VAT Group AG

SIX:VACN

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the Q1 Trading Update, Media and Analyst Conference Call. I'm Andre, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Mike Allison, CEO of VAT Group. Please go ahead.

[Michael Allison, CEO & Interim COO]

Thank you, and good morning, and welcome to VAT's conference call on the Q1 2020 trading update, which we published earlier today. With me this morning are Stephan Bergamin, our CFO; and Head of Investor Relations, Michel Gerber. After my short introductory remarks, we will start the Q&A session. The call moderator will take your questions in the order you enter them. So before I start, I'd like to thank the global VAT team who have done a really outstanding job in the last few months, keeping our business and factories running through this terrible pandemic and in doing so helping VAT retain VAT's strong reputation in the market. These swift actions and flawless execution of all measures and precautions help safeguard the health of not only our employees but also the families and communities. And on behalf of the management team here, I cannot thank them enough. So with that, let's start looking at the business development during the first quarter of 2020. VAT has posted top line sales growth of 14% in Q1 2020 versus Q1 prior year as the semiconductor business came out of the cyclical downturn, and this was in the middle of our guidance window. Sequentially, Q1 was down as predicted due to strong restocking by our customers towards the end of the year and also due to some operational issues connected to COVID-19. Year-on-year orders grew 42% to CHF 181 million. On a sequential basis, orders were up around 3%. The improved order pattern in the first quarter is a further indication that the semiconductor industry is fully into a cyclical upswing. What is encouraging is that demand was up across all semiconductor sectors. Advanced logic and foundry are continuing the build-out of 7-nanometer technologies and also starting to ramp 5 nanometers, which is good for VAT, given our strong market share position on advanced nodes. We are also seeing recovery in the memory market, driven by stronger pricing and the need for higher performance devices, which is driving our customers to upgrade their NAND flash chips to the latest 128-layer designs. This is driving strong demand for deposition and etch equipment, which have a high vacuum valve content. In the other sectors, we also saw strong order intake in display, driven by OLED. In general vacuum, we saw strong demand in the R&D sector as well as analytical instruments, which offset a weaker environment in automotive. Service had a weak sales quarter as the COVID-19 virus shut down many nonessential maintenance activities like upgrades, but we continue to see very strong order intake and we recorded our highest ever order quarter, which shows that our business development actions are paying off. Retrofits and spares orders were especially strong. Internally, we have continued our measures to improve operational efficiency further, and we also continue to invest heavily in new technologies to cope with the demand from our customers for new and enhanced products. We continue to drive new specification wins, and this is a leading indicator of our future market share, which was already up 2 percent points in the semi, display and solar sectors in 2019. Turning now to the impact of COVID-19 on our business. We took very swift and decisive actions in early Q1, which were rolled out across all our locations. This allowed us to continue operations at a very high level across all sites. Our main facility in Haag in Switzerland has had no shutdowns, with the only real impact being some supply chain restrictions which are now mostly resolved. In Malaysia, we were forced to shut down for 2 weeks at the end of March, and this is continuing, but then we were giving an exemption due to the critical nature of semiconductors in the global supply chain. We also campaigned hard in Switzerland to ensure that our industry was seen as a similarly critical industry, and we were happy with the response from the local and federal government. In many semiconductor locations such as U.S.A., Singapore, Malaysia, Japan, China, France, semiconductor makers, OEMs and related suppliers were granted exemptions to allow continuous operations through the lockdowns. We will continue our campaigning efforts to get VAT and other semiconductor companies recognized in the same way in Switzerland. Overall, I have been happy with our handling of this critical situation, and the business continuity plans we had in place were a great advantage for VAT especially in having multiple manufacturing sites with different supply chains. Post COVID-19, we will use this to further cement our leadership position across the various sectors. Before turning to our guidance for the rest of the year, let me go a little deeper into the development of the business. Looking at our reported segments, you will see Valves sales were up 21.5% versus prior year, and order intake was up almost 50% over the same period. This was mostly due to the increase in the semi business. Service was down 9% versus Q1 '19, but up 14% in order intake in the same period. In the Industry sector, we continue to diversify our third-party components business, and sales in this segment were down 12% versus prior year. So turning now to the outlook. Starting with semiconductor. Despite the global challenges caused by COVID-19, there is growing optimism that semi will weather this situation. We will likely see some supply-driven challenges in Q2 across the industry, but we then expect the second