers to generate the spec wins that will drive our share in the core from here. So, summarizing in Slide 8 some of the observations we made over the past year. Of course, we will afterwards focus and looking ahead, but just summarizing also what happened last year. In semiconductor, we saw last year the tail end of the market decline that started already in 2022 and continued throughout the half year -- the first half year in 2023. While we all expected 2023 to be something a down year, strong demand from our Asian customers, mainly in China and mainly due to the rising importance of the ICAPS market proved supportive in Horizon 2. Solar markets continued to soften in China, leading to oversupply and limiting new investment. On the other hand, the renaissance of nuclear energy has added to the demand for specialized valves used in the nuclear fuel cycle and also large investments in fusion energy experiments around the world. So this was a key driver for our Advanced Industrials business. Research spending remained strong. This is a kind of a stable order intake we get from research. The demand for our valves in industrial applications are kind of mixed. They are often also related to the semi upturn as semi starting to picking up. We saw also the semi adjacent markets such as silicon carbide are picking up as well. And finally, one of the key drivers of this recovery has been end user demand with inflation concerns still hanging over consumers had. Spending has remained somewhat muted. But in the second half of the year, the AI-enabled technologies started to be a driver of demand for high-end logic and memory chip in late 2023. So this concludes my initial remarks to the 2023. And I want to hand over now to Fabian for a more detailed look into the financials.

Thank you very much, Urs. Good morning to all the participants here in the room and also a warm welcome to those on the webcast. Look, as a CFO, the last year has thrown quite some challenges at us, most notably, dealing with a very sharp decline in the semi markets. At the same time, building up our ramp capabilities. And last but not least, we have also operated in a very strong Swiss franc environment. Our results reflect the overall subdued market conditions in 2023. 80% of our business is exposed to semiconductors. So we saw a material impact not only on our top-line with a reduction of 23%, but also our order intake was down 43% as we executed on our considerable order book. Throughout the year, the whole management was focused on preserving our EBITDA margin and our cash flow despite the downturn biting hard. Ultimately, we achieved a very solid result of 30.6% EBITDA over sales. Whereas free cash flow was down 17%, we remain fully committed to being ready to harness the next ramp. The free cash flow decline also reflects record R&D spend and our ongoing capacity expansions. We were able to maintain a conservative balance sheet with a leverage of 0.2x net debt over EBITDA. So, let's go into more detail through the results. In light of the muted investment environment, our order intake was down 43% as WFE spending contracted. This slowed into Q4 with just a reduction of 5%, including some large projects in ADV that we have commented on earlier this year and also some seasonality effects in the order flow. With the order book reduction of 44%, we ended the year with a value of CHF 292 million. And already in Q4, we started to replenish this order book again with a positive book-to-bill ratio. On the next page, we see the development of orders and sales since the first quarter of 2018. The previous downturn that started in 2019 reached the bottom of order intake in the first semester. So basically, the downturn that we saw in 2023 compares pretty similar to the previous one back in 2019. However, as you can see here from the chart, we had a much sharper decline. Now this is down to mainly 3 reasons, which I would like to repeat here. First of all, customers were reducing their inventories as they saw less demand. You remember that our order intake almost fell off a cliff earlier in 2023. Secondly, we had to deal with the post-COVID slump in device purchases, both from corporates, but also from consumers. And last but not least, geopolitics and regionalization of production have also slowed the overall investment. Now let's draw our attention to our segments for a moment. As you can see here, we had a very sharp decline in our semi business unit in the first semester of almost 60%, which was followed by quite a rebound in the second semester. Overall, a 19% reduction on a full year basis in order intake. This also translated into a 33% reduction of sales in the first semester followed by a 5% reduction. Our ADV business, as expected, has fettered the impact of the sales trough where we saw a growth in sales in the first semester of 5% and even 10% in the second semester, especially as the energy transitions continued. And there, VAT has a very strong foothold in various applications. On Global Services, we saw a considerable slowdown in the course of 2023 and sub-product group saw a uniform development in sales. I would like to highlight spares and repair, which was down 20% in the first semester, but this rate of decline slowed to only 10% in the second half, which now reading could serve as an early indication for increased tool utilization. Retrofits on the other hand were also down 19% on a full year basis, reflecting the muted investment environment. If we move over to EBITDA, I'm very glad to report that our operational measures of our downside protocol enabled us to increase the EBITDA from 29.2% in the first semester to 32.1% in the second semester, and as such, also moving back into the lower end of our earlier communicated margin band. Key measures included a reduction of our temporary workforce, the application of short-time work in Switzerland and also a relentless focus on our continuous improvement initiatives. In addition to our flexible operating model, we were also driving about 2/3 of our costs on a variable basis and maintained about 75% outsource ratio. Putting this into historic context, improved the floor of the last downturn by about 4.1 percentage points. This is a proof of resilience of our flexible business model which allows us to react to this very volatile business environment. While we were just shy of the communicated EBITDA target range, we were adamant that we are ready for the next ramp and spent a record sum into R&D during the last year. Even as we managed the down cycle in 2023, we continued to invest into future capacity and technology. We delivered a return on invested capital of 33.4% and the cash return on invested capital of 30.4%, which is a spread of 19% or 16% respectively or our weighted average cost of capital and reflects the substantial economic value creation. Below the EBITDA line, our depreciation and amortization just increased slightly by about 3%, yielding into an EBITDA of 25.8%, down 36% to the prior year. Net finance costs were substantially higher than 2022 on net FX losses on financing activities. Income tax expenses reduced by a staggering 66% in 2023, resulting in an effective tax rate of just 8% compared to 14% the year before. This was the result of higher profits from the Swiss entities, but also the effect of prior year items in these entities. Going forward, I expect the tax rate to trend towards our mid-term guidance. Taking all of that together, our net income declined by 38% to CHF 190 million. One of our key focus areas in 2023 was, as I mentioned before, the application on our downside protocol and maintaining our ramp capability. Our free cash flow was down 17% for the year, which still reflects a free cash flow conversion ratio beyond the communicated target band of 60% to 65% in the second half year as we ended the year with a 70% conversion ratio. As Urs mentioned before, one of the key mantras of this company is that we invest ahead of the curve and that we continue to prepare ourselves for the expected market upturn. As such, you can see here on the left-hand side, our capital expenditures; and on the right-hand side, our R&D spend. Those numbers increased in 2023 with CapEx of about CHF 70 million. This includes 2 of our large projects being the new factory in Malaysia, but also our innovation center in Switzerland. On the R&D, we hit a new record level, investing CHF 54 million or about 6% of sales, which is at the upper end of the communicated guidance. So the technological parity remains a key moat for VAT to defend our established market position. We continued our conservative balance sheet policy also through the correction year 2023. Net debt increased slightly to CHF 63 million for 2023, resulting in a leverage of 0.2x. This is a testimony of our strong balance sheet that allows us to fund our growth initiatives, but also future investments into R&D. Let me summarize my remarks. In 2023, we have managed a steep market decline in the semi market successfully, utilizing our established and proven downside protocols. The second semester showed signs of improvement. Order flow is expected to continue to improve sequentially. Last but not least, we were relentlessly maintaining our full readiness for the recovery in the years to come. The priorities for this financial year lie in the application of our flexible but disciplined cost management to remain in the lower half of our stated mid-term EBITDA target range. At the same time, we continue to provide ramp capabilities for the expected market recovery as we continue to manage our FX exposure to minimize the impact on the bottom line. Last but not least, we are facing another lighthouse project conclusion in Switzerland this summer with the deployment of our new ERP Microsoft Dynamics, which is planned for the summer timeframe after successful rollouts in Romania and in Malaysia. You have noted with earlier communications that we have started to prepare for this changeover as we are currently building the safety stock to ensure supply readiness to our customer during this implementation. Last but not least, I'm really happy also to confirm our dividend proposal here with a stable dividend of CHF 6.25 per share. With that, I would like to close the financial remarks and hand back to Urs.

