Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's ASM International Q2 2018 Earnings Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Wednesday, 24 July, 2019.
I would like to hand the conference over to your speaker today, Victor Pareno. Please go ahead, sir.
Thank you, Maria. ASMI issued its Q2 2019 results last evening at 6 Central European Time. For those of you who have not yet seen the press release, it along with our latest investor presentation is accessible on our website, asam.com. As always, we remind you that this conference call may contain information relating to Eazm'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 Chuck Del Prado, President and CEO of ASMI. Chuck?
Thank you, Victor, and thanks to everyone for attending our Q2 2019 results conference call and for your continued interest in ASMI International. Before I start with the review of the Q2 results, Peter van Bommel, our CFO, will first discuss the financial impact of the patent litigation settlement that we announced recently. So Peter, please go ahead. Thank you, Chuck.
On July 1, we announced that we reached settlement agreement with Kokusai Electric to resolve our lawsuits regarding the use and infringement of patents. The agreement includes a cost license agreement for a period until July 2021, 2 years from now, and a payment of an amount of $115,000,000 by Kokusai to ASM. This amount, euros 103,000,000 has been included in our Q2 bookings and sales, which amounted to €373,000,000 and €363,000,000 respectively. The €103,000,000 also dropped through to gross profit, resulting in a gross margin of 59% and to operating results, which increased to €150,000,000 In our earnings release, we show the financial numbers, both including and excluding the settlement. The legal costs related to the patent litigation cases increased in Q2 as compared to Q1.
These legal costs, as in the last several quarters, have been included in our SG and A expenses. We expect that legal expenses in the second half will be at a much lower level than in the first half of twenty nineteen. The settlement agreement is also impacting our tax rate. We started the year with tax compensation possibilities, also called NOLs or net operating losses, of approximately €82,000,000 in the Netherlands. €25,000,000 of these NOLs have already been recognized in our net results in the past years.
Due to the income from the patent litigation settlement, combined with the profitability from normal operations, we fully utilized these NOLs in the course of the Q2. As a consequence, part of the income in the Netherlands was taxed at a regular rate of 25%.
This is
the main reason why tax expenses increased in the 2nd quarter. At early occasions, we guided that the structural tax rate would increase to a mid to high teens percentage once we would have fully utilized our net operating losses. As we have now reached that point in the Netherlands, the tax rate going forward will be in the range of mid to high teens. Lastly, it's important to note that the settlement did not have a cash impact in the 2nd quarter. Half of the €103,000,000 cash payments will be and in the meantime has been received in the 3rd quarter and the other half is expected to be received late in the Q4 or early in the next quarter in the Q1 of 2020.
Okay. Thank you, Peter. Let's now review our Q2 2019 financial results. As Peter just discussed, the financial impact from the Pennant litigation settlement, I will focus on the results excluding this impact. Sales in Q2 reached a new quarterly high of EUR 260,000,000 which was up 5% compared to the Q1 and ahead of our guidance, which was between €230,000,000 250,000,000 Equipment sales increased 5% compared to Q1.
Spares and services accounted for 20% of total sales in the 2nd quarter and were approximately flat sequentially. For the first half of twenty nineteen, equipment sales were up 44% year on year and spares and service sales up 20%. In terms of product lines, our ALD business continued to be the main driver in the 2nd quarter, but the other product lines also had again a solid contribution. Looking at the first half of the year, all of our product lines showed healthy sales growth both sequentially and year on year. By industry segment, sales were led by logic, followed by foundry and then memory.
Combined logicfoundry sales were approximately similar to the record high level in the Q1 and continue to represent the largest part of our sales with logic sales up sequentially and foundry down sequentially. Memory sales increased slightly compared to Q1. The gross margin improved to 42.8% in the 2nd quarter, up from 41.3% in Q1. This increase is explained by a favorable sales mix during the quarter. As a reminder, our gross margin can fluctuate from quarter to quarter due to variations in the sales mix.
In addition, we continue to have a solid pipeline of new products. The related costs such as for evaluation tools can impact the gross margin from quarter to quarter. SG and A expenses increased by 19% compared to the 1st quarter. This increase is explained by, 1st of all, a rise in legal costs for the patent litigation second, an increase in variable expenses related to the higher activity level and thirdly, as a result of investments in the strengthening of our organization and business processes. R and D expenses increased by 9% sequentially and 20% year on year, driven by increased spending on new product development.
