艾司摩爾 (ASML) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the ASML first quarter results 2003 conference call on the 16th of April 2003.

Throughout today's recorded presentation all participants will be in a listen-only mode.

After the presentation, there will be an opportunity to ask questions.

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I would now like to turn the conference to Mr. Doug Dunn.

Thank you, sir, please go ahead.

Thank you.

Well good morning or good afternoon, ladies and gentlemen, wherever you are in the world.

Thank you for joining.

The intention today is to spend the next hour really answering your questions, but I will kick off by giving kind of a brief introduction.

And then I'll throw the microphone over to you so you may ask us the questions you wish.

I will begin then by saying that the first quarter was, I don't know what the word is here, a dull first quarter for the industry and the sector.

And we therefore had a rather dull set of numbers to report based on that.

The features of Q1 were, I think, were mostly emphasized by customer's indecision to embark on new investments.

It has nothing to do with ASML products which is still in great demand relatively speaking.

In fact, some analysts would say we're still gaining market share, although I can't prove that at this point in time.

But our customers certainly are, by and large, reluctant to place new orders of great significance.

They're placing a broad range one and two here and there.

The exception to that has been, I think, a couple of Dion (ph) customers who have come in with relatively large orders, relatively large.

Although, I use the word relatively very advisedly there.

But by and large the main bulk of rich customer base are holding on major investments and I guess that's no surprise to anyone.

I took heartening news from the Intel and TI comments and they intend to maintain their investments this year, the present level in their revised budgets.

That I think is good news.

The issue that we face, of course, is now a quarter of the areas behind us, behind the industry.

And with the exception of one or two notable companies, most of our customers are not spending any linear rate.

In fact, if you look take an average $1 billion company, they're spending far less than a quarter of a billion in the first quarter.

Therefore, clearly they're waiting to see, and they're also, I believe, still trying to fill their existing capacity, which therefore suggests a stronger second half and probably a stronger fourth quarter within that second half.

But all of that remains to be as we go through the year.

So the interest rate is still extremely cautious.

I call it flat.

I call it dull, but it's not boring, that's for sure.

And we've done, I think, the right things from ASML's point of view to continue making the progress that we have to make.

And despite the flat level of sales, the kind of dull sales level, it is significantly up on the first quarter of last year, significantly up as you have seen.

And we've been able to fill from that some cash as our continuing trend to build through this year our cash balance up towards that we'd advocated in the middle of last year.

But I thought I'd ride around that slightly, just slightly.

Clearly around the building it's still the number we're aiming at and we think it's very doable.

This, of course, require the market to continue at least at its present level, and hopefully and not too optimistically improve as the year goes by as we all expect it will.

So we're not coming away from that number.

And I guess the range for me is just under a billion to a billion.

And if the market picks up, as some suggest, just over a billion and that's what we intend to do still this year.

The discontinued operations, just to dismiss them fairly quickly are going to topline (ph) if that's the right word here.

And the thermal (ph) operation we implied and in fact I said we'd sell probably in the first half of this year.

I also said that if it took a quarter longer, that's no big deal from my point-of-view.

I'd rather get a good sell that offered the customer's of those products a good future rather than a quick sell.

And it certainly will not be early in the second quarter.

It could happen late in the second quarter or even the third quarter.

And I don't think we should worry too much about that.

We've got the cost of the operations now down to a very - a satisfactory underlying level.

I've been giving first quarter 13 million was set against those operations, but a significant part of that was some extra - with the finishing off of the redundancy program and also a reevaluation of some real estate in California.

And we expect that to come down to roughly half that amount for subsequent quarters, probably even better.

You saw the continuing increase in average selling prices.

And you'll have picked up also the disappointing gross margin.

Gross margin is clearly effected by the dominant issues.

The fact that we only sold 27 new systems in the quarter, therefore, we have earned the recovery of our factor fixed overhead which is not insubstantial.

Clearly, that's an issue.

And that won't go away until this market increases.

But we do have to provide some of those reserve capacities.

So taking our factory utilization and level down to 27 systems would not allow us to do more in the next quarter, so we have to keep that slightly higher so we are doing so for.

So that's a significant part of the gross margin problem.

We're also seeing - for those who sit on these calls regularly you recognize that a relatively small amount of grant repayment to the Dutch government that comes to an end in Q2.

The other dominant factor along with overhead recovery of lack of it was a mix.

If you look at the mix of TWINSCAN in the first quarter build and sales it's very high compared to any previous quarter.

And unfortunately, in the early days of the product, that has a depressing effect on gross margin, also.

And the third element of gross margin disappointment was an honest appraisal of the fact that there's very few orders right there.

And we are fighting tooth and nail for everyone to maintain or even grow our market share.

And therefore, we're giving slightly greater discounts than we would normally wish to give to our products to ensure that we don't allow our competitors to encroach in our space.

So those three items with the small addition of the Dutch of the TOK grant were the sole contributors to our disappointing gross margin.

What's going to happen in the future, I think is a function of the market volume.

As the volume increases to our operation, then clearly the gross margin will increase and quite substantially through overall recovery.

OK.

Let me just look at what other points I want to raise in a general front.

So let's talk a bit about the rest of the year, then.

And as you know, we're not in a position of knowledge to give guidance and therefore, we won't give guidance.

We're just telling what we know.

It's pretty clear now from all our customers who we're in contact with, that the second quarter is going to be a dullish second quarter as well.

It's equally clear that the second half is relatively an unknown and un-chartered waters.

And given the capital budgets of our customers, and given the slow rate at which they're spending it, there's every possibility for a significant upturn in the second half.

And that is merely a possibility.

There's no factual evidence yet to prove that.

When there is you will know pretty quick afterwards.

So the second quarter is going to be a kind of, you know, a dullish second quarter.

