艾司摩爾 (ASML) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the ASML half year results 2003 conference call on October 15 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 the star key followed by '0' 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 is Craig DeYoung, Director of Investor Relations for ASML.

We would like to welcome you to ASML's Q3 financial results conference call.

Just a few ground rules, as you know, this call is scheduled for one hour.

We would like to ask that you limit your questions to one, with one short follow up, so that we can handle as many questions as possible.

I will turn the floor over to Doug here momentarily, but I am obliged to read the Safe Harbor statement, so bear with me.

The matters discussed during this presentation include forward-looking statements that are subject to risks and uncertainties including but not limited to: economic conditions, product and pricing, manufacturing efficiencies, new product 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.

So with that, I will turn the floor over to Doug Dunn, CEO.

Thanks Craig.

One of these days, you will learn that off by heart.

Good morning, good afternoon and good evening, ladies and gentlemen around the world.

Thank you joining in to our third quarter results call.

This is Doug Dunn, speaking as CEO and there are many more important people here with me who will help me out with any difficult questions.

I would like to begin with just a very quick summary of the quarter and then give maximum time to you to ask the questions that I am sure you are dieing to ask us.

So, the third quarter.

Revenue of €370m, up by 12% quarter on quarter and 5% year on year.

I think this supports our previous statements that we have been making all the way through this year that it is a year of moderate, but sustained growth and that as each quarter goes by, the sustained word comes I think, more and more relevant.

So we are quite pleased that our customers are experiencing this very positive trend throughout the year.

We have also made the point that there is of course a time lag between our customers having this experience of growth and it reflecting on our own fortunes and perhaps the heavy period of bookings at the end of Q3 maybe show some light that finally the reflection of our customers' growth now begins to impact on we systems companies.

In the quarter we saw 34 lithography tools, 28 new and 6 refurbished.

The selling price for the new systems increased from 8.3 in Q2 to 10.8 reflecting the richer mix of twin [indiscernible] products in the quarter.

Our backlog, which is always an excellent bell weather for our next few quarter sales increased by 47% quarter on quarter to 91 systems.

I must say that I do like saying that increased by 47% - it has a certain ring to it which I enjoy these days, having had three years of a rather lack luster backlog growth, so that is an excellent trend.

Net loss for the period was reduced from €54m in Q2, I am talking Lithography here or Continued Operations down to €18m in Lithography for the quarter just completed.

Our gross margin improved from 22% to 25%.

Again that is for Lithography tools.

We ended the quarter with positive cash of just over €1.1b.

We used €124m in debt reduction, so you can add those two numbers together to get a like for like comparison in our cash position and we completed the divestment of our Thermal Operations.

That therefore summarizes the highlights of the quarter.

There were very few lowlights, none of which I am going to tell you about anyway.

Therefore, I think we had, on balance an interesting and a good quarter.

Let me just make one comment on the backlog which is perhaps the most compelling number that I have mentioned to you so far.

Indeed, we are pleased by that.

Some 85% of that backlog is required in the next two quarters to be sold and to be shipped in the next two quarters.

Of course the next two quarters will take more backlog and I guess will also take one or two cancellations so it is not an accurate predictor of what we are going to sell, but it is a good indication.

Certainly compared to the end of Q2 it is a very positive improvement.

The backlog is a very natural number.

It is what customers want to order and when they want to order it.

We have little or no control on when they place those orders and you will understand that we have a very relatively small customer base.

You can measure it on counting your fingers and therefore we do tend to get lumpy orders coming in and sometimes it appears synchronously at the same time.

We can have a very healthy backlog certainly, or conversely occasionally, a very weak one.

I think at the end of Q2 you saw the other side of that synchronicity when we had a weak backlog, and at the end of Q3 you have the positive side where we had a strong backlog.

It is not a wide assumption to assume that the customer who placed six months orders at the end of Q3 will place another six months orders at the beginning of Q4, so be careful about making those extrapolations.

It is a good trend. [indiscernible] indicate the persuasive nature of our product and our ability to [indiscernible] that product and sell to our customers worldwide and we are pleased by it.

So with that, I will cease the introduction and pass it over via the operator for questions.

Ladies and gentlemen.

At this time we will begin the question and answer session.

If you have a question, please press star followed by '1' on your push-button phone.

If you wish to cancel your request, please press star followed by '2'.

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 Matthew Gale.

Please state your company name followed by your question.

It's with Goldman Sachs.

Good afternoon.

Two questions, one on the backlog breakdown and the second one on R&D.

First on backlog, could you give us a little bit more insight into the swings we have seen in the Logic portion and the Microprocessor portion and maybe give us a little insight might have been caused by any reclassification of IBM from one to the other?

Then I would just like to get a little bit of light on the Microprocessor portion of the backlog which was up pretty substantially quarter over quarter, but your North American portion of the backlog was down.

So if you could shed any light there?

The second question, on R&D, you have been doing an impressive job of bringing the R&D level down over the past four quarters.

Quite recent [indiscernible] reports would lead one to believe that ASML is going to press ahead with 157 nanometer as well emergent lithography, do you think this R&D level on an absolute basis is something you can maintain, going forward?

Or will we look to see that ramp up in the near future?

Thank you.

The second one, first if I may.

Our position is that we have ramped down on the expenditure.

Don't forget we designed, built, launched and introduced a twin-scan(ph.) in the period 1997 to 2001 and that took a lot of R&D activity that is now largely behind us.

