VAT Group AG

SIX:VACN

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, welcome to the analyst and media conference call. I am Sandra, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Michael Allison, CEO of VAT Group. Please go ahead, sir.

[Michael Allison, Chief Executive Officer]

Thank you. Ladies and gentlemen, a very happy New Year to you all. Good morning and welcome to the short conference call on VAT's Fourth quarter and full year high level results release. With me this morning is our CFO, Fabian Chiozza and our Head of Investor Relations, Michel Gerber. I will start by elaborating on our Q4 and full year 2021 performance. And then Fabian will explain in more details the impact of change in accounting policy driven by a decision of the IFRS Interpretations Committee had on our results. Such changes applied retrospectively and consequently, prior period financial statements will be restated. After our introductory remarks, you will have the opportunity to ask questions. I would like to remind you that VAT will publish its full Q4 and full year 2021 results on the March 3 together with an outlook for 2022 and an update on our midterm targets. Today's Q&A session will, as usual, be moderated by the call operator. Before I start with a review of VAT's fourth quarter business performance, I would like to thank the entire VAT team around the world to deliver an outstanding performance throughout 2021 by delivering at an extremely high level despite the ongoing challenges such as COVID-19 and the global supply shortages. Overall, they made possible for VAT to post record full year results for order intake, sales, EBITDA, EBITDA margin and free cash flow, capturing not only the great market opportunities, but also by further extending our market and technology leadership in 2021. Based on preliminary and unaudited figures, VAT's fourth quarter and full year 2021 results are substantially above the previous year period confirming the positive outlook given in the fourth quarter of last year. In the Valve segment, the business unit Semiconductor reported record results in 2021 as high capital investments in the semiconductor industry continued and we continue to gain share and grow our adjacencies. Strong order momentum in the Display & Solar business unit confirms that the bottom of the cycle has been reached in this market. The Advanced Industrial business unit benefited from recovering industrial markets supported by targeted growth initiatives. The Global Service segment also achieved record results driven by its increasing installed base and our expanding product portfolio. The high utilization levels in the semiconductor fabs also drove increased demand for spares and repairs as well as consumables. Let's have a look at Q4 2021 results. VAT recorded preliminary Q4 orders of around CHF 434 million, up 107% compared with the same period a year earlier and 45% higher than the third quarter of 2021. The order pattern seen in the fourth quarter confirms the significant capital investment programs that end customers, especially in the semiconductor industry, plan in 2022. However, this exceptional increase in order activity was to some extent driven by special factors. We estimate that at least 20% of Q4 orders represent a concentration of year-end order activity driven by longer lead times, price increases which were effective on January 1, last-buy orders on end-of-life products and finally advanced orders from smaller OEM customers. Preliminary net sales came in slightly above the guidance of CHF 240 million to CHF 250 million provided in October and amounted to approximately CHF 255 million, an increase of 36% compared with the same quarter a year earlier and up 11% in the third quarter of 2021. This translates to a Q4 book-to-bill ratio of 1.7. And at the end of December 2021, the order book amounted to approximately CHF 461 million, 62% higher than the end of the third quarter of 2021. As a result of the strong fourth quarter full year 2021 preliminary orders amounted to approximately CHF 1.23 billion, up 69% compared to a year earlier while net sales increased by 30% to approximately CHF 901 million. Preliminary figures indicate that VAT achieved a full year EBITDA margin including the impact of changes to IFRS accounting rules of above 34%, a strong increase compared to prior year period. This excellent performance reflects higher sales volume and operational leverage as well as VAT's ongoing operational improvements. Despite higher investments to support the continued growth in 2021. VAT's preliminary free cash flow reached a full year record level of approximately CHF 190 million -- sorry, CHF 194 million compared to the previous year's level of CHF 147 million. Looking ahead, the strong order growth in the fourth quarter and the high order backlog indicate a continued healthy business environment going into 2022. Despite ongoing supply chain constraints across the entire industry and the ongoing COVID pandemic, VAT expects a solid improvements in its 2022 results. As mentioned earlier a more detailed update on the outlook for 2022 and VAT's midterm targets will be provided with the release of the company's final full year 2021 results on n March 3, 2022. For the first quarter of 2022, VAT expects net sales of CHF 270 million to CHF 280 million. I would now like to hand over to Fabian for more information about the impact of the change in interpretation of accounting standards. Fabian?