half to be stronger. The logic and foundry sector continues to be robust as it did during the '18/'19 market correction, driven by the 5G rollout in 2021 and the whole compute data sector. Semiconductor may turn out to be one of the main sectors to benefit from the pandemic. For example, the network and data traffic has increased more than 20% in the last few months driven by the imposed changes to our work and personal lives. This is driving strong server and data center demand. We also expect to see digitalization, automation, data storage and IoT to benefit from these societal and business changes. The second half of 2020 is likely to benefit from increased memory spending driven by 3D NAND fab upgrades, which I pointed out earlier, and we expect this to continue into 2021. DRAM, we should also see a recovery later this year. It may take a little bit longer due to some of the changes in smartphone demand, but I think it's a bit early to tell how that's going to play out. I think it's also too early to fully determine the long-term impact of the semiconductor sector due to falling GDPs and a general recessionary environment, but we should gain insight into this during the second half of 2020. Display is continuing the investments in OLED, and we already see this developing in Q2. As for the full year 2020 capital spending, we don't expect too much impact as most of the major OLED projects are in progress and continue to go ahead. General vacuum will be mixed. We continue to see good spending levels in R&D, scientific instruments and instrumentation. This should be relatively unaffected by COVID-19, and we may even expect an increase in the medical applications within these sectors. We do expect automotive to be down, but on the other hand, the environmental benefits of lower air and vehicle traffic may accelerate the electrification of vehicles and accelerate battery manufacturing, which is an area we're investing in. Overall, the businesses of VAT developed in line with our expectations during the first quarter, and we expect this to continue during the rest of 2020. While visibility has improved in our core markets, we are under no illusion that conditions of the pandemic can change quickly. And as such, VAT has several scenario plans developed and we're ready to implement if things should change. VAT's medium-term growth drivers, such as Internet of Things, 5G, cloud computing and storage, artificial intelligence and many other global digitalization trends, remain firmly in place and are expected to fuel further demand for semiconductors and advanced displays. This, in turn, is forecast to drive demand for our high-performance vacuum components and related service. In addition, VAT sees further expansion of vacuum-based production processes in a variety of industries. This view is echoed by research companies such as VLSI Research, and the recent news flow from several of our peers is supporting that assessment as well. For the second quarter of 2020, we now expect net sales of between CHF 150 million to CHF 160 million, of course under the provision that we do not see any major impact of any of our key manufacturing sites from COVID-19. Based on the ongoing internal measures to improve our operational efficiencies, we continue to see the half year and full year EBITDA margin to be above 2019 levels. VAT maintains its midterm EBITDA margin target of 33% by further improving the company's cost structure. Full year CapEx is expected to be in the range of CHF 25 million to CHF 30 million. Free cash flow in 2020 is expected to be less than 2019 due to the investments in inventory and growing the business. Given the current outlook and the very strong balance sheet of VAT, the Board of Directors has confirmed a dividend of CHF 4 per share for the financial year 2019, as communicated with the full year results on March 3, 2020. As announced earlier this month, Thomas Berden will join VAT as the new Chief Operating Officer at the beginning of October. Thomas joins VAT from Sweden-based industrial bearings manufacturer, SKF, where he has led the company's spherical roller bearings business, serving a wide variety of industrial markets around the world. Thomas brings VAT a strong track record in operational excellence and state-of-the-art manufacturing, which are key success factors in our long-term strategy to drive growth and profitability. Thomas is joining an experienced team at a perfect time as we accelerate our efforts to increase productivity, speed up the company and ensure unmatched product quality from our manufacturing bases in Switzerland, Malaysia and Romania. In addition, we also announced this morning that the Board of Directors has nominated Daniel Lippuner for election to the Board of Directors at the company's Annual General Meeting on May 14 for a term of 1 year. Mr. Lippuner is a Swiss citizen and is currently a member of the Board of Directors for Remnex Foundation, 3S Solar Plus AG and Amsler Tex AG, all based in Switzerland. He has also held a number of senior management positions across a variety of global industrial companies. He brings more than 25 years of international experience from a range of manufacturing and technology companies, from construction equipment to semiconductors and renewable energy. He has successfully expanded businesses in the dynamic Asian market and has a proven track record in operational excellence initiatives that have driven higher profitability and cash flow. Last but not least, we had to again postpone our Capital Markets Day scheduled for April 28 due to the COVID-19 restrictions. The new day for this event is set for October 25, together with our Q3 2020 trading update.