And the second half has a lot of hope built in to it.

And I personally feel that this has to break at some point in time.

And later this year, we're going to see signs of it breaking it in to a more positive mode.

Whether that comes through and dramatically changes our year profile we won't know.

It requires customer to get to a high level of utilization before they place orders.

And having placed the orders we've got to spend a few months making the equipment.

So you can see it could easily move from the third to fourth or fourth to first quarter of next year.

But we won't know that yet for another six to eight weeks.

So when talk again in a quarter's time we'll give you a better feeling for what the full year will be like and what the second half will be like.

I think at that point I've made the general comments I want to make.

And I'm prepared to pass the floor to our administrator to those who wish to have questions.

And we're here until 6:30 central European time to answer those questions.

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question-and-answer session.

If you have a question, please press star followed by one on your push button phone.

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Your questions will be answered in the order they are received.

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One moment please for the first question.

The first question comes from Mr. Jan Vilan Vardous (ph).

Please state your company name, followed by your question.

Yes, good afternoon.

It's Campan and Co (ph).

You mentioned several factors that would influence the gross margin or have influenced the gross margin in the first quarter.

Can you give any idea of the level of price pressure you're experiencing right now.

And if you cannot give that number can you sort of indicate what the product mix effect is.

And is the, for example, in TWINSCAN below 20 percent?

Or is the difference between TWINSCAN and normal 200 millimeter tools more than five percent in gross margin.

Can you give an indication on that effect please?

OK.

Well first of all, I forgot to say this by I'm ably assisted here Peter Wennink, myself and Craig DeYoung from our investor relations group.

So I'm going to ask them to contribute their knowledge to these questions.

Taking your questions for a moment, I'm not going to be precise on giving any numbers on this issue, but I will kind of talk generally on this issue.

Q1 was really loaded with TWINSCAN as you will be aware.

As it happens, and we haven't discussed backlog yet, I'm sure you're going to discuss it at some point in time, the Q2 backlog, the orders we have in the books right now which we think are pretty genuine for the second quarter have got a less TWINSCAN mix.

That's just how it happens with the lumpiness of various customers placing different orders.

Nothing significant in that just how it happens in a relatively small volume business like a capital equipment company is.

So the second quarter gross margin will ...

ASPs.

Yes, sorry, ASPs will increase - will decrease because of the change in that.

Also, therefore, possibly a small uplifting gross margin because of that, because the eight inch product has got more history and therefore more - further down the learning curve on that product.

When it comes to competitive position around the world, you know it is to some extent also geographic and timely in nature.

It's no secret, I think, that in Asia the price pressure tends to be somewhat higher than it is in the U.S.A. for all kinds of reasons we'll get in to.

First of all the time of the year in which they've placed orders.

A lot of the Asian companies are bigger than many of the U.S.A. companies, therefore, can command greater kind of pressure on pricing.

And so it's not an easy answer to tell you what the percentage is.

It varies by customers based on the demand, based on the product mix, based on the options they want and based on the geography and based on the time of the year they place the orders now the competition is faced at that point in time.

So I'm not going to try and give you any numbers there because it will probably help the people it shouldn't help, i.e. my competition, and won't help me at all.

So that's not my incentive here.

So if you will allow I'm going to be vague on those numbers because you can only give competition advantage.

Right.

But I'd like to add something there.

Let's make it quite clear that if we talk about pressure on the gross margin, the contributing factors are in, I would say descending order, the under utilization of the factory.

Then it's mix.

And then it's price pressure.

Yes.

And I don't want - we don't want to go in to the price pressure issue because it does give in this market where we are competing for every order, some lead in to what our competitors think that they can offer.

So we're not going to do that.

But this is the descending order.

And therefore on the ascending order, the bigger the volume builds the more quickly the gross margin will recover.

Yes.

OK.

That's very clear.

But - and can you still comment on let's say the difference between the gross margin of the newer TWINSCAN systems and the 200 millimeter systems?

We have said before that the newer TWINSCAN systems because of their - of the, let's say point-in-time of their life have generally lower gross margin.

But also given the fact that we are finding (ph) enough (ph) for (ph) everyone (ph) who weights 200 millimeter, 300 millimeter we're going to make public statements about the difference in gross margin between the two products.

Because we know quite a lot about of comp earns (ph) and they know quite a lot about us.

And it gives them the type of information that we don't want that to have.

But it is clear that the 300 millimeter products are in the first phase of their life.

What we are - what we can say that we have targets of bringing our cost of good down.

We're on that target.

We are confident that we will reach those.

And we are investigating currently every - at every opportunity to bring those cost further down.

So we will be armed to, you know, fight a competitive battle.

Yes, the price pressure, don't overestimate it.

It is the third, of the three categories, effecting gross margin.

We do have accelerated and very deep and serious cost reduction programs in place anyway which will allow us to make good gross margins, greater than 40 percent gross margins on TWINSCAN in a normal year.

And in fact in a very good year, better still because these cost reductions won't go away but the prices will increase on the good years.

So first of all, we're not at all phased by the price pressure, you know, where we expected it.

It's leaving up to our expectations.

And we're also internally taking actions to make sure that we continue to stay ahead of this price pressure.

And so don't overemphasize that one.

All right.

Thank you.

The next question comes from Mr. Robert Mayer (ph).

Please state your company name, followed by your question.

Yes, Semiconductorequipment.com.

Could you tell us -we've heard from other companies as to the impact on SARS on their business.

I would assume that given your business is longer term, longer lead time, longer sales cycle that you should be somewhat less impacted than most but perhaps you can tell us about that, and particularly over the last few weeks what the impact has been.

And also, in terms of the business that you're doing and did in the quarter, could you give us sort of your sense as to what percentage of it was business with new customers or new systems or what percent was follow on?