[Fabian Chiozza, Chief Financial Officer]

Thank you, Mike. And a very warm welcome and happy New Year to everybody also from my side. With today's announcement, we also like to inform you about the change in the interpretation of the accounting standard for cloud-based services that requires VAT to restate some of its previously reported numbers. Earlier in 2021, the IFRS Interpretations Committee clarified how implementation costs for cloud-based service costs are to be treated in the company accounts applying IAS 38 intangible assets. As a result of this clarification and our analysis of implementation expenses incurred to date, costs for VAT's new ERP system can no longer be capitalized, but have to be expensed through the income statement as incurred. In accordance with IFRS, this change in the interpretation of the accounting policy will be applied retrospectively and consequently, the prior period financial statements will be restated. For 2021, VAT estimates that the changes in the interpretation of the accounting rule will have a small negative impact of about minus 0.6 percentage points on its reported half year EBITDA margin and about the minus 0.6 percentage points impact on its full year 2021 EBITDA margin. Comprehensive details of the restatements in the P&L and the balance sheet will be provided with the release of our annual report on March 3, 2022. With that, I'd like to hand back to Mike.

[Michael Allison, Chief Executive Officer]

Thank you, Fabian. So in summary, these results demonstrate that VAT continues to perform across all sectors and there are growth initiatives around increasing market share, developing new adjacencies and optimizing our service business are yielding outstanding results and continue to grow VAT above market rates. Also our focus on operational excellence and supply chain is allowing us to successfully ramp the company, improve our manufacturing cost structure and deal with a very challenging supply chain situation. This concludes our prepared introductory remarks and I'll now turn it back to the operator for the Q&A session. Thank you.

[Operator]

The first question comes from Sebastian Kuenne from RBC Capital.

[Sebastian Kuenne, Analyst]

Three questions here. First of all, your comments on preorder, you say [ 20% ] of the orders in Q4 are preorders, so roughly 100 million. How do you define that preorders? Would that basically mean that the remainder of the orders has the usual delivery times of 2 to 6 weeks? And then the remainder is basically pushed into Q3, Q4. I would like to have some clarification on that. My second question, on Malaysia, you are planning the new plant, the extension basically of your new plant there. Could you tell us again what the current staff costs are compared to assembly workers in Switzerland? And you also mentioned that the selling prices there for your valves in Malaysia are lower. You mentioned that in the conference call and I would just like to find out or have some detail on how much lower the prices are locally for our selling prices. And finally, On the -- so the semi organization mentioned that they expect 10% of equipment growth this year for the entire semi equipment market after 39% growth in 2021. Now this seems a bit odd given that the order backlogs of all these companies are so large and the run rate into Q1 and Q2 is so massive. It would basically imply a very sharp drop off in the second half. Do you see the same? Are you very cautious on the second half of the year in terms of order intake? That would be my question.

[Michael Allison, Chief Executive Officer]

Okay. Thank you. Yes, we've just had the analysis of our order book. So we're still digging through the results. It's quite a complex picture to work out because there are so much -- so much volatility in the order patterns right now, driven by supply chain challenges. The individual OEMs capacity, the high growth rate [indiscernible] lead times, it's a very confusing order picture. So we said at least 20% is driven by these sort of one-off effects. And when customers place orders, we can see the request dates obviously of those orders. So we can tell how much is one-off, how much is scheduled for the second quarter or the third quarter. And interestingly, in our Q4 order intake about let's say, above 35% to almost 40% of those orders were for the second half of 2022. We've got a good picture of that. But as I mentioned in the prepared remarks, we also had -- we introduced price increases to counter the supply chain cost inflation and they came into effect 1st of January. So there's quite a bit of preordering there and we could tell that from the average volume we see from those customers and triangulate back to what we think is this one-off effect. So as you said, somewhere between 85 million to 100 million, we think is in these one-off impacts. But it still gives us a very healthy intrinsic run rate in the business. And if I jump to your last question as part of that, I think you're correct, 10% seems pretty [ anemic ] for industry growth at this point. There is nothing right now that would say we see a slowdown in the second half. I do think the first half will moderate a little bit because of the overall supply chain challenges and companies like ourselves trying to deliver at higher rates. So I think that the market wants this high volume, but I think some of it will push into the second half. But I think you'll see CapEx estimates increasing during this quarter and I expect them to be more in the 15% to 20% range for the year at least. I think the market again would take more if the supply chain could deliver at a higher rate. Malaysia, you had some questions there. Staff costs somewhere between 1/4 and 1/3 on assembly workers. As you get into the professional workers, the change is half to sometimes similar price depending on the skill set. And sorry, the question you had on price...