Thank you, Fabian, for this deep dive in the financial. I think at the moment, it's also time before we go to the outlook to say thank you. Thank you to the global VAT team. There are 2,666, a number I could easily remember, employees worldwide. They have proven again that they have the ability to adapt to changes, and that's very important in the semiconductor industry. They have demonstrated that and took that challenge as an opportunity for growth, for future growth. You have seen that in the spec wins we have done. You have seen it also in the financial numbers. Everybody is affected on such numbers and big thank you to the whole team. So now let's go to the outlook. The most interesting part for you, probably where it's going, where the market is going, where VAT is going. In this still kind of foggy environment, everybody knows that it's not just an easy announcement, but we have a huge confidence in the market, in our market we are in. We have a huge confidence in our products, what we have developed. And this translates then in all the investments we have done. So given the progress made in 2023, we expect 2024 to be still a transitional year, but investments in semiconductor manufacturing will gradually improve over the course of 2024. China, which was a very strong driver in 2023, will continue into 2024. I do not expect any huge growth anymore, but they are still on a very high level and we will benefit from China as well. 2024 will also be kind of the year of the Gate-All-Around technology inflection. So we see that 3D DRAM and Gate-All-Around tools in the leading edge will help to recover the market. And this is the place where we are very strong. With these -- in these markets, we will also see more and more of our adjacent product introductions and even new adjacent product will be launched in 2024. There is still headwinds to master such as inflation, ongoing geopolitics tensions and also continue to provide uncertainty, but this is not something we can influence directly, but we have to watch and follow our protocols. Wafer fab equipment estimates still not a huge growth this year. So I think there is a consensus between CHF 90 million to CHF 100 billion. So flat to plus 10% overall. But given what we have seen, the inventories going down, we are more and more in the run rate again from our customers, and this will help us to accelerate our sales as well. After 2024, everybody is talking about 2025 and this will be the new record year. But let's see next year what we report. We still believe that because of the fabs that are built, because of the technology transition. In the ADV market, we will continue to grow mid-single-digit. We still see this mainly energy transition and also slow recovery in solar. Finally, in service, we expect that these early signs, which we have -- which Fabian also has mentioned will kick in pretty soon. And with the utilization of the fabs, more services will be needed and also upgrades will come. An important portion of the future business in the service business will also be the environmental footprint of the semiconductor industry. It's a huge discussion on that. Every -- our customers are working on that and the ESG road map. The end users are doing that. And here, the whole supply chain has come with an innovative idea, not only to reduce greenhouse gases, but especially waste. And you certainly have read a lot about the PFAS as well, which is in all the sealing technologies. This will call again for new innovation. So every challenge is always a kind of the breeding ground for innovation. And here, we just display the growth we have seen in our spec wins. Again, about 50% were semi-related and a lot -- big growth as well in the advanced industrials field with all the major wins we had in this energy transition. And for us, very exciting, the build of the innovation center. So we are investing in this down year, invested in a down year and will be fantastic for our teams to enter the new building in almost exactly 1 year from now. So let's close with the qualitative outlook and guidance for Q1 2024. We are now on Slide 26. For 2024, we expect that the business conditions are more upbeat than 2023, but still there are challenges ahead. Fabian told us about our plans to implement an ERP system, which we better complete ahead of the ramp. That's the target we have. We expect higher sales, higher EBITDA, higher EBITDA margin and higher free cash flow versus 2023. For the first quarter in 2024, we expect sales between CHF 185 million and CHF 205 million. Before handing to my dear friend, Michel, before you can still seat, I want you to take home 3 messages from today's event. The first one, I mentioned in the beginning, we are ready for the upturn. So we did everything in 2023 to prepare the next ramp. We are investing and had to cycle our capacity expansion in Penang in Malaysia is bringing us closer to deliver up to CHF 2 billion capacity by 2027. In our headquarter in the Rhine Valley, the construction of the innovation center progressing well and we haven't slowed down, as you have seen, in all our R&D. So we are ready. The second point is we are also on track to successfully execute on our ambitious strategy and mid-term plan, which we presented in the last Capital Markets Day. We still believe that we can outgrow the market with our adjacencies and stay on a comfortable profitable EBITDA level between 32% and 37% and a strong free cash flow conversion rate of 60% to 65%. And the third one, also very important looking ahead, long-term, we are confident that in the long-term market outlook. We are confident that the industry is growing to this CHF 1 trillion industry coming now from roughly CHF 500 billion. So in the next 7 to 10 years, the industry will double. This will call for investments for new fabs and the technology will evolve. So even more vacuum system will be in the market and there is where we play in best. So with that, Michel, the floor is yours. Thank you.

