ASML Holding NV

AEX:ASML

Earnings Call Transcript 2022-Q4

[Unknown Attendee]

Mr. Wennink, can you give us a summary of the fourth quarter and full year results 2022?

[P. Wennink, executive]

Yes, let's start with the fourth quarter. Let's start with net sales. Net sales were -- came in about EUR 6.4 billion, which is at the midrange of our guidance. However, we were able to accelerate, what we call, fast shipments on deep UV also in Q4, which actually was quite a significant number because if you would add the fast shipments to the EUR 6.4 billion, then the normalized sales for Q4 would have been EUR 7.4 billion.

Now for the total year, EUR 21.2 billion in sales, of which about EUR 3.1 billion of fast shipments went into 2023. So the net effect of the fast shipments plus the revenue of EUR 21.2 billion would give you a normalized revenue, if you would have booked the fast shipments as revenue, of EUR 24 billion, which is quite a significant increase as compared to last year. So that's on the system -- that's on the total sales.

On Installed Base, about EUR 1.7 billion of Installed Base sales, which is higher than our guidance. That has to do with the fact that we had a pull-in of, what we call, field upgrades. And field upgrades from Q1 into Q4, which gave us an extra boost in sales in Installed Base.

Now on the gross margin. The gross margin -- a good gross margin number, 51.5% in Q4. That is also the result of the pull-in of these field upgrades because they're high margin. And we had a one-off, which basically we got an insurance settlement on the Berlin fire which happened last year. So that was a one-off. So for the total year, 50.5% gross margin, pretty good.

Net income, because that's a result of the gross margin and all the cost, EUR 1.8 billion in Q4 and EUR 5.6 billion for the year. On bookings, bookings were good in Q4. We booked over EUR 6 billion in terms of bookings, leading to a record backlog by the end of 2022 of over EUR 40 billion. We've never seen that before. So a record backlog.

So if you peel it off and you look at the year and you look at the quarter that actually was quite a good year, good performance under some challenging circumstances.

[Unknown Attendee]

Can you provide your initial outlook for this year 2023?

[P. Wennink, executive]

Yes, like I said, some challenging circumstances that we're currently facing. I mean, clearly, there's a fear of a recession, that's driven by high inflation, high interest rates, geopolitical confrontations, discussions about export controls. On top of that, we see a weaker demand for consumer-related products such as smartphones and PCs. We see some lower growth rates in the data center domain, but strong demand and still in the industrial space, for instance, automotive.

So all in all, if you look at the situation today, it's not a surprise that our customers are currently seeing inventories rise because we see a lower demand in some of these areas. So inventory for chips are going up. And also then the natural reaction, what customers are doing to actually swiftly turn that is to reduce the utilization of the machines in the installed base. This is what we're seeing. We're seeing that the utilization rates of our tools is going down. Our customers are swiftly adapting their output to reduce inventory.

And by doing that, they hope and they expect that the industry will then recover in the second half of the year. Now that's being helped, potentially helped also by the recovery of the Chinese economy coming out of the COVID crisis. This is an expectation that the industrial activity and thereby semiconductors will actually go up again in the second half of the year. So all in all, customers are expecting a better second half of 2023.

What does it mean to us? Basically, the situation for us is that the demand that we're currently seeing because of this is still much higher than what we can make. So why are we not affected then? Well, that's a very simple conclusion that the expectation of the duration of a potential recession in the minds of our customers is much shorter than the average lead time of our machines because they want to prepare, because of the strategic nature of our machines, for an upturn in the second half of the year and 2024. That means that the demand is still higher than what we can make. And that means that our plan is still to produce 60 EUV systems this year and 375 deep UV systems, about 25% immersion of that 375, which actually means that we will see a significant step up in the 2023 sales numbers.

And if you split it out in -- over the different business sectors, then you'll see that EUV business will probably grow about 40%, the non-EUV business about 30%. Installed Base business will see some lower growth rates, it's logical. The utilization rates in the factories in the first half of this year will be down. So not a lot of field upgrades. It's about 5%. Now if we add all up, we think that 2023 could give us an increase in sales of more than 25% over 2022, which is a significant step-up from where we are today, which is under the circumstances, a pretty good foresight.

[Unknown Attendee]

What's your guidance for this quarter, Q1?

[P. Wennink, executive]

Well, on Q1 -- basically, Q1 is also a reflection of a very strong Q4. And what I mean with this is that we expect sales between EUR 6.1 billion to EUR 6.5 billion, about EUR 1.5 billion of Installed Base sales. But like I said earlier, there has been, you could say, an acceleration of deep UV shipments from -- in Q4 that come from Q1. The same is true for field upgrades, so from Q1 2023 into Q4. So that is why we see the sales number not significantly higher than the fourth quarter. However, because we do see more than 25% increase for the total year, you could expect a growing quarterly sales numbers throughout this year.

From a margin point of view in Q1, between 49% to 50%, that's basically the reflection of lower Installed Base business, basically because of the upgrades, which is high-margin business.

