Ladies and gentlemen, welcome to the VAT half year results 2022 conference call and live webcast. I'm Alice, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Webcast viewers may submit their questions or comments in writing by the relevant field. For operator assistance, please press star and zero. 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 thanks for joining this webcast on our Q2 and half year 2022 results. As you know, VAT has pre-released preliminary key figures, including orders, sales, EBITDA and EBITDA margin already on July 13th, 2022. You can see the final numbers are well in line with what we announced back then. Today, our CFO, Fabian Chiozza, our Head of Communications and Investor Relations, Michel Gerber, join me on this call. Go on to slide two. Looking at today's agenda, we'll cover the following items 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.
After these sections, I'll give you a brief insight on VAT's first ever sustainability review that we have also just released this morning. Then tell you a bit more about the announcement of a new executive member, our head of the new Semiconductor Solutions Group, Urs Gantner, and the reason behind enlarging our GEC. After that, I will lay out our current view of the markets we participate in for the remainder of 2022. Last but not least, we will host the Q&A session, and I expect to close the call around 11:00 A.M. Slide three. Let's turn to slide three, and this is available on our website, this presentation. As we communicated back in July, VAT had an excellent first six months of 2022, reflected in record results we were able to achieve.
The business started very strongly into the year and including the month of July, did not lose momentum. This performance was driven by a sustained and unprecedented strong demand for semiconductor manufacturing tools, and VAT fully harnessed its leading market and technology position to capture the available growth. At the same time, we continued to improve all our internal processes, put enormous focus in mitigating the supply chain challenges, not only to mitigate the cost inflation witnessed during the first half of 2022, but also to honor the commitments to our customers as a trusted and reliable partner.
VAT improved its performance and posted record results across all of its key performance measures, from order intake, up 31% year-on-year, to sales with an increase of 32%, an all-time record EBITDA margin of 35%, and a free cash flow generation of nearly CHF 80 million. All of this was achieved despite the very challenging industry environment, where the limits of supply or production capacity were tested on a daily basis. While VAT never was a bottleneck affecting our customers in a negative way, it was only through the great dedication and efforts of our close to 2,900 employees that made this possible. Therefore, at this stage, I would like to thank all my colleagues at VAT for this great achievement and their dedication to continue to write VAT's success story further.
VAT continued with the ramp in Malaysia and also added additional capacity in Switzerland to increase our factory output overall by more than 35% year-on-year. Currently, VAT has an installed factory output capacity of about CHF 1.3 billion. In Malaysia, VAT expects to reach a factory output for 2022 of between CHF 250 million and CHF 275 million. At the same time, we've started to build a second large factory in Malaysia, reflecting not only the company's confidence in future business growth, but also its ambition to further deepen customer relationships by strengthening its local capabilities in the Asian market. Today, we are confident that the growth will continue in the second half of 2022 and expect to achieve another strong year with record results.
Market demand continues to show positive momentum from technology build outs, especially in logic and foundry, but the weakening consumer demand could negatively impact the memory side of the business, as you have heard in some of the recent market announcements. Nevertheless, VAT is well positioned to deal with any changes in the market. Chart number four gives you a quick overview of the six-month 2021 key figures and a segment breakdown. I will not elaborate too much on this one as Fabian will report this list in a few moments. As you can see, our largest segment, Valves, accounted for about 82% of our sales.
Segment sales increased by about 32% year-on-year based on the strength of the semiconductor equipment market. Orders also continued on a strong path, growing approximately 32% year-on-year. The full year EBITDA margin in Valves increased by 1.2 percentage points to 34.6%. Global Service recorded for the first time, greater than CHF 100 million in sales in the first half of 2022. Sales increased 30%, driven by all our product categories, including spare parts, upgrades and retrofits, and the repair portion. The service segment's 2022 EBITDA margin remained firmly in the mid-forties of 45.4%, slightly higher than 2021.
With this strong performance, our service business accounted for 18% of group sales, slightly lower than the full year 2021, when it was 19%, but still at a very high percentage given the many new investments in the semiconductor industry, and very close to the 20% we're aiming at. This is even more impressive if one consider that the service business typically shrinks as a percentage of the overall sales in a Semi growth cycle. We also saw another good six months results for spec wins, which I'll elaborate on in more detail. On slide five, you will see the split of revenues into our different market segments.
During the first half of 2022, there were not too many changes compared to the chart we showed you in 2021, except that the business unit, Semiconductor, has grown the fastest, increasing its overall share of VAT's revenues to 62%. Advanced Industrial will now account for about 12%, while Display and Solar remains the smallest business unit. From a geography point of view, more than half of our products and services end up in Asia, about a third in the U.S., and the rest in Europe, reflecting the global semiconductor footprint. Turning to slide, to chart six, I'd like to share one of the highlights in our six months 2022 results, the continued growth we see in our adjacent products.
There still seems to be a bit of confusion about our strategy in this area, so let me quickly remind you about our goals here. As elaborated during our first Capital Markets Day in December 2020, VAT is extremely successful in its valve business. To continue our above market growth in the years to come, we must develop new business streams for the company. We looked at new business opportunities, that are adjacent to our core valve and modules business and have identified a number of areas where we thought we could create new growth opportunities for the company. First streams we focused on were advanced modules and motion components, but we're also developing several other opportunities. Overall, our communicated strategy was to reach CHF 150 million of additional sales by 2025. Two things are absolutely critical to understand here.
