Please note, anyone who wishes to ask a question during the conference may press star and 1 on their touchtone telephone. You will hear a tone to confirm that you entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handset only while asking a question. Please hold the line. The conference will begin shortly. Thank you. Ladies and gentlemen, welcome to the VAT Q3 2022 trading update conference call. I am Sandra, the Chorus 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 1 on your telephone. For operator assistance, please press star and 0.
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. Ladies and gentlemen, good morning and welcome to VAT's Third Quarter 2022 Trading Update Conference Call. With me this morning are our CFO, Fabian Chiozza, and our Head of Investor Relations, Michel Gerber. After my introductory remarks, we will start the Q&A session. The call moderator will take the questions in the order you enter them. I trust that you've all seen the media release we issued this morning at 6:30 A.M., and I'd like to point out that we're very pleased with the way the third quarter of 2022 has developed. Geopolitical uncertainties, the persisting supply chain challenges, and more recently, weakening customer demand have not prevented VAT from posting another set of very strong results.
Record quarterly sales levels were achieved in the global service business in semiconductors as well as in our advanced industrial business. To achieve these record sales level, it was crucial that the whole operations team from procurement to machining and assembly was able to further increase our factory output, not only in Malaysia but also here in Switzerland. This great effort allowed VAT to satisfy the customer requirements for products and services, and I'm proud again to be able to say that VAT has not been the bottleneck for our customers. A big thank you goes out to all of our 2,900 employees around the world who have made such a strong result possible in the third quarter.
At the same time, VAT is aware of the challenges that we're still dealing with on a daily basis, be it in the challenging supply chain with regard to cost inflation or the need to further increase our factory output. Here we have gained invaluable experience over the last two years. We're confident that VAT is best positioned to deal with these challenges. Now let me turn to our business performance in the third quarter. Demand in the third quarter of 2022 remained at a healthy level as investments in the semiconductor industry continued, driven by technology advances and ongoing capacity increases in the lagging edge products. At the same time, demand for service offerings continued to grow as persistent high utilization rates in the semiconductor fabs require high levels of maintenance to prevent shutdowns and to further increase the productivity of those assets.
This led to record quarterly sales in semi and the global service businesses. Also the advanced industrial business unit contributed to VAT's strong Q3 performance with record sales by continuing to expand its activities in targeted growth sectors such as industrial coatings, crystal pulling used to produce silicon and silicon carbide, and medical equipment devices. The display and solar business reported higher Q3 sales versus prior year period on the execution of orders received back in 2021. The further ramp of the factory output in Malaysia and Switzerland continues as planned and as already mentioned, thanks to the capabilities of VAT's global supply chain organization, enabling the company to provide uninterrupted product deliveries and services to all its customers, despite supply and logistical uncertainties.
As a result, the group's Q3 net sales reached CHF 306 million, a 33% increase compared with the same quarter in 2021, and above the midpoint of the Q3 guidance of CHF 290 million-CHF 310 million. Foreign exchange movements, especially the US dollar against the Swiss franc, had no impact on reported Q3 sales growth. Orders in the third quarter grew 4.5% to CHF 312 million compared to a year earlier, and the Q3 book-to-bill ratio stood at 1.02. Sequentially, however, orders did not reach the very high levels seen in the second quarter of 2022, and while we expect the order activity to remain at a robust level in the fourth quarter, we do anticipate.
We do anticipate a moderation of order activity during 2023, and I'll come back to that in the outlook. Turning to our businesses in a bit more detail. The Valve segment reported Q3 orders of CHF 244 million, down 16.1% sequentially compared to the very strong order levels seen in Q2 of 2022. Year-on-year order intake was down 2.1%. However, net sales increased 35.4% to CHF 251 million compared with the same period in 2021. Year-on-year Q3 order development was mainly driven by the Semiconductor business unit, where orders increased 0.5% to CHF 187 million.