[Unknown Executive]

October 15.

[Michael Allison, CEO & Interim COO]

Sorry, October 15, not 25, together with our Q3 2020 trading update. This concludes my prepared introductory remarks, and we're now turning the call back to the operator for Q&As. Thank you very much.

[Operator]

The first question comes from the line of Sebastian Kuenne from RBC.

[Sebastian Kuenne, Analyst]

Gentlemen, 2 questions. One is relating to the complexity of the wafer manufacturing equipment machinery, which -- there seems to be no disruption in the supply chain when I listen to your statements. At the same time, ASML seems to have some delays in deliveries and revenue recognition. So I'm a bit surprised that you're also confident that you see no major disruptions. Maybe you can elaborate a little bit on this. And secondly, I think a lot of clients are restocking on components just to make sure that the -- any disruption in the supply chain can be buffered with more inventory. So how much of the Q1 order intake do you think is kind of inflated by the fact that there's restocking by your clients?

[Michael Allison, CEO & Interim COO]

Okay. Thank you. Yes, the semiconductor supply chain is complicated, but most of the major OEMs in the industry and suppliers have very detailed business continuity plans, and we work very hard daily to make sure these are initiated and that we move fast to fix any restrictions. We had some supply chain bottlenecks in Q1. Again, we work with those suppliers very quickly to solve problems and ensure the continuation of supply. If you heard my comments, I did say that in Q2, we will see some supply-related challenges across the industry, and they'll come in different forms in different countries. For example, Malaysia, we still have a lockdown. VAT is still operating at about 50% output there. We expect that restriction to be relaxed by the end of this week. But I think it's reasonable to assume that we're going to see some level of restrictions across the supply chain. That's why I said in my statement I expect to see some supply-driven challenges in the second quarter. And if you look at our order backlog and our order intake, you'll see that we've taken a little bit of that into account in our guidance. As we did in the first quarter, I mean by the beginning of March, I could see the likelihood of some challenges and we took that into account in our Q1 guidance. So yes, expect to see, I think, some ongoing challenges in Q2. I'm hopeful by the third and fourth quarters, we're through that completely. And the other thing is the speed of semiconductor companies to address challenges is incredible. We really move in days rather than weeks and months, and we have a fantastic capacity to drive these constraints out of our supply chain. The second question was around restocking of components. It's quite difficult to tell at present, because of the virus and the output constraints some of our customers have, exactly where the supply/demand balance is sitting at the moment. All I can say is that from the strength of our order intake and the view we're getting from the market is that our supply is still pretty tight. I don't think our customers are stockpiling at present. I think they're shipping as much as they can. So I'd say overall, it looks pretty tight and I don't see, as I say, a lot of restocking. At the beginning of the year and the fourth quarter, what was changing is our customers were starting to see an increase in their demand and they were increasing their consignment levels. So it's not so much restocking. It's getting ready for that increase in volume. And I think we should expect strong order intake to continue through Q2 is what I'm seeing at present.

[Operator]

The next question comes from the line of Charlie Fehrenbach from AWP.

[Charlie Fehrenbach;AWP;Media]

You mentioned the reduced capacities...

[Michael Allison, CEO & Interim COO]

Sorry, we can hardly hear you.

[Charlie Fehrenbach;AWP;Media]

You mentioned the reduced capacities in U.S.A. and Malaysia. Is it better now?

[Michael Allison, CEO & Interim COO]

Yes. Yes. We can hear you.

