Ladies and gentlemen, welcome to the VAT Q3 Results 2023 Conference Call. I'm Alice, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Mike Allison, CEO of the VAT Group. Please go ahead, sir. Good morning, ladies and gentlemen, and welcome to VAT's Q3 2023 trading update conference call. With me this morning are our CFO, Fabian Chiozza, our CEO Designate, Urs Gantner, and Investor Relations team with Michel Gerber and Christopher Beasley. After my introductory remarks, we'll start the Q&A session. The call moderator will take your questions in the order you enter them. I welcome you to my last earnings call as CEO of VAT. I thank you for your support and interactions during my tenure as CEO. I look back with fond memories of the past six years and at what we have achieved, and I'm happy to see that I pass on VAT to such steady hands as Urs. I'm also happy to see that the team is reporting better days, with positive signs that we have reached the bottom of the semi cycle, and we are returning to more supportive markets. As you can see from the media release we issued this morning, the third quarter of 2023, the semi cycle continues to be challenging, but there are signs across the board that the industry is emerging from the down cycle. Year on year, we remain below the record results posted in 2022, as spending on capital equipment in the semiconductor industry remained on a low level. However, we're seeing continuous growth in our order flow from Q1 of this year onwards, which is encouraging, and into the fourth quarter, ahead of expected market recovery in 2024. Our third quarter orders amounted to CHF 164 million, 5.4% higher than Q2. Group net sales have decreased for Q3, slightly to CHF 210 million, which is slightly above the midpoint of the sales guidance we communicated at the half one results back in July. The FX impact of the strong U.S. dollar versus Swiss franc was approximately 8%. Nevertheless, our order numbers were down 48% year-over-year, and sales number were down approximately 31% year-over-year. We maintain a healthy order backlog of approximately CHF 282 million, which equates to book -to- bill of approximately 0.8. This was 0.7 at half one results, so we see a slight improvement here as well. We have been using the lower utilization in both Switzerland and Malaysia to work through our backlog, but also to focus on innovation, cost, and process efficiency. Across the three businesses, we saw the following performance: In the valve segment, the Semiconductor business unit was impacted in the quarter by continued lower spending by chip manufacturers on wafer fabrication equipment. Geopolitics and trade restrictions increased uncertainty for our clients. However, we have observed that investments in lagging-edge chip manufacturing in China continued at a healthy level during the quarter. We're using the down cycle to work closely with our clients on next generation of tools and made progress on further spec wins and adjacency products. In the Advanced Industrial business unit, orders decreased for scientific instruments and high vacuum valves used in industrial coatings. Some nuclear fusion project orders were pushed out to the fourth quarter of 2023, hence the slightly slower order recovery. However, Advanced Industrial business unit delivered a sequential increase in sales of 8% in the quarter versus Q2 of 2023, as the business executed on its order backlog. We also expect strong order momentum in this business in Q4. VAT Global Service segment continued to see relatively weak demand in the third quarter. This was mainly driven by lower capacity utilization in semiconductor fabs, and as a result, VAT customers continued to have elevated levels of consumables and spare parts. These levels are coming down, but not as fast as we had predicted, especially in the memory segment. With the market slowdown also impacting the build-out of new fabs, demand has declined for subfab valves, an important growth driver for the global services business. Talking numbers. In the Semiconductor business unit, orders decreased 47% year-over-year to CHF 105 million. Net sales amounted to CHF 120 million, down 41% compared with the third quarter of 2022. Orders in the Advanced Industrial business unit declined in Q3 year-over-year by 31% to CHF 31 million, due to the project nature of some of its businesses. Sales, however, increased in Q3 year-over-year by 13% to CHF 53 million. The global service segment reported Q3 orders of CHF 28 million, 20% lower than in Q2 2023, and 59% lower year-over-year. Sales reached CHF 37 million, down 19% compared to the same period last year. As we wrap up 2023 and look forward towards 2024, we believe that capital spending on semiconductor manufacturing equipment is expected to remain at relatively low levels over the rest of 2023. However, as OEM inventory levels are now normalizing, we're gaining confidence that order intake should improve in Q4 and into 2024. Based on these factors, VAT expects 2023 full year sales and EBITDA to be below the record set in 2022. Low capacity utilization exchange headwinds are also negatively impacting the company's EBITDA margin, which is expected for the second half of 2023 compared to the first half, but slightly below the target range of 32%-37%. Net income is also expected to be lower than in 2022. As I mentioned at the Q2 results, we are uncompromising in our approach to being ready for the next upcycle, and VAT will continue to invest in both innovation and capacity expansion. Overall, 2023 CapEx is forecast at CHF 75-CHF 80 million, and while free cash flow is also expected to be below the 2022 record, it remains at an attractive level. As new leading-edge semiconductor technology is being developed and produced, we at VAT will support our clients at the forefront of the manufacturing process with their valves and advanced components. The AI revolution, further digitalization of industry, and our move to a data-centric society will require further leading-edge hardware. Even a mass market product like the iPhone 15 runs on a 3-nanometer chip, and we continue to see a growth in new advanced devices being rolled out. Finally, VAT continues to prepare the manufacturing and supply chain footprint in Malaysia for future growth opportunities. This will help us increase