Good afternoon ladies and gentlemen. Thank you for standing-by. Welcome to the ASML 2018 Second Quarter Financial Results Conference Call on July 18, 2018. Throughout today's introduction all participants will be in a listen-only mode. After ASML's introduction there will be an opportunity to ask your question. I would now like to open the question-and-answer queue. [Operator Instructions] I would now like to turn the conference over to Mr. Skip Miller. Please go ahead.

Thank you, Patricia. Good afternoon and good morning, ladies and gentlemen. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today from ASML headquarters in Veldhoven, the Netherlands, is ASML's CFO, Peter Wennink; and we would like to welcome our new CFO, Roger Dassen. The subject of today's call is ASML's 2018 second quarter results. Length of this call will be 60 minutes and questions will be taken in the order that they were 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 Web site shortly following the conclusion of this call. Before we begin, I’d like to caution listeners that comments made by management during the 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 presentations found on our Web site 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 would like to turn the call over to Peter Wennink for a brief introduction.

Thank you, Skip. Good morning and good afternoon ladies and gentlemen and thank you for joining us for our Q2 2018 results conference call. Before we begin the Q&A session, again, I would like to provide an overview and some commentary on the second quarter as well as provide our view of the coming quarters. Roger will start with a review of our Q2 financial performance with added comments on our short-term outlook and I will complete the introduction with some additional comments on the current business environment and our future business outlook. Roger, if you will?

Thank you, Peter, and welcome everyone. As Peter mentioned I will first highlight some of these second quarter accomplishments and then provide guidance for the third quarter of 2018. Q2 net sales came in at €2.74 billion somewhat higher than we guided driven by a strong demand across our full product portfolio. Net system sales of €2.09 billion was nicely balanced between memory at 54% and logic at 46%. EUV revenue of €667 million was a combination of revenue from four shipments one more than previously guided and preferred revenue from previous quarters as you know we are now recognizing the majority of revenue for an EUV system at the time of shipments. Installed base management sales for the quarter came in at €654 million. Overall gross margins for the quarter came in at 43.3% which was just above our guidance reflecting the strength of our DUV and Holistic Lithography business as well as progress in EUV profitability. Overall OpEx came in slightly above guidance. With R&D expenses at €380 million and SG&A expenses at €117 million. Turning to the balance sheet. After paying the total amount of €866 million on dividend and share buybacks, we ended last quarter with cash, cash equivalents and short-term investments at a level of €2.98 billion. Moving to the order book, Q2 system bookings came in at €1.95 billion, 45% of the order intake was from logic customers, memory made up the remaining 55% of order volume. The bookings are mainly driven by the strong EUV business. We took one new EUV order in this quarter. In Q2, €269 million worth of shares were purchased. This leaves around €2 billion of the 2018/2019 share buyback remaining. Additionally, we paid a dividend of €1.48 per share valued at €597 million. With that, I would like…

Thank you, Roger. As Roger has highlighted we had a good first half of the year and our business continues to perform very well. The positive industry environment and increasing litho intensity continues to drive strong demands in both logic and memory markets as customers migrate to more advanced nodes requiring our full suite of products. For the second half of the year, we see strength in DUV driven by memory and EUV driven by logic. After an excellent first half in 2018, we expect the second half to be stronger with improved sales and profitability as well as continued growth from Q3 to Q4. Logic demand continues to be solid as both existing and new market applications require more high performance compute power. Customers are preparing to ramp up the 7 nanometer node which is driving a significant increase in EUV demand. Given the progress made in EUV execution there's now increased customer confidence in the future logic roadmap. And furthermore plans are being put in place to secure the next generation of high-NA EUV. Progress in high performance compute require similar advances in the memory roadmap execution for both volatile and non-volatile memory. Memory strength involve DRAM and NAND is driven by increasing content per device as well as expanding end market applications and in DRAM to meet the current big growth of demand expectations of between 20% to 25%. We see customers continuing with technology migrations and wafer capacity additions. As fewer bits are being supplied via technology node migrations, it drives an increased need for wafer capacity additions enhanced with planned to 2D to 3D NAND conversions nearly finished customers require a new greenfield fab capacity. This along with critical scaling via spec of stacks drives additional lithography demand. Significant investments in greenfield fabs although dampened…

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

Thank you, sir. Ladies and gentlemen at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Mr. Sandeep Deshpande. Please state your company name.