Okay. Thank you, Urs. Let me quickly do a commercial for my second role. As you know, I'm not only Head of IR, but also of sustainability. In the annual report that we have distributed to you today, you will only find a short section on sustainability, as in previous years. The actual sustainability report of VAT will be published in mid-April. Take a little bit more time there with all the data collection and everything. But I think that is probably the fourth thing that I would like people to take away also ESG sustainability in an appropriate way is really at the heart of VAT as well. Thank you. So with that, we will turn to the Q&A. As usual, please try to stick to 2 questions initially. I know sometimes it's hard because you have all these questions and you want to address them upfront, but we want to give all the participants, also the ones on the phone, a chance to ask their question. As usual, I will take a couple of questions from the room to initiate the discussion then we'll go to the phone, to callers on the phone, and we might also get some questions through the webcast. So with that, I would start now the Q&A session. Please do wait for the microphone to be handed to you before you start with your question, because otherwise, people that are on the webcast will not hear you and they will not have a clue of what we are answering about. Okay. So who wants to go first? All right, everybody here. Let's start with Patrick.

Patrick, Berenberg. Basically, I have more than 2 questions, but I will limit myself to 2 questions. So you're not sharing guidance for order intake for Q1, if I'm correct, and you haven't so far, which is okay. However, I'm just wondering if we can expect the book-to-bill ratio to improve to more than 1.1x, the one you had in Q4, which gives us a kind of indication of how order intake could be in Q1? And the second question, that's relatively easy here. Can you remind us your mid-term tax guidance, please? And also remind us the costs related to the rollout of the ERP system.

So from the book-to-bill, yes, we see positive book-to-bill. So book-to-bill be beyond 1 since several quarters now. And we also expect that this will be the case in Q1 2024.

All right. And then on the tax guidance, we have 16% to 18% in our mid-term plan. And the cost for the ERP rollout is somewhere between CHF 30 million to CHF 40 million. But again, that is a multi-year project with an annual run rate of about CHF 5 million.

Okay. Then I guess the next question, we go to Michael here in the middle.

I follow-up on the order intake question basically. Can you explain your sales guidance for the first quarter in relation to the strong order intake you had in the fourth quarter? Just to sort of we understand sort of the dynamics that your sales are following there, because obviously, Q1 is weaker than Q4.

Yes. So we see here also some seasonal effects often in the first quarter. I think that's quite typical in the semiconductor as well, also with holidays and what we see in some regions as also everything has an effect as well. On the order itself, by year end, it's also quite seasonal, some are using budget or some are ordering before a price increase. And so there is sometimes some shifts and we always have to see kind of this Q4, Q1 in kind of a mixed way.

