艾司摩爾 (ASML) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the ASML annual results 2003 conference call on January 15, 2003.

Throughout today's 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 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.

Thank you Janet.

Just to correct your eloquent voice, it is actually January 2004 but never mind.

Ladies and gentlemen, thanks for listening.

I am going to actually turn you over to Craig DeYoung who will just read out to you the first paragraph, or the first two pages of Winnie the Pooh.

Sorry, the Safe Harbor statement.

Craig, over to you.

Actually, I would also like to remind you of the protocol for the call.

The timing of the call will be one hour and with us is Doug Dunn and Peter Wennink to answer your questions.

We ask that you confine your questions to one with one small follow-up please.

So we can get the maximum number of callers in as we can.

So, having said that, I will remind you that 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 developments; 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.

I missed that Craig, could you repeat?

I will get with you after the meeting.

Having said that, let us open it up for the first question.

Thanks.

Thank you.

Actually, if I may, could I just make two or three sentences just before we begin, just maybe to give the questioners time to gather their thoughts.

So, we are reporting on the fourth quarter and the full year of 2003.

Indeed, a year ago it was a pretty desperate climate for the industry, and those of us who remember that very well, I guess.

What a difference a year makes.

Here we are today with a growing backlog rather than a decreasing one.

A company which has moved from losses into profit in the fourth quarter, and that trend will continue.

A company which was committed to having a cash balance of $1bn by this point in time has achieved it.

Sorry, euros, thank you Stuart.

A company which committed to taking its working capital down and has done so substantially.

A company which also committed introducing a breathtaking range of new products, unequalled before, and we have done that also.

I remind you the fact that we have introduced and taken the first order for an immersion tool, that we have shipped the first two [fill] 157 tools into development centers for customers to evaluate and to learn the techniques for the eventual use of 157, probably as an immersion technology.

And we maintain our leadership position in development of of EUV.

And, of course, when it comes to volume manufacturing, we are a world leader in the shipments of 193 tools destined for real production environments.

So, a very, very difficult year, the worst year ever in the industry, but fortunately saved very much by the fourth quarter, which showed a breathtaking turnaround, and one that I think is built on very, very firm foundations.

Therefore, we can look forward to four or six or eight quarters of sustained solid growth.

And, believe me, I cannot tell you how pleasant it is for me to be able to say that to you.

So, given that small preamble showing where I am coming from on this, I will now turn it over to your worthy selves for the torturous questions I am sure you are going to put to myself and my colleagues here.

[Operator instructions]

The first question comes from Mr. Jay Deahna.

Please state your company name followed by your question.

That would be Jay Deahna with JP Morgan.

Doug, it is unfortunate that the majority of your tenure has been downturn-related.

On the other hand, congratulations on keeping up the product development commercialization excellence while transitioning the company into a focused operating and financially managed operation.

Thanks Jay.

That was not a question, but I appreciate your words.

I am sure as the years go by my successor will do even better.

Here are the questions.

First of all, in light of the fact that you are seeing, I guess you could say, a greater than expected surge in 200mm demand.

Does that change your peak unit expectation for the cycle?

Do you still think it’s in the 700/800 range?

Where do you think it is for the peak for the cycle?

And then secondly, what is the timing now, do you expect the timing to get to breakeven at 130 units and is that all new systems only?

Well, I will answer your questions in reverse because that is easier.

The 130 breakeven point, Jay and other guys and girls on the line, is new systems only, yes.

When we will get to that, I will not be specific to the month or quarter but this year, 2004, we will pass through that, down to that barrier.

First half or second half, Doug?

It is going to be second half, Jay, okay.

I think, to be honest, there is a slight chance in Q2, but most likely second half.

It is a pretty imprecise thing to stab at.

We are looking at our programs that we have on various items, second half, maybe end of Q3.

And only the Dutch part, because we have finalized some of it.

Well, the 130 applies to the world, unfortunately.

Your first question was the number of units for the next peak, right?

New units, I guess, right?

New units.

Okay that is fine.

And you actually gave a pretty good answer yourself, which I would expect of you, actually. 700-ish, I guess, could be the next peak.

Some would have it at 650, some at, I guess, 800, and I guess that is the respectable range.

The next peak I would anticipate being 2005.

It will not reach those levels this year.

I think there is not the impetus yet to get us up there.

Nor is there, perhaps, the capacity with the suppliers around in a balanced way for all the equipment that will go to make up the equivalent in implanters and tracks and other things as well.

So that will be 2005 number in my opinion, Jay.

And you probably got it about right, as good as I can guess as the same number actually.

And to pre-empt, perhaps, part of your question, therefore we can get there.

We can do our fair share.

You can judge yourself our market share.

We are roughly 40% by volume today.

We can get there.

You also asked the mix between 200mm and 300mm.

That is a tough one.

I think right now we are seeing a lot of 200mm because the capacity exists and it is easy to switch on.

It’s existing fabs that are working well, so a bang a few more tools in to get more output.

It is also why the refurbished market is pretty strong just now.

I think that is going to change some time in this year, probably in the second half, as all that refurbished stuff will dry up because people want to use it for volume, not to sell it on to somebody else.

The 200mm spare space will begin to dry up to some extent, not totally obviously.

