艾司摩爾 (ASML) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the ASML half year and second quarter results 2003 conference call on the July 16, 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.

If any participant has difficulty hearing the conference, please press the star key followed by the zero on your push-button phone for operator assistance.

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

Please go ahead, sir.

Actually this Craig DeYoung, Director of Investor Relations for ASML.

I'd like to welcome you to the Call.

I have with me Mr. Doug Dunn our CEO, and Mr. Peter Wennink our CFO.

I would like to ask that everybody constrained their questions to one, with one short follow up please.

The duration of the call will be one hour.

After I read a Safe Harbor statement Doug will open with a kind of a summary or an overview of our Q2 results.

The matters discussed during this call include forward-looking statements that are subject to risks and uncertainties including but not limited to: economic conditions, product pricing, manufacturing efficiencies, new products development, ability to enforce patents, availability of raw materials and critical manufacturing equipment, trade environment and other risks indicated in filings with the US Securities and Exchange Commission.

Over to you, Doug.

Repeat that again please, Craig.

Thank you.

Good day ladies and gentlemen around the world.

Thank you for listening in and calling in, and I look forward to your questions in a few moments.

But just to start with a few general comments, I'm not going to go through the presentation, it is on our -- the presentation was web cast and all the documentation is available for you, so please use it.

Let me just therefore give a few opening comments then we will get onto the questions.

So the second quarter was I think predictably - and I think I called it this last time we spoke a quarter ago - bullish and flatish.

You saw our sales at 41 Systems were kind of in that flat region I indicated that we had experienced back in -- when we talked last in April.

But we have made some, I think, good progress, and I want to talk about two things very briefly.

One is my view of the state of the market, and secondly then the progress we are making despite the market.

So the market for semiconductors, I think there's a growing body of confidence now that there is gentle but sustained growth now for several quarters.

Growth in dollars.

Even greater growth in units, but still gentle and sustained compared to the previous growth period of the 90s and 80s and 70s of 17%.

We're probably down to half that number.

I must say, although we'd like to see the 17%, I'm quite content to see it even growing at all.

And if we can sustain this 8% for the next few quarters then it will make a big difference to all of us, including ASML.

ASP's, however for IC's are still going down, although there's month to month variation.

So it does indicate, as does the utilization graphs, that there's a lot of overhanging capacity still out there in our customers.

And for that reason they are not ambitiously placing lots of orders with us.

They are very -- they're scrutinizing very clearly and very carefully every order they place, and eking out the orders one by one to ensure that they aren't embarrassed by a further overhang of their capacity, which has been around their necks now for almost three years.

And to make sure they're not committed to taking on extra costs and depreciation from us that they don't actually need.

Firstly, I think that's a very healthy approach, and I actually say I endorse that.

I want to get rid of this capacity overhang as well, and so we have the same objective here as our customers.

It does mean there will be I think a lean period still for another period of weeks, quarters, whatever, on order intake, but that is a function which finally is going to be healthy.

Let me reassure those of you who may think otherwise, we are not losing market share, and therefore out lack of order intake is only a function of customers' reluctance to place orders in advance of that need.

We also know that we can deliver much more quickly now because we've honed down our cycle times with our sales and our suppliers, so they're taking advantage of that as well.

So that's the general market condition, and long may this steady and sustained growth continue.

And at some point there will be intersection of the curves of utilization, and at that point you will see the trickle of orders come into a steady flow of orders.

Maybe not a gush, but a steady flow would feel much better.

Let me just talk about the things that we at ASML have done in the face of that.

Well, you will have seen in Q2 compared to Q1 - and I think that quarterly-to-quarterly comparisons, sequential quarters, is more appropriate quite frankly than year-on-year, although we will do both obviously.

I say that because I think we should look at the recent trends, not the historical kind of aberrations that may have occurred a year ago.

It seems like a lifetime ago.

For sequential quarters we've seen an improvement in our balance sheet and the cash.

We're now up to €1.25b in cash, and yes we will exclude 370 of the convertible from that.

We will still stick to our objectives to generate by the end of the this year from our ongoing operations - not the convertible - €1b in cash, and we're on track to do that.

And that is a commitment we still make.

And it has removed of course the overhang of the convertible that matures next year in November, and people I think have now removed that from their worries.

We've achieved that cash inflow by controlling the cash receivable.

It's come down as you see in days of sales.

And from reducing inventories, they've also come down over the quarter.

And by the extremely diligent and cost conscious in all the cash that we expend.

So that's a big step forward.

You saw the gross margin improve.

I think 5 percentage points from 17 to 22.

In actual fact were it not for the element of the restructuring costs that came into gross margin, you would have seen 23% gross margin up from 17%.

So that's if you like a measure of the beginning of the process to recover that gross margin.

It will go up again quarter-on-quarter, hopefully for the rest of our lives, but certainly for the next few quarters.

You've seen also our recent announcements, today in fact, on the further efforts we are taking, the rather sad and unpleasant efforts to reduce our cost base by a reduction of human resources.

We do that after great deliberation for a few weeks, but it's necessary.

The last time we announced such a reduction was in November I think of last year, or December - I forget which now - in which everyone including we believe that the bottoming out for the industry would be something like 450 or 500 systems, and that we would experience therefore a low point of 160-ish.

That unfortunately was not quite the bottom.

The bottom occurred probably four or five months later in Q2 of this year.

And now I think there's a growing consensus, not just from me but from many more persuasive forecasters than myself, that we have reached the bottom.

And therefore that bottom is looking like a number of tools sold for the industry of around 400, maybe slightly less, 360, 380, or whatever the number is.

We therefore have taken the extra reduction to heart and will reduce our cost base accordingly.

So our new breakeven point will come down to 130-ish systems at today's mix.

Because of some of the issues we have to face with our trades unions and works councils and local regulations, we won't see the benefit or the advantage of that coming through perhaps the first quarter of next year.

We will see some later this year, but mostly first quarter of next year.

And we've taken that action with -- clearly with sadness, but it's vital for our future health.

Because never again do we want to be in a position where the market fall so suddenly and so dramatically that it leaves us with a cost base that generates losses.