That helps in reducing our R&D.

Equally well, you comment on the two major programs for next nodes(ph.), that is 193 immersion(ph.) and 157.

At this point in time, different customers show a strong interest in both and therefore it is our obligation to give them, if we can, what they want.

So to answer your question - in a nutshell, yes.

We can maintain those two programs and EUE(ph.) and the other programs that you are not aware of yet, within our R&D spend that we have today in absolute dollar or euro terms.

It is not to say that we won't continue to reduce it as we see fit, if programs allow, nor at some future point would I say that we wouldn't increase it as well.

But right now, the trend that you have seen will level out and there will be another small reduction perhaps next year as the second reduction in force takes effect in the middle of next year and yes, we can do all the programs, including 197(ph.), 157, 193 immersion 157, should customers require both those programs.

That in itself is a question which we are prepared to wait for the answer from our customers.

On the first one, I don't know frankly off hand really the split between Microprocessor, Micro-controllers and Logic, those two paths you mentioned, the 70% and 80% of our [indiscernible] use.

Frankly, we have customers that do some of each and therefore, if I may say so, not a particularly interesting question as to how we categorize them and I am certainly not going to indicate you what the customers are within those segments.

You may be able to guess yourself, some of the names in there.

So, if I could suggest that you ignore that detail and look at the two combined Logic or MP or MCU and that is sufficient for our purposes.

With respect to your original question, you have to remember that many of those customers have perhaps that part around the world, so we specify the region to the physical destination of the tool not where the [indiscernible] customers were held.

Okay.

That's very thorough.

Thank you.

That by the way was Peter Wennink.

Many of you know him.

He is the guy who keeps me honest on the numbers.

Next question, please, operator?

Thank you, sir.

The next question comes from Mr. Uche Orji.

Please state your company name, followed by your question.

Hello guys.

Uche Orji from JP Morgan.

I have two questions.

One is on gross margins and the second is around what do you expect in terms of orders coming into 2004?

Gross margins.

How do we think about the trend of gross margins into Q4 and into next year, actually giving that the negotiations with Walkers(ph.) Council is being delayed a little bit?

So how do you think this will trend and when that competition is done, how much impact do you think that will have on your margins?

The second question is that it looks like all these [indiscernible] orders could be due to be shipped in the next six months.

What is your expectation of 2004 orders essentially?

Do you think that this is yet to come, or are you just going to help us characterize expectations for next year?

The gross margin that it would be fair to comment on, is the historical gross margin and you may assume from the backlog that we have on the books right now, the 91 systems, of which I explained 85% [indiscernible] very quiet in the next six months.

Clearly we know the gross margins on those orders and indeed the gross margin will continue to trend upwards in the next quarter or two.

That is as far as we are prepared to go.

We have no visibility on the size or mix or volume of orders for beyond the middle of Q2, which is normal these days in this industry and therefore when we know that, and we report that to you, then you will have some idea of the gross margin potential from it.

As you know, Uche, it is very important to know the volume, because volume is the important line before the gross margin and as Doug said, we don't have a very clear view as to what the volume for 2004 will be, because our backlog is 85% for the next six months.

So that is a question which is very difficult to answer right now, but historically we see gross margins trending upwards for the next two quarters.

I think that in a way that answers the questions also regarding next year's orders and volume and the Q4 backlog.

We will know the end of the Q4 backlog 13 weeks from now and at that point we will report it.

However to try to be more helpful there, as I explained to the last questioner, orders always come in lumps from customers and if you get two or three customers at once, it is a big lump.

That could happen in Q3, towards the end of Q3.

It would be unreasonable to expect that to be the same in Q4 and therefore I don't think you can draw any trend graphs from the Q3 backlog increase.

Just a quick follow up on that.

In terms of the breakeven levels, you are programmed to bring breakeven levels lower.

Where are we now?

We are not [indiscernible].

Follow-ups are okay, but they take time from other questions.

We are on time with the break even, okay?

Perhaps we should announce the next question.

Thank you sir.

Our next question comes from Mr. Oliver Brugen(ph.).

Please state your company name, followed by your question.

Hello.

It is Oliver Brugen from Peter Kavanagh.

I have a question on 157 and on the [indiscernible] of 157.

It is lower than in the previous quarter.

Have there been cancellations as suggested by TSNC(ph.), or have you shipped any 157 tools during this quarter?

I won't comment on the TSNC(ph.) because it is not appropriate to comment on customers, specific paying customers.

But to answer your question it has gone down for the good reason that we shipped two.

12s(ph.)?

22s(ph.).

Two different customers?

Yes.

Going forward, how do you feel you are in terms of 193 Immersion development, compared to competitors, meaning when do you expect to see a Beta tool or an Alpha tool and when do you expect to be in volume production, if any?

I think the simple answer is - and I will keep this fairly short, is that whenever our customers want 193 Immersion for production, we will have it ready for them.

Okay.

But do you have plans to ship Beta tools yet?

Yes.

We have plans to ship tools.

But in Immersion?

You are only talking about Immersion, right now?

Yes.

Yes.

And the timing for that?

When we ship them and [indinscernible] launch the product, we will let you know.

Okay?

Okay.

Thanks.

Thank you sir.

The next question comes from [indiscernible].

Yes, it is [indiscernible].

Two quick questions.

