VAT Group AG

SIX:VACN

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, welcome to the Q1 trading update media and analyst conference call. I am Alice, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. The presentation would be followed by a Q&A session. [Operator Instructions] 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, sir.

[Michael Allison, Chief Executive Officer]

Thank you. Good morning, ladies and gentlemen, and welcome to VAT's conference call on the Q1 trading update, which we published earlier today. With me this morning is our new CFO, Fabian Chiozza, who started in the 1st of April; and also our Head of Investor Relations, Michel Gerber. After my introductory remarks, we'll start the Q&A session, and the call moderator will take your questions in the order you enter them. Before I start, I'd like to thank the global VAT team who continue to do an outstanding job in this persistent COVID pandemic to keep everybody safe and then keep our business and factory running at record levels. The swift and decisive actions and almost perfect execution of all the precautions helped safeguarded the health of not only our employees, but also the families and communities and kept VAT up and running at all times. And as a management team, we really can't thank them enough. With that, let's start by looking at the business development during the first quarter of 2021. Orders in the first quarter reached a record level of CHF 241 million, up 33% year-on-year, and the first quarter book-to-bill ratio amounted to an extraordinary 1.25x. The strong order growth was driven predominantly by Semiconductors, but also by Global Services and Advanced Industrials. Global semiconductor sector, VAT's largest end market, continued to grow strongly, driven by the global shortage of semiconductor chips as well as further technology advances which require our semiconductor manufacturers to continue investing heavy in new equipment and also to upgrade existing capacities. This drove higher demand for both vacuum valves and service products aimed at maximizing wafer fab uptime. As a result, many of the major chip makers announced increased CapEx projections for 2021 and even into 2022 over the last couple of weeks. The demand for silicon chips has never looked brighter, and this is creating enormous opportunities for VAT. Industrial markets also rebounded from a weak first quarter a year ago, and we were able to harness the growth initiatives implemented in our business unit, Advanced Industrials, especially in Asia. We do believe, however, the order activity in the first quarter was also fueled by a certain amount of preordering across all of our businesses driven by 3 main factors: first one, a very buoyant business outlook; second one, supply chain shortages; and third one, from Chinese OEMs who are growing fast and trying to secure their supply chain. This could slightly impact orders in the second quarter of 2021, but despite this, we still expect very strong business conditions. And in fact, in the first 2 weeks of April, we continue to see a very strong order intake. VAT's order backlog at the end of the first quarter was CHF 193 million, up 28% compared with the end of March 2020. Net sales in the first quarter of 2021 grew to CHF 192 million, an increase of 32% compared with the same period in 2020 and slightly above the company's guidance issued with the fourth quarter and full year 2020 results on March 4. Looking at all our individual business units, we see very positive signs in all areas. Before I dive into the details of the businesses, as announced together with the full year results and starting the 1st of January, VAT integrated the former Industry segment into the Valves segment, and in particular into the business unit, Advanced Industrials, which is formerly our General Vacuum business. The Industry business, which is mainly a supplier to the automotive industry, fits much better into this business unit. As a consequence, VAT now reports in 2 segments: Valves segment and the Service segment. The Valves segment, which encompasses the development, production and sales of vacuum valves and components, consists of 3 main business units: Semiconductors, Display & Solar and Advanced Industrials. And starting this quarter, VAT now separately discloses orders and net sales of these 3 business units in an effort to further increase the transparency of our reporting. The Services segment remains unchanged and comprises spare parts, upgrades and retrofits and the maintenance businesses of the group. So looking now at Valves. In the Valves segment, we reported orders of CHF 201 million, up 34% year-on-year, and net sales of CHF 156 million, an increase of 29% compared with the same period in 2020. This growth was mainly driven by higher demand in the Semiconductor business unit, where orders increased 43% to CHF 141 million, which is an all-time record. And net sales amounted to CHF 112 million, up 40% compared with the first quarter of 2020. End users continued to invest in new technologies to manufacture the next generation of chips, while at the same, increase in capacity for existing chip designs in order to satisfy the fast-growing demand for both logic, foundry and memory chips. Semi also recorded 5 specification wins in the quarter, 3 of them resulting from the company's growth initiative to develop new adjacent products that complement its core valve business. In addition, VAT's technology leadership was acknowledged during the quarter with the 2020 Best Supplier of the Year Award from Samsung Mechatronic's R&D Center (sic) [ Samsung's Mechatronic R&D Center ], in recognition of the 2 companies' long-standing collaboration and pressure control algorithms