Operating income in the 2nd quarter was EUR 47,000,000, stable compared to Q1. Financing results in the Q2 included a currency translation loss of €5,000,000 compared to a gain of €4,000,000 in the 1st quarter. As a reminder, we hold a substantial part of our cash balances in U. S. Dollars, and we include the translation effect in our we include the translation effects in our financial financing results.
Net earnings on a normalized basis and including the patent litigation settlement amounted to EUR 125,000,000, up from EUR 53,000,000 in the Q1. Let's now briefly look at ASMPT. Normalized results from investments, which reflect our share of approximately 25% in the net earnings from ASMPT, Those normalized results from an investment day decreased to €2,000,000 for the quarter, down from €3,000,000 in the 1st quarter. In the 2nd quarter, ASMPT sales were US461 $1,000,000 down 1% from the 1st quarter and down 31% year on year. Bookings were down 17% year on year but increased strongly by 31% compared to Q1 of this year.
So now turning back to ASMI's consolidated operations. Our order intake in the 2nd quarter amounted to EUR 270,000,000 excluding the settlement and as such exceeded our guidance, which was a range between €240,000,000 260,000,000 Orders increased by 15%, 1 5% compared to Q1. Looking at the breakdown in equipment bookings by industry segment, Logic was the largest segment in Q2, followed by memory and then foundry. Combined logicfoundry orders decreased compared to Q1, but were still at very healthy levels. Logic bookings increased compared to Q1 and were primarily driven by 10 nanometer related demand and early tools for 7 nanometer.
Foundry orders decreased somewhat compared to the record high level in Q1 and primarily reflected further investments in the 5 nanometer node. Memory orders in the 2nd quarter increased compared to low level in Q1, mainly driven by DRAM. The increased DRAM bookings in the quarter were largely related to specific customer demand and in our view, not indicative of a broad based recovery in spending in this segment. Looking at the bookings by product line. While ALD was again our largest product line, we also experienced healthy demand in, for instance, our PCV and Epi business in the quarter.
Looking at our balance sheet and cash flow. At the end of June, the cash position increased to EUR382,000,000 up from EUR 312,000,000 at the end of March. And as Peter just explained, this does not include the cash receipts related to the patent litigation settlement. The increase in the cash position was mainly the result of a strong free cash flow and to a lesser extent, EUR 16,000,000 in dividends from ASMPT and partly offset by the €49,000,000 dividend, the equivalent of €1 per share that we paid to ASMI shareholders. Free cash flow increased to €105,000,000 in Q2 and EUR 226,000,000 in the first half year.
In the second quarter, free cash flow was driven by a strong decrease in working capital, next to continued solid profitability. Excluding the SEK 103,000,000 in receivables from Kokusai related to the litigation settlement, working capital decreased by approximately €70,000,000 compared to Q1. This decrease was primarily driven by an underlying reduction in accounts receivables as well as customer prepayments received during the quarter. In addition, the measures that we earlier implemented to structurally reduce inventories are also bearing fruit. Days of working capital, excluding the effect of the patent litigation settlement, dropped to 49 days at the end of June, down from 77 days at the end of Q1.
Capital expenditure dropped in the Q2, but this was due to the timing of investments. Our guidance that CapEx will remain at a higher level in the full year, full year of 2019 is unchanged as we are investing in our new facility in Singapore, which is well on track for completion in the first half of next year. With the Q2 report, we have also announced a new €100,000,000 share buyback program that will start as soon as feasible. This reflects the solid increase in our cash position and our unchanged policy to use excess cash for the benefit of our shareholders. Furthermore, on July 23, the cancellation of 5,000,000 treasury shares has become effective, reducing the issued share count by almost 9%.
Let's now look
more closely at the dynamics in our key markets. Against the backdrop of economic uncertainty and global trade issues, the semiconductor end market is expected to decline by a high single digit percentage this year. Looking at the wafer fab equipment or WFE market, average expectations for WFE spending now show a year on year decrease of a high teens percentage in the full year of 2019 compared to a decrease of mid- to high teens still expected 3 months ago. This is the balance of a further weakening of the outlook for memory spending, which is expected to be down substantially this year, while spending in advanced logicfoundry is expected to increase in 2019, supported by solid demand for the most advanced nodes. Looking at the memory market.
