ASM International NV (ASM) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM International Q4 2022 Earnings Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Victor Bareno, Investor Relator. Please go ahead, sir.

Thank you, Juliet. Welcome, everyone. I'm joined here today by our President and CEO, Benjamin Loh; and our CFO, Paul Verhagen. ASM issued its fourth quarter 2022 results yesterday evening at 6:00 p.m. Central European Time. For those of you who have not yet seen the press release, it is available on our website, asm.com, together with our latest investor presentation. As always, we remind you that this conference call may contain information relating to ASM's future business and results in addition to historical information. For more information on the risk factors related to such forward-looking statements, please refer to our company's press releases, reports and financial statements, which are available on our website. And with that, I'll turn the call over to Benjamin Loh.

Thank you, Victor, and thanks to everyone for attending our fourth quarter 2022 results conference call. I'll start with a few of the highlights. ASM delivered a strong performance in 2022. We increased our equipment revenue by 38% at constant currencies, our sixth consecutive year of double-digit growth and despite significant supply chain challenges throughout the year. We further expanded our R&D engagements with key customers, and we continue to invest in our people and in the growth of our company. I want to thank all our ASM people as they ran again the extra mile to meet our customers' requirements and contributed to another successful year for our company. I also want to thank our investors and other stakeholders for their continued support. The agenda for today's call is, as usual, Paul will first review our financial results. I will then continue with a discussion of the market trends and the outlook followed by the Q&A. With that, handing over to you, Paul.

