VAT Group AG ($VACN)

Ladies and gentlemen, welcome to the VAT Q1 2026 Trading Update Conference Call. I am Valentina, the Chorus Call operator. [Operator Instructions] The conference is being recorded. 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.

Thank you. Ladies and gentlemen, and welcome to VAT's Q1 2026 Trading Update Conference Call. With me this morning are Fabian Chiozza, CFO; and Christopher Wickli from our IR team. After my introductory remarks, we will start a moderated Q&A session. We are pleased to connect with you again after our full year results in March and the following roadshow. A lot has happened around the world since then. But the one thing that has not changed, and I can reconfirm today the is here. We are seeing very strong demand for our products from our customers across the semiconductor industry. Q1 orders of CHF 356 million represents a 17% increase in the previous quarter -- on the previous quarter and full 47% increase on the same quarter last year. This is the second highest order intake that VAT has ever recorded. At constant currencies, orders would have been up 19% sequentially and up 67% year-on-year. The conflict in the Middle East has been a big topic in the past weeks, and we have not been completely immune to it. While we do not source components or commodities from the region, its important position in global shipping, including air freight, temporarily challenged our activities. We shared these challenges and their impact already in our short press release on March 31. Overall, we achieved Q1 sales of CHF 221 million. This means sales were down about 14% quarter-on-quarter and down about 20% year-on-year. On a constant currency basis, sales would have been down 13% sequentially and 9% year-on-year. The resulting book-to-bill ratio amounted to around 1.6x, and our order book increased by 42% to CHF 431 compared to the end of 2025. The Q1 sales impact due to the disruption in the supply chain amounted to roughly CHF 20 million. Let me provide you with some additional color on it. We had both our own components and components from our suppliers blocked in transit in the region for a limited period at the beginning of the conflict. As mentioned before, we do not source materials or components directly from the region. So the main challenge was to figure out where exactly our goods are located and then to find ways to get these components to our factories. As the global supply chain and semiconductors works with tight schedules and just-in-time deliveries, already small and unforeseen disruption can have a meaningful negative impact in the short term. This Q1 situation was a logistics challenge, but not in any form a sign that the ramp is in nature. All orders placed for shipping in Q1 that got delayed will be manufactured and delivered in Q2. As a result, we do, at this stage, not expect any negative impact on our full year results from these disruptions, bearing any further escalation of the conflict, which we hope will not be the case. Within our business units, Advanced Industrials continue to see good demand for semi-related end markets such as metrology or inspection tools, but other project-related businesses remain subdued. Global Service saw a slowdown quarter-on-quarter following some restocking in Q4, but overall orders are higher on a year-on-year basis. The high utilization rate in the fab will further fuel the global service business in 2026. Over the past weeks, we have been very closely engaged with all our major semi customers and everyone agreed on the strength of the current trend. Wafer fab equipment spending is estimated to amount to approximately USD 130 billion to USD 135 billion in 2026. And in 2027, this is expected to increase even beyond USD 150 billion. This wafer fab equipment spending is a result of the build-out for the artificial intelligence infrastructure, especially driven by the hyperscalers. Consensus expected to over USD 750 billion this year. The overall value of the semiconductor sales might even exceed the USD 1 trillion mark in 2026, which is certainly driven by higher average sales prices, but also reflects the increase of units produced. So thinking about the next quarters, we expect that the market is continuing its strong structural growth phase with demand for advanced logic and memory chips outpacing the industry's ability to provide supply. 110 semiconductor fabs are currently planned or under construction for completion in the coming 2 to 3 years. Very steep ramp environment is also tricky as challenges can emerge from unexpected geopolitical events and their impact on the supply chain. Our globally diversified manufacturing footprint and its flexible operating model provides a good level of resilience. The ramp environment we are in requires adjustment of the staffing levels, and we are in the process to hire over 450 colleagues globally to support this ramp. We have discussed this with you in the past, our flex model is capable to increase our factory output by 20% to 30% quarter-over-quarter. Our operational run at full capacity in the second half of 2026. On this basis, we confirm the guidance provided at the full year results presentation in March, and we expect full year 2026 orders, sales, EBITDA and EBITDA margin to be higher than in 2025. Net income and free cash flow are also expected to be higher in 2026. The coming quarters will continue to be in ramp mode. For the second quarter of this year, we expect sales between CHF 265 million and CHF 295 million. This concludes my prepared remarks, and we are now turning the call back to the operator for the Q&A session. Operator, please.

