Ladies and gentlemen, welcome to the VAD Half Year Results 2021 Conference Call and Live Webcast. I am Alice, 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 and A session. The conference must now be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Mr. Mike Allison, CEO of Batigroup. Please go ahead, sir.
Thank you, and good morning, ladies and gentlemen. Thank you for joining the webcast Start on our Q2 half year twenty twenty one results. As you already know, VAT had pre released preliminary Figures including orders, sales, EBIT and EBITDA margin already on the 15th of 2021. And as you can see, the final numbers are well in line with what we announced back then. Due to the persisting COVID-nineteen situation, we can unfortunately still not meet you in person.
But we hope this situation is going to normalize Today, I'm delighted To be joined on this call with our CFO, Fabian Chiosa, who joined VAT on April 1st And also our Head of Communication and Investor Relations, Michelle Gerber. So on Slide 2 and looking at today's agenda, we'll Cover the following three parts before going into Q and A session. I'll start with the highlights of the Q2 and half year results, And then Fabian will go through the results and financials in more detail. I'll then conclude with a look ahead followed by the usual Q and A session. On Slide 3 of the presentation, you can see our results.
As we communicated back in April With our Q1 trading update, VAT started the year with a strong business and operational execution in that first quarter. This strong performance further accelerated in the Q2 of 2021. When VAT not only harnessed presented by the strong market trends in the semiconductor and service business, but also achieved a record quarter And the Advanced Industrial Business Unit. The group's order intake broke another record level, beating the previous record set in Q1, As all our businesses experienced growth momentum, strongest being in semiconductor, followed by Advanced Industrials, Global Services and our Display and Solar Business Unit. This strong order momentum together with an already impressive order backlog at the end of The Q1 allowed PAT to post another record quarter in sales, EBITDA, EBITDA margin and free cash
flow.
These records were achieved despite an FX headwind and material cost increases. At the same time, the COVID pandemic really had limited impact on our operations. And I'd like to thank our outstanding workforce who Continue dealing with the challenges that the pandemic brings in a really exemplary way and with incredible resilience. My thanks also goes out to our suppliers who reacted well, not only to the pandemic challenges, But who are working really day and night to address the supply chain bottlenecks during this unprecedented growth phase, Especially in the semiconductor markets. Operationally, we again delivered a very strong performance with the ramp of our factory in Malaysia, And they're fully on track to achieve close to CHF200 1,000,000 of output in 2021.
And at the same time, they're getting Ready for a further large increase in 2022. Our factory in HAG also reacted quickly To add additional capacity and is now producing at record levels. In the last few years, we have significantly restructured our supply chain team And their performance in the last quarter contributed highly to achieving these strong results. There's no question that the Supply chain will be our number one challenge in the second half. So I'm really happy to have this very competent team driving our critical issues.
Our market assumptions for the rest of 2021 remain very positive and we expect substantially higher 2021 results including sales, EBITDA, EBITDA margin and free cash flow and net income. Last but not least, and confirmation of VAT's outstanding market position We continue to increase our market share across all industries in the 1st 6 months of the year From 55% to 58%, really fantastic development, which I will comment on later. Moving to Slide 4, the chart gives you an overview of the half Your key figures and segment breakdown. Valves, our largest segment, accounted for about 81% of our sales, Up 29% year on year and based on the strength of the semiconductor equipment market. The 6 months EBITDA margin in valves increased by 2.4 percentage points to 33.4%.
Global service sales also achieved a record level in the first half of twenty twenty one. Overall, the segment grew 40% year on year, Driven by the upgrade business, which really gained momentum with 42% growth. The maintenance and repair business Also grew an impressive 50% and spare parts were just shy of 39% growth. The Service segment's half year EBITDA margin increased to 45% compared to 40% a year earlier, Benefiting from the recent introduction of new products and higher volumes. With this strong performance, our service business accounted For 19% of group sales, very close to the 20% we're aiming at.
This is even more impressive if one considers that the service business Typically shrinks as a percentage of overall sales in a semiconductor growth cycle. For the group, orders net sales, EBITDA and EBITDA margin and free cash flow were substantially up In the 1st 6 months of 2021 and Fabian will give you more details in a few minutes. We also Saw a satisfying increase in our spec wins, up 21% year on year. This is not only an indicator For future business success and market share gains, but even more proof that our close collaboration with our key customers Coupled with our world class innovation team, consistently delivers products and solutions that solves our biggest technology challenges. This is a win for VAT, but more importantly, a win for our customers.
