Thank you for standing by. Welcome to the ASML 2022 Second Quarter Financial Results Conference Call on July 20, 2022. Throughout today's introduction, all participants will be in listen- only mode. After ASML's introduction, there will be an opportunity to ask questions. If you'd like to ask a question, please press zero one to register. If you'd like to withdraw a question, please press zero two at any time during the call. If any participant has difficulty hearing the conference, please press star zero for operator assistance. I'd now like to turn over the call to Mr. Skip Miller. Please go ahead, sir. Yeah, 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 law. 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. Before we begin the Q&A session, Roger and I would like to provide you with 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 EUR 5.4 billion, slightly above our guidance. We shipped 14 EUV systems and recognized EUR 2 billion revenue from 12 EUV systems this quarter. Net system sales of EUR 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 EUR 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 semi costs. On operating expenses, R&D expenses came in at EUR 789 million and SG&A expenses at EUR 222 million as guided. Net income in Q2 was EUR 1.4 billion, representing 26.0% of net sales and resulting in an EPS of EUR 3.54. Turning to the balance sheet, we ended the second quarter with cash equivalents and short-term investments at a level of EUR 4.4 billion. Moving to the order book, Q2 net system bookings came in at a record EUR 8.5 billion, reflecting the continued strong customer demand for both advanced and mature nodes. Strong order intake of EUR 5.4 billion for EUV 0.33 NA and EUV 0.55 NA systems, and EUR 3.1 billion for non-EUV systems. Total net system bookings was driven by Logic, 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 and 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 EUR 5.1 billion and EUR 5.4 billion. This excludes around EUR 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 EUR 1.4 billion. Gross margin for Q3 is expected to be between 49% and 50%, similar to prior quarter. Expected R&D expenses for Q3 are around EUR 810 million, and SG&A is expected to come in at around EUR 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 EUR 3.70 per ordinary share. Together with the interim dividend paid in 2021, this results in a total dividend for 2021 of EUR 5.50 per ordinary share. We plan to grow our dividends and will move from a biannual to a quarterly dividend pay out 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 of 2022 will be EUR 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 EUR 1.2 billion. Total shares bought under the 2021 to 2023 program until end of Q2 is around 12.4 million shares for a total amount of around EUR 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 expected 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 down or a 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. Tool utilization at our customers is still at very high levels, while we're 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're increasing the number of fast shipments to get systems to customers as quickly as possible. 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 side. This leads to a deferral of revenue recognition for those shipments until formal customer acceptance, but does provide our customers with early 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 EUR 1 billion, as previously communicated, to around EUR 2.8 billion, an increase of EUR 1.8 billion. This then also leads to EUR 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% for approximately EUR 22.3 billion and EUR 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 EUR 20.5 billion and EUR 2.8 billion value of fast shipments at the end of the year. The total business value, 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 EUR 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 nine systems to a total of 15 systems with a sales value of around EUR 2.4 billion. In our DUV and application business, we still expect significant growth both in immersion and dry systems, as well as continued strong demand for metrology and inspection systems. Due to a higher number of fast shipments on DUV systems, we now expect a revenue of around EUR 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 EUR 1.8 billion of delayed revenue is EUV and therefore relates to our Logic segments, 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 EUR 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. Finally, strong inflationary effects related to material costs and freight and labor will 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 discussion with our customers and suppliers to find a fair way to share in this inflationary cost increase. 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 ecosystem 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 mega trends 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. 