Thank you for standing by. Welcome to the ASML 2022 Second Quarter Financial Results Conference Call on July 20, 2022. Throughout today’s introduction, all participants will be in listen-only mode. After ASML’s introduction, there will be an opportunity to ask questions. I’d now like to turn over the call to Mr. Skip Miller. Please go ahead, sir.

Yes. Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today on the call are ASML’s CEO, Peter Wennink; and our CFO, Roger Dassen. The subject of today’s call is ASML’s 2022 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 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 second quarter 2022 results conference call. I hope all of you and your families are still healthy and safe. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the second quarter 2022 as well as provide our views of the coming quarters. Roger will start with a review of our second quarter 2022 financial performance, with some added comments on our short-term outlook. And I will complete the introduction with additional comments on the current business environment and on our future business outlook. Roger?

Thank you, Peter, and welcome, everyone. I will first review the second quarter financial accomplishments and then provide guidance on the third quarter of 2022. Net sales came in at €5.4 billion, slightly above our guidance. We shipped 14 EUV systems and recognized €2.0 billion revenue from 12 EUV systems this quarter. Net system sales of €4.1 billion were driven by Logic at 71%, with the remaining 29% from Memory. Installed Base Management sales for the quarter came in at €1.3 billion, above guidance. Gross margin for the quarter came in at 49.1%, which is at the lower end of our guidance, primarily due to increasing inflationary costs. On operating expenses, R&D expenses came in at €789 million and SG&A expenses at €222 million, as guided. Net income in Q2 was €1.4 billion, representing 26.0% of net sales and resulting in an EPS of €3.54. We ended the second quarter with cash, cash equivalents, and short-term investments at €4.4 billion. Q2 net system bookings came in at a record €8.5 billion, reflecting continued strong customer demand for both advanced and mature nodes. Strong order intake of €5.4 billion for EUV 0.33 NA and EUV 0.55 NA systems and €3.1 billion for non-EUV systems. The total net system bookings were driven by Logic with 60% of the bookings and Memory accounting for the remaining 40%. Moving to our expectations for the third quarter of 2022, we are experiencing increasing supply chain constraints that resulted in delayed system starts and require us to increase the number of fast shipments in Q3 to supply our customers with systems in production as quickly as possible. We expect Q3 total net sales to be between €5.1 billion and €5.4 billion. This excludes around €1.1 billion of net delayed revenue for Q3 as a result of more fast shipments at the end of Q3 than at the end of Q2. We expect installed Base Management sales to be around €1.4 billion. Gross margin for Q3 is expected to be between 49% and 50%, similar to the prior quarter. The expected R&D expenses for Q3 are around €810 million and SG&A is expected to come in at around €235 million. Our estimated 2022 annualized effective tax rate is expected to be between 15% and 16%. In Q2, ASML paid a final dividend of €3.70 per ordinary share. Together with the interim dividend paid in 2021, this resulted in a total dividend for 2021 of €5.50 per ordinary share. We plan to grow our dividend and will move from a biannual to a quarterly dividend payout starting in Q3 this year. This will provide more timely return of cash to our investors and more evenly balance our cash across the year. The first quarterly interim dividend over 2022 will be €1.37 per ordinary share and will be made payable on August 12, 2022. In Q2 2022, we repurchased around 2.3 million shares for a total amount of around €1.2 billion. Total shares bought under the 2021-2023 program until the end of Q2 is around 12.4 million shares for a total amount of around €7.9 billion.