Slide number 5, You'll see the split of our revenues into different market segments. We showed you this chart at our Capital Markets Day last year and you will notice That we have since included the industry segment into the valve segment, specifically into the advanced industrial segment. We are also now providing more detail across the individual business segments. In 2020, semiconductor accounted for roughly 70% of our business and this number has now increased to 75% by June 2021. Advanced Industrials now accounts for about 15% of our business, reflecting the strong performance in 2021 After the challenging business conditions experienced in 2020 at the height of the COVID pandemic.
Display and solar currently is our smallest segment with approximately 7% of group sales. From a geography point of view, More than half of our products and services end up in Asia, about a third in the U. S. And the rest in Europe, reflecting the global semiconductor footprint. Turning to Chart 6 and coming back to our market share gains in 2021.
As I mentioned earlier, we continue to grow market share across all industries by 3 percentage points from 55% to 58% And our market share in semiconductor now reached 74% after being 70% at the end of last year. There are four key reasons for the success in this area. First of all, we are the clear technology leader In an industry where rapid innovation is absolutely critical to success. 2nd, we continue to invest heavily This technology leadership and the 21% higher spec win number during the 1st 6 months of 2021 compared to last year We'll allow this market share trend to continue. 3rd, we have a long track record of working closely with our customers to develop the products they need And to deliver them when they need them.
We're a reliable partner in a capital intensive business where there's little room for error. Final point is our increasingly global footprint and value chain, which makes us faster, more flexible And a more reliable supplier. I believe our performance through the COVID-nineteen pandemic shows that we can continue to deliver Even in a difficult and unpredictable business environment. So Slide number 7, Before turning to the more detailed financial slides, let me quickly summarize the 6 months 2021 market development and putting our performance into Effective. In semiconductor, the growth in wafer fab equipment spend accelerated at an unprecedented pace And is now expected to be around $85,000,000,000 for the full year 2021, well over 30% higher than in 2020.
This growth is occurring across all market segments, foundry, logic, NAND, DRAM and others, Which highlights the strong impact of digitalization across all sectors and products. Technology intensity is also driving a Higher spend per wafer, which in turn is driving higher investment level in the below 7 nanometer nodes, which you can see later in the presentation. In fact, the 7 nanometer and below segment will really accelerate wafer fab equipment spending in 2021, Driven a lot also by EUV. It's important to understand the uptake of EUV into DRAM and this increasing device and process Complexity will also increase the capital intensity of this device segment. I believe this will help with the sustainability of Waver Fab Equipment Spending, just as we saw in Advanced Logic and Foundry in recent years.
In display, fading LCD CapEx could not be offset by somewhat higher investments And OLED for flexible screens and handhelds as large format OLED becomes or remains a challenge. Solar continues to grow and should continue this path into 2022. The solar powered technology remains The major investment area, however, Hetero Junction continues to make advances. For the advanced industrial markets, Growth prospects improved across a variety of applications such as advanced coatings, scientific instruments and automotive. In addition, research spending by governments continued, especially in the U.
S, Japan and Korea. So this concludes my initial remarks, and I'd now like to hand over to Fabian for a more detailed look at the financials.
Thanks, Mike, and a warm welcome to all of you who are joining us on the webcast today. Let's start on Slide 9 with a very quick recap of our key figures. Mike has already touched on the good top line and EBITDA development And I'll show you a bit more detail on that in a moment. A highlight in the 1st semester of 2021, Clearly, the free cash flow generation reaching a new 6 months record level of CHF61 1,000,000 Despite growth related investments in working capital and the slightly higher CapEx level compared to the same period a year ago. This allowed VAT to reduce its leverage, which at midyear stood at 0.8 times Compared to 1.3 times at the end of June 2020.
Part 10 shows the development of orders in the second quarter and half year, respecting VAT's strong business execution, Coupled with the buoyant market conditions in the semiconductor business and the economic recovery in the advanced industrials business That Mike described earlier on. Q2 orders are up 5% sequentially versus Q1 2021 and the 43% higher than in the Q2 in 2020. For the 1st 6 months of the year, orders are up 38% year on year, reaching CHF 4.94 CHF 1,000,000. With the 2nd quarter book to bill ratio of 1.13, our order backlog also increased Compared to the end of the Q1 and stands now at CHF 218,000,000 up 13% quarter on quarter and up 42% year on year. This backlog strongly supports our positive expectations For the second half of twenty twenty one.
Turning to chart 11. Here we see the development of orders and sales Since the Q1 of 2018, we reached the bottom of the cycle in the first half of twenty nineteen. And since then, we've seen a steady and accelerating growth trend. As you can see, the book To bill ratio has been at or above one time since Q1 2019 with the exception of Q3 2020 Where we had a knock on effect from certain pre orders in the first half of twenty twenty coupled with substantial sales growth in the quarter. In the Q1 of 2021, the book to bill ratio peaked at 1.25 And remained at a very healthy 1.13 times in the second quarter.
