Thank you for joining us. Welcome to the ASML 2021 Second Quarter Financial Results Conference Call on July 21, 2021. During the introduction, all participants will be in listen-only mode. After ASML’s introduction, there will be a chance for questions. I will now pass the call to Mr. Skip Miller. Please begin your meeting.

All right. Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today on the call is ASML's CEO, Peter Wennink; and our CFO, Roger Dassen. The subject of today's call is ASML's 2021 second quarter results. The length of this call will be 60 minutes, and questions will be taken in the order that they are received. This call is also being broadcast live over the Internet at asml.com. A transcript of the management's opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the safe harbor statement contained in today's press release and presentation found on our website at asml.com, and in ASML's annual report on Form 20-F and other documents as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Wennink for a brief introduction.

Thank you, Skip. Welcome, everyone, and thank you for joining us for our Q2 2021 results conference call. I hope all of you and your families are healthy and safe. But before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the second quarter as well as provide our view of the coming quarters. Roger will start with a review of our Q2 2021 financial performance with added comments on our short-term outlook, and I will complete the introduction with some additional comments on the current business environment and our future business outlook. Roger, if you want.

Thank you, Peter, and welcome, everyone. I will first review the second quarter financial accomplishments and then provide guidance on the third quarter of 2021. Net sales came in within guidance at €4.0 billion. The guided lower revenue was due to a number of systems in the quarter that did not receive factory acceptance testing due to customers' desire to bring systems into production as quickly as possible. Therefore, revenue will be recognized in subsequent quarters after completion of acceptance testing at customer site. We shipped 10 EUV systems and recognized €1.3 billion revenue from 9 systems this quarter. Two EUV systems shipped this quarter without factory acceptance testing, so revenue will be recognized in the subsequent quarter after customer site acceptance. For the system we shipped in Q1 without factory acceptance testing, we were able to complete site acceptance tests and recognize revenue in Q2. Again, the net result is 9 EUV revenue systems in Q2. Net system sales of €2.9 billion was again more weighted towards Logic at 72%, with the remaining 28% from Memory. The strength in Logic drives both deep UV and EUV revenue. The Memory business is mainly driven by DRAM. Installed Base Management sales for the quarter came in at €1.1 billion, above guidance, due to increased upgrade business as customers continue to pull forward software upgrades that can quickly increase productivity of systems in this high semiconductor demand environment. Gross margin for the quarter was 50.9% and was above guidance primarily due to the additional software upgrade business and one-off revenue accounting releases. On operating expenses, R&D expenses came in at €634 million, and SG&A expenses at €172 million, which was slightly lower than our guidance. Net income in Q2 was €1.0 billion, representing 25.8% of net sales and resulting in an EPS of €2.52. Turning to the balance sheet. We ended the second quarter with cash, cash equivalents, and short-term investments at a level of €5.4 billion. Moving to the order book, Q2 net system bookings came in at a record €8.3 billion, including €4.9 billion for EUV systems. The very strong order intake for both EUV and deep UV is a reflection of the global demand environment across all markets. Order intake was largely driven by Logic with 71% of the bookings, and Memory accounting for the remaining 29%. The majority of EUV orders continued to come from Logic customers, but we also had our largest EUV order intake for DRAM this quarter, coming from multiple customers. With that, I would like to turn to our expectations for the third quarter of 2021. We expect Q3 total net sales to be between €5.2 billion and €5.4 billion. We expect our Q3 Installed Base Management sales to be around €1.0 billion. Gross margin for Q3 is expected to be between 51% and 52%. The expected R&D expenses for Q3 are around €645 million and SG&A is expected to come in at around €180 million. R&D expenses for 2021 are expected to be around 14% of sales. We expect SG&A to remain around 4% of sales for 2021. Our estimated 2021 annualized effective tax rate is expected to be around 15%. In Q2, ASML paid a final dividend of €1.55 per ordinary share or €639 million. Together with the interim dividend paid in 2020, this results in a total dividend for 2020 of €2.75 per ordinary share. This is a 15% increase compared to the 2019 dividend. In Q2 2021, ASML purchased 3.6 million shares under the 2020-2022 program for a total amount of around €2.0 billion. As part of ASML's financial policy to return excess cash to its shareholders through growing dividends and share buybacks, ASML announces a new share buyback program that will start on July 22, 2021, and is to be executed by December 31, 2023. As part of this program, ASML intends to repurchase shares up to an amount of €9 billion, of which we expect a total of up to 0.45 million shares will be used to cover employee share plans. ASML intends to cancel the remainder of the shares repurchased. The new program will replace the previous €6 billion share buyback program from 2020 through 2022, under which ASML has repurchased approximately 11.7 million shares for an approximate amount of €5.2 billion, which will not be completed for the full amount in light of the new share buyback program.

