艾司摩爾 (ASML) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ASML Annual Results 2002 Conference Call on the 16th January 2003. Throughout today's recorded presentation, all participants will be on a listen-only mode. After the presentation, there will be an opportunity to ask questions, If any participant has difficulty hearing the conference, please the * key, followed by the 0 on your push button phone. I would now like to turn the conference over to Mr. Doug Dunn. Please go ahead sir.

Thank you Mark. I guess I'm the only guy that is not on a listen-only mode so I will kick off. What I would like to do ladies and gentlemen and good morning, good afternoon and goodnight to you wherever you are in the world. Give a brief introduction, a few words from me and then since we want to limit this one-hour because we have things to do at 6.30 here in Central European time, I will pass it over to you for your no doubt searching questions.

So let me begin then by picking a few of the major points of our annual results. Firstly, I want to touch on a few of the, I think, brighter spots in this rather gloomy high-tech environment that we are in. We at ASML increased our sales by 23% year-on-year in the face of a 20% decline in our sector, the capital equipment sector. So I think that for me re-enforces the message that our product is excellent and our customers like it.

We, also by moving the mix of products towards the high-tech end, the 193 INN, the 2. INN and TWINSCAN increased our average selling price substantially. It's gone up in fact from 8.1m to 9.1m in the past 12 months. I stress that it is a mix effect and not an affect of our ability to get more money from the customers for the same product. Underlying that mix effect, there is indeed some quite severe price pressure and we are also impacted to some extent by that. And it is at this point a buyer's market as you appreciate. So we are pleased by those two market related instances.

We have also performed gain market share. The news on this is not fully out because the statistics don't close for another month or two yet, but it is expected by those who forecast these things, they tell me at least, that we will have 50% or greater by value and 40% or greater by unit volume into the semiconductor market of Lithography units. Again, supporting our stance that customers increasingly buy from ASML.

And one of the public commitments we made a few months ago was to generate cash from our operations. We have generated a net Euros65m of cash and Peter is with me by the way, Peter Wennink, CFO and he will be able to comment on how that has been put together. The underlying value of that by the way is much greater as you will see as Peter explains that later on. So we are pleased with that performance and there is a lot more to come yet from the ability to squeeze our assets cash wise.

We also took some decisions regarding our strategic future. As you know we are taking the rather difficult decision to reduce our employment level to give a reduction in the break-even point of the operation. We do this in the back of the fight. We have had two years of low sales as an industry. And the next six to nine months will not be much better. I don't think. Not much better and therefore we are taking a prudent step. Fortunately the efficiency improvements we have made in the past 12 months allow us to take those reductions in capacity without impacting the major programs. Our major programs R&D and customer support, applications, field service, etc. We can sustain at the present high level satisfaction, even in the face of the reduction in resources applied. So that's good news, that's bringing efficiencies out of the organization.

We also decided to close down our Track operation. Frankly it was not going to give us the product that we wanted quickly enough. So with a lot of regret we have closed that down. And we also decided to divest of our Thermal operation. That we will do through a sale sometime in the next couple of quarters or thereabouts. We have no precise time in mind. We have two objectives. Sell it into good and safe hands who will look after the installed customer base and allow the group to prosper. It has excellent products and I'm sure in the long-term will do very well indeed. And also to ensure of course that we get a decent price for it. If that takes us four months or eight months, well I'm easy on that.

They were the primary actions we took. To recap, gain market share; increase our sales despite the decline in the market; generate cash from ongoing operations with a lot more to come yet; divest of our thermal operations; it's non core and non strategic for us; close down our Track operation and reduce our break-even point by taking all kinds of costs out of our cost base, including unfortunately people costs. That kind of summarizes the management actions for the past 12 months.

The numbers you will be aware of and speak for themselves. I will not go through those with you. Let me just make a quick comment on the industry as I view it right now and then I will pass over to you for questions. But so far as the sector is concerned, the semiconductor sector, it is going through I think a very gradual renaissance. If you look at the underlying sales growth quarter-on-quarter, it's positive. I think by the way this quarter, Q1 of 2003 will show a slightly negative dip. It's a seasonal industry and probably will dip slightly this quarter. But underlying that, there does seem to be a gradual improvement in the sales ability of semiconductors. So that is positive news. It gives, I think, good indication that the worst is now behind us. Although I am the last person to claim any false dawn here. It's going to be a very, very patchy six, nine, twelve months ahead of the industry, whilst it recovers from the two dark years behind us.

The average selling price rise has been coming down quite substantially for the past 18 months, even more actually. And therefore although the sales have been flat, the unit volume of course has been increasing. And that for us is good because basically we sell based on their volume of sales in units not dollars. And if you look at the unit sales of integrated circuits and discrete components, it is approaching the levels of 2000 and therefore the time will come for us to kind of try and guess when, but the time will come when that capacity is saturated and they start to place ever increasing quantities of orders. We haven't yet triggered that threshold and I don't know when the trigger point will be reached in time. I know in percentage of utilization but not in time. And therefore we wait patiently for that, doing the things that we do best, getting market share; convincing customers to use us; expanding our customer base; generating cash and taking our cost base down.

One last point now on geographic markets. We have moved from one to two Japanese customers. The second one is secret unless you know something. I don't actually know who it is. And we have also established a strong presence now in China. We have sold in the past 12 months over 30 systems into China. Some of those fairly leading edge and some of them secondhand. Nevertheless, there is no doubt that China is rapidly becoming a very important market for this industry and we are determined to play our full role in that large continent. And at that, I think I will rest my initial introduction and pass back to Mark, our operator and controller so he can begin the question and answer process.

