Ladies and gentlemen, welcome to the VAT Q1 2023 Trading Update Conference Call. I'm Andre, 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 one on your telephone. 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 the VAT Group. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen. Welcome to VAT's Q1 2023 trading update conference call. With me this morning are our CFO, Fabian Cozza, and Head of Investor Relations, Michel R. Gerber. After my introductory remarks, we'll start the Q&A session. The call moderator will take your questions in the order you enter them. As you can see from the media release this morning, the first quarter of 2023 is kind of a mixed bag of results. On the positive side, we've achieved revenues that were slightly ahead of the guidance high point at CHF 233 million. The strong execution of our order backlog contributed around CHF 100 million in the first three months of the year.
Nevertheless, overall sales were down 12% year-on-year as we approached the bottom of the semi cycle. Across the 3 businesses, we saw the following performance. Please note that we moved the former display business into the Semiconductors business unit and the solar activities into the Advanced Industrials business unit as of January 1st. In Advanced Industrials, we achieved 28% higher sales year-on-year and 2% higher sales in Global Service. This was more than offset by the 23% sales decline in our largest business unit, Semiconductors. On the rather negative side, order intake declined strongly by 54% year-on-year to CHF 136 million, leading to a book-to-bill ratio of 0.6. On a sequential quarter-to-quarter basis, orders also declined substantially and were 45% below the level of Q4 2022.
The net order intake in Q1 2023 also includes order cancellations in the range of CHF 25 million. These cancellations were predominantly from semi customers and reflect the inventory corrections going on across the industry. We estimate that this number will slow down in future quarters. A focus during the quarter were the continuing operational cost adjustments to align the structure to the current business volumes. As this process was already initiated back in the third quarter of 2022, we are confident that we can maintain the margin resilience that VAT has successfully demonstrated in previous down cycles. This operational cost discipline is important as we navigate the uncertainties of the down cycle. We believe the bottom will occur in the first half of 2023, but given the macroeconomic challenges, we're constantly adapting our operational plan to ensure we successfully deal with the market conditions.
We are however, not sacrificing R&D investments, nor the ability to ramp up our production sites, as you will hear later in the update. What do we believe 2023 will look like? It's very hard to say exactly due to the constantly adjusting forecast, you will have all seen that there's a wide spread of opinions as to how the market will develop and by when we can expect the semi industry to turn positive again. Our working hypothesis is that we expect a low point in the first half of the year and then a gradual improvement into the second half of 2023 as our customers prepare for a ramp up in 2024. We still see unprecedented midterm demand for the semiconductors, which is clearly seen in the high number of new fabs getting built around the world.
A variety of macro factors currently weighs on chip demand from both the business and consumer segments. In this environment, investment in memory capacity is especially hard hit, maybe down by as much as 40% this year as market research indicates. The expected decline in the area of advanced logic for the use in data centers or artificial intelligence is currently only about 10%. Additionally, we see some strength in the legacy 200mm fabs supplying areas like automotive power and microcontroller chips as demand is still very strong in these areas. Taking all this information into account, we expect Q2 orders to remain at a low level, cancellations should be less pronounced than in Q1. Sales-wise, you have seen our guidance of CHF 200 million-CHF 230 million for the second quarter.
These sales will again be supported by the ongoing backlog execution, which we expect to be again around CHF 100 million, leading to a backlog after the first half of around CHF 300 million and a good basis for our second half sales development. We expect the second half order intake to pick up again as the OEMs prepare for a rebound in the first half of 2024. The shortening order to sales conversion times driven by reduced lead times will contribute to sales in the second half. As a result, we expect sales in the second half of 2023 to be slightly above those in the first six months. Again, this fully depends on a capital equipment rebound in the first half of 2024.
What did we see for the business units in the first quarter, and what do we expect in 2023? Global Service had a slow start of orders in Q1 while revenues were in line as previously mentioned. Service customers are still sitting on slightly elevated inventory levels in spares and consumables, but we expect this to improve as fab utilization starts picking up again in the second half of 2023. In addition, the upgrade and retrofit demand is expected to gain traction as the year moves on. We continue to expect growth here. In Advanced Industrials, we have seen a weaker first quarter order pattern. This, however, has to be seen in the context that Advanced Industrials customers typically spend their budgets in the fourth quarter.