And people will feel more confident to go populate all the 300mm fabs which are currently only running at 20% of their capacity, their shells, right now and relatively empty shells.

So, I think we are going to see a change in mix towards the end of this year, as 300mm starts to pick up the slack, so to speak, once we have exhausted the 200mm expansion.

That's great, thanks very much

The next question comes from Mr. John Pitzer.

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

Yes, it is Credit Suisse First Boston.

Doug, you started to answer my question, talking about the mix between new tools and used tools in the fourth quarter.

Do you expect that mix to be about the same going into Q1?

And can you talk about overall order trends that you see going into the first quarter of 2004?

I think the Q1 mix, John, just to be precise there.

It is difficult to guess much beyond Q1.

Q3 and Q4 are still unknowns and you heard my comment there.

I think the Q1 mix will be similar, and there will be a fair mix of used tools in there.

We expect, in fact, in Q1 in general terms to kind of beat the usual trend where Q1 is a low bookings quarter.

I would stick my neck out a little bit here and suggest that we can probably see the backlog increase in Q1, both in units and in value.

Whether you measure the value in euros or dollars is up to you.

I would take euros because that is a more conservative view.

So, I think that Q1 is going to be a pretty good booking period because of the momentum that we see sustained through the Christmas break and into January.

I could be wrong there, but I think we are going to buck the trend and see good growth-- Well, not good growth, modest but positive growth in Q1 on the bookings front.

And then, Doug, could you speak a little bit about the 193 immersion tool?

When do you think you will see competitors into the marketplace?

My guess is for about the first half of this year you will be the sole provider.

How many units do you think you can book on the 193 immersion tool?

And can you talk a little bit about the ASP increase you are getting from 193 dry to 193 immersion?

So, 193 immersion is a latecomer to the party, right?

I guess a year ago very few people understood, including myself by the way, the value of adding water, just add water.

I do it to my whisky all the time but never to my steppers and scanners.

It does not improve the whisky, but it does seem to improve the steppers and scanners.

So, it is a new trend, and I have got to say to my organization: Well done, chaps.

To get that out in a year and take the first order was a pretty special performance.

We were, let me say, lucky a little bit.

And you have got to understand this because you have got to place some bets on the company shortly.

The TWINSCAN system is ideally suited for a wet environment, so to speak, in that it has two chucks.

So you can do all the measurements off-line in the dry chuck, without having the problems of refractions on the surface of the water and so on.

Transfer those measurements to the wet chuck for exposure.

So, a big spin-off benefit of the two chuck solution is that when you go to a water-based system, boy it does give a big, big advantage to the customer who can perform measurements in the dry, known, well-tried, well-tested environment.

Also a bit of luck with the bottom service of our lens system, which was flat rather than convex, which allows the water meniscus to better stay with it.

So, we had a bit of luck but still, we got them out in time.

We are going to sell this year between, I do not know, five and ten systems, I guess, of that order.

There will be early development tools for our customers who want to explore the new technology, find out how the water interfaces with various processes and other things.

Learn how to use it, in other words.

The true value of immersion will not come through until you have a lens designed specifically for it, with a numerical aperture greater than one.

In other words, a lens that will not work in air but will work under water, so to speak.

And they will be the real winning products.

And we have got those lens designs coming through as we speak.

And we will be shipping those kind of products a few quarters down the track from now.

So you will see this year a handful or two of tools using development work by our customers.

And then after that, about a year afterwards, you will see the real improved resolution tools coming through with specially designed lenses.

And Doug, you still feel you have at least a six-month lead on the competition here?

If it were only six months, I would feel disappointed.

I personally think it is more than that.

It is difficult to tell because they are good.

We have heard a lot of noise from the competition, but we have got the orders.

And then lastly, Doug.

Two of your larger customers, you have extended these option agreements to them.

I am kind of curious when you look at the Q4 order rates.

Did they include those two large customers or can we expect to see a surge from those guys in the first half of this year?

Peter is the architect of our option program.

He is dying to tell you.

So come on Peter.

It is true, John, that those got converted into cold orders.

So, they are in there.

Let us hear it for Peter, yes.

But more to come, Peter.

Is that the way to think about it?

Sorry, more?

More to come?

Well, those will not be options.

What customers now want, if you offered them an option program so that they can choose that moment in which they can call the order, they call it the moment that they give you the option.

Yes, last year we wanted to sell tools and they wanted to give us orders for options.

This year we wanted to take options, they want to take the tools.

So, I think the option program has served, at least two quarters in 2003, quite well and gave us a liquidity advantage, and gave us an early sight on some orders that we could book.

But currently what customers want is not options, they want tools.

Right, thanks guys.

The next question comes from Mr. Matt Gable.

Please state your company name followed by your question.

Matt, sorry, this is Craig.

Before you start, could I just ask all the listeners and question askers to ask just one question and one follow-up, just in consideration of all the rest of the audience, so we can get as many in as possible.

Thanks.

Go ahead Matt.

Hi.

Just had a question about the linearity of bookings in Q4 and follow-up.

Do you think in Q1 that backlog ASP will increase sequentially?

Thanks.

It is a tough one to call.

Depends on the mix as you know, mostly mix.