One, can you comment on what your service income was or [indiscernible] revenue was this quarter and secondly, maybe it is possible to identify how many customers in the past two weeks placed this lump of orders?

I will take the second one, because it is very simple.

I don't know, between two and four, okay?

That is as close as I can get.

I don't see an accurate track of every customer, every day.

Regarding the service revenues, I will hand over to Peter to give you more detail on that one.

The service sales were around the €57m in the second quarter.

Thank you.

The next question comes from Mr. Tom Leach.

Please state your company name, followed by your question.

Yes.

It is Tom Leach from Bennett Lawrence.

Forgive me, I don't know your company that well, but I am looking at the backlog number of 91 machines.

Could you break that up for me as to how many of those machines are in which different geometries?

In [indiscernible] numbers, I should say.

If you have an online facility there, I could refer you to our presentation, slide 12.

It does tell you there precisely by value, not by number of units, but by value what the backlog is by technology note.

So 47% is €248m, 42% is €193m and then there is a bit of 157nm and 365nm in there as well.

That slide is up on your investor site?

Yes.

Slide 12 is the one you want.

It is by value, so you can't take 47% of €91m, you take 47% of €859m.

So it is very, very roughly 47% is €248m and 42% is €193m.

Thank you so much.

Thank you, sir.

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

Please state your company name, followed by your questions.

Hi, gentlemen.

This is Jean D'Anjou from CSFCB.

I have one quick question.

If I look at what happened in the last two weeks of the quarter, and these rush orders at the last minute, were you surprised by the timing, or were you surprised at the size of the orders from this client?

We were not surprised by the size because we are in discussion with clients regarding their orders for many weeks and often many months and never surprised in the terms of the size, plus or minus 10% or so.

The timing is always a surprise, quite frankly, because customers always say 'we are ready to place orders', and then they haggle and negotiate for three or four more weeks and another couple of weeks.

Then lo and behold some day they pop in with the piece of paper.

That is how it was at the end of Q3.

So the timing of orders is always a surprise to the nearest week or two.

But the size of the order is not usually a surprise within plus or minus 10%.

As I say, it was a gratuitous synchronous activity where two or three deals we had been working on, that we knew would come up sometime this year popped in at the end of some of our customers' fiscal year, for fiscal reasons and, yes, we were very delighted to receive them in the last part of September.

Okay, then I have a very quick follow up on Discontinued Operation.

It is safe to assume that you will show no loss starting in Q4 on that front, after the agreement you have reached for the Thermal business?

I have my hands around my CFO's throat - yes.

The answer is yes.

Thank you.

Thank you, sir.

The next question comes from Mr. Johannes Reece (ph.), DRK in Frankfurt.

Good afternoon.

It is Johannes Reece, DRK in Frankfurt.

First a question with regard to the order intake and maybe the implication for the forthcoming quarters.

Is it maybe right to say some of these have worked down a little bit early?

Is the pipeline that you are seeing for the rest of the year?

On the other side looking at what we see at the semiconductor company side that the utilization is permanently moving up, especially at the high end.

But what this may be from the pipeline prospectus you are feeling for next year?

Okay.

A couple of good questions.

I think that you are right.

I think your words were locked down, some of the orders that we expected to take between September and December of this year.

They actually came in September, so that was great.

We are always pleased to receive orders early, but having got them once, you don't get them again until that order base runs out, so you are correct on that one.

You are also correct that most IT companies are using their capacity at a very high level of utilization. 90% and better.

Certainly for the high technology at the leading edge, 95% and sometimes better.

They will continue doing that until they have the courage of this sustainability as the last three or four quarters growth that they have been seeing, continues into the indefinite future.

I guess they will then relax a little bit and place longer term orders.

So think for the next quarter or two we can expect to see that kind of cautiousness continuing.

In fact many CEOs of our customers have made those public statements.

We are seeing still very short term orders just covering one or two quarters out, which obviously puts pressure on our cycle time, but we can respond to that.

We are seeing our customers tell us, precisely what I tell you, that they have little courage and visibility beyond the six months period, and therefore steady as it goes.

It has been a nice ride for the past three or four quarters.

Everyone thinks it is going to continue, but let's not assume too much here and take each quarter by quarter.

Maybe a follow on question regarding the ASPs of the backlog.

It is a little bit lower than ASPs that you have received in Q3.

How much can we see this as a sign that you have peaked at that quarter and that you have maybe given a bit more discount like a software company, which is coming closer to the end of the quarter and maybe is more open to give maybe another percentage discount to the list price?

Is it unfair to see it in this way?

I am going to give you a quick answer because others are waiting and I feel it has been a long set of questions.

The ESP is also a function of the mix of products that we have in the backlog and we sell.

We have some that sell at a few million and some that sell in the teens of millions.

Therefore a little shift on mix makes a big swing on the backlog on the ASP.

I kid you not it still isn't an easy sellers market out there.

We do occasionally come under a little bit more pressure on pricing than we used to, perhaps in the year 2000.

We can handle that, and we have cost reduction programs that will neutralize the effect of that.

The prime reason for any ASP shift, I think is more a function of mix than anything to do with discounting and price pressure.

Okay, thanks.

Thank you sir.

The next question comes from Mr. Steven Pelayo(ph).

Please state your company name followed by your question.

Steve Pelayo with Morgan Stanley.

Peter I am curious about your slotting(ph) plans from a manufacturing standpoint for the remainder of the year?

