ASM International NV

AEX:ASM

Earnings Call Transcript 2017-Q4

[Operator]

Good day, and welcome to the ASM International Q4 2017 Earnings Call. Today's conference is being recorded and at this time, I'd like to turn things over to Victor Bareño, please go ahead.

[Victor Bareño, Director of Investor Relations]

Thank you, Kayla. ASMI issued its 2017 fourth quarter results last evening. For those of you who have not seen the press release, it, along with our latest investor presentation, is accessible on our website, asm.com.We remind you that this conference call may contain information relating to ASM's future business or results, in addition to historical information. For more information on the risk factors related to such forward-looking statements, please refer to the company's press releases, reports and financial statements, which are available on our website.Today's call will be led by Peter van Bommel, Chief Financial Officer of ASM International. Unfortunately, Chuck del Prado, our company's President and Chief Executive Officer, cannot be with us today because he's recovering from the flu. Chuck sends his apologies for not being able to attend today, but he's looking forward to attend the next call again in April.

[P.A.M. van Bommel, CFO & Member of the Management Board]

Thank you, Victor, and thanks to everyone for attending our fourth quarter and full year 2017 results conference call, and for your continuing interest in ASM International.So let's start with a review of the highlights of 2017. Looking at the company's financial performance, 2017 was a year of recovery in our ALD business, in particular, driven by strong increases in the 3D NAND segment. In 2017, we also successfully increased our addressable market in epitaxy as we won our first leading high-volume manufacturing customer for our new Intrepid 2.Initial cost related to new product launches impacted to the gross margin, but we still increased our operating profits by 38% in 2017. During the year, we also reduced our stake in ASMPT. We did that in 2 steps, from 39% to 25%. And we are returning the proceeds to our shareholders, including the capital return and the new share buyback program that we announced yesterday.Backed by further progress we made last year in important strategic areas, we expect our company to outgrow the wafer fab equipment market in 2018, which market watchers currently expect to increase rates, on average, a high single-digit percentage. We would like to thank our employees for their continued commitment and hard work during the year.Let's now review our fourth quarter and full year 2017 financial results, starting with the fourth quarter. Net sales in the fourth quarter came in at EUR 206 million, up 11% from the third quarter and up 19% compared to the fourth quarter of 2016.Sales in the quarter were at the higher end of our guidance, which was a range of EUR 190 million to EUR 210 million. In terms of product lines, the key driver was our ALD business, at some distance, followed by Epi and PECVD.By industry segment, the revenue stream in the fourth quarter was led by memory customers, largely 3D NAND, followed by foundry.The gross margin decreased to 39.3% compared to 40% in the third quarter. In the third quarter results, we discussed that initial cost of the new products in Epi and PECVD negatively impacted the gross margin in third quarter with 5 percentage points, and that the negative impact would continue for the next few quarters.In the fourth quarter, we have again a negative gross margin impact from the new products, with it moderated 2 or 3 percentage points. On the other hand, our margin in the fourth quarter was negatively impacted by a few incidentals, making up for approximately 2 percentage points and relates to some specific cost we are making in relation to new product introductions and obsolescence.Operating income of EUR 35 million increased 17% year-on-year and by 36% compared to the third quarter. Financing result in the fourth quarter was EUR 5 million negative due to a currency translation loss of a similar size. As a reminder, we keep a substantial part of our cash balances in U.S. dollars, any related translation differences are included in the financing results. Financing results included the translation loss of EUR 8 million in the third quarter and a gain of EUR 19 million in the fourth quarter of 2016.Our net earnings of EUR 225 million in the fourth quarter of 2017 included a net gain of EUR 184 million, related to the sales of a 9% stake in ASMPT last November. Excluding this gain, our normalized net earnings amounted to EUR 46 million in the fourth quarter compared to EUR 48 million in the third