Edited Transcript of VACN.S earnings conference call or presentation 3-Mar-20 10:59am GMT

One of the leading indicators in our future success is our specification wins. And in 2019, we had a record number of specification wins. That means we’re winning slots or positions on new platforms that will come to market in high volume over the next 5 years. So this is a leading indicator of our future market share, and you’ll also see from our 2019 market share that we gained 2 points of share in our core markets.

We’re also focused on the non-semi parts of our business, and we saw growth there. Our service business returned about 6%. We had a very strong performance in the first half of ’19, but that did tail off in the second half as many of our semiconductor customers reduced their spend on upgrades, which is a key focus area. That was simply in an effort to preserve their profits during the cycle. But we expect the service business to come strong in 2020.

So I think we can firmly say we reached the bottom of the cycle in the first half of 2019, and we had a very strong fourth quarter. And we see that continuing into 2020. I think the only hiccup on the horizon is the situation with the virus, which I’ll say a little bit on now. We’re taking all possible precautions during this time. Our #1 priority is the health and safety of our employees, and we take that very, very seriously. We’ve also taken a lot of measures to ensure our supply to our key customers remains intact. We don’t have a huge supply base in China, but we went into a lot of detail to ensure our suppliers also have backups for their supply chain, which obviously reaches into China. So far, we haven’t seen any major delays in our supply chain, which is good.

I can’t make predictions for the future. The situation is very uncertain. This morning, for example, there was announcement that the Chinese are taking priority in a lot of their flights. There’s a reduced number of flights. So freight into China is reduced. So what’s ahead of us in the next month is uncertain. The key thing for us is we’re looking at it on a daily basis, and we will make adjustments fast as required. We’re very confident, however, that the dynamics we see, especially in the semicon industry, still should provide a very strong platform for 2020 growth.

Sales per segment, you see, we finished the year at CHF 570 million, a 27% EBITDA. The main portion of that is Valves, 77%. Global Service made up 20%. I’d love to keep that percent as we start growing again, and that’s one of the focus of the team, to keep our service growth at a high level. And Industry, you’ll see, will be a shrinking part of our portfolio. Don’t mistake that again for general vacuum valves. That is in our Valves segment. The Industry is our third-party components that we make in Romania and also some automotive business.

Now that will be reducing for 2 reasons. One is I’m moving out the low-profitable third-party components that we have in Romania to make way of more a supply chain transfers into Romania to reduce our cost basis from suppliers in Switzerland. So there’s a substitution effect there, as our Romania plant becomes really just a component supplier to VAT. The second thing we’ve seen at our — in our Industry business is a reduction in the automotive sector. That fell considerably in 2019. We think that’s stabilized. So we should see the automobile part fairly flat in 2020.

Looking at the trends in ’19. I think these are pretty well understood in the market. Wafer fab equipment in semiconductor was down 10%, and it really was all about memory. The logic and foundry component was very strong during ’19, and it simply was the memory segment that caused this major cycle. There’s a lot of technology enhancements happened in the second half of ’19 to be ready for the next cycle. And I think as we finished Q4, we saw supply/demand in the memory sector get into a better balance. For example, the flash memory lead times were down to 4 to 5 weeks, and that’s down from almost double that a quarter before. So I think that things are looking much healthier within the memory sector, and we’ve already seen investments happening in the first half. And I think that will gain momentum through into the second half of the year.

In display, it was really a transitional year as investments moved from LCD into OLED, and we see that continuing into 2020. Latest estimates are showing an increase in CapEx spending in display, driven by OLEDs in 2020.

Solar module demand was up in ’19, but CapEx equipment spending was lower. And we saw that in our business, and Stephan will mention, we’ve made a few provisions around that in our ’19 numbers. We think that 2020 will be fairly flat. But looking into ’21, ’22, I think there’s opportunities there for future enhancements in the solar business.

Our general vacuum business, which is industry and research, was fairly solid. Some interesting new business coming in the battery segment, so we’re focused in how we can take advantage of that. And also new megatrends like medical give us a good view of the future. The research spending was slightly down overall. But I think looking into 2020, we’re optimistic that should start improving again. So overall, it was a fairly challenging year, as I mentioned, but I think VAT maximized our performance during that time.

I think that can be seen in our market share numbers. You see starting from the far right-hand side, as you look at the chart, our semiconductor share grew to 65%. That’s 2 points. If I bring in display and solar, plus semi, that’s the middle chart, we also see we grew 2%. And then overall, across every industry and valves, we grew 1% up to 50%. Again, the focus here is our specification wins. And during a downturn, there’s always a lot of pressure on pricing or competition trying to get into our market. But as you can see, we weathered that storm pretty nicely. But our focus in specification wins ensures that we gain future share as the cycle progresses.

So that’s the highlights of the business. I’ll now pass you on to Stephan, who will give you a more detailed view on the financials.

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Stephan Bergamin, VAT Group AG – CFO [4]

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Thank you, Mike. I will give you now an overview about the key figures. Before doing that, I would like to mention also Beat Posratschnig. He’s new in the [audience]. Beat joined us as new Head of Controlling end of last year, and he’s supporting us in financial steering of the group.

Net sales are down 18% to CHF 570 million, as market passes through cyclical trough.