Was most of it sort of follow on or increases of existing systems?

Or perhaps a little more detail?

Yes, OK.

First of all, SARS I'm happy to report that so far we have maintained a high health record.

We haven't had anyone here from the organization who - has SARS surfaced.

And that's great news for everyone.

We have put some sensible restrictions on travel clearly.

Our customers are equally sensible in their lack of travel these days.

And there was a major equipment show in Munich, as you may well know of, a week or two ago and that was poorly attended, partly because of SARS and partly because of Iraq.

To return to your question, I honestly don't believe that SARS has any significant effect on our business unlike the airlines and the hotels.

You know, when you're building a $3 billion factory, despite the severe nature of this virus, you're going to go ahead and make those investments.

And if need be, you're going to do it more video conferencing and more teleconferencing, but you're still going to make the investments and buy the equipment.

So as far as I know it's had zero effect on real business.

It has had quite a bit effect on our people who live in Hong Kong and so on.

And they're being much more careful about their travel plans and their domestic arrangements.

So I don't think there's any impact on with SARS.

Yes, and you have to remember also, Robert, that we don't send people over when we ship those tools.

We have local teams who do the installation.

So we don't need to have a lot of people movement, you know, basically, you know, throughout the company if tools get shipped and get installed.

So far 100 percent clean bill of health on that one.

And regarding new co's - new customers and as opposed to your follow on, I think, and we're talking about first quarter here.

And I think from memory and my colleagues may tell me I'm wrong but I don't think in the first quarter, we took on board any new customer.

I'm pretty sure we did not.

By the way, w got pretty good privilege of customers.

So that's, you know, we don't take them on every five minutes.

Regarding the business we did take some were follow one expansions to existing facilities.

But I must say they're in the minority right now because most people are not expanding today's capacity.

They're building new capacities as to the future.

So most of the business that we took was with existing customers.

And that was for the leading edge products, the high NA 248 and 193 nanometer (ph) tools on both wafer sizes, eight and 12 inch wafers.

And that's, of course, where ASML has still a strong and distinct advantage in time.

We're out in front of the competition.

The competition has nothing at this point in time.

Therefore, we're in that fairly unique position still so far.

And of course or throughput and technical performance is superior to the competition, even if they make their paper tigers in to, you know, smaller pussycats.

And so I guess to answer your question, we're still taking out just rewards at the high end.

Therefore, it's existing customers in to new -, at the leading edge.

That's what we're selling right now.

OK.

Great.

Thank you very much.

Our next question comes from Jean Danjou.

Please state your company name, followed by your question.

Hi, good afternoon.

This Jean Danjou from CSFB.

I have a couple of questions.

The first one is on DRAM if I may.

I see the share of Korea in the backlog dropping sequentially at the end of Q1 compared to the end Q4.

But at the same time, memory is rising.

Could it be the fact that you have shipped a lot to Korea new makers?

And now it's kind of a pause going in to Q2.

And you could have some of the DRAM manufacturers compensation?

And then I have a follow up question.

Good.

Yes, I mean - after you make your question long there, but answer wrong, this is as short answer, really you're actually right.

You know, as one customer is satiated, if you like, for the time being and gets down to making our equipment work.

The other customers find the need to invest and therefore they come on screen and that's what happened here.

OK.

Have you got any visibility on this one customer not taking time to install coming back for extensions?

Or do you think that is too difficult to call at this time?

Again, I missed the question there.

Regarding the one customer you mentioned that took a lot of equipment and now is installing, have you got any visibility on the timing of when this customer is going to come back ordering further equipment?

Customers like that, you know, there are several of them.

We're not talking about any one here.

You may be thinking of one in mind, but I'm thinking of probably six or seven actually, -, in total.

We're in constant dialogue with them.

That's the beauty of our commanding position on technology.

So I guess, as I speak here to all of these ladies and gentlemen, we're probably we're probably in dialogue with the top five IC manufacturers in the world about their requirements for this first - I'm sorry, the second, third and fourth quarter.

So yes, there's not one of those big customers who have gone away from talking to us about their next requirements.

Some are more urgent than others.

Some want it in early Q2 and Q3, others maybe Q3 and Q4.

So yes, they're all still talking, all very sincere and genuine.

Some have placed order in the first quarter obviously.

We had that - net bookings in Q1.

So yes, those - it's as good as it can be out there right now for us.

We're taking still a high percent of the going business.

OK.

My follow up was on the gross margin on TWINSCAN.

Aren't you concerned that gross margin on TWINSCAN are so low because it's been some time you've been producing TWINSCAN now, volumes are significant.

And I felt like I remember the last quarter, you were particularly confident on gross margin improvement from the level it was at the time.

That was still significantly above what it is today.

Yes, I mean, you know, of course, yes, we - I'm going to be quite candid, honest here.

We are very concerned about the TWINSCAN gross margin which is why we're able to analytically decide to determine why it's like it is.

And the major impact is volume.

So I'm afraid the volume thing will not go away until the volume increases.

And it's as simple as that.

I can't make it go away.

But what we can do is effect our cost of goods and there we have aggressive programs in place which will bear fruit in a cycle time or two from now as we go through the rest of this year with reduced cost of good which will improve the gross margin.

So volume is going to make the biggest impact.

And the cost of goods is going to make a big impact.

And the pricing will do what the pricing does.

Yes, just for clarification, we have seen these poorly numbers of last year which we set out.

If you take the first two quarters of the year which wasn't highly impacted by TWINSCAN sales.

But you do see a very significant impact of the volume of element there.

We saw only 13 tools in the first quarter of last year which led to a gross margin of less than 10 percent.

And then there are over 60 tools in the second quarter leading to gross margins in the mid 30s.

That is not really effected by mix issues, but it just shows you the very strong volatility and the gross margin driven by the volume.