I assume all those manufacturing slots are taken up, is that correct?

You cannot do any more turns(ph) business through the end of the year, correct?

That is correct.

You could say that is largely correct because we now have 2.5 months left before the end of the year.

Perhaps on some Stepper inventory or a lower [indiscernible] Scanner, we can do a [indiscernible] but you shouldn't expect miracles there.

In light of the manufacturing [indiscernible] being locked up a little bit here, I am curious about your customers posturing, or mentality about lead times, and if they are starting to stretch at all?

If they are actually starting to get an increased sense of urgency to get involved sooner rather than later, if you will [indiscernible]?

I think if you look at what we have said before, that sale to order backlog, what we're seeing is 85% for the next six months.

They're still very short term focused.

If they really want to get in line and get long-term focus, you will see that the order lead times will start stretching also.

The percentage of the six-month maybe will go down, and the second six months will go up.

I don't think that has actually been happening yet.

We were slightly above 90% in the second quarter for shipment in the next six months.

We are 85% now, so you could say it is a trend down, but it is very minor.

My last question was just relative to - when you look at your backlog, Doug I think you said it was unrealistic to extrapolate.

I'd love to see 47% quarter-over-quarter growth every quarter.

We do Steve, we do.

Yes.

When you think about it going into the fourth quarter, you guys have obviously some phenomenal bookings this quarter.

I would imagine those bookings decline, but do you think the backlog declines?

Over the fourth quarter period Steve?

Yes.

That is tough.

Because as you know, we were surprised with some order intake at the end of the quarter, coming in a bit earlier than we thought.

It could happen I guess in Q4.

I would not be at all surprised or even concerned if the backlog were to reduce in this coming period.

Okay.

When you look out at these charts you show us from a regional perspective and from an end-use perspective.

Where would you expect them to look at the end of the year?

Do you expect any major changes one way or another?

Are you looking to a specific region or a specific type of customer for the fourth quarter?

That's quite a heavy question.

I cannot give you a thoughtful answer there Steve, so I will decline to do that and cut you off at this point.

If you come back to our IR guys they might be able to help you there, but essentially not.

I suspect Taiwan may start over the next few quarters to build itself again.

But it is tough to give an honest valued judgment there.

Okay, fair enough.

Thanks Doug.

Thank you.

The next question comes from Mr. Nash Herrar(ph).

Please state your company name, followed by your question.

Hi gents, good afternoon, Nash Herrar of Citigroup.

Two quick questions.

Firstly at the end of the second quarter you actively cleaned up your backlog.

You took some orders, which were out of the 12-month range and put them off the backlog number.

Have you seen a trend from those customers to start pulling those orders back in again?

Secondly Doug, or Peter, you have highlighted the options program that you started with up to three customers at the end of June, and potentially rising up to six.

Would you be able to give us an update on that as well?

Thank you.

On your first part, the quality of the backlog and the fact that we took out what we thought was suspicious or suspect orders and didn't worry you or ourselves with them.

I think one or two of those have come back in again, because customers finally came clean and said they wanted them.

It is a small amount though, so there isn't much of that.

So we still have a very clean backlog in our opinion.

Regarding the options, I will let Peter comment on that.

We didn't see any change in the number of customers that have signed up for the program, but we are expecting one or two to be very interested in something like this before the end of the year.

So no big changes there in the third quarter.

That's grand.

Thank you very much.

Thank you sir.

The next question comes from Mr. Jim Fontanelli(ph).

Please state your company name followed by your questions.

Hi, [indiscernible] Research.

My first question, what impact do you think the likely introduction of immersion is going to have on your margin and revenue profile, over the course of the cycle?

Is it a benefit?

The answer is yes, for two reasons.

It is a more complex tool and I think we will be out there early with a superior product, therefore, the ability to generate somewhat higher margins.

Also it extends the economic life of the node.

Clearly we benefit from the continuation of the node without having to jump ship and moving to a new node.

So it extends 193 potentially by another year or two, and that is very helpful to us.

I'll just put a plug in there if I may for our solution to immersion?

The fact that we have two chucks(ph) is a serendipitous advantage, because it means that all of the meteorology that has to be done under water with our competitor's products, can be done on the beach so to speak.

Our meteorology chuck, therefore we can measure accurately in dry, and then do the imaging under water.

Measuring under water is much more complicated and prone to errors for our customers.

So you should watch that very carefully with us.

Your next question was?

Sorry, can I just clarify that?

Do you expect the margin benefit to be versus the 157 units, which are presumably pushed out by the extension of the immersion?

Or versus twin scan without immersion?

I think the answer is both.

It is not certain that 157 will be pushed out actually.

That is to be decided, I have my own opinion on that, but that is not for discussion right now.

It depends upon the customer's requirements.

Those who want 157 will get it, and therefore I imagine we will shift both in parallel.

Although I think nature has a way finally of picking the winner through some natural selection process here.

The margin will benefit I guess for both reasons.

Okay, great.

Just quickly can I clarify, on the last question you said a small number.

Would that be sub 10 for the scrubbed back re-entering the third quarter?

Yes, sub 10.

Very much sub 10.

Thank you sir.

The next question comes Mr. Jonathan Mennin(ph).

Please state your company name followed by your question.

Most of my questions have been answered, but I have two small ones.

You have said that the signs of recovery you see are riddled with inconsistencies.

