ASML HOLDING NV (ASML) Q4 2022 Earnings Call Transcript

ASML HOLDING NV (NASDAQ: ASML) Q4 2022 earnings call dated Jan. 25, 2023

Corporate Participants:

Monique Mols — Head of Media Relations

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Roger J. M. Dassen — Chief Financial Officer

Analysts:

Peter Hak — — Analyst

Toby Sterling — Reuters — Analyst

Presentation:

Monique Mols — Head of Media Relations

Good morning, everyone, and good afternoon if you’re in Asia. Welcome to this press conference of ASML. We’re going to talk to you about the Fourth Quarter and Full-Year 2022 financial results. We here at the auditorium in Veldhoven, at our headquarters, and I’m actually pretty happy to have a real audience here after two years of COVID, so it’s nice to have a few journalists that we’ve known for so long here in the room. There are also people watching and following this press conference online, they are also allowed to ask questions.

There is a form on the website, just fill that out, state your name and your publication name and then send it in and we hope to get an opportunity to come to your question. My name is Monique Mols. I forget to introduce myself. My name is Monique Mols. I am responsible for Media Relations at ASMLs. And with me I have Peter Wennink, CEO of a ASML; and Roger Dassen, CFO of ASML, and they will talk you through our financial results, but also developments around our industry that I’m sure also has your interest.

So let me invite Peter Wennink to the floor and will kick this off.

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Thank you, Monique. Welcome everybody. And yes, you’re right. I mean, it’s good to have people live here, and also people on the webcast. I want to just talk about a few things, key messages I think more the industry — the state of the industry right now. And then Roger will talk about the financials and the outlook and then we’ll take the Q&A.

So key messages. Well, In fact is what we said and what we told you at the Capital Markets Day. I think despite the fact that what we are currently seeing is of course a lot of turbulence. There is questions on are we going to get the recession. And if so, how deep will it be and how long will it be. There are issues on geopolitical developments and export controls. There is a lot of uncertainties right now, but our company and our industry really looks beyond the short-term. I think we really look beyond the next 12 months, the next two years, we look five to 10 years ahead. And why is that because we are convinced that semiconductors are currently playing a critical role in the economy and that will only increase. We will only — only need more semiconductor, compute and storage power going forward. And this is why we strongly believe that we need to invest and our customers feel the same way, they need to invest for the longer-term.

And have to remind you that — we have to remind you that building a semiconductor fab or a factory, we call the fab, will take three years. And then if you have to start planning it from day one, probably five. So this is all about the long-term. And we look forward and look at the growth rates of semiconductor sales, you’ll see it later, I’ll talk about later that we see a very significant upside for our customers and also for ASML. This is why we need to invest.

And this is also why we believe there is an opportunity depending on different market scenarios, higher or lower market scenario that by 2025 will be anywhere between EUR30 and EUR40 billion in sales and we have within 54% and 56% gross margin, which will grow to 2030 depending on the scenario between EUR44 and EUR60 billion, between 56% and 60% gross margin. And I think it’s not only us, it’s also throughout the supply chain we’re significantly investing together with our partners, which also means that the company is going to be profitable. We are profitable. We are very profitable. But of course, because we will grow, that profitability will grow and also for our shareholders there is going to be a significant return.

Now, when we look at the industry, three major drivers. I think it’s — still we all noticed is connectivity. Its connectivity where it’s a cloud or the edge computing, it’s all connected. These things are not separate. There is no centralized computing in the cloud without the decentralized computing at the edge. It’s all connected, and that’s needed to drive artificial intelligence, any hyperconnectivity now being supported by 5G. But by the end of the decade will be 6G. So, going to be faster, lower latency, more bandwidth. And then there is — is not a driver, is called the climate change and the resource scarcity, I mean semiconductors. We’ll, and while going to show you a couple of — couple of examples is going to be very significant building block of making sure that we can manage climate change, whether it’s electrification, smart mobility, the energy transition, and of course, how are we going to use our resources smarter. And last big driver is a social and the socioeconomic shifts. I mean, yes, with the pandemic that actually thought as to us to use different ways of working — working from home, but also that this remote connectivity is extremely important also in areas of medical technology, for instance. And then we’ll talk about it later, technological sovereignty is a big driver for this socioeconomic shift.

Okay, just a couple of examples, is energy transition, we believe will be one of the main drivers the coming decades, and it’s about energy generation, it’s about storage, about distribution, and it’s about consumption of this electrical energy. And, I’ll give you an example. If you want 1 megawatt of a wind power, it needs about EUR3,000 of semiconductors. And 1 megawatt of solar power EUR4,000. Now if you think about the gigantic increase in demand for electricity and the renewable energy coming from wind and from solar, just from wind and solar just for generation, you can think about the enormous impact this will have on semiconductor consumption. And don’t talk about the grid, about the smart grid that needs a lot of sensors and actuators and compute power.

And so — and how do we use it. I mean, its used in the electrification of our mobility. The electrical vehicle will at least — at least use twice the number of semiconductors as compared to a combustion engine. And I think the electrical vehicles, so it’s not our numbers, it’s just an estimate of one of our customers who very, very clearly involved in the electrification of the automotive industry said, at least, over $1,500 million per vehicle and some even say over $2,000. So that’s just one example.