Thank you sir. Ladies and gentlemen at this time we will begin the question and answer session. If you have a question, please press * followed by 1 on your push button phone. If you wish to cancel your request, please press * followed by 2. Your questions will be answered in the order they are received. If you are using speaker equipment today, please lift the handset before making your selections. One moment please for the first question. Your first question comes from Mr John Danju(ph). Please state your company name followed by your question.

Hi, this is John Donju(ph) from CSAB. Good afternoon. I had a quick question on gross margins for the first half of 2003. If I remember well the level in the second half on gross margin Lithography was around 27% excluding the one-off charge. And you are committed obviously to improve that margin given the restructuring taking place at the moment in Lithography. Is it fair to say that you could improve sequentially this gross margin even though volumes at the start of the year could be lower for the first half of 2003 compared to the second half of 2002?

John, you just mentioned the 27% but that includes the technical development credit repayments that we booked because of the TWINSCAN shipments in 2002, which were significant especially in the second half of the year. That accounted for another 2 1/2%* of gross margin. So that repayment will go away in 2003 and it will stop in the first half. So that will give a sequential improvement of the gross margin when we stop that of 2.5%, bringing it up to using your 27%, anywhere between 29% and 30%.

Given the fact that in 2002, the TWINSCAN part of sales was significant, but also included TWINSCANs that we shipped in the early stages of their life where they were at the bottom of the learning curve, you could expect a sequential growth of the gross margin because TWINSCAN will enter a period whereby those margins will improve due to learning curve efficiencies. So you could start off with the gross margins in the second half of this year taking away the [indecipherable] case and the one-time provision and it will be around the 29% level and then building up gradually sequentially over the year 2003. So it will be over 30% for the total year.

Thank you.

Thank you. Our next question comes from Miss Kirsten Parker. Please state your company name followed by your question. Thank you, Miss Parker, please go ahead.

Hello can you hear me?

Yes.

Oh, sorry about that. It's Kirsten Parker from Morgan Stanley. So just the first question, what was the accounts payable number for the second half of 2002? And when you mentioned during the analyst presentation, the service revenue numbers of about Euros300m. Did that include the service revenues associated with the Thermal and Track business? And then I have a follow-on question.

The accounts payable number as part of the current liabilities at the end of the year in Euros was Euros213m.

Okay. And then the service revenues of Euros300m approximately, does that include any for Track and Thermal?

No.

It's just Lithography.

Just Litho, great. And just on the follow-on question. In terms of your ASP expectations for the next 12 months, could you just discuss that a little bit further given that they have sort of increased from Euros8.9m to Euros9.1m. Do you expect them to continue to accelerate or improve quite so well over the next 12 months?

Kirsten if you look back in history for 18 months and you will understand why that ASP has gone up, I know you know that. And we introduced TWINSCAN which had a dramatic increase on ASP because of the complexity of the product and the job it does. We also introduced simultaneously the High NA248 and the High NA193 lenses, which clearly because of their excellent performance commanded a higher price. I think therefore the very rapid ASP increase we have seen in the past year and a half has got a logical reason behind it but will not continue with that repidity. There will be new products for sure, like the 1200B when it comes out and the Microscan 7, but they will not alone be sufficient to maintain such a dramatic increase in average selling price in such a short space of time.

So as you will expect with ASML, our products get more exotic and more capable and more expensive, but we have gone through if you like 18 months of real drive to bring out a brand new platform and that carried with it a higher ASP and you saw a steep angle of increase. That steep angle will not continue. So yes, if you strip away the underlying capacity business, which today isn't there. If you assume that it's not going to be there in the future, which I hope your wrong by the way there, but then ASP will increase more gently. What is likely to happen at some point of course is we will trigger the threshold for capacity expansion and we will get a load of orders for ordinary 200mm product and then you will find ASP probably coming down because of the mix issue.

Great. Thanks very much.

Thanks Kirsten.

Your next question comes from Mr Nicholas Goddard. Please go ahead sir.

Yes, hi. I've got two questions. The first one is relative to the cash flow and it's probably for Peter. If you look at the July to December period, there was about Euros 47.5m positive coming in from over investing activities. I just wanted to know what this is referring to mainly. And then I have a follow-up question.

Yes, okay. That has to do with the fact that we have taken out of our equipment line, which is part of the fixed asset lines those tools that we consider tools ready to be sold. So those were taken out and went to the inventory balance, where they were either there or they were part of the sale for the second half of the year. So when you look at your movement in your property plant and equipment line, you have of course your regular investments and what we have taken out are those tools that we have identified to be sold and they went to inventory.

Okay, thanks very much. My second question relates to the backlog. Could you try to quantify how much of the backlog was impacted by cancellations and orders you may have excluded from your backlog. And also within that portion, grossly speaking, how much of that would be soft orders? And within that very specifically, if we look at the push out which materialized in August/September from Taiwan, are all of the orders remaining in the backlog as of December considered as soft and were therefore excluded off the backlog number you reported.

The backlog we reported 103 systems for Euros 1.1b is a 12-month backlog. And it is as far as we can tell a healthy backlog. Indeed there are some orders which we have received in the past six months or so, which for various reasons, let's not go into those reasons, we would consider as soft backlog and we have not reported those to you. Now, it's clean as far as we can make it and therefore represents an honest commitment from customers and an honest commitment from us to satisfy that order.