Thank you for letting me on. This is Sandeep Deshpande from JPMorgan. Peter I have two quick questions, having firstly on your gross margin guidance for the third quarter, I mean you clearly guiding to a much stronger gross margin than the market expected, Can you give us a dynamic, I mean is this EUV related that EUV gross margins are beginning to ramp up and which is why your gross margins are improving so quickly from the second quarter when you had a large number of EUV shipment? Or is it some other mechanisms which is causing the gross margin to improve. And secondly, I mean the market has been worried about issues in the memory supply CapEx environment and you have said in your introductory remarks as well that you are not seeing any of this. Can you confirm at this point that you have not seen any DRAM related push outs or anything of that sort at this point and that your customers remain confident on their existing roadmaps in terms of capacity additions that you mentioned on the wafers as well into 2019? Thank you.

Okay. Thank you. Sandeep, I will answer the second question and Roger will go into the gross margin question on Q3. On the memory market, as you said our customers which is multiple and we have always seen that in the roadmap execution customers from time to time had some push outs and some pull ins and that's what we are seeing. We are seeing one customer pushing out with few tools and other customer pulling in. So as a memory segment and especially DRAM and you referred to DRAM, we haven't seen any change. So was some push-ups and pull ins that's actually quite normal. Roger you want to take that question?

Sure. On gross margin Sandeep it's a combination actually of three things. So, as you see there is a 4 percentage point increase in gross margin, but half of that is a result of the mix within EUV as for the mix in DUV is such that we see 10% -- 2% uplift of gross margin as a result of that. The remaining 2% uplift is an EUV and that is a combination of two things, so first off, as you heard, we plan to recognize five system sales in Q3 rather than 7, so that is an uplift. And secondly, we also are looking at an improvement of the EUV margin overall, so mix of DUV improvement of EUV margin and [indiscernible].

Thank you.

Following question is from CJ Muse. Please state your company name and ask your question.

Hey, good morning, good afternoon. Thank you for taking my question. I guess, first question, you talked about accelerating your EUV roadmap, I'm curious I guess short-term, long-term question is part of that. What impact is that having on your ability to close orders for EUV shipments into 2019 and if you think I guess medium term looking to 2020, what is this higher throughput mean in terms of your thought process in terms of what capacity and/or growth in shipments in EUV you require? And then, I have got a quick follow-up?

The acceleration of roadmap is clearly driven by the fact that we see an opportunity to grow the productivity and that's a function of availability and the wafer per hour capability of the two and that is a result of the execution, results that we have seen of the last six months. So having said that, we would like to pull in that value -- which is strictly a value for the customer because that basically means that customers are of course wanting that value sooner than later but this is an R&D program that we are just starting in Q3, so it takes time for that productivity increase to become available in 2019 until that moment in time customers have the -- have the availability for a machine which is 3400V that's 125 wafers per hour and provides full value for the price that they are paying. So for the -- customers that's a very good alternative to keep going on EUV because that's every capable out there with the expectation and with the promise of an even more valuable to -- in the course of 2019. So it is what it is the tools will be available when they are available. Customers need to ramp their 7 nanometer logic and they will do so, but -- and answer to your second question clearly if we keep increasing the productivity of that two what means that the cost per layer will be more and more in favor of EUV. You will see layer adoption going forward beyond 2019, of course, potentially being more in favor of EUV than it was before because higher productivity means a low cost. Now from a capacity point of view from our point of view, it means that with the group performance of that machine we can provide our customers with more wafers, so we don't need to do that by actually selling more tools that's 125 wafers per hour but we can sell the same number of tools that were going to leave planning with a higher throughput. So that will help our customers. And we don't see at this moment yet a need for a very fast increase of our current capacity at ASML. I think what we will see first, give our customers more wafers on EUV at a lower cost provider. Long answer but I hope it will help you CJ.