Firstly, we expect the adjacent businesses to contribute positively to VAT's current EBITDA margin profile. We will definitely not go into activities that would dilute our EBITDA margin target of between 32%-37% sales. Secondly, we aim to develop these adjacent businesses from within VAT in an organic way. Having said that, we may also look at smaller technology or bolt-on acquisitions in order to get to the desired results faster than if we strictly followed the internal development path. These would likely be small and focused. We're not intended to diversify into a wider industrial strategy. Staying focused is what made VAT the global market leader, and it will remain that way.
When we look at the development of our adjacent businesses during the first six months of 2022, we are well on track to meet or exceed the roughly CHF 90 million sales target mentioned to you earlier in the year. The margin levels are supportive of VAT's overall profitability profile, and we are confident that we will overachieve the 2025 sales target of CHF 150 million communicated to you in December 2020. Slide seven. Before turning to the more detailed financial slides, let me quickly summarize the market development we've seen in the first half of 2022. In semiconductors, the growth in wafer fab equipment spend continued at an unprecedented pace, mainly driven by the technology build-out in advanced logic.
Today, WFE is expected to be around $100 billion, which would be some 12% above the final 2021 number of $89 billion calculated by VLSI, TechInsights. Very high semiconductor fab utilization rates we're currently experiencing are also driving strong growth in the service business, and we do expect this to continue. In the Display market, overall investment conditions remain challenging, especially in LCD. Fading LCD CapEx could not be offset by higher investments in OLED for flexible screens and handhelds, and the weakening consumer demand will put further pressure on this market as some of the fab investments are under review. In Solar, PERC remained the major technology as there is still a cost advantage in the initial investment compared to heterojunction. However, the heterojunction technology is also gaining traction, as the oil and gas price inflation accelerates the adoption of solar.
For the Advanced Industrial markets, growth prospects remain good across a variety of applications such as crystal cooling, high-end coatings, nuclear fusion, and analytical instruments such as scanning electron microscopes. In addition, research spending by governments continued, especially in U.S., Japan, and Korea. This concludes my initial remarks, and I would now like to hand over to Fabian for a more detailed look at the financials.
Thanks, Mike, and a warm welcome to all of you who are joining us on the webcast today. Let's start on slide nine with a very quick recap of our key figures. Mike has already touched on the solid top line and PnL development, and I'll show you a bit more detail on that in a moment. Besides a substantial increase in net income by 52% to CHF 148 million, our free cash flow generation was another highlight in the first six months of 2022. We reached a record level of CHF 79 million despite growth-related investments in working capital and higher CapEx levels compared to the first six months of 2021.
Chart 10 shows the development of orders in the second quarter and half-year 2022 reflecting VAT's strong business execution, coupled with the buoyant market conditions in the semiconductor business and the solid trend in the advanced industrials business that Mike described earlier on. Q2 orders were up 20% sequentially versus Q1 2022, and 40% higher than in the second quarter in 2021. Overall, six months 2022 orders are up 31% year-on-year, reaching CHF 649 million. With a second quarter book-to-bill ratio of 1.24, our order backlog increased to CHF 559 million, up 15% quarter-on-quarter and up 156% year-on-year. This backlog, together with the favorable market expectations, strongly supports our positive view for the remainder of 2022. Turning to chart 11.
Here we see the development of orders and sales since the first quarter of 2018. We reached the bottom of the cycle in the first half of 2019, and since then we've seen a steadily increasing growth trend. As you can see, the book-to-bill ratio has been at or above 1x since Q1 2019, with the exception of Q3 2020, where we had a knock-on effect from certain pre-orders in the first half of 2020, coupled with substantial sales growth in the quarter. In the second quarter of 2022, the book-to-bill ratio reached again a very solid 1.24x on the back of steady quarterly order inflow. This ratio does neither include any special extraordinary large orders, nor have we seen special orders being placed to reserve capacity or in anticipation of future price increases.
In consequence of this constantly positive book-to-bill ratio, our order book has now reached CHF 559 million, and this backlog bodes well for the rest of 2022 and even into 2023. Chart 12 shows the development of net sales and EBITDA. Six months, 2022 net sales are up 32% year-on-year, and the impact of year-on-year FX movements, especially in U.S. dollar versus Swiss franc, was negligible. The higher sales were a major driver of our EBITDA margin expansion of 1.8 percentage points, together with the improved operational performance resulting from better fixed cost absorption and the efficiency and cost reduction programs we continue to execute across the whole organization. On the next chart, you see the sequential EBITDA margin development since H1 2018.
As you can see, we have constantly improved our EBITDA margin since its cyclical trough in H1 2019, now reaching a new peak with 35% after six months in a challenging and demanding market environment. We are now firmly in the middle of our updated EBITDA margin target band of 32%-37% between 2020 and 2025, to be communicated to you with the year-end results back in March this year. When talking about value creation on the next slide, we closely look at the return on invested capital and the cash return on invested capital. With our prudent approach to capital expenditures and our capital light operating model, we balance the invested capital with current and expected future earnings. With about 70% of our materials being purchased externally, we are able to maintain the invested capital at low levels.