[Charlie Fehrenbach;AWP;Media]

Can you give us an indication how much the capacity utilization overall is?

[Michael Allison, CEO & Interim COO]

Yes. Well, in Switzerland, we're running the maximum output. The output in our Swiss facility is governed at any time by the number of assembly people we have. We keep a buffer in our machining and other critical areas within the factory. And then we ramp our output with the number of assembly people. So right now, we're pretty much at full capacity and assembly in our Swiss factory and we expect that to continue during Q2. Malaysia, we've -- as you know, Malaysia makes up about -- somewhere around about 20% of our global output, 15% to 20%. And at the moment, that's operating at about half that rate because of the lockdown that we have in Malaysia. So -- but again, we expect that that's going to be released hopefully by this weekend, in which case we can get back to 100% output within our Malaysia plant. We have no restrictions in Romania, and we have no restrictions now in any of our service centers around the world. We even got full exemption to operate in our California service center, which is a critical one for us. And as you know, there are ongoing very severe lockdowns in California.

[Operator]

The next question comes from the line of Michael Foeth from Vontobel.

[Michael Foeth, Former Head of Industrials Team]

Yes, 2 questions. The first one is in displays. You mentioned this frame contract with one of your customers. My question would be can you be a little bit more specific in terms of sort of what sort of growth in your display operations this is driving, whether that's an isolated order or whether it's a trend in the market that demand for OLED equipment is increasing again. And maybe also comment on sort of the duration of that frame contract. That would be the first question. And the second one is you mentioned continued spec wins. Can you give an indication in particular in which sort of segments you continue to gain those spec wins and gaining market share as a consequence?

[Michael Allison, CEO & Interim COO]

Okay. Thanks. Yes. The display frame contract was a 2-year frame contract we set up with a Japanese OEM. And I'd say that's just continuation of our share gain efforts within display, I don't think in terms of growth for VAT. It's within the overall growth numbers but I wouldn't call it out specifically as a massive growth driver. Display is harder to read right now in terms of where we think that's going to end up and the implications from the pandemic. I think for the near term, Q2, even the second half of 2020, the projects are pretty well defined and the equipment is in manufacturing now across the OEM community to ship into these facilities in Q2, Q3 and even as much as Q4. So I think the -- our understanding of the market in 2020 is pretty good. I think there's a big question still for 2021 in terms of the OLED and LCD capacity and how that's going to be affected by a reduction in GDP in a more recessionary environment. I would expect that display is going to be hit harder than semiconductor because semiconductor today is just such a breadth of applications, whereas, as you know, the displays is heavily driven by smartphones and domestic displays. So let's see how that one works out. The continued spec wins, we communicated at the end of last year that we had substantially higher number of spec wins in '19 versus '18. And I'd say that trend is just continuing. It's an ongoing process. New platforms in semi, display are being introduced continuously and we continue to stay focused on those spec ones. I can't give a number at this point. It is probably better to look at it on an annual basis and see the total number of spec wins we gained. But I would say on the high-technology platforms, we are heavily dominating the market share and spec wins in that area.

[Michael Foeth, Former Head of Industrials Team]

Okay. Maybe just one additional question if I can. The -- is it fair to assume from your comments that you see continued high order intake levels through the second quarter that you will have had sort of 3 quarters in a row with high order intake and relatively lower sales that you will -- you're expecting a significant jump in sales once the constraints from the supply chain are over? Is that correct to assume?

[Michael Allison, CEO & Interim COO]

Yes. I think that's fair to assume. We continue seeing strong order intake even in the first few days of April. So it looks a positive trend at this point. As I also said though, we -- in semiconductor, we're very used to a cyclical environment. So we pay a lot of attention to book-to-bill ratios. And I mentioned we have various scenarios worked out in case that had to change. I think, thankfully, we were really at the beginning of a semiconductor cycle. Had this virus came in at the end or in the middle of a cyclical downturn, I think it would have been quite challenging. But the fact that supply/demand was getting tight in several areas like memory and advanced logic I think is really helping the business in 2020.

[Operator]

The next question comes from the line of Felix Remmers from zCapital.