I mean our backlog ASP is not disappointing.

It is really a function of the mix.

It is richer in used tools and 8 inch tools.

And, therefore, they do sell at a lower price because they produce less silicon per hour.

So, it is by no means, as far as I am concerned, a negative.

I think one or two of my colleagues on the call in here maybe think it is.

And it is just a function of mix.

It is difficult to tell what is going to come in Q1.

And I think there is still a lot more demand pent up for quick release capacity, which probably means that Q1 will stimulate also a lot of 200mm, and even some more refurbished tools to come into the backlog.

So, perhaps it will be the same mix as we see today and, therefore, similar ASP.

I would like to add to that, Doug.

We did mention that we expect that 300mm demand in the second half of the year will actually increase.

So, that will need to find its way through the order backlog in the first half of the year.

Whether it is Q1 or Q2, that remains to be seen.

What we are currently seeing is indeed this trend of 200mm additions to the capacity of our customers.

But it has to grow to 300mm in the first of the year.

So, that will mean growing ASP in the backlog.

On the linearity thing.

We actually had four good booking months, if you include September in that.

Four good booking months in one quarter is quite good going actually.

So, September and the three months of the quarter we had four good booking months.

Fairly linear and, I suppose, a bit lumpy.

Obviously a bit of a lull over Christmas and the first part of January, as people take their well-earned vacations, but interest still happened strong out there.

So I think we are going to see less of a kind of a rush but a good solid incoming set of orders that will at least equal our outgoing orders.

And, therefore, we will have a neutral, positive book-bill ratio in the first quarter.

Okay, thank you.

The next question comes from Mr. Ali Irani.

Please state your company name followed by your question.

Yes, with CIBC World Markets.

Could you please help us identify, as we go through the first half of the year, what mix of customers you see ordering for new fab build and 300mm asset replacement cycle versus some of the line width improvements?

And how long you see the line width improvement extendible under 200mm fab?

And here, Doug, I am hoping you will give us a little bit of a view over the next 12 months of where you think your new 65nm 200mm offerings are going to play out in this cycle?

Okay, you may be surprised, you perhaps would not be surprised, inside ASML we have different views on some things, and this is one of them.

One of my colleagues in this room, Mr. McIntosh, the well-known Scotsman, believes that 200mm is dead essentiallty, and 300mm is the only investment area that sensible customers will go.

I happen to disagree, modestly, with Mr. McIntosh, and that is fair too.

So, you get my answer, but since we allow you only one question, you only going to get one answer.

So, you are only going to get mine and I will not allow Stuart to give you his answer.

Well then, let me ask for this, maybe perhaps some color.

You have been marketing this product for a couple of months now and capacity in the industry is very tight.

And you would think that there was some value perceived over the next six to eight quarters in extending the life of the 200mm fabs.

So, perhaps, tangibly if you could help share with us what your customers are telling you in terms of potential bookings for those tools?

So, there are a few customers, a randomly select bunch of customers, who have not yet, and probably should not yet, commit to 200mm but they want to go down the next node.

And they are the guys who are expressing interest, and strong interest, in advanced technology at 200mm.

Obviously, if you have a 300mm fab, it is probably-- Well, I would not say a waste of money, but it is maybe not the wisest investment to invest in 200mm leading edge if you have got a 300mm fab empty.

So, those guys are going to be inclined to go more for the solution at 300mm, for obvious long-term, benefit reasons.

So, think about the customers who are big but not quite big enough for 300mm.

Those kind of people, at the leading edge, want to take their existing fabs, which are quite good, well-constructed fabs, and just take them down as far as we can technology-wiseTherefore putting off the point in time they have to commit to an investment, which maybe for them is a bridge too far.

A big 300mm project.

So, there is a handful of customers showing initial interest.

I am sure there will be more pop out of the woodwork as the time goes by.

And we are taking orders for the XT product as we speak.

Great, thank you very much.

The next question comes from Mr. Shekar Pramanick .

Please state your company name followed by your question.

Yes, this Shekar Pramanick for Shekah.

Maybe you could comment a little bit, with the increasing visibility that you have now?

Some of the expectations for shipments?

I know that you do not give a specific guidance but maybe some directional indication for shipments.

And also if you could comment a little bit about targeted operating margins as we go forward?

As you have the cost improvements as we get to the lower break, the 130 unit breakeven level in the second half.

But if you could maybe revisit what the target operating margin is?

Okay, well, look we have got to leave you guys and gals some work to do.

So we tell you what the backlog is and we tell you how much of the backlog is required in the next six months.

And it is 80% of 124, you can do the sums yourself.

It is roughly 100 and three or four systems round figures for the first six months.

That is as far as I am going to go with giving you guidance on what we are going to ship in the next two quarters.

Okay, so, I am sure you can get pretty close from that information and knowing the company.

The other part of your question was operating margin.

And, again, if I tell you all that then arguably we do not need you guys to do the analysis work for us.

I say that with a smile on smile on my face.

We do need you, obviously.

What we will commit to is that we achieved 29% gross margin in Q4.

We are going to commit to increasing that by between 2% and 3% in Q1.

And we are going to commit to a continual quarter-on-quarter improvement through the whole of next year, and probably through most of 2005, by the way, but not in significant amounts.