[Unknown Attendee]

What are your expectations for your gross margin for the full year '23?

[P. Wennink, executive]

Yes. I mean, we saw 50.5% for the total year 2022. Now there's a couple of building blocks for the gross margin in 2023. The first one is the volume, the higher volume. We have higher volume from '23 as compared to '22, which means that in EUV and in deep UV, we'll have a positive impact on the gross margin because of higher volume.

On Installed Base, we see lower growth rates, as we explained. And we see then, I think, a lower level of field upgrades, which is high-margin business. So that could have a slightly negative effect on the gross margin for this year.

Inflation, that's on people's mind. Now we do believe this year, we -- there will be kind of a net-zero effect because, yes, we'll have higher inflation costs, but also we have inflation compensation from customers.

And then the last point, we do will see higher cost levels. It has to do with the build-out of the capacity that we need, not only for '23, but for '24 and '25. And that is the capacity build-out in EUV, in deep UV and in High-NA. That will lead to higher cost levels.

So the year will start Q1 with gross margin between 49% and 50%, but that will gradually increase throughout the year. I'd like to add to that, that is, in fact, on the trajectory towards our gross margin that we gave as a guidance for '25 at our Capital Markets Day, which we believe by that time, 2025, will be between 54% and 56% and between 56% and 60% by 2030. So we're well on track.

[Unknown Attendee]

You just touched on it. The discussion around export controls and the situation -- the geopolitical situation between China and the U.S. Can you give us an update?

[P. Wennink, executive]

Yes. I think you said it's geopolitical. So we're business people. We're not politicians. So -- but I'd like to refer, I think there were some good comments made by our Dutch Prime Minister last week when he visited Washington and spoke to the U.S. President. Actually, a summary of his comments were, this is a multinational question that needs to be answered. It's an issue between several countries, not only the Dutch and the Americas, but several countries.

And also, multiple companies are involved with a complex supply chain, upstream and downstream. It's a complex industry. In fact, what he said, "It's a complex issue. It's a sensitive issue. There's a lot at stake. There's high economic stakes. So we have to find a balanced solution." And that's I think where the politicians are. But I think it's a fair reflection of where we are. And I think there were some good comments made.

Now of course, there have been media articles coming out that basically speculating and suggestions on what the potential outcome could be. But we just have to look at the facts. The facts are that nothing really changed since the October regulations that came out of the United States, which actually means that we can -- we will not ship EUV to China, for instance, but we can still ship deep UV and metrology and inspection tools.

And any further speculation of what might the outcome be, I think, doesn't help. I mean we just have to wait for the governments and the politicians to keep talking and come to a reasonable solution. That's where we are today.

[Unknown Attendee]

Can you update us on your capital allocation plans?

[P. Wennink, executive]

Yes. Our capital allocation plans are actually quite consistent. We will generate a lot of cash because the company will grow quite substantially. And of course, we will first use our cash to build the business. And when we've done that, we'll use the cash to pay a growing dividend and any -- out of cash left, we will buy back shares.

Now on the dividend, we'll propose to the general meeting of shareholders, a closing dividend of EUR 1.69, which will bring the 2022 dividend to EUR 5.80. And for Q1, we're going to pay an interim dividend of EUR 1.37. Now that's for the dividend.

On share buybacks, we've announced at the Capital Markets Day, our EUR 12 billion program for the next 3 years. And like I said, any excess cash when we use it for our business and pay the dividend, we'll use for the share buybacks.

[Unknown Attendee]

What are your expectations regarding demand and your business beyond 2023?

[P. Wennink, executive]

Well, I think the medium- to longer-term future of the company is very bright. I mean, it has to -- it is driven by the fact that semiconductor applications are growing at a significantly accelerated speed. Think about the big societal problems, whether it's electrification, the digital revolution, it's the energy transition, everything you touch is semiconductors.

And I think it's clear also the way that we look at the world, but also world analyst firms have looked into that this industry of our customers, the semiconductor industry, will grow to $1 trillion or $1 trillion-plus by 2030. It actually means that we need to be able to provide our customers with systems and with services that will help them to make that output.

And that's also why, as we said at the Capital Markets Day, we will and we are continuously with our supply chain, investing for a capacity of 90 EUV systems and 600 deep UV systems by the 2025-2026 time frame and 20 High-NA systems, next-generation EUV by 2027-2028. So if we take it all together, that -- and then depending on whether we're in a high market or low market by 2025, we could be anywhere between EUR 30 billion and EUR 40 billion in sales. And also depending on whether we will be in a lower or a higher market by 2030, we think we'll be between EUR 44 billion and EUR 60 billion sales by that time.

So no matter how you look at it, semiconductors are positioned extremely well when it comes to growth, and helping some of the large and big solutions for the big problems that we all face. And I think so we are looking forward to a very bright future. And perhaps, yes, of course, there will be short-term issues that we have to deal with, but mid- to long-term, very bright future and very strong growth.