VAT Group AG (VACN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Half Year Results 2024 Conference Call and Live Webcast. I am Maria, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Urs Gantner, CEO. Please go ahead, sir.

Good morning, ladies and gentlemen. Thanks for joining this webcast on our Q2 and half year 2024 results. We have done things a bit differently this year, by not publishing preliminary key figures earlier but by speeding up our closing process and delivering final results a week earlier. We now are one of the first companies reporting in the sector. Today, I'm joined on this call by our CFO, Fabian Chiozza. Also here with me are Michel Gerber, and Christopher Wickli from our IR and sustainability team. Let's move to Slide 2, the agenda. For today's agenda, we have scheduled the following 4 parts before opening for Q&A session. I will start with the highlights of the Q2 and half year results, and then Fabian will go through the results and financials in more detail before sharing some of our 2024 sustainability efforts. I will then conclude with the look ahead, followed by the usual moderated Q&A session. Move to Slide 4. We have a lot of ground to cover before we start with the business review. I want to share some observation I made during last week SEMICON West Trade Fair in San Francisco. The VAT team had a great set of meetings with our largest customers, and you might have seen already some commentary and feedback from the event. Aside from presenting our products and meeting customers, there is a different aspect that is important at SEMICON. It's a chance for the industry to come together and discuss some of the challenges that face us all. The one thing I think remarkable in the industry is our collective focus, delivering on the promise of the USD 1 trillion semi industry, continuing to push the boundaries of R&D beyond what is physical possible, and at the same time, ensuring that the core product, the chips remains affordable. We are facing as an industry, some real challenges, like ensuring that talent is nurtured. We have set net zero targets for the industry and we are establishing a new normal for our supply chains, especially after COVID. Finally, geopolitics are impacting where and how we will be manufacturing as an industry. The level of cooperation in the industry is astonishing, and I believe, unique to the semi space. We had established in various forums to address these topics. We have spoken to you previously about the Semiconductor Climate Consortium and Energy Collaborative, for which VAT was founding member. We have also introduced a comprehensive workforce development program, which includes both raising awareness at the young age, but also reskilling and upskilling and training to chip workers. Finally, the SEMI International Policy Summit, SIPS serves as a platform driving alignment across industry, government, academia and civil society. So let's move to Slide 5. On Slide 5, that's available on our website and we will look at an overview of the half year key figures and the segment breakdown. Valves, our largest segment accounted for about 81% of our sales, which is up from 79% in total a year ago. Global Services grew as well, proportionally less so, which explains the somewhat smaller share in H1 sales. As we communicated back in March with the full year 2023 results and reiterated in April with our Q1 2024 trading update these markets have seen continuous recovery since Q2 2023 with sequential growth in order and sales and with our book-to-bill ratio remaining above 1 for this period. We achieved sales of CHF 450 million, flat compared to our H1 2023 sales. Our EBITDA margin increased by 0.9 percentage points over H1 2023, standing at 30.1%. We achieved 48 spec-wins in H1 alone, 17% higher than last year. Fabian will give you a deeper dive into the numbers, so I will focus on discussing some of the key observations in H1 2024. Next slide. Orders have been up this half year by 74% compared to last year and are up sequentially 50% compared to the first quarter of 2024. This has been mainly due to the order recovery of 140% in the semiconductor business unit compared to last year, which has also increased 23% over the last quarter. Sales and orders from customers in Asia, especially China, have remained strong. Regionalization remains a key topic and a driver for demand from the region. Utilization rates are on the rise across logic and DRAM fabs, and we are hearing indication that NAND utilization rates are slowly creeping up as well. And yet, despite all the good signs, there are still areas where semi markets are recovering more slowly. Consumer electronics sales are running slower across the world as economies are grappling with residual post-COVID inflation. Some industrial and automotive chip makers are still seeing slow demand due to high inventory levels at their customers. Our ADV business saw a decline in orders of 23% versus Q2 2023. For energy transition applications Solar remains sluggish, while our sales of Valves to nuclear enrichment and fusion continued at a good pace. Some end markets in the industrial and scientific instruments business remained muted as well. The Global Service segment has continued to see improving market conditions. Chip fabs are seeing higher capacity utilization levels with certain customer fabs reporting over 90% utilization, which in turn increases demand for VAT consumables and spare parts. Sales of replacement gains have grown strongly at 40% plus over H2 2023, while spares and repairs are showing a slower growth that is in the [ 20s ] but also posted sequential growth. Six months orders are up 37% versus the same period last year. While demand related to logic tools was stable. Demand increased for the service business from memory manufacturers. In the retrofit and upgrades business, it is currently engaged in qualification activities with fab customers who are creating capacity in anticipation of strong demand. Finally, for the