Wafer fab equipment spending is slow due to continued oversupply in both the 3 d NAND and the DRAM segment. While the visibility remains limited in memory, our view about the market is unchanged, that spending in the broader memory market will not show any material recovery in the second half of this year. As a consequence, for the full year of 2019, memory spending is still expected to be down significantly with most of the spending on technology transitions. For ASM, memory sales in the second half are likely to be somewhat higher as compared to the first half, as we already indicated with the Q1 results. As mentioned, this increase is driven by customer specific demand in the DRAM segment and not so much an indicator of a broader recovery.
We believe we are on track to meaningfully outperform the WFE market this year. In the first half of twenty nineteen, our equipment sales increased by more than 30% in U. S. Dollar terms. This compares with high teens percentage decrease year on year for the WFE market in the first half.
Logic and Foundry are the key drivers behind our outperformance. While our memory sales were down year on year in the first half by a double digit percentage, basically in line with the broader market, this was more than offset by very strong growth in our sales in the Logic and Foundry segments, as customers stepped up spending on the advanced nodes. As highlighted in the last few quarters, Logic and Foundry account for the largest part of our business. In addition, we have strongly increased our share of wallet with Logic and Foundry customers in their most advanced nodes, as we are engaged in a substantially higher number of layers. This is driving our strong current performance.
In Advanced Logic, demand remained strong in the 2nd quarter. Equipment spending was focused on additional capacity for 10 nanometer HVM and initial 7 nanometer investments. The transition to the 10 nanometer node in advanced logic has driven for us a substantial increase in the number of ALD layers as compared to the 14 nanometer node. In Foundry, we continue to experience healthy demand in the Q2, primarily related to 5 nanometer investments, where we have successfully expanded our position, resulting in substantial share of wallet gains in this segment. We expect the strength that we have seen in the logic and foundry market in the first half to continue in the second half of twenty nineteen.
Finally, looking at the analog segment. As we already flagged last quarter, we anticipate that demand in the analog segment will be lower in the second half of this year, following healthy sales levels in the last several quarters. In terms of product lines, ALD continues to be a solid driver for our company. The long term outlook remains strong. The current most advanced nodes, 10 nanometer in logic and 5 nanometer in foundry, have been a major inflection in terms of ALD needs, driven by further miniaturization, new materials and by new more complex device architecture that are on the industry's road map, the need for additional ALD applications at future nodes will only further increase.
This will support continued healthy growth in these segments of the ALD market over the longer term. Our focus in the memory segments of the ALD market remains the expansion of our served available markets, our so called SAM. We continue to invest in broadening our portfolio of ALD applications for future DRAM and 3 d NAND device technology. In 3 d NAND, for instance, as the industry moves to higher stacks of 96 layers, 128 layers and beyond, The increasing device complexity and high aspect ratio structures will stimulate the need for a higher number of single wafer ALD applications. We are targeting to increase our SAM and our share of the memory market step by step as customers transition to next generation devices over the next years.
Next to ALD, Epi has now become a second growth engine for ESM. The prospects for structural growth of the epitaxy market are healthy as next generation devices in the logicfoundry market are expected to require a steadily rising number of EpiSteps. At the same time, we remain focused on further increasing our market share by broadening our engagement in the advanced CMOS segment. An important step in this context is the introduction of the Permian that we announced at Semicon West in San Francisco earlier this month. Permian is an integrated epi pre clean module, integrated as a module in our entrapid epi product.
Pre clean steps can be critical to enable high quality epi film growth in advanced devices at 5 nanometer and smaller. The integrated premium modules, therefore, strengthens our offering in the Epi market. In short, ASM is well positioned both in short term as we are on track to meaningfully outperform WFE this year and in the long term as ALD and Epi are expected to be the key growth segments in the deposition market.
Now let's close
guidance as included in our press release overnight. So what we stated there was for Q3 on a currency comparable level, we expect sales of between €250,000,000 to €270,000,000 while bookings on a currency comparable level are expected to be also in the range of between €250,000,000 and €270,000,000 And as stated earlier for 2019, general expectations are now that WFE market will decline with high teens percentage. While expectations for the memory segment has further weakened, the healthy demand in logicfoundry segments in the first half is expected to continue in the second half of this year. Based upon this current market view, we maintain our expectation to meaningfully outperform the WFE market in 2019. At this point, Peter and I are happy to answer any questions that you may have.
We'd like to ask you to limit your questions to not more than 2 at a time, so that everyone on the call has a chance to ask a question. Okay, operator, we are now ready for the first question.
