VAT Group AG (VACN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the VAT Half Year Results 2022 Conference Call and Live Webcast. I'm Alice, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Mike Allison, CEO of VAT Group. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and thanks for joining this webcast on our Q2 and half year 2022 results. As you know, VAT has pre-released preliminary key figures including orders, sales, EBITDA and EBITDA margin already on July 13, 2022, and you can see the final numbers are well in line with what we announced back then. Today, our CFO, Fabian Chiozza; our Head of Communications and Investor Relations, Michel Gerber, join me on this call. So on to Slide 2. Looking at today's agenda, we'll cover the following items before opening for Q&A session. I will start with the highlights of the Q2 and half year results, and then, Fabian will go through the results and financials in more detail. After these sections, I'll give you a brief insight on VAT's first ever sustainability review that we have also just released this morning, and then tell you a bit more about the announcement of a new executive member, our Head of the new Semiconductor Solutions Group, Urs Gantner and the reason behind enlarging our GEC. After that, I will lay out our current view of the markets we participate in for the remainder of 2022. And then last but not least, we will host the Q&A session, and I expect to close the call around 11 a.m. Slide 3. So let's turn to Slide 3, and this is available on our website's presentation. As we communicated back in July, VAT had an excellent first 6 months of 2022, reflected in the -- in record results, we were able to achieve. The business started very strongly into the year and including the month of July did not lose momentum. This performance was driven by a sustained and unprecedented strong demand for semiconductor manufacturing tools, and VAT fully harnessed its leading market and technology position to capture the available growth. At the same time, we continued to improve all our internal processes, put enormous focus in mitigating the supply chain challenges not only to mitigate the cost inflation witnessed during the first half of 2022, but also to honor the commitments to our customers, as a trusted and reliable partner. VAT improved its performance and posted record results across all of its key performance measures from order intake, up 31% year-on-year to sales with an increase of 32% and all-time record EBITDA margin of 35% and a free cash flow generation of nearly CHF 80 million. All of this was achieved despite the very challenging industry environment with the limits of supply. Our production capacity were tested on a daily basis. While VAT never was a bottleneck affecting our customers in a negative way. It was only through the great dedication and efforts of our close to 2,900 employees that made this possible. Therefore, at this stage, I would like to thank all my colleagues at VAT for this great achievement and their dedication to continue to ride VAT's success story further. VAT continued with the ramp in Malaysia and also added additional capacity in Switzerland to increase our factory output overall by more than 35% year-on-year. Currently, VAT has an installed factory output capacity of about CHF 1.3 billion. In Malaysia, VAT expects to reach a factory output for 2022 of between CHF 250 million and CHF 275 million for strength. At the same time, we started to build the second large factory in Malaysia, reflecting not only the Company's confidence in future business growth, but also its ambition to further deepen customer relationships by strengthening its local capabilities in the Asian market. Today, we are confident that the growth will continue in the second half of 2022 and expect to achieve another strong year with record results. Market demand continues to show positive momentum from technology build-outs, especially in logic and foundry, but the weakening consumer demand could negatively impact the memory side of the business, as you have heard in some of the recent market announcements. Nevertheless, VAT is well positioned to deal with any changes in the market. Chart #4 gives you a quick overview of the 6 months 2021 key figures and segment breakdown -- sorry, 6 month 2022 key figures and segment breakdown. I will not elaborate too much on this one, as Fabian will report this in a few moments. As you can see, our largest segment Valves accounted for about 82% of our sales. Segment sales increased by about 32% year-on-year based on the strength of the semiconductor equipment market. Orders also continued on a strong path, growing approximately 32% year-on-year. Full year EBITDA margin in Valves increased by 1.2 percentage points to 34.6%. Global Service recorded for the first time greater than CHF 100 million in sales in the first half of 2022. Sales increased 30%, driven by all our product categories, including spare parts, upgrades and retrofits, and the repair portion. The