The decline in the book to bill is not the result of Slowing order momentum, but rather of the accelerated capacity ramp at VAT in response to technology advances Investments in additional chip manufacturing capacity demanding higher factory output and thus enabling increased sales numbers. Chart 12 shows the development of net sales and EBITDA. Half year sales are up 31%. Adverse year on year FX movements, especially in U. S.
Dollar versus Swiss francs had a negative impact of about 5 percentage points in the first Semester 2021. The higher sales were a major driver of an EBITDA margin expansion of 4.2 percentage Together with the improved operational performance, resulting from better fixed cost absorption and the efficiency And cost reduction programs we continue to execute across the whole organization. These programs are aimed That making all our internal processes faster, more efficient and scalable to allow VAT to quickly adapt to changing market conditions And thus avoiding the higher costs traditionally associated with sudden adjustments of production volumes. This agility allows us to continue investing in our future success. For example, The implementation of a new global ERP system increases speed R and D spending and to make the people investment in Malaysia Without negatively impacting our EBITDA.
For VAT, flawless execution of the Malaysia ramp With high quality and high predictability is essential for meeting demand today and in the future. On chart number 13, you see the sequential EBITDA margin development since First half year twenty eighteen. As you can see, we have constantly improved our EBITDA margin Since its cyclical trough in the first half twenty nineteen and are moving towards the upper end of our target band. During the first half of twenty twenty one, VAT recorded a record EBITDA margin of 33.9% Or 4.2 percentage points above the previous year level and 1.1 percentage point above the margin we achieved During the second half of twenty twenty. With this development, we are very confident about our 30% to 35% target And between 2020 2025 that we communicated to you at our Capital Markets Day back in December.
When talking about value creation on the next slide, we closely look at the return on invested capital The cash return on invested capital. With our prudent approach to CapEx and our CapEx light Business model, we balance the invested capital with current and expected future earnings. With 70% of our materials being Externally, we are able to maintain the invested capital at low levels. This allows us to achieve returns on invested Capital and cash flow returns on invested capital that are substantially above our weighted average cost of capital, Which we placed at 10.9%, the same level that the external auditors used during their 2020 impairment Let's now turn to some other financials on Chart 15. Depreciation and amortization are about the same level as during the 1st 6 months of last year, yielding in an EBIT CHF 121,000,000 and the corresponding EBIT margin of 29%.
Net finance costs were of CHF 2,500,000 for the 1st 6 months, a substantial reduction versus The $10,000,000 recorded in the 1st 6 months of 2020. This reflects the absence of foreign exchange losses recorded on loans and bank balances In 2020, the effective tax rate for the 1st 6 months of 2021 was at 16 percent compared with 14% a year earlier. The change in effective tax rate was mainly caused by higher volumes from foreign production sites So taking that all together, net income increased by 78% to CHF 99,000,000 and then earnings per share of CHF 3.31. Our free cash flow generation is shown on chart 16. As I said at the beginning of my remarks, free cash flow reached another record level in the 1st 6 months of 2021 despite slightly higher CapEx and additional investments in trade working capital to support our growth.
The trade working capital at the end of June 2021 also represented about 28% of net sales And above our midterm target level of 20% of sales. At 43%, the cash conversion rate measured Free cash flow as a percentage of EBITDA showed a seasonal lower level and we expect it to be firmly within the target band of between 60% to 65% of EBITDA as communicated at our Capital Markets Day for the period between 2020 to 2025 for the full year of 2021. When it comes to leverage on Chart 17 is further improvement in net debt compared with 2020. Gross debt declined as we were able to reduce The drawings from our credit facility despite the payment of the dividend in May and some investments in trade working capital. At CHF208 million, net debt was about 10% lower than a year ago.
Our leverage of 0.8 times net debt to EBITDA was at the lowest half year level since the IPO back in 2016 And below the target level of 1 times average over the year. With this, we have a very sound balance sheet and liquidity Position available, which gives us additional financial flexibility during this growth period. When summarizing the half year twenty twenty one financial performance, we can state that VAT continued to fully capture the strong market conditions both in semiconductor, which includes our valves And Service Business and Advanced Industrial Activities based on innovation, market leadership and Fusion Skills. Record levels were achieved in orders, sales, EBITDA, EBITDA margin and free cash flow in the 1st semester of this year. Order backlog and ongoing market demand during July bode well for record full year results.