Now, there are no guarantees in this world. No guarantees that existing orders may not also be cancelled. And no guarantees, by the way that we won't get a lot more orders, in fact we will. So you see backlog at the moment in time and we clearly will continue taking orders and we will ship, I believe, far more than that current backlog holds in store for us. But to answer your question, it's as good as we can get it without knowing every intimate detail of our customer. So we have taken out the ones that we consider or that a customer has advised us to consider as soft.

Okay. Maybe another way to ask the question if I may, would be if you look at the additional orders you referred to many times during your last reporting season that you took in in June and July from Taiwan. How much of that has been shipped in the six months that followed?

Well the Taiwan base we received a lot in the timeframe up to June. In the timeframe since June, two things have happened to those. We have shipped some and some have been cancelled. A few, relative few, have been pushed out into next year, but with good intentions from that particular customer. So I think they are solid. And we took also in the second half orders from Korea, in which we have shipped, I don't know, many of them, I would say half, or two thirds round figures. And the balance of those are good orders from a reliable source are on the backlog for the first half of this year. So I think does that kind of answer your question?

Yes that's perfect Doug, thanks very much.

Thank you. Your next question comes from Mr Jim Fontanelli. Please state your company name followed by your question.

Jim Fontanelli at Arete Research. I just have a couple of questions. One again on services, I just wanted to clarify. I guess in absolute terms, services was flat half and half. But proportionally in the second half declined quite substantially. I just wanted to check what was sitting behind that, was it services given away to get hardware sales? And if so, what was the gross margin impact? And I'll hit you with the second question after that.

I'm still struggling with your first question, it's a pretty detailed one Jim. But thanks anyway just for giving my colleague such a test.

Yes, you are about right. It's about half and half is in [indecipherable] terms the same number. But service is something that you sign up for the year. So it means that if your sales volume of your system shipment change, then your service revenue does not change. So it's a fixed contract for 12 months and that is why it's not strange that it is half-and-half about the same. The thing that does change in service revenues is the sale of field options. That has no relationship to the number of system sales that you do. So your relative percentage of sales that declines when your sale of your systems will increase.

Should we then extrapolate sequentially high service revenues for the first half of next year in anticipation of hardware sales for this half, sorry second half of 2002?

Your service revenue, there is a single digit growth in your service revenue that we expect for the first half of 2003. It's a gradual growth because your install base grows and your tools come out of the warranty and you sign up service contracts and with that growth to grow with double-digit numbers.

Okay thanks-

So you have to take the absolute number Jim, not the relative number.

Okay. The second question, you talked early this afternoon about reaching peak margins again.

Yes.

I just wanted to clarify the timeframe for that. Do you think it's possible this cycle, whenever this cycle is? And if so, what sort of volumes need to sit around that ability to gain peak operating margins again?

I was talking about this cycle. And I think we should be mixed between 250 and 300.

Excellent. Thanks.

Yes.

Thank you. Your next question comes from Mr Ucha Orgy(ph). Please state your company name followed by your question.

Right. My name is Ucha Orgy(ph) from JP Morgan. Just a couple of questions for you. The first is, can you quantify the impact of the AT 1200 B2 in the order backlog, because B2 was launched in December and then you had a spike in your backlog in December. How much of that included AT 1200?

Yes well I can fairly happily say, or unhappily say whichever, there is no connection between the spike in the backlog of the orders we booked in December and the announcement and launch of the tools. We do have a small and growing order book for that tool. It's an exotic tool as you can imagine. Only a few customers can take advantage of it in the short term. So the spike in December was not a function of that. The spike in December was several contracts coming to fulfillment for existing products. And I guess the backlog must contain 10%ish, 12% or so of 1200s right now.

Okay.

It's not insignificant, but it isn't responsible for that spike you saw in December.

Right, fair point. What was the ASP for that tool? I mean is that something that you are likely to discuss or give us a range of how much that tool will cost?

Enter my negotiating hat now and how many do you want to buy and I'll tell you the price? I think the list price is around high teens, maybe Euros 19m ish. But for you we can do one for Euros 20m.

I wish I could afford it. Just one more question. Post the restructuring, how will your current pricing affect the capacity at the moment. I know before the restructuring you told us it was about 400 units. Given this restructuring, has that affected your effective capacity or not?

Our effected capacity is not going to be significantly impacted by the restructuring program. When Peter mentioned earlier a number of 250 units, I think to the previous question, as a level at which we can achieve peak margins. And we can do that. We can do that many a year systems from our installed manufacturing base, factory space, most of the toolings in place and all of it. So there is no limitation there. We have got the resources and capacity. Don't forget in our peak year of 2000, we shipped around 400 systems, just under 400 systems. Although they were less complex than today. So the restructuring is being done through efficiency improvements, not by just taking out the base strength of the organization. So we can do the 250 or the 275 if and when it happens in the next, hopefully quarters, maybe a year or two.

Right. Thank you very much.

Okay.

Thank you. Your next question comes from Mr Robert Mair. Please state your company name followed by your question.

Yes, Bear Stearns & Co. Could you give us a little update as to break-even and when you are looking-- you talked at the analysts meeting of 160 unit break-even. Is that still your break-even expectation and maybe where and when we can sort of look at getting there? And a couple of other questions. Microscan 7, is that sort of end of life product ramping down as expected? Or is that ramping down faster than previously expected given the weakness in the market? And a third and last question. If you could update us as to where TWINSCAN is in terms of performance and your expectation of throughput on that product?

