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Earnings Call Analysis
Q2-2023 Analysis
VAT Group AG
In a recent conference call, VAT provided insights into their second quarter and first half of 2023 financial results, confirming preliminary key figures previously announced. The company introduced Urs Gantner as the new CEO-elect, set to take the helm on January 1, 2024.
Despite a challenging market, particularly in the semiconductor sector, VAT managed to navigate through their 'rough patch' with resilience. VAT's sales were impacted by lowered order momentum across all business lines and unfavorable foreign exchange (FX) movements, which in turn affected the EBITDA margin, bringing it down around 6 percentage points from the previous year's record. However, VAT remains committed to cost management and innovation, ensuring readiness for market recovery with a strong product pipeline and R&D investments.
VAT’s Valves segment experienced a slight decline to 79% of total sales, while their Global Service business increased its share, despite a 6% decline in sales. The company’s EBITDA margin reduction reflects these changes and the broader market challenges, falling to 29.2%, compared to a record margin of 35% in the previous year.
VAT's revenue streams largely depend on the semiconductor industry, accounting for around 75% of the business. Geographically, more than half of VAT's products and services are destined for Asia, approximately one-third for the U.S., and the remainder for Europe, underlining the company's broad global footprint.
In a testament to VAT's innovative prowess, the company recorded 41 specification wins in the first half of the year, a 13% increase over the same period in 2022. About 25% of the spec wins in the semiconductor business are in new areas (adjacencies), reflecting the company's successful strategy execution and its positive impact on the overall margin profile.
VAT predicts orders might have bottomed out, with a 56% decrease in year-over-year orders, despite an upswing from the previous quarter. The company expects the year-end EBITDA margin to be just shy of the lower end of the communicated 32% to 37% range. Net income declined by 43%, while leverage and equity ratio figures were in line with the prior year. Moreover, VAT emphasizes a commitment to ESG (Environmental, Social, and Governance) pillars, having set ambitious targets, such as reducing GHG (greenhouse gas) emissions by 50% by 2025.
As part of their ESG efforts, VAT has increased the gender diversity on its Board of Directors to 38% and has outlined strategic goals for GHG reductions and diversity within the company. In the area of artificial intelligence (AI), VAT sees significant opportunities, with AI-related revenues expected to grow at a 32% CAGR over the next 5 years, benefiting their growth prospects and enhancing their technology leadership.
For the upcoming third quarter, VAT anticipates sales between CHF 190 million to CHF 220 million, reflecting the impact of the strong Swiss franc against other major currencies.
Ladies and gentlemen, welcome to the VAT's Second Quarter and Half Year 2023 Results Conference Call and Live Webcast. I'm Andre, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [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.
Thank you, and good morning, ladies and gentlemen, and thanks for joining this webcast on our Q2 and half year 2023 results. As you know, VAT has pre-released preliminary key figures including orders, sales, EBITDA and EBITDA margins already on July 13, 2023, and you see that the final numbers are well in line with what we announced back then.
Today, I'm joined on this call with our CFO, Fabian Chiozza; and VAT's new CEO elect, Urs Gantner. Also, here with me is Michel Gerber, our Head of Investor Relations and Sustainability; and Christopher Wickli, who joined Michel in the IR department on June 1, 2023.
Slide 2, please. Before we start with the half year results presentation, I'd like to say a few words about the second announcement we have released this morning. The Board of Directors had its meeting yesterday has appointed our Executive Vice President of Semiconductor Solutions Group, Urs Gantner, as the new CEO of VAT effective January 1, 2024. I'm personally delighted and fully supportive of this decision.
Over the last 5.5 years, I've been working with Urs, first as the business unit head semiconductor and then since last August in his present role. And in this time, I've got to know Urs as a very dedicated businessman with an enormous understanding of the semiconductor industry. Since joining VAT back in 2004, at a time when VAT had less than CHF 300 million in sales, Urs has witnessed, shaped and executed the transformation of VAT from a small, family-owned company to today's global market leader in vacuum solutions.
His central role in the development and growth of VAT's manufacturing in Malaysia is only one of his latest achievements together with the implementation of new and adjacent products with our customers. So I and the whole group management are looking forward to help Urs making the transition into the CEO role a flawless exercise, and I wish him all the best in this new and well-deserved role.
Okay. Moving to Slide 3, the agenda. We'll cover 3 parts before opening for a Q&A session. I will start with the highlights of the Q2 and half year results, and then Fabian will go through the results and financials in more detail. I will then conclude with a look ahead, followed by the usual moderated Q&A session.
Slide #4. As we communicated back in March with the full year 2022 results and reiterated in April with our Q1 2023 trading update. VAT's markets, especially in semiconductors, are going through a rough patch this year with lower order momentum across all our businesses. This soft market environment also negatively impacted VAT's sales despite the fact that we started the year with roughly CHF 0.5 billion in order backlog.