group, sales of CHF 450 million for H1 are flat at less than 1% below the levels of last year. Last year's numbers benefited from a strong order book that we were able to execute during the order slowdown whereas the sales for H1 2024 are effectively the conversion of orders received during the last 6 to 12 months. Sales to our customers across semi include both our top OEM customers as well as our emerging Asian OEM customers. On profitability, the EBITDA margin for H1 2024 was at 30.1% versus 29.2% last year. We have maintained our efficiency measures from last year, but with a focus on getting ready for the ramp, we continue to execute our CapEx plans and R&D at strong levels. Our plant 1b in Malaysia remains on track to open at the end of this year. I was there just a few weeks ago and the space and capacity we have available are exciting. Our innovation center here in Haag is progressing according to plan as well and is on track for opening early in 2025. Note, we might even meet you there for our annual media conference. We have mentioned several times our ERP implementation to you in the past, and this continues to be a focus with the actual transition to be completed in the coming weeks. The good news is we have successfully done these, 2 of these implementations in the past in Malaysia and in Romania. The good news is that clients have commended that these transitions have been completely unnoticeable to them. And there is no bad news. We are working with the same protocols for the transition in Switzerland. You know that there could be shortfalls, which we have entered for and our sales guidance for Q3 sales is taking all this into account. From our perspective, we believe that the semiconductor investment ramp is imminent and as previously stated, we must maintain a high degree of readiness. Our close dialogue with customers gives us good visibility on what we can expect in the coming quarters. We have started to hire again both as workers and full-time employees. Our employee count increased just shy of 3,000 at the end of H1 2024. A plus of about 12% compared to the end of 2023. So for the rest of 2024, we confirm our expectations of higher overall results. The degree to which we will be above last year's result will ultimately be driven by the CapEx of fabs updating to the latest tool to manufacture the most advanced chips. There are several promising data points such as new releases of smartphones later this year or memory manufacturers announcement of increased CapEx in 2025. Let's talk about outlook a bit later. And let's go to Slide #7. Chart #7 gives you an overview of the segment and regional breakdown. I don't think there are any surprises here. On the left-hand chart, we reiterate that about 80% of our total business comes from the semiconductor market. Compared to last year, ADV is lower by about 6 percentage points and 15% of sales. We have always said that ADV is a bit lumpy and often driven by large projects. While the nuclear enrichment infusion project business is running well, the solar and scientific instrument businesses are underperforming, especially the latter was expected to recover post COVID over ordering, but this recovery seems to be delayed into 2025. The regional split shows a very similar picture to what we showed you one year ago, confirming that we continue to develop very much in line with the global wafer fab equipment split. Around 2/3 of our business come from Asian customers, 1/5 from the U.S. and a similar number from our European customers. To preempt a question, direct sales to domestic Chinese customers were around 28% of group sales during the first six months of the year. Let's go to Slide 8 to the market trends. I've covered some of these points already in the previous remarks, but wanted to be recapitulate some of the developments in our key markets. Our largest end market is the semiconductor market. Memory manufacturers are seeing higher demand for DRAM driven by the introduction of HBMs and have been able to sell down inventories. NAND still is recovering slowly, but steadily. The logic market is seeing increased demand for leading-edge chips again, fueled by AI applications. This is visible also in the PC and desktop market where major manufacturers have presented their new models, which incorporate AI function as a new feature. At the same time, WFE spending in 2024 has not seen a significantly higher pickup versus H2 2023. While 2023 was about the recovery of [ wafer fabs ] 2024 to date is a normalization of spending pattern. Our customers had built up significant inventories which they have been managing down over the course of the last year. The current levels look normalized and we are seeing a good run rate of sales that corresponds with replenishing these normalized inventory levels. Finally, with the introduction of EUV machines, there is also a notable shift in the wafer fab equipment spend towards lithography, which used to make up [ 15% ] of WFE and now is closer to 30%. In solar, overcapacity continues to dampen orders from customers. Our energy transition customers continue to work closely with us and fusion and uranium enrichment projects continue to drive demand for our valves. The impact of recent elections if left wing wins in U.K. and France must still be assessed, but nuclear power was not key policy for the parties involved. Our industrial and scientific instruments, the expectations were to see a recovery in 2024. Our conversation with customers indicate that they are not yet seeing the demand they were expecting. Finally, consumer and end-user market demand for products such as smartphones and TVs are still volatile. Macroeconomic data on inflation and consumer spending has been mixed in H1 but the presentation of AI-enabled smartphone in the past months has shown that technology is progressing for consumer application as well. This concludes my initial remarks for the H1 review, and I would like to hand over to Fabian for a more detailed look at the financials.