Yes. No. Very helpful. And then, I guess is a very quick follow-up. You talked about early indications pointing to another strong year in '19. If I look at your DUV order book excluding EUV, it looks like that business accelerated 30% Q-on-Q. So I guess how far is your visibility expecting and should order momentum within DUV continue into the coming few quarters. Thank you.

Well, given our longer lead time as compared to some other place in the industry, I mean the visibility that we're getting from our customers goes into 2019 is generally 9 to 12 months where we're going to be pretty detailed on what they need and what we can provide because we have a supply chain also. So when we say we see this DPV strength both memory and logic moving into 2019 that is based on the interaction that we have with our customers on these 9 to 12 month horizon.

Very helpful. Thank you.

Our next question is from Mr. Kris Sankar. Please state your company name and ask your question.

Yes. Hi. Thank you taking my question. It's Cowen & Co. I have two questions on gross margin. One on the near term, you guys mentioned revenue should grow from Q3 to Q4. How should we think about gross margin in Q4 relative to Q3? And then, on the longer term looks like your EUV gross margins in the mid teens, what levers do they have beside volume to drive it to 40% gross margin for EUV based on your 2020 model? Thank you.

Well, we will give you gross margin guidance on the Q3 we gave you that clearly that was so we won't give it on Q4 that we gave you an overall comment in the prepared remarks that we believe both our sales and profitability will go up. So I'm not going to give you any details on the gross margin, but clearly we see it -- we see an improvement on both counts sales and profitability. And the first evidence which we gave you for the Q3 gross margin guidance. On the gross margin on the EUV 2020, I think there are four ingredients that's what it this way how to get to the 40% gross margin. We've always said if that is the volume. Well, the volume haven't changed really. I mean volume is -- we set at 20 this year 30 in 2019 growing to potentially 40 in 2020, you can group that up into our -- into the scenarios that we gave you. That hasn't changed, but the volume is very important for gross margin increase because this is better coverage of our fixed cost. The fixed cost for our total capacity to 40 to 45 is already there. So that will be a big help, one. Two, is mix, mix we have to know the gross margin, we had before was based on our views that we would -- in 2020 ship a combination of our 125 wafer per hour tool and potentially higher wafer per hour tool. Now, we've pulled that in. So if anything -- the second pillar of the gross margin increase has now been pulled in. And it's positively changed in the sense that by 2020, we will have only the higher productivity tool, instead of a mix of a lower end…

Thanks Peter very helpful. Thank you.

Following question is from Mr. Andrew Gardiner. Please state your company name and ask your question.

Good afternoon, gentlemen. It's Andrew Gardiner from Barclays. Peter I was interested in some of the comments you were making in terms of EUV tool shipments or capacity. You guys have talked specifically about 2019 and the sort of the 30 unit level in prior quarters. The last couple of quarters you talked about how that was a challenging target and in particular sort of through the supply chain and the lead times you're dealing with in terms of the different components different modules. So perhaps reading between the lines here, but you sounded a little more confident in some of your comments on that 32 unit or at least 32 unit for next year. Is that the case and is it indeed a case that you all used to working through some of those capacity constraints and so there could be more likely to be upside to the 30 unit mark for next year. Thank you.

Yes. I think firstly we stick to the 30 unit mark. But, yes, of course, we're in a learning curve and that also is true for our supply chain. So I think from a supply point of view, we are more confident about the 30 units, but I think it's too early to -- from anyone including our customers anything more than that. Now of course, we will try to get every one or two unit extra out of it that's our plan, currently stays at that 30 unit. And that 30 unit is going to be a mix between, we call our B-system and our C-system, like I explained earlier whereby C-system will be introduced in the course of 2019.

Okay. Thank you. And then just a quick follow up in terms of the EUV revenue recognition this year. You've previously said 2.1 billion. Is that still the case or given you did a little better in the current -- second quarter and you're expecting a reasonable amount in the third quarter is likely to be a bit higher than that now?

Andrew, I think we are still in for the 2.1 in this year.

Okay, great. Thank you very much.

