Ladies and gentlemen, welcome to the VAT Half Year Results 2019 Conference Call and Live Webcast. I'm Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Mike Ellison, CEO of WACC Group. Will now be joined to the conference room.
Okay. Good morning, everybody, here in the room, and also welcome those joining us today on the conference call or the webcast. Welcome to the half year results presentation of VAT. We issued our media release this morning at 7 I'm sure you have seen that. Otherwise, you can download all the presentation materials from our website to be well aware.
Today, we have with us Mike Allison, CEO and Stefan Bergamyn, CFO. We will go, as usual, through a shorter presentation of the results followed by Q and A. And as usual for the Q and A, we will switch between questions here from the room and from the conference line. So with that, I would like to hand over to Mike.
Thank you, Michel. Good morning, everybody here in the room and on the phone. The agenda this morning is I'll start with some of the highlights from the first half. I'll then pass on to Stefan to cover the Q2 and financial results in detail. And then I'll finish off with some of the outlook and priorities for the second half of the year.
So it's always a challenge at the middle of a downturn to talk about highlights of the business. But I think what you'll see this morning, it's a pretty solid set of results. And you'll also see a company extremely focused on technology and innovation and driving high value solutions for our customers. What you'll also see is a company who's very focused on improving their operating model, and I think we're demonstrating the flexible and resilient operating model through this downturn. I think also more importantly, we're going to be in a great position as we come out of this low market situation, and we'll attempt to show you that this morning.
Looking at some of the key points. Our sales were up about 6%, so we were towards the top end of our guidance. We were up in our valve segment as expected, but also in our service segment. I'll talk a little bit more about that. The industry segment was down, but we're kind of planning that because we had some low profitability business, legacy business in there that we're trying to reduce over time to give us more capacity in our facility in Romania.
During this downturn, we focused on the things we can control, so a lot of focus on cost, and you'll see that from our margins and EBITDA margin. You'll also see a huge focus on technology and innovation. One of our values of VAT is reliability and trust. And when you're a technology leader in a segment like semiconductor, getting that customer trust is really important to continue to build market share. And the executive team and I, we spent a lot of time building that and I will show you later our market share results, which really verify that level of technology focus and trust our key customers are placing VAT.
One of our focuses in the last 12 months has been growing our service business, and I'm happy to show that that's growing about 11% year on year. That's down to having a great leadership team. It's down to having a great service strategy, and the team have worked very hard in expanding the product portfolio and also having simpler options and more options for our customers and you see that's growing 11%. We've been doing all that, investing in the service infrastructure, investing in innovation and R and D, yet still delivering an EBITDA margin of 25%, which I think is quite remarkable and way above the levels we've seen in previous downturns. I think what we've also delivered during this period is a brand new facility in Malaysia that's fully up to speed, qualified in close to 30 products and really ready to ramp when we come out of this semicon downturn that we're experiencing at the moment.
So I think that puts VAT in a great position. The markets remain pretty mixed. I'll talk more about that as we look at future visibility. Visibility is very low at the moment, and we expect it to stay that way for the next couple of quarters, and you'll see that also within our guidance. Turning to the results for the first half, you'll see our valves make up about 75% of the business with a reasonable EBITDA margin.
Service is up at 22%, which I'd love to keep it that way. That's kind of the long term targets we're setting ourselves in the 20%, but obviously, that's higher because of the lower valve sales. But still, good performance and good EBITDA margin. And industry lower as expected, and you can see from the EBITDA margin the reasons why I'm trying to restructure that area and get out of some of the unprofitable businesses. Again, that is mostly third party components and some of our valves business.
Looking at the market trends, I'd say I think it's well publicized that the memory market is still struggling. We are, however, seeing some signs of stability there, especially in the NAND market. And when it comes to things like hyperscale servers, we're seeing in July some positive signs there and been positive comments from some of the big memory companies. Advanced logic is going well as is microprocessors. So we're seeing pretty strong activity in the semi sector there.
I think overall, there's a lot at this part of the cycle, there's probably a bias of spending in CapEx towards litho and metrology as customers focus on improving yield. And as capacity comes back, you'll see more spending in the vacuum based applications. Within display, down as expected again year on year. Current investments are mostly in the Jan 10.5 area of display for large scale TVs. But we are seeing some OLED projects around mobile in China, and that's driving a fairly strong business in the second half of the year for us in the OLED sector.
Again, TV size is still dominated by Gen 10.5. Solar was a reasonably strong area in 2018 and that's continuing into 2019, mostly this time around the PERC technology, but we'd probably see the thin film stuff improving in the latter part of 2019 as well. And again, most of the demand here is in China. Industry and research is going along reasonably well, a fair amount of spending in large government projects, CERN, ETAHR, etcetera. And we're also penetrating with new products into areas like scientific instruments and so on.
Talking about our growth dimensions, and we've talked a lot about this in the past. The first dimension is the end market growth, and I think the digitalization of the planet continues. I think you read about that every day. 5 gs starting to make a bit of an impact as I expected, and I expected 2020, we'll see improvement in smartphone growth. I think the important thing for 5 gs is the applications that will enable longer term on machine to machine communication.
