Thank you for standing by. Welcome to the ASML 2022 Second Quarter Financial Results Conference Call on July 20, 20222. Throughout today’s introduction, all participants will be in listen-only mode. After ASML’s introduction, there will be an opportunity to ask questions. [Operator Instructions] I’d now like to turn over the call to Mr. Skip Miller. Please go ahead, sir.

Yes. Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today on the call are ASML’s CEO, Peter Wennink; and our CFO, Roger Dassen. The subject of today’s call is ASML’s 2022 second quarter results. The length of this call will be 60 minutes, and questions will be taken in the order that they are received. This call is also being broadcast live over the internet at asml.com. A transcript of management’s opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I’d like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Safe Harbor statement contained in today’s press release and presentation found on our website at asml.com and in ASML’s Annual Report on Form 20-F and other documents as filed with the Securities and Exchange Commission. With that, I’d like to turn the call over to Peter Wennink for a brief introduction.

Thank you, Skip. Welcome everyone, and thank you for joining us for our second quarter 2022 results conference call. I hope all of you and your families are still healthy and safe. And before we begin the Q&A session Roger and I would like to provide an overview and some commentary on the second quarter 2022 as well as provide our views of the coming quarters. Roger will start with a review of our second quarter 2022 financial performance with some added comments on our short-term outlook. And I will complete the introduction with some additional comments on the current business environment and on our future business outlook. Roger?

Thank you, Peter, and welcome, everyone. I will first review the second quarter financial accomplishments and then provide guidance on the third quarter of 2022. Net sales came in at €5.4 billion, slightly above our guidance. We shipped 14 EUV systems and recognized €2.0 billion revenue from 12 EUV systems this quarter. Net system sales of €4.1 billion which was driven by Logic at 71%, and remaining 29% from Memory. Installed Base Management sales for the quarter came in at €1.3 billion, above guidance. Gross margin for the quarter came in at 49.1%, which is at the lower end of our guidance, primarily due to increasing inflationary costs. On operating expenses, R&D expenses came in at €789 million and SG&A expenses at €222 million, as guided. Net income in Q2 was €1.4 billion, representing 26.0% of net sales and resulting in an EPS of €3.54. Turning to the balance sheet. We ended the second quarter with cash, cash equivalents and short-term investments at a level of €4.4 billion. Moving to the order book, Q2 net system bookings came in at a record €8.5 billion, reflecting the continued strong customer demand for both, advanced and mature nodes. Strong order intake of €5.4 billion for EUV 0.33 NA and EUV 0.55 NA systems and €3.1 billion for non-EUV systems. Total net system bookings was driven by Logic with 60% of the bookings and Memory accounting for the remaining 40%. With that I would like to turn to our expectations for the third quarter of 2022. We are experiencing increasing supply chain constraints, which resulted in delayed system starts and requires us to increase the number of fast shipments in Q3 in order to supply our customers with systems in production as quickly as possible. With more fast shipments planned in the quarter, it will increase the amount of revenue delayed to subsequent quarters. We expect Q3 total net sales to be between €5.1 billion and €5.4 billion. This excludes around €1.1 billion of net delayed revenue for Q3 as a result of more fast shipments at the end of Q3 than at the end of Q2. We expect our Q3 Installed Base Management sales to be around €1.4 billion. Gross margin for Q3 is expected to be between 49% and 50%, similar to prior quarter. The expected R&D expenses for Q3 are around €810 million and SG&A is expected to come in at around €235 million. Our estimated 2022 annualized effective tax rate is expected to be between 15% and 16%. In Q2, ASML paid a final dividend of €3.70 per ordinary share. Together with the interim dividend paid in 2021, this resulted in a total dividend for 2021 of €5.50 per ordinary share. We plan to grow our dividend and will move from a biannual to a quarterly dividend payout starting in Q3 this year. This will provide more timely return of cash to our investors and more evenly balance our cash across the year. First quarterly interim dividend over 2022 will be €1.37 per ordinary share and will be made payable on August 12, 2022. In Q2 2022 we repurchased around 2.3 million shares for a total amount of around €1.2 billion. Total shares bought under the 2021-2023 program until end of Q2 is around 12.4 million shares for a total amount of around €7.9 billion. With that I would like to turn the call back over to Peter.

