VAT Group AG (VACN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the VAT Q3 Trading Update Call. I am Valentina, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions on telephone. For operators, the conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Fabian Kota, CFO. Please go ahead.

Ladies and gentlemen, good morning, and welcome to VAT's Q3 2026 Trading Update Conference Call. On the line with me this morning are Michel Gerber, Chris Wigle from our IR team. Our CEO, or cater is attending SEMICON West in San Francisco. And as it's in the middle of the night for him, he's having a good night sleep to be well rested to continue what can only be described as an ultra high intensity week triggered a semiconductor ramp that undergoes an unprecedented growth phase. After my introductory remarks, we will start the usual Q&A session. . The feedback we are receiving from our team present at Semicon West is always the same. Demand remains tremendous, and as an industry, we see records being shattered. Let me start with the broader semiconductor market backdrop. The industry continues to benefit from powerful long-term growth drivers and the USD 1 trillion revenue milestone is now expected to be reached 3 to 4 years earlier than originally anticipated. While much of the current attention is focused on the AI data center build-out and the significant infrastructure investments that come with it, we believe it is important to distinguish between the catalyst and the underlying driver. AI is clearly accelerating demand, but the more fundamental trend is the continued advancement of semiconductor technology itself. The industry is moving to increasingly sophisticated manufacturing architectures, including gate-all-around transistors and sub 2-nanometer process technologies. In fact, since recently, we saw the introduction of consumer devices incorporating 2-nanometer chips demonstrating that Moore's Law remains very much alive and continues to drive higher levels of semiconductor performance and manufacturing complexity. To support these technological transitions, investments are accelerated across the ecosystem. Existing facts are being expanded and new facilities are being brought online, particularly in advanced toci and DRAM. In many cases, projects originally planned for the latter part of the decade are now moving forward on more aggressive time lines. It is also worth remembering that previous semiconductor growth cycles were largely driven by consumer electronics, especially smartphones. Those markets remain healthy and continue to innovate. However, today, the strongest source of incremental demand is the rapid build-out of AI infrastructure by the longer-term growth opportunity remains anchored in the increasing complexity, performance requirements and semiconductor content across a broad range of applications. For VAT, this reinforces our conviction that the current market momentum is supported not only by an AI investment cycle, but by durable technological trends that continue to drive advanced semiconductor manufacturing forward. Let's talk about the records we achieved in the third quarter. Order volumes tripled in Q3 compared to a year ago, reaching record levels as new production capacity for leading-edge semiconductors remains highly sold after and continues to drive significant demand for VAT products. Following Q2 of 2026, this marks another record for VAT and reflects the strength of this current cycle and is substantially amount of our own expectations when we indicated the flat order pattern for Q3 during our half year results call. Let me talk about the nature of the orders. They are predominantly from our core semiconductor customers, driven by the continued supply-demand imbalance for advanced semiconductors. This imbalance is expected to last well into 2027. In the past weeks, we have received 1 question repeatedly. Are you seeing double ordering or inflated orders? Our answer is clear. We are not seeing double bookings, but orders that are driven by real capacity demand. One note worth the indicator of the continued strength in demand is that order lead times have further lengthened during the year and currently extend to approximately 9 months or more. While at the beginning of the year, this was as little as 3 months. This situation provides us with better visibility of the customers' needs as well as helping us plan manufacturing capacities and supplier demand. We mentioned at the half year call that the challenge this year will be to continue the ramp of our manufacturing capacity at the required speed. Our factory outlook confirms that we have been able to deliver another quarter with a sequential 30% growth, and we are on track to achieve a quarterly output run rate of around CHF 450 million by end of 2026. We achieved Q3 sales of CHF 376 million, up 29% sequentially and up 46% year-on-year. The book-to-bill ratio increased to around 1.9x, and our order backlog sits at CHF 980 million. Comparing this to our order book last year, this represents an increase of 280% and is testament to the unprecedented and unexpected steepness of the increase in demand. Turning to our manufacturing footprint. We continue to systematically expand capacity to support future growth. Ramp investments initiated at the beginning of 2026 continued into Q3. VAT added an additional 450 FTEs in Q3 globally and aligns the supplier base for continued growth into 2027. In Switzerland, we are further optimizing our factory layout and workflows. Assembly utilization has now increased to more than 75%, enabling us to absorb additional demand while continuing to improve operational efficiency. In Malaysia, utilization has reached over 90%, and we will ramp our production further by bringing Factory IB online during the first quarter of 2027. This marks the next important step in our capacity expansion road map and moves us closer to our planned manufacturing capacity of up to EUR 1.2 billion at the site. In Romania, we are advancing the site from a semi-finished goods operation to a fully integrated manufacturing location. Going forward, finished products will be shipped directly from Argos to customers worldwide, increasing the site's contribution to total factory output by approximately CHF 200 million to CHF 300 million. We continued to invest in our workforce as well. Since our half year update, we have added approximately 450 employees bringing our global workforce to around 4,500 FTEs across all locations. As a result, we continue ramping towards our global footprint capacity of approximately CHF 2.5 billion and have identified additional levers that allow us to expand beyond this. We believe this manufacturing footprint positions VAT well to support the anticipated growth in semiconductor demand over the coming years. At the same time, given the industry's growth trajectory, we will make decisions regarding the next phase of capacity expansion in due course. We expect to provide an update on our longer-term manufacturing road map during 2027. Most of this growth is visible in the semiconductors unit. Our Q3 orders were up 37% sequentially and 270% year-on-year. Sales increased by 39% and 70%, respectively, reflecting the capacity ramp activities. Looking at our other 2 business units, in Advanced Industrial growth was seen in orders for vaults used in scientific instruments and analytical products as well as systems with exposure to semiconductors by end markets such as coatings and industrials have seen a flat year-on-year order development. Orders in Global Service increased by 52% sequentially and by 88% year-on-year as demand surge for consumables amid overall high utilization rates. Repairs and retrofits saw a strong increase as well in line with the sector's growth rates. Sales, however, increased by only 2% sequentially and by 4% year-on-year. Many fab customers are maximizing output of new chips, limiting tool downtime from maintenance work or upgrades. Here, the order window has widened as well. This brings us to the outlook, which remains very positive and exciting. We second our customers' public statements of unprecedented demand in their reading, they claim visibility across the sector that now spans over the next 8 quarters. We believe that the market remains in a strong structural growth phase as about 150 fabs, either under construction or planned over the course of the next 3 years to address the persisting supply and demand imbalance. Assuming each fab will require on average more than USD 10 billion of WFE industry is well on track to seeing WFE growing to over USD 200 billion per year in the years to come. WFE estimates have been ticking higher throughout the year compared to our Capital Markets Day in May 2025. WFE estimates for 2026 have increased by 35% and for 2027 by over 66%. For this year, markets believe that WFE could reach up to USD 155 billion and might cross EUR 200 billion in 2027. Based on the production expansion activity witnessed in Q3, we remain on track to reaching our quarterly factory output run rate of CHF 450 million by year-end. As a result, we expect 2026 to be another record year for orders, sales and free cash flow with higher EBITDA, EBITDA margin and net income compared with 2025. For the last quarter of '26, we expect sales in the range of CHF 420 million to CHF 450 million. Looking further ahead for '27, we are preparing for a sales volume that is significantly above previously communicated guidance of CHF 1.5 billion to CHF 1.7 billion. This concludes my prepared remarks, and we now turn to the Q&A session. Moderator, please open the line for the first question.