[Felix Remmers, Research Analyst]

One question from my side on order intake. I mean you mentioned that you expect a better H2 versus H1. Does that also hold true for order intake? I'm asking because today, TSMC actually confirmed its CapEx budget for the year, $15 billion to $16 billion, but already spent like 40% in Q1. So I actually would assume that just based on logic, maybe memory will overcome this trend, would see a lower order intake in H2 versus H1. Any thoughts on that?

[Michael Allison, CEO & Interim COO]

Yes. I haven't analyzed the TSMC numbers yet nor have I had specific feedback from our OEM customers. I think the trend that's pushing the solid outlook for the second half is also the memory recovery. As I mentioned to you, memory has a high percentage of etch and CVD equipment, which is very good for us on the vacuum valve content. So normally, when memory kicks in at a higher spending rate, we see a slight acceleration. But I think the logic area spent consistently through the last downturn, as you know, in advanced logic, microprocessors and foundry. So I'm assuming that's going to continue during 2020, but it's a bit too early to see, yes. And I also mentioned in my remarks that the real implications of the pandemic and GDP, I don't think we'll see in semiconductor until we get into the second quarter, maybe even into the third quarter and look at the implications for 2021. But I think that our hope is that memory spending, especially the upgrading of flash memory fabs, one of the trends we are seeing is the growth of the high-end server business and data centers. That's really accelerating and it's making up for some of the reduced demand of smartphones. So the next question will come -- Apple 5G smartphones were supposed to come out in September, October. There's no exact clarity now on when it's going to come out. It may be later, maybe November. But that should kick-start again the smartphone business. So because of this, I think we're hoping the logic market will continue, and we'll also see this continuation of the flash memory and DRAM spending.

[Felix Remmers, Research Analyst]

Maybe one follow-up on that. Your view on the recovery within memory, how firm is that view? I'm asking just the project, the CapEx projects of your -- of the largest memory spender? How advanced are they already? Or how high is the risk of postponement in such an environment?

[Michael Allison, CEO & Interim COO]

There's always risk of postponement. I think the interesting thing here is a lot of the CapEx right now is going into upgrading existing flash fabs. So we're not actually adding additional capacity. We're simply turning it into -- from a 64- or 90-layer flash device up to a 128 one. So that's good because it's driving CapEx but it's not adding too much additional capacity into the market. The capacity adds will probably come in the second half of the year and into 2021. And I think if we are going to see a correction on CapEx spending in 2021, which, by the way, is forecast to be a high-growth year up in the high teens, maybe even 20% CapEx growth, that may come down a little bit if we do see an impact from a shrinking GDP across the world. So a bit too early to tell, I think we'll get more visibility in the end of second quarter, beginning of third quarter.

[Operator]

The next question comes from the line of Robert Sanders from Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

First question would just be what is your working assumption on WFE spending in 2020 in terms of percentage growth because -- the reason I ask is because last time, I think a month ago, we discussed Lam and AMAT talking about 15% to 20%. But VLSI, well, I think we've referred to as well, they're now looking for 8% decline in 2020. So there does seem to be a disconnect between sell-side assumptions and industry forecast. So what is your working assumption in terms of underlying equipment spend behind your outlook? And I have a follow-up.

[Michael Allison, CEO & Interim COO]

Yes. I think I'm leaning more towards the 10% to 15% growth this year from what I'm hearing from our customers. But it's -- again, it's very early in this pandemic to know exactly a specific number, but I would put it probably in the 55 billion to 58 billion type of spend for process equipment. It's the tougher numbers I'm hearing from the industry.

[Robert Duncan Cobban Sanders, Director]

Got it. So it sounds like if there is a downturn, it's going to be more affecting your 2021 outlook versus 2020 at this stage just because so much of the investment is strategic at TSMC, Intel, et cetera. Is that fair?

[Michael Allison, CEO & Interim COO]

It is. There's a lot of strategic investment happening. But bear in mind, that's not an incredibly high number of wafer starts. There's a high-technology component there. So I'm not sure yet we're still seeing the capacity spends happening at the rate we expected. But that really is the big question, what is the global impact in 2021 assuming that we do have a good year in 2020.