Thanks, Urs, and welcome to all of you who are joining us on the webcast today. Let's start on Slide 10 with a quick recap of our key figures as Urs has covered the highlights already. Our results reflect the overall normalized market conditions in H1 '24. We have recovered off the '23 lows and are operating on the normalized conditions. So look at these numbers as a normalized base as we have gone through the recovery and we are still preparing for an industry-wide ramp. There are four key messages around to demonstrate to you in this section. While orders are up considerably versus prior year sales are flat. This is due to the strong order book we had last year and that we were able to execute on. In the past three quarters, our book-to-bill has remained above 1, which means we are rebuilding our backlog. Our planned ERP implementation in the third quarter has limited impact in the second quarter on the current business, and we expect a small reversal of these effects in the coming quarter. During the second quarter, the pending ERP implementation has boosted sales by around CHF 8 million or about 3% to 4%. We have been coordinating with our customers to deliver their requirements ahead of the planned production shutdown in early August. This is nevertheless important to better understand our Q3 sales guidance on which we will elaborate later. Profitability remains a focus for VAT, but we are in a phase where we still and must invest in anticipation of substantially higher customer demand in the next industry wide ramp. VAT achieved an EBITDA margin of 30.1% despite high investments into R&D. Free cash flow of CHF 26 million, down 29% year-on-year reflects the still high capital expenditure related to the new plant 1b in Malaysia and the new Innovation Center in Switzerland. Both these projects are expected to be largely finalized by the end of this year. CapEx in the first 6 months amounted to CHF 40 million or 28% more than a year ago. Let me take you in detail through our results. Chart 11 shows the development of orders in the second quarter and half year. Our customers have managed to reduce their inventories in the past quarters and current order patterns are what we believe to be the regular run rate. Thus, we have seen continuous sequential orders and sales growth since Q2 2023. In Q2 '24, we achieved orders of CHF 271 million, up 15% over Q1. Main contributor was the semiconductor business, where orders increased 23% quarter-on-quarter. This amounted to CHF 251 million, which was up 27% on last quarter and in the upper half of sales guidance we communicated to the market at [indiscernible] versus 2023 group orders for H1 of CHF 507 million surpassed H1 '23 orders by 74% again with a significant increase in the semi business of over 149% versus H1 '23, our sales were flat, demonstrating the importance of a strong order book in a downturn. Our order backlog in H1 has seen small growth of 7% and 2%, respectively, versus both previous quarter and the same period last year. FX impact in our 6-month sales amounts approximately minus 4%. We've been talking about the ERP implementation a lot with you for a good reason. Keeping customers in the loop has been important for us, and we have had a close discussion on ensuring that all our customers receive their required orders during this downtime. At the start of August, we will effectively have 2 weeks in which we will not be able to produce anything in Switzerland. Thus, we have been pre-producing and selling our valves and other products ahead of this downtime. We believe that approximately CHF 20 million of orders and approximately CHF 8 million of sales in the second quarter replaced related to this pre-shipping. Including these adjustments, our book-to-bill was still above 1x for the quarter. Our sales in Q3 will naturally be affected, and this is reflected in our guidance. On Slide 12, we want to put the current results into historic context. Here we see the development of orders and sales since the first quarter of 2018. As you can see, we have increased orders and sales since the trough at Q1 2023, which compares very similarly to the trough levels in Q1 2019. Our book-to-bill has been increasing steadily since Q1 '23, when we hit the low of 0.6x and currently is running at 1.1x, slightly down versus the previous quarter rate was at 1.2x. Looking back at history, you can see we are only at the early stage of the next up cycle. Let's move to profitability. Chart 13 shows the development of net sales and EBITDA. We recorded a gross profit of CHF 298 million in the first six months of '24, which is an increase of about 6% on '23. This equates to a gross profit margin of 66% and an increase of 4 percentage points compared to a year ago. Note, our gross profit is calculated as net sales minus the cost of raw materials and consumables and the change in inventory is finished goods and work in progress. Thus, coming ERP implementation in Switzerland has had an impact here. We have had a substantial buildup of inventory in semifinished and finished goods, which we were able to capitalize, increasing the gross margin. We expect the counter effects in the second half of '24 as we will sell down these excess inventories. EBITDA for H1 '24 increased by 2% to CHF 135 million, while the margin increased 30.1% versus 29.2% a year ago. This increase can be explained by the contributions of our operational measures introduced last year. The margin still reflects our high R&D investments as well as the hiring of additional staff for the expected [ ramps ]. On Slide 14, putting this performance into historic context again, we see the sequential EBITDA margin development since H1 2018. As you can see, we have constantly improved our EBITDA margin since the last downturn in the first half of 2019 and the current margin results represents a step off the trough margin recorded last year. At 30.1%, we are 5 percentage points higher than the last trough level. So based on this, we wanted to provide our outlook that year-end headline EBITDA margin would likely come out at the lower end of our communicated EBITDA margin range of 32% to 37%. Note, this is again with the caveat of FX rates. Our range communicated at the Capital Markets Day 2022 was defined as the U.S. dollar to CHF 0.95 to CHF 1. Our efficiency programs, including, for example, the ERP implementation will help get the EBITDA margin back into the range. But