Thank you, Roger. As Roger has highlighted, we had a good quarter in both sales and profitability. We are seeing continued strong demand from our customers across all market segments, from both advanced and mature nodes, driving demand across our entire product portfolio. Compared to last quarter where we expected an annual sales growth rate towards 30%, we now expect revenue to be up around 35% this year. The higher sales growth comes from our ability to increase output in our factories and in the supply chain as we work to meet the strong customer demand. Looking at the different market segments and changes from last quarter, we now expect stronger growth rates across all markets. In Logic, global demand continues to be strong across a broad application space in both advanced and mature nodes. Compared to last quarter where we expected 2021 Logic revenue to be up 30% year-on-year, we now expect Logic to be up around 35% this year. In Memory, customers see tight supply-demand dynamics continuing into next year. Compared to last quarter where we expected 2021 Memory revenue to be up 50% year on year, we now expect Memory revenue to be up around 60% this year. In our Installed Base business, for the second quarter in a row, our upgrade business has been stronger than guided. Customers are looking to upgrades to provide the fastest path to increase their wafer output capability. Compared to last quarter where we expected 2021 Installed Base revenue to be up 10% year-on-year, we now expect Installed Base revenue to be up around 15% this year. As we continue to strengthen our outlook on the year, the majority of the increase is coming from our deep UV business. We have increased our planned factory output to meet customers' growing demand and now expect higher growth in deep UV in 2021. While keeping in mind the minimum stocking levels, the increased output was partly due to the usage of service inventory at ASML and its suppliers. On EUV, we continue to push our manufacturing capability and have been able to realize a limited increase in output. We now expect EUV revenue growth of around 35% year-on-year, an increase from the 30% communicated last quarter. We also shipped our first 3600D systems in Q2 which will deliver a 15% to 20% higher productivity capability than our 3400C systems. The vast majority of the EUV systems in the second half will be 3600D systems, contributing to increased wafer capacity in our customers' fabs. To summarize this year, taking into account the planned system output improvements in the second half, we now expect sales growth of about 35% and a gross margin between 51% and 52% for the full year. Looking beyond 2021, if you read the papers, you can see the three trends we highlighted last quarter continue to drive semiconductor and equipment demand. Chip shortages, partly due to decisions made during the global pandemic, first reported in the automotive industry have since moved to other industries. This is causing a more cyclical or catch-up driven demand that we expect will likely continue into next year. More importantly, secular growth from the digital transformation that is underway as the world becomes more connected, not only machine to people, people to machine but also machine to machine. The expanding application space, with secular drivers such as 5G, AI, high performance and distributed computing, is fueling a rapidly growing demand for semiconductors. This demand is not only for leading edge devices required to power these high-performance applications but it also requires a wide array of applications using other technology to support the build-out of the digital infrastructure. Computing is also rapidly moving to the edge where sensing technologies require connected compute technologies that are often mature in nature. Lastly, the push for technological sovereignty as countries and regions are planning to establish or expand regional semiconductor manufacturing capabilities in an attempt to manage geographical semiconductor manufacturing risks. This will likely create some level of inefficiency in the semiconductor supply chain and thus additional equipment demand although we believe that this potential inefficiency will be managed rationally by a few very large manufacturers which are crucial in building this additional infrastructure. We expect these trends to continue for the next several years, which fuels long-term demand for both Logic and Memory and drives demand for our entire product portfolio. For EUV, future demand growth is primarily driven by Logic, with increasing EUV layer counts and stronger wafer demand on advanced nodes. We are also seeing growing demand for EUV in Memory as customers are ramping EUV in volume production with plans to implement EUV on future nodes across three DRAM customers. With the strong order intake this quarter, this brings our total backlog to €17.5 billion, which includes EUV of €10.9 billion, which is a reflection of the very healthy market environment we are in today and covers approximately 80% of the planned EUV output for 2022. Future deep UV demand is driven by the growing wafer demand in both Memory and Logic. We see both advanced and mature nodes increasing over time. Immersion is required for the more advanced nodes in Memory and Logic, with dry technology required for both advanced and mature technology. We see the deep UV demand, certainly for dry products, being stronger for longer. In order to meet our customers' increasing long-term demand, we are working hard with our supply chain to increase our capacity. We continue to drive down manufacturing cycle times, both in our factory and in our supply chain. Jointly with our suppliers, we are looking across the supply chain to determine where we need to add people, equipment or buildings to increase our output capability for EUV as well as deep UV. Each of these activities have different time horizons to materialize. For deep UV, in response to market demand, we will need to increase our capacity in 2022 and beyond and have therefore started to execute plans to significantly increase our capacity, primarily with dry systems. This is needed since we will not be able next year to again use the surplus inventories of deep UV modules and parts to fuel our sales, as we will do in 2021. It’s too early to provide specific details on our capacity plans for the coming years as we have not yet confirmed the targeted capacity increases with our key suppliers, but we will provide an update as soon as we have finalized these plans. For EUV, we are planning our supply chain for a capacity of around 55 EUV systems in 2022 and are looking to further increase the capacity to over 60 EUV systems in 2023. In addition to increasing our system capacity, we are also driving our product roadmap to deliver higher productivity systems to increase effective wafer capacity. All of our planned shipments in 2022 will be the higher productivity 3600D systems. In summary, the chip demand is very strong and we are working to maximize output to meet customer demand. The secular growth trends as part of the digital transformation to a more connected world is fueling future demand across all market segments at both the advanced and mature nodes, which only increases our confidence in our long-term growth outlook. We plan to provide you an update on our future scenarios at our Investor Day on September 29th, so please book the date. With that, we would be happy to take your questions.

