Ladies and gentlemen, welcome to the VAT Q1 2022 Trading Update Conference Call. I am Sandra, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Mike Allison, CEO of VAT Group. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen, and welcome to VAT's Q1 2020 Trading Update Conference Call. The call this morning will be approximately 45 minutes in length. With me this morning are our CFO, Fabian Chiozza, and our Head of Investor Relations, Michel Gerber. After my introductory remarks, we will start the Q&A session and the call moderator will take your questions in the order you enter them. I trust you've all seen the media release we issued this morning. I'd like to point out that we're very pleased with the way the first quarter of the year has developed, given the high uncertainties around the global supply chain that has forced us to lower our guidance when we announced the detailed full year results at the beginning of March.
At that time, we expected sales in the first quarter to be between CHF 245 million and CHF 255 million. The reason for the lower guidance compared to what we communicated in mid-January was not because VAT had production issues, but the result of delayed customer shipments due to missing parts and components from other suppliers. Today, I'm pleased to tell you that we have further increased our factory output during the first quarter, and that all our manufacturing plants are ready to fully support customer demand in the quarters to come. Global supply chain issues remain a challenge also for VAT, but our procurement organization has done a really outstanding job in finding swift solutions to the many issues, especially around electronic supply. Now let me turn to our business performance.
The global semiconductor sector continued to grow in the first quarter of 2022, driven by the persisting global shortage of semiconductor chips. Coupled with further technology advances, semiconductor manufacturers invested heavily in new fabrication equipment, as well as to increase the productivity of their existing production facilities. This led to strong shipments to OEMs, especially in the latter part of the quarter. In the industrial markets, we saw coatings and automotive make a strong start to the year, especially in Asia. However, demand in the display market remained mixed, while the solar business benefited from strong demand for advanced PV technologies. As a result, group orders in the first quarter were 22% higher year-on-year to reach CHF 294 million, leading to a book-to-bill ratio of 1.1x.
On a sequential quarter-to-quarter basis, orders declined as expected and as indicated to you previously, reflecting the unusually strong Q4 2021 order intake that was driven by extended lead times, year-end concentration of orders ahead of price increases, last by announcements, and a high level of advanced orders from smaller OEM customers. VAT's order backlog at the end of the first quarter reached CHF 487 million, up 152% compared with the end of March 2021. Net sales in the first quarter of 2022 grew to CHF 263 million, an increase of 37% compared with the same period in 2021. As I mentioned in my opening remarks, slightly above the company's guidance issued on 3 March 2022.
Foreign exchange movements, especially the U.S. dollar versus Swiss franc, had no significant impact on first quarter net sales compared with the same quarter in 2021. Our segment valves reported orders of CHF 241 million, up 20% year-on-year, and net sales of CHF 214 million, an increase of 37% compared with the same period in 2021. This growth was mainly driven by higher demand in the semiconductor business unit, where orders increased 31% to CHF 184 million, and net sales amounted to CHF 163 million, up 45% compared with the first quarter of 2021. This corresponds to a book-to-bill ratio for semi of 1.12x .
End users continued to invest in new technologies in both logic and memory to manufacture the next generation of chips, as well as to increase much needed capacity across all production nodes. Highlights in the quarter for semiconductors included the continued growth across the Asian OEMs and the first specification win in Motion Components used in a volume deposition application. This specification win, in which VAT designs a new product together with the customer, reflects VAT's strategy to expand into profitable adjacent businesses that build on its leading core vacuum valve segment and builds a foundation for future growth. In addition, the scope of production at the company's Malaysia plant was further expanded with the release of a high volume Pendulum Control Valve. Orders in the display and solar business unit declined by 29% year-on-year, mainly reflecting the project nature of this business.
Sales, on the other hand, increased by 37% as VAT started to execute some of the orders received in late 2021. In the display business, demand was strongest for valves used in the production of Mini LEDs that serve as the light source for premium LCD displays. The OLED business remained muted. In the solar sector, demand was driven by slightly accelerating investments in solar cells based on high-efficiency heterojunction technology. PERC, however, remains the dominant technology. The advanced industrial business unit continued to grow with orders up about 8% and sales up about 7% respectively year-on-year. This was fueled by continued demand for crystal pulling and high-end industrial coating applications, especially in Asia. The business also saw increased demand for E-beam, that's electron beam technologies used in areas such as medical device sterilization, scientific instruments, and other industrial applications.