Thank you, Roger. As Roger highlighted, revenue and profitability for the quarter basically came within guidance. We expect sales in Q3 to be in a similar guided range as Q2 as increasing supply constraints drive more fast shipments and delay revenue recognition to subsequent quarters. Looking at the more near-term market dynamics, we see a couple of mixed messages. Some customers are indicating they are seeing signs of slowing demand in certain consumer-driven market segments, primarily PCs and smartphones. Other market segments like high performance computing and automotive are still seeing strong demand. Litho tool utilization at our customers is still at very high levels while we are also seeing chip inventory levels trending towards pre-COVID levels. The demand for our systems still significantly exceeds supply this year and we see no change to this demand picture. We are planning to ship a record number of systems but we are faced with an increasing number of supply constraints, which, as it seems today, are likely to continue throughout the year. In an effort to recover from these delays, we are increasing the number of fast shipments to get systems to customers as quickly as possible. And as a reminder, a fast shipment process skips some of the testing in our factory. And final testing and formal acceptance then takes place at the customer site. This leads to a deferral of revenue recognition for those shipments until formal customer acceptance but does provide our customers with earlier access to wafer output capacity. As fast shipments delay revenue recognition to subsequent quarters, we are seeing more delayed revenue that will move into next year. The value of fast shipments in 2022 leading to revenue recognition in 2023 is expected to increase from around €1 billion, as previously communicated, to around €2.8 billion, an increase of €1.8 billion. This then also leads to €1.8 billion lower revenue recognition in 2022 and we therefore now expect year-on-year revenue growth of around 10%. As a reminder, we began the year expecting a revenue growth of around 20%, or approximately €22.3 billion, and €1 billion value of fast shipments at the end of this year. We are now expecting a revenue growth of around 10%, which is approximately €20.5 billion, and €2.8 billion value of fast shipments at the end of the year. So, the total business volume for 2022 is essentially unchanged. For our EUV business, we still expect to ship 55 systems this year. As a result of the higher number of fast shipments, we now expect recognized EUV revenue this year on 40 systems to be around €6.4 billion, which is similar to revenue last year. Compared to last quarter's view, the number of EUV fast shipments in 2022 that will now be recognized as revenue in 2023 has increased by 9 systems to a total of 15 systems with a sales value of around €2.4 billion. In our deep UV and Applications business, we still expect significant growth in both immersion and dry systems, as well as continued strong demand for metrology and inspection systems. Due to a higher number of fast shipments on deep UV systems, we now expect a revenue of around €8.6 billion or an increase of over 15%. For the Installed Base Management business, service revenue will continue to scale with the growing installed base of systems. Customers will continue to look for upgrade opportunities to improve the performance of systems in their fabs but will be limited by high utilization levels which will dictate their ability to install upgrades. We still expect 2022 installed base revenue to grow around 10% year-on-year. Regarding the market segments, there has been no change in customer demand. As the majority of the additional €1.8 billion of delayed revenue is EUV and therefore relates to the Logic segment, we now expect Logic system revenue to be up around 5% year-on-year and Memory system revenue to be up around 20% year-on-year. On gross margin, we started the year with an expectation of a gross margin for 2022 of around 53% and we adjusted this to 52% last quarter due to increased inflationary costs. There are a few developments that have a further impact on our expected gross margin for the year. First, the higher delayed revenue, an increase of €1.8 billion, relates to our higher margin EUV and immersion systems. Secondly, the supply chain issues lead to delayed system starts and therefore we will have lower fixed cost coverage on a lower number of system starts this year compared to what we had planned last quarter. Fixed costs also increased due to our plans to ramp capacity faster in preparation for what still seems to be a good growth year in 2023. And finally, strong inflationary effects relating to material costs and freight and labor continue to impact our cost of sales. Combination of these effects result in an expected 2022 gross margin between 49% and 50%. We are currently in discussions with our customers and suppliers to find a fair way to share in these inflationary cost increases. It is important to emphasize that the reasons for the lower margin guidance are a result of short-term shocks in our ecosystem and can be adjusted over time in collaboration with our ecosystems partners. Therefore, our longer term gross margin ambition of 54% to 56% in 2025, as communicated during Investor Day last year is still valid. Longer term, if we look at the secular drivers, the global megatrends driving our industry are still in place and fueling demand for both advanced and mature nodes. The expanding application space for semiconductors and secular trends are driving long-term structural demand. The growth in the automotive market is very strong as semiconductor content scales with increasing automation and electrification. Customers are also indicating increasing demand for semiconductors as part of the green energy transition and build out of the smart grid. The demand for more mature technology nodes is furthermore driven by the Internet of Things fueling the demand for sensors, power IC's and actuators. Customers are seeing very strong growth due to demand from high performance computing applications. As applications require higher performance at a lower power, we see the energy efficient path to transistor growth driving the need for larger die sizes. Finally, there are a number of fabs being planned or already in progress driven primarily by technological sovereignty investments and subsidy schemes next to increased foundry competition. Growth in semiconductor end markets and increasing lithography intensity are pushing the demand for our products and services. This is evident in our quarterly order flow of over €6 billion the past five quarters and a record order intake of €8.5 billion this past quarter. Our backlog has grown to over €33 billion and we expect continued high order intake this quarter. Almost 85% of this backlog is for EUV and immersion which is planned for advanced nodes. Demand for our products this year and next continues to exceed supply. There is clear concern in the market regarding recessionary fears and the impact this could have on demand. Of course, if we were to go into a significant recession, we would not be immune to this but we don't expect our 2022 business to be impacted. And also for 2023, given our backlog we believe that we are well covered. Customers keep stressing that they will not cut CapEx for litho despite current market conditions and uncertainties. So, assuming that we have the supply chain issues addressed by the end of the year, or early next year, we are still positive that we should be able to turn the envisaged capacity for 2023 of more than 60 EUV systems and more than 375 deep UV systems into another healthy growth year for ASML. And as mentioned in April, we are actively engaging with our supply chain to add capacity so that we will be able to have a shipment capacity in 2025 of around 90 EUV 0.33 NA systems and around 600 deep UV systems. We're also discussing with our supply chain partners to secure a shipment capacity of around 20 EUV 0.55 High NA systems in the medium term. Our 2025 capacity targets as well as updates to our longer term scenarios will be addressed at our Investor Day later this year. So, in summary, although we are currently experiencing obvious supply chain challenges, we are still working to maximize output to meet the strong customer demand by means of fast shipments. We still expect demand to exceed supply this year and next. And even though there are currently clear macro-economic concerns we expect strong continued demand for semiconductors in support of the ongoing digital transformation. We are working to increase our capacity next year with a plan to further increase this by 2025 as communicated last quarter. We remain confident in the opportunity this provides for our future growth which we plan to update you during our Investor Day on November 11th. Really hope to see you there. With that we would be happy to take your questions.