So by this action we believe we've underpinned the low point in the industry, and that low point may be achieved again but will never be surpassed in the future.

And therefore we've kind of put our cost base such that we never have to report significant losses again, even at the down part of the cycle.

And also we have to reflect on the fight of the up part of the cycle.

We'll never get to those 1200 type unit shift that we experienced in 2000, that was a somewhat unique event.

If we get back to 800 that will be quite pleasing for all of us, and I see the range of forecasts for the next peak is between 650 and I think 800 or so.

So we've taken necessary action, painful as it is to downsize for that.

Those discussions are taking place with employee works councils, and we will work through that process this year.

So they are, I think, the positive things that we have done.

We've also maintained our market share.

We've bid for every serious bit of business that we can find and we've won a lot of it.

There is some price pressure our there, we're only human, so we do give a little bit more perhaps now on pricing than we would have in a good year.

But still we have a price premium to our competition.

Still we lead in technology.

We shipped the world's first [full field] 0157 tool in the second quarter.

And we just shipped last month the highest [NA] 193 tool known to this world.

So we maintain that lead in technology.

And also customers, through and independent survey - sponsored by ASML but by VLSI Research - have voted us number two - okay, that's not quite as good a gold medal, but a silver medal is quite good - for customer satisfaction.

So in the process of all these changing events around us, we're also maintaining a high level of satisfaction with customers.

And we came in with the silver medal there.

The nearest competitor from a litho point of view was number 10, and so I think from a litho point of view we've clearly had a higher level of satisfaction substantially than our nearest competitor.

And I'll let you judge who that may have been.

I think therefore I'm going to draw this preamble to a close.

By now you will either be bored or dying to ask some questions, so I will throw it open, Diana, please to some 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 pushbutton phone.

If you wish to cancel your request, please press star followed by two.

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 selection.

One moment please for the first question.

The first question comes from Mr. Jean D' Anjou.

Please state your company name followed by your question, sir.

Hi, good afternoon.

This is Jean D' Anjou from CSFB.

I have a very quick question on the near term.

Basically you are now in half July.

Have you seen anything different in trends in orders since the beginning of Q3 compared to the end of June?

And what about recent speculation that there is some new DRAM projects that were going to turn into orders?

Here I am talking about Samsung and Inotera (ph).

Okay, I didn't quite understand the first half of your question.

I understand the Samsung and Inotera (ph) one Jean, but what was your first part again?

The first part is, basically I was talking about what kind of business trends have you seen beginning of July?

Does that make you a bit more optimistic about the long[indiscernible]?

Thank you, yes.

We're supposed to be reporting on the second quarter but of course we're always keen to talk about the latest bit of news.

And yes, I guess you had a good antenna here, Jean.

There are a few pieces of business being bid for actively as we speak, and I guess you guys and gals will know most of those, you're quite intelligent in these things.

And indeed we're bidding for them, and I believe that we're going to be successful in part or in whole with quite a few of them.

Indeed recent comments, as recent as today - and done forget Semicon West is taking place - is that ASML is well positioned on some of these potentials.

And I will say no more than that.

So I think when you look at the backlog at end of Q2, you saw -- you know this is a very lumpy industry.

We fill up our backlog and then suddenly a customer comes in with a lot of orders, and if he comes in a day too late you see a pretty weak backlog.

A day later it can be a very strong backlog.

I'm not saying it's turned to a weak to a strong one, Jean, but it's certainly, I think, going to recover this second half.

And there's some good indications that our products are very competitive and we will get serious orders coming in from some of the big bids going down.

You know, Inotera and Samsung, I'm not going to comment on individual customers until they want me to and will allow me to, and some of these deals are in process.

Suffice it to say that we are a serious contender in both these accounts.

Okay.

I have just a quick follow-on.

If these things are coming, but they seem to be long to coming away, don't you think there's a risk that you could see some seepage into 2004 in terms of shipments, even though you get the orders at the end of the day?

Yes, I mean some of these orders by the way are for 2004, to be quite frank about it.

Most of the big deals going down right now are for next year.

There's a lot of ones and twos for filling in this year, but most of the orders that we will get for the big contracts this year are for delivery next year.

So you're quite right.

That's not slippage, because I never envisaged -- well maybe one or two I thought may be in the fourth quarter from a deliver point of view, but that was always a long shot.

I'm quite content that we take the orders now for delivery in 2004.

That's the reality of building fabs and equipping them.

Thanks.

Thank you, Jean.

The next question comes from Mr. Michael Haufelder.

Please state your company name followed by your question, sir.

Hi It's Michael Haufelder, HSBC in Munich.

I just had a question on your optimistic outlook regarding the gross margin.

I think your share of 193 nanometer systems increased on the backlog compared to the last quarter.

So would you comment on this one?

Yes, let me come back to your comment about the optimistic gross margin.

As you know it's improved from 17 point something to 22 or 23, depending whether you allow us to take in or exclude the restructuring costs that affect gross margin.

That is an improvement which we're proud of, but still it's a long way from where it will be and should be, Michael.

So please don't think that we have a complacency with that kind of gross margin.

It will continue to improve in small increments as each quarter goes by, as the volume builds and our cost of goods production program comes on stream.

It will be further helped by a following wind if the rate of order input, and therefore delivery increases, if it's market recovers and the utilization reaches a threshold point in the medium term.

And regarding 193, I would say hopefully humbly that we are in the lead with ARF, with INA ARF.

And that does command a high selling price, because it is a complex product and a leading edge product.

Whether that's going to have, in itself, a bigger material impact on the gross margin, I suspect it may not in its own right.

And the gross margin is reached with the inability to -- sorry, the backlog is reached with [indiscernible] to tools, and increasingly they go towards the 193 end, as our sophisticated customers buy them.

But don't forget the higher selling price of the 193 tool reflects a higher bill of material cost.

The lens cost, building the [calcium fluoride] elements in that lens is high.

And therefore you can't translate that increased selling price into increased gross margin.

Not immediately anyway, no.

I was more thinking about a negative impact from the in the increase in 300 mm systems in your backlog, from 55% to 67%.