quarter and EUR 69 million in the year-ago period.Let's now have a closer look at ASMPT. During the fourth quarter, we reduced our stake in ASMPT from 34% to 25%. On November 2, we announced that we sold 37 million shares or a stake of approximately 9%, for proceeds of approximately EUR 445 million. This followed on the sale of a 5% stake in April 2017 for proceeds of approximately EUR 245 million.We continue to regularly review shareholding in ASMPT, with the focus on long-term value creation. Our view that a significant stake in ASMPT is of strategic importance at this stage of our company remains unchanged.In line with the commitment that we communicated last November regarding the proceeds of stake sale, we announced yesterday that we will propose to the AGM 2018 the repayment of EUR 4 per share in capital to the shareholders. And this repayment will be effectuated to be free of dividend withholding tax. In addition, we also announced that we intend to launch a new EUR 250 million share buyback program.If we then look at the results from investments, which reflects our share of the net earnings from ASMPT, the fourth quarter, these amounted to EUR 40 million, down from EUR 32 million in the third quarter and EUR 18 million in the fourth quarter of 2016. This decrease is strongly impacted by the reduction of our stake. The figures exclude the ongoing PPA amortization charge, which amounted to EUR 5 million in the fourth quarter, are included -- are excluded from the numbers. For 2018, this amortization charge is projected to be EUR 30 million.In the fourth quarter, ASMPT reported sales of USD 542 million and bookings of USD 497 million. Sales were seasonally down by 17% from the third quarter but increased 19% compared to the fourth quarter of 2016. This year-on-year increase was at the higher end of the low to high teens percentage increase that ASMPT has guided for. On a 100% basis and excluding incidentals, ASMPT's net profit increased 22% year-on-year and decreased 45% compared to the third quarter.Now turning back to ASMI's consolidated operations. We booked EUR 203 million in new orders during the quarter, which is up 27% from the third quarter and up 15% from the fourth quarter of 2016. This number also comfortably exceeded our guidance for the fourth quarter, which was a range of EUR 170 million to EUR 190 million.ALD was the main driver behind the order intake in the quarter, but we also recorded a healthy level of bookings in Europe for appliance, including vertical furnaces.By industry segment, equipment orders in the quarter were led by memory, largely 3D NAND, followed by foundry and logic. Bookings in all segments increased compared to the third quarter, with a strongest increase in logic. Bookings also picked up in DRAM, but are still relatively low in an absolute terms.Now let's discuss the full year results. Our net sales in 2017 increased by 23% to a new record high of EUR 737 million. Sales were led by our ALD product line, which continued to represent clearly more than half of our equipment revenue. The epitaxy product line showed very strong growth, driven by sales of a new Intrepid system. PECVD also showed strong growth.Looking at the ranking of the industry segments for the full years -- full year, sales were led by the foundry segment, which recorded the further sales increase following the strong growth in 2016. Foundry was followed by memory and then logic, wherein memory, sales were for the largest part related to 3D NAND, which showed very strong growth compared to 2016.Gross margin decreased to 41.5% in 2017 compared to 44% in 2016. This decrease is fully explained by the initial cost of the newly introduced products in our epitaxy and PECVD activities. Excluding this impact, our gross margin would have been stable in 2017. We are confident that this is only a temporary effect. Margins on the new products are on track to improve, and as a result, we expect the gross margin for the total company to normalize again in the course of 2018.Operating expenses remained in the control during the year. SG&A expenses increased by 13% and decreased as a percentage of sales from 15% in 2016 to 13% in 2017.The total R&D expenses increased by 2% and, also, dropped as a percentage of sales from 15% to 13%, which is in line with our structural target of low to mid-teens percentage. The operating profit for the year increased 38% from EUR 82 million to EUR 113 million, and the operating margin improved from 13.8% to 15.3% in 2017.Result from investment on a normalized basis increased from EUR 68 million in 2016 to EUR 112 million in 2017.The total sales, as reported by ASMPT, increased by 23% to USD 2.2 billion in 