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

Just having a question on the capacity ramp-up in the second half. So previously, you have mentioned that you could ramp up 30% quarter-on-quarter. But if we look at the sort of historical pattern, the second half versus first half sales delivery has sort of been maximum 20%, whereas now consensus implying you could ramp up about 50% in second half versus first half on the sales if we take midpoint of your 2Q guidance. Do you think this is achievable according to your current ramping up plan? And I have a follow-up.

Yes. Thanks for that question. Yes, we are very confident that we can ramp up 20% to 30% in factory output. And then, of course, there is the lag in sales. So we have done all measures already started in Q1, and we continue to do that now in Q2 to achieve the 20% to 30% ramp up quarter-over-quarter.

Got it. And my second question is, do you see any signs of double ordering from your discussion with your major customers? And on the second quarter book-to-bill, do you expect it to slightly normalize versus the first half as the sales ramp up? If you could give us a bit more color would be helpful.

Yes. Well, of course, among the whole industry, it is in a ramp, but there is no way that everybody has its own capacity, right? And you have to fill the pipeline that you can deliver what your customer is needed. So it's not [indiscernible] of course, you are securing your supply chain. That's also normal behavior. But everybody has also its own capacity and has to build up the capacity as well. So it's very important that the whole supply chain stays very close, each other discussing. And in the end, this is a B2B business. And well, you have to be very close and they don't want to overstock as well.

Got it. And the book-to-bill in second quarter comment?

Book-to-bill, I think you have seen we have a wonder book-to-bill in Q1. And for Q2, we expect that this also will remain well above [ 1 ].

The next question comes from Daniel Schafei from Citi.

So the first one from my side would be basically just would be great if you could bridge the sales number that you've guided now for 2Q from your current backlog. Obviously, we have this deferred component of, let's say, CHF 40 million, but what are some other effects that hindered this translation from the [ CHF 360 million to CHF 380 million ] Because, for example, you've mentioned before that lead times are 8 to 12 weeks. I'm just wondering, is that now longer because given demand is ramping up and people are trying to kind of order more and that's why you have to extend your lead times? Or are there some other factors?

I mean, thanks for that question as well. So I think phasing of the revenue, right? Once you produce it and your factory output kind of then you deliver that and that is kind of like a phasing of the revenue generation. So that's why capacity increase is certainly the main focus now for us. Yes. And roughly about 10% is always kind of in transit, right? We're shipping it from Malaysia from Switzerland to our customer.

Okay. And then also, would you be able to split the semi order that you have now into maybe something like leading edge HBM from China? Would that be -- I know it's difficult for you to differentiate between the technologies, but at least could you give us maybe some color where you feel the split is, specifically China because is it still accelerating? Or do you see some customers being now more worried around the potential [indiscernible] enforcement?

Yes. Well, in the last year, China was rough 30% to 35% of our sales, right? And China is still hard. We just had silicon in China in March, so we could meet all the -- our main customers there. Q1 was a little bit lower, roughly 25%, maybe 25% to 30%. But it's also there are holidays as well. So in China. But overall, the number will be around the 30% overall is what we expect. Of course, it always depends on the Western world trend. If they are ramping faster, then it can be a little bit lower. But overall, the Chinese market is still growing for us. because even though the wafer fab equipment will not grow a lot in China, the local wafer fab equipment manufacturers, they will gain share, and we are working closely with them, and we do benefit from that situation.

The next question comes from Martin Jungfleisch from BNP Paribas.

Two questions, please. The first one is really just a follow-up on the first question. You have a total capacity of around CHF 2.3 billion in sales across the [indiscernible] Fabs. Can you just disclose your current utilization rates or production capability of that and your maximum quarterly sales out based on that? So for example, could you potentially reach a quarterly sales output volume of around maybe CHF 400 million by year-end? And going back to the question that consensus is looking at CHF 1.3 billion in sales this year. So this would be around CHF 380 million on average in sales in the second half per quarter. Is that kind of achievable with your views?

Thanks for that question. So our current utilization rate in Switzerland is roughly 65%. And in Malaysia, we are at 18% level, showing that, of course, semiconductor business is accelerating more also in Malaysia. This is based on all our relocation efforts we have done in the past years as well. And yes, our clear target is now is 20% to 13% quarter-over-quarter increase that we come to a run rate of at least CHF 400 million in the second half.

Great. And the second question is also maybe a bit of a follow-up on the order momentum. I mean in the media release and just now, you said that you expect the book-to-bill well above 1. I know it's early in the quarter, but would you expect orders to increase consecutively in Q2 versus the Q1? And maybe also a bit more further out in Q3 versus Q2 and so on. So like a consecive increase that you're seeing from here?