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 the 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 ICs, and actuators. Customers are seeing very strong growth due to demand from high-performance computing applications. As applications require higher performance and 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 process services. This is evident in our quarterly order flow of over EUR 6 billion for the past five quarters, and a record order intake of EUR 8.5 billion this past quarter. Our backlog has grown to over EUR 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 a 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. Also for 2023, given our backlog, we believe we are well covered. Customers keep stressing that they will not cut CapEx for litho despite current market conditions and uncertainties. Assuming that we have the supply chain issues addressed by the end of the year or early next year, we're still positive that we should be able to turn the ambitious capacity for 2023 of more than 60 EUV systems and more than 375 DUV systems into another healthy growth year for ASML. As mentioned in April, we're actively engaging with our supply chain to add capacity so that we'll be able to have a shipment capacity in 2025 of around 90 EUV 0.33 NA systems and around 600 DUV 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. In summary, although we are currently experiencing obvious supply chain challenges, we're 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. Even though there are currently clear macroeconomic concerns, we expect strong continued demand for semiconductors in support of the ongoing digital transformation. We're 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 11. 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 to kindly limit yourselves 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. At this time, we'll begin the question- and- answer session. Again, please press zero one to register a question and zero two to withdraw a question from the queue. If you're using speaker equipment today, please lift the handsets before making your selections. One moment please for the first question. The first question comes from the line of Joe Quatrochi of Wells Fargo. Please go ahead. Your line is open. Yeah, thanks for taking the questions. You know, you talked about your customer conversations indicating that, you know, even in a moderate recession, they're still wanting your tools. You know, maybe you don't see, you know, cancellations, but I guess, how do we think about the delays and potentially for delays in delivery times? You know, how do you think about that relative to your backlog, I guess, you know, is obviously well covering 2023 at this point. Yeah. I think the delays in the delivery times. We're actually doing, and 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. The delay in the delivery times is really a delay in revenue recognition. I mean, we are delivering. This is why we go to fast shipments as we can point out and then just looking at our production value coming out of the factory, the second half is higher than the first half. This is also exactly why we're still working on getting a production capacity in our factory that helps us to ship over 60 EUV systems next year and over 375 DUV systems. Because as you pointed out, the backlog is there, and the customers say, "Whatever you do, you know, please ship those systems," because we are under shipment. We are under shipping the demand. We are shipping. It's unfortunately not as fast as we would like to. Our output ramp coming out of the factory could have been higher. That's because of the supply chain constraints that we currently see. We are executing according to the backlog and according to plan and according to customer demand. That's where we are today. Then this issue of, you know, revenue recognition delay, but that is an accounting thing. Joe, just to underscore what Peter is saying, the delay that we're having is purely based on, you know, on constraints, right? On constraints in the supply chain. It's not, you know, at the request of customers. Quite to the contrary, right? The customers are still pushing very much for shipments. Therefore, as Peter said, we have been turning to the fast ship mode, and that has not changed at all. We don't have, you know, customers knocking on our door saying, "Could we have the tools later?" That has just not happened. Absolutely not. Got it. As a follow-up, is EUV capacity for next year already covered by the backlog? Can you remind us, you know, when you start shipping the NXE:3800E next year, how do we think about your ability to do the fast shipments? I think isn't there a period where you kind of have to establish a baseline for that tool before you can fast ship? Yeah. The backlog of EUV is well over 100 at this stage. We talked about, you know, we talked about EUV capacity for next year of over 60. Of course, we still have the second half to go. Yeah, the answer is well covered for next year. In terms of the TWINSCAN NXE:3600D versus the NXE:3800E, I think the lion's share of the tools that will be shipped next year will be TWINSCAN NXE:3600D. The NXE:3800E will be a fairly small number, and all of those will ship in the second half. The lion's share also of the second half will be TWINSCAN NXE:3600D. Yeah, Joe, and I think also last quarter, we, as we said, we expected that by the end of Q2, we would have been covered till the end of 2023, and it turned out to be correct. Perfect. Thank you. Thank you. Our next question comes from the line of Mehdi Hosseini of SIG. Please go ahead. Your line is open. Yes. Thanks for taking my question. 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 2023, does that mean that at some point it will catch up and you would potentially be recognizing revenue for 75 system, 60 system that was expected to be shipped in 2023, and 15 system that are slipping from 2022 to 2023? I have a follow-up. All right. You know, yeah. Roger Dassen, you want to— Yeah, I can 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. There are multiple ways how fast shipment can reverse itself. One way how it could reverse itself is that we simply, you know, start to slow down fast shipments and are going, you know, back to the way we've done it before. In that way, you would then indeed, you know, get revenue, get more revenue recognition out of a previous quarter than what you what you push into the next quarter. 