For the rest of 2021 into 2022, the following financial priorities apply. Our ERP introduction is on track. However, certain COVID-nineteen related delays have to be recovered And our focus is on the prevention of any production output interruptions during launch at major production sites in Malaysia and later on in Switzerland. Continued focus on cost and productivity improvements and trade working capital optimization despite ongoing Growth. However, we are conscious that supply chain challenges may require slightly higher Working capital levels to guarantee business continuing.
Our midterm target of 20% of net sales remains in place. Last but not least, our disciplined approach to CapEx expected around €40,000,000 to enable the Productivity improvement, whereas we are conducting a comprehensive capacity review during our strategy process now in the 2nd semester This concludes my financial remarks, and I'd like to hand back to Mike.
Okay. Thank you, Fabienne. So let's move on to Slide 20 and look at the market expectations for Riverfab Equipment Spend in 2021. You may remember that back in November 2020 at the Capital Markets Day, at that point, we were forecasting Around $58,000,000,000 in WFE for 2020. And in fact, the final number for that year turned out to be $65,000,000,000 It just shows how fast spending can change in semiconductor and how agile our business models need to be.
Also at that time, we were forecasting $64,000,000,000 for 2021, and now that has increased To $85,000,000,000 representing more than 30% year on year growth. Within that $85,000,000,000 all node sizes are expected to grow substantially in 2021, with the leading edge nodes posting the strongest growth at around 60% year on year. You can also see in the chart that spending gone into the legacy nodes To address many of the current chip shortages, which are driven by very fast industrial recovery, Those legacy nodes also include NAND spending. This growth pattern plays into VAT's technology and market leadership And we'll allow our semi and service businesses to outgrow overall WFE spend in 2021. Across the different chip types, there's quite even split of growth rate between 27% in foundry, 40% in logic and both memory types in the mid-30s.
On Slide 21, For VAT, one key success factor remains our strong innovation capability, allowing us to constantly set the bar higher And to define new industry standards when it comes to valve technologies. Our 6 month spec win number is up Roughly 21% over 2020. We have further strengthened our R and D organization to increase the focus on our strategic initiatives And to develop our adjacencies such as modules, motion components and smart components. This focus on adjacencies is developing According to our expectation, year on year our adjacencies have grown by about 65% and today Already represent about CHF 20,000,000 of sales. The very strong market development in semiconductor investments is expected to generate Additional potential above the previously communicated levels.
Slide 22, As we look into the rest of 2021, what type of market outlook should you expect? In semiconductor, we now expect to see more than 30% market growth driven by higher investments in all IC types. Investments into leading edge technologies will be the main driver, more than doubling the volume compared to 2020. We expect to grow our service business well above this 30% level, as our share gains are expected to continue and adjacencies take hold. In the first half, you can also see that semi grew 40% versus last year.
Service market is expected to grow in excess of 15% in 2021, which is significantly up on the 4% to 6% Expectations we had earlier in the year. The growth will come from all of our sub segments. As a result of our fast growing installed base, we now expect to grow again much faster than market. And you can also see In the first half, services grew 40% year on year. In Advanced Industrials, we will see a market recovery across all sectors in combination Global market rebound and accelerating growth in China.
While the overall market is expected to grow by low double digits, Our share gains and movement into new sectors will add a few additional points of growth above market. You can also see we grew 37% in 1st half versus last year. Display will have a challenging year as we come off the LCD peak and we expect Only the mobile OLED sector driving investments together with mini LED and micro LED starting to become more visible in the premium TV and IT segments. Overall, the market is expected to be down more than 20%. In the first half, you can see we were down 26%, but we Expect to get closer to the market level in the second half of the year.
In solar, we expect approximately 10% market growth with equipment Spending at around 15%. Overall, we are very optimistic about the rest of 2021 and as the industry continues to be supply limited, We believe this strength will continue through 2022. Slide 23. So what does this mean for VAT? Overall, we look forward to positive business development in the second half of twenty twenty one.
Global Semiconductor CapEx outlook remains positive and industrial recovery is expected to continue. Supply chain challenges remain a factor of uncertainty over the coming months and we've factored this into our Q3 guidance. Not only do we have the risk in our own supply chain, but we also see the potential of disruptions across the wider industry. Despite these challenges, VAT expects HF2 results to be higher than the 1st 6 months of the year. For the fiscal 2021 net sales, EBITDA, EBITDA margin, net income and free cash flow to be substantially above 2020.
2021 capital expenditure should be approximately 40,000,000 For the Q3, we expect sales of between $220,000,000 $230,000,000 I would point out unfortunately there was a Typo in the presentation we sent out this morning, but the guidance was at $220,000,000 to $240,000,000 Instead of 2:30. I apologize for that. So what can I tell you about the start of 2021? So far, the Q3 has continued at the record pace we saw in the Q2, especially in the continuation of very strong order intake, Not only on a year on year basis, but also compared to the Q2 of 2021. So this already bodes well for the Q3 and the second Half of twenty twenty one.