Yes, of course, I also expect that the order is slightly higher, but it's not a big chunk anymore. I think now the whole supply chain has to digest as well. So we have to -- we are now in the ramp at a certain point, it's more constant than what the order and sales and deliveries are more in balance. So now we have typical ramp. That's why we have this 1.6x in Q1 and certainly well beyond 1 in Q2 and then it will level out once the capacity in the whole supply chain is kind of in balance. But we also expect that the service will go up as well. This can have a positive impact also in the second half of the year.

The next question comes from Craig Abbott from Kepler Cheuvreux.

Also from my side. The first question, please. I know, obviously, in this Q1 call, you don't report EBITDA for the quarter. But I just wondered as we're heading towards the midyear point, if you -- if there's anything you could flag that we should be thinking about on the likely margin progression in the first half. I'm thinking about things like potential feed-through of the higher oil prices to the material -- on the material cost side, aluminum, things like that, plus maybe things like the ramp-up you were talking about in terms of the 450 new hours or so. So any indication you give you on the margin progression would be very helpful. And then I have a follow-up.

This is Fabian speaking. Let me give you some additional color on the expectations regarding the margin. Look, we do not expect any material adverse effects out of the situation in the Middle East and its consequences. Most of our main commodities are hedged well through the first half. And as such, I do not see that as a negative on margin. What we certainly do have is a bit of freight cost increases here and there. But overall, the freight costs are not material to VAT. So I would also not expect this to have a material effect on H1. On the other hand, with the ramp now happening in our factories, we will see kind of a reversal of the inventory effect in the first half. So there, I would expect that we can have a positive contribution to the bottom line margin from additional inventories. And overall, we are on a trajectory towards the midpoint of our communicated margin band for the full year. And I would say the first step will be accomplished in the first half.

Okay. That's very helpful. My second question is basically, for the most part, already been answered and talking about the ramp of the capacity on a quarterly rate going forward. But again, just kind of like a follow up on that. I mean, like the order conversion rate into sales, I mean, can we expect that to like be speeding up in the next couple of quarters?

Yes, so that we are now increasing capacity and speeding up and also this conversion. So last year, the lead time for our customers and our products has been reduced. And of course, with the ramp, we have to catch up now with capacity and lead time to the market expected level.

Okay. Okay. And my last question, any early views for at this stage already heading into the first half of '27?

2027, our expectation still is that there will be a fantastic year. We can just also confirm what our customers sees and what is published everywhere that 2027 again will be a growth year and certainly a record year 2027. This is how we see that, how we prepare our capacity at the moment also in the midterm horizon.

Okay. So no risk of like an overhang of capacity heading into the next year.

The next question comes from Jörn Iffert from UBS.

The first one is, please, to double-click on the capacity. I think you mentioned you should have a quarterly sales capacity of at least CHF 400 million coming through in the second half. But may I also double check, I mean, as you have outsourced around 70% of your component production, I mean, are your sub-suppliers also ready to ramp this? Do you have some good visibility here that this will not be a bottleneck? This would be the first question, please. And the second question on China. You said, I think the China share of local OEMs was going down to 20%, 25% in the order intake in Q1. On average, you still expect to 13%. It's not so easy to get the data, but did you get insight that their 12 months inventory was coming down, that they are normalizing somewhat? So any color here would be appreciated.

Let's start with China again. Overall, of course, if you are -- if you go to China, you really feel in China. They are building up their own ecosystem. At the moment, they are less interested in any stocking inventories. They want technology. They want to bring up and be capable to produce leading edge chips on 7-nanometer, 5-nanometer, that's the drive. They want to have all the processes produced and manufacturers on their soil, and that's the main drive in China at the moment. But your question is supplying more commercial optimization, that will follow afterwards. At the moment, it's really a battle and race who will win the different process steps and in China. I think that's certainly still ongoing. And just that we have now a little bit lower sales in China in percentage in Q1, this is just also a seasonal impact, as I mentioned with the Chinese New Year and everything ongoing. But overall, the OEMs in China, they will win share. So their share was pretty low. The self-sufficiency rate is in the range of 20% only, and they want to increase that to the 70%. And this is what I always say, this is the opportunity we have to grow in China, just to grow with them and since they increase the self-sufficiy Second question is about capacity. Yes, of course, we have maybe 3 main areas we are following. That's our workforce in assembly ramping up there, our own workforce in machining as well as producing our own parts. But as you know, it's only 25% and we have the 75% in the supply chain. And of course, since the last ramp, we did a lot of -- I mean, did our homework and for most of the components, we have second sources as well. So we cannot only rely on one source, and this gives us much more flexibility. Everybody has to ramp up. That's certainly true. Everybody needs some time to ramp up. I think I mentioned even during the road show sometimes, it's like a diesel engine that was idle for a year and then you start the button and there is some smoke and noise at the beginning until it runs smoothly. And this is now the phase, and this is the ramp-up phase for us, but also for the suppliers, but also for our customers. So that's the whole industry, the whole value chain working on that. So I feel very comfortable for many of the critical suppliers like in electronics, like in elastomers, we have sources.

