Asm International Nv

Good afternoon, this is the Call to Call Conference operator. Welcome and thank you for joining the ASM International First Quarter 2024 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, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome everyone to our Q1 Earnings Call. I'm joined here today by Benjamin Lowe, CEO, Paul Verhagen, our CFO, and Hissje Massad, CTO and incoming CEO. ASM issued its first quarter 2024 results yesterday at 6 p.m. Central European Time. For those of you who have not yet seen the press release, it is accessible on the website asm.com along with our latest investor presentation. We remind you, as always, that this conference call may contain information related to ASM's 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 profitability measures mentioned in this call will be primarily based on adjusted non-IFRS figures. For the reported IFRS figures as well as the reconciliation between IFRS and adjusted results, please refer to the quarterly results press release. And with that, I'll now hand the call over to Benjamin Lowe, CEO of ASM.

Thank you, Victor. And thanks to everyone for attending our first quarter 2024 results conference call. We know it is a busy day for all of you. We will follow the usual agenda for today's call. Paul will first review our first quarter financial results. I will then continue with a discussion of the market trends and outlook, followed by Q&A. I will now turn it over to you,

Paul.

Thank you,

Benjamin. In the first quarter of 2024, revenue came in at 639 million euro, which is at the top end of our guidance of 600 to 640 million. At constant currencies, revenue decreased by 8% compared to the level in the first quarter of last year. Compared to Q4, revenue is up 2%. Equipment revenue was left by ALD and followed by EFI. Fertile governance revenue dropped year on year, mainly reflecting the weaker trend in the power analog segment. Spares and service revenue was up 2% at constant currencies compared to the same period last year. In terms of customer segments, revenue was led by foundry, followed by memory. Sales in the combined logic foundry segment decreased compared to Q1 last year, but increased substantially compared to Q4. Year on year leading edge logic foundry was down and in part offset by a strong increase in the mature logic foundry, mainly in China. We recorded decent gate all-around related sales in Q1. This followed on the first meaningful orders for gate all-around that we booked in Q3 and Q4 of last year. Memory sales also rebounded strongly compared to the depressed level in Q1 of last year, and also increased significantly compared to Q4. Sales in this segment were for a big part driven by high KALB tools for high-performance DRAM in HBM applications. Sales in power analog waiver dropped significantly, both compared to the first quarter and compared to the fourth quarter of last year. This is following the weakening order trend in this segment that we already reported in the last couple of quarters. To be sure, this is excluding sales in car rides where the trend continues to be healthy. Gross margin in the first quarter increased an exceptional high level of 52.9%, up from .9% in the fourth quarter and .1% in Q1 of last year. The increase in Q1 gross margin was explained by a generally strong mix, including a continued strong China sales contribution. Sales from the Chinese market were up both -in-year and compared to Q4 and reached a quarterly record high. For Q2, we expect China's sales to remain strong. For the second half of the year, we expect China to decrease compared to the first half, but to remain at a more resilient level than we anticipated at the start of the year. As DNA expansion increased by a moderate 4% compared to the first quarter of last year, and were below the level of Q4 2023, explained by lower variable expenses and reduced spending across various departments. For the full year of 2024, we continue to expect a moderate increase in SG&A compared to the full year of 2023. Net R&D increased at a relatively low page of 2% -in-year. While gross R&D increased by 17%, the increase in net R&D was moderated by the fact that Q1 capitalization of development expenses increased stronger than amortization. In the course of the year, we project this trend to reverse, as amortization will start to increase more substantially. This is explained by several newly developed products and applications for which amortization of the related capitalized development expenses will start as of Q2. For the full year, we expect the net R&D to increase by 10-20%. This is in line with our previous indication that the net R&D as a percentage of sales in 2024 will be somewhat above the target range of high single to low double digits. Below the operating line, financial results include a currency translation gain of 23 million euro, this compared to a translation loss of 7.25 million euro in the first and fourth quarter of 2023 respectively. As most of you know, these currency gains and losses are explained by the fact that we hold the largest part of our cash in US dollars. And the translation differences are included in our financial results. Let's move to ASMPT. Our share in income from investments reflecting a stake of approximately 25% in ASMPT amounts to 5 million euro in the first quarter, up from 2 million in the fourth quarter and down from 9 million in the first quarter of last year, reflecting the slowdown in the backend equipment market. Note that the amortization related to the ASMPT stake came largely to an end last year, and for 2024 it will amount to just 0.4 million euro. Now turning back to ASMPT operations. Our new orders in the first quarter were 698 million, an increase of 10% at constant currencies compared to Q1 of last year. Looking at the breakdown by customer segments, Foundry was the largest segment followed by Memory and then Logic. Combined Logic Foundry orders representing the largest part of total orders were down from Q4 but up from Q1 last year. Orders related to Gates All Around were again healthy. These orders were for multiple customers and included for the largest part ALD tools but also multiple Epi tools. Maturo Logic Foundry amounts mainly from Chinese customers also remained strong in Q1. Memory orders increased strongly in Q1 and DRAM accounted for the largest part, but we also saw a decent uptick in demand for ALD in the 3D NAND segments. Power and microwave bookings excluding silicon carbides remained relatively low in Q1, reflecting the softer conditions in this market segment. Silicon carbide Epi orders on the other hand remained healthy in the first quarter with a meaningful part driven by 200 mm tool demand from Chinese customers. Next are balance sheets. ASM's financial position continues to be strong. We ended the quarter with €720 million in cash, up from €637 million at the end of the fourth quarter. Free cash flow amounts to €62 million in the quarter, down from €155 million last year in Q1. While profitability remained solid, the decrease in free cash flow was mostly explained by increased working capital. The consummation which tend to fluctuate from quarter to quarter were up in the first quarter. Inventories also increased in the first quarter in preparation of expected higher shipment levels in Q2 and in the second half of the year. Data for income increased to €70 million up from €61 million in Q1 last year and remained within our target range of 55 to 75 days. Capex amounts to €31 million in the first quarter. As a reminder, our target for the annual Capex continues to be between €100 million to €180 million. A significant part of Capex will be for infrastructure investments, primarily for R&D, including the expansions in Korea and in Arizona that we announced last year. And with that, I hand the call back over to Benjamin. Thank