Thank you, Roger and Peter. The operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I would like to ask you kindly limit yourself to one question with one short follow-up if necessary. This will allow us to get to as many callers as possible. Now operator, could we have your final instructions and the first question, please?

Thank you. [Operator Instructions] And the first question comes from the line of Joe Quatrochi of Wells Fargo.

You talked about your customer conversations indicating that even in a moderate recession they're still running your tools. And so maybe you don't see cancellations. But, I guess, how do we think about the delays and potential for delays in delivery times? And how do you think about that relative to your backlog, I guess, is obviously well covering 2023 at this point?

Yes. I think the delays in delivery times, we're trying to -- we're not trying, we're actually doing. We are helping our customers with the fast shipments, which actually means that if you look at our production value, so the value of the system coming out of our factory with and without fast shipments, that's actually, as I said, not as fast as we planned, but it's definitely growing. It is ramping. So, the delay in the delivery times is really delaying the revenue recognition. I mean we are delivering. This is why we include -- this is why we go to fast shipments. And as we can point out and just looking at our production value coming out of the factory, the second half is higher than the first half. And this is also exactly why we are still working on getting a production capacity in our factory. That helps us to ship over 60 EUV systems next year and over 375 deep UV systems because as you pointed out, the backlog is there. And the customers say, "Whatever you do, please ship those systems." because we are under shipment -- we are undershipping the demand. So, we are shipping. It's unfortunately not as fast as we would like to. So, our output ramp coming out of the factory could have been higher. That's because of the supply chain constraints that we currently see. But we are executing according to the backlog and according to plan and according to customer demand. And that's where we are today. And then, this issue of revenue recognition delay, but that is an accounting thing.

And Joe, just to underscore what Peter is saying. So, the delay that we're having is purely based on constraints, right, on constraints in the supply chain. It's not at the request of customers through -- quite to the contrary, right? The customers are still pushing very much for shipments. And therefore, as Peter said, we're turning to the -- we have been turning through the fast-ship mode. And that has not changed at all. So, we don't have customers knocking on our door saying, could we have the tools later? That has just not happened.

Absolutely not.

Got it. And then, as a follow-up, is EUV capacity for next year already covered by the backlog? And then, can you remind us when you start shipping the 3800E next year, how do we think about your ability to do the fast shipments? I think isn't there a period where you're going to have to establish a baseline for that tool before you can fast ship?

Yes. So, the backlog of EUV is well over 100 at this stage. So, -- and we talked about EUV capacity for next year of over 60. Of course, we still have the second half to go. But yes, the answer is well, well covered for next year. In terms of the 3600 versus the 3800, I think the lion's share of the tools that will be shipped next year will be 3600. The 3800 will be a fairly small number, and all of those will -- and those will ship in the second half. But the lion's share also of the second half will be 3600.

Yes, Joe. And I think also last quarter, we -- as we said, we expected that by the end of Q2, we would have been covered until the end of 2022, and that turned out to be correct.

Thank you. Our next question comes from the line of Mehdi Hosseini of SIG.

Just a quick follow-up to that 100 EUV systems that are in your backlog. Peter, if there are about 15 system revenue recognition that are pushed out into '23, does that mean that at some point, it will catch up and you would potentially be recognizing revenue for 75 systems, 60 systems that was expected to be shipped in '23 and 15 systems that are slipping from '22 to '23? And I have a follow-up.

Right. Roger, do you want to...