EBITDA. EBITDA margin as well as EBIT margin declined on a lower sales volume. We are reporting record free cash flow of CHF 140 million. That’s a result of [closed] costs, inventory and trade working capital initiatives. Free cash flow conversion is at 91%. That’s significantly above our midterm target of 70%. And net debt-to-EBITDA leverage is at 0.9x. This slightly higher leverage ratio primarily reflects lower EBITDA reached in 2019. Based on that, we will continue with our dividend policy, and we will pay out a dividend of CHF 4 per share.

Order intake in the fourth quarter 2019 was CHF 176 million. That’s up 31% compared to previous year and 20% higher compared to the third quarter 2018. Order intake for the full year is at CHF 585 million. That’s down 10%. The order backlog at year-end stood at CHF 115 million. It’s 7% lower compared to Q3 2019. The year-end backlog includes the cancellation of a large order related to a solar project which was halted and where we — it’s uncertain whether it will be resumed.

Volume reductions are the main reasons for the negative sales bridge. Volume declines in semi and display and, to a smaller extent, in general vacuum, whereas global services is showing growth. Product mix has a positive impact on the sales bridge, and it demonstrates our innovation capabilities. Pricing is stable, and the FX impact is not significant.

We are seeing gradual recovery of the business activities throughout 2019. After record sales in 2016, ’17, the chart shows that we have seen a sharp decline in business activities beginning of 2018. Order and sales trough passed in Q1 2019, followed by a gradual recovery over the rest of 2019. The book-to-bill ratio is above 1x for the fourth consecutive quarter.

We are generating high economic profits on invested capital. On this chart, we are comparing invested capital and cash return on invested capital with our cost of capital, represented as the WACC of 10%. And it shows that we are exceeding the cost of capital with our returns. Therefore, VAT is generating constantly shareholder value over the whole period 2015 till 2019.

Compared to the record levels posted in 2018, net sales declined 18% in 2019 to CHF 570 million. EBITDA for the year declined by 28% to CHF 154 million, reflecting the decline in sales. Full year EBITDA margin reduced to 27% compared to 31% 1 year earlier. Net sales for the fourth quarter 2019 amounts to CHF 170 million, and we are growing compared to previous year but also compared to previous months. We are increasing by 50% compared to the fourth quarter 2018. Comparing to the third quarter ’19, sales grew in the fourth quarter by 25%.

The cyclical business decline turned around in the second half year 2019 with an EBITDA margin of 25%. At the trough, we are 2% higher compared to previous trough. The — VAT’s focus on costs and operational efficiency allowed it to post an EBITDA margin approximately 2% higher compared to previous low cycles. The EBITDA in quarter 4 amounts to 29%. That’s significantly higher compared to the beginning of the year.

Net income is 45% lower compared to previous year. There are 3 key reasons for this decline: First, lower EBITDA; higher depreciation; and third, timing of tax recognition. The EBIT includes a negative impact of higher depreciation charges resulting from the finalization of the expansion in Malaysia in 2018. The finance costs are down as a result of lower interest expenses. Due to the Swiss tax regime, the tax rate amounts in 2019 to 24%. Going forward, we expect a normalized tax rate of 18% to 20%.

Free cash flow reached a record level of CHF 140 million. Cash flow from operations in 2019 is lower compared to the previous year, but improved net working capital and lower CapEx led to this record. Due to the high net working capital at the beginning of 2019, as a result of previous ramp in ’16, ’17, we launched last year an inventory task force. And this led to a significant reduction in inventory and working capital. Trade working capital amounts to 21% of net sales. That’s close to our midterm target of 20%.

The CapEx is significantly lower compared to 2018, as the factory expansion in Malaysia was completed. The CapEx in 2019 include ERP rollout as well as research and development investments.

On the right side, you are seeing free cash flow conversion. It reaches 91%, and that’s significantly above the target of around 70%.

Net debt level is slightly lower compared to 2018. The gross debt includes the bond of CHF 200 million and the partial use of the CHF 300 million revolving credit facility. Year-end leverage is slightly higher last year. It’s negatively impacted by the lower EBITDA but partially compensated by the lower net debt at the end of 2019.

I would like to conclude with achievements 2019. Overall, we are reporting lower results in 2019 compared to 2018, but we guided correctly through the year. And we expected the recovery in the second half year of 2019. Full year EBITDA of — margin of 27% is substantially above previous downcycles, and it shows that we focus on cost management and on improving productivity within the group. We have demonstrated strong cash flow generation also in a difficult year. That was thanks to a clear focus on lower CapEx and working closely with the trade working capital. We are close to the target of 20% of sales. And that allows us to pay out the dividend of CHF 4 per share. In ’19, we had a negative impact from the Swiss tax reform with a higher tax rate. But going forward, we will keep the average tax rate of 18% to 20%.

Looking ahead, which are the priorities for 2020? First of all, we will continue with the cost and productivity improvements. We will keep trade working capital in line with the expected ramp in the production, and we will apply a disciplined approach when it comes to CapEx, expected to be around CHF 30 million.

I will give now the word to Mike for the final remarks.

