Asm International Nv

Good afternoon. This is the Coral School Conference operator. Welcome and thank you for joining the ASM International first quarter 2023 earnings call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Victor Barreño, Investor Relations. Please go ahead, sir.

Thank you. Welcome, everyone. I'm joined here today by our CEO, Benjamin Lowe, and our CFO, Paul Verhagen. ASM issued its fourth quarter 2023 results yesterday evening at 6 p.m. Central European Time. For those of you who have not yet seen the press release, it is available on our website, asm.com, together with our latest investor presentation as always we remind you that this conference call may contain information related to asm future business and results in addition to historical information for more information on the risk factors related to such forward-looking statements please refer to our company's press releases reports and financial statements which are available on our website Please note that the profitability measures mentioned in this call will be primarily based on normalized non-IFRS figures. For reported IFRS results, please refer to the quarterly results press release. And with that, I'll turn the call over to Benjamin.

Thank you, Victor. And thanks to everyone for attending our fourth quarter 2023 results conference call. I'll start with a few of the highlights. ASM had another successful year. Our sales increased by 13% at constant currencies, despite the softer wafer fare equipment market conditions. This marks our seventh consecutive year of double digit growth. In the second half, we received the first meaningful orders for gave all around technology, which will be a significant driver for ASM. We remain on track towards our strategic targets and continue to invest in innovation and expansion. I want to thank our ASM people. Their hard work and dedication contributed to our company's robust performance in 2023. The agenda for today's call is as usual. Paul will first review our financial results. I will then continue with a discussion of the market trends and outlook, followed by the Q&A session. With that, handing over to you, Paul.

Thank you, Benjamin. Anita, we'll start with the fourth quarter results. So our revenue amounted to 633 million euro in Q4, down 7% year-on-year at constant currencies. Revenue is above the midpoint of our guidance of 600 to 640 million euro. By customer segments, equipment sales were led by Foundry, followed by Power Analog Waiver, and then Memory. Combined logic foundry decreased both year-on-year and compared to the third quarter. Softness in the leading edge part of this segment was partially offset by continuous strength in mature logic foundry, mainly in China. Despite the weakening demand that reflected VQ3 results, sales in the power analog wafer segment increased to a quarterly record high. As we shift the tools related to the strong orders in this segment received earlier in 2023. Memory sales increased strongly in the fourth quarter compared to the very low level in the third quarter, mostly driven by DRAM. Growth margin of 47.9% in the fourth quarter of 2023 was up by one percentage point compared to the same period last year, but down one percentage point compared to the third quarter of 2023. The mix in the fourth quarter remained favorable, including a continued strong contribution from China sales with above average profitability. The Q4 margin was also impacted by approximately one percentage point due to a one-off restructuring cost related to the further optimization of our global manufacturing footprint. Net R&D expenses increased from €70 million in Q3 to €79 million, reflecting a continued increase in R&D projects and also the impact from a 2.5 million euro impairment of capitalized development costs. SG&A increased from 77 million euro in Q3 to 83 million euro, including higher variable expenses and specific investments to further strengthen the organization, such as in IT. Our new orders in the fourth quarter amounted to 678 million, up from the $627 million in the third quarter and down 14% compared to the fourth quarter of 2022. Logic Foundry accounted for the largest part of our Q4 orders and increased both sequentially and compared to the fourth quarter of 2022. After the first more meaningful contribution in the third quarter, it gained all around two nanometer orders, further increased in the fourth quarter, while demand for mature logic foundry in China remained relatively solid. Compared to the relatively strong bookings in Q3, memory dropped in the fourth quarter. Power analog wavel also dropped somewhat compared to the third quarter, and especially compared to the record high level in the fourth quarter of 2022. Now let's have a look at the full year results. At 2.6 billion euro, our sales in 2023 increased 13% at constant currencies, outperforming the WFE market, which dropped slightly in 2023. In terms of customer segments, our total logic foundry sales increased slightly and continued to account for more than half of our equipment sales. The leading edge part of the logic foundry sales meaningfully decreased, impacted by end market weakness and the delays in a number of new fabs that we reported in earlier quarters last year. This drop in the leading edge segment was offset by growth in mature logic foundry, particularly in China. In memory, our sales dropped around 40% against a relatively stronger level in 2022. The drop in DRAM sales was relatively moderate, supported by demand for high-K ALD solutions for high-performance DRAM and AI applications. 3D NAND sales dropped sharply, reflecting the market-wide sharp investment cuts in this segment. In total, the memory contribution dropped from 19% of our equipment sales in 2022 to 11% in 2023. We booked strong growth in the combined power and log wafer segment in 2023, and compared to a relatively lower level in 2022, sales in this segment almost doubled. including the consolidation of a silicon carbide EFI business, and also in large part fueled by strong growth in China. At constant currencies, our equipment sales increased by 12%. Our ALD sales decreased moderately, impacted by weakness in the leading edge part of the WFE market, but continued to account for more than half of our equipment sales. Apart from silicon carbide EFI, The vertical furnaces were our strongest growing product line in 2023, in part fueled by solid demand for our new Sonora tool, followed by Silicon Appy. Spares and services had another strong year, with sales 19% higher with constant currencies and continued momentum in our outcome-based service offerings. Our silicon epi sales increased strongly and comfortably met the target of more than 130 million in 2023. LTE has been successfully integrated and we have been stepping up capacity and capabilities in this business to prepare for continued growth in coming years. Growth margin for the year increased from 47.5% to 49.3% in 2023, mainly reflecting mix including substantially higher sales from China. Despite inflationary pressures on our cost of goods sold in 2023, we were able to limit this through commercial price negotiations and increased cost reduction value engineering initiatives. We remain committed to gross margins of 46 to 50% in coming years, which we believe is a healthy and sustainable rate. With a normalization in the contribution from China sales in the full year of 2024, We expect a decrease in gross margin compared to 2023. Net R&D increased by 29%, reflecting a record high number of customer R&D engagements and further expansion of R&D headcounts up 11% in 2023. For 2024, we project a further increase in R&D in support of the rising number of engagements for new applications, such as for the second generation data all around and new opportunities in memory. Net R&D expenses will remain at a high single-digit to low double-digit percentage of sales in the period up until 2027, and in the first part of this period more towards the higher end of the range. SG&A expenses increased 10% in 2023, which was broadly in line with the indication that we provided at the start of the year. The rate of the increase in SG&A slowed down compared to 2022, as a large part of the investment to strengthen our organization were completed by the end of 2022 and also due to continued cost focus amidst softer market conditions. We expect a moderate increase in SG&A in 2024. Our target for the period up until 2027 is for SG&A to be a high single digit percentage of sales. In 2023, SG&A was still at 11.5% of sales. We expect relative normalized SG&As to decrease once revenue growth accelerates again. The operating margin in 2023 was stable at 26.6%. Results from investments, reflecting a 25% stake in Asian PT, dropped from 78 million euro to 21 in 2023, reflecting the downturn in the back-end market. Now turning to the balance sheet. ASM's financial position remained very solid, with cash of 637 million at the end of 2023 and no debt. We generated free cash flow of 447 million in 2023, a record high and up from 17% from 2022. Next to continued solid profitability, free cash flow was driven by improved working capital. Working capital decreased as we managed good collection from our customers, Infantry decreased slightly in 2023. With the normalization of the supply chain conditions, work in progress already decreased in 2023, but we still kept higher buffer inventories to ensure flexibility in our operations. CAPEX increased to 154 million in 2023, up from approximately 100 million in 22. And as a reminder, for the period 2024 till 2027, the target for CAPEX is 100 to 180 million annually. majority of this capex will be geared to the expansion of r d infrastructure and activities including the construction of new facilities we announced last year in korea and arizona in terms of shareholder remuneration we spent 223 million in cash on dividends and share buybacks in 2023 and yesterday evening we announced a new share buyback program for an amount of 150 million as well as a proposed dividends of €2.75 per share, up from €2.50 last year. We remain committed to return excess cash to our shareholders. And with that, I have to call back to Benjamin.