clearly, the significant pickup in sales will create the operating leverage we can benefit from most. On to the next slide. This is our classic slide to demonstrate that VAT continues to create value. We measure this based on return on invested capital and the cash return on invested capital. For H1 '24, we achieved a ROIC of 32.5%, which is in line with the trough level in '23 and 2019. Our cash return on invested capital due to investments into capacity and working capital has moved to 27.9% versus 31.3% for the year '23. Comparing this to the WACC of 14%, our cash returns remain around 15% above WACC, confirming that we are creating economic value while investing further. I expect this number to look again, even better as our free cash flow improved in the coming quarters. Let's now get to the bottom line with some of the other financials on Chart 16. Depreciation and amortization are about the same level as during the first six months of last year, yielding an EBIT of CHF 114 million and the corresponding EBIT margins of 25.3%, which is slightly higher than the 24.6% recorded a year ago. Net finance costs were around plus CHF 1 million compared to minus CHF 11 million in H1 '23. Revaluation gains on cash balances and intercompany loans contributed to the overall positive results. Effective tax rate for the first six months of '24 was 18% compared with 16% a year earlier. So taking all that together, net income amounted to CHF 94 million, 12% higher compared to the first six months of '23. Slightly higher EBITDA and the positive financial results more than offset the slightly higher depreciation and tax rate. EPS cost is CHF 3.14 per share for this period. Our free cash flow generation is shown on Chart 17. Our free cash flow in H1 '24 amounted to CHF 26 million, down 29% compared to '23. Major impact here was CapEx, which amounted to CHF 40 million in H1 '24, up 28% compared to CHF 31 million in H1 '23. Our capacity expansions in Malaysia and the new Innovation Center in Switzerland continue with focus to meet expected higher demand in '24 and beyond. As a percentage of net sales, our trade working capital was at 36%, up from 30% one year earlier. This is due to the already explained inventory buildup ahead of the ERP change in Switzerland. We expect this ratio to decrease during the rest of the year. At 20% cash conversion rate measured as free cash flow as a percentage of EBITDA showed the usual seasonal lower level. Our goal is return to the target band of between 60% to 65% EBITDA. When it comes to leverage on Chart 18, we continue to demonstrate our conservative views on leverage and capital structure despite our significant investment appetite. Net debt amounted to CHF 231 million compared to CHF 198 million, 1 year ago. This translates to a net debt-to-EBITDA leverage ratio of 0.8x. This is in line with the normal seasonal pattern and includes the dividend payment in May of each year. As a reminder, we distributed 103% of free cash flow, 2023 in form of a dividend of CHF 6.25 per share to our shareholders. This means we retain a very healthy balance sheet that allows us to self-fund our R&D and growth initiatives in the years to come. And summarizing the half year 2024 financial performance on Slide 19, we can state that investment conditions are expected to continue to show a gradual improvement during the second half year '24, the order and sales figures grinding higher. 2025 is expected to be a strong year. ADV is expected to grow orders and sales, especially as investments return in some core end markets. However, the visibility here is somewhat blurred. Global Service is expected to continue its growth driven by higher fab utilization and higher demand for upgrades and retrofits, driven both by ESG needs and upgrading older fabs to manufacture newer chip fabs. For the rest of '24 into '25, the following financial priorities apply. Successfully we complete ERP implementation in Switzerland and manage our inventories of raw materials, semifinished and finished goods. It is important that our clients provide us with the same feedback as from Malaysia and Romania. We did not realize we completed that implementation. Maintain a disciplined approach to CapEx expected around CHF 70 million to CHF 80 million in '24 driven by the second Malaysia plant and Innovation Center in Switzerland. Build on our improvement program DarWin to drive productivity measures. Thus, we expect higher sales, EBITDA, EBITDA margin, net income and free cash flow in '24 versus 2023. FX headwinds will continue to prevail, especially with geopolitical risks remaining. This concludes my financial remarks, and I look forward to any questions in our Q&A session. Let me now turn to another important topic at VAT ESG. In April, VAT published its third Sustainability Report. In line with the new Swiss Regulation, we provided the report to the AGM, and it was subject to a consultative vote. The report was signed off by 94% of the votes. I'd like to show you some of the highlights on Slide 21. Over the course of '23, we continue to work on improving our ESG credentials. We believe that our long-term business success is subject to our -- successfully integrating ESG targets into our strategic and operational planning. This is not only a question of ecological goals, but also enabling our employees to grow and develop as well as having a positive impact on the communities in which we operate. Our improvements reflect the clear focus of our Board of Directors and Executive Management in translating our measures and targets into everyday results. Amongst the improvements reflected in the report, we highlight the better data quality and availability. We can demonstrate the decrease of our Scope 1 and 2 greenhouse gas emissions by 45% versus 23% and a group-wide increase of the renewable energy proportion to 68%. This was achieved by our solar array installed in Malaysia and sourcing electricity from renewable resources. Our employee engagement score has increased for the seventh year in a row, and our accidents have reduced by 1/3. Finally, we continue to make strides in diversity inclusion hirings with 24% of our new hires being female. To highlight the importance of sustainability in our overall corporate strategy, VAT has also formed a proper sustainability committee on Board level replacing the previous, more informal Sustainability Council. With that, I would like to hand it back to Urs.