Also in the first half, all our trading currencies have weakened against the Swiss franc, posing another headwind, and Fabian will talk more about this in this remarks later. In this environment with lower sales and adverse FX movements it doesn't come as a surprise that our EBITDA margin came down significantly compared to the record level we've seen in 2022.
It does take us about 6 months to get our operational cost in line with the output. And despite the sizable decline of close to 6 percentage points compared to a year earlier, we are confident of bringing the margin performance back to the bottom end of the margin corridor that we committed in the Capital Markets Day in 2022.
We have an incredible operations capability, continuously focused on cost reduction and cyclical management, and this will ensure strong performance over the cycle. In implementing these cost reduction measures, you can be assured that VAT is ready to bounce back as soon as the market improves. We've maintained a strong infrastructure and have not reduced our spending on future capacity or R&D. This is the lifeblood of VAT and the reason why we maintain our above-market growth and strong customer satisfaction.
So for the rest of 2023, we confirm our expectations of lower overall results. The strength in Advanced Industrials is not enough to offset the weak market environment in semiconductors that negatively impacts both our semiconductor business as well as the global service activities.
Moving on to Slide 5. This slide gives you an overview of the half year key figures and the segment breakdown. Valves, our largest segment, accounted for about 79% of our sales down from 81% in total a year ago.
The Global Service business increased it's share despite lower sales compared to the first half 2022 as this decrease was less than the one experienced in semi. The 6 months EBITDA margin in the Valves segment decreased by about 6 percentage points to 29% from 34.6% a year earlier.
Global Service sales also saw a decline of about 6% year-on-year, mostly due to low utilization rates, wafer start reductions and high inventory levels of wafer fabs across the industry and the segment posted an EBITDA margin of just shy of 40%, down 5 percentage points.
For the group orders of CHF 290 million are 55% below the record level of 2022. On EBITDA, with 29.2%, the margin is substantially lower than the 35% record set last year due to lower volumes and adverse FX movements. Fabian will give you more details on this in due course.
We also saw a satisfying increase in our spec wins, up 13% year-on-year. This is not only an indicator for future business success and market share gains but also even more proof that our close collaboration with all our key customers, coupled with our world-class innovation team consistently delivers products and solutions that solve their biggest technology challenge. This is a win for VAT, but more importantly, a win for our customers.
Slide 6, please. On this slide, you will see a split of our revenues into the different market segments. Remember, the display activities were integrated into semiconductor business unit at the beginning of the year, and solar is within the Advanced Industrial business unit.
With about 80% of the Service business geared towards the semiconductor industry, VAT has an exposure of about 75% towards the semiconductor industry as a whole. As a result, VAT's business development is highly correlated with semi investments or the wafer fab equipment spend.
Advanced Industrial now accounts for about 20% of our business after roughly 15% a year earlier. This is a result of the [ ADD ] business growing its sales by 25% in the first 6 months of the year, while the Semi and the Global Services businesses declined.
From a geography point of view, more than half of our products and services end up in Asia, about 1/3 in the U.S. and the rest in Europe, reflecting the global semiconductor footprint.
Slide #7. In this chart, you'll see our innovation power and the development of our adjacencies. During the first 6 months of the year, we've recorded 41 spec wins, an increase of about 13% compared to the same period 2022. This is the highest level of spec wins in the past 3 years and shows that the industry continues to invest in new production platforms aimed at the leading-edge node sizes of 3 nanometers and less.
Our spec win rate has continued to be very high due to a huge focus on customer, value, innovation and cost. We also continue to focus on innovation cycle time with our top customers, so we can always be first to deliver them the solution they need.
Our business and adjacencies has moved in line with the general semi market. Nevertheless, we continue to see a successful execution of our strategy in this area, and it's on track with our expectations. About 25% of all our spec wins in our semi business are actually in adjacencies. And in 2023, we've been able to ship several prototypes of adjacent products to our customers.
The margin profile of our adjacent portfolio continues to be supportive of our overall margin profile.
So with that concludes my initial remarks, and I'd now like to hand over to Fabian for a more detailed look at the financials. Fabian?
Thanks, Mike, and welcome to all of you who are joining us on the webcast today. Let's start on Slide 9 with a quick recap of our key figures as Mike has covered the highlights already.
Our results reflect the overall subdued market conditions H1 2023. We are down compared to the record-breaking 2022 results as the semi cycle showed us its ugly side. However, there are 3 key messages I want to demonstrate to you in this section. First, while orders and sales are down, we have been focused on costs.
Despite the downturn, we achieved an EBITDA margin of 29.2%. On constant currency terms, this would have equated to a margin of roughly 30.3%.
Second, our free cash flow is down year-over-year. This reflects our continued commitment to both building out our capacity globally as well as ensuring we are ready for the next up cycle.