Yes, but the last one Peter, I'm surprised because on Q3 last year, basically volumes were around 30 shipments, but the gross margin help up solidly at 27 point something percent so that is a mix effect.

But that is the effect of, I would say the mix.

Because in the third quarter, we did ship - most of what we shipped was 200 millimeters.

And what you say in the fourth quarter, where the total number of shipments were significantly up, the mix of the TWINSCAN was significantly higher.

So there you saw the impact of, you know, the mix.

So TWINSCAN revenue recognition in the fourth quarter as of the - resulted from the SOB 101 (ph) issue basically lets to if you're correct for the one time inventory write up in the fourth quarter, led to margins that were about similar as in the third quarter of last year.

But that was then heavily impact by the mix of TWINSCAN versus 200 mil.

And 200 mil was dominant in the third quarter.

OK.

Thank you.

The next question from Gaetan Van Der Bruggen (ph).

Please state your company name, followed by your question.

Yes, hello from Peter Cam (ph).

I read on Bloomberg this morning that you expected to ship 60 machines in Q2, Q3, is that correct?

Is that the correct statement?

I don't know what you read on Bloomberg actually.

What I'll tell you is that we have given you the medical unit size of our backlog for the next 12 months out.

And that was 87 systems.

And we've also told you that it was an average selling price each of - for each of those of 10 which is 870 million therefore, in that 12 months.

We also indicated that around 60 percent of that - 65 to 70 percent of that, I'm sorry, was required in the next six months.

OK.

So doing the math with what you shipped in the first quarter and ...

Just finishing off then, so you may imply they will not take any more orders, receive any more cancellations and therefore will ship the six and that's your indication, it's not mine.

We will take more orders and receive more cancellations.

And therefore, it will be a different number at the end of the next six months, OK.

I know, OK, but too you see the market flat for the year.

No.

I don't.

No I see next quarter being fairly dullish and flatish.

And I was very - gave very careful and precise to say that the second half has everything going for it.

It can be equally flat and boring or it can be significantly up.

And if you look at the spend rates of customers, if they keep their spending budget it will have to be significantly up.

But, you know, again, I'm not predicting that.

OK.

I will ask it differently.

So if you would see a better second half of the year, I mean orders in the - in Q2, and perhaps in early Q3 would be to have very strong, actually.

Correct.

Yes.

Correct.

So quite correct.

And did say that the next six to eight weeks would begin to give as a strong indication of the second half of the year, that's quite correct.

And the ...

...

... look of Q2 last year, if you have the database look at Q2 of last year, I think we got, I don't know, 100 systems or something in Q2 of last year.

OK.

So but now that we're mid April do you see that trend materialize?

Or what can you tell now.

I'm reporting on Q1, end of March.

Yes, and we don't see a similar trend now as we saw in the second quarter of 2002.

And you can see on the Web site, we give the overview of the monthly movement in the backlog position.

You can refer to that when you see the movement.

But what we are seeing now is that Q2 '03 is not comparing to Q2 of '02.

And - but you are right that if anything happens in the second half of 2003, we will have to see that order movement over the next six to eight weeks.

So please be patient as we have to be and wait for the next six to eight to 10 weeks before we will know that.

Great.

And just can you disclose the service revenues for the quarter?

...in the room ...

Yes, we can disclose it.

And if you give us a few seconds we'll have it for you.

Yes, it's about 65 million.

Sixty-five million.

OK.

And this is in increasing numbers compared to last year's first quarter.

As compared to last year's first quarter it is slightly down.

OK.

So my question is with the increasing install base that you have and seeing service revenues going down, would it mean that kind of a discount that you could give to your customers is to be more aggressive in pricing on the services would be a fair statement?

No, that's not the case.

The reason why it is down because the - not so much the service contracts business but the field option business which is basically the variable.

So we do sell additional options in the field.

And that is the quarterly variable.

And that can basically vary from quarter-to-quarter.

And that was done Q1 this year, Q1 last year so that was the main reason.

OK.

So it's only the variable part of the service revenues that are down.

Yes.

OK.

Thank you.

Thank you.

The next question comes from Mr. Jay Deahna (ph), please state your company name followed by your question.

Hi, I'm with JP Morgan.

Hi guys.

A couple of questions here, the first one is on TWINSCAN you guys have done a great job of penetrating new accounts over the last couple of years.

Have there been any new account penetrations recently on TWINSCAN?

Or are you at the point now where you're just waiting for, you know, your tremendous work and design wins over the last two years to mushroom in to volume?

And if you could comment on whether or not you're seeing any increased competition from canon to new 300 millimeter platform in that equation, I'd appreciate it.

And then I've got a quick follow up from there.

Yes, thanks, Jay.

The first part of your question, we haven't had any new customers for TWINSCAN in the quarter reporting on.

And one of the reasons is that as far as I'm aware, and God news we're proven wrong here, every announced 300 millimeter fab outside Japan just bought equipment or placed orders has bought from ASML.

So we're in to everyone.

So it's not surprising we haven't gotten any more.

So that - I don't know if that's a good or bad answer actually there.

But it's a fact, we bring them all and that's good from our point of view.

And regarding our competition, I don't want to give them much air time.

There is competition out there.

They all tend to have great marketing brochures and pieces of paper and very few of them - none of them have any great steel and glass and things that make you work.

So right now, your competition is more of a future paper tiger threat than a today reality.

But, you know, we're always paranoid in this business.

So we will assume that one of these days they'll get looking and get it right, and we'll be ahead of them.

OK.

And then two quick follow ups if could, Doug.

Number on is your inventory of lasers sufficient for the next three or four months?

Or do you envision needing to order more?

And then number two, do you view the Novellus (ph) order guidance for the second quarter as indicative of the realm?