you Paul. Let's now continue with a review of the market trends. Against a backdrop of macroeconomic uncertainty, sluggish consumer spending and geopolitical unrest, the recovery in the semiconductor market continued in the first quarter, albeit at a relatively slow pace. AI remains the vice port with very robust growth. The smartphone market returned to -on-year growth and PCs appeared to have passed the bottom, although the recovery in both segments is still early and somewhat slow. The automotive semiconductor market weakened and has been impacted by inventory corrections. In WFE, conditions were still mixed in the first part of the year. Memory picked up somewhat, primarily driven by HBM DRAM. Except for early investments in GATE all around, the leading edge logic foundry segment is still relatively weak. Spending in the Chinese market remains strong. If we look in more detail at our logic foundry business, capacity spending on the current advanced nodes such as 5 nanometer and 3 nanometer continues to be soft in the first quarter. Momentum in 2 nanometer is, however, picking up speed. Our customers have been talking about significant interest among their own customers for the 2 nanometer node, including for new AI applications in the coming years. Several new 2 nanometer fabs have been announced over the last couple of months by key customers, which suggest that the 2 nanometer node is going to see sizable capacity investments in the next couple of years. In addition, all key customers reconfirm their targets to ram the 2 nanometer node in high-volume production in the course of 2025. Following the first meaningful orders in the second half of last year, we book again a healthy level of GATE all around related orders in the first quarter, still largely related to pilot line activity. We expect continued orders for 2 nanometer throughout the year, with the first orders for high-volume manufacturing in the second half. For the full year of 2024, we continue to expect that GATE all around will account for the majority of our order intake in leading edge logic foundry. As we discussed on previous occasions, GATE all around will be an important driver for ASI. We confirm our estimate that this transition will increase our SAM in logic and foundry by some $400 million US dollars for each additional $100,000 monthly wafer capacity. Many new ALD layers are required in GATE all around devices, and we believe we successfully maintain our leading market share in 2 nanometer compared to the 3 nanometer node. FPE is also an enabling technology for GATE all around. In the transition to 2 nanometer, we believe we will significantly increase our FPE market share, putting us on track towards our market share goal of 30% by the end of 2025. If we then look at the memory business, demand is gradually recovering, even though spending is still mostly related to the conversion of existing capacity. DRAM is the main area of growth on the back of strong AI-related demand for HVM. ASM is well placed in this area as we have a leading position in high KALD, which is a key technology for high performance DRAM in HVM stacks. Looking at the full year, we expect memory sales to rebound strongly compared to the lower level in 2023. Next, our business in China. As Paul just mentioned, sales from the Chinese market continue to be exceptionally strong in the first quarter. With the publication of our fourth quarter results, we conservatively expected the normalization in the second half of this year in China, following the strong spending levels in the recent periods. Based on current visibility, we still expect sales from China to be lower in the second half compared to the first half, but the decrease will be more moderate than we earlier expected. Spending trends in power analog wafer excluding silicon carbide have been slowing down in China, similar to other geographies. This is, however, offset by continued robust spending in the mature logic foundry segment. This segment, which is the largest part of our sales in logic foundry in China, continues to be dynamic with several new projects being launched. In addition, the size of the existing internal market in China, for example, for instance, for 28 nanometer semiconductor devices, is very substantial. If we then look at the power wafer analog segment, demand has weakened significantly, as we already reported in the last two quarters. Revenue in the first quarter was meaningfully lower, and also for the full year, we expect revenue in this segment to drop. As a reminder, last year, our sales in power analog wafer almost doubled. This industry segment is going through a phase of digestion after two years of substantial investments in new capacity. In addition, slowing end demand and inventory corrections in parts of the automotive and industrial markets, which have been the main driver of power analog demand, also led to reduced investments. Despite the current slowdown, power analog wafer segment is expected to remain an attractive market in the long term for ASM, and we are in a good position to benefit. In the last couple of years, we successfully expanded our positions, for instance, with our Intrepid ESA tool for 300-millimeter power and wafer applications. My comments about the slowdown in power analog wafer mostly refer to the silicon-based business. In silicon carbide, the trend is more resilient, even though demand has been impacted by a temporary slowdown in electric vehicle growth. Some silicon carbide customers recently pushed out new capacity investments. We still expect meaningful double-digit growth in this business in 2024, although not as strong as we anticipated at the start of the year. Our sales growth this year is in part supported by the contribution of the new customer wins that we reported in previous quarters. With a further increase in electric vehicle penetration, growth in the silicon carbide market is forecasted to remain strong in the coming years. In addition, we expect to further expand our position as the industry is going to transition in the next couple of years to 200-millimeter, for which our silicon EPI tools offer substantial benefits. Now turning to the outlook. For the second quarter, we expect sales to increase to between 660 to 700 million euros. This is a bit higher than our previous guidance explained by somewhat higher demand, particularly in the memory segment. For the second quarter, we now expect sales to increase by 10% or more compared to the first half. That means 2024 will be another year of revenue growth for ASM. Sales in China are projected to be lower in the second half as just discussed, although at a higher level than previously expected. The sequential decrease in China in the second half will be more than offset by higher sales in leading edge logic foundry, mainly in gate all around and to a lesser extent increases in memory. We reiterate our revenue targets for 2025 as communicated in our investor day last year, supported by the rebound in WFE with 2 nanometer moving into high volume manufacturing and further strengthening of the memory markets. On a personal note, this will be my last earnings call. I'd like to thank you all. Being the CEO of this unique company has been a privilege, and it is great to see what we have achieved as one ASM team over the past four years. Our company has never been in a stronger position than today. I'm confident that with Hisham as CEO, ASM has a bright future and continued success ahead. I'd like to thank you, our investors and analysts, for your support and interaction in the past four years. I really enjoyed the many investor meetings, conferences and road shows and even the earnings calls. I wish you all and your families a healthy and prosperous future. Mary