Yes. I could take it. Mehdi, the fast shipment -- of course, at some stage, you would expect that the effect of fast shipment is somehow going to reverse itself. And there are multiple ways how fast shipment can reverse itself. One way how it could reverse itself is that we simply start to slow down fast shipments and are going back to the way we've done it before. And in that way, you would then indeed get revenue -- get more revenue recognition out of previous quarter than what you push into the next quarter. So, that's one way. Another way, quite frankly, is if indeed, at a certain point in time, fast shipment becomes the standard and it turns out that the installation at the customer as frankly, we're currently experiencing is not experiencing any issues. And that's what we're seeing right now. Right now, we see that by -- even though there is a number of tests that we're not doing at the factory, we see that we're not exporting problems into the field. So to the extent that that has corroborated, in essence, that means that those tests that we used to do in the factory do not have a lot of value or might not have any value at all. So, when it then becomes the standard, then we're also going to turn to the question, might we actually then get factory acceptance even with a few of these tests eliminated. And as a result of that, we could go back to the model of having revenue recognition upon shipment rather than upon installation. Of course, we need to have a fact pattern to back that up, right? So there's still work to be done there. So, those are two potential outcomes. Because at a certain stage, I think it is logical that you would expect some of these fast shipments effectively reversed and as a result of that, to get benefit from previous quarters rather than see it go into the next quarter. Timing is difficult to project, when exactly that is and when you might see the reversal. But it's not lost, right? And anything that we push out of the year at some point we'll be able to deliver.

Yes. And to your math, I mean it's a simple math, anything we will ship in terms of EUV next year, whether it's 60 or 55 or 65 or whatever number it is, that is the number. And if we can recognize all those shipments, then of course, everything we've pushed out of 2022 into 2023 will come on top, yes.

Okay. And then a follow-up question for both of you, Peter and Roger. I'm just trying to understand how you're planning. And in case there is more risk, how are you planning to mitigate the risk? Peter, you highlighted the weaker end-market demand from PCs and smartphone. That effectively accounts for half of the semiconductor industry. You talked about your customers' customer have inventories that are at all-time high. And there are uncertain factors. Yes, hyperscalers are doing well, but that was expected to be seasonally strong in the second half. So, as I look into the first half of next year, given all unknown factors, what is ASML now thinking or doing to mitigate the downside risk if, in fact, there is some pushout in the equipment delivery scheduled for the first half of 2023?

Well, what we are doing, if that would happen, which we don't think is going to happen, I'll explain later why. Then, we -- as you know from our cost of goods, 80% to 85% of our cost of goods is in the supply chain. So actually, it means that we would have to spread that pressure, like we did in any other downcycle in the past. We will spread that in a now larger supply chain. So what? So, we will just adjust our output. That's what we normally would do. And the reason why I think 2023 is still going to be good and is going to be a growth year and you refer to EUV has to do with the fact that when we look at the EUV shipments, so where are we shipping to? Till the end of next year, we will ship to 8 new EUV fabs, 8, yes, which are largely, you could say, fabs on an average at least 40,000 per month capacity. Those fabs needs -- way over 300,000 wafer starts per month capacity that's being built that actually needs EUV tools. And not only EUV tools, they need immersion tools and they need dry tools, yes? And those are all fabs which are in the advanced nodes, which are the leading edge fabs for our customers. And yes, there may be a slowdown, but the innovation won't stop. And I'm pretty sure that our customers, if you ask all of them -- just refer to TSMC's comments a couple of days ago. They have a strong belief in the digital transformation. So, any short-term shocks in the demand cycle -- and you have to compare with the long-term view that our customers have on the whole digital transformation, and that's why they are building fabs. 8 EUV fabs till the end of next year need tools, and they need immersion and they need dry. And so, this is why we have a big backlog. So, you have to -- clearly, customers are going to adjust some of their CapEx and going to make choices when there is a recessionary environment or when there's a slowdown in the demand. But a longer-term view, yes, or what is needed going forward, bearing in mind that they're dealing with a supplier that has by far the longest lead time, which has, to be honest, traumatized them over the last two years with respect to their capacity, yes, they’re going to take the tools. That's at least our strong conviction today.

And also bear in mind, Mehdi, that on -- at least on the EUV tools and a number of immersion tools, we get quite significant down payments. So, before a customer decides to either cancel or push out, I mean that's illogical, if you realize that they put up already so much money to get the order. So, I think the likelihood, particularly in combination with the points that Peter made, I think, is low. And yes, the way we are organized, we have quite a bit of flexibility. We're still hiring many, many people. We have flexibility in our supply chain. We have a strong balance sheet. So, I think from that vantage point, I think the Company is well prepared. But the likelihood is just kicking in at this stage given the data points I just mentioned with Peter.

Yes. And on cancellations, as you know, Mehdi, in all the time I've been with the Company, the only cancellations I can remember were -- was a customer actually canceled orders because they wanted to replace that tool type with a new tool type is the kind of cancellation that we are getting, so. And yes, this is actually not what we've seen in the past. Having said that, there's a lot of talk -- and I said it in my introductory comments. There's a lot of talk about recessionary fears. And nobody can really give good insights or foresight into how deep a recession would be. When it's a deep, deep recession that everybody gets it, and I think we have different problems than customer pushouts, yes? When it's a moderate recession, then I’d have to refer back to what I said earlier in my answer to your question, I think we're going to ship those machines, because they need it.

And our next question comes from the line of from Francois Bouvignies of UBS.