Pete is itching to answer this one and therefore I'm going to let him.

I think there are two elements to that gross margin story.

I mean the 300 mm sales will generate a higher absolute sales level.

While on a relative base, tool for tool comparison, 200 mm, 300 mm, your relative margin contribution of course [indiscernible] might be a step lower in the long run.

But if you look at the absolute contribution because of the higher selling price, it is higher in euros.

And since the margin is meant to cover fixed costs, the volume of sales is the most important driver to bring the gross margin up.

That is one.

And therefore when you talk about this, cost of goods are being -- they are [indiscernible] as we speak, because the ability [indiscernible] INA [indiscernible] and that platform because of good sold, that is going down as we speak.

So most important element in here, the absolute sales volume with yet a relatively lower gross margin going through.

And in absolute terms giving us a higher gross margin to cover the fixed costs.

Okay, that's great.

Thank you very much.

Thank you, sir.

The next question comes from Mr. Jay Deahna (ph).

Please state your company name followed by your question, sir.

Mr. Donna, please state your question.

Okay, thanks.

Good afternoon, guys.

I just wanted to ask you about your cash flow situation given the incremental restructuring.

What do you expect to see in a reasonable growth environment in the first half of next year, improved cash flow versus what we otherwise would have expected prior to the incremental restructuring?

Quite a convoluted question, Jay.

By the way, thanks for your question it's a tough one.

Yes, so we've said that we'll generate cash through this year, and we've achieved it as you know so far, and will do so, Jay, for the rest of the year.

Next year, as far as I'm concerned, we have a cash generation program in place as well.

The only time it could actually falter would be if there is a very sudden uptake in input of orders that requires to make a lot of purchases on materials.

I mean frankly I would look at that problem.

But given the more gentle uptake that I think will take place, I believe we can continue our cash generation program through next year - although I'm not going to make any public commitments on the value of the amount of cash it might reach.

And also don't forget -- Peter's just told me not to forget things like lead times and cycle times, as they have an impact on that.

We are reducing those, by the way, internally and externally, so they will help.

Are we going to buy back?

As you know the maturing convertible from next November, starting now -- So all in all next year I think there will be -- we will have an aggressive cash generation program internally, it will only pick up I think if there's a very quick burst of orders that we have to go and extend our cash supply.

But that's why we're building the cash reserves quite frankly, Jay.

That was actually my next question.

Are you actually buying that back now?

Has that process commenced?

And then finally, when do you expect broad-based orders for 90 nanometer capacity expansion to start?

And that's it for me, thanks.

With respect to the announced buyback program, we will do that at our convenience to the company.

And we have announced it today - that's all I want to say.

And on the --

The 90 nanometer broad-based order kind of purchases that your question -- each customer is different, and clearly 90 nanometer is tough nut to crack for the better customers out there right now.

So it's focused on a few, for the ones who have the momentum, technology and impetus to go do that.

But they are either placing order or taking delivery of a few, or in intense negotiation with us for new orders right now.

Ninety nanometers is a node that we're not frightened of, and our customers are not either.

I think the question that will pace the 90-nanometer node deployment will be the ease and the speed of design, not processing.

I believe once we went through the 130 kind of barrier as an industry we sold a lot of problems which are relevant for 90.

But the issues now which come up for 90 nanometer kind of development is the ability to create and design those circuits of great complexity that will fill a 90 nanometer fab.

So from our point of view that's started already, and our hired [A tolls] are proof of that.

Right, just to follow up on that.

Assuming you get an order surge in the fourth quarter, is that largely driven by 90 nanometer capacity, or is it more of a spread between that and 130?

I think it's going to be a spread, because the surge was going to be more a surge for existing nodes, and that's 130, 150, and some at 90, absolutely.

Thank you very much.

Thank you.

The next question comes from Mr. Ali Irani.

Please state your company name followed by your question, sir.

Yes, good morning, good afternoon.

It's Ali Irani with CIBC World Markets.

I'm hoping you could do two things.

One, if you could please clarify the gross bookings versus the cancellation for us, Doug.

And if you could talk about the foundry market?

Historically these have been your most forward-looking customers in they'll be getting complex and pretty high on capacity utilization.

And your positioning with the foundry vendors has strengthened in the lead with GSM and UMC and IBM.

Could you give us an idea of how you see that business come back and how you see the business split between 200 mm and 300 mm please?

Okay, I will take the first part of your question.

I may come back to you to clarify the second part.

So you asked about I think the gross bookings in the second quarter?

The gross bookings and the cancellations.

Let me explain one thing, and you may have picked this up from the web cast.

I don't know if you've heard it or not.

We shoed a backlog of 62 systems that is at €670m at the end of the Q2.

I think the number we projected at the end of Q1, which we told you was 82 or 87 -- 87 sorry.

Those two are not strictly comparable and in many ways we need to explain this.

In the past we have always given you the unfiltered absolute orders we have from customers, an expurgated version if you like, for 12 months forward.

Because there has been such a flurry in the past year and a half of push outs, cancellations, reschedules, all those things which really damage the value of that information to because it's mutilated almost before you're heard it, we've actually taken the trouble this time round to clean it up.

So we've gone through our order book, and all these order that we took now, we have a signed purchase order for, and we've said, do we know that this customer is going to take this product at this point in time?

What's the fab development?

What chemistry is exhibiting?

Is it due for a push out or a cancellation?

And if it, we've taken it out.

We've scrubbed it and put it to one side.

It's still an order, it's still valid, but we've -- quite frankly we've held that back from the public because they are uncertain order that we don't feel that confident in. and there are between 10 and 20 of those.

So that 62, please view it in that light.

It is a much cleaner 62 than any previous number we've probably given you in this downturn.

Then it's turned out with hindsight to be a lot of soft and flaky orders.

We've actually tried to clean those out.

So that kind of should help you with a bit of -- so when you talk about the gross and net bookings and so on, bear in mind that we've already taken out good firm orders, that most companies would kind of put on the table as being firm orders [indiscernible] which are not -- which we think have got some suspicion about them.

Okay.

And that's between 10 and 20.

Absolutely.

And is that closer to 20 or closer to 10?