Apart from the fact that you are getting 50% of the orders in the last week to the quarter, then you might see a bit of weakness after that.

Any other glaring inconsistency that you see in this recovery?

Are you confident that this is going to shape up as a recovery?

My second follow-up question is - your services revenue seems to have declined quarter-on-quarter, quite a bit if my numbers are right, they could be wrong.

I was just wondering what the reason for that could be?

The inconsistency part really reflects two things.

One is the hesitancy, the conservative approach, the caution, the lack of courage in one sense of our customers in giving anything more than a three to six month, or even two to six month backlog of orders.

That is not entirely consistent with previous upturns.

This may well be a break the mould situation here.

Then there are some more kind of macroeconomic issues around, like in the USA growth, but still a loss of jobs.

So many inconsistencies around, that is why I used the phrase riddled inconsistencies.

But underneath all of that I am absolutely convinced that the past four quarters of growth for our customers, will continue for some time to come yet.

Is that another four quarters, another four years?

Time will tell.

Therefore I have enough conviction in what we have seen so far, to say that the upturn that has been actually with the industry now for a year will continue for some time to come.

It is a relatively modest upturn by previous standards, and it has not yet hit the equipment industry big time.

It may never hit the equipment industry big time.

It may be more of a kind of gentle upturn.

But let us make no mistake, the backlog that we saw grow in Q3, although to some extent is one offish because of [indiscernible] events of customers, is also indicative.

I think the utilization that our customers now experience in their factories, and the growing confidence that they seem to have, makes them a little bit more inclined to splash out and place the orders with companies like ASML.

[indiscernible] your question on the service sales that is correct.

It has [indiscernible] that it went down.

There are two reasons.

One reason is that at this time, when customers are focusing on cost reduction in their [indiscernible].

When they come up to the point where they need to renew a service contract, they negotiate contracts with low service levels, so that they can actually [indiscernible] that is one.

Also the sales of [indiscernible] options as separate over time.

Another reason in this quarter is that we used to have the service business for the track(ph) business, which we saw, which was an integral part of our [indiscernible] service operation, which went up in the second quarter, so you can see the full impact of that in the third.

Peter if I may ask one more question?

The value of option that you are selling, where is it being recorded?

Is it in the backlog or in the services?

You should see the options as a prepayment.

It is a financing structure.

It gives the holder of that option the right to demand the delivery of a product within a certain time.

So it means if you buy an option, which is basically your prepayment [indiscernible], you have a piece of paper that when you hand it in at ASML you know you will get your tool in four or five months.

So when you finally ship the tool the option premium will be deducted from the ultimate price of the tool.

So every option you sell will have an accompanying entry into your backlog number?

No, because it is when they pull it off, is when it starts getting into the backlog.

Basically the customer tells us when they want to exercise their co-option.

Okay, thank you very much.

Thank you sir.

The next question comes from Mr. Jay Deahna.

Please state your company name followed by your question.

J P Morgan.

If you guys look at your manufacturing slotting activity, does it give you some level of confidence that the bookings for the next quarter or two are going to be reasonably robust and potentially up sequentially in the fourth quarter?

My second question is, I notice that the backlog on your refurb business is substantially higher.

Have you seen a potentially permanent mix shift to higher end refurb systems?

That's it, thank you.

Your first question, which I think I understood.

The backlog in Q4, the orders on the books in Q4 for delivery over the next 12 months, may well reduce.

I don't necessarily think that the order intake will continue at the pace it did in September.

Having placed the orders once, they won't place them again for a few more weeks or months, that's for sure.

So it is quite likely that our backlog at the year-end may be down.

I don't have any concern about that.

I think we will still continue to take good solid bookings.

I suspect that in one of the first two quarters of next year, we may well have another good booking period to refuel the second part of next year.

That is how it is working out these days with our customer's kind of characteristics.

Does that take your first part, did I understand you correctly?

Is that commentary based on your slot [indiscernible] plan, right now, which comes before hard copy purchase orders?

Or are you just basically being conservative and if your customers decide to get excited as the quarter progresses, then potentially that could be different to the other direction?

You must come and visit us again Jay.

We don't have a slot list these days, we have moved to newer and better ways of planning our production.

So far let me just say that, although we had a good surge of orders at the end of Q3, we have had to disappoint no customer with deliveries.

I don't imagine that is going to be the situation for some time yet.

Then on the refurb?

What we have seen Jay is an increase of the refurb.

We have seen a couple of things there.

One is that the activity level of refurb systems, or secondhand systems, or used tools as we call them, has gone up over the last quarter.

That is an indication that there is a need for some of those tools, and it is not all like we used to see, Steppers, it is definitely also used Scanners.

Which means that there is a certain capacity need for those tools, but the customers don't have the CAPEX budget.

So they still try to extend their capacity without paying the full amount for a new tool.

That is a trend that we have seen over the last two to four months.

Will that continue going forward, that potential, the availability of those tools?

The reason why we started giving the refurb information in the backlog is that now for the first time we are seeing secondhand demand or used demand for Scanners, which, of course, sell at a significantly higher price than the Steppers.

Which used to be the only used business that we had.

Yes there are a few trends.

It is trending from Steppers and also into the Scanner world.

There is some more activity.

That means that there is more demand and more opportunity for us to book and to ship those systems.

Are your margins higher on the refurb Scanners?

It is very different.

The secondhand business is a fast turn around business.