2017. Sales of the Back-end equipment business increased 19% in 2017. This growth percentage was impacted by the LED market, which contracted in 2017 as customers needed time to digest a new capacity as installed in 2016.ASMPT performed very well in segments which has camera, image sensors and 3D sensing, advanced packaging and power management applications. Sales of the SMT solutions increased by a very strong 31% for the full year, driven by automotive, industrial electronics and the latest upgrade cycle in smartphone markets.ASMPT increased gross margins from 37.6% in 2016 to 40.2% in 2017, excluding incidentals. And on 100% basis, ASMPT increased net profits by 70%.If we then look at a consolidated numbers again, our normalized net earnings increased to 17% to EUR 190 million in 2017. On a per share basis, the normalized net earnings increased 21% to EUR 3.22 per share.Let's look at our balance sheet now and our cash flow. At the end of December, the cash amounted to EUR 837 million, which is up from EUR 525 million at the end of September. This increase is mainly explained by the EUR 445 million cash proceeds of the 9% stake sale in ASMPT last November, which is partly offset by EUR 137 million in cash used for share buybacks during the quarter.For the full year 2017, free cash flow amounted to EUR 32 million, approximately stable compared to 2016. The development in free cash flow was held back by a rise in working capital and an increase in CapEx.At the end of December, net working capital stood at EUR 171 million, which is up from EUR 157 million at the end of 2016. The number of outstanding days of working capital, measured against quarterly sales, decreased from 81 days at the end of 2016 to 75 days at the end of 2017. The rise in working capital is explained by higher accounts receivable due to the back-half-weighted character of sales in the fourth quarter of 2017, which was even more pronounced than in 2016. In addition, inventories increased during 2017 and reflected a higher activity level, including the new products in Epi and PECVD.The capital expenditures increased from EUR 26 million to EUR 48 million in 2017, for a large part related to the increase in our R&D activities. We are stepping up investments to prepare our company for the next stage of growth. In the last several years, we could largely accommodate the increased demand within our existing facilities. To grow out structurally higher levels, we plan to increase investments in the forthcoming period.ALD continues to be an attractive growth market and in epitaxy and PECVD, we now also have good opportunities for further expansion. Investments will include the construction of a new facility and cleanroom in Korea and the construction of a new manufacturing facility in Singapore. These investments had the first impact in 2017 and will lead to higher CapEx in 2018 and 2019.Looking at the share buybacks, in the fourth quarter, we spent EUR 137 million to repurchase approximately 2.4 million of our own shares. Last August, we completed our third consecutive EUR 100 million share buyback program. In September, we started a new EUR 250 million share buyback program, using the proceeds of the 5% stake in ASMPT that we sold in April 2017. By the end of 2017, this buyback program was for 60% complete. And at the end of last week, this program was nearly completed. As part of this program, we have so far repurchased 4.2 million shares at an average price of approximately EUR 57 million -- EUR 57 per share.During the full year 2017, we used the total of EUR 281 million cash -- in cash for dividends and share buybacks, which is up from the EUR 140 million in 2016 and in line with the continued commitment to use excess cash for the benefit of our shareholders.As mentioned earlier, we will propose to the 2018 AGM a tax-efficient capital repayment of EUR 4 per share. We also announced that we will propose the cancellation of 6 million shares, this will reduce the number of issued shares by almost 10%. In addition, we will propose a regular dividend of EUR 0.80 per share, which is a 14% increase. And we also plan to launch a new 250 million share buyback program, subject to the AGM approval of the share buyback authorization. All in all, this means that we plan to return in 2018 more than EUR 0.5 billion to our shareholders.Let's now have a more detailed look at the trends in our markets. The wafer fab equipment market had a very strong year in 2017, growing by approximately 30% in U.S. dollar terms. This growth was driven by primarily 3D NAND and DRAM, while wafer fab equipment spending in the Logic/Foundry segment was relatively stable last year. Against this backdrop, the