The following question is from Mr. Edwin Mok. Please state your company name and ask your question. Hello Mr. Mok. Please unmute your line.

I'm sorry about it. Thanks for taking my question. So my first question on kind of outlook for 2019. Just curious how much of that growth or the strength you expect on industry comes from indigenous Chinese customer versus kind of the more multinational in China?

Yes. I think what you're seeing in China. Yes, you have to make -- you may have to make a separation between let's say the local Chinese customers and the multinationals having their operations in China. There are some activities on the latter sort of multinationals into China. For instance there is investment ongoing in Wuxi, which is from a Korean memory maker so that will happen next year. There are some others -- from other -- some multinational customers especially in the memory space. There is something happening in the logic space that still going pretty strong. But there are local Chinese customers will use 2019 to further ramp their first lines, which we see shipments through the first lines of local Chinese customers happening this year. And depending on the success of their products and qualification of their products for the use in their local Chinese customer market that will drive the level of tools that they need to further ramp their first and their second line. And that is really dependent on the success with which they can execute on the qualification of their products be it memory or be it logic products for their local customers. And that's something that we have not full insight in but that is a potential upside, if they do this very well. But I believe the Chinese market will be strong for both local and for international customers.

Great. That's very helpful color. And just my quick follow-up, can you remind us what's the timing of the high-NA 2 and we could get some color on that?

Yes. The first high-NA 2 was scheduled late 2021. They will ship through 2022 to 2023 the first R&D systems what we call early volume systems. And that in total -- it's about 12 systems. So 2021 -- late 2021 starting through 2022, 2023 about 12 systems and 2024 onwards we will see the high volume introduction. Is it clear? Operator next question.

Following question is from Mr. David Mulholland. Please give your company name and ask your question.

Hi. Thanks so much. Just coming back on the -- I'm from UBS. And just coming back on roadmap acceleration comments you made. I know you said you're still finalizing the specification, but if I recall from the roadmap, you've presented before you said the next stage was 155 wafers per hour. Is that essentially what you're pulling in or do you think you can do a little bit better than that. And can you help us understand what this means for ASPs. I know you said it will deliver value to yourself and customers. But can you help us quantify that?

Yes. I think what we presented last week at Semicon West we gave you a teaser in a sense we said well that's a roadmap beyond 155 wafers per hour and 155 is the first target. Now how much that will be in the details of it. I think we will be very happy to go away do detail with you and your colleagues on November 8. Well, we'll do an extensive review of the roadmap and we see that develop into a couple of years -- the next couple of years. And yes, that we will have an impact on the ASPs because we will provide higher throughput which will drive of course the cost per wafer down which will also lead to a review by our customers of the layers that they want to allocate to EUV versus DPV. And that will lead to higher ASPs. What we normally done, we've always said to the customer listen we're going to share the upside value and the trend that you've seen of increasing ASPs on DPV where ASPs rose generally with the productivity that is also what you would see in EUV.

And then just a quick follow-up, on the confidence you have on kind of DRAM adoption obviously probably the most sensitive to the productivity of the tool. So given the progress you've been making. Can you just comment on your confidence on same DRAM adoption in the next year or two of EUV?

Well, I think clearly higher productivity better availability leads to significant lower wafer cost which is more sensitive in the memory space and in the logic space. So yes, I mean it is our expectation that when we -- when we execute our roadmap that the advantages of applying that lower cost related to the DRAM market also obvious. So one of our drivers of course is to make sure that we can have the consistency of that productivity also extended into the market for DRAM and it may not be a surprise there of course the key focus of our key DRAM customer is on the productivity and on this 3400C roadmap. So yes that will have a positive effect.

Great. Thank you.

Our next question is from Mr. Stephane Houri go ahead. Please state your company name and ask your question.

Yes. Good afternoon. This is Stephane Houri from ODDO BHF. So I have a question about R&D, we see R&D budgets going up. Do you have a view or could you help us understanding how this budget is going to evolve -- it's going to evolve in the coming years. I understand this is to accelerate the roadmap, but could you give us some clarity on the numbers? Thank you.