Service segment's 2022 EBITDA margin remained firmly in the mid-40s of 45.4%, slightly higher than 2021. With this strong performance, our Service business accounted for 18% of Group sales, slightly lower than the full year 2021 when it was 19%, but still at a very high percentage given the many new investments in the semiconductor industry and very close to the 20% we're aiming at. This is even more impressive if one consider the service business typically shrinks as a percentage of the overall sales in a semi growth cycle. We also saw another good 6 months results for spec wins, which I will elaborate on in more detail. On Slide 5, you will see the split of revenues into our different market segments. During the first half of 2022, there were not too many changes compared to the chart we showed you in 2021, except that the business unit semiconductor has grown the fastest, increasing its overall share of VAT's revenues to 62%. Advanced industrials now account for about 12%, while display and solar remains the smallest business unit. From a geography point of view, more than half of our products and services end up in Asia, about 1/3 in the U.S. and the rest in Europe, reflecting the global semiconductor footprint. Turning to Slide -- to Chart 6, I'd like to share one of the highlights in our 6 months 2022 results, the continued growth we see in our adjacent products. There still seems to be a bit of confusion about our strategy in this area. So let me quickly remind you about our goals here. As elaborated during our first Capital Markets Day in December 2020, VAT is extremely successful in this valve business, but to continue our above-market growth in the years to come, we must develop new business streams for the Company. So we look to find new business opportunities that are adjacent to our core valve and modules business and have identified a number of areas, where we thought we could create new growth opportunities for the Company. First streams, we focused on were advanced modules and motion components, but we're also developing several other opportunities. Overall, our communicated strategy was to reach CHF 150 million of additional sales by 2025. 2 things are absolutely critical to understand here. Firstly, we expect the adjacent businesses to continue positively -- sorry, to contribute positively to VAT's current EBITDA margin profile. So we will definitely not go into activities that would dilute our EBITDA margin target of between 32% to 37% of sales. Secondly, we aim to develop these adjacent businesses from within VAT in an organic way. Having said that, we may also look at smaller technology or bolt-on acquisitions in order to get to the desired results faster, and if we strictly followed the internal development path, but these would likely be small and focused. And we are not intended to diversify into a wider industrial strategy. Staying focused is what made VAT the global market leader, and it will remain that way. So when we look at the development of our adjacent businesses during the first 6 months of 2022, we are well on track to meet or exceed the roughly CHF 90 million sales target mentioned to you earlier in the year. The margin levels are supportive of VAT's overall profitability profile, and we are confident that we will overachieve the 2025 sales target of CHF 150 million communicated to you in December 2020. So Slide 7, before turning to the more detailed financial slides, let me quickly summarize the market development we've seen in the first half of 2022. In semiconductors, the growth in wafer fab equipment spend continued at an unprecedented pace, mainly driven by the technology build out in advanced logic. Today, WFE is expected to be around USD 100 billion, which would be some 12% above the final 2021 number of $89 billion calculated by VLSI/TechInsights. Very high semiconductor fab utilization rates we're currently experiencing are also driving strong growth in the service business, and we do expect this to continue. In the display market, overall investment conditions remain challenging, especially in LCD. Fading LCD CapEx could not be offset by higher investments in OLED flexible screens and handhelds, and the weakening consumer demand will put further pressure on this market, as some of these fab investments are under review. In solar, PERC remained the major technology, as there is still a cost advantage in the initial investment compared to heterojunction. However, the heterojunction technology is also gaining traction, as oil and gas price inflation accelerates the adoption of solar. The advanced industrial markets growth prospects remained good across a variety of applications such as crystal cooling, high-end coatings, nuclear fusion and analytical instruments such as scanning electron microscopes. In addition, research spending by governments continued, especially in U.S., Japan and Korea. This concludes my initial remarks. And I would now like to hand over to Fabian for a more detailed look at the financials?