[Sebastian Kuenne, Analyst]

Yes, we had a discussion and either you or Michael was mentioning that the retail price or the prices that you charge your customers locally in Malaysia are lower than the prices you charge from Switzerland. So you have basically lower price or different prices locally in Malaysia [indiscernible] that you produce in a low-cost country. So there's kind of an adjustment for that and I just want to have some clarification.

[Michael Allison, Chief Executive Officer]

Yes. Yes, let me clarify that because it really isn't the case. We have a global price less independent of where our products manufactured because when you -- it's hard to actually define the cost differences. Production equipment is the same price in Malaysia as it is in Haag. So it's mostly the labor and some of the more commoditized supply chain items that we can get at a lower cost in Malaysia. But we don't disclose that to our key customers because it is a -- we have to balance that across the globe. And in fact, we make different products in Malaysia compared to Haag, which is really key. I think I've mentioned many times that in Malaysia, it's our latest products that are being adopted by the market. That's why it's harder to predict the actual ramp in Malaysia because that depends on the adoption of our customers' new equipment. But it's pretty much a different product set that we have in Malaysia compared to Haag, which is good because it makes it difficult for the market to try to segment the pricing of our products and allows us to balance our pricing a lot better, but intrinsically there's no price benefit. We may choose because of slightly lower cost to offer different products into different market segments to drive our market share for example and take some benefit from the slightly lower cost, but it's not a massive difference in cost between manufacturing in Malaysia and manufacturing here.

[Operator]

The next question comes from Sandeep Deshpande from JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

Can you hear me?

[Michael Allison, Chief Executive Officer]

Yes.

[Sandeep Sudhir Deshpande, Research Analyst]

My question is on the timing of these orders again, slightly. I mean can you talk about how these orders were taken in past years? Did you have price increases in January in past years? Did you have this bunching of orders from some customers facing large orders for the full year, potentially ahead of time in past years. And then of course, also did you also discontinue products in past years, which could cause bunching of orders. So I mean can we look back to the past to explain what has happened in terms of the orders at least at 20% partially at all?

[Michael Allison, Chief Executive Officer]

Yes. I think this year is different. We had some, for example on obsolescence. We have a couple of large products where because of electronic component challenges, we've -- we are moving to a new generation of controllers and moving customers to a new product set. And that was a fairly large amount worthy of mentioning. We've normally go obsolescence happening across every quarter. But this was a couple of big ones that were coming into effect. The price increases we generally do in every year. This was a slightly larger one due to the supply chain inflation we're seeing and we announced that this was taking place on the 1st of January. So I would say there was a much higher uptake of the [indiscernible] pricing than we see normally. So that was definitely unusual. And I think one of the other things we're seeing the small OEMs are quite often participating in the legacy sector and they've been growing pretty fast, especially some of the Asian smaller OEMs. And they're really trying to secure production slots against the larger OEMs are placing almost full year demand in the fourth quarter. So we saw some very sizable orders from smaller customers that for example one, we would expect 5 million to 10 million per year from this specific OEM. And we saw a 15 million to 20 million order come in to represent the size of growth they had and also trying to tie down their production loss. So it was quite -- some quite unusual ordering.

[Sandeep Sudhir Deshpande, Research Analyst]

Then one quick follow-up. I mean in terms of your capacity, if your orders remain at these levels, I mean do you have capacity to supply through 2022?