Yes. I think when you think about R&D and the R&D increase that we're going to be seeing is two reasons -- two key reasons, one is pulling off the high-NA EUV 2 which we explained the last quarter. And this quarter we see the acceleration of the .33 high-NA road map. That of course is there to support the ramp up of the higher productivity tool that will of course tail off at a certain moment in time I think it will still extend into 2019. Like I said as an absolute [brilliant] [ph] question in our -- at our Capital Markets Day in November, we will give you more details on the productivity roadmap and I will not stop at the 155 wafer's. So some of that R&D that is needed there, we'll continue in 2019. But going forward, I think the R&D in itself cannot be seen as a separate pipe. We also have to look at what we see as an upside opportunity in terms of sales with the progress we have made with the EUV, the fact that the EUV can be used in more layers. I think it is good to realize that our sales numbers beyond 2020 will also grow and that means that to support that growth and we'll give you more details in the fourth quarter. We also will adjust our R&D spend to it. Now, clearly that is going to be well explained and indeed they will explain. So it's too early to give you a quantitative guidance on the R&D number going forward because it's very much tied to the upside opportunity and the sales opportunity that we are seeing which we believe is beyond 2020 significant.

Okay. And I have a quick follow-up. Did you see in your recent discussions with your customer any distortion regarding the potential trade war between the U.S. and China? Did it have any impact on your discussion? Thank you.

Very short on that. I mean we have not had any negative feedback or feedback that has an impact on our business from our customers due to this dispute. That's not the case.

Okay. Thank you very much.

Our following question is from Mr. John Pitzer. Please go ahead. State your company name and ask your question.

Yes. It's Credit Suisse. Peter, thanks, let me ask questions, congratulations on the good results. Peter, I wonder if you could elaborate a little bit around your comments around the expected up tick and upgrade revenues in the calendar third quarter that you talked about in your opening commentary. As you pointed out customers only really willing to do that when they're willing to take utilization hit and it's a little bit surprising given that Q3 is supposed to be the seasonally strong period that customers would take so much upgrade in that quarter. Is that sort of specific to a device type of certain customer or are you all worried that utilizations for your customers or your customers are willing to take utilization hit in the calendar third quarter?

Well, I think our total installed base management business for the second half and I think year-on-year does see an effect of the fact that our customers don't want to put the tool down to do an upgrade. I think that makes sense if you look at the profitability of the customers and the price that they can get for their devices right now. So generally, I don't think there was any issue with the upgrades. The upgrades that are currently not happening will happen later. And it is really -- it is not even seasonal. As far as Q3 or Q4 doesn't really matter as long as the business and especially the memory business, our customer stays really strong. That means that the upgrades that they planned earlier they are -- in the end they don't want to do because there is a revenue downside that they don't want to take. So it is -- we'll just move on, we will just move to 2019. And as long as the memory business stays healthy, it stays very strong, they will keep pushing back those upgrades to a point in time where they have to do it. So it is all you could say deferred revenue to a point where customers can allow it. And there's nothing more to it. But if you don't say what you mean to the installed base as well, the installed base making year-on-year probably likely to be flatter than we anticipated at the beginning of the year and that simply is caused by what I just talked about.

That's helpful Peter. And then, follow-up, just as you make progress on improving EUV wafer throughput per hour. One of the tradeoffs we're hearing is just as you raised power on the tool, the offset is kind of increased consumable cost for the customers especially with [indiscernible]. Is that a meaningful consideration on the ROI for your customer and rate of adoption and is there anything that you can do with the tool level to help on the consumable cost side.

Yes. I think on the -- when you think about the telcos for instance and we are working cautiously on lifetime of the consumables. And I think that is not a major hindrance for our customers to start introducing a higher productivity tool because the benefits of the higher activity are so large that they can do with the initial higher cost of the consumables. But we as an industry are all working on driving the cost of the consumables down. You have to realize that when you take telcos, it is only very recent that we started to have telcos that can withstand 250 watt. So it's just a matter of time and matter of learning curve. That's not going to be a major issue and the discussions that we have with our customers on the 3400C on the high productivity tool. There was no concern at all in this direction.