Third, VAT retains a conservative balance sheet with leverage about the 0.6x level and an equity ratio of 56%, which compares to 0.5x and 53%, respectively, for H1 2022.
Let me take you in detail through our results. Chart 10 shows the development of orders in the second quarter and half year. As our customers continue to manage down their inventories during the course of H1, we have seen promising signs that we might have reached the trough of this market cycle. On one hand, we can see that while orders are down 56% year-over-year, they are up sequentially to the previous quarter at CHF 155 million versus CHF 136 million.
For the first 6 months of the year, orders are, however, down 55% year-on-year reaching CHF 292 million for the first half of 2023. With the second quarter book-to-bill ratio of 0.7, our order backlog has pulled back as inventory levels, both in-house at VAT and with our customers, normalize as we see stocking ahead of cyclical upswing. Our backlog stands now at CHF 340 million, down 39% year-on-year. This backlog represents a strong base.
Moving to Slide 11. Putting this development in historic context. Here, we see the development of orders and sales since the first quarter of 2018. In the previous downturn, we reached the bottom of the cycle in the first half of 2019. Our ability to work through a full order book and diversification has allowed us to manage the sharp drop in orders better than in 2019, where the delta between the order intake and sales was more pronounced.
As we are now seeing signs of customer reengagement, the sequential book-to-bill improvement of the Q1 lows to 0.7x provides comfort. We're still somewhat away from the previous year's level of 1.24x, so more work ahead for us there.
Chart 12 shows the development of net sales and EBITDA. Half year sales are down 17%, and we achieved an EBITDA margin of 29.2%. As mentioned previously, we are focused on cost and execution, but we do not have control of all factors. FX has taken its toll with our exposures predominantly in the U.S. dollar, the Japanese yen and the Chinese renminbi, weighing in on the operational results.
Sales would have been 5% higher assuming constant currencies. Price effect was virtually flat, i.e., aside from FX, volumes were the only driver for the lower sales.
In turn, these sales were a major driver of EBITDA margin impact of 5.8 percentage points. Profitability improvement measures introduced as the downturn became apparent in late 2022, gradually contributed to the bottom line, whereas the full effect of our measures is materializing at the moment.
As the business corrected in the first 6 months of 2023, we performed below the margin target band communicated at the CMD in 2022. However, adjusting for constant currencies, we would have achieved a margin of about 30.3 percentage points for the first half 2023.
Putting this performance into historic context again on Slide 13, you see the sequential EBITDA margin development since H1 2018. As you can see, we have constantly improved our EBITDA margin since the last downturn in H1 2019. H1 2023 shows again a sharp decline in EBITDA margins, driven by the decline in orders and sales.
However, the year-over-year EBITDA margin decrease in H1 of 5.8 percentage points is less pronounced compared to the 2019 down cycle when the reduction amounted to 6.5 percentage points. The overall EBITDA margin of 29.2% is 4.1 percentage points higher than in the 2019 trough despite the substantial FX headwinds.
Our operational efforts, including efficiency measures, short-term work and increasing our footprint in Malaysia are all contributing to this achievement. With these developments, we wanted to provide our outlook that year-end headline EBITDA margin could come out just shy of the lower end of our communicated EBITDA margin range of 32% to 37%.
Moving on to Slide 14. This is one of my favorite slides as we get to talk about the future based on our investments made today. I mentioned that one of our core focus points was to ensure we do not deviate from our investment program into the future. Value creation is measured at VAT based on return on invested capital and the cash return on invested capital.
Our tested flexible operating models that got us through the 2019 downturn has been further optimized since. We have maintained our investment program in anticipation of the next up-cycle to ensure maximum rebound capability going forward. The spread of returns over the bank, which stands at 13%, remains above 20% even in this downturn, creating substantial economic value.
Let's now get to the bottom line with some of the other financials on Chart 15. Depreciation and amortization are about the same level as during the first 6 months of last year, yielding in an EBIT of CHF 112 million and corresponding EBIT margin of 25%.
Net finance costs were CHF 11.3 million for the first 6 months. FX hit us here again as we were required to reevaluate our bank loans and balances in various currencies. On a separate note, hedging activities of our operational FX exposures netted out nearly perfectly and are reflected in the other income line.
Nonetheless, the revaluation of various balance sheet items, including accounts receivable payables and as shown here, loans and balances, have been impacting us in the past quarter.
Effective tax rate for the first 6 months of 2023 was at 16 compared -- 16% compared with 14% a year earlier. In absolute terms, however, the tax expenses were considerably lower.
Taking that all together, net income declined by 43% to CHF 84 million. On free cash flow generation, is shown on Chart 16. As I said at the beginning of my remarks, one of our key focus areas was to ensure we are prepared for future growth.