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

My first question is on the capacity ramp-up in 2027. So what is your current status of your Malaysia 1 factory. And if I understand correctly, you have identified additional levers to allow you beyond the current global capacity of 2.5 billion does this meaning that you would be launching a new CapEx to be a third hub? And my second question is on the impacts of your further hiring and inventory preparation that you've previously mentioned? And how should we think about the margins impact for the full year?

Thank you for your question. Maybe I answer the status of the capacity build-out of Malaysia first. So Malaysia 1A is running at above 90% utilization. So clearly, at a high level. But overall, Malaysia capacity includes 1A and 1B and amounts to more than EUR 1.2 billion. So globally, our current footprint provides for around EUR 2.4 million to EUR 2.7 billion of capacity. This means that our capacity remains sufficient for the strong demand in the years ahead. What has changed is the speed and magnitude of the market development. We originally thought this capacity would take us into 2030 with today's demand momentum we need to take the next capacity decision earlier than initially anticipated. Then on the margins, look, we are currently adding significant resources ahead of the growth opportunity because execution and delivery are the immediate priorities. However, the productivity of these new employees will progressively increase as the ramp matures. At the same time, we continue to run efficiency programs to support our margin performance question.

The next question comes from Desert from UBS.

Would be also to, please. And the first 1 is on the order trends to come. How do you think about the order book in the next 1 or 2 quarters? And to also better read the extended window of ordering timing from customers. What do you think the order intake of around EUR 700 million reflects on hemiacequipment CapEx? Would you feel comfortable with around EUR 270 million, EUR 280 billion just is a reflection of this. And the second question, if I may, on the capacity ramp, how should we think about the quarterly progress going into Q1 and Q2 2027 as current order run rates would clearly show revenue run rate of more than EUR 500 million per quarter. .