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Michael Allison, VAT Group AG – CEO & Interim COO [5]

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Thank you, Stephan, and I’ll conclude with looking at what’s ahead of us in 2020. We’ve spoken of the 3 major dimensions of growth for VAT in the past. And I think looking at where businesses are going, these remain fully intact. Our end market growth, I think, is — looks very favorable for the future with things like IoT, artificial intelligence, et cetera. And that really was demonstrated even during 2019, where the foundry and logic businesses were performing at a very high level, which means this cycle has actually extended much longer for that logic business and foundry business than we’ve ever seen in the history of semicon. I mentioned it was just the memory area that really suffered. But there, we had very high-growth rates. I think as we look into 2020, the hyperscale applications, the cloud storage will drive memory back to a point where we see major investments from the key players in the industry.

And behind that, 5G is also going to be a positive driver. We also saw surprisingly in Q4 a big pickup in Apple iPhone sales, which helped first and second quarter demand. And that was surprising, as we had expected the major demand would come in the third quarter of 2020 with the introduction of the 5G iPhones. So it shows you, there’s still a lot of life left in that business. We’ll see a little bit of a pause in Q1, Q2 with the current virus situation, but that may just accelerate the second half of the year from an investment standpoint.

The second dimension is equipment growth. The transistor structures and the architectures of silicon devices are becoming much more complicated as we go to advanced memory and also advanced logic and things like 100 level NAND and 5-nanometer logic. And that means you need more equipment per wafer start. And that’s good for our business. As the shrinkage and number of layers build, we’re going to see a progressively higher amount of CapEx required to build the same level of output. And that’s positive for VAT.

The third dimension is vacuum. Everything these days needs to be done under vacuum pretty much in the semiconductor process. And during the year, I mentioned we had a record number of spec wins, and that’s because there’s a record number of new platforms getting developed to deal with these new complex materials and transistor structures. And they’re mostly all in the CVD and etch areas, which is good for VAT’s vacuum valve business. EUV lithography has also really established itself as a driver for this 5-nanometer era and getting into 3 nanometers. And the whole ecosystem around EUV requires more vacuum, which is good for us. Our market share is driven not just by making good valves, but it’s the whole ecosystem around the valve.

The flexible operation structure that we’ve demonstrated, the business continuity by having a fully capable facility now in Malaysia, which is an area that many of our customers are moving to, but also things like zero particles, which I’ve talked about, is competencies that VAT has compared to the competition.

So if you take all 3 of these together, I think the future in our semiconductor and display, display really is behind this as well with things like the progression of OLED screens across the consumer devices, this is going to ensure solid growth for VAT in the future.

Visibility is better in semicon, for sure. I think there’s some short-term uncertainty around about the virus. But from what we see in talking to our key customers and looking at their plans for 2020, we see a pretty solid year developing. It will be a strong growth year. How strong, I think, depends what happens in the next few months with the virus.

If you look at the semiconductor wafer fab equipment, VLSI, who are a major commentator, are saying 5% growth in CapEx spending next year. Other projections are up at 10%. I’ve also had more optimistic outlooks for the year. So I think we — as I said, we will have a strong growth year. How much depends in the next few months.

The latest view on display is about 8% growth compared to ’19, and I think we’re seeing that in the OLED business. The solar business, fairly flat, I think, with hopefully stronger growth into ’21 and ’22. And overall, I think going back to semicon, the ’21 to ’22 years look pretty solid as well within that business.

Investments in innovation, I mentioned, is really key to our future. We pay a lot of attention across our business areas on how many platforms we win. And you can see here across semi with a record number of spec wins. Display and solar, not so much new technology there coming to play, so I’d say fairly flat on spec wins. A growing number of spec wins in Global Service, as we bring out new upgrades. And the same in general vacuum, we’ve refreshed our business plans in that area and focused on bringing new types of products and focusing on new applications. So overall, the total number of spec wins is considerably up over 2018.

We also look carefully at the patent index to ensure that we are putting in place the right IP protection for our products, and the first view of that of the year shows that we have a much stronger position than our competition. I don’t yet have a breakdown of the exact competitive status by competitor. We won’t get that till the April, May time frame until the Japanese companies have fully reported. But the first pass numbers show that, again, we’ve gained 2% roughly of share in our core markets.

I mentioned we added 4% head count in R&D during the year. We added something like 23 people in Malaysia for 2 reasons. One is we want to have the competence in that facility to deal with customer issues and fine-tuning of the products there. But we’re also pushing to a lower cost environment to ensure we have a stronger downturn resistance within the business. This additional head count is focused on our core valve technologies but also on things like our modules business, our motion components and a drive into smart components. For VAT, it’s critical that we drive innovation into every product to give us even more stickiness within our key customers and ensure our solutions are perfectly targeted for their progression into a smarter environment.

So to conclude, I think improving market conditions in the second half of the year, very strong Q4. Some of the Q4 strength was driven by our customers replenishing inventories that have been brought down to fairly low levels. So we’ll see a slight correction as we move into Q1. And — but we think looking beyond Q1, we’ll see continued strong momentum for the rest of the year. Second half, at this point, does look stronger than the first half. I think our medium-term growth drivers are fully intact, as I mentioned. And I think they will all demand — drive a very strong demand for semiconductors and advanced displays.