The business unit Semiconductors net sales in the quarter amounted to a record of CHF 192 million, up 40.4% compared with the third quarter in 2021. End users continue to invest in new technologies to manufacture the next generation of chips, which plays into VAT's technology leadership. VAT's capabilities to deliver the required products and solutions has further strengthened the company's market position. In addition, the growth initiatives and adjacencies continue to bear fruit. Semiconductors also reported nine specification wins in the third quarter, bringing the total for the first nine months to 27, with seven of them resulting from the company's growth initiative to develop new adjacent products that complement its core valves business.
Orders in the Display and Solar business unit decreased to CHF 20 million, down 3.2% year-on-year, continuing a trend already witnessed in the first two quarters of 2022. Sales in Q3 increased by 14.7% to CHF 18 million on execution of orders won in 2021. Fading LCD investments in Display can still not be offset by increasing OLED investments. In Solar, however, other trends continue both in the PERC and the heterojunction technologies. Orders in the Advanced Industrial business unit declined in Q3 year-on-year by 13% to CHF 37 million, mainly due to the project nature of some of its businesses. Sales, however, continued to grow in Q3 year-on-year by 24.3% to CHF 41 million in a variety of key markets.
Asia, for the first time, became the biggest market region, surpassing Europe in that capacity. We had many key specification wins in Advanced Industrial business unit, but notable were several advanced assembly prototypes into the scientific instrument sector, which demonstrates our ability to copy the successful semi-adjacency methodology into this segment. The Global Service segment reported Q3 orders of CHF 68.1 million, or 7.5% higher than in Q2, and 38.1% higher year-on-year. Sales reached another record volume of CHF 55 million, up 24.2% compared to the same period last year. Strong demand was seen across the entire services portfolio, with fab utilization remaining very high, driving spares and consumables, and the ramp-up of new fab build-outs driving sub-fab valve growth.
The high-capacity utilization is expected to continue into 2023, while the increasing installed base generates a solid stream of service opportunities. Now let me turn to the outlook for the fourth quarter of 2022 and what this means for our full-year expectations. We expect growth to continue in both our Valves and Global Services segments during the remainder of 2022 as we execute orders at hand while tapping further into significant opportunities offered by our various attractive markets. Our continued success is driven by the unparalleled market and technology leadership positions, coupled with the successful execution of our proven strategy for profitable growth. In the Valve segment, we expect further high demand for additional semiconductor manufacturing equipment driven by technology advances in the leading-edge areas in logic.
Memory investments which peaked in the first half of 2022 are expected to show a softer development, mainly driven by reduced general consumer and industrial spending. This situation is expected to affect our Semiconductor business growth during 2023. Based on orders on hand for delivery in 2022, we expect Display sales to grow compared with 2021. However, the soft order intake in 2022 indicates a lower level of activity in 2023. Further growth is expected in the Solar market as positive trends continue both in the PERC and the heterojunction technologies.
Forecast for vacuum-related equipment sales in Advanced Industrial market points to continued growth as the business unit executes its strategic focus in selected growth areas. VAT expects the market for its global service segment to grow further in 2022 as semiconductor manufacturers continue to invest in both new capacity and upgrading their existing vacuum equipment assets. The high capacity utilization rates drive strong ongoing demand for all our service products as the installed base continues to grow, and the semi investment, which took place several years back, are now entering a period of higher maintenance or upgrade requirements. VAT expects Q4 2022 net sales of CHF 285 million-CHF 315 million as the supply chain situation remains challenging.
As a result, we expect net sales in 2022 of between CHF 1.14 billion-CHF 1.17 billion, or nearly 30% higher at midpoint than in 2021. In the last few days, the U.S. has implemented new sanctions against China, targeting at reducing their access to semiconductor technology. These new regulations will restrict the shipment of U.S. semiconductor process equipment into China for leading-edge and mid technology nodes. These are complex new sanctions, and we expect it will take some time for the implications on WFE to be defined. If we see any material impact on our Q4 guidance, we will issue a formal statement in due course. We expect these issues to be short- to medium-term oriented as the robust demand for chips will ensure the appropriate amount of WFE is allocated to meet the long-term market demand.