[Michael Allison, Chief Executive Officer]

Yes. I mean I think it's too early to call where the industry run rate is for us right now. As we look at the order pattern and analyze this, we'd say around the 300 million maybe what the demand is. I think when you look at the investments we're making in Haag in the short term, I think we can get up to that level. It's tighter than we wanted it to be, for sure, the speed of the industry I think has been being much faster than we anticipated. Our Haag facility, we're running about 650 million. We plan to take that up to 750 million this year. Our Malaysia, our current run rate is over 200 million, and we expect to get that closer to 300 million by the end of the year. So I think we're comfortable we can ramp our production facilities to meet this demand, but it's certainly tighter than we had expected. Hence, the decision to move ahead with this Phase 2 Malaysia makes a lot of sense and we're trying to accelerate that as much as we can.

[Operator]

We will take the next question from Michael Foeth from Vontobel.

[Michael Foeth, Head of Swiss Industrial Research]

Happy New Year to all of you. 3 questions. The first 1 is you talked about those price increases. Can you give us an idea of the sort of average percentage price increase across your product so that we have an idea of the price impact for 2022. That would be the first question. The second question is in terms of supply constraints or constraints in general. How far are you constrained from your supply chain to deliver product to our customers today? And do you have any short-term constraints related to sort of the Omicron wave in terms of availability of your workers in factories. That will be the second question. And the third 1 is if you could give us an idea on the 2022 and 2023 distribution of your CapEx plan in terms of annual CapEx spend.

[Michael Allison, Chief Executive Officer]

Okay. As you can imagine, the price increase topic is super sensitive because it's applied differently depending on agreements we have. So we're not going to release any details of that price increase at this point. On supply constraints, I think these are pretty much across the board. You can imagine after a 30% year to have another 30% growth here, you see limitations across many different elements of the supply chain. I think the 2 key ones we've been faced with was raw material, so mostly aluminum, which we now have secured a pretty much the supply we need for 2022. So that's in good shape. Electronics components remains very complex. You get constraints jumping up every day there. I'd say they've gone a bit better recently compared to say the third quarter where we really had some challenges. And we're working very hard with second sources and new qualifications to try to minimize risk there. We've recently just also completed a very detailed audit of our supply chain because I think we've communicated before that about 70% of our material is outsourced of our production parts are outsourced. So we've gone into a lot of detail to look at our supply chain capacity. I'd say in general that's in good shape. We have a couple of suppliers that are challenged. So we're looking at second sources there and qualification of new parts. I think it's all manageable. It's just an enormous amount of work. And we're also driving some slightly higher costs as we drive those qualifications, et cetera. So I think at the moment, we're doing well. You've seen the guidance for the first quarter would continue to ramp. And I think we can ramp the business this year up to the $300 million per quarter. As we get above that level, we certainly have to continue investing in Haag and in Malaysia. And we expect that new facility in Malaysia to be up and running towards the end of '23 into early '24. So still quite a lot of work to do between now and then to ensure we have the capacity, but we have a very professional supply chain team here driving it. Fabian, do you want to comment on the CapEx distribution?

[Fabian Chiozza, Chief Financial Officer]

Absolutely. As you remember from our announcement in December, the total initial investment will amount to approximately 160 million over the period, '22 to '24 and I do expect here some front-loaded CapEx in this year and also in the following year. So the CapEx-to-sales ratio will increase somewhere between 5.5% to 6.5% of sales for the next -- for this year and next year before then we will return again to the band of 4.4% to 5% over sales.

[Operator]

The next question comes from Robert Sanders from Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

Yes. Happy New Year. I just had 2 questions really. One is in terms of the source of the semiconductor upside. Would you say that it is driven mainly by logic foundry? Or you think it's across the board, I guess, that would be my first question and I have a follow-up.

