Ladies and gentlemen, welcome to the VAT Group Full Year 2018 Results 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 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. Michel Geva, Head of Investor Relations. He will now be joined into the conference room.
All right. Yes, yes, yes. My password wasn't working.
Okay. Good morning, everybody, and welcome to this year's VAT full year results presentation. Thank you very much for joining us this morning here. I know it's a busy day for a couple of Swiss issuers that have reported results today. And so we would like to kick it off immediately because I know some of you will have to attend other conferences later in the morning.
So today, we have with us Mike Allison, our CEO and for the first time, our new CFO, Stephan Bergamine, who joined VAT on January 1 this year. We will go through a formal presentation of the results, give you the outlook of what we expect is going to happen in 2019 and how we, as VAT, intend to deal with the market situation. And then there is plenty of time for Q and A where you can ask further questions. So with that, I'd like to hand over to Mike. Over to yours.
Thank you.
So good morning, ladies and gentlemen. It's a pleasure to be here and great to be here with my new CFO, Stefan. I also have Markus Jaeger here today, our Head of Controlling, and just like to give him a special thanks for his help in the transition we've had, and he helped me tremendously navigate a pretty difficult second half of the year. So thank you, Marcus. I'll start by saying that great companies is not how they perform in the upturn in the good times, it's how they perform in the tougher times.
And I'm going to show you this morning what VAT has done to demonstrate its performance in what was a pretty challenging second half of the year. I'm going to cover the highlights and then pass on to Stefan for the full financial review, and then I'll finish with the outlook and conclusions. So as I said, we had a tough second half of the year. I think despite that, we had record sales and EBITDA. Our operational performance in the second half of the year especially was close to 30%, as you'll see later.
And that was quite astonishing given the big reduction in sales we saw in the second half. And I'll explain a little bit about the flexible structure we put in place and the other measures we took to safeguard that and also the structure that we put in place to ensure the VAT over delivers in the future. We've also continued our investments in innovation, and you'll see later that we had a record number of spec wins. A spec win means when an equipment company like a Lam or Applied Materials has a new platform, what is our efficiency in winning that new platform? And we had a record number of them in 2018.
That talks about future market share. So that guarantees that we continue our market share growth. Nevertheless, in this year sorry, in last year in 2018, you'll also see that we made substantial gains in market share. In 2018, we also completed our new Malaysia site. We've got a brand new facility there ready to go.
We've qualified over 30 new products there. So as the semiconductor business comes back, we're going to see that facility ramping pretty rapidly. It's looking good. We've got reasonably high quality from there that we would expect, and we really are ready to ramp that in the future. 2019, I'll talk about that, but just in general, it's a pretty mixed picture out there.
We still see things slow in the semiconductor and display areas. Our general vacuum and service businesses look pretty good, but the lack of visibility we have, especially for the second half of the year, is very low. So it made it very hard to give an accurate guidance for the whole year, and that's why we're guiding just on the 1 quarter. So looking at the results in a bit more detail. Our overall VAT group were up 1% with an EBITDA of 30.8%.
The valves, which is the core part of our business, was slightly down year on year and a reasonable EBITDA margin. Service grew 7%, as you can see, again, a very strong EBITDA margin. And the industry sector, which is really the non valve business, it's our bellows and some industrial components, was up 5%. Struggled a bit in EBITDA, and Stephane is going to go into that in a bit more detail as we go through the presentation. Looking at the market trends in 'eighteen, I'll cover 'nineteen at the later part of the presentation.
But in 'eighteen, we saw wafer fab investments up 16%. As you see, VAT was roughly flat because a lot of those investments in our components were made in the second half of twenty seventeen and coming into early twenty eighteen. So although wafer fab investments were up 16%, we were pretty much flat. Second half of the year, we saw a big slowdown in memory, quite dramatic slowdown, and that's prevailing into 2019. There's still a lot of strong technology inflections in logic and foundry.
There's a big drive now to get to 5 nanometers. TSMC have started piloting the 5 nanometer processes and I think there's a high probability in 2019 they'll continue with the 2nd phase of that fab. And the large microprocessor guys are also driving the 7 nanometer processes. That's all good for VAT because they're much more complicated processes and it drives a much higher CapEx per waiver, which drives a lot more valves for VAT. So these are all good trends.
In 2018 in display, we saw OLED being reasonably strong in China. That's kind of coming to an end, that investment in 2019. In 2018, the Gen 10.5 investments in the record sales in our display business, mostly driven by the market share gains we had. Solar was really a China story in 2018. The Chinese OEMs and manufacturers grew dramatic share and you've seen that compared to some of the European businesses.
We do well when China does well. We have very, very high market share in China. So also our solar business did quite well in 2018. And capacity supply demand is reasonably in balance, I would say, in solar, but there's quite a lot of investment in new technology still to improve the solar cell efficiency. So I think we'll continue to see a fairly stable output from solar into 2019.
The general vacuum business we have, Industry and Research, again, generally pretty strong growth across the board. We saw a reasonable performance from that business. And also the research spending in large government programs drives our high complex valves or all metal valves in CERN, Etar, we saw a pretty strong growth last year. In past, we've talked about the 3 dimensions that grow VAT. The first dimension is the end market growth.