Or do you see something different potentially for the industry or for you guys given the fact that you typically have a better second half of any given half?

OK.

On the issue of the inventory of lasers, I honestly don't know.

I mean I don't know the number.

I assume ...

We attempt to keep the inventory as low as we can.

... production guys have got us well covered with orders on Simon (ph) and increasingly -.

Simon (ph) has become a little bit less competitive probably.

And therefore, I feel relaxed about that.

Although I'll go and check after this phone call just to make sure.

And we don't stock inventory other than we need.

So we've got line here.

We fill the line as we need it.

And I believe we're well covered with orders to meet their expected demand in the short term, the next three or four months.

It certainly won't be in house right now.

Regarding Novellus (ph).

I'm not sure what they've been saying so I can't comment.

From our point of view, the second quarter bookings can unfold much better than we've currently probably seen in the first quarter.

But to be honest with you, I don't believe so.

I think it's going to be quite a dullish second quarter.

I think any unfolding any kind of growth is going to come at the back end of Q2 or in to Q3.

Therefore, we're pushing out still the point in which we start to get optimistic about the future.

And it's now pushing well in to the second half of this year.

Right.

... by the way?

Excuse me?

What did Novellus (ph) say.

Novellus (ph) said that orders would be 22 to 23 percent sequentially in the June quarter versus the March quarter.

No.

I don't think I would - that's something, you know, it's very company specific, right.

I don't think I would say that at all.

Right.

Now if orders don't start to materialize for your guys in a meaningful way until the later part of the second quarter, let's say the month of June or the end of June.

You know, given the lead time situation, that would imply that the semiconductor companies would probably have to reduce some of their expectations for the capital spending in the July earnings season, you know, given the lead times, right?

For a little (ph) tools that would be true.

Yes, for the longer lead time tools including -, that would be true .

Yes.

OK.

And then I'm sorry to take up too much, but one last follow up ...

No, you're not.

You made a comment that you thought that Simon (ph) was losing its competitive in this relative Lana Physique (ph).

My understanding is that a lot of people are buying in to their new dual chamber technology for the leading ex-lithography (ph) tools, of which we're not aware of Lana Physique (ph) with an announced product.

Could you expand on that comment, if you could, please?

Well I'm here to talk to about ASML -.

You know, we expect all our slides (ph) are very competitive.

And things like the laser source, and the customer has a say - the end customer, you know the semiconductor manufacturers.

And right now, we - I'm fairly unbiased in whatever laser source we choose to you, it's what the customer wants frankly because he has a final choice on that.

Right now, it's clear, I think to everyone that customers are varying in their opinions about what laser source they want to purchase.

And it must be only can be a competitive issue because the performance is dictated by the machine, and therefore, has to be equivalent.

And assuming things like long-term reliability and operating costs are similar then it comes to the up front cost.

So I only made that comment because I see - we see from our customers a greater hesitation in their choice.

OK.

Great.

I appreciate it.

The next question comes from Mr. Navdeep Sheera (ph).

Please state your company name followed by your question.

Hi, gentlemen, good afternoon.

Navdeep Sheera from Smith Barney.

Just a couple of very simple questions please.

And I'll just recite them one - how many cancellations did you see in first quarter?

The second question is what proportion of the 27 new shipments were turns orders?

And thirdly, in your backlog, do you put IBM in the MPU section or in the foundry section?

Thank you.

We put IBM in the MPU section, just to answer that question for you.

And that's the easiest one of the three.

Thank you.

On the cancellations, I don't think I'll keep count.

I have a sense in my head, so I can give you kind of a feel for it.

There were are few, I mean in absolute cancellations where a customer says I want to cancel this order.

I don't never want to take it every.

And I don't to change it for a higher specifications lens, there were very few, I mean less than a handful, I would suspect.

There were some push outs where a customer say oops, you know, Q1 maybe Q2, Q2 maybe Q3, and so on.

... sell side to fourth quarter window.

Yes, some of them went outside there for the fourth quarter window.

We only give you a fourth quarter number.

And the other side with the cancellation issue, and the other one was ...

Proportion turns.

Yes.

Proportion turns in Q1, I suspect it was relatively low.

There were, I think, a few used (ph) tools that we turned because we had those in inventory or close to a finished good status.

So there or four of the used (ph) tools.

And I wouldn't say zero to anyone.

We're close to zero now maybe three or four.

Not because we couldn't turn them if we had to.

But it did get more difficult inside three months.

We got - there was not a lot of pressure from customers for that urgent response.

I mean they're usually in this climate they're not - the demands on them are less severe.

They're still running at 60 to 70 percent utilization.

Therefore, they're not clamoring for turn business either.

And so generally speaking, for the second quarter you might not necessarily accept much turns potential either.

Yes, I mean wait and see.

But yes, I mean it could be case now yes, let's wait and see.

It could be the case.

OK.

No.

That's fine.

Thank you very much.

The next question comes from Michael Haufelder (ph).

Please state your company name, followed by your question.

Hi, Michael Haufelder here with HBB.

Actually most of the question have been answered.

Maybe just one last, may you comment a little bit about the activities in terms of end use in the last weeks especially in the foundry business.

I think we saw a slight up tick in that area.

Thanks.

Yes, OK.

Yes, the foundry business is always the bell weather of the industry.

It's the one that gives the, you know, kind of indication of a change.

It's also the one that probably gets the most confusion because it goes up and down very quickly.

But certainly the foundry guys have shown more interest recently.

Their interest level, their call rates and so on has increased with us.

A big reason is the SMU reasons for that which we don't have any input on.

And so that's true.

But I have to say if you're looking for any kind of big white light here there isn't one.

Apart from that, everything is relatively predictable and therefore in my term dull.

You know, all customers are buying a few of, enough to get them in to the next technology node or just to put a small jump in their line.