Beynman, before I hand over, I would also like to take this opportunity to thank you on behalf of everyone at ASM. Since you took over as CEO of ASM in 2020, revenue more than doubled, strongly outperforming WFE. Our operating profit more than tripled. Our engagement with key customers further strengthened and we stepped up investments in our people, in R&D and in sustainability. Over the past four years, the total share return amounted to close to 500% or almost 60% annualized, placing ASM among the top performers in the sector. Ben, thank you for your great contributions to ASM achievements and success.

Thank you, Paul. Let's now move on to the Q&A. We also have Hisham in the call today, but Paul and I will take most of your questions. As you know, Hisham will take over as CEO with the AGM on May 30.

We'd like to ask you to please limit your questions to not more than two at a time so that everyone has a chance to ask a question. Okay, we are now 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 1 under touchtones on the phone. To remove your FAF from the question queue, please press star and 2. Please pick up the receipt of an asking question. Anyone who has a question may press star and 1 at this time. The first question is from Sandeep Deshpande with JP Morgan. Please go ahead.

Thank you very much for letting me on. And thank you. It's been a great pleasure to work with you, Benjamin, over the last four years. I was very happy chatting with you on the industry development. So maybe in this last Q&A to ask you how do you see the cadence of the order intake given that you've won a lot of business in both ALD and in EPI at the foundries and at other logic customers, and they are ramping up this process in next year. So how do you see this cadence developing? You had a strong order intake in the first quarter. Do you see this progressively continuing through the year or is it going to be lumpy or is it going to be fourth quarter oriented? That's my first question. And my second question is, again, regarding the ALD and EPI business of ASM, clearly there are competitors in the market. They are knocking on your customers' doors all the time and some of them say they will take share from you in the future, et cetera, et cetera. How do you see that environment developing at this point? And in particular with regard to single-waiver ALD versus batch process, whether single-waiver will have its own position, which is very differentiated from the batch process, particularly in the memory side, which tends to be more cost-conscious. Thank you.

Sandeep, thanks a lot. And it's certainly been a pleasure working with you over the last couple of years. So maybe I will take the first question and I will have maybe Hisham try to give you more insight from the market share question. So on the cadence of ordering, I think we will continue to see especially get all around orders throughout the year. I think what we are seeing in terms of orders since the second half of last year is primarily targeted at the pilot line. And we have two things. One is they are not ordering one shop, just all the tools, and they order, let's say, gradually and at a time. That's one. Secondly, I think one thing that has changed fairly significantly is we now have multiple customers. So when we look at, for example, maybe we're looking at three nanometer pilot going into RAM, we were essentially looking at one customer. But now it's very different. We have multiple customers going in, trying to build pilot line capacity for two nanometers. And this is creating a situation where we are going to get the orders constantly, also over the next couple of quarters. Now, of course, the big question is, so when do we expect to get high volume manufacturing orders? We do expect that this will be on track for the second half of this year. And with respect to the ALD and the FD market share, I will probably pass this over to Hisham.

Okay. Thank you, Benjamin. For our market share, if you look into ALD market share transitioning from three nanometer to two nanometer, we believe we at least have mixed in our market share, which is 55% plus in ALD. And in EPPE, we think that we have definitively gained market share with the three leading semiconductor logic and boundary customer. In three nanometers, for example, we have one customer only in EPPE. And in two nanometer gate around, we have all three leading logic boundary customer.

And maybe lastly, Sandeep, your question on the single-wafers versus batch ALD, I think both will continue to have its own play. Some years ago, we were thinking that perhaps batch ALD, some of it will transition to a single-wafers ALD, and that is still happening, but it's happening at a very, very gradual pace. As long as batch ALD can continue to satisfy the kind of performance, they

will continue to be used. Thank you, Sandeep. Can we move on to the next

participant?

The next question is from Alexander Gisal with Goldman Sachs. Please go ahead.