Thanks, Mike, and a warm welcome to all of you, who are joining us on the webcast today. Let's start on Slide 9 with a very quick recap of our key figures. Mike has already touched on the solid top line and P&L development, and I'll show you a bit more detail on that in a moment. Besides a substantial increase in net income by 52% to CHF 148 million, our free cash flow generation was another highlight in the first 6 months of 2022. We reached a record level of CHF 79 million despite growth-related investments in working capital and higher CapEx levels compared to the first 6 months of 2021. Chart 10 shows the development of orders in the second quarter and half year 2022, reflecting VAT's strong business execution, coupled with the buoyant market conditions in the semiconductor business and the solid trend in the Advanced Industrials business that Mike described earlier on. Q2 orders were up 20% sequentially versus Q1, 2022 and 40% higher than in the second quarter in 2021. Overall, 6 months 2022 orders are up 31% year-on-year, reaching CHF 649 million. The second quarter book-to-bill ratio of 1.24. Our order backlog increased to CHF 559 million, up 15% quarter-on-quarter and up 156% year-on-year. This backlog, together with the favorable market expectations, strongly supports our positive view for the remainder of 2022. Turning to Chart 11, here we see the development of orders and sales since the first quarter of 2018. We reached the bottom of the cycle in the first half of 2019, and since then, we've seen a steadily increasing growth trend. As you can see, the book-to-bill ratio has been at or above 1x since Q1, 2019 with the exception of Q3, 2020, where we had a knock-on effect from certain free orders in the first half of 2020, coupled with substantial sales growth in the quarter. In the second quarter of 2022, the book-to-bill ratio reached again a very solid 1.24x on the back of steady quarterly order inflow. This ratio does neither include any special extraordinary large orders nor have we seen special orders being placed to reserve capacity or in anticipation of future price increases. In consequence of this constantly positive book-to-bill ratio, our order book has now reached CHF 559 million, and this backlog bodes well for the rest of '22 and even into 2023. Chart 12 shows the development of net sales and EBITDA. 6 months 2022 net sales up 32% year-on-year and the impact of year-on-year FX movements, especially in U.S. dollar versus Swiss franc was negligible. The higher sales were a major driver of our EBITDA margin expansion of 1.8 percentage points, together with the improved operational performance, resulting from better fixed cost absorption and the efficiency and cost reduction programs, we continue to execute across the whole organization. On the next chart, you see the sequential EBITDA margin development since H1 2018. As you can see, we have constantly improved our EBITDA margin since its cyclical trough in H1, 2019, now reaching a new peak with 35% after 6 months in a challenging and demanding market environment. We are now firmly in the middle of our updated EBITDA margin target band of 32% to 37% between 2020 and 2025 that we communicated to you with the year-end results back in March this year. When talking about value creation on the next slide, we closely look at the return on invested capital and the cash return on invested capital. With our prudent approach to capital expenditures and our capital-light operating model, we balanced the invested capital with current and expected future earnings. With about 70% of our materials being purchased externally, we are able to maintain the invested capital at low levels. This allows us to achieve returns on invested capital and cash flow returns on invested capital that are substantially above our weighted average cost of capital, which we placed at 10.2% same level that the external