Ladies and gentlemen, good morning. Welcome to the Q1 Trading Update Media and Analyst Conference Call. I'm Irvuna, the course 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 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 WAT Group and Mr. Andreas Leutenegger, CFO. Please go ahead, gentlemen.
So good morning, ladies and gentlemen. This is Mike Allison speaking. Welcome to our trading update for Q1 'eighteen. As you heard, Andreas Leutenegger, our CFO is with me, as is Michel Gerber from Investor Relations. So this is my first earnings release as new CEO, a trading update.
It's always good to start with good news. Things continue to look positive in all our market segments. And that really hasn't changed since the 2017 update we gave a few weeks ago. So let me start with some of the headline numbers and then I'll say a little bit about each segment. Q1 order intake was $215,000,000 up 18% year on year.
And net sales were just shy of $198,000,000 which was an increase of 20%. This 20% includes a negative 3% for FX impact. So, 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 percent to $183,000,000 Looking at the individual segments, the valves segment reported net sales growth in the Q1 of 20% to 159,000,000 dollars Net sales grew 22% in Global Service to $27,000,000 while the Industry segment net sales were up 18% to $12,000,000 Evals accounted for 81% of our net sales in the 1st quarter with service at 13% and the industry at 6%. Looking a little bit deeper into our valve 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. And this now gives us a better sales in all units compared to the Q1 a year earlier. The retrofit business, which now represents about a third of our global service sales, that grew faster as customers continue to upgrade the large installed base of valve valves.
And 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 approximately 50% of segment sales continue to benefit from the growth in semiconductor and display manufacturing and the maintenance business remains about the same level as Q1 2017. So 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 reporting a very strong financial performance.
Just last week, I visited a large Japanese OEM during a trip to Asia, and 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 key partnerships. This is really key to keep our focus on new technology design wins. Also the week before, had a visit here in Hyde from 1 of the top U. S.
OEMs and really got the same outlook for 'eighteen. I think the first half driven by DRAM and Logic and then 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 the fiscal year. So it's difficult to forecast exactly the total outlook. But overall, very positive and we retain our previous guidance of 15% to 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 are reported last month have really not worked through the system yet and mainly driven by the disappointing sales of the iPhone X. So 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. And we have some key new orders in the aerospace sector as well as winning some key tenders in R and 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 and as well as positive developments in other sectors. So moving on now to capacity, we've had a lot focus on that since last year as you know.
At the end of March, our production capacity grew to grew roughly 50,000,000 dollars to around $900,000,000 putting us in a much better position to deal with the growth and 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 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 square meters and it's equipped with a real state of the art clean rooms, roughly 4,600 square meters of isolate and 1400 square feet of ultra high performance cleanroom. So, 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 $400,000,000 in revenue by 2020. But looking at the magnitude of the facility, I think we can ramp beyond that. We also have in the region of 500 people by the end of the year.
And what I saw from the team is they are really first class. That base in Penang is a big center for assembly and test, although not directly front end semiconductor, but these guys have a lot of experience in engineering for semiconductor and that's allowing us to tap into a pretty strong talent base. So, we've made some good hires and we're growing our engineering and supply team there as well as our manufacturing base. And that helps a lot with the product transfers. And 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.
Okay. So final segment here is outlook for 2018. I think that you've seen in the release, as the world's market leader for high 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% to 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 higher EBITDA margin, more 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. So that concludes my update for the quarter. And I've now invite any questions from Marion.
Thank you.
We will now begin the question and answer session. The first question comes from Sangeetesh Bande from JPMorgan. Please go ahead.
Yes, hi. Thank you. I have a couple of questions. I mean, firstly, regarding you mentioned in your prepared remarks that you have some wins in China in solar. Can you describe if this thin film solar is starting up again as a technology?
Or is this in standard solar that you are winning business? Secondly, can you possibly I mean, 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? And 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. Yes, we're certainly seeing, I'd say, some revival in solar, mostly in China. This is one large this order is specifically 1 large major Chinese there and the technology is mostly based on the state technology. They're ramping a whole series of programs there.
And they've set some very ambitious goals to generate, I think, upwards of 50 gigabytes over the next 5 to 7 years. So 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. So 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 pushed out their next AMOLED factory, which is a big chunk of business. And 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 LCD area, the Gen 10.5 projects. And
all I
would say is our relationship with both the customer and the OEMs and AMOLED is very good. And when it comes back, we should be able to take advantage of it. In terms of the mix, Andres, would you see as much change in Yes.
We don't expect any significant changes. We have seen we have a bit more sales in dollar, which has, of course, a bit of slightly lower margin, but it should not impact overall margins materially.