Yes, thank you very much for the question, and thank you so much, Benjamin, for all the discussions over the years. My first question is about AI. A large foundry player talked about very, very strong AI demand. And you, in your introductory remarks, alluded to broader AI strength. I wondered to what extent you've seen stronger than expected demand for any of your leading edge tools if you compare with three or six months ago. And how would you think about that from a memory and from a logic perspective? And secondly, think about memory. You talked about strength on high-k metal gate orders. Do you see upside risks or expectations next year in the event of a stronger than expected rebound in the memory market? And to what extent is an opportunity for HPM orders to provide a boost to the second half of this year? Many thanks.

Alex, thanks. So on AI, I think we can speculate which country you are talking about. But AI is really the hot topic today. And it's not just giving a boost as far as the processors are concerned. In other words, not just the GPUs are concerned, but you are seeing a significant driver as far as high bandwidth memory or HPM is concerned as well. So we do think that these are going to be very significant drivers, not just for this year, but over the next couple of years. And in fact, from some of our customers, we know that they are trying to increase capacity as far as the HPM is concerned. Now on the processor side, I think today what you see as the GPUs, they are still being manufactured on, I would say, the relatively less advanced nodes of four and five nanometer. I think we still have not seen processors jumping onto two nanometer. So we do expect that that is going to help us drive the business significantly forward as well. Memory, yes, we are, of course, at this moment in a good position because of the increase in HPM, which requires our high-K ALD tool for the high-K method to make the HPM products. And we think that if you look at the kind of forecast or information that we are getting from all of our DRAM customers, we will continue to see a constant flow of orders for the high-K ALD tools throughout this year and potentially also into next year as they try to ramp up as much capacity as

possible. Many thanks. Thank you, Alex.

The next question is from

Atami Q with Berenberg. Please go ahead.

Hi, thank you for taking my question and thank you, Benjamin, for the past four years. It has been great to have you. So on two nanometer ramp up, if I can just follow up with some details, do you have already visibility and can share with us the magnitude and the shape of the high-volume production ramp up? At your three customers, do we have the normal ramp up as we have in three nanometers, half and half in year one and year two, or that would be slower or faster? And does it differ between customers?

Tammy, thanks again. I think each one of the three customers have a different, let's say, philosophy as far as, or let's say, on how they are ramping up. I think we just saw the leading foundry make some announcements, so that is something that is there. But as far as the capacity or how much they are going to ramp, I think that is still not the full view decided. For the other two, of course, some of them are already further down the road in terms of pilot, some probably less. But all three of them, including the leading foundry, have reconfirmed they want to go into high-volume manufacturing in 2025. So I think what we are going to see is that in 2025, all three of them will enter into high-volume manufacturing at some stage, also maybe at some point in time. And what that means for us is that equipment needs to be already delivered probably by the beginning of 2025, if they are ramping at the end. So we are working together with them on all of these plans that they have. Some of them I think are still being finalized, but generally we believe that 2025 is the year of the start of high-volume manufacturing for Gate All-Around.

Okay, amazing. Thank you. And Hisham, may I have a question on the market share you have on DRAM? Hi, Kate, please. Can you talk about your market share within the DRAM market? Are you having a relationship with all three of them? Or is it still at an early stage with certain DRAM makers? Thank you.

Tammy, I will take that. For the DRAM market share, I would say that we have – the best way to characterize that is as far as the high-key metadata is concerned, we have the majority. We have the majority of the share for high-key metadata in DRAM.

Is that right to understand all three or not really?

No, we will not go into that. But the best way to understand it is we have the majority. And it also depends on what product they are producing. But we have the majority as far as the market share is concerned.

Okay, thank you,

Benjamin. Thank you, Tammy.

The next question is from Robert Sanders, Deutsche Bank. Please go ahead.

Yeah, hi there. And yeah, I want just to say, Benjamin, it's been great and good luck with your next moves. I just have two questions. One on 3D DRAM. It seems like Samsung have been pushing this 4F squared DRAM in development, seem to be accelerating. I just wondered what your opportunity set could be there. And then secondly, on ALD, it looks like LAM has taken some share in this Moolad Dinam opportunity at GATE all around. I was just wondering, are you set to – do you have an ambition to compete heavily in that sort of metal ALD area or is it really more kind of LAM's territory? Thank you.

Rob, thanks a lot. So you're correct. We recently saw Samsung announcing 3D DRAM, which actually led to a little bit of a confusion. It's not the 3D DRAM that we know of. It's 4F squared, yes. It will definitely have more opportunities as far as ALD. Maybe also, as it actually is concerned. And of course, we are working with the customers who are working in that area. So in terms of timing, I think we are still maybe a couple of years out. But we are of course actively engaged together with them. On the MOLLE, the metal, of course we are deep into it. And we are involved with all the different players, different customers. It's probably going to be one of the major transitions as far as the technology is concerned. And we are heavily involved in that.

Thanks a lot. Thanks, Rob.

The next question is from Francois Bouillie with UBS. Please go ahead.

Thank you. And first of all, Ben, I wish you all the best for the future as well. I have two quick questions. The one is on the HBM. So you see the orders coming through this quarter. Can you talk about when it's going to impact your revenues? And should we expect a material impact of HBM straight away? Or is it something that is still not going to be very visible because it's too small? Is it already meaningful in terms of orders and revenues? And when it's going to impact the P&L?