[Michael Allison, Chief Executive Officer]

So the CapEx distribution right now, yes, I think right now, it's definitely a high percent going into logic and foundry, not just at the leading edge, but also in the mid and lower technology nodes. But a lot also going into the memory sector across DRAM and NAND. I think the split I saw recently was about 60% into logic and foundry and about 35% into memory that was for the full year of 2021. I don't know yet what the distribution was like in Q4 because we're really the first to announce at this point and haven't seen where the CapEx is going. But clearly, this trend I've mentioned before on the CapEx per wafer driving the logic and foundry business is certainly still very much alive with the CapEx numbers you see in high-end logic especially. It will be very interesting to watch DRAM in the first half of the year because I do expect that CapEx per wafer ratio to increase also in DRAM. And if that continues to grow then I think it could be 1 of the main drivers to take us over the [ 100 billion ] this year in CapEx.

[Robert Duncan Cobban Sanders, Director]

You mean WFE [indiscernible].

[Michael Allison, Chief Executive Officer]

WFE. Yes. Yes.

[Robert Duncan Cobban Sanders, Director]

Got it. And just on display, can you just talk what you say it's rebounding. Is that OLED driven? Is that OLED and LCD? Can you just give a bit more color on what's actually happening there?

[Michael Allison, Chief Executive Officer]

Yes. I mean we saw strong order intake in Q4. I mean sizable order intake compared to the rest of 2021. Most of that was coming from OLED projects. Yes, there was some legacy LCD there, but a majority coming from OLED.

[Operator]

The next question comes from Timm Schulze-Melander from Redburn.

[Unknown Analyst]

I just have 2. The first, could you perhaps just talk a little bit about your aftermarket business and the stocking and what kind of distribution of parts you have and if there are any challenges there. It looks like it executed very well in 2021. It looks like it's going to execute well in 2022 despite the challenges. And I just wanted to know if there are any sort of constraints or anything we need to be aware of there?

[Michael Allison, Chief Executive Officer]

Yes. Yes, the service group performed extremely well in 2020, but also in 2021, tremendous growth in both years. I think that's been driven by the high utilization rates in the fabs for sure. Wafer fab utilization rates are above 97% right now, probably the highest have ever been on average and that's driving a very high increase in consumable spend especially. Also customers are repairing things immediately because every piece of equipment is highly valued right now. Constraints in that business, I think we see probably less because there's not the same level of electronics components required. Most of our consumable business is metallic parts with elastomers are the 2 main raw components there. So we've had less challenges there apart from just the general demand increase, trying to ensure we have enough machining capacity. So the consumable business is very strong, the repair business is very strong again because the installed base of valves is growing exponentially. And we're capturing a higher percent of that because customers want the high performance. They don't want to -- in this high utilization environment, they don't want to take chances on third parties and substandard components. So they're more likely to buy the original OEM parts. So we're seeing strong performance there. We're also taking share back in Korea. We've had a couple of successful lawsuits there against third-party component providers that we're clearly infringing some of our patents. So we're gaining share back in Korea, which is helping. And lastly, our retrofit order intake has been very strong. The challenge in that business is getting actual time on the production equipment to upgrade it and put in the new retrofits that's trying to get machine time right now is very challenging. But the order intake and the expectation for that to continue into '22 is very strong. So I think all the main parts of our service business is performing at a really high level.

[Unknown Analyst]

Great. That's super helpful. And then just coming back to this challenging supply chain, I mean your comments around how proactive VAT has been on the raw materials and the multi-sourcing and second or third supplier qualifications. It looks like actually investors probably shouldn't be too worried about things from a VAT Group perspective. Have you seen any limitations of your ability to ship products because of supply chain problems further down at your customer side, for example?

[Michael Allison, Chief Executive Officer]

Yes. I think that's a hardest thing for us to predict because I mean, the -- obviously, supply is determined by the weakest link in the supply chain. So, so far, we haven't seen too much of an issue there. But I get the feeling we are going to see some challenges at our customer side on production capacity based on some weaker links. And that's what makes guidance very difficult is to try to balance out with our own production ramp, but also what's happening in the broader industry. And I think that will ultimately mean a smoother 2022 because there's huge demand that's required in the first half of the year. I think some of that will push into the second half just because of those supply chain concerns. But I think from a VAT standpoint, we're doing pretty well. I wouldn't be too concerned about our ability to ramp and produce. I mean COVID is always uncertain. Nobody is in control of that one. But so far, the precautions we've taken there and the way we are executing on the health and safety aspect is also very strong.