With the virus situation, there’s some short-term uncertainty. But we don’t expect a significant impact on 2020. And our main focus right now is to ensure that we’re ready for this coming upturn. We delivered pretty well in Q4 with a fairly large increase in revenue, as you saw. We want to be ready to take whatever comes at us during the second half of the year. And again, we’re focused on what we can control, our cost, our productivity, our supply chain and also our innovation.

For the full year 2020, we will have a growth year. We expect sales, EBITDA and our EBITDA percent and net income to be up versus 2019. From the work we’ve done in improving our cost position, we’re very confident of reaching the midterm guidance of 33% on EBITDA, probably at a lower sales level than we anticipated before.

Our CapEx, we will progress prudently. The eventual amount we spend determines on how fast the market comes back. We put in a substantial investment in Malaysia. We may have to do a little bit of incremental investment if that business gets above a certain level. We expect 2020 to be around CHF 120 million in Malaysia, progressing up to something like CHF 170 million in 2021. So that is moving fast as the new products we’re developing get launched within semicon.

I think our financial results for the year is even more impressive when you think that we brought up a completely new facility that we didn’t have in the past and ran that at fairly low utilization levels right through this cycle. But that is now ready. It’s fully capable. It’s been audited by all our key customers, impressive quality record, impressive on-time delivery record. And we’ve staffed it with very competent people to ensure we have a smooth ramp in that business.

The CapEx also includes investments into our infrastructure. We’ll see the first stage rollout of our new ERP platform in the third quarter of this year. It will start with our Romania plant and then the sequential rollout during the second half of the year and into 2021.

For Q1, we expect sales of CHF 140 million to CHF 150 million. But really, that’s fully dependent on what happens in the environment in the next few weeks. Demand looks solid, but we’ve given a fairly prudent guidance there.

So with that, I will thank the VAT team for their tremendous performance during 2019. It was hard work across a whole bunch of fronts. And Stephan, Michel and I will take your questions. Thank you.

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Questions and Answers

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Michel R. Gerber, VAT Group AG – Head of Corporate Communications & IR [1]

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Okay. Thank you very much, Mike. I will, as usual, take a couple of questions here from the room. Please do wait until you get the microphone so that the people on the phone and on the webcast can hear your questions as well. So with that, I’ll hand over here to Marta first.

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Marta Kinga Bruska, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [2]

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Marta Bruska from Berenberg. I have 3 for the beginning. So first of all, your Q1 guidance of CHF 140 million to CHF 150 million sales look a little bit soft after CHF 170 million reached in Q4. Could you please break that down to the impact — possible impact from the coronavirus, perhaps on the supply chain, that you may have included in that guidance? And from this inventory effect that you had in Q4, so when I compare Q4 to Q1, then how much in Q4 was due to this extraordinary inventory adjustments?

Secondly, I would like to ask about Malaysia. You mentioned CHF 120 million sales for 2020. How much was that then in 2019? The last number, I have some CHF 50 million, CHF 60 million. And third, if you can give us more detail on this large order in solar that was canceled in Q4.

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Michael Allison, VAT Group AG – CEO & Interim COO [3]

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Okay. Thank you for your questions. The Q1 guidance, we — as I mentioned, I think the key element there was the restocking of inventories in the OEM base to be ready for a sharp upturn in semiconductors. Exactly how much, we can’t fully quantify, but I would put it probably in the CHF 10 million to CHF 15 million area.

The impact in coronavirus at this point, we really can’t quantify. I would say overall, demand is — looks robust for Q1. But just how much we will eventually ship depends on so many factors. The availability of freight, the — any short-term supply issues that could come up. I think we gave a prudent guidance.

Malaysia this year, we did around CHF 65 million. So we’re pretty much doubling the output there in 2020. And solar, it was a large Chinese solar company. But obviously, we don’t want to mention any customer names at this point.

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Michel R. Gerber, VAT Group AG – Head of Corporate Communications & IR [4]

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Question from Michael.

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Michael Foeth, Bank Vontobel AG, Research Division – Head of Industrials Team [5]

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It’s Michael Foeth, Vontobel. 3 questions also from my side. You showed this chart with your spec wins, the spec win development. And my first question would be, how long does it take between the spec wins that you — the increase in spec wins? And when that translates actually into revenues or market share gains? The second question is you show in the — in your outlook in the market forecast, you show a higher growth expectations for 2020 in overall wafer equipment compared to vacuum-related equipment. So the question is, why is vacuum equipment growing more slowly? Is that related to EUV?

And the third question is regarding your dividend payout. You’re paying out the same dividend despite higher free cash flow, so less payout there. My question is, first of all, is there a change in your dividend payout policy? Do you — are you preparing for keeping the dividend stable in 2020 if your free cash flow goes down? Or does it have to do with any potential M&A plans that you have?

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Michael Allison, VAT Group AG – CEO & Interim COO [6]

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Okay. Thank you. I’ll address the first 2. Spec wins really depend on how critical that new step is for the key end users. In general, it takes about 5 years from the engagement with our customers to that platform reaching, let’s say, peak revenue levels. So roughly a 5-year cycle. But it can be shorter if it’s a key problem technology that our customers are looking to fix. But on average, 5 years. That’s why we focus very hard now on those future technologies.