All right. Thank you, Peter and Roger. The operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I would like to ask that you kindly limit yourself to 1 question with 1 short follow-up if necessary. This will allow us to get to as many callers as possible. Now operator, could we have your final instructions and then the first question, please?

Our first question comes from Francois Bouvignies of UBS.

Maybe the first one, if I may, is on the upside for dry DUV. How would you slice this between what ties up to your new leading-edge Logic and Memory capacity? And what relates to new trailing-edge, Logic and analog? Would it be interesting to have the color of the two. And the second question I had, maybe, Peter, when we look at the market dynamic, I mean there is obviously a strong demand and, as a consequence, a significant shortage. And on top of that, you have some local capacity concern that you talked about in your video. So what I'm trying to understand is with these 2 factors that probably one concern is kind of inflation of orders, creating some disconnect between the supply and the demand i.e., the shortage and local domestic capacity. So how do you assess this risk? How do you manage this risk of overcapacity when you think about adding capacity in deep UV and EUV?

Those are great questions. To start with the dry deep UV, whether it's driven by leading edge or more mature processes, we have a fairly clear understanding of what our customers require for new fabs and their ramp-up plans. We're also well aware of the layer compositions involved in dry immersion EUV. This segment is indeed growing, and we have better visibility into it. However, we were somewhat surprised by the strong demand from non-leading-edge customers across various regions including Europe, the U.S., and Asia. This demand encompasses microcontrollers, power devices, analog components, and image sensors. It's evident in multiple sectors. The shortages in automotive and other industrial applications shed some light on this demand. Our connections with semiconductor manufacturers indicate that these trends are widespread. We're seeing longer lead times in household appliances due to shortages in analog, power, sensors, and microcontrollers. What we are witnessing is essentially the rollout of the Internet of Things and 5G, allowing for effective data transfer. The significant surprise has been in the demand for mature or specialty semiconductors, reflecting the ongoing digital transition. Regarding your second question about assessing the risk associated with the capacity increase, we need to consider whether the digitization and digital infrastructure rollout could be misleading or slower than expected. Given the current shortages and the time required to resolve them, we believe there is a strong underlying growth trend. Therefore, we are committed to building that capacity. Historically, over the past 15 years, we’ve consistently underestimated the industry's growth. For instance, back in 2007, we provided a scenario target based on market assumptions five years ahead, and we achieved that target a year early. The same happened on the second occasion, two years early, and now we’re guiding towards almost €19 billion for 2025, which again is ahead of schedule. We have underestimated the industry's growth, and I am not worried about building this capacity as we will effectively utilize it.