auditors used during their 2021 impairment testing. This weighted average cost of capital of 10.2% is used in an illustrative way over the whole period of this chart. The actual annual [ facts ] used in all the impairment testing done by the external auditors between 2015 and 2021 range between 8.8% and 10.8%. Let's now turn to some of the other financials on Chart 15. Depreciation and amortization decreased by about 2% to CHF 20 million in the first 6 months of 2022, yielding in an EBIT of CHF 172 million and corresponding EBIT margin of 29.4%. In the first 6 months of 2022, net finance costs were 0 compared to a negative CHF 2.5 million a year earlier, as finance income benefited from FX-related revaluation gains. The effective tax rate in 2022 was at 14% compared with 16% a year earlier. So taking that altogether, net income substantially increased by 52% to CHF 148 million, and then, earnings per share to CHF 4.92. Our free cash flow generation is shown on Chart 16. As I said at the beginning of my remarks, free cash flow reached another record level in the first half of 2022 despite 60% higher CapEx and required investments in trade working capital to support our strong growth trajectory. The trade working capital at the end of June 2022 was about CHF 297 million or CHF 79 million higher than a year earlier, and thus represented about 29% of last 12-month sales, an increase of 1 percentage point compared to the same period a year earlier. We are intentionally keeping our trade working capital at an elevated level in order to ensure our supply capabilities and keeping a safety stock to cope with supply chain challenges and also handle any unexpected demand spikes as well. At 41%, the cash conversion rate measured as free cash flow, as a percentage of EBITDA was below our full year guidance of 60% to 65%. The seasonal pattern expected to reverse in the second half of the year. When it comes to leverage on for Chart 17, there is a very stable situation we see after 6 months of 2022. Gross debt was about the same level, as a year ago, as we do about CHF 100 million from our RCF loan to bridge the dividend payment in May 2022. However, the higher cash balance at the end of June 2022 led to a net debt position that is about CHF 30 million below the previous year level. Our leverage of 0.8x net debt to EBITDA was at the same level like a year ago, seasonally driven below the level of 0.5x seen at the end of 2021. Current cash flow expectations will improve that ratio again much closer to 0 by the end of the year. With this, we have a very sound balance sheet and liquidity position available, which gives us the financial flexibility to continue to invest in our future growth. And summarizing our achievements on Slide 18, in the first half of 2022, we can state that VAT continued to fully capture the strong market conditions both in semiconductor and advanced industrial activities based on innovation, market leadership and its execution skills. Record levels were achieved in orders, sales, EBITDA, EBITDA margin and free cash flow in the first half of this year. Record order backlog and ongoing market demand during July bode well for record full year results. Finance priorities for the rest of 2022 and into 2023 consists of rolling out our new global ERP in Malaysia with a slight delay due to COVID-related postponement, go live, foreseen in Q3 this year. Continuing strong focus on cost management and operational excellence provide elevated trade working capital to support our increasing factory output. And a disciplined approach to capital expenditures, full year 2022 is expected around CHF 65 million to CHF 75 million, driven by ongoing construction of our second plant in Malaysia, optimizations in Switzerland and start of construction of our new innovation center here in Switzerland. This concludes my financial remarks. And I'd like to hand back to Mike.