Thank you, Fabian. Let me now turn on Slide 23 to the short-term expectations for our markets. And when we were at the SEMICON West event market outlook discussions revolved around the same few topics every single time. First, how we, in the industry were dealing with the overall impact of demand for AI-related products. Second, the introduction of major chip production tax developments like EUV, Gate-All-Around, atomic layer deposition and high-bandwidth memory. And third, the timing and the shape of the market ramp. Overall, the first and second topic, and their developments are feeding into the third topic. AI is providing to be a key growth driver. On the one hand, requiring equal or better computing abilities at lower power output, but also driving demand for more and faster memory. This, in turn, is driving demand for new manufacturing technologies to produce these advanced chips, as we continue to drive node size down across the industry. And yet wafer fab equipment spending is not expected to accelerate strongly this year. There is a lot of uncertainty in the equipment market. One of the factors is the geopolitical risk such as the elections in the U.S. or the duration of Chinese government subsidies for domestic Chinese semiconductor manufacturing. Overall, with largely depleted inventories at our customers, the current market is showing what we would call normal run rates rather than a ramp phase. The current consensus is that wafer fab equipment spend in 2024 will reach around USD 90 billion to USD 100 billion, accelerating in 2025 to USD 110 billion to USD 120 billion. For semi market, we expect demand overall to grind higher in H2. With wafer fab equipment estimates forecast to be around USD 100 billion this year, we expect sales and orders from our semi clients to grow over the levels in 2023. In Advanced Industrials, overall business should be flat for the remaining half year, while some areas have performed very well, others have been lagging. These end markets are likely to start ordering towards the end of year again, with sales recognition coming through in 2025. For the service market, we expect the current higher asset utilization in the fabs combined with the normalized inventory levels of spares and consumables will lead to higher orders and sales in this segment. Move on to Slide 24. Wafer fab equipment spend is a topic that I want to address here. Wafer fab equipment spend is a measure that captures the industry-wide front-end investment in semiconductor manufacturing equipment. Unfortunately, and as you have noticed yourself, the numbers from the various data providers vary widely and changed drastically even as we approach the year-end. The consequence, [ VAT ] actually do not manage our company and financial planning and analysis based on this number. Nonetheless, I think it serves as a good indication of potential future market development. Looking at 2024, and based on the consensus of multiple sources, the USD 98 billion, representing a growth of approximately 3% change over 2023 reflect our current expectations of the 2024 market very well. Comparing, however, the high and low end of the 2024 estimate, you see a huge spread of USD 26 billion. There is a clear consensus though that 2025 remains a good year for the industry and that we will see strong demand for wafer fab equipment development. Some of the uncertainty factors remain on the timing of a NAND recovery, the geopolitical developments driving the speed of onshoring, the continuation of Chinese subsidies for the domestic chip industry, and the adoption of new production technologies such as the 2-nanometer node, Gate-All-Around and HBM. We have updated Slide 25 for the latest statements made at SEMICON West. The great news is that despite some lack of visibility on the exact timing of the ramp, we continue to see great opportunities ahead. There are over 100 fabs that will come live over the next 2 to 3 years. 22 are presently in qualification runs with 14 equipping. 2/3 of all are either under construction or in the planning stage now. These numbers give us confidence that the demand for VAT products continues to be out there. Moving to Slide 26. The R&D remains core to the VAT story, and our R&D spend ensures that we remain at the forefront of technological developments in our markets. We were able to achieve 48 spec wins in this half year, which represents another 17% growth on the spec wins we posted last year at the end of the first half. As usual, this represents products that will be turned into sales in the coming years, which demonstrates we continue to win new business. Two out of 3 spec wins are in the semi business. 1/4 of the spec wins relate to adjacent products. And while R&D will impact our bottom line, in the end, this is making VAT future proof. We increased our R&D spend in H1 2024 by more than 12% on H1 2023 but remain with our stated R&D guidance spend. Finally, coming to the outlook. So for VAT and the rest of 2024, we expect that the trend will continue similarly. We mentioned geopolitics and the uncertainty over where and when the semiconductor investments will be made. We showed you why we believe in a strong ramp in the future. As a consequence, and communicated earlier, VAT expect sales, EBITDA, net income and free cash flow to be higher versus 2023. We now expect full year 2024 EBITDA margin to be at the lower end of the 32% to 37% target band. This obviously is still dependent on continued sales and subject to the usual habit that we set the spend at the 2022 Capital Markets Day and based on a USD Swiss franc rate of 0.95. For the third quarter, we expect sales between CHF 235 million to CHF 255 million. This includes planned lower output from the production ramp, which is the result of the ERP implementation. With that, I'd like to conclude our remarks and hand over to Michel Gerber for the Q&A.