Well let me take your easy one. Well the middle one first, the Microscan 7. We haven't ever shipped a Microscan 7. It's a brand new product and therefore is not by any means ramping down, just the opposite, it's ramping up. I think you are confusing the Microscan 5 Robert, which was a product which we ramped down a year and a half ago. So the 7 is a 157 tool. The world hasn't yet seen one. It's leading the pack and we introduced it this year. Now it is fair to say it's a R&D tool and won't sell like hot cakes. First of all very few customers can afford to move into 157 early, like this year, and secondly they will use it for R&D purposes, one or two tools. So we are talking a handful of tools only. But it isn't a ramp down, this is a ramp up of a brand new tool.

Secondly, the TWINSCAN performance is excellent. We have increased our mean time to failure. We have increased the overlay capability, the resolution capability. It is now producing in volume on many sites. We have shipped 61 systems in the year that's just finished. 40 of those in the last half. 59% of our backlog is for TWINSCAN product and customers buy them because they work extremely well. So the performance of TWINSCAN is now really beginning to hit the quick pace that we always said it would. And there is a lot more to go yet. We have got years and years worth of development improvements coming out every two or three months and new improvement on various aspects of the system throughout this decade. So it's getting good.

And the first one was a break-even level. That depends on what the mix is and what the price is as you can imagine Robert. But the 160, you guys should not pin a number on this because it's a moving thing. We will transition from around 200 to 160 and we will go via 190 and 180 and 170. And we may come out at 160, 155 or 150. We will decide that as and when appropriate. So just assume that we will get through that number towards the end of this year.

Okay. But 160 is still your target?

No, no. 160 is the number that we are going to transition through later this year.

Though if we can get lower Robert, we will go lower.

Okay. And just a clarification on my question on Microscan 7. I meant the sort of the Microscan product line ramps down -

Yes, it's the last of the Microscan range-- that's correct.

Yes. And I would assume that the number of expected orders from Microscan 7 haven't been reduced given the current market environments since those were R & D tools of a low volume that there are probably still about the same expectation level?

Yes. Around a handful of products will sell this tool.

Okay. Great, thank you very much.

Thank you Robert.

Thank you. Your next question comes from Mr John Pitzer. Please state your company name followed by your question.

Yes it's Credit Suisse First Boston. Good afternoon guys. Just a couple of follow-up questions. First, relative to break-even. What kind of shipment forecast can you give us in the first half of the year. And relative to that shipment forecast, do you think you are going to building backlog in the Litho? And then I have a couple of follow-up.

John, we are not giving you a shipment forecast in the first year. We are quite explicit for any period of time in fact. We are quite explicit on that. We have shared with you our backlog 103 systems, just over six of them acquired in the first half with another five and a half months to go, so that will build obviously. 40 in the second half and that will build obviously, so will increase by close-- there's a lot of noise on the line, it's not from me I can assure you.

Doug I apologize, I'm sitting in an airport right now.

Then I suggest that you [inaudible] the conference. I suggest you sign off or something. We can't hear you.

[inaudible].

Okay, let me try again. We will build the backlog through the year and we are not giving guidance on shipments because neither you nor I, nor anyone else knows whether this market will grow rapidly, flatten out or decline gently. And until we know that, then forecasting is just like picking next week's lottery number.

Doug, when you look at your breakeven targets, how much more restructuring charges could we expect? Do you think most of the restructuring charges are behind you at this point?

Most are behind us. There will be some in this year because of legislation in Europe for laying people off. Clearly we won't incur the lay-off costs until this year, but it's a small amount. It's around Euros 10m or even less than Euros 10m. So it's not let me say material in that sense, although it's not insignificant either. So no, we don't except any more restructuring charges, other than the ongoing costs of that less than Euros 10m I just mentioned this year.

And then the last question Doug. In the second half of 2002, it looks like you guys saw customer recognition on the TWINSCAN a little bit more aggressively than you had anticipated. I am assuming that you guys hit internal customer requirements more quickly. And then you mentioned earlier that some of the gross margin pressure in the second half of the year was due to TWINSCANs that were shipped early in the first half, but not recognized them. I'm kind of curious where do TWINSCAN gross margins sit going into the first half of the year and do you expect to see margin improvement in the first half of 2003 on the gross margin side? Thank you.

Okay well yes. Good set of questions there. TWINSCAN gross margins-- it's like any of our products. When the volume is right and Peter has mentioned that volume, 250 systems in total we will hit greater than 40% margins, gross margins on all our products including TWINSCAN. Now of course the volume is less than that right now, so we carry under recoveries because of that. And it is still an early tool but as you have noticed now we don't have to observe SAB101 and defer the income because the customer acceptance has become more natural and normal like an ordinary tool. That tells you that the product is improving, is being installed more quickly, it's coming up to it's full capabilities more quickly. Such that we can with confidence, the auditor's support by the way, take revenue recognition on the day that we ship as opposed to waiting for customer factory acceptance.

The gross margin is a function of two things. It's the volume and we have talked about that and you know the issue there and that will be fixed with the market and how market kind of share increases. And it's the fact that still it's only a year and a quarter old and a very complex tool and we are still going through the learning curve and so are our suppliers. But we have urgent programs with them and this year will see the benefits of some of the programs coming through. So that gross margin will continue to improve through this year, but it will take also volume to finally get us through to those 40% plus levels that we can reach with this product.

Yes, I can add to that John. We started those margins at low 20s. We improved through the high 20s and we have to go into the 30s in the year 2003.

Great. Thanks guys.

Thanks.

Thank you. Your next question comes from Ali Imrani(ph). Please state your company name followed by your question.