[Robert Duncan Cobban Sanders, Director]

Got it. And just last question would be you mentioned DRAM may take a bit longer to get going again given smartphone demand. Does that mean that most -- almost everything you've seen so far has been layer migrations in NAND so far but no real capacity additions in NAND or any kind of technology spending in DRAM? Is it mainly just in memory, the layer migration?

[Michael Allison, CEO & Interim COO]

So far, it seems to be. Again, I don't get direct information exactly where every piece of equipment goes, but it seems like flash is the dominant factor at the moment. And I'm also hearing on the data center conversions, the amount of flash going into data centers and substitution of hard drives is accelerating, again driven by the lower pricing of flash that makes it more economically viable to put in the higher performance, more environmentally friendly as well, upgraded flash systems. So it seems to be flash is growing in the high 20s percent. It's some of the numbers I've heard. And although DRAM is improving, I don't know yet that trade-off, as I mentioned, between smartphones and data centers, what the impact will be in DRAM.

[Operator]

The next question comes from the line of Sandeep Deshpande from JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

My question is regarding your manufacturing flexibility. I mean today, I mean you've had some supply chain issues, say, in Malaysia, et cetera, and you've got very strong orders. So you may be over-manufacturing in other places to make up for the lack of some capacity in some places. The question is if there were to be a slowdown in the second half, how quickly you could adjust to a slowdown in the second half of the year associated with the economy mainly because -- I mean are you going to be preordering -- ordering materials or whatever and that would cause a big working capital overhang? So I'm just trying to understand the mechanics of how quickly you can change your outlook and thus -- and reduce balance sheet risk associated with it.

[Michael Allison, CEO & Interim COO]

Yes. Yes. Well, as you saw in the last cycle, we managed that pretty well with our working capital and people expense. We do have -- we have been building up into this ramp a high number of temporary employees, which is one of the vehicles we use to adjust through cycles. So we're continuing to do that. There is always some risk on inventory. And VAT, with our market share, we're in a position that we have no option but to build to the forecast we're seeing from our customers, and we'll continue to do that. So when things cut off, we end up with some -- a higher level of inventory than we need, and we had that problem in late 2018 into 2020 -- 2019. Roughly 2/3 of our costs are variable. So that helps us a lot. And I think we're continually looking at our cost structure and making cost savings across our whole operations model to make that breakeven point continuously better. So I'm confident based on the scenario planning we're doing that in almost any scenario, we would be EBITDA and cash flow positive. And hence, that was one of the reasons we decided to go ahead with the dividend even given the level of market uncertainty.

[Operator]

The next question comes from the line of Jürgen Wagner from MainFirst Bank.

[Jürgen Wagner, Director]

Yes. Actually, I have a question on your competitive positioning in the current environment. Historically, in a recession, some weaker competitors refocused or were forced to refocus or even get out of their core markets. What might that -- or do you see something similar in case in the second half there is a downturn for you? And what would that imply for pricing?

[Michael Allison, CEO & Interim COO]

Okay. Let's start. It's really quite market-dependent. In semiconductors, we have long-term relationships with our key customers, and typically when you're installed on that equipment, you're in there for a fairly long period of time. So market share changes more on a generational aspect than it does on a cycle. And that's why I put so much emphasis on spec wins and pushing VAT to win as much as we possibly can at the latest generation nodes. And that's an indicator of future market share. So I think this type of activity doesn't really impact short-term market share, but what it does is it makes it difficult for our smaller competitors to compete with the same level of resources with the R&D spending, with the business continuity plans that we're demonstrating, having 2 manufacturing centers, for example. So I think our key customers see the strength of VAT in these tough times rather than in the good times. And I think that ultimately helps our drive to increase our market share over time in semiconductor. Display is a little bit like that, tends to be longer term, but I think it's certainly making it tougher for our smaller Japanese and Korean competitors in this environment. So I would expect to see them having some real challenges. It's not really interesting for us from an M&A standpoint because our technology is generally better. They tend to be less technology advanced, and quite often, they end up focusing on more commoditized markets. So I think the remaining market is the general industrial market. And there are some pricing dynamics there because they're mostly spot buys from individual projects or just the generic and industrial purchases. So far, we haven't seen much change in pricing and it's -- something I'm looking at as we come through this is how does VAT use the pandemic to strengthen our position across the world. What can we do in terms of supply, in terms of geographic presence? How can we come out of this stronger? And we've had some significant brainstorming already around that and we've got some good ideas and, longer term, how we can take advantage of it. But in the short term, I don't see a dramatic change in market share. The biggest change comes from the activities we drive around specification wins.

