Ladies and gentlemen, welcome to the VAT Q3 trading update call. I am Valentina, 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 Fabian Chiozza, CFO. Please go ahead.
Ladies and gentlemen, good morning and welcome to VAT's Q3 2026 trading update conference call. On the line with me this morning are Michel Gerber and Chris Wickli from our IR team. Our CEO, Urs Gantner, is attending SEMICON West in San Francisco, and as it's in the middle of the night for him, he's having a good night's sleep to be well-rested to continue what can only be described as an ultra-high-intensity week, triggered by a semiconductor ramp that undergoes an unprecedented growth phase. After my introductory remarks, we will start the usual Q&A session. The feedback we are receiving from our team present at SEMICON West is always the same. Demand remains tremendous, and as an industry, we see records being shattered. Let me start with the broader semiconductor market backdrop.
The industry continues to benefit from powerful long-term growth drivers, and the $1 trillion revenue milestone is now expected to be reached three to four years earlier than originally anticipated. While much of the current attention is focused on the AI data center build-out and the significant infrastructure investments that come with it, we believe it is important to distinguish between the catalyst and the underlying driver. AI is clearly accelerating demand, but the more fundamental trend is the continued advancement of semiconductor technology itself. The industry is moving to increasingly sophisticated manufacturing architectures, including gate-all-around transistors and sub-2 nm process technologies. In fact, just recently we saw the introduction of consumer devices incorporating 2 nm chips, demonstrating that Moore's law remains very much alive and continues to drive higher levels of semiconductor performance and manufacturing complexity. To support these technological transitions, investments are accelerated across the ecosystem.
Existing fabs are being expanded, and new facilities are being brought online, particularly in advanced logic and DRAM. In many cases, projects originally planned for the latter part of the decade are now moving forward on more aggressive timelines. It is also worth remembering that previous semiconductor growth cycles were largely driven by consumer electronics, especially smartphones. Those markets remain healthy and continue to innovate. However, today the strongest source of incremental demand is the rapid build-out of AI infrastructure, while the longer-term growth opportunity remains anchored in the increasing complexity, performance requirements, and semiconductor content across a broad range of applications. For VAT, this reinforces our conviction that the current market momentum is supported not only by an AI investment cycle, but by durable technological trends that continue to drive advanced semiconductor manufacturing forward. Let's talk about the records VAT achieved in the third quarter.
Order volumes tripled in Q3 compared to a year ago, reaching record levels as new production capacity for leading-edge semiconductors remains highly sought after and continues to drive significant demand for VAT products. Following Q2 of 2026, this marks another record for VAT and reflects the strength of this current cycle and is substantially ahead of our own expectations when we indicated a flat order pattern for Q3 during our half-year results call. Let me talk about the nature of the orders. They are predominantly from our core semiconductor customers, driven by the continued supply-demand imbalance for advanced semiconductors. This imbalance is expected to last well into 2027. In the past weeks, we have received one question repeatedly: Are you seeing double ordering or inflated orders? Our answer is clear. We are not seeing double bookings, but orders that are driven by real capacity demand.
One noteworthy indicator of the continued strength in demand is that order lead times have further lengthened during the year and currently extend to approximately nine months or more. While at the beginning of the year, this was as little as three months. This situation provides us with better visibility of the customer's needs, as well as helping us plan manufacturing capacities and supplier demand. We mentioned at the half-year call that the challenge this year will be to continue the ramp of our manufacturing capacity at the required speed. Our factory output confirms that we have been able to deliver another quarter with a sequential 30% growth, and we are on track to achieve a quarterly output run rate of around CHF 450 million by end of 2026. We achieved Q3 sales of CHF 376 million, up 29% sequentially and up 46% year-on-year.
The book-to-bill ratio increased to around 1.9x , and our order backlog sits at CHF 980 million. Comparing this to our order book last year, this represents an increase of 280% and is testament to the unprecedented and unexpected steepness of the increase in demand. Turning to our manufacturing footprint, we continue to systematically expand capacity to support future growth. Ramp investments initiated at the beginning of 2026 continued into Q3. VAT added an additional 450 FTEs in Q3 globally and aligns the supplier base for continued growth into 2027. In Switzerland, we are further optimizing our factory layout and workflows. Assembly utilization has now increased to more than 75%, enabling us to absorb additional demand while continuing to improve operational efficiency. In Malaysia, utilization has reached over 90%, and we will ramp our production further by bringing factory 1B online during the first quarter of 2027.