Thank you, Benjamin. So let me start with, first, with our acquisition of LPE and how this impacts our financial numbers. As you know, we closed this deal early October. And with LPE, we now have entered the fast-growing silicon carbide market. As we will disclose in our annual report, the revenue contribution of LPE in 2022 with consolidation as of October 3 amounted to EUR 11 million. This was, to some extent, negatively impacted by supply issues. LPE experienced solid demand in the recent periods and ended '22 with a strong order backlog. We now expect revenue of more than EUR 130 million for LPE in 2023, up from our earlier target of more than EUR 100 million. As we mentioned previously, LPE nicely fits the profitability target model of ASM. And that is excluding expense for integration and amortization of purchase price allocation, PPA. In the initial period, the PPA expenses will be relatively higher. For the combination of Reno and LPE, we incurred PPA expenses of EUR 8 million in Q4. And in 2023, the PPA will have an estimated impact of EUR 46 million at the operating level. In our press release and investor presentation, we have provided a detailed overview of PPA expenses and the impact by P&L line item for Q4 and estimates for the coming years. In the rest of my remarks, I will focus on the normalized numbers, so adjusted for PPA expense. Now I'm going over to our fourth quarter results. Our revenue amounted to EUR 725 million in Q4, up 42% year-on-year at constant currencies. And on January 17, we already announced that revenue would amount to approximately EUR 710 million, which was higher than earlier expected, thanks to a further improvement in supply chain conditions in the fourth quarter. By customer segments, revenue was led by foundry, which increased substantially, both year-on-year and compared to Q3 to a new quarterly high. This was followed by logic, which increased compared to Q3, but decreased year-on-year. Memory was the third largest segment, up year-on-year, but down substantially compared to the record high in Q3. In the fourth quarter, gross margin was 46.9%, about unchanged compared to 47.0% in Q4 '21 and down from 48.1% in the third quarter. As always, the quarterly variations in gross margin are largely explained by mix, which as a reminder was relatively strong in Q3 of 2022. Q4 operating margin amounted to 26.2% in Q4, about unchanged from Q3 and in line with the 26% level that we announced in our press release of January 17. Below the operating line results included a translation -- a currency translation loss of $36 million in Q4 compared to a gain of $25 million in Q3, mainly due to the depreciation of the U.S. dollar in the quarter. The full year results include a EUR 25 million positive translation results. Income in associates, which largely reflects a 25% stake in ASMPT, dropped to $8 million in Q4, down from USD 20 million in Q3 and USD 26 million in the year ago period. For the full year of '22, income in associates dropped from EUR 87 million to EUR 78 million, which is mainly explained by the slowdown of the back-end equipment market in the second half last year. Our reported net results in Q4 were positively impacted by a partial reversal of EUR 106 million of the impairment that we took in Q3 for our stake in ASMPT. This reversal was due to the increased market value of the ASMPT stake in Q4. Our new orders in the fourth quarter amounted to EUR 829 million, up 26% year-on-year at constant currencies and up from $676 million in Q3. By customer segments, bookings were led by the combination of Foundry and Logic, which increased year-on-year but decreased compared to the third quarter. This was followed by power/analog, which includes an exceptionally high order intake from LPE in Q4 as also announced earlier. Memory orders continue to be relatively weak in Q4. In Q4, we also rebooked part of the China fab orders that we earlier removed from the backlog in Q3. As a reminder, in Q3, we conservatively derisked the backlog by taking all orders for Chinese fabs that could be impacted by the export controls that were announced on October 7. For the first 9 months of 2022, this impact would have been equivalent to 40% of our China sales. At the end of November, we reported our updated assessment that the impact would be more moderate, a negative impact of 15% to 25% instead of the 40% of our sales in China. In Q4, we rebooked the larger part of the tool orders that we still can ship according to our updated assessment and complying with all export regulations. Most of the shipments related to these bookings are scheduled for the first half of '23. Our equipment sales in China for the full year amounted to 16% of total ASM sales similar to the first 9 months. Apart from the rebooked orders, we had a solid order intake in Q4 from Chinese customers. Virtually, all of it related to mature nodes, power/analog and wafer manufacturer segments. Let's now go to the full year results. At EUR 2.4 billion, as sales increased 33% at constant currencies. Equipment sales grew 38% in constant currencies. And as such, we clearly outperformed the WFE market that grew by a high single-digit percentage in 2022. We recorded double-digit growth in all our product lines. ALD grew strongly and continued to account for more than half of our equipment sales. We booked the strongest growth in Epi, our second largest product line. Spares and services increased by 11% at constant currencies, driven by solid growth in our outcome-based services. In terms of customer segments, revenue in the combined Logic/Foundry segment grew strongly and again represented more than half of our sales. Sales in the Memory segment showed a solid double-digit increase and accounted for 19% of our total equipment sales in '22. Growth was especially strong in NAND. Also worth noting was again the very solid growth of the combined segments of analog power and wafer manufacturers in 2022, which in the recent quarters have been approaching the size of our memory business. Gross margin for the year decreased from 47.9% to 47.5%, mainly reflecting mix. Cost inflation went up considerably in 2022, especially in the second half, but we were able to manage it well last year. For 2023, our focus remains on managing our margin as per our midterm guidance through cost reduction initiatives such as value reengineering and via price increases to offset inflationary cost impact. SG&A expenses increased 45% in '22, mainly reflecting the increase in headcount and higher compensation, both fixed and variable. And as discussed at previous occasions, we stepped up SG&A as we needed to strengthen the organization and in preparation of high business levels. Those investments have now largely been completed. At 3% in Q4, the sequential increase in SG&A was already more moderate. In '23, we expect a further increase in SG&A, but at a significantly more moderate pace than '22. Net R&D expense for the full year increased by 52%. This largely reflects the increased R&D staff numbers, which were up 49% in 2022 and more generally, a strong increase in R&D projects. In 2023, we project a further double-digit increase in net R&D expenses, driven by a growing pipeline of new opportunities on the technology road maps in the next years. Operating profit for the year increased by 30% with the operating margin slightly decreasing from 28.4% to 26.6%. As we continue to increase our R&D investments this year, it is possible that the operating margin will temporarily be slightly below 26% in 2023. We remain committed to the structural target of 26% to 31%, and we expect the operating margin to move back into this range beyond 2023, supported by continued solid revenue growth prospects. Now turning to the balance sheet. We ended the fourth quarter with a cash position of EUR 419 million, down from $670 million at the end of Q3, at a decrease in cash position was fully explained by the $276 million in cash spent in Q4 on the acquisition of LPE. As a reminder, we aim to bring the net cash to a target level of EUR 600 million, as announced in our Investor Day 2021. Excluding the $340 million cash spent on the acquisition of Reno and LPE, free cash flow in 2022 increased by 43% to EUR 381 million, supported by a solid increase in profitability and despite an increase in working capital. Days of working capital were at 62 at the end of 2022, up from 58 at the end of 2021. To have more flexibility, we increased our buffer inventories of critical parts and materials. Supply chain constraints also resulted in increased WIP as some tools could not be completed for delivery to customers due to missing parts. CapEx increased to EUR 101 million in 2022. This was at the high end of the target range and in line with our earlier projections. Apart from some spending that was carried over from '21, we spent more on expansion and upgrading of lab facilities as well as the completion of the second manufacturing floor in our Singapore facility. For 2023, so for this year, we decided to increase the CapEx to EUR 150 million to EUR 200 million, significantly above the annual target guidance level of $60 million to $100 million. We plan to expand our innovation and manufacturing infrastructure to enable continued growth that we expect beyond our 2025 target, and we need to start preparing for it now. In terms of shareholder remuneration, in 2022, we paid $122 million in dividends. And for this year's AGM, we will propose a dividend of EUR 2.50 per share, similar to last year. We did not yet start $100 million share buyback program for the period '22, '23 due to the cash required for the acquisitions we did in 2022, but we still intend to execute this program in 2023. And finally, looking at our solid performance in 2022, we believe we're on track towards the midterm targets that we launched on our Investor Day in 2021, including the 2025 revenue target of EUR 2.8 billion to EUR 2.4 billion (sic) [ EUR 3.4 billion ], and we are planning to have our next Investor Day in September of this year. And with that, I hand the call back to Benjamin.