our natural foreign exchange edge by sourcing from best cost countries and gaining greater economies of scale in global supply chains. Fabian was just last week in Malaysia, and our preparations for getting Factory 1 B operational are well underway. In Switzerland, we had the groundbreaking ceremony in mid-September for a new innovation center, and we are on track to open this site early 2025. For the final quarter of the year, we're guiding sales of CHF 200 million-CHF 230 million, which includes the ongoing impact of the current strength of the Swiss franc. So one more thing. We are happy to make the announcement that we're appointing Finn Felsberg as the new Executive Vice President, Semiconductor Solutions Group, a new member of the company's group executive committee, effective December 1st, 2023. He is a successor to Urs Gantner in the SSG group, and I would like to extend a warm welcome to him here. Finn has extensive experience in the semiconductor sector, having worked over 20 years at Infineon. He served in a wide variety of important roles, including the Senior Vice President and General Manager of the Power Integration and Supply business in the automotive sector. We're all excited to have Finn join VAT and bring his experience into running the group and allow Urs to take over his duties as CEO. This concludes my prepared introductory remarks, and we're now turning the call back to the operator for the Q&A session. Thank you. We will now begin the question-and-answer session. Anyone who wishes to ask a question or make a comment, may press star and one on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question or a comment may press star and one at this time. Our first question comes from the line of Sandeep Deshpande with JP Morgan. Please go ahead. Yeah, hi. Thanks for letting me on, and all the best, Mike, for your future endeavors. My first question to you is, are you seeing any signs of revival in your order intake into next year? What are you hearing from customers in terms of revival? Because many other large semiconductor equipment companies are talking down 2024 and the recovery into early part of 2024. I'm trying to understand whether you, as a component supplier into them, are seeing these orders because of changes in inventory situation, or is it because the end demand is actually improving? My second question is regarding all these new facilities coming on stream, how quickly will this capacity come on stream through the next 12 months? Because, 2024 will continue based on what some of these other companies are saying, to remain fairly challenging. Yes, thank you. Yeah, I think there's different effects, Sandeep, happening across the layers of the supply chain. I think in the component sector, we're probably seeing a more positive sentiment because of the pretty high inventory levels that we're setting across the OEM companies. You know, as you saw for our early order intake in the first half of the year, it was down considerably because of the high inventory levels. I think we will see an increase, you know, through the fourth quarter and into 2024 because of that effect. I think it's also quite difficult to gauge fully 2024 at this point. As you know, the market changes very quickly. Samsung were a bit more positive on memory outlook in their recent results. And, you know, the situation is very changeable. I think consensus for next year is coming in somewhere around the high eighties in WFE. You know, which is up sort of mid-single digits on this year. But I think for VAT, you know, we'll see a faster return because of that inventory challenge that we've had in the first half of the year. When you were meaning facilities, are you talking about chip plants, or are you talking about VAT facilities? No, I'm talking about VAT facilities. Yeah. You know, we're very flexible in our facilities. If you remember that we outsource about 75% of our supply chain. So we have a lot of ways of managing that capacity. The new facility in Malaysia, we're really only bringing up the machining capacity in that facility. We're not fully equipping all the assembly clean rooms, et cetera. And the reason we wanna bring on the machining is to give us some business continuity for a faster than expected ramp, if that happens. Trying to get high quality machining components in Asia is harder than in Europe. So, you know, ratio and do a little bit more internal machining to give us more... So it made a lot of sense for us to bring up that factory. It gives us tremendous expansion power in the future. Then, you know, through 2024, 2025, 2026, as we see the market improve, we can start to bring in the additional assembly capacity, et cetera, within that facility. So I, I don't really have a concern that we're gonna be sitting on underutilized assets. I think we can do a really good job to manage that, and also give our customers tremendous confidence that VAT is ready to really absorb anything you can throw at us. And that will give us a chance to take further market share. Thank you, Mike, and all the best. Thank you. The next question comes from Sebastian Kuenne with RBC. Please go ahead. Good morning, gentlemen. I have a few questions, and I will ask them straight away, so you have a bit of time to maybe prepare. First question is on year-on-year demand. If you could split this to volume pricing, FX. You mentioned FX, 8%, headwind, or no, tailwind, sorry, you mentioned. Maybe you can give us the volume component. Secondly, services was surprisingly soft, down 20% quarter-on-quarter. If you could quantify the destocking effect of it, it doesn't seem to be all just lower utilization. There seems to be a very strong destocking effect still going on, and maybe the way to quantify. Third question is on China. You mentioned strong demand for lagging-edge equipment from those clients. What is the current share of China, and how did it change over the last 12 months? The last question is on, yeah, profitability for the rest of the year. I think you mentioned earlier that you don't plan to cut staff in Malaysia. You have short-time labor in Switzerland, but you don't cut staff in Malaysia. What does that mean for utilization there, and what would that mean for the margin in the second half? Thank you very much. Could you just, on your