Thank you, Paul. Let's now look in more detail at the trends in our markets. We had relatively solid bookings, but overall, market conditions continue to be soft in the fourth quarter. Leading edge logic foundry spending was still solid at the beginning of 2023, but demand weakened in the course of the year, as we already first reported in April 2023. Demand for advanced node capacity additions continue to be relatively soft in the fourth quarter. Importantly, our customers remain strongly committed to their technology roadmap, in particular, the transition to gate all around technology. with pilot line activity starting in the first part of this year, 2024. After the first orders in the third quarter, we booked additional and increased GAA or gate all around pilot line orders in the fourth quarter. Gate all around is a major inflection for our industry, which will drive further improvement in device performance and power efficiency, which in turn will be key for new end market applications such as in AI. We expect Gate All-Around to increase our self-available market, or SAM, by US $400 million per 100,000 wafer starts compared to the previous technology norm, as discussed in our Invest Today. The more complex device architecture of Gate All-Around will increase ALD requirements and layers. Silicon Epitaxy is also an enabling technology for Gate All-Around to create the multi-layer stack of Dano sheets. We believe we successfully defended our leading market share in ALD in the transition to nanometer. And in addition, based on product tool or record selections with the leading customers, we remain confident that the transition to gate all around will drive our overall Silicon Appy market share to the target of more than 30% by 2025. In memory, we had good traction in 2023 with our High-K ALD solutions for high performance DRAM, which is a key requirement for AI. As Paul mentioned, this could not offset the steep drops in the other parts of the memory market, particularly in 3D NAND. We continue to work with key memory customers on new applications such as on the expected adoption of EPI in DRAM, which we expect to further increase our share of wallet once the industry migrates to the next memory nodes in the coming years. The softness in leading edge logic foundry and in memory market was offset by strong growth in the mature node segments, particularly in China. In power analog wafer, sales were strong throughout the year. As we already discussed with our third quarter results, demand started to slow down towards the end of 2023. Following two years of strong investments in this segment, particularly in the automotive and industrial space, the industry has now started to digest the added capacity. Our revenue was still strong in the fourth quarter, but orders already decreased and revenue is expected to trend down in the next couple of quarters. Mature North demand in the Chinese market was exceptionally strong in 2023. In power analog wafer and also in the parts of mature logic and foundry, they were not impacted by export control measures. We confirm the assessment that we shared in the third quarter earnings call that the updated export control regulations that were issued by the US government in October 2023 are not expected to have a material additional impact compared to what we previously communicated. While the mature note segments were only a smaller part of our revenue in earlier years, they had a strong contribution due to the substantial size of the investments in these segments in China during 2023. We also benefited from our investment in recent years to expand our presence and customer base in China. Furthermore, our sales in China also increased due to the consolidation of LPE, which has a strong share in this market. In total, we booked strong growth in China in 2023. On the acquisition of LPE, our silicon carbide epitaxy business performed strongly in 2023. The synergies in leveraging ASM scale and capabilities have already been paying off. We increased development and manufacturing capacity in Italy. We also qualified the latest 200 millimeter silicon carbide EPI tools for manufacturing in our Singapore facility. And we substantially stepped up global support. We expanded the silicon carbide EPI customer base in 2023 with a leading North American customer and a major European player, as previously reported. Additionally, in the fourth quarter of 2023, Two more customers selected our latest 200 mm silicon carbide EPI tool with multiple tool orders expected in 2024. We believe our tools offer industry-leading performance and cost of ownership, particularly for 200 mm silicon carbide EPI processing. We expect to further expand our position as the silicon carbide industry transitions from 150 mm to 200 mm wafer size over the next couple of years. Despite the recent deceleration in the automotive market, long-term prospects remain strong for the silicon carbide market, driven by structural increase in electric vehicle penetration and other applications such as renewable energy. Supported by new customer wins, we expect strong revenue growth for this business in 2024. The highlight during the fourth quarter was a landmark ceremony in Scottsdale, Arizona, where we will construct a new state of the art research and development center. It will consolidate our existing operations in the Phoenix area and double available clean room space. Investment in innovation remains a key priority for our company. In terms of manufacturing, we believe we have the capacity in place to deliver on our 2027 revenue targets. The completion of the second assembly floor of our facility in Singapore and the additional manufacturing in our expanded facility in Korea will, in total, increase our capacity by 3.7 times by 2025 compared to 2020. Next, I would like to highlight our progress in ESG. A highlight this year was the verification of our net zero targets by the Science-Based Target Initiative, or SBTI. We target net zero greenhouse gas emissions for all scopes by 2035. One of the shorter-term goals in our path towards net zero is to achieve 100% renewable electricity by 2024. We are well on track. In 2023, we increase the use of renewable electricity to 88%, up from 73% in 2022. The longer-term prospects continue to be strong for ASM. Third party research firms forecast the semiconductor market to go to more than one trillion by the end of the decade. Digital transformation will continue to drive semiconductor usage. Artificial intelligence is expected to be one of the fastest growing end market applications. In 2023, the impact on the semiconductor market started to become more significant, triggered by the huge interest in generative AI. Related chip volumes were still limited, but expected to notably increase in coming years. This will lead to more investments in manufacturing capacity for advanced logic devices, such as GPUs and MPUs, and high-performance DRAM. And that means, for ASM, more ALD and EPISEPPS. Let's now have a look at the outlook that we issued with our press release last evening. While the economic outlook continues to be uncertain, the broader semiconductor market is expected to recover to double digit growth in 2024. However, the softer WFP market conditions we saw during the second half of 2023 are continuing into the first part of 2024. Our guidance, as published yesterday evening, is for the first quarter 2024 revenue to be in the range of 600 to 640 million euros and with a similar level in the second quarter. For the second half of 2024, we expect revenue to be up compared to the level in the first half year. But it is too early to provide more specific guidance for the second half. It is also too early to give an outlook for the full year. Looking at the expectations for WFP demand, memory and leading-edge logic boundary demand is expected to gradually recover in the course of 2024, supported by early investments in gate all-around. We expect continued gate all-around orders throughout 2024. Power analog wafer is expected to decrease somewhat in the first half. Revenue from the Chinese market is expected to be still relatively high in the first part of the year, but likely to normalize in the rest of the year. For our silicon carbide EPI business, we expect a strong performance in 2024. We expect the ASM will benefit from an expected rebound of the WFP market in 2025, and based on this, we remain confident ASM revenue will increase to the forecasted range for 2025 which is 3.0 to 3.6 billion euros. An important driver supporting this will be the move of gate all around two nanometer technology into high volume manufacturing in 2025. And with that, we have finished our introduction. Let's now move on to the Q&A.