single-wafer ALD market showed a clear recovery in 2017, following the contraction in 2016. The Logic/Foundry segment of the single-wafer ALD market was relatively stable at a healthy level following the strong increases in 2016. Customers in this segment further invested in the 10-nanometer node and also made their first investments in the 7-nanometer node.During the year, we achieved tool of record selection for multiple new ALD applications for the 7-nanometer logic/foundry node. We expect that these new applications will increase our addressable market for single-wafer ALD.In this context, I would also like to highlight the excellent performance award received from TSMC last December, as 1 of 7 equipment suppliers, in recognition of our technology and performance in development and production at the TSMC fabs. This follows the award that we received from TSMC in February 2017, we are again very honored to have received this prestigious award.After the drop in 2016, our DRAM business remained at relatively low level in 2017. While this was in line with our indications in the last couple of quarters, the performance of our DRAM business was disappointing compared to the higher expectations that we still had at the start of 2017 and also compared to the strong wafer fab equipment increases in the broader DRAM market. Investments of our DRAM customers increased in 2017, but they're mainly made within existing fabs, with more reuse of existing equipment as a result. This negatively impacted demand for new ALD patterning tools in particular, as we explained in earlier calls. On the positive side, looking at 2018, DRAM customers are expected to invest in capacity additions, which are likely to drive some demand in new ALD patterning tools in a course of 2018. In addition, we have been broadening our R&D scope in a DRAM ALD market beyond applications in patterning for which we expect the first results in the first half of 2019.3D NAND was the main driver of the growth in single-wafer ALD market in 2017, and it was also the main driver of growth in our ALD sales. We recorded very strong growth in our 3D NAND sales compared to a relatively low base in 2017. In 2017, for the first time, 3D NAND accounted for solid double-digit percentage of a total company sales.Looking at 2018, we are focused on serving the current volume ramps at the 3D NAND manufacturers. Taking a longer-term view, as customers transitioned to even more complex higher-stacked device generations, we remain confident that the 3D NAND segment will be an important driver of the long-term growth in the single-wafer ALD market.Looking at our epitaxy business, 2017 has been an important year for our company. With the successful launch of the Intrepid, we substantially increased our addressable market in epitaxy. As mentioned earlier, our Epi sales increased strongly compared to last year and more than doubled compared to 2016. Traction continues to be strong. In the fourth quarter of 2017, our sales again included multiple Intrepid tools.At PECVD, we also had a solid year, following the new customer wins in the 3D NAND market that we talked about earlier in 2017.In short, sales showed a healthy increase in 2017, driven by clear recovery in the ALD market and strong increases in our Epi and PECVD product lines. We made important progress in 2017, positioning our company for continued growth. We remain confident about strong prospects in the ALD market. ALD is now firmly established as a key enabling technology and has already contributed to the introduction of several device generations in the memory and logic/foundry markets.Looking at the road maps of our customers, the introduction of complex 3D device structures and new materials and further scaling will drive the need for more precise deposition of ultrathin and highly conformable films. This plays to the strength of ALD and as a leader in the single-wafer ALD market, our company remains well positioned to capture the growth expected in this market.Now let's look at our guidance as included in our press release. For Q1 and Q2, on a currency comparable level, we expect sales, respectively, of EUR 150 million to EUR 175 million in Q1 and EUR 200 million to EUR 230 million in Q2. The broader range for Q2 reflects some uncertainty around the exact timing of individual tool shipments. For Q1, on a currency comparable level, we expect an order intake of EUR 190 million to EUR 210 million. For 2018, market watchers currently expect the wafer fab equipment market to increase with, on average, a high single-digit percentage. We aim to outgrow the wafer fab equipment market in 2018.At this point, we are happy to answer your questions.