Then you have got to do your own work on that one to find out where you think we are going to be.

We have helped you with the operating margin by telling you a pretty tight range or R&D and SG&A expenditure by quarter.

And it is in the press release.

So if you cannot get it, please call our investor relations guys.

And from that you can construct a good model, I think, which will get you pretty close to the answer without me committing every number that I think I know.

Okay?

Thanks.

A pleasure.

The next question comes from Mr. Mike O'Brien.

Please state your company name followed by your question.

Yes, Mike O'Brien, SoundView Technology.

Just a question on backlog.

Do you have any significant portion of the backlog that is greater than a year in delivery?

And, if not, when do you think you may start to see some backlog you would be putting on the books of a greater than a year out delivery?

The 99% answer is no.

There is maybe one or two, or maybe three, beyond a year but essentially they are within twelve months. 80% is within six months as we have told you.

The other 20% or 19% of those 20% probably is in the next six months.

So I do not think there is a big tail-off in aging there.

And my colleagues are looking and I think they are saying there is nothing at all.

So not even one, so therefore it is less than 12 in backlog...

So when do we start to see backlogs beyond twelve months, I don’t know.

My first requirement, if I can use that word, is to see a backlog that is between 12 and 6 months.

I’d be quite content with that.

I think orders beyond 12 months out, given the cycle times of our industry on volatility, are probably irrelevant to me.

What is important is my own lead time on orders [inaudible].

I want to see that backlog filling out between 6 and 9 months.

So, I don’t want to see orders beyond 12 months, I do want to see more orders between 6 and 9 months.

But typically, you do see, do you think the cycle will be different that you won’t see those 12 month orders, it seems like typically there’s a panic?

In the past, we’ve never actually told you of orders beyond 12 months, I believe, because we treat it with a degree of skepticism.

So you’ve only ever seen from us a 12 month backlog, even if an order is 18 months out, we’ve not actually, usually disclosed those to you because we think they are misleading to us and therefore, to you.

I think we’re going to see orders’ lead times stretching out and that 6-9 months is my interest point.

Beyond 12 months, I will take them gratefully but I will not talk about them too much because I know that in the next 12 months things can change dramatically.

They could be cancelled or pushed out.

And I think the rest of your question is there a panic?

Well, there is no panic because I think customers are still, 80% of the backlog is for the next six months.

I think there is still caution and that shows.

So there is no panic inside I would say.

Great, thank you.

The next question comes from Mr. Matthew Gale.

Please state your company name followed by your question.

Hello, Goldman Sachs.

A question for Peter on the SG&A line.

I think you mentioned earlier today in the press conference that the variance there in your guidance has a lot to do with the litigation expenses.

And I was wondering if you could just give us an update on the various suits that are going on in the different geographies as far as timing?

What really is the key trigger for the uptake in expenses?

Is it actually when you are seeing significant hearings?

Or is there any way you can predict which quarters we are going to see a big uptake in the SG&A line?

Yes, I think it is very much driven by the hearings.

So the intensity of the hearings.

And that is the result of the legal process, that is driving cost.

What we see there, the major case we have in California.

We have an appeal case on the IPC which serves in the second part of this year.

We have cases in Asia, in Japan.

We have in Korea a case.

Those are cases that are stretching out over a very long period of time.

And in California we are not proceeding very fast either.

We have experienced some delays and it is difficult because those delays we did not expect.

So it is difficult to actually say we will hit a peak in the third quarter.

It might just as well be the fourth, given the fact that the courts might decide to take part of the hearing in Q4 instead of in Q3.

And that happens all of the time.

So it is bit difficult to say we will hit a peak there and then.

I do not expect that the only fixed date which is in the third quarter, which is the appeal to the IPC court ruling, that that will lead to a big increase in cost.

Because that is, in terms of time spent by the lawyers, not a very significant part of the case.

The big money spent will be on the California case.

And that is a case that basically changes a lot in terms of timing.

So it is difficult to say.

Okay, thank you.

Just two quick follow-ups.

So if you had a revenue breakout in Q3, you gave us between 200mm and 300m.

I was wondering if you could provide that again?

And then, finally, a clarification.

Earlier today you were saying you were forecasting that the backlog would be up sequentially in Q1.

And then I thought I heard in the call Doug say that now bookings would actually be up.

Because I know backlog can be up even with bookings down in Q1.

So could you clarify that?

Okay, let me take the second one because I guess you quoted me on that one.

Let me replay it again so we can clearly understand.

So, we have a backlog right now of 124 systems valued at just under €1bn.

What I was trying to say, obviously failed to communicate to you, I am sorry for that, when we meet on this telephone call in three months time, I am kind of predicting, and it is out on a limb a bit and I appreciate that but I have got good reasons, that thebacklog at that point, as we have moved on a quarter, will be higher than 124 systems and greater value than €1bn, by a small amount.

Okay?

That is what I was saying.

Therefore we have to, in the quarter, book more than we are going to build to achieve that mathematical objective.

Understand?

Okay, but you are not forecasting your bookings to be up sequentially?

No, no, no.

In fact, looking at the rate we booked in Q4, I would absolutely say that they will not be up sequentially.

No way, no.