That is the growth of silicon chips in general, the digitalization of the world and really nothing has changed in that long term trend. In 2018, as I mentioned, we did see a slowing memory market after 2.5 years of pretty extensive growth in wafer fabs. But we're also starting to see now and that started in 'eighteen the build up of 5 gs and that looks like quite an exciting technology that will drive a lot of growth in silicon on the chip side, but also on the connectivity side and what 5 gs will enable within the overall environment. The second dimension is equipment growth. We saw a huge investment between 2016 2018 and I think we knew that would never continue at that pace.
We were still optimistic about the long term trend in wafer fab equipment, but we saw very high growth rates over this period. And I think there's a few things, too much capacity. There was also some yield issues when people went to 10 nanometers, and they over installed equipment to meet the demand at that point. As they improve their yield, it made the supply situation even worse. So I think that's getting in balance.
I think by the second half of twenty nineteen, we'll start to see real supply demand balance across all the technologies. In 'eighteen, the logic adoption, especially 10 nanometer processors were slower than we expected. Intel underinvested. That was pretty clear and that was unexpected because Intel have traditionally been quite a solid spender through any cycle. So their investments were slower than anticipated.
And I think the other headwind we had a bit was the U. S.-China relationship, which just made the whole market tentative and reduced overall investment. The 3rd dimension, vacuum valve growth. Valve content continues to grow, and we see that especially as you go to 10 nanometers and 7 nanometers. EUV lithography is picking up, which is a good thing for us because EUV enables the 7 5 nanometer processes.
So although there may be a little bit less etch in CVD equipment, overall, it's allowing our customers to bring on that 5 nanometer technology on time, which drives a higher CapEx per wafer, which is good for us. And we're also seeing general vacuum applications growing as well in the advanced coating, R and D, etcetera. So that's a view of 2018. I think really key thing for me in 2018 was our performance in market share. You'll see overall across all our businesses, we grew 3%, which really is a large year on year improvement, and that is due to our technology advantage.
There's no other way to put it. We are so far ahead of our competition that our spec win performance is very high, And over the last few years, we continue to grow that. You'll see in the second set of graphs here is the market share in semi and related. So that's semi plus display and solar. And you'll see we had pretty dramatic gains there from 1% to 55%.
That's mostly driven by our display wins. We made big inroads in 2018 in our display business. In semiconductor, we grew one point, which while it was a tough year for semi, a lot of the new processes slowed down. The adoption of new fabs slowed down. So we didn't see as much of that coming to market of the spec wins that we made in '16 and 'seventeen.
But nevertheless, we still continued in a positive way. I think also looking at how we performed against the competition, we are the outright technology leaders. You'll see, we continue growing, but there's really not one competitor that's made substantial inroads against us in 2018, and we really don't expect that to change in 2019. So really strong performance there. I think it's not just technology, but it's our unrivaled scale that we have.
It's our operational performance. It's our quality performance. It's the worldwide footprint we have, especially with the building of our new facility in Malaysia. We have a lot of capacity, which gives our customers trust that as their business grows again, they can give us more business. We also have now strong business continuity capabilities.
So we're the only major valve player that can deliver same products from Hague in Switzerland and Malaysia. That gives our customers tremendous confidence to give us business. It also gives us the ability to look at other adjacencies like our modules business and continue to grow that without damaging our valve business. So I think all that together gives us a tremendously strong market position, and I expect that to continue in 2019. So at this point, I'd like to pass on to Stefan to cover the financials, and then I'll look at the 'nineteen outlook and priorities.
18 despite softening business environment in the second half of the year. Net sales grew significantly in the 1st 6 months, reflecting strong market demand and customer capacity increases. Orders and sales decreased in the second half as some customers postponed capacity expansion plans. Nevertheless, VAT could build on its strong market position, gain market share, report slightly higher revenues and leading to another record for net sales. At the same time, the company's ability to quickly adjust its capacity across its global footprint also allowed to maintain profitability at the same level as 2017.
We are reporting an EBITDA of EUR 250,000,000. That's equal to previous year. EBITDA margin is marginally below the margin level in 2017. Free cash flow, it reflects focus on cash management. We were able to increase free cash flow by 14%, And that situation is in line with company's goals.
And we are in a position to propose a dividend, which is in line with previous years. Total order intake in 2018 was 648,000,000, down 12% compared to previous year. In Q4, order intake decreased by 28%. The backlog amounts to EUR 114,000,000, down 31%. The lower backlog reflects not only decrease in orders, but also improved customer delivery times.
In this area, VAT made substantial progress, especially in the second half of twenty eighteen. In a time of lower business intensity, we allowed we were able to tackle overdue deliveries with a positive impact on backlog. Looking at revenue comparing 2018 situation with 2017, status product mix gains more than offset general volume decline. General vacuum, global services as well as specification wins from 'sixteen and 'seventeen had a big impact on revenue growth. At the same time, pricing changes are minor.
Higher innovation and new products are key elements for a higher resilience regarding pricing. Net sales grew slightly up 1% compared to 2017 to reach EUR 698,000,000, a new record. VAT's EBITDA remained unchanged, and EBITDA margin decreases marginally to 30.8%. Despite a substantial sales deterioration in 2018, first half compared to second half of minus 19%, EBITDA margin sinks only from 31.6% to 29.9%. Thanks to our flexible business, we were able to react immediately to the market downturn with adequate cost measures.
At the same time, we initiated cost reduction program, which will have a positive impact in the next months with lower business activity. Allocation of revenues to the 3 business segments and regions is in line with 2017. We don't see significant changes. The business segment, Wealth, is the biggest business segment. It represents 79% of total revenue.