It is driven by the demand from our customers and our ability to get a tool, a Stepper or a Scanner quickly.

In one instance you will be able to find it quickly and get a good margin, in another instance you don't have a very good margin but you satisfy a customer.

So it is very lumpy, it is not something that we control very well.

It all depends on the demand and the availability of the tools.

Thank you.

Thank you very much sir.

The next question comes from Mr. Nicholas Gaudois.

Please state your company name followed by your question.

Deutsche Bank.

My first question on the order backlog.

In terms of the orders you saw in Q3, were there any that were incremental surprises from what you were expecting initially, for orders for the whole of the second half of this year?

Or again is it purely timing in terms of the strength?

My follow-up question is on product margins for Twin Scan(ph)?

Mostly timing.

Mostly timing okay.

We don't get every mix quite right, and the customer sometimes comes through for a few more.

I would say there were more positives than negatives this time around.

In the past they have been negotiating for maybe 10 systems and they will end up placing orders for 8.

This time they negotiated for 10 and they ended up placing orders for 11 or 12.

So I you like, the trend has gone on the upside, rather than the downside, but it was mostly a timing issue.

Great.

In terms of product margins.

You have [indiscernible] recently that your cost for the Twin Scan could come down into 2004, due to both redesigning and also use of dual supplies for mechanical parts in particular.

Could you elaborate a bit and tell us about how much you think costs could decline for a Twin Scan next year?

I don't think with respect, we will give this information to you.

It is a competitive position we are in right now.

Let me just confirm to you, we have very well put together plans for cost reductions for the next two years actually, not just for the next 12 months.

Some are far reaching, some are less far reaching.

They will ensure that we can maintain and support the kind of margins we used to get in the peak periods, once the volume recovers.

The volume is a key [indiscernible].

But we certainly are not going to discuss the kind of cost reduction percentages that we have identified for our product, no I'm afraid not.

Thank you.

Thank you very much sir.

The next question comes from Mr. Ali Irani.

Please state your company name followed by your question.

Good afternoon gentlemen.

Ali Irani with CIBC World Markets.

I have a number of questions for you.

One, I was hoping Doug that you could talk a little bit about the swing factor at year-end.

A number of your competitors or peers in the equipment business are talking about some fab activity that's [indiscernible] to book, either early January or early December.

I am wondering if you have taken this into account yet in your expectations for bookings and backlog in the fourth quarter?

Yes I think we have.

I have kind of hinted and said that I think the backlog could well reduce in the fourth quarter as we ship off it and don't replace it because of timing of next big buys.

I think they could well come in Q1 of next year.

So Doug, your bat right now is those for you, the swing orders would come in the January onwards time frame?

We don't get that kind of [indiscernible] data, but it isn't going to come in Q4 I am pretty sure.

Peter, I am hoping that you could give us a little bit more perspective on the cost structure.

In addition to the head count reduction; you have been on a very aggressive swing to adopt new suppliers in the US in particular.

I am hoping you can give us some granularity there.

Finally Peter also on pricing, with the...

The cost structure on the product, do you mean?

On the supply side, the cost of goods, exactly.

Also if you could give us an idea of pricing and whether, like [indiscernible] last night you are seeing OEMs like yourselves take a firmer stance on pricing?

You mean the OEMs being the suppliers to the industry?

Exactly.

ASML for example.

People like us.

We always take a firm stand on pricing that is my first comment on the last part of your question there.

Our stand hasn't shifted on that one.

I guess in one or two occasions in the past 12 months or 3 or 4 even, we have been more inclined to consider strategic order taking and therefore buys from our customers.

But we still maintain a price premium over our competition, and we still have an intention to maintain that for the rest of our natural lives or even beyond.

Without going into a lot of detail, because as you understand if we give out very detailed information about our cost of goods reduction and the percentage of total cost, that would benefit our competitors we think.

But what I can tell you, because the goods reduction are focusing now mainly on the redesigned.

You basically make the tool more efficient.

We have not doubt about the effectiveness of our tool, as a matter of fact the reliability of the Twin Head Scan is now above what we actually planned.

So the cost of goods reduction is really an effort encompassing all elements and all modules that form our tools.

It is largely driven by the redesign efforts of the mechanical parts, of the electronic parts and also including the lens.

I don't think I want to give more focus there but it is going to be substantial, that is why we feel that we can safely say that at least for the next two quarters we do anticipate an improving gross profit.

Sorry, we are running out of time.

I'd like to try and give everyone a chance.

If there is time at the end Ali you are welcome back to ask your next question.

Thank you sir.

The next question comes from Christina Osmena.

Please state your company name followed by your question.

Christina Osmena with Needham & Company.

If you are willing Doug, could you gives us a revenue split for the third quarter between [indiscernible] 193 and 248 please?

Secondly, if you were expecting the timing of the next big orders to occur in Q1 and shipments have already been - [indiscernible] have already taken place for six months out.

What kind of lead times do you think those Q1 orders are going to have to have to reflect?

If I take your second one first, one of my colleagues is looking at that split you asked for between I-line(ph) and so on.

I explained that the backlog of 91 systems, €850m or so is 85% required(ph) in the next two quarters.

We run out of steam, if you like, in Q2 of next year.

So we are expecting to take orders, continuing orders all the time.

But if there are any more peaks late this year, early next year, by my guess, they will begin to fill up the Q2 and Q3 backlog.