We also saw growth for equipment used in 3D metal printing and lithium-ion batteries for electric vehicles. The Global Service segment reported orders of CHF 53 million in the first quarter, an increase of 33% compared with the same quarter in 2021. While net sales were up 35% to CHF 49 million. Year-on-year growth was driven by the large investments by major IDMs, which drove the sub-fab business of Global Service. This coupled with record level of fab utilization in both semiconductor and solar segments, is driving strong sales in spare valves, spare parts, valve repair, and consumables. In addition, our strong partnership with the OEMs in driving their recurring service agreements has been very successful. Moving now to the outlook. 2022 is expected to be another year of strong growth.
VAT expects growth to continue in both its valves and global services segments in 2022 as it taps the significant opportunities offered by a growing market, its leading market and technology positions, and the successful execution of its proven strategy for profitable growth. In the valve segment, the company forecasts further growth in investments in the semiconductor manufacturing equipment market as the industry addresses both the global chip shortage and the rollout of new chip technologies. Based on orders for delivery on 2022, VAT expects display sales to grow compared with 2021. Further growth is also expected in the solar PV market. Forecast for vacuum-related equipment sales in industrial market point to continued growth, especially in molecular diagnostics related to COVID pandemic, as well as industrial coatings, automotive, and tooling businesses.
VAT expects the market for its Global Service segment to grow further in 2022 as semiconductor manufacturers continue to invest in both new capacity and in upgrading their existing vacuum equipment assets. On this basis, VAT expects net sales in 2022 to be substantially higher than 2021. VAT also plans to continue to build its flexible global footprint and strengthen its natural hedge against foreign exchange impacts by further ramping up its production facility in Malaysia, increasing sourcing from best cost countries, gaining greater economies of scale in global supply chains, and driving further operational excellence measures. At the same time, VAT remains dedicated to technology innovation and investments in research, development and new product development will therefore remain at the heart of VAT's strategy in 2022.
Furthermore, the company expects its EBITDA to increase substantially and the EBITDA margin to be higher as well, driven by higher volumes and better cost absorption, as well as the ongoing focus on costs, offsetting the inflation seen in raw materials, logistics, and energy costs. Because of higher expected sales, EBITDA and EBITDA margin, VAT also expects, 2022 net income to increase significantly compared with 2021. The stronger operational performance is expected to again drive substantially higher free cash flow in 2022, despite the investments in Malaysia, the innovation center in Switzerland, and the ongoing production improvements in VAT's production hub in Switzerland. For 2022, CapEx is expected to be CHF 65 to 70 million. For the second quarter of 2022, our manufacturing plants are ready to support the customer demand.
However, global supply chain issues or renewed COVID clusters, especially in China, could negatively impact customer shipments and thus may negatively impact VAT's Q2 results. Including current uncertainties, VAT expects net sales of CHF 260 million-CHF 280 million. This concludes my prepared introductory remarks, and we're now turning the call back to the operator for the Q&A session. Thank you.
The first question comes from Sebastian Kuenne from RBC. Please go ahead.
Yeah. Good morning, gentlemen. I have a couple of questions. First, on the component shortage that your clients are seeing, what are they commenting on? Where do they have shortage that doesn't allow them to take up your products from the warehouses? Secondly, on the cost increase that you see, I mean, you talk about good cost absorption and rising margins. What cost increase do you expect, let's say, per unit? And where's the key cost driver at the moment? And why do you think that you can overcompensate with pricing? I leave it at that for now. Thank you.
Okay. I'll take the first one and Fabian can address the second one. The component shortages are pretty much across the board, but I would say still concentrated on electronics. There are some unique issues, for example, the lockdown in China has definitely had an impact on some of the component makers. You know, even if they don't have manufacturing in China, they may have components sourced in China. I think that was the situation with a major gas panel provider that you saw in the news this week, where they had components coming out of China. With the lockdown, that's impossible at present.
I mean, we see, for example, right now there's a lockdown in customs within Shanghai and, you know, we don't expect to resume shipments there for a few weeks. We obviously have taken that into account in our guidance. I think there's some unique challenges around China and COVID. The main thing is still the global shortage of various electronics components.