EUV is ticking up a higher percentage of CapEx, and we expect that in — to see in logic and foundry, a slightly increasing amount of EUV CapEx within those segments. As memory comes back hard, that will address itself a little bit because, as you know, flash memory doesn’t have any EUV. And DRAM is just at the point of maybe 1 to 2 levels of adoption in the future. So I think as we get into 2021 and memory comes back fully, we’ll see that change a little bit, that equation. But in 2020, there’s still a very large component of foundry and logic. And dividend, Stephan?

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Stephan Bergamin, VAT Group AG – CFO [7]

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We are happy to keep the dividend policy. Having in mind the down cycle in 2019, we believe it’s a great achievement. Looking ahead in 2020, we have a ramp-up ahead of us, and we will make sure that we are in line with building up trade working capital. And that’s one reason why we would like to keep the existing dividend policy.

Revision of dividend policy, that’s a permanent role of the Board and the management, and we are looking carefully in this topic. But depending on future performance, that it’s — maybe, at the moment, will come where we will change the dividend policy.

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Michel R. Gerber, VAT Group AG – Head of Corporate Communications & IR [8]

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Okay. We’ll have the next question, maybe here, Remo?

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Remo Rosenau, Helvetische Bank AG, Research Division – Head of Research [9]

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Remo Rosenau, Helvetische Bank. About the utilization, it’s I think at the low point. Malaysia was at 15%. Now it’s probably somewhere between 30%, 35%, I don’t know. Haag was at 45%, now around 60% or something. Where do you expect these utilizations to be in ’20 in average? And the adjacent question is — I mean if the markets — let’s say, corona will be overcome, the markets develop more or less as you think they should in ’21 as well. And your bonds, you also said that you need a 30% reserve on your capacity in order to be able to react on any short-term fluctuations to the upside as well. Isn’t there a point where you need to think about expansion of capacity again?

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Michael Allison, VAT Group AG – CEO & Interim COO [10]

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I’d love to have that problem. Yes, so utilization, you’re correct. In 2019, Malaysia was in the 15%, 20% level. During this year, we’ll get up above CHF 100 million, hopefully, around CHF 120 million. That will get us to — closer to the 30% to 35% rate. Malaysia was built with CHF 400 million in mind. We could probably squeeze more out of it by a little bit more outsourcing, but there’s a strong footprint there in Malaysia. Haag, we had — maximum output in Haag was getting up close to CHF 700 million at one point. We want to stabilize that, though, around the CHF 500 million level and try and bring in as much automation, and so on, as we can. Haag will remain a key site for our complex products, things like our own metal valves, where we have a high level of competitive advantage and competence. And the semiconductor business will migrate to Malaysia, which is really a high-volume semi facility.

Overall, we’ve got a footprint of about CHF 1.2 billion roughly. So we think that’s strong enough for the next 2 years, at least. But yes, of course, if the market looks stronger, we have the financial muscle to build, for example, a second module in Malaysia or something like that.

We’ve also talked in the past about having a China footprint at some point, not so much for the semiconductor market but for the industrial market. There’s a lot of high-growth advanced industrial businesses in China, like the battery market, that at some point we may want to address. So that would possibly be on the cards beyond the Malaysia fill-out. Does that answer?

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Remo Rosenau, Helvetische Bank AG, Research Division – Head of Research [11]

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Yes, that’s fine. Second one, you mentioned that the sales level, in order to reach the 33% target, is lower than in the past. Could you remind us what the levels were actually and what they are now?

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Michael Allison, VAT Group AG – CEO & Interim COO [12]

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We didn’t communicate a value at that point. I think when we communicated that, we were looking at a semicon cycle that continued beyond ’18. So that would have put it above CHF 700 million somewhere. I think as we get closer to the CHF 700 million, we’ll get pretty close to that target.

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Michel R. Gerber, VAT Group AG – Head of Corporate Communications & IR [13]

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Maybe we take one more question from the room before…

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Unidentified Company Representative, [14]

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(inaudible)

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Michel R. Gerber, VAT Group AG – Head of Corporate Communications & IR [15]

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Okay. Here, yes, [Dominic]. One question from the room, and then we turn to the conference call.

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Unidentified Analyst, [16]

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It’s [Dominic Vazquez] from (inaudible). I have 2 questions. First question, obviously, in 2018, you had to introduce shorter working hours in Haag for extended period of time. I mean did this really hurt a bit, in hindsight, the morale in any way, in Haag? I mean did you — might you also have lost some key competencies there, which you need to replace still? Or that did that not do you any harm at all?

And my second question would — will be about China. Your predecessor was always quite ambitious about China, the semiconductor industry there building its own semiconductor industry. Do you think now with coronavirus that this could be a bit delay, that it might take China longer to build such substantial position in this industry?

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Michael Allison, VAT Group AG – CEO & Interim COO [17]

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Okay. Thank you. First question, I think the short-term working is an instrument we use to retain the talent within VAT at a tough time. And I think you can see our ability to ramp up Q3 to Q4 was fairly seamless. And that’s because we did retain a lot of our talent. We do an engagement survey every year. We like to hear what our employees think and what they feel. Our engagement grew slightly during 2019, which is good in the downturn year.