And in the business segment, valves net sales were impacted by the lower demand in the second half of twenty eighteen and ended the year marginally below at the level of EUR551,000,000 EBITDA improved by 2% and EBITDA margin went up to 32.3%, driven by a growth of some higher margin products in display and the solar business unit. The development in the various business unit varies. The semiconductor business unit was negatively impacted by the demand slowdown in the second half. And despite sales generated by successful specification wins from the last 2 years, full year net sales declines compared with the record level achieved in 2017. In contrast, display solar as well as channel vacuum are reporting record results.
The global service segment achieved sales growth of over 7% as a result of successful execution of a focused service strategy. It represents a new sales record while maintaining high levels of profitability. The sales growth in services was supported by 3 main factors: 1st of all, growing installed base of valves secondly, increasing focus on equipment retrofit programs and third, a faster maintenance and repair times. Net sales in the industry segment rose by 5% compared to last year. After a very strong first half year, demand slowed significantly, in line with softening demand seen in semiconductor business as well as in the display markets.
Segment EBITDA declined by 37% as the buildup of capacity in the first half year led to under absorption in the second half year. EBIT grew marginally to EUR 180,000,000. The finance costs are slightly higher compared to previous year. Adjusted for the 2017 noncash cost for unwinding the finance structure, VAT finance cost increased from EUR 6,000,000 to EUR 14,000,000. Earnings before tax went up 24%, reaching 160,000,000, 60 6 1,000,000,000.
Income tax expenses increased compared to previous year and lead to a higher tax rate of 18%, but still within the target range of 18% to 20%. High tax expenses in 2018 is mainly due to the positive tax impact in 2017, which were not repeated in 2018, namely the buildup of tax assets. Net income is at SEK 135,000,000. Free cash flow amounted in 2018 to EUR 124,000,000, up 14%. This is primarily a result of a 10% increase in cash flow from operations.
Capital expenditures are in line with 2017 and include investments in the buildup of Malaysia. Trade working capital represents about 23% of net sales, and we are aiming to reduce this ratio to 20% of net sales in 2019. As a result, and you see it on the right side, free cash flow conversion rate was 58 percent of EBITDA. End of 2018, VAT's debt amount to EUR 148,000,000, representing a leverage ratio expressing net debt to EBITDA of 0.7x. Gross debt includes a €200,000,000 bond issued last year.
The revolving credit facility is largely untapped. EGRAND net debt is within our targets. Summing up achievements in 2018. We are reporting record results despite moderation of activities in the second half of the year. We reacted fast in a phase of slowing demand with adequate cost measures, and we proved that we have a flexible business model in place.
Cash generation, where we saw significant improvements. But also for 2019, we see additional improvement potential. Higher net income and earnings per share as a result of all work done in 2018. We are aiming for 3 main priorities with regard to finance. First, EBITDA margin protection.
That's a key topic. Secondly, we want to further reduce trade working capital to 20%. Cash flow management will remain a key topic. And third, the CapEx will be down in absolute terms, but also as a percentage of net sales.
Okay. So I'm now going to talk a little bit about our priorities in 2019 and give you some outlook at the various sectors and what we can see at this point. Let's start with semiconductor. I think overall, semiconductor order activity is still pretty low. We believe we're close to the bottom of the cycle or at the bottom of the cycle.
You never quite know, but our book to bill ratio is reasonably stable at this point. So we're kind of seeing the first half of twenty nineteen as the low part of the cycle. Memory activity is certainly driving that, and we're still seeing very little investment happening within the memory sector, and they're dealing with weaker ASPs. But I think it's still worth pointing out that their operational performance, the profitability performance at this part of the cycle is higher than it was at the peak in the previous cycles. So the key IC makers, Samsung, Hynix, Micron, etcetera, are still doing pretty well in terms of profitability.
I'd say logic chipmakers are more confident. I think there's a few things driving that data centers, the gaming market, automotive. Intel are pretty bullish on their data center business and that's driving their expansion in 10 nanometers and 5 nanometers. TSMC are bringing the 5 nanometer processes to market, which I think is quite positive at this part. We are going through an inventory correction phase.
There's quite a bit of inventory out there across the supply chain. It looks like it's stabilizing. The expectation is that by the second half of the year, NAND will be in positive territory again. And then either towards the end of 'nineteen or first half in twenty twenty, DRAM should be pretty stable as well. The semiconductor IC market is likely in revenue terms to decline 5%.
Most of that's driven by pricing though because unit demand is still increasing. Semiconductor overall CapEx is likely to be down about 12%, really heavily impacted by memory. So logic and foundry is going to be flat to up. Waver fab equipment, which dominates our life, estimates are minus 15% to minus 20%, and we're expecting that and planning for that at this point in the cycle. And vacuum processing equipment, where the valves go, probably more on the negative side of that 15% to 20% range, so likely to be about minus 20%.
That's the visibility we have at this point. It's kind of changing frequently, and we're constantly having to review our plans around that. Looking at display. There's a lot of activity out there. I think a little bit more positivity on the display market than there was 6 months ago.
There's a few new foldable phones come to market. I think the price point for them is still far too high to have mass adoption, but they will drive that price down quite rapidly. And I think that combined with the adoption of 5 gs will bring smartphone demand increasing in 2020. I don't think we're going to see it much in 2019. 2019 is more likely to be fairly flat on 2018, but I think 2020 we'll see adoption.