Thank you. The first question is coming from the line of Kwang Lee. Please go ahead.
Hi, thank you for taking my question. Can I just firstly confirm with you that your Q2 cash balance, does it include half of the litigation cost or the settlement or not at all?
Not at all.
Not at all. All right. And if I can have a follow-up regarding your new orders. It was led by Logic and followed by Memory and then Foundry was last. Do you see orders declining from your largest Foundry customer?
Or is it just quarterly fluctuations?
We definitely see it as quarterly variations.
This is quarterly variations. Got it. Thank you.
Yes.
Thank you. The next question is coming from the line of Sandeep Deshpande. Please go ahead.
Yes, hi. Could you just comment on your Epi wins and where and what kind of process you have won in Epi and how because you talked about Epi being the next big driver of sales for the company. I mean ALD is a very considerable driver. So is Epi going to get to that scale? Or what kind of wins are we talking about on the Epi side?
Secondly, in terms of the process transitions, we have these logic process transitions, which are clearly helping your orders very much because of the use of ALD in the 7 nanometer5 nanometer node, the EUV based nodes, for instance. Do you expect in the other Logic customers when they start ramping by the end of next year into 2021 that they will also be using a lot more ALD in the process?
Okay. Yes. Thank you for your question, Sandeep. So first on Epi, what process as well? As we have shared over the last 2 years in this conference call, we clearly said that we started, of course, with a strong baseline in analog power in both 203 100 millimeter.
And as you may recall, we started to penetrate into mainstream CMOS high volume early 2017. That was the start at N7 leading N7 node, the leading foundry. And we further expanded and we shared with this audience at that time that, that was a result of a conscious strategic decision that we took in 2015 to get back to become a meaningful player in mainstream CMOS besides our healthy position in analog power because, of course, mainstream CMOS is the biggest part of the epi market, and the Epi market is expected to have a high single digit CAGR for the coming years. And we also sense very, very clearly that the market would love to have a viable second player in mainstream CMOS because it's just a healthier ecosystem. So we got that opportunity at leading foundry at 7, and we further expanded our number of layers into 5 nanometer.
And we are very eager, not that it doesn't stop there. We have quite some R and D ongoing in many ways. First of all, to further expand our engagement with existing customers, but also to expand into more customers. And of course, logicfoundry is by far the biggest segment in, let's say, mainstream CMOS, happy. But we also don't close our eyes for memory.
We also have R and D engagements already ongoing for quite some time in memory, and we are learning a lot from that. So that is so as a result of that, we have been able to develop Epi as a clear second growth engine for the company. And now for 2 years in a row, Epi product line has significantly growth grew in their absolute contribution to the company. And also, we foresee this year, year on year, that Epi will meaningfully grow in its absolute contribution to the company, Sandeep. So that's on Epi.
Then on, yes, logic, of course, we are I think the best way to see it is that the success that we have are experiencing now in the transition in advanced logic from 14 nanometer to 10 nanometer, the significant amount of layer increases that we have are experiencing now, so basically increase in share of wallet. The same we are experiencing in Foundry going from 7 to 5. And that is, of course, a great baseline to work from in expanding our presence also at other players in the logicfoundry arena. Are we immediately at the same level in terms of layers? No, we are not.
But of course, also the volume at those players is so much lower, at least currently, that in terms of market share, the big players that we are engaged with today determine mostly our position. But we are very, very eager. If you look also at the developments in advanced LogicFoundry towards gate all around, we're all over the needs in the market in that for that market space a few years from now.
And then thanks, Chuck. I mean one last question on the memory market. I mean, what are you hearing from your memory customers? I mean, are you getting any indications of when they may come back? Or is this still too far away?
They're still waiting to see a stabilization in their market before they start talking to equipment suppliers such as yourselves?
Yes. It's a yes, it's a fair question, Sandeep. And yes, we don't see we in our model, we have not we are not forecasting a meaningful recovery of equipment demand in 2019, let's say, beyond the demand that we have in our forecast today. And as we shared, we have specific customer demand in DRAM that is very, very healthy. So as a result of that, our memory contribution is not bad this year.
But an overall recovery in that segment of the market, we don't before 2020 from an equipment point of view.
The next question is coming from the line of Stephanie Holi. Please go ahead. Yes.
Hello. Good afternoon.