for productivity optimization. This demonstrates the depth of technology relationship VAT has, not just with the semiconductor OEMs, but also with the chip makers. Orders and net sales in the Display & Solar business unit declined 14% and 27%, respectively, year-on-year, as higher demand for OLED displays using the latest generation of smartphones could not offset lower customer investments in traditional LCD technologies. However, the order pattern seen in the first quarter suggest that the trough in the display cycle could be reached during the first half of 2021. VAT expects a rebound in business activities for LCD displays and continuing investments into OLED displays during the second half of the year. Net sales in the solar business grew strongly in the quarter, with high demand for the latest photovoltaic cell production technologies. The Advanced Industrials business unit saw a strong rebound from the weak first quarter a year ago with record orders up 41% and sales 39% higher, respectively. The recovery was broad based and resulted from generally improving market conditions, coupled with positive results from growth initiatives implemented during 2020 to focus on Asian markets, especially China where our orders more than doubled. In Europe and Asia, the coating and life sciences business has continued to improve, while the automotive business grew mainly in Asia. Demand in the U.S. remained at a relatively low level during the first quarter, but we expect that to gain momentum during the rest of 2021. Turning now to our second segment, Global Services. The segment reported another quarter of record orders of CHF 20 million in the first quarter, an increase of 29% compared with the same quarter 2020, while net sales were up 48% to CHF 36 million. Growth was driven by significantly higher demand among chip manufacturers as they invest in service solutions aimed at increasing productivity of existing assets and maximizing uptime. In addition, the sale of spare parts and consumables to chip manufacturers in China also increased, while new upgrades and retrofit products released in 2020 also supported growth in the quarter. Global Services also qualified several new service products in the first quarter, such as a quick shut-off valve for subfab applications. Let me now elaborate on our expectations for 2021 and the sales guidance for the second quarter of 2021. Despite the persisting uncertainties around COVID-19, the medium-term growth drivers such as technology advances and digital mega trends remain firmly in place. Technology advances in logic and memory chips continue to fuel the need for advanced vacuum products, and the number of process steps under vacuum also continues to increase. In addition, vacuum-based production processes are also critical in displays and solar markets and continue to gain importance in other industries. An additional growth driver is a capacity shortage in many semiconductor chip categories. This shortage, coupled with high demand for ICs, requires additional CapEx from chip producers, and several players have already announced higher CapEx budgets for 2021 and also well into 2022. In sum, VAT expects significant market growth, driven mainly by the semiconductor and service-related businesses, but we also see positive growth signs in Advanced Industrials and Display & Solar. Market analysts now estimate that investments in wafer fab equipment in 2021 could increase 15% to 20%, that is well over $70 billion, up considerably from the record level set in 2020. This plays to VAT's technology advantages and is expected to drive further market share gains. In displays, investment in OLED screens are expected to remain muted. Declining investments in LCD displays are forecast to continue, leading to a general softer market in 2021. However, recent market data suggests that the trough could be reached during the first half of 2021. In solar PV, the move to higher-efficiency cell designs is expected to lead to higher vacuum equipment investments during the year. Forecast for advanced industrial valves are also more positive in anticipation of an economic recovery, following the COVID pandemic. On this basis, VAT expects net sales in 2021 to be substantially higher compared to 2020. To cope with this growth, we will continue to build out our flexible global footprint and strengthen our natural hedge against foreign exchange impacts. This is mainly achieved by further ramping up our production facility in Malaysia, increasing sourcing from best cost countries, gaining greater economies of scale in global supply chains and driving further operational excellence measures. At the same time, VAT remains fully dedicated to technology innovation, and investments in R&D and customer engineering teams will remain at the heart of VAT's strategy in 2021. Overall, the company expects its EBITDA and EBITDA margin to increase, driven by higher volumes and better cost absorption as well as the ongoing focus on costs and productivity. This expectation includes a U.S. dollar-franc exchange rate assumption of 0.9 for the full year. Because of expected higher sales, EBITDA and EBITDA margin, VAT also expects 2021 net income to increase compared with 2020. The stronger operational performance is also expected to drive higher free cash flow in 2021, despite a planned increase in capital expenditures to approximately CHF 40 million and growth investments into working capital. For the second quarter of 2021, we expect our net sales to reach a new quarterly record level of between CHF 205 million and CHF 215 million. This concludes my prepared introductory remarks, and we'll now turn the call back to the operator for the Q&A session. Thank you. Operator, please?