Thank you, Paul. Let's now look in more detail at the trends in our markets. The slowdown in the semiconductor end markets that started in Q2 of last year continued in the final part of the year. Consumer-related parts such as PCs and smartphones were hardest hit, but also other segments were impacted by inventory corrections. The semiconductor market ended the year with growth of just 5%. The WFE market grew by a high single-digit percentage, with equipment growth of 38%, we clearly outperformed the WFE market in 2022. The Logic/Foundry segment continued to be the strongest driver for the WFE market. And for ASM, in 2022 and also in Q4, demand remained healthy. Key customers continue to invest in advanced node capacity to prepare for the new end market products that will be introduced in 2023 and beyond. In the numerous logic/foundry node, which some of our customers have been ramping into high-volume manufacturing since the end of 2022, the number of ALD layers and applications has increased by a strong double-digit percentage. We also continue to have strong traction with all the leading logic/foundry customers for the next node, which will be the transition to gate-all-around device architecture. We are confident that the transition to gate-all-around will expand our combined ALD and Epi markets in leading logic/foundry with USD 1.2 billion as we detailed in our Investor Day. In the past few quarters, we have secured several tool wins, both for development and HVM for critical gate-all-around related applications. ALD is an enabling technology for gate-all-around devices and supported by our active customer engagements, we believe we are well positioned to maintain our leading position. In addition, in Epi, the benefits of our Intrepid such as film uniformity and cost of ownership are also particularly relevant for gate-all-around applications, which we expect will further share gains for us towards our target of doubling our Epi market share from 15% to at least 30% by 2025. In Memory, market conditions further weakened towards the end of the year and going into 2023, illustrated by rising inventories and price declines. A number of customers have announced substantial CapEx cuts for 2023. Despite the sharp correction in memory WFE in the second half, we grew our memory sales by a solid double-digit percentage in 2022. Demand continued to be solid for high-K metal gate in which ASM has a leading share as customers adopt this key technology for a growing part of DRAM devices. We had especially strong growth in 3D-NAND as we successfully gained a number of new positions for our advanced ALD gap fill solutions in 2022. We are working with customers in R&D on several new opportunities as we remain focused on further strengthening our position in the memory market in coming years. We also had strong growth in the mature node segments of power, analog and wafer manufacturers. We serve these markets primarily with our vertical furnaces, and with part of our epitaxy portfolio, silicon Epi and now with LPE also silicon carbide. Over the last few years, we have strongly expanded our position in these segments for a large part driven by the success of some of our new products. A great example is our Intrepid ESA tool that we introduced in 2021 for 300-millimeter applications in power and the wafer market and already contributed significant revenue in 2022. Another example is our new 300-millimeter vertical furnace platform. Next to customers in the Logic segment, we have booked multiple new wins in the power/analog market and expect a solid revenue contribution in 2023. Among the highlights in 2022 were also the 2 acquisitions we did last year. We know earlier in 2022 was a smaller but important acquisition that will help to improve the performance of our plasma products in the coming years. We also continue to be very excited about the acquisition of LPE. In the fourth quarter, LPE booked exceptionally strong orders from a mix of customers located in Asia and the U.S. As Paul mentioned, we increased our expectation for LPE sales to more than EUR 130 million in 2023. The forecast of a 25% CAGR for the silicon carbide Epi market that we communicated last July now looks conservative following recent announcement about substantial manufacturing capacity expansion in this segment. In addition, LPE has expanded the number of R&D engagements for its next-generation 200-millimeter tools. We are in the process of integrating LPE, and we continue to see many opportunities for value creation by combining expertise in areas such as platform development and process control technologies and leveraging our scale in supply chain and our global service network. A key challenge in 2022 was the tight supply chain situation, while at the same time, our customers' demand continued to increase significantly. Our team executed well in close collaboration with our suppliers and customers. And with the benefit of earlier action such as maintaining strategic inventories and qualification of additional suppliers, we were able to grow our shipments consistently quarter-to-quarter, reaching again, record high sales in 2022. In the fourth quarter, we increased our sales more than expected as we benefited for further improvements in supply conditions in the course of the quarters, although we currently are still experiencing constraints in certain areas. From an internal capacity point of view, we benefited in 2022 from our timely investment in our newly expanded facility in Singapore. At the same time last year, we also made the second manufacturing floor in this facility ready for production, which we completed in January 2023. And this will provide us with flexibility to meet our midterm targets. As Paul already discussed, we have to start preparing for continued growth beyond the 2025 period. This will require further expansion of our innovation and manufacturing infrastructure. As a first step, we recently announced a USD 100 million investment in our Korea activities to expand R&D and manufacturing in the coming years. This is not only intended to serve our leading Korea customers. But in Korea, we also have one of our global innovation centers where we developed key ALD applications such as gap-fill. We are also exploring options to expand our operations in Phoenix, Arizona and in Europe. Next, I would like to highlight our progress in ESG. After announcing our net zero by 2025 targets in 2021, we took an important step by submitting our net zero measurements and targets for Scope 1, 2 and 3 greenhouse gas emission to the science-based target initiative in December 2022. People is another key focus area for us in sustainability. And in 2022, we continue to further embed our core values 'We care, we innovate, we deliver' throughout the organization. I'm also pleased about the progress in our diversity and inclusion targets. In 2022, the female participation increased from 15% to 17% of the total workforce, and we continue to target a further improvement towards 20% by 2025. Our progress in sustainability is increasingly recognized in improved ESG ratings. Moving on to the outlook. Looking at 2023, the global semiconductor market is forecasted to contract by some 5% with continued inventory corrections in the first half of the year. WFE spending is expected to decrease by a mid- to high teens percentage this year, a level that we expect to outperform. The logic/foundry part of the WFE market is expected to be more resilient with a forecasted single-digit percentage decrease. In the trailing-edge nodes logic/foundry is projected to be weaker, especially for consumer-related products, while spending on the most advanced nodes is expected to remain healthy in 2023 as leading customers continue to execute their multiyear investments in technology road maps. The reduction in memory is expected to continue with spending in this segment down double digits in 2023. While this will also impact our memory sales in 2023, we believe that our recent application wins such as ALD gap-fill in 3D-NAND position us well once new node capacity investments in the memory segment recover again. Equipment spending in the power/analog and wafer markets is expected to remain healthy in 2023 with robust automotive-related demand, partly offset by slower consumer-related demand. In these segments, as mentioned earlier, we also expect to benefit from solid new product momentum. We ended the fourth quarter with a record high order backlog of EUR 1.7 billion, which underpins our expectation for the first half. As announced in yesterday's press release, we expect revenue for the first quarter of EUR 660 million to EUR 700 million at constant currencies with a slight increase in the second quarter revenue compared to this level. Based on the current visibility, we expect revenue in the second half of 2023 to remain at a healthy level, albeit somewhat lower than in the first half of 2023. Looking at the longer term, we believe the prospects for ASM continue to be bright. Despite the market slowdown in 2023, structural drivers for our industry are still very much intact. Third-party research firms continue to expect the semiconductor market to grow to more than USD 1 trillion by the early 2030s. Semiconductors have become essential in all aspects of life and help to create new applications such as in cloud computing, artificial intelligence and electrification of cars. Our customers continue to invest in the development of faster and more power-efficient next-generation semiconductors, enabled by further scaling, new device architectures such as gate-all-around and the introduction of new materials, all of which drive further demand for our ALD and Epi technologies. With that, we have finished our introduction. Let's now move on to the Q&A.