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 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. To the extent that that is 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. When it then becomes the standard, then we're also gonna turn to the question, you know, might we actually then get, you know, Factory Acceptance, even with a few of these tests eliminated. 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. All right. There's still work to be done there. Those are two potential outcomes, because at a certain stage, I think it is logical that you would expect some of these fast shipment effects to be reversed. As a result of that, you know, to get benefit from previous quarters rather than, you know, see it go into the next quarter. Timing is difficult to project when exactly that is and when you might see the reversal. You know, it's not lost, right? Anything that we push out of the year at some point will be reversed. Yeah. 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, you know, that is the number. If we can recognize all those shipments, then of course, everything we've pushed out of 2022 into 2023, we'll come on top. Yes. Okay. A follow-up question for both you, Peter and Roger. I'm just trying to better understand how you're planning, and in case there is more risk, how are you planning to mitigate the risk? Peter, you highlighted weaker end market demand from PC than smartphone. That effectively accounts for half of the semiconductor industry. You talked about your customer's 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 significantly strong in the second half. I look into the first half of next year, given all the unknown factors, what is ASML thinking or doing to mitigate the downside risk if in fact there is some push out in the equipment delivery schedule for the first half of 2023? Well, you know what we are doing, if that would happen, which we don't think is gonna happen, I'll explain to you later why. As you know, from our cost of goods, 80%-85% of our cost of goods is in the supply chain. Actually what it means is, you know, we will have to spread that pressure like we did in any other down cycle in the past. We will spread that in a now larger supply chain. What? We will just adjust our output. That's what we normally would do. Now the reason why I think 2023 is still going to be good and it's going to be a growth year is, 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 eight new EUV Fabs 8. And which are largely, you could say fabs on an average at least a 40K per month capacity. Those fabs need. So there's way over 300,000 wafer starts per month capacity that's being built that actually needs EUV tools. Not only EUV tools, they need immersion tools, and they need dry tools. Those are all fabs which are at in the advanced nodes, which are the leading edge fabs for our, you know, for our customers. Yes, there may be a slowdown, but the innovation won't stop. I'm pretty sure that our customers, if you ask all of them, just refer to TSMC's comments a couple of days ago. Yeah. They have a strong belief in the digital transformation. 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're building fabs. 8 EUV Fabs till the end of next year need tools, and they need immersion, and they need dry. This is why we have a big backlog. You have to— You know, clearly customers are going to adjust some of their CapEx. They're going to make choices when there is a recessionary environment or when a slowdown in the demand. The longer term view, yeah, or what is needed going forward, bearing in mind that they're dealing with a supplier with by far the longest lead time, which has, to be honest, traumatized them over the last two years with respect to their capacity, yeah, they're going to take the tools. That's at least our strong conviction today. Also bear in mind, Mehdi Hosseini, that on at least the EUV tools and a number of immersion tools, we get quite significant down payments. Before a customer decide, you know, to either cancel or push out, I mean, that's a bit illogical if you realize that they put up already so much money to get the order. I think the likelihood, particularly in combination with the point that Peter Wennink made, I think is low. Yes, the way we are organized, we have quite a bit of flexibility. We're still hiring many people. We have flexibility in our supply chain. We have a strong balance sheet. I think from that vantage point, I think the company is well prepared. The likelihood of this kicking in at this stage, given the data points you just mentioned, we believe is low. Yeah. On cancellations, as you know, Mehdi, in all the time I've been with the company, the only cancellations I can remember was a customer actually canceled orders because they wanted to replace that tool type with a new tool type. That's the kind of cancellations that we are getting. You know, this is actually not what we've seen in the past. Having said that, you know, there's a lot of talk, and I said it in my introductory comments. There's a lot of talk about recessionary fears, you know, and nobody can really give a good insight or foresight into how deep a recession will be. When it's a deep, deep recession and everybody gets hit, then I think we have different problems than you know, customer pushouts. Yeah. When it's a moderate recession, then I have to refer back to what I said earlier, in my answer to your question. I think we're going to ship those machines 'cause they're needed. Thanks for all the details. Thank you. Our next question comes from the line of François Bouvignies of