So with this, I conclude the formal part of the presentation, and we'll turn over to the Q and A session.
Thank you, Mike. We'll now start the Q and A session and you have the possibility to either ask your questions via the operator over the phone As a reminder, please limit your initial question to 2. Follow-up questions may be possible later in the Q and A. With that, I would like to ask the operator for the first question from the
We will now begin the question and answer session. Participants are requested to use only handsets while asking a question. Webcast viewers may submit the questions or comments in writing by the relative field. The first question comes from the line of Sandeep Deshpande with JPMorgan. Please go ahead.
Yes. Hi. Thanks for letting me on. I'm trying to understand, I mean, what is The extent of the supply shortages you face, what are the problems you're facing at this point into the Q3? And what will Change into the Q4 to relieve those supply constraints that you have and how you are seeing I mean, clearly, the order environment is incredibly strong at this point and how you are seeing this order environment potentially develop Through the second half or you don't have visibility at the end of how that order environment built through the second half?
And I have a second question on your display business.
Okay. First of all, on output, First of all, I would say that from a people standpoint, we're in good shape. We've ramped up considerably our headcount Both our locations, 78 people increase in Switzerland and close to 90 in Malaysia. So we put the people in place in our manufacturing operations to drive the type of growth we need for the order intake you're Seeing. The challenges in the supply chain are really broad based.
You've heard a lot about the chip shortages. We see the same thing and it's not in any particular category. And I would say The issues we're having are sporadic. It's things like suppliers not meeting the committed Deliveries, it's changes in lead times, it's a whole bunch of generic issues that are more Troupt of than really causing total shortages. We have a very high mix of products And that causes a lot of inefficiencies in our manufacturing operations.
I would say that It's getting slightly better. We're working those. We've got a lot of second sources now in place For components where we saw bottlenecks and we expect the electronics supply chain at least On our current view, to improve into the late Q3 and into the Q4, Also in the supply chain, raw materials is a challenge. Our use of aluminum has dramatically increased as you can imagine with the change in We're pretty well covered to the end of the year, but we've seen, for example, a few delays in supply. Even although we're confident we'll get the total amount we need for the year.
So I'd say it's more of the unpredictability of Supply that's causing an issue and supply across all the commodities, we've seen gaps In resin supply that we need for our sealing, our valve seal technology, We've seen issues on plastics. We've even seen problems in packaging. So it's creating a lot of inefficiencies across the supply chain. And that's why we've given ourselves a bit of room for the Q3. But we're pretty confident as we grow and as our Suppliers react to the shortages that we will continue to see a higher output as we go through the year.
In terms of order intake, as well Fabienne and I mentioned, we're continuing to see strong Order intake in July. At this point, because of The growth we've seen in the Q2 and start of the Q3, it's quite hard to predict what that's going to look like in order intake For the rest of the year, the only thing I can say is that the outlook from the OEM community And the end users looks extremely positive. So we believe the chance of increasing Order intake is pretty high for the second half of the year.
Understood. The second point is on the Display market, I mean, can you comment on display market versus how the order intake and the environment is in the semiconductor market?
Yes. I mean the order intake in display is really at the trough. We're starting to hear that there may be more momentum into 2022, Driven really by some of the shortages, even in large panels, so we may see some additional investments It's an LCD at the beginning first half of twenty twenty two, but there still isn't clear direction on large Screen all adds and what that's going to mean for CapEx spending in 2022 and 2023. The best estimates I have right now From some of the OEMs is that we would expect to see a return to higher spending in 2023. So I'd say continuing troubles in that industry and really I think some technology challenges as well.
Thanks, Link.
The next question comes from the line of Robert Sanders with Deutsche Bank. Please go ahead.
Yes, good morning. Hi, thanks My first one was just if you could talk about you talked about spec wins, I think, up 21% year on year. If you could just talk about the value per spec win, how that's increasing given the increased added value, but also Given the unit cost inflation that's clearly driving up your cost structure. And then I have a follow-up. Thanks.
Okay. Yes, as you can see, our spec wins are up 21%. I don't think it's changed dramatically from a value perspective. A difference we're seeing right now in Spec wins, they're on a broader base. They also include many more of our motion components, which are certainly A lower dollar value per unit than say our major control valves and so on.
