MARY JO DIECKHAUS:
Welcome and forward looking statement. Hands over to Rinse:
RINSE DE JONG:
Thank you, Mary Jo.
Good morning, good afternoon and good evening. Thank you for joining this conference call in which we will comment on our performance in the third quarter of 2000 and on our outlook. Daniel Queyssac joins us from Phoenix, Arizona, and he will answer your questions with respect to front-end products and technology. I apologize for the absence of Mr. Del Prado, but due to laryngitis, he is unable to speak clearly and is staying home.
We are holding a conference call on third quarter earnings for the first time. As you know, ASM Pacific Technology Ltd, our 55% owned subsidiary that operates our assembly and packaging activities does not report its quarterly earnings. We are, therefore, restricted in answering questions on the performance of that company. I trust that you will understand this and take this into account.
This week, the new SEC regulations on Fair Disclosure take effect for US companies. ASM International intends to comply, to the extent possible, with the same regulations. We are pleased that the quarterly conference call is viewed upon as an appropriate platform under the new Regulation on Fair Disclosure to update the market on the developments in our Company. This way, we can improve on our information flow to the market and at the same time meet the request for such quarterly conference calls that many of you asked of us in the past.
Looking at the third quarter of 2000, you may have noticed the lower level of net sales compared to the previous quarter. As stated in yesterday’s earnings release, this has been caused by some delay in the delivery of systems, related to capacity constraints at certain sub-contractors in the front-end segment and some component shortages from time to time for back-end products. It is expected that these constraints will continue, albeit to a lesser degree, in the next quarter and will limit revenue growth to some extent. We are in the process of qualifying additional subcontractors, which should alleviate this constraint going forward.
The quarter did bring record new orders, in total € 346 million. August was the month with the highest new orders ever in the history of the Company and September was a close second. We are very encouraged by this momentum. We are confident that we can show another year of outstanding performance, which would be, in fact, the third year in a row in which we grow faster than the industry as a whole and the segments of the industry, which we serve.
This high level of new orders resulted in a record € 431 million backlog at the end of September, which represents more business than all of our Net sales in 1999. Particularly encouraging is that we are booking orders across the business, not one or a few large orders. Also, many of the orders from the front-end side are related to implementation of technology and pilot lines. We are confident that many of these technology orders will lead to capacity driven orders, in particular for 300mm, and we expect to see strong growth further out.
The net sales in the third quarter are contributing a higher gross margin. As a percentage of net sales, the gross margin improved from 43.8% in the second quarter of 2000 to 45.3% in the third quarter, another step towards our target of 50%. Year-to-date, the gross margin stands at 44.2% of Net sales compared to 40.6% in the same period last year. The improvements are realized by way of adding more advanced technology and functionality to our products and by offering unique production solutions to our customers. Both factors allow us to command better prices. In addition, we continue to reap manufacturing efficiencies. We expect margin improvement to continue.
Selling, general & administrative costs actually showed an absolute decline in the third quarter of 2000 compared to the preceding quarter. This is the balance of higher costs related to the continued build-up of our support organization and a lower charge for an employee share incentive program at ASM Pacific Technology. As a percentage of net sales, SG&A costs decreased from 15.5% in the previous quarter to 15.4% in the current quarter.
Investments in Research & development continue to increase, be it only slightly in this quarter. In terms of percentage of net sales, investments in research and development increased from 7.1% in the previous quarter to 7.4% in the third quarter of 2000. Concentrating on front-end, investments are focused on what we have identified as unique production solutions: Atomic Layer CVD integrated in a cluster tool, 300mm, integrated metrology in furnaces, low-k dielectrics, high-k gate stacks, Silicon Germanium. The latter is a fully developed product, now that we have completed the process sequence for 300mm. SiliconGermanium has been a large contributor to sales and gross margin in the last few quarters and has given us the first place back in the epitaxy market.
We feel that, with Atomic Layer CVD, we have a winner. We are actively seeding this new CVD concept with top-tier players in the semiconductor market, mostly as part of the Polygon cluster tool, working on an integrated process for high-k gate stacks but also on barrier and seed layers for Copper metalization. The technology will, we believe, help lower the barriers to further shrinkage in line widths to well below 100 nanometers.
Another winner, we believe, is our 300mm vertical furnace. This tool is meeting interest from all corners of the industry and has already won us some important new accounts. These accounts give us visibility on substantial new orders in 2001. By adding integrated metrology and in-situ particle counting without adding significantly to the cost of the tool, we make it a very attractive solution for our customers, not only for 300mm production but also, as a bridge tool, for 200mm production. Current order and quote activity gives us confidence that we are gaining significant market share in this segment. Many believed that this market would have been replaced by now by single wafer technology. However, furnace technology is very much alive, offering great cost advantages to its users who, combined, provide us with a substantial market with an estimated size of US$ 1 billion this year. We are convinced that by adding features like integrated metrology and particle counting to a very high level of productivity, we have extended the life of this technology and will be able to do so for additional equipment generations.