In addition, we did see pre-ordering due to the price increases which were effective from January. The coating business started the year on a weaker note. Scientific instruments, research spending, and solar also have positive gains. Again, 2023 should see growth in the Advanced Industrials business. In the Semiconductors business unit, we have seen the expected sharp drop in sales and orders driven by the WFE CapEx decline of about 20%. Expected market share gains and an expanding adjacencies business will not be able to offset the significant negative impact of the semi down cycle. We did see some very positive developments in Q1 with some strong advanced module spec wins and first qualification orders for our new high flow ALD valves. We also continued to see strong spec wins across the industry. This shows the importance of maintaining continuous R&D spending across the cycle.
In summary, as already communicated with our full year 2022 results, we expect lower full year 2023 sales, EBITDA margin, net income, and free cash flow. I elaborated on our order and sales pattern expectations for 2023 already. On the cost side, we started to take measures already in Q3 in 2022, and we will continue throughout 2023. As a result, we are optimistic that we can be around the low end of the EBITDA margin band of 32%-37% despite a substantial sales drop. The EBITDA margin for the first half, however, will be below the 32% threshold. Achieving this full year result would represent a full 5 percentage points improvement in our EBITDA margin compared to the 2019 down cycle. You can expect that VAT will follow the same model as the last cycle.
That is strong continued investments in R&D and infrastructure so that we can take full advantage of the next growth cycle. As such, there is no change to our investment in our new Swiss R&D center and also to the new production facility in Malaysia, which will be ready for qualification in the second half of this year. Spending in R&D, both in the core business and in adjacencies will increase, and we are confident to continue our organic growth in the future. Therefore, we expect CapEx to be between CHF 80 million to CHF 85 million in 2023, ensuring strong long-term success and organic sales growth. Last but not least, we will closely manage our trade working capital to support our free cash flow generation despite higher CapEx. This concludes my prepared introductory remarks, and I'll now turn 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 their 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 handsets while asking a question. In the interest of time, we kindly ask you to limit yourself to two questions. Anyone who has a question or a comment may press star and one at this time. The first question comes from the line of Sebastian Kuenne from RBC. Please go ahead.
Yeah, good morning, gentlemen. My first question was on your comment on the order backlog. Is it correct that you assume CHF 300 million by June? If so, that would imply if you have CHF 200 million to CHF 230 million revenues, it would imply another quarter with orders of somewhere between CHF 130 million-CHF 140 million. Would that logically correct?
I think directionally that's correct. Hard to tell exactly where orders will be in the second quarter. We expect them to be above the first quarter. Directionally, I think you're in the right area.
Okay. On the cancellations you had about I think some CHF 9 million cancellations. For your existing order book, do you expect a similar trajectory of cancellations going forward. Also, is there a risk that you have to book out orders that you have in your book, but because of project delays, you have to remove them from the order book? I just want to get an idea of the quality of the current order book. Thank you.
Yeah. We manage our order book, very carefully. I had mentioned in the remarks that we saw around CHF 25 million of cancellations.
Oh, okay.
Okay. It was slightly higher than that. We expect that number to drop in the second quarter. You know, we have a very close relationship with our customers. It's really in our best interest to quickly align our production plans together. You know, there's no point in us shipping as much as we can in the first quarter, then seeing a, you know, very low production volume in the second quarter. We've learned through experience and through previous cycles that it's better to work with our customers and very quickly align the backlog. What we try to do obviously is where we have goods in production or in shipment, our customers normally take those goods and we work with them.
Where we have orders for maybe 4 to 5 months out, those are the ones that we cancel or adjust or reschedule. It's a very dynamic process. I think together, you know, we work very closely with our customers to ensure the best outcome for both. As I said before, it's really important that we align very quickly on what the coming 2 to 3 quarters are gonna look like.
Okay. Thank you very much.
The next question comes from the line of Divyesh Mama from Bank of America. Please go ahead.