UBS. Please go ahead. Your line is open. Thank you very much. I have maybe one clarification. It's on the DUV for 2023. Peter, if I look last quarter, you expected to reach, I think the full DUV capacity in 2023 at 375, versus a demand of 600. Now, since last quarter, we experienced a slowdown that you know, flagged as well, and especially maybe on the Memory side, which is a bit more aggressive since last quarter. In this, in light of this change and, maybe that the Memory represents a meaningful part of DUV revenues, do you still expect to reach 375 tools next year? Yeah, I think, like I said also in my introductory comments, yes, we are, of course, not deaf. We listen, and we also read a lot, you know, customers have actually said, and especially to specific Memory customers that we see a slowdown, especially in the consumer segment on PCs and on, you know, smartphones, that they hastened to pick up the phone and said, "The one thing, 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, you know, Mehdi just asked a few minutes ago. Yes, I mean, we see it, we hear it, but we also listen to what customers said, that we have these strategic investment projects, yeah? And we need those machines whether they're 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 planned. Now, could their 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 from us now. That ask can come, you know, down, but before it hits that 375 and before it hits the real strategic investment that they are doing in all these fabs, yeah, we need to have a real slowdown. That's anybody's guess at this moment in time. Okay. Thank you very much, Peter. Maybe my quick follow-up, it's how should we think about the pricing of the tools in 2023? I mean, given the inflation, is it something that you renegotiate maybe the pricing, which is, EUV may be more driven by your, you know, innovation and updates of tools, but what about the DUV pricing strategy going forward? Well, I think, you know, it applies to both tool types. I think, when you look at the purchase orders, the purchase orders are in agreement with the buyer and a seller, you know, and, over the last couple of decades, we never had to deal with this very short-term sharp rising inflation. 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 indication that customers, "Yeah, we understand your predicaments and your issues." We're in discussion with those customers then to see what's, you know, fair. Clearly for every net non-PO going forward, you know, 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. You know, we need to actually and we are in discussions with our customers to say, "Listen, you know, this is a short-term shock effect, so how are we going to deal with it?" That's happening as we speak. Great. Thank you very much. Thank you. Our next question comes from the line of Alexander Duval at Goldman Sachs. Please go ahead. Your line is open. Yes. Hi, everyone. Many thanks for the question. 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. Yeah, Alexander, the principle in and by itself is correct, right? To the extent that we have less starts this year, that means that you get less fixed cost coverage. Of course, to the extent that you catch up on that, of course, you get a bit more fixed cost coverage on that. That is true. That's, you know, on an EUV system, that's a couple of million that you're looking at, EUR 4 million or EUR 5 million approximately is the amount there per system that you're looking at in terms of the fixed cost coverage. That is part of it. Of course, it goes back to an earlier question that we had, which is, you know, at what stage do you expect that you know that the effect of fast shipment is going to reverse itself, right? That's what it is related to. You have a little bit of an indication on the direction of travel and the amount involved. Many thanks. Thank you. Our next question comes from the line of Aleksander Peterc of Société Générale. Please go ahead. Your line is open. Yes. Hi. Thank you for taking my question. 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 acquired because it is proven largely as redundant. 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? I have a quick follow-up. To be honest, I hope we don't have to wait all that long for that. You know, at a certain point in time, it is, as I said, either this becomes standard practice, and if it becomes standard practice, then I think we've also been able to persuade customers that this is, that this works and that we're not, you know, exporting products from the factory into the field, and then I think we should be in a position, you know, 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. We determine that, you know, 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. Therefore, I think at a certain point in time, you will see the fast shipment effect reverse itself. To be honest, I don't hope that that's gonna last another three years because I think the communication with you guys will be significantly enhanced if we no longer have to go through, you know, all the adjustments around fast shipments. That's a realistic assumption that I would have. I hope that, you know, at least somewhere next year, we're going to be in a position to determine whether we're going to go left or right. Yeah, I know. 