Our next question comes from the line of Joe Quatrochi of Wells Fargo.

So you talked about the catch-up effect is stretching into 2022. I was curious on the DUV side, your orders remain really strong. So just curious with the capacity increases you're putting in place, is that catch up with your order book, is that more of a first half 2022 dynamic? Or do you see that as continuing into the second half of 2022?

Yes, that's a good question. It depends on how quickly we can get confirmation from our supply chain. We asked them, especially for the mature and dry products, to significantly increase their capacity, aiming for a double-digit growth. This could extend into the second half of next year. As I mentioned earlier, the disruptions in the supply chain during the global pandemic resemble a traffic jam; resolving it takes longer than the initial hold-up. This situation is reflective of the industry as a whole, involving many key players. When disruptions occur in a global supply chain and are not resolved simultaneously, it leads to depleted inventories before everything can resume, which takes time. We are observing this issue not just in our supply chain but also affecting our customers and their customers. They are now reevaluating their planning and discovering shortages everywhere, as the key players in that ecosystem are not yet aligned to restore operations smoothly. This challenge will likely persist into 2022. If our supply chain, as well as that of our peers, can improve, we might see some relief by mid-next year, which could lead to a decrease in order intake. Otherwise, we expect to continue facing these challenges into the latter half of next year.

Got it. That's helpful. And then on the increased EUV revenue outlook for this year, from a revenue perspective, it sounds like you're doing some things to maybe improve the manufacturing or your capabilities and maybe get another tool out the door. But just curious, in addition to that, is that reflective of maybe any sort of expectations around mix being a little bit stronger to the 3600D or configurations being a little bit richer than expected when we entered this year?

Yes, I believe you’re correct, Joe. It’s a combination of factors. What you observed during the quarter is that the average selling price was indeed stronger than last year, which I attribute to the options that customers requested. They were more advanced configurations than our previous generation, which is why you noticed the average selling price for the 3400C was 145. This quarter, it’s even slightly higher, although we have a very small amount of the 3600D included. That’s one aspect, and the second point is that we are making every effort to further reduce cycle time by adding one or two more tools. This is the reason for the increase to a 35% rise compared to last year, as opposed to the previously anticipated 30%.

Our next question comes from the line Sandeep Deshpande of JPMorgan.

Peter, I'm trying to understand the need for capacity in both DUV and EUV. You have shared your plans for EUV capacity. Will you also outline your plans for DUV capacity additions in the coming years at your Capital Markets Day, or is that information available now? My second question is about margins. Shipping more DUV clearly contributes to improving your overall gross margin, which has been beneficial this year. Do you expect this trend to influence your midterm outlook on gross margins due to the increased shipments of DUV and sensors, as well as older tools?

I believe Roger will address the second question. Regarding our deep UV capacity, it is indeed our intention to provide that number once we have confirmed details from our supply chain. We aim to offer greater insights into our deep UV capacity related to dry processes, with some information on immersion and more specifics on EUV by the end of this quarter. However, we need firm commitments from our key suppliers first. We plan to obtain these confirmations from the actual teams responsible for building that capacity, ensuring a comprehensive understanding. As capacity aligns with demand, we will accept orders because we do not want to let our customers down. This process has been ongoing for the past few months, and it is definitely our aim to share all available information at that time. I genuinely hope and expect we will be able to provide that number.