So as we have probably shared previously, sometimes the orders don't really correlate to, for example, our average lead time of six months. So I think you are going to see HBM orders being converted into revenue not necessarily based on the lead time of six months, but it will definitely occur over the next couple of quarters. That's what we have. Now in terms of what is the material or meaningful impact, for us memory is still the smaller part of our business. But it is not nothing. So it is helping us boost up our revenue. And depending on the magnitude of how much investment goes into DRAM, I think it will be a meaningful addition to our revenue. And especially when you compare to 2023, we do expect a nice rebound in memory revenue over 2023.

Thanks, and thank you. And maybe the follow up is on China. I'm not very hopeful about this one, but can you tell us the China market share or market share, your China exposure as part of the revenues, given the strong gross margin? That would be great. And given I don't have a lot of hope on that one, I'm going to squeeze this more the China as a whole. We see NOAA and AMIC growing strongly, their revenues, we know that they are investing significantly in terms of localization. How do you see the competitive landscape for ILD and epitaxy specifically in China? And do you see any impact potentially in the years to come for SMI?

Sure. Once again, sorry to disappoint you. We in fact do not disclose the product.

I had low expectations. That's fine.

We are small. We only play deposition compared to some of our peers. And if we disclose, it could be competitively sensitive information, which we do not want to disclose. You are very spot on again on the competition. So we have seen some of the domestic competitors increasing their revenues significantly over the years. Now, of course, I think that is coming from two main areas. One, of course, the size of the market has increased because the Chinese customers are investing significantly. But at the same time, there are also certain export restrictions that have made imports more difficult. And I think they have no other choice but to adjust them to local domestic supplies. As far as we are concerned, I think we are still in, I would say, a good position. Of course, with the export control regulations, we comply 100%, maybe even more than that. We follow the regulations very strictly. But at the same time, if you look at the type of equipment that we are good at, the ALD and epitaxy, I think we are still in terms of performance, still ahead of the local domestic suppliers. And I think as long as we can sell to them and as long as they can buy, we are still the preferred supplier by that.

Thank you, Ben. All the best. Thank you. The next

question is from Stephanie Uri with Odo from HHS. Please go ahead.

Yes. Hello. Good afternoon. Thank you for the question. Benjamin, thank you for everything. And Ishem, looking forward to work with you soon. Two questions, indeed. First one is on the gross margin. Because you have hit a record gross margin, I understand it's notably because of China and that China is going to weaken in the second half. So we can expect an impact. But is this impact going to be very strong on the gross margin? And is it going to be already in Q2, even though you say that the business should remain strong in the first half? That's the first question. And the second question is more about 2025, as you seem to say that Gator around is going to be a significant driver at the same time. The seek slowdown is temporary, but also HBM, DRAM is driving some growth. So why don't you upgrade your target for 2025 or at least shrink into the upper hand? Because to get to the lower end of the guidance, it would probably be the sign of a dramatic year or a very bad year, I would say. Thank you very much.

So maybe I'll take the first question on margin, Stefan, and then Benjamin will take a second question. You're right. So we had a record margin in Q1, two, maybe even three factors. One, indeed, record high sales in China has definitely contributed because you know by now that that's on average probability is higher there. But also the mix in China was good. So also there we see quite substantial differences. But that was good. And thirdly, also the mix outside of China was good. So actually everything fell to the right direction, which results in what you saw 52.9. Moving to Q2, we still expect good China sales. I don't think there will be a new record. So there might be some impact, of course, relative to Q1, but still with good sales that that in itself, everything else equal will, of course, have a positive effect as well. I'm not going to guide now if it's below or 50 percent, sorry, above 50 percent or not. That's really too early to tell because there's also still a significant part outside of China where there's also a mixed element as you know. But you can take as a general rule, of course, if China is higher than typically that will pose as a positive impact on the on the overall mix. But you should also not discount the fact that the rest outside of China is also important. And there we also have a strong mix in Q1. And then for the second half, China impact is what we expect normalization is not as much as we initially believed. So China is somewhat more resilient than initially thought. So also there, of course, comparing to what we thought before that will have somewhat of a positive impact on our.

And I find all your questions regarding 2025. So the way that we look at it today is, you know, 2025, the significant drivers for us, of course, is again all around going into high volume manufacturing. We do expect, you know, recovery in memory. And maybe just to clarify today, when you look at memory, a lot of the investments are just to make high bandwidth memory and more advanced 3D NAND products. There is still not really additions in the new capacity. And, you know, that still has to happen. And that is probably a solid missing. We do expect that to recover as well. You know, Silicon Carbide, I think the verdict is still open, whether the recovery will be in 2025. China, again, you know, we do base again on our cautious view is that there should be some normalization. But, you know, let's see how much that is. But based on the biggest drivers of data around, you know, high volume manufacturing and recovery in memory, we are very confident of our 3 to 3.6 billion euro target. We don't see anything that, you know, necessitates us to change the target at this moment. But going further, if things are really picking up, you know, if we have to change, of course, we will inform the market.

Thank you very much. Thank you, Stefan.

The next question is from Andrew Gardiner with City. Please go ahead.