If I gave the impression, then I was dreadfully wrong.

No. bookings will not be up, backlog will be up.

Okay, and then the shipment breakdown 200/300?

For which period?

For Q4.

We can tell you for the half year.

It is on our Web page for the half year, right?

The billings for the second half was 39 for the half year 200mm and 70 300mm.

Sorry, 39 200mm, 31 300mm.

Can we come back to you if we find it.

Move on or we will waste time otherwise.

Sure, thank you.

If we get it we will come back to you, okay?

[Operator instructions] The next question comes from Mr. Peter Testa.

It is Peter Testa from One Investments.

I was wondering if you could help explain what is going on in supplier lead times?

And especially the degree to which it is has been affected by quite a different mix than maybe had been expected by the suppliers?

And whether this has been an issue at all as to why inside 300mm backlog there is a preponderance of 248 rather than a big shift towards 193?

No, to answer the second part of your question first.

The mix of the backlog, both wafer size and node, is a natural mix as required by customers.

Do not forget that the sweet spot for production of integrated circuits these days is still 180nm and that is 248.

And the node going into volume production right now is 130nm and that is still accomplished mostly by 248.

So that is why it is 248 rich.

It is a natural backlog, not a function of what we can supply and what we cannot supply, if you understand that.

The impact on our suppliers.

Well, in a way, they have had three easy years, although not pleasant years.

Clearly we are now upping the ante with them.

We are communicating with them strongly and making sure that they are responding to our needs.

I do not think at this point in time that they are in any way, shape or form, a limitation.

What we have to do is continue working with them to improve their cycle times.

And we have got active programs with all those suppliers to do that.

We have internally, by the way, also increased our internal capacity for module development.

We had some modules, major modules, the most complex ones we have, sole sourced from external suppliers.

We are not performing, quite frankly, on price or lead time or even quality.

And we converted part of our Wilton assets into a module manufacturing capability which has done three things in parallel.

Improved the quality, reduced the costs to us, and improved the cycle time to us.

So we are a little less dependent on some of the people who were difficult to manage previously.

And we have also swapped some suppliers.

So we have taken action on our supply base to try and make it more flexible.

And less dependent on key suppliers who were sole sourced who did not have any leverage on them to improve their performance.

Okay, so effectively your suppliers are not causing you any lead time questions at this point?

No, the lead time questions are actually from customers.

Let us be quite candid here.

I really go on record defending my suppliers but they do have real lead times.

The issue here is that customers have been used to giving orders with low lead times because we had high inventories, and we had lots of capacity.

That is no longer the case.

So the issue is not my suppliers.

The issue is my customers who are going through the process of having to pick up a bit more courage and give longer lead times orders.

Because they are now recognizing I cannot supply a six month lead time product inside six months.

Okay, and as a follow-up.

What do you think your supplier lead times are in the different product classes?

Between six and 12 months actually.

Total lead time from receipt of order to shipment of product, including our relatively modest assembly time internally.

Between six and 12 months, depending on the product type and mix and so on;Lens type, platform, etc.

Right, okay, thank you.

A pleasure.

Thank you.

The next question comes from Mr. Pascal Peton.

Please state your company followed by your question.

KPC (kvc??)Financial Products.

Good afternoon.

I wonder whether you could tell me what the company short-term debt, if there is any short-term debt?

The debt outstanding are two convertibles.

One due in 2006 and one in 2010.

And the 2006 is $575m and the 2010 is €380m.

Well you owe me for last week expenses, Peter, as well but we will not count that.

But when I talk about debt I do not talk about short-term liabilities like accounts payable and accruals.

I talk about debt.

Did that answer your question?

How about the next question?

The next question comes from Mr. Dan Duckery.

Please state your company name followed by your question.

Similar questions that I may push the limit on too many, so stop me if I do.

If we look at sort of the changes.

Stop.

If we look at the changes since last year, the credit situation has improved a lot.

If you hit some of what you forecast to the equity analysts, do you see one burning cash in terms of working capital?

Even with your DSO target in 04?

What do we see, burning cash?

The answer is no.

Even with the working capital build at the second half of 04 and 05?

We hit this recovery?

Correct.

The working capital build, like we also said in the press conference.

We still intend to increase our inventory terms which we also did, by the way, in 2003.

We will continue with that in 2004.

When you look at the profit forecast, as you mentioned the analysts, you have to remember that we do have a quite significant deferred tax asset on the balance sheet which is a source of cash.

It basically means that the tax that we use for accounting purposes is not actually paid.

And together with the depreciation for next year which we estimate at roughly €130m and about €75m to €80m in CAPEX expense, we will add a lot of cash.

But we will also use some cash in working capital.

But with the improved inventory terms, we think the overall balance will be a positive.

So we will generate cash this year.

Okay, you answered my second question on CAPEX.

Last one.

If we look at the convertible, the five and three quarters of 06, the $575m.

That is provisionally callable in October of this year.

Should we assume that you would wait until that was callable and forcing conversion into stock?

Or would you envision calling that even if there was a probability that you might actually pay cash to call it?

That is too early to say.

When we look at the second quarter of this year, 20% of the backlog has to do with the second half of the year.

We all have great expectations of the year.

Let us see how the year develops.