We'd like to ask you to please limit your questions to not more than 2 at a time, so that everyone has the opportunity to ask a question. Okay, Judith, we are ready for the first question, please.

[Operator Instructions] The first question is from Didier Scemama with Bank of America.

Just had a few questions, if I may. So first of all, can you help us try to calibrate expectations for calendar year '23 on the revenue line? I think your comments helpful, but it's still reasonably vague for us. So maybe can you just help us understand what healthy levels in the second half might mean? My first question. And then secondly, on the CapEx guidance, what does that tell us about your level of confidence in growth in '24 and '25. I mean should we expect a return to double-digit or mid-teens revenue growth in the medium term because of that? Or is that not the way to think about it? And I've got a follow-up.

I'll take the first question, and then I'll maybe let Paul answer you on the CapEx question. So if you look at what we have guided, I think in first half, we are actually looking at trying to convert some of the huge backlog that we have accumulated until the end of the year. So first half, we think that, that conversion is going to help us secure revenue. We do expect that in the first half, especially in the leading-edge logic and foundry that the revenue is going to continue to be healthy. We also expect that the momentum that we have seen in the power/analog and wafer, especially those that are related to automotive and industrial. That's also going to be healthy. Memory, of course, is going to be weak. And compared to, let's say, the second half, which, in our opinion, it's still a little bit too early to really make a judgment call. I think we have looked at the second half as I would say, somewhat going to be lower than the first half, but it's going to be dependent on, I would say, a couple of factors. One, of course, is are we going to see the macroeconomic situation improve so much so that demand goes up. We also need to see, for example, recovery in, let's say, some of the segments that are currently impacted by inventory corrections or adjustment. So I think it's a little bit early to go into a second half to really give a better picture. But what we can say is that first half, because we are also announcing this time very late, we have a good view towards Q1 and Q2.

I'll take the second part, Benjamin. On the CapEx, we -- for this year, we increased the CapEx to $150 million to $200 million. This is more for beyond 2025. So we have communicated earlier that with the current completion of our second manufacturing floor in Singapore, we believe we have sufficient capacity in place up to '25 to deliver on our midterm targets. So there we're confident that, that still is possible. So with the announced CapEx plans that you have heard today, you should think of beyond 2025. And we are planning on our Investor Day, which we will hold in September of this year to give more color on what is precisely means. But now we thought it's appropriate to at least give an indication and this year CapEx is higher because we're starting with the next level of expansion.

Very well. And maybe my follow-up is on gross margins. So if you could explain the dynamics impacting the mix in Q4. Was it just a function of the Chinese orders or Chinese business being removed from the P&L? In which case, is that the new level for the business? Or are there any other factors that we should be thinking about for '23?