The next question comes from Deshpande Sandeep from JPMorgan.

My first question is regarding your ramp-up of your sales. I mean this is a follow-up to one of the earlier questions as well. I mean, historically, your lead times from the orders to the sales are much shorter. You've seen very strong orders, but the sales is somewhat lagging. Is this because of where we are in the cycle that things are just recovering or it is because associated with customers that things are much more second half loaded? Or is it something to do with VAT's own supply chains, which are taking time to ramp up?

I think you gave the answer already. I think it's the ramp-up as well that everybody is now building up the capacity from, let's say, 50% to 60% utilization, everybody has to staff facilities ramp up and this needs some time. And if you would -- even if you would deliver everything that was booked, our customers could also not digest it, right? So that's why it's also good in a ramp that the forecasting becomes better than in earlier times as well. So it's also scheduled to Q3 some of our order intake. So I think we have a very good order book and visibility now for Q2 and execute that and still the order inflow is very, very healthy. That's why we are very comfortable and planning to ramp up also in Q3 and Q4 to ramp up in Q3 and Q4.

I mean in following up to that, I mean, your orders are very strong. Would we expect to see maybe your orders translate directly, so whatever your bookings are into sales in Q3 or Q4 because that would substantially lift your sales number in the second half of the year?

That's correct. So we expect that now with our forecast in the first half year, we will end up about CHF 500 million, right? And we still are very comfortable with the overall consensus close to the [ CHF 1.3 billion ]. So this will be roughly an increase in the second half of 50% to 60%.

The next question comes from Michael Foeth from Vontobel.

Two questions from my side. The first one is in your Q1 sales impact that you mentioned, the CHF 20 million to CHF 25 million, you initially said there was some -- one of the reasons was also changes in customer specifications. Could you be a bit more specific what that refers to? That would be the first question. And the second question is, you said order intake was up 67% in constant currencies and 47% in reported terms, that's a 20% differential due to FX, whereas in sales, you only have 10% differential. Can you explain what the FX mix in there? Or what's going on in that differential there, please?

Thanks, Michael. Let me take the first part of your question. The impact of the CHF 20 million on that configuration that was such a ramp because also our customers have to optimize which configuration, which tool they can deliver. And then certainly, there is a higher activities in pull or push out for certain orders. And then in the second -- at the end of the quarter, of course, this can have quite an impact also on that. But it's a typical situation, especially the ramp is coming or if it's slowing down dramatically, then we see more pull or pushout activities also from our customer side where we have to react and this also led partially to this CHF 20 million delayed sales recognition.

And on the second question, Michael, this is purely a mix topic. So whenever these orders and sales have been received and then translated at the respective FX and also remember that in Q1 2025, we had quite a huge volatility, which was not the case this year.

The next question comes from Martin Marandon-Carlhian from ODDO BHF.

My first question is on WFE. I mean I think you kept your assumption of WFE at $130 billion this year, which would imply growth of around 13%. And I think most of your customers have talked about 20% now growth. So is there a reason why you kept the same forecast? And also, is your expectation to continue to beat WFE growth by 5 to 7 points of growth through '26, '27 as you highlighted at the last I have a quick follow-up.

Growth, of course, is always where we start the base different models, they don't have the same number also historically. So that's certainly the starting point is important. I think we feel comfortable at the moment with $130 billion, $135 billion. If it's more, certainly, we are happy to do that. I think it's the growth we calculate at the moment is 10% to 15%. Also considering at the moment, everybody has to ramp up, right? And you see that in the demand might be even higher, but there might also be delayed because of the constraint in the whole supply chain.

Okay. And about the expectation to beat WFE growth by 5 to 7 points '27 you think that's still a valid scenario?

Yes, that's still a valid scenario. But we -- our ambition is always that we want to outgrow by 2x. And I think what is now up to 2x. So at the moment, you also see a lot of orders going well and we have our higher share of wallet on the equipment.

Okay. And the last question for me is on DUV. DUV lithography is growing quite fast, especially versus UV. So my question is how material is it in the order intake momentum? And do you see actually lithography-related orders going faster than other orders?