[Operator]

The next question comes from the line of Marta Bruska from Berenberg.

[Marta Kinga Bruska, Analyst]

I have 3 or 4, if I may allow for a little bit more this morning. So firstly, what gives you the confidence that the supply chain challenges will be sorted out in Q3 or the second half of 2020? Does this assume that the pandemic will be contained by then?

[Michael Allison, CEO & Interim COO]

Yes. Well, I think we're seeing, for example here in Switzerland, actions to reduce the impact of the pandemic on industry. We've been working very closely with the authorities to put in the right level of protection for our employees. And our assumption is now it's safer for an employee to be at work than it is to be in the community with the measures we put in place. We've also been working very hard with our suppliers to ensure they implement similar segregation and the same preventative measures that we put in place. So I think the chances of a major disruption are reducing, but there's still a big question on how we exit from the pandemic and could we see a reoccurrence of it if we relax these. And these are the big unknowns and that's why I said in my guidance that that is subject to not having further supply chain challenges. The other thing is globally, we have supply chains now not just in Switzerland or Europe but also in Malaysia and Southeast Asia. So we do have a wider supplier network. And as we qualify our suppliers, we try to make sure that they have multiple manufacturing locations. And this is VAT migrating from a small company to a larger company where we really think about supply chain considerations for the future and how we maximize our business continuity planning. So I'm not saying we're immune. That would be irresponsible. But I'm saying with the efforts we're putting in place, we really are minimizing the impact, as you've seen in the first quarter.

[Marta Kinga Bruska, Analyst]

Yes. So I understand that you are increasing resilience of your business. Do you think it would have been enough in case the second outbreak appears in autumn, November? Or also will these people get simply scared, they do not show up to work? That was an issue for some of the other companies that I cover.

[Michael Allison, CEO & Interim COO]

Yes. Well, a good example of that -- this is where communication and employee engagement is really important. Communication is arguably one of the biggest drivers of a good business continuity plan. Your employees have to know what we, as a management team, are thinking, and we spend a lot of time on that. A good example was in Malaysia. The Malaysian government insisted that employers pay 100% of salary. So it became almost voluntary for employees to turn up at work because they were getting paid anyway. We had 99% turnout of the 30% of employees that were allowed to come back to work. Some of our peers had between 10% to 20% of turnout. So bringing back 30% of our total employees in Malaysia, we were able to operate at 50% of output. So I think this is where engagement and involving your employees in the action plans and making them feel secure is a critical part of our management challenge, and we've worked very, very hard on that.

[Marta Kinga Bruska, Analyst]

That's very reassuring. And now going to the second question. I know this is something that you have relatively low visibility and we tried to get a little bit more out of you on that topic already before but I'll try again. How much of demand for your products is driven by the end demand in automotive and the smartphone end markets versus data centers? Again, just helping me to think about it in terms even of just the relationship would be very helpful.

[Michael Allison, CEO & Interim COO]

Yes. Good question. Automotive drives quite a lot of chip output. But if you look at the design rules for automotive, they tend to be made, a lot of them, in the legacy fabs. A lot of the engine management systems and so on are really focused at the higher design rules and they don't spend much on CapEx anyway. The majority of semiconductor CapEx has been at the leading edge of advanced foundry, advanced logic and advanced memory and also in the capacity expansions of those advanced nodes. So the amount of CapEx is -- I don't know the exact number, but it is probably -- out of that, say, 50 billion, 55 billion, there's probably only 2 billion to 3 billion that comes into the automotive sector. Where we may see a little bit is just the amount of infotainment going into cars these days on screens and high-end sensors and so on. Maybe a little impact longer term if we -- if this recession goes on too long, but I think we're also seeing the chip content going into electric cars much higher than in the diesel and petrol equivalent. So there's some benefit from the electrification happening, but I'm not so worried about automotive. I think that's a very specific segment and will impact specific companies both for the large OEMs and the immediate supply chain. It's probably not the biggest issue.