It's closer to the middle, between the two.

Right.

That's good enough.

And on the foundry side, you know, the point that I was making as your positioning with the top three foundries certainly has strengthened.

And you have a strong position in China as well in the utilization rates generally are rising.

So I'm thinking of your business at IBM, at CSM, at UMC, at [Tower Semi] as well as at SMIC.

Could you give us some idea of the mix of business being booked 300 mm versus 200 mm as you see it come back?

And if you could give us an idea of will this remain in your opinion, a [tons] driven foundry business in the next couple of quarters?

Orders for delivery in the next three months.

That's quite a convoluted question you have there.

You know the foundries are still using a lot of 200 mm, so a lot of foundry orders are coming in 200 mm.

But the UMCI order - I'm looking to my colleagues here - I think was a 300 mm order.

So we're seeing increasingly now the foundries beginning to come on hot and heavy with 300 mm.

And as you know the announcement of SMIC in Beijing - almost a year ago they announced it now actually - is for a 300 mm investment, and we are contending for that order, and IBM also, which is also a foundry.

So increasingly foundries are switching towards 300 mm.

But I think if this thing turns heavily and soon you will find they're wanting to back fill their 200 mm fabs.

Because they're cost effective still, and so on.

So it's difficult to extrapolate what may happen in the next two quarters, which is what you asked me to do.

So I'm going to sit on the fence here and say, foundries are taking a lot of -- well small amounts of 300 mm and small amounts of 200 mm, and it's your guess is as good as mine how that will change if there's a rapid upswing - although I don't expect a rapid upswing.

Great, thank you very much, Doug.

Thank you.

the next question comes from Mr. Stuart Adrian.

Please state your company name followed by your question, sir.

Hi there, this is Stuart Adrian from Morgan Stanley.

Maybe just a quick follow up on the de-risking of the backlog.

When we're looking at the way the backlog has moved by end customer or by geographic region, is there any particular region that has been impacted by this de-risking that would kind of skew shipment and order trends?

That's Stuart in sunny downtown San Francisco is it?

It certainly is, yes.

I can't imagine a guy that would fly to San Francisco rather than avoid our wonderful press conference here in Veldhoven, Stuart, but yes, each one has is own demands.

The de-risking was I think -- if you reflect our order book a little bit, but therefore more of it was in Asia.

I'm not suggesting that our Asian customers are more kind of prone to this, but they probably are to be honest with you.

Also our backlog issue is also an Asian dominated one.

So I guess even if you look at the proportionality of it, it was slightly more focused on looking at some of the Asian customers.

Okay.

And then second question on inventories, can you just talk about the mix between finished goods and work in progress?

And also if you feel strategic necessity to hold sort of a higher level of finished goods inventories to meet the short lead times of your customers at the moment.

My colleagues will tell me the mix.

But basically the philosophical part of your question is, do we want to hold more finished goods to meet short-term demands?

I'll give you my answer, and I hope my colleagues will agree on this one, no.

We're quite determined now to be much more ruthless and disciplined in the inventory hold to bring it down to acceptable and compatible peer levels.

And clearly we always like to have a bit of finished good, but we're not making significant investments in building speculative products anymore.

Unless it's the brand newest one, which often carry a longer lead time through our suppliers, then we may order a few.

I'm talking only a few, a handful or less of for instance, lenses or later stages, in anticipation of new orders.

And they are low risk because it's the newest product.

But basically we don't have a policy at all of holding finished goods inventory.

Any finished goods inventory we have is frankly a mistake, and we're reducing it.

Stuart, just to give you kind of insight into the breakdown, it's about 60% -- 50% to 60% generally, and now it's close to 60%, which is [indiscernible] work in process, and some finished goods left that are basically available for sales or are dead, because we have orders on the books.

And the remainder is step ups and is inventory we are building for our R&D group, because they're prototypes of new generation tools that prototypes will be shipped to the customers later on.

That's more R&D inventory.

So the majority of our inventory, that's close to 60%, is inventory we keep for, you could say, the order portfolio after sales.

Okay, thanks very much.

the next question comes from Mr. Sekar Promenik (ph).

Please state your company name followed by your question.

Hi, it's Prudential Equity Group.

Doug, a question for you.

Could we say that given the target detector we see it selling so few units that part of what's happening is a significant reuse in tools because people have been able to reduce K1 factor by mask enhancement?

And then I have a question for Peter.

I think you've put your finger on one of the reasons for that.

I used the expression in one of my slides, sweating the assets.

Our customers are really burning the midnight oil, 160-odd hours a week usage, reducing unnecessary maintenance to a minimum.

And sweating the assets more and more to get more out of them.

They are also taking advantage of design tweaks to improve the yield, you know, change a resistor here and a capacitor there, and improve the yield by 2, 3, 4, 5% and they're also taking advantage, as you say, of the K1 factor reduction improvements that we offer, quite frankly.

We have stopped wear capability that allows that.

We have hardware improvement that allow that.

It's part of our drive this year.

We have a [full] K1 program which is designed to give our customers the ability to push our equipment to the very edge of its capability, by exploiting these techniques.

And we're proud of that, we're the only companies doing that right now that I'm aware of.

It's very successful.

You may say it's cannibalizing our sales.

Well it's part of the customers service program, and ultimately those customers will reward us with orders when the time is right.

So we definitely are allowing customers to utilize their assets much more aggressively in this period of time, yes.

And encouraging it and proving new facilities to do that.

But doesn't it kind of set up [indiscernible] that the peak units on the cycle would be most probably significantly lower than what we did in 2000?

Yes.

I thin if you look at the peak of 2000 there are around 1200 litho tools shipped.

I think the next peak in whenever it's going to be, I think DataQuest (ph) say in two year's time, will be more like 750 to 800 tools shipped.

Of course they're much more expensive tools, probably carrying almost twice the average selling price, and therefore the value will be higher.

But the peak units will continue I think to come down.

But that's not so much only the result of let's say ultra of low K1 applications, it's also the productivity of those tools are significantly better.

And 300 mm of course.

Right.

A question for Peter.

On the margins, you're going to take breakeven to 130 units.