Free cash flow is reflecting this priority as the lower EBITDA and heightened working capital requirements weighed in. We took the clear decision not to slow our investments in the Malaysia plant. Important to reiterate here that having this plant in place will also provide a natural hedge going forward to lessen the FX impacts as well as ensure supply chain resilience, which is important to our customers.
At 28%, the cash conversion rate measured as free cash flow as a percentage of EBITDA through both the seasonal level and the impact of the market conditions. We expect it to return to the target band of between 60% to 65% of EBITDA.
When it comes to leverage on Chart 17, we can see the last focus point I mentioned at the start of this section. Net debt increased slightly to CHF 319 million, which includes the refinancing of the CHF 200 million bond through a term loan and some utilization of the CHF 250 million RCF.
Our leverage of 0.6x net debt-to-EBITDA as per June 30, 2023, has spiked due to the lower EBITDA result, but is comfortably below the target ratio of max 1x. This reflects, again, our focus on a strong balance sheet that allows us to fund our growth initiatives and R&D in the years to come.
When summarizing the first half year 2023 financial performance on Slide 18, we can state that the slowdown in semiconductor spending shows its expected impact on Q2 and H1 orders, sales and profitability, which is also in line with what our customers and peers are seeing.
At VAT, we believe that the market might have bottomed. Demand is expected to improve sequentially over the remainder of this year, but difficult to gauge how rapidly demand might return.
Our established downturn protocols are applied and in full execution. They have been utilized in the past downturn to great effect. For the rest of 2023 and into '24, following financial priorities apply: strong focus on cost management and operational excellence, while maintaining maximum rebound capabilities into 2024.
We need to be ready to grasp opportunities. Continue with preparations for seamless ERP introduction in Switzerland next year. We'll manage appropriate trade working capital to support the expected market recovery in 2024.
Furthermore, we will maintain a disciplined approach to CapEx expected around CHF 80 million to CHF 85 million, driven by second Malaysia plant and optimizations in Switzerland. On a final note, construction on our innovation center commenced in Haag. We are on track for the inauguration in early 2025.
This concludes my financial remarks, and I look forward to any questions in our Q&A sessions. Let me now turn to another topic that we will talk to you about in a much more regular way than before, ESG. But we have not communicated a lot on this topic in the past, it is today 1 of our 4 strategic pillars, as we have showed you during the Capital Markets Day back in December.
In July, VAT has published its second sustainability report and I'd like to show you some of the highlights. So let's turn to Slide 20 and look at them. During 2022, we have intensified, not only the internal efforts to create a strong ESG structure, but we have also started implementing several initiatives to reduce our greenhouse gas footprint or increase our overall diversity, inclusion and equity in VAT.
For example, we have further reduced our CO2 emissions for CHF 1 million of revenue by 9%. We have received the advanced certificate for equal pay for equal work, and we have been able to reduce our Lost Time Injury Frequency Rate by 9% as well.
With the addition of Petra Denk to our Board of Directors in May of this year, we have further increased the gender diversity in the Board to 38%.
Moving on to Slide 21. In the latest report, we have now also published an inaugural set of ESG targets. For example, we committed to lower our Scope 1 and Scope 2 GHG emissions by 50% until 2025 compared to 2022. This is achieved by applying the most vigorous insulation measures in our new Malaysia factory upgrade of the cooling system in Malaysia and to switch to electricity that is generated by renewable sources and no longer by fossil fuel despite these representing the majority of Malaysia's generation assets, but also diversity both in the leadership team and in the general workforce are at the center of our targets, as you can see from this slide.
These are first tiny steps towards a more comprehensive set of targets or ambitions, and our target is not to please one particular stakeholder group above others, but to become an ESG leader in our industry the way we are the technology leader today.
With that, I close my remarks and hand it back to Mike.
Thank you, Fabian. So slide -- going back to the agenda on Slide 22, I'll wrap up the formal part as I'm sure you have a lot of questions to ask. So bear with me for a few more minutes.
Moving on to Slide 23. I'd like in this slide to address a topic that's created quite some buzz in the last couple of weeks, artificial intelligence. A few weeks ago, we all saw the industry news about a large revenue upside developing in GPUs from the AI-enabling infrastructure. AI has been around for a long time, but with the recent commercialization of the first true products, we're starting to see the opportunities this sector will bring.
We have been monitoring the news flow very carefully, and we agree that the proliferation of AI-enabled devices and infrastructure will require a massive amount of leading-edge, advanced logic and advanced DRAM chip technologies. This acceleration of AI technology will likely drive acceleration of chip investment as we start to build out the new data center architectures needed to host this.
So what does this mean for VAT? Well, overall, it's expected that AI-related revenues will grow with a 32% CAGR over the next 5 years. The majority of this growth will be in AI networks and AI hardware. And this all needs leading edge logic and memory chips.