This allows us to achieve returns on invested capital and cash returns on invested capital that are substantially above our weighted average cost of capital, which we place at 10.2%, the same level that the external auditors used during their 2021 impairment testing. This weighted average cost of capital of 10.2% is used in an illustrative way over the whole period of this chart. The actual annual WACCs used in all the impairment testing done by the external auditors between 2015 and 2021 range between 8.8% and 10.8%. Let's now turn to some of the other financials on chart 15.
Depreciation amortization decreased by about 2% to CHF 20 million in the first six months of 2022, yielding in an EBIT of CHF 172 million and corresponding EBIT margin of 29.4%. In the first six months of 2022, net finance costs were zero compared to a CHF -2.5 million a year earlier as finance income benefited from FX-related revaluation gains. Effective tax rate in 2022 was at 14% compared with 16% a year earlier. Taking that all together, net income substantially increased by 52% to CHF 148 million, and then earnings per share CHF 4.92. Our free cash flow generation is shown on chart 16.
As I said at the beginning of my remarks, free cash flow reached another record level in the first half of 2022, despite 60% higher CapEx and required investments in trade working capital to support our strong growth trajectory. The trade working capital at the end of June 2022 was about CHF 297 million or CHF 79 million higher than a year earlier, and thus represented about 29% of last twelve-month sales, an increase of 1 percentage point compared to the same period a year earlier. We are intentionally keeping our trade working capital at an elevated level in order to ensure our supply capabilities and keeping a safety stock to cope with supply chain challenges and also handle any unexpected demand spikes as well.
At 41%, the cash conversion rate measured as free cash flow as a percentage of EBITDA was below our full-year guidance of 60%-65%. The seasonal pattern expected to reverse in the second half of the year. When it comes to leverage on chart 17, there's a very stable situation we see after six months of 2022. Gross debt was about the same level as a year ago, as we drew about CHF 100 million from our RCF loan to bridge the dividend payment in May 2022. However, the higher cash balance at the end of June 2022 led to a net debt position that is about CHF 30 million below the previous year level.
Our leverage of 0.8x net debt to EBITDA was at the same level like a year ago, seasonally driven below the level of 0.5x seen at the end of 2021. Current cash flow expectations will improve that ratio again much closer to zero by the end of the year. With this, we have a very sound balance sheet and liquidity position available, which gives us the financial flexibility to continue to invest in our future growth. When summarizing our achievements on slide 18 in the first half of 2022, we can state that VAT continued to fully capture the strong market conditions both in semiconductor and Advanced Industrial activities based on innovation, market leadership, and its execution skills. Record levels were achieved in orders, sales, EBITDA, EBITDA margin, and free cash flow in the first half of this year.
Record order backlog and ongoing market demand during July bode well for record full-year results. Finance priorities for the rest of 2022 and into 2023 consist of rolling out our new global ERP in Malaysia with a slight delay due to COVID-related postponements to go live, foreseen in Q3 this year. Continued strong focus on cost management and operational excellence. Provide elevated trade working capital to support our increasing factory output and a disciplined approach to capital expenditures. Full year 2022 is expected around CHF 65 million-CHF 75 million, driven by ongoing construction of our second plant in Malaysia, optimizations in Switzerland, and start of construction of our new innovation center here in Switzerland. This concludes my financial remarks, and I'd like to hand it back to Mike.
Thank you, Fabian. Let me now turn to two topics that we have published today and that we put here under the title Creating Value Sustainably. I'm really excited to talk about these two important steps we're taking in developing VAT today. First, the publication of our first sustainability review, and second, the promotion of Urs Gantner to the Group Executive Committee. Slide 20. Since its foundation back in 1965, sustainability has always been at the heart of what we do. Being a Swiss-based company meant that from day one, stringent rules about how wastewater or general waste had to be treated were in place. It was the right thing to do, and VAT followed this and other regulations.
Today, the world is at a different stage, and we all agree that doing the things you do in a sustainable, fair, and caring way is the right thing to do. With this in mind, the board of directors, together with the executive team, made the development and implementation of a clearly defined ESG strategy a priority for 2022 and the years to come. Today, we release our first sustainability review. We don't call it a report yet. That marks the start of a much more proactive approach to sustainability. Ultimately, our goal is to transform VAT into an enterprise that puts sustainable value creation for all its stakeholders at the heart of everything we do. We have appointed two board of director members to oversee the strategy development, and Fabian will act as a responsible executive team member when it comes to this topic.
Over the next months, the ESG strategy development will be a key part of the overall group strategy exercise, which we always carry out during the summer months for the board to approve in its November meeting. We hope to give you a much better understanding of our ESG roadmap during the Capital Markets Day in December. You can see here, however, a few examples of our 2021 highlights, which include, carbon dioxide emissions reductions of 21%, a 111% increase in our own solar electricity generation, and a 16% reduction in total waste. Slide 21. The second thing I'm excited about today is the fact that we can announce that Urs Gantner, our head of our business unit Semiconductor, has been appointed to the Executive Committee effective today as Executive Vice President of a newly formed Semiconductor Solutions Group.