Okay. Then we'll go to Jorn here, the second row.

And the first question would be please on the semi wafer equipment CapEx mix in terms of NAND, DRAM logic and your actual sales performance. I think you indicated there is little to China, you have limited exposure. Do you see any structural changes here that can prevent you from, for example, the semi wafer equipment CapEx was CHF 95 million in 2022 year, sales were above CHF 1.1 billion. Does this algorithm has changed now or deteriorated?

That's a very good question. And also here we see some of the dynamics, right? So if you look back in 2021, 2022, the whole industry was in a ramp and there were shortages everywhere. So shortages in chip, which also affected us or the shortages in elastomers. So everybody started. The lead time went up, doubled, tripled. So customers started to order much ahead of time. And they also took the product in the end. So they filled their inventories as well because sometimes they did not get other products. So this is kind of giving a wrong picture maybe on the 2022 numbers. It's not correlated to that wafer fab equipment. We could deliver, VAT could deliver, but the wafer fab equipment was not able, they also had a lot of installed base. In the CapEx mix, what we have seen last year, it's a huge change or a step-up of the whole lithography. So it's about 10 points up in -- so up to I think 27% for the wafer fab lithography last year. And this was also quite a lot driven by Chinese market requirements. I expect this will level out again since the more etch and depth system will be required in the future again.

And then the second question on your 2025 targets, I don't want to pin you on this CHF 1.5 billion sales. But just if you can indicate, given the current semi wafer equipment CapEx mix and also when we consider there was some restocking happening in 2022 to reach CHF 1.5 billion sales. What would be the underlying semi wafer equipment CapEx you need to see for this? I think in the last guidance, it was CHF 110 billion or so...

So it's CHF 110 million, it's our assumption. But if you look into the market, you'll hear numbers between CHF 105 billion to CHF 125 billion and our assumption is roughly at CHF 110 billion. But this is a very early estimate. And there is not yet a real consensus. I see numbers around CHF 105 million to CHF 125 billion for 2025.

But so at CHF 110 billion or CHF 115 million, it would indicate around CHF 1.5 billion sales for you. Is this the right equation?

No, that's not correct. I think here also ethics plays an important role. If you would have the same as in 2022, then this would be roughly the CHF 1.5 billion was more about CHF 120 billion, CHF 125 billion.

So remember that when we set this mid-term target, we were still operating in a U.S. dollar Swiss franc environment of 0.95. So this has considerably come down. Currently, this would translate into a reduction of about CHF 125 million, CHF 130 million from that CHF 1.5 billion. And if we take this number now as a target, then I would still believe that this is a milestone that we are able to hit if WFE is growing within the current expectations. So there is no reason whatsoever to correct any of these statements that we made earlier on.

Sorry to interest. But then 120, 125 was that would be needed for this CHF 1.5 billion, right? Did I understand this correctly or not?

For the CHF 1.5 billion. You did the calculation the other way around, right, instead of deducting from our sales what additional wafer...

Okay. We have another question here in the room. If this is not the case, then I ask the operator to start with the first question from the phone.

The first question comes from Sandeep Deshpande from JPMorgan.

I have a couple of questions. Firstly, I just wanted to understand on the adjacencies to your valve business. How is that business doing at the moment? And how do you see that contributing in terms of revenues to this year? And then secondly, again, looking at the long-term growth for the business, at your Capital Markets Day, you had talked about this market share going towards the 90% level. Where are we in terms of moving towards that target? I mean, how many years will it take for customers to implement all the design wins that you've already had with them?

Yes. Thank you, Sandeep, for this question. So let's go first to the adjacencies. So the adjacencies in 2023, as I mentioned, was a little bit muted because the leading-edge was not growing that fast. And this you see also in our market share that was just flat. We see that will kick in more if the leading-edge is growing again. We have done a lot of spec wins. So about 25% of our spec wins last year was in the range of -- in the field of adjacent products. Normally to ramp such a tool takes our customers, our clients also 2, 3 up to 5 years. I think this is the number we experienced. So we are on track. So what we guided in the last Capital Markets Day that by 2027 we will be at the CHF 300 million. I think we are well on track to achieve that. On the market share, here, we talk about this market share in our core in the valves business. So we guided about 80% to 85% stretch target from, Sandeep, to go to the 90%. Certainly, we will have almost 100% on leading-edge tools. And then it's more about the mix, which mix will go into the market. So this year, we have seen a lot in the ICAPS market, so more lagging nodes where our share is not at 70%, 80% or maybe on the 50%, still quite good. But this of course is then not going to the 80%, 85%. It depends on the market, what is going, which technology will be ramped.

And then one just quick follow-up. I mean, on the presentation, you've talked about your orders. Have you said that in -- on one of the pages in the presentation that your orders continue to grow through this year and you think that your order book will continue to improve through this year?

Yes. This is what we see and what we also hear from our customers that the orders will gradually grow quarter-over-quarter this year.