Yes. The gross margin, indeed, as actually every quarter, short term is mostly determined by mix. In Q4, actually, we return to, let's say, what I would call an average mix. It also included some China sales, partially related to debookings that were done in Q3. As I already mentioned earlier, the biggest chunk of that, we expect to actually feed back in revenue in Q1 and Q2 next year. But I know also in Q4, we had some of that, plus we had also China sales related to, let's say, the combined power wafer analog market, which was continue to be healthy. So there's nothing really special in the Q4 margin other than sometimes the mix is slightly better and sometimes it's slightly less favorable. So I would say it's a very average, maybe slightly below average quarter, but nothing really to call out. So I wouldn't say that this is the beginning of a new trend. We've seen this level of margin as close to 47% actually almost throughout the whole year. I think Q3 was a little bit higher. So nothing really special to call out here, Didier.

The next question is from Adithya Metuku with Credit Suisse.

Yes. So firstly, just -- maybe just focusing on the second half. You talked about logic/foundry remaining strong in the first half in momentum in power/analog and wafer remaining healthy and memory will be weak. Now when I look out to the second half, I can't see why leading-edge logic and foundry guys, they're taking your machines with 3- to 6-month lead times now, why they won't take them at least at a similar level in the second half? And the same for the power/analog and wafer guys, where the structural trends are very strong. And memory, if anything, it will improve, it's unlikely to get worse from the levels you're seeing in the first half. So I'm struggling to reconcile why you think second half revenues would be lower than the first half revenue. So any color you can give on that on a market-by-market basis would be really helpful to help us understand your thinking. And would it be fair to then say that if it is too early to comment, then you've taken a conservative approach to what you expect for the second half? Would that be a fair assumption? That's my first question. And I've got a follow-up.

Okay, sure. Adi, I think your question makes a lot of sense. I think as we shared earlier, we do expect that logic/foundry, especially at the leading edge, that's going to continue to be strong. And in the power/analog wafer space or segment, other than those that are consumer-related, we also expect that, that's going to be healthy. The thing that we have done so far in maybe guiding that the second half will be slightly lower than the first half is based on what we can see today, it is still quite volatile as far as the market is concerned. I mean those are our projections, and we think that highly likely they will play out that way. To give you an example, whether memory will or will not recover, I think in the second half is still left to be seen. I think there are various forecasts, and we're also hearing various types of, I would say, forecast from our customers. So I think that is a little bit more uncertain. Even though it's a smaller part of our business, it is not insignificant. As we have shared this time, it is about 19% of our revenue. And we do hope that it recovers, because if it recovers, I think we are going to be in a good position to even have more, let's say, wins because we have been focusing very much on the technology. That is the reason why we -- you could maybe say that we are a little bit conservative.

Understood. And then secondly, just on the CapEx budget. When you -- you previously when you've talked about raising capacity in Singapore, you -- well, I suppose your predecessor gave some color on how much additional revenue it could enable. I just wondered if you might be able to say something similar on the capacity you're deploying in Korea. And if you're unable to comment specifically on how much additional revenue this facility will be able to enable, maybe you can talk a bit about the additional square footage that led to your manufacturing footprint.

Yes. That's a fair question. Actually, the plan is because this is beyond '25, and we want to come at a more comprehensive update to actually do this in September, Adi, with the Investor Day. So now we stick to our 2025 guidance, and I don't want to start already guiding beyond that at this stage. So in September, we will give a more comprehensive update on all these questions that you have on CapEx and additional capacity and revenue contribution related to that capacity. By the way, a big chunk of that is also R&D, again, because we see a lot of opportunities in R&D. There's a lot going on. So I also note that the material part will be for R&D this time as well.

The next question is from Marc Hesselink with ING.

Yes. Actually, my question is on what you mentioned on gate-all-around winning the first applications. Could you say something about what you're seeing so far on the increase in the intensity. You always said it's a meaningful increase. Is this clearly a more meaningful, like really a step change in the ALD intensity and maybe also the epitaxy intensity.

So we are actively engaged with all 3 customers in the development of the gate-all-around technology. What's really interesting is, I think when you look at the technology that is being developed, there will be, what you call, the first-generation gate-all-around technology. And because of the push in terms of technology advancements, we see that the customers are also starting to look at what is going to be the second generation. So what we can tell you in terms of ALD intensity, whether you call it a step change, of course, depends on what is the number that you attribute to. But we do see a very significant double-digit percentage increase as far as ALD layers are concerned, and this will continue into the second generation gate-all-around. Epitaxy, as well. We do see more usage of epitaxy. And I think we did give some guidance during our Investor Day in 2021, that at least for the first generation of gate-all-around, we see the served available market are expanding by -- or increasing by at least USD 1.2 billion for us. So we are all very excited working hard on trying to secure as many wins as possible.

Clear. And then second question, especially on LPE. The increase in the revenue guidance there. So what's happening there? Is the -- assuming the demand stronger than initially expected? I mean, are you quickly integrating the businesses or you can generate the higher quality product there like really the synergies on the product level? Or what kind of things are behind it?