On the right-hand side of this slide, we try to identify the areas where the AI push could benefit our business, and actually, it's pretty straightforward. Firstly, AI-related infrastructure investments will be supportive of the expected growth in WFE way beyond the forecasted USD 110 billion by 2027.
As overall vacuum content as a percentage of WFE is expected to increase over time and VAT's market share is higher at the leading edge, this would have a direct positive impact on VAT as the market and technology leader. DRAM content and complexity of these chips will also increase, requiring further investments into deposition and edge tools. These development in turn will create opportunities for our adjacencies and in that further strengthen the relationship we have with our key customers.
Now don't get me wrong, we are not implying that this trend will completely change the semi landscape, nor will it trigger a massive investment push in the short term. However, medium to longer term, it will be a key growth driver towards the USD 1 trillion in semi sales forecast for 2030 and supporting the underlying WFE investment needed to be able to produce the required number of IC units.
So moving on to Slide 24 and look at the short-term expectation for our markets. The semiconductor story is rather well known at this point. This year, WFE is expected to be around USD 80 billion, maybe even a bit lower. And in 2024, market research indicates a return to growth in the order of magnitude of about 10%. So let's say, USD 90 billion of WFE.
For the industry to get to this growth in 2024, it would mean that they have to start replenishing their inventory towards the end of this year, the latest. Hence, our expectation that we may see the trough in orders and expect them to sequentially increase over the remainder of 2023.
Overall, it is expected that trailing-edge investment remains strong driven by the Chinese investments and the investment in automotive sector. We also expect leading-edge logic investments to remain intact to support AI and other leading-edge trends. For the semi market, we expect the gradually increasing capacity utilizations in the fab, combined with the normalized inventory levels of spares and consumables will lead to higher orders and sales in this segment.
For the full year, however, we do not expect sales to be below the -- sorry, we do expect sales to be below the 2022 level.
In advanced industries, the solar business as well as the scientific instruments on the research applications are expected to remain strong.
Moving on to Slide 25. On this slide, you can see the latest growth estimates from the various sources and different segments of our markets. And I'll not elaborate too much in this as they speak for themselves. Overall, you can see that 2023 is expected to be a down year for all segments, except solar. However, all segments are currently then expected to return to growth in 2024.
The drivers that can move this 2024 market faster are probably in the NAND sector. And this could be driven by consumer and enterprise sectors rebounding faster by China GDP growth or faster reduction of inflationary pressures. It doesn't take much to impact the supply/demand balance.
Moving on to Slide 26. So for VAT, the rest of 2023, we expect that the business conditions remain mixed. The semi-related activities involved in service will continue to see activity levels below the previous year. However, we expect a gradual improvement over the rest of 2023.
Advanced Industrials are the exception to the rule, and we expect this business to continue strongly. As a consequence, and as communicated earlier, VAT expects EBITDA, net income and free cash flow to be below the record levels of 2022.
We had to have to make an adjustment to the EBITDA margin guidance as a result of the strong FX headwind that we've experienced especially during the second quarter, and we do not believe that this is going to persist for the rest of the year. We now expect to achieve a full year margin that will be slightly below the 32% to 37% margin band that we communicated to you at our Capital Markets Day in December 2022.
Remember that at that time, we had said that the targets we've given you over the 2023 to 2027 period were calculated with the U.S. dollar to Swiss franc ratio of 0.95. Today, we have this rate at 0.86, and therefore, the negative impact on the margin is quite substantial.
For the third quarter, we expect sales of between CHF 190 million to CHF 220 million, reflecting the current Swiss franc strength against other currencies.
With that, I'd like to conclude our remarks and hand over to Michel for the Q&A. Thank you.
Thank you, Mike. We now start the Q&A session. [Operator Instructions] With that, I will start quickly with 2 or 3 questions from webcast before going to the phone.
So the first question is from [indiscernible] he's with the [indiscernible] and he would like to know what are the next steps with short-time work?
And maybe let me answer that question, Michel. The short-time work is all of the proven measures of our downside protocol, and we have seen now the effect of 1 month in our half year results. Short-time work has been granted for 3 months initially, and we have there a possibility for an extension in case that we -- if that's required.
Thank you, Fabian. The next question over the webcast is from [ Rene ] from Octavian, probably for you, Mike. Can you provide us with an update on new fabs being built in TSMC, Arizona as there are signals that the fab constructions are getting delayed due to the lack of skill -- worker skills in the West?
Sure. Yes, I think the number of new fab constructions remains unchanged, and it's actually at a very historical high level. There's some recent data by Semi showing, I think it's around about 90 fabs in construction around the world.
Now I've mentioned this before that the CHIPS Act, money in the U.S., in Europe and other regions of the world, certainly stimulates capital to start the construction of fabs, but ultimately, these fabs are not going to be filled with production equipment until the demand in the market is there.