And when you mean grow quarter-on-quarter -- because see, in Q4, there were some one-offs in the orders, if I remember right. So you mean from the absolute number or from the adjusted Q4 number?

From the Q4 numbers, yes.

Yes. But from -- Sandeep, when you recall our comments on the Q4 release, we noted that we had about CHF 35 million to CHF 40 million of seasonal and project orders. So the normalized run rate would have been about 195-ish. And when we talk about sequential growth -- and that is a statement for this year. And if you want to compare it to Q4, you have to start with this normalized level.

The next question comes from Sebastian Kuenne from Bank of Canada.

The first question is on China. I'm surprised that you expect China demand to remain at an elevated level. You don't see much growth, but you think it's elevated. But do you actually think it's possible that Chinese orders will actually increase this year? And if so, what is the share of China of your current business? My second question is on the ramping of your capacity to CHF 2 billion. I was wondering what that means for your depreciation costs in 2024, '25? And whether we should expect some pressure on the EBIT margin even if the EBITDA margin goes up? What's your view on the EBIT margin?

So I'll take the China question first. So our share in China did grow up to 25% in 2023. Yes, and we still see a lot of order intake from China. They are still in a boost. China, we see this localization, regionalization. They want to localize as many process steps as possible. So there's a lot of qualification ongoing from applications, which have been served before from the typical Western OEMs. So yes, we still believe there is a lot to do for the China ecosystem in semiconductor and we see this high level activities in China.

And then Sebastian on your questions on the D&A, remember that both large projects are mainly buildings, which have quite an extended depreciation timeframe. Secondly, neither the innovation center nor the new factory in Malaysia will be fully operational at the end of 2024. So we will switch on certain machines that we are currently qualifying as demand evolves, but there, the impact on the depreciation is rather muted in the next year. And if we look at a mid-term number, I would still see that in the neighborhood of around 4.5% over sales. So we had 4.8% in a very muted top-line environment. And I do believe that this will come down given the depreciation patterns underlying to these investments that we are making.

The next question comes from Martin Marandon from ODDO BHF.

My first question is on WFE. Sorry to come back on that, but just wondering about the correlation between WFE and your sales. I mean, like, is it a one-to-one correlation? So if WFE is 10% below previous expectations, so we should expect your sales to be 10% below as well or are there any other things to take into account? And I have a quick follow-up.

Thank you for the questions. Of course, there is a correlation between, but it also depends on what kind of wafer fab equipment. And as I mentioned before, last year, it was a lot of non-vacuum equipment, but the share of non-vacuum equipment was higher than the year before. And our share is the highest on the leading-edge tools, and of course, on the leading-edge with a lot of vacuum. That's more the correlation. So we always have to deduct the part of the wafer fab equipment that is not vacuum-related. So they don't need valves, they don't need vacuum. That part in leading-edge is growing. But as I mentioned before, in 2023, with the ICAPS and also the lithography pool push, there was a little bit of a change in that environment.

Okay. Very clear. And you talked previously about gaining important share of wallet for ALD valves. Is it already materializing into orders or should we expect any pick-up later this year?

It's progressing very, very well and we will inform on due time on that as well. So we will certainly see first orders this year already. But also, as I mentioned before, it always takes time until then it goes to a high volume, because our customers, they also have to qualify the new tool then with their customers. And then it must always be an inflection point in technology and an extreme when you see the growth. But ALD valves certainly is a very nicely evolving adjacency for VAT.

Maybe, Urs, I can just bring in a question that we got over the webcast from Henrik. He would, again, ask a little bit the average time from a spec win to kind of like first revenues. I think we talked about that in the past, but also in connection with the ALD question we just had, it's probably good to remind people how the process is from a spec win to actual revenues.

Yes. So of course, we're talking about average. It can be very fast if there is a huge issue in the field and something you have to solve, it can go in a year, but that's not a normal case. If they develop a new tool, our customers, they also need 5 to 8 years sometimes from the tool development. And if they do not, then new process chambers -- every process needs a kind of a specification, a new specified process chamber. Typically, it goes 3 to 5 years until you go to high volume. That's the normal number.

Okay. And then maybe just keep it on the webcast. Generative AI, NVIDIA and so on, hasn't been asked yet, but we have a question here. How does that influence VAT's business?

Well, of course, we love all the inflection points of technology that's coming in. In the past, it was mainly driven by kind of single event. There was once a PC coming, laptop coming, then the smartphone coming, Internet coming. And today, it's more about everything is coming. It's much faster and multiple things. And AI is one of the element that is now kind of driving the leading-edge technology. They will need the next generation of logic chip, but also the next generation of memory chip. It's not yet a huge share in the overall. I think TSMC announced some numbers, but it's one of the biggest growing they expect in the future. So for us, it's fantastic. So there will be more chips, more leading-edge chip used and there is where our customers will deliver products and we as well.

And maybe just say a little bit on the technical side since we have you here. Can you talk a little bit around the valve content and Gate-All-Around, 3D DRAM or HBM versus, let's say, normal average?