But also people talk about advanced semiconductors and the importance of it and mature semiconductors as if these were two different worlds. They aren’t. This is a good example which comes from from NXP. Lars Reger is the CTO of NXP Semiconductor. He actually showed this slide, and it then shows that If you look — if you take a car, it consists of mature semiconductors and his thoughts on left-hand side with 40 nanometer, its just actuators. Picking up the sensor data would actually — picking up the sensor data is semiconductor technology that is even older than 40 nanometer, a lot older, and then it needs to actually go through the central core of the car where it needs to be processed very fast, yeah, high processing capacity because the input of that first and looking then digital data into the car is massive. But the 5 nanometer chip doesn’t work without the input. And if the inputs cannot find a place holder in the central computing, it doesn’t work either. So it’s all connected. So mature and advanced semiconductors are part of a systemic approach to a problem, which you will see with more increasing complexity that the approaches will be more systemic. We don’t only need advanced semiconductor, but very much we also need more and more mature semiconductors.

Now our customers realize this. So just take an example. Our three major customers. Intel, TSMC and Samsung, they have announced fab projects, investment projects. Well, I’ll do the math for you. It’s a $326 billion announced — $326 billion announced in new fab expansions, and it’s not only leading-edge. It’s also mature and as needed. As needed because of what I just talked about.

Now if we then look at the total semiconductor market. When you take all those developments, and semiconductors are going to be pivotal in our day to day life, then — and we look at the growth rates that we’re currently seeing and the new areas of growth in connectivity, in the energy transition, let’s say as a result of the socioeconomic shifts is not a surprise that when you do the math, it not only us, but different sources come to a semiconductor industry is the business of our customers. They will be anywhere between $1 trillion and $1.3 trillion, which is a doubling of where we are today.

Now, the semiconductor industry took 40 years — close to 50 years to grow to $600 billion sales. It needs another 8 to 10 years to double it again. And this is the challenge that we have. So what do we need to do. We need to build capacity because we need to scale and we need to find talent around the world. And we are investing in our production capacity and in our EUV factory here, our TWINSCAN factory here, our a deep UV capabilities here, but also in Berlin. We invest in Taiwan, we invest in Korea. Wwe invest around the world to make sure that we can deal with this increase in capacity needs.

And also our current build capacity is 375 deep UV systems. Well, we want to have 600 by 2025 and ’26. We have last year just — a build capacity of around 50 units, this year 60 units for EUV. We want to get to 90. That’s all needed to drive the growth of this industry, and also means we need to hire people. And now we — just this morning I told this news agency that over the last 12 months we received about 300,000 applications for a job at ASMLs, which we hired close to 10,000 people. So we still have a choice. And we now employ close to 40,000 people worldwide, but half here in the Netherlands. That is going to be a constant challenge for us because we need to grow. We need to hire the people. That’s one. But I need to onboard and make them effective. Big management challenge.

Now, so what do we do then on the ESG. It’s very important. We launched our ESG strategy last year. So what do we do this year. For instance, we have a good example. We connected all the buildings here in Veldhoven and what we call a one energy grid, which basically means we use concept. We find places where we can transfer a waste heat, which is in one of buildings. You could imagine this waste heat in the factories and we use it to heat the buildings, which ultimately we will save 70% gas in this site, which by the way you’ve seen is a big site, 70% gas reduction. And it also means that we’re significantly in the social domain significantly scaling up our investments in the community, in the infrastructure to basically make sure that all people in the communities that we’re working have as much as possible access to personal growth, and can also benefit from the value that’s being created.

And I think also from a governance point of view, we are one of the founding members of this semiconductor climate consortium, which was actually launched just a couple of months ago and was opened by Al Gore. I mean, we take our responsibility also as an industry.

Now, geopolitics, probably not going to get any questions on this. So that’s why I’m going to preempt something. Basically, its a clear issue. It’s driven by the fact that we all realize that semiconductors are now a pivotal element in creating a sustainable society. And it’s perhaps its mind boggling that only now governments seem to realize that we have created, you could argue some single-sided dependencies on certain countries around the planet because they basically have 80% of the world’s manufacturing capacity. So that means everybody is now rethinking, as I said, what do we need to do? We need to stay relevant. We don’t need do everything ourselves, we need to stay relevant. So we need to push the development of semiconductor manufacturing in our region, whether the region is India or the United States or Europe or Japan. All governments are rethinking their semiconductor strategy.

And one of the consequences. Well over the last 40 years, 50 years, the semiconductor industry has consolidated itself into a global collaboration network, an ecosystem without borders, without boundaries, which has great advantages because customers could talk with us and throughout the ecosystem very clearly about the roadmaps, about what needed to be done to drive innovation together. We have worked together with peers — with peers to just make sure that we created processes that customers could use and actually created a semiconductor industry that innovated faster, very and almost unlimited coordination with academic partners, and of course, with suppliers in an open structure, and open collaboration model to drive innovation. That’s what we created. And also by sharing risks and rewards. Now because of the — you could say the bifurcation of the world into new social economic blocks with a significant impact that has on the way to look at semiconductors, you see, of course, a bifurcation happening. One element of that is export controls, but that’s not only it. I mean, it’s the Chips Act around the world. The Chips Act that come with consequence is that comes with liabilities. If you want to get the money from the government, you have to give something in return, which basically means that this world is indeed bifurcating.