We'd like to ask you to please limit your questions to not more than two at a time so that everyone has the opportunity to ask a question. OK, operator, we are ready for the first question.

Thank you. This is the conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove your staff from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Tammy Kew with Burenburg. Please go ahead.

Hi. Thank you very much for taking my question. and Paul. So I have a question on gate all around. You mentioned in that gate all around order should be received throughout 2024. I wonder what kind of pattern should we be seeing and also is that actually for wooden production in 2025 or that's still going to be for pilot production?

I'm sure. Tammy, thanks for the question. I think what you are seeing is that of course Customers have placed orders for pilot line, but the way that they have done this varies from customer to customer. Some of them will just give you a block or bulk order and for some time maybe they will not have any more additions. Some of them, they place it, I would say, regularly, depending on which process is defined and which equipment has been decided to be a process of record. So we will see both. Now, there's also some possibility that you might see that there's an increase in terms of number of tools that they might buy, even for a pilot line to increase capacity because of sampling, because of tweaking the yield, etc. So we do expect that we will be seeing get all of our orders throughout the year. The end of the year is where we potentially could see pulling for high volume manufacturing. It is actually announced and reported by one of the three players that they are trying to pull in two nanometer high volume manufacturing into early 2025. And if that happens, they'll probably have to order and buy the tools already by the end of the year.

Okay, thank you. That was clear. And also, from your market share perspective on three players on their GAE production line, are you basically getting very similar kind of steps within all three chip makers, or it kind of varies between different players?