And none of them are seeing any reason to aggressively do anything other than that.

So apart from that small kind of feeling of hope we get from the foundry comments, you know, I think end use wise, and all of our customers whether they're ASIC, or logic or microprocessor based or memory based all are boring and predictable I'd say right now.

OK.

Thanks.

The next question comes from Mr. Mark Fitzgerald (ph).

Please state your company name, followed by your question.

Banc of America Securities.

Could you talk to us about free cash flow?

What was it in the quarter?

And given that you moved through and shut down some of these operations, what you could expect going in to the second half of the year?

Yes, I'll let Peter tackle that because he wants to get the decimal places right.

And I tend to round them.

Well we had - thank you, Doug.

We had free cash flow out of our continuing operations around 40 million in the first quarter.

We had a usage of cash in the discontinued operation of about 11.

But part of that had to do with some of the restructuring that was announced at the end of last year.

Going forward, the cash usage will be quite similar to what we will see as a possible net loss out of the discontinued operation going forward.

And Doug said that it's going to be around five to six million a quarter max.

And there was an effect of foreign exchange ranges - well rate changes on the U.S. dollar balances that we have around eight, which is basically an accounting adjustment.

So going forward, Doug also said it, we still have a target of a $1 billion or one billion euros in cash at the end of the year.

We feel that we are on target with that.

We can still achieve that.

You may have seen that in the end of the first quarter, the inventories basically went up.

That is a result of some push outs we saw in the first quarter from the second quarter to the third.

And those push outs were largely the - we would say the result of the geopolitical uncertainties.

Customers didn't want to take the tools in the second quarter, asked for shipment in the third.

But unfortunately, we did have the material in.

So what that basically means is that we will not purchase in the second quarter.

And we will those inventories off throughout the second quarter going in to the third.

So I think we're on track.

And we can repeat our targets that we have set in the second half of the year 2002.

On the net loss of five to six million over the next couple of quarters here, does that include your cap ex expenditures?

On the discontinued option, do you mean?

I thought that was for the overall ...

... five to six million.

That basically includes the cap ex movement which will not be significant.

So the five to six million we must be very clear is only discontinued operations, not per quarter.

OK.

And then just, could you give me a headcount number at the end of the quarter?

Yes, we have a targeted headcount number stated after the restructuring of 5,200 in the litho business, which would be effectuated by the end of this quarter, for the end of June.

OK.

And then just when you look in to the second half, one of the market type questions, I mean is DRAM still a big part of the mix in to the second half of the year in terms of the projects you're potentially looking at?

Yes.

Yes.

And don't ask me - you can't ask me what the mix is, I can't tell you for the second half precisely.

I can tell you in general. -, backlog information shows you how that backlog splits.

But to answer your question DRAM, I think will still continue to be very volatile, but a very important part of our backlog.

And around 35 percent, I think, is the answer, isn't it?

OK.

We don't feel that's going to change in the next few months as we continue taking orders.

Yes, and we'll ship.

I mean we will ship especially to the DOM customers in the second quarter of this year.

But we made it clear that we think the ASPs will decrease in the second quarter, because of the high content of 200 millimeter, 248 nanometer (ph) shipments which will go largely to DOM customers.

And we do that.

I mean that's kind of a fact.

That's kind of a fact.

In the third quarter, we expect quite a substantial increase of our average selling price, and that's largely the result because we see the mix more skewed towards 300 millimeter in the third quarter.

OK.

Thank you.

Very helpful.

Thank you.

The next question comes from Mr. Matthew Gettle (ph).

Please state your company name followed by your question.

Yes, I think that's me.

Matt Gail (ph), Goldman Sachs.

Most of the questions have been answered, all ready.

But I guess could you give a quick update on the situation with the large tax receivable that you have outstanding with the Dutch government?

Yes, I think that's one that we said is ...

Is my personal tax receivable on that? ...

I'm afraid if it was yours it will be a text table that way.

It's - that is totally on track.

I mean we are confident that we'll come in as we said this year.

We'll be let's say mid year we would be targeting this quarter.

It could be the first months of the third quarter, but we're - they'll come from there.

OK.

And the second question ,could you give an idea of where the ASPs came in to your gross orders?

The ASPs, I think if you compare the ASPs backlog at the end of last year, or the end of the fourth quarter 2002 and the end of this quarter, ASPs are, you know, around the 10 million euro level.

That's where they are.

And that's where they come in at this moment.

OK.

Thank you.

The next question comes from Mr. Johannes Rice (ph).

Please state your company name, followed by your question.

Yes, good evening.

Johannes Rice, DRT in Frankfurt.

A couple of more questions.

First, you mentioned you think you have a high win rate and you don't expect that Q2 will be better than Q1.

But maybe one question regarding the change now you're accounting to quarterly accounting.

And I think the -, has known in the past only to work to half year deadlines.

Do you think that had any impact, maybe, that therefore maybe we could expect, maybe, some positive surprises in Q2 because all people have known to work to this old deadline and it's maybe hard to change in the short term?

Yes, first of all I don't think I actually said that Q2 will be similar to Q1, although it could be.

You know, we have still three months to go, two-and-a-half months to go for Q2.

But it's going to be a dullish quarter, we will all agree on that point.

No, I think what you're alluding to is the -, effect that every sales organization in the world for every company always has when it knows that the period closes in a few weeks time to try to get the orders in in time.

And -, business.

And we're not immune from that either.

But I think it's going to make no material significant change in the second quarter compared to first quarter, any other quarter.

You know, at the day, the customer's decide when they're going to be ...

The business side is deciding it.

And it's mostly our customers who the deadlines, not us, actually.

You too - you change how you -.

You take the order to keep the job basically.