[Unknown Analyst]

That's great. Very helpful.

[Operator]

The next question comes from Craig Abbott from Kepler Cheuvreux.

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

Just to come back on the pricing situation at the moment, you made clear that the price increases you implemented for your customers in January is a sensitive issue. But looking on your procurement side, I mean could you maybe just give us kind of like a ballpark indication of what kind of price increases you're seeing and expecting in the coming quarters? And do you feel relatively confident that in the balance you're passing most of this on and therefore, you're looking for sort of a stable gross margin in '22, enabling you then to generate operational leverage on your fixed cost base. Is that a fair assumption?

[Michael Allison, Chief Executive Officer]

I mean this is a very challenging situation because you -- traditionally in semiconductor our business has operated by reducing costs overtime and doing product redesign and finding ways to do things cheaper and faster. So it's very unusual in fact to see price increases. And I really don't want to get into our costs and what we're seeing as our input costs because we're having very challenging negotiations with our customers as you would expect on this topic. So we're trying to create the right balance. We have to be fair and I think part of the reason the VAT is doing so well in the market is because we're reaching a strong equilibrium with our customers between value and price. And if we extend that price too hard, it's just going to create very heavy competitive momentum with our key customers. So we're trying to balance those that total cost equation and offset some of the input costs by improved efficiency and lower costs in Malaysia. At the same time, there are some, for example, aluminum raw material has in some cases gone up 20%; in some cases, higher where we have to pass on some of that cost. It's just no way of escaping it. But the total cost overall, I really don't want to get into that the same as with the price increases because it's a very contentious topic and I think it's -- just the less we say about that to the broader market the better.

[Operator]

The next question comes from Remo Rosenau from Helvetische Bank.

[Remo Rosenau, Head of Research]

Before you mentioned that Haag runs at a run rate of around 650 million a year, which will be going up to 750 million, then you said Malaysia will go from 200 million to 300 million. If you take 750 million and 300 million, this gives me 1.05 billion. On the other hand, you said that you can ramp up your sales capacities to around 300 million per quarter, which would give CHF 1.2 billion. In an earlier conference call you however also said that with your existing capacities, you think you would be able to process 1.4 billion of sales. So I'm a bit confused here. So how much could you actually do with your current capacities?

[Michael Allison, Chief Executive Officer]

Yes. Well, on top of the factory capacity, you've also got some service business that is not related to factory capacity. So there's between 100 million and 150 million of additional sales that come from other sources unrelated to that factory capacity. So with that number, I stated we can get to 1.2 billion. On top of that, we plan to ramp high up towards 800 million and Malaysia more towards the -- getting close to 500 million. So we would get pretty close to 1.4 billion overall with existing capacity if we push that. But we need the additional headroom, hence, the additional investment in the second Malaysia facility. So you've got to add the high capacity, you've got to add the Malaysia capacity and then somewhere around about say 130 million, 150 million in additional sales from other sources.

[Remo Rosenau, Head of Research]

Okay. That's very clarifying. And in addition to that, I mean if you would -- I mean, of course, the 1.4 billion would at the earliest be possible in 2023, I guess. But if you would push it to that limit, would then the operating leverage turn into a negative leverage? Because as we all know going towards 100% utilization rates, actually costs go up, not down. What is your take on that one?

[Michael Allison, Chief Executive Officer]

No, I don't think we would see any increase in operational costs really because our overhead is not growing at the same rate. And overall, I think we would still be improving our EBITDA margins. Even with the cost increases that we're seeing across the board, our plan is to maintain or grow our EBITDA position today. And if you look at our '21 results. If you take out those IFRS numbers, we're pretty close to the top end of the corridor. We said we'd operate in around 35%. So our plan is to continue delivering at a very high level.

[Remo Rosenau, Head of Research]

Okay. So bottom line if the supply chains work, you could process basically 1.2 billion this year and 1.4 billion next year if everything goes smoothly and the demand is there.