Also, Apple are moving all their phones over to OLED screens, which will drive, I think, investment in especially the Samsung OLED fab in Korea. There's been rumors that that's going to move faster, rumors that it may come into the second half of twenty nineteen. We haven't actually seen physical activity on the site to drive that. We're watching that closely. But there's a lot of rumors that Samsung are readying investment for the OLED business.
I think there's still excess capacity, especially in the LCD area, and pricing on LCDs are extremely challenging for the makers. And estimates for 'nineteen is that display equipment will be down about 20%. I've even seen estimates recently it could be as low as 30%. We shouldn't be impacted as heavily as that because of the share gains we've made and making, but it still is a challenging year in display overall. 2020, as I say, looks better.
I think we'll see possibly up to 40% increase in OLED CapEx in 2020. Solar is still a Crystaland story mostly. It was a big thin film investment in 2018, but I expect it to be mostly that sort of mix going forward. Again, we see fairly stable business there, and that continues, I would say, on a flattish outlook into 'nineteen compared to 'eighteen. So what are we focused on as a company?
In the second half of the twenty eighteen, I really it's a difficult time. When you get difficult times, you've got to focus the employees and some really key themes. And I focused on these 3: growth, profitability and free cash flow. I'll go into these in a bit more detail. Innovation is the driver behind growth, and I think VAT have a really outstanding growth process.
It's a real economic engine behind the company. We've introduced a strategic planning process that dives deeply into each of our sectors, getting inputs from our key customers, competitors, our field teams, the market in general, analyzing technology trends. We then look at initiatives for each of the business units and we make sure we're prioritizing our R and D programs around about the highest growth initiatives. We then have a very, very robust product development process. We call it our stage gate process where we have a really strong way of measuring the performance of our engineering teams and their ability to bring products to market.
We have over 100 programs running today in VAT. It's a tremendous number. Now some of them are small customizations that are maybe only a few man months or one man year or whatever, but we also have some large programs as well. We have more than 150 R and D direct engineers working in R and D. And then our efficiency of turning them into spec wins, which you'll see in this graph here, is pretty strong.
And in 'eighteen, we had about 30% more spec wins than we had in each of the previous years. I've also put a big focus around our general vacuum business and service business, and I'm focusing them also on this innovation process and driving spec wins into the market. And I think especially that will drive our service performance in 'nineteen and 'twenty. So I think overall, a really strong process. And in terms of trouble, it's great to get people really focused on this type of program.
Another way of looking at our innovation is this is an index a patent index looking at the strength of companies' patents in a given sector. And it's 2 axis here. 1 is the quality on the y axis, the quality of the patents. So the higher the number, the more enforceable and protected your patent is. And then on the x axis is the quantity that we have.
And you'll see VATs on green. We continue to grow that up to a very strong quantity of possessions, but also defendable position, and that puts us in a really, really great position versus a competition. You see the competition haven't moved much and some of these are pretty old patents that they have. So again, very, very strong position in innovation and technology. The second thing is cost and our operational cost structure.
You see these graphs here show you FX adjusted performance over the last 10 years or so, And VAT has done tremendously well to hold our financial performance over this time. You'll see the cyclical low in EBITDA that we've had is around 23% in the past. And through this cycle, we'll do substantially better than that. And that's really focusing on agility, bringing our new low cost country manufacturing plant subs in Malaysia and Romania. It's focusing harder on our supply chain.
We've made a lot of changes to our supply chain group, driving much stronger supplier performance, especially in cost, but also looking at strategic suppliers and larger suppliers that can provide us better quality and better cost performance. And innovation, by the way, is excluded from any of our cost savings. We haven't reduced any of our focus on technology. So I think all this that we've done in the second half has really allowed us to keep that EBITDA position in place like Stephan talked about. One of the other things we did in 2018, with the lower utilization of our manufacturing plants, we've got people really, really focused on cost reduction.
And we set up a team. We have an internal program that has over 20 direct people working in it full time. There's a lot of part time people, but we have 20 or more full time people working in this program. We have a weekly steering committee, in which my exec team all play a part on. And we have a project office that looks at ideas from across the company.
We assess them and we decide the priority for implementation. And through this program, we've managed to make pretty substantial savings in 'eighteen, but not just that, but get ready for 'nineteen and 'twenty. And the savings we're making, especially in the supply chain, are going to help us tremendously in the future. We've also done I'd say in the short term, purchasing the supply chain will help us improve EBITDA the most. But some of the other things we're doing in terms of reengineering products, value engineering of products, commoditization, standardization will also help us in the future.
We've also done a little bit of in sourcing of products because of the lower utilization of our plants, but we have to be careful because our supplier volumes are down quite dramatically, and they are really key for us to be able to ramp in the future. So we've been quite selective on where we've in sourced because those suppliers are a very valuable part of our operational footprint and we can't destroy that. So overall, I think this has been a great program and allowed us to perform. We've also implemented short term work, and we're continuing that at the moment. Obviously, I would like to get off that as soon as I can.
And as soon as the market is in a little bit stronger position, we'll definitely go there. So looking at cash and working capital, we're not where we want to be. We're at 23%. That is certainly not where VAT wants to be. We worked hard in 'eighteen on inventory reduction.
We had a very strong reduction in our finished goods inventory because I've said before, we grew our inventory levels at our key customers quite heavily in the first half of twenty eighteen. We brought that down substantially in the second half, but we still have a lot of raw material because we stocked up also pretty heavily in raw material. That gives us an opportunity in 'nineteen to continue that positive cash flow performance. We're also bringing our CapEx down. We've been running almost close to $50,000,000 The Malaysia facility is more or less completed.