[Victor Bareño, Director of Investor Relations]

[Operator Instructions] All right, Kayla, we are ready for the first question.

[Operator]

[Operator Instructions] We'll go first to Nigel Van Putten, Kempen & Co.

[Nigel Van Putten, Analyst]

I have a couple, but I'll limit myself to 2 on the NAND side. You indicated during the last call that you expected to know more about your positioning for the 96-layer process at the market leader. So I guess we're now in early 2018, and we're all eager to find out if you've succeeded. And my follow-up is that, also on the same topic, I guess some of the other customers you have are looking towards strength stacking instead of adding more layers. So to what extent is that sort of impacting your view on the longer-term potential for the NAND market?

[P.A.M. van Bommel, CFO & Member of the Management Board]

Okay. The first question about -- Nigel, thanks for your questions. With regards to the 96 layers, we indeed have continued to make good progress with the qualification of a new layer in the 90-layer device of the leading 3D NAND manufacturer. And the qualification has not been finalized yet, but in the meantime, we have [ shaped ] in order to -- as part of this R&D engagement. And with regard to your double stacking, I think it's too early to say what that impact might be. I mean, that's a discussion which is still going in -- with customers and in the market.

[Nigel Van Putten, Analyst]

And maybe just a clarification on the first point. So it's still R&D tools at the moment? I mean, if you guys are qualified or not, but when do you expect the customer to start ramping this in volume? And when do you expect sort of meaningful orders? Is that the second half or is it already sort of in your order book guidance?

[P.A.M. van Bommel, CFO & Member of the Management Board]

We expect that to be somewhere in the second half of 2018.

[Operator]

We'll take our next question from Peter Olofsen, Kepler Cheuvreux.

[Peter Olofsen, Analyst]

Two questions from me on the outlook. First, the outlook for the full year. You operate in a U.S. dollar-denominated industry so when you aim to outgrow the market, should we then look at your reported sales in euro or should we look at the numbers in constant currencies? And then looking at the guidance that you've given for Q1 and Q2, what is driving the expected uptake in Q2? Is there one particular segment that will drive that pickup of sales?

[P.A.M. van Bommel, CFO & Member of the Management Board]

Okay. Thanks for your questions. First of all, yes, it would be a little bit foolish to mention here that currency don't play an impact. But when you look to the guidance that we have given at paper for the first half of the year, when you take that midpoint, that's a principal. And that would lead to a sales of EUR 385 million in the first half of the year, when you compare that with EUR 344 million that we did in the first half of last year, that shows a growth of 10% a euro, in euro terms. We have also there to take into account the dollar development. The dollar in the first half of last year was 109. Of course, we are in dollar company reporting euros. The dollar is now 122, 123. So the guidance -- in short, the guidance that we have given is in principle, that with the current development of the dollar at 122, 123 level, that we expect also in euro terms to outgrow that market. Is that clarifying it a little bit better?

[Peter Olofsen, Analyst]

Yes, it is. And on the Q2 uptick?

[P.A.M. van Bommel, CFO & Member of the Management Board]

The uptick in Q2, it's more -- we are, on this moment, in a market, which -- where as well the supply chain is fully loaded. Our customers are heavily increasing the capacity, so we see some shifts, pull-ins, pull-outs, simply because capacities on the certain [ moment ] are not fully ready. And that leads to the shrinks. It's the shrink that you have seen towards the end of Q4 last year, you saw then. We expect now that we'll deliver a few tools less in Q1 and that will come back in Q2. In principle, it's a general uptick that we see in all of the segments.

[Operator]

We'll take our next question from Robert Sanders, Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

Maybe just coming back to the 96 layer question. You mentioned you were competing for 1 layer. In terms of our strength to quantify the opportunity here, how does that compare with the amount of steps that you are currently doing ALD for at Toshiba and SK Hynix? Just so that we can understand how big this opportunity would be. Are you doing multiple layers with SK and Toshiba, and therefore, this may be not as big? Or is it proportionate to the size of the companies?

[P.A.M. van Bommel, CFO & Member of the Management Board]

Yes, I understand your question, but we rather don't provide that sort of competitive information.

[Robert Duncan Cobban Sanders, Director]

Okay. And then a follow-up would just be on your market share. Maybe I missed it, but do you think that you took back market share in 2017, relative -- because, obviously, last year, we had this kind of nasty surprise with finding out that you lost -- I think it was 4 points market share. So what's your view this time around when we see that data?

