Hand over to Urs Gantner, CEO, Prisca Hafner.
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, but not by 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 four 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 four. 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's 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 $1 trillion semi industry, continuing to push the boundaries of R&D beyond what is physically 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 have 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 of the, of, at a 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 societies. Let's move to slide 5. On slide 5, it's available on our website, and we will look at an overview of the half-year key figures and the segment breakdown. Wafers, 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, VAT's markets have seen continuous recovery since Q2 2023, with sequential growth in order and sales, and with our book to bill ratio remaining above one 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 in 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 electronic 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 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 gates have grown strongly at 40%+ over H2 2023, while spares and repairs are showing a slower growth. That is in the 20s, but also posted sequential growth.
Six-month 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, VAT 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. Who knows? 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 commented 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. We know that there could be shortfalls, which we have catered 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 temps workers and full-time employees. Our employee count increased just shy of 3,000 at the end of H1 2024, a + 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 number 7.
Chart number seven 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 lowered by about six percentage points at 15% of sales. We have always said that ADV is a bit lumpy and often driven by large projects. While the nuclear enrichment and fusion 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 two-thirds of our business come from Asia, Asian customers, one-fifth from the US, and a similar number from our European customers. To preempt the 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 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 HBM, and have been able to sell down inventories. NAND still is recovering slowly but steadily. The logic market is seeing an 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 a trough, 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 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 with left-wing swings in U.K. and France must still be assessed, but nuclear power must remain a key policy for the parties involved. For industrial and scientific instruments, the expectation 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 EVs, 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 month does show 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 2024. We have recovered off the 2023 lows and are operating on the normalized conditions. So look at these numbers as normalized base as we have gone through the recovery, and we are still preparing for an industry-wide ramp. There are four key messages I want 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 about one, which means we are rebuilding our backlog.
Our planned ERP implementation in the third quarter had a limited impact in the second quarter on the current business, and we expect a small reversal of this effect in the coming quarter. During the second quarter, the pending ERP implementation has boosted sales by around CHF 8 million, or about 3%-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 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 six months amounts 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. Also, we have seen continuous sequential orders and sales growth since Q2 2023. In Q2 2024, we achieved orders of 271 million, up 15% over Q1.
Main contributor was the semiconductor business, where orders increased 23% quarter-on-quarter. Sales amounted to CHF 251 million, which was up 27% on last quarter, and in the upper half of the sales guidance we communicated to the market at Q1. Versus 2023, group orders for H1 of CHF 507 million surpassed H1 2023 orders by 74%, again, with a significant increase in the semi business of over 149%. Versus H1 2023, 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. The FX impact in our six-month sales amounts to approximately -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 two 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 were placed related to this pre-shipping. Including these adjustments, our book-to-bill was still above one times 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 result 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 2023, when we hit the low of 0.6 times, and currently is running at 1.1 times, slightly down versus the previous quarter, it was at 1.2 times. Looking back at history, you can see we are only at the early stage of the next upcycle. 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 2024, which is an increase of about 6% on 2023. 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 costs of raw materials and consumables, and the change in inventory is finished goods and work in progress. Thus, the coming ERP implementation in Switzerland has had an impact here. We have had a substantial buildup of inventory in semi-finished and finished goods, which we were able to capitalize, increasing the gross margin. We expect a counter effect in the second half of 2024 as we will sell down these excess inventories.
EBITDA for H1 2024 increased by 2% to CHF 135 million, while the margin increased to 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 represent step off the trough margin recorded last year. At 30.1%, we are five 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%-37%. Note, this is again, with the caveat of FX rates, our range communicated at the capital market, say, 2022, was defined as the US dollar to Swiss franc of 0.9521. Our efficiency programs, including, for example, the ERP implementation, will help get the EBITDA margin back into the range. But clearly, 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 2024, we achieved a ROIC of 32.5%, which is in line with the trough level in 2023 and 2019. Our cash return on invested capital due to investment into capacity and working capital has moved to 27.9% versus 31.3% for the year 2023. 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 improve 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 a corresponding EBIT margin of 25.3%, which is slightly higher than the 24.6% recorded a year ago. Net finance costs were around +CHF 1 million, compared to -CHF 11 million in H1 2023. Revaluation gains on cash balances and intercompany loans contributed to the overall positive result. Effective tax rate for the first six months of 2024 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 2023. Slightly higher EBITDA and the positive financial results more than offset the slightly higher depreciation and tax rates.