Mm-hmm.
On the material side, I think that's getting better. We certainly don't see at the moment many issues around raw materials. The current crisis in Russia, we certainly don't see an impact there, but some of the fabs are a bit concerned about some of the gas supplies that come out of that region. I think there they've also diversified enough that there should be no issue. I think when I talk to my peers around the world, it's mostly the unpredictability of electronics components that's our biggest headache.
Mm-hmm.
Fabian, could you answer the second one?
Absolutely. As you said, Sebastian, we currently see cost increases all commodities, be it ferrous, non-ferrous, materials, electronics, which are currently hovering around the, I would say, mid-single to high single digit. On top of that, you have distribution cost increases, which for the first quarter are somewhere around 10%. The biggest driver currently definitely is energy, which is up to about 40%-50% higher than what we have seen last year. Now, as I explained in previous calls, we have basically three pillars in place to cope with these increases, which are purchasing savings, where we drive productivity increases and also cost optimization together with our suppliers.
Second pillar, certainly one of the key focus areas at the moment is our continuous improvement program, where we drive operational excellence and internal productivity programs. Last but not least, we have defined in the second half last year already, our price increase strategy for 2022 throughout all customers, which are now kicking in. These three pillars together help us to absorb those input cost increases that we currently see. That also makes us confident to meet our expectations in terms of bottom line profit.
I'm asking specifically because we had big cost increases for aluminum and stainless steel only in the last four weeks, really. I wonder if your price increases that you had are. Well, do they take this into account or do you have new price increases coming up that would take those costs into account? Or is it not really relevant because it's such a small part of your cost of goods sold?
Especially aluminum and also steel is a larger part of our COGS. However, we are hedged with most of these commodities and therefore I do not see any additional pressure at the moment which would trigger us to rethink our price increases.
Mm.
That is at least for the time being.
Mm.
We constantly monitor that and then we also react if this becomes necessary.
Understood. Last question on the pre-ordering. We estimate roughly CHF 150 million-CHF 180 million pre-ordering in Q4. What is your feeling for pre-orders in Q1, and what do you expect Q2, Q3? Thank you.
I think as I explained in the last conference call, I expected Q1 to get back to a more natural demand profile, and I think we're seeing that now in the first quarter. I would expect orders to be around this level moving forward. It will take us to Q3 to really absorb that backlog and get down to more realistic lead times that we had in the past. Our lead times are a fraction too long, but then again, the whole industry's lead times are too long. I think VAT's one of the better performing ones at this point. I think we're more at a natural point right now.
Thank you very much.
The next question comes from Timm Schulze-Melander from Redburn. Please go ahead.
Hi there. Good morning. Two quick questions, please. Just thinking about you know, how you're running the business through the first half of this year. How many positions, you know, in terms of headcount positions, are you currently hiring for? Just wanted to talk about whether any of those plans have changed or evolved, year to date. On the gas panel supplier issues that you mentioned, if you could provide some details of kind of what kind of impact you factored in for your 2Q, that'd be great. Thank you.
Yeah. I think, you know, in our business, headcount is a topic we keep a very tight rein on. As you know, VAT is a fairly lean infrastructure. We're certainly continuing to invest heavily in the R&D area, and we're definitely prioritizing our resources into R&D and trying to keep a tighter rein around our functional and operations team. Obviously, direct labor is a given. You know, we add that in conjunction with the growth of the business. You know, we're also looking at scenarios. There's a lot of nervousness in the market about consumer demand and so on. You know, we're ready to go up or down. We have our business plans in place. At this point, I'm still optimistic for 2022 and 2023.
That gives us a great chance to work on our processes, to work on our cost efforts, as well as to work on R&D without the highly distracting issues around cyclical management. I mean, don't underestimate what that takes. It's a huge effort to ramp down as well as to ramp back up again. The smoother the cycle, I think the higher performance and the better innovation capability we'll see in the future. You know, we're still expecting this year to be a growth year and still challenges to ramp our manufacturing. We're taking the headcount on a step-by-step basis, but again, prioritizing R&D. You know, the gas panel situation was very new.