So I think as we get into 2022, 2023, things like autonomous vehicles and smart factories will pick up the pace there. So that's certainly a positive trend. 2nd dimension is equipment growth. At the moment, that's muted obviously because of the capacity adjustments. We'll see that improve in 2020.
It's still a bit early yet to say how 2020 is going to play out. The market commentators are talking about 10% to 15% growth in CapEx, but we'll see how that develops as we get towards the end of this year. A lot of technology advances in logic and foundry. 5 nanometer in foundry is accelerating, and we're seeing some activity in the second half of the year around there. And as I mentioned S.
And China, but also recently with Bank of America. Not just with U. S. And China, but also recently with Japan Korea. And that certainly isn't happening the business confidence around making major CapEx investments.
So hopefully, we'll see that resolve itself also through 2019. The 3rd dimension is a vacuum valve growth. I think in this part, the bottom of the cycle is hard to see, but as you look at 5 nanometers and beyond, there's a huge amount of new platforms getting developed in the semi area to deal with the new device structures and more complicated processes happening at 5 nanometers and also on advanced memory. So I think that bodes very well for vacuum valve growth. EUV is now established as a production technology, mostly around the 7 nanometer, 5 nanometers, but it's likely going to come into DRAM at some point as well.
I think what's interesting is that starts to proliferate. We're seeing opportunities across the EUV ecosystem. So not just on the EUV platform,
but also on
things like inspection and metrology associated with EUV. So I think there's a little bit more growth in that whole ecosystem than we expected. I think more importantly is heading towards this 0 particle environment, which I've talked about in the past. One of VAT's core strengths is our ability to make products with extremely low particle levels. And as you proliferate into 7 nanometers, 5 nanometers, that really is a key strength for our company and is allowing us to win more and more market share in terms of spec wins on these new platforms.
So this whole growth in high end nodes is good for VAT, and you can see that in our share gain, and you will see that next year in share gain also. The last slide in this section is the latest half year update from VLSI on market share. They do a full in-depth analysis every year where they analyze company's results and try to break it down into vacuum component sales. So the half year is an estimate. Nevertheless, it shows our overall market up 1 point.
But in display, solar up 2 points and in semiconductor up 2 points. That's actually a pretty good achievement in the middle of a downturn because in this type of environment, okay, we're specced in on many of the advanced nodes, but there's a lot of generic sales that happen. And typically, our small competitors try to target the business with price reductions. So we're still able to repel that and grow market share at this point.
So I
think it shows that our overall platform development and the spec wins that we've talked about in 2018 are following through with solid market share gains for the half year. And we expect that to continue as we go into the second half of the year and into 2020. So a very positive trend. I think this is not just our technology. It's the scale we have.
It's the ability to produce in 2 parts of the world. I think our neutrality as a Swiss Malaysia manufacturer right now is also playing well with a lot of the global conflicts. And also the investments that we've made during the downturn in putting stronger key account teams and applications engineers closer to our key customers is also allowing us to flow these new products to our customers across the world very quickly. And I'd say that the market share is not just one specific region. We're also gaining share heavily in Asia, which is good overall for our business.
So I'm very happy with this. A big thank you to our global team. They worked very hard on this. And it's another reason why we managed to keep our gross margin high with new technologies coming to market quickly. And as we come out of this downturn, the market share we're gaining here is going to stand as in very strong stead for solid growth at a strong profit margin.
So that's the end of the first session. I'll pass you on now to Stefan, who will look a little bit more detail with the first half results.
Good morning. I would like to summarize year to date financial situation. Revenues of EUR 263,000,000 are at the top of the end of our guidance, and we see a positive trend comparing revenues Q1 with revenues Q2. EBITDA margin amounts to 25%. That's 2% higher compared to previous down cycles.
And it's a result of strict cost management as well as it shows the strength of our flexible operating model. Free cash flow is only marginally below free cash flow 12 months ago. We had low CapEx, and we were able to reduce net working capital. As a consequence, free cash flow conversion amounts to 69%, that's 30% higher compared to previous year. Order intake for the 6 months in 2019 amount to CHF262 1,000,000 that represents a decline of 31% compared to previous year.
Order backlog at the end of June was €112,000,000 That's only slightly below the backlog situation end of 2018. Looking at the sales pitch. Comparing revenues end of June 2018 with revenues end of June 2019, you see significant impact of the volume reduction on the sales side. But we were able to add positive elements with product mix. And very impressively, pricing remained stable despite significant lower volumes.
EBITDA for the first half year decreased 36% to €66,000,000 And EBITDA margin is at 25% versus 31.6 percent, reflecting the under absorption of fixed costs, investments into operational improvements and higher level of research and development. EBITDA was impacted negatively by 1.3 percentage points from FX and IFRS 16 adoption. IFRS 16 adoption means that we have to report operating leasing costs below EBITDA. The EBITDA margin is at 25%. As mentioned, it's 2% higher compared to previous cycles.