So there's a much bigger mix of SpecWins. These are critical, however, for us to build adjacencies and you can also hear the comments I made about the adjacency growth Is substantially up on, I think, it was 65% year on year basis. We committed last year to deliver in the period of our strategic plan More than $150,000,000 in adjacencies, and I think we're more than on track to overachieve that. The unit cost inflation, we manage pricing pretty tightly as you can imagine, given the Consistency of our gross profit margins. We work very closely with our partners To ensure we're giving them the maximum value, and we try to optimize our margins in doing so.
So we take the cost into consideration. We take material costs, we take FX. We look at All of this, we look at the competitive situation and we come out with the right value proposition for VAT and our customers. So I think that's all positive. It's going in the right direction.
And it gives me good confidence that we'll continue Achieve our EBITDA margin goals.
Just relating to the OEMs, Some of them are clearly now offering more generous payment terms in order to suppliers, in order to derisk The expansion, which is obviously in some cases very significant. So are you seeing any change in There's terms of trade with you guys or perhaps building more inventory for a longer period than they have historically. Have you seen any change there? Thanks a lot.
Yes, I don't think we're seeing much from an overstocking standpoint. I think we In the Q1 of the year, there was definitely a higher level of stocking happening. I think we've kind of reached equilibrium there now and we're really at a true demand level in Q2 and into Q3. We have our own contingency plans in terms of how we manage the supply chain. So we're already making our own investments into Our most important components like electronics components, I mean, one of our learnings from this last pandemic and the material shortage Where you have a single point of failure, for example, a microprocessor that is not substitutable in the short term That we need to keep longer inventory periods for these critical components.
So we're already addressing that. We're also discussing with our OEM partners our next capacity expansion. I think we've been pretty transparent Our current footprint gets us to about $1,100,000,000 And with the rate of growth we're seeing, obviously, We need to make provisions probably faster than we had originally expected. So we're discussing that with OEMs. I would say the level of flexibility Between the OEM community and the component makers like ourselves is really high.
They're reacting very quickly to requests for changes, which historically have taken 3 to 6 months to get a change through a component change qualified, but They're reacting much faster and more favorably to that. And that's allowing us together to meet the supply chain challenges. So I think the level of cooperation, extremely high level, but we haven't seen any specific Need to ask for extended payment terms and so on.
Great. Thanks,
Al. The next question comes from the line of Michael Firth with Sunpro. Please go ahead.
Yes, thank you. Good morning, gentlemen. Two questions, two financial questions actually. You mentioned the 5% headwind on from on revenues. I was wondering if you could give us an indication what the FX impact on your EBITDA margin was And whether there is any chance that you see the 35% upper limit of your target range Moving higher on the back of the strong developments.
And the second question is regarding your free cash flow generation in the second half. You mentioned net working capital developments. Can you be a bit more specific what you expect in the second half? Will the net working Capital intensity go further up? Or will we see an acceleration in free cash flow in the second half of the year?
Thank you.
Good. Thank you very much for your question. On the FX effect, as we said, we had roughly 5% on net sales. However, on the EBITDA Margin, it was flat. So there we didn't have any adverse effect.
On the target spend for the EBITDA, the 30% to 35%. I think we are now certainly hitting the ceiling of that band. However, I think we need to point out Even if we see slight improvements in the second half of this year, we will continue to invest in Capacity technology, but also in people, which would certainly Allow us then to facilitate further growth. Also, I would like to add what Mike has already alluded to That obviously the whole industry is facing material price increases. However, we at VAT, we are quite successfully managing these increases with our Cost reduction and continuous improvement programs that we put in place back in 2019, 2020.
And therefore, I expect that we should contain Most of the adverse effect. Regarding your second question on the working capital, I do see some potential for reduction For the second half year as we continue to build Our capacity, however, as I said in my earlier remarks, I would expect a certain increase Over the 20% midterm target spend given the unpredictability That we currently see in our supply chain.
So free cash flow should accelerate in the second half?
Yes. As you know, at VAT, our second half year free cash flow generation is typically Substantially higher than in the first half. And therefore, I also assume that we will have Quite a substantial increase, which will then lead to record free cash flow for the year 2021.
Very clear. Thank you. Thank you very much.
Thank you.
The next question comes from the line of Sebastian Kjellnes with RBC. Please go ahead.
Yes. Hi, gentlemen. I have a couple of questions. 1st on the spec wins, up 21%. I think I recall that for control valves, you already totally dominate the market with over 90 Send market share and then for transfer valves, it's probably also above 60%.
So I wonder where any further Market share gains would be possible? That's my first question. Secondly, you mentioned extremely high chance of higher orders in The second half, does this refer to the first half of the year? Because consensus, I think, expects 9% drop in 2nd half orders versus the first half. Then maybe a third question and then maybe you can answer first.