Good morning, thanks for taking my question. I guess my question is as follows. Mike, would the current cut to production at the memory customers, SK hynix, Micron, Samsung, et cetera, and, you know, elevated inventories at your direct customers might create a delay, if you want, between a pickup in demand for memory chips and orders and recovery for your own business. Do you think that we should not worry too much about that?
It is a dynamic situation. I think the cut to memory output is the right thing. You know, pricing is everything to the IDMs, as you could see from the recent Samsung results. I think getting, you know, realigning their output is a smart move. I think the logic spending is still pretty strong. We don't expect to see much reduction in logic and foundry, maybe about 11%, but the very advanced nodes are getting good traction, so we still expect strong WFE into that segment. I think, you're also seeing increased spending in artificial intelligence through data centers, which is driving advanced logic, but it also has the need for the most advanced memory chips, both DRAM and flash.
I think you will start to see in 2024, investments coming into capacity expansions in memory again. We mentioned in our remarks that we're expecting a pickup in revenue in the second half, and that really is on that premise that our direct OEM customers will start shipping equipment in the first half of 2024. Therefore, we need to get shipments into them by the fourth quarter. I think that's the most likely outcome at this point. You know, if you consider that the equipment shipping into the memory manufacturers then in the first half of 2024 will only contribute to output in the second half of 2024, because it takes some time, obviously, to get the systems qualified and producing chips.
You know, that's still 18 months away. I think there's a pretty good chance that capacity needs will be back up again in that time period. I think that's the most likely hypothesis at this point.
Okay. Thanks for the color. That's helpful. On your comment, I think you sort of alluded to it already a bit on your comments on the strength in AI, in data center. Could you characterize a little bit more the leading edge logic market? I mean, have you seen any pushouts or any cancellation or anything like that? Then I think related to that, maybe talk a little bit more about your success in EUV and in ALD as well. Thank you.
Yeah. I mean, from what we see, and obviously we can't triangulate this directly in our sales, but in talking to our customers, we see strength in all the logic segments, so that's foundry, advanced logic, and mature logic. That seems to be progressing quite well. Most of the cuts apparently are in the memory area again, but we can't correlate that one to one. Starting first with the mature logic, that tends to be our older technologies. Our share in those areas is not as high as a leading edge. You know, that doesn't give us the full potential to exploit the share gains we've had in recent years. It's still an important business for us.
As you move into advanced logic, that's where we really start to see improvements in our share and also the percent of wallet we get. That's very strong in ALD, and from talking to the OEMs participating in that area, we expect growth in the ALD businesses. They're really critical for 3 and 2 nanometer processes and we should see them grow during the year. The same with EUV. Although I think we're already ASML are already capacity limited in improved forward this year, so I'm not seeing that grow, but it's staying steady as we look into 2023. Our share of wallet is improving nicely in EUV, and looks very good into 2024 and 2025 as we grow our business there.
Two very important segments for us. But also, I think don't underestimate the impact of etch in the leading-edge logic areas as well. We have very strong share there, and etch is a critical component on the 3 and 2 nanometer chips. You know, these are all very strong for us and will certainly help us this year.
Just one clarification. The ALD sort of design win, is it a new customer or is it an existing customer?
Well, really, they're all existing customers. you know, we really are heavily supporting all the OEMs in the top 20 list. They're all existing customers. These are share wallet gains at these customers.
Okay. Thanks so much.
The next question comes from the line of Christoph Grau from AWP. Please go ahead.
Hello. Thank you very much for taking my question. Can you maybe give me some more details on the development of the regions and where have the losses in order intake been most severe? Can you maybe clarify it a little bit for me?
Yes. memory is very much an Asia-focused business, with the major memory sites in Korea, China, Taiwan and Japan. Actually, Singapore also. All the reductions in CapEx are coming in those regions. Europe and North America are quite logic focused, both in the mature area and also advanced areas, so they should do pretty well out of this. Also the ongoing government stimulus packages, the and the U.S. CHIPS Act pending European one, are also creating quite good, in-investment grounds for the chip companies, again, especially in the 2 logic segments. I think it's really Asia that's been impacted by the memory segment at this point.