We will take it from there.

Okay.

I mean could you run the company with only €500m in cash?

Yes.

Yes but we will not have to.

Okay, thank you very much.

And, Doug, I was sort of rubbing it in on your retirement statement there.

Thank you both.

Good luck.

Bye.

Thank you.

The next question comes from Mr. Uche Orji.

Please state your company name followed by your question sir.

Mr. Orji, please state your question sir.

I am sorry sir.

We have a follow-up question from Mr. Mike O'Brien.

Please go ahead sir.

Yes, two quick questions.

I do not think in answering John Pitzer's question you talked about the ASP increasefor the immersion tool.

If you can give us an update on that?

And then, can you give us an idea of when you think, or if you think, there will be a unit crossover of more 193nm tools shipped than 248nm in the cycle?

Thanks.

I think in the second half of this cycle we will see 193 picking up.

As we explained earlier, the sweet part right now is 839nm and that is a 248.

And Stuart is just saying to me it all depends on the DRAM guys ,how they perform.

I anticipate 192 will start to pick up part way through this cycle and start to show a clean pair of heels, so to speak, in the second half of the cycle.

Your first part of the question was regarding ASPs for immersion tools.

Yes, they are tools that have distinct advantages when they hit production.

Right now they are development tools and we are selling them for prices in excess of €20m.

Clearly, I am not going to give away precisely what to whom there but that is, if you like, if I can use the pun, a watershed price for immersion.

Mike O’Brien: Good enough, thank you.

Thank you.

The next question comes from Mr. Uche Orji.

Please state your company name followed by your question.

Just a question on service revenues.

Clearly we have seen a bit of a jump in service revenues in the quarter.

Can you give us an idea of how they will trend through the rest of the year?

Yes, the service revenue for the quarter, just to fresh up, is roughly €50m which is contract related.

So it is basically our spend and some material in there.

But the swing factor in the quarter is basically the sale of field options.

And field options have the tendency to go up when there is an upturn because we do sell productivity improvement packages then.

They are combinations of software and hardware-related options.

So for the fourth quarter, we had roughly €50m in service sales and about €25m in option sales.

The €50m you can extrapolate, with a little increase of about between 5-10% for 2004.

With respect to the option sales, that is relatively bumpy.

But I would say that, if you take the fourth quarter sales, I think it is safe to extrapolate that for the first two quarters.

And beyond that is not quite certain.

That really depends on where customers are.

Whether they do need the productivity improvements.

But for the first two quarters that seems to be a safe bet that it is going to be in that area.

Okay.

Can you just tell us what the gross margin was on services now?

It was in the low 20s and will go in 2004 to the mid 20s.

Okay.

So you mean that the field options tend to drive the gross margins high?

Is that correct?

That is correct.

Okay, thanks very much.

We have a follow-up question from Mr. Peter Testa.

Please go ahead sir.

Hi, it is one follow-up and an addition to my previous question.

Given the supply lead times, to what extent can orders that you are taking now be delivered in the first half?

And then the second question was just on foreign exchange.

I mean obviously you price in euros.

But with the dollar moving the way it is, customer [inaudible] set in dollars.

To what extent do you think this is taking away your potential for pricing power later on or delaying your potential pricing in the cycle?

And there is much pricing power assumed in your comments and gross margin during the year?

So on the first part and Peter will answer the bit on the foreign exchange.

The question was do we have room to put in more product into the first half and deliver in the first half for orders we have not yet taken.

The answer is limited now.

We are quite candid that with five months to go to end this half, there is limited time to take orders and turn around into a finished product in a five month period.

Given our lead time, given our supplier lead time.

Many customers now begin to realize and it is current to see orders coming in for six or seven month lead times.

We can turn a few, a handful here and there, but depends on the mix obviously.

But, in essence, the answer to the question, and I would say this to all customers listening, is that we are becoming sold out in the first half of the year.

And it is time that we closed the first half and focused on the third, fourth quarter.

With respect to the dollar euro exchange rate.

I think you are right.

In the minds of customers, and especially that run a dollar related income statement, it is a problem.

Because the [inaudible] dollar are getting more expensive.

But what we have seen over the last 60 to 90 days is that at least the yen has moved to the same direction as the euro.

Ad that is present to all customers.

We have to buy in yen or in euro the same, no problem.

So it is an issue that our sales people have to deal with.

But, in the end, if you have compare our pricing to all our competitors, not the dollar euro but the euro yen is really of no relevance.

I understand that.

I was just more thinking that you have made comments earlier today suggesting that, as lead times stretch out, things tighten up.

That you would be able to maybe start to reverse some of the pricing moves that were taken during the down cycle.

And I was wondering the extent to which the dollar exchange rate versus all currencies has tended to take that possibility away?

Or stretch that possibility out maybe a few quarters?

I understand it but we price in euros.

I know you do.

So, I mean, the euro price is the euro price, and the yen price is the yen price.

And that is what is being translated effectively by our customers when they make a comparison between our tools and those of the competition.

Sure, but do you think you are going to be increasing your price in euros as the same time as they are already having to deal with the exchange rate within the CAPEX budget?

I think it is also a matter of how badly do they need the tool.

And many of those customers have quite extensive CAPEX plans which they have hedged.