So I have two
questions. The first one is to come back on the strong investment cycle, which is currently driven by Biologic and Foundry. So I know it's a bit early to talk about 2020, but how do you see sales evolving? And then I know there is the question mark also of memory, but at least if you could give us some visibility on the logicfoundry discussions that you have with your customers? And second question is about gross margin.
It seems to be improving a bit. It was stuck at 41%. Now it's 42.8%. I know there is volatility on the quarterly basis, but can we expect this positive uptrend to continue through the rest of the year? Thank you.
Okay. So first of all, on 2020, yes, it's, of course, early too early to provide real forecast on 2020, but we can try to provide you some, let's say, general color on what we sense with the market today is and that is that, of course, we sense that from an end product point of view, there's a lot ongoing in terms of 5 gs, data centers, artificial intelligence that is, let's say, those are healthy underlying end markets that could fuel the Logic and Foundry segments over the medium and long term. If you so that's, of course, good to know. Looking at the spending itself at this moment in time in advanced logic, We have no visibility at this moment that 10 nanometer investment, for example, in 2020 would immediately dry up. And on the contrary, we at this moment in time, we see a healthy climate in advanced logic.
And in addition to not 10 nanometer investments drying up going into 2020, we see also a strong ambition in advanced logic to continue on the path towards 7 nanometer. So from that respect, it would also not surprise us that we will face healthy investments, R and D investments here for 7 nanometer in 2020. But that's the best we can say at this moment in time. Again, we don't so we don't see advanced logic falling off a cliff at this moment in time, absolutely not. But how strong it will be throughout the whole year, that's a little bit too early to tell.
On Foundry, yes, we are seeing, as we, of course, have also shared during the introduction, a very healthy climate in the first half of the year. We also see, yes, that climate not deteriorating in the second half based on the visibility we have today. And yes, and if you then look at 5 nanometer, the 5 nanometer investments that the customer is now, let's say, is basically preparing for is by far not the end capacity level that is planned for 5 nanometer. So also in that respect, if the macroeconomic environment stays healthy, 5 nanometer investments in 2020 are very likely to happen, and we are excellently positioned to benefit from that, as you have seen on at the numbers in our guidance so far. So then on gross margin, Peter?
Yes. As we always have stated, we expect the gross margin to be in the low to mid-40s. We also have provided some guidance in the last quarters that we expect due to the introduction of a lot of new products that the gross margin would fluctuate a little bit more in 2019. Maybe to recall that one important reason is that we have a lot of evaluation tools that we are placing at our customers. And evaluation tools, you only place on the moment that you think that you have higher volumes there, but we have also some smaller customers on the certain moment where we are introducing new applications.
And that's the first tool that we placed there is something coming sometimes coming with a discount. So that's and those costs are also reported by us under the introduction costs or under the evaluation costs. Last but not least, what is also important to mention here is on the moment that you bring your first products to a new customer or a new application to an existing customer, then most likely the introduction costs, so the installation costs and related warranty costs might be a little bit higher than what you see when you do this for the 2nd, 3rd or the 4th time. And that's especially due to the strong growth that we're seeing in 2019. The impact of gross margin a little bit more.
So I think that 2019 still will show somewhat more volatility than what we expect for later years.
The next question is coming from the line of Nigel Bambunta. Please go ahead.
Hi. Good afternoon. Could you please provide some color regarding the DRAM order and potentially also a rough indication of the size of it?
Yes. The size of it, it's a customer specific, project specific. We have been working with this customer for multiple years. And yes, we just are benefiting from fact that year on year, this application range gets more attention and more demand. So as a result of that, we have seen, yes, strong bookings momentum in the first half, which, yes, will become visible in terms of billings in the second half of the year.
Maybe a quick clarification. Is this an example of how you can expand your service industrial market at DRAM customers? Or is it
So it's tens of 1,000,000. So yes, that's a color from a size point of view that we can give. Nigel, your second question was on service. Please continue.
Also related to the same DRAM order, is it related to the SAM expansion? Or is this what was the reasoning for the customer to place the order? I mean to the extent that you can provide us that detail.
It's just an expansion of their capacity. We were engaged in this application already, and they just specifically expanded in this space, and we were very well positioned. So we were more than anybody else able to benefit from that.
Appreciate it. Maybe one quick follow-up.
Yes, sure.
Thanks. With regard to the comments Peter made on the share buyback or the reasoning behind it, you obviously haven't received the cash yet, at least when you reported you hadn't. So should we assume that as the cash from the Kokusai settlement comes in, that there's additional room for share buybacks or other capital returns to shareholders?