So it's pretty common in any cycle that the top players in the industry like TSMC, Samsung, Intel, et cetera, will be looking at the demand signals and then just phasing the equipment spend for these fabs to meet that demand. So small changes to the schedules is very, very common. Getting skilled labor, for example, in Arizona is, of course, it's a new challenge.
Ramping a fab in a new area of the world is always a challenge. But I personally think this is more of a demand adjustment than fully about labor content. I think we've -- as an industry, we've always done very well to address the labor challenges.
Okay. We have another question from [ Dick ] and he would like to know whether we can share some more light on 41 spec wins that we had in the first half? Namely which areas? Whether they were [indiscernible] adjacencies? And whether this is more for the leading-edge technology or also for more lagging edge businesses?
Sure. Well, yes, to start, our spec wins are typically around the leading edge. I would say, 80% to 90% of the platform development we do is on new platforms to address the next-generation challenges of the industry. There is a little bit of work going on in the mature tools because some of these are quite, let's say, aging platforms that maybe need a little bit of updates and that also gives us opportunity to penetrate some of the share that we lost previously on these older mature platforms.
But in general, the focus is on the leading edge. On these platforms, we're doing extremely well. We're very focused. As I mentioned earlier, we're focused on innovation, but also in cycle time to ensure that VAT is always first to market. Obviously, semi is the leading area of spec wins, and we see good progress really across every sector of the business.
Our adjacencies make up a solid part of that, around 25%. And we saw good spec wins in motion components and advanced modules. And as I also mentioned, we saw some traction with the new ALD valve technology that we're developing. There's a lot of high interest in that product from all the actors in the ALD sector. So I think on the technology front, we're doing extremely well. The challenge is really all about managing the cycle in the operations area.
Yes. Thank you, Mike. Before turning back to the phone, one last question now from the webcast. It's from [ Christoph Grau ] he's with AWP. And he would like to know whether we could give him some update on the economic and political situation in China? How will the situation there effect our business in the medium- and long-term run?
Sure. Yes, I think the things are stabilizing a little bit. I think it's encouraging to see the dialogue at a high level between the U.S. and China. They still talk about further sanctions and you can certainly see the European players benefiting somewhat from these challenges with American suppliers into China.
I think the OEMs in China are quite optimistic for the next 12 months. Urs Gantner and I met with all the leading-edge CEOs in the last month of all the China OEMs. And they seem positive for the growth in the mature technologies and they certainly see an opportunity to grow their share in the coming years.
I would also say that a large percent of our spec wins in VAT was actually in China in the last 6 months. So we also have a high focus in that part of the world. So we expect continued strength in there.
On the mature nodes, we're not seeing much activity on the leading edge, as you would expect, because of the sanctions. And I think it's mostly at the 20-nanometer-plus nodes that the Chinese OEMs are focusing.
Okay. Thank you, Mike. So with that, I would now like to hand over to the operators for callers that have a question.
The first question comes from the line of Timm Schulze-Melander with Redburn.
The first one was just on Semi segment orders. In rough numbers, they improved from CHF 60 million in Q1 to CHF 80 million in Q2. Could you maybe just give us a little bit of color what was the contribution from a drop-off in cancellation activity? And what would be the underlying improvement net of cancellations, please? And then I have a follow-up.
Okay. I would say that the simple way to look at this is cancellations are now back to historical norms. I mean there's always a little bit of pull in pushouts and cancellations in our day-to-day business. And I'd say they are now back at the levels we saw in '22 and '21. So that's one of the reasons Fabian and I are quite convinced that we are at the bottom of the cycle.
And yes, the semi orders, obviously, there's different dynamics happening across the different OEMs, depending on what segments they play in. But we're gradually seeing a normalization of the inventory levels back to more realistic levels. And we expect that order intake to improve sequentially through Q3, Q4 as the inventories are burned down. And your follow-up question?
Great. The follow-up, I think more for Fabian is just to make sure I understood correctly. I think in your prepared remarks, you made 2 comments, which relate to currency. I think you talked about the impact on profitability being 110 basis points year-on-year. And I think you also talked about currency hedging being reported under other income with a gain of, I think, CHF 7.4 million. Did I understand both of those base points correctly?
Yes. Thank you, Timm. That's correct. We do have a comparable currencies, a drop of 110 basis points compared to prior year. And the FX gains are reported in the prior year in our finance income. Whereas this year, we have FX losses reported in the finance costs. So that's below EBITDA. And in the operational hedging, we do have gains that boost our other income to CHF 7.4 million. Whereas, in the prior year that was an FX loss reported in other expenses.
The next question comes from the line of Sandeep Deshpande with JPMorgan.