Thanks.

Next question is from Mr. Mehdi Hosseini. Please give your company name and ask your question.

Yes, thank you. Mehdi Hosseini, SIG. Peter, I have two follow ups. You talked about the Internet's capacity to be able to ship a minimum 130 DUV system in 2019. Can you help us understand perhaps qualitatively about the breadth of customer or customer diversity. And should we expect any DRAM application to be included in these targets and I have a follow up.

Yes. I think the breadth of the customer diversity clearly, if you look at the order book, I mean it's been driven by the top 3 customers that we have in the both logic and in memory. And there will be the drivers also for our shipments in 2019 and DRAM is going to be part of that. So it's the top 3 customers. But then again, if you all see in 2019 customers following both in memory and in the logic space starting to receive their first DUV production tools. But again, the top three customers will drive the bulk of business including the DRAM.

Sure. And the reason I ask the question is, it seems to me that there is a bifurcation among your logic/foundry customer were one particular customer is pulling away winning all the designs. And I'm just wondering how you think about that -- any potential downside risk, if that particular customer continues to win all the designs for 7 and 5 nanometer.

Well, we look at this from an industry segment point of view. I mean we wish all our customers the best and we hope that they compete fairly and want to win and the other ones. But as an industry segment we are not that concerned because we're concerned about the ultimate demand for the 7 nanometer devices and 5 nanometer devices which are driven by the value that is being created by those devices which will be taken up by the customers of our customers. So the after market we will in the end determine what the demand will be for EUV wafers and where we're going to ship them. We will just have to wait and see who wins the business. So what we ship is determined by the authorities and the customers of our customers not the sale by our customers from a segment point of view -- from industry segment point of view.

Just to be clear, you're capacity to ship 30 plus that doesn't include any upgrades, correct?

That's correct, yes.

Okay. Thank you.

Okay.

Following question is from Mr. Amit Harchandani. Please state your company name and ask your question.

Good afternoon. Amit Harchandani from Citigroup and thanks for taking the question. My first question relates to maybe an update from your side with respect to the E-beam business. If you could kindly share with us what is the progress in terms of the roadmap of the new product as well as potentially customer attraction. And how should we think about that shaping up going towards the 2020 target? And I have an unrelated follow-up?

Yes. I think the E-beam business we showed you last quarters from -- same pictures of a few that we know to be in prototype, which are basically we're building that today and we will ship that commercially to our customers in 2019. But that will not end there will be a next version which is more beam's in 2020. So clearly it's execution of the R&D program making sure we can ship the first 3 months we need to in 2019 and more will follow in 20.

Okay. And as an unrelated follow-up, when we think about your installed base management revenues and as you said EUV tool gradually move out of their warranty period, can you maybe help, if there is step up in the opportunity you get in the installed base management side with respect to EUV with the associated services revenue be dramatically different or higher than what you're generating to DUV. Thank you.

Yes. I think the installed base management revenue tool for EUV is significantly higher. But also the costs are significantly high, but argue that EUV and the source we have some consumables. So I would say wearables, whether you see [indiscernible] time and some other parts of that tool. So that needs to be replaced from time-to- time. And I think the service charge is now based on a charge per wafer. So yes you will see a step up once you see a significant number of our EUV systems coming out of warranty and when they are more productive they will produce more wafers which gives us an upside in the service revenue, but also clearly whether you have more wafers then you also have an impact of your cost of the wearables. So that's all the increase in EUV shipments coming out of warranty after 2020 will definitely give an impetus to our service top line whereby as we said on cost €5 million to €6 million of service revenue per EUV system is currently what we are planning or what we have in our long-term financial models. Now clearly when we have higher productivity we can sustain that then there is some upside to that number. But this is what we are working with beyond 2020.

Thank you, Peter.

Next question is from Mr. Robert Sanders. Please state your company name and you’re your question.

Yes, hi. It's Deutsche Bank. First question will just be on the 3400C, it looks like you're making good progress there on availability. But that won't ship until the mid of next year. So how do you ensure customers don't defer taking delivery of the older generation B tool in situations where they don't have to ramp before 2020. And I have a follow up. Thanks.