I have maybe one clarification. It's on the deep UV for 2023. So, Peter, if I look last quarter, you expected to reach, I think, the full deep UV capacity in '23 at 375 versus a demand of 600. Now, since last quarter, we experienced a slowdown that you flagged as well and especially maybe on the Memory side, which is a bit more aggressive since last quarter. So, in light of this change and maybe that the Memory represents a meaningful part of deep UV revenues, do you still expect to reach 375 tools next year?

Yes. I think, like I said also in my introductory comments, we don't see -- yes, we are not -- of course, not there. So, we listen and we also read what customers have actually said and especially to specific Memory customers that listen, we see a slowdown, especially in the consumer segment on PCs and on smartphones. But they hastened to pick up the phone and said one thing, "I don't think you can give our machines to other people because of this. We want those machines." For the reasons I just gave as an answer to the question that Mehdi just asked a few minutes ago. So yes, I mean we see it, we hear it, but we also listen to what customers say, "We have these strategic investment projects, and we need those machines." And whether there are memory customers in Korea or in the U.S. or in China, for that matter, they want those machines because they still aren't getting what they plan. Now, could that demand go down? Yes, it could go down. But there's still a significant gap, as you pointed out, between what we can make and what they ask for us. Now -- and that has come down, but before it hits that 375 and before it hits the real strategic investment that we are doing in all these fabs, we need to have a real slowdown. And that's anybody's guess at this moment in time.

And maybe my quick follow-up. How should we think about the pricing of the tools in '23? I mean, given the inflation, is it something that you will negotiate maybe, the pricing, which is EUV may be more driven by your innovation and update of tools? But what about the deep UV pricing strategy going forward?

Well, I think it applies to both tool types. I think, when you look at the purchase orders, the purchase order an agreement with a buyer and a seller. And over the last couple of decades, we never had to deal with this very short-term sharp rising inflation. So, in fact, we don't have any formal agreement in contracts that would allow us to just jack up the price. However, we are in discussions with customers and already, we have some indications that customer say, "Yes, we understand your predicaments and your issues." So, we're in discussion with those customers and then see what's fair. But clearly, for everything that's non-deal going forward, that's clear that we will adjust our pricing to just cover the inflationary pressures wherever they will go. I think that's also clear. But there is a -- we need to actually -- and we are in discussions with our customers to say, "Listen, this is a short-term effect. So, how are we going to deal with it?" And that's happening as we speak.

Our next question comes from the line of Alexander Duval at Goldman Sachs.

A quick one on gross margins. Given that a certain amount of fixed costs are being recognized this year for some of the EUV and DUV systems that will have related revenue recognition not until next year, which obviously has a negative impact on gross profitability this year, should we expect that this is going to translate into a margin boost next year? And how large could that be? If you could help us understand a bit the moving parts and quantify perhaps, that would be very much appreciated.

Yes. Alexander, the principal in and by itself is correct, right? So, to the extent that we have less starts this year, that means that you get less fixed cost coverage. And of course, to the extent that you catch up on that, of course, you get a bit more fixed cost coverage on that. So, that is true. That's -- on an EUV system, that's a couple of million that you're looking at €4 million or €5 million approximately of the amount there for a system that you look at in terms of the fixed cost coverage. So, that is part of it. Of course, it goes back to an earlier question that we had, which is at what state do you expect that the effect of fast shipment is going to reverse itself, right? So that's what it is related to. But then, you have a little bit of an indication on the direction of travel and the amount of all.

Our next question comes from the line of Aleksander Peterc of Societe Generale.

So, just one clarification first and then a quick follow-up. The clarification would be, when I listen to your comments, Roger, it seems to me that you imply that a couple of years out, we'll either see the delayed revenue recognition going away naturally as you no longer have to fast ship or you think that there will be a change in revenue recognition so that that final test will no longer be required because it is proven largely as redundant? So, should we think that, say, by 2025, we no longer will have this variable buffer of revenue that is hard to estimate and that changes revenue prospects quite a lot? And then I have a quick follow-up.

To be honest, I don't -- I hope we don't have to wait all that long for that. But at a certain point in time, it is, as I said, either this becomes standard practice. And as it becomes standard practice, then I think we've also been able to persuade customers that this works and that we're not exporting problems from the factory into the field. And then, I think we should be in a position to also get customer sign-off when the tests are done here in the factory. And then we should also be able to get revenue recognition there. Or we determine that we're no longer going to do fast shipments and that we're going to go back to what we did before. I think it's pretty likely that it will be either one of those two outcomes. And therefore, I think at a certain point in time, you will see the fast shipment effects reverse itself. To be honest, I don't hope that that's going to last another three years because the communication with you guys will be significantly enhanced if we no longer have to go through all the adjustments around fast shipment. And that's a realistic assumption that I would have. And I hope that, at least somewhere next year, we're going to be in a position to determine whether we're going to go left or right.