And what to do, by the way, in case there's any - we intend to advise them on several things but it's not just taking orders.

OK.

The primary incentive for everyone in the organization, sales guys or not including the CEO is cash right now by the way.

So they interpret that cash, from their point of view, as accounts receivables.

Do you see where we're going?

So we have many measurements on them that give them the ability to take home a decent living wage.

Incentives are part of that and cash is a good ...

A prime driver.

... is a prime driver.

But also, bookings and billings and, you know, penetration.

OK.

Super.

Then, sorry, about it but I'd like to come shortly back to the cross-margin topic.

If I remember right in the Q4 call your guidance for cross-margin up around 30 percent.

Do you speak to this guidance for the whole year after this comparatively weak margin we are seeing in the first quarter?

Or do you like to bring it down?

I think, Johannes, you have to go back to 2002 again where the first quarter gross margin was 9.6 percent.

And it is very much depending on the volume.

So - because margin target is also depending on, I would say, some level of recovery as compared to the first quarter of this year, for the remainder of the year.

Because if we have four quarters which are equal to what we've seen in the first quarter of this year, then clearly a target of 30 percent will be a quite, you know, optimistic one.

So it does mean that we need to see, you know, improvement as compared to the first quarter.

But currently, we don't see a reason to suggest that we will not get there.

Like Doug said, there is still a question mark on the second half of the year, especially the fourth quarter.

So we'll know more about that in the next six to eight weeks.

And I think we can be much more clearer when we are reporting in the second quarter.

OK.

But in some regard it is a little bit more challenging maybe.

Each quarter that goes buy then clearly gets - you could argue gets more of challenge.

Actually I could say this to you, as each quarter goes by the customers are saving up their cash, they're going to spend it all in Q4.

And then 30 percent will seem very easy.

So I'm afraid, I'm not trying to give a sneaky answer.

It really does depend on that volume.

If that volume -, and the gross margin is going to follow it faithfully.

OK.

Cash flow topic, again, regarding your target for the free cash flow which must be around three to 350 or maybe 400 million, a lot of -, space on the reduction of working capital.

You mentioned all ready the reason why inventory has come up in Q1, so far the cash flow has been driven a reduction in receivables.

For the whole year, how do you see the split in the reduction of working capital on receivables and eventually what will be the important drive?

Will it be inventories?

Or maybe 50-50, what do you think?

For the remainder of the year, the biggest driver should be the inventory balance.

I explained for the first quarter, the inventories went up but it was largely, you know, as a result of the 2Q push outs to Q3.

And that will be the - that will have the main focus, because first we have turn the inventory into the receivables before we can turn it in to cash.

So that has the main focus, of course which is important that we're comfortable we will get the tax receivable which will also help.

And if you would look back at the end of the year, I still think that at the end of the year, when we would call bear working capital balance with the end of 2002, you could probably say that it's been a 50-50 contribution.

OK.

Super.

My last question is regarding on the call center SG&A costs, both have - SG&A have been flat compared to last year.

And you have been up eight percent.

Slightly disappointing for me regarding restructuring, so maybe even with the restructuring one.

But even on this, yes (ph), cost we would see an impact maybe in the coming quarter, so for they should come down in the quarter.

Yes, that has to do with the fact that we announced the restructuring at the end of the last year, both in the U.S. and especially here in the European space, we have a waiting period before we can - before we basically execute and that will be done.

One early question was what our level of the number of people was in the course of the year?

Well at the end of the second quarter, we think we'll be around 5,000 people.

Which means that the announced restructuring of last year will have been effectuated.

So we won't see as to the third quarter and the fourth quarter, the impact there.

Compared to the SG&A, you know, say it stayed flat.

Remember that we did have about eight million of legal cost in the first quarter of this year, and around two million in the first quarter of last year.

So there is a six million increase which is about a 10 percent difference of the total SG&A cost that has to do with that legal, you know, cost.

We were building up to legal battle in the first quarter of 2002.

We have basically finished the ITC part of that in the first quarter of the ...

But that's a big -, for, you know, not bringing the SG&A down.

OK.

And a lot of the - you don't expect a lot of additional bids from lawyers in the coming quarters, yes?

We also expect - well we always get more than we think.

But the fact that the ITC was settled in the first quarter does help in terms of the level, you know, legal activity.

But there is this kind of basic stream of activity that keeps them going, you know, towards the end of the year.

But it's going to be less than the first quarter.

Super.

Thanks a lot.

OK.

Thanks.

The next question comes from Mr. Dan Berkley (ph).

Please state your company followed by your question.

Hi, UBS O'Connor.

Three questions, if I can just ask them in order.

Could you refresh our memory on what the tax rebate, the size of that is expected to be?

Yes.

That's 150.

One hundred and fifty euros?

Million euros, yes.

Right.

The cap ex forecast for the year at ASML?

The cap ex world (ph) is less than 100 million.

So it will be in the range between 80 and 90, that's our target.

It will be 25 in the first quarter.

OK.

Two questions that are sort of related on the same line.

You're targeting $1 billion in cash by year end.

What is sort of the minimum amount of cash that you need to run your business on a day-to-day basis?

I would assume most of that billion is going to be sort of cushion.

And then a follow up question to that.

Minimally it's about 300 million.

That's - that is what we basically need to run our business even with a slight up tick in the business activity level.

OK.

The final question, a little bit now, I know your visibility is limited, but how should we think about the maturity?

And how is the company thinking about the maturity of the convertible next November?

Especially in light - especially if sort of a worst case scenario that the orders are pushed out, from the semi guys are pushed out to 2004 and you basically - you don't hit the one billion euro target.

And you're going to be using cash to build inventory and receivables over 2004.

You know, how should we think about paying off that November maturity?

Well if you look at our cash flow - well at our cash target at the end of the year, we said that's around $1 billion.