Nigel, you know what our process is. On the moment that we have an amount which is substantially above the EUR 300,000,000
then we look how we
can fulfill a promise to our shareholders that we will use excess cash one day or another for the benefit of our shareholders. Since at the end of the second quarter, we had a substantial higher cash amount. We decided to do that. And we will look at the same sort of situation on the moment that we are again then after having done this above that EUR 300,000,000 and then we will look at the sort of solutions that we will have, which might benefit our shareholders most.
The next question is coming from the line of Mark Hiseling. Please go ahead.
Yes. Thanks for taking the question. The first question is actually on the new Epitaxy module. So it's the first move away from the position and into Edge. Is this very specific to what you can do in Epi?
Or is this also something that might be a first step to do other edge clearly
very well and you're at
the moment investing in your capacity. Doing very well and you're at the moment investing in your capacity. At what kind of point of utilization are you today? Are you gaining growth in the current base without the Singapore expansion? Or do you really need that to grow to the next level?
Thank
you. Okay. Yes. So on the edge part, the way you should see it is that in Epi, especially when you go to more advanced nodes, then pretreatment of the wafer ahead of the critical epi process is becoming more and more important. So you should view this announcement in that context.
As we go to smaller nodes and the amount of epi steps are expected to increase, especially in logicfoundry, then the pretreatment becomes more important. So to make sure that we really are successful in increasing our service available markets in Epi in the years to come, we put this on our road map. And this introduction is part of that. And in general, beyond epi, you may see it also that also pre- and post treatments before and after deposition, also in the ALD space, in other areas of deposition becoming more important. And we are paying a lot of attention to that.
But in Epi, it's very specifically critical, and that's why we made this separate announcement, which is very valuable to our customers in viewing us as a viable partner also on their future roadmaps.
Yes. With regard to the capacity, I mean, you can imagine that with the growth that we have seen, especially in equipment in the first half of the year, that we are stretching our capacity on this moment to the max. There will be enormous relief for the moment that the new building in Singapore will be up and running, but that will cost some time. But I think so far, we have been able to handle that, and we are also taking some additional actions to ensure that we will not run into capacity issues in the next
year to come.
And that year is necessary to overcome that because we expect Singapore operation be ready by mid next year.
Okay. Thanks. Okay. You're welcome.
Next question is coming from the line of Robert Sanders. Please
go ahead. Yes, hi. Good afternoon. I guess first question would just be on the applied Caucaside deal. You traditionally haven't been in the batch area of ALD.
Do you anticipate that market to grow as fast as single wafer ALD? And or do you think that single wafer ALD will basically ultimately grow faster than that? And then I've
got a couple of follow ups.
So you're talking specifically not to the batch market as a whole, but the batch ALD part and compare that with single wafer ALD, right? That's what your question is. So yes, our analysis so far, and of course, that could evolve over time, is that the batch ALD market is a very healthy one and it will stay a very healthy one for years to come. But our estimate is that the single wafer LD market will grow faster and also today is bigger than the batch ALD market. But it is a factor that it will stay a factor, the batch ALD market for a number of years.
But the dynamics we I just
like. Got it. And in terms of next year, it sounds like you're saying that in terms of your 2 largest customers, they're only about a third of the way through those big ramps, whether it's 10 nano or 5 nano, respectively. If so, is it not quite likely that you will continue to grow next year given that trend? Or is there some pull forward or lumpiness that we should be worried about in terms of thinking about the comparables next year?
Thanks.
Yes. I would love we would love to answer that question also if of course but we cannot at this moment in time. We talked to the climate a little bit on one of the earlier questions on the 2020 climate for LogicFoundry and there's not too much to add to that. Again, at this moment in time, we see pretty healthy climate in logic and foundry and we don't foresee the 10 nanometer and 7 nanometer demand in logic and the 5 nanometer demand in foundry to, let's say, fall off a cliff in 2020. That's not what we hear so far based on the visibility we have.
But how it will develop in the course of next year, we don't know. The only thing you and I know is that end markets, so many attractive end markets that are gaining a lot of traction at this moment in time about facial intelligence, 5 gs, many things that we could elaborate on for much longer, but we don't have the time for that. So exactly on a quarter by quarter basis is difficult, but the overall climate for our business, especially in advanced nodes is, in our view, perspective for us is good over the longer term. Okay. Thank you.