This is a result of continued operational improvements in areas such as global supply chain optimization and more flexible labor cost structures. Summing up, half year results demonstrates strength of VAT's flexible operating structure. Personal cost as well as operating expenses are below plan and reflect the strict cost management. Q2 net sales were steady to higher in all business units compared with the Q1 of 2019. The development Q1 to versus Q2 indicates bottling out of the down cycle.
Regarding net sales by market segment, the valve segment represents 75% of group revenues. The service business grew compared to previous years to 22% of total revenues and industry at 3%. From a regional perspective, HR is contributing with 47% to total revenues, followed by North America, 34% and Europe with 19%. Moving on to the segment results. In the valve segment, sales declined 39 percent to CHF 198,000,000.
Both the semiconductor and display and solar business units reported significantly lower sales as a result of the cyclical decline in their markets that started in the second half of twenty eighteen. However, the book to bill ratio in display and solar business reached a multiple of 1.2. It's a strong indicator for improving revenues in the quarters to come. The market for solar photovoltaic equipment remains steady as increasing energy efficiency levels continue to improve the competitive position of solar energy. First half sales increased in general vacuum business unit, supported by technology innovations such as the first order for a vacuum furnace application in China.
This order reflects the success of VAT's strategy to apply its proven technologies in semiconductors and displays to a broad range of industrial customers. The global service segment reported 11% net sales growth in the 1st 6 months to €56,000,000 led by its valve repair and spare parts activities. The segment also released new service products, including upgrades for a wide range of transfer, control and isolation valves. Net sales in the industry segment were down. This was mainly a result of moving the bellows activities from the industry segment to the valves segment effective January 1, 2019.
Additionally, first half sales declined related to a temporary reduction in demand for dampers used in high efficiency automotive fuel injection systems, reflecting the introduction of new emission regulations in several markets. Below EBIT, there is a negative impact due to the new Swiss tax regime. Higher tax rate in the holding company as well as lower tax rate in the operational company caused changes regarding deferred tax assets. The final assessment of the new tax regime is still underway. We are evaluating implications of the patent box as well as of research and development treatment on the final tax planning.
The effective tax rate for the 1st 6 months of 2019 was 30 5%, a temporary result of timing of new tax regulation in Switzerland. For year end, we expect normalizing tax rate going towards the long term level of 18% to 20%. The combination of lower sales, lower EBITDA and higher tax rate leads to an net income of €25,000,000 which is significantly below previous year's situation. Free cash flow generation is well on track. Free cash flow in the 1st 6 months amounted to €45,000,000 4% below previous year.
CapEx are lower than planned, lower than previous year without compromising on investments in future projects. It reflects also the successful completion of our infrastructure buildup in Malaysia, which had a negative impact in 2018. The company was able to reduce net working capital by €8,000,000 over the last six net 6%. The aim for end of year is to improve this ratio further and to go versus the midterm guidance of about 20% of sales. Summing up, free cash flow conversion rate was 69%, significant improvement compared to 12 months ago.
On June 2019, net debt amounted to 2.30 €7,000,000 and leverage ratio is at 1.5x. Year end net debt to EBITDA ratio is unchanged at 0.7 times. And coming to the summary, key achievements for 2019. We deliver in a tough environment. We are reaching an EBITDA margin of 25%, higher compared to previous down cycles.
And we cope also with negative impacts from volume driven higher investments into building the infrastructure and also negative implications from the FX side. On free cash flow generation, we are acting well within the plan. That's a key focus. And the net income, it's temporarily negatively impacted by the Swiss tax situation. Priorities for the end of the year are to focus on EBITDA margin, execute on cost improvement programs, making sure that we can improve EBITDA margin.
Secondly, to further reduce networking capital with a clear task force in place And finally, we are very prudent when it comes to CapEx without compromising on future projects. That's the end of Section 2. I'm giving now the word back to Mike.
Okay. Looking now at the priorities, conclusion and then guidance for the Q3. The end market, as I said, semiconductor continues to be very low visibility. We believe we're at the bottom of the cycle, signs that we're gradually coming out of that. As I mentioned, memory inventories seem to be reducing and ASP is stabilizing.
The logic and foundry business is improving, and see that coming in a little bit in the second half. If you look at the 3rd party forecast for the market, you'll see overall decline in the IC market around about minus 12%. So that's further declined from minus 5% in February, but it does seem to be stabilizing. Semiconductor CapEx, overall CapEx down about 16%, slightly down from the February number of minus 12%, but you see a big reduction still in memory CapEx. And as I've mentioned in previous results, that change in memory will really indicate when VAT sees the volume coming back.
We have our fab equipment specifically, again, minus 19% to 22%, a little bit down again from the February estimate. Again, seems to be stabilizing at that level. And specifically in our market, vacuum processing equipment, a little bit lower than the overall CapEx, again, because the vacuum related equipment tends to be more capacity driven than shrink or design rule driven. That's the outlook on semiconductor. Moving to display.