Yes I am with CIBC World Markets. Hi Doug, hi Peter. I was hoping you could give us the mix of shipments in the second half of last year, including you mentioned 40 TWINSCAN. But could you give us a breakdown of that by light wave, 193, 248 [indecipherable] as well as the balance in terms of 248 versus [indecipherable].

Ali, yes we can. If you log onto our website, you will see it in full color before you. But since you are probably not in a position to do that this very second, we will try to give it to you just over the phone as well. [indecipherable] webcast.

I mean as of now all those numbers will be part of the presentation that will be on the website, including the backlog numbers. But for your convenience I am going to give it to you. It's on the second half, 200mm [indecipherable] 15 scanners, 42 428nm scanners, 8 193nm scanners which brings the total 200mm scanners up to 65. And for 300mm, 6 [indecipherable] scanners, 19 248 scanners, 16 193 scanners making a total of 41 for 300mm. Total scanners of 106 and 4 new [indecipherable] scanners, bringing total new systems to 110 and then 17 used systems, all being steppers bringing the total of [indecipherable].

Thank you very much, I appreciate that. Looking at one of the questions that was asked before. How many cancellations did you see to your gross bookings in unit terms in the second half of last year? And I was hoping qualitatively you could give us an idea of where in the tail end of the year, the bookings have accelerated and what activity you have seen or expect to see here in January?

I'll just give you an estimate and it really is a pretty crude one if any one of my colleagues here have a better number, then yell out. I would estimate that we took around 30 or 40, maybe 40 or 50 cancellations, gross cancellations in the second half of last year. And we took obviously orders, some orders to replace them but not totally, because the backlog's down. Does that answer that question good enough for you, Ali?

Yes, it does. Thank you.

It's the closest I can get to that one. The cancellations have trickled down towards zero now, so let's hope that stays as it was. It was zero also in May and June of last year. So we have learned that one haven't we? And the second question was?

The second question was the order trends late in the quarter in December as well as the trends that you are seeing here in January. I am thinking in particular the de-ram space where you have a very strong exposure and seems to be leading the foundry reinvestments. And where you expect to see the impact of some of the budgets, some of the existing new customers are penetrating to your order book?

I think it's fair to say and no secret that the last quarter of last year, the sector which saved us, if you like, from the dramatic cancellations from some of our foundry customers was the de-ram sector, particularly Korea. They are still going strong, negotiating and placing orders for 200mm product. I believe that the foundries will come back to life, if that's the correct expression, relatively soon in months rather than quarters from now, because if you look at their utilization at the leading edge, it's pretty good. Although overall, they still have a lot of spare capacity. And frankly for January we have been so busy getting this road show together, I have not actually looked, I think our customers are still taking a long vacation in January actually, still on the ski slopes I suspect. I think there is always a lull in the first few weeks. There are a few big bits of business lurking around that we are not going to talk about, but which we are going to be aggressively going for. I think actual bookings taken in the first couple of weeks of the year, you can count it on less than one hand I'm sure.

Great. And one final question. You mentioned China several times. You obviously have a very strong install base there and a leading position at the largest foundry in that market that's now moving to two new fabs in Beijing. And I'm hoping you can give us some idea of what the regulatory issues might be in terms of shipping 300mm to that geography? And where you see the strength of orders from China continuing this year?

On the regulatory conditions that apply, you mean the Wassenaar Agreement. I'm not the leading expert on that and I've yet to find anyone who is. I don't think there are any. But it's basically not a wafer size regulation, it's a wave length regulation. Taiwan in fact has placed on it's companies a wafer size regulation, but that was just for I guess for local reasons in Taiwan, political reasons. The issues are wavelength and resolving capability and that's where the Wassenaar Agreement put certain limitations on. All I can tell you is that we ship always with European Union agreement for our products and therefore we comply with the interpretation of the Wassenaar Agreement in every sense. And so far we have not been stopped from shipping anything that yet that they have asked for.

Yes, and yes I do believe strongly in China. Huge population, dramatically low cost base, you know engineers are a factor of 10 less there than in the USA and Western Europe. And great engineers, lots of them. And a lot of incentives from governments local and national, great work ethic, huge demand for semiconductors internally and a huge demand to export them. And therefore the next 15 years I think, I believe that China will be alongside the Japans, the Taiwans and the USAs of this world in vying for the top slot for making semiconductors.

Thank you very much.

Thank you. Your next question comes from Mr Philip Lee. Please state your company name followed by your question.

This is Jay Dana from JP Morgan. Good afternoon guys.

Hello Jay.

Hi Jay.

A couple of questions. Doug, on the sale of the ThermCo business. Can you kind of give us some sort of sense as to what would be a reasonable expectation as to what you can bring in for that? And then I've got two follow-ups.

How much would you offer Jay? We're realistic here. You have may have noticed and I'm sure you have Jay from the background. This is not exactly a boom market for semiconductor CAPEX equipment nor for mergers and acquisitions of such companies. I think, well-- because we are negotiating and discussing with a multiple group of people who are looking to buy it, I'm not actually going to give away too much of our negotiation tactics here. But we are talking multiple 10s of millions, but probably not over Euro100m, okay?

Okay.