This marks the next important step in our capacity expansion roadmap and moves us closer to our planned manufacturing capacity of up to 1.2 billion at the site. In Romania, we are advancing the site from a semi-finished goods operation to a fully integrated manufacturing location. Going forward, finished products will be shipped directly from Arad to customers worldwide, increasing the site's contribution to total factory output by approximately CHF 200 million to CHF 300 million. We continued to invest in our workforce as well. Since our half-year update, we have added approximately 450 employees, bringing our global workforce to around 4,500 FTEs across all locations. As a result, we continue ramping towards our global footprint capacity of approximately CHF 2.5 billion and have identified additional levers that allow us to expand beyond this.
We believe this manufacturing footprint positions VAT well to support the anticipated growth in semiconductor demand over the coming years. At the same time, given the industry's growth trajectory, we will make decisions regarding the next phase of capacity expansion in due course. We expect to provide an update on our longer-term manufacturing roadmap during 2027. Most of this growth is visible in the semiconductors unit, where Q3 orders were up 37% sequentially and 270% year-on-year. Sales increased by 39% and 70%, respectively, reflecting the capacity ramp activities. Looking at our other two business units, in advanced industrials, growth was seen in orders for valves used in scientific instruments and analytical products, as well as systems with exposure to semiconductors. While end markets such as coatings and industrials have seen a flat year-on-year order development.
Orders in global service increased by 52% sequentially and by 88% year-on-year as demand surged for consumables amid overall high utilization rates. Repairs and retrofits saw a strong increase as well, in line with the sector's growth rates. Sales, however, increased by only 2% sequentially and by 4% year-on-year. Many fab customers are maximizing output of new chips, limiting tool downtime for maintenance work or upgrades. Here, the order window has widened as well. This brings us to the outlook, which remains very positive and exciting. We second our customers' public statements of unprecedented demand in their reading. They claim visibility across the sector that now spans over the next eight quarters.
We believe that the market remains in a strong structural growth phase as about 150 fabs are either under construction or planned over the course of the next three years to address the persisting supply and demand imbalance. Assuming each fab will require, on average, more than $10 billion of WFE, the industry is well on track to seeing WFE growing to over $200 billion per year in the years to come. WFE estimates have been ticking higher throughout the year compared to our capital markets day in May 2025. WFE estimates for 2026 have increased by 35%, and for 2027 by over 66%. For this year, markets believe that WFE could reach up to $155 billion a nd might cross $200 billion in 2027.
Based on the production expansion activity witnessed in Q3, we remain on track to reaching our quarterly factory output run rate of CHF 450 million by year-end. As a result, we expect 2026 to be another record year for orders, sales, and free cash flow, with higher EBITDA margin, and net income compared with 2025. For the last quarter of 2026, we expect sales in the range of CHF 420 million-CHF 450 million. Looking further ahead to 2027, we are preparing for a sales volume that is significantly above the previously communicated guidance of CHF 1.5 billion-CHF 1.7 billion. This concludes my prepared remarks, and we now turn to the Q&A session. Moderator, please open the line for the first questions.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to disable the loudspeaker mode while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Meihan Yang from Goldman Sachs. Please go ahead.
Hi. Good morning. Thank you for taking my question. My first question is on the capacity ramp-up in 2027. What is your current status of your Malaysia 1B factory? If I understand correctly, you have identified additional levers to allow you beyond the current global capacity of CHF 2.5 billion. Does this meaning that you would be launching a new CapEx to build a third hub? My second question is on the impacts of your further hiring and inventory preparation that you have previously mentioned, and how should we think about the margins impact for the full year? Thank you very much.
Yeah, good morning, and thank you for your question. Maybe I answer the status of the capacity build-out of Malaysia first. Malaysia 1A is running at above 90% utilization, so clearly at a high level. But overall, Malaysia capacity includes 1A and 1B and amounts to more than CHF 1.2 billion. Globally, our current footprint provides for around CHF 2.4 billion-CHF 2.7 billion of capacity. This means that our capacity remains sufficient for the strong demand in the years ahead. What has changed is the speed and magnitude of the market development. We originally thought this capacity would take us into 2030.