Yes, Sandeep, regarding margins, particularly with the introduction of the D model, the differences in gross margin between our various products are becoming smaller, which reduces the impact you mentioned. As we've noted in previous calls, there are variations in gross margin within deep UV products. It's especially important to focus on immersion, which remains a strong product from a gross margin standpoint. Notably, in the last quarter, immersion accounted for 47% of our system sales, but this quarter, that figure has decreased to 34%. This adjustment is likely more reflective of what we can expect in future quarters. Consequently, this change influenced why our gross margin in Q1 was robust, while it was somewhat lower in Q2. I believe this reset is significant. The immersion percentage moving forward should closely resemble what we experienced in Q2, leading us toward the projected gross margin of 51% to 52% for Q3.

Regarding dry margins, we anticipate shipping more dry products. Dry margins have typically been lower than immersion margins due to increased competition and cost pressures in the mature market, which differ from the advanced market. These lower-priced tools, such as KrF tools, generally yield single-digit to very low double-digit margins, although this can vary based on their configuration, resulting in lower margins compared to our energy immersion products.

Our next question comes from the line of Dominik Olszewski of Morgan Stanley.

The first topic I wanted to address is silicon solvency. In your discussions with policymakers, do you see any possibility for the U.S. to permit shipments of EUV to China once you have successfully rolled out tools for research in 2024? Do you believe this gives China a technological and timing advantage regarding access to EUV tools? My second question is specifically about Immersion. Are you seeing or expecting momentum in gaining market share, particularly within your Logic customer base for emerging tools?

I believe we already have a fairly high market share in the immersion sector, so I will leave it at that. Regarding EUV, it is a topic we have explored extensively in our previous discussions. EUV is currently subject to export control under the Wassenaar Arrangement, a multilateral treaty involving 42 nations. This requires an export control license from the government of the exporting nation, which in this case is the Netherlands. That process is still under review. This is not the right time to speculate on the implications if we introduce High-NA. What we can confirm is that there are ongoing detailed discussions among the governments involved about their next steps. While we are in touch with them, the final decision rests with the governments. We will wait to see what unfolds. I have mentioned previously that the demand for leading-edge semiconductor devices is likely unaffected by the destinations to which we ship EUV tools. The end market will depend on the value these products create and the global demand for them, which in turn will stimulate the need for high-end semiconductors and consequently for EUV. We will supply EUV wherever advanced semiconductors are being produced, whether that’s in Korea, the U.S., Europe, or elsewhere.

Our next question comes from the line of Aleksander Peterc of SocGen.

The first question is about the pace of increasing capacity. Are your comments mainly related to 2022, or can you provide more context? I want to know if we're essentially at full capacity for 2021. The second follow-up is regarding the timing of certain revenue adjustments. It seems you suggest that your guidance indicates Q4 will see a decline year-on-year and quarter-on-quarter. I would like to clarify if this is related to the pull-in you experienced in the first and second quarters.

Yes, the increase in capacity will take time, and there are three main ways we can achieve this. First, we can improve efficiency within the next 6 to 9 months by optimizing our production processes, specifically by reducing cycle times. This is something we are currently working on. The second approach involves utilizing our existing space more effectively by hiring additional staff and acquiring new machinery, particularly for our supply chain, which typically has a lead time of 12 to 18 months for obtaining equipment. It's important to note that there are also challenges in the machinery sector due to chip shortages, which could delay this process until late 2022. Finally, the third method is to expand our physical footprint, which would take 2 to 3 years and push capacity increases into 2023 or 2024. Therefore, our immediate focus for increasing capacity will be on using the same space more effectively through machine upgrades, additional personnel, and cycle time improvements. For this year, we’re reaching our limits, and any further capacity enhancements will require increased personnel and machines, primarily planned for 2022. Aleksander, on your second question and your line broke up a little bit, but I understood your question to be the distribution of the installed base revenue over the first half and the second half of the year. And that is a correct observation. So in the first half, we had €2.3 billion revenue for installed base. And with the indication of 50% growth over last year, you would get to €1.9 billion for the second half of the year. And you're quite right. As we also indicated, there has been quite some pull-in of particularly the software-related upgrades by customers who want a relatively easy way to increase capacity without having to give us too much machine time. So both in Q1 and Q2, we actually got more of these software related upgrades than we anticipated. And yes, there is a bit of pull-in there from the second half. So that's the correct observation.