Thank you very much. You just mentioned the U.S. CHIPS Act . How was the impact in the last quarter? Can you have maybe some more details? Last time you said you are not truly clear how much you have been impacted or you will be impacted. Maybe you have here some of the visibility on this now.
Sorry, on the impact of the Chip Act? Is that the question?
Yes.
Yeah. I don't really try to quantify the Chip Act, because, you know, these packages are just incentives to move a chip plant into the U.S. or Europe, probably from Asia. I only look at the total labor fab equipment budget and outlook. That really remains unchanged. Either the fab's in America or it's in Taiwan. I don't really care where that is. I think the impact of the Chip Act is not substantial this year in both Europe and America. It's mostly gonna be a 2024 story, especially in the U.S., where we'll see the biggest impact.
Mm-hmm. Thank you.
The next question comes from the line of with UBS Jörn Iffert. Please go ahead.
Hi, Mike. Hi, Fabien. Hi, Michel. Thanks for taking my questions. The first one would be a follow-up on your statement, half sales should be a tick better versus the first half. Is this more a top-down view, because we have some market forecast CapEx is going up in 2024, or do you actually really get already some capacity reservation, requirements from your customers for the second half? Just to check a little bit the clarity you have for the second half. The second question would be, please, on your profitability metrics. Where do we stand here right now? I remember you said 30% of your workforce in 2022 were temps. Is this fully reduced now? Is short time work already in discussion?
Also, can you just, remind me what you do with the capacity expansion outside there in the center in Switzerland? Is this on hold now? Just to check this also from the cost side. Thank you.
I'll let Fabian answer the second half. Let me touch on the first part first. The visibility is still, I'd say, pretty cloudy in the second half. I mean, we're in close dialogue with our customers, and the challenge as you know, when the business comes back, it comes back pretty quickly. You know, we're in dialogue as to what their needs are in the second half and into the first half of 2024.
Again, it is kind of a top-down view, but if you just extrapolate out to what the needs are gonna be in chip demand at the end of 2024, as I mentioned, and bring that back as to when the equipment has to be manufactured, you start to see the needs for growth in the first half of 2024. It's a working hypothesis right now. Hence, the importance of us realigning our cost structure as much as we can. I'll let Fabian elaborate a little bit on that for the second half of the question.
Thank you, Mike, and also good morning, Jörn. Look, we have already started to adjust our cost structure back in Q3 last year, where we went in with a temp workforce, as you said, close to 30%. At this point of time, we have reduced that significantly. Right now we're looking at around 5% remaining. Besides all the other cost reduction measures that we have in place, including overtime reduction, vacancy reduction, cut on discretionary spending, et cetera, short-term version of the further options that are certainly being explored.
With regards to the second part of your question about our ongoing capacity expansion programs, this is absolutely unchanged, and we continue to build out this additional capacity, maybe in Malaysia at full steam. The facility will be ready for equipment move in in August this year, and then qualification will follow by the end of the year. Overall, continued focus on investments including R&D, but also the preparation for the next cycle with the continued expansion plans.
One other point.
Yeah. Mike.
I think an important point there, Jorn. As you know, we outsource about 75% of our bill of materials. As we bring on the second factory in Malaysia, we can insource a higher percentage of our machine components to ensure we get this factory ready and qualified, and we get it matched to our first factory there. That gives us tremendous operational flexibility. We then have two factories qualified there. As the market ramps, we can expand both in our factories, but start increasing that percent of outsourcing again. It's also a way to help us navigate the development of the supply chain in Malaysia, which is nowhere near as sophisticated as the supply chain here in Central Europe.
It's a pretty nice strategy, again, really developed through this flexible operating model we have.
Mm-hmm. Thanks for this. Really just a five-second question for clarification. The CHF 25 million order cancellation, is this booked in the order intake?
Sorry, could you repeat it?
The CHF 25 million order cancellation, is this booked in the order intake number of the CHF 136 million?
Oh, yes. Yes. Yeah.
Yeah? Okay.
Absolutely. Yeah. That is.
Thank you.
That is the net number. Yeah.
Thank you.
The next question comes from the line of Michael Foeth with Vontobel. Please go ahead.