Smartphone sales still moderating. A lot of new technology being trialed and coming to market. I think we'll see in 'twenty further developments in the foldable smartphone area. There'll be a lot of new technology coming to market around 5 gs. There's quite a few 5 gs phones already within the market, but 2020, we'll see a new portfolio from Apple, and we expect that will generate a fairly substantial refresh in smartphones.
The current investments all around Gen 10.5 percent, and as Stephane mentioned, the book to bill ratio in the display business of 1.2 percent, and that gives us a bit of confidence in the second half. There's still overall overcapacity in LCD, so we don't expect to see further major LCD capacity expansions going into 2020. We think the capacity situation in 2020 will favor more OLED, large scale OLED but also continued investment in mobile. And the display equipment market has actually improved from March. In March, we talked about a minus 38%.
That has moderated to minus 23%, again based on the improved OLED sales. Solar, we expect to continue. There's a lot of activity in China around solar. The silicon based solar technologies seem to be dominating at present, about 75% of revenues, but we expect Thin Film also to improve in the near term. And the majority of the end user projects are happening in at this point.
So our priorities in the near term, we're we've got to be ready for any change in business conditions, especially in semiconductor. We're spending a lot of time ensuring that our supply chain, our facilities are ready to react very quickly to changes in semiconductor demand. You really have to be on the pulse. On top of that, the main internal priorities are continuing our focus on innovation and market share. A lot of activities there, close to 100 development projects from small to large across VAT, targeting all different technologies, Cost Management remains a huge focus.
That isn't Cost management remains a huge focus. That isn't going to change. Being in the high-tech market, delivering cost performance for our customers as well as for our shareholders is a critical item. And we continue to strengthen our supply chain into Asia and Eastern Europe. We continue to make strong productivity gains in our manufacturing operations and overall improve the processes and efficiency of our company.
Putting in a new ERP system during 2019 2020 is also a key focus that will simplify how we run our business, again, give us more operational visibility into running the company. So cost management will remain a big focus for us. Working capital, as Stefan mentioned, key focus. We still have quite a bit of inventory in the network that we built up during 2018. A lot of that is for the semiconductor sector.
So to see real improvements in that, it will depend a little bit on the semicon recovery, but we're working hard on it. We're also being very prudent in our CapEx spending during the year. So there are key internal priorities. Looking at the conclusion, I think the overall market long term still looks positive. We don't change any of our view long term on the digitalization impact to VAT and how that's going to grow our end markets.
Industry commentators are still talking positively about a long term growth of semiconductors and the increasing capital intensity of equipment as you go to smaller design rules. We are at this point, we believe we are seeing the bottom of the market, but I would caution that by saying there's still not much visibility out there. So I'd say it's steady as you go at this point, and we're ready for a quick change in the market when it comes. Independent researchers are talking about an improvement towards the end of 2019 and then a further improvement into 2020. I think for us, we move a little bit before the capital equipment.
That's why end of 'nineteen may see a little bit of improvement, but it's too hard to tell at this point due to that lack of visibility. I mentioned the trade disputes. I don't think that's impacting our business dramatically other than overall business confidence. If certainly, if that gets resolved, it will give, I think, a boost of confidence to the overall business. And we'll continue a focus on service.
I think that's a great opportunity for us, work hard during 2019 and 'twenty. I think in 2020, we'll see there a good opportunity with our upgrades. We've spending 2019 developing a lot of new upgrades for the installed base. That takes some time to get traction. And also reduced operating expenses within the IC market makes that quite difficult to penetrate in the short term.
But as capital frees up a little bit in 2020 2021, we see the upgrades as a great opportunity in our service business. So looking at the qualitative and guidance for the Q3, obviously, we expect net sales to be lower compared to last year as with EBITDA and EBITDA margin. But I hope you've seen today a very strong focus from us and keeping those EBITDA margins at a pretty high level. That's going to put us in a very good position to deliver a 33% target as the market recovers. We're pretty confident we can achieve that based on the infrastructure improvements and operational improvements that we've made.
Net income will be lower. And CapEx, as you saw in the first half, we're managing that very prudently. But we will have to make a few investments towards the end of 'nineteen to ensure we have the right equipment in place for new technologies coming to market. So we have plenty of latitude still in the second half to ensure we hit a low CapEx number but still prepare VAT for the future. And free cash flow is expected to be higher based on the working capital reductions that Stefan talked about.
For the Q3, we are guiding net sales to be between $130,000,000 140,000,000 dollars Again, limited visibility out there, but I think from some of the markets like display, we're seeing certainly an improvement in order intake, and we're confident in that, confident in the service business, the industrial business. The main questions remain over the semiconductor business. So that concludes the end of the presentation, and I'll now open to questions. Thank you.
Okay. The first question is here from Michael. Please, if you all could state your name as the company because all the calls are transcripted. And for those who are following it later, it will be nice to know who asked what question.