There's a little bit of assembly CapEx I'm going to have to bring in when the products there ramp. But pretty much, I expect CapEx to be in the €30,000,000 to €35,000,000 level. Bear in mind that there's quite a large sum in there for replacement of our ERP system this year. It's somewhere around about $6,000,000 or so just for the ERP system in 2019. And all of this I'm trying to do while maintaining the readiness to support things like the Kurzah by short term working allows us to move quickly if we see a change in demand.
And it's really important we keep that in place. The problem in semiconductor increases as fast as it comes down. And when one memory maker invests, the others jump on immediately. So you go from having a very low level to a very high level very quickly. That's why it's important to keep the suppliers ready, but also our manufacturing footprint and the manufacturing workforce in place.
So conclusion, it was quite tricky to come up with a conclusion for 2019. I think we're still very optimistic about the future. I think you can tell that. There's nothing really changed from the past. Yes, some supply demand challenges.
It was steeper than we thought. I didn't think we'd see as big a correction as we did. But I think the trends out there are going to grow this business possibly in the second half of twenty nineteen. I think it's looking more likely into 2020 though. There's not enough signals to tell me that the second half of twenty nineteen is going to be strong at this point.
So quite tricky to put a number on the whole year. So visibility is extremely limited. We have tremendous visibility into the OEMs. You're hearing the same story for them from them as you look at their earnings announcements. And at this point, really all we can see is the 1st few quarters of the year.
And I think in the service and general vacuum area, reasonably positive. We expect to grow both of those businesses in 2019, but they're not of the magnitude that makes up for a decline in the semiconductor business. So I think with all that in mind, we expect 'nineteen sales to be lower than 'eighteen. I think that's pretty obvious. EBITDA and EBITDA margin will also be lower.
But I think you've seen from the second half that we'll maintain them at pretty strong levels. We very, very strongly believe that the 33% EBITDA margin that we've said we're capable achieving, we will achieve at some point in the future. Obviously, that depends a little bit on volume coming back because I do need to keep the readiness of our manufacturing capability in place. When that comes back with the cost reductions we're making with our flexible structure, with the innovative new products And you'll see from our gross margins that those new products keep our pricing at pretty strong levels that we're in an excellent position to achieve this 33 percent EBITDA on the medium term. Net income will be lower and CapEx in the €30,000,000 to €35,000,000 Free cash flow will be higher, as Stefan mentioned earlier.
So looking at guidance, we decided with the lack of visibility in the market that we would guide what we know and that is right now the Q1 and we expect that to be in the range of €120,000,000 to €130,000,000 But that shows you the operating environment we're in. There's still a lot of variability. Even with 25 days till the end of March, I'm giving a range. Normally, at this time, I would know exactly what I'm going to do this quarter, but there's still quite a bit of movement. Some of that's positive, some of that's negative, but the range fairly confident, €120,000,000 to €130,000,000 As we get better visibility in our midterm, we'll try to update you as professionally as we can with guidance for the rest of the year.
But at this point, we decided to just keep it at the Q1. So that's all of our formal presentation. And at this point, I'd open to any questions you have.
Thank you very much, Mike and Stefan. We'll go into the Q and A. As usual, I will first take a couple of questions from the room, and then we move forward to callers on the phone. Please wait until you get the microphone because otherwise, people on the webcast or the phone will not be able to hear you. So the first question goes to Remo here in the front.
Remo Rosner, Helveit, De GeBank. What are the conditions for the short term time work, I. E, for how long can you keep it up if the market does not recover as you expect in the second half?
Yes. Short term work maximum is roughly a year. Obviously, it does not create a positive environment when you're in short term work, so we're quite motivated to end that as soon as we can. We had a big buffer in our temporary workforce. We reduced that in sort of midpoint to second half of 'eighteen.
We're not far off the number of people we need to operate at this number. So I'm hoping within the Q2 time frame that we would come off the short term working. We're also losing people, as you can expect, from general attrition. So with that and performance management, we can adjust our total workforce.
Just for the sake of the argument, if you would assume that the $120,000,000 to $130,000,000 sales level would be the level for the next four quarters, just for the sake of the argument. The short term work would then run out in August, I think.
Yes.
Right. So
what Well, probably more like, I think, October.
October, okay.
Yes, yes.
What would you do then if the sales level would not improve?
Yes. We've obviously planned various scenarios for the business. In this environment, you have to run multiple scenarios. So we have a very strong plan to deal with that if we see a second half that's negative, but also if we see 2020. I think the 2020 landscape is the important one.
The problem is with restructuring, it costs you a year of cost pretty much to restructure and then you're left with the inability to ramp. So you've got to be very sure the market's not coming back in any way before you restructure. And I've done everything possible to avoid a full restructuring. If that comes, we'll obviously do it if we need to. But we've so far obviously do it if we need to, but we've so far managed to keep a readiness in place and still perform pretty solidly.
So may I make the assumption that if the outlook for 2020 was still a bit doubtful, but well, you're not sure. You rather keep your people than to restructure, right?
Within reason. Obviously, we would reduce the infrastructure to a sensible level that we would perform, but we wouldn't take it to the point that we couldn't recover. And that's in the semiconductor world, traditionally, that's been the fine balance of trying to find that right point, not just internally, but also with your suppliers. You can imagine the supplier volume in the second half of the year was maybe 60 percent 50%, 60% of what it was in the first half. So we've also got to watch very closely how we deal with suppliers.