first question, could you give me a little bit color on, on exactly what you're looking for in that question? Yeah, maybe to simplify, what is the, what is the volume component in demand? I mean, you have the 50+ drop in total orders, but is there, is there pricing, is there volume? Can you-- is pricing coming down from the level, or? Yeah. Okay. Because that would then imply what we expect for Q4 and going into 2024, if pricing drops. Yeah. I think on that topic, Sebastian, you know, our pricing remains very stable. You know, we have long-term contracts with all of our major customers, and the pricing doesn't really change much during the cycle. So any impact is pure volume driven, and FX driven. So it's really not an issue on pricing. In fact, you could even argue the pricing would certainly improve in a downturn because volume rebates will be less than expected. Service, I can't quantify the exact restocking, but I think when you reflect back on 2023, the amount of additional stock that was added because of the supply chain crisis was probably quite considerable. And, you know, we don't get visibility to what our customers are stocking. So I think some of that growth in 2023 was a little bit artificial, driven by higher stocking levels and probably also the lead time. Lead time went up, almost doubled, in fact, compared to historical levels. So as we bring our lead times down, that maybe, you know, pushes out the recovery a little bit. We don't see any fundamental changes, though, in the service business. You know, we don't see any encroachment from third parties. And you know, we expect the business to bounce back fairly quickly once these inventory levels reduce to more historical levels. We expected that to be really in the second half of the year. Possibility that could happen or start to happen in the fourth quarter. But if it doesn't, then, you know, we're into 2024. China, Fabian, do you want to comment on the percent in China? You know, we have seen a bit an increase on the share of our business in China during this year. This was just about 20%. I would say they're now trading somewhere between 20% to 24%. And for China, just to come back to China very briefly. Is this—your best estimate, is this China stocking up on valves that they might need for future WFE equipment, or is that valves that China uses today in equipment for solar, display, microchips? Maybe I can step in or speaking here on that topic. Now, China is really, they have a demand, right? So they are, they have to build up their own infrastructure on the tool. So even the wafer fabric, the wafer starts is not that high, but the share on the wafer start from our customers, our Chinese customers, increasing a lot. And this is driving our business with for the components business with our Chinese customers quite significantly at the moment. And finally, on Malaysia, Yeah. On the utilization margin. Yeah. Yes. First of all, we do still see higher utilization coming out of Malaysia as in Switzerland. Secondly, we have also adjusted our workforce in Malaysia ahead of this downturn. And third, they're also now utilizing the, let's say, excess capacity that we have in Plant 1A, in order to bring 1B up. So overall, I think, we do not see any effect of Malaysia not having such a short-term work scheme, you know, in our bottom line consolidated results. Thank you very much. The next question comes in the line of Jörn Iffert with UBS. Please go ahead. Yes, good morning. Thanks for taking my question. First of all, Mike, thanks a lot for the good communication and that we, yeah, from the capital market feedback, and you, we will miss you. So thanks a lot for the cooperation. Thank you. And then maybe going into a couple of questions. The first one is, I mean, do you already see the September order runway to be better versus August and July? And are you still sticking to your order intake target, which you mentioned the last earnings call, that you can reach toward the end plus in Q4? Is this the magnitude you're looking for? Second question would be, please, on the R&D headcount, and with all the spec wins you recently had. I mean, is, I think, the target to add around 100 new R&D headcount still valid? When does this happen? Have you identified the people? Have they signed contract already? And the third question is, please, on Finn Felsberg. Can you tell us why you choose this person? What is happening with the headhunter, or did you know him before? And why you are looking for an external candidate, not using somebody internal? Thank you. Great. Yeah. Order run rates, I think, in the third quarter was somewhat as we expected. Semiconductor, I'd say, was about the level we expected. Advanced industrial was actually down a little bit. We were expecting some larger orders coming in, in the diffusion area, which pushed out to the fourth quarter. And we had expected service to be a bit more robust, as I said in my last comment. So I think it was more or less on track. We expect in the fourth quarter, the advanced industrial area to grow considerably. And I think we'll see incremental improvements in semi. I wouldn't expect to see a you know an explosion in the semiconductor area. And then, service is unpredictable. You know, we still don't quite see. Because, because the service market is much more distributed than the OEM business, where we're only dealing with, really, seven or eight large OEMs, the service business is literally hundreds of fabs. So we don't get the same level of visibility to when our, that order intake's gonna pick up. So that could really go both ways. It could remain, you know, fairly sluggish, or we could start to see the recovery as we had expected. But I think we can safely say order intake will be up. It's just a question of how much at this point. On the R&D headcount, Fabian, do you wanna comment? Yeah, Jörn, I think that the number that you have in mind is what we communicated in connection with the new innovation center. And as we march towards the opening in 2025, we are gradually increasing our headcount. And if I just compare the numbers to the end of 2022, I can say that we have added about 20 positions already from that 100, and the remainder will now be identified during the course of the next, say, 15 to 18 months. On Finn, I'll make some