Ladies and gentlemen, good morning. Welcome to the Q1 Trading Update Media and Analyst Conference Call. I'm Yvonne, the call operator. I would like to remind you that all participants will be in listen-only mode, and the conference call is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mike Allison, CEO of VAT Group, and Mr. Andreas Leutenegger, CFO. Please go ahead, gentlemen.
Good morning, ladies and gentlemen. This is Mike Allison speaking. Welcome to our trading update for Q1 2018. As you heard, Andreas Leutenegger, our CFO, is with me, as is Michel Gerber from Investor Relations. This is my first earnings release as the new CEO, our trading update. It's always good to start with good news. Things continue to look positive in all our market segments. That really hasn't changed since the 2017 update we gave a few weeks ago. Let me start with some of the headline numbers, and then I'll say a little bit about each segment. Q1 order intake was CHF 250 million, up 18% year-on-year. Net sales were just shy of CHF 198 million, which was an increase of 20%. This 20% includes a negative 3% for FX impact.
Overall, it's a pretty positive start and in line with the guidance we provided a few weeks ago. We also continue to have strong order backlog, and this grew 10.8% to CHF 183 million. Looking at the individual segments. The Valves segment reported net sales growth in the first quarter of 20% to CHF 159 million. Net sales grew 22% in Global Service to CHF 27 million. While the Industry segment net sales were up 18% to CHF 12 million. Valves accounted for 81% of our net sales in the first quarter, with Service at 13% and Industry at 6%. Looking a little bit deeper into our Valves business. Some key spec wins allowed us to report higher sales in each segment. Semi reached record levels. Display and Solar also had substantial growth, especially as we recorded a very key win in a major Chinese Solar project.
As you can see in the press release, General Vacuum also had a strong quarter as we addressed some of the capacity issues that had hindered us in previous quarters. This now gives us a better platform for future growth in 2018. Global Service grew net sales in all units compared to the first quarter a year earlier. The retrofit business, which now represents about a third of our Global Service sales, that grew fastest as customers continued to upgrade the large installed base of VAT valves. That really reflects the ongoing technology improvements we're making in our valves, especially around contamination management with the latest products because that gives our customers a significant yield impact by upgrading to the latest generation.
The spare parts business, at approximately 50% of segment sales, continues to benefit from the growth in semiconductor and display manufacturing. The maintenance business remains about the same level as Q1 2017. Let me now comment a little bit on some of the market segments. The semiconductor market continues to look strong with the supply-demand drivers pretty much in balance. Chip pricing is still above historical levels, and most of our customers and their customers are recording a very strong financial performance. Just last week, I visited a large Japanese OEM during a trip to Asia. They were seeing pretty robust demand from all the key device segments. I try to get around the top three customers very frequently, not just from a relationship standpoint, but also to stay on top of the key technology challenges and to help the teams with our key partnerships.
This is really key to keep a focus on the new technology design wins. Also, the week before, I had a visit here in Haag from one of the top U.S. OEMs and really got the same outlook for 2018. I think the first half driven by DRAM and logic. Flash improving again in the second half of the year. Of course, there's a lot of critical projects sitting on the Q4, Q1 boundary that could fall either side of this fiscal year. It's difficult to forecast exactly the total outlook. Overall, very positive, and we retain our previous guidance of 15%-20% growth. The display market also looks to be doing well. There's a record number of Gen 10.5 projects on the horizon. In the AMOLED sector, not so positive.
The investment delays that I reported last month have really not worked through the system yet and mainly driven by the disappointing sales of the iPhone X. I think it's going to take some time before we get more clarity on the AMOLED future. In the General Vacuum space, continues on a positive trend, as I said earlier. We had some key new orders in the aerospace sector, as well as winning some key tenders in R&D fields. The industry segment also had growth in orders and sales, driven mostly by our bellows business in the automotive sector. That's really coming around with stronger petrol sales versus diesel, as our components used in petrol engines, as well as positive developments in other sectors. Moving on now to capacity. We've had a lot of focus on that in the last year, as you know.
At the end of March, our production capacity outgrew roughly CHF 50 million to around CHF 900 million, putting us in a much better position to deal with the growth. Also any quarter-to-quarter spikes, which can happen if you get overlapping major fab projects. We still have a few bottlenecks in certain products, but we do expect that these will be fully resolved by the end of Q2, as we bring on new machining and also resolve some of the remaining supplier issues. We're also using the move to the new Malaysia facility to broaden the supplier base. During my Asia trip last week, I also visited our new Malaysia factory. That was really amazing. I was really blown away with the scale of our new facility there. It's a full state-of-the-art factory with around 24,000 sq m.