We obviously factored a certain percent into our results. I mean, you can see with our backlog that there's a bigger potential there. We consulted with OEMs, and I can't speak too much about their numbers because you know they'll be reporting soon. We consulted heavily with them, the major OEMs, and came up with a balanced number for this quarter. As you can imagine, it's pretty hard to triangulate this fully being the first to announce in the market. We you know we think this is a balanced approach between these supply issues and also the situation in China.
Okay. That's super helpful. If I could just maybe squeeze one other quick one in, please. On your order intake for Q1, could you just give us some sense as to what the split was between, you know, leading edge versus a more mature node capacity? Thank you.
Yeah. We don't really have visibility to that. You know, right now, you can imagine that the OEMs, just like VAT, have such a wide range of systems, different configurations. They're basically looking at the supply chains and shipping whatever they can, because, you know, shortages exist in various types of components, various materials, et cetera. It's really hard to see where our customers are shipping to. What I hear, so I can't directly measure it, but what I'm hearing from them is still strong shipments into China. And very strong shipments into advanced DRAM and advanced logic. But in terms of percents, I don't have any more info on that.
Okay, great. Thanks very much.
The next question comes from Joern Iffert from UBS. Please go ahead.
Just one or two questions, please. The first one is on the CapEx looking into 2023. With the recent statements of TSMC saying seeing lower demand for PC chips or smartphone chips
Also after cutting some production of consumer electronics and maybe memory prices are not really developing great. Are these not leading indicators that in 2023, the CapEx can be down? Here's the question, I mean, what are your customers and what are your connections to the semi chip producers telling you about 2023 right now? Then the second question, in a scenario, for example, the semi CapEx would be down next year, 5% or 10%. To what extent do you have visibility you can compensate this as market share gains and the adjacent product launches? Thanks a lot.
Okay, I'll take the first one, and I think I'll have Fabian comment on the second half. Yeah, I think it's an interesting situation we're in here with equipment lead times almost at 12 months. There's a huge demand there for equipment into the leading edge nodes. Obviously those end users see the demand at the leading edge, especially. With 12 months lead time, it's hard to predict exactly how that's gonna come into 2023. I think looking, I think the main question is, can the increase in CapEx per wafer in advanced logic and DRAM offset the inflationary cost increases that are causing the weakness in consumer demand?
I think one other way to look at that though is, the consumer demand is gonna be mostly in mature chip technologies and probably more in the low to mid-end handset markets as well, where you're definitely using lower CPUs and lower memory. For example, if the difference between a 5G smartphone compared to mature smartphone is roughly double the amount of NAND and 50% more DRAM. You know, you're always gonna see a strong demand for 5G conversion in high-end smartphones. I think that's probably gonna offset a lot of the weakness in the more mature markets.
I think if you also look at some of the recent data points, Micron, for example, I mean, their high-end business performance is really eclipsing the more mature segments. Shipments into data centers, all things compute, AI, VR, et cetera, they're still looking extremely strong. You know, there's definitely a question into 2023 on how industrial output increases 'cause the high-end industrial infrastructure also has a major benefit for the leading edge devices. I think at this point, estimates are pointing to a flat to up 2023. You know, with 12-month lead times for the existing equipment, I think that's not a bad assumption at this point. We don't really have more color than that.
I think that's where we're planning on a roughly 10% growth in 2023 at this point, from a WFE standpoint. Somewhere around about $107 to 110 billion in WFE. As I said in my last remarks, you know, we're ready to react if we saw that drop. Fabian, do you wanna comment on the second part?
Yes. Joern, on the adjacencies, we have made quite substantial progress last year and do also forecast a strong increase this year. We have achieved around CHF 60 million of sales last year, and we forecast to go up to CHF 90 million in 2022. We've also seen quite some attractive insertion points with regards to our ALD valve. The adjacencies are forecasted to continue on that favorable growth trajectory. At the same time, with regards to our market share, we do expect gradual increases over the course of the next years, which then could soften eventual slowdown in the WFE spend.
However, as Mike has just mentioned, right now, the supply chain constraints would rather favor a push out into 2023, and so the growth is right now still on a healthy path.
Okay, thanks a lot for this. Just to double-check, this would mean, let's assume you have a flattish CapEx next year with the adjacent products. If I take the run rate of the last one or two years in terms of growth and the market share gains on a flattish wafer equipment CapEx, you can add maybe around CHF 30 million-CHF 50 million sales year-over-year. Would this be a fair assumption?