So we are getting into a situation where we are discussing this with customers.

But we say, hey, we do not control the FX movements.

This is the price.

And we are introducing new versions and new gizmos of our tools, so we are able to at least increase our average selling price in euros.

We are seeing that and we are still able to do that.

So, it is clearly a mental block that our customers have because of the exchange rage, clearly.

But, on the other hand, there is also not a lot that they can do about it.

Or, for that matter, that we as a company can actually do about it.

So it is what it is and some of the orders that we are getting in now, we do not see a negative effect.

We are able to increase on prices here.

Okay, and the second part of the question.

Are you expecting, say, like for like product price improvements in euros during the year within your gross margin assumptions?

Well, of course, gross margins assumptions are based basically on three pillars.

That is, one, the fact that value of ownership of our tools and the improvements therein will drive the ASPs up.

That is one.

Number two is the cost of goods reduction program, on especially the TWINSCAN program, is significant, and we have reached all targets in 2003.

We will reach all targets in 2004.

And number three is the volume.

So, volume will also have an effect on the gross margin because we will have a better load.

So, it is not only the gross margin.

It does not only hinge on the ASP improvement but all the pillars are based on it.

So, if I can summarize.

Basically, supply and demand is going to work on time regardless of FX?

But you are not pinning gross margin comments upon that?

Correct.

Thank you.

The next question comes from Mr. Uche Orji.

Please state your company name followed by your question sir.

Uche from JP Morgan.

Just a follow-up question on the margin discussion.

Can you characterize for me how the margins work between refabs and new tools?

I was under the impression that refabs have very high margins.

Sorry, I missed that Uche.

Can you just characterize for me how the margins of refurbished tools work?

I have always been under the impression that refurbished tools tend to have very high margins.

But you were talking about having scanners as well as refabs now.

Are the margins on those type of tools fairly high?

Well, they sometimes are but they sometimes are not.

I mean they really are all over the place.

It depends on the moulding time that we can get our hands on the tool.

The eagerness with which a customer wants to get rid of the tool and that changes.

That changes per customer, per week of the month.

So, it changes per product type.

So it is basically all over the place.

Okay.

Very difficult to forecast and I sympathize with you with your models on that one.

But on average they tend to trend towards the normal product margins.

But, as Peter said, we can get some real excursions around that average.

Okay.

Now just on the 248 200mm tools.

Let us just take a typical example of a mature platform.

What sort of margins do you think in the cycle could be considered peak margin on those type of tools?

I think we have only got the comment on peak margins for the company.

I do not want to give out any gross margins on any particular product line of a competitive nature.

Fair enough.

Yes.

What we have said is that, given it is a decent peak as opposed to a small molehill, which will probably occur in 2005 to the industry, if the forecasts currently are correct.

We expect to get gross margins back towards levels that we had in the previous peak in 2000.

From memory, they were just over 40%.

So of that order for the next peak, providing it is a decent sized peak.

Right.

The question now is that, given the fact that you have spent quite a lot of effort for working the operations.

Do you have any chance that peak margins this time, taking in all the restructuring, should be higher than it was in the last peak?

No reason to really think that they can be higher than the last peak actually.

It is a kind of interesting question.

We have not rehearsed this one.

No reason to believe they would be higher than the last one.

About the same is all we can say.

I do not think that the peak this time is going to be kind of as breathtaking as the peak last time.

So everything was in our favor last time around and therefore I do no think we are going to exceed that on average.

But let us see.

Another year to go yet.

Who knows?

Yes, but it is a little early to say that.

Let us see how the second half of the year develops.

How the order intake goes.

How the [inaudible] prices are basically holding or going up.

See how the cost of goods reduction program is going.

I think these things are very important I think what we have said is we see no reason why they could not be at that level.

I think we need to see some proof in some other areas to be certain to say we think we can exceed it.

Okay, and just one last question on the same topic.

At the operating level, given that you have taken a lot of cost out, and you are still taking cost out.

Assuming you maintain the same type of margins, will you be assuming that the operating margins will be higher than the last peak?

Yes, I think that could be a fair assumption.

But like I said, it is too early.

We need to see some more data points in terms of orders, and ASPs, and cost of goods reductions, volumes, that will build our confidence to be able to say that.

We have kind of helped you with the answer in what we are giving you.

It is not our job to do that, I do not think, and we decline that one.

But we do know now what we expect in gross margin terms.

We have been quite clear with the band of SG&A and R&D.

And therefore I am sure your model is better equipped than me to get down to the operating margin levels.

I would like you to probably do that part of the job yourself actually.

Okay, thank you very much.

We have a follow-up question from Mr. Peter Testa.

Please go ahead sir.

Last one.

Just noticing on China that SMIC is shown up in your projected top 10 spenders.

China is now 11% of the backlog.

Can you give us an idea of what you see?

What you are seeing is different?

What you see SMIC doing?

What do you expect China as a proportion of backlog to continue progressing?

Just some comment there please.

China, anything that is less than kind of 25% has the habit of going up and down.

We get an order and then we ship it off, and it goes up again, it goes down again.

So China is in there.

It was not in there last time we talked, I believe.

So, please bear in mind that is a snapshot in time and goes up and down quite a bit.