Sure. I think LPE has always been a company that had very good technology when it comes to silicon carbide epitaxy. And of course, we are now -- the transaction close, October 3, we are now still in the midst of doing the integration. And I think what we have -- what we are seeing today is there is very significant, let's say, demand coming in for investment into silicon carbide over the next couple of years, actually much larger than what we had projected as a 25% CAGR. If you look at what some of the major players have announced, it's probably going to be a higher number. So we have, I think, as part of the integration brought some value to LPE in the following ways. I think one, with platform and process technologies, we have been able to help them improve to some extent, the product. Secondly, LPE by themselves were a small family-owned company, but now they have a larger, let's say, company. So we have better supply chain presence in that sense. And last but not least, and I think this is where customers are getting a lot of comfort is that they see now LPE as part of a larger company with a global footprint. And this has enabled us to engage and be in discussions. And in fact, in some development with, I would say, all the major players in silicon carbide worldwide. So we are actually very enthusiastic about the prospects. And based on what we see, it was necessary for us to increase the guidance because we felt that the guidance of EUR 100 million was a little bit on the low side, and we wanted to take this opportunity to increase the guidance to $130 million.

The next question is from Stephane Houri with ODDO.

My question is around LPE and silicon carbide again. I just wanted to understand what kind of differentiating factor are you bringing to the table? Because when we listen to some of your competitors like Aixtron, for instance, where they are talking about multiple wafer technologies and seems to gain a lot of market share. It seems that you're also gaining market share. So are you addressing different markets or customers? If you can give some color on that would be helpful.

So maybe just a quick explanation of what's a little bit of what is happening in the silicon carbide market today. The market is actually in high-volume manufacturing for 6-inch, 150-millimeter products. But over the next 2 to 3 years, the market is going to transition to 200-millimeter or 8-inch products. LPE's products are involved in both. So they already have a very good presence as far as being used for 6-inch manufacturing or high-volume manufacturing. And what is really going to drive further growth is going to be the transition from 6- to 8-inch. I don't think we should go into comparisons with some of our peers. But what we do know is that a lot of the customers that we have talked to are very keen and very, let's say, attracted by the performance of the LPE tools and their reactors. And we are in a lot of engagement at this moment, a lot of discussions. And we are actually confident that we will get our fair share of the market going forward.

All right. And back on the comments that you made on the second half, let's say, slightly below or somewhat below level in H2 versus H1. It probably means that you see orders coming down in the first half. So can you help us understand at what level they would fall according to you?

Stephane, in terms of orders, actually, orders are still pretty healthy. So we base our second half kind of guidance, not because we see a dramatic drop in orders, no. It's just, as I said, again, the second half has less -- still has less visibility at this moment. Our assumptions or our projections and also based on what we work with our customers is we do expect leading-edge advanced logic/foundry that will continue to be healthy. Power/analog and wafers, except those that are impacted by consumer type of products, that will continue to be healthy. In fact, the automotive and industrial sector or that part of the market will be very robust. Again, memory is a wildcard. We cannot tell. And at this moment, it could go up, it could go down, it could recover, it could not recover. I think it's a little bit too early. And probably, we will have more visibility as we go on into another 1 or 2 quarters.

Okay. And sorry to come back on...

Sorry, Stephane, you can rejoin the queue if you want to.

The next question is from Tammy Qiu with Berenberg.

My first question is, recently one of the large U.S. semi companies have released a new tool, which is aiming to eliminate EUVs double patterning processes. On the back of the launch, do you see your ALD double patterning [ TAM ] being impacted negatively over the next few years.

Tammy, I would also like to know. I think the news just came out very recently. So we will need some time to look into that. But I think by and large, we are not so concerned. And the reason for that is, I think EUV patterning or double patterning will continue to be around for quite some time. And if you really look at a potential kind of a replacement or substitute or complementary, this is probably still quite a number of years out.

Okay. Sorry, I just had one more follow-up. And my question is in terms of next-generation 2-nanometer and from your large customer perspective, when do you think the ordering of the tools will start to happen? And do you have early visibility of your market share 2-nanometer versus 3-nanometer?

Maybe I'll answer the second part of your question first. I think in terms of market share, we are actually confident that we will continue to maintain our leading share just based on the engagements that we have. Of course, some of the applications are still in the final stages, not really fully decided which one goes into a process tool of record. So there's still some question mark there. But I think just based on the engagement based on what we are hearing from customers, we are very confident about our ability to keep our market share. Timing, there is a little bit of a difference, let's say, between the 3 players, but you could see potentially what we call pilot line kind of investment, maybe end '23, early '24. And you will probably see high-volume manufacturing type of investments happening sometime in the '24, early '25, timeframe.

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

My question is just a clarification on the backlog. I think in your prepared remarks, you indicated that it gives you some more visibility into the first half. So my question would be, how do you see the backlog evolving towards sort of the mid of the year? Do you see it normalizing? Or should we expect to sustain at these levels? That's my first question.

I think in terms of the backlog, we ended the year with a significant backlog. I think by the end of the, let's say, the first half, the backlog will still be higher than what is normal for us because we are not able to convert as much as we like to. As I said, we still have some constraints in the supply chain. It's not like the supply chain has fully normalized compared to maybe 9 to 12 months ago, I would say it has improved a lot, but we are not out of the woods yet.

Got it. Maybe just a clarification then on that. So that seems that maybe order intake is at a lower level and you're leading some of the backlog into revenue, and that will be less so the case in the second half as you see it today. Is that correct?