Thank you, Roger. As Roger highlighted, revenue and profitability for the quarter basically came within guidance. We expect sales in Q3 to be in a similar guided range as Q2. Looking at the more near-term market dynamics, we see a couple of mixed messages. Some customers are indicating they are seeing signs of slowing demand in certain consumer-driven market segments, primarily PCs and smartphones. Other market segments like high-performance computing and automotive are still seeing strong demand. Litho tool utilization at our customers is still at very high levels while we are also seeing chip inventory levels trending towards pre-COVID levels. The demand for our systems still significantly exceeds supply this year and we see no change to this demand picture. We are planning to ship a record number of systems but we are faced with an increasing number of supply constraints, which seem likely to continue throughout the year. In an effort to recover from these delays, we are increasing the number of fast shipments to get systems to customers as quickly as possible. A fast shipment process skips some of the testing in our factory. Final testing and formal acceptance then takes place at the customer site. This leads to a deferral of revenue recognition for those shipments until formal customer acceptance but does provide our customers with earlier access to wafer output capacity. As fast shipments delay revenue recognition to subsequent quarters, we are seeing more delayed revenue that will move into next year. The value of fast shipments in 2022 leading to revenue recognition in 2023 is expected to increase from around €1 billion, as previously communicated, to around €2.8 billion, an increase of €1.8 billion. This results in €1.8 billion lower revenue recognition in 2022 and we now expect year-on-year revenue growth of around 10%. We began the year expecting a revenue growth of around 20%, or approximately €22.3 billion, but we are now expecting a revenue growth of around 10%, which is approximately €20.5 billion, and €2.8 billion value of fast shipments at the end of the year. For our EUV business, we still expect to ship 55 systems this year. As a result of the higher number of fast shipments, we now expect recognized EUV revenue this year on 40 systems to be around €6.4 billion, which is similar to revenue last year. Compared to last quarter's view, the number of EUV fast shipments in 2022 that will now be recognized as revenue in 2023 has increased by 9 systems to a total of 15 systems with a sales value of around €2.4 billion. We still expect significant growth in both immersion and dry systems in our deep UV and Applications business, as well as continued strong demand for metrology and inspection systems. Due to a higher number of fast shipments on deep UV systems, we now expect a revenue of around €8.6 billion or an increase of over 15%. We still expect 2022 installed base revenue to grow around 10% year-on-year. Regarding the market segments, there has been no change in customer demand. As the majority of the additional €1.8 billion of delayed revenue is EUV and therefore relates to the Logic segment, we now expect Logic system revenue to be up around 5% year-on-year and Memory system revenue to be up around 20% year-on-year. On gross margin, we started the year with an expectation of a gross margin for 2022 of around 53% and we adjusted this to 52% last quarter due to increased inflationary costs. There are a few developments that have further impact our expected gross margin for the year. First, the higher delayed revenue, an increase of €1.8 billion, relates to our higher margin EUV and immersion systems. Secondly, the supply chain issues lead to delayed system starts, and therefore we will have lower fixed cost coverage on a lower number of system starts this year compared to what we had planned last quarter. Fixed costs also increased due to our plans to ramp capacity faster in preparation for what is still expected to be a good growth year in 2023. Lastly, strong inflationary effects relating to material costs, freight, and labor continue to impact our cost of sales. A combination of these effects results in an expected 2022 gross margin between 49% and 50%. We are currently in discussions with our customers and suppliers to find a fair way to share in these inflationary cost increases. The reasons for the lower margin guidance are a result of short-term shocks in our ecosystem and can be adjusted over time in collaboration with our ecosystem partners. Therefore, our longer-term gross margin ambition of 54% to 56% in 2025, as communicated during Investor Day last year, is still valid. The global megatrends driving our industry are still in place and fueling demand for both advanced and mature nodes. The expanding application space for semiconductors and secular trends are driving long-term structural demand. The growth in the automotive market is strong as semiconductor content scales with increasing automation and electrification. Customers are indicating increasing demand for semiconductors as part of the green energy transition and build-out of the smart grid. The demand for more mature technology nodes is driven by the Internet of Things fueling demand for sensors, power ICs, and actuators. Customers are seeing very strong growth due to demand from high-performance computing applications. As applications require higher performance at a lower power, we see the energy-efficient path to transistor growth driving the need for larger die sizes. Finally, there are a number of fabs being planned or already in progress driven primarily by technological sovereignty investments and subsidy schemes next to increased foundry competition. Growth in semiconductor end markets and increasing lithography intensity are pushing the demand for our products and services. This is evident in our quarterly order flow of over €6 billion the past five quarters and a record order intake of €8.5 billion this past quarter. Our backlog has grown to over €33 billion and we expect continued high order intake this quarter. Almost 85% of this backlog is for EUV and immersion which is planned for advanced nodes. Demand for our products this year and next continues to exceed supply. There is clear concern in the market regarding recessionary fears and the impact this could have on demand. If we were to go into a significant recession, we would not be immune to this, but we don't expect our 2022 business to be impacted. For 2023, given our backlog, we believe that we are well covered. Customers keep stressing that they will not cut CapEx for litho despite current market conditions and uncertainties. Assuming that we have the supply chain issues addressed by the end of the year, or early next year, we remain optimistic about turning the envisaged capacity for 2023 of more than 60 EUV systems and more than 375 deep UV systems into another healthy growth year for ASML. We are actively engaging with our supply chain to add capacity so that we will be able to have a shipment capacity in 2025 of around 90 EUV 0.33 NA systems and around 600 deep UV systems. Our 2025 capacity targets and updates to our longer-term scenarios will be addressed at our Investor Day later this year. In summary, although we are currently experiencing obvious supply chain challenges, we are still working to maximize output to meet the strong customer demand through fast shipments. We expect demand to exceed supply this year and next. Even though there are currently clear macroeconomic concerns, we expect strong continued demand for semiconductors in support of the ongoing digital transformation. We are working to increase our capacity next year and further increase this by 2025. We remain confident in the opportunity this provides for our future growth, which we plan to update you during our Investor Day on November 11th.