So what does that mean if that happens? Well, you actually see that the chip availability could be reduced as a result of export controls that go too far and cut-off certain parts of the chip manufacturing capacity, which will have an impact on significant industries like the car industry, like the energy transition, like the medical tech, supply chain might get disrupted because countries say yes you can get my money from the government, but these are the conditions. You only need to spend the money where we think it is wise, which means that, that could put a lid on the collaboration with peers, with academia, because there will be borderless. This borderless ecosystem now is a danger of creating hurdles, and will also have impact on the supply chain that was, I would say, seamless. It will not be as seamless going forward as it is today.

Now, it also means that countries will double down on investing in their own industry, whereas in the United States or in China or in Korea or in Europe. And it also means that we will have a less efficient infrastructure. Costs will very likely go up. And that’s the risk that we’re facing, but that’s the result of, let’s say, the realization that this ecosystem that we have built was almost seamless, is now indeed bifurcating in different socioeconomic blocks each with their own economic and political interest. That’s where we are today.

I’m happy to take some questions later on, but Roger, why don’t you do the following, and talk about something boring like financials. Thank you.

Roger J. M. Dassen — Chief Financial Officer

This was a former CFO talking, how about that. It’s a small step from US politics to US GAAP as I said it yesterday. So that’s what we hear. Small step from man, giant leap for mankind. Here we are, financials. So Q4 results of 2022, strong quarter all-in all, if you look at the numbers. The net sales came in at the midpoint approximately of our guidance at EUR6.4 billion as you see here based on EUR4.7 billion of system sales and EUR1.7 billion of installed base management sales, that was pretty strong.

We saw that there were quite some customers that actually do want upgrades to their — to their system. in Q4, actually a number of upgrades that were planned for Q1 have actually been pulled into Q4. And that really beefed up the installed base number for Q4. Gross margin, pretty strong at 51.5%, we guided 49%. There was a one-off in there, but again a major driver here is that same installed base management sales. There were quite some software upgrades in there. On software upgrades, the gross margin is very-very high.

So if you see installed base management go up the way it — the way it went. this quarter, that also be sub the gross margin. So that’s what you — that’s what you see there. Operating margin of 33% and then it goes all the way down to the numbers that you see here, as net income, earnings, etc. Important to note the net bookings — in spite of — in spite of the climate, inspite of a number of our customers saying that they are looking at ways to reduce capex. It’s very clear that we’re still adding to our order book because if you look at the 6.3 billion net bookings number that you have here and you compare that to the first bullet where we talk about net system sales of 4.7, that tells you that we’re still adding to the order book. And if we look at your order book today at over EUR40 billion, you are in fact looking at more than twice the expected system sales for this year in the order book which is very-very strong I would say. included in the 6.3 as we have it here of EUR3.4 billion for EUV.

If we look at the full-year number of highlights that we would like to emphasize and share with you. Of course, first-off, the sales growth — sales growth of 14% over 2021, strong — really strong demand, reflecting strong demand in all of our products to EUR21.2 billion at 50.5% gross margin. Pretty strong net income of EUR5.6 billion and an EPS of 14 — over EUR14.

Lithography, very strong once again, grew 12%, EUR7 billion. But important to recognize what we have here, we recognize revenue for 40 tools — for 40 EUV tools. We actually shipped 54 tools. And I won’t bother you with accounting rules all that all that much, but the essence is because of the high demand for EUV tools that we had in 2022 and some of the supply chain limitations that we had, we had to optimize the way we ship tools to our customers that mandate some testing in the factory didn’t happen. As a result of that, we could only recognize revenue for 40 tool. And in essence, we shipped 54 tools. That delta of 14 tools is therefore not recognized in the growth number of 14% that you see for the full-year, but that will come in the course of this year.

Also important to note is that all five EUV customers actually have now placed High NA orders and nothing that really emphasizes the confidence that our customers have in the High NA technology that really is going to get us into the second half of this decade and there you will see that High NA will play a pivotal role both in high-end logic and also in the memory business. Also the Deep UV business continues to be very, very strong on the back of some of the comments that Peter, made in the mature business, but also in the advanced business, grew 13% to EUR7.7 billion as as you see here, and this really reflects the continued capacity growth that Peter also showed you in the earlier slides.

Two new models for being introduced, the new ArF immersion system the NXT:2100 and the advanced dry system the NXT:870. Also in the application business strong growth, 28% to EUR660 million. So really firing on all cylinders there and there you see that we have quite a few new products that we were able to launch. Installed base business, we talked about that as a major driver for the growth in Q4. Very strong all-in all at EUR5.7 billion, both based on service but also on the demand from customers on upgrades to increase the productivity of the installed base that they already have. And finally in terms of capital return. Everyone is sharing in our success, but also the shareholders are sharing in the success in the aggregate with a combination of what we paid in terms of dividend and share buybacks. We were able to return to shareholders an amount of EUR7.2 billion.