That's as good as I'm going to tell you given that we are negotiating as we speak almost. And we do have people who are interested. Some are strategically interested because they make equipment. Others are financial houses who see an ability here to buy it, dress it up and sell it on I guess later. And surprisingly the negotiations are pretty strong as we speak. But we also have a second objective Jay. And I say this because of our install base of customers. Those customers buy from us as well as [indecipherable] also litho tools. We have an obligation, a right and expectation by them to make sure that we do sell it into good hands. So we want a customer and it may not be highest bidder, but we want someone to buy from us this company with the full intention of making it successful and supporting the existing install base and bringing out these new ALD products that they have that are so good. So we may not take the highest bidder, we may take the one that's got the best offering from a support and ongoing point of view.

Okay. And then the follow-on is, if you look at the customers that you are negotiating with right now in terms of companies, chip makers that are going to place orders in the next two to three months, would you characterize that as a small subset of strategic buyers or a broader base of chip makers from multiple end markets? And then the last question is you mentioned that pricing is challenging earlier in your comments. Could you give us a little granularity on that please?

I'll begin with the pricing one actually because that's the easy one to answer actually, Jay. And one I'll let my colleagues think about for a second or two. I'm not sure I can be very granular with the pricing. Well let's be quite frank here. Although we have-- let me say the best tools available-- I think that's probably not a contestable issue, unless you work for one of two Japanese companies. Given we have the best tools, you would think it's easy to get any price we want. That isn't the case. Customers can always hold off making their purchases another month or two and we are quite frankly very hungry for orders. And very occasionally therefore, just to get the order in the house, so we can actually turn it into steel and glass, we will offer a point or two of more discount than we are kind of normally going to do when we are full. And also the competition has good pieces of paper. They can always talk about in nine months time, they will have a wonderful high flying, whiz bang product which may never happen, but customers can use that to put the fear of god into my sales guys and me and always get a point or two of discount extra above and beyond our normal level of discounting.

So we have probably seen discounts go from the low teens towards the high teens in percentage terms. And occasionally more than that and sometimes less than that. It's not distressing but it is a sign of the times and we have to be aware that that's the case right now and will remain the case I think this year. So even although we boast the best products and have the best products, we are not immune from the ability of smart buyers to really wring out of us every last cent that's possible.

Okay and then on the number of customers in the loop? And then finally do you expect to ship any TWINSCANs in 2003 with any lasers other than [Symer]?

Since you mention TWINSCAN Jay, can I just come back to your first part of the question? Because the 300mm discounts are much less than those I've mentioned, that's an average. They are towards the single digit top end, very low double digit numbers percentage discounts.

I don't know. Yes, I guess we are going to ship TWINSCAN with other lasers. I am pretty sure that we do. Yes, there's nods round the table and my colleagues say yes. So [indecipherable] and [indecipherable], good for you guys. And in addition bring some competition into the laser business.

Can you give a sense as to what percentage that would be? And then just some comments on the number of customers in the bookings loop?

I can't give you any intelligence into the percentage. I think it's still going to be high for [Symer] whether it's 70, 80, I don't know but high anyway. The customer loop, give me that again, Jay, what are you wanting there?

I'm just kind of curious. In terms of the customers, the chipmakers that you are negotiating with for bookings to be placed in the first quarter let's say. Okay? Are you looking at a small number of strategic chipmakers, like maybe Intel, Samsung, IBM a few others? Or are you looking at a broad base of chipmakers from many different end market segments?

Yes. It's broad based actually. I think your question is are only one or two guys buying round here? The answer is no. One or two guys are buying a lot, but there is a lot of guys buying you know ones and twos. So we go for all of them. Everything that moves right now we are shooting at it. So we have got a broad base of customers that we are currently discussing for bookings to be taken this quarter. If you look at the distribution by units, then may be there is three or four of those guys who account for 70% of the number of units we will take. But there are a lot of customers out there who do want to buy one or two.

Gotcha. Thanks very much for your help, appreciate it.

Thanks.

Thank you. Our next question comes from Mr Matt Gable. Please go ahead sir.

I was wondering if you could talk about bookings linearity in the second half, particularly in the last calendar quarter of the year?

I'm glad you mentioned that because we have with us our EVP of Sales and I'm always mentioning to him this bloody booking of linearity, which is not linear at all I might tell you and I'm blaming him for that. In defense of him he tells me the customers are saying this as well. The booking linearity for a company like ASML, where we ship let's say around 200 systems a year in this kind of difficult times, like last year, is very, very lumpy indeed. I try to allude to this by giving you a backlog slide by month and you will it on our web cast as well. And in a way, that tells you it's not just bookings, it's backlogs.

So it's a function of what we have shipped, what we've booked and what's been cancelled-- making the bookings if you like. But you can see it's very lumpy. If you look at the underlying bookings underneath that, it's even lumpier. You know we only negotiate with Samsung, the annual wrestling match once a year, take a large order and then we book nothing from them for maybe six to nine months. So we go into a drought period of Samsung orders. We're still living off their backlog. And that is true for most of our big customers, they negotiate annual buys and then we ship off and we bill against it for the year. It isn't as though we are selling MacDonald hamburgers with a statistical probability of selling 3m a day or whatever. So you would not like to see our bookings linearity because it's anything but linear.

Right. Did you see any discernible trend up or down as you exited the year?

As usual at the year-end we saw a bit of an uptake because customers have year-ends and we have year-ends and there is a fine focus. For us to get the orders in and for the customers to get the orders placed before their bosses or CEOs cut back their CAPEX.

Right.

It's always a kind of nerve wracking last three days in the year as we get these negotiations concluded and they hang out as long as they can and we hang out as long as we can and then it finally comes through on Christmas Eve.

Okay. Thank you very much.

Thank you.