Thank you, Roger and Peter. The operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I would like to ask you kindly to limit yourself to one question with one 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 the first question, please?

Thank you. And the first question comes from the line of Joe Quatrochi of Wells Fargo.

You talked about your customer conversations indicating that even in a moderate recession they're still running your tools. And so maybe you don't see cancellations. But how do we think about the delays and potential for delays in delivery times? And how do you think about that relative to your backlog? I guess it is obviously well covering 2023 at this point?

Yes, I believe the delays in delivery times are impacting us, but we are assisting our customers with expedited shipments. Our production value is definitely increasing, but these delays are hindering our revenue recognition. We are actively making shipments, which is why we prioritize fast deliveries. I anticipate that the second half of the year will outperform the first half. We continue to focus on expanding our production capacity and we recognize the backlog. Our customers have clearly expressed a desire for us to deliver those systems. While the pace is not as quick as we would prefer, we are fulfilling our commitments based on the backlog and customer demand.

And Joe, just to underscore what Peter is saying, the delays we're experiencing are purely based on constraints in the supply chain. It's not at the request of customers. Quite to the contrary. Customers are still pushing very much for shipments. Therefore, we have turned towards a fast-ship mode. That has not changed at all.

Got it. And then as a follow-up, is EUV capacity for next year already covered by the backlog? And when do you start shipping the 3800E next year, and how do we think about your ability to do the fast shipments? Isn't there a period where you're going to have to establish a baseline for that tool before you can fast ship?

Yes. The backlog of EUV is well over 100 at this stage. We talked about EUV capacity for next year of over 60. So yes, the answer is well covered for next year. In terms of the 3600 versus the 3800, the lion's share of the tools shipped next year will be 3600, while the 3800 will be shipped in the second half, but the lion's share of the second half will also be 3600.

Yes, Joe. I think also last quarter, we said we expected that by the end of Q2, we would be covered until the end of 2022, and that turned out to be correct.

Thank you. Our next question comes from the line of Mehdi Hosseini of SIG.

Just a quick follow-up to that 100 EUV systems that are in your backlog. If there are about 15 system revenue recognition that are pushed out into '23, does that mean that at some point it will catch up, and you would potentially be recognizing revenue for 75 systems that were expected to be shipped in '23 and 15 systems that are slipping from '22 to '23? And I have a follow-up.

Roger, do you want to respond?

Yes. The fast shipment, at a certain stage, is expected to reverse itself. If fast shipment becomes the standard, we'll also be able to get customer sign-off when the tests are done at the factory. So there are two potential outcomes for the fast shipment approach.