The kind of lead time we are getting is sometimes aggressively two or three months, but certainly three to eight months is a kind of lead time we are being given these days by customers.

Which puts us under pressure around production, but that is the kind of pressure we like these days, after the last two or three years of famine, that we have been suffering from.

Regarding the split between technology, I think we are going to have to draw a blank today in this room.

We give it six monthly.

So we will give it to you at the end of the year, for the six-month period.

But I would suggest it has not changed substantially from the middle of the year point.

I have probably swung towards 193 a little bit.

Okay, thank you.

Thank you.

The next question comes from Mr. Stuart Adrian.

Please state your company name followed by your question.

Hi.

Morgan Stanley.

Post Q2 you mentioned two real things that gave you some confidence for the second half, in terms of ordering would be better than the first half.

First off with five or six big projects and secondly you talk about the release of 2004 capital spending budgets.

Do you think that we have seen all of the projects that you expected in the second half of the year already in Q3?

Or do you think there is more to go in Q4?

In terms of '04 spending budgets, again the same type of question.

Have you seen the majority of what you expect, or do you think that's really going to be a fourth quarter phenomenon?

We haven't seen all the deals come through yet Stuart.

We are going to book quite a bit in Q4, probably we will bill more than we will book, probably, who knows on the timing issue.

Therefore I keep saying the backlog may go down, it will not be a great concern to me from kind of a structural point of view.

I think the release of customer capital budgets, which takes place in October/November, [indiscernible] now kind of thing; they are firming up their budgeting plans and so on.

We will see that translating into orders for our Q2 and Q3 probably at the end of this year, a bit of it, and some of it at the beginning of next year, which is why I think we are going to see the order ramp.

I could be wrong in a pleasant sense and see it all happening Q4, I don't kind of believe that will be the case.

I think it is going to come through into Q1 next year.

Peter, just in terms of operating working capital expectations for Q4.

How do you expect inventories and accounts receivable and payable to move?

As you saw in Q3, both the gross working capital elements, accounts receivable and inventories went down.

Also a turnover of sales and cost of goods.

I think that trend will continue in the fourth quarter.

What you saw in the third quarter was that we used about €49m in cash from operations, but that has to do with the fact that we basically paid off some accrued liabilities, for instance the appeal case, which we accrued over the last 12 months, we were paid in the third quarter.

There were some restructuring charges paid in the third quarter, so I would [indiscernible] incidental payments in the third quarter referring to those items of about €60m.

I think the trend will continue and we will generate cash in the fourth quarter.

Great, thanks.

Thank you sir.

The next question comes from Mr. Michael Bryant.

Please state your company name followed by your question.

Michael Bryant from Sound View.

Doug I think I heard you say something to the effect that Taiwan may start to build itself again over the next few quarters.

Does that mean that the boundaries haven't started to order in any kind of major way, so they were not part of the surprise to orders in the third quarter?

You have a way of putting words in my mouth.

In fact there was some foundry(ph) business in our third quarter numbers.

It is also a fact, if you look at our distribution of backlog that it is still un-typically Taiwan light.

My comment was merely focused on that.

I think we will see growth the memory segment continuing and we'll see growth in the foundry segment continuing to pick up.

It has peaked and run a little bit faster.

We had significant sales in China also, which is foundry as well, by the way, as you recognized.

Understood.

I was talking about the Taiwan foundries on rebuilding themselves.

Could you talk a little bit about 193nm competition?

Are you seeing any increase there or do you still think you have a pretty sizeable lead?

Yes, I am bound to say I think we have a sizeable lead.

I really believe that as well, but I am bound to say it anyway.

There is competition, it is primarily a paper competition, but still it can be effective.

You know we have glass and steel that works and the competition has - compared to our specification products, still paper replicas of glass and steel that might work in the future.

I guess they will work ultimately.

But still when the sharpness of urgent demand from our customer is not there, and they can afford to wait a quarter or two, a paper solution can sometimes look attractive and at least stall him placing the order.

So we have to compete with that, but when it comes down to imaging on real silicon with 193, I believe we could modestly say that we have a significant advantage over the competition, whoever they may be.

Okay, thanks a lot.

Thank you sir.

The next question comes from Mr. Andrew Griffin.

Please state your company name followed by your question.

Hi, I'm with Merrill Lynch.

A question for Peter.

I wonder if you could just run through your cash flow objectives that you set at your analyst meeting, just over a year ago, and just talk about how that has panned out over the last 12 months please?

If you take those cash flow objectives and look where we are now.

We had a target of €500m and we have beaten that target, close to €700m.

The problem that we currently have is that at that time we did not foresee the operating loss that we have incurred in this year, because of the market.

I think this is a big difference.

If we look at the working capital element of it, we have met that 12-month target.

But the operating line was significantly worse than we expected at the time.

Are there going to be any other one-off tax effects?

I know there were some deferred tax effects in the last 12 months.

No.

So basically working capital and your operating profit are going to be the keys going forward?

Yes.

Thanks very much.

Thank you sir.

The next question comes from Mr. Ori(ph) Paltar(ph).

Please state your company name followed by your question.

Hello, I'm with Lehman Brothers.

Two quick questions, I was just wondering whether cost of goods sold benefited from the head count reductions in Q3, and whether I can model OPEX, SG&A plus R&D at around €110m in Q4?

Then I have one quick follow-up.