[Operator]

[Operator Instructions] The first question comes from the line of Jörn Iffert with UBS.

[Jörn Iffert, Director and Analyst]

It would be 3 quick questions, please, if I may. The first one is, I mean, looking on the CapEx plans, on the order intake of your key customers. Is it fair to assume that the second half has a good likelihood to be better than the first half in the whole CV industry and also for VAT? And second question is, please, can you share with us how many headcount are you planning to ramp up in '21? And what is roughly the share of temps here on the total headcount ending 2021? To get a feeling how flexible your SG&A cost base is if you go into a downturn. And the third question would be, please, there's a lot of innovation happening also at the moment on logic and foundry. Is this segment becoming maybe more important for you in the next couple of years versus memory, also in terms of revenue share?

[Michael Allison, Chief Executive Officer]

Thanks. Good questions. The first question, CapEx in the second half, I think the answer to that is yes. We're definitely seeing the forecasts for Q3 and Q4 filling up nicely. And I think at this point, we would expect the second half to be better than the first half. In terms of headcount, we've made quite a few investments into our overhead, into our R&D teams and our business units over the last 2 years in preparation for this next ramp of the industry. So I expect our fixed overhead costs, so people cost, to remain fairly flat. We will make a few targeted investments into further R&D programs and also supporting our key accounts, but I'd say our overhead costs should remain pretty stable during this year. The main headcount increases come in manufacturing, as you mentioned. And this year, I think we've added around about 100 people here in Haag in Switzerland, and I would say probably about 70% of them are temps. And we currently would operate at temp ratio of about 25% to 30%. The investments we made in Malaysia last year are paying off, and we continue to grow our business in Malaysia. We've put in place, as I've mentioned in previous calls, a very strong structure there that enable us to produce at a high-quality level. And the adds we're making in Malaysia as we ramp that are mostly in the direct manufacturing area. So I think we will now benefit a little bit from the infrastructure that we've prudently put in place over the last 2 years. The third question, innovation and foundry, I think it's always been a critical segment for us. You've seen the capital investment plans from the 2 big players, TSMC and Intel, was almost $50 billion of CapEx between them. So that's a critically important area for us. And it's also the leading area of the industry. That's now -- main manufacturing around 7 nanometers, but 5 nanometer's in pilot production and 3 nanometer's in development. And that's where VAT has its highest market share. And I think that's where we also have our highest opportunities for future development of adjacencies, where our customers need the high precision and high purity of our products. So that's a critically important segment for us. I think, though, what's interesting, and I've alluded to this a little bit in previous calls, DRAM is starting to make that transition to below 10 nanometers and coming into the 7 nanometer era. And that means we're going to see more complexity in DRAM, and that means a higher CapEx to waiver output ratio. And I think that's also going to be good for VAT, and it's going to create a bit more stability, I think, within the DRAM sector. So that is also a critical area for VAT because our leading products will also be needed for the transition to 7 nanometers, et cetera. Okay?

[Operator]

Your next the question comes from the line of Michael Foeth with Vontobel.

[Michael Foeth, Head of Swiss Industrial Research]

Three questions from my side also. The first one is regarding your spec wins you talked about. Just wondering if those spec wins are at a higher level than usual. And also, you talked about spec wins for your adjacencies. Can you be a bit more specific sort of what type of applications we're talking about? The second question would be regarding your order intake. You talked about potential small contribution from preordering, so -- or over-ordering, if you want, from customers. Could you maybe quantify what you mean by small? Are we talking about 5 million excess orders or are we talking 30 million? Just to give us an order of magnitude of what you think is beyond normal. And the final question is regarding your leverage. You talked about your operating leverage. You talked about higher volumes driving up profitability in 2021. And I was wondering if you could already reach your sort of a midterm target profitability of 35% EBITDA considering the strong growth that you are seeing in 2021? Or are we still far away from those levels?

[Michael Allison, Chief Executive Officer]

Okay. First question, on spec wins. I'd say we're on track with the plan for this year. Very, very high win efficiency overall. But I would say that is exactly on track, what we expected. Just to give you a feeling, 2 of those spec wins were in our core valve products, 2 are in advanced modules, which is looking good. We put a lot of effort into adding a richer technology content into these advanced modules, things like cooling and heating. So we're not just providing machine components there, we're also providing functionality. And then we had 1 in our motion component. The motion component business is also looking very good. I think we're going to be well on plan to achieve the opportunities that we highlighted in the Capital Markets Day. In terms of orders, quite hard to dimensionalize that, but I would say mid-, high single-digit percent. So average may be about 7%. And because it's coming from several factors, there's also a bit of over-ordering happening in China as the OEMs there try to secure themselves against any restrictions from the U.S. government. So it's quite hard to say exactly how much. But we think roughly somewhere between 5% and 10%. Leverage and higher volumes, yes, of course, we will see an improvement in profitability, as I mentioned. And I think the only comment I'll make on that is that we're well positioned to achieve the profitability corridor that we showed in the Capital Markets Day. Okay?

[Operator]

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

[Charlie Fehrenbach]

Given your guidance of a substantial sales growth in the current year and the guidance for the Q2 sales and also given your outlook that the second half could be better than the first half, is it a good guess that sales will surpass the limit of CHF 800 million this year?