Thank you very much for taking the question. Best wishes from me as well, Benjamin. Two, if I could, one on gate all around and then just a clarification for you, Paul, on the OPEC. So first on gate all around and two nanometer, as you guys have pointed out, another healthy quarter of orders. And you're saying that's going to continue in terms of pilot line activity into 2Q. I'm just wondering whether you can give us a sense as to how that has shaped up relative to your earlier expectations for two nanometer. There's clearly lots of talk in the market about, you know, is it slightly delayed and what size is it going to be and how is the process performing in the early phase of development? I'm just wondering what kind of feedback you're getting on your tools and what you're hearing from the customers in terms of their ramp. Is it going faster than you had expected? And I suppose I come back to a point you made on the last earnings call and a few times in public statements, Benjamin, about a potential acceleration. Are you seeing that or is that something that you still are thinking is perhaps later in the year? And then, Paul, could you just clarify the OPEC? You said it's going to be up slightly in 2024 on a net basis, but the R&D clearly up more. And so therefore, SG&A is going to be down. I just want to make sure I got that clear. Thank you very much.

Andrew, thanks a lot. I think our observations and expectations of the 2 nanometer moving into pilot and eventually going into high volume manufacturing, I don't think that that has changed. We are in the stage now of delivering tools for pilot manufacturing, and we have not been told of any problems by our customers. So we have seen some market rumors that maybe there were some technical issues and so on, but not that we know of. And I think in terms of the acceleration, we could still potentially see some of that. As I said earlier, if you look at where the AI chips today are made, they are still made on 4 and 5 nanometers. And there has to be some of them that are thinking of making them more advanced notes because of the lower power consumption, better performance. And I'm sure that there are some things that are cooking behind that we are not aware of. But I think a lot of the initial RAM that is going to come from 2 nanometer high volume manufacturing could in fact be because of AI chips.

And Paul, you can. Okay, then Andrew on OPEX. So SCNA for the full year, so 24 full year compared to 23 full year, I would expect a marginal increase, less than 5% -in-year increase. Net R&D, I mentioned 10 to 20%. Important to note, Q1 was net was low growth, you saw significant increase, and net was still relatively low because we did not yet start amortization of a few significant projects. That will start in the course of Q2, not all of them on day one. So Q3 will again be higher than Q2 because then you have the full quarterly run rate of the newly amortized projects. But taking that into account with this increase in amortization, net R&D is expected to be up 10 to 20% -in-year. Growth R&D will be somewhat less than that because growth is growth. They don't have the impact of the relative higher increase in amortization relative to capitalization. So I hope that's clear.

Thanks very much, Paul. Thank you, Andrew.

The next question is from General Domenon

of the Jeffries. Please go ahead.

Hi, good afternoon. Thanks for taking the question. And Benjamin from my side as well. Also great working with you and all the best in your future endeavors. My first question is on the gate all round side once again. You've been taking three quarters of pilot orders right now and you're saying that Q4 also is going to be pilot. So that's about four quarters of pilot orders. And you're saying that because there's three nanometers with one customer and now it's multiple customers and it's getting spread out a little bit. So when you're talking about high volume orders on two nanometer gate all round in the second half, is that all more from one customer or do you expect all your customers to be placing those high volume orders in the second half of this year? And in terms of delivery, you said that you expect gate all round to rise quite a bit in the second half and compensate for some of the China decline that you still expect. Is there any chance that you'll take an order in Q3 and ship in Q4 on the high volume side because there's not a clear match between orders and delivery? Or will your high volume orders really start being delivered only in Q1 2025 and all the upside on second half gate all round will be coming from pilot order delivery? Jonathan, thanks a lot.

It's been a pleasure. So you are correct. We have seen several quarters of pilot line orders. For one, for each specific customer, they don't order in one shop so they might order in the other shop and so on. And you couple that with multiple customers and I think that's what we are seeing in terms of the spread of pilot orders potentially also in Q2. So as you already mentioned, over the last four quarters. Second half, high volume manufacturing. We do expect second half that we will be getting the orders. We will not disclose whether it's one customer, two customers or three customers, but we will be getting second half high volume manufacturing orders. And to your question on is it possible that we get an order in one quarter and deliver the next quarter, it is possible. And like I said, the orders especially from our big customers, sometimes they work together with us based on forecast so the orders can come late. And generally we are expected to build according to the forecast that they give

us.

So

it is possible. You said you

are seeing strength, but you are also seeing some push outs. Would it be fair to say that the continuing strength because your 200mm orders in Q1 came from China. So is it your Chinese customers which are continuing to invest quite strongly and some of the push outs are coming from outside China?

I suppose Jonathan, you are referring to Silicon Carbide?

Yes,

Silicon Carbide. So the situation and Jonathan, you are quite correct. We still see some of our Chinese customers investing. And they are investing to prepare for the rebound or the recovery. And they are also investing for the transition to 80. So that is correct. I think the push out, it is happening I would say across the board because of the slowdown in electric vehicles. But I think in our opinion this is maybe temporarily. And when these vehicles start coming back and we all believe that the world needs those electric vehicles, I think we can see the recovery there. For the time being, this year a couple of things are helping us to achieve the meaningful double digit increase. One is we ended the year with a nice backlog. Our Chinese customers are still continuing to invest. And last but not least, we are also benefiting from the non-Chinese customer wins that we have had and which we have reported over the last couple of quarters.

Understood. Thank you very much.

Thank you. The next question is from Didier Shimama with Bank of America. Please go ahead.