Thank you. Your next question comes from Steven Puckerwitz(ph). Please state your company name followed by your question.

Yes, it's Steve Puckerwitz(ph), CIBC World Markets. Just a real quick question. Did I hear correctly your anticipating gross margins to be on a run rate of approximately 30% by year-end 2003? Was that correct or have I just -

It's 30% in 2003, where it will end is a function of the ultimate business volume and of some of the elements that we discussed over this call which is the price pressure that we are seeing. But all our target is to be over 30%.

And a run rate by year-end. Okay. Thank you very much.

Thank you. Your next question comes from David Vocara(ph). Please state your company name followed by your question.

Yes, thanks for taking the call from Q Investments in the US. I would just like to understand, given the fact that you have laid out in your cash flows and your P&L Statement the discontinued operations, which appears to have been a very heavy cash drain this year, Euro127m I reckon for the full year. I mean once you sell the Thermal operation then you discontinue or you are actually in the process of shutting down Track-- I mean are those costs essentially going to go away pretty much overnight or are they still going to be a drain within the next six months or even the next twelve months from those? How is that going to impact your cash flow? Can you give some details on that?

Track is essentially over and out. There will be a small cost coming through in the next few months, but nothing of significance, nothing material. Thermal of course keeps going until we sell it. And as you know we don't when that will be. We have given you some crude estimate of between four and eight months as a likely time scale, it could be sooner, it could be later.

And do you have any leeway opportunities to reduce the burn from Thermal in the meantime or what kind of amount does this represent -

Peter may cover the amount with you, but yes we have as well as put the operation up for sale and discussing now with potential buyers as you heard earlier. We have actually also reduced their cost base, so that we had the ability and have taken the action to reduce their burn rate as well. Because essentially this is now an operation discontinued and for sale, I have to some extent lose interest in the operating of the operation. I let the negotiations continue. So I don't know what the burn rate for the first few months could be. Peter may be able to say.

I think on an annualized basis, we don't expect that that will be more than Euro20m. But the sooner that we sell it, you know the better it is. But that's all in a few years [indecipherable] so it's up to us to come to the conclusion quick.

I'm sorry you just said not more than Euro 20m -

That's for a full year and a half year Euro 10m and a quarter year Euro 5m.

Yes, but how do you explain then the very large figure of Euro 127m for 2002? Where did that come from essentially?

That came from the Euro 127m included all the charges that we put in there for closing the business down. And that is a full year loss for the Track operation and a full year loss for the Thermal operation before it was restructured in December.

Okay.

So it's a totally different picture. You can hardly compare the two numbers.

Alright. Just one last thing if you don't mind? As far as the capital expenditure guidance if at all for next year. What are you targeting?

Yes, we are not going to exceed our 2002 number of slightly over Euro 130m. It's very likely going to be less because our need to invest is limited to the introduction of our new tools, the [indecipherable] 193mm tool, [indecipherable] for and 157 tool. There will be our regular information technology infrastructure cost that we will put into capital expenditure, but it's not going to exceed our 2002 numbers. It will be anywhere between Euro 120m and Euro 130m.

Okay. Thank you.

Let me just comment, it's now I think Central European time 24 minutes pas the hour. We have to close at 6.30, so there are six minutes or five minutes left. Maybe two or three questions.

Thank you sir. Your next question comes from Mr Francois Breao(ph). Please state your company name followed by your question.

This is Francois Breao(ph) from Credit Technical. Just one small one to verify. The used ASP, is it around Euro 5m, is that the correct figure because I was trying to reconcile your average unit price? The second question you mentioned a price for the disposal of the Thermal operation. I assume that this price is over and above the asset value in the balance sheet? Is that correct also?

We're just trying to look up the used ASP one. From my recollection it's more like than Euro 1m than Euro 5m which tells you the vintage nature of the product. So that answers the first part of your question. And because we were scrabbling for that information, we missed your second part of the question I'm sorry.

Okay. So the second one is that you mentioned the price you want for the Thermal business. Is that above the asset value, the book value?

The book value is Euro 40m as you can see from the balance sheet. And Doug gave a very wide range that I've got to stick with. I mean we are right in the middle of a negotiation process and I am not able to comment any further.

Okay. Thank you very much.

Next one please.

Thank you. Your next question comes from Miss Moira Gabero(ph). Please state your company name followed by your question.

Actually it's Peter Testa at Warner Investments. A couple of questions quickly. One on working capital. If you could give some update as to the ability you think you are going to have in getting your suppliers to accept different payment terms and get your customers to pay more quickly? Secondly is on the order book and the state of the market. To what extent are you collecting deposits or getting an active deposit or finding it difficult to get deposits to then allow you to plan your production more clearly? And on the 300mm part of the order book, there's a theory out there of a first wave and a second wave of investment and that we have seen the first wave of investment and the second wave may take longer to actually be drawn down. Can you comment a bit on that and in particular as regards your backlog? Thanks.

Okay. Last one first, 300mm wave as you call it. Yes I think there has been a wave because initially there is the first products to allow customers to produce their first wafers and learn how to do all the difficult stuff they have to do. And then move into the consolidation period where they improve the yields and then comes along the big ultimate wave, if you like, that drives their factories to be full. We have not hit the second point yet. We've had the first point. You know our backlog for 300mm is 59% by value, right? So, half a billion in round figures of Euros is our 300mm backlog. It's pretty good and orders will continue coming in for those products for sure. So I don't think we've actually done into the second acceleration mode yet, but we are certainly still moving ahead, still supplying customers and customers are still negotiating for even more products. So I think we're coming through that first phase. I think it is in the flattish mode now, but flat is actually up slightly, hence the half a million backlog. And at some point in the next twelve months, whether it's three or nine, or twelve I don't know, it will start to kick into the second phase.