[Michael Allison, Chief Executive Officer]

Well, we've refrained from giving full year guidance. And I think you can see why when you look at the changes in market conditions. We've had people at TSMC increase their capital outlook from $18 billion up to $25 billion and then up to $30 billion. So trying to give an accurate full year guidance in a fast-moving industry ramp like this is extremely difficult. But if you just use basic principles of a 20% CapEx growth and VAT growing at or above that rate, then I think your assumption can be simply deduced.

[Operator]

The next question comes from the line of Sebastian Kuenne with RBC.

[Sebastian Kuenne, Analyst]

Three questions here. First of all, on the order intake, is this now a situation where you start feeling uncomfortable having orders that -- with deliveries of more than 3 months? And are you therefore starting to kind of refuse or push back on certain orders? Secondly, what is the theoretical ramp-up that you can achieve this year in Malaysia? Is the 170 million, is that the maximum? And then on the manufacturing costs, Malaysia compared to Switzerland, what is the headcount cost that you have in Malaysia for an assembly worker compared to Switzerland?

[Michael Allison, Chief Executive Officer]

Okay. Yes. First question, on order intake. I think one of the benefits we have in VAT is, if you think back to 2017 and 2018, we produced almost 700 million output in Switzerland. So in this ramp, we've also got the benefit of the Malaysia factory so we can absorb quite substantial growth rates. We're certainly -- this speed of increase is the challenge for everybody, not just VAT. That has an impact on our suppliers. And the limiting factor at the moment is more the rate of hiring and training people. But we can do that pretty quickly. And during this quarter, we've seen from the start of the quarter to the end of the quarter approximately 30% output increase. So we're pretty scalable. We're pretty flexible. And I think we've got enough capacity in place to deal with the growth rates that we're seeing for this year and into next year. If we see a 20% increase, for example, in 2022, which some analysts are talking about, that starts to get up to pretty substantial numbers for us, and we need to start thinking about further capacity expansions. So I think, at the moment, we are not limiting our customers. I think that's the key thing. In the semiconductor supply chain, you just don't want to be the last person supplying. As long as you can more or less keep up with everybody else, then that's the position you want to be within. And I would say up to now, VAT is doing a great job in general, keeping up with the major OEMs and ensuring a very strong supply capability. Malaysia, you asked about the theoretical output there. Malaysia is a little bit different because of the challenges of moving products across facilities. We've targeted Malaysia more as the driver of our latest generation products. And so that's a little bit more proportional to the ramp of leading-edge semiconductors and the move from 7 to 5 nanometers, et cetera. So in fact, the majority of the ramp we're seeing right now is in Switzerland, and I don't think Malaysia will be substantially over the 170 million. We may get closer to 200 million, but I think 170 million to 180 million range is still realistic for that facility. And then you asked about the cost difference. It's roughly -- assembly person is roughly about 1/3 of the cost in Malaysia than it is in Switzerland.

[Sebastian Kuenne, Analyst]

And maybe just a very quick follow-up. How do you assess the risk that this is a peak cycle that we just see? DRAM prices and all component prices go through the roof. Everyone ramps up CapEx. A bit similar to what we saw in, I think, early 2018. Do we -- how do you assess the risk that we -- that everyone jumps on the opportunity to increase CapEx, and then 6 months down the line, all the semiconductor prices fall through the bottom and that it leaves a void with everyone? How do you assess the risk?

[Michael Allison, Chief Executive Officer]

Yes. I think that's -- it's always a risk. And I mentioned in one of the earlier questions that we've been really prudent in how we manage our overhead costs because in a cyclical environment, you've always got to keep an eye on what happens 2 years' time. I think what's different this ramp is we're really starting to see substantial chip shortages across many, many different areas. It's not just the leading-edge products, but it's across the midrange and the lagging products like automotive, et cetera. So we're seeing extensive CapEx everywhere. We're also seeing quite a bit of discipline in the CapEx announcements. For example, Micron just last week had pretty stellar results, but they refrained from any major change in the CapEx announcement, which I think is a good thing. They're trying to keep the capacity in check and focus more on pricing. And I think we've seen that also with Samsung. But I think you're seeing a little bit of the global demand for semiconductors increasing at a fast pace, coupled with a few years of underinvestment. So do I think that we'll see a downturn? Of course. I don't think it will be as steep as previous ones. And the other factor that I mentioned, about DRAM becoming more capital-intensive, means that I think we'll start to see the same dynamic as we've seen in advanced logic where they have a more consistent CapEx profile. If you look at 2019, while the memory industry dropped in CapEx, the advanced logic area kept on spending. They needed to keep spending to keep a reasonable level of wafer output at the leading edge. And I think we'll see more of that happening in DRAM because they have to spend more to make 7-nanometer and then further shrinks. NAND will continue to be volatile. We see that also in the pricing today. The recovery hasn't really happened in NAND pricing. And I think with 5 major manufacturers there, you're going to see a little bit more volatility in the NAND market.