With today's demand momentum, we will need to take the next capacity decision earlier than initially anticipated. Then on the margins. Look, we are currently adding significant resources ahead of the growth opportunity because execution and delivery are the immediate priorities. However, the productivity of these new employees will progressively increase as the ramp matures. At the same time, we continue to run efficiency programs to support our margin performance.
Got it. Thank you very much.
Next question.
The next question comes from Joern Iffert from UBS. Please go ahead.
Good morning. Thank you for taking my questions. Would be also two, please. The first one is on the order trends to come. How do you think about the order book in the next one or two quarters? To also better read the extended window of ordering timing from customers, what do you think the order intake of around CHF 700 million reflects on semiconductor equipment CapEx? Would you feel comfortable with around $270 billion-$280 billion if this is a reflection of this? The second question, if I may, on the capacity ramp, how should we think about the quarterly progress going into Q1 and Q2 2027 as current order run rates would clearly show revenue run rates of more than CHF 500 million per quarter? Thank you very much.
Yes. Good morning, Joern. Look, on the orders, I think we should factor in this effect that we have observed now in Q3 on extended order windows. Normalizing for that effect, I would expect that our Q4 orders will land somewhere between CHF 500 million- CHF 600 million. Going forward, this plateau seems to repeat as per current indications of our customer build plans. As I have said in my prepared remarks, we have very good visibility for the next six to eight quarters ahead. With regards to the capacity, as I mentioned before, we are on track with our internal targets to add about 30% quarter-over-quarter overall. When I just look at Malaysia, there we are clearly ahead of this as Malaysia plays a very pivotal role in this ramp and has also stood up to our very high internal ambitions.
In Switzerland, obviously, the ramp is a little bit less accentuated, but nevertheless, meeting the targeted levels. So with about the CHF 450 million exit run rate for Q4, I do expect that we are able to ramp further. We will definitely have the usual seasonal effects in Q1 around Chinese New Year. Overall, I would expect that the growth in factory output is continuing. However, most likely not at the 30% quarter-over-quarter, which we have now seen at the beginning of the ramp. With regards to your last question on WFE, our internal projections, as mentioned, are pointing at about $200 billion for next year, and then I would sit somewhere around $250 billion - $260 billion for 2028 at the moment, which is a volume assumption which we currently use in our plannings.
Thank you very much.
The next question comes from Oliver Wong from Bank of America. Please go ahead.
Hi. Thanks for taking my question. My first question is on pricing. I think you mentioned something about pricing increasing in your press release, but I assume that's related to your customers raising prices. I was just wondering, on your end, whether there are any pricing effects to be aware of. Thanks.
Look here, just to repeat what I have been telling also in recent investor meetings, our pricing is value-based, which means we do not automatically increase pricing because our customers do so. Our pricing reflects technological value we provide, particularly through technology advancement, new product introductions. At the same time, certain input cost inflation, such as transportation and raw materials, will be passed through. Here we have also seen this over the past couple of years, that we adjusted catalog prices into Q4 to be then effective as of January of the following year.
Thank you. My follow-up would be, whether you could share a bit more color on the composition of domestic China demand in your orders and revenues.
Yes, absolutely. China continues to develop in line with our expectations. We have seen orders just ticking a little bit above the roundabout 30% sales share of China. Overall, markets are developing very favorably, and our strategy remains to work closely with OEMs, co-develop technologies, and win the relevant specifications.
Thank you.
The next question comes from Timothy Lee from Barclays. Please go ahead.
Hi. Thanks for taking my question. My first question is about the customer behavior. I think you mentioned there's no double booking or inflated orders in your commentary. Do you see if your customers are placing orders based on their orders secured, or they're placing orders to us based on their expected coming orders from the chip makers?
Yeah, thanks for your question. I would assume that with this increased visibility overall, customers are also placing orders now as they see demand for their tools building. Another evidence for this would be that we're still receiving quite some reconfigurations, which would point at specific changes or let's say, reprioritization in their demand. Overall, I would agree to your observation.