EPS thus is 3.14 per share for this period. Our free cash flow generation is shown on chart 17. Our free cash flow in H1 2024 amounted to CHF 26 million, down 29% compared to 2023. Major impact here was CapEx, which amounted to CHF 40 million in H1 2024, up 28% compared to the CHF 31 million in H1 2023. Our capacity expansions in Malaysia and the new innovation center in Switzerland continue with the focus to meet expected higher demand in 2024 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 build-up ahead of the ERP change in Switzerland. We expect this ratio to decrease during the rest of the year.
At 20%, the cash conversion rate measured as free cash flow as a percentage of EBITDA, show the usual seasonal lower level. Our goal is a return to the target band of between 60%-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 one 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. In 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 2024, with order and sales figures grinding higher. 2025 is expected to be a strong year. VAT 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 lines. For the rest of 2024 and into 2025, the following financial priorities apply: Successfully complete the ERP implementation in Switzerland and manage our inventories of raw materials, semi-finished and finished goods. It is important that our clients provide us with the same feedback as from Malaysia and Romania. We did not realize you completed an implementation. Maintain a disciplined approach to CapEx, expected around CHF 70-80 million in 2024, driven by the second Malaysia plant and the 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 2024 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 2023, we continued to work on improving our ESG credentials. We believe that our long-term business success is subject to our success 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. Among 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 2023, 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 one-third.
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 back to Urs.
Thank you, Fabian. Let me now turn on slide 23 to the shorter-term expectations for our markets. 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 tech developments like EUV, Gate-All-Around, Atomic Layer Deposition, and High Bandwidth Memory. And third, the timing and the shape of the market trend. Overall, the first and second topic and their developments are feeding into the third topic. AI is proving 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 sizes 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 $90 billion-$100 billion, accelerating in 2025 to $110 billion-$120 billion.
For semi market, we expect demand overall to grind higher in H2. With wafer fab equipment estimates forecast to be around $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 capacity 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 change drastically, even as we approach the year-end. The consequence, we at VAT 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 $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 $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 develop. 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 Semiconductor. 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 2-3 years. 22 are presently in qualification runs, with 14 equipping. Two-thirds 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. Therefore, R&D remains core to VAT, 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. 2 out of 3 spec wins are in the semi business. 1 quarter of the spec wins relate to adjacent products. While R&D will impact our bottom line, in the end, this is making VAT future growth.
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 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%-37% target band.
This obviously is still dependent on continued sales and subject to the usual caveats that we set this band 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 and 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 run 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 two, 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 floor.
Anyone who has a question may press star and one at this time. The first question comes from Olivia Honychurch, Jefferies. Please go ahead.
... Good morning. Thank you for taking the question. 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 for 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 to be 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? Thank you.
Hello, 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 is it remains flat. And as you know, there are kind of a balancing now in Q2, Q3. So we had this prebuild in Q2 and 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 DRP certainly has an impact now on the numbers Q2, Q3. That's correct. Mm-hmm. Maybe to give you a bit more color on that, Olivia, take an 85 million given months there. You have about 25-30 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 two 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. Thank you. My second one was around your order expectations. You've, you've now explicitly said that you've seen inventory levels at 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 for order growth, which you said on multiple occasions will be low double digit sequential growth?
I think what we can mention here is that, compared to the last years, 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, 8-12 weeks, and this turns then in 2-3 months, a quarter, right? So that's why the visibility in orders is, it's 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 short, closer to sales.
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's no change. No.
Okay, that's great. Thank you.
The next question comes from Jörn Iffert, UBS. Please go ahead.
Thank you. Hopefully the first question only counts as half a question, because it's a follow-up. With the CHF 20 million orders pulled forward in Q2 due to the ERP shutdown, is this part of your guidance? So 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, thanks. This was half a question. Second question, please, if I may ask, look on the mix of 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 DUV, which is not so favorable for you, or is it relatively balanced versus 2022, if I may ask?