Yes, good afternoon. And allow me to thank you also Ben for the last four years. It has been a fantastic ride and amazing execution. And please also allow me to congratulate Ishem for your promotion, my book. I've got a question for Ishem if you can take that. I don't know Ben if you want to take it. Now that the 2 nanometer is sort of locked in and we're moving into production, what's your earlier view of the market share you have in ALD and AP for the 1.8 nanometer process recipes? Historically, given that there is not a huge amount of disruption and changes between 2 and 1.8, I would imagine that your share should be broadly stable plus or minus. Is that the right way to think about it? And I'll have a quick follow up. Thank you.

So if we look into the ALD market share between 2 and 1.8 nanometer, I think what's important to say is that for ALD we really have maintained our market share going from 3 nanometer to 2 nanometer. And in AP we have increased our market share going from 3 nanometer to 2 nanometer. But as you transition from 2 nanometer to 1.8 nanometer, you see more and more ALD intensity happening. And for that you see more and more ALD, high performance ALD layers which we are working with our customer. And I think we are very well positioned for these applications.

Very clear. Thank you so much, Michel. And my follow up is on the target model for 2027 because we will focus on 2025, but it feels like it's in the bag by now. So 2027, just to remind us, when you gave that guidance of 4 to 5 billion for 2027, how much of that was motivated by AI both on the logic and HBM side?

Maybe I'll take that one. If you go back to our presentation, DJ, you see that by 2027 I think we said that 40% or so is investments in WFBs all around. This is 2 nanometers leading edge related. And of course, I think you also made a comment on, I forgot the percentage, on how many percent of devices we believe that they will have one way or the other on AI functionality. So we have made some assumptions. Are they wrong? 100% sure they're wrong. Will it be higher or lower? That is still hard to tell. I mean, we have ultimately taken the overall WFB as a leading, let's say, guidance. From there we calculate backwards, of course, on the different nodes and technologies that we believe are the smart will be composed. And from there, literally bottom up, layer by layer, we do our modeling and we validate that again top down with what we see happening in the various market segments. And that's how we validate that. Will that be different? For sure there will be pluses, there will be minuses. It's really too early to tell.

All right. Thank you so much. Thank you, Jay.

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

Yeah, good afternoon, guys, and best wishes to you, Benjamin. So firstly, just on HBM, I just wanted to understand how the tool demand from the IKDRAM site changes. There's been this talk of 3X the wafer count for bit growth. Does that mean that you need 3X the number of tools when you go from HBM versus non-HBM when you use these high-care metal gate cells? That's the first question. And secondly, just on 200 millimeter silicon carbide epitaxy, Exron made some recent announcements on wins. Would it be fair to assume that batch tools will still be used at 200 millimeter and it won't all be single wafer AP tools when the industry transitions? And issue opportunity on silicon carbide epitaxy with single wafer tools, mainly with Chinese customers, would that be a fair assumption to make? Those are the two questions. Thank you.

Aditya, thanks a lot. And on the HBM side, so I think the better way to understand this is when you look at, for example, 2023, HBM was still a very small portion of DREF total. I think it was maybe just a mid-single digit kind of percentage. And the market generally is projecting that this is going to go up to, well, based on some of the forecasts that I'm reading, it may go up to as much as 20% of demand by the end of this year, early 2025. So if you look at that, there has to be quite some capacity that needs to be either built or converted to be able to make either high bandwidth memory. And so far, I think what is happening is that most of the, in fact, all of them are converting to some extent excess capacity and buying some additional tools like our high-K ALD tools and converting them to be able to make high bandwidth memory. Now as to whether it's going to be 3X wafers or whatever, I am not too sure and I haven't seen the real correlation between a number of wafers. But I think overall, moving from a mid-single digit to let's say 20%, that's a fairly nice increase as far as HBM and demand is concerned. You know, we always look at our competitors with respect and that is the same for silicon carbide. I am actually not aware of which wins that they have announced because I think most of the wins at 8 or 200 mm, we are well aware of that. So maybe there's something that we are not aware of. But in general, I think you're going to find that whether it's batch or whether it's single wafer, there's going to be a play for both. It's just a question of eventually what is the cost of ownership. And I think even though it has been kind of mentioned that single wafer has a higher cost of all higher cost, I think we have done a lot of work and we are very, very competitive. And on top of that, you know, we have excellent performance and this is actually one of the reasons why we have been winning customers outside of China in both Europe and also in North America. And we continue to be confident of our ability to grow our market share even from here.

Understood. Thank you and all the best. Thanks.

Thanks, Adi. Can we move on to the next participant,

please? Yes. The next question is from Nigel van Buitum, Morgan Stanley. Please go ahead.

Thank you. Hi, good afternoon. I have two follow-ups on China. First is if you could discuss what your main exposure is into China at the moment. Is it still more power analog or rather mature logic or even memory? And then also maybe what has changed in the last quarter resulting in the pretty significant uptick in the gross margin? That would be your first question.

Thanks. Sure. Nigel, thanks. I will take the China question. I think in terms of exposure, as we mentioned, power analog and wafer is generally down and that includes also China. So the biggest part of our exposure today in China is probably mature logic and foundry. And we think that to your question of what has changed, we were kind of cautious as to whether they will continue to invest at the type of capacity or let's say a level that they have been investing over the last two years. So far it seems like they are still continuing and we still do expect some degree of normalization in the second half. But because of more recent information that we have, I think the moderation is much less than what we had anticipated. You

know, on the margin, Nigel, it's actually a repeat of what I said earlier. I mean, one, record high sales. So we never had so high sales in China as in Q1, which contributes positively to the mix in China, believe it or not. But there is also quite some margin differential from product to product application to application. And three, also the mix outside of China was actually very strong this quarter. So adding that all up, we got to, I would almost say an exceptional 52.9 percent great margin. I wish I could deliver it every quarter, but I'm afraid that will not be the case. But these three factors pushed up the margin.