Urs is a true VAT veteran with 18 years of intimate VAT Semi experience. Over this time, Urs has consistently pushed the bar for the Semi business, and today has a strong and proven record of business growth, achieving an almost double market growth over the last years. Urs was also one of the first VAT managers realizing the potential of moving parts of our production to Malaysia and then executing on this strategy. What will Urs role in the GEC be? Well, he will first continue to head the Semiconductor business unit until a successor has been appointed. In addition, the new Semiconductor Solutions Group will integrate the BU Semi with all of VAT's R&D activities, and in addition, create a new team responsible for the development of new advanced solutions products.
As we look to our future growth, the competencies, technologies, interconnectivity of products and sensors will require enormous coordination of all internal engineering and technology functions, and Urs will lead this. This is also an opportunity to bring in new talent and succession planning options for our Semiconductor business. I'm really excited to add Urs to my senior executive team, and I hope you will get to meet him at the Capital Markets Day on December 2nd . Let's turn to slide 23 and have a look at the current expectations when it comes to wafer fab equipment spending. On this slide, you will see data collected by VLSI Research on how they expect WFE to develop in 2022.
$107 billion projected for WFE for 2022 represents an unrestricted growth number under the assumption there are no supply chain problems. Based on the news we've heard in recent weeks, I now expect this to be in the $95 billion-$100 billion range, reflecting the longer equipment lead times. Nevertheless, the chart is quite useful as it shows clearly that the investments are growing fastest in the leading-edge nodes of 7 nm and below, and that the logic and foundry business accounts for not only the largest part of the investments, but is also the fastest-growing. This business sustained us in the last cycle and recent market announcements like data center growth and high-end smartphone growth should keep this growing into 2023.
DRAM capacity expansions look to be slowing, but the technology development of leading edge also continues in a positive way. These two factors are very positive for VAT as our share in the highest, our share is highest on the leading edge platforms. Our overall Semi growth in the first half of 2022 was 39%. On slide 23, it gives you good indication of our confidence in winning further market share and being the main player in the development of new manufacturing platforms and processes. Spec wins are the key to future success, and VAT for many years has been at the forefront of winning.
As you can see from this slide, Semi has increased the number of spec wins in the first six months of 2022 by about 15% compared to the previous year, and most of them were at the leading edge. Global Service had a softer start into 2022, mainly due to the high capacity utilization that has negatively affected the penetration of upgrades and retrofits. Solar was strong while Display was lower due to lower R&D investments, and our Advanced Industrial business is only slightly behind the 2021 level and expected to catch up. Overall, I expect to be on a similarly high level as 2021 and at a very high win rate percentage. Slide 25. Before wrapping up with the outlook for the rest of the year, let me quickly give you our latest expectations for our key markets.
The Semi market is expected to grow by as much as 20% in 2022, driven by the already mentioned investments in new capacity and technology. VAT Semi business will fully participate in this market growth, gain market share, and grow its adjacency business. During the first six months, this BU grew 39%, and we expect strong growth again in the second half. The Service market is expected to show strength across all segments and post strong growth numbers. Orders and sales were up 28% and almost 30% respectively in the first half versus prior year, and we also expect strong performance in the second half as we execute on all our key programs. Advanced Industrials has grown in the first six months in line with the market, but we expect that our strategic initiatives will continue to generate above-market growth going forward.
Our order intake growth in the first half was up 16.7% year-on-year, which is a good leading indicator. Last but not least, Display and Solar has a split scenario, with Solar performing well, with heterojunction finally gaining traction, while Display continues to suffer from declining LCD investments. Closing off now on our prepared remarks with some commentary on what to expect for the rest of 2022. As we have explained during the last half hour, we expect ongoing strong investments in semiconductor equipment. This is supported by the growth of Advanced Industrial markets, while Global Service continues to benefit from growing install base and a high-capacity utilization within semiconductors. Overall, we expect substantially higher sales, EBITDA, EBITDA margin, net income, and free cash flow, and a CapEx envelope of approximately CHF 65 million-CHF 75 million.
For Q3, we see sales of between CHF 290 million and CHF 310 million. This concludes our prepared remarks, and I will now hand over to Michel for the Q&A.
Thank you, Mike. We now start the Q&A session, and you have the possibility to either ask your questions via the operator over the phone or send your question directly to me via the webcast chat function. As a reminder, please limit your initial questions to two. Follow-up questions may be possible later in the Q&A. With that, I'd like to ask the operator for the first question from the phone.
We will now begin the Q&A session. Anyone who wishes to ask a question or make a comment may press star and one on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to unmute themselves while asking a question. Webcast viewers may submit their questions in writing via the relevant field. Anyone who has a question or a comment may press star and one at this time. The first question comes from the line of Sandeep Deshpande with JP Morgan. Please go ahead.
Yeah. Hi, thank you so much for letting me on, and good morning. Just a couple of questions from me. The first question I have is, clearly this is a very strong demand environment based on what your orders and your sales were in the second quarter. At the same time, I mean, your backlog is very strong, over CHF 550 million. But the sales guidance that you're giving, you did CHF 286 million last quarter, now the midpoint is CHF 300 million. I mean, I think conversion from backlog to sales seems to be lower than it used to be in the past. Maybe you can comment on that. Secondly, your inventories have also gone up in the quarter. Why is this happening in a market which is so strong in terms of demand?