[Michael Allison, Chief Executive Officer]

That's the top, the top end of the capability. I mean that's assuming everything goes perfectly well, which is, as you know life can be a little bit different to that. But we're certainly targeting getting to that level of output.

[Remo Rosenau, Head of Research]

Okay. My last question. I mean you didn't elaborate on the price increase exactly. But will it be enough to fully compensate for the higher input costs in 2022?

[Michael Allison, Chief Executive Officer]

The price increase alone may not be enough to compensate for that. But then we've got a lot of additional supply chain cost reduction processes and it's an ongoing. We put in place a very disciplined process now to cut costs. We have a major program called [indiscernible]. We've been running now for 3 years. This has done a great job in reducing our cost structure. And as we continue to ramp Malaysia, we'll also benefit from that. So that's why I'm saying I don't want to talk too much about the price increases and input costs because it's multidimensional here.

[Remo Rosenau, Head of Research]

Great. That's very clear.

[Operator]

The last question for today's call comes from Didier Scemama from Bank of America.

[Didier Scemama]

Apologies earlier, I was on mute. Most of my questions have been answered. I just wondered if you could maybe give us a sense of where you think your major OEM customers in the semiconductor equipment sector inventories might be. Obviously, the order intake you've announced today is quite eye popping. And I think I understand you did your best to try to sort of indicate what might be over ordering or orders brought forward from next year. But have you got a sense of where inventory that your customers might be, pretty much all of them talked about supply constraints in the last quarter. Do you think that with those sort of orders they are going to be more comfortable? Or do you think that, that strength sort of carries on at least through the first half of this year, if not the full year.

[Michael Allison, Chief Executive Officer]

Well, I think the -- from what I'm seeing from the end market with CapEx announcements and actually talking to some of these players, myself and this trend for 2022 certainly looks very promising. I think as I said earlier, trying to predict right now the run rate where the industry is at super complicated because the inventory positions are really volatile. Some OEMs may have high inventory positions and some components and then not in the others. It's back to [indiscernible] the weakest link. And that's what makes our guidance extremely tricky. So it's very hard to tell. I think we need a little bit more time, maybe a couple of quarters to see where we're really are in the industry. I'm hoping by the 3rd of March, when we do our full release, we'll try to give a market update for the year and give some idea of what that means for VAT. But there's too many complexities right now to give that -- make it a very accurate number.

[Didier Scemama]

Got it. And then just to piggyback on the previous question. So I summarize what you said. So I think roughly a 1.2 billion run rate probably for the first half seems accurate. And would you say that perhaps you could be operating at around 1.4 billion run rate by the end of this year as you add capacity, is that a sort of a good summary?

[Michael Allison, Chief Executive Officer]

No, I think that's still too high. When I say -- I mean the 300 million you see from our output right now, we're not at that level yet. And even by the end of the first quarter, you've seen our guidance. So we're not at 300 million yet. I'm saying that's what the order intake would demand if we could fulfill it at least for the first half, but we're not going to be at that level yet and a higher number would be into 2023. But that also then depends on the outlook for '23 and is the CapEx spending going to continue at this elevated level or high level? Or is this a new run rate? I think the other questions we don't know yet. Certainly seems like the pace of digitalization and just the growth in advanced processing and requirements into the memory market should keep that CapEx running at extremely high levels into '23, very optimistic on that.

[Didier Scemama]

Maybe a final quick one. I mean it sounds like the major [indiscernible] programs to the U.S. are going to start to have an impact on WFE demand in 2023. Do you have a view on this? I know it's probably further remote away from you guys. But there is a view as to whether you get orders from your semicap customers already now? Or is that later in '22 or even in '23?

[Michael Allison, Chief Executive Officer]

Well, the order -- interestingly, the order profile from our largest customers is pretty smooth. We're seeing increases, but we're not seeing these dramatic increases that we've seen with some of the smaller players. So I think the larger OEMs have this more under control. And that's why I'm saying, I think the intrinsic run rate could be getting closer to 300 million.

[Didier Scemama]

Fair enough. Thank you so much and congrats.

[Michael Allison, Chief Executive Officer]

Thank you.