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. The only reason why customers say, "Ship me the tool," is because we now have evidence because we're doing this for nine months now that as Roger explained earlier, the installation time between a fast shipment and a non-fast shipment is exactly the same. What we 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 customer say, "Hey, then we should act." Basically change the acceptance term in our factory by just doing less tests. I think we're just building the proof data, because that would effectively mean a reduction of cycle time, and that's to the benefit of ASML and the customer. It's not an accounting thing. Unfortunately, accounting is what we have to deal with. Just from a business point of view, it makes a lot of sense. Thank you. Very clear. 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 that we'll land for the year at EUR 160 million per system approximately. As H1 was significantly higher, I think around EUR 172 million, what is driving the lower ASP in the second half? Is it just a question of mix and features or anything else at play here? No, I think it really was an anomaly in the first quarter. In the second quarter, you would see that the ASP is EUR 163. That's around the EUR 160 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. There was some one-off effects which drove up the ASP very high. 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 for the remainder of the year is probably the right way to go. Great. Yeah. Yeah. Thank you very much. Thank you. Our next question comes from the line of Didier of Bank of America. Please go ahead. Your line is open. Yeah. Good afternoon, gentlemen. Didier Scemama for 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 between, you know, shipments and revenues? Is that, is that the right way to think about it? And I've got a follow-up. Thank you. Yeah. Under the condition that the customers agree, because the customers need to accept ownership and also the economic ownership of that machine when it leaves our factory here in the Netherlands. I mean, that is currently not in our documentation. That's something probably that the accountants would require. This is something where the customers would then say, "Fine, you know, with all the proof data that we have gathered over this period of time, you know, this is where we need to go to." Then it will be the standard. Yeah. To be clear, we're not there yet, right? Just to be clear, we're not there yet. What we say 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. This whole track record in order to get there has not yet been established at this point. We are, you know, working and hoping to get towards that point if indeed we determine that fast shipment is gonna be the standard on a go-forward basis. Understood. I've got a follow-up. It's on DUV. A lot of questions I've got from investors are about your 600 DUV capacity targets 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? We see, you know, the likes of Texas Instruments and others, you know, talking about capital intensity that is more than double their historical levels. In part because they can no longer buy, you know, bankrupt DRAM fabs for, you know, 10 cents on the dollar, in part because I suspect there is no or limited second-hand equipment available on the market. How much of that is driven also by higher layer count for 3D NAND? If you could give us a sense of t his structural shift in higher DUV tool demand. Yeah. You know, I wish I had something like a time warp machine of bringing us to November 11 of this year, because that's exactly what we're going to talk about. I won't give you the data because we're working on the data, and actually we have some data here that we are actually looking, like, using in our role models. I think generally DUV, what we've significantly underestimated is the demand for DUV type nodes, whether it's the 20th nanometer, 45, 65, 90 or 0.18 micron and the application space it's being used for. We actually have evidence that the number of products that our foundry customers are running on these nodes, yeah, is significantly higher than two or three years ago. The number of products. It's driven by the need for. That's data, which I'm not going to share with you. We need to find a way how we want to show that to you in November, you know, eleventh. The fact of the matter is that the number of products that are used in this 20th nanometer up to 0.18 micron or even higher, that the number of products run are significantly higher over the last two to three years. That's driven by the end markets. We talked about this, and I gave you that in my introductory remarks, whether it's automotive or whether the Internet of Things, whether it's anything that comes in with sensors, Power ICs, Mobile Sensors, you know, Microcontrollers, that space has grown significantly because the nodes that I just mentioned, that's exactly the nodes that are working for those applications. Yeah. This is what we are seeing today, and that's not going down. Yes, I think Mehdi Hosseini said we are at record high inventories. Well, not for everything. Yeah. And especially in that space. Yes, everywhere I think we see inventories growing, but they're growing at a moderate pace. It's what we are seeing. That's also where the, you know, demand from our customers comes. It's anecdotal, but I had a Chinese customer says they want to build a 12-inch fab node. Well, they're planning, and they're going to do it, a 12-inch wafer fab, you know, for 90-nanometer products. I said, "What are you going to use it for?" "Well, it's for automotive, yeah, and it's for the energy transition." Yeah. That's a 12-inch fab. That's 90 nanometer, nine zero. We cannot get those tools out of the market. You are right. I mean, the old DRAM fabs are not for sale anymore. Everything that we used to do to take systems out of the Memory Fabs and, you know, reuse them in, you know, you know, Logic and in, these IDM fabs, those systems are not there anymore. They're all gone. You'll have to buy new. These are all trends