Our next question comes from the line of Stephane Houri of ODDO BHF.

I have a question back on margins. And maybe if you could update us on the evolution of the gross margin at EUV services. And the question linked to that, so the follow-up would be, what is, in your view, your potential for gross margin improvement, if you put together the improvement of EUV services margins, but also the fact that now you're selling the 3600D, which carries, if I'm correct, the same kind of margins that the rest of the tools? Yes, that's basically my question.

In terms of EUV service gross margin, we reached a break-even point last year. For this quarter, we anticipate a 25% gross margin on EUV service. We believe that within about four years, we can elevate that gross margin to approximately match the corporate level. Our strategy to achieve this involves reducing costs and assisting customers in operating the machines more efficiently, which will lead to increased wafer production. As a consequence, we will receive more compensation for the wafers produced. Achieving a 25% margin from zero in a few quarters is significant, but we consider this an ambitious target. The initial jump to 25% is a major milestone, though we expect future improvements to occur at a slower pace. Regarding system gross margin, the D tool aligns with our corporate gross margin goals. While it remains below the deep UV gross margin, it does reach the corporate level. With the E tool, we aim to elevate gross margins to the levels of deep UV, ultimately targeting parity between EUV and deep UV margins. We plan to introduce the E tool in under two years, which should help us reach deep UV-like gross margin levels.

Our next question comes from the line of Rolf Bulk of New Street Research.

You mentioned that around €1 billion of EUV tools are being purchased by DRAM manufacturers this year, primarily for bit capacity for next year and beyond, due to the long lead times for EUV tools. My question is, how should we view the DRAM EUV business in the context of 2022 and 2023? Do you perceive a risk of a decline in DRAM lithography spending as cycle times for EUV tools decrease, potentially leading manufacturers to no longer require purchasing that capacity 1.5 to 2 years in advance?

Yes, I think the exact number this year is probably €1.2 billion, which is slightly higher. In terms of our 2021 Memory guidance or DRAM guidance, the €1.2 billion in EUV is something that you must examine in relation to bit capacity additions from those machines, which will not happen in 2021 but will occur later. Looking at the road maps for 2022 and 2023, we will notice an increase in EUV shipments for DRAM, driven mainly by the capacity expansions that customers are planning. When cycle times decrease, order lead times also decrease, affecting the timing of order placements more than the actual necessity for the tools, as the tools are tied to the fab planning, which can be years in advance. We have around 2 to 3 years of planning visibility, which will influence our build capacity and potential sales, ultimately impacting the timing of orders. As we've seen last quarter, there were significant EUV tool deals due to the long lead times. This has resulted in about 80% of our capacity being ordered for next year, which may change as lead times decrease, but sales will continue to rely on our customers' RAM and capacity plans that are fairly predictable over the long term.

The RAM plans are based on layer count, which is clear from feedback from customers indicating their intention to increase the layer count of OBV in DRAM manufacturing. To provide another data point, this year we expect approximately 20% of the EUV revenue. Based on the estimated 6 billion, that amounts to 1.2 billion. It's reasonable to assume this percentage will apply to next year as well. This suggests ongoing growth in EUV implementation in DRAM, along with a corresponding increase in revenue.

So absolute numbers will grow because like you said, next year, we'll have 55 units capacity, which will probably very likely we'll sell that. But it also means that from an absolute shipment number point of view, it will keep growing for both Logic and for DRAM.

And our next question comes from the line of Robert Sanders at Deutsche Bank.

I just had one that is about EUV layer count from 3-nanometer to 2-nanometer. That’s when TSMC will be introducing gate-all-around, most observers seem to think there will be close to zero pitch scaling from that transition as TSMC did from 20-nanometer to 14 when the FinFET was introduced. So I was just wondering if that's something you're anticipating in your plan.

No, we don't share that perspective. We believe that the tools we'll be utilizing for the 3-nanometer and 2-nanometer nodes will differ, and there will also be an introduction of double patterning EUV, which will assist with pitch scaling. Therefore, we have a different outlook.

In our view, the transition from FinFET to gate-all-around will be layer count agnostic. So that's going to be layered.