We also expect more of this to be in Europe and the U.S. In the meantime, we will continue to build our flexible global footprint and strengthen our natural hedge against foreign exchange impacts by further ramping up our production facility in Malaysia, increasing sourcing from best-cost countries, gaining greater economies of scale in global supply chains, and driving further operational excellence measures by getting closer to our customers. At the same time, we remain dedicated to technology innovation. Investments in research, development, and productivity improvements will therefore remain at the heart of our strategy also in 2023.
Furthermore, we expect our 2022 EBITDA to increase substantially and the full year 2022 EBITDA margin to be around the half year level of 35%, driven by higher volumes and better cost absorption, as well as the ongoing focus on costs, offsetting the cost inflation seen in raw materials, logistics, and energy costs. Because of the expected higher sales, EBITDA and EBITDA margin, we also expect our 2022 net income to increase significantly compared with 2021. Stronger operational performance and its related free cash flow will partially be offset by higher CapEx compared to 2021 and the elevated working capital levels which are needed to maintain production and delivery continuity. Full year free cash flow is expected to be substantially above the 2021 level despite these higher working capital requirements and our overall CapEx of around CHF 75 million.
We will give you more details on how we see 2023 evolving together with our midterm expectations out to 2027 during our Capital Markets Day that we host on December 2 in Zürich. It is planned to do this event in person, but it will also be broadcast live. Invitations to this event will be sent out in the coming weeks. This concludes my prepared remarks, and we're now turning the call back to the operator for the Q&A session. Thank you.
We will now begin the question and answer 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 use only hands up for asking a question. Anyone with a question may press star and one at this time. The first question comes from Sebastian Kuenne from RBC. Please go ahead.
Yeah. Hi, gentlemen. My first question is regarding AMAT's curve of revenue guidance in Q4. I mean, that would indicate that China is accounting for some 11% of their revenues. How big is China for VAT at the moment? That would be my first question. Secondly, do you expect cancellations from direct Chinese orders or order cancellations from your book or just deferrals? Thirdly, on operating leverage, if we do have a slowdown next year and or maybe second half of next year, that also reflects then in your revenues, how big is your operating leverage? If you lose 10% of revenue, what do you think your margin will do? Thank you.
Yeah. Thank you for that. Yeah, the AMAT guidance came out last night, so obviously we're digging into that. I think, you know, VAT is a pretty good proxy for overall WFE spending. If you look at China in recent times, it makes up around 20% of WFE. Now, half of that goes to foreign companies investing in China, like Samsung, SK hynix, TSMC, and the other half goes to the indigenous semi manufacturers. I think, as I said in my comments, it's gonna take a little bit of time for this to play out because there's a good chance that the foreign investments in China will be directed to other assets within the foreign company's fab portfolio.
The overall allocation of that will come back to what's happening in the consumer markets. The big question is obviously the 10% going into China. A big part of that is still made up by U.S. and Japanese OEMs, also European. There's still, I think, a lot of understanding on what the sanctions are gonna mean exactly for those shipments. What percent are gonna be over the 15-18 nanometer geometry level where the sanctions kick in. I think it's gonna take at least a quarter to understand that. For VAT, I think roughly our numbers play into that total WFE allocation to China. As yet, we haven't seen any cancellations. You know, we've got plan A, B, and C, obviously.
We're confident we can navigate any challenges. We've done it successfully before. Cancellations are always possible. We have mechanisms in place to get reimbursements for some of that, depending on how far away the cancellations are from the delivery time. Deferrals is something we work with in the semiconductor industry a lot, so we're very experienced in dealing with that. On the operational leverage, I'll ask Fabian to comment on that.
As you have seen from our results recently, we do benefit quite a bit from the operational leverage, thanks to our flexible operating model. The same way that we can grow, we can also reduce our costs in a potential correction. Now, you must expect a certain lead time, I would say between 3 to maximum 4 or 5 months up until we have our costs adjusted. If you compare this also to historical levels, I would say that we are here still quite solid in our conversion rate in a potential correction.
If the lead time is 3-5 months and you have the order book, you know when you have to deliver the revenue, so you can plan your production 6 months ahead. That means you can adjust your capacity just when the orders drop, right? Because your order book is so long. The people-
That's right. Yes, that's right. Therefore, we are realistic about that. We are on the pulse. As Mike said, we have our plans ready in place. As soon as we see the need to execute on them, then we would also start with the respective measures being put in place.