[Operator]

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

[Marta Kinga Bruska, Analyst]

I have one related to the purchasing behavior of your customers. So I would like to understand a little bit how much of the growth in order intake can be related to the -- some further hamstring purchases, as some people call that, or toilet paper strategy, that you stockpile a lot and then buy even more despite of ample reserves? So how much of that behavior have you seen in the past and going into the ramp-up? And why this time could be different, if at all? Because we all know that the visibility in this industry is low, but it's even lower, I think, on the downturn than on the upside. That's just a little bit of the color, please.

[Michael Allison, Chief Executive Officer]

Okay. Yes. I think as our industry gets bigger, you're seeing much more focus on efficient supply chains. So I think when you look at the major OEMs, we have very good visibility into their short, medium-term plans. And I'd say there's lot less stockpiling and inventory buildup with the top players in the industry because they just can't afford to. They don't have the storage. They don't have the cash sitting there to spend at that level. So I think that is very well managed, and we're seeing a very consistent ramp-up in line with the output requirements. I think where the stockpiling or advanced purchases are happening is probably more with the smaller OEMs and some of the unique issues like the Chinese restrictions that I mentioned. And the smaller OEMs are always really concerned that they don't get the right allocation when the big guys ramp up. So there's probably more nervousness in the smaller OEMs, and I think that's what we've seen specifically from China and a little bit from Korea of higher-than-expected order intake. But I think, overall, as I mentioned, the large OEMs are doing a pretty consistent job of managing it.

[Operator]

The next question comes from the line of Remo Rosenau with Helvetische Bank.

[Remo Rosenau, Head of Research]

You mentioned the announced substantially higher CapEx budgets from chip producers for '21 and also well into 2022. Now, time-wise, what is the approximate correlation between those CapEx spendings from chip producers and your order intake? I mean as valves are probably not the first element to be needed in a new wafer fab, there might be a certain time lag here. Is that correct?

[Michael Allison, Chief Executive Officer]

Yes. I think there's a time lag, but it's shortening as the supply chain semiconductor gets more efficient. I mean I saw that TSMC spent already roughly $8.5 billion in the first quarter of this year. And that increase is in line with the elevated CapEx they talked about, and you can see that coming into our order intake. So I think with the highly efficient supply chains we're talking about, that is getting maybe down to a quarter or so. Their profile -- CapEx profile can change a little bit over the year. You quite often see more of a first half of the year spend profile. But I think this year, just because of the sheer volumes we're talking about, that's going to be more evenly distributed over the year, in fact, maybe even with the bias towards the second half.

[Remo Rosenau, Head of Research]

Okay. So if there was a time lag, it gets shorter all the time.

[Michael Allison, Chief Executive Officer]

Yes. Yes, maybe a quarter. Our customers are very efficient at producing equipment, and the fact that we consign our products typically to our major customers means they can react very fast from an assembly standpoint. So that time lag is a good thing. And in fact, that time lag is quite important in reducing the volatility in the industry because it means the major players can make decisions closer to the demand requirement, and it means they can also stagger those investments. So the shorter the lead times, the less cyclical the industry will become.

[Operator]

The next question comes from the line of Jürgen Wagner with Stifel.

[Jürgen Wagner, Director]

A follow-up on China and your direct business. How do you see that trending this year? And how significant was that for you in Q1?

[Michael Allison, Chief Executive Officer]

Yes. China was a great success in Q1. We have a very strong market share position in the semiconductor market. And with the growth of especially flash memory in China, we're seeing the benefits of that. I'd say China was almost double the normal order intake that we've seen historically there. I think with the restrictions that are being placed on Chinese companies, there is an even greater push to develop more capability in the Chinese OEMs. And they need development partners. They need strong capabilities. So they're relying heavily on Western suppliers like VAT. And I think we're uniquely positioned there because we're neutral and we don't have any restrictions across supplying our products into China. But we're also seeing good progress in our Advanced Industrial business. We focused our efforts in ensuring we were able to harness things like industrial coating, solar business, and they're also growing extremely well. We saw very strong business momentum in those 2 areas. We haven't started yet in the lithium-ion battery area. We're working closely with a few OEMs, but that hasn't materialized yet in orders. We still see that as an opportunity, but it's not yet been harnessed. The COVID situation makes it very difficult to develop the business when you don't have relationships. It's very easy to work with existing customers. But it's certainly -- that's one of the harder things, is to capture new markets when you don't have those technology relationships in place. So that's, I think, an opportunity for the second half of the year as things start to open up again. But I'd say, overall, our China plan is going very well. I'm very happy with what our 3 business units -- and our service business unit also are really starting to grow in China. So great momentum overall.