Well, the valve content in general is roughly the same because they all still need the same equipment tools. So they need lithography, they need the position etching tools, but they will need more chambers. So there will be more process steps. And with more process steps, the wafer takes longer until it is complete. And the more process steps, the more equipment will be out. And this is also kind of boost for our business, yes.

So quickly, I'll look around here in the room. Any follow-up questions from here?

Maybe my first question on the capacity in Malaysia. I mean, you mentioned that you're now fully ready for the ramp-up. What would be the capacity right now? And also, if I recall correctly, you said that for every Swiss employee you need 3 in Malaysia. Has this ratio somehow changed or what is the productivity there?

That's a rumor, right? About capacity, yes, the facility is there. Of course, it's not fully fledged at the moment. So we have the 1A and the 1B. And 1A, we are roughly at maybe 60% utilization now or 70% utilization and we start using our 1B now as kind of a supplier for the 1A because supply chain is the biggest risk for a ramp. Supply chain in Europe, it's well established over the last 60 years for VAT, but in Malaysia, it's still also a challenge and we want to be ready. That's why we did also 1B, using this 1B first as a machine job as well for our 1A. And once 1A is fully operational, then of course, we have the capacity in Malaysia to grow. It's as we say, we are investing ahead the cycle. It's not that it's fully running, then we would just need to build another building again. So that's why it will gradually grow with the market in the next 5 years.

And on the second part of your question, it's not that people in Switzerland are 3x more productive than the ones in Malaysia. But when we look at direct labor, we have a fully loaded cost benefit in Malaysia of about 3.5x to 4x. So that is what we have said before. And if you look at an overhead position, so for instance, an engineer, this then reduces to about 2x to 2.5x roughly.

Okay. And maybe as another question on the adjacencies. I couldn't see the number in the annual report, maybe it is there, but I couldn't see. I think last year, you had around CHF 100 million. And if not mistaken, even in H1, you provided the split of motion control and advanced modules. So I understand that you said there was a different mix this year in the wafer fab equipment spend, but can you maybe provide more information how it would develop if the year was, let's say, the same split as last year?

Well, of course, it dropped also as has the whole semi market for us dropped by roughly the 30% range. So also in the adjacencies, you would see the same drop. So if the number was roughly at CHF 100 million, it must be around CHF 60 million to CHF 70 million what we have in the adjacencies, I would say. That's why we focus more now in the down year that we can win more of the adjacency for the future. I think that's what is our driving force. And we did hear a lot of spec wins, as I mentioned, about 25% of all the wins are related to our adjacent product.

Okay. Another one from the room.

Yes, a quick one. Can you share your thoughts on what you expect in regard to the use selection for your industry or for VAT? What is the official wording from your side?

I'm Swiss.

But your Board probably also has some source.

So normally, I'm then neutral. Well, this is something we cannot influence, but I see both parties, it's -- they have a focus on semiconductor. That's on one side positive. It's a priority for them. It's a lot of investments ongoing. On the other hand, you don't know what's coming on a geopolitical side.

But would it limit your exports to China, for example? Would this be a case?

It's a scenario, but we don't expect that.

One more from the room here.

You mentioned that you had a lot of design wins, 120 design wins. Is any of that in the Chinese market? Are they building yet because they are spending a lot of money on new fab equipment?

Yes. So we have a lot of spec wins in China as well. So there are a few very big companies in China building wafer fab equipment. And also there, we have quite a high number of spec wins.

Okay. And operator, with that, we go back to the people on the phone.

The next question comes from Robert Sanders from Deutsche Bank.

I guess, my first question would be around your spec wins. In the past, Mike used to talk about sub-systems being a big driver of your content per machine. And I was just trying to understand what percent of your spec wins included kind of sub-systems. And I have a follow-up.

Yes. So this is still the -- volume-wise, the biggest portion is on the sub-systems, we call them the advanced modules. That's the biggest portion on our adjacency today.

My question was what percent of your valve spec wins were including sub-systems as opposed to not including subsystems?

In the spec wins, of course, we did differentiate all the sub-systems include also valves, right? So the sub-system normally include valves, it's an integration of our valves in a sub-system and then it becomes one spec win even if you have 10 different valves then in this sub-system.

Got it. And then on the margin, you've obviously got different things happening. You're going to be presumably restarting some of your employees, et cetera, but you've got input costs that I assume will start declining. So -- and you've got FX headwinds. So maybe you could just pass the different headwinds, positive and negative as you move into 2024, whether it's FX, input costs and perhaps higher employee costs?