Yeah. Two more brief questions. If you had to adjust capacity, would you start in Switzerland or Malaysia? Were you surprised by TSMC's cut of the CapEx plan this year? Thank you.
Where we cut really depends on where the product is going to which market, because we have different products in different facilities. Really it's a mix. We probably have to make reductions in both factories. I think what we're gonna see realistically in the short term is the OEMs are still running pretty heavy backlogs, and they're gonna be looking at the China situation and adjusting shipments to go to other customers in other regions. There's gonna be a lot of reflow of capacity into different areas. It's gonna be quite a challenging couple of quarters coming out as things are reallocated there. I think the semiconductor business is dynamic. We all know that.
TSMC as well as Samsung, I think will adjust to the changes in consumer spending and industrial spending. The latest estimates I've seen for WFE are maybe down 10%-15% in 2023. We'll continue to monitor that. We have to look carefully at what that means for VAT, because we have things like specification wins that are growing our market share and growing the adjacency business. The final outcome, we're still working on. We hope we're gonna have a better idea of both the China situation as well as the WFE outlook for 2023 by the time we do our capital markets day at the beginning of December.
Okay. Thank you very much.
Before we go to the next caller, because there are more callers on the line, please do keep to the two questions initially. If we have time at the end, we can still come back. It'd be nice to give everybody a chance to ask their-
The next question comes from Marta Bruska from Berenberg. Please go ahead.
Hi, good morning. I have a quick clarification. Have I heard that correctly, that you said for 2023, semi CapEx forecast at the moment stands at 10%-15% down. Is that correct?
Yes, approximately. That's from both estimates. One is from SEMI and one is from VLSI Research.
Thank you. The actual question is, so back in 2020, you mentioned that there were two times the normal level of the new greenfield projects for fabs being announced, in anticipation of the CHIPS Act, and they came, then the financing came, earlier this year both in Europe and in the US. I was wondering at what stage are those projects now, and when would you expect them to trigger new orders for VAT?
Yeah. The whole industry works on a kind of a risk portfolio of assets where you look at what you're gonna need over, say, a five-year period. You know, VAT acts in the same way. Our customers are building shells, and they speed them up as demand looks more promising or slow them down if they see slight declines. There's no change, I think, to the number of assets. The speed of which they come online will really be dependent on the growth. One thing I think we will see is a lot of those assets will come online as planned, but maybe with lower wafer starts because the qualification time to get the most advanced processes up and running is increasing.
I think you'll see the major investments from, say, TSMC, Intel, Samsung continuing, but maybe the build-out of total wafer demand will be staggered a bit longer if we see a sluggish demand in the short term. There's still gonna be more announcements. There's a lot of rumors right now that TSMC are gonna announce in Dresden. I mentioned in my remarks that I think we'll see this rebalancing effect of more fabs coming into U.S. and Europe as a result of the sanctions in China.
All right. Thank you very much. Thank you. That answers my question. Very helpful.
The next question comes from Timm Schulze-Melander from Redburn. Please go ahead.
Hi there. Good morning. Thanks for taking the question. Two quick questions. If I could start, please, Mike, with what consignment inventory pools you've seen in recent weeks. That would be really helpful color, please.
Yeah. I would say pretty normal. Our consignment levels are sitting pretty much exactly where we want them to be. You know, we adjust these very dynamically, and we have min-max levels on our key products, and I'd say we're sitting exactly where the OEM forecasts demand them to be. I do expect we're gonna see coming up, you know, significant volatility in them as our customers rebalance the short to midterm to account for the shipments into China. I think it was obvious from the announcement last night that Applied Materials have looked like they've stopped shipments until they understand the overall sanction framework with China.
We expect to see our portfolio of products changing a little bit as that portfolio is rebalanced. The reduction from AMAT last night looks like it was about 10%, but I'll let you guys analyze that. I think over the next month, through the announcement season, we'll gain a lot more insight into what that means. Again, we're very experienced at dealing with this. We have our teams ready to manage any change in that. It could lead to a little bit more inventory in the short term as we rebalance things. These products have very long lifetimes. I think that's another key thing, is that even if we ran with a bit more working capital, we can deal with that in the longer term.