comments and maybe Urs can also make a few comments. But in summary, we're both very aligned in bringing Finn in. You know, we've had a very intensive talent program in VAT over the last five years, and we've really stepped up our actions there. Of course, we're growing so fast that you really have no option but to bring in some additional talent. But 50% of our internal promotions are now filled by internal candidates, you know, and that's up from the low 20s if you go back five years. So we're certainly generating a lot more talent from within our employee base, which is great. And, you know, we make a very clear statement to our staff that our goal is to promote them. You know, at the top level of the company, as we grow, we have to bring in some additional talent. You know, we have to bring in expertise. It's difficult in Europe to find top-level semiconductor people. And when we looked at the options we had, with Urs moving into the top job, we decided that we did want to improve our bench strength a little bit within the company. But we do have a very solid level below Finn, and Urs has strengthened the sort of sub-business unit structure under Finn to make sure we are bringing that next level of talent up. But, you know, Finn is a professional, 20 years of experience in the semiconductor market. Coming from a bigger company, he knows how to grow, he knows how to get the process landscape, the engineering landscape in place to ensure we have consistency in the programs and grow in a systematic way. So, you know, we're coming from a smaller company growing fast, and he's coming from a larger company, so I think that marriage will be, will be great for Urs to, to make sure we harness on the fantastic opportunities that exist in Semi. So maybe, Urs, you can say a few comments on, on Finn. Yeah, you did a lot already. Yes, but I can maybe add just from the inside view of the SSG, right? So we have a very ambitious growth target as well. And this we will not only do with our core, but mainly also with the changing products and new products which are in development for the future. And here, of course, we have a lot of opportunities for our internal staff to grow and move up in positions. But with these new fields we want to enter, it's also very important that we also bring in expertise and other views. And in that way, also get this diversity in the teams. And I think with Finn coming from more our customer side as well, he will open up quite a lot of opportunities and insights to be even a better supplier toward in this industry. So I'm very confident and looking forward to work with Finn, and I think it will be exactly in line what we want to achieve in our mid- and long-term strategy. Thank you. The next question comes from the line of Michael Foeth, with Vontobel. Please go ahead. Yes, good morning, gentlemen. Thank you. And also thank you, Mike, for what you've done for the company and for investors, and all the best for the future. Just two follow-ups from me. One was on China. You mentioned the increased, the increased share of total revenues. I didn't do the math, but are your shipments to China actually growing right now? Do I understand that correctly? And the second question is on your CapEx guidance. It is, I think, slightly lower than what you guided before. I guess that's just pushed into 2024. Can you explain the dynamics behind those shifts? Thank you. Yes. Maybe let me take this question on China. I would say sales are basically flat, but as everybody else is dropping, therefore, the share increases. Okay, that'd be- CapEx guidance. Yes. So CapEx guidance has been adjusted by about CHF 5 million midpoint, and that is in connection with the opening of the innovation center, which we have also pushed out by about 3-4 months, which is a result of some delays we have experienced with the, let's say, start of the construction. Okay, that's clear. Thank you. Yep. The next question comes from the line of [Nick]. Please go ahead. Yes. Hi, hello, and thank you for taking my questions. Maybe my first question would be, could you maybe expand on the geographic sales development? So you mentioned in China is steady, but we see from the semiconductor sales that U.S. is also slowly picking up. So, can you maybe expand on that? And the, on the utilization rates, you mentioned before that the logic segment is strong, but here we now see quite a decrease. So can you maybe expand on the logic side? And my final question would be on the spec wins on adjacencies. You also mentioned for some new products. Could you maybe expand on that? Thank you. Okay. Let me talk first on the utilization. Yeah, I think we see. Again, you have to remember that we don't get direct feedback exactly where our product ends up, but we can kind of triangulate at a macro level. Logic does seem to be driving business right now, and we see the OEMs are slightly more logic focused with slightly higher sales. We're very optimistic on the logic segment long term. Urs and I were just doing some work for our strategy process, looking at the impact of Gate-All-Around at the 3 and 2 nanometer area. And you know, with our position, we really see a pretty substantial increase in content that we see as the industry proliferates into those advanced nodes. So I think for VAT, that advanced logic growth is really a great thing. And the OEMs are winning in that space. You know, we have a tremendous partnership and relationship with. The spec wins are going well. They're all in new platforms, so again, it's back to how quickly these platforms make it into the market and start ramping up. You know, we've seen, for example, a kind of a mixed bag this year, where some of the spec wins we had in our advanced modules, advanced assemblies, have been growing very fast, even through this downturn. But there are in areas where we had motion components, they were a little bit more memory-centric, and we've seen them reduce year-on-year. So it really depends on which platforms are shipping. Looking at the geographic nature of the business, just checking here. Yeah, I think, as you would expect, the areas that are more memory-focused, like Japan and Korea, are heavily down. I'd say the U.S. is slightly less. There's more logic coming out of the U.S., and Europe is fairly steady. In