Mike, I have a question about your comment on WFE into '24. You mentioned that you think things are going to improve in the second half of this year. Is this primarily because you think that inventories of your part that customers are at low levels or is it because you believe that '24 WFE is going to be up from '23 levels? Given that, for instance, ASML has been incredibly cautious on '24 and in fact, it terribly turned cautious more recently on '24. So why is your view different from, say, an ASML's view at this point?
Yes. I don't think our view is dramatically different. I mean I mentioned that we may see something around high-single digit 10% growth potential in WFE. And that is consensus across all the market players. Although I do agree that in the last couple of weeks, things have become a little bit more bearish on that.
What I was referring to in VAT's business, we see a very sharp decline when the market turns and inventory levels were especially high due to the supply chain challenges in 2022. And that's going to take a little bit of time to burn that down. So we will see order improve, I think, in the second half and especially in Q4, back to support the run rate of the businesses in 2024.
So yes, at this point, I think it's too early to really comment on '24. I think a single -- a high single-digit number, somewhere between 5% and 10% is maybe realistic at this point. But we'll see towards the second half of the year.
And then secondly, my question is, I mean, you mentioned earlier on your comments that solar is doing okay at this point. What about Display and what is Display looking like through this year and potentially into '24?
Yes, we see some signs of improvement in Display, and we expect in our Q3, so this quarter, to see some stronger order intake from Display. I think the CapEx investment in '23 will probably be on a similar sort of level as we saw in '22. But we're hearing from some of the actors that we should expect some further investments in OLED into 2024 with some increases.
I don't think it's going to be a massive market recovery back to the strong days of '15 and '16. But I think it will be above, 2024 should be above '22 and '23. And by the way, that's all about the transition of all the smartphones and PCs and tablets, et cetera, to OLED. There's a very fast drive to move them all into OLED.
The next question comes from the line of Robert Sanders with Deutsche Bank.
I was just wondering if you could talk about how the outlook into 2024 has changed in the last kind of 2 or 3 months. Would you say it's meaningfully improved? Some people have been suggesting that the outlook has meaningfully improved. I was just interested to get your take.
I don't think we've seen such a tremendous change across our customers. At this point, there's still quite a bit of guess work into the second half, especially of 2024. We're hearing fairly flat into the -- between the second half of '23 into the first half of '24.
And I think the second half of '24 at this point is really hard to call. It depends on so many factors like the ones I mentioned in the prepared remarks: inflation, China GDP, et cetera. I think though a lot of people underestimate the technology refresh that's required that quite often bites us in the negative part of the cycle as we start to come out. There's going to be quite a lot of technology investment required to upgrade DRAM and flash to support the leading edge nodes and the leading edge products.
And quite often, we forget the CapEx impact of that. So very rarely the semi stay flat. So if you look back in history, there tends to be high growth one way or shrinking in the other direction. So I think the important thing for VAT is we're ready to ramp quickly. We've been very disciplined in our supply chain. We've been very disciplined in our staffing.
We haven't actually eaten into full-time employees. We have made adjustments in our temp pool as we've mentioned, and we have implemented short-term work. So we're doing all the right things to be ready to ramp faster if the industry does pop back in the second half of 2024. But I think at this point, it really is too early to call anything like that.
And just as a follow-up, I'd be interested to get your perspective on AMEC and NAURA in the etch and depth industry within the domestic Chinese semiconductor industry. Clearly, the Chinese are under pressure to drop Applied and LAM -- 2 largest customers. And China seems to believe that those companies will be on par technologically with [indiscernible] and Lam in the next 3 to 5 years. So are you supplying those companies? Do you see big threats at the mature nodes from those companies to your largest customers? Or would you see it more like the Korean equipment industry that didn't really have a huge amount of success?
Yes. I mean VAT don't comment on any specific customer. We hold confidentiality very high. So I think that we are supporting the Chinese OEMs. And we're also complying with any international regulations that are out there.
We certainly do a lot more technology development with our U.S. and Japanese OEM customers, for sure. So I'll let you decide there on how you want to perceive that from a technology standpoint. But I think it's very hard to come into this market on developing solutions for a high-tech market.
As you rightly mentioned, the Korean OEMs have been trying for many years to become bigger players in [ DAP ] and etch and other areas, but it's very, very challenging. So I think the strength of the top 10 OEMs is not going to change. I think these guys have got tremendous technological capabilities.
And I'm sure they all have business plans to address these mature markets. It's not just about cost, it's also about productivity. And I think there's a lot of innovation in the Western OEMs in terms of bringing the right solutions to market. So I think this is a tough one to comment any more than that.
The next question comes from the line of Jorn Iffert with UBS.
Just to double-check, can you hear me?
Yes.
Yes.
And the first question would be, please, on the order run rate. According to my calculations, when the wafer equipment CapEx is around CHF 80 billion, the order intake should mirror around CHF 800 million, so CHF 200 million per quarter. Now Q3 is likely the third quarter in a row, we are not meeting the CHF 200 million order intake.