It is equipped with real state-of-the-art clean rooms, roughly 4,600 sq m of ISO Class 8 and 1,400 sq ft of ultra-high performance clean room. This is really a fantastic platform for us to continue building the business and also to become the supplier of choice within Asia. We've committed capital and expense to take the factory to more than CHF 400 million in revenue by 2020. Looking at the magnitude of the facility, I think we can ramp beyond that. We're also having in the region of 500 people by the end of the year. What I saw from the teams there, really first class. That base in Penang is a big center for assembly and test, although not directly front-end semiconductor. These guys have a lot of experience in engineering for semiconductor, and that's allowing us to tap into a pretty strong talent base.
We've made some good hires and we're growing our engineering and supply team there as well as our manufacturing base. That helps a lot with the product transfers. This will really be a key focus area for me in 2018 to ensure that we ramp this facility and make it a very strong competitive advantage for VAT. Final segment here is outlook for 2018. I think, like you see in the release, as the world market leader for high-end vacuum valves, modules, and components, we'll continue to benefit from the strong favorable market trends. As we announced previously, and we don't change that guidance, we expect to grow around 15%-20% at constant foreign exchange rates. The midterm EBITDA margin target of 33% by 2020 remains in place, and we will show progress towards that goal this year.
As a consequence of the expected sales growth in 2018, also a higher EBITDA margin, lower finance costs, and a slightly higher effective tax rate, net income and earnings per share are expected to grow substantially. Accelerated capacity expansions, mainly in Malaysia and Romania. We know capital expense will be around 7% of net sales before coming down to around 4% in following years. That concludes my update for the quarter, and I'll now invite any questions from the audience. Thank you.
We are now beginning the question and answer session. Anyone who wishes to ask a question may press star and one on your touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Sandeep Deshpande from JPMorgan. Please go ahead.
Hi. Thank you. I have a couple of questions. Firstly, regarding, you mentioned in your prepared remarks that you have some wins in China in solar. Can you describe, is this thin film solar starting up again as a technology, or is this in standard solar that you are winning business? Secondly, what is your view at this point, based on your conversations with these display companies on what is happening in the AMOLED display market and how that will play out through the rest of this year? Finally, was there any change in the mix overall within the valve business and that could have any margin impacts for the first half? Thank you.
Okay. Starting with the first question. We're certainly seeing, I'd say, some revival in solar, mostly in China. This order is specifically one large major Chinese player. Their technology is mostly based on the a-Si technology. They're ramping a whole series of programs there. They've set some very ambitious goals to generate, I think, upwards of 50 gigawatts over the next five to seven years. That is the majority we're seeing right now. There's a few projects associated with that. Some of the other OEMs are supplying equipment into it. I wouldn't say it's a full market recovery at this point, but I'm certainly seeing a robust Q1 and Q2 as a result of that. In AMOLED, it's very difficult to say more than I commented.
It's pretty well known, I think, that Samsung has pushed out their next AMOLED factory, which is a big chunk of business. Until we get more visibility on that, I just really don't know what this year brings. At the moment, we're focused mostly on the LPD area, the Gen 10.5 projects. All I would say is our relationship with both the customer and the OEMs in AMOLED is very good, and when it comes back, we should be able to take advantage of it. In terms of the mix, Andreas, would you say there's much change in-
We don't expect any significant changes. We have seen a bit more of the sales in solar, which has, of course, a bit of slightly lower margin, but it should not impact the overall margins material.
Thank you.
The next question comes from Marco Amstad from Vontobel. Please go ahead, sir.
Yes, good morning. A question regarding your supply constraints you had at the beginning of this year. Can you quantify this adverse effect on the sales level? Do we have to expect an impact also then on the margin trend and progression in the first half against the second half 2018?
Yeah, certainly. No, we don't expect any. We had some bottlenecks. All the books are full. Order intake is strong. These bottlenecks first did not have any visible impact in the past and will not have a visible impact going forward. There is no significant impact at all.
Thank you.
The next question comes from Paul Moran from Northern Trust. Please go ahead.
Hi, good morning. Just to follow up in terms of the impact of mix on sales. Would you be prepared to split what, looking at the reported sales, what was the volume versus price mix? I'm assuming that given your previous comments, it's going to be mostly volume. If you could confirm that, please.
Yeah. Nevertheless, you cannot expect a significant change. Sorry, significant change to what we reported earlier. You know the FX effect and I said the product mix, which means new products, for example, what we disclose at year-end is usually one third. The price effect is almost nil. That's why I said no significant change to the year-end 2017 report. Except what has changed is the FX effect, which is a bit larger. It was almost nil in 2017. Now it's almost -3% , the rest has not changed. I would say an insignificant price effect, then we have volume, two-third and one-third mix.
Understood. Just to follow up on the FX comment, has there been much change in Q1? You mentioned that it was 300 basis points of a headwind. Looking over the quarter there, Swissie/dollar was about 5.5. Renminbi is obviously a tailwind at the moment. Is there much change in the FX mix in Q1 versus Q4 2017?