Yes. To your math, anything we ship in terms of EUV next year, whether it's 60 or 55 or 65, will also include everything we pushed out from 2022 to 2023.

And then a follow-up question for both of you, Peter and Roger. How are you planning to mitigate the risk considering the weaker end-market demand from PCs and smartphones? And what is ASML now thinking or doing to counter any potential delays in equipment delivery scheduled for the first half of 2023?

If we see a slowdown, we will just adjust our output. When we look at EUV shipments, we will ship to 8 new EUV fabs that need EUV tools and immersion tools. This is why we have a big backlog. Customers are going to adjust some of their CapEx, but the long-term view on the digital transformation ensures continual need for our systems.

Customers have already put up significant down payments for their orders, making it illogical for them to cancel orders. So the likelihood of cancellations is low.

As for cancellations, the only cancellations I recall were customers replacing tool types. No cancellations have been seen in recent times despite the recessionary talks.

Our next question comes from the line of Francois Bouvignies of UBS.

A clarification on deep UV for 2023. Last quarter, you expected to reach full deep UV capacity in '23 at 375 versus a demand of 600. Given the slowdown, do you still expect to reach 375 tools next year?

Yes. We are listening to our customers and have evidence that the number of deep UV products being run by our foundry customers is significantly higher than in the past. Many products run on these nodes show increased demand, and customers are still asking for machines despite market fluctuations.

How should we think about the pricing of the tools in '23? Given inflation, will you negotiate pricing?

We need to adjust our pricing to cover the inflationary pressures. There are ongoing discussions with customers to find fairness in pricing, but our pricing strategy will evolve to reflect these costs.

Our next question comes from the line of Alexander Duval at Goldman Sachs.

Should we expect a margin boost next year given that certain fixed costs are being recognized this year but revenue recognition is delayed?

Yes, you've got the principle correct. To the extent that we have less starts this year, that means that you get less fixed cost coverage. If we catch up on that, you would see a margin boost corresponding to that.

Our next question comes from the line of Aleksander Peterc of Societe Generale.

When evaluating your comments, it seems you imply that we’ll see delayed revenue recognition go away naturally as fast shipments become standard. Should we expect this by 2025?

I hope we won’t have to wait that long. If fast shipment becomes standard, it's likely that we’ll persuade customers this is the acceptable practice for revenue recognition.

The fast shipment process aims to reduce cycle time from system start to customer installation. If we gather enough data, we can establish a case for changing acceptance terms.

On EUV average selling prices, your guidance implies €160 million per system. What is driving the lower ASP in the second half?

The higher ASP in the first quarter was an anomaly. The second quarter ASP is €163 million, indicating that the expectation of €160 million for the remainder of the year is appropriate.

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

If fast shipments become the norm, would that mean no differences in shipments and revenues when cycle times are reduced?

Yes. Assuming customers agree, because they need to accept ownership of that machine. This could be an outcome that ultimately benefits both ASML and the customer.

To clarify, we're not there yet, but we're working towards that point if fast shipment becomes standard.

Can you run us through the drivers of the uptick in demand for DUV? It seems there are structural shifts contributing to the demand.

The demand for deep UV products is significantly driven by increasing applications and products produced using these nodes. Customers indicate ongoing needs for machines despite market fluctuations.

Our next question comes from the line of Krish Sankar of Cowen & Co.

How to think about domestic China's growth this year? Any updates on the speculation regarding U.S. bans on deep UV shipments to China?

China is expected to grow with the same percentage as the rest of the world, around 10%. Regarding the U.S. banning deep UV shipments, we have to wait for political decisions.

Hypothetically, if there were no supply constraints today, we probably wouldn’t have started fast shipments. However, we may actually like fast shipments as they provide efficiency gains.

Thank you. If you are unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations department with your question. Before we sign off, I'd like to remind you that our Investor Day is currently planned to be held in Veldhoven on November 11th of this year. We 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'd appreciate it. Thank you. Thank you. This now concludes the ASML Q2 2022 financial results. Thank you for participating. You may now disconnect.