Could you give us what the trend on Semicon has been -- you know, 40% growth from current levels to 60%, then 100%, you can do that on a unit once.

Where you see your gross margins trend?

Well not being a participant in that Semicon discussion, I think we have said, and we stand by this, that in the next peak, whenever that may be, we clearly have an aim [indiscernible] with const reduction programs we have.

Plans where we see our sales price going and cost reduction goes, that will bring our peak margins to the one that we've seen in previous peaks.

And of course there is an internals chance to beat those.

And I said it earlier, the biggest driver for gross margins is the volume.

When volume comes back you will see definitely an improvement of the gross margin, especially when you combine that with the aggressive cost of goods programs that we have running.

Okay.

Great.

The next question comes from Mr. Matthew Gale.

Please state your company name followed by your question.

Goldman Sachs.

Good afternoon.

A question regarding 300 mm versus your 22 mm machines.

Could you give an idea of what the difference in the gross margin for the machines stands at, at the current time?

And then also comment on where we stand with the 2.5% research credit that you had been paying on all 300 mm machines?

And then finally just an update on the other cycle times for each of the two?

Yes.

Some of that stuff we won't give you precise amount.

But I will come to your question the other way around.

So we don't give product gross margins out - competitive obviously.

But if you look at the gross margin for any machine that we make right now, it's to some extent the value that loaded to the gross margin is a function of volume.

And it's not a function whether it's an 8 inch or 12 inch, it's kind of the volume effect swamps it.

And so each product does have a different gross margin, but the big difference for every product is the fact we're not making as many as we could make with our existing overheads - which is why we're taking action to reduce our costs to improve that, obviously.

So it's volume basing rather than a difference between this machine and that machine based thing.

That answers the first part of your question.

Your second part was what again?

I didn't take a note of it?

the research credit, I think it was around 2.5% that you're paying for the 300 mm machines?

Yes, that has decreased in the second quarter to around a percent.

Slightly above that.

But we didn't sell a lot of 300 mm tools, and I think the remainder will go into the third quarter, but it will be less than a percent impact on the gross margin, closer to 0.5%.

And then it's over.

So it is the remaining tail end.

And then cycle times for the two?

Oh, cycle times for 8 inch and 12 inch?

Yes.

I've quoted these before, so basically 8 inch cycle time is less of a pressure to do it better, we can do it in 6, 7, 8 weeks, that time scale.

We've done it in one or two less than that, but that's the kind of normal time there.

And on the 12 inch we set up a year ago at 26 or 20-odd weeks.

We're now down -- I think we're still in double-digit weeks, but only just, so it's in the 10, 11, 12 week timeframe, something like that.

And then maybe just one last question with regards to the restructuring program you announced.

Where do you see your current capacity, that is [indiscernible] capacity you can do with the internal people, versus what you can do by bringing on temporary workers with the current facilities?

And where does that go down to after you cut the 550 workers?

It's a difficult one to answer precisely.

Just given me the problem and I will make the output, okay.

But basically 200 systems per year, if that were demanded of us in the next few years - and I hope it will be - would be achievable -- maybe we'd have to bring in a little bit of extra help here and there, but by and large that's manageable.

Do you have the ability to quickly add in temporary workers?

Or if you saw substantial ramp in the, let's say --

Yes, we have that ability, and I do hope we will need it.

But I'm not to hopeful.

We have the ability certainly to do that, yes, and we've proven that in the past.

Part of the reorganization is also focused on adding the flexibility to get those temporary workers on board relatively quick.

Whereby we will use the capacity available in terms of technical labor that we have in other parts of the company that will assist in that first ramp.

So we have a kind of a changeover period in which people already working in the company now in different functions will add into production.

And then we have to try to actually move in the temporary workers.

Don't forget, Matthew, that this reduction in people that we're talking about today is across all the functional spectrum, it's not just manufacturing people.

And with respect to some departments you know, they're not as relevant to an increase if the volume increases.

They don't need more CEO's for instance [indiscernible].

So don't think that the fact we're taking out this number of people is crippling our ability to ramp up, it is not, we would not do that.

Okay.

Thank you.

The next question comes from Mr. Uche Orji.

Please state your company name followed by your question, sir.

Alright, it's Uche Orji here from JP Morgan.

Just a few questions for Peter.

Peter, can I ask you about the [calculation] in the quarter, how much of that came from the [bridge fund] or the tax credit, and how much of that came from the prepayments of [indiscernible], so we can just get a clean picture of how much came from the operational improvements?

Tax credit was 170 and prepayment [indiscernible] were a few million [indiscernible] margins.

Because we didn't receive a lot of [indiscernible] in the second quarter.

There are a few -- there was a few million, about €170m from tax.

So when you look at the cash flow statements we generated cash in the second quarter of about €211m.

Whereby we had €54m in net income loss, if you take out the depreciation and the amortization.

Then you have an increase in the cash due to change of working capital, about €238m.

So if you take out the €170m, and a couple of million from [indiscernible], then the remainder is from pure working capital elements.

Right.

Just one other question.

It's with regards to something that's been talked about at some points during the quarter.

It is regarding what are your customers at some point considering buying options on the tools as a way to reduce delivery time?

Also a way for you to manage working capital going forward?

Is there any update on that type of program being considered by ASML?

Yes.

And that program is starting to show fruits and the results are coming in.

So companies that are placing [indiscernible] and are doing still that, and that has positive effects on the cash flow.

But do you have any sense as to when this could become material?

I think that's a difficult question to answer.

It will become more material when customers increasingly see the benefits of having an option that secures their production flow.

And that will guarantee a certain delivery time.

So I would say when customers want to place their bets, and want to place their hedges, then it becomes I think more interesting in terms of more interesting instruments.

So it really has to do with when we see the upturn come, and when they feel the pressure.

Thank you.

One last question on the margins of TWINSCAN. [indiscernible] 300 mm tools versus 200 mm, when do you think those margins will equalize?

And if we just deliver it forward into the next --

Sorry, I think I covered this one in the last question.

First of all we don't --

Sorry, I missed - I came in --

We don't release individual products margins.