Very quickly in terms of the sales breakdown. You see technology-wise, not a real big difference. You see that EUV — the one business RFI, etc, you’d see that it’s more or less in-line composition wise with last year. You see that in terms of end-use, actually memory is picking-up, moving from 30% to 35%, which might be a surprise to some because some of our customers are clearly indicating the memory market in ’22, what was down. Also prices were down. But this really it tells you that the investments that our customers make in the memory business are strategic. So they’re really looking not at the demand in Q4 of ’22, or even the demand in Q1 of ’23, they really look at potential pickup in the second half of this year. And they want to continue to make investments. So they really see lithography investments as critical on their strategic roadmap, and that is reflected in the the pickup of the — of the memory business. In terms of regional breakdown, it’s more or less in line, again with last year. And in terms of unit numbers, you see it pick up from the 309 units in total in 2021 to 345 in this year.

If we then quickly look at the composition in terms of end-use. Again, as we see here, memory, strong growth. Logic continued strong growth. And then you see this pickup of the installed base business that we already talked about. And it’s interesting to see the five years how particularly the Logic market has really-really picked-up on the back of the end-use developments that Peter has been talking about.

If we then look at the boring numbers here, it’s once again good to take the five-year perspective and then you see that, in fact, in this period, the company doubled in many — in many different ways. We doubled in terms of — in terms of sales. Gross profit is picking up. You see a slight decline in the gross margin percentage for 2022 in comparison to 2021. There is a number of reasons, but the two primary reasons. First-off, there is inflation. Inflation has been hitting us in 2022 as it has been heading everyone. And not all of the inflation burden could be — it could be passed on within the — within the ecosystem. So that’s one driver.

But secondly and very importantly, we are investing in growth, as you see. If you look at the campus here, if you look at some of the slides that Peter was presenting, we’re very much gearing up for further growth. And it also means that in the gross margin there is quite some — quite some money that is being spent on being ready for increased capacity in ’24, in ’25 and ’26. So that means that — that creates a bit of a burden on the gross margin. Nonetheless, if you take the longer-term perspective, very healthy development on that front.

R&D also more than doubled, which I think is still a good sign because it really tells you that the company still — has still an abundance of ideas and is driving a very aggressive roadmap towards the targets that you’ve seen that we articulated at the — at the Capital Markets Day. Also SG&A grows in line with the growth of the company and more or less doubled in comparison to 2018. The rest is just a translation of that into the bottom line.

The last one just to emphasize is the very-very strong net bookings for the year at over EUR30 billion, already on the back of very-very strong order intake in ’21. And as I mentioned, that led to an order book of over EUR40 billion. I mentioned the return to the shareholders. So we had very strong share buybacks last last year. Also in terms of dividends, once again we we present to the AGM an increase in the dividend, an increase of 5.5% towards EUR5.80 per ordinary share dividend over 2022. That is the proposal. And for the — in terms of share buyback, in November introduced our new plan for EUR12 billion of share buybacks over a three-year period.

In terms of outlook. For the quarter EUR61 billion to $65 billion in terms of net sales, which is more or less in line with what we had in Q4. Installed base a little bit lower, because as I mentioned to you, there was quite some pull-in from customers into Q4. So that has a slightly negative effect on the installed base that we — installed base sales that we expect for Q1. That also has a slightly negative impact on the gross margin. Although for the full-year, we expect gross margin to be slightly up in comparison to the gross margin that we had for the full-year 2022.

R&D, once again to step up to EUR965 million and SG&A commensurate with the growth of the company to EUR285, so those are the key parameters for Q1. If we look at the full-year. We are looking for 2023 at an over 25% increase in terms of sales. So that really tells you that in spite of some of the — some of the signs that you get, it is very clear that our customers are really looking at investments into lithography as strategic investments. And while it’s clearly, you can clearly recognize that there are some end markets that are under pressure, big end-markets, like like PCs, smartphones etc. You see that growth continues in other markets, like in the auto market, and I think the example that Peter just gave you both on electrification, but also ADAS systems think is a good example there.

So clearly there is some — some pressure I would say on some of our customers and some of the growth of our customers, particularly in the first half of the year. Most of our customer if you listen to their commentary, they expect the market to regain strength in the second half of this year. And then the logic of our customers is pretty clear. They say, okay, so if the market within a one year timing is going to pick up and if the lead-time that ASMLs has for ordering new tools is over that. And as I just mentioned, it’s on average about two years time, then we better take our tools. Because if we now let go of our tools, that means that we’re at the end of the queue. We have to wait two years before we get the tool. And if then indeed the market picks up with within one year, we will be too late to cater to the pickup of the market. And that’s the reason why in spite of some of the pressure that some of our customers feel, we still see a very strong demand for ASML.

I mentioned the over EUR40 billion in terms of backlog, very-very strong, a record number there. And yes, we are based on the increase in capacity there that we’re funding. We are looking at at plans to ship 60 EUV tools this year, and 375 DPV tool. So that gets you significantly north of the 345 lithography tools in total EUV and DPV combined that we had for 2022. EUV business year-on-year growth 40% as expected, 30% for the non-EUV business and the installed base business we expect a moderate 5%, and that is because we think most of our customers have done a lot of upgrades last year. We expect them to slow that — slow down a little bit on that in 2023.