They do vary because even though the technology is common, it's gate all around technology, but there are different ways that they design it. So you do see differences between the three of them. So it's difficult to give a generalized idea, for example, exactly what is the increase or how each one compares to the other. But there are differences between the three of them. Thank you, Sami.

The next question is from Stéphane Oury with OdoBHF. Please go ahead.

Yes, hello, good afternoon. Actually, my first question is about the second half of 2024. There are obviously different scenarios, there are different moving parts like market recovery, logic foundry or analog expected, Gator around starting to rise. What about memory? What about China? And on what do you base your assumption that there will be a rebound in the second half? And if you can help us trying to quantify this kind of rebound, that would be helpful. Thank you.

Sure, Stéphane, thanks. I think you mentioned all the factors that I would say, contribute to a lack of visibility or maybe uncertainty. The pace of recovery for memory, for example, how much is the normalization in China matured, logic and foundry, any recovery in the power analog wafer, et cetera. And I think that's the reason why we have decided not to quantify the second half versus the first half. However, we are confident that the second half, we should see that leading-edge logic and foundry, primarily driven by get-all-around, will be stronger. At the same time, we are already seeing signs, maybe still a little bit slow at the moment, but there will be probably more investments coming in DRAM, especially for high-performance DRAM, because of the drive by AI. And that usually is good for us. uh especially with the high k ald tools so i think with that we we kind of are confident that we should see a second half that is higher than the first half but until we have more clarity which probably could come in a couple of months so it might be that we might give you a better visibility or better guidance when we announce our first quarter results uh as of today we will just leave it as second half will be higher than the first half

OK, thank you very much. And my second question would be about silicon carbide, because there has been a lot of discussion in the market that with the slowdown in EV, maybe silicon carbide investment would be more moderate. And you didn't give guidance for your revenues in silicon carbide for 2024. So can you help us understand how it's going to grow this year? Thank you.

Sure. So I think the reason why we gave a guidance, you know, first for 100 million euros and then we upgraded it to 130 million euros last year was because it was the first year and we just did it. We just acquired them. So I think we want to give more colour to everybody, you know, how big this business is potentially going to be. But I think going forward, as we have always, you know, We don't give individual product or segment breakdowns because it's very competitive and whatever we say can be easily picked up by also our competitors. Nevertheless, as we have in the prepared remarks, we did much more than 130 million euros for last year and this year we do expect to significantly increase that. You are right, Stefan, that EV is slowing down and there's been some concern about, okay, for silicon carbide devices, is that going to continue growing? I think we do see a slowdown in the growth. So it's not a slowdown in the market, it's a slowdown in the growth. So it's growing slowly, slower than what it used to be, but I think it is still growing. And what is really propelling that, of course, is you see a lot of silicon carbide manufacturers preparing for potentially the ramp that will come when the EV market comes back and at the same time they are also exploring a lot of other markets which are much smaller but they're meaningful, such as renewable energy. So what we are seeing is really that despite the market being a little bit going slower, it is still going to result in a significant increase in revenue for us this year. And when it comes back, I think we will be in a very good position.

Okay, thank you very much, Benjamin.

Thank you, Stéphane.

The next question is from Jeannardin Menon with Jefferies. Please go ahead.

Hi, good morning. Sorry, good afternoon. Thanks for taking the question. I just wanted to get a feel for what you see for this year since you haven't given full guidance, but I'm trying to get some information on what your thoughts are. For instance, SEMI, the industry organization, is forecasting WFE this year to grow at 6.5%. And for many years now, ASM has always comfortably outgrown WFE, as you did once again last year as well. I'm just wondering, is there anything specific that you see in 2024 which would cause ASM's revenues to underperform WFE? Is it that you know, you have specific exposure in China or something like that, or excess in mature nodes outside China where there could be a slowdown and that could affect you, or is it that, you know, at this point you just don't know, but if WFE does grow at 5%, you'll probably grow at least at 5%, if not something higher than that. And that's my first question. I have a short follow-up.

Sure. Jonathan, thanks for the question. I think the explanation is actually easier than that. It's two reasons. One is I think the data research companies and the independent organizations like SEMI, I think the WFE number or growth that they have is still fluctuating and you still see a pretty wide spread between zero to some have gone up to at least eight or nine percent. So it's kind of quite a wide spread. So I think there's still a lot of uncertainty as to exactly how much it will go. This is not uncommon. It's just that we are at the beginning of the year. So, you know, we need to be more careful about that. Second thing, of course, as we have mentioned, we know that the second half is going to be or our second half is going to be higher than the first half. but we do not want to quantify this yet because of some of the reasons that we had mentioned earlier. And as I said, in a couple of maybe months, when we have a better view of exactly how the second half is going to shape up, I think we might be able to come back to the statement on how we will perform relative to WFE this year. But if you look at the longer-term history of ASM, we have always kind of outperformed WFE over the last couple of years. And we do intend to outperform WFE again over the next couple of years. In fact, I think we have great opportunities because whatever is being driven by GATE all around is actually helping us increase, let's say, the part where we play in the share wallet. So we are actually confident that longer term over the next couple of years, we will outperform WFE.

Understood. And just on the second half, is the uncertainty on which way it will go coming more from the memory market? And you have some idea on how the two nanometer advanced logic side will go? Or is it more sort of an uncertainty on how much weakness there will be in China or something like that? I mean, can you just give us some color on where you see more of the uncertainty?