And I think overall, morale is okay. I think there are areas where it could be better. There are areas where it’s extremely good. It was a tough environment during ’19. So we did have a few regrettable losses, as you always have in business. But I think we also brought in some fantastic new talent. I think that’s a really key point when you look at the people we brought in this last year. Across all our departments, we brought in some really strong talent that’s getting VAT ready for the next plateau, which is up to CHF 1 billion.

China, yes, this has been an interesting time for China. I think there’s been a little bit of a wake-up call for a lot of people looking at the supply chains and looking at how diverse the supply chains are. It was great wearing a VAT shirt during this time, having a facility in Switzerland and also in Malaysia. I think in retrospect, it was a great decision from my previous management to put that facility there.

China is still strong in semiconductors. The indigenous market is not progressing as fast as some people would have thought. I predicted, myself, it would take more time. It’s not easy to develop that level of technology without a legacy of R&D and patents behind you. But we are still seeing investments from all the large IC makers around the world, the Samsungs, Intels, Microns, hynix, et cetera, are all building in China.

We are seeing the memory area, especially NAND memory, the Chinese companies are investing there and developing technology. But the OEM is still fully dominated by the U.S., Japanese and Korean companies at this point, and it’s not changing that fast. If anything, the percent of the top 5 is growing year-on-year, which is good for us.

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Michel R. Gerber, VAT Group AG – Head of Corporate Communications & IR [18]

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Okay. And with that, we turn over to the operator, please?

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Operator [19]

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The first question comes from the line of Sandeep Deshpande, JPMorgan.

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division – Research Analyst [20]

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I’m trying to understand your guidance into Q1 as well as what you’ve reported in Q4 and second half simply because — I mean I heard you say on the response to an earlier question that there was some inventory possibly built by your customers in the third and the fourth quarters. But when you look at your growth in 2019, or your revenue decline, was at the upper end of what was seen at some of your customers. And so why is your guidance so soft into Q1? Because — I mean it — you — it did not seem from your revenues as such in 2019 that you were supplying inventory to the customers given that the customer sales were actually down slightly less than what your sales were down as such really.

Then secondly, regarding the recovery itself. I mean I understand what you’re guiding. I mean maybe you — on Q1. But have you got indications on what customers require into the future quarters? And this is not taking into account COVID-19. I mean you probably got some rolling orders from your customers. And I have one follow-up.

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Michael Allison, VAT Group AG – CEO & Interim COO [21]

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Okay. Thank you. An upturn is a lumpy period. Our customers plan and they plan again and they replan. It’s — what I can say is that the outlook is very optimistic for 2020. The very short-term guidance is dominated by the restocking I talked about, but also the uncertainty going into March. There’s a lot of factors at play. We took a prudent approach.

But I think looking beyond Q1, I have a view into where our customers are looking in 2020. That’s obviously confidential. But all I could say is it looks optimistic for 2020. And I think you’ve seen guidance from the large OEMs, there’s no reason why our growth for the year should be any different than that. So I think you can expect strong performance during 2020.

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division – Research Analyst [22]

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Okay. And then regarding your design-ins in new platforms. Do you have any metric that you’re looking that we are supplying to this many platforms — in x number of platforms this year, and now in 2020, we are going to be supplying to x plus 20 platforms or x plus 30 platforms? Or however you look at it. I mean it’s not platforms, but into a number of machines because that gives you a sign of how your share is going to develop through the year as such?

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Michael Allison, VAT Group AG – CEO & Interim COO [23]

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Yes, we do internally. VAT builds its market reputation on the protection of IP and data of our key customers. So we don’t get into specifying the number of platforms. All I can say is that the — we see a progression of market share opportunity for VAT. The spec wins we’ve done in 2020 should continue to grow that semicon market share on a solid basis over the next 5 years. But I really don’t want to get into how that breaks down by which technology, other than to say we group everything into 1 semicon bucket.

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Operator [24]

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

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Sebastian Kuenne, RBC Capital Markets, Research Division – Analyst [25]

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2 main questions from my side. One is, again, on COVID-19. We had like warnings from SK hynix and also comments from Samsung in the past days, including self-quarantined employees of hynix in South Korea. Is this development — or to what extent is this development included in your Q1 comments and Q2 comments? That would be question number one. Because I get the feeling that you are far more optimistic than what we currently hear from the semi market.

And secondly, on the platform wins, can you indicate for how many platforms, maybe as a percent, how many platforms you are a sole supplier, to LAM or TEL? And whether this sole supply components for specific categories, so maybe modules. That will be question number two.

And then maybe a third one, do you currently see exits of peer companies? Because your market share gains are so fast that it seems that other companies are dropping product lines or are completely exiting the market.

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Michael Allison, VAT Group AG – CEO & Interim COO [26]

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Okay. I’ll start with the first question. Yes, I mentioned that Q1 is very dynamic. We tried to take a balanced view of all the factors in front of us. We spend a lot of our time in our business predicting what the future looks like in a downturn and an upturn. So we always try to take a balanced view. When I looked at the order backlog, when I looked at what our customers were asking us for, and then I looked at the potential downsides that could happen, we came up with a number that we were fairly confident we could hit, of course. We’ve tried hard during 2019 to provide our shareholders with a very solid view and are trying to get a track record of consistently meeting those forecasts. So we’ve taken some level of risk within that.