Okay. Thank you. Yeah, as you can see, we had strong order intake in the second quarter, and we see that continuing through the month of July. We do have strong backlog, and I think one of the challenges right now is the overall supply chain situation within the semiconductor sector. VAT is in general in a good position to supply, and we've been growing our manufacturing output and our inventories to support that. There is some restrictions in our ability to ship based on what the semiconductor manufacturers and the equipment manufacturers can actually absorb. That's kind of the gating factor at this point. We do expect that to accelerate a bit in Q3 and Q4.
You've seen the increasing equipment lead times in the semiconductor sector are pushing out to 9-12 months. That is pushing our backlog into the late second half of the year, and so even into 2023. We're ready to, you know, step up if that's needed, but we're gated by the overall supply chain situation. That flows through to inventories. We have added some buffer inventory also for our rollout of our ERP system in Malaysia, which happens in September. We've also added some buffer in areas where we've seen some severe supply shortages. It's really a combination of those factors and also being ready to drive the output if we're able to do that.
Thank you.
The next question comes from the line of Sebastian Kuenne from RBC. Please go ahead.
Yeah. Hi, gentlemen. I have a few questions. I will go through them one by one. One relates to inventory again. Some of the increase in inventory in the finished products, does that relate to the consignment stocks that you have? Is that in your book still, just for me to understand? Do you see a risk that uptake of those inventories could slow down if the memory CapEx cycle slows? That would be my first question. Thank you.
Yeah, the increase we've seen in finished products is twofold, one, to support the higher revenue base that we're seeing, but also, as you rightly pointed out, the consignment stocks that we have for our key customers. Now, obviously, our key customers are obliged to take that inventory within a given period, so there's some protection for the company there. We have a very dynamic forecasting process between ourselves and our OEM customers, so, you know, we're constantly adjusting that. If we'd start to see a slowdown, I don't think it would happen until into 2023 because there is such a backlog into well-publicized investments, and I think we would have some time to adjust those inventory levels, if we have to do that.
How big is consignment as percentage of your inventory if there are such a number?
I think in terms of our total inventory or finished goods?
Yeah, just the number that for me or as an absolute number, something I can work with.
About 20%, roughly. I think maybe slightly lower than that, 15%-20%.
Okay. Perfect. My next question is on the guidance, CHF 209-CHF 320, I think it was. You say it's FX neutral. The FX neutral, is this based on the Q3 2021 exchange rates or on current exchange rates? Because that would imply, you know, the dollar has gained, like, 4% or 5% against the Swiss franc in the last year. That would present some tailwind for you. On top of the guide.
Sebastian, let me maybe quickly elaborate on the methodology applied with regards to this footnote. When we guide for the next quarter, the baseline is, in this case for Q3, as per June 30th, t here we look at the quarterly development. Then you also find a footnote in our half-year report, where we look at year-over-year comparison, and there we refer to the rates used in the respective comparison period.
FX neutral is basically as of 30th July exchange rates, if nothing changes.
30th of June. Yes.
Yeah. Yeah, 30th of June. Okay. Understood. Final question is on the tax rate. Yeah. Sorry.
One clarification on the first point. We just got the exact number on the consigned inventory. It's about 13%, so slightly lower than I mentioned.
Understood. Okay. Final question is on the tax rate, 14%. You said it's related to higher earnings in low tax countries. I always thought Switzerland is a low tax country, but is it now Malaysia? Or what is your lowest tax country and that basically drives the really low tax rate, and what shall we now think for tax rate going forward?
No, you're not misled by your assumption. Switzerland definitely is our lowest effective tax rate country. What we have seen in the first half is a higher profit share in Switzerland. I do expect a normalization of our effective tax rate towards the 15.5%-16% for the full year, compare that to 15.6% in the last year. Overall, I do not expect significant deviations.
For temporary effect. Okay. If Malaysia ramps up further and further and you have to allocate earnings to Malaysia, how would that change the tax rate going forward? What's the effective tax rate in Malaysia that you have?
The tax rate in Malaysia is about 24%, but remember that we have also received a quite substantial investment incentives and allowances for the first factory, but also in connection with commitment for the second factory, which we would then also apply as profits will increase in Malaysia. Now we have to put that into perspective of the developments under BEPS 2.0, Pillar Two, minimum taxation rate, which will become effective in Switzerland as the first of January 2024. We will anyhow see a gradual increase in this tax rate in the course of the next two to three years.
Oh, understood. Perfect. Thank you so much.
Welcome.
The next question is from Christian Braun, Finanz und Wirtschaft. He wrote us over to chat. His question is: Do measures like the CHIPS and Science Act additionally increase semiconductor supply, or do they simply spread it better across the globe? What do such measures mean for the investment cycle of the industry? Do they prolong the upswing or maybe exacerbate the softer period?
Yeah, good question. I think the main beneficiary of the CHIPS Act is to change the geographic distribution of chips. As everyone knows, we're very highly reliant on Taiwan today for the foundry chips. About 64% of the global foundry capacity is coming out of Taiwan. With TSMC moving into the U.S., that certainly creates a slightly better balance. I think that's the key element. I don't expect this to have a dramatic impact on capital expenditure for wafer fab equipment. I think what it will do though is allow more options for the chip manufacturers to invest early in new fab shells.