Sure. I think it's a combination of all of them. So let's take it one at a time. You know, leading edge, logic foundry, specifically two nanometer gate all around. I think we are seeing already signs. There have been also official reports published that we are seeing acceleration. So there's a lot of competition between three customers of ours and they're all trying to get to a market as soon as possible, which is good for us as a equipment supplier because they are trying to accelerate that. But how fast, I think that's still a question mark. Memory recovery, you know, it's also to some extent uncertain. I think, as we said, DRAM, because of the AI push, you know, driving a high-performance DRAM, that should be relatively, I would say, will gradually grow. But there's no view now, especially on 3DNet. In fact, The latest report that came up from one of our customers is that they are still trying to cut production capacity. So that's another one we have mentioned that China will be, you know, matured logic and foundry will be strong continue to be strong in the first part of 2024 and we do expect it to normalize In the second half, but how much of the normalization. I think we still need time to to look at it. And then, of course, We have mentioned as well that power, analog, wafer, all the trends have been going down since probably the end of last year. Is there going to be a recovery maybe at the end of the year? That's another factor that we want to have a little bit more time so that we have better visibility before we make any concrete judgment.

Thank you.

The next question is from Francois Bouvigny, UBS. Please go ahead.

Thank you. My first question is on the memory side. So you discussed that now 11% of your revenues is down 40%, and I was actually surprised by the drop. I mean, it's actually underperforming even the memory market at this minus 40%. That would suggest that you are much more three dina and exposed and then i thought you would be in uh with if you have minus 40 and since the beginning of the year we saw um you know um some light on the memory side you know if you look at v80 and isml on the orders i was wondering you talked about you know high bandwidth memory uh But we don't see any, like, much impact, you know, at least in orders. You didn't particularly mention it. And your performance last year, which suggests that you have a low exposure to that. Could you tell us maybe, like, give more color about your content opportunity? I mean, not your content, but your incremental market opportunity for HBM, for example, or DDR5 versus traditional one and how your market share is evolving there? that would be very helpful because we don't see much evidence of intraction on your side. So, I was wondering.

Sure, Francois. I actually thank you for your observation that we are actually underperforming the entire memory market. It's not my goal.

It's not my goal, too. I was just... No, no, no. Yeah, yeah. I know.

First of all, I think memory, especially on the 3DNet side, has been very, very weak and the weakness actually continues. As I said earlier, we are even hearing, actually there was a report that one of our customers is even going to cut the production even further. What has really, you know, been in 2022 driving 3D NAND for us, of course, was ALD Gapfield. And that was a fairly big win, which was, you know, a very nice chunk of revenue for us. And that contributed, you know, to our significant memory sales increase in 2022. And of course, in 2023, that almost evaporated because there was just no investment in 3D NAND. Now, of course, if we look at 2023 and actually it follows also from 2022, our big play in DRAM has always been in high performance DRAM, always DDR5. And of course, when generative AI started kicking off and driving a lot of HBM, that helped us a lot. So we already saw additional orders for some tools that are required to make HBM type of memory. I think as far back as the third quarter of last year. And we do expect that this traction is going to continue because the demand for HBM memory devices is just huge. And I think this is, of course, driven by AI. And as we go on, we think that we will probably see more orders for this type of tools because they are absolutely essential for making HBM. I hope that kind of gives you some color between DRAM and 3DNAND.

That's very clear, thank you. And maybe on your market share there, I mean, the memory has been more on the bad side for some time and you saw a couple of opportunities on the single coming through. But how is it evolving with HBM? I mean, can you quantify a bit the number of incremental layers that you can address maybe or your market share, anything you could flag there?

Maybe not in terms of layer, but you are correct, François. I mean, you know, memory is a very cost-competitive, you know, type of commodity. So, of course, you know, batch type of tools do have a certain advantage. But as the technology progress and as they go into a very, you know, advanced, you know, devices, let's say, you know, scaling and so on, More and more, you'll find that some of these applications will have to change to a single wafer ALD. The Hi-K ALD tool is one example. a lot of increasing demand for high KLD tools because these are required to make high-performance DRAM, whether it's DDR5 or whether it's HBM. So that is where it's helping us in this down market even for DRAM.

Thank you very much.

Thank you.

The next question is from Didier Simama, Bank of America. Please go ahead.

Good afternoon. Thank you for taking my question. I'm going to try again on HBM. Could you just give us a sense? It's probably a stupid question, but I just want to understand. So what we learn from ASML order intake in Q4 is that to get the best yields on HBM dyes, you need EUV. Is that not mutually exclusive, but does that also mean that high-chemical gate is a must for HBM? And related to that, how are you positioned in Korea? Have you got one customer or two? And I've got a follow-up for Paul on OPEX. Thank you.

Didier, I think you could try to correlate that because when you look at DRAM, especially the more advanced guys, they started adopting EUV with one layer and then they went up to four layers. And there's probably more. I haven't kept track of that. But a lot of this was, you know, used for making advanced event devices so high performance event. And at the same time, you know, you got the launch of DDL5 and also HBM3 and they also need, you know, high K, you know, ALD let's say, tools. So there is some correlation, but I do not think that it is a one-to-one correlation. It's just that the most advanced DRAM devices, or what you call high-performance DRAM, it seems that both EUV and high KALD are used.

Got it. And in Korea, I mean, how... We have both.

Both of them are...