Thank you, Fabian. Let me now turn to 2 topics that we have published today and that we put here under the title creating value sustainably. I'm really excited to talk about these 2 important steps we're taking and developing VAT today. First, the publication of our first sustainability review; and second, the promotion of Urs Gantner to the Group Executive Committee. Slide 20, since its foundation back in 1965, sustainability has always been at the heart of what we do. Being a Swiss-based company management from day 1, stringent rules about how wastewater or general waste had to be treated were in place. It was the right thing to do and VAT follow this and other regulations. Today, the world is at a different stage, and we all agree that doing the things you do in a sustainable, fair and caring way is the right thing to do. With this in mind, the Board of Directors together with the executive team made the development and implementation of a clearly defined ESG strategy a priority for 2022 and the years to come. Today, we released our first sustainability review. We don't call out our report yet. That marks the start of a much more proactive approach to sustainability. And ultimately, our goal is to transform VAT into an enterprise that puts sustainable value creation for all the stakeholders at the heart of everything we do. We have appointed 2 Board of Director members to oversee the strategy development, and Fabian will act as a responsible executive team member when it comes to this topic. Over the next months, the ESG strategy development will be a key part of the overall Group strategy exercise, which we always carry out during the summer months for the Board to approve in its November meeting, and we hope to give you a much better understanding of our ESG road map during the Capital Markets Day in December. You can see here, however, a few examples of our 2021 highlights, which include carbon dioxide emissions reductions of 21%, a 111% increase in our owned solar electricity generation, and a 16% reduction in total waste. Slide 21, the second thing I'm excited about today is the fact that we can announce that Urs Gantner, our Head of our Business Unit Semiconductor has been appointed to the Executive Committee effective today, as Executive Vice President of a newly formed Semiconductor Solutions Group. Urs is a true VAT veteran with 18 years of intimate VAT semi experience. Over this time, Urs has consistently pushed the bar for the semi business, and today has a strong and proven record of business growth, achieving an almost double market growth over the last years. Urs was also one of the first VAT managers realizing the potential of moving parts of our production to Malaysia and then executing on this strategy. So what will Urs role in the GEC be? Well, he will first continue to head the semiconductor business unit a semi -- successor has been appointed. In addition, the new Semiconductor Solutions Group will integrate the BU semi with all of VAT's R&D activities, and in addition, create a new team responsible for the development of new advanced solutions products. As we look to our future growth, the competencies, technologies, interconnectivity of products and sensors will require enormous coordination of all internal engineering and technology functions, and Urs will lead this. This is also an opportunity to bring in new talent and succession planning options for our semiconductor business. I'm really excited to add Urs to my senior executive team, and I hope you will get to meet him at the Capital Markets Day on December the 2nd. Let's turn to Slide 23 and have a look at the current expectations when it comes to wafer fab equipment spending. On this slide, you will see data collected by VLSI Research on how they expect WFE to develop in 2022. The USD 107 billion projected for WFE for 2022 represents an unrestricted growth number under the assumption there are no supply chain problems. Based on the news we've had in recent weeks, I now expect this to be in the $95 million to $100 billion range, reflecting the longer equipment lead times. Nevertheless, the chart is quite useful, as it shows clearly that the investments are growing fastest in the leading edge nodes of 7-nanometer and below, and that the logic and foundry business accounts for not only the largest part of the investment, but is also the fastest growing. This business sustained us in the last cycle and recent market announcements like data center growth and high-end smartphone growth should keep this growing into 2023. DRAM capacity expansions look to be slowing, but the technology development of leading edge also continues in a positive way. These 2 factors are very positive for VAT, as our share in the highest -- our shares highest on the leading-edge platforms. Our overall semi growth in the first half of 2022 was 39%. On Slide 23 gives you a good indication of our confidence in winning further market share and being the main player in the development of new manufacturing platforms and processes. Spec wins are the key to future success and VAT for many years has been at the forefront of winning. As you can see from this slide, semi has increased the number of spec wins in the first 6 months of 2022 by about 15% compared to the previous year, and most of them were at the leading edge. Global Service had a softer start into 2022, mainly due to the high capacity utilization that has negatively affected the penetration of upgrades and retrofits. Solar was strong, while display was lower due to lower R&D investments, and our advanced industrial business is only slightly behind the 2021 level and expected to catch up. Overall, I expect to be in a similarly high level as 2021 and at a very high win rate percentage. Slide 25, before wrapping up with the outlook for the rest of the year, let me quickly give you our latest expectations for our key markets. Semi market is expected to grow by as much as 20% in 2022, driven by the already mentioned investments in new capacity and technology. VAT semi business will fully participate in this market growth, gain market share and grow its adjacency business. During the first 6 months, this BU grew 39%, and we expect strong growth again in the second half. Service market is expected to show strength across all segments with very strong growth numbers. Orders and sales were up 28% and almost 30%, respectively, in the first half versus prior year. And we also expect strong performance in the second half, as we execute on all our key programs. Advanced Industrials has grown in the first 6 months, in line with the market, but we expect that our strategic initiatives will continue to generate above-market growth going forward. Our order intake growth in the first half was up 16.7% year-on-year, which is a good leading indicator. Last but not least, display and solar has a split scenario with solar performing well with heterojunction finally gaining traction, while display continues to suffer from declining LCD investments. So closing off now in our prepared remarks with some commentary on what to expect for the rest of 2022. As we have explained during the last half hour, we expect ongoing strong investments in semiconductor equipment. This is supported by the growth of advanced industrial markets, while global service continues to benefit from growing installed base and a high capacity utilization within semiconductors. Overall, we expect substantially higher sales, EBITDA, EBITDA margin, net income and free cash flow and a CapEx envelope of approximately CHF 65 million to CHF 75 million. For Q3, we see sales of between CHF 290 million and CHF 310 million. This concludes our prepared remarks. And I will now hand over to Michel for the Q&A.