And what I mentioned about the outlook for 2020, again, it was a balanced view of what the end users are saying on chip demand. It was a view on what the OEMs are saying publicly in the press and also our personal experience in — what happens in a semicon recovery. So that’s where the numbers come from.

On platforms, I’m not going to go into detail on how that breaks down by customer or whether or not we’re a sole supplier. That is confidential. I would say we’re making good progress on our modules business and our motion components and a recent spec wins on new platforms are seeing an increasing number of those types of components.

Exit of competitors, that’s a tough one. Most of our competitions come from Asia, Japan and Korea, and they have tremendous resilience to going out of business. They survive at very low profit levels. And they’re generally part of a larger corporation and quite often funded by that. So we haven’t seen any exits.

We certainly see some of our competition in very tough financial positions and having no ability to invest in future platforms. The cost of the latest R&D, for example, to have a particle lab is measured in millions of dollars. And these companies don’t have that capability to invest in the tools you need to develop the next platform.

So what I see from the competition is they’re focused more heavily in the less complex areas. So we see more competition in things like solar and the general vacuum areas because they’re having a tougher time competing in the more complex applications like semicon and display. Okay?

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Sebastian Kuenne, RBC Capital Markets, Research Division – Analyst [27]

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Understood. I have 2 follow-ups. On the platforms question, I’m not interested in — if you’re a sole supplier to certain clients. But just on the products overall that you have for certain customer systems, what’s the percentage where you are sole suppliers? Is there a number you can give?

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Michael Allison, VAT Group AG – CEO & Interim COO [28]

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I can’t give a particular number.

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Sebastian Kuenne, RBC Capital Markets, Research Division – Analyst [29]

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Okay. That’s fine. And then on the cancellations that you had, I assume that’s not related to COVID-19 for the solar panels. But for the existing orders that you currently have in the books, and — how would you assess the risk that there are cancellations on the existing order book or that you have severe delays in deliveries? Is there any indication from your direct customers that they get cautious now or might step back from an order?

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Michael Allison, VAT Group AG – CEO & Interim COO [30]

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As far as the question on the solar cancellation, no, that was us taking a very prudent approach to what we saw with that specific customer. It’s nothing to do with the virus, simply the financial situation with our customer. The rest of our order backlog, I really see very little risk in that at present. In fact, it’s the opposite, I’d say our customers are pushing us harder for earlier shipments.

However, this market changes quickly. And I mentioned that we look at that every day and we look at what we’re seeing in the market every day. It just takes a large customer to say we’re shutting down an investment for 6 months and things stop. So we’re constantly taking a very dynamic view of the situation ahead of us. But from where it stands today, we still look — it looks pretty optimistic.

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Michel R. Gerber, VAT Group AG – Head of Corporate Communications & IR [31]

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Okay. Let me quickly check if we have a question here in the room. If this is not the case, maybe we go back to the conference caller.

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Operator [32]

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The next question on the phone comes from Robert Sanders, Deutsche Bank.

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Robert Duncan Cobban Sanders, Deutsche Bank AG, Research Division – Director [33]

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On your outlook on 2020, it sounds like you’ve haircut WFE expectations significantly. I mean it sounds like you’re baking in the VLSI number 5%, which your customers are nowhere near right now. I mean Applied is looking for 15%. LAM is looking for 20%, and they expect to outgrow that WFE expectation. So am I right to assume you’re just baking in basically the low end — the 5% scenario, given coronavirus, but you can still do your 1.3 to 1.4x multiple of that growth rate and, therefore, your high single-digit growth is kind of your baseline core conservative view? Because — I mean I just note the consensus is 14% for the year and you’re not getting to double digit, which is a bit of a difficult thing for me to get to unless you’re just haircutting what the OEMs are saying today by a significant amount.

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Michael Allison, VAT Group AG – CEO & Interim COO [34]

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Yes. I think the number we showed was data from some of the official commentators on the industry. I didn’t say that was exactly what we were planning on. You’re correct that the OEM community are talking about higher growth numbers. That’s a dynamic situation now. I mean these numbers are changing on a daily basis. As I mentioned in one of the last questions, you can be assured that if that type of growth comes in from the OEMs, VAT will at least perform at that level. So as I think Q1 firms up into Q2 if we see double-digit growth then VAT and the semicon business will achieve that particular level of growth. So I was just giving you a view in the slides of the most recent official data I have, but I didn’t include in there any of the estimates from the OEMs.

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Robert Duncan Cobban Sanders, Deutsche Bank AG, Research Division – Director [35]

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Got it. But there’s no reason outside of SMEs or maybe because Applied is growing in the lagging edge in China where maybe you have less valve content or solar display a reason why you can’t grow at that kind of trend growth rate above WFE and your — in principle, as valve content grows as a percentage, et cetera?

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Michael Allison, VAT Group AG – CEO & Interim COO [36]

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That’s correct. In fact, I think the more growth we see at the leading edge, the better for VAT because our share is definitely higher on the newer platforms. So that’s why I said I’m very optimistic about the growth in semicon in 2020. I’m just trying to contain that enthusiasm a little bit with the current uncertainties ahead of us.