To be perfectly honest, I think we are all a bit surprised that you're not seeing the sort of pop in orders from the Koreans on Heike, or at least not, if not in Q4, in Q1 or Q2, given the lead time differences with ASML. And clearly the ASML orders, which is spectacular, I mean, I think that's probably an understatement. So I'm just a bit surprised you're not seeing that, or perhaps you are suggesting you're going to get that in the second half, and I suspect you will. Just Can you help us understand? Is that a meaningful part of your second half recovery, if not in revenues, at least in bookings?

Okay, I think the easiest way to understand this, Didier, is our peer in lithography, their lead times are probably anything from 15 to 18 months, especially when you talk about EUV. Our lead times are six months. So our customers still have a lot of time. And potentially, as I said earlier, we do expect to see continued orders for our high-key ALD tools until the end of this year. But we are not going to, at this moment, let's just tell you when it is coming in. But we do expect that the pace of memory recovery, first of all, will increase. And it should lead to increased orders for us.

OK. Perfect. Thank you. And just for Paul, quick one. I mean, taking into account all the things you said on the mix, should we assume gross margins to trend down in the second half? And I think you've been sort of fairly explicit on OPEX, but I'm sorry to be stupid, but can you give us maybe a range of OPEX range for the full year you're thinking about? Because obviously we don't know if your revenues are going to be down 1%, up 5%, up 10%, down 5%. And so it's The OPEX number is something you've got control about. It's a fixed cost, so that would be helpful to understand you don't have visibility on the top line.

Yeah, thanks for the question. So maybe first on your gross margin in the second half, I think it's fair to assume that we will see some drop compared to 23, simply because we believe that China, which is one of the mixed factors, will start to normalize somewhere in the later part of this year. The first part, we still expect a strong contribution from China with, as you know, above average profitability. And towards the latter part of the year, we expect that to normalize. So there will be some impact, very likely, on the margin, so somewhat lower. And then, of course, other mixed elements can have a plus or a minus, but it's always difficult to tell, given the number of tools that we have with different margin potential On the OPEX, as I mentioned just now, SG&A expect a marginal increase compared to this year. Not a lot. Of course, there will be some merit. There's maybe some inflation, but don't expect a major step up there. R&D will continue to invest. So that will go up. As we said, also, our, let's say, medium-term guidance is high single-digit below double-digit. whereby we will be maybe even above the range slightly in the beginning period, given that the revenue is not yet growing to the extent that we foresee in 2025. So we might go a little bit over this range in 2024.

All right, brilliant. Thanks very much.

The next question is from Aditya Metuku with HSBC. Please go ahead.

Good afternoon, guys. Thank you for taking my questions. Firstly, just around 2025 demand around gate all around, I just wanted to hear your thoughts on what level of capacity you're expecting to be deployed. Is it around 80k wafer starts per month, which is normally what you see at the leading edge in the first year? Will it be higher, lower? If you could give any colour around that, that you've factored into your 2025 outlook, that would be very helpful. And secondly, just on the Hi-K metal gate, or high bandwidth memory, which you talked about earlier, you talked about Hi-K as just one of the growth drivers. I just wondered if you could give some color on what the other growth drivers are for ALD tools, apart from the Hi-K step in the transistor part of DRAM. Any color there would also be very helpful. Thank you.

Thanks a lot. I think the capacity is something that we do have, let's say, an estimation in mind as to, for example, each one of the three players, how much they would ramp. But I think at this moment, we think that that could change. As I said earlier, some of them are already announcing that they are trying to accelerate the move to high volume manufacturing. But overall, if we look at just maybe for 2024, we expect that the orders that we are going to get from GATE all around for logic and foundry will be larger, will be greater than half of all of our logic and foundry orders. So the transition to get all around is really happening. And we do expect that all this will continue throughout the year. And we still have to maybe wait a little bit as to how much of the high volume will be done next year. But I think overall, we are positive that there should be a significant amount of investment also in 2025. Hi, HBM and Hikay Metalgate. I think we have tried, or at least my colleague Hisham has tried to explain during our investor day that the Hikay is only one layer, but there are other layers inside that are gradually being adopted that is also helping us. One example, just to give one of the layers, is perhaps at the most advanced DRAM devices. Instead of just the hapnium silicate, they are now also adding, for example, lanthanum oxide. And that's also on our tool. So we do have more than one layer there. And as they get more and more advanced, especially at the latest generation of DRAM devices, it becomes more complicated. And they have to use even more layers. And fortunately, a lot of these layers are done on our tools.

Understood, very clear. By the way, is this your last call or you?

Unfortunately, no. I still have to do the first quarter.

Okay, got it. Thank you.

The next question is from Mark Hesselink with ING. Please go ahead.

Yes, thank you. First question is actually a small explanation in the press release. You're saying that your bookings in the fourth quarter are also a bit ahead of your own expectations, among others for the gate-all-around pilot lines. Is there anything that we can read into that? The fact that it is a bit bigger than you expected earlier, does it mean that also eventually it can become a bit bigger, more applications for you, or is that not the way to think about it?

So, Mark, thanks for the question. You know, it just came in, you know, slightly bigger than what we expected. You know, I think customers were ordering, you know, maybe additional tools as part of their pilot line. And that's why it was a little bit higher than what we had expected, especially after we had already announced that some of the orders actually dropped into the third quarter. So we were, of course, very positively pleased with the additional orders. I don't think it really signifies, for example, does that mean that they're going to invest more in HVM or anything? It's just that they ordered more tools for their pilot line.