[Operator]

The next question comes from the line of Thomas Jäger with Mirabaud.

[Thomas Jäger, Senior Portfolio Manager]

I have a more or less a short one, and maybe you answered already in -- quite in a part. Related to the strong demand, these dynamics in global CapEx, are there any bottlenecks in the supply chain? And you, specific, do you see any bottlenecks in your supply chain?

[Michael Allison, Chief Executive Officer]

I don't think there's any company right now that can say they don't have any bottlenecks. It's -- there really are shortages across the whole global supply chain. VAT has a pretty good supply chain group. For example, we've just secured a very substantial amount of aluminum that will ensure our continuity of supply through the end of the year even at these elevated demand levels. But the surprise is every day popping up. I think what gets you is what you can't see rather than what you actively manage on a day-to-day basis. For example, The electronic components are getting very unpredictable. The fire that happened in Renesas in Japan is really starting to hit now because you typically see a 2- to 3-month lag in the supply chain. So that fire was about a month ago, and we're now starting to see unpredictable supply in some of our electronics components. So you've really got to be alert. You've got to be able to move fast. You've got to constantly work on second sources. And there's no easy ride. Thankfully, so far, we're doing pretty well. But I think if I look over the next 9 months to the end of the year, the biggest risk is probably in electronics components. So we're working very hard on that one.

[Operator]

The next question comes from the line of Craig Abbott with Kepler Cheuvreux.

[Craig Abbott, Head of Mid and Small Cap Research, Germany]

Yes. Two remaining questions from my side, please. The first one is, as you were just discussing on the supply chain, my basic question there was answered. But if I may just follow up there. I mean, can you just give us a little bit of a feel for how much of your procurement is with electronic components? And the second question is I just want to make sure I'm understanding the math here or the mechanics correctly. When you were talking about the preordering impact maybe being somewhere between 5% and 10%, are we supposed to interpret that to mean 5% to 10% of the absolute Q1 orders that we reported that might not be repeated short term in Q2, and then potentially, later, made up as the expected strong performance in H2 starts to feed through?

[Michael Allison, Chief Executive Officer]

Yes. The first question, electronics component. I mean, pretty much every product we manufacture has an electronic component. It has a controller. So it is a major purchase part. The good news is, we don't make one product. We make thousands of products, and we use a very broad-based supply chain there. So what we're seeing typically is that we have individual product family challenges rather than one component that's impacting the whole business. So one of our complexities of manufacturing actually becomes a bit of a benefit in these situations. But it's -- definitely, challenges everywhere. The question on preordering, yes, approximately correct. Again, it is hard to dimensionalize. And when I look at the order intake even in the first 2 months of April, it's running at an extremely high level. So we estimated based -- we looked at the run rate we saw in all the major OEMs, and then we looked at the run rate from the sort of second tier and other areas. And we estimated somewhere in the 10 million to 15 million level, if you assume 5% to 7% to 10%. That's the best guess we could make at this point. But it's changing. The demand keeps going up, I think. So it would be very interesting to see how the order intake develops into May and June. But at this point, it looks very healthy.

[Operator]

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

[Sandeep Sudhir Deshpande, Research Analyst]

Yes. Sorry. I didn't hear the whole call so I apologize if the same question has been asked before. My question is, I mean, one of the big trends we are seeing this year is this lagging edge. And does that impact VAT's valve sales at all? Because the growth that we have seen -- likely to see through this year in the lagging edge because of the lack of capacity in older load.

[Michael Allison, Chief Executive Officer]

Yes. It does impact us a little bit. It's -- it means that we're seeing higher output in our Swiss facility. This year, there's been substantial CapEx, as you mentioned, the lagging nodes plus flash. Flash memory could be considered somewhat lagging because it's more around the 20 nanometer. So that means we're seeing very high demand on our Swiss facility, and we had to ramp that up quite considerably. Again, the good news is we can do that. I mentioned before, we had already produced almost 700 million out of our Swiss facility. And we have the plant and the facilities here to do that. It's just a question of adding the assembly capacity and getting our suppliers up and running. So we have quite a bit of flexibility here.

[Sandeep Sudhir Deshpande, Research Analyst]

And I mean, a follow-up overall. Just to look at the numbers being performed by TSMC and Intel and others in terms of capital spending over the next few years. Does this imply that VAT will need to expand capacity? Or do you already have, associated with your Asian capacity, enough to supply this much bigger capital equipment market that seems to be developing at least in the next 2- to 3-year view?