No, I would say as long we stay at the current level, there will no further significant impact on the top line.
Okay. Thank you.
The next question comes from Michael Foeth from Vontobel. Please go ahead.
Yes, good morning. I have a question regarding your retrofit business. You report strong growth in retrofit, has that actually accelerated over the quarter compared to last year? That would be the first question. The second one, are you retrofitting mainly older VAT valves or also valves from competitors, i.e., gaining sort of a market share there? Thank you.
The first part, your retrofit versus last year.
That's the same. The retrofit part, remember we always said about half of the global service segment is spare parts. One-third is retrofit, the remaining one-sixth remains is the service itself. No, the proportions have not changed.
I think on where retrofits are happening. Certainly, the leading-edge fabs, maybe within the last five years, they see a real benefit from the particle improvements to upgrade to the latest generation. That has a significant impact on yields. There's still a pretty good productivity improvement for the eight-inch fabs, the older fabs, and there's quite a lot of investment going into that sector with the IoT and automotive being strong. Really pretty much across the board, and I'd say it's also a combination of replacing our old technology, and some competitors' fabs as well. A bit of a mix there.
Okay, thank you.
The next question from the phone comes from Sebastian Kunath from Berenberg. Please go ahead.
The ramp-up in Malaysia. It seems that goes a bit faster than you had expected. What additional costs do you have in your numbers that just relate to the ramp-up? I just want to try to isolate those costs from the ordinary business. Secondly, staff levels. You mentioned 500 staff by year-end in Malaysia. What level do you then have outside of Switzerland if you combine Romania and Malaysia? Just for us to get an idea of the staff mix. Finally, on your end markets, what projects do you see in the logic and foundry sides, in terms of the timeline? Do you expect a bigger order intake than for Q2, Q3 from the logic side? At the moment, I think it's mainly driven by memory, right? That would be it. Thank you.
I will do the first couple of questions, maybe the first three. Malaysia is not going faster than expected. It's going according to our timeline, which is actually good. You remember we said we want a start-up extension in Q3, that we confirm. We are optimistic that will materialize, but we are not well ahead of that curve yet. Second question, the additional related costs. We do not split that up, but you can imagine a similar number than what we had additional costs last year in Switzerland, of course, related to Malaysia, not Swiss costs. Certain margin points are in, but we will not split that up, or we will not disclose it. Thirdly, the capacity by the end of 2017, remember, it employs 1,200 in Switzerland, 300 in Romania, and about 280 in Malaysia.
By end of Malaysia, you go to 500, right?
In terms of people, yes.
Okay. Romania, no change in Romania?
Malaysia not fully committed by the end of this year. One has to understood, we ramp Malaysia as we grow the volume. That's why it's not kind of a fixed cost or fixed FT. It can also be 600 if the volume growth is much higher and, as you said, if we do well in terms of the ramp-up, then we add. If we don't need the capacity, it will be lower, then maybe it's 400. Don't take the 500 as granted, because this is a variable cost and not fixed cost for us.
Understood.
The final part of your question was around projects. We don't get 100% clarity in terms of where our valves are going. Obviously, we're shipping to the OEMs. What I would say is, the first half of the year, there's been quite a lot of volatility in projects. Some have pushed it out, some have been brought in, depending on market situation for that particular customer or yield performance. What I've been hearing, and again, I can't substantiate this 100%, the first half seems to be a little bit more logic and foundry-driven. There's a little bit of a pause it seems to be in NAND, with the build-up, especially from Samsung, that we saw towards the end of last year. There's quite a few projects sitting on the horizon in Q4, Q1 next year around the next major NAND projects, especially in Korea.
I expect the second half of the year to be more memory-driven than the first half.
Thank you very much.
The next question from the phone comes from Jörn Iffert from UBS. Please go ahead, sir.
Hi, gentlemen, and thanks for taking my question. The first one would be please on operational momentum. Given the strong order growth, given the high order backlog, is it fair to assume that in terms of year-over-year growth, Q2 will be the strongest for 2018? Second question would be on competition. You are seeing it source for high-end valves now since a couple of years. Do you observe any exercises on your clients that they are trying to diversify the dependency on VAT? The last question, coming back on the semi cycle, just what is your personal opinion? Memory price seems to come down significantly, potentially in the next six to nine months. What is your best guess and the view for the 2019 first half and CapEx development in the industry? Thanks very much.
The first question. The second competition and then price. Sorry, the first part of the question was again?
Looking on Q2 2018, the operational momentum, is it fair to assume, given the strong order intake and the high order backlog, that Q2 2018 will be the strongest quarter in terms of year-over-year sales growth?