This is very helpful. My next question is about the service business. I think we obviously see a very strong ramp-up in terms of ordering in the quarter. As you mentioned, it is probably due to the higher utilization of the customers. How should we think about the growth momentum from here, as long as the chip makers probably they can continue the run rate. On the other hand, we probably also have a much stronger increase in the install base next year. Is it fair to assume the service growth will continue to pick up further in 2027 onwards?
Yes, I can definitely confirm this assumption. Our service business will not only benefit from an ever-growing installed base, but also continuously strong demand for upgrade retrofits, plus obviously the consumables business, which serves the high utilization rates in the fabs. So here, nothing has changed. You saw that the orders increased by 52% sequentially, and I would see this pattern observed in Q3 really idiosyncratic and not as a concern over the midterm growth trajectory for our service business.
Got it. Wonderful. Thank you so much.
The next question comes from Martin Jungfleisch from BNP Paribas. Please go ahead.
Yeah. Sorry. Good morning. A quick follow-up on the order trends from an earlier question. You mentioned that you would expect the book-to-bill above one in the fourth quarter as well, right? In your comments, you mentioned drivers for the strong orders were the anticipated price hikes and also concerns about the availability. What factor would you say is the larger driver here? Would you say that these drivers will also be the main factor for the Q4 order intake? Were there any larger price increases announced for certain cost pass-throughs in the Q3 or maybe for Q4 that has driven customers to rush in orders early in the third quarter? Thank you.
It's using a little bit the crystal ball here, but what I can assure you is that historically, when we communicated the price increases, there was some uptick in order momentum, but certainly nothing that would now materially change the picture. The key growth driver remains the fundamental demand for our products. There might be some pricing-related orders, but I really wouldn't see that as a key factor here.
Okay, interesting. But the price increases that were announced and pushed through in Q3, or is this mainly a Q4 thing as usual?
No, again, we constantly adjust prices for our custom valves or whenever we introduce new products. On the other hand, you have some catalog parts, mostly in advanced industrials, but also some service products, where we do adjust pricing towards the year-end. This is a communication that is happening usually in autumn and then implemented by the beginning of the year.
Okay. No, that makes sense. Thanks. On the ramp, also a quick follow-up. You are guiding for CHF 435 million roughly midpoint for the fourth quarter, so 15% higher Q-on-Q. You mentioned the seasonal impact of Chinese New Year in the first quarter. Would you still see revenues up Q-on-Q in Q1, including this effect?
Yeah, absolutely. I would see revenues further growing into, not just into Q1, but obviously also then progressively throughout 2027. The key distinction here is between sales and factory output. We increased sales by around 30% in Q3, and now continue to ramp production towards this CHF 450 million output run rate. You need to consider for Q4 that sales are affected by fewer production and shipping days around the holidays, and also by some deliberate rebuilding of consignment inventory ahead of 2027. With that, I am also providing you now the confirmation that we expect a strong Q1 despite the events or seasonal events like the Chinese New Year. We are now really cranking up the system, replenishing these warehouses, increasing goods in transit that we can then also harness this through Q1 2027.
Okay, sounds good. Thank you very much.
Thank you.
The next question comes from Om Bakhda from Jefferies. Please go ahead.
Thanks for letting me on. I just had a question on your potential capacity increases you might need to do. If you were needing to increase capacity, how long would this take to ramp? If we were to assume that you might need this incremental capacity at some point in 2028, when is the latest you can make this decision on the additional capacity?
Yeah. As you are right, sir . The current discussion is not about the near-term capacity constraint, but about staying ahead of our customers' requirements. As such, we are currently assessing further capacity expansions. This is not within the existing footprint, so within the existing brick-and-mortar, where we have capacity of around CHF 2.4 billion-CHF 2.7 billion. But we are already thinking beyond that, which then would also include some additional buildings, et cetera. The lead time for such additions is when you do it outside of Switzerland, is somewhere around 12 months plus qualification. You end up somewhere up to 18 months, which suggests that these discussions are currently running within VAT. As mentioned, we will provide an update on this during the course of 2027.
Great. That is super helpful. Thank you.
The next question comes from Nabeel Aziz from Rothschild & Co. Redburn. Please go ahead.
Hey, guys. Thanks for taking the question. Just had a follow-up on pricing and margins. Would there be any meaningful impact to gross margins heading into 2027 and beyond? Could you talk about some of the puts and takes on gross margins heading through 2027 and any factors that might cause this to differ meaningfully from the current 64%-65% range? Thank you.