Yeah. I think.
Well-
Sorry, Fabian.
No, go ahead.
The adjacencies this year, about CHF 90 million, we saw about 35% growth. I think we're still at the adoption phase of a lot of these adjacencies. I've just mentioned this morning in the prepared remarks about the deposition when we had, you know, that adds, you know, a nice contribution into 2023 and 2024. We're hoping that we can grow at similar rates to what we've seen in the past. I think that's a reasonable assumption for the type of growth.
Thanks a lot for this.
The next question comes from Michael Foeth from Vontobel. Please go ahead.
Yes, good morning, gentlemen. Just two questions from my side. I want to come back on what happened in the first quarter, basically when you lowered your guidance because basically the bottlenecks that your customers were seeing and then now basically two weeks later, you were able to ship more and record more revenues than what you had guided for when you changed the guidance. Just trying to understand really what happened in those past weeks that provided the ability to ship more to your customers than what was planned. The second question really maybe tying in to what Joern just asked.
When you look at the forecast for 2022 and 2023, what really has changed in the past few weeks from what you hear and see, and in particular relating to the geopolitical situation and to geographic diversification of production relating to those uncertainty? Is there anything really changed or accelerated? Thank you.
Yeah. Okay. The first question on the bottlenecks. Yeah, you know, when we revised our guidance, we'd obviously seen January and February and they were weaker than we had expected. I think the OEMs themselves were having a real challenge and reprofiling their Q1 shipments. You know, we really had an enormous March, bigger than we expected, back in the beginning of March. The OEMs had pre-built a lot of systems, and they were ready to pull a lot of components. They obviously didn't wanna pull components until they had verification that they were getting supply from other providers.
We just saw a much larger pool than expected within March, you know, probably around CHF 10 to 15 million more than we expected. I think we did see a little bit of a loosening of the supply chain. I think things were starting to improve in March. Maybe what's changed coming into April is this lockdown in China. You know, that was unexpected. I think we'll, because of that, certainly see a slight slowdown again in April before recovering into May and June. The monthly profile of the quarters are certainly a little bit lumpy at the moment and making it hard to forecast. In terms of the second half, for us, very little has changed.
Yeah, we hear a lot of noise about some of the slowdowns in consumer markets, et cetera. You know, a huge part of our CapEx goes to leading edge and technology development. Into 5 nm build-out in logic, into the, say, the 1α nodes in DRAM and 176-layer in NAND. It's quite difficult to connect at this point, the technology build-up versus the capacity situation. Yes, of course, we're hearing of AMD pushing out some orders and Apple slowing down a few lines. At the moment, it isn't triangulating back to the CapEx at leading edge. I think there's still also a build-up happening in the mature technologies.
There's quite a bit of shipments from the OEMs going in to resolve the chip crisis, the supply challenge that we're all facing. I think that's gonna continue up into 2023. It just takes that amount of time. The trailing edge guys have more difficulty getting equipment than the leading edge. Obviously, they're smaller, more niche players. You know, of course, the big IDMs obviously have more pull when it comes to equipment shipments. On a geopolitical standpoint, again, I've seen some notes around about the geopolitical drive will cause additional CapEx spending in other parts of the world or a more distributed spend across the world. I'm not fully aligned with that thesis.
I just don't see the large IDMs spending where they don't see the demand. You know, okay, governments can provide incentives, but governments don't control the P&Ls and balance sheets of the top three guys. They're gonna balance their equipment spend directly in proportion to their short, medium, and long-term forecasts. I don't quite see that becoming a big issue other than China, where there's a very definite connection between the IDM spending and government spending. They can control how much these companies spend. I'm not as pessimistic that we're gonna see a big build-up that will cause further supply challenges other than in the mature technology in China and maybe the mature flash memory nodes also coming out of China.
Thank you. It's very helpful. Thank you.
The next question comes from Marta Bruska from Berenberg. Please go ahead.
Hello. Good morning. I would like to follow up on the display and solar market and the volatility there. I think you well explained this is project business. Just thinking about it, you know, over the medium term, what's your outlook with regards to the growth rate? You know, this quarter, we had the order intake down nearly 30% again. You know, how should we think about it for the full year and then over the medium term?