Yes. Good morning, gentlemen. Good morning, everyone. Just two questions. The first is a follow-up on a question already asked on the new design wins. You said in your press release that you added several new key accounts to capture growth opportunities. Then in your answer, you said that these are all existing customers. I'm a bit confused whether they are really new or existing now. If you could clarify that without obviously naming the customers. The second question is if you could give us an update, if there is any, on the CEO or succession process procedure. Thank you.
Yeah. Yeah. Yeah. To clarify the first question, yes, these are all existing customers, but as our customers grow, we have different types of account structures that we build around them. You know, our largest global accounts, we have a fully dedicated team of sales applications, even engineering teams dedicated for largest global accounts. We have key accounts, and key accounts for us are probably in the CHF 20 million-CHF 50 million size. We've been gradually adding customers to the key account status where they have, again, dedicated sales, but we also add dedicated applications and some engineering resources to them. We also fully customize designs for both the global accounts and the key customers. It's really elevation of some of these growing accounts, to a full key account structure.
You know, when you take, for example, EUV customer, if you go back five years, we almost had no business in the litho segment. We then started doing business. We added a salesperson. As we got to CHF 10 million-CHF 15 million, we add applications people. Today, we have a full key account status for our EUV customers. That includes sales applications and engineering teams supporting them. It's really a structural growth around the key customers. We added two new key accounts in the first quarter of this year.
CEO succession.
CEO succession. No update on that yet. It's a progressive search, and as soon as we have any update, we will announce that.
Okay. Eric, anything?
The next question comes from the line of Emre Nebez from Berenberg. Please go ahead.
Yes. Hi, good morning. The first question would be on lead times. What are the approximate lead times at the moment in months, and how do you expect it to develop for the rest of the year?
Yeah. If you go back to say the midpoint of 2022, we were seeing lead times in our core semiconductor products elevated to 4-6 months. Some of that was just getting capacity in place and some was the electronic component shortages especially that were impacting output. Now that we've got most of the supply chain challenges under control and demand is sorry, supply is coming back in the component area and electronics area, I would say that's coming down by approximately 50%. Back to more historical 2-3 months lead times. That's an important factor as you think about the second half of the year because the order to sales conversion time is gonna shorten.
Even though we see weaker order intake in the first half, as that starts to increase going into the third quarter, you see a pretty fast conversion into revenue.
Yeah, that's perfect. Thank you very much. The second question would be on your guidance. You issued a 2025 guidance or you revised it of around CHF 1.5 billion for 2025. Is this guidance still valid, or was it indirectly also updated with your last capital markets guidance?
Yeah, I think at this point, we wouldn't want to change it till we start seeing the recovery, expected recovery in 2024. you know, if you think back to 2019 and what the growth rates were coming back into 2020 and 2021, they were pretty significant. They were around 25%-30%. you know, I think if the industry gets back up above $100 billion in WFE, I think we can still get pretty close to that number by 2025. Obviously as we go through this year and we get better visibility in 2024, we will update our guidance around that, as it's a very strong correlation to WFE.
It may take a year longer, it may happen in 2025, but I think it still shows directionally, what to expect in the next two to three years.
All right. Thank you very much.
The next question comes from the line of Jürgen Wagner with Stifel. Please go ahead.
Good morning. Thank you for letting me on. I have a follow-up to one of the previous questions regarding visibility. You mentioned the recovery you see next year is a bit of a top-down view. Taking all the data points together, how high would you consider the likelihood that this time you end up in a 2-year pause in terms of CapEx growth for you and the cancellations, are they broad-based, or where are they coming from in general? Thank you.
Yeah. As I already mentioned, I think the cancellations were more around the memory sector, and just the fact that OEMs were planning at a higher WFE number for 2023. As they scaled that back, they've just adjusted the capacity outlook for 2023. You know, we can never be especially because of macroeconomic issues that are affecting all businesses today. You can't fully predict when that capital equipment spending will come back. I mentioned what our hypothesis is. As Fabian also elaborated, we've adjusted our cost structure so that we can perform well, you know, even at this reduced level.