Developing low-k dielectrics is another cutting edge technology on which we are placing emphasis in our research efforts. Our Aurora film compares favorably to the competition and we are moving towards a new low k-level of 2.2.
Our higher than average growth in the last three years has been driven by the current 200mm products as well as by the successful AB339 gold wire bonder. We expect that the new products mentioned above, together with the further improved gold wire bonder, the AB339 Eagle, and the IDEALine, the integrated line for assembly and packaging, will ensure that we continue to grow faster than the industry in the years to come.
Our Statement of Operations now shows a separate line for amortization of intangible assets, which comprise primarily the goodwill associated with the purchase of an additional 5% of the outstanding shares of ASM Pacific Technology, in July this year.
Our Operating margin, which we define as Earnings from Operations before amortization of goodwill as a percentage of net sales, improved to 22.1% in the third quarter compared to 21.2% in the second quarter of 2000. Our target for this margin is 25% of net sales, so we still seek further improvement.
Net interest and other financial income remained positive in the quarter. The increase in interest expense resulting from the loan we received to finance the purchase of the additional ASMPT shares was offset by higher interest income at ASMPT as well as from currency gains. The strong US Dollar and HK Dollar (or should I say the weak Euro) have contributed to our profit in the quarter and in the nine months ended September 30, 2000. Comparing to the same periods last year and using constant exchange rates, the effects are approximately 16% in the third quarter of 2000 and 17% in the nine months ended September for net sales and 21% for the third quarter 2000 and 17% for the nine months ended September for Earnings from Operations. The continued slide of the Euro versus the US Dollar and HK Dollar gives us additional operating leverage as, relative to our distribution of revenues across currencies, a higher than proportionate part of our operating costs is denominated in Euro.
The recent slide of the Euro versus the US Dollar has also an impact on the translation of earnings per share. ASM International reports its results in Euro and, consequently, most if not all analyst reports provide earnings models in Euro and provide convenience translations in a US Dollar earnings number. Such translations are, necessarily, always based on an assumed or an historic exchange rate. If the actual exchange rate starts to move, that EPS translation is no longer valid, especially not if the movement is as large as we have seen for the Euro in the last month or so. To illustrate this: the Euro stood at par to the US Dollar at the beginning of the year, at $0.95 at the end of the first quarter and at the end of the second quarter of 2000, but at $0.87 at the end of the third quarter, a drop of 8.5%. If we apply the end of June exchange rates to the EPS we published yesterday, the US Dollar equivalent of our € 0.58 EPS, after amortization of goodwill, would have been $ 0.55, which, I believe, was the consensus estimate.
The tax rate in % of Earnings before tax went from 12.1% in the second quarter of 2000 to 12.7% in the third quarter. This trend will continue as our front-end segment starts to move seriously into profit.
The Minority interest in net earnings of ASM Pacific Technology declined as a result of the purchase of the additional 5% of the shares in ASMPT. The net earnings of that company increased sequentially.
Looking at our balance sheet at the end of September 2000, we can conclude that our financial position is healthy. Our debt/ equity ratio (interest-bearing debt as a percentage of shareholders’ equity) stands at 34%. Cash and cash equivalents amount to € 128 million. Our cash flow is such that, in early October, we have prepaid on the $69 million loan we received when we acquired the 5% additional shares in ASMPT. This way we can make a better return on our money. We also do not need, and will not need in the foreseeable future, any proceeds from the $140 million Structured Equity Line that we entered into at the same time as the loan. The Line is, in essence, a put option that we enjoy and has the effect of a so-called shelf registration for which we filed a registration statement with the Security and Exchange Commission. We are in the process of voluntarily withdrawing this registration statement to address concerns by the SEC about the structure of the transaction. We are working with the investor to restructure the transaction and plan to file another registration statement in due course.
Looking at the immediate future, I have already provided some impressions on our expectations: Modest revenue growth with an increase in gross and operating margins. Positive cash flow will contribute to lower interest costs but the tax rate will continue to creep up. Putting this all together, we believe that we can achieve earnings per share, after amortization of intangible assets, of approximately € 0.62-0.64 per share in the next quarter, which would represent a sequential 7-10% growth.
I would now like to give back to Mary Jo, who will open the call for questions.