[Marta Kinga Bruska, Analyst]

Right. The biggest issue is perhaps the smartphones or one of the larger ones slide. And how much would you estimate your exposure to that one?

[Michael Allison, CEO & Interim COO]

I don't have a number for that. The smartphone market though moves very quickly. I mean sales in China in the first quarter of Apple iPhones were actually not too bad surprisingly. Samsung did announce that they would see a reduction in smartphones in the first half of the year, but then that could be offset by a strong growth in the second half. It's quite hard to tell. Overall, I would expect those smartphones to be down in 2020.

[Marta Kinga Bruska, Analyst]

And that would drive perhaps the majority of the market for the DRAM memory chips, wouldn't it?

[Michael Allison, CEO & Interim COO]

It drives as a percent. I don't know the exact percent, but what I've been reading over the last few weeks is that the growth in high-end servers is making up for the expected reduction in smartphones. And I mentioned, I think some of the implications of the virus, more people working from home, increase in network adoption -- we've got at the moment more than 700 people working from home. We've had to increase the spend in PCs. Ourselves, we've increased the spend on servers and also in data services. So we're seeing a boom happening in those areas.

[Marta Kinga Bruska, Analyst]

Yes. That's clear. Yes. I mean it would be just helpful to get a little bit more of the numbers behind it for rough comparison at least, but I'll try to dig into it and come back later. And then coming to the third question, it's about expanding to other parts of the vacuum chamber. You mentioned several occasions before. What is the total market potential? What would be some of the competitors or new peers you would be seeing there?

[Michael Allison, CEO & Interim COO]

Oh, that's -- I mean depends exactly which segments and which product areas we decided to play. And I think when we last talked, I mentioned that we've been focused on some of the advanced load locks, some of the motion components, and we were also working on some new valve technology for the ALD sector, which we've now got in trial. And typically, these new markets are somewhere in the $50 million to $100 million sizes, but there's a lot of chamber components out there. And I think one of the last questions was on the competitive opportunity coming out of this. I think that this will highlight the weaknesses in the semiconductor supply chain where the small guys don't have the level -- the depth of capability in their organizations, don't have the business continuity plans, don't have the professional supplier networks. So we're -- part of our actions out of this is to really look in-depth where our key customers have their biggest problems and then try to partner with them to see if VAT can produce a better solution in that area. So I think it will accelerate opportunities for us and adjacencies, and that will be a focus of my business development teams as we come out of this.

[Marta Kinga Bruska, Analyst]

And then just the last one, out of curiosity, you mentioned that there is an increasing share of vacuum in -- manufacturing in the general industry. Assuming engineer by education, I was always told that vacuum is bad when designing manufacturing processes because it's just far more expensive to manufacture anything when you use vacuum versus not. So is that that my peers are stating industry are failing to come up with a better understanding of these -- of non-vacuum processes or would try to...

[Michael Allison, CEO & Interim COO]

Yes, I think it's obvious. If you can manufacture without a vacuum, it's a lot cheaper. But unfortunately, if you're going to -- either semiconductor display -- display have been trying, for example, for many years to implement things like inkjet printing of certain compounds within the display process, but it's very difficult and you don't get the purity levels. You don't get the conformity of coatings. You get far too many defects within your process. So it comes down to manufacturability in the end. If you have no other way, then vacuum is an option. And we're seeing more and more high-end applications requiring vacuum technologies, which is good for us. Okay. I think that's all questions. So I thank you for attending this morning. And the next update from VAT will be in July as we...

[Unknown Executive]

On August 6.

[Michael Allison, CEO & Interim COO]

August 6 when we present our half year results. Thank you very much.