... I already love EUV, like everybody loves it. It's such a fantastic technology. Yeah, but you are right. There was, of course, a huge shift in last year in the wafer fab. I mean, so lithography did 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 2nm 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.
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 going back in percentage, but certainly stay beyond the 20%.
Okay, thanks. 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 the industry view and 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, right? They did build up capacities to build out 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 also built out more capacity. I'm talking now 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.
I see there is kind of 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.
Thank you very much.
In percentage, of course, it's going back since we are expect that the others will grow.
Thank you very much. Thanks a lot.
The next question comes from Sebastian Kuenne, RBC Capital Markets. Please go ahead.
Hi, gentlemen. My first question is regarding the pricing level for consumer electronics. When I look at the retail price 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? The second question is again on China. You mentioned overstocking of equipment there. I think it's the first time that anyone mentions it. I think even ASML has mentioned it. Does that overstocking also apply to components, so vacuum components? And if so, I mean, I think China must now contribute about 45, maybe 50% to 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.
Thank you.
Let's start on China, then maybe we can conclude on China. I know it's 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 deliver 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 this expertise, capabilities for all these different, for the hundreds of process steps, to serve the domestic market.
So yes, that, that's why I say, it's quite 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, carved in stone, but this is something that can be expected. On the pricing on consumer electronics, well, for us, for us, what we track is more the quantities.
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, you know, we are providing the equipment manufacturers, and this is something we are tracking. Less tracking on the price of pricing on consumer electronics. Maybe this is an indirect impact then to our business.
Understood. A follow-up on the China question, because you write in your presentation that there's overstocking of goods. So you seem to have some-
Also, we can hardly hear you.
... Sorry, yeah, on, 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?
I don't-
It's on page 24.
Well, as mentioned, it's certainly not the Chinese OEM, so, and, it's not-
It's not the Chinese OEM. Okay.
Yeah.
Thank you very much.
Okay, we now take a question from the webcast. It's from Nicolò Piovaccari. And he asks whether 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 via pricing or just operational excellence or so, or any changes in the competitive landscape?
Yeah. 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 varying 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 usual, 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, J.P. Morgan. Please go ahead.
Yeah, hi, good morning. 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?
Good morning. I do expect that we return to normal operations towards the end of Q3. So into Q4, we will be fully back to the normal run rates. And here, I would just add a bit of color. We are currently operating in Malaysia, about 70%-75% of capacity, and in Switzerland, it's about 70%. So here we have certainly enough headroom to ramp. We do have also the staff in place, and as Urs also said before, we're taking this investment ahead of the curve very seriously and are preparing ourselves for a strong Q4.
My second quick follow-up on that is, based on what you are hearing from your, you know, 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 of the parts that they need from you, or you will continue, you know, you expect significant growth next year as well, then, on the back of that?
Certainly we are checking with our customers, as mentioned, weekly, what their outlook is, will be. So, also they have kind of a visibility for the next quarter. So it's just that, we do a lot with these customer also through consignment, and this helps a lot also to buffer them, that they are ready for a ramp as well. And, yeah, for us, the inventories did quite normalize over the last year, as you may remember, after 2022, with this 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, on the expected run rates as well. So this is a kind of a, a checking and adjusting on, on a weekly and monthly base, with our customers, but also important with our suppliers as well.
Thank you.
The next question comes from Tim Schulze-Melander, Redburn Atlantic. Please go ahead.
Hi, good morning. Thanks for taking my questions. Just very quick ones, please. First of all, just clarification on ERP. I think you've said it's a two-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, hi, Tim. Good morning. So the changeover is happening early August, which triggers production outages for about two weeks.
... And then you gradually ramping your production back up, get people back on board, having them work with the new system processes, etc. What I said is that I do expect that, after about 4 weeks, 4-6 weeks, we should be back at a run rate that we have seen prior to the changeover.
Okay, super clear. That's very helpful. Thank you. The second question's 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 the pickup as well in the aftermarket from not in China, because, you know, 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 3-5 years behind.