Thank you, Urs. We now start the Q&A session, and we will have our call on for more than an hour. So all the questions you might have, we could possibly answer. What I really like to remind you is, as usual that you should limit your initial questions to 2 to allow also the other callers who wish to ask questions to do so. Follow-up questions may be possible later in the Q&A, should time allow. I would now like to ask the operator for the first questions from the call.

[Operator Instructions] The first question comes from Olivia Honychurch, Jefferies.

I've got a couple, if that's okay. The first is around quantifying the impact of the ERP in Q3. So you said that, that led to CHF 8 million of advanced shipments in Q2. If we assume that all of that was pulled in from Q3 and therefore, add that CHF 8 million back to your Q3 guidance revenue, that would imply CHF 253 million in sales, which is broadly flat versus Q2. So I'm just wondering if you can talk about what might be behind that lower-than-expected growth in Q3? Or is there also an ERP roll-on effect we had, i.e., are you also seeing some customers delaying shipments into Q4? I guess I'm really asking what is the hit to Q3 revenue? Is it CHF 8 million? Or is it actually higher than that?

Olivia, thanks for the question. The first part of the question was pretty hard to understand, but I think the question goes around the Q2 versus the Q3. Well, the guidance remains flat. And as you know, they are kind of a balancing now in Q2, Q3. So we had this prebuild in Q2 of roughly CHF 20 million. And part of it, we already shipped, so this was then already booked, of course, in Q2. So if you would balance out that we will see also even a growth now also in Q3. Not a huge growth, but a balanced out, there will be a growth from Q2 to Q3. So ERP certainly has an impact now on the numbers Q2, Q3. That's correct.

Maybe to give you a bit more color on that, Olivia. Take a CHF 85 million. Given months there, you have about CHF 25 million, CHF 30 million out of Malaysia, then the rest is coming out of Switzerland also with some, let's say, maybe 10% service business. And from that, we have about 2 weeks of production outage, which we have partially already covered by shipments in H1 and then the remainder to be happening in Q3 also from inventories that we have built in the meantime.

Okay. That makes sense. My second one was around your order expectations. You've now explicitly said that you've seen inventory levels of your customers fully normalize. And I noted that you added the new wording in your release statement around customers now moving into order replenishment territory. So I'm wondering, is there scope for your order trends over the next couple of quarters to exceed your previous guidance order growth, which you said on multiple occasions will be low double-digit sequential growth.

I think what you're asking, I mentioned here is that compared to the last year, a very important factor is that the lead times are much reduced now. So during the COVID time, everybody was ordering, sometimes almost a year ahead. And so the visibility was in orders and what's coming was much better. So market expect the lead times, let's say, normal 8 to 12 weeks and this turns then in 2 to 3 months a quarter, right? So that's why the visibility in orders is not that high anymore. But of course, it's very important to stay very close to our customers. We have weekly alignment meetings with our key clients so that we know what's coming on. But it's of course, it's not yet in the order book. And with this discussion, we know that there will be sequential growth over the next quarters as well. Then also going into the 2025, where the industry anyway, expects finally the ramp coming. So the lead time is a very, very important element in this equation now that this is reduced and that's why orders are coming closer to sales.