Okay. And the last question, if If the short term work would be over and you would decide to keep your people, what would then the impact be on the margin?
It really wouldn't change dramatically. I mean, we're only talking about a short a small number, 20% or so of our workforce and HAG. It's in the operations side. We don't have short term work in our R and D or marketing or other functions. So it's only a production area.
And as I mentioned, we're also adjusting that slightly. So it's not a dramatic change.
So but still, I mean, do we talk about 100 basis points or 600 basis points or?
Yes, I'd say, yes, closer to the first, yes. It's not dramatic. Put it that way. Okay. Fair
enough. Well, thank you.
Thank you. Michael Popebank, Vontobel. Obviously, net working capital management will be key to achieve improved cash flow. In 2019, you mentioned raw materials and inventories. Can you maybe elaborate a little bit more on the on all the factors that
or the levers that you have
to control net working capital would be my first question. And the second one is, if you see a significant ramp again in the later part of the year, let's say, in Q4, what's the risk that your net working capital is actually going to move up quite rapidly towards the end of the year? And that and with that, what's the risk that your free cash flow improvement target is then at risk? You can comment on it. Thank you.
Yes. I don't want to get into absolute inventory numbers, but all I would say is we have we still have a substantial amount of raw material. In the first half of twenty eighteen, we had to make a lot of strategic buys because we saw at that point, we were forecasting a 24% increase in the business. So you can imagine the amount of raw material we needed for that versus 'seventeen was quite substantial. So we ended up with quite high levels of raw material, and we haven't been able to bring that down as much as finished goods in the second half.
So I would say at this point, even at the if you look at a fairly flat market from where we're running at the moment that we there's still enough inventory we can take out of our overall network to improve cash flow versus 2018. So that's the first part of the question. The second part around our ability to ramp, it really depends on the magnitude of the ramp and how that would impact. If we saw a return, say, to the Q1 of 2019, where we had close to €200,000,000 in sales, then it would be a different scenario. It will be a challenging one, and I think that could impact our free cash flow a little bit in that 4th quarter, but that would be a very substantial ramp.
We've obviously modeled various scenarios for the year, and we're fairly confident around the sort of consensus numbers that we can deliver and improve free cash flow.
Okay. And maybe then a last add on. The 20% net working capital intensity, is that a target that you could reach also, let's say, going forward in 2020, even if you have a, say, 20% higher sales level? Or is that going to be challenging if the sales increase in 2020?
Yes. I think if you look back historically, where net working capital percent was when we had a substantial ramp, yes, it tends to go up a little bit. So if we saw that type of ramp of 30%, 40%, I would expect it to not be 20%, but probably within the band we've been operating in sort of 20% to 23%. Would you say that?
It's a challenging target, 20%. It's the aim. But in an upturn, it could be slightly higher.
Okay. Next question from Jern.
Thank you very much. And 2 to 3 questions, please. The first one would be, please, on your market underperformance in 2018. I mean, wafer equipment CapEx was up around plus 10%. And if I would exclude your market share gains of around adding 30,000,000, 40,000,000 sales, you would be down 5% to 10% in the wealth end market at the end of the day.
I mean, why is this underperformance happening? Do you think a big inventory correction on your customer side? And does it not mean then that in 2019, when the cutback down 15% to 20%, you should be up and the inventory is normalizing again? So I'm lacking here to understand this. 2nd question, please, on the gross profit.
I think impressive contribution of €80,000,000 in 2018. This would mean your new products are priced 10%, 20% higher. Is this trend continuing in 2019, 2020? Thanks. Okay.
I think let's do the latter one first. Our new products definitely contribute without a question. The amount of new products we bring to market, it really impacts our ability to keep that pricing. If you look at the bridge from 2018 to 2019, you'll see that the pricing was almost negligible year on year. So those products absolutely drive that improvement.
Looking at underperformance, I think if you look at all the component suppliers, so a good competitor is Advanced Energy or MKS. You'll see we all underperformed versus the CapEx number. And part of that is, yes, the inventory that was built up within the system. Some OEMs were much better than others. One of them had a very large ERP implementation and drove a lot of extra inventory.
And that's another reason why forecasting 2019 is quite difficult because it's hard to even say where the run rate is right now because of the burn down they've had in their inventory. For that reason, I kind of expect the second half to be a little bit better anyway because we should see an improvement in that run rate as they complete the depletion of that inventory. But it really wasn't it wasn't a market share issue. It wasn't a reduction in valve content. I think it was the whole supply chain.
We saw a big buildup at the end of 'seventeen, as you know, record sales in Q4 'seventeen, Q1 and 'eighteen, probably above the demand at that point.
And on the product mix, this should continue in 2019?
In terms of profitability? Yes. And I the
product mix improvement, we have seen in 'eighteen.
Yes. Yes, absolutely. I mentioned we've got we have nearly 30 new products qualified in Malaysia that are not shipping in volume. And as we see them come to market, that should be favorable for us.
Okay. Before coming to the next question here in the room, probably we take 1 or 2 from the call. Operator?
Our first question from the phone comes from Sandeep Jeshpande with JPMorgan.
I have two quick questions. Firstly, regarding in terms of your customers, what sort of lead times do your customers give you in the sense that when we look at the inventories at your key customers, I mean, they are very high at this point. And so I mean, following on to one of your earlier questions, does this mean that in 2019, if semiconductor equipment sales are down 15% to 20 percent, it would mean that your sales would be down less or would they be down more or would it be much more in line with that because of this inventory situation at your customers? And then secondly, regarding the new facility in Malaysia and CapEx that has been spent on it, how should we be looking at the depreciation of that facility? And how will that impact underutilization of that facility impact your margin in 2019?