With that dear friends, I have come to the end of my presentation and I hope Peter and Monique can join us for Q&A.

Questions and Answers:

Monique Mols — Head of Media Relations

I see we have some issues with our website. So the connectivity is not a good. I think this is related to the general IT disturbances that are going on worldwide. Hoping to get an update in my ear, but let’s just start here and we’re hoping to fix it as soon as we can [Speech Overlap] Yeah, don’t blame it on the semiconductors. So we have a microphone here in the room, Kelsey Zeegers will come to you if you indicated you have a question and my Sander my colleague — Sander Hofman is checking the website to see if there’s any questions coming in through the website.

So let’s — so let’s start-off with the first one. So, state your name and your your publication number, then we’d be happy to answer your question, so people can hear it.

Unidentified Participant — — Analyst

Thank you very much. Its [Indecipherable] Germany. Could you elaborate a little on the communication between ASML and politics? I wonder in political talks in what way is ASMLs getting involved, specifically when the Dutch Prime Minister has talks in the US, for example, what — how many ASMLs representatives will be part of the delegation and what way will they communicate with politicians? Thank you.

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

It can be very short on on the content of the delegation. I mean, this is geopolitical. It’s not geo business. So I think is there are no delegation members of ASML there because it’s political. And again, yes, we cannot deny that. We are at the heart of a lot of political discussion because of the importance of semiconductors. I just explained that in my introductory comments. Our role is predominantly the role of making sure that people understand how this industry works. Until two, three years ago, you could have asked the average politician tell me how the semiconductor industry works, he wouldn’t have no clue, because semiconductors were always there. It is like 1973 revisited, oil was always there until it wasn’t and then became a strategic commodity. Fast-forward 2021, semiconductor is always been there, nobody needed to worry until they weren’t. And we figured out it wasn’t — it was a worldwide dependence on only a few countries. It’s only very reasons.

So, our role is education is basically providing information, data, how does this industry work. How is this global ecosystem connected and where are the interfaces between those pieces and how does that work. So if you think about a bifurcation, but also of the world and the world creating different sets of Chips Act and think about export controls, then our role is really to provide the information and the insight into what it means, what are the consequences of certain scenarios. That’s our role.

But then ultimately this whole concept of national security and economic interests is something that is of a higher political major, that of course, governments, each with their own views and desires, they need to — they need to discuss this amongst themselves what they want to do. And that’s them and it’s not us. So it is our role. So in your question, we’re not part of the delegation, but definitely part of the discussion. And our role is to provide the information and the insight. Good question.

Monique Mols — Head of Media Relations

Okay, thank you. I’m just getting an update that there is quite an issue with our website, so we won’t be able to get the questions in from people online. Sorry about that. We’re available after the press conference. So if you have any questions or want to reach out to us, please do it to any of my team members. Next question here.

Peter Hak — — Analyst

Hi. This is Pete Hak from [Indecipherable] I also had a question on export controls. We’ve seen last week, there were discussions between Rutte adn Biden, but to what extent do you think that this should be a debate more on an EU level because I can imagine that there, if there are bans in place that this would have a ripple effect to certain of your suppliers. What are your thoughts on that?

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Yes. I think — that’s a good comment. But I think our Prime Minister was pretty clear on that. He said, listen this is a complex situation because it involves several countries. He didn’t say it involves only the Netherlands and the United States. He referred to several countries with several companies in a complex supply chain, which we need to look at — and the consequences of doing anything could be quite significantly, he actually mentioned that, So it’s sensitive.

I don’t remember he came out of it and said, oh, yeah, no we have struck a deal. I don’t think he said that. I think we still are discussion because of the complexity of that matter. But you’re absolutely right. I mean, it’s what I tried to say. This is an ecosystem that’s been built over 40 years. If it seamless and you put locks into that system, you need to understand what the consequences will be because that you just ask the automotive customers how to think about that chip, sure lets try to still order a car and you’ll find out that you’re waiting time is more than 12 months or even longer. They don’t know for sure because of the chip shortages, is all connected. So this is why these are decisions that can have far-reaching consequences for the worldwide ecosystem and the capacity in that ecosystem and the flow of semiconductors in that ecosystem. And this is why it’s not between one or two countries. I think this is what the Prime Minister said. I think he has a point.

Monique Mols — Head of Media Relations

Okay, next question. Guys, you have to do this also for the people online. So if you know anyone who is watching, open your chat.

Unidentified Participant — — Analyst

You have dwelled on the many drawbacks of the geopolitical situation, but to what extent do you sympathize or understand the concerns that the Americans have about China getting more ASML machines.