fact, Europe's actually going to be slightly up, on the back of the EUV growth that we're seeing there. But I would say it kind of goes along with what you would expect, across the segmentation of the industry, and where the OEMs are positioned with respect to those segments. So I'd say fairly consistent year-on-year. All right, thank you, and all the best, Mike. Thank you. I appreciate the comments. The next question comes from the line of Didier Scemama with Bank of America. Please go ahead. Yeah, good morning. Thanks very much for taking my questions. It's all on China. So first, on the weight of your China business, can you give us a sense of the amount of benefits you think, or share gains, whatever you want to call that, you accrued from the export controls that have been effectively imposed on your U.S. competitors, too? So is that a key driver for you to gain share with domestic China Semicap companies? And then related to that, I wanted to ask your opinion, Mike, educated opinion really on where your domestic China customers are in terms of competitive, competitiveness in depth and edge versus, you know, your, your non-China customers. Just where do you think that they are like two years behind, three years behind, or are they closer to that, you know, closer to them today? Thank you. Yeah. I think our share gains, I'd say, probably not dramatically different year and year. VAT already enjoyed a very, very high market share in China. I think one area we have made some gains was in solar, where one of our U.S. competitors had some business there, and we've done a good job at capturing that business. But I think in the semi space, we were already very high in terms of share. I think over the last couple of years, I've made comments where I saw China's technological capability was and where they focus, and I think they're playing out quite accurately. I think their ability to compete in the leading edge is obviously curtailed by the litho challenges they have. Litho is, is a monster for them to try to, you know, make progress, when you see the complexity of technologies like EUV, that's just not gonna happen, within 10 years. So I think the, the focus on, on the China OEMs now is really at that lagging and, and mid technology, range. And, they're really trying to make cost-effective systems as well as, performance systems. So I, I think they'll be successful there. As easy-- It's easier for them to do, you know, to, to compete in the kind of 25-50 nanometer, segment. And I think we'll see rapid growth there, as they refocus their efforts into these mature areas. I think that brings a challenge for the Western OEMs, who like to compete in that area as well, because obviously these tools in China will be cost effective. I don't think the focus is really on leading edge as much. I think in the last six months, we've certainly seen more focus on cost, on improving their position in the mature technologies, with less focus on pure technology. Now, will that change again over the coming months? Hard to tell. I mean, obviously they want to keep up some position on the 7 nanometers, as we saw with the recent Huawei 7 nanometer chip. So I think there'll be some focus on technology, but I think an increasing focus on capacity and overall system efficiency in these mature nodes. Okay, great. That's interesting. Can I just ask maybe quickly on just your opinion if you know the U.S. administration imposes additional export controls on China, let's say a full immersion ban on China. I know you don't supply into ASML immersion systems, but you know considering the use of immersion system in the sort of 28-64 nanometer node, give or take, do you think that could have an indirect impact on your customers? Well, I think, as I mentioned before, that there's still a very high determination to really exploit the whole lagging and mid-technology areas, and to really own the whole segment of consumer and automotive segments, especially. You know, and I think there's tremendous growth opportunity for the OEMs and the market in China. Plus, you know, a lot of that, a lot of the equipment, the service by these industries is already made in China, so they get the direct beneficial impact of having lower cost chips made in China. So I think the focus is really gonna be in that area, and I don't think it will be as much of a focus on immersion and DUV. I think I also feel that there's a lot of lobbying in Washington about the impact this is gonna have on the Western OEM companies. You know, the fact that they're gonna be losing out in China if they're not able to compete. So, I’m not convinced we're gonna see expanded sanctions. Let's wait and see how to react to that. But I think that there's got to be a realization that the U.S. OEMs will lose out if they're not able to compete there. Super interesting. Thank you so much, Mike, and best of luck. Thank you. The next question comes from the line of Thomas Paul with AWP. Please go ahead. Thank you very much. I just was just wondering if you could explain to me a little bit the importance of solar business and what for your company and what the developments and cycles are in this industry? Yes, thank you very much. Yeah, thank you. Yeah, as said, solar has been a fairly small part of our portfolio in the last five years. You know, I had a big ramp up in the mid sort of 2010-2015 time frame. But in recent years, it's been a little bit more sluggish because of the capacity that was added in China back in, at that time. It's about 3% of our total business in 2022. However, you can imagine there are a lot of forces driving solar. There's a lot of new technology coming to market, and I think the most recent solar efficiency numbers I've seen should mean that over the next 10 years, we will see a refresh of that install base, where you can get, you know, between 30%-50% improvement in solar efficiency. Which makes it a pretty strong value proposition for industry and consumers to house that. So I think we'll see continued growth in that business. Our recent strategic plan shows our solar business growing quite significantly within China, but also a little bit more growth in other parts of Asia and even some in Europe and the U.S. I don't think it's gonna be a dramatically large part of ET in the future, you know, probably