And your assumption that the two are not in alignment is an assumption you have made, we haven't said that.

I did make a point that the dominant factor in gross margins was volume, not machine mix.

So I don't think we want to comment, for obvious reasons on individual machine gross margins.

And you may have assumed that there's a difference in the two, 8 inch and 12 inch margins, you may be wrong in that assumption.

Right.

Thank you very much.

The next question comes from Miss Marisa Baldo.

Please state your company name followed by your question.

Hi, good afternoon, this is Marisa Baldo from SG Securities.

I would like to come back on the restructuring measures.

Could you comment on the other measures that you will have to take other than headcount reduction that can bring the breakeven down from 160 to 130 units?

Yes, I think it is not only the headcount because when you say 550 people then you apply an average cost, and you won't get to the cost reduction.

It is about 11% in the headcount, but we are talking about 20% in total costs.

It means we are taking all the fixed costs now, lower running costs.

At present we are two compounds here, and [indiscernible] we will go to one.

The same is true in the United States, so we're doing all these things.

So you are talking about close to 20% cost reduction.

And on top of that we have an aggressive cost reduction program.

You will not get to 130 by only letting go of 550 people, you have to do a lot of things.

Which is addressing the rest of the cost base, and especially also the cost of goods.

Yes, okay, thank you.

And can you please come back and maybe give us a guidance on R&D and SG&A [indiscernible] for the coming two quarters, please?

I understand --

On R&D we are seeing a decrease to our level of about €73m or €74m for this quarter.

I think we will also see a further decrease from the R&D spend, largely as a result of the stage where the TWINSCAN is.

I mean we used to spend over the last 24 months, a lot of money on the TWINSCAN development.

That is becoming more and more mature, so we are able to spend less there.

And we're more efficient on the other programs, and as the R&D goes down, on an annual basis you can see a reduction of around 10% if you would compare year-on-year.

You mean 2004 versus 2003?

Yes, I would say 2003 versus 2002.

Okay.

And on SG&A you say a significant drop in SG&A costs in the second quarter.

We do think that we can maintain that level throughout the rest of the year, and improve on that as we go more towards the end of the year.

Because the effects of the restructuring under SG&A, because of the time it will take to take some of those costs our, and also to get the 550 jobs out, it will take some time, and you will see that [indiscernible] in Q1 of '04.

So the big effect of that restructuring will not be noticeable in SG&A in this quarter.

For this quarter we should be about level with Q2.

And last question, just a confirmation question.

The soft orders you mentioned, the 10 to 20 soft orders you mentioned, were they included in the backlog at the end of Q1.

Yes.

Okay, thanks.

Diana we have 109 minutes left, and I am conscious there are quite a few people using more than one question.

Is there a long queue of questions?

If can go back to one each, is that going to give everyone the chance to ask the question?

Yes, we have approximately 12 questions to go actually.

So I am going to be strict them please, now.

You get one question each until the time runs out.

It's only fair to hold the questions with so many.

Thank you, sir.

The next question comes from Mr. Nicholas Gaudois.

Please state your company name followed by your question, sir.

Yes, hi, Nicholas Gaudois from Deutsche Bank.

A quick question on your systems, Doug.

In H1 you shipped about 19 systems.

You seem to agree that it's actually a bit of a structural change for the company in seeing more new systems in the past.

What kind of levels should we think about H2?

Should it be around flat or could we see a decrease sequentially?

The best guess I can give you is it could be a similar number.

Actually it was quite high in Q2, so probably to be realistic, Q3 is always a dullish quarter with holidays in Europe and so on, I think it's probably not going to be beaten in Q3, in fact this could well be less than that in Q3.

Okay, thanks.

The next question comes from Mr. Alan Bruno.

Please state your company name followed by your question, sir.

Good afternoon, Alan Bruno from [indiscernible] Securities.

I wonder if as consumers now seem to reduce the order lead times, if in the coming quarters we will see less difference between new systems ASPs, and the backlog ASPs?

I think the answer is yes, because in many ways what we see in the backlog now is what we're going to get.

It's a very [indiscernible] backlog, as we've said, 90%. [indiscernible] 62 clean orders for the second half -- for the year, 12 months out are required in the second half.

So you're probably right that -- But I think it will get slightly richer perhaps with the leading edge -- 1200 products one of my colleagues is telling me here - but basically yes, you're right.

On the other hand some of the [indiscernible] that we are planning are also for some [indiscernible], which will take it out.

But I mean it's certainly a good indication.

Okay, thank you.

The next question comes from Mr. Mark Fitzgerald.

Please state your company name followed by your question.

A two-part question.

Can you tell us what your utilization rates are across your tools at this point, that are out in the field?

And are there any inventory issues with systems in crates at your customers?

On the utilization rates we don't give you that because obviously it's confidential.

Not looking by customers, but across the --

Yes, it is really by customer, so you're getting an average therefore from me.

It's trending upwards, which is good news.

And it's been consistently trending up now for a few quarters.

I don't memorize the whole thing, but I'd say it's say -- let me say customers who have been cautious with their expenditure it's well over 80% now.

And for one or two others it's down in the 65%, 70% region.

But the average is between the two and it's trending up nicely.

So with the gradual reduction of that [indiscernible] capacity we will see orders I think flowing through more consistently, maybe later this year or perhaps in next year.

And on the [indiscernible] I could say I don't think --

I think they've all been uncrated.

Okay, thank you.

The next question comes from Mr. John Pitzer.

Please state your company name followed by your question.

Yes, it's John Pitzer with First Boston.

Doug, just real quickly, can you give us a sense what unit level on the booking front you will go back to your customers and start quoting much longer lead times?

I'm just trying to get a sense at what point or what threshold point your customers start to fear getting slotted with longer lead time.

Well some of the leading edge products, John, that's the position today actually.

We do try to apply a measure of discipline on this, on some of the leading edge with problems and so on.

There is a lot of demand out there relatively speaking, it's not overwhelming, and we do use a discipline control to manufacturing and order placement.

On the others it's a little bit easier.