I think, you know, given the growth in chips, I just can't see too long of a pause before the need for the advanced nodes, especially in advanced logic, and advanced memory, are gonna be needed. Again, our hypothesis really is showing additional capacity, chip capacity not coming on stream until the second half of 2024. That is almost a 2-year pause. It does take about 6 to 9 months for equipment to be fully installed and qualified and chips produced. This is quite a long pause that we're already factoring in here.
Okay. Thank you.
The next question comes from the line ofHarald Eggeling with SEB. Please go ahead.
Yes, thank you. Three quick questions. First question, what would be your biggest challenge in cost management currently? Are there probably current, more pronounced month-over-month swings you need to manage? Second question is, the expected WFE CapEx rebound for H1 2024. Is this assumption pre or post TSMC? What would be your implied assumption on inventory in the value chain? Third question for Q2, I understand you correctly, that cancellations are in absolute numbers likely to come down, but would it be reasonable to assume that the share of logic in cancellations would increase? This would be the three questions, please. Thanks.
Okay. I'll start with the second question, look at the WFE rebound, Fabian can comment on the cost challenges. We're factoring at this point an approximate return to WFE levels, you know, around $90 billion-$95 billion next year. That's the best estimates we have at this point. I don't think we'll get more clarity on that until really the second half of this year. I didn't quite understand your point on inventory in the value chain. Could you elaborate on that?
Yeah. My understanding currently is that we've, both tier one and also at the OEM, so to say, seeing still high inventory levels. This not speak against a more, earlier recovery in WFE?
I don't think so. I mean, if they've got higher inventory levels, you know, they are gonna deplete into the second half. The potential rebound into 2024, you know, will require additional shipment builds in early 2024, that's what we're factoring in, I don't think they're fully related. Are you talking about high inventory levels of finished systems or of components within the supply chain?
No, I don't have this granularity, unfortunately. In the end, my expectation would simply be that even if you work down sequentially, like 5% every quarter, your inventory, I would arrive at a number by end of 2023, which seems, yeah, still pretty high compared to historic levels and also taking into account, clearly rising interest rates. My thesis would simply be that the recovery cannot be that big that probably currently is assumed, no, in WFE.
I think it's important. Let's see what the outlook from the OEM community is like in the coming months. I think you'll see revenue levels, you know, still at a fairly high level. We're still predicting around $75 billion of shipments in 2023. Even if you assume a quarter's worth of inventory, component inventory in the network, you know, it still means substantial shipments from VAT. That has to be, we have to refill that inventory starting at least in Q4 to allow the OEMs to build in 2024. The other part, cancellations. I don't expect to see cancellations in advanced logic. There's no major change in the build-out of the advanced nodes.
In the mature nodes, there's still pretty tight supply. In fact, I think the OEMs are seeing very robust shipments into the mature logic area. Let me pass over to Fabian to talk about some of the cost challenges and the month-to-month swings.
Okay. Thanks, Mike. Look, we have started, as I said before already last year, to execute our proven, I'll call it downcycle, protocol. That is basically a toolbox
Of measures that we apply as we see demand reducing. I wouldn't like to make kind of a segregation here between the difficulty of implementing these measures. At the end of the day, they're all painful, especially for the teams that have to drive these measures. I think for us, the most difficult judgment that we have to apply is that we balance between strategic spend, which we will definitely continue to execute, and the cost adjustment measures. Basically it comes down to this distinction that we have to drive. Overall, I would say the company is very experienced in managing through the cycles, and we have also improved this toolbox throughout the last couple of years.
Now, let me maybe add another sentence on the pattern of the cost reduction and what to expect on the bottom line. I have commented on this already in March, where we come from a full steam growth mode into this downcycle adjustment now, and then when you hit the brakes as hard, you obviously suffer for the first, I would say, 3-4 months, up until you see really the bottom line effect. That is also now the bridge back to the weaker first half that we expect with the concept of measures then contributing to a boost of the bottom line into the second half.
Okay, many thanks.
The last question for today comes from the line of Robert Sanders with Deutsche Bank. Please go ahead.