We're pretty confident we can deal with any situation that's thrown at us.
Got it. My second question, I'm gonna sneak in a two-parter, if I may. You mentioned Applied Materials halting their China activities. I think ASML and KLA Corporation are reported to have done the same. At VAT Group, are you pulling back any of your people activities? The sub-question, have you made any changes to your existing hiring plans? Thank you.
Yeah, we haven't made any change right now to China. There's no restrictions in any of our products shipping to China. I would also highlight that we ship more of our standard product portfolio into China, which is a lot more generic than a lot of the customized products we ship to our more advanced technology customers. I think there'll be less restrictions on them. That's gotta be. We've gotta play that through and see what happens in the long term. At the moment, there's no comment from the European authorities or the Swiss authorities on potential sanctions. There's still no official statement from the Japanese, although Tokyo Electron have said that they will follow the U.S. sanctions. Again, I think a lot's gonna play out in the next month.
Some of the IC actual chip shipments are actually economically far-reaching in their impact. You know, for example, the ability to ship latest microprocessors from TSMC and Intel into China could have a massive impact on the electronics shipments. I think that's gonna become a bigger economic question. For us, we're just looking at, you know, what our customers start telling us in the next few weeks, and also we're closely in touch with local and regional authorities.
Great. That's very helpful. Thank you.
The next question comes from Sandeep Deshpande from J.P. Morgan. Please go ahead.
The industry has been substantially backed up in being able to supply tools, which is why, I mean, you know, if there is going to be any weakness in demand, it will take some time to be seen. How do you see, I mean, what you are supplying today to your customers, is this what you're supplying today to your customers going to go into tools which they're gonna ship well into next year, or does it go into tools within three months after you ship? How do you see that timing? I have one quick follow-up on that.
I think that's exactly right, that there is a lot of backlog within the industry. Our customers will be juggling that backlog as we go through the fourth quarter and the first quarter, you know, in order to linearize and manage their shipments. At the moment, we're running roughly about a five-month backlog when you look at our numbers. You know, we've still got close to, when you look at the numbers, roughly CHF 300 million in backlog for this quarter, hence our guidance. Now some of that could change obviously with the China situation, but that may be rebalanced by other tools, and that's the big question mark we have at this time is how are our customers going to rebalance things.
Our current order book roughly goes through the first half of the first quarter in 2023.
In terms of the order book, I mean, since you're planning for a, you know, that there could be some risks in the scenario going forward, how does your order book run? I mean, can customers push out or cancel at will? Or is it that you enforce some kind of, you know, three months you can't cancel, you know, three months before you're able to take the product or any other such, you know, restrictions that you have, which mean that you can prepare for a downturn through revenues that you ensure that occur?
Yes, it's a huge mix. Our smaller customers, obviously, we have tighter constraints on the order and, you know, if they're close to the manufacturing date, we will ensure those products ship. With our larger customers where we have consignment inventories, there is flexibility on when they can pull that. Ultimately, they have to take the product that's on consignment, but there's different windows within that consignment inventory period in which they're allowed to defer parts of that. It really is a mixed bag. The most important thing is, and we've learned this in previous cycles, is partnering with our customers to fix these issues is really important, just like partnering with our own supply chain.
Because the most important thing is you maintain customer trust, you build those relationships, and you come out of the cycle with the maximum upward potential. If we harm any of our supply chains, we wouldn't have that ability to bounce back. That's what we're gonna be looking at, is how do we optimize that overall supply chain with our customers to ensure when demand comes back strong, which we know it will, that we're ready to ramp the way we did in 2020 and 2021.
Thank you.
The next question comes from Michael Foeth from Vontobel. Please go ahead.
Yes, thank you. Good morning. Two questions. The first one is you said that you were still constrained by supply in the quarter. My question would be, where do these constraints come from at this point and how much approximately of sales growth did it hold back? The second question would be regarding the pretty wide range in your Q4 sales guidance. I think it's a bit wider than usual, and that does not yet include any uncertainty from the U.S. restrictions, obviously. What explains that increased uncertainty in your guidance, please?