I think in terms of orders, we will continue to see a relatively, I would say, healthy or resilient orders. The issue here for us is the visibility into the second half. And that is why I think we are giving a more guidance that we think that second half might be slightly lower than the first half. I think, again, as we go into another 1 or 2 more quarters, when we have more visibility, we would be able to share more as far as how we see the second half.

Got it. Then a question on OpEx. So if I annualize the fourth quarter SG&A, I'm up 9%, and that's 30% for R&D. Historically, that's been sort of a good way roughly to model this. Maybe in this inflationary environment, it's actually a little bit too low. Would it make sense that the average of this year will not be lower than the fourth quarter of '22?

Yes, maybe to give some guidance there. So let's start with SG&A. So we mentioned already last quarter that we don't expect SG&A to go up all time marginal increase. Now if you correct the Q4 SG&A for the LPE consolidation and for PPA expense or amortization, and it's actually slightly lower even than Q3. But based on what you see in Q4, I think you could assume more or less, let's say, continued run rate base at the Q4 level. We have some ups and downs from quarter-to-quarter depending on certain costs come in. It's never fully a linear line, but more or less Q4 run rate, I would say. Then for R&D, you saw a big step-up which we also announced from Q3 to Q4. If you pull the [indiscernible] and adjusted for, again, LPE and for the PPA expense with a normal regular R&D, LPE expenses and the PPA expenses. Then the increase quarter-on-quarter is around $10 million. So it's a big step-up. And for '23, I think also there I would expect, let's say, similar to what I just said for SG&A kind of Q4 run rate, we have some ups and downs from quarter-to-quarter. That's the best guidance I have at this moment in time.

The next question is from Amit Harchandani with Citi.

Amit Harchandani from Citi. Two questions, if I may. My first question goes back to the topic of adoption of ALD and the competitive dynamics in that space. For example, for silicon carbide, you already talked about the CAGR looking conservative. Could you give us a sense for your conversations in ALD today is the level of adoption discussions, your positioning or even broader market pointing to a direction which is higher than you previously thought? I appreciate CMD coming up. But if you could give us a sense for how the ALD adoption trends and your competitive positioning is trending along, please? And secondly, if I may, just clarification around orders, just so that I understood that correctly, have you seen any pushouts or delays in shipments. So in other words, the orders have been placed, but the shipment is being delayed, which means that there's a bit of a normalization as we go through the year?

On the first question, it's a very interesting one. So when you look at what we have guided during our 2021 Investor Day in September, of course, we had a certain projection. And we were expecting the -- what we call the adoption of ALD or ALD intensity to reach a certain level. I think we were looking at a growth of maybe 16% to 21% starting from 2020 to 2025. I think we are still in that space where we need to do further work just based on the gate-all-around engagements that we have. And we also need to look at, for example, what kind of data, third-party research companies are going to publish in April. I think with that, we will be able to have a better view. Is the adoption or is the ALD intensity higher than what we had projected or is it lower? I think we need a little bit more time. And hopefully, by the time we get to our Capital Markets Day, we have more visibility, and we'll be able to share this in more detail with everybody, including what happens on the first generation, what happens on the second generation, I think we will have more details on that. Orders pushout, absolutely. In this market, of course, we have had some orders that were pushed out. But I also want to maybe stress that when you look at the EUR 1.7 billion backlog that we have, basically, what is counted inside there are all orders that have to be delivered over the next 12 months. So we have a very, I would say, solid backlog that we intend to execute as much as possible, as much as supply chain constraints permit. And that's where we are. But we do see some pushouts. And I would say, primarily coming from the Memory segment.

The next question is from Timm Schulze-Melander with Redburn.

First question maybe for Benjamin. Could you just -- I know you disclosed it in the annual report, which is coming out later. But could you talk a little bit about the eval tool activity in Q3, Q4 for the year and just kind of how active that is coming into 2023. And then I have a follow-up.

Sure, Timm. I think when you look at eval tools, so we are actually in the process. First of all, we have a lot of eval tools out in the market when we had to do 3-nanometer kind of logic/foundry. We also had quite some of it that was out in -- with our customers when we did the current high-volume manufacturing nodes for DRAM and for 3D-NAND. Some of these have turned and they become revenue and they get taken off from our balance sheet, the line item of eval tools assets. What we are doing now or what we are going through now is most of the eval tools that are out with our customers, this is for gate-all-around and for the next-generation memory. And we do expect that as we go through the year 2023, this is going to probably increase because we may have to put eval tools for the second-generation gate-all-around as well. So it's a consistent model that we have been working on. We will give the customers to develop the process that they need. And when they qualify us, that's when we go into high-volume manufacturing. It's just that the intensity now because of the technology being more difficult is actually increasing.

Okay. That's super helpful. And then a follow-up question for Paul, please. It's very helpful getting your steer on some of the OpEx lines and your comments around how you might dip out of the margin channel that you've set yourself temporarily. Can you just maybe talk a little bit about the outlook for your services activity, particularly with parts of the market softening? And is that a contributing factor here? Or is that not really a material impact vis-a-vis the margin guidance that you've -- or the margin comments you've given?