The first years anyway, it's always going through the OEM, and when 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 or anything that's caused you to question or doubt the durability of those incentives? Thanks very much.
Yeah, 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 roadmap, a long-term roadmap, 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 a biggest surprise, probably this year.
All right. Super helpful. Thanks very much.
The next question comes from Craig Abbott, Kepler Cheuvreux. Please go ahead.
Yes, good afternoon, everyone. Thank you. Yeah, just one question. I realize this very high-level generalized, but looking at the, you know, kind of revenue growth potential in 2025, if we start, you know, as a base for 2024, assuming, whatever, sales around that CHF 1 billion level, maybe a bit more, and looking at the sort of midpoint of the WFE CapEx outlook you gave us for 2025, let's say high-teens growth or so, I'm just wondering what your current thoughts are in terms of the sort of correlation potential for what kind of revenue growth VAT might be able to generate, and if that all comes through as expected in 2025 versus that underlying WFE CapEx growth that is expected. Thank you.
Yeah, of course, it's always, thanks for that question, a very interesting one, and going deep in our modeling, how we model the markets and the growth. In the end, it will depend, of course, which technologies will ramp and what kind of equipment goes to the market. Our ambitious goal is always to say that we wanna just outgrow the market. So if there is a 10% growth in the market, we certainly wanna outgrow. And with newer technology going to market, our share of it will be higher. And this will certainly. We even benefit from that as well. Then of course, it also, and here, Fabian, as always, raises his finger.
FX, of course, will also be a big driver as well, but this might be not in favor to us. If it's differently, of course, we take that, but this will also play a certain role. But in general, normalized or with a constant FX rate, we will outgrow that, our ambitions and with our initiatives, we will outgrow the market if the new technology goes into the market.
Okay. Thank you. Very helpful.
The next question comes from Robert Sanders, Deutsche Bank. Please go ahead.
Yeah, thanks for taking my question. I just had a question regarding the Malaysian expansion. You've obviously got 1B opening at the end of this year. Are you gonna ramp that at full pelt to get to the, the feasible capacity? And, and what kind of standard cost reduction could that give you per valve, or, or what could it do to your EBITDA margin by 2027, for example? Thanks.
Yeah, well, as we mentioned, we are investing ahead the cycle, right? And we started already qualification of our machining in our 1B. I think that's the most important, because we also want to kind of safeguard the whole supply chain in Asia. So if the ramp is coming, we want to deliver. So we kind of qualify already 1B in machining, and then we will gradually increase, of course, capacity and build out the clean rooms when it's needed. So the capacity in Malaysia will be CHF 1 billion, so this will be our CHF 2 billion story, which we want to achieve by 2027, 2028 timeframe.
So over the next years, we will gradually increase the output and capacity out in the 1B. But we already started. Qualification of machining always takes time, and it's also close collaboration with the whole industry. There is a copy exact in the market and that, so we follow the rules in the market, and that's why we started off early.
Is there a particular standard cost reduction that you're targeting in Malaysia versus Switzerland?
Look, what we have commented before is that labor rates in Malaysia are about a factor of 3-3.5 blended cost lower compared to Switzerland. And if you just take now a standard product, say, you have whatever, 100 Swiss francs of sales, then your labor content in that is between 10%-15%, and that is where you can apply this cost, labor cost benefit. So overall, I think the contribution is rather small, given that we use also the machinery equipment, et cetera, that we have in Switzerland, so there you do not have a benefit.
Overall, I think where we definitely will see our operational leverage kicking in, then this is definitely with the volume. Plus, also, just complementing to what Urs has said, is that we have a nice BCP opportunity with Malaysia 1B on the one hand side, and on the other hand, we can also accelerate the buildup of our supply chains and could just play then with the in-outsource ratio in case of the external supply chain not being able to cope with the expected growth next year. So overall, I think that gives another comfort for us, but especially for our customers, as we prepare for the next ramp.
Thanks for that. Just one quick follow-up. On adjacencies, how should we think about the ramp, from, you know, below 100, I guess, this year, to 300 and above in 2027? Is that gonna be sort of linear growth? Is it more back-end loaded? Just so we understand. Thanks.