Yes. And you have to realize that this fast shipment has only got one goal, and that is to reduce the cycle time from the moment that we start a system until we get it accepted at the customer side. That's the only goal. And the only reason why customers say, "Ship me the tool." is because we now have evidence because we're doing this for 9 months now, that as Roger explained earlier, the installation time between a fast shipment and a non-fast shipment is exactly the same. So, what we've effectively done, we have reduced the cycle time from the start of the system to the installation at the customer side with about a month. Well, if this is something that we can make standard practice and perhaps we need another year or so or a couple of quarters to come to the conclusion that that is the predictable outcome, then we could also go to the customers and say, hey, then we should basically change the acceptance term in our factory by just doing less test. And I think we're just building the approved data, but that would effectively mean a reduction of cycle time, and that's to the benefit of both ASML and the customer. So, it's not an accounting thing. Unfortunately, accounting is what we have to deal with. But just from a business point of view, it makes a lot of sense.

Thank you. Very clear. And a quick follow-up. Just on what's going on in terms of EUV average selling prices. Your guidance for the year seems to imply this will land for the year at €160 million per system approximately as H1 was significantly higher, I think, around €172 million. What is driving the lower ASP in the second half? Is it just a question of mix and features or anything else to play here?

No. I think, it really was an anomaly in the first quarter. So, in the second quarter, you would see that the ASP is €163 million. So, that's around the €160 million that we say -- that we advise you to take. As you know, last quarter, we had a very limited number of tools that we had in revenue recognition. And there was a one-off effect which drove up the ASP very, very high, but that was a one-off effect that we explained in the first quarter. The second quarter is back to normal. And therefore, the expectation to use €160 million for the remainder of the year is probably the right way to go.

Our next question comes from the line of Didier of Bank of America.

Didier Scemama from Bank of America. I just wanted to double check one thing related to this fast shipment. So, if I understand correctly, if fast shipments become the norm, that effectively means you are shaving off a month of cycle time. And obviously, it's a lower cost for you, obviously because you don't have to do the test on site. But does that mean that there is no difference at that point from shipments and revenues? Is that the right way to think about it? And I've got a follow-up.

Yes. Under the condition that the customers agree, because the customers need to accept ownership and also the economic ownership of that machine when at least our factory here in the Netherlands. I mean that is currently not in our documentation. That's something probably that the accounts would require. But this is something where the customers will then say, "Fine. With all the proof data that we have gathered over this period of time, this is where we need to go through." Because then it will be the standard.

Yes. But to be clear, we're not there yet, right? So just to be clear, we haven’t -- we're not there yet. But what we see is that if, at a certain point in time, it becomes the standard, if at a certain point in time it is completely accepted by everyone, including the customers, then we would think it would also be the right outcome, accounting-wise, for this to be accepted. But this whole track record in order to get there has not yet been established at this point. But we are working and hoping to get towards that point, if indeed we determine that fast shipment is going to be the standard on a go-forward basis.

Understood. I've got a follow-up. It's on DUV. So, a lot of questions I've got from investors are about your 600 DUV capacity target and even at 375 that you are sort of talking about for 2023. Can you run us through the drivers of that uptake in demand? How much of that is driven by effectively lagging edge capacity, capital intensity going up? So, we see the like of Texas Instruments and others talking about capital intensity that is more than double their historical levels, in part because they can no longer buy bankrupt fabs for $0.10 on dollar, in part because I suspect there is no or limited secondhand equipment available on the market. And how much of that is driven also by higher layer count for 3D NAND? If you could give us a sense of the structural shift in higher DUV to demand.

Yes. I wish I had something like a time warp machine bringing us to November 11 of this year because it's exactly where we're going to talk about, so. So, I won't give you the data because we're working on the data -- actually we have something here that we are actually looking at our -- using in our own models. But I think, generally, deep UV, what we've significantly underestimated is the demand for deep UV-type nodes, whether it's 28-nanometer, 45, 65, 90, 0.18 micron and the application space is being used for. We actually have evidence that the number of products that our foundry customers are running on these nodes is significantly higher than two or three years ago. So the number of products, yes, and is driven by the need for -- and that's data, yes, which I'm not going to share with you, and we need to find a way how we want to show that to you in November 11. But the fact of the matter is that the number of products that are used in this 28-nanometer up to 0.18 micron, even higher, yes, that a number of projects run are significantly higher over the last two or three years. And that's driven by the end markets. And we talked about this, and I gave you that in my introductory remarks, whether it's automotive or whether it's Internet of Things, whether it's anything in a company with sensors, power IC, non-optical sensors, microcontrollers. That space has grown significantly because the nodes that I just mentioned, that -- exactly the nodes that are working for those applications. And this is what we are seeing today. And that's not going down. And yes, I think as Mehdi said, we are at record high inventories. Well, not for everything, yes, and especially in that space. Yes, everywhere I think we see inventories growing, but they're growing at a moderate pace. So that's what we are seeing. And that's also where the demand from our customers comes. It's anecdotal. But as a Chinese customer says, I want to build a 12-inch, do their planning, and they’re going to do it 12-inch wafer fab for 90-nanometer products. I said, "What are you going to use it for?" Well, it's for automotive, yes? And it's for the energy transition, yes? And that's a 12-inch fab. And that's 90, 90-nanometer, nine-zero. And we cannot get those tools out in the market because you are right. I mean the -- all DRAM fabs are not for sale anymore. Everything that we used to do to take systems out of the memory fabs, and we use them in Logic and the -- fabs. Those systems are not there anymore. They're all gone. So, you'll have to buy new. These are all trends that we will discuss in more detail at ever. But for us, the trend is also clear. There are many, many more applications and products coming out of these nodes used for these applications, which are not leading edge, yes, but which are basically everywhere. It's the Internet of Everything.