On the order backlog, it has been risen, so you seem to have some delays of deliveries of certain components. And Do you expect further backlog increases in the year, which basically means that market demand is very strong, but you may not be able to Catch up as quickly for the year. That will be my third question. Thank you.
Okay. First of all, on spec wins, yes, you're correct. We do have very high market share in our control valves. Well, as new platforms come on to the market, we still have to win the control valve position. So they still would be Included within our spec wins.
And we continue that very high share in our control Valve market. Our transfer valves probably where the majority of the major spec wins are happening right now, And we're definitely gaining a lot of momentum there in our market share. We're also seeing Increases in our adjacencies, the motion components especially are gaining a lot of momentum. And that's where if you look in the first half of twenty twenty one, we had a high percentage of motion On an advanced module spec wins. So there's even although we've got a high market share, there's still plenty of runway for growth.
Even in semi, we're only at a combined 74%. So we still see tremendous opportunity there. And we see opportunity across the adjacencies. Both the adjacencies that we have today, But also the adjacencies we're developing for the future and as we go through the year, we'll continue to update you On where we see some new adjacencies for VAT. It's very clear to me that I have to drive those adjacencies To ensure we continue this very strong growth performance we've had.
Looking at your second question on orders, consensus may be down, but we're certainly not seeing that at this point. And the forecast we're seeing from our customers is definitely not pointing to a negative order Performance second half versus first half. So at this point, I would say it continues to look very, very positive. But we'll see how that continues and we have the next update in early October on how the Q3 Numbers, Luke. But so far in July, it's very encouraging.
Order backlog, I think When you look at output, I think it's a factor of 2 constraints. 1 is Our own supply chain, but also if our customers are seeing supply chain issues in other parts of the business Our supply chain, they will reduce the intake of our components. So that's what makes it so difficult to Forecast at this point, are they going to see larger supply chain issues elsewhere? So we've Taking a balanced view of that and we think our current guidance is a good reflection of where we think we'll end up for the Q3. We do expect our order backlog to increase a little bit into, I'd say the mid part of the 3rd quarter and then I think we'll start working that down into the 4th quarter.
So I'd say at the moment, our overall lead times haven't increased too much. We're certainly nowhere near the Challenges we had back in 2017 2018, the customer noise or our customer noise in terms of Escalations, etcetera, are a very, very minimum level right now. And I'm very much aware that we have to ensure we have the supply, which we're working hard To put in place, but so far so good. I don't see too much of an issue within our markets.
I have two follow-up questions. On services, I saw a very strong jump in basically the service per installed Well, so usually, well, my business is about CHF 35 per quarter per valve and then now I jump to CHF 40 Also really big jump per valve. Is that because of the intensity with which the valves are running? Is it a level that you can For the numbers going forward or will this normalize? And then my last question, the low financing cost, is this a Sustainable levels, so €2,000,000 to €3,000,000 per half year, is that also something you see for the second half and going forward?
I'll answer the service one and I'll have Fabienne answer the second part. You have to be careful on the Service per installed valve because one of the big drivers of our service business is the upgrade business, Where we're physically removing the old valve and putting in a new VAT valve, and that's a real key driver for us. Our repair business, however, is growing as the installed base grows, but I think The upgrade business skews that value per valve at the moment. What I would say on upgrades though, If you look back to 2018, we had about 3 upgrades available For the market, today we have close to, I think, 25 upgrades available. That means on any given customer platform, we can support upgrades on 25 major legacy platforms Industry.
And we're continuing our engineering efforts to provide more and more upgrades across an even wider Install base. So I think the upgrade business still has a lot of legs. I think we're in the early stages of getting that to market, and it should give us strong gains across the next 5 years. So I'm pretty confident that we'll continue the positive trend in service. I was delighted that we managed to achieve 19% In the middle of a semi upswing, because I had thought about 20% Maybe on the lower part of the cycle, but if we can achieve 19% in the upper part of the cycle, I think it shows How well we're driving that service business.
The second part of the question, Fabienne?
Yes. On the financing cost, The substantial reduction, which we have observed compared to last year, is definitely sustainable. And I do expect full year finance cost To remain below €5,000,000
Thank you very much. Very helpful.
The last question from the phone comes from the line of Marta Brusca with Berenberg. Please go ahead.
Hello. Good morning. So I would like to ask about the adjustment fees. You mentioned €20,000,000 in sales already. Was that for the half a year or for 1 year?
Just to clarify. And also regarding your comments further to the adjacencies, you mentioned lower value per unit. I wanted to ask Whether this also implies a lower margin per unit versus your valve business or how do you see And then I have a follow-up question, please.