Yes. Look, on the orders, I think we should factor in this effect that we have observed now in Q3 on extended order windows. And normalizing for that effect. I would expect that our Q4 orders will land somewhere between EUR 500 million to EUR 600 million. Going forward, this plateau seems to repeat as per current indications of our customer build plans. And as I have said in my prepared remarks, -- we have very good visibility for the next 6 to 8 quarters ahead. With regards to the capacity, as I mentioned before, we are on track with our internal targets to add about 30% quarter-over-quarter. Overall, when I just look at Malaysia, there, we are clearly ahead of this as Malaysia plays a very pivotal role in this ramp and has also stood up to our very high internal ambitions. In Switzerland, obviously, the ramp is a little bit less accentuated, but nevertheless, meeting the targeted levels. So with about CHF 450 million exit run rate for Q4, I do expect that we are able ramp further. We will definitely have the usual seasonal effect in Q1 around Chinese New Year. But overall, I would expect that the growth in factory output is continuing. However, most likely not at the 30% quarter-over-quarter, which we have now seen at the beginning of the ramp. With regards to your last question on WFE, our internal projections, as mentioned are pointing at about EUR 200 billion for next year. And then I would sit somewhere around EUR 250 million to EUR 60 billion for 2028 at the moment, which is a volume assumption, which we currently use in our planning.

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

My first question is on pricing, whether -- I think you mentioned something about pricing increasing in your press release, but I assume that's related to your customers raising prices. So I was just wondering on your end, whether there are any pricing effects to be here.

Here, just to repeat what I have been telling also in recent investor meetings that our pricing is value-based which means we don't automatically increase pricing because our customers do so. Our pricing reflects technological value we provide, particularly through technology advanced and new product introductions. At the same time, certain input cost inflation, such as transportation and raw materials will be passed through. And here, we have also seen this over the past couple of years that we adjusted catalog prices into Q4 to be then effective as of January of the following year. .

And my follow-up would be whether you could share a bit more color on the composition of domestic China demand and your orders and revenues?

Yes, absolutely. So China continues to develop in line with our expectation. We have seen orders just ticking a little bit above the around about 30% sales share of China, overall, markets are developing very, very favorably, and our strategy remains to work closely with the OEMs, codeveloped technologies and win the relevant specifications.

The next question comes from Timo Teri from Barclays.

My first question is about the customer behavior. So I think you mentioned there's no double booking or inflator orders in your commentary. But do you see if your customers are placing all the space on their orders secured or they are placing orders to us based on their expected coming orders from the chip makers?

Yes. Thanks for your question. I would assume that with this increased visibility overall, customers are also placing orders now as they see demand for their tools building. Another evidence for this would be that we're still receiving quite some reconfigurations, which would point at specific changes or, let's say, reprioritization in their demand. So overall, I would agree to your observation. .

Understood, very helpful. And then my next question is about the service business. I think we obviously see a very strong ramp-up in terms of all in the quarter. As you mentioned, it's profit due to the higher utilization of the customers. How should we think about the growth momentum from as long as the treatment is probably they can continue the run rate. But on the other hand, we probably also have like a much a stronger increase in the installed base next year. Is it fair to assume the service growth will continue to be take up further in '27 onwards.

Yes, I can definitely confirm this assumption. Our service business will not only benefit from an ever-growing installed base, but also continuously strong demand for upgrade retrofits plus, obviously, the consumables business, which serves the high utilization rates in the fabs. So here, nothing has changed. You saw that the orders increased by 52% sequentially and I would see this pattern observed in Q3, really idiosyncratic and not as a, say, concern over the midterm growth trajectory for our service business. .

The next question comes from Martin Jungla from BNP Paribas.

A quick follow-up on the order trends from an earlier question. You would have -- you mentioned that you would expect a book-to-bill above 1 in the fourth quarter as well, right? So in your comments, you mentioned drivers for the strong orders were the anticipated price hikes and also concerns about the availability like what factor would you say is the larger driver here? And would you say that these drivers would also be the main factor for the Q4 order intake in were there any larger price increases announced for certain cost pass-throughs in the Q3 or maybe for Q4 that has driven customers to Russian orders early in the third quarter .

It's using a little bit the crystal ball here. But what I can assure you is that historically, when we communicated price increases. There was some uptick in order momentum, but certainly nothing that would now materially change the picture. So the the key growth driver remains the fundamental demand for our products. And there might be some pricing-related orders, but I really wouldn't see that as a key factor here. .

Okay. Interesting. But the cost -- the price increases that were announced in push through in Q3? Or is this mainly a key thing as usual?

No. I mean again, we constantly adjust prices for our custom valves or whenever we introduce new products. On the other hand, you have some catalog parts, mostly in advanced industrials, but also some service products where we do adjust pricing towards the year-end, and this is a communication that is happening usually in autumn and then implemented by the beginning of the year. .