Okay, clear. And then the second thing, you obviously added a lot of capacity. You elaborated on that before as well. But given what we're now seeing with AI, and also you stress it multiple times now during the call, is the capacity also enough for you in the, let's go beyond a little bit the medium term? And last time it was maybe sort of easy to add your capacity given that you already had the floor ready. Is it going to be that easy for you again to add the capacity if needed?

The construction of the second building in Korea will be completed early next year. I think it's in the first quarter or maybe early second quarter. Now that is still the smaller part of our capacity in terms of manufacturing. What we have with that and also with our facility in Singapore, as we have shared before, we can easily accommodate all the way up to the high end of our 2027 target, which is 5 billion. So we do not really have an issue with manufacturing capacity and we are ready to be able to supply when the demand comes.

So with the current AI story, there's no scenario that you will get into capacity constraints.

I mean, Mark, it's of course possible if the demand is so big, but we always have, we're always cautious that look, we need to track the demand carefully. And should we see signs that it is going to get to a level where it's going to exceed the capacity that we have, we need to start planning for that quickly. Because for every new factory that we build, it's easily 24 months. So we are very carefully monitoring that. But at this moment, we have enough capacity all the way until our plans for 2027.

Thank you. Thank you.

As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is a follow-up from Tammy Q with Berenberg. Please go ahead.

Hi, guys. Sorry. Thank you for speaking to me. So I have one on China. So you mentioned that China demand would be leveling off in the second half of the year because of capacity digestion periods. I kind of think that a lot of the China investment was actually strategic related and also they probably do have a market to absorb incremental facility requirement given the EV industrial trend. Where's your assumption of China will be leveling off and do you think there potentially can be some upside from that?

Tammy, part of it is just based on discussions that we are having with customers. And over the last, I would say, maybe 24 to 36 months, there's been a lot of investments into what we call mature technology in China. And we do expect that a lot of this now are going to come online in the sense that they are finally going to be doing high volume manufacturing and producing wafers, which ends up in devices. I think your assumption or what you have heard is not incorrect in the sense that within domestic China itself, there is a huge demand for such chips. So it is possible that maybe they still need even more. Let's put it this way. In our view, based on what we are seeing today, based on backlog, based on what our customers are giving us as forecast, is that the beginning of 2024 is still going to be strong. But we have not really great visibility now as far as the second half is concerned. And for that matter, for that reason, that is why we are saying that it might normalize. But how much it will normalize is difficult for us to tell at this stage.

okay thank you and lastly you sorry you mentioned that your your sort of you know process within different ga players are different can you confirm your market share is as strong as uh within all three players for ga process or your market share differs uh you know so when you look at the ald part we are very confident that we have at least maintained our market share uh you know from the pin fat days

And I would just add that on the silicon epitaxy, we have, in fact, gained market share.

Okay, thank you.

The next question is from Ruben Devos with Kepler Chevro. Please go ahead.

Yes, good afternoon. Thanks for letting me on. I just had a question around an initiative by a Japanese consortium, which I believe has the objective to transition to mass volume on two nanometer by 2027. I was wondering whether you've had any engagements with them so far. And I guess there's been some activity generally in the Japanese market. So curious to hear what your views are on the developments in this region and to what degree you can see some of the local opportunities. Thank you.

So, of course, we are engaged, but I will not say the name. In fact, I visited them last week. And, you know, it's a very... I would say highly focused on project by the Japanese government to really try to build their own, let's say, leading-edge type of capabilities. I think they are still very much in the early stages, but we are, of course, heavily engaged with them and with their partner in the US, so that's all going well. I think in general, when you look at Japan as a whole, The government is focusing a lot now on semiconductors, and they have been subsidizing or giving incentives to a lot of investments that are happening today in Japan. And I think this will actually kind of rekindle Japan as a major semiconductor manufacturing location.

All right, thank you. That's helpful. And just a final question on the aftermarket would be helpful if you could share a few comments on that. I guess you were trending higher in terms of growth rate for the aftermarket relative to equipment sales. I suspect that could be the same for 24. It would be helpful to have your thoughts on this.

Yeah, so I think for 2023, we grew at 19%, which was ninth. And I think a part of it is because some of the outcome-based services type of products that we have been pushing, we are gaining traction. I think we will continue to see a very nice growth again in 2024, but we will not give a number at this stage.

All right. Thank you very much.

The next question is from Nigel van Putten with Morgan Stanley. Please go ahead.

Hi, good afternoon. Thanks for letting me on. I'm just a clarification Benjamin on what you said around 2024 gate all around orders. I've written down, but I'm not entirely sure that you said greater than half of our logic found the orders are for to get a bit or get it around. Is that correct, or did I miss. I know that's correct. That's correct. So that's quite a step up then. I mean, if we model third quarter, fourth quarter, maybe combined triple digit, but I had to send that, you know, per quarter, high double digit, then this should be quite a step up relative to what we've seen in the last two quarters. Is that correct?

Yeah, I think, you know, the way that you described it is quite a step up. But I think now we are seeing, you know, um you know orders really are coming in and as i mentioned we will continue to get orders throughout the 2024 uh and you know again i i want to refer back to what i said earlier we also see some signs of acceleration uh one of them has publicly committed that they even want to pull in um so i think it's moving it's moving uh in a very nice way and you know we are actually quite sure that we will see uh more than half of our logic foundry orders you know, being a two nanometer gig all about.

Good. All right. And then, Paul, follow up on sort of OPEX. There's obviously also the capitalization line in cash flow. Is that approaching capex this year? So 160 to 200 or is that maybe a little bit too high?