On the cost of goods side, that has not benefited yet from the announced reductions.

As we said most of the reductions will take place in the Netherlands and we foresee some delay in the implementation.

The last part of your question was?

Operating expenses, SG&A, R&D, should I model €110m roughly flat for Q4 or will that move higher?

I think we can model what we have seen now in the third quarter, where R&D is probably going to be going forward between €65m and €70m a quarter and SG&A between €50m and €55m.

That depends really on the R&D side, on the timing of some of the material.

Okay.

One quick one on the options.

If I understand it correctly, basically you are using the down payment to buy certain long-lead time items?

That is correct.

Therefore reducing the lead-time for your customers.

Should we then not expect as more customers sign up for that, that your order intake will - the amount of customers queuing in slots becomes less and less.

Therefore the order backlog numbers will tend to be lower than they perhaps were historically, and therefore also your long-term visibility will tend to be lower?

One, I think the effect of the program is still marginal.

But it will have a significant number of customer sign-up that will at least mean that we would have increased the flexibility, because we would have secured the long-lead time items.

That is up to the customer, when they want to call the option.

You always have the issue where you have a lot of customers doing that, and they all come at the same time.

It will give pressure on the factory, but that is not the situation right now.

I don't think that program has an impact right now on our backlog or on the visibility that we currently have.

Thank you.

I think we have time for only one or two more questioners' operator.

Thank you sir.

The next question comes from [indiscernible].

Please state your company name followed by your question.

I have a follow-up on the gross margin please.

Can you tell us how much of the improvement in Q3 was due to improvement in 200mm margins?

Also, where do 300mm gross margin stand versus 200mm products?

I think the improvements were largely in the 300mm field, because it concerns cost reductions.

Those are most prominently in 300mm.

I don't think we are going to give any break down on the profitability of 200mm and 300mm margins, because of competitive reasons.

But generally 200mm margins have always been higher than 300mm. 300mm is improving that's as far as I'm going to go.

Okay.

Just another quick question on your breakeven target of 130 units.

Is this the order of the day?

What are the measures that you are going to take beyond the workforce reduction, to reach this target?

This target was mentioned taking into account the workforce reduction, but also as we mentioned last quarter, we have an efficiency action going on, which means we are consolidating certain operations.

We are selling off buildings that we don't need, so it is a comprehensive package which includes lay offs and includes the reduction in the number of people, so you could say that €130m break even target is still there.

The only thing that we want to mention is that here in the Netherlands, because of the anticipated delay of the execution of the program here, is that the €130m break even point will be reached at about a quarter later than we anticipated.

Thank you.

Now, one last question please.

Ladies and gentlemen, the last question will be from Mr. Sekar Hominick.

Please state your company name followed by your question.

Good afternoon.

Prudential.

Doug, a question.

First of all congratulations on a very, very impressive order number.

My sense of view is 53 new units and previously we were expecting 27 to 30.

Is there a risk that [indiscernible] that the new orders in Q4 are going to be lower than what you had in Q3, likely to be lower - is there a risk that basically we inverted Q3 into Q4?

So it could be as low as 30 or so?

First of all, thanks for your compliments on the order intake.

It happens that our EVP of Sales is here, so I will pass your compliments directly on to him.

Dave?

All for one silly compliment?

Chasing funds in the last thirteen quarters.

I think that the number of orders that we will take in this half year are probably at the top side of our expectation.

Quite frankly I don't get too excited about whether the order comes in during the last week in September, or the first week in October.

To me it is incidental.

Getting the orders in [indiscernible] means a lot to you guys, and to you guys and my CFO because we stop the clock on the end of September and we will measure ourselves then.

But that is a fictitious situation really.

So I am delighted by the way we are taking orders from new and old customers and by the [indiscernible] acceptance, and I just encourage my colleague Dave Chavoustie of Sales here, to bring all those orders in as quick as he can.

We don't hold any orders back.

We bring them in.

We drag in through the door, screaming, so to speak, every day of every month of every quarter and that will continue through Q4 as well.

We will see what Q4 [indiscernible] do for us as we go through the quarter.

It could be that they come battling in like they did in Q3, or that there is a bit of a [indiscernible] so that they all come piling in in Q1 of next year, and I am not going to get too excited by either of those two outcomes, because we will know the status through our discussions with customers so finally to take a snapshot of one particular moment in time is just for you analysts, who have to try and deduce from that.

It is fairly easy for us because we know what is happening with customers in real time.

So what you are really saying is that you didn't really see the broadening of projects, but projects were well identified and you got those early?

They were well identified.

We got them somewhat earlier than we anticipated.

That's great.

Not for any real tangible insightful reason, just if you look at the timing and they all came in a little bit bigger than we thought, which is the good news.

It means that our customers really were going out to bid for ten and then finding out that they needed eleven or twelve, which I think is a very positive sign.

We should take some heart from that.

One last tactical question.

We talked of a big increase in MPU numbers.

My sense is that is of the 800 [indiscernible] gorilla.

It is maybe 200 [indiscernible] gorilla.

Am I right?

A family of gorillas.

There are a whole lot of gorillas out there.

There is a whole lot of monkey business around.

I will let you speculate on that yourself.

Thank you operator.

Thank you for dialing in and spending your time with us.

Ladies and gentlemen.

This concludes the ASML half year results 2003 conference call.

Thank you for participating.

You may now disconnect.