I was just making some notes here. The first part of the question, the supply chain constraints really fall into two buckets. One is the electronics supply, and the second one is elastomers. The first one, electronics, you'll read in the press that electronic shipments are improving and that the world is a rosy place. Actually, the reality is in certain sectors, the situation is getting worse. If you look at products like microcontrollers and other products that maybe are also focused in the automotive industry, they're still very tight supply. We're actually seeing a worsening of some of the allocations there. So far, we're managing to get what we need. But again, we're working feverishly with our supply chain teams to get those allocations.
Sometimes we're having to pay outrageous increases to suppliers or to get that supply. The elastomer situation is slightly more complicated. There are some compounds in elastomers that originate in Russia and Ukraine, and that has restricted some level of supply into the large makers of elastomers. We're having to do a lot of requalification to other sources. That just takes time, and there's some risk in terms of how fast our customers can requalify things. The risk is probably in the CHF 20 million-CHF 30 million level, and we've taken that into account within our guidance. The second part of the slightly wider guidance is the fact that our customers still have other supply chain challenges, so it's not all within our control.
If they delay or if they see delays from other suppliers or elsewhere in the supply chain, it can mean a slight push on some of the equipment. All in all, the slightly wider guidance is a reflection of some of our own challenges and our customers' challenges.
Thank you. Very clear. Thank you.
The next question comes from Harald Eggeling from ZKB. Please go ahead.
Thank you. Two questions, please. First, could you please indicate the underlying absolute numbers of WFE spending? You were mentioning with the 10%-15% for 2022 and 2023. This was the first one. The second one regarding the supply chain, the CHF 20 million-CHF 30 million, does this relate to Q4, or is it more an annualized number for the top line level? Thank you.
Yeah. On WFE, if you look at 2021, we estimate that was around $89 billion. For 2022, we're estimating somewhere between $95-$100 billion. For next year, we've seen various estimates, so it depends where the baseline is set for 2022, but somewhere around $85-$90 billion are some of the estimates we've seen. That's the best numbers I'm playing with at the moment. In terms of the supply chain challenges. I would say the challenges, and remember, we've done a pretty good job every other quarter at minimizing those risks. I would say that those CHF 20-CHF 30 million risks are specific for Q4, but we're heavily working on.
Okay, thank you.
The next question comes in from Joern Iffert from UBS. Please go ahead.
Hi, gentlemen. Thanks for taking my questions. The first one would be, please, let's assume 2023, where if equipment CapEx is down minus 20%-25%, what do you expect your sales are doing, in such a scenario, being down 15%-20% or more given these stocking effects? The second question would be, please, on your adjacent products. Can you give us an update on the total revenue line you would expect in 2023 even, where if equipment CapEx would be down? Also if you identified more adjacent products and beyond multi-valve modules. Thanks a lot.
Yeah. That's a billion-dollar question you're asking there. I think it is too early for me to estimate our sales based on that. It's really dependent on which sectors we see the reductions. You know, if we still see a very strong advanced logic spend, which people are estimating for next year still around $50 billion in advanced logic, then that will play out differently than if we see, for example, accelerated DRAM spending. You're just really too early also to figure out what's happening with China. Are we gonna be able to ship our products to China or not? Will there be Swiss restrictions? All I would say, we will not see the full reduction. If it's 20%-25%, we will see growth in our adjacencies.
We will see growth in, for example, our EUV shipments and also the market share gains that we've been making play out in different platforms. We'll certainly see a higher number than that, but it's really too early until we understand the mix and get a view on specifically. Adjacencies, I don't think we'll see tremendous change in our adjacencies because they're mostly advanced products. I think there's a higher probability that the CapEx in 2023 will be allocated to advanced logic and the more advanced nodes as we qualify them. As I mentioned at the half year, we expect our adjacencies to get close to CHF 100 million in 2022, and we would expect that to grow into 2023.
We'll try to have a better estimate of that at the Capital Markets Day.