remaining in that 3%-5% area of sales. But it's, you know, these are nice segments to be part of. We can reuse our semiconductor portfolio, so, it's pretty easy for us to play and harness that opportunity. Cycles are very different from semicon, though. It's really connected to different markets and probably more connected to things like oil prices and the cost of fossil fuel. But I think we're at the start of a slight ramp up in that business overall. Okay? Yes. Thank you. The next question comes from the line of Bhavin Patel with Bloomberg Intelligence. Please go ahead. Thank you so much for taking my questions. I have two, actually. I'll take one at a time. So just considering your WFE growth assumption for 2024, if it stays at mid-single digit, as you said earlier, would it be more profitable for you to expand your scope of short-term work in Switzerland and shift more production towards Malaysia? Mm-hmm. Yeah, I mean, I think we're constantly looking at what products are ramping. You know, we have a pretty enormous portfolio with highly customized parts for the different OEMs. I mean, that's one of our value propositions and why we're successful, the fact we can tailor our products uniquely for our key customers. So we're a little bit tied on the portfolio as to where we make that product. So some of that is out of our hands, but of course, we'll look at a lot of factors. We look at the supply chain, we look at our equipment utilization, we look at the availability of labor, and we also look at where we have the other segments growing. For example, our advanced industrial business is very much a Swiss-centric set of products. Also in the EUV sector, we also see that almost entirely within Switzerland. We have to take a lot of factors into account, but, you know, one of the nice opportunities we have is to balance across our factories. We're also looking at putting a little bit more of the Swiss supply chain into Romania. You know, we've seen good performance and cost from our Romanian supply chain, and we're looking at insourcing a few commodities into that factory, which helps both with cost, but also with moving some of our supply chain out of Swiss francs and into alternate euro currency. Okay. Okay? That's helpful. A second question is a bit longer term in nature. So we have read media reports suggesting that some companies like Microsoft may be trying to design their own chips. So just wanted to get your opinion, Mike, on what does this development, if it is true, means for the WFE landscape? Do you think in longer term, it can be big enough to move the needle? Yeah, I think this has been going on for a long time. You know, you've had the success of TSMC and their kind of common architectural platform allows pretty much anybody to design their own chips. So you've got Nvidia, Broadcom, Qualcomm, AMD, all these people developing their own chips. So Microsoft, yeah, of course, they're gonna have their own chips, as will Google. I've even heard Tesla and Facebook also designing chips. So I think that's fairly normal. You know, when you take a microprocessor, say an Intel microprocessor, these chips have tremendous redundancy. They're not really optimized for a specific application. So there's a lot of cost and performance opportunities to be gained by developing the right architecture for your specific application. So I think this is gonna continue, and it's really the backbone that drives the success of TSMC. Thank you so much. All the best, Mike. Thank you. The next question comes from the line of Remo Rosenau with Helvetische Bank. Please go ahead. Yes, thank you. Just a quick one. In the Q1 order intake, you also had to digest a few order cancellations at the time, probably in the magnitude of CHF 25 million or so. Could you remind us if there were also some cancellations in the order intake included in Q2 and Q3, or was this just a phenomenon in the first quarter? Yeah, in fact, we've actually just seen the first pull-ins happen in the end of the third quarter and beginning of the fourth, which is kind of the opposite to the pushout and cancellations. I think it's been a very traditional pattern we've seen. We've had high cancellations and high pushout of the orders in the early part of the year. And as we've come through, has really normalized to historical levels. The third quarter, I would say, was back to very historical levels. And then towards the end of the third quarter, we actually started to see some pull-in requests. So that was also behind giving us a bit of confidence on this fourth quarter order intake that we should see that continue to improve. Okay, great. On the backlog, this has been half now since mid 2022, from 560 to 280. Now, if orders will not pick up, you know, dramatically, just gradually, you will continue to go down in the backlog, of course. At some point, if orders will not recover as fast as everybody hopes or expects now, then it could have a strong impact on the sales level, right? Yeah. So have you kind of backup plans if that happens? Yeah. I mean, the way we operate, VAT, you know, we always said, with an upside plan and a downside plan. And as you've seen through this cycle, you know, we react. A flexible operating model allows us to deal with that. You know, if that had to happen, we have a lot of options to manage that. We could continue short-time work. We can further adjust some of our labor. But I think we'll see that normalize, you know, into 2024 and see continued improvement. So I'm not as worried on that topic. I think we're in a good position to deal with both. We're putting more effort right now into the upside plan. You know, we're running readiness reviews across the supply chain in our factories to ensure that, you know, we take advantage of any jump back in the market. But as always, you know, we'll be ready if that doesn't happen. Okay, great. Good to hear that you look at both sides all the time. Thank you, and all the best also from my side. Thank you very much. The next question comes from the line of Timm Schulze-Melander with Redburn Atlantic. Please go ahead. Hi there. Thanks for my question and from my side as well. Thank you, Mike, for everything in recent years. I had just three quick questions, if I could just take them in order. You've talked a number of times