Yes. Maybe let me start on the headwinds. As you rightly say, FX, somewhat unpredictable. Now if I look at the latest reports, this suggests that we would actually always talking about the Swiss franc to the U.S. dollar, do we see kind of a sideways development, which I would certainly welcome. On the other hand, we are adding workforce now into the first semester as we are preparing for the ERP changeover. We will build safety stock, and therefore, add back some temporary workforce. That was also the reason why we have decided, amongst others, to end our short-term work regime. Then on the input cost, I would expect that we see a bit of an easing on the material cost. So initial assumptions that we have received in Q3 were certainly a bit higher than what we see right now. And last but not least, this is both valid for the coping with the increased input costs and other uncertainties, but especially also to prepare our run rate for the future ramp is that we've put a continuously high focus on our operational excellence programs that have served us so well in 2023. And with that enhanced run rate, I would then also see that any operational leverage that is kicking in during the course of 2024, will definitely help us then to mitigate some of these adverse effects that I have mentioned before. So overall, on a comparable basis, I do expect a muted to slightly upward trend on the gross profit margin. And on the EBITDA, as we have commented, we aim to return into the lower end of our margin band.

The next question comes from Craig Abbott from Kepler Cheuvreux.

Yes. Two questions from my side. First of all, you elaborated a bit on the earlier question regarding the AI growth driver. And I recall this was embedded in your mid-term targets presented at the '22 CMD. It was by far expected to be already then the biggest end market driver, I think around 30% CAGR or so across the cycle. And I just wanted to know, have your assessments in general about the growth contributions likely to emerge over the next years from the investment in AI-related leading-edge? Has that changed materially or not with the recent positive AI news flow? That's the first question, and I have one more pending.

That's a little bit of crystal ball question as well, how AI will evolve, right? So at the moment, certainly it's a hype. Everybody is talking about it and we read it every day something new is coming out. We had other hypes in technology before. And normally, after a hype, it's kind of maturing and becoming a maturing technology. For us, I see it in a way, yes, it's driving at the moment this leading-edge chip and in memory and logic. We see the growth probably from -- at the moment, the contribution is between CHF 1 billion to CHF 5 billion in CapEx as a rough estimate. So it's a growth. Yes, it's an additional. And that's good and it's leading-edge. But still, as I mentioned, it's still hard also to differentiate what's now pure AI and what would have been done as a leading-edge chip anyway.

But bottom line here is that it's just another vector of our trajectory towards the CHF 1 trillion industry. And as it was rightly said, if you listen into TSMC, they say they have about 2% of their spend. So say CHF 1 billion is AI-related that has a significant CAGR up until 2026, '27 that brings this to CHF 5 billion, so about 10% of the spend on a comparable basis. So yes, there is huge growth. But in absolute terms, of the overall WFE cake, is still a rather small number.

Okay. Very helpful. And my second question is just on the services business. I just want to confirm, I mean, what you saw in '23 was just cyclical downturn, low utilization rates. You said yourself sciences is picking up. But I just wonder because I know there was a discussion with one of our previous calls, did you see any erosion in your market share, i.e., have you seen any customers beginning to in-house more of the service refurb activities and/or are you seeing more local competition? And I'm thinking particularly in China, which now is 25% of your sales?

Yes. Service business certainly was affected -- was a little bit of surprise, but it was mainly, as I mentioned, utilization, especially in memory was really low. I think it dropped to the 40% region, was not expected at that time. So we see once it's going up to the 60% to 80% then investments start again. If you have a utilization of 40%, they did just shut down the tools. They're just not using it anymore. And of course, they use the spares from tools before they buy new ones. And this has happened in 2023. Competition in commodities and spare parts is always there. So we always have to serve better our customers. And it's a way we also bring in upgrades that they can -- this is the best way to defend as well that you come with upgrades and tool upgrades to have a better total cost of ownership in the end.

The next question comes from Olivia Honychurch from Jefferies.

My first one is on your visibility. I believe your lead times are around 3 months. But obviously, you're commenting that you expect orders to grow sequentially through this year and you've also given qualitative statements that you're expecting 2025 to be a record year. What gives you confidence on that outlook? Is it based on genuine customer pipeline or is it more of an overall commentary on the trends that are expected at the market level? And then I have a follow-up.

Yes. Visibility is pretty accurate. It depends of course on the different type of products, but 8 to 12 weeks is roughly -- so we are back on a normal lead time for product again. So this is certainly the visibility you have on hard orders, but -- and that's very important. So of course, we have a set-up, a global account set-up that we daily talk to our main clients, to our customers and align the way going forward, talking about their consignment stocks. So we have a better visibility aligning with our clients, also their build plan correlating to the wafer fab equipment. What we hear also for the big ones, the IDMs. And with that, of course, we have this visibility and this confidence what we presented today.

My second one is on valve content. I know a few questions have already sort of touched on this area. But I just wonder if you could give us an idea in quantitative terms on the content growth you're expecting in 2024? And how much that value increase fees into your expectations for the full year versus on the volume side?

So you mean the valve content on such a wafer fab equipment tool or in general?

Yes. So on WFE, how much valve content growth you're expecting for this year? And how does that compare to what you're expecting in terms of volume growth for VAT? And how does that relate to your 2024 guidance?

Yes. So the -- our valve content of course will just grow with the number of tools going into the market, especially if it's leading-edge tool where we have close to the 100% of the valve content on leading-edge tools. So this content will grow if leading-edge kicks in. So it's quite good correlated in the wafer fab equipment tools, especially if you just consider the vacuum-related tools.