[P.A.M. van Bommel, CFO & Member of the Management Board]

Yes. We are still finalizing our assessment of the growth of the ALD market in 2017. But our current expectation is that we lost some market share in that area. That's mainly due to mix. We remain strong in a, basically, stable logic/foundry market in 2017 over 2016. In memory, we really made big inroads, it's what I mentioned earlier in the prepared notes, on the -- in the 3D NAND area. But also a part of that market we are not addressing, that was also growing strongly. And in DRAM, as I mentioned earlier, we have seen that the reuse of patterning solutions was impacting our strength, and the non-patterning part has been growing, but we have not the solutions on that moment in the -- readily in the market available.

[Operator]

We'll go next to Marc Hesselink, ABN AMRO.

[Marc Hesselink, Analyst]

My first question is actually on a little bit like what you're facing in the year. You guys are talking now that the 3D NAND and the 6 layer will be more in the second half of the year, and that's also probably the case for DRAM. In -- but you still had a very strong order intake and not only in your last quarter, but mostly what you're guiding in for the next quarter. So does it imply that the foundry was very strong in the first half of the year and that you expect it to moderate? Or do you expect that the full year will be more back-end loaded? And the second question is on your cost outlook. You have pretty good cost control last year, what do you expect for the next year?

[P.A.M. van Bommel, CFO & Member of the Management Board]

Yes. Okay. First of all, the question about the second half, so I think -- yes, you mentioned already the 96 layers and the DRAM activities that, indeed, we expect that to grow further in the second half of the year -- will come across in the second half of the year. With regard to logic/foundry, we expect that that market will relatively be stable in 2017 -- 2018 over 2017. So with that, I think that's the color that I can give about that. With regard to cost control, yes, what you mentioned already earlier, we have indicated -- I've indicated in the prepared notes that our SG&A cost are increasing a little bit, that's in line with what I mentioned already in previous calls. They will not increase substantially, but we will add some people of a certain level for specific projects or -- and that will lead to some additional cost. So then our sales will increase then, highly likely, so our SG&A cost as a percentage of sales will decrease. We have a big leverage in that. And with regard to R&D, we expect that -- to keep that in the low to mid-teens. So we ended the year at an average in 2018 -- in 2017 of 13%, and we expect also that in 2018, that low to mid-teens percentage for R&D will be reached.

[Operator]

We'll take our next question from Tammy Qiu, Berenberg.

[Tammy Qiu, Analyst]

Firstly, I would like to understand, in terms of the non-ALD market such as Epi and PECVD, do you have a rough estimation regarding what is your total addressable market?

[P.A.M. van Bommel, CFO & Member of the Management Board]

Yes. With regard to epitaxy, what we have indicated earlier, in principle, we were, in the past, only dealing with a small segment of the market, where we had a decent position, so that was part of the market of EUR 100 million. We are now going for the full CMOS market, and that is a market which is around the $600 million. So that's 6 times as big as the market that we are serving so far. And that's also -- that's very important also. It's a market which is growing very fast in the forthcoming period. With regards to PECVD, PECVD, as you know, Tammy, is a huge market. We are a niche player in that, and we will remain a niche player in that. So we see some opportunities. We grabbed some possibilities in the V-NAND business last year, and we are looking around there. We will not be a broad player in that market, also not in the future. But for certain applications, when we see some opportunities and when they come across, we will go after them.

[Tammy Qiu, Analyst]

Okay, I see. And in terms of the foundry and logic market for ALD, everyone is kind of ramping up their 10 nanometer/7 nanometer and into 7/5 nanometer next year and maybe 3, 2 years later. Do you have any visibility in terms of what is the share of your addressable application? In the new designs, do you get notified by your customer from early stage that you will be involved as much as you can today? Or you will only know once they actually tell you closer to the launch date?

[P.A.M. van Bommel, CFO & Member of the Management Board]

No. You will appreciate that I cannot give details per customer, but I can assure you that we are fully aligned with our customers in all those new developments and that we expect that our share in the future there also will increase.

[Operator]

We'll take our next question from David O'Connor, Exane BNP Paribas.