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Robert Duncan Cobban Sanders, Deutsche Bank AG, Research Division – Director [37]

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Yes. No, it sounds like consensus is going to say the same, regardless of what you say. But on the NAND expectation, we’re hearing about a — quite a lot of yield issues at 128-layer NAND, and that those customers are now going back to try and to shrink in a horizontal dimension. Are you hearing about that? Does that concern you that maybe NAND is kind of hitting some serious technical challenges as you move up to 128 and above? Because obviously, that used to be your biggest end market within semiconductors, NAND.

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Michael Allison, VAT Group AG – CEO & Interim COO [38]

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I’ve only heard very, I’d say, sketchy details of yield issues. It’s quite a big step forward, and it’s not uncommon moving to a next-generation technology that you had yield issues. We’ve seen that from many of the IC players. I’m not really that concerned now because progression of shrink means new transistor structures, new materials. And also if you’re doing 60 to 90 levels, there’s still a lot of etch and deposition equipment. So I think let’s let that play out. I’m not concerned at this point. I don’t see any reason why that should cause a significant reduction in CapEx.

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Michel R. Gerber, VAT Group AG – Head of Corporate Communications & IR [39]

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Okay. There is one question here in the room that we take, and then probably the last question from the phone, and then we can go to the more informal. Here in the middle (inaudible).

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Unidentified Analyst, [40]

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[Thomas Wong] from [GAM]. I have a question regarding batteries. How complex do you expect the products to be in batteries? I would expect them to be pretty basic, especially at the beginning. How do you see that?

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Michael Allison, VAT Group AG – CEO & Interim COO [41]

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Good question. We’ve just done in — starting in Q4, we really saw the battery industry growing significantly and starting to mature. There’s an interesting trend in going from single pieces of production equipment for batteries into large in-line systems that give a much higher level of throughput and performance. So the cost of this is growing reliabilities becoming a bigger issue for them to try to keep these large lines of battery equipment up and running. So we’re very strong in reliability.

You’re right, the complexity of the valves are less than you would get in the semicon area. But we think there’s enough opportunity in the size of the valves, the reliability requirements of the valves. And also the smart requirements, they want to have very automated systems that drive the next-generation battery technologies. So we’re looking hard at it. We were planning on a major market survey in Q1 in China. But obviously, that’s slowed down a bit. So we’re focused right now in U.S. and Europe.

We’ve got some product concepts that we are using to really start that market penetration. But we think 2020 will be a year that we understand that. We haven’t quite quantified how big the market will be. It’s progressing fast. But it could be a sizable segment for our general vacuum. That looks promising.

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Michel R. Gerber, VAT Group AG – Head of Corporate Communications & IR [42]

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Okay. And we then return to the last question, which is again from the call.

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Operator [43]

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The last question comes from Jörn Iffert from UBS.

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Jörn Iffert, UBS Investment Bank, Research Division – Director and Analyst [44]

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The first one is a follow-up from my colleagues’ questions. If I see that VAT semiconductor revenues, just focusing on semiconductor as far as I can calculate it, was underperforming the wafer equipment CapEx in 2018 and 2019 by around 10 percentage points. Is it fair to assume that your value content in memory is definitely higher versus logic and foundry?

And second question is, please, on your initiatives on incremental revenues. Can you give us an update? Where do we stand on modules? What do you think could be incremental revenues over the next 2, 3, 4 years, also considering recent design wins?

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Michael Allison, VAT Group AG – CEO & Interim COO [45]

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Okay. Thank you. Yes, the — I think we probably have a slightly higher percent of our content in memory. In memory, there’s more deposition and etch. So as that business comes back, I think we should see a slight increase over wafer fab compared to what we saw in ’19. I think the cycle — when you look back at ’16 and ’17, there was clearly a high level of expenditure into NAND, and there was also a high overstocking that happened at that point. So I think we are seeing things flattening out. There’s not a steeper cycle as we’ve seen in the past and maybe a slightly more prudent approach to stocking. So overall, I would expect us to perform at a slightly higher level in 2020. But exactly how much of that is quite hard to predict.

Looking at the modules and motion components, we see motion components being a CHF 50 million to CHF 100 million opportunity for us. We’re speccing them in on many, many platforms. But as I mentioned, they can take 3 to 5 years to reach substantial volume. So I think over that time horizon, we could see that level of revenue coming from motion components.

Modules, I’d say, is a similar dimension. It’s quite hard to predict exactly where VAT can really extract high value there because a lot of modules are built to print. But we are seeing a lot of interests from customers in having higher specification modules. And again, many of the recent platform wins have included some level of modules. So I would put that at a similar dimension of maybe slightly higher, CHF 50 million to CHF 150 million opportunity in that time frame.

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Michel R. Gerber, VAT Group AG – Head of Corporate Communications & IR [46]

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Okay. So thank you very much. With that, I would like to conclude this presentation and webcast. Thank you very much for joining us. And those here in the room, we kindly invite you to some refreshments, where you have further opportunity to have discussions with Mike and Stephan or myself. Thank you very much.