Thank you, Mike. We now start the Q&A session, and you have the possibility to either ask your questions via the operator over the phone or send your question directly to me via the webcast chat function. As a reminder, please limit your initial questions to 2 follow-up questions may be possible later in the Q&As. With that, I'd like to ask the operator for the first question from the phone.

[Operator Instructions] The first question comes from the line of Sandeep Deshpande with JPMorgan.

Just a couple of questions from me. The first question, I have is, clearly, it's a very strong demand environment based on what your orders and your sales were in the second quarter. At the same time, I mean, your backlog is very strong, over CHF 550 million, but the sales guidance that you're giving, you did CHF 286 million last quarter, now the midpoint is CHF 300 million. I mean, I think conversion from backlog to sales seems to be lower than it used to be in the past. Maybe you can comment on that? And then secondly, your inventories have also gone up in the quarter. Why is this happening in a market, which is so strong in terms of demand?

Yes. I -- as you can see, we had strong order intake in the second quarter, and we see that continuing through the month of July. We do have strong backlog. And I think one of the challenges right now is the overall supply chain situation within the semiconductor sector. VAT is in general in a good position to supply, and we've been growing our manufacturing output and our inventories to support that. But there is some restrictions in our ability to ship based on what the semiconductor manufacturers and the equipment manufacturers can actually absorb. So that's kind of the gating factor at this point. We do expect that to accelerate a bit in Q3 and Q4. But you've seen the increasing equipment lead times in the semiconductor sector are pushing out to 9 months, 12 months, and that is pushing our backlog into the late second half of the year and even into 2023. So we're ready to step up if that's needed, but we're gated by the overall supply chain situation, and that flows through to inventories. We have added some buffer inventory also for rollout of our ERP system in Malaysia, which happens in September. And we've also added some buffer in areas, where we've seen some severe supply shortages. So it's really a combination of those factors and also being ready to drive the output if we're able to do that.

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

I have a few questions. I will go through them one by one. One relates to inventory again. Some of the increase in inventory in the finished products, does that relate to the consignment stocks that you have? And is that in your book still, just for me to understand? And do you see a risk that uptake of those inventories could slow down if the memory CapEx cycle slows? That would be my first question.

Yes, the increase we've seen in finished products is twofold. One, to support the higher revenue base that we're seeing. But also, as you rightly pointed out, the consignment stocks that we have for our key customers -- now, obviously our key customers are obliged to take that inventory within a given period. So there's some protection for the company there. We have a very dynamic forecasting process between ourselves and our OEM customers. So we're constantly adjusting that. And if we start to see a slowdown, I don't think it would happen until into 2023 because there is such a backlog into well-publicized investments. And I think we would have some time to adjust those inventory levels if we have to do that.

How big is consignment as a percentage of your inventory, if there is such a number?

I think -- in terms of our total inventory or finished…

Yes, just a number, just for me or as an absolute number, something that I can work with.

About 20% roughly, I think, maybe slightly lower than that, 15% to 20%.

My next question is on the guidance, CHF 290 million to CHF 320 million, I think it was. And you say it's FX neutral. The FX neutral, is this based on the Q3 2021 exchange rates or on current exchange rates? Because that would imply the dollar has gained like 4%, 5% gain against the frank in the last year. So that will be -- present some tailwind for you on…

Let me maybe quickly elaborate on the methodology applied with regards to this footnote. So when we guide for the next quarter, the baseline is, in this case, for Q3 is as per June 30. So there, we look at the quarterly development. And then you also find a footnote in our half year report where we look at year-over-year comparison. And there, we refer to the rates used in the respective comparison period.

If it's -- basically as of 30th July exchange rates, if nothing changes?

30th of June, yes.

Final question is on the tax rate…

One clarification on the first point, we just got the exact number on the consigned inventory, it's about 13%, so slightly lower than I mentioned.

Final question is on the tax rate, 14%. And there was -- you said it's related to higher earnings in lower tax countries. I always thought Switzerland is a low-tax country, but is it now Malaysia? Or what is your lowest tax country and that basically drives the really low tax rate? And what shall we now think for tax rate going forward?