[David O'Connor, Analyst of IT Hardware and Semiconductors]

Just 1 or 2 from my side. Firstly, just looking at the order intake, no clear is that kind of EUR 200 million level for first time, and it's 2 consecutive quarters, Q4 and Q1, you're guiding for -- to be above this level. Just thinking in the long term, are we now -- is the business strong enough that we are now -- you are now probably regularly able to clear that EUR 200 million order intake? Or do you think there's just some exceptional things happening at the moment to -- that enable those things?

[P.A.M. van Bommel, CFO & Member of the Management Board]

Yes, that's the $100 billion question, of course. Now we think that with the actions that we have taken in the past year, so the inroads that we have made, our leading position with ALD, the inroads that we are making in PECVD, the epitaxy business where we are making inroads, that's -- that it's not impossible to reach that level more often because we always have indicated that we want to go for growth, and we are preparing ourselves in full for that. I mentioned it already earlier that we are increasing our capacities there to be able to deal with that. Of course, that could always be a certain form of cyclicality in the business, so there might be some deviations in that. But to give you the short answer, yes, we think that we can reach that sort of levels more often than what we have done in the past.

[David O'Connor, Analyst of IT Hardware and Semiconductors]

That's very helpful. And maybe then just to follow on the -- you mentioned increased investments, Korea, Singapore. How should we think about OpEx -- or sorry, excuse me, CapEx for 2018 and 2019 as you ramp up those subsidiaries and the type of impact on D&A?

[P.A.M. van Bommel, CFO & Member of the Management Board]

Yes. We think that the impact on -- in 2018 and 2019, in both years, could be a few tens of millions. The D&A impact -- yes, mostly when you do this sort of investments, they have a long depreciation time.

[Operator]

We'll go next to Edwin de Jong with NIBC.

[Edwin de Jong, Analyst]

A few questions left. First, on the capital-friendly return of EUR 4, is this the end of all the returns that you have to be returning fiscal-friendly money to the shareholder? And secondly, maybe on the Hitachi Kokusai disputes in the patents, it's regarding the batch ALD patterns, I think. And could you elaborate maybe a little bit on what you are seeking, what they are seeking? Are you seeking monetary benefits? Could it affect operations in one way or the other? Could you say just a few words on that?

[P.A.M. van Bommel, CFO & Member of the Management Board]

Okay. The first question is about the fiscal-friendly way of dealing with it. Yes, it has to do with the share premium and -- the fiscal share premium. And with the EUR 4 of this moment, we end -- we reach in the end of -- on that possibility. So with regard to Hitachi Kokusai, a few things, but I can give you -- the only color that I can give you is that we started an arbitration case against Hitachi Kokusai already in August. We filed a suit for patent infringement by -- towards them in -- by the end of November. They countersued us, also infringements, and they brought in a new suit also in -- a few weeks ago. So the only thing what we can say about is that we will diligently prosecute these cases so we would vigorously defend against Hitachi Kokusai's claims to protect our strong IP position. Now we strongly believe that their claims lack merit.

[Edwin de Jong, Analyst]

Yes. But -- and so you suit, it's the first -- you were the first to sue Hitachi, I think. And what do you seek then? Do you seek money? Or do you seek that they stop producing? Or what is it exactly what you want?

[P.A.M. van Bommel, CFO & Member of the Management Board]

No, there are things that we have not disclosed yet.

[Operator]

We'll go next to Charles Lepetitpas with Natixis.

[Charles Lepetitpas, Analyst]

Two questions on my side. First, on the gross margin, you said you expect them to normalize during the year. So should we expect the gross margin to come back at 44% level by the end of the year? And second question, on the R&D side, I was a bit surprised to see that capitalized R&D bounced a bit, rebounded in Q4. So what should we expect on that side for 2018?