about pricing stability, long-term contract pricing. So does that mean that the only way you're able to offset cost inflation is through productivity, or are there some areas in which you can respond with raising prices to your customers? Yeah. I think in general, I would say, in our industry, we haven't tended to increase prices annually. You know, we've all worked together to keep prices stable through the cycles, which helps businesses a lot. You know, we've managed productivity to ensure that we keep the P&L going in the right direction. In the last two years, we've seen some very significant supply chain inflation. You know, we have worked with our customers to demonstrate that this has happened, and I think it's been very visible to them. So we have managed to get some price increases. I'd say that's fairly unusual. But I think the supply chain understands that the total health of the supply chain is required to be able to ramp seamlessly through these cycles, and our customers and their customers are working, I'd say, hand in hand, to ensure we retain that readiness and the right level of profitability to continue investing. So I think that's pretty well managed. In general, I would say we're probably coming back to a more stable pricing environment, where we're gonna have to work, you know, hard again on cost and productivity, as we've always done to keep our profitability going in the right direction. Got it. Very clear. The second question I had was just on China. I missed the number you gave in terms of percentage of semi sales. And then, just within your China business, where you're shipping to domestic tool makers, you know, which is the sort of dominant process technology that you ship into in China? And then had one last follow-up, please. Okay. Yeah, when we talk about China shipments, we don't talk about the product that we ship to our non-China OEMs that end up in China. We only talk about domestic China sales, which is sales directly to the Chinese OEMs or the Chinese fabs or other customers in advanced industrial or solar. That was around about 20% of our business, if I remember correctly. Around, Fabian tells me 22%-24%, this year of our business. It's a very important sector for us. The areas of high growth have certainly been in the mature. The build-out in China right now is really attacking those mature markets. I'd say that's in the nodes from anywhere from mid-teens, maybe 20 nanometer, up to 50 nanometer, where there's a huge amount of semiconductor demand. In China, we also see a very robust solar market. We see a very robust advanced industrial market, and things like the crystal pulling for substrate development is very strong in China. A lot of the scientific instruments are moving there as well. We are enlarging our team there. Urs has done an amazing job putting key account teams into the semiconductor OEMs, and we manage them very closely and have very strong partnerships with them. Up till now, we haven't had any manufacturing in China, you know, but it's something we'll consider for the future. Okay. Great. Maybe just one last one, please. Just on EUV, is there any change in your ship set between sort of 0.33 NA EUV and high NA? Just maybe anything you've seen in terms of call-off activity in the last six months? Thank you. Yeah, I'm not gonna comment on individual shipments to individual customers. I mean, I think that reaches our confidentiality. I would say that Urs's team has done a great job improving the content we have in the different generations. And you know, over the next five to seven years, you'll see you know, quite healthy increases from generation to generation. Which was one of the goals we set out, if you go back 5 years ago, you know, when Urs and I were looking at the business, we saw that EUV was gonna become a fairly sizable portion of vacuum-based capital equipment. At that point, our share, our share wallet was just too low, and I think the engineering teams have done a really fantastic job, quadrupling plus, the amount of content we have. So it's, you know, it should be a nice segment for us in the long term. Great. Very helpful, and all the best in the future. Thank you. Thank you. The next question comes from the line of [Marta Bruska]. Please go ahead. Hi, good morning. Just a short one. Is there a margin difference on display orders versus the average of the bulk segment? If you could comment on the degree in that, please. Yeah. Display's been pretty lumpy, as you know, over the last couple of years. You know, there hasn't been anywhere near the level of investment we saw in the, back to the 2015 to 2017 period. We have seen, investments this year on the back of some Samsung OLED investments, and that's certainly driving a healthier environment in the second half of this year. So we did see some strong order intake in the third quarter. And, again, that's, that's really project business. That's gonna fade as we go into the fourth quarter. And still a little bit uncertain, yeah, as to what's gonna get spent in, in 2024. But I'd say there's some optimism that we'll see... But still to be defined, how big that's gonna be. Yeah. Thank you. Thank you, Mike. But actually, my question was whether there is any margin difference, so is that, the display orders from, the content that is inside the business is perhaps a little bit below the average group margin? I know you don't disclose it- Yeah. But, uh- Right. If and if you don't want to, then that's totally fine, but I was just wondering, whether there is any. Thank you. Yeah. I think when you go back five, seven years, there was a margin difference really in our display business, but the engineering teams have done a great job, you know, getting cost out of those products. And I'd say that today, the margins are pretty much on average with the rest of our portfolio. Fantastic. Thank you so much. And, I think I will still see you before you head off. So, you know, pushing you all the best. Thank you. the best. Thank you. Yes. Thank you very much. Bye. The next question comes from the line of Nigel van Putten with Morgan Stanley. Please go ahead. Hey, good morning. Question on maybe providing a little bit more color on the composition of the order book, especially for semiconductors. What has driven the sequential increase? Was it