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Well, I think that concern has already — that is already there. As you know, our extreme ultraviolet machines, EUV, are under export control. So that is a fact. And of course, listen to the arguments and the arguments are — these chips will be then used into military applications. We have to realize that every time when I hear that and I think about the export control or proposed export, it’s about our advanced technology, and being able to make advanced semiconductors, that the military applications use rugged, very mature semiconductors. And semiconductor is always a 10, 15, 20 years-old, which are widely available across the globe, also in China. So to fuel a significant amount of chips into a military complex, emerging machinery, that’s a significant amount of systems out there. There are not advanced. They are mature. Now having said that, of course, there is artificial intelligence or smart algorithms, they need high power compute. Well, those chips are available — they are available in the world market and they are made on ASML machines, on EUV machines.

But not only China, they are made in Korea, in Taiwan, in the United States, and those chips available for every end-user and manufacturer on the planet to buy. It’s also true for China. China buys, is a biggest importer of chips on the planet. I mean, American chip companies they just look at their financial statements. Just add to the five biggest chip manufacturers on the planet in the United States they sell EUR80 billion worth of chips to China. This just shows you how complex this is. And so it’s — and those chips — those advanced chips they go into anything. I don’t know where, but they are being sold, so they probably end up somewhere. So I think this is the complexity. And this is also where the reference to the complexity was made. Its highly sensitive. It’s a much bigger and more complex situation than just saying, well, that chip goes into a military application, its far more complex than that.

Operator

Meanwhile. I have really good news. If those who are watching refresh to page, then it should work again. I have one question in through WhatsApp

That I saw someone wanting to ask a question there. Kelsey, can you give the microphone here.

Unidentified Participant — — Analyst

If there was a possible ban on just the DUVs would [Speech Overlap] to China.

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Yeah. I think that fully depends on what the deal is. I think if they strike a deal that we can — actually we laid out on different scenarios what the potential consequences are. So it’s up to them to basically decide on the basis of the information. I cannot even give you the answer because I don’t know what the outcome is. That fully depends. And I’m not even willing to speculate on this because this is so sensitive if start speculating here, I know what’s going to happen and I know what you guys are going to write. So I’m not going to do that. It’s too sensitive.

Operator

I just want to remind everyone that this is annual report — annual results, you are allowed to ask questions [Speech Overlap] bravely broke through the barriers and she sent us a message. She says, Peter noted that too much export control will lead to fewer chips. Could you define too much? Where do you draw the line?

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

That’s exactly what I tried to say, it depends on how deep those export control. I think export controls are a legitimate instrument, I think that’s clear here, but it’s how do you want to use them. And if you overuse them, it will have an effect on availability of mature chips which are being used not in a military complex but are used in much larger, very, very larger industrial complex, which is basically is what we buy everyday from cars to washing machines to PCs, to smartphones to infrastructure.

Now I’ll talk about the energy transition. The energy transition needs massive amounts of semiconductor, massive. So I think we also need to be careful that we don’t — that instruments that are well meant don’t come to a — don’t have a consequence that we all feel sorry about.

Monique Mols — Head of Media Relations

So that’s also the position that Margareta referred to. I saw Tobey, yeah.

Toby Sterling — Reuters — Analyst

Toby Sterling from Reuters. Not purely, my question here, but it’s financial. So there you go. I think the general idea is there’s some skepticism about the weakness in the chip markets not having much of an effect on ASML. I mean, you’ve explained a bit. But maybe you could say will they — I mean there is such a big building program happening right now, is there a chance that could be slowed down by some of your major customers? And yeah, and could you break down your projections for DUV and EUV sales, not by systems, but by the number?

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

I think Roger can. I think he probably put it on the slides so we can refer to that for this year. But you need to remember, we are not insulated. We’re not from any macroeconomic events and especially not when it’s such a big inflation coming at us and there is a recessionary fears and some people even say some parts of the world are in a recession. Of course, that impacts our customers and would impact us.

You have to remember that we come out of a period like 2022, where we could hardly — hardly ship 55% of what our customers wanted. So, and they want this because they know that these investments are long-term. So the 1.5 to two years of lead-time and then they need to build factories and it’s going to take time. So we have this this demand which was significantly over our build capacity which has come down. So this is a reflection of what wee see in the market, but it’s still quite a lot above our build capacity. And that means our customers are actually saying, well I think the duration of this recession is significantly shorter than the lead-time of your tools. And that also means that the recession will turn up into an upturn by the time I need your machines. So why would I cancel or push back those machines. If I do that, and I’m wrong about the duration is shorter than I think, I’ll be in the back of the line because these guys don’t have enough capacity. This is where we are.

Toby Sterling — Reuters — Analyst

When somebody falls out of line, does it just simply go to the very next customer.

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Absolutely, because there is a shortage. So if you said. I don’t need your machine and your neighbors says thank you, thank you. Thank you very much. That’s gone.

Roger J. M. Dassen — Chief Financial Officer

Where is the the next thought. So, Tobey, in terms of numbers. For EUV we’re looking at 60 for this year, and 375 units for DPV. Those are numbers that we are envisaging for this year. But I think it’s important to note is that the capacity that we are building is not — we’re not building that capacity for the short-term. I mean, the capacity for the 90 EUV and the 600 DPV and that’s the capacity that driving towards. Of course, we drive that for the medium and for the longer-term. And any cyclicality that might be there in demand might be there. But one thing is for sure, we will need that capacity. Maybe we don’t need it in full for 2025, but then we will leave it in ’26 or in ’27.