Yes, you're welcome. Hope that's helpful, Rob.
The next question is coming from the line of Tommy Qiu. Please go ahead.
Hi, thank you guys. Thank you for taking my question. So basically, you mentioned that your addressable market and step wins within next 2 generations and logic chips is already known. Can you actually comment about your addressable market expansion opportunity you will have within your single wafer ALD market because I remember you used to say by the time of 2021, your addressable market will be X. Is that actually different today because the number of locations you are getting is actually bigger than you thought?
Or can you comment on that?
No, I think our view is still the same. If we're let's be clear, we are basically, we put together a strategy a number of years ago to address to increase our served available market across for the whole within the whole deposition TAM, yes? So we're not only within ALB, but also in Epi and also in a more modest way on the 2 other product lines. So we're really looking for how can we address our served available market across the board, which, of course, ALD and Epi, the biggest opportunities. Well, we talked to Epi a little bit ago, zooming in on single wafer ALD.
Yes, we are we have been successful now, as you can see, in increasing our served available market in a meaningful way, going from 7 to 5 in foundry and from 14 to 10 in advanced logic. As a result of that, our share of wallet, those customers is increasing significantly, and it will not stop there. So we are very eager as we go in Foundry from 5 to 3 and in logic from 10 to 7. We foresee, we are working on R and D programs that if we are successful, will enable us to further increase our layer of participation in that transition. And in memory, as we spoke to earlier, it will go more gradually.
It will really go step by step that we will in DRAM and 3 d NAND, node by node, increase our presence, But as a result of all of this, we see a big potential for this company.
Okay. I see. You covered batch tool impact. What about mini batch tool? Because Togollectron has been talking about mini batch tool and commenting that they are actually a very sort of popular solution for the memory makers.
Yes. Mini batch, that's in general included, Tammy, that's in general included by us and also by the industry watchers in the single wafer segment.
Okay. Do you see going forward talk electrons mini batch because the efficiency is actually higher, it's likely to be firstly adopted by memory guys before single wave, the real single wave that has been adopted?
Yes. The distinction between many, it's really dependent on what kind of product they are we are talking about. But in general, if again, I don't want to talk too much on specific competitors, but Tokyo Electricum, for example, has a strong presence in batch, so really the real batch and with specific many batch products in the single wafer space. And those products have been there already for quite some time. And in specific segments, they have been very, very successful.
And we are very much aware from that, Tammy. And we're developing our strategy based on our own strengths and based on whatever move moves our competition makes in that space. But so you mentioning their presence in MiniVetch is not new to us.
Okay, cool. Thank you.
You're welcome.
The next question is coming from the line of Achal Sultania. Please go ahead.
Hi, good afternoon. Just one question on gross margins. Like obviously, we've seen a number of moving parts in the last few quarters, whether it's your mix within your customer, your Singapore operations being ramped up. Can you help us understand like what could what are the biggest moving parts going forward in your gross margins? Is it just the mix within the customers or by foundry, by logic?
Or is it some incremental investments that are needed understand whether like what could be the biggest delta for gross margin going forward? Yes. Understand whether like what could be the biggest delta for gross margin going forward? Thank you. And this is more like a longer term question, not just for the second half, but generally in 2020 2021?
I understand that. But besides what I already have mentioned there, so the introduction of new products, the introductory extra costs, which are, by the way, not only installation, so in our service organization. The biggest swing factor is, of course, the certain applications for certain customers. So it's not customer driven specific. It's not memory or logical family related.
But there are certain applications which have a lower or a higher margin than the average, right? As you can so what we have said in earlier calls, all our gross all our product lines are showing healthy gross margins. But within the product lines, you have products which have higher or with or lower gross margin margins. And in a lot of cases, the effect of that in totally is relatively small, but there could be quarters where you have bigger swing factors leading to a slightly higher average gross margin than in other periods or to a slightly lower gross margin. I think that's the biggest swing factor besides the introductory cost that I just have mentioned.
Okay. Thank you.
Next question is coming from the line of Michael Deutsche. Please go ahead.
Good afternoon, gentlemen. I have a question about your current run rate. Judging by Q1, Q2 and your outlook for Q3, your run rate is roughly SEK 1,000,000,000 in sales, which is quite a lot more than last year. How would you say that, that growth is crudely broken down if you would have to distinguish between existing clients buying the same products as last year? And on the other hand, all the new innovations, the new products and the clients using new applications for existing products?