Thanks a lot.
The next question comes from Jürgen Wagner from Stifel. Please go ahead.
Yeah. Good morning. Thank you for letting me on. Actually, as a follow-up to the previous question, in your prepared remarks, you mentioned you would expect your service business to be strong or growing next year. How cyclical are your other non-semi businesses, not the adjacencies, but also display and solar going into next year? Thank you.
Yeah, service business, as you can see, has been growing pretty nicely. As we analyze that, we see the roughly, you know, 3-5-year delay in service intensity of our products. If you use, say, a 5-year window, that takes us back to 2017, where our installed base started to grow pretty exponentially. During 2023, we do expect there'll be a larger population of valves available for service. That may offset some of the overall spending reductions that fabs will be doing. Again, a bit too early to tell yet, but we do expect that service will continue to grow even during a period of reduced WFE spending.
The other businesses, well, I think we can see that display is pretty cyclical. We're probably reaching the trough. I think one of the challenges there to really isolate the drivers that will bring significant display spending back. We're still seeing sluggishness in OLED. There's a lot of technology challenges getting large format OLED panels to be cost competitive. So we still expect display to be weak in 2023 with maybe some additional spending kicking in in 2024, 2025, but I wouldn't expect any miracles out of that segment in the coming year. Solar, I think, will continue on a fairly good growth plan as the pressure on alternate energy sources continues. So we're expecting that business to grow quite well.
Our advanced industrial, we're putting a lot of effort into that. We're using the methods and technologies in our semiconductor business and the adjacencies there to infuse into our advanced industrial business, where we're taking a higher content of some of the vacuum chambers that exist in industrial applications. I think our market share will continue well, and our share wallet growth will continue well in advanced industrial. I wouldn't expect that to follow too much a downward revision in WFE. I think we'll see continued growth in that business. You know, that will help offset somewhat the WFE challenges that we could face in 2023.
Okay. That's clear. Thank you.
I have a follow-up question from RBC. Please go ahead.
Yeah. I have a question regarding your Chinese direct business with local WFE players, if there's any. How big is that business, and do you think there could be restrictions for you? Another follow-up on the capacity planning. How many temporary workers do you have in your production as a percentage of total? Thank you.
Yeah. Our Chinese business has been very successful. You know, we've grown very high market share in all the segments we participate in. Our total sales to China directly are approaching about the CHF 200 million mark in 2022. And that's across all segments. And yeah, at this point, I mentioned we do ship a more generic set of products into the semiconductor segment, and that's a way of protecting IP both ourselves but also our leading-edge customers.
We're quite confident at this point we wouldn't face restrictions, but we don't know how the European authorities are gonna look at the situation, and we'll obviously have to follow any guidance that comes from them. The other sectors in China, I don't think we see any restrictions there, either in display or solar or advanced industrial, or service business. There may be some restrictions on service parts for leading-edge tools. But again, these are the questions that have to be asked in the coming months. Yeah, it's a very solid part of our business. You know, obviously we've got concerns there, but we'll also take as much action as possible to ensure we can continue shipping into China.
Mm-hmm.
Temp workers, Fabian, do you wanna comment on that, the percent of temps?
Yeah. We have been making investments into our temp workers actually to support the ramp throughout this year with slightly elevated temp ratios compared to the, say, 20%-23% that we have commented earlier on. The current temp ratios are beyond the 25% level, which is an investment that we have made. On the other hand, it also now provides us some further flexibility in case that we would see a need to adjust.
Very helpful. Thank you very much.
Operator, next one is a follow-up from Mr. Timm Schulze-Melander from Redburn. Please go ahead.
Yeah. Hi, thank you. Two quick questions, please. On the volume of deferral activity, you mentioned that it's, you know, a standard feature of the business. Could you maybe share with us what kind of volume or value is generally kind of deferred or under deferral in a quarter? And then the second question was around pricing. A lot of headlines around pricing pushbacks to some of your ultimate chipmaking customers. If you look at the pricing actions that you've taken in FY 2022, what kind of a benefit should we expect to deliver in FY 2023? Thank you.