Yes. On the pitch scale, there will be an introduction of double patterning at that moment. But Roger is correct, I mean in terms of layers, it doesn't matter.

The next question comes from the line of Andrew Gardiner at Barclays.

I wanted to come back to the point you were making around DUV capacity. In particular, for this year, just to try and establish a baseline, can you give us a sense as to how much of this year's revenue is being driven by the buffer stocks, of the drawdown of that inventory that you've got? If I doing my math right based on your guidance, we're now talking about a low €8 billion level of DUV revenue this year. So yes, how much of that’s coming from the inventory?

Yes. Let me respond to that in a different way. It's important to dive deep into the supply chain, as it involves both our service inventory and our suppliers' inventory. To provide an exact percentage, I would need to investigate further. Looking at the 2022 deep UV plans, especially concerning immersion, I believe our immersion sales next year will be similar to this year's figures. This year, we benefited from a one-time reduction of stocks from various sources. Thus, I cannot confidently predict changes at this moment since the immersion numbers this year are significantly high. It's rare to see similar shipment volumes historically. I anticipate that next year's immersion sales will likely remain the same, but without the benefit of stock depletion. Regarding KrF, there may be increased numbers next year as we are expecting higher demand for capacity. This demand appears to emerge from specialty or mature markets. Hopefully, that clarifies your question, Andrew.

Yes, it does. I mean, if I could just follow up with that quickly. I mean you're talking about a significant double-digit increase in capacity to DUV. Clearly, not all of that is going to come online in '22. That presumably is just the starting point. But if we look out over the next couple of years, I mean, significant, perhaps to effect, the obvious is not 10%. And I know you want to save something for September. But I mean it feels like you're talking 20% plus or minus, that kind of ballpark? Would that be reasonable?

You have known us for a long time, so you can determine what significant means for us, and it’s not 10%, as you've mentioned. We will likely provide more specific details at the end of September. When capacity comes online, there is also a lead time between when that happens and when we receive the models and parts, enabling us to create the tools and ship to customers. The significant capacity increase, which will indeed be double-digit, will have an impact in 2023, not in 2022. If it becomes available on January 1, 2022, you would be correct. However, I must emphasize that it takes 12 to 18 months before the workforce and equipment are fully operational and we can begin production, followed by installation. Therefore, we expect to see that capacity increase occurring next year. The extent to which we can utilize that for output is still uncertain, and we are working on that with our suppliers.

Our next question comes from the line of Didier Scemama of Bank of America.

I have a first question and a quick follow-up. Peter, could you share your thoughts on a debate in the market that relates to one of the three long-term drivers you mentioned? In the U.S., there seems to be a significant gap between what is being produced and what is being consumed, around 12% and 40% if I remember correctly. My first question is if we were to narrow that gap substantially, what level of spending on lease equipment would be necessary? Secondly, how long do you realistically think it will take to achieve that? I also have a quick follow-up.

I believe you may find this surprising, but I don’t think it’s that significant. We have a reasonable assumption regarding the expansion plans, which appear more concrete in the U.S., though discussions are ongoing in Europe. The expansions will primarily be undertaken by established industry leaders who have the capability and expertise to replicate successful processes from other regions in the U.S. and Europe. These companies will construct the necessary facilities to meet market demands for specialized products. Only a select few companies will take this rational approach. I doubt any administration can compel the executives of these companies to invest in capacity that will remain unused, as this would lead to inefficiency. Based on the information we have, it’s clear that only a limited number of companies possess the capability to build these facilities. From my perspective, while there will be some inefficiencies due to the establishment of new operations in areas lacking a supportive local ecosystem, I don’t anticipate inefficiencies reaching double-digit percentages because the rational behavior of our key customers will prevent that. As for the timeframe, I don’t expect any output from these facilities before 2024 or 2025, meaning we are looking at a couple of years for construction and ramping up operations. These facilities will be large, and their ramp-up will occur in phases, not all at once. The focus on technological sovereignty is driven by the expectation that the semiconductor industry could potentially double its sales over the next decade, leading to a need to diversify manufacturing capabilities geographically. This trend appears logical and will be influenced by a few large manufacturers. While some inefficiencies will arise, the drive for efficiency and government incentives will play a role in shaping this landscape, which ultimately affects the taxpayers in those regions.