I think once we get up to 90, 100 systems on the backlog, 110, then we feel much happier, and perhaps so will you if they're good orders, and we begin to talk about, hey, times are getting different now and it's time you started to take more responsibility for longer lead time orders.

And we're going to start talking about allocation and slot lists and so on.

But we're a way from that, yet.

Great, thanks, Doug.

Thank you.

The next question comes from Mr. Steve Connell.

Please state your company name followed by your question.

[indiscernible].

Doug, this may sound like ancient history, but there was a time when you lost market share because you didn't have the capacity to deliver.

If there are 800 systems at a peak this time, and you're cutting your capacity back to 250 or 300, and yet you've secured every major customer there is outside of Japan, aren't you setting yourself up for another capacity shortage?

I hope not, Steve, but give me that challenge and I will grab it with alacrity.

Yes, if you took 800 as a peak, and by the way that's I think the next peak in 2005, that's probably on the high side.

But still, who knows.

And if you took our 45% market share in volume as being a good average, then you can work out yourself what we should be shipping.

I don't think it's going to be 800 systems, and I don't think it's going to be 800 by quite a way, quite frankly.

And also we've got a lot more flexibility now built into our processes.

Partially because of that time when we were in danger of losing market share because we couldn't ramp up.

We looked at our supply base, made some serious changes to suppliers, required them to be more flexible.

We changed suppliers, we made dual sourcing rather than single sourcing often.

You've heard me talk about internal cycle times earlier, Steve, coming down substantially for the 12 inch product.

So we think out ability to ramp is far better than it's ever been, even if we do take this a reduction.

And I stress again, this reduction in force that we're discussing today are not all manufacturing people, not at all, and therefore some of them will; not be an issue if there's a ramp up, because they're not involved first hand with our ability to output product.

Great, thanks.

The next question comes from Mr. Dan Burkery.

Please state your company name followed by your question.

UBS O'Connor.

Could you clarify exactly what you said regarding the 4.25% convertibles on the analysts presentation?

And then the question sort of if you're earning call it 2.5% on your cash, you're paying out 4.25% on those bonds, why wouldn't you be buying them back soon rather than later?

Thank you.

What we said on the conference was that we've announced the program, and that we will review time by time whether it's an opportune moment for the company to now enter into a transaction like that.

To announce the program, so you're going -- what exactly is the program, sorry?

The program is our intention to go into I would say buyback, like we said in the press release, sales transactions with market parties, to buy back when there is an opportunity to do so and if it's good for the company.

Then we will do so, like you say, what we're earning on our cash balance is slightly more than the 2.5%, that there is an advantage if there is an opportunity.

So we need a willing seller and we need a willing property buyer, and that's that.

So we will review that as of now, and we will wait for the right moments to do that.

Thanks a lot.

We are getting here by the way, inputs from people who may be considering offering them to us, so --

The next question comes from Mr. Jim Fontanelli.

Please state your company name followed by your question.

Hi, it's Jim Fontanelli [indiscernible].

I just want to know what service revenues were on the quarter, and if you can remind we what they were for the last quarter?

On the quarter it was 70 I believe, the quarter we've just reported on.

And the previous quarter I'll just play for time and sing a small song here while they find out for me.

No, you wouldn't like my singing - well you would actually.

Yes, it's a 65 in the first quarter, and the difference is [field options]

The difference is five.

Quite, due to field options.

Thanks.

How are we doing on question, Diana, how many left on your queue?

We still have four questions - five questions to go.

Okay, can we maybe cut the queue off and we'll do those five, one at a time and one each.

Okay, I will do so, sir.

The next question comes from Mr. Randy Groebel (ph).

Please state your company name followed by your question.

Hi it's Randy Groebel from Tudor.

I'm slightly confused.

I'm under the impression that a year ago you'd cleaned the order book then, so was this orders that had leaked through since then that you've had to clean up, or were these orders that you got subsequently that looked like they weren't going to be required?

You know, how do you tell in advance, Randy, whether the order is clean or not?

So we applied certain criteria a year ago to try and weed out the wheat from the chaff to some extent.

And we clearly were not aggressive enough in that, and we've learnt with hindsight how our customers can really sometimes give us a well intended order one week and cancel it three months later.

And we saw that very graphically in Q2 and Q3 of last year if you think back.

So we just applied more stringent criteria.

Have we got it fully right this time?

Probably not, but every time we tighten the criteria we must get closer to the real number.

So we're much more confident now.

But yes, there could be still one or two dodgy ones in there.

So going forward, would it be any orders you now put on the book, will they be on a much tighter criteria that --?

We've certainly made it clear internally, every order we get is signed and sealed by the customer, it goes on the order book.

What we choose now to report to you will be a number which we think reflects the confidence of those orders.

So we will keep the other orders on the books, but we will not embarrass you by telling you what they are, only to say they were cancelled a week later.

If we think there's a chance of a push out or a cancellation or a change to machine type, we will keep it on the books as valid orders, and thank the customers for them.

But we'll not report them to you to try and prevent you having to go through the process that we struggle with, how many of these orders are good, what's going to get cancelled, and so on.

Right, thank you.

Thank you.

The next question comes from Mr. Kenneth Yap.

Please state your company name followed by your question.

Dresdner Kleinwort Wasserstein here.

I was just wondering whether you could give us a feel for what number of actual cancellations were during the quarter?

It's difficult that in that I just don't know off hand.

I mean I watch it fairly well but I don't remember the numbers.

But also, it isn't just cancellations, they are slowing down.

What we get it customer says, we want it in Q4 and then later push it out to Q1 or Q2 to year after.

That's not a cancellations it's an order adjustment to the delivery.

So we see more of those actually than cancellations.

We also get a customer who says, hey, we ordered the 800A, we'd like to change out minds to an 850B.

Now is that a cancellation or a -- you know, you have to be a little bit careful on what we talk about here.

So we have to wrestle with those things, and I don't want to burden you with our problems, so that's why it's not helpful always to give a straight, oh we say X cancellations.

We saw some push outs, some model changes, etc, that's why it's difficult to always be kind of -- Maybe you think that we're out of control here, it's not the case, it's a complex situation to manage.

Sure Okay.