Our next question comes from Krish Sankar of Cowen and Co.

Yes. Hi. Thanks for taking my questions. I have two of them. First one for Peter. How to think about how much domestic China is going to grow this year? Last quarter, you said 20%. I want to find if that's -- what growth is going to be. And also, any color you can give on some press speculation on U.S. banning deep UV shipments to China? And then a quick follow-up for Roger. See, hypothetically speaking, if supply constraints -- there were absolutely no supply constraints today, would there be no fast shipments anymore? Thank you.

Well, let me answer the China growth question. I think we said it last quarter. I think China growth with the same percentage as the rest of the world. And we grow -- or let's say, we grow 10%, which means, yes, all in all, every geographical ship to region grows with 10%, which includes China. They grow with 10% just like rest of the world. I think on the U.S. better, there a lot of speculation but also media coverage on all things, which -- that is not new. I mean it's been on the table from time to time. It pops up and which is just a political position. We just have to wait what the politicians come up with. But having said that, I think we need to realize that China is an important player in the semiconductor industry and especially in the more, let's say not mature nodes but in the more mainstream semiconductors. It's everything that has to do with deep UV, yes? And it ranges from 20-nanometer up to 28, 45, 65. It's immersion, it is dry. And they're a very significant supplier of the global markets. So, we just have to be careful what we are doing. That's just -- we've also been saying publicly that we cannot ignore the fact that China has a manufacturing capacity out there on deep UV, which the world needs.

Krish, your question on hypothetically, if there were no supply constraints, would you stop doing fast shipments, well, I think if there hasn't been supply constraints, we probably wouldn't have started fast shipments, I think, in reality. The problem, however, is we might actually like it. And this goes to the earlier point that Peter made. I mean, indeed, we do find out that we can omit a number of testing steps in the factory that ultimately do not, in any way, lead to the erosion of the quality of the product that we ship, and therefore, doesn't lead to any problem on installation. We might actually like it so much because it gives us more time gives us more capacity. So, that's why it's hard to answer that hypothetical question. Now that we've done it, we might actually like it. And we might actually, at a certain point in time, make it a standard.

Our next question comes from the line of Adithya Metuku of Credit Suisse.

I had two questions. Firstly, you talked about roughly 150 bps of inflation-related gross margin headwinds since the beginning of the year, so including the downgrade we saw three months ago. So, when you look at your pricing contracts and renegotiation time lines, can you give us some color on when you expect tool repricing to offset this margin headwind? I'm just trying to get a sense for how much of the margin headwind I should back to when to my numbers for 2023 when I think that my gross margins for 2023. And then, I've got a follow-up for -- on the fast shipments.

Yes. I think when you -- and I said it before, we don't have any formal agreement that could give us the, let's say, the supplier power to just have raised supplies to any level that we want. That's not the case. And you also need to look at the 150 basis points that we talked about this year, which really relates to short-term shocks and -- of which for instance, freight is a significant one. Freight cost got quick -- I mean, it's just gone through the roof, which, of course, we're in being close negotiation with the customer. Hey, why don't you pick up the cost because it's the cost for -- we -- it's normally in the contract. But this is something which is so extraordinary, where, say, hey, this does not make sense, which would be a relatively short-term fix, yes? Now, there's another main reason for the 150 basis points is labor, especially in the service space. When you go to Asia and you go to Korea and to Taiwan, we've seen labor cost inflation of up to 20% this year. And it's not planned. It's just because we are losing people hand over fist if we don't do it. So these are the short-term shocks that, of course, will also be corrected, yes, in the service contracts. So, having said that, those are really the short-term inflation shocks and the short-term fixes that I think we can get through with our customers. The bigger things are, of course, inflation for the longer term. And that largely is material because the material for our EUV systems has already been sourced. It's over here. So, it's the inflationary pressure that we might see next year. So, this is why the negotiations with the customers are about next year and the year beyond. So, this is where I think it has to come to a fairness where we are looking at the unavoidable pressures above what I would call as a normal inflation percentage of 2%, 3% that we always take into consideration. And anything above that, we just have to get compensated with our customers. And we're right in the middle of the negotiations on this issue. So, you have to really split between short-term effects, short-term fixes, longer-term effects, longer-term fixes.

Got it. Understood. And just as a follow-up to Roger. When we look at these fast shipments, do your customers give you milestone payments on top of repayments, or will they just say you just when they sign off on the tool after you've done the testing at the customer side? I just want to better understand the cash flows on these tools.