The next question comes from Reko Amstazdan from Baader Helvea. Please go ahead, sir.
Yes, good morning. A question regarding your supply constraints
you had at the
beginning of this year. Can you sales level? And do we have to expect an impact also then on the margin trend and progression in the first half against the second half twenty eighteen?
Yes, certainly. No, we don't expect any. We had some bottlenecks, but order books are full. Order is still strong. So this bottlenecks team had first did not had any visible impact in the past and do not have a visible impact going forward.
So there is no significant impact at all.
The next question comes from Paul Moran from Northern Trust. Please go ahead.
Good morning.
Just a follow-up in terms of the impact of mix on sales. Would you be prepared to split what the 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?
Yes. We will not disclose that in Q1. But nevertheless, you cannot expect a significant change. In other words sorry, significant change in what we recorded earlier. You know the FX effect and as I said, the product mix, which means new products, for example, what we disclosed a year and is usually onethree.
And the price effect is almost nil. So that's why I said no significant change to the year end 2017 reporting, except what has changed is the L6 effect, which is a bit larger. It was almost nil in 'seventeen. Now it's almost 3% negative, but the rest has not changed, I would say. In significant price effects, and then we have volume, 2,000,000 and 1,000,000,000 of mix.
Understood. And just a follow-up on the FX comment. Has there been much change in Q1? You mentioned that it was 300 basis points of the headwinds. Looking at the over the quarter, the Swissy dollar was about 5.5%.
So is there any and renminbi is obviously a tailwind at the moment. Is there much change in the FX mix in Q1 versus 2018?
Yes. No, I would say as long as we stay at the current level, there will be no further significant impact on the top line.
Okay. Thank you.
The next question comes from Michael Swerd from Vontobel. Please go ahead.
Yes, good morning. I have
a question regarding your retrofit business. Does you brought strong growth in retrofit? Has that actually accelerated the quarter compared to last year? That would be the first question. And second one, is it are you retrofitting mainly older VAT valves or also valves from competitors, I.
E, gaining sort of market share there? Thank
you. The first part here was 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, 1 service retrofit and the remaining 1.6% then remains is the service itself. Now the proportions have not changed.
And then I think on where retrofits are happening, certainly, the leading edge fabs maybe within the last 5 years, they see a real benefit from the particle improvements to upgrade to latest generation. That has a significant impact in yields. But then there's still a pretty good productivity improvement for the 8 inches fabs, the older fabs, and there's quite a lot of investment going into that sector with the IoT and automotive being strong. So really pretty much across the board. And I'd say it's also a combination of replacing our old technology and some competitors as well.
So a bit of a mix there.
Okay. Thank you.
The next question from the phone comes from Sebastian Kuehnert from Berenberg. Please go ahead.
The ramp up in Malaysia, it seems that 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? So just for us to get an idea of the staff mix. And then finally, the on your end markets, what projects do you see in the Logic and Foundry side in terms of the time line? So do you expect a bigger order intake than for Q2, Q3 from the Logic side? Because at the moment, I think it's mainly driven by memory, right?
That will be it. Thank you.
I will do the first couple of questions and the first three. So Malaysia is not going faster than expected. It's going according to our time line, which is actually good. You remember, we said we won a startup extension in Q3 that we confirm. We are optimistic that will naturalize.
But we are not well ahead of that curve here. 2nd question, the addition 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, North Swiss. This is cost. Certain margin points are in, but we will not split that up or we will not disclose it.
Certainly, the capacity by the end of 'seventeen, remember, at employees, 1200 in Switzerland, 300 in Romania and about 280 in Malaysia.
So by end of Malaysia, you go to 500, right?
In terms of people, yes. Okay.
And Romania, no change in Romania?
But by Malaysia, not by let's say, fully committed by the end of this year. We ramp one has to understood, we ramped Malaysia as we grow the volume. So that's why that it's not kind of a fixed cost or fixed FTE. I mean, it can also be €600,000,000 if the volume growth is much higher. And as you said, if we do well in terms the ramp up, then we add.
If we don't need the capacity, it will be lower than maybe 400. So take the 5 don't take the 500 as granted because this is a variable cost and not fixed cost for us. Understood.
And then the final part of your question was around projects. I mean, we don't get 100% clarity in terms of where our valves are going. Obviously, we're shipping to the OEMs. But what I would say is, first half of the year, there's been quite a lot of volatility in the project. 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%, but the first half seems to be a little bit more logic and foundry driven. There's a little bit of a pause that seems to be in NAND with the build up, especially from Samsung that we saw towards the end of last year. And then there's quite a few projects sitting on the horizon in Q4, Q1 next year around the next major NAND projects, especially in Korea. So I expect the second half of the year to be more memory driven than in the first half.