Thank you.
So the first question, I think lead times I mean, with all the OEMs, we have consigned inventory. And those consigned inventories are managed on a minmax level, and the minmax by the OEMs is generated by what they see in their outlook. We're obviously running those consigned inventories at the lowest level we can because of the market uncertainty. I think with at least 2 of the large OEMs, we're in a fairly good supply demand balance. So what we see in their system represents reality.
One of them, I think, we're still in an inventory they're in a higher inventory position. So it's quite difficult to see exactly what their true demand is. But I think by the end of the first or second quarter, we should overall be in a reasonable supply demand visibility within the OEMs. Really, that's all I can say on that topic at this point. The second question, Stefan, do you want to comment on that?
CapEx Hello?
Ex investment will have an impact on depreciation.
But
it will be not significant.
Hello?
Hello?
Hello? Can you hear me?
Thank you.
Okay. Thank you very much, Sandeep. So operator, next question please.
The next question from the telephone comes from Nigel Van Putten with Kempen. Please go ahead.
Hi, good morning. Just pushing on that inventory point again. So just summarizing your answer to the last question, you're not willing to call the bottom in sort of that inventory burn that's still going on at least one of your OEM customers. Is that correct?
Yes. I think we're very close to that position. I mentioned our book to bill is quite stable. The question is, is there a little bit of additional sales we're going to see as that large OEM depletes the inventory. So I'd say right now, it certainly feels like we're at the bottom overall.
Okay, clear. And then also again pushing that point, I think my numbers imply sort of a minus 20 Q on Q for the semi business. That compares to maybe high single digits for most of your supply chain peers like MKS, Advanced Energy, Ichor. They're more in the range of high single digit. Could you explain what that difference comes from?
Yes. Well, MKS, for example, and I'd put something like Ensicon in the same sort of basket, they have more than 50% of the revenue coming from non semiconductor businesses. So they hold up pretty well in this type of market correction. They don't see potentially the upside that we'll see when semiconductor comes back, but they certainly get a benefit. And that's one of the reasons that we've been trying to push or trying to grow our service business and also general vacuum business.
I think when you see someone like Advanced Energy, who's maybe closer to VAT when they report at the
end of
Q1, I would expect them to be in a very similar position to VAT. They don't have the same exposure to a large advanced industrial Could you give us a sense of sort of your look
through end market? Could you give us a sense of sort of your look through end market demand in the semi space? So you've alluded to both Intel and the memory space. Just maybe quantifying that a bit, what percentage of your semi revenue would be more towards memory side and what would be logicfoundry?
Well, we're pretty well balanced in market share across the 3 large OEMs. So it really depends on the distribution with them. It's hard for us to really segment our products into memory sectors. It really depends on where the OEMs are selling at any one point. It's just too difficult for us to correlate.
We don't get exact visibility on our product by product shipment from the OEMs where that goes to exactly. So I think whoever spends in 2019, we're kind of going to mirror that overall market spend.
Got it. Thanks.
Okay. We're coming back to the room
here. Yes. Felke,
I would like to ask
you about the morale in HAG. Has it it what is it like amongst your staff there? And do you face some increased attrition as people just decide to quit? I mean, we are in a tight labor market. And if you maybe just could comment on the overall change of the workforce there and how has it changed against last year?
And final question in Malaysia. How many people do you have there now on the ground? And how many more do you intend to add?
Okay. First question on morale. I think it depends which part of our employee base you talk about. If you take our production people, they had a very challenging 2018 first half. They were working long over time, huge production pressure to ship things.
So they were under a lot of pressure then. The move to short term working obviously is tough for them. It does create a negative environment. So we're working very hard to keep our communication open to the employees. I think the decision to do a curdsubhai, short term working, was very well received though.
Rather than us laying off people, we communicated carefully what we were trying to do as a company is to keep our workforce in place to enable us to ramp in the future. And I think overall, it was received pretty favorably. Of course, there are some employees that are going to be negative and not like that. But our engagement we have an employee engagement score. And the engagement score that we did in September of last year was up on the year before, and that was done just as we introduced short term working.
So it wasn't a dramatic reduction, but I've really encouraged the management team to get out and talk to people, keep them communicated. We're now very transparent as a company. We're letting employees know what's happening and trying to involve them in our decision process. That certainly helps. We're also targeting our high talent people to make sure that we have retention programs in place for our key talent.
And that's not just in engineering and product management, for example. Some of our machine operators, they're invaluable. You can't find them within the Rhine Valley area. So we're trying to make sure the most important people we keep. But yes, there has been some attrition.
Of course, people will find other opportunities and don't like the goods of it. In Malaysia, we are at 2.70 total number. We maxed about 3 100 roughly, I would say that was Q1 into Q2 'eighteen, and we've allowed that to come down with attrition, and we're at 270. So we've probably got a little bit too many than we need. But as I mentioned, we've got more than 30 products that are ready to ramp.
So I'm really trying to keep that base. We're also spending using a lot of that labor there to qualify the products and qualify the suppliers, that's a big challenge. And we need a strong motivated and capable workforce there to do that.
Concluding question, but in HARC, how many people do you have now there left? And how does that compare to the year before?
Yes. I'd say we're about €950,000,000 total in Hague. We that's not including previously, we had about 200 temporary workers. They're more or less gone. But our full time workforce hasn't reduced dramatically, I'd say less than 100.