Lithography historic was not a big business [indiscernible] very interesting business for VAT as well. But also here, there is just a limited amount of machines going into the market and compared to etch and dep machines. And here, you see probably the relation what it means for VAT. [indiscernible] pillar for us. But of course, the and still dominant.

The next question comes from Nabeel Aziz from Rothschild & Co Redburn.

Just a follow-up on the disclosure at the 31st of March prelim announcement on reconfigured orders. I was just wondering, is there any color that you can provide in terms of whether it's related to certain deposition technologies or etch technologies that have been reconfigured or whether there's a difference in the impact between memory and between logic? And I've got a quick follow-up.

I think it was just through the band. In the end, you can imagine if a new factory, a new fab is equipped, they need everything, right? The need that lithography and all the other process steps as well. It's more kind of which customers win, which part of a fab and then this [indiscernible] and optimization takes place or if they -- if you talk about pushout, then maybe they are delayed and don't want to take the products yet. And if they are asking for pull-ins, then they want something and have to accelerate something. But this is a dynamic in the industry. It's not related on a specific device. It's more than on a customer level and dynamic to [indiscernible]

Okay. Very clear. And then I guess, in terms of your order intake, I know you mentioned growth through the year or modest growth in the CHF 350 million that you disclosed in 1Q. Is there anything through this year that would point to -- that you would point to in terms of customer build plans, fab build plans that would mean that order intake may not grow through the year and whether there's anything seasonally that you would expect or call out from a demand perspective?

Well, we just see what we hear and what we hear from our customers and also what we read out there that hyperscalers are investing fabs, the 110 fabs that get online wafer fab equipment will be needed [ CHF 10 billion to CHF 20 billion ] for each wafer fab in total is going up, we say beyond [ 150, 170 ]. So this kind of indicates that we will see continuous growth as well in order intake. If you don't see that, then maybe also something in the fab or fab completion is delayed. There is a question is, are there enough clean rooms out there has nothing to do with us, but that's kind of just the infrastructure is the infrastructure ready to digest all the wafer fab equipment. At the moment, it's heavily driven by DRAM and logic. And then in the coming 2027 plus, we can also expect that even NAND will also have investment cycles again. So very positive environment, very volatile as well, as you know, the situation out there in the world. But in semiconductor, certainly, the long-term trend is just going in one direction and that is growth.

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

I wanted to go back to the capacity ramp-up. Would you say that you're kind of surprised by the order intake by the demand, hence, you're not able to kind of shift to the full demand in the first few quarters of the year? And then also, you mentioned 25% kind of on your end, 75% supply chain. On your end assembly and machining workforce, kind of where do you expect that to kind of show up the most on the income statement? And then also, is there a potential risk in the supply chain ramping to the timing that you expect given that the bigger chunk of capacity?

Maybe let me address the second part of the question. So according to our flexible operating model, we are able to source staff when we need them and then also have them productive within a couple of weeks. That said, the additional cost follows quite well also the increase in volume and as such, does not have a material lag effect on the P&L. In terms of the input factors, I just talked about workforce. We talked earlier on about the scaling of our supply chain, which is now in full swing. Fortunately, we do not see major constraints on important commodities such as electronics or aluminum for the time being, right? And last but not least, the assets that we need in order to convert all these components into end products are also in place. So we do have sufficient machining capacity. We do have sufficient assembly capacity. It's just basically a matter of bringing the parts from the supply chain together with the increased workforce and then convert this into product. And as you can imagine, this is not an overnight exercise. It needs a couple of weeks, and we are now seeing that at the end of Q1, which was unfortunate. But nevertheless, now we are seeing daily increases of our output capacity, and this is set to continue.

That's helpful. But would you say that you were kind of somewhat surprised by the order intake and otherwise, you would have sort of ramping capacity already, let's say, at the end of last year?

Well, we are hearing about the ramp from our customer engagements since almost about 2 years, right? We have been talking about it. It has always been pushed out. And obviously, we didn't start to bring neither material nor manpower into the system as the orders didn't materialize. What we did do is wherever we have long lead times. This is on the brick-and-mortar, on the machines, et cetera. We have invested ahead of the curve, and this is now enabling us within a couple of weeks really to open the tap and now also increase our capacity according to the model and also the promises that we have made.

The next question comes from Tim from Barclays.

So my first question is again on the capacity ramp and guidance from the...

Sorry, it's Chris here. You're very difficult to understand. Can you find a different way to speak to a microphone...

[indiscernible]

Tim, sorry, you're inaudible. Let's take this up bilaterally. I'm sorry about that. It's very difficult to understand you. I appreciate the last person asking a question. I'm going to speak after this call directly, and. I'll hand back over to the operator, please, to conclude this call, please. Tina, over to you.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.