quite narrow? You've mentioned large orders for display, clearly China remains a source of strength, or was it broader and just a reflection of, you know, inventory levels at OEM stabilizing? I think as a quick follow-up already, on the last question, you say that display may fade into the fourth quarter, but you've also said you do expect the semiconductor. Well, I took it as, you know, I see semiconductor business still, still increasing sequentially from an order intake perspective. If that's a headwind, where do you see the sequential growth coming from? Thank you. Yeah, the sequential growth, I also mentioned that our advanced industrial should see a much stronger fourth quarter, and sequential increases in semicon. I think looking at the semi order book, pretty much as we expected in the semi area, overall, a little bit better performance with the OEMs that are more logic focused. The big driver was the Asian OEMs, especially China, where we saw, you know, quite substantial increases, within the China OEMs. They also tend to order towards the end of the year, so we also expect the fourth quarter to see a bit of an impact from the China, Korean, and possibly Japanese OEMs as they stock up towards the end of the year for 2024. And then I think the other factor that you mentioned yourself was just the fact that our inventories are gradually normalizing with the larger OEMs, you know, where we had consignment and where they had their own inventories. And I think that's gonna get us back to a higher overall run rate with those OEMs. So it's really all these factors combined. But I think the increase in advanced industrial will offset any impact from the display orders. Got it. I do now also want to follow up on sort of the first quarter seasonality. If you do expect some sort of end-of-year push out of some geographies, should we then still assume sequential growth into the first quarter? Or could the fourth quarter be a temporary peak in order intake for semiconductor, specifically? Yeah, it's. We're really just starting to get visibility on the first quarter, the first half. At this point, I think it would probably best to say it's mostly sequential growth. Harder to see beyond that at this point. I think as we get into November, we'll get a little bit more visibility into the first quarter. It's still hard to fully predict that. I'd say just continuous sequential growth at this point. I understand. Thank you, Mike, and all the best. Thank you. Today's last question comes from a line of Craig Abbott with Kepler Cheuvreux. Please go ahead. Yes, hi, good morning, everyone. Thank you. And also from my side, all the best, Mike. Two remaining questions, please. One is just on the EBITDA margin outlook, which was lowered a bit for H2, and I just wonder if you could provide some color on how much of this was due to the lower capacity utilization and how much due to FX headwinds. Plus, some thoughts here on any potential, if there are any, potential mix effects as memory rebounds and aforementioned Chinese demand for lagging edge technology continues to increase. That's the first question. Second question is on global services. You mentioned earlier in the call that you aren't seeing new third-party providers entering, but I just want to confirm that the current weakness you're seeing is just due to low capacity utilization rates, and should pick back up, or are you potentially losing some market share here? Thank you. Yeah. I'll talk about services and then Fabian can give you a quick update on the EBITDA position. Yeah, I don't see any in the services business. In fact, I think I mentioned in previous calls that we'd actually won some legal cases against some Korean third parties who were infringing on our IP. We'd actually gained some share in that geography. I think long term, you know, of course, we've got to be realistic in markets like China, especially the mature area, is gonna get tougher. That's just the nature of that business. Our service group are working hard to come up with a different set of products, more cost-effective products, more cost options for those customers to try and maintain the business through the whole lifecycle. I expect that's gonna be a tougher market in the long run for services. Right now, it's purely a combination of utilization rates, overstocking due to the supply chain issues we had in 2022, and also to the reduction in lead times. You know, our lead times are down by half compared to this time last year. You know, that's gonna-- Our customers have a little bit more time at this point. They can place orders closer to the actual demand. On EBITDA, Fabian? As an EBITDA, I mean, you mentioned it, FX is certainly still taking its toll. On the bottom line, that's somewhere between 50-100 basis points. And you also see now from our release that we do expect about 2% points increase, comparing the second semester with the first one. So the cost measures that we have defined as part of our long-term protocol are certainly having some lagging effects as the price increases are applied, are now really helping on this. And then also an excellent work of our supply chain colleagues to mitigate any inflationary cost pressure. Plus, we then have the short-time work scheme in place here in Switzerland, which is also helping us to balance this on the utilization that you have mentioned. Okay. Okay, so, but you're not expecting any major changes in product mix effects going forward? No. No, I don't. Okay, excellent. Thank you. Thank you both. Great. Thank you. So I think we're already over the allotted one-hour time here, so I'll just wrap up. So, thank everybody for joining. As you can see, it's a bottom of the cycle type of quarter. We're optimistic on where things go from here. Again, thanks a lot for your cooperation and support over the last six years. It's been a lot of fun, and I can assure you, I leave here with a fantastic team, huge opportunities for the company still. And I think you'll see, you know, continued very strong performance from VAT and a safe pair of hands running the company moving forward. And I look forward to watch VAT succeed as we've done in the last six years. So, good luck to Urs, and thank you, everybody, for your support. Thank you. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.