Yeah. Hi, good morning. My first question was just around stock levels of valves at the equipment OEMs in semiconductors. I was just wondering whether you thought that the on-hand inventory today would be higher than the last cycle, just given the impact of the shortages in semiconductor equipment. I have a follow-up. Thank you.
The stock levels in the network I think is a more complicated picture than the last cycle because the relevance of the subsystem suppliers today is much greater than it was in the past. You know, the OEM, larger OEMs especially, have outsourced a lot of their module manufacturing to a whole host of subcontract suppliers. The inventory at the OEMs in general, I'd say is reasonable, as I mentioned before. I think, you know, at a, I'd say a historically normal level, our own consignment inventory is under control. I think what we are starting to see is that there's maybe a bit more inventory in the subcontract module suppliers than we originally imagined.
I think dimensionally, you know, maybe something around 3 months between or 2-3 months in consignment and OEM stocking and maybe 4-5 months, maybe as high as 6 months in some of these guys at the subsystem suppliers. That's why you're seeing such a sharp reduction in order intake as this whole thing is rebalanced. Some of the cancellations we've seen have been in the sub-suppliers rather than directly from the OEMs. Obviously, the relationship is there.
What's the ratio between OEM and subsystem of your business?
I don't know exactly because, there's just such a wide range of sub-suppliers. I wouldn't even hazard a guess without going in and calculating it. It's something we'll look at for next time.
I guess the reason I'm asking is 'cause in the automotive market, a lot of the kind of less strategic components were handled by Flextronics, you know, assembly companies, EMS companies, and now those OEMs are building up their own parallel supply chains of these components. I'm just wondering whether now there's inventory at OEM level and subsystem level because of basically kind of scar tissue.
That's hard for us to see, really. I think the only visibility I've got is just in general, slightly higher inventory levels at the subsystem suppliers. I don't know much more detail than that.
Okay. My other question would just be on Leading Edge, Leading Edge logic. You sound remarkably kind of benign given the, you know, utilization is falling quite considerably at 5nm, 7nm, Intel's cutting CapEx, et cetera, et cetera. What is behind that? Is it just the content gains? I know you're baking in the semi forecast of $92 billion for 2024, they're not assuming really any kind of, you know, issues with TSMC, with Intel beyond what we already know.
Yeah. I think the optimism is based on, again, the content and share gains we've had, but also on the build out of 3 and 2nm. You're gonna see a considerable amount of CapEx going into TSMC and Samsung. I think Intel will also start picking up in 2024 again, especially with some of the new product launches they have planned. You know, they haven't spent as much on these nodes as maybe TSMC has, so a little bit of catch-up there. The spending at the very leading edge, I agree with you, 5, 7, and 10 are slowing at present. A lot of that's gonna be based on the PC market seeing historical lows.
As that starts picking up with GDP growth again in 2024, I think you would expect them to see some level of growth. The biggest growth expected at 3nm and 2nm.
Got it. You're not worried about tool reuse, just because of inability to backfill 7 and 10 and 5?
I think tool reuse has happened in our industry really forever. It's not really been a new thing. You know, customers will do everything possible to reuse their existing tool sets. A good example of that was the 3D NAND market. You know, all of a sudden by bringing in, you know, increasing number of metal layers, you got tremendous usage out of your existing NAND factory. If they can find ways to do it, you know, especially with the capital cost of equipment growing at advanced nodes, they're gonna do that. There's been rumors of some changes maybe to in the 3nm and 2nm areas with advanced litho systems.
Again, I think it's a bit early to say, is that gonna cause significant impact to the EUV shipments. I think again, we'll see that through 2023, at this point I'm not really phased by it. Again, it's been a traditional strategy in Semiconductors to reuse as much as possible. Typically, you would see node to node, probably around about 50%-60% equipment reuse, maybe even higher. It's not that unusual.
Got it. Thank you.
Okay. I think that concludes the questions for this call. Thank you very much for joining. As you can see, a challenging first quarter. We expect that to continue into the second quarter and then hopefully, with the expected rebound in first half of 2024, we start to see business improvement into the second half of the year. Our next call will be in July with the first half results, I look forward to seeing you all there. Thank you very much.
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