Do you think the delivery of that is contingent on their experience with the first machines they have in getting them up to efficiency rates and capacity utilization and so on?

Absolutely, absolutely. I mean it depends on two things. Their experience with the first ones and also the order book. So yes, I think we can help with the first one, we can't do a damn thing with the second one other than buy a lot more PCs and mobile phones each, which I encourage by the way. So yes, I think the experience issue, it is a difficult ride for our customers because they are bringing on 300mm, but also they are bringing on at 130nm in some cases even better. So it's a double kind of jeopardy there and they've had a tough time some of them to get the process and the new wafer size and all the brand new equipment to work. They are coming through those early kind of disquietening days and seeing the benefits now. Some customers are now reporting yields at 300mm equal to yields at 200mm, which means the cost base is going to be less as of now for some of those guys than to build a 200mm -

So the timing might be a bit variable depending on clearance?

Yes, yes. Regarding deposits from customers. We don't get many of those. They are not too inclined to give them to us. We would love to and it's always an ambition of ours, but we don't get much satisfaction, not surprisingly from our customers. So we build to order and we also build intelligently against one or two letters of intent, which are proving to be highly credible. And we build occasionally where we think we know what's going to happen and that's of course the slightly more difficult part of the business. But with 300mm we have the full knowledge that if we build against a speculative order for customer X, if they don't take it, within a pretty short space of time customer Y will because 300mm is in fairly consistent demand and is the future product.

I should say however that we do receive prepayments or deposits from customers of the development projects that we have with them for [indecipherable] 157nm project.

And the UV.

And the UV yes.

Okay. And the working capital question?

That's with respect to the accounts receivable sold to suppliers. I mean of course it is difficult for the total supply chain, so starting 2002 we have entered into a new long-term agreement with many of our suppliers, whereby we have made much more stringent deals with them with respect to their order lead time. But also with respect to the ASML payment schedule, which is of course difficult in the current circumstances, but we have been successful.

With respect to the accounts receivables, our customers, it is of course in periods like this it is a continual struggle where our customers will use every argument whether it's a loose screw or whether it's a missing document. They will use every argument not to pay. So it is up to the company to basically organize ourselves in such a manner that the sales organization works together with customer support, with the factory and with development and with the finance organization. And that is basically where it is because if you take the impediments away, customers will always pay. We have a customer base that is from a financial point of view normally very healthy and we aren't delivering under letters of credit. So it is up to us basically internally to speed up that process and to be very focused. And that's what we are doing and we are seeing days outstanding coming down as we speak, but we are not there yet. So there is still some ground to conquer.

By the way when my CFO mentions to the dear listeners on this call a loose screw is not talking about the CEO okay?

So is that to say that in a currently relatively flat environment, you are not seeing any particular impediment either from your supply chains' struggles or from your customers' struggles to achieving your targets?

[inaudible] fourth quarter Peter.

I mean continuing and going on?

Yes and I think we are not there yet. [indecipherable] on both inventory and on receivables there is still room to find improvement and we will do that.

Thanks very much.

It is 6.30 and because we are generous, I will allow more single question, not one of these multiple part questions please. So if the last lucky winner would like to place their call?

Thank you. Your last question comes from Mr Johannes Reece(ph). Please state your company name followed by your question.

Yes, good afternoon it is Johannes Reece(ph) TRT in Frankfurt. One question regarding the ordering. Take maybe in two parts but very quick. First, of de-ram orders based on the next shrink you have already seen or is something to come in the first half? And you mentioned regarding the whole semiconductor industry that you expect an improvement, a stronger improvement in the second half. Does this mean that you even expect a stronger order development for your company in the second half?

On the first part of your question which was de-ram based and I did ask for a one-part question but I guess we'll allow this one to slip through. I missed part of it, did you say Micron did I hear at one time?

No, no, the overall.

Oh the overall.

Most de-ram companies speak of CAPEX in their first quarter in Q4 last year because of the next shrinking step to 2010 to 2011 based on the technologies. Therefore have we seen most of the orders from the de-ram side already or is there more to come based on the next shrinking?

There's more to come based on the next shrink. We saw a lot of orders for existing technology, 130nano meter and now we are going to see the next phase down at 190 nano meters. That answers the first part of your question. What was your second question again?

Second question was regarding your overall outlook on the semiconductor industry. You mentioned second half will be stronger than the first half, therefore is it even the case for your company on the order side?

I mean if the people who forecast increase in semiconductors later this year are right, and I don't claim to be able to forecast that, I just read the forecasts I see. Then clearly at some point in time we will see an increase in orders. But bear in mind there is a time lag between our customers increasing their output, using their capacity until it triggers the need for them to place the orders. And there is often a three to six month time lag between that. So a resurgence in semiconductor output won't instantaneously give us new orders. There will be a time lag there of a few months.

For capacity based orders, do you expect more in the year 2004?

Yes. If you believe the IT companies are going to continue to grow as I do, then at some point in the next 18 months we will see a lot of capacity orders coming in.

Okay I think from our side, let me thank you to the listeners for being on the line. And those who asked questions thanks a lot, searching questions as usual. Let me wish you all the best for 2003 and safe journey home. Thank you Mark.

Ladies and gentlemen this concludes the ASML Annual Results 2002. Thank you for participating. You may now disconnect.