[Michael Allison, Chief Executive Officer]

I think if you take another year of, say, 20% growth in 2022, if that's what happens, then we get up -- we're certainly heading towards our capacity ceiling. And then we have to think about some further expansions. I think the profile of the spend is very important for us. If that spend really starts getting targeted on the leading-edge, it helps us because our leading-edge products are being ramped out of Malaysia. And we're really depending on the adoption rate of our customers' new platforms to dictate the output of what happens in Malaysia. So if it's the mid-technology products and the legacy products, we may have to consider a transfer of some of the products to Malaysia. That requires a lot of additional qualification from our customers, and that's a dialogue we would have to have with them. It's never easy. But it's an option we've certainly got. We can probably also squeeze more into Malaysia. We said 400 million. We could probably get 500 million, possibly even more than that if we did additional outsourcing. So there's certainly plenty of options there. But as I mentioned in previous calls, once we start seeing the sort of billion-dollar level revenues, we would really have to think about some further capital investments in buildings, which is a nice problem to have. So we're certainly looking at options there.

[Operator]

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

[Robert Duncan Cobban Sanders, Director]

I guess my first question would just be on the Chinese OEMs that you're working with. How would you assess the level of technical capability today versus your U.S. and Japanese OEMs? I guess the reason I ask is because those companies have been around for a long time, but they still have very little market share, but now we're in a situation with export restrictions where they may end up ramping for domestic capability. But I'm just wondering, are they actually capable of producing equipment that is of sufficient quality? I have a follow-up.

[Michael Allison, Chief Executive Officer]

Yes. I think our primary focus is always protecting the IP of our major existing customers. So we have extremely tight firewalls on IP and technology. And traditionally, we've only sold fairly standard components into China, and then we really don't see that changing too much. Our standard components are still quite highly technical and highly capable, but we have far too much to lose by jeopardizing too much technology-sharing there. I think the -- in terms of capability, the Chinese OEMs are moving fast. They're getting a lot of government support, getting a lot of Chinese end-user support. But there's still very substantial gaps exist to the high-technology levels you see out of the U.S. and Japan. We're getting into the realm of atomic engineering. And it comes down to chemistries, to very complex interactions, surface interactions, chemical interactions. And it takes a lot of knowledge and IP to make equipment that can deal with these unbelievable challenges that we face going to 5 and 3 nanometers. So I really don't see much change in the balance of power over the next 5 years.

[Robert Duncan Cobban Sanders, Director]

Got it. And then on DRAM, you mentioned that there could be reduced cyclicality on the back of kind of logic-like layers. I mean, how do you quantify that? I mean, it sounds like you're referring to sort of ALD, high-K metal gate type layers being introduced into DRAM and the kind of structurally high capital intensity. Is that what you're referring to? And is there not a danger given that DRAM scaling is slowing, that the industry struggles to push through cost of their reductions even more than they already are?

[Michael Allison, Chief Executive Officer]

Yes. By the way, it's not so much the adoption of logic technology into DRAM. It's just the complexity of the transistors. You need more equipment per wafer output. So the cost of producing, say, 20,000 DRAM wafers is going up 30%. The customers have to -- they have to ensure the output. They're going to have to spend 30% more. They're going to be very prudent about those investments. You're not going to see as much overcapacity because it doesn't cost that much today. So I think they're going to have to really think hard about what investments they make and how they stage them. So I think that will reduce cyclicality. And you saw that in Micron's results, right? They're really managing carefully their CapEx. At the same time, they need to invest in technology, otherwise, they miss the scaling opportunities that you mentioned. But the majority of the profit's still generated at the very, very high leading-edge, and that's too much of a prize for people not to invest. But those investments need to be better managed. And we've seen that in logic, that the advanced logic, the big guys who can invest are winning. And they're now managing their CapEx really carefully to ensure they get the pricing and they grow in a very linear fashion. So I'm not saying DRAM won't be cyclical. I just think the cost per wafer challenge will push them to a more consistent and metered ramp up. Any last questions?

[Operator]

We have a follow-up question from Mr. Michael Foeth with Vontobel.

[Michael Foeth, Head of Swiss Industrial Research]

Yes. Just one question regarding your Global Services business. You mentioned in your comments that sort of customers can ensure increased productivity and maximize their uptime using your products and solutions. If you can just explain that and tell us how strong that Global Services business can get. I mean, can we continue to expect the sort of growth rates that you have seen in the first quarter? Just a comment would help on that.