Yeah, understood. And then as a follow up, you kind of already hinted about it, your view into the second half for China. I think previously it was more based on assumptions around normalization. But as the second half now comes into view, you've alluded to new information. But I guess also the order book would now sort of reflect what you can deliver in the next six months. So to what extent would you say your view is still conservative or is it now more based on actual orders in hand? And there's less of a chance of that turn out to be conservative as I think happened in the first half. Sorry about that. I

think you're correct. You know, as we of course, we are now in April, you know, at the end of April. So we do have a better view. And this is the reason why, you know, we have guided that, you know, the second half, we still expect to see, you know, some degree of normalization. It's just that it is less than what we had expected. But there will be. And China will be in terms of second half lower than the first half.

Understood. Thank you very much, Benjamin. Also from my side. Thanks for the discussions and all the best in your future endeavors. And also Hicham, look forward to working with you. Thank you. Thank you.

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

Great. Thanks for taking the question. So thanks from my side. First, on DRAM. So making good progress on HBM. I think in the past we've spoken about that eventually it can also move into the less high performance DRAM market. Can you share anything on do you still expect that to happen and what kind of timeframe that also the traditional DRAM market can be more significant for you?

Mark, thanks a lot. I think there is still that possibility. I think the question today is how fast we want to move. I think if you probably speak to our customers, the DRAM customers, today they are just really focusing on trying to drive high bandwidth memory. That is today the product for them. And how much they want to, for example, also adopt high-end metal gate for automotive DRAM and so on, I think that's still left to be seen. But over time as products become technically more complicated, I would not be surprised that they would have to do that. But the focus today by all the DRAM manufacturers is really how much they can churn out in terms of high bandwidth memory.

Great. My other question is on the market share in EPPE. You said that it's going to go up significantly, going to 2 nanometer. Traditionally you spoke about moving from 15% to 30%. I guess there are a lot of moving parts also with the traditional market being more strong than probably earlier expected. But is that 30% market share something that you can still expect or you will grow into that more into the 27 period? Thanks.

So we have mentioned – okay, I'll take this question. We have mentioned last year in our investor meeting in London that we expect to achieve 30% market share in EPPE in 2025. So that's really still our goal and that's our expectation. Going forward it's really anybody's call from this point of view. But what we can tell you is that we see a really good momentum for us in our EPPE technology and more and more customer wins in the future. So we are confident of our EPPE technology and we think that we have some technology differentiation going forward.

Okay, great. Thank you.

Thanks Mark. Can we move to the last question?

The last question is from Team Short Melander with Redburn Atlantic. Please go ahead.

Yeah, great. Thank you for taking my questions. I had one sort of quick housekeeping question and a quick follow-up. Just maybe Paul, you talked about amortization and capitalization. Just my housekeeping question is kind of what kind of scale of amortization should we be thinking of for the year? And then also just the final one on the margins, obviously a lot of focus. They've been very clear about the contributors. China is the only one that I hear you sort of suggesting is going to moderate in any way really. Application mix should really stay very strong and potentially even build further here. So I hear you also on quarter to quarter gross margin, but I just want to just really double check. I don't see any other question. I just want to make sure that you have a clear indication that there is nothing that we should have in our mind that's potentially going to unwind that you can already see going into 25 or 26 or 27. Thank you.

Thanks for the question. Maybe on amortization, although this is not meant to be a guidance, but to give you some more clear indication if you take Q1, which we have disclosed the actual amount of amortization. I think it will not fully double towards the year end, but get close to that. So it's a significant increase that will happen gradually. I think Q3, as I said, we should be at a, as I call it for now, full run rate because of course over time things will most likely further increase given the amount of gross R&D that we spend. But if you take Q4, Q3 compared to Q1, not fully doubling, but let's say towards around 20 million euro because we had 12 million in Q1. So it should give you a reasonable indication. Then on margin, it's always difficult because I have to remind, I think you almost have recalled it, if you go back, let's say two years where China was much less of a, let's say, dominant play in the overall margin development, we still saw quite some significant changes from quarter to quarter. So there could be up to 2% changes from one quarter to the other simply because of product mix and likely that is not going to change. And some quarters, these things fall all to the right direction, some it's a mix and some they all fall to the wrong direction in terms of margin. So it is really very hard to tell. And it's not because I don't want to give you any more information. It is difficult to guide. And then I just want to repeat, of course, China, given the share of China now in Q1 and most likely also in Q2 and then in H2 something less, that will still have an important impact on the margin. But I don't expect it to be as large as in Q1 simply because I don't think that we will hit another record level of China sales in the course of this year. I'm not excluding it, but I don't see it at this moment time at least. All right.

That's very

clear. Thanks very much.

Thanks Tim.

This was the last question. I turn the conference back to Mr. Benjamin L. Lowe for any closing remarks.

On behalf of Paul, H. Sam and Victor, I want to thank you all for attending our call today. Stay safe and goodbye. Thanks a lot.