Yes, sorry. I think Q4 last year, beginning of Q1, we thought Q2 might be the peak quarter, but I think there's still quite a lot of volatility around projects at the end of Q2 and into Q3. I expect to see a bit more flattening of the quarterly profile compared to what we originally had forecast. Doesn't really change the outlook for the year, just a little bit of flattening and probably pushing a bit more to the second half. In terms of competition, we make it very difficult for our competitors with the investments we're making and the new technology we're bringing out. Obviously, as a market leader, you're constantly faced with challenges around pricing and so on. We've got such an advantage in terms of our performance, our reliability, our particle performance, as well as other key attributes.
Also the volume that we can supply to the key OEMs. These accounts are pretty big, with almost half the company's revenue going to the top three OEMs. They need a reliable partner that can deliver extreme high volume. I would say there's always competition, but we're doing all the right things to repel that as much as possible. Also, the resources we have, the applications people close to the customer, the quality people. You have to be able to respond with a lot of resources quickly when there are issues. With the extreme technology environment that we're operating under, going from 10 nanometers, seven nanometers, five nanometers, things happen every day. It's that global company response that keeps us ahead of the competition.
As long as we continue to do that and keep our technology investments in place, I don't see a big risk there. Memory pricing. I think at the start of the year, people thought 2019 was going to be a down year. I think there's probably a moderation happening here with maybe a little bit less in 2018 and more in 2019. Again, doesn't change our guidance, but I would say from what I'm seeing and hearing, a little bit of a flattening across the two years. Memory reinvents itself every 18 months, so you've got the latest technology coming, the next generation pretty soon. That's going to see another series of technology investments and capacity investments. Still looks pretty robust from what I can see.
All right. Thanks very much.
Thank you.
The next question comes from [inaudible] . Please go ahead, sir.
Yes. Thank you for taking my question. I've got two. The first one, can you remind us what is the peak capacity planned by the end of 2018? The second question is, what do you hear from your customers regarding Chinese OEM making orders now already in the second half 2018? Is that something you can verify or is it just still kind of invisible future with the Chinese?
I will start with the first one. We have not communicated a capacity target build up for 2018. We communicated by 2020 having a capacity of CHF 800 million in Switzerland, CHF 400 million in Malaysia, and CHF 100 million in Romania. You have seen the numbers, the figures in the trading update of Q1 with CHF 815 million in Switzerland.
The CHF 900 million preparing the capacity going forward. We also said Malaysia would double this year to around 7%, 10% last year, which is around CHF 70 million double this year to CHF 140 million, CHF 150 million. I think that should provide you sufficient guidance what we expect for 2018.
The second part around Chinese OEMs. I'd say our trading in China has been strong. We're definitely seeing an increase in business there from the OEMs. I mentioned earlier, solar business and our display business. I wouldn't say I've noticed a dramatic trend in the Chinese OEMs in the semi area. I probably see as much of a trend in Korea as I do in China, especially towards the end of last year with Samsung and Hynix ramping so high. The OEMs in Korea were relatively strong. I don't see a dramatic impact in China. We have pretty strong market share there, so I'm sure we would see it if it was happening.
Thank you.
The next question from the phone comes from Daniel Stickler for Kepler Cheuvreux. Please go ahead, sir.
Yes, sir. Good morning. Thanks for taking my question. Firstly, regarding on the aerospace project you mentioned in the press release. You said that you consider this to be a large project. Can you give us some kind of indication on the size of this in terms of revenues? The second question maybe relates a bit to a question asked earlier. It's relating to a statement you made on semiconductor CapEx at the full year results presentation. There you mentioned that you expect to see more coming through in the second quarter. Is that something you would reiterate or rather not at this point? Can you give us some kind of indication on the incremental capacity addition in 2019? Thank you.
So incremental-
Capacity
capacity
2018 to 2019
2018 to 2019. Okay. The aerospace contract, I'd say first of all, it's a multi-year contract. It's nothing like a major semiconductor order, but it's pretty sizable for the industrial sector. That's all we can say about that one. Semiconductor CapEx. As I mentioned earlier, I think there's been a little bit of moderation between Q2 being what we forecast as a peak quarter into maybe a bit more business in the second half of the year. There's quite a bit of volatility with these major fab projects that can move in and out quite a bit during the year. It does change quite a bit. At the moment, I would say a slight moderation of Q2 and stronger second half. On the capacity Andreas for 2019.
I think that was a similar question to before. We do not disclose the yearly capacity ramp up. Just be reminded of the 2020 target. Again, 700 Switzerland, 100 Romania, 400 Malaysia. That gives you the 1.2 billion, which we flexible ramp up by 2020, fully in line with the market growth. Mike has given an indication that the 400, we call it at least, so there's upside potential. How much we add in 2019, again, this is flexible depending on the market opportunities.
Okay. Thank you.
Okay. I think that was the last question we have. If there's no other question, I'd like to first of all thank you all for attending, and I'm going to close the call at this point. Thank you very much.
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