So just to clarify, no change in your outlook for low double-digit sequential growth going forward in orders.

Can you say it again?

Just trying to clarify that you're not changing your expectations for the time being around order growth as being low double-digit sequential growth over the next few quarters.

No. There is no change, no.

The next question comes from Jörn Iffert, UBS.

Hopefully, the first question only count as half a question because it's a follow-up. With the CHF 20 million orders pulled forward in the Q2 due to the ERP shutdown, is this part of your guidance? Or we really should take the CHF 271 million and then multiply it with low double-digit growth for Q3? Or shall we adjust for the CHF 20 million?

No, you have to adjust that, Jörn.

Okay. This was half a question. Second question, please, if I may ask. Look, on the mix etch deposition lithography, how do you think this is developing in 2025 versus the mix in 2022 when we had the last semi CapEx peak. Is there much more lithography in 2025, like the EUV, which is not so favorable for you? Or is it relatively balanced versus 2022, if I may ask?

Jörn, we love EUV, like everybody loves. It's a such a fantastic technology. Yes. But you're right, there was, of course, a huge shift in last year in the wafer fab equipment. So lithography didn't really pick up, if I'm not wrong, from 18% to 28% or close to 30% in that range. I think this will be probably quite similar now also this year. And then as soon as the 2-nanometer and also especially NAND is kicking in. So there will be more etch and deposition tools required so this will balance out and again, this hype in lithography, what we have seen in the past. So I expect this will go back. But there, of course, there are official numbers from the obvious companies, where you can also see what they expect. We expect it's going back in percentage, but certainly stay beyond the 20%.

And then really the last half question, just incrementally, you have answered this so often but China entity list. Anything else incrementally you can add here also from the SEMICON, what is an industry view in your view?

Well, of course, China is a very challenging business, but also offering huge opportunities for us as well. I think China is meanwhile also, I always call it like a run rate. They did build up capacities to build all the tools, and they are currently on this run rate, and we can expect that this will be kind of a stable business going forward until they have got to build out more capacity. I'm talking more about the wafer fab equipment manufacturer, not on the chip side. So our clients are wafer fab equipment and only in service business, we go to the fabs directly. So I see there is kind of -- it's a huge move. So they are, I think, up to CHF 28 billion last year, this year will be roughly the same. And latest numbers I have seen, this will also stay quite stable over the next year. In percentage, of course, is going back since we expect that the [ orders ] will grow.

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

My first question is regarding the pricing levels for consumer electronics. When I look at the retail products for GPUs, [CPUs] and memory, they're all trending down still. Could you give us a bit more indication of what you see in the lagging edge of the market everything outside AI? And the second question is again on China. So you mentioned overstocking of equipment there. I think it's the first time that anyone mentioned that. I think even [indiscernible] mentioned that. Does that overstocking also applied to components, so vacuum components. And if so, I mean, I think China must now contribute about 45%, maybe 50% for your revenues, if you include the OEM exposure. What makes you so confident that Chinese demand can remain flat this year? This is the question.

Let's start on the China and then maybe we can conclude. China, I know it is a hot topic for everybody. So for us, of course, we always see as you know, China for the semiconductor market and for rest of the industry. And in semiconductor, we delivered directly to the OEMs and for these Chinese domestic OEMs, there is no overstocking of tools, and there is also no overstocking in components. I think they are now on this run rate, and they are even forced to deliver more if they could. But of course, they also have to build up all these expertise, capabilities for all these different for the hundreds of process steps to serve the domestic market. So yes, that's why I say it's quite of a steady flow into China, and there's not an overstocking. For sure, but that's more -- I don't have numbers on that for the Western wafer fab equipment tools, of course, the fabs in China, of course, they did buy whatever they could. And I expect they will do that also going forward since trade restriction might change in the future as well. Nobody knows, there's nothing set as carving stone, but this is something that can be expected. On the pricing on consumer electronics. Well, for us, what we track is more quantitative. It's much more important to us than just the pricing because the quantity of semiconductor chips produced kind of equals then in the number of equipment that is used. And we are providing the equipment manufacturers, and this is something we are tracking. That's tracking on the pricing on consumer electronics, maybe this is an indirect impact then to our business.

Understood. Follow-up on the Chinese question because you're right in your presentation that there's overstocking of tools. So you seem to have some...