Thank you for your answer. As a quick follow-up, I wanted to revisit DUV. My question, Peter, is straightforward. Historically, the semiconductor industry has struggled to exert pricing power with its customer base for various reasons. However, now that you're in a somewhat different situation, discussing the doubling of market demand over the next decade, and considering the necessary investments, shareholders may be concerned about whether this is the right time to increase capacity. Would it be possible for ASML to ask its customers to pay in advance for the DUV tools, thereby reducing your risk and eliminating concerns about double or triple ordering?

It's always important for entrepreneurs to consider how to minimize risks in their business model, but honestly, that's not something that typically happens. It's not how we should approach our relationships with our limited number of customers or equipment manufacturers. Regarding deep UV, we plan to charge our customers based on the value provided by these machines. For example, incorporating deep UV KrF on the NXT platform will greatly enhance our customers’ productivity, and it's reasonable for us to expect them to share in that value. Our strategy for increasing prices focuses on delivering more value, rather than relying on short-term market pressures that may fluctuate over a few years, which could lead to pushback from customers in a typical supply relationship. This industry thrives on value creation, and we have numerous opportunities to deliver that value while justifying higher prices. As for capacity increases, we may have previously underestimated the growth potential of this industry. There are solid reasons to believe that the demand we're observing, particularly in dry deep UV and its applications, warrants additional capacity. We will sell this added capacity and boost our profitability, satisfying our shareholders while minimizing risks. Short-term cycles may fluctuate, but I don't foresee long-term risks in this area.

In terms of advance payments, it's important to note that such payments do occur in the EUV sector. Given the lengthy lead times, we have established significant prepayment schedules with our customers, which is evident from ASML's free cash flow in the past year. In this respect, we are indeed following that practice, not just in this specific case but as a general principle due to the extended lead times we experience.

That's a very good point, Roger, because I mean, the lead times of deep UV are a lot shorter, which also means that you can manage the supply and demand better. But we will increase the capacity also, not only in base, but also in the supply chain. But again, based on our strong conviction that we need that capacity going forward, because of the market developments that we are seeing. And I think that risk, we believe, is limited.

All right. Thank you. We have time for one last question. If you were unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations department with your question. Now operator, may we have the last caller, please?

That's the line of C.J. Muse at Evercore ISI.

I guess first question, Peter, I wanted to clarify a comment you made to Andrew. Were you guiding immersion units next year flat, or was that a commentary around supply availability before adding new capacity?

Yes, my answer may have been a bit complex, but I aimed to convey two main points. In 2021, we are experiencing a surge in sales because we are utilizing all available inventory. Some might argue that our minimum stocking levels for servicing are quite low since we are using everything to manufacture our machines. This situation creates a one-time increase that results in a high immersion number. I believe next year we will be looking at a number without the benefit of this one-time increase. We are effectively boosting our capacity to reach similar levels, taking into consideration our cycle time improvements and the addition of staff. Thus, while we are increasing capacity, we expect to end up with roughly the same figures.

First of all, I don't think we mentioned 55 during Capital Markets Day. If I remember correctly, we presented 50, but we had two arrows in front of it, leaving it up to your imagination on how far to stretch that. So for 2022, considering the various dynamics I mentioned, there is certainly promise from a gross margin perspective, but it's too early to provide any definitive guidance on that. However, if you observe the trajectory over the year, you’ll see that we’re now guiding towards 51 to 52 percent for the next quarter, which serves as a solid basis. That already includes a fair amount of development. Next year, everything will be development-focused, and you'll benefit a bit more from the 2050 initiative than you will this year. So there is some potential, but it remains too early to forecast what next year will look like.

All right. Before we sign off, I'd like to remind you that our Investor Day is currently planned to be held in London on September 29, 2021, COVID conditions permitting. We will keep you posted on details and hope you'll be able to join us. Now on behalf of ASML, I'd like to thank you all for joining us today. Operator, if you could formally conclude the call, I would appreciate it. Thank you.

Thank you. This now concludes the meeting. Thank you all very much for attending. You may now disconnect your lines.