Is that about right? Yes. We are doing some fairly intensive performance management as well because when you hire the amount of people we did in 2017 2018, you end up making some wrong decisions, and we're really driving performance management of our people pretty hard.
Next question from the room here.
Yes. Felix Remmers from ZEP Capital. One question on the semi end market. So I question myself what is actually driving the increased demand. So if I look at the end demand for semis, automotive is down, smartphones units are down, server CapEx is not increasing as much as before.
So what is your view on the end market for semis? What is actually driving the increased demand? And then obviously, the waiver CapEx spend, Is it just the move to more advanced nodes or the inventory clearance or
Yes. You'll always see a move to advanced nodes, and that will drive CapEx. I mean unit volume is not down dramatically. NAND will still grow approximately 40%, bit growth year on year and DRAM about 20%. So pricing is down a lot for sure and inventories are up a little bit, but actual unit growth is still pretty reasonable.
Cell phone is down or flat to down and that will continue in 'nineteen, but DRAM content in smartphone is also increasing. Automotive is down, but silicon content per car is increasing. So that offsets a little bit. Server demand, as I mentioned, year on year is going to be up about 24% is the current estimate. Some of that will be the 2nd half.
But one of the byproducts of reduced pricing is it drives adoption itself. When you've got NAND priced at record highs, the cost of, for example, SSD cards is too high for a lot of applications. So a much lower price point will drive adoption. I think that's what's forecasting the NAND to come back in the second half of twenty nineteen, but DRAM maybe not into 2020. But it's a complex picture as you can see.
It's not one driver, and that's why forecasting the year makes it really, really tricky.
Next question from the phone comes from Peter Testa with 1 Investments.
I'll go one at a time, please. Just looking on the display business, you gave some view on OLED and LCD. But could you give us some help in understanding what your mix is between OLED and LCD, say, in 2018? And whether you think that will change a lot in 2019?
I don't really have a strong answer on that. Our market share in both sectors is, I'd say, pretty equal across OLED. We're maybe a little bit more OLED share orientated than we are on LCD. But I think overall, not much difference across either sector. There's also quite a lot of difference when you look at OLED.
There's OLED small panel. There's OLED large panel. The OEM base supporting Gen 6 versus Gen 8 and 8.5 is very different. So you've got quite a big dynamic there in which OEM is getting the business. We again, our market share is fairly even across the Japanese, Korean and the U.
S. Providers. I'd say, actually, we're probably better in the Japanese than we are in the U. S. Ones at this point, and that's one of our big market share focuses.
So it's really hard to say how our how the CapEx split across the generations and technologies impacts the business. We don't have as much visibility on that as we do in the semi area.
Right. Okay. And then when giving a view then on OLED being up 40% or so in 2020 perhaps, I mean, when you look at overall display or including LCD, how would you take that into account or maybe even on 2019, just to give us an overall display view?
Yes. I mentioned before that I think overall display will be 20% to 30% down in 2019. We'll be less than that because of our share gains. I think 2020 will be up driven by OLED. I expect OLED to be up 30% in or so in 2020.
I expect LCD to be down in 2020. Overall, though, I expect display to be up in 2020 versus 2019.
Right. Okay. And then just on trying to understand a little bit more on the gross margin. As the business goes through a downturn and you look at the mix of products that are still spending, it's obviously you tend to get more advanced product spending because customers are trying to push the envelope. When you look at how the down cycle has maybe some countercyclical aspects on gross margin.
Can you give any help there just to understand that, please?
Yes. I'd say our pricing we tend to enter long term contracts with the OEMs. So we don't see dramatic change in pricing. Some we have rebates depending on volume. So you get a little bit of a downside actually on volume, but we make up for that obviously with our operational leverage.
New products, yes, they're not high volume. So right now, you see this is what I call the technology part of the cycle where you're seeing people like ASML with the latest EUV technology driving. You see KLA doing pretty well because they're focused on yield and shrinks. We don't have high volume sales into that because you don't need as much deposition in etch. So yes, there's some new products, but they're pretty low volume.
In general
I'm thinking also your spec wins. I was thinking also your spec wins. I mean, as you advance your product, your spec wins are going to customers' more developed advanced product. They tend to stay a bit better versus, say, the older capacity products in the downturn. I was trying to understand how much that might help you in terms of that mix might be helping you on gross margin?
There's definitely an improvement with the new products for sure. I don't have an exact number between them because it's quite difficult to calculate. But definitely, a few points improvement with the new products. Okay.
And then last question is just as you work on cost structure and supply chain and so on and thinking about the 33% target and your views on whether it could achieve in 2020 or not. Do you think you need just sales levels to be above 17 levels to get that because of all the to get everything to work? Or do you think you could get that level of margin below 17 sales level?
Well, you saw in Q4, we had pretty strong EBITDA performance in Q4 at a fairly low sales level. I think if we got back close to '18 levels, for sure, we've got a chance of hitting that number. But again, it also depends on the environment, how much we're investing and how much we're growing our infrastructure at that point. But we're not far off that number. The question is, can we get it to a sustainable long term platform of around that number?
And I think the fundamental changes we're making in our cost structure and moving facilities will allow us to get closer to that.
But we're not far off. Okay. Okay. Thank you.
Okay. So maybe we take one last question here from the room. Somebody has a cross question. This seems not to be the case. So thank you very much for joining us today, and that concludes today's presentation.
Thank you.