Yes. I think the customers ramp up plans are based on a certain capacity that they need for EUV wafers. Now the 3400C in 2019 is not going to fulfill that capacity on its own. You need a 3400B. But that is a fully equipped high volume productivity tool which of course is a lower price. So you get fewer wafers, but you pay a lower price. So it is in that sense relatively simple that the EUV wafers are needed in 2019. They need to be made and it can only be made in a mixed combination of 3400B and 3400Cs. And that's pretty clear to our customers and pretty clear to us and that's why we say 30 units that we have in our capacity plant as very valid. But, I cannot give you any detail yet on the mix or the combination of a B and C.

Okay, great. And just one point of clarification, I just wanted to check that you said that both Q4 sales and Q4 profit would be higher than the third quarter. I just wanted to check when you just said you indicated a rough kind of direction? Thanks.

Yes. Well, the rough direction is as follows Q3 to Q4 sales will be up and H2 sales and profitability will be up as compared to H1.

Oh, that's perfect. Thank you very much.

Thank you.

Next question is from Mr. Adithya Metuku. Please give your company name and ask your question.

Good afternoon guys. It's Bank of America. So just looking at the gross margins when your EUV revenues in the second quarter -- in your third quarter rather based on your guidance, it looks like you will be doing something like 38% gross margin on your EUV revenues in the third quarter and this uplift is not coming from any deferred revenue recognition. So in light of this, can you provide some color on how much higher your EUV gross margins in 2020 can be higher than the 40% you've guided for especially given the ASP and productivity of new EUV tools would be higher than what you've been planning previously. Thank you.

Yes. I think what I would suggest that you do because the 38% gross margin is not something that I can easily relate to. So why don't you after this call get in touch with our IR folks and they will probably can help you understand where you -- that they can understand where you're coming from in your calculation of the 38% because if it is 38% in Q3 then 40% in 2020 would be really sandbagging. So that's probably not what you are suggesting so somewhere that we probably need to help you understand this or we need to understand what your thinking is. I don't think this call is suitable for that. So I would ask you to call our guys.

This is a quick follow up. Where are your EUV gross margins in the third quarter?

We don't guide specifically on the EUV gross margins, but we can say we've given you some guidance in the past. I would say gross margin improved to from 2% to 40% being almost on a linear scale from where we were in 2017. I think that is year-on-year. That's approximately correct and we are on that trajectory. So we're not guiding on the quarter we were guiding year-on-year in a more general terms and there's a Web site there that I would agree to, if people say fine if you start selling higher productivity tools in 2020 with some higher productivity and some higher value that might the support of your 40% margin target for 2020, which I explained in one of the first questions. So no quarterly guidance. The linear improvement from 2017 to 2020 that's what you have to deal with.

Okay. Okay. Thank you.

Our next question is from Ms. Tammy Qiu. Please state your company name and ask your question.

Hi. Thank you for taking my question. So, I only have one question so you talked about you accelerating your EUV R&D process, does that actually change your estimation of the lay count, we can see in the logic and foundry initial adoption because I remember you actually said 10 to 15 layers insertion in the first phase. Does that actually increase the potential layers EUV can address, you actually doing better than previously expected.

Well, I think Tammy, we initially not I mean, customers have done their designs they've done the qualification work. I mean that's what it is. But I think clearly 2020 and beyond having a better cost per wafer to higher productivity clearly creates an opportunity for customers to start thinking of adding more layers. But initially I would say they stick to where we are today because it would prove too much of a hassle to do that. They're going to start 7 nanometer like I said 2009 or 2019, they are going to be use [3400B] [ph] for it and over time you'll see an increased productivity. We'll likely have an impact on the number of EUV.

Okay. So Pete you actually mean the adoption layer increase can actually accelerate based on your accelerated roadmap of EUV?

I think so because as a matter of course but now it's a matter of when, I don't think it happens in 2019. They will happen probably 2020 and beyond.

Okay. Thank you.

Next question is from Mr. Doug Smith. Please state your company name and followed by your question.