It quite depends on the technology going in. It's quite linear growth on leading-edge equipment going to market.
Great. Thanks a lot.
The next question comes from Mate Nemes. Octavian, please go ahead.
Yeah, hi. Thank you for taking my question. Maybe just as a follow-up on the adjacencies, you mentioned, I think two or three times, you have substantial R&D investment, significant R&D investment. Can you maybe provide more color on that? I mean, is it just the higher personnel count that you will use for the innovation lab, or are you developing some new applications that are experiencing high demand? And of course, if you could quantify some of these movements, would be great.
Yeah, well, of course, R&D, that's in the DNA from VAT. So we've I always say, actually, we started our founder was really an engineer and tried to solve the industry's problems. So the first valves went to universities and CERN, for example. So that's in our DNA, and I think with valves, of course, we set the standard a few years back already, but there's nothing finished, right? We also see that we have continued R&D going forward here. So there are issues in the market, for example, the PFAS and also in ESG, to make it more environmentally friendly. So there is a lot of also here, innovation ongoing, even in our core products.
Apart from the core products, yes, we have also the adjacent product, as we mentioned. And then looking ahead in the five+ years, our R&D team is also working on, we call them the Horizon two products. Products that, it is not yet in the market, but we anticipate there will be inflection points coming, and we are preparing for, let's say, the, the next generation on, on the gate-all-around technology or even the CFVAT technology coming then in the five+ year.
Maybe more specifically on the advanced modules and motion control. I mean, you did say last year that the sales was down with the market. I mean, could you maybe say more to that, this year?
Yeah. So this is kind of why it was down, because we always have these adjacent products qualified on the latest generation of wafer fab manufacturing tools, and basically on all in the etch deposition, and also lithography. And especially etch and dep was quite muted last year in the leading edge, so it was more the ICAPS growing, and that's why we saw the decline. As mentioned already before, as soon as we see that this 2 nm and beyond will be invested for the 2 nm and beyond, the adjacent, our adjacent products will kick in. But we keep working on that, and as I also mentioned, about 20% of the spec wins we have done in half year one was for adjacent products.
... Okay, and then maybe again, a question on China. I was maybe a bit surprised because recently I also read from the same organization that the wafer fab equipment for next year could be down for China. So my question to you would be: Do you think that the wafer fab equipment projections reflect the risk that maybe China won't really grow? And why would it come to such a change? Because it's somehow contradictory that they have kind of announced higher than expected subsidies to support their industry, and yet, now we are seeing that second company or you guys are also highlighting that China might be overstocking. So it almost appears that there is a risk of overcapacity.
I always mention that we just—if I talk about China, I talk about the Chinese OEM, and with our Chinese OEMs, there is no overstocking. And the government in China, they have to invest because they have to develop all the process steps for the wafer fab equipment. And I think that that's cancel the one with the overstocking, that's not what we see. And in China, of course, it's mainly what is now installed is more mature technologies, and they have to work also on the leading edge. They are behind that, and that's why they will invest a lot in achieving also the 7, 5 nanometer technologies.
They are not yet there, that's why they have to invest in these technologies. So the investments will not stop.
Okay, so the wafer fab equipment projection for next year assumes growth in China?
I said that this will be stable on a very healthy level and in kind of the percentage from the total wafer, the wafer fab equipment, it will go down because the others will grow.
Okay. Thank you very much.
The next question comes from Didier Scemama, Bank of America. Please go ahead.
Hey, good morning, gentlemen. Thank you so much for taking my question. I've got a few. Just wanted to clarify a little bit the impact of the ERP implementation on your Q3 guide. Is that, if you take CHF 250 million as sort of the base assumption, is that sort of the two-week disruption on that basis, or is it just on the Switzerland portion of revenue? Related to that, also, you mentioned that you will start the implementation in August, so should we expect an additional disruption to Q4? And I've got a follow-up on China. Thank you.
Hi, Didier. I can just repeat what I said about 10 minutes ago. So the effects of the changeover are included in the guidance that we have established to the amount that I have said before, and in Q4.