Yes. Okay. First of all, the $20,000,000 in sales In the first half of the year and that was versus the same period last year. The 2nd, about the unit value, I was referring them mostly to our motion components. They typically have a low unit value, but I would say the margin profile on those Pretty similar to the average valve margin.
So no dilution happening there. I would also point out that when it comes to things like advanced modules, the advanced modules are Probably above the unit price of our valves, they tend to be larger pieces of a larger component. And again, the typical margin level is consistent with our valves. So I think we choose our adjacencies very careful. We choose Areas where we see an ability for VAT to excel, where there isn't a red ocean full of Competent competitors and for example, Motion Components, there isn't a global competitor In that particular space.
So we look at them really, really carefully. Okay.
Yes. Thank you. That was helpful. Yes, we know that you definitely did your homework, but it's also one thing to expect something. And the second thing is What's coming through the numbers actually?
So thank you. That was very helpful. And then with regards to Advanced Inductures, I was a little bit surprised that the order intake was down quarter on quarter, given we have very strong PMIs data coming And what has driven this slight decline? And then I have a third question, please.
Yes. Advanced Industrial covers a lot of segments and one of the big segments is R and D. So It's quite a lumpy business where we get large orders, sometimes $3,000,000 to $5,000,000 for one specific order. So that can impact the quarter to quarter order intake. But I would really focus on the Annual growth levels where you can see the aggregate of all sectors and how we're really driving that business.
One of the things we're doing is we're really taking our semiconductor OEM model and we're trying to go after more of the advanced Industrial OEMs to try and make that a more sustainable, more consistent business and leverage all the technology and Design competencies that we've developed within our semi business.
Okay, brilliant. And then with regard to the new memory type, So we have a lot recently going on in the memory as well with Phase 3 memory and 3 gs DRAM. How do you see your the valve content developing in this new memory types? And I know they are still small, but Just to have an idea, please.
Yes. The actual equipment going into advanced memory is quite similar to type of equipment you get in advanced logic, you still have deposition etch and so on. In the past, it's been less critical. So there have been simpler processes and applications there. The good news is, as we're seeing and with the announcement, for example, Micron investing in EUV tools, The advanced DRAM nodes are now coming into that area of much more complex transistors and smaller geometries.
So that's really driving, I think, the more advanced tools from the OEMs, which is good for us because If you compare that to the NAND market, the NAND market is still in the 20 nanometers. They're using legacy platforms From 10, 15 years ago and quite often our market share is not as high on those legacy platforms. So the more they progress into the smaller design rules in newer platforms, the better it should be for VAT's growth. But I think memory is a really interesting area. You could talk all day on that topic.
There's just so much new technology coming into DRAM, which I hope will make it not just a capacity driven investment market, but also A much higher technology, therefore CapEx per wafer increased in the next 5 years. So I think it's quite an exciting development there.
Yes. So, I agree to you. Do you plan like making up like a technology day to discuss that a little bit more in more detail?
I think that's quite challenging for VAT. I'm going to leave that job To the OEMs, I think they do a better job at relating the specific technology requirements, the process requirements Of the memory customers, I don't think you can learn any more from us on that topic. We will continue doing our Capital Markets Day focus around what BAT can do around the chamber and how we can, Over the next 5 years, continue to adapt our products to drive adjacencies and to drive higher content and higher differentiation And our valves. But I think there's much more competent players to talk about process technology.
Okay, clear. And just really lastly, with regard to the supply chain issues, as I understood, It's globally. It's nothing specific to Malaysia because we heard so much about Southeast Asia being like particularly challenged. And for you, it's not
No. Malaysia has done a great job through this even with the recent COVID situation. I mean Their output is by the end of the year, they'll be up at $20,000,000 a month and heading towards the mid-250s in output. So these guys are doing a great job. And in fact, the fact that we've now got a supply chain team in Malaysia is giving us access to A wider global supply chain and operational footprint.
So they've been really instrumental in helping us fix Some of the shortages that we've had. So it's really day night advantage compared to where we had back in 2017 2018.
Thank you very much. It's very, very helpful. Thank you.
Okay. I think at this point, we have to close. We're pretty much over Time. So just a few concluding remarks. I hope you've seen today a very strong performance in the first half, Not just in our financials, but also the continuation of our innovation strategy and how we plan to drive the company forward.
The outlook is very promising. We're working very hard to ensure that we meet the challenges of the market and the higher output, And I'm pretty confident that we'll manage that in the second half of the year and continue to drive record results. So, thank you for joining today, and I hope to see some of you at conferences later in the year. Thank you very much.
Ladies and gentlemen, the conference is now over.