Actually, our service business is doing well, I would say. We saw a good growth over the year, but in particular, also, which is very, very positive, supported but if you call outcome-based services, which we started late, I think 2020 or so. We've seen an annual year-on-year continued growth there, very, very healthy growth, I would say, which is win-win to our customers and ourselves because we lock in customers for multiple years. But on the other hand, it's also a benefit to our customers because they get a better value proposition. So good for them, good for us. Also for '23, we expect the services. What we see now is still to be good and healthy. And in terms of margin, very much in line with the group margin. Again, small differences from quarter-to-quarter, obviously. But if you look over the whole year, very much in line with the group margin, and we expect that to continue also in '23.

The next question is a follow-up from Stephane Houri with ODDO.

Yes. Actually, the follow-up was also on LPE. Just to understand the strategy, which is, for the moment, primarily based on silicon carbide, but it was just to know if you also have a vision for GaN, which is also a fast-growing market and could be maybe as big as the silicon carbide market at some point?

Stephane, so at this moment, we are not looking into GaN because it requires a different type of equipment that is not in our product portfolio. It is, as you correctly mentioned, a very interesting fast-growing market. But at this moment, we do not have any plans to go into the GaN market.

The next question is from Michael Roeg with Degroof Petercam.

I have a question on your CapEx guidance, including the investment in Korea. There's a lot of subsidies available in Korea and also in the United States. I was wondering if you are able to get any of them for your investment programs.

Paul, can I take that?

Yes. You can take as well, please go ahead. You were into it just very recent, so maybe you can take it.

Yes. So I think of course, Michael, you are correct. I think almost every country is now throwing subsidies to try to get guys like us or chip manufacturers, our customers to invest, I think, in Korea, and this is actually the reason why we decided to sign a memorandum of understanding with the Ministry of traded industry. We are working on that. But our investment in Korea builds on what we already have there. So it's not -- we are going to Korea, just because of incentives or subsidies. We already have a very sizable R&D presence and a small manufacturing presence already in Korea, and we want to build on that and expand on that.

Yes, I understand the rationale for expanding your existing sites, but still $100 million is a lot of money, and there should be something from them as well. And...

Maybe to add, Michael, is that we already, today, we have credits, tax credits, which we are with the current presence and our current level of operations in Korea are not consuming. So the new site will help us to further consume what we already have, which is a positive. To get something on top of that is difficult to be honest because it's not really an incentive for the government to do so. Obviously, we ask, we knock on the door, we do whatever we can. But the most important reason what management just said is we have a presence there, we want to build on that presence for a number of good reasons, intrinsic regions, which are the most important for investment decisions. Obviously, subsidies helps, but should never be a reason to invest. And as I said, we already have tax credits in place that we can further utilize when we have the new facilities ready.

Okay. That's quite clear. And then a follow-up on the CapEx. Will the 2023 level be a onetime boost for future growth? And will it then return in 2024 to, say, $70 million, $80 million? Or will be the additional investments in '24, quite vary beyond 2025?

Yes. That's also a good question. I don't want to really comment on it, because I think it's too early to comment on it, also because there is a few things that we are still, let's say, on our designer table. So it's still -- and some decisions have not yet been taken. So as I said, we want to come with a more comprehensive update during the Investor Day. Then also for ourselves, more things are clear. But at least for this year, we expect it to be above our initial guidance of $60 million to $100 million. And again, that's for capacity and in particular, also R&D this time because we're literally outgrowing all our R&D facilities where we are. So that's a big part of it, but it's also for capacity beyond '25. So please give us a few more months, and we'll give you a comprehensive update on our plans.

Perfect. See you in September.

Absolutely.

We still have a few follow-up questions in the queue, but I'm afraid we are running out of time. Judith, can we have the last question, please?

The last question is from Didier Scemama with Bank of America.

Yes. Sorry, obviously, talking to myself as always. One question on LPE. Maybe could you give us a sense on a pro forma calendar year '22 revenues of about $100 million, the split between wafer manufacturers and IDNs. And maybe a geographical split as well. If you could tell us maybe what the was in the U.S. versus Europe versus APAC and China would be helpful for us to understand the dynamic there.

So I don't think we have that detailed kind of numbers. But what I can tell you is that when you look at the high volume manufacturing that is at 150-millimeters, the -- a large part of that is, for example, in -- with customers in China. But as we go out into a 200-millimeter kind of investments over the next 2 or 3 years, you will see that a lot is the reverse. A lot of it is going to be outside of China, highly focused on a couple of countries in, for example, Europe and also in the U.S. That's where I think a lot of the 200-millimeter kind of investment is happening, and we are right in the tick of action at this moment.

Gentlemen, there are no more questions registered at this time. I turn the conference back to Mr. Loh for any closing remarks.

Thank you, Judith. On behalf of Paul and Victor, I want to thank everybody for your attendance today. We look forward to seeing many of you in our upcoming investor roadshows and thank you again. Stay safe, and goodbye.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.