But, fundamentally, I believe, and this is a personal opinion on China having been there a few times and so on.

I believe that China will continue to be an ever increasing part of our business lives.

They are committed to developing a lot of new factories supplying integrated circuits.

It is the next logical step for their development as an economic block.

And we see the holes being built in the ground and the cement being poured with Grace and SMIC, and the other investments of SMIC, and others also.

It may go down to 8% next time round, who knows?

But underlying that fluctuation, there is a positive dynamic in China.

It never appeared on our slides at all until about a year and a half ago, and now it is never off our slides.

And it is increasingly getting more and more significant for us.

And will do so for a long time yet.

And China will stay as a bigger proportion than Europe on average over time?

I personally believe China will overtake Europe relatively quickly.

Yes, Stuart is just saying, from other things, a lot of the European suppliers are saying their next big investment will be in a low cost region, and often that is China.

Okay, thank you.

We have a follow-up question from Mr. Jay Deahna Please go ahead sir.

Thank you.

Doug, what do you think your booking market share is for 300mm in the fourth quarter?

Well, that is a tough one, Jay.

It is difficult to have there.

I will try and give you an answer but just to explain to the audience who think I should have these answers just bang like that.

There are 300mm investments in Japan which we are not always as close to as we would like because we are new in Japan, and it is a tough road to haul, okay.

You recognize that.

Outside Japan, we have a dominant, leadership position, dominant is a bit strong probably, in market share, both bookings and billings.

If you take Japan into account, and the fact that Japan this year, Jay, as you will probably recognize is spending disproportionately well.

Because it has been on holiday for a couple of years and there are some fabs being built there.

I suspect that the booking number may come down slightly.

Is it going to be 50% of world 300mm?

I am kind of struggling here for an answer for you quantitatively.

So that is the best I can do actually Jay.

To give you some information.

Of total bookings about close to 70% was 200mm.

200?

Yes.

His question was what is the percentage of the 300mm?

Yes, but as you say, you can say what the 300mm are and then we just have to make an assessment of what you think the market was.

But we do not have that data readily available here.

We are still doing very well, Jay, on 300mm and inside Japan we are trying to do a lot better, obviously.

Yes, so if you combine it all, is your cycle expectation somewhere in the 40% range for new systems, for market share?

Yes, I feel pretty comfortable with that.

I would like to do better.

Yes.

You think better is more likely or less likely?

I think better is desirable.

How is that?

Okay.

And the other thing is that there was a question earlier.

I believe the gentlemen from Goldman Sachs was asking it.

He was trying to get a gauge on the fact that you are saying the backlog will be up in the first quarter, but bookings will probably be down.

Were you talking in units or dollars?

Because if 200mm was 70% of your bookings in the fourth quarter, and you get a mix shift at 300mm in the first or second quarter.

It seems to me that your dollar value of bookings could potentially be a different picture than the unit picture?

That is correct, Jay.

The question was specifically the first quarter, the previous question, right?

Right.

And the gentleman in Goldman Sachs, if they have such people.

They have nothing to do by the way.

That was a joke for those who cannot see my face.

So, it was Q1 and I do not think the booking mix is going to change substantially in Q1.

But also it is true that later year it is going to change to 300mm.

If it is Q2, or even if it is Q1, it will have an impact, obviously, on the dollar value bookings and ASP as well.

I do not know when that transition is going to come actually.

So I just hope it will not come in Q1 because Q1 is on top of us right now.

So we are totally clear.

You are saying that orders should be down sequentially in 1Q.

Both in terms of the euro or dollar value and units.

The backlog should be up both in units and currency, sequentially?

That may be the case.

We will have a bigger backlog but it does not mean to say that our bookings rate will be as high in Q1 as it was in Q4.

I have not extended my thinking that far to be that precise actually.

But the major question from most people has been, will your backlog be up or down at the end of the first quarter?

And I am saying I believe slightly up.

Yes, and I think it is definitely true in units.

What you are suggesting, Jay, we said that could very well either in Q1 or in Q2.

There will be a value added difference because of a shift to 300mm which will have to occur somewhere in 2004, for us to be able to ship that in the second half or in the first quarter of 05.

So that is correct.

I mean in terms of value that could be different.

Right.

Good news, though, because we really have a Q1 in which we do not lose order book value.

And I am saying this time round we will probably will have a Q1 in which we [..].

We used to have a Q1 in which we lose order book value, and I am saying this time we will probably gain order book value in Q1.

Yes, I mean, going intto the margin issue.

I just do not see how you could not have higher margins this cycle, given the near-term profile in 200mm.

But the cyclical peak margin is going to be a lot more 300mm intensive.

And I can see that is where you would be hedging a little bit because you have go to chop some wood to get there, right?

That is correct.

Okay, thanks.

To the call administrator.

It is 5.30pm.

We do have a schedule.

Therefore, I think we have to call a halt to the questions at this point in time.

Thanks for all those who took part and asked your usual difficult and torturous questions.

I hope we also gave you difficult and torturous answers, and look forward to seeing you at the end of Q1.

Ladies and gentlemen, this concludes the ASML Annual Results 2003 conference call.

Thank you for participating.

You may now disconnect.