that we will discuss in more detail at, you know, November eleventh. For us, the trend's also clear that many, many more applications and products coming out of these nodes used for these applications which are not leading edge, yeah, but which are basically everywhere. It's the Internet of Everything. Great. Thanks very much. Thank you. Our next question comes from Krish Sankar of Cowen and Company. Please go ahead. Your line is open. Yeah. Hi. Thanks for taking my question. I have two of them. First one for Peter. How to think about how much domestic China is gonna grow this year. Last quarter you said 20%. I want to find out if that's what growth is going to be. Also any color you can give on some press speculation on U.S. banning DUV shipments to China. Then a quick follow-up for Roger. Hypothetically speaking, if there was absolutely no supply constraints today, would there be no fast shipments anymore? Thank you. Well, let's answer the China growth question. I think we said it last quarter. I think you know, China grows with the same percentage as the rest of the world. We grow or let's say we grow 10%, which means, yes, all in all, every geographical you know, ship to region grows with 10%, which includes China. They grow with 10% just like the rest of the world. I think on the U.S. ban, there's been a lot of you know, speculation but also media coverage on this which you know, which is not new. I mean, it's been on the table from time to time. It pops up you know, which is just a political decision. We just have to wait and see what the politicians come up with. 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 DUV. It ranges from 20 nanometer up to 28 to 45, 65. It's immersion, it is dry, and a very significant supplier of the global markets. We just have to be careful what we're doing. That's just, I mean, that's just what we've also been saying publicly, you know, that we cannot ignore the fact that, you know, China has a manufacturing capacity out there on DUV, which the world needs. Krish, your question on, you know, hypothetically, if there were no supply constraints, would you stop doing fast shipments? Well, I think that if there hadn'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. This goes to the earlier point that Peter made. I mean, if indeed we do find out that we can omit a number of testing steps in the factory that ultimately, you know, do not in any way lead to an erosion of the quality of the product that we ship, and therefore doesn't lead to any problems upon installation. You know, we might actually like it so much because it gives us more capacity and time. You know, that's why it's hard to answer the 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. Got it. Thanks, Peter. Thanks, Roger. Thank you. Our next question comes from the line of Adithya Metuku of Credit Suisse. Please go ahead, your line is open. Yeah. Good afternoon, guys. I had two questions. First, you talked about roughly 150 basis points of inflation-related gross margin headwinds since the beginning of the year, including the downgrade and, you know, we saw three months ago. So when you look at your pricing contracts and renegotiation timelines, can you give us some color on when you expect tool repricing to offset this margin headwinds? I'm just trying to get a sense for how much of a margin headwind I should factor in to my numbers for 2023, when I think about my gross margins for 2023. Then I've got a follow-up on the fast shipment. Yeah. I think, you know, when you and I said it before, we don't have any formal agreement that could give us the, let's say the pricing power to just raise prices to any level that we want. That's not the case. You also need to look at the 150 basis points that we talked about this year, which really relates to short-term shocks. Of which, for instance, freight is a significant one, you know. Freight costs have gone up. I mean, it's just gone through the roof, which of course we're in close negotiation now with the customer. "Hey, why don't you pick up the cost?" Because it's the cost for. It's normally in the contract, but this is something which is so extraordinary where say, you know, this, you know, does not make sense, which would be a relatively short-term fix. Now, there's another main reason for the 150 basis points is labor, and especially in the service space. You know, 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. It's not planned. It's just 20% because we're losing people hand over fist if we don't do it. These are the short-term shocks that of course will also be corrected in the service contracts. 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 you know, the inflation for the longer term. That largely is material because the material for our EUV systems has already been sourced. It's already here. It's the inflationary pressure that we might see next year. This is why the negotiations with the customers are about next year and, you know, the year beyond. This is where I think, you know, it has to come to a fair assessment where, you know, 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. Anything above that, we just have to get compensated with our customers, and we're right in the middle of the, you know, negotiations on this issue. You have to really split between short-term effects, short-term fixes, long-term effects, long-term fixes. Got it. Understood. Just as a follow-up to Roger, when we look at these fast shipments, do your customers give you milestone payments on top of prepayments, or will they just pay you just when they sign off on the tool, after you've done the testing at the customer site? I just want to better understand the, you know, the cash flows