Hi, it's Doug Smith from Agency Partners. I've a longer term question about high-NA. I think in the last call you said that the R&D units that are going to be shipped were priced at around €270 million. I recall some time ago the R&D units for low-NA on EUV were about 60. Now it's obviously much higher than that, is the expectation that high volume manufacturing high-NA is going to be €350 million per unit. That's my first question. And second the production capacity for high-NA you are putting in [indiscernible] is it targeting around a 20 unit level for mid 2020s?

Yes. I think on your last question we're going to give you a bit more detail on the supply capacity around 2025 at the Capital Markets Day. But on your question on the R&D tools, you have to realize that when we started EUV it was completely new technology so the first EUV low-NA R&D tool was a real research tool. While we think about high-NA EUV, it's the second generation EUV whereby for instance we use the same source. We have a mature EUV resource by that time which they refer to 60 million. There was a very immature EUV shortage and was not able to produce many wafers. Now high-NA tool, we will actually benefit and that means that the R&D tool will be extremely close to the high value configuration. So it actually means that R&D is almost the same as the high-NA tool, sorry, as the volume tool, which is the same as the current DPV tool. If we sell, a NXT 2000 which will be used in our R&D first that tool will also have the same configuration and the same price as a tool that was used in high volume that will also the same for high-NA. So the comparisons that you made between low-NA and a high-NA is really a conversion between immaturity and maturity and that's why it doesn't add up. But I would say €270 million for high volume tools still a pretty good price.

Sure. That's a very good point and just a quick follow up. I think we've mentioned also previously the wafer throughput for high-NA would be greater than current low-NA. Do you think it might actually be able to exceed 200 wafers per hour power eventually?

Well, I think this is something that we're very happy to answer at our Analyst Day because that's where we'll go into those details. I mean like I said earlier we have now a roadmap that we're working on for our low-NA tool, which starts at the next slot is 125, the next data point is 155 and it goes beyond that 155 and we'll tell you then how much but it also we will show the roadmap of high-NA and whether that goes over 200 wafers per hour. We would like to say if that's what a date, otherwise it doesn't make sense to have a Capital Markets Day because everything is known by that time.

Sure. Thanks. I will wait for November then.

Ladies and gentlemen, we have time for one last question. If you were unable to get through on this call and still have questions, please feel free to contact ASML Investor Relations department with your question. Operator may we have the last caller please.

Yes, sir. The last question is from Mr. Mitch Steves, please state your company name and ask your question.

It's Mitch Steves from RBC Capital Markets. Yes, just had a quick one to follow-up on the EUV comments about pulling in kind of just the spend in there, so is that mean that you are essentially have a lower spending going forward, just want to understand the implications from the operating margin front assuming the gross margins continue to try to plan.

Yes. I think the EUV spent in terms of the exploration and the exploration R&D programs that will bring the productivity of the 255 wafers per hour to pull that in. But also to accelerate that productivity beyond 255 wafers, well that R&D program will start around now that will also -- there is still a program running in 2019 that's what I said. That ultimately when you get to the highest level of productivity on the 3400 that's the point of G&A too that will reach a certain maximum then before that time that R&D will tail-off for that particular part of the EUV program. On the other hand, we will then see that high-NA comes up. Now what the impact will be on the total R&D that has to be seen in the context of total sales of the company at that time and I believe that the progress of EUV will provide us with ample opportunity to drive the top-line because EUV will be more and more cost effective going forward. And that top-line will enable us to spend R&D that we need and it will be more detailed like I said in November timeframe when we put this into the context of the total long-term financial planning of the company.

That's great. Thank you.

All right. Before we sign off, yesterday you should have received an invitation to our Investor Day which will be here in our headquarters in Veldhoven on the afternoon of November 8. Please let Investor Relations know if you did not receive an invitation and we hope you will be able to join us in November. Now on behalf of the ASML's Board of Management I would like to thank you all for joining us today. Operator, if you could formally conclude the call, I would appreciate it. Thank you.

Ladies and gentlemen, this concludes the ASML's 2018 second quarter financial results conference call. Thank you for participating. You may now disconnect your line.