The actual population of the wafer fab equipment will undoubtedly happen with respect to the demand of the market. I really don't see, you know, additional growth because the major players in the chip market want to protect the strong pricing environment, and the last thing they wanna do is bring on too much capacity. I really don't expect over-inflated WFE CapEx because of that.
Okay. Thank you for that, Mike. I have an additional one from Kwan Lee from Columbia Threadneedle. His question is, memory players, Micron, SK hynix, Samsung and so on, have indicated CapEx cuts in financial year 2023. How do you see this affecting VAT? How is it similar/different versus 2019 when VAT sales were down 18% year-over-year?
Yeah. Well, we did expect to see some softening in the memory market, and you start to see that in company announcements. If you dissect these announcements, it's worthwhile pointing out, for example, the Micron one. They clearly stated that they would split their CapEx into capacity expansion and technology development and expansion, and they made it very clear they will continue with the technology expansion. I think that will sustain a certain level of CapEx. There's clearly one scenario for 2023 where we see some WFE reduction, you know, driven by that weakness in memory and maybe a slowdown in the capacity build-out. We're certainly looking at a scenario that we would be down a certain percentage. How much we haven't defined yet, because it's changing considerably.
We're also looking at other scenarios where we keep growing. There's also a scenario where we see stimulus packages in China that will, you know, after the elections at the end of the year, that could boost consumer spending there. We're still seeing tremendous growth in hyperscale computing and data centers, which does drive advanced logic and the associated memory and flash, especially the high-end versions of them. I think that will continue to drive a certain percentage of memory spending. I think it's different from the eighteen cycle, where we really were impacted by way over capacity and flash. I don't think we're at that level of overcapacity, and I also think there's many more drivers of overall chip demand that help mitigate that.
For example, the automotive industry, we expect to see strong growth in 2023 in cars, especially EV cars, which drive a higher percentage of chip demand.
Okay. Next question from the operator, please.
Next question comes from the line of Didier Scemama from Bank of America. Please go ahead.
Thank you so much for taking my question. Congratulations on the outlook. I just wanted to elaborate a little bit on the question that was just asked on memory. CapEx cuts you've answered, but if you could just give us a sense of your memory exposure in your semiconductor sector, that'd be great. And then secondly, as you mentioned, you know, you are operating towards the upper end of your EBITDA margin corridor. Is it? And obviously we are quite far away from 2025, so is there a scenario where you could revise that corridor, or is it too early to talk about that?
Yeah. The first one, memory exposure, I think that's a very easy question to answer. With our market share numbers, we're pretty much a proxy for total WFE spend. You know, you can expect to see the percentages follow those markets pretty accurately. The second one, I think it's too early yet to revise anything on profitability. As you know, there's a lot of challenges in the materials market, labor inflation, and I think the high inflationary environment we're sitting at the moment. I mean, I think by the end of the year we should start to see a better view of 2023 and maybe then look at this. I think at the moment it's too early to even make any guess at revising that target.
Thank you. If I could have a quick follow-up, I just wondered if you could give us a sense of your design win market share or what you are seeing in sort of two years out, in new platforms with your customers. And if you could elaborate a little bit on who you're winning against, if it's still mostly at the expense of internal solutions, were there any change in the competitive dynamics on that front? Thank you very much.
Yeah. The spec win program is going well. We're also increasing the number of key accounts that we're putting in place. You know, we started off with three key accounts, and we're growing that up to seven or eight key accounts. That means putting technology teams, application teams, and product management and operational people around supporting the spec win process with our key customers. That's all going very well. I'd say our spec win rate is probably over 90% at the leading edge. And we really continue to take that share against all participants in the market. Some are local niche players, some are larger players, and some are, as you mentioned, internally designed components.
I think overall it's going well. You saw our growth in Semi in the first half of the year, up 39%. I think that's a reflection of both the previous year spec wins, but also the success we have in rolling out our adjacencies.
Thanks so much.
The next question comes from the line of Michael Foeth from Vontobel. Please go ahead.
Yes, thank you. Good morning, gentlemen. Two questions. The first one really is relating to the rising tensions between the U.S. and China, and the risks or eventually opportunities you see related to that. Is there any risk that we could see more restrictions for U.S. equipment makers to ship into China? Anything you hear on that front? The second question is regarding your guidance. Did I understand correctly that the risks of push outs such as we saw in the first quarter relating to inability of your customers to ship actually is already factored into your Q3 guidance and into that outlook that you gave for the full year in terms of a $95 billion-$100 billion total WFE. Thank you.
Yes. On that last portion, I think, you know, forecasting in the last few quarters has become a pretty major challenge. We're trying to balance the supply risks that we have with the supply risks our customers have. It's becoming quite a challenge. Yes, that's a balanced view of, you know, what we see in our order backlog, what we hear from our key customers, where we think the supply issues are in their supply chain, and also any potential risks we see in our own, that's how we came up with the guidance for Q3. Restrictions to China, yeah, it's certainly a tricky point right now with the rising tensions again this week. I would suspect we'll see some additional restrictions put in place.