Then could you just talk about the trend that you saw in cancellations or --?

We see the trend in cancellations reducing.

But we also still see not an insignificant trend on delivery time changes.

And that's because customers decide they want it a quarter later because their market assessment was wrong, or because their factory has been delayed because of the SARS outbreak or some other issue.

So the trend for delaying the orders by a quarter or so is still significant, and hasn't reduced down to minimum levels.

But the actual clear cancellations, they've dropped away quite dramatically.

Okay, great.

Thank you.

The next question comes from Mr. Pria Costelada.

Please state your company name followed by your question.

Pria Costelada from [indiscernible] Capital.

Just a question on -- I may have missed it, but the [indiscernible] loan, can you give me the absolute value?

And could you also confirm as you use units, how's the price fix in terms of the lenses?

Is that a changing kind of number, or has that been fixed in advance?

The [indiscernible] loan is slightly under €70m.

So it's still around €70m, okay.

It's under that number, but it hasn't decreased as fast as we thought, because of the unit shipment that were [indiscernible].

and in terms of how the -- as you basically use units, that number reduces the ASP on the lens, how is that fixed, and how does that change over time?

Well the ASP on the lens reflects the fact that they're paying back the loan through the ASP.

But regarding - if you're getting at how do we price the lenses without [indiscernible], I'm not going to comment on that.

In particular to that loan as opposed to --?

Oh, so just a loan issue?

Yes, exactly.

I'm basically wanting to -- if the ASP on the lens for that loan on that has been fixed in advance, or is that market issue, or is it market pricing?

It's a fixed amount for lenses, not the percentage of the sales price to us.

Okay, great, thanks.

We must be getting down to the last one or two now Diana, are we not?

Yes, we still have two questions to go.

Okay.

Two it shall be.

Perfect.

The next question comes from Mr. Steven Pelayo.

Please state your company name followed by your question, sir.

Great, good morning, it's Morgan Stanley.

I wonder if we can explore for a moment - I'm looking at your backlog here - I want to hear your comments on your turns capabilities.

You talked a little bit about cycle times, you talked a little about finished goods.

But if I remember correct in the past, I think two of your top customers, I think leading [indiscernible] leading [indiscernible] maker, you also work against comfortable building against letter of intent.

And that gives you an increased ability to actually do book and ships within a quarter.

Can you talk about a little bit about your turns capability and how that might be able to help you, despite the fact of having relatively low backlogs generally.

Right, Steve, you're out of time.

Yes, I will try and address those points.

First of all the out of line.

We do -- there are one or two customers who are so disciplined and well in control that [indiscernible] for them is a solid gold ticket, and we call that an order.

And you see that in our backlog.

You see that in there already, it's in there.

Okay, that 62 contains those.

That's the first thing, Steve.

So that doesn't change out turns capability.

So coming at your question, can we turn orders in a quarter and a half year, absolutely, we will.

We will definitely turn orders this half year, we will do it because some -- as you know we have some inventory, that will help.

The older refurbished type of product we have a lot of modules and piece parts, we can turn those fairly quickly, it's a short cycle time to build that product internally.

And therefore we can and will make turns of a serious nature in any period of time.

Of course the nearer you get to the week we're in the more difficult it is, but we have some finished goods, quite a bit of modules, so for older products, no problem.

Whatever the customers want we can probably turn them in certainly with expectation of this year and first part of next year.

For some of the leading edge new products, that's when we have a problem, Steve, and what we do then - and I mentioned this earlier - we will place speculative orders of a few off.

I mean a handful off of the longer lead items so that we are able to get those in and turn them in a reasonable timeframe.

So is it safe to say that, I guess the top date for the year is somewhere -- I guess you're talking about 12 weeks lead times for 300 mm type tools, or somewhere 12 weeks before the end of the year?

Yes.

Some I mean is [indiscernible] machine because for some it's 12 weeks, for some it's as little as 6 weeks, and for some it's 9 months, so yes it's a good rule of thumb, we're now in a position where we can turn any serious amount of business inside three months.

Okay, great.

Thanks, Doug.

The final question comes from Miss Cristina Osmena.

Please state your company name followed by your question.

Needham and Company.

I just wanted to get a sense of the magnitude and breadth of the pricing pressure that you're seeing.

How long should we expect the price concessions that you've been giving to affect the ASPs we're seeing?

And at what point can we see those pressures reverse?

What needs to happen?

Okay, Christina.

First of all let me stress one thing on the prices.

We still sell our product at a premium.

Please [indiscernible] we're not competing with any two products at the same price.

We're competing with premium products for premium price.

But it does mean, however, if the competitive product, usually the lesser specifications, is sold at a very low price, then the expectation of our customer is that we will come part way to meet that.

So we come down from the price we'd like to have.

But we're not competing on price alone, almost never in our history do we do that.

The price pressure will be on I think while ever there's customers who can be slow in placing orders, and take a long time to negotiate and renegotiate and negotiate again on prices and terms and conditions.

And while ever the competition that we face us as under utilized if not more so as we are.

There's a natural instinct from our side, and from theirs as well, for some of the companies in the world to be sharp on pricing.

When will it recover?

Well it will recover when we all get back to kind of a stability of the market where the customers are more urgent for products, and therefore are slightly more desperate to place the orders.

And where we and our competitors have fuller factories and less ability to respond to pricing pressure from customers.

But we're not banking on that happening, because I don't know when it's going to happen.

We're banking on the things that we can control, so we're taking out costs down.

So we will improve our gross margins, not by increasing the price - well I hope we can, but maybe not, we're not banking on that - but by reducing our costs.

By reducing our cost of goods and our other costs and that's what we're focusing on.

That we do control.

Wonderful, thank you.

Thank you, Christina.

Diana, I think we're all finished?

We're all finished, there are no further questions, sir.

Okay, well let me thank the remaining audience, any who are left.

Thank you very much for your time, your patience and your questions.

I hope we gave you answers you can live with.

And we look forward to seeing you again soon and talking to you in a quarter's time.

Ladies and gentlemen.

This concludes the ASML half year and second quarter results 2003 conference call.

Thank you for participating.

You may now disconnect.