Yes. Thank you. Michael Ford Bank, Vontobel. Three questions. The first one, regarding your cost run rate and your EBITDA margin, assuming that your sales would stay flat in the second half of the year, similar to the Q3 guidance?
What sort of EBITDA margin level would you expect in the second half considering where your cost run rate is now? That will be the first question. The second question is on the on those vacuum furnaces for battery production, And the third question would be on the memory markets. If we hear comments from Micron and Hynix talking about further deterioration of CapEx into 2020, my question would be how you reconciliate that with the statement that you see market researchers expecting 10% to 15% growth in wafer fab equipment in 2020. Yes, those would be my 3 questions.
Okay. I'll do the battery and the cost run rate. So the battery potential, the general vacuum segment, it's not like semiconductor. It's not one large market that's easy to get your hands around with a small number of OEMs. The general vacuum segment is literally 20, 30 different vacuum segments.
It's a little bit harder to gauge exactly how big they are. Typically though, we see these individual sectors in the somewhere between $10,000,000 $30,000,000 Lithium Ion battery is emerging fast. It's mostly China, but it's also expanding outside of China. But I would certainly put it in that sort of range, dollars 10,000,000 to 30,000,000 dollars It is a lower cost type environment. It's not as high-tech as, say, our semiconductor and display.
But we think we can offer products within that at a reasonable margin. So I would gauge maybe half of that number, so maybe an average about $15,000,000 there. In memory, the CapEx for next year definitely will see continued growth in foundry and in logic and probably also in some of the smaller sectors. The CapEx in memory, well, you've got to bring new products to market at some point. Capacity utilization is still low in memory, and you've seen the large players are actually idling some of the capacity.
So it's certainly a question when they'll make those next capital investments, but I would expect them to start in 2020 around new technologies, new DRAM technologies and new flash technologies. But that's kind of what adds to the uncertainty of predicting a memory return. It's not just capacity. It's an intersection of new technologies plus capacity. So in all downturns, you're faced with this.
All logic tells you that the market is going to stay low forever, but then it rebounds pretty quickly as the major players come in and make new capacity investments around about new technology. So that's what makes it so difficult. And the commentators try to balance that view of new technology and existing capacity challenges. So that's the best visibility we have at this point. You want to, Stephan, talk about the EBITDA run rate?
We expect the margin in the second half to be above the first half, but to be below the second half twenty eighteen. Why do we believe it will we will see an improvement in the second half? We have a performance improvement program in place where we had a slow start beginning of the year and there we expect significant additional improvements in the second half.
Okay. Thank you. Next question here from Jern.
Thanks. Jern from UBS. Two to three questions. The first one is, please, can you give us an update on your current capacity utilization? And what is the potential to capture new revenues in 2020?
Would you, for example, be able with your current fixed cost base to deal with another €51,000,000 revenues in 2020? Or would you need to have more fixed cost investments? And second question would be, please, on your design wins you had and your product launches for 2020. What percentage of revenues is this roughly? And is this coming at significantly higher gross margins?
And the last question on the OLED and solar sales going into the second half, making the math, is it roughly about 10,000,000, 50,000,000 higher sales in the second half versus the first half? Many thanks.
Okay. Capacity utilization, still at a low level. In Switzerland, it's certainly higher than it is in our factory in Malaysia. The factory in Malaysia is still, let's say, around a 25% utilization level. That's expected.
When you in our business, it's very hard to move existing products from factory to factory because of the very tight qualification requirements by our customers. So we tend to bias new products into our new facility in Malaysia. We do have a lot of products qualified there, as I mentioned, that should ramp pretty quickly when the market comes back. So obviously, that's a drag on the results right now, but at some point, you have to have that business continuity plan in place of having 2 factories, and that's the situation we're in right now with that. I'd say the capacity utilization in Hag is somewhere between 50%, 60%.
Opportunities on expansion, I think the cost the fixed cost structure is pretty well in place now for HAG and for Malaysia. We shouldn't need much additional investment as the capacity ramps in fixed costs. We will have a few spot requirements on latest technology tooling. We also want to make sure we continually upgrade our machine tool base to have the highest productivity, the highest speed machine tools. So there's an ongoing replacement cycle required there.
But we expect the CapEx to be significantly lower and more roundabout the 4% level that we've talked about. New products tend to make up about 25% of sales in a given year. It very much depends on the adoption cycle of our key customers and where we are in the overall semicon cycle. Obviously, the moment things are slower in adoption because the overall CapEx is lower. I think as we come out of this downturn, we'll see a fast pickup and adoption of new products.
And I think new product margins depend which market, depend which type of valves. We have different margin performance across different types of our control valves, transfer valves and so on. So it's difficult to put a finite number on that. But typically, they would be on the higher range, the higher side. And the OLED question for the second half, yes, with a book to bill ratio of 1.2, we do expect an improvement in sales in the second half.
I think the sort of $10,000,000 range you talked about is reasonable.
Thank you very much.