Sebastian, we can hardly hear you.

Sorry. In your presentation, you do write that there are some overstocking of tools anticipated to be restricted in the future. So you do seem to have a thought on the overstocking there, right? It's on Page 24.

Well, as mentioned, it's certainly not the Chinese OEMs. So I think except Chinese...

Not in Chinese OEM, okay.

Okay. We now take a question from the webcast. It's from [Nicolo Penola], and he asks is, we can shed some light on the achievement of the solid EBITDA margin, whether this is just the capitalization of the inventory build or whether we have any other measures we took on deal pricing or just operational excellence or so or any changes in the competitive landscape.

So let me address that question. Thank you very much for it. So from the, let's say, 4 percentage points increase in gross profit margin we can allocate about 50% of it to the inventory build, which will then also reverse into the second half but we still have a sharing 2 percentage points improvement on a normalized level, thanks to all the operational excellence measures that we are driving on the one hand side. But also a favorable mix on the other hand. As usually, pricing in our industry tends to be very stable. So that is not a significant contributor here. Neither is any change that you make reference to in the competitive landscape.

The next question comes from Sandeep Deshpande, JPMorgan.

My question is, you've talked about the adjustments because of the output ERP and other points in the third quarter. How do you see the trajectory now because of that into the fourth quarter and the full year.

I do expect that the return to normal operations towards the end of Q3. So into Q4, we will be fully back to the normal run rate. And here, I would just add a bit of color. We are currently operating in Malaysia about 70% to 75% of capacity. And in Switzerland is about 70%. So here, we have certainly enough headroom to ramp. We do have also the staff in place. And there's, Urs also said before, we're taking this investment ahead of the curve very seriously and are preparing ourselves for a strong Q4.

And my second quick follow-up on that is, based on what you're hearing from your large semi-cap customers. They are preparing for a big '25. And so do they already have inventory by the end of this year, perhaps that they need from you or you will continue, you expect significant growth next year as well than on the back of that.

Certainly, we are checking with our customers, as mentioned weekly what their outlook will be. So today, they have kind of a visibility for the next quarter. So it's just that -- we do a lot of the -- receive customer also through consignment. And this helps a lot also to buffer them that we are ready for the ramp as well. And yes, for us, the inventories did quite normalize over the last year. As you may remember, after 2022, this is huge ordering. They had a lot of inventory as well. And now it's kind of normalized as well. So it's going back to a run rate. And of course, if we see that it's picking up the whole inventory level will also be adjusted always on the expected run rates as well. So this is a kind of a checking and adjusting on a weekly and monthly basis with our customers, but also important with our suppliers as well.

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

Just very quick ones, please. First of all, just a clarification on ERP. I think you said it's a 2-week implementation. But I think, Fabian, you also just said you expect normal operations at the end of Q3. Maybe you could just let us know when do you expect to start and finish that implementation, please?

Yes. So the changeover is happening early August, which triggers a production outages for about 2 weeks. And then you're gradually ramping your production back up, get people back on board, having them work with the new system processes, et cetera. And what I said is that I do expect that after about 4 weeks, 4 to 6 weeks, we should be back at a run rate that we have seen prior to the changeover.

Okay. Super clear. The second question is on China. I know it's a hot topic. I just want to focus very specifically on the aftermarket business. So in that China aftermarket business, where you supply non-China OEMs. So is there anything that has changed in that part of your business? Or is the supply and the flow of spares, consumables, upgrades like everything that's aftermarket, is that still running normally with your non-China OEMs in China?

Well, of course, it is our non-China OEMs, what we deliver there, we don't know where this will end up, right? If you deliver to a non-Chinese OEM in the aftermarket, so we go through them. So we work with our OEMs and then, of course, they decide where they go. And yes, today, I'm sure our products still flow into China. We have seen mainly that the pickup as well in the aftermarket from, not in China because in China, they are building up now the capacity. So there is not yet an aftermarket established. This will come then in a few years. So service business is always lagging 3 to 5 years behind. And the first years anyway, is always going through the OEM. And when the tool is out of course, the tools are out of warranty, then the aftermarket gets established.

Very clear. Very clear. And maybe just one last quick one. In the risk factors, you talked about the sustainability of China government incentives. Is there anything you've seen or any news flow, anything that's caused you to question or doubt the durability of those incentives?

Yes, of course, it's more of a political question, I can't read their minds. I expect that they will not stop. They have a clear road map, a long-term road map, this will continue. They want to build up the semiconductor industry locally and do not expect at all that this will stop. It will be the biggest surprise probably this year.