You know, we weren't impacted before. We don't manufacture in China, and we no longer have any major components coming from China. We're in a good place to continue supply. You know, we differentiate our support, our supply into the Chinese market, where we only ship standard products. We also go to great length to protect the IP of our high technology Western customers. That's a really key element for VAT. You know, we'll have to wait and see how these restrictions take place, and also if the European governments decide to support the U.S. in that. Up to now, that hasn't happened as you've seen with the ASML and other European suppliers still shipping into China. It's a complex topic and, you know, we'll deal with the situation as it arises.
Okay. Thanks a lot. Thank you, and well done.
The next question comes from the line of Robert Sanders with Deutsche Bank. Please go ahead.
Yeah. Hi, good morning, and thanks for taking my question. I just wanna come back to your lead times. You've increased your capacity significantly to well over the current run rate. Does that mean lead times for valves have come down? I think there was a Nikkei article 3 months ago saying that they were 12 months, so presumably then your lead time has come down. Then how does that, related to that question, how does that affect your backlog? I mean, put it another way to ask the question, if the outlook for WFE is flattened to 2023 as TechInsights is forecasting, would you expect your backlog to normalize back to kind of three months of duration versus six previously? Thanks.
Yeah. Our lead times are certainly not 12 months. We typically operate in the 2-3-month lead time. We can do faster for high volume products. In our Advanced Industrial business where there's a lot of customization and a lot of project work, we can get out to 6-9 months. That's in line with major infrastructure projects like fusion reactors and so on. In Semiconductor it's much shorter. In our high volume products, that lead time hasn't really changed. You know, the challenges are certainly in other parts of the supply chain. I think, as we go in, if it is flat in 2023, that backlog should come down. I think it should normalize and back eventually to the 2-3 months that we've seen historically.
Okay. Thanks a lot.
The next question comes from the line of Marta Bruska with Berenberg. Please go ahead.
Hi. Good morning. I would like to follow up on the previous question. You mentioned that there are some persisting issues in the supply chain, and I wanted to ask what are some of the bottlenecks that haven't been yet resolved that you still see? Then I have another question please.
Yeah. The supply chain I think is very varied. We're in very good shape in our raw materials. You know, we've managed to secure our aluminum and stainless steel requirements and really no challenges there. There's still persistent issues in the electronics supply chain, and they're hard to predict and you know, really hit us really at a moment's notice. We have been trying to build some inventory there. It's challenging. You know, we use 1,200 individual silicon chips within our controllers and you know, trying to keep tabs on the availability of each of them is a huge challenge. I think that's probably the number one issue we all face. It's not just VAT, it's across the global market.
I would say we've done an amazing job in our supply chain and engineering teams mitigating risk there. Another issue has come up recently, and that is the availability of elastomers which we use for sealing. These are produced in large chemical plants where it takes longer to bring on capacity, and that's impacting the whole semiconductor supply chain. Again, we've been doing a lot of requalifications and finding second sources and it had a few impacts on our output, but nothing material. We've managed to keep you know supply to our key customers at an extremely high rate. As we've mentioned before, right now VAT is not the bottleneck. I think overall these issues are easing but still challenging.
Thank you. I wanted to actually know what for your customers who think you are not the bottleneck. I just wanted to ask who is the bottleneck, basically?
Well, again, it's things like these O-rings and the elastomers. I think it's still some material availability, and it's a lot of small individual components. I think the power supply and gas panel area has been quite challenging for our customers. I hear they're gradually releasing and it's expected to improve in the third and fourth quarters.
Thank you. In the past you used to show a chart with the market share, and you mentioned now that in spec wins you have more than 90% of the leading edge. What's your overall market share in Semi at the moment? Could you update us on that, please?
Yeah. We don't have an update on half year. I think there's a challenge right now in getting accurate market share data that comes from the OEM equipment because of all the deferred revenue issues and other topics. We don't have a mid-year update, and I don't think we'll get one until the full year results at the end of the year. That's why we showed the Semi business unit growth at 39% versus market. Yes, we expect market share to grow, but we don't know how much at this point.
All right. It's clear. Thank you very much. May I have the very last one, please? With regard to the expectation for the next year, I heard you speaking about, you know, considering the scenarios and which is basically unchanged throughout the year, and it's very difficult environment. I was just wondering, is it the right way to think like, you know, the CHIPS Act and, you know, the support from government for the industry that has been known already for more than a year, so why it's basically not really a new news.
While on the memory CapEx cuts are something that came out right now, so does this mean that the weight on your downside scenarios could probability weight that would have increased versus the continued growth for the next year? Can you talk us a little bit through the weight you are putting on these various scenarios?
Yeah. As you say, I've pretty much discounted the CHIPS Act. You know, of course it's important for the U.S. manufacturers that support their build-out in the U.S., but I mean, that's already included within the investment plans for the various actors in the U.S. I don't really factor that into our plans. The market commentators are saying flat for 2023, and I think that's the best estimate at this point. I would say the tendency leading slightly negative on that with the CapEx cuts we've seen in memory. But those memory players haven't elaborated on what they're gonna spend on leading edge. They mostly talked about capacity cuts.
When you look at the order intake from ASML, which is a leading indicator of certainly of advanced manufacturing, it was extremely strong in the second quarter. You know, which starts to give you some visibility for the first half of 2023. You know, it's very hard to read at this point. I think a flat assumption is probably the best one, with a slight negative tendency. That's the best view I can give at this point.
I would completely agree with that view actually. Thank you very much. That's all from my side.