[Michael Allison, Chief Executive Officer]

Yes. I think we have some -- I've placed a lot of emphasis on previous calls on the investments we're making in product development around retrofits and upgrades. And it's hard to compare to Q1 last year because Q1 was impacted by COVID pretty substantially and it was difficult for us to get on site to do these upgrades. But nevertheless, retrofits grew slightly over 100% year-on-year. And I think what you're seeing there is, we are offering latest generation valves that can be swapped out onto old unreliable valves. And when you see that some of our -- the end users, the chip makers are running over 100% utilization, when you have unreliable situations and you have a breakdown, that can have a very substantial impact. It can have a 2- to 3-day impact potentially to swap out a valve that is unreliable or faulty. So preemptive retrofitting can be quite a lucrative option for our customers. So I think we've developed a whole host of upgrades in the last 2 years. And I think as the industry ramps and as they get experience with those upgrades, we should see that grow pretty nicely. So I'm very optimistic about that. There may probably a little bit of cyclicality in that because, obviously, the more buoyant the outlook for the chip makers, the more OpEx and CapEx they have to spend. But I think that's up to us to show the real value proposition and the return on investment in these upgrades. So I think the upgrade is doing well. The consumables, you would expect to be running high because there's no idle equipment, and our customers are stocking up, ensuring they have high levels of consumables ready to minimize any downtime. So I think in these ramp-up periods, you're going to see service grow faster than expected because it's mostly semiconductor. But nevertheless, the infrastructure we're putting in place and the products we're providing should give us a pretty -- a sustainable base for our services business.

[Operator]

We have another follow-up question from Mr. Sebastian Kuenne with RBC.

[Sebastian Kuenne, Analyst]

Yes. Just a comment on pricing maybe. So components or input costs are going up. How do your framework agreements work? Can you pass on each of these price increases directly to the customer? And do you then prioritize deliveries if you don't have such agreements with second-tier customers? How does that work exactly, the pass-through of costs?

[Michael Allison, Chief Executive Officer]

Yes, yes. It ranges from customer to customer. Typically, you don't pass on them, because when costs drop, then what would you do? You expect it to reduce costs? So typically, these are managed within the supply chain, I would say, in general. If there's really unusual one-off costs like distribution, we've certainly passed on some of the higher distribution costs to a wide range of our customers. But apart from that, you're pretty much expected to manage that within your supply chain. And I think...

[Sebastian Kuenne, Analyst]

So a year from now, if all your input costs are 50% higher, you still sit on the same selling prices? Or how does it work?

[Michael Allison, Chief Executive Officer]

Well, if it's 50%, you'd obviously have a discussion. But there's limits that we operate with each of our key customers, and that's worked pretty well in the past. And it's up to us to ensure we manage cost. That's why we are regarded as a reliable supplier and a capable supplier. And we manage that on a case-by-case situation. And obviously, if material costs are increasing substantially, that is one reason to have a pricing discussion. But there's no one rule for everybody. I would say, with -- the larger the customer, the less flexibility, the smaller the customer, more flexibility.

[Sebastian Kuenne, Analyst]

So that means do you prioritize deliveries? Is there like a ranking of customers that go -- come first?

[Michael Allison, Chief Executive Officer]

No. We're -- I mean, we're making tens of thousands of products, so we don't get down to that. I think that's bad practice. We try to treat our customers all fairly.

[Operator]

The last question comes from Marta Bruska with Berenberg and his (sic) [ her ] follow-up.

[Marta Kinga Bruska, Analyst]

So I have a question with regards to 3D NAND, actually. So I have heard your positive comments about the DRAM space. And I'm a little bit surprised by being a little bit more -- or less enthusiastic about NAND. And specifically, I would like to know your view on the next step in the 3D NAND manufacturing from 128 layers, 160 and above at Samsung. So we know that Samsung has managed to edge so far all 128 layers in a single step basically, thanks to the superior chemistry that they have and access to hexafluoride compounds. And now going beyond, that is a big question mark, whether they will manage to do it in one step or not, and most likely not. So then I would like to know what would be the implications then for VAT and for the demand for valves? If you have the view on this space.

[Michael Allison, Chief Executive Officer]

Yes. I'm certainly not enthusiastic about flash memory. I mean, it's a huge driver of our business. My comment was I still believe it will be the most volatile segment because you've got the highest number of players. Now technology differentiates. And you're absolutely right. The race to above 160 and the next generation of flash is what everybody is after. And I think that gives a real benefit to the technology leaders like Samsung and Micron, et cetera. So the more mature that comes and the faster they drive complexity and technology, I think the less cyclical it will become because there's less players able to do that and spend at those levels. But it's still the easier technology compared to logic and DRAM. And I think that's where we'll see the most of the competition. But I think it's a wise move that the leaders are doing. And I was kind of surprised that Samsung didn't drive that earlier. That's been their behavior in previous cycles, that they really drive technology harder and faster to outgun the competition. So it seems to be happening now, and it's a great sign. And flash does have a higher percent of vacuum-based equipment. There's a lot of edge. There's a lot of deposition. So that's great for VAT's business. Okay. So I think that ends the question session. Thank you, everybody, for joining. Just a quick summary. So as you can see, very positive operating conditions, records being set across all the segments and a very positive outlook. The next call we'll have will be on the 5th of August, where we present our first half results. So thank you very much. Speak to you soon.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.