No, you're not misled by your assumptions. So Switzerland definitely is our low-cost effective tax rate country. What we have seen in the first half is a higher profit share in Switzerland, but I do expect a normalization of our effective tax rate towards the 15.5%, 16% for the full year, compare that to 15.6% in the last year. So overall, I do not expect significant deviations.

So, it's a temporary effect. Okay. And if Malaysia rents up further and further and you have to allocate earnings to Malaysia, how would that change the tax rate going forward? What's the effective tax rate in Malaysia that you have?

The tax rate in Malaysia is about 24%. But remember that we have also received a quite substantial investment incentives and allowances for the first factory but also in connection with the commitment for the second factory, which we would then also apply as profits will increase in Malaysia. Now we have to put that into perspective of the development under BEPS 2.0-Pillar 2, minimum taxation rate, which will become effective in Switzerland as the 1st of January 2024. So we will anyhow see a gradual increase in this tax rate in the course of the next 2 to 3 years.

So the next question is from Christian Brown, [indiscernible]. He wrote us over to Chat. This question is, do measures like the CHIP and Science Act additional increase semiconductor supply or do they simply spread it better across the globe? And what do such measures mean for the investment cycle of the industry? They prolong the upswing or maybe excavate the softer period?

I think the main beneficiary of the CHIP Act is to change the geographic distribution of chips. And as everyone knows, we're very highly reliant on Taiwan today for the foundry chips, about 64% of the global foundry capacity is coming out of Taiwan. So with TSMC moving into the U.S., that certainly creates a slightly better balance. So I think that's the key element. I don't expect this to have a dramatic impact on capital expenditure for wafer fab equipment. I think what it will do, though, is allow more options for the chip manufacturers to invest early in new fab shells. But the actual population of the wafer fab equipment will undoubtedly happen with respect to the demand of the market. I really don't see additional growth because the major players in the chip market want to protect the strong pricing environment. And the last thing we want to do is bring on too much capacity. So I really don't expect overinflated WFE CapEx because of that.

Thank you for that, Mike. And then I have an additional one from [ Kon Lee ] from Columbia Threadneedle. His question is memory players, Micron, SK Hynix and Samsung and so on have indicated CapEx cuts in financial year '23. How do you see this affecting VAT? How is it similar/different versus 2019 when VAT sales were down 18% year-over-year?

Yes. Well, we did expect to see some softening in the memory market, and you start to see that in company announcement. If you dissect these announcements, it's worthwhile pointing out, for example, the Micron one, it clearly stated that they will split their CapEx into capacity expansion and technology development and expansion, and they made it very clear they will continue with the technology expansion. So I think that will sustain a certain level of CapEx. But there is clearly one scenario for 2023, where we see some WFE reduction driven by that weakness in memory, and maybe a slowdown in the capacity buildup. So we're certainly looking at a scenario that we would be down a certain percentage, how much we haven't defined yet because it's changing considerably. And we're also looking at other scenarios where we keep growing. There's also a scenario where we see stimulus packages in China that will -- after the elections at the end of the year that could boost consumer spending there. And we're still seeing tremendous growth in hyperscale computing and data centers, which does drive advanced logic and the associated memory and flash, especially the high-end versions of them. And I think that will continue to drive a certain percentage of memory spending. So I think it's different from the '18 cycle, where we really were impacted by way overcapacity in flash. I don't think we're at that level of overcapacity. And I also think there's many more drivers of overall chip demand that help mitigate that. For example, the automotive industry, we expect to see strong growth in 2023 in cars, especially EV cars, which drive a higher percentage of chip demand.

Next question from the operator, please.

Next question comes from the line of Didier Scemama from Bank of America.

Congratulations on the outlook. I just wanted to elaborate a little bit on the question that was just asked on memory. So CapEx cuts you've answered, but if you could just give us a sense of your memory exposure in your semiconductor sector, that would be great. And then secondly, as you mentioned, you are operating towards the upper end of your EBITDA margin corridor. And obviously, we are quite far away from 2025. So is there a scenario where you could revise that corridor, or is it too early to talk about that?