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

The customer capacity, you are right. I mean, we see a demand reduction. Again, above our build capacity. So, yes I think customers are reshuffling, retiming some of their capacity and they’ll be sure. I mean, that’s what they do. I mean, in the memory industry some of our customers have actually said out that we’re going to cut capex for this year, and always have said we’re not going to do that. But in terms of this very strategic long-term, long-lead time item called lithography, they’re very cautious. And if for whatever reason the duration of the recession will extend to years, of course, we will see the effect. But that’s not what they currently think, at least that’s our conclusion.

Toby Sterling — Reuters — Analyst

And this question was really simple. I mean, I could look at the average sale prices — selling prices for each type of machine, but the question is, in dollar terms, is it about 50-50 the way it was in 2022 for 2023? You said I’m saying I can’t multiply 375 tons…

Roger J. M. Dassen — Chief Financial Officer

You mean, DUV versus EUV?

Toby Sterling — Reuters — Analyst

Yeah.

Roger J. M. Dassen — Chief Financial Officer

I mean, we said that — that EUV is going to grow a bit a bit harder — faster than than the non EUV business. So EUV we expect to be to grow by 40% and the non EUV business by 30%, so that give you…

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

So the shift will be a little bit more towards EUV, which makes sense. Its most expensive and that’s where the capacity — a lot of the capacity expansion that I showed you, the EUR326 billion is about EUV — EUV driven fabs.

Monique Mols — Head of Media Relations

Thanks for that, Toby. I have a question from your colleague, Chris Bryant from Bloomberg Opinion. Is the drive for technological sovereignty including export controls more positive than negative for an equipment supplier like you?

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Well, there are two sides to it. I think the positive side is, it will create more capital inefficiency. So capital inefficient means high capital allocation. So it’s good for equipment makers. That’s good. The bad thing is that if you if you have this — if you have more locks or hurdles into the system, you have more friction, and friction flips our frictionless cost. So yes, you have a higher-level of business, but it’s not as efficient. So it’s also — that also is true for us. So it means that you will create higher cost. I think on balance, equipment companies will sell more machines. That’s it. So on that, you could say it’s positive. That’s a bit selfish.

Monique Mols — Head of Media Relations

Yeah, Thanks. But hey, that was the question. Anyone here.

Nobody else has been.

Go ahead, go ahead.

Unidentified Participant — — Analyst

On the talks in the US, when do you expect a decision which would help you asses the commercial ramifications.

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Yeah, I think. No, I think it’s in the papers and you are right about that. The politicians want to do this rather sooner than later, probably also driven by the fact that there a lot of uncertainty created. So the quicker you know where you are, the better is probably is. So, it’s probably under high-pressure. And I mean that’s also what I read. So we’ll see. And then — but given the complexity of this, I mean you have to distinguish between some kind of general agreement and the details. How do you work-out the details of these regulations and the laws. There is of details involved and working out the details will probably take significant amount of time. So you don’t talk days or weeks. I think you talk months to really talk about the details of something like that to really understand what does it mean, what are the ramifications of something like this. And that always take time. But I think we can safely say that the thing is under time pressure.

Monique Mols — Head of Media Relations

And maybe as an example, the October export controls, I think we’re still — everyone in the industry is still trying to figure out what the details are and how to deal with that.

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Yeah, and that’s absolutely true. I think until the end of — I think until the end of this month there is a, let’s say a feedback opportunity from the industry and industry participants on on what actually means. So, think the final wording is still under review. This is how these things go. So to really say we fully understand all the ramifications, we can translate that into business plans, I think it’s going to take some time.

Monique Mols — Head of Media Relations

Okay, question online, computable. Do you expect any — very long-term effect of China getting a position in manufacturing its own semiconductor machine equipment? How do you assess the probabilities of Huawei developing competing chip building machinery or probably any other party in anywhere in the world?

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

You cannot be naive on this. When we’re in semiconductors are so pivotal and vital to a responsible economy and a responsible society and you can’t get hold of those semiconductor, you going to do it yourself. That’s clear. So I think this will happen. That’s one of the consequences of not having this global fluid seamless ecosystem. It’s gone to develop themselves. But having said that, and I cannot speak for our peers in the semiconductor equipment industry. But for ASMLs, in general I think there is a lot of equipment in the industry that is focusing on a very complex process that — that is that inside the machine, but the machine itself is not that complex. But for lithography, we make it relatively simple process. We just below light through a lens. But we do this in a very complex machine. So that’s a bit different. So this is why basically rebuilding a lithography industry, which as it concerns to ASMLs consists of hundreds of suppliers, but each of them are world-class in what. Just need to name TRUMPF and Zeiss and VDSL, and they are world-class in what they do. And that’s just three out of a couple of 100.

Now you need to basically get and is not patents, its know-how, it’s people, is the brains. You need to just take that and then redo all of that to come to the same conclusion. It took us 40 years. So I’m not going to say that laws of physics are different in China or in the US or in Korea or in Russia for that matter. Now, law of physics are all the same. But the accumulated know-how with hundreds of companies where we as a system architect, as a system integrator bring it altogether, that’s a bit of a challenge. So I think, yes, of course, the efforts will be there. That’s going to be massive challenge going forward because it’s not about ASMLs, it’s about the ecosystem.