We think that with the things we that we discussed we can still do that.

It means that we have about in euros, we have about 480 million in convertible which is the $520 million.

So if you then look at what we think our free available cash is at the end of the year, it's about 500.

When the orders start coming in, we think we do have sufficient cash to take care of building inventory on the working capital.

On top of that, we have 290 million, 288 million euros available of lines of credit, which we can also use to fund the orders that come in.

So we don't expect any issues there.

Are there any sort of back up plans for a worst case scenario if you were to sort of miss that target of, you know, if the orders get pushed out you miss the target of one billion in cash at the end of the year and you having to build working capital June of next year?

There is - if you say well orders are pushed out then we don't need to build working capital.

No, I think the question Peter is ...

In 2004, you mean.

If the orders are pushed out of this year, so we have less sales this year, therefore, less chance to build a billion.

And the orders fall in to next year, we'll need the cash to spend there (ph).

I think yes, it's, you know, you can always amend these.

And it's a good scenario by the way in a sense of it, not impossible.

I think Peter but his finger on the fact that if we missed it by, we'll take a worst case, 200 million soon one becomes 0.8.

Then given our line of credit and so on and given the convertible ace 408 million, we're still OK in there.

And by the way, if next year is a hugely - a huge bookings year, then there's all kinds of ways that we can solve the problem.

Thank you very much.

And, you know, I know the visibility is tough.

So thank you.

Yes, please.

Help us if you can.

The next question comes from Mr. Nicholas Gaudois (ph).

Please state your company name, followed by your question.

Yes, could I make the point we are 6:30 central European time.

I'd like one more question after this one, and then we'll have to flee this place to a better place.

Hi.

Deutsche Bank.

A very quick question then on how we should consider your four-five-four (ph) shipments in Q2, based on your trend backlog in your quarter?

Could you give us an idea of the end markets basically?

And also what kind of level of -, tools we may have to plan for going forward?

Should we account for the same level in Q1?

Or do you see these coming down rather really?

Thank you.

A pretty detailed question.

I will just start off.

I don't - I couldn't tell you from where I'm sitting right now, the data in front of me what the percentage - what - how many use (ph) orders we have for the rest of this year.

What we've given you is our new order - new tool order backlog of 87.

We told you that 70 percent of it is in the first six months.

And beyond that there are some, I don't know how many, I really don't, a handful maybe of second hand tools.

We never include them in backlog numbers.

No.

My question was more do we actually see now trying after two quarters, basically nine months of refurbished and specialized -, accounting for quite a lot of units?

Or do you think it's basically a one off ...

No, I think it is - I wouldn't call it a trend.

But it is noticeable.

There is a lot more activity in the second hand and refurbished market, which you could interpret here that some people here do, that there is a need for some capacity in the lower ends.

And people don't want to invest in new tools.

They want to look for cheaper second hand tools.

And that's happening.

And I think it's happening in Asia, especially in Asia but also in the U.S. and in Europe.

And so I do think that our special applications group is preparing for more second hand business than they probably thought a couple of months ago.

Great.

And then in terms of end market, Q2 again based on ...

I think it's mostly, yes, it's circuit - in to the circuit market, actually.

It's not - but we do have a constant stream of products that go in to the thin film head and Galanostard (ph) markets.

And that's a fairly consistent level actually.

((inaudible)).

Yes, but this is - the ones we are seeing, the ones that are fluctuating are for IC manufacturing silicon manufacturing.

Right.

But within that, again, any idea of where the memory versus logic versus ...

No, it's not memory.

I'm talking about new tools again.

Yes.

You're talking new, I'm sorry.

OK.

We're back to new, OK.

I think we've kind of given the answer to that question.

We've exposed in the backlog that the percent of backlog for a memory tool is as opposed to foundry and logic.

New memory is 34 percent of the backlog.

Foundry is 23.

Logic is 24.

Microprocessor is 11.

You know, there's bits and pieces of others.

I can't do any better than that actually.

Yes, I think that is a reflection of what the market currently is and it's a good reflection of our customer base.

OK.

Thank you very much.

And very last one if you have it at hand, any idea of what was the speed 300 millimeter and 200 millimeter tools shipped in Q3. -, news for this seminar we discussed in what you achieved in Q1?

Last year?

Yes.

Could be a little bit more specific?

What do you want to know on Q3?

The ratio of TWINSCAN three millimeter as opposed to - four to one..

Thank you very much.

Thank you.

We have time for one more question.

Four 200 millimeter to one.

Yes, four 200 millimeter to one 300 millimeter precisely, yes.

We'll take one last question.

Thank you.

Mr. Yenhine Alts (ph), please go ahead with your question.

Yes, good evening.

This is Yenhine Alts (ph) from bank in Singer (ph).

Pretty small question, I believe.

Given all of the information you just gave on gross margin development and to cost structure, what about the break even level?

Are you still targeting a number of 160 systems toward the end of the year?

Or is that number changed?

And are some additional metrics maybe necessary in order to realize the 160 systems?

I think the 160 has not changed or thereabouts.

I think we'll achieve in that in line with the cost reduction programs.

And Peter explained, not that really doesn't kick in until middle of the year because of the labor regulations here and it will actually start in the U.S.

So from the middle of this year, onwards, and annualized rate of 106 will break us even.

Therefore, you know, you can have that for each half year.

OK.

Thank you.

Thank you.

Thank you.

I'm going to conclude now so thanks for listening for those who stood the course.

And I appreciate your questions and your interest.

And I guess we now enjoy the luxury of speaking to each other every quarter rather than just twice a year.

So I look forward to talking to you in July.

Thank you.

Thank you.

Ladies and gentlemen, this concludes the ASML first quarter results 2003 conference call.

Thank you for participating.

You may now disconnect.