Next question here is from Philippe.
Philippe Ray from La Jaffee. You continue to invest in your service
infrastructure.
What are your new initiatives to and what is the position today? Okay. Our service business really breaks into 3 distinct areas. 1 is repair of our valves, the second one is spare parts and the third part is upgrades and retrofits of existing products. On the repair side, what we're doing there is expanding the available network of repair centers.
So we're ensuring that we have a wide installed base of repair centers close to all our customers across the world in every geography that has semiconductor or display We're having to expand some of those repair centers also because they tend to be pretty small operations. So we're we'll have some CapEx investment in expanding, but the return on that investment is very high, obviously. And specifically, what we're doing in repair is making it simpler for our customers. We had a fairly primitive model around repair. We're giving our customers a lot more options from very high quality, almost replacement type service down to a very basic refurb to compete with some of the lower price third parties.
We plan to take some of that business back from the 3rd parties that we lost over the years. So it's really a wider range in repair. In spare parts, it's and just ensuring we have better availability of parts around the world that we deliver quickly at very high quality, and we don't have any delays in execution. I think a big area is the third one, the retrofits and upgrades. We have huge installed base of BAT valves in the market, and we want to use the latest technology we've got to offer all those customers the ability to upgrade to valves that are better productivity and also lower particle levels.
That has an impact on yield for them, and they can be pretty lucrative from a return on investment for those end users. It takes a lot of engineering effort to get these upgrades completed and ready for market, and that's what the team has been working on. We've introduced 5 upgrades during this year. They're starting to come into the market, and we saw some of that happen in the first half of this year. I mentioned that the uptake of them is a little bit muted because of the lower spending environment that exists in silicon today.
But I would expect that to accelerate as those budgets start to loosen up as the industry grows again. So those three dimensions in service, I think, will be pretty good for us. At the Capital Markets Day we're going to have in November, we'll give you a more detailed view of the service business. I think it's a key one for us and give you more examples on how we plan to grow that business.
Okay. There seems to be no question from the room. There is one here in the front, Rimmel. After that one, we will turn to the callers.
Alexander Kohler, Zurcher Kantonalbank. If I do cross read to other market participants, we see that there is certain pricing pressure in China, especially to get orders there. If I look at your gross margin, I see that this is not the case for you. What are the main reasons that you are in a way more
resistant in this respect? Today, most of the equipment going into China comes from U. S, Japanese, Korean based OEMs. So we're not actually competing directly in China. There are a few OEMs that we're heavily involved with, but typically our equipment goes into the OEMs from those different geographies.
So that we work very closely with the customers around the world to get them very cost competitive products to allow them to compete in the Chinese market. So I think we offer a range of products to satisfy the our customers' demands from the very high end to medium end to low end where price competition is high. So I think it's as simple as that. But I would say our China business, we have very high market share in China, not just with the Chinese OEMs, but also in selling directly to the fabs with our fab products, which are things like valves for the sub fab.
Okay. Yes, there's one from Remo here in the front.
Remo Rosenau, Helvetica Bank. On a side remark, you mentioned the introduction of the new ERP system this year next year. Could you just remind us what this exactly entails, including the time line and the costs? Stefan,
do you?
It's Microsoft Dynamics. We will introduce Microsoft Dynamics will cover the finance part, but also manufacturing and all other key core disciplines within VAT. We are now in the implementation phase. It's expected to do the 1st launch late of next year. And we did a readiness check over the last 2 months, which confirmed to us that we are in line with plan costs and also timing wise that we are confident to deliver according to the plan.
Then on time line and costs in figures?
We will invest into an ERP system more than CHF15 1,000,000 for the whole project over the next 3 years. And to start with the first pilot will be mid of next year.
I would add one comment to that, however, as we're today, we're running different ERP systems across our our different manufacturing facilities. So there's a big consolidation got to happen. But what that allows us to do is roll out the systems incrementally. So we're rolling it out to our 1st manufacturing site in Romania, which is our lowest risk, smallest facility. So we will not proceed with the second one, Malaysia, until we're compared to HAG and we'll further test it with Malaysia.
And then the final implementation will be in HAG, where we have a pretty high mix, more complex environment. So I think we've got a pretty solid plan on rollout, which will take us into 2021 for full rollout.
So I hear you that you take the
whole thing serious and going forward prudent because when we hear new ERP systems, always alarm bells start to sound because we had many, many problems. So we're doing many, many companies in doing that. It always takes double the time and sometimes triple the costs.
Well, I've gone through 2 major ERP implementations in my life, and I know the upside, I know the downside. Stefan also comes from an environment of having done a few. We're taking a very cautious approach. We cannot risk our business. I mean, we are we've got such a dominant position in the semiconductor market that I mentioned customer trust.
Customer trust is the one thing that we cannot lose either in product reliability, product quality or disruption of supply chain. We cannot let that happen. And it is not just a small focus, it's enormous focus. And I would say the governance also from our Board of Directors is extremely high in that area.