And here's the question, do you expect Q4 to be already significantly above the CHF 200 million? Or is the low order intake run rate we are seeing right now, not a supply chain preparation that 2024 can really be tougher? This will be the first question, please.
Yes, that's a good question. I think you've seen the order intake is gradually increasing. And I think it's in transition mode. Exactly which quarter it pops back to CHF 200 million is we've yet to see. But I think as we head towards the end of the year, to support the OEMs at that CHF 80 billion, we're going to have to see that level of order intake. But at this point, we're forecasting Q4 should be at or above that number. That's our current plan. But as we know, things change pretty quickly in the industry.
Okay. And then the second question, on your medium-term outlook, you mentioned CHF 110 billion wafer fab equipment CapEx plus by 2027. I thought your underlying assumption for your 2027 target was wafer equipment CapEx of CHF 140 million, CHF 150 billion. So has this changed somewhat the medium-term outlook?
No. I think we're still thinking that 2025 could be in the range of 100-plus, how hard the industry pops back in 2025 is still to be understood. I think when we see DRAM, NAND and Advanced Logical all heading at the same time, then it's not impossible that could be back to -- or at that sort of 110 level in 2025, but too early to tell.
In our Capital Markets Day, we talked about CHF 135 billion by 2027. I think that's still realistic. And I think potentially 110 in 2025 is realistic as well.
The next question comes from the line of Michael Foeth with Vontobel.
Yes. So my question is around inventory and the cycle has been answered, but I have one regarding your margin rebound in the second half of the year. You're guiding for the full year to just below 32%, so this implies a pretty significant bounce back in the second half in EBITDA margin.
Can you just walk us through the sort of the ingredients of what is driving that bounce back? Is it more on the gross margin side or is it more on the OpEx savings?
Thanks for the question, Michael. As I mentioned in my remarks, all our operational cost-saving measures have been put into place a couple of months ago, and they're now in full swing. Therefore, we expect quite some considerable upside in the second half. And the measures are, I would say, a composition of OpEx and employee cost-related measures in combination also with some further [indiscernible] gains that we do expect.
Now the gross profit margin, I expect to be on a comparable level. What we do see there is certainly from the continued inventory reductions we will have a bit of a correction there. But what you can assume is that the second half is certainly going to be at the lower end of the previously communicated margin band.
Okay. And would you expect that the FX impact on the margin is stronger in the second half than in the first half?
I'm not a FX strategist and certainly don't have the ambition to become one. So our current planning assumption is on June 30 FX rates. And on that basis, I have commented before. So what we definitely do not expect, at this point, is that we have, again, this huge revaluation effects coming from the balance sheet that we have seen due to the sharp correction in the first half. And on the other hand, we expect if we see a continued, let's say, flattish FX environment that we have also further FX gains that I have already explained in some of the earlier questions.
The last question for today comes from the line of Jurgen Wagner with Stifel.
Yes. You talked a bit about China, what is your view on local Chinese demand going into '24? And can you share, please, the utilization rates you have in Switzerland and Malaysia at the moment?
Yes, I don't have any specific comments on local China demand. I mean we tend to look at our markets on total demand by segment. And China today is certainly ramping in the mature sector, which is, in general, pretty buoyant, strong momentum in the automotive area and also in some areas in the consumer and telecoms area. And there still is some challenges getting hold of chips.
We've had some -- even in the last month, some challenges getting microcontrollers. So I think the mature sector, in general, is pretty solid, and that's generally good for China. China also invested last cycle in flash fabs. And obviously, that must be extremely challenging for them because they're not in the leading edge.
And the price declines we've seen across flash are very significant, but much more on the trailing edge rather than the leading edge. So I think the China fabs will have a tough time recovering in that flash business. In terms of utilization rates, I think -- do you want to comment, Fabian, on that one?
I can comment on that, Mike, yes. So without any surprise, our utilization rates have come significantly. If I compare it to the previous run rate in Malaysia, currently, we are somewhere between 50% and 60% and Switzerland is hovering around the 50% level at the moment.
Okay. Well, thank you, everybody, for joining. Just to summarize, first of all, I'd just like to welcome Urs again to the new position and you can be assured that him and I will work very diligently on the transition plan towards the end of the year.
We're also very heavily focused on cost and ensuring we get as close to the margin target that we set out at the Capital Markets Day. That's fully in our focus. And that we continue building our capacity, getting that ready for whatever comes in 2024 or '25. And finally, the continued focus on innovation and getting our next-generation products to market, we're actually increasing our R&D spend year-on-year and putting a huge focus on getting leading-edge technology to market to support our customers.
So with that, I'd thank the team, and I'll speak to you all in October, where we have our trading update for the Q3 results. Thank you very much.
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