Okay.
The next question comes from [Michael Inauen ] from ZKB. Please go ahead.
Yes. Thank you. Basically looking into 2025, I mean, we have seen the wafer fab equipment spending split on slide 23. Going for 36% for 7 nm below. Could you probably elaborate a bit on your personal expectation of the trajectory of these three elements, 7 nm below, legacy and 14 nm- 7 nm, please? Thank you.
Yeah. I think the spend at the leading edge will grow because you're gonna see more DRAM spending coming into that category as we take the next DRAM nodes towards 7 nm. I expect that percentage to grow. The mid-level, I think could possibly ease a little bit because we put a lot of capacity into the mid-level, and it's consumer driven mostly. I think that's where we may see you know some restrictions. The more mature technologies, I still see a positive view on that driven by the automotive industry and especially the electrification of that industry and other industries and also the drive in digitalization. The IoT build-out requires a lot of legacy chips.
I think we'll still see strength in that market, but definitely the highest growth rate's gonna be at the leading edge.
Okay. Thank you. One last follow-up. Would you call it a bullish scenario to go for 50% share of 7 nm and below by 2025 and like 45% share of legacy?
I think that's a reasonable assumption, you know, especially with the increasing spend in lithography, you know, where the transition to EUV is accelerating. I think that's a reasonable assumption.
Okay. 50% 7 nm below and 45% for legacy?
No, I don't think that midsection will shrink that much. I would say that's probably gonna stay in the low twenties and legacy growing a little bit.
Okay. Thank you.
The next question comes from the line of Jürgen Wagner from Stifel. Please go ahead.
Yeah, good morning. Thank you. You mentioned your spec momentum, like 90% for leading edge. At what point would you regard your share as being a bit too high for your customers that they might be forced to look for a second source? And if so, who could that be? The second question, please give us an update on the competition in China. Do you see anyone? Thank you.
Yeah. I think the first question, competition and market share, you know, is all about how much value we deliver and how responsible a supplier we are. You know, we've done a really outstanding job during COVID and the supply chain challenges to deliver almost 100% faultless to our customers. That is really important in our drive to continue market share growth. It's also becoming more common in semiconductors to see single sources emerge because of the technology complexity and the R&D spend required to get there. You've seen today with the announcement of this new Silicon Solutions Group. I'm putting more emphasis on developing an advanced team that will integrate more components, sensors and control systems into our products.
Again, this is all aimed at adding more value to our customers. But obviously if we do that correctly, we continue our share growth, but also continue growing adjacencies close to our main products. So I think it's really up to us if we behave responsibly, if we continue to add value, and we don't abuse our market position, then we can stay the leader and continue growing the business. You know, the challenge in the market is most of our competitors are small niche players, and they just can't expand at the rate our key customers require. You know, our market growth this year is getting close to all of those competitors combined. So there's not many alternatives for our key customers. But we should never ignore that.
You know, we are in a privileged position. We work hard to earn that, and we need to continue performing. China, yes, there's competition. It's mostly in the Advanced Industrial area and the commodity products. I expect that to get tougher. These guys are smart. They're very ambitious. You know, investment's not an issue for them. So again, it's even more important that we drive these technology programs, that we continue to add smart capabilities and sensors into our products. That's how you win in Asia, is by innovation, and moving at a pace that they can't keep up with you.
Okay. Thank you.
Today's last question comes from the line of Craig Abbott from Kepler Cheuvreux. Please go ahead.
Yes. Hi, good morning, everyone. Yeah, my question. A lot of my questions you answered earlier on the detailed discussion on supply chain issues, and I just have one remaining follow-up part of that and because some of your peers, you know, have sounded much more cautious in terms of the supply chain outlook in the second half, or certainly they sounded the message has not gotten any better, let's put it that way. In particular, I'm thinking about, you know, the potential situation we might have in Germany where the gas supply is reduced dramatically further. We may get into allocation situation and so forth. Do you see any potential risks regarding your supply chain if we get into like a kind of a worst case scenario regarding the gas supply? Thank you.
Yeah, good question. I mean, I hope in my remarks you could figure out that I'm not saying the supply chain challenges are over. You know, we still see issues. They come up very frequently. I think what we've done is reacted well. We've also proactively put in place qualifications for second sources, which has helped. We did an analysis of our key pinch points and you know, the operations team have done a pretty amazing job at really countering any potential risks. The situation with energy shortages, it's yeah, I don't have a clear answer on that. We do have a lot of supply chain coming out of Germany and central Europe.
I think there would definitely be a prioritization of energy supply to industry. You know, we're pretty good at finding solutions. I think from Germany specifically, a small part of our supply chain is coming from there. I think the biggest is still Switzerland and Austria. We're also growing our supply base in Malaysia. We now have options to bring in components from Malaysia. We're also growing our supply out of Romania. Clearly, you know, if Germany really suffers, that could bring up some new challenges that we would have to react to quickly and get second sources in place.
Okay. Thank you very much.
Okay. I think that's the last question. Thank you all for attending. I hope you saw this morning tremendous first half performance, a positive outlook, our first sustainability review and also the addition of a new member to our senior management team. I think one that will allow us to put even more focus onto our adjacencies and next generation products. Thank you for attending, and we'll see you in October.