And to add on, we are supported by top consultants. Microsoft is involved. It's a key project for them in Switzerland. PDWC is supporting us in order to make sure that we have further project under control. Okay.
Thank you.
Okay. Thank you. So with that, we would go to the callers on the phone.
The first question comes from Deshpandeep from JPMorgan. Please go ahead.
Yes. Hi. Thanks for letting me on. I'm not sure I heard all the questions, but I have one question on your valves business. Firstly, regarding the modules, I mean, when you're talking about the next generation product being designed, are these customers now designing standalone valves or is this module based?
And will then how do you see that progression? And does that have an impact on your margin going forward? And then secondly, just regarding what's happening in the market at the moment, you've said in the past that things remain uncertain, but you were hoping that by the Q4 things would begin to pick up because there would be a rollout at some of your end customers of your customers early next year. And do you still see that or the visibility is not there at this point? Thank you.
Okay. First question around about the valve business. We have a solid plan to offer not just the different types of valves we produce but also modules and also different types of components like motion components. So when it comes to dealing with our key customers, we do offer them a range of options of not just designing a custom valve for them but integrating that more into their platform. Now that depends entirely on the architecture of the platform and also the complexity of the platform.
I would say on some of the latest platforms in the industry, we're seeing more motion component sales And I'd say that's at a higher level than our modules. So our modules is improving definitely, but I think the motion components is a slightly higher uptake. There are much lower ASP than modules or valves. But typically, they're in the same margin level as our valves. The module business, depending on complexity, they can be similar to valves or a little bit lower than valves.
But obviously, we don't want to compete with things like the large contract manufacturers that make chambers. That's not attractive for us. So unless we can offer a very strong value proposition around integration of our valve with the chamber or very, very advanced particle performance, then we would not take that business. So we're very picky in the type of business that we want to offer there. There's no point offering chambers for the sake of it.
But when it is the right conditions, it certainly leverages our ability as a turnkey supplier around the whole vacuum transfer train. That was the first question. 2nd question, I mentioned visibility right now is still very low for the second half of the year. The information I'm conveying is more what external commentators are saying about the business. If they say a Q1, Q2 recovery, then we may see some of that into Q4.
But I don't think I'm going to have visibility in that until really towards the end of this quarter. So it's too hard to tell at this point.
Thank you.
Yes.
Okay. We have another question from the phone.
The next question comes from Sebastian Kuhn, RBC. Please go ahead.
Sebastian A couple of questions. First of all, IFRS 16, could you give us the impact in the first half of the year on EBITDA? It's I assume it's a helpful number for EBITDA, although in your statement, you write a net negative impact, which I don't quite understand. So what's the positive impact on EBITDA in the first half? And then when you speak of the year on year change, lower EBITDA that you expect for the second half, is this adjusted for IFRS already?
Or do we then have to be a bit more careful when it comes to comparable numbers? That's the first question. Then I would just like to know what the current shares of memory business as part of your valve sales. I would expect last year or in the last 2 years was around 40%, maybe 40% of valve sales. Do you have an indication of how much of your business currently goes into memory?
And then next question would be market share gains. You mentioned that earlier that you expect more gains in 2020. Was there any exits from the wealth market? Any competitor that dropped a product line? Or did you make any wins or specifications where you are more confident to gain share?
And then finally, on the 400 staff that you have or had on short time, they are now back in full employment. Is this really because of an improved order level? Or does it have to do with Swiss regulation that you have that the government doesn't pay the 5th day for these people anymore and that therefore you have to take them back? And what impact does that have on second half costs? Thank you very much.
Okay. Thank you. I'll do these in reverse order then. So it's first to short term work. Yes, one reason is the slightly improved business levels.
The second reason is we've been making productivity gains in our manufacturing. And we've had some attrition of the workforce over the last 1 year, and that's allowing us to stop the short term work. In the Q2 of the year, we weren't too far off the requirements of full time employment for the production staff in Hague. So it was a pretty easy decision to come out of the short term work. But the improved business in Q2 and then further into Q3 gives us confidence that we could bring or stop the short term work.
The other factor was the holiday season in the Q3 gives us a drop of productivity. So we needed the full staff to get through Q3. And we even need a few temps as we will now start to build up a temp workforce as we go through Q3 and into Q4 as we expect the market to come back. Being ready with trained employees is a really critical thing. And we could have continued short term work through till the end of October, but there was really no point at the level we were running at.
The question before that was share gains. Yes, I mean we follow spec wins very closely. So we basically chart all the new platforms and products coming to market across semiconductor and display. So we have very good visibility of what we're winning. Obviously, a lot of the platforms are at the high end focused on next generation products.
So that lends itself very much to VAT's strengths on low particle performance, high productivity and very strong total cost of ownership. So we see we're gaining at that level, which gives us very strong confidence of future market share gains. So I'd say pretty confident we'll continue that trend over 2019 and into 2020. Memory, very hard to say exactly the impact of memory. I mean, even if I knew we have NDAs with our key customers, I wouldn't give that exact number.