Yes. Adi, there is in essence no cash flow impact from fast shipments because what happens is -- as you know, in a number of tools, we get down payments and the remainder, in essence, with the lion's share of our shipments is for shipment. So upon shipment, we get said. So that is not influenced by the fact that installation is going to happen later on. So no impact, I would say, on the profile of the cash flow.

Got it. And then essentially, there are no milestone payments then on this fast shipment?

No. No, there are not.

And effectively, the invoice goes out at the same -- whether it's a fast shipment or not a fast shipment, the invoice goes out at the same point, it's upon shipment. So from a cash flow point of view, there is no difference.

And our next question comes from the line of C.J. Muse of Evercore ISI. C.J. Muse: I guess first question, Peter, in the video remarks that you provided, I was intrigued by the fact that you thought your supply chain headwinds could be corrected by the end of '22. So, can you please discuss your thoughts around that as well as how you are kind of dealing with some of the gas and energy issues in Germany? Any implications to your key supplier, Carl Zeiss?

Yes. I think the supply chain headwind -- I mean, it is an assumption, and the assumption is based on the fact that when we look at the material escalations that are really delaying the output, we saw a peak I think last month, but it's coming down a bit. And we're just trying to extrapolate that trend, which, of course, is dangerous because it's just -- you just look at the graph. And then if we follow that trend, then there could be a possibility by the end of the year, early next year, there could be a situation where we are more in control of those supply constraints. Having said that, there are still guarantees because if you look at the supply chain, it comes down to the first tier suppliers, but if you really look through it, they -- often the issue is not in the first tier supplier but in the second, the third and fourth tier, even further, goes to base materials, yes? And that transparency is limited. We're pretty transparent, I think, in the first and the second tier. But beyond that, it becomes more difficult. So, we're just following the trend. And it's a bit -- trends extrapolation that we're doing that might give us end of the year, beginning of next year, so more relief. But like I said, it's based on limited transparency that we currently have. Now, on the energy situation in Germany and especially on Carl Zeiss, I mean, they of course, are taking measures and have taken measures. I think the dependence of Carl Zeiss on gas is going to be limited. I mean they're switching to oil. They are not a big gas user either. But what is true in -- for the transparency, what I mentioned on our own supply chain is also probably true for the energy supply chain. How transparent is our insight into potential energy risk or gas risk in Germany? We don't know. I mean it could be far down in the third- or fourth- or fifth-layer suppliers. Having said that, I think government with also companies are on top of this issue. And there will be gas, whether gas comes from different sources, it is a matter of price, which is going to be an inflation issue. But I think every supplier that we know of and that we have some insight into is working on securing their energy resource. And also here some of our suppliers are actually claiming a very strategic status and getting reference. So overall, work in process. I think we don't have the full transparency, yet to give you a definite answer. But I think I'm more confident than it was a couple of months ago that our suppliers are doing the right thing. C.J. Muse: That's helpful. As my follow-up, interesting that Memory orders actually accelerated 40-plus percent sequentially, I think, to a new record high for ASML, and that's amidst obviously weakness that we've heard in terms of CapEx trends from Hynix and Micron. So, I guess as you look at the memory complex, obviously, you're benefiting from EUV technology buys, but would love to hear your overall thoughts there, both technology focus on strength and perhaps what kind of weakness you have in your build plans around new capacity adds. Thanks so much.

Yes. The weakness in our own build capacity, if I understand you correctly, C.J. -- are you asking this also what we see in our own build capacity? Because we don't see any weakness in our... C.J. Muse: No, no, no. This is just -- how you're thinking about Memory trend in your record -- yes.

So, basically weakness that our customers are talking about and to build capacity, it also goes back to what I said earlier. I mean, yes, EUV plays a significant role. The EUV transition in Memory, especially, is happening and it's essential. When we talk about 8 new EUV fabs, some of them are memory fabs, which is an essential part of the roadmap transition. And EUV is critical in that sense. Well, building these big €15 billion-plus fabs, you need to fill those fabs with the latest and greatest technology, which is EUV -- is EUV-driven. But of course, you cannot make this device without immersion and without dry deep UV. And this is what our customers also told us. Yes, they are acknowledging the weakness. Yes, they are concerned about the inventories that are going up, but they're not backing off, which they didn't do in the past either. They're not backing off of their innovation roadmaps, which are essential for their future competitiveness. So this is why they say, they pick up the phone and if they tell us, "Listen, we talk about weakness, but don't you guys dare to just change your shipment pattern to us?" So, this is what I'm holding on to. That is why we have this big order backlog, and we know where to ship to. So, yes, of course, there is a longer-term correlation between structural longer term weakness and our -- or the ability of ASML to ship to those customers. But shorter term and longer term are currently two different things.

All right. Thank you. If you are unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations department with your question. Before we sign off, I'd like to remind you that our Investor Day is currently planned to be held in Veldhoven on November 11th of this year. We hope you'll be able to join us. Now, on behalf of ASML, I'd like to thank you all for joining us today. Operator, if you could formally conclude the call, I'd appreciate it. Thank you.

Thank you. This now concludes the ASML Q2 2022 financial results. Thank you for participating. You may now disconnect.