Thank you very much.
The next question from the phone comes from Jorgen Evertz 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, it appears to assume that in terms of year over year growth, Q2 really did the strongest for 2018. Second question would be, please, on competition. I mean, you are seeing it also for high end dwells now since a couple of years.
Do you observe any exercise on your clients that they are trying to diversify the dependency on VAT? And 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 6 to 9 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,
Sorry, the first part of the question was again?
And 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?
So yes, sorry. I think Q2 I think Q4 last year beginning in 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. So I expect to see a bit more flattening of the quarterly profile compared to what we originally had forecast. It doesn't really change the outlook for the year, but just a little bit of flattening and probably pushing a bit more for 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 the challenges around pricing and so on. But we've got such an advantage in terms of our performance, our reliability, our particle performance as well as other key attributes. And also the volume that we can supply to the key OEMs. These accounts are pretty big with almost half of company revenue going to the top 3 OEMs. So they need a reliable partner that can deliver extreme high volume.
So I would say there's always competition, but we're doing all the right things to tell that as much 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. And with the extreme technology environment that we're operating under going from 10 nanometer, 7 nanometers, 5 nanometers, things happen every day. And it's that global company response that keeps us ahead of the competition. So as long as we continue to do that and keep our technology investments in both, I don't see a big risk there.
Memory pricing, I think at the start of the year, people thought 'nineteen was going to be a down year. I think there's probably a moderation happening here with maybe a little bit less in 'eighteen and more in 'nineteen. Again, it doesn't change our guidance, but I would say from what I'm seeing and hearing a little bit of a flattening across the 2 years. And memory reinvents itself every 18 months. So, you've got the latest technology coming, the next generation pretty soon.
So that's going to see another series of technology investments and capacity investments. So still looks pretty robust from what I can see.
All right. Thanks very much. Thank you.
The next question comes from Michael Stuttler from UBS. Please go ahead, sir.
Yes. Thank you for taking my question. I've got 2. The first one, can you remind us what is the peak capacity planned by the end of 20 18? And the second question is, do you what do you hear from your customers regarding Chinese OEM making orders now already in the second half 'eighteen.
Is that something you can verify? Or is it still kind of an invisible future at the Chinese?
Yes. I will start with the first one. So we have not communicated a capacity target buildup for 2018. We communicated by 2020 having a capacity of 800 in Switzerland, 400 in Malaysia and 100 in Romania. You have seen the numbers, the figures in the trading update of Q1 with 815 Tristolons
and the
900,000,000 remaining capacity going forward. We also said the Malaysia would double this year, so around 10% last year, which is around €70,000,000 double this year to 1 140,000,000, 150,000,000. And I think that should provide you sufficient guidance what we expect for 2018.
And then the second part around Chinese OEMs. I'd say our trading in China has been strong. So we're definitely seeing an increase in business there from the OEMs. Also, I mentioned there the 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. So, I don't see a dramatic impact in China. And we have pretty strong market share there. So I'm sure we would see it if it was happening.
The next question from the phone comes from Denner Stikler from 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. So can you give us some kind of indication on the size of this in terms of revenues?
And then the second question maybe relates a bit to a question of 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 Q2. So is that something you would reiterate or rather not at this point? And can you give us some kind of indication on the incremental capacity addition in 2019?
So incremental capacity from 18 to 19, okay. The aerospace contract, I'd say, first of all, it's a multiyear contract. But 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. Then we can go to CapEx.
As I mentioned earlier, I think there's been a little bit of moderation between Q2 being what we forecasted as
a big quarter into
maybe a bit more business in the second half of the year. Again, there's quite a bit of volatility with these major fab projects that can move in and out quite a bit during the year. And it does change quite a bit. So at the moment, I would say a slight moderation of Q2 and stronger second half. And then on the capacity, Andreas, for 2019,
I think it was a similar question to before. We do not disclose yearly capacity ramp up. Please be reminded of the 2020 target. Again, 700 Switzerland, 100 Romania, 400 Malaysia. That gives you the €1,200,000,000 €1,200,000,000 which we flexible ramp up by 2020, fully in line with the market growth.
Mike has given indication that the 400, we call it at least, so there's upside potential. But how much we add in 'nineteen, again, this is flexible depending on the market opportunities.
Okay. I think that was the last question we had. So 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 time. Thank you very much.
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