I think it's fair to say, though, it's fairly it flows pretty well with the overall CapEx going into logic, foundry and memory, and obviously, memory is down at this point. When it comes back, it's high volume, and we'll see the benefits of that. The questions before that, Stefan, do you want
to talk about them? Regarding IFRS 16, the positive impact amounts to SEK 1,400,000 for the 1st 6 months. That means EBITDA is positively impacted by €1,400,000 On a year on year basis, adjustments are already reflected.
At this point, I'm looking back here in the room if there are further questions. Yes, we have one here from Marc.
Marc Polsavi, VAG. Just a short question concerning the forecastability of cycles. Have you done an analysis, back tested how accurate the forecasts were in the past concerning cycle developments. And as I remember, your predecessor basically said that there was no cycles anymore due to different reasons. And shortly after that, we came into a downturn.
So how valuable are these forecasts? Isn't it like garbage in, garbage out a bit?
I don't know how to answer that question. I think cyclicality to me is really a function of the growth rates of an industry. The more mature the industry, typically the lower the growth rates. The lower the growth rates, typically the lower the cyclicality. We are participating semiconductor participates in a lot of new markets with very high growth rates.
And that means you get massive fluctuations in demand and the CapEx requirements around that. I don't think until semiconductor really becomes a $1,000,000,000,000 industry maybe by the end of the decade or the next decade that you'll see a type of stability that would say there's no cycles. I think the key thing for us is we know we can't forecast it. We have as I think a strong sensing network as anybody in our industry. And I think you've seen from our forecasting in the last couple of quarters, we've been pretty accurate.
But I think it's really impossible to nail it on a long term basis. Short term basis, we're getting better. Key thing is to have the flexible most flexible operating structure that can deal quickly with those changes, both up and down. And the down is just as important as up.
And taking these Honda projects that you're involved in that you mentioned and weighting them by the size, the potential, I mean, can you describe how that evolved over time looking back maybe 2, 3 years?
Yes. I mean, the engineering projects we've got go from sizable ones down to smaller customizations. But we because of the complexity, even the small customizations, we have to treat with a full project mentality with high quality standards. So we track every major project. I'd say overall, it's growing because of the complexity of Semicon.
Semicon used to be pretty straightforward with litho, etch and deposition. These days, you've probably got 10 to 15 different types of deposition, ALD, many types of different processes. And also, the markets changed dramatically. The transistor structures today are very different in logic compared to memory or other types of chips. So that means we need different technology to support them.
So overall, there's more projects and that puts a strain on our engineering teams because we customize everything. But again, it's one of our strengths. We have 150 or so engineers working across Switzerland, but we've also expanded our engineering team into Malaysia. We've now got around, I think, 20 people in engineering in Malaysia, and we'll continue to grow that team so we can have a lower cost structure across our engineering. But it's one of VAT's core strength and our ability to rapidly customize for our key customers.
Okay. We have one more question here in the room.
Thank you. Ronald Winterkoecker, Raiffeisen, Switzerland. I have a more general question. The capital market environment is heavily affected by the trade wars at the moment. My question would be, where you're affected so far and how do you see the developments in the future for your company?
I mentioned earlier that our neutrality as a Swiss company is a great calling card when I visit customers. We're not manufacturing in China, so that doesn't impact imports into the U. S. And also now having the fab in Malaysia, again, that's also neutral with respect to the semiconductor producing countries. So I think we really have very little impact directly.
But indirectly, it reduces overall business confidence. And if you're about to make a $10,000,000,000 $15,000,000,000 investment in the next generation memory fab, that business confidence, I think, plays into the timing. So I think it's more of a confidence issue than it is direct impact to VAT. But our position of having manufacturing here in Europe and in Malaysia, I think, is a really optimal footprint that will support our growth into the future.
Okay. Any more questions? This does not seem to be the case. So before I hand back to Mike for short closing remarks, I'd like to remind you on our next date. It's October 24 with our trading update for the Q3.
And then on November 11, VAG will host its 1st Capital Markets Day here in Zurich. Invitations will be sent out in due course. Thank you for joining us here. And with that, I would hand back to Mike for short closing remarks.
Yes. So thank you very much. I hope today we've demonstrated through this cycle that we have a very flexible company, a very resilient company, a company that's very focused on technology. We're also continuing to upgrade our capability as a company and that's in our people, that's in our facilities, that's in our cost structure. We're adding a lot of strong talent to the business.
I didn't mention that in the presentation, but I've just added a new head of our general vacuum business. She comes from very strong industrial background and she will help me in the general vacuum business do hopefully what we've done in the service business is really reinvigorate that area. We're also upgrading talent across many other parts of the company as well as giving our current talent a chance to grow with the business. So I think it's a very valuable time for us now during this downturn to really optimize our performance and really get ready for outperforming the market when the market returns. So thank you very much, and I'll see you at the Q3 midterm results.
Thank you.
Ladies and gentlemen, the conference is now over.