[P.A.M. van Bommel, CFO & Member of the Management Board]

Yes. First of all, the gross margin, yes, I don't want to bring here to the community that 44% is the ideal gross margin percentage. We always have said that the gross margin will be in the low to mid-40s and more going in the direction of that mid-40s than in the low 40s. And that's, I think, what we still expect looking to 2018 as a whole. When you look to the R&D, the capitalized R&D part, that increased in the quarter. That's also partly reflecting the fact that we are, with our R&D programs now, more working together with the customers. And the moment that you are more in the final stage of some R&D projects, and on that moment, you start capitalizing a little bit more. So I think that the trends there might a little -- might stabilize on a certain moment. I think that Q4 will not be a reflection of what you might expect every quarter. So if -- I would like to make a correction what I said earlier because I said there are market share growth, but of course, what I mean is that we think that we will have increases in the share of wallet of the different customers. And that's in logic/foundry, yes, that's related to the logic/foundry business.

[Operator]

We'll take a follow-up from Nigel Van Putten with Kempen & Co.

[Nigel Van Putten, Analyst]

Just a follow-up on the DRAM. I was perhaps mistakenly thinking that there will be quite some wafer start additions to the DRAM space, especially in Korea this year. But you said you only expect a couple of shipments, a couple of tools. So does that imply we don't -- we should not expect a strong rebound in DRAM 2018?

[P.A.M. van Bommel, CFO & Member of the Management Board]

No, I think it's a misunderstanding. So we had very low sales in DRAM towards the end of last year, while the market in principle for DRAM was picking up, and the equipment market was picking up. That had to do -- due to the reusage of equipment because they increase the capacity in all the factories. What we now expect for the latest guidance is we expect that the DRAM-related ALD sales to improve compared to both the first half and the second half of last year in the course of 2018. And that's driven by the fact that we now expect that more new DRAM capacity will be established in complete new factories. So that will highly likely lead to additional orders for especially multi-patterning solutions. [indiscernible], Nigel?

[Nigel Van Putten, Analyst]

Yes, what's up year-on-year, that's good to hear. Could you quantify maybe a bit more because it was such a weak year last year, like you said maybe 2016 wasn't the greatest one either? Should we compare it to 2015? Or is that maybe a bit too optimistic?

[P.A.M. van Bommel, CFO & Member of the Management Board]

I think that -- we will give some more color in the future, but we are not going to give guidance on this moment with regard to that already for the rest of 2018.

[Operator]

And I will take a follow-up from Robert Sanders, Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

Just one question on this 2018 outlook. I just wanted to -- I think someone asked it earlier, I didn't quite catch the answer. But you're expecting to grow faster than wafer front-end equipment market, which is growing at high single digits. But I -- that's in dollars, right? So in euro, that would be a different story. So are you referring to your euro growth being better than high single digit or your dollar-based growth in 2018?

[P.A.M. van Bommel, CFO & Member of the Management Board]

We refer to euro growth, providing that the U.S. dollar is not -- is relatively stable during the remaining part of 2018.

[Operator]

And we'll go now to a follow-up from Marc Hesselink, ABN AMRO.

[Marc Hesselink, Analyst]

Apologies if I missed it because I was shortly disconnected from the call again. On the ALD market size, the $1.5 billion, I think in the last call, we discussed that the market has been a lot stronger than -- when you said that target for the market growth, and maybe it's time to look at an update to that number. Did you look at an update to that number? Or did you simply kept the old number and you will do that potential upgrade somewhere in the future?

[P.A.M. van Bommel, CFO & Member of the Management Board]

Yes. What we are doing is we review our forecast from time to time. But for now, we stick to the assessment of the USD 1.5 billion market in 2020, 2021.

[Marc Hesselink, Analyst]

Yes, so you didn't think it was time to do the assessment right now? Or you simply didn't do the assessment?

[P.A.M. van Bommel, CFO & Member of the Management Board]

We do on a regular basis that assessment, yes. But our conclusion is that we do not see any reason on this moment to deviate from the $1.5 billion market.

[Operator]

And with no further questions, I'd like to turn it back to Peter for closing remarks.

[P.A.M. van Bommel, CFO & Member of the Management Board]

Okay. All right. I would like to thank you all very much for your questions today. Let's stay in touch in the coming months, and any follow-up question that you may have, of course, feel free to contact us. Thanks again, and enjoy the rest of your day. Bye.

[Operator]

That concludes today's conference. We thank you for your participation. You may now disconnect.