Deferrals. I guess we look at it a little bit as more forecast uncertainties at the beginning of a quarter to the end of a quarter. We're very accurate typically in our estimation of what our total shipment volume's gonna be. But we can see up to 30% volatility in the actual type of equipment or models of equipment shipping. There's quite a bit of volatility there. That's pretty normal in our business as our customers reallocate CapEx to different segments such as DRAM, NAND or different technology nodes and logic. There's an inherent, say, 30% flux happens on a quarterly level that we're used to dealing with.
Again, our consignment inventories, which is a relatively small population of our overall shipments, there are deferral periods built into those consignment agreements. That probably plays within the 30% volatility I talk about. On pricing pushbacks, Fabian, do you wanna comment on that?
Yes. I think I can just reiterate that we address highest recognition, but also respect to the very symbiotic relationship that we have with our customers. That also mirrors the way that we have crafted the price increases in 2022, balancing the inflation with a combination of operational excellence and productivity measures, purchasing savings, and then also a portion of price increases. That same approach we have also taken now in preparation for 2023 based on the assumption of material cost inflation and labor inflation. We are currently in the finalization actually of these programs. We so far have not experienced any major concerns with regards to the planning for 2023.
Okay, great. Let me just, if I could sneak one in. You talked about standard products in China. Does that mean if China reduces as a percent of your sales mix, that that's actually a sort of a net positive to the margin? Thank you.
No, I'd say it's fairly neutral. You know, I wouldn't say that's any major impact.
Great. Thank you.
The last question for today's call comes from Harald Eggeling from ZKB. Please go ahead.
Thank you. One follow-up, please. I mean, we are all meanwhile talking about consolidation year in 2023, a year of decline in WFE spending. As a gut feeling, how do you see the possibility that it could be a two-year consolidation period, and what would be the biggest driver for that? Thank you.
Yeah. Good question. I think a lot has changed in six months with global demand and some of the very high inflationary pressures we've seen, which obviously is playing into chip demand. I think the high-end chip demand is still very robust. The last two years, we've clearly had a benefit from elevated consumer spending and the impact on chip overall demand. That's interesting how that's gonna play out. I still think we'll see a whole host of new applications and new sources for chips that will continue to drive demand in the next two years. Will that offset fully the elevated consumer spending of the last two years? Hard to tell. I think a one-year pause is realistic.
Again, the requirements in CapEx to bring these new technology nodes for the next ramp require a very significant increase in spending. You know, a 5 nanometer fab is roughly 25% higher than a 7 nanometer fab. That's gonna also offset some of that as we strive to bring these latest generation nodes to market. I'm still pretty confident we'll continue to see strong levels of CapEx with a much higher baseline than we saw back in 2018, 2019. When the next full ramp will kick in is, at this point, until we understand the China situation, quite difficult to fully predict.
Okay. Thank you. This could probably imply we say higher nodes could be a baseline of CHF 50 billion annually than the new, multiplied with 1.25. We have a new baseline probably of a bit above 60 billion. Then, would it be possible that that CapEx is cut down massively in the mid edge and lagging edge nodes, so we could probably end up at a probably normalized spending ratio of CHF 80 billion going forward?
I think CHF 80 billion is probably, you know, not a bad estimate, CHF 80 billion-CHF 85 billion, but I would derive it slightly differently because you can't underestimate the spending still required in memory, to bring latest DRAM nodes in. There's not much point investing just in advanced logic if you don't have the sophisticated memory products to get optimal utilization out of them. It's gotta be a different balance. Yeah, I would concur with that.
This does mean CHF 80 billion-CHF 85 billion would be more realistic than a CHF 100 billion run rate, right?
I think in a downside scenario, where we see cutbacks on capacities, some of the wafer fab capacity expansions. I think in that region is probably where a baseline would lie.
Okay. Many thanks.
Okay. Thank you for your participation. As you can see, a solid third quarter and as we start to see how Q4 plays out with these sanctions, et cetera, we will notify you of any changes in our guidance. We hope to see you at our Capital Markets Day on December the second in Zurich. That's it for today. Thank you very much. Operator, you can close the call now.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.