So can you give us a crude breakdown?
Yes. That's, of course, information which is rather difficult to provide. I mean, in general, we introduced a lot of new applications, as what we already have stated earlier. So the percentage of sales coming from completely new applications is especially in 2019 very, very high. What we already have stated in earlier calls is also that we are working very hard to increase also our position with new customers in, as an example, China.
So that our strategies are also becoming visible as we speak. But it's a lot of the applications to make that mix, you need to have a good definition of what you mean with that. But I think that in general, Michael, what we can say about it is that a lot of the sales turnover that we have seen in 2019 is coming from rather new applications.
Yes. And I and to add to what Peter said, I think as we said during our our introduction, the transition of the nodes in logicfoundry has been instrumental also in the year on year growth. So that's a lot of that is, of course, new applications and not only ALD, as we spoke to also Epi. And then there is also a pretty healthy contribution from the 2 other advanced stuff in a way that those applications were, let's say, formed in the last 2 years or so. But they are just steady footprints at existing customers where the volume is decreasing now and where we're basically harvesting from basically the strong coverage at those customers for multiple years.
That's a little bit of color, Michael. I hope that that's good enough for now. And of course, you're always possible to look for some further contact on that with Victor outside the
Okay. No, that's very helpful, especially the comment that it's quite sizable, all the innovations. Maybe a follow-up on that. I noticed that in the balance sheet that the amount of evaluation tools remains rather high, which is also very promising going forward. I assume that, for instance, evaluation tools of 1 2 years ago in your balance sheet are now driving that particular growth this year.
Is that correct to assume?
It's an element of it, So it's one of the elements, as I mentioned earlier. We also have a lot of new customers where we place order which are placing orders of tools which we already have developed a few years ago, which we have already been installed with other customers. And yes, that's also driving more growth.
Okay. Good. And the valuation tools that you have today, I assume part of it is with existing customers, but there's also potentially new customers with it within that framework?
As you know, in this industry, we basically are doing business with all the players in the top ten. So most of the new evaluations are with the big spenders because top 3 is spending more than 50% of the CapEx today, Top ten is spending more than 70%, 75% of the CapEx today. So that's where most of your seeding tools should go to. But of course, you see here and there some dynamics of new areas where new customers pop up, for example, China, where big investments are being made. So selectively, we also make investments there.
But it's more it's mostly existing customers, new applications in ALD, in Epi and sometimes in other areas. Yes.
And Michael, because there we test the first tools and the first applications, when that has been done and when a new customer will pop up or a second customer, which is able to do that, and we try to do that as I mentioned earlier, with giving a certain discount on that first product that we are going to deliver. So to ensure that our evaluation tools are not at the highest level. Yes, but that's further clarification on the color that I tried to give when we discussed the gross margin earlier in this call.
Okay. That's clear. Great. Thanks.
The last question is coming from the line of Syed O'Connor. Please go ahead.
Great. Good afternoon, gents. Thanks for taking my question and for squeezing me in. Maybe just one, Chuck, on the capacity and your current run rate. Can you continue to grow sales into 2020 if you're currently at max capacity and Singapore doesn't come online until middle to late 2020?
Yes, we can do that. We have limited capacity in Korea, and our own facility is limited, but we have found ways to extend our capacity. So capacity should not be the limitation in that.
Okay. Got it. And then for Singapore, when exactly is that ready for 2 coming off the line
in 2020?
We expect that the building will be delivered towards us in the course of the first half. So I think that in the at early second half of next year, that we can start high volume manufacturing in Singapore.
Okay. Great. And maybe if you could comment also on the lead times, how they're currently trending? Thanks.
Lead times for orders, you mean?
Lead times for orders, that's correct.
Yes. Well, In general, you see that they are 3 to 4 months, except for Korea. That has been the general practice throughout the years. But more recently, you see that sometimes in the logicfoundry space also orders are placed a little bit with a shorter lead time.
There are no further questions. Please continue.
Okay. I think we're out of any further questions from the audience. So on behalf of Peter van Momo, Victor Berano and myself, I would like to thank you all for attending today's conference call. And of course, feel free to contact us on any remaining questions that you may have in the coming days or weeks, and let's stay in touch, of course. Thanks very much for your interest in the company, And let's stay in touch.
Thank you again. Bye bye.
That does conclude our conference for today. Thank you for participating. You may all disconnect.