You can expect this year, let's say, some acceleration in the amortization because we have, of course, capitalized quite a lot in the last, whatever, a number of quarters, even last two years, especially given, of course, all the upcoming inflections that now start to gradually move into into pilots and then of course into high volume production so there you would you can expect a acceleration at the same time there's still a lot of um the engagements going on new engagements you can also see it in the balance over evil tools so also capitalization will trend up and further and but i yeah i if you look at the ratio simply that way of the last let's say two years I think the relative ratio of capitalization relative to growth spent and amortization relative to growth spent will not change a lot. But you will still see a step up in both of them.

So I guess there's a bit of a headwind on the P&L and the ratio is staying the same.

There will be some relatively some more amortization than this year. That's what I expect. Yes. Thank you. Thank you, Nigel.

The next question is from Aditya Metuku, HSBC. Please go ahead.

Yeah, guys, thank you for squeezing me in. Just two more. I noticed the impairment of some capitalized R&D in the quarter, about 2.5 million. I just wondered if you could shed some light on what happened here. Are these some projects that you expected to materialize that didn't come through? Just any color there would be helpful. And then just as you look through to the second half of this year, one of the potential uncertainties is tied to political change in the US and how that may affect your ability to ship to China. So I just wondered if you could quantify what proportion of your revenues in this year came from China and how you're expecting that to trend in 2024. Any high-level color around that would be helpful. And if possible, if you could talk about why your capex came in a bit lower than expected this year as well, it would be helpful. Thank you.

Hey, Paul, do you want to take the impairment and capex and I do the second half?

Let me take the first one and the second one, the third part of the question. on your payment is very simple it's a project that was started where at a certain moment in time at a certain toll gate you you recognize that we need to maybe take a different a different turn or take a different approach that happens sometimes luckily at this time we've seen it on time so only between inverted commas two and a half million euro but yeah that happens sometimes not every project that we started is let's say successful from the get-go onwards. So that's the first one. On the capex, now we guised in these 150 to 200. Now phasing of capex is always difficult to project because you never know precisely progress, invoicing, et cetera. So we are just in the range that we gave. So I would not raise too much out of it, but yeah. Given the uncertainty, we forecasted a pretty big range, 150 to 200, and we're just in that range. And at the same token, we have guided for 2027 for 100 to 180 million. Also, that gives quite some large range again, and that's an indication of different phasing of CAPEX in between years. That's very difficult to precisely predict.

Aditya, on your question on the second half with the political change, China, I wish we have some better ideas of forecasting this, but it's just not possible. And our view is that we should just continue as long as there's demand, the customers want our products, we will supply them with our products, fully complying to all the regulations of the three countries. But as to how this will change because of the potential change in the political situation in the US, it's just almost impossible to predict. And again, we comply to all the regulations, every single one of them, and we do whatever business that we can do.

Got it. And maybe are you able to quantify what proportion of your revenues came from China in 2023?

Yeah, well, I can only say that it's... It's a significant percentage. If you look at 2022, we mentioned that it was about 16% or so. We will not disclose a full number, but we can only say that in 2023, because of the massive investments also in mature logic, boundary, and also power analog, it increased significantly for us.

Understood. Thank you.

And the last question is a follow-up from DDS MLM, Bank of America. Please go ahead.

Thank you. Question for Ben on AI actually. So AMD have given an AI time for I guess their accelerator business or accelerators at large and HBM of about $400 billion in 2027 up from $45 billion last year. Sam Holtman is also, you know, there were press reports that were talking about $7 trillion of capital investments to build AI chips, etc. So we're going to put that aside for a minute. But I don't think many people in the market really believe in that $400 billion time in 2027. But if we were to dream for one minute, that would effectively imply a 2027 global semiconductor time of almost $1 trillion, which is double from 23 level. And so the question to you, Ben, is what's the latest? If these numbers are even remotely close to reality, when does these orders need to come in for semi-cap companies? I mean, is 2025 already too late or can they come a bit later for those fabs to be built and the revenue to be delivered on that timeframe?

I think the way to look at that, Didier, is to make a wafer at advanced nodes, whether it's 3 nanometer, 2 nanometer, the wafer probably has to stay in the fab for six months, six months or sometimes maybe even longer. And that is when the wafer is completed and then it has to be packaged, which is probably going to take another couple of weeks, etc. So if you really look at the demand coming in at the end of 20, let's just say the demand is required, you know, December 2025. I think they have to already start manufacturing this early 2025. Otherwise, you are not going to get the chips.

No, understood. But I guess the question, the more broader question, is there enough capacity today to satisfy a trillion dollar semiconductor demand in 2025 with basically the majority of the upside coming from AI, so leading edge?

I think that's easier because the AI chips is already having a constraint in terms of advanced packaging, let's say, capacity. So you look at, for example, the largest foundry making a massive investment for advanced packaging and also getting the help of what we call the OSETs to do that. So that is actually the bottleneck. It's the packaging, the advanced packaging that is the bottleneck. Now, if you go to a trillion, you know, I haven't done the math, but my guess is there will not be enough capacity.

Brilliant. Thanks very much.

But I hope we get there.

Me too.

Thank you, Judy.

Gentlemen, there are no more questions registered at this time. I turn the conference back to our CEO, Benjamin Lowe, for the closing remarks.

Thank you, Judy. So I would like to thank you all for your attendance today, also on behalf of Paul and Victor. We look forward to seeing many of you in our upcoming investor conferences and roadshows. Thank you again. Stay safe and goodbye.