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

A quick one. I wanted to understand where you are in your journey to penetrate EUV? Where are you in terms of market share in EUV valves? And I've got a follow-up.

EUV also was a hot topic quite a time ago. It's also quite political. As you know, that's a very specific tool. A fantastic client for us, highest requirements in valve in cleanliness in particle, must be particle-free, absolutely clean, also the vacuum system behind that, exactly the spot we want to be in. And we had also quite a few interesting wins on that field. Normally, of course, we don't talk on any customer that's quite hard on EUV. I'm not talking about the customer, but we also had spec wins and an interesting collaboration with that client.

Okay. I mean, I think if you look at [indiscernible] roughly at 3% of the COGS of your customer. And so I guess another way to look at it would be, are you at 1% of the COGS of an EUV system or are you already at 2% or are you closer to 3% even?

Well, if you can tell me the COGS of an EUV system, then I can calculate it.

I don't know. Assume $100 million.

Yes. It's certainly lower than on a typical etch tool because also the much lower than on an etch tool and deposition tool certainly, but I cannot disclose the number.

The next question comes from Timm Schulze-Melander from Redburn Atlantic Aviation.

Yes, I'm not sure about the aviation bit. I had 2 questions. First one was, if I heard you correctly, did you make a comment that said 3D DRAM will help recover the market? If I heard that correctly, could you just maybe give us some color about what you're seeing expectations on timing? And then I had a follow-up.

Yes. This is all driven by this AI. Also, they need not only logic, they need also the high bandwidth-based memory. And this will all together they need is leading-edge chips. And this is what we expect will boost its recovery this year as well.

Okay, great. And then maybe for Fabian. In the release, you talked about an FX benefit of 160 bps. So I just wanted to understand, does that mean that the full year margin would have been 29% without that FX benefit? And normally, if it's a transactional hedge, we wouldn't see it. It would just net off the cost and the benefit would just net off and we'd see you book your reported profit. So is this 160 bps above and beyond the sort of transactional hedging? If you could just give some color about what the puts and takes are and what the underlying kind of rates are that would be really helpful?

Sure. So in terms of FX, let me start with the top-line where we had about 7% reduction on a comparable basis. This translated into a net EBITDA FX exposure of about 3.5% to 4%. And given our very favorable hedging activities over the course of the last, say, 15 months, we were able to overcompensate that to come then in with a hedging gain, which helped to absorb all the negative revaluations that we have had above the EBITDA line. So you have -- there, you have a benefit, that's correct. And below that, we have this net finance costs of about minus CHF 21 million, which were mainly due to effects on our foreign currency bank accounts, plus also some intercompany loans that we had to revalue.

Okay. So those -- okay. So below the line, those are balance sheet mark-to-market impacts, but the 160 is over and above the transaction. So I guess, do you have some of that still helping you as a tailwind in 2024? And then maybe just one quick clarification. On the press release, you talked about a 7% increase in spec wins. And in the presentation, you said it's 20%. And I just remember, I think Mike Allison said that there were, in general, fewer spec wins, but larger value. So does the 7% refer to the number of spec wins and the 20% related to their value, that would be really helpful?

Maybe I'll take the first question on what to expect now with regards to our running hedging activities. I suggest you have a look into the notes of the annual report where you see the fair values of the hedges. And there, you can derive that we still have a couple of millions in positive hedges that will benefit into the first semester of 2024.

Yes. On the spec wins, it's 7%. In absolute numbers, yes.

We have a follow-up question from Sebastian Kuenne from Bank of Canada.

I have a question regarding the vacuum intensity for the next-generation chips, 2 nanometer Gate-All-Around. You mentioned that, let's say, per layer, the content of vacuum doesn't really increase, but I was thinking if you use more EUV, you need more vacuum for lithography. If you do atomically the positioning, you need vacuum compared to chemical repositioning. So the content per layer seems to increase as well. I would like to have that confirmed. And then in a similar direction, if you compare a 2 nanometer chip coming up now to a 10 nanometer chip of older designs, how much more steps, how many more steps, processes do you actually have that? Just to give us a context of the intensity here.

Yes. So you mentioned actually, all the CVD, PVD, ALD etching steps they are under vacuum. So that's all vacuum processes. What was the big change was lithography. Historically, was not a vacuum process and now with EUV it becomes a vacuum process, but also it's substituted in the beginning some of the patterning processes, so less etching, less deposition, but this has already been overcompensated by the number of process that in total. And we see in the now Gate-All-Around technology, and this will be the 3 nanometer and below, there is about 30% more process steps coming.

Compared to 10 nanometer?

Yes, correct.

Okay. I think with that, we are approaching our 90-minute deadline that we have set. I think you probably are a little bit hungry by now. We have exhausted all the questions on the phone. Maybe I look here into the room if there are any additional questions in the room. If not, then I would like to thank you for your interest in VAT. We would close here. As a reminder, Q1 trading update will be in mid-April. And then in late July, we will give you the half year report, hopefully with good news. And with that, we invite you here who are present for a little lunch downstairs one floor down. Thank you very much.