Yes. Well, thanks for the question. Look, when you reflect on the gross profit margin trajectory, you clearly see that we have been able to gradually increase this to now around 65%-66% levels amidst the series of negative effects that were burdening this development. We continue to drive our continuous improvement programs, operational excellence, relentlessly. At the same time, the further ramp of production outside of Switzerland will also bring some positive contribution to the margin. With the price increases, which we drive as usually to merely compensate negative effects, such as material, labor inflation, huge spikes in transportation costs, energy costs. I would assume that our gross profit margin will hover somewhere around 66% going forward.
Awesome. Just had a quick follow-up on FX. What is your assumption for FX in the quarter, and embedded in your guidance for revenues? What is your expectation through Q4? Thank you.
Yeah, the guidance is always based on the year-to-date average rates, which we use also for the revenue recognition, and that is currently $0.8 over CHF. This is what is embedded in the guidance. Going forward, yeah, tough one. I think we were equally surprised about the current strength of the US dollar versus the Swiss franc. I would, however, assume that the long-term trajectory of a strong Swiss franc remains very valid. So I would say it is a matter of time up until this surge will end, and the Swiss franc will again become a little bit stronger.
Great. Thank you.
The next question comes from Craig Abbott from Kepler Cheuvreux. Please go ahead.
Craig? Craig?
Mr. Abbott, your line is open.
Sorry, can you hear me now?
There you go.
Sorry about that. Yeah, apologies. Yeah, no, good morning. My questions were also going to be around the gross margin, and you just, a moment ago, talked us through very clearly how you see that progressing. So my question has been answered. Thank you.
Okay, thanks, Craig. Great, thank you. It seems we are coming to the last question already. Operator, I think the last question is from Rob, right?
Yes. The last question comes from Robert Sanders, Deutsche Bank. Please go ahead.
Yeah, hi. Thanks for squeezing me in. Could you just contrast your order strength between Chinese OEMs and non-Chinese OEMs? Could you also talk about the impact of IFRS 18 as you look to next year? What does that mean for your gross margin percentage? Obviously, today it doesn't include employee cost, depreciation, et cetera like that. Thank you.
Yeah, thanks for your question. I sort of hinted already at the Chinese order share, which was slightly above the 30% revenue share for Q3. Slightly above means low single-digit percentage. On IFRS 18, in your question, you're mixing two subjects. The first one is the, let's say, the presentation of the financial statements, and the other one is how we account for it. We are currently disclosing our financials using the so-called P&L by nature. For now, we would continue to do this also under IFRS 18. However, IFRS 18 provides a couple of new management performance measures. We, however, envisage to continue to provide you with the very well-introduced and understood metrics. However, this would ask for some further disclosures, which we will make, and as such, you should not expect any material changes of this accounting change.
No change to presentation of gross margin percentage. Okay. Thank you.
Yeah. Thank you.
We now have a question from Leah Süss from-
Okay
AWP Finanznachrichten. Just one second, please.
Okay. Thank you so much for taking my question. I know it's a bit late. Just given the current market reaction to all the chip stocks and so on, do you maybe have a comment on the market fear, given all the AI investments and so on?
Yeah, thanks for your question. We obviously monitor these developments closely, but our demand outlook is not based on individual AI projects or even external headlines as we see them surface from one day to another. What ultimately matters for us is what our semiconductor equipment customers are planning, and also our own planning for 2027 and 2028 is increasingly based on those direct customer conversations. These continue to indicate strong growth. Bottom line is, we see it through this noise. We have confirmation from customers, but also from end users that about 150 fabs are still going to be built. At the same time, I would expect that also further clarity surfaces on the business models themselves, on all these AI applications and models.
Okay. Thank you so much.
Thank you.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Fabian Chiozza for any closing remarks.
Yes. Thank you very much for your continued interest in VAT. As we have said earlier on, the ramp is here. I think we are in the middle of the storm here as we continue to ramp our capacities and serve the customers with these unprecedented demand. The next touchpoint we have with each other will be March 2, 2027 with the full-year results release. And then we are also attending some IR conferences still in Q4, early Q1, and I am looking forward to further engagements with all of you. And for now, I wish you a good day and speak to you soon. Thank you.
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