on these tools. Yeah, Adithya. There is in essence no cash flow impact from fast shipment because what happens is, you know, as you know, with a number of tools we get down payments and the remainder, in essence with the lion's share of our shipments is upon shipment. Upon shipment we get paid. That is not influenced by the fact that, you know, that installation is gonna happen later on. No impact, I would say, on the profile of the cash flows. Got it. Essentially there are no milestone payments then on this fast shipment? No, there are not. Okay. No. Got it. Effectively, you know, the invoice goes out at the same time whether it's a fast shipment or not a fast shipment. The invoice goes out at the same time, and it's upon shipment. From a cash flow point of view, there is no difference. Okay. Got it. Thank you. Thank you. Our next question comes from the line of C.J. Muse at Evercore ISI. Please go ahead. Your line is open. Yeah. Thank you for taking the question. 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 2022. Can you please discuss, you know, your thoughts around that, as well as, you know, how you are kind of dealing with some of the gas and energy issues in Germany, and the implications to your key supplier, Carl Zeiss? Yeah, 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. So it's coming down a bit, and we're just trying to extrapolate that trend, which of course is dangerous because, you know, it's just, you know, you just look at the graph, and then if we follow that trend, then it could be a possibility by the end of the year, early next year, it could be a situation where we are more in control of those, you know, supply constraints. Having said that, there is no guarantees, you know, because if you look at the supply chain issues, it comes down to the first-tier suppliers. If you really look through it, very often, the issue is not in the first tier of suppliers, it's not in the second, it's the third or fourth tier, even further towards the base materials. Yeah. That transparency is limited. We're pretty transparent, I think, in the first and the second tier. Beyond that, it becomes more difficult. We're just following the trend. It's a bit, you know, extrapolation that we're doing that might give us end of the year, beginning of next year, some more, you know, relief. 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've of course taken measures. I think the dependence of Carl Zeiss on gases could be limited. I mean, they're switching to oil. They are not a big gas user either. What is true for the transparency that what I mentioned on our own supply chain is also probably true for the energy supply chain. You know, 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 governments, but also companies are on top of this issue. There will be gas, whether gas comes from different sources. It is a matter of price, which is going to be an inflation issue. I think every supplier that we know of, and that we have some insight into, all is working on you know, securing their you know, energy resource. Also, yeah, some of our suppliers are actually claiming a very strategic status and getting preference. All in all, 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 I was a couple of months ago that our suppliers are doing the right thing. That's helpful. As my follow-up, interesting that memory orders actually accelerated 40-plus% sequentially, and I think to a new record high for ASML. That's amidst, you know, obvious weakness that we've heard in terms of CapEx trends from Hynix and Micron. I guess as you look at the memory complex, obviously you're benefiting from EUV technology buys, but we'd love to hear, you know, your overall thoughts there, both technology focused on strengths and perhaps, you know, what kind of weakness you have in your build plans around new capacity adds. Thanks so much. Yeah. You know, you know, 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 own build capacity. No, no. This is just how you're thinking about, you know, memory trends. O kay. Your record, yeah. Basically weakness of that that our customers are talking about and the build capacity. It also goes back to what I said earlier. I mean, yes, EUV plays a significant role. EUV transition in memory, especially DRAM, is happening, and it's essential. You know, when we talk about the eight new EUV Fabs, some of them are Memory Fabs, you know, which is an essential part of the roadmap transition. EUV is critical in that sense. Well, building these big $15 billion+ fabs, you know, you need to fill those fabs with the latest and greatest technology, which is EUV. It's EUV driven. Of course, you cannot make this device without immersion and without dry DUV. This is what our customers also told us. You know, yes, they are acknowledging their weakness. Yes, they are concerned about 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. Yeah. This is why they say they pick up the phone, you know, and they tell us, "Listen, you know, we talk about weakness, but don't you guys dare to just change your shipping pattern to us." This is what I'm holding on to. This is why we have this big order backlog, and we know where to ship to. Yeah. Yes, of course, there is a longer term correlation between structural longer term weakness and our or the ability of ASML to, you know, ship to those customers. But shorter term and longer term are currently two different things. Yeah. Very helpful. Thank you. 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 questions. Before we sign off, I'd like to remind you that our Investor Day is currently planned to be held in Veldhoven on November eleventh 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.