Yeah. I think you've gotta look at the two sectors separately. Solar, I think, we're gonna see fairly consistent demand over the next three-five years. You know, a consistent growth rate. There's no question the advances in solar panel efficiency, coupled with the cost reduction they're working closely on the heterojunction is gonna mean more cost effective and higher capacity or higher output panels, which I think will provide a fairly strong and consistent growth in CapEx. Now, it's a small part of our business, though. You know, it's probably only a 5% part of our business. It will be consistent, and it will grow at a sizable rate year-on-year.
I think you can see the macro trend behind solar to give you confidence in that. Display, on the other hand, is complicated because there's already huge capacity out there. There's not really been a compelling need for consumers to move to further upgrade their large-scale panels. You know, the small and medium scale panels, of course, there's a high demand in automotive, for example, that's driving some capacity increases. The transition on handsets from LCD to OLED has also been driving the OLED business. Again, there's a finite market that you see in display. Comparing that to semiconductors, where you just see new applications coming out by the day as either the compute or storage engines within these products.
We're not seeing quite the same proliferation of displays, hence the kind of flatter profile of that market. At the moment, you know, because there's no compelling upgrade opportunities, the display business is very project-by-project oriented, and you can see big differences quarter-to-quarter. Now, on an annualized basis, we still expect display to be slightly up. I think you can continue to expect big fluctuations in the quarterly orders and sales of that business. I think, you know, you really gotta look at it as an annualized return rather than a quarterly. There's certainly a little bit of action around the LED backlit panels, so the Mini LEDs.
That's definitely generating quite a bit of CapEx in the LED market, as well as some upgrades in the panel side, but nothing compared to what we saw back in 2016. I don't see anything changing this fundamentally in the next year. I think we've got to look beyond maybe to the next generation of higher resolution, higher brightness, lower power panels that may come in the 2024 type of horizon.
Thank you. Just to clarify, you mentioned that the solar is 5% of your business. Did you refer to the display and solar or to the group total?
This year I would expect the combination of them to be around 7-8% of the group. In fact, solar is probably half of that, so more like 4%, I would say.
Okay. Basically to make it simple, so from display and solar, 50% is display and 50% is solar.
Yeah. At the moment because it normally display.
Mm-hmm.
is much larger.
Mm-hmm.
We're seeing certainly stronger action in the solar area than we are in the display.
Thank you. That's very helpful. May I ask you know, with regard to your digital initiatives, can you update us, you know, quickly what would be the highlight you expect to introduce or the progress you expect to make in this year?
On our ERP systems and [inaudible].
Digital initiatives.
Fabian, do you wanna comment on that?
Yes. Marta, as you know, we are in the,
ERP project. We are looking at the go live of our Malaysian operations early in the second semester, which will then followed by the whole Swiss operations and the sales entities throughout 2023. That really is the foundation of our digitalization journey. In line with the ERP implementation, we are currently also running a major project throughout the group where we collect and prioritize all the different digitalization initiatives and projects that are running or are planned to come into play throughout the group. We're talking about 150 different initiatives that we will now cluster and then implement in order to really enhance our flexibility, but also to boost our productivity in line with our process landscape.
I think there is a lot in the making right now, and I'm actually very excited from the opportunities that we have as a starting point with our new ERP system.
Are those, like a project that already, you know, were implemented, somewhere in some niche areas of your business or in certain regions? Or rather these are the ideas that you collecting across your employees that to just make something tangible out of it, you will later prioritize?
No, we do already have projects that are about to be implemented, especially in the finance area, where we optimize our processes by, let's say, RPA and OCR application. We will also go live with a fully automated travel and expense management system that will reduce the manual work that we currently have by about 97%. These are the type of initiatives that we are driving that help us to ensure our productivity and, on the other hand, also address our need for flexibility and downside resilience.
Thank you very much. Very interesting. Thank you.
Okay. I think that's all questions from the floor, and I think time's up on the call. I'd like to thank you for your participation. It was another strong quarter for VAT and look forward to a very strong year. The next report out from us will be on August the fourth with our half year results, and I look forward to hoping to see you in person at that presentation. Thank you very much.