Roger J. M. Dassen — Chief Financial Officer

I’m going to — the best defense line that we have there obviously is to keep on innovating, right. I think that’s critical. I mean, sometimes you got the question with the market-share that you have, why don’t you lay back and be a little slow. Well, we are not. As you could see, we’re investing very-very significantly on our R&D roadmap, and we truly believe that pushing down the accelerator there is the best potential defense into anyone trying to get — get on par with Arctic LNG [Phonetic]

Monique Mols — Head of Media Relations

Its good to be challenged sometimesr.

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

That’s absolutely true. When I had a discussion with the founder of TSMC on what do you do when you have to think about competition coming from different areas, he says one solution. You just have to go faster, that’s it. And that’s it. So this is also why you will — you will see that we will invest to your point, is not only in capacity, which will of course have a temporary effect on your gross margin, technology resell. In R&D, we will spend more on R&D because we spent the R&D not for next year or for this year, we spent the R&D for the second half of the decade and the first-half of the next decade. This is where the R&D goes.

Monique Mols — Head of Media Relations

So, John Couch from Bloomberg.

Unidentified Participant — — Analyst

Yes, John Couch from Bloomberg. What do you see as the biggest challenge and risk in the US implementation of Chips and Science Act.

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Well I think. I think the biggest opportunity. Let’s talk about the opportunity first, is that you will build a part of the semiconductor ecosystem capacity inside the United States. So it means that the dependence — the geopolitical strategic dependence will of course go down. So that’s why they do it. I think the risk is that both in the US and in Europe for that matter, the experience and the knowledge that semiconductor makers have in bringing very advanced semiconductor manufacturing on soil is highly complex. It’s an art. And that art is mastered over the last 10, 20 years by the TSMC’s and assumptions of this world and also Intel. But this is why you see the invitation. It’s an invitation, where the big carrot, which is called subsidy and investment support of governments to bring those companies with that particular competence within their borders, and this is exactly what’s happening. This is why we have the Arizona fab opening of TSMC. Ultimately, 2 fabs $41 billion of investments, but that’s Taiwanese knowledge and know-how.

Now, bring that into your country and then ramping this up in a way that you haven’t been doing for the last 20 years. It also means that talent is a massive risk. You need to get the talent especially to do that. You cannot just draw everybody from Taiwan or from Korea to do it. You need to create your talent pool. And that’s a big challenge here. I think that is a generic risk, not only to the US Chip Act, but also to the European Chips Act.

Roger J. M. Dassen — Chief Financial Officer

And the risk is also the single biggest opportunity because if you’re able to do it and if you’re able to build an ecosystem around that, if you are able to make that the knowledge and the expertise in that ecosystem, if you’re able to really create at on soil again in Europe and the United States, I think it’s a major boost to your competitiveness. So it’s the biggest risk, are you able to attract that talent, but also by far the biggest opportunity is not just about creating capacity, it’s creating that knowledge infrastructure that will help you through the next…

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

The ecosystem. That’s what that’s the secret word, you need to build those ecosystems. If you look at where did the biggest centers our of chip manufacturing, its in Taiwan, around Hsinchu and Tainan and it’s not only those factories, it’s the suppliers, it’s the universities, the knowledge institution, their customers, part is the technology partners, it’s the peers. That’s all there. This ecosystem. If you find the same in Seoul and in Wasum. As you find the same in Silicon Valley, but not manufacturing, but the rest is there. You have the design companies their. This is where, so it’s not just the money — throw money at it, find a deserted air place — air force base and just build a factory. Now, you have to build an ecosystem.

Monique Mols — Head of Media Relations

Okay. We have time for one last question. I have one online, but anyone’s here up for, no. Then we go to Switzerland [Speech Overlap] How do the US restrictions on the involvement of US persons in the Chinese semiconductor industry effect ASMLs daily business, if at all?

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Currently, not. Because, I mean, we have quite a significant workforce in China, which is non-US, and that’s both Chinese nationals and people from outside the US. So, that’s not the case. Now, we are a European company. So, I mean, so we have European know-how with people with European or with non-US nationality, so that’s less of an issue for us.

Monique Mols — Head of Media Relations

One minute, last call.

Unidentified Participant — — Analyst

Follow-up on that. Are you still able to supply your Chinese customers with parts that are more American made than European maybe because that’s. a [Speech Overlap]

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Well, that’s not always possible, so that would have an effect on the operability of the installed — of the installed base. But again, we’re predominantly a European company with European technology. So the parts are predominantly European, but here and there, yes, there are issues that we have to — we need to deal with, which actually means that some of the tools will then stop working, but it’s minimal right now. But yeah, that will be the consequence.

Monique Mols — Head of Media Relations

Okay. Well, thank you everyone for being here. I’d like to conclude this call. Thank you everyone online for being with us and hopefully we’ll see you next year. Thank you.

Roger J. M. Dassen — Chief Financial Officer

Thank you.

Peter T. F. M. Wennink — Chairman of the Board of Management, President, Chief Executive Officer

Thank you very much for your time.