ASM International 3Q 2000 operating results teleconference call October 24, 2000 question & answer


SUE BILLAT, ROBERTSON STEPHENS: Good afternoon, good morning, good day, wherever you may be. A few questions for you. Could you give us a little more color on the low-k films and the high-k films? You talked about seeding some units, can you give us a sense of what your expectation is over the next few quarters, as far as product acceptance, and what's going on with the demand, the pull from your customers, versus other alternatives that they're looking at? Let me start with that, and then I have a couple of follow-up questions.

RINSE DE JONG, CHIEF FINANCIAL OFFICER, ASMI: Daniel, can I ask you to go into low-k, high-k seeding?

DANIEL QUEYSSAC, CHIEF OPERATING OFFICER, FRONT-END OPERATIONS, ASMI: OK. We are seeing a lot of interest for high-k, obviously people need to replace silicon oxide for gate dielectric starting probably at 130 nanometer or 100 nanometer, depending on customers. Basically we have been in discussion with all the key top tier customers. I think that, within the next 6 months, we will have one of our tools in each R&D of all the top tier customers. We have some competition with MOCVD , but MOCVD is a technology that does not present the same advantage as ALCVD ™, and I think ultimately, ALCVD ™ will be the way to go. This is for high-k. For low-k we have some interesting prospects. We are working really hard to get design-in with one major customer in the US, and a couple of major customers in Japan. For low-k, also, we are starting to get some results for what we call ultra-low-k or ULK. With the ultra-low-k we have preliminary results showing dielectric constant between 2 and 2.2. So we are very encouraged with that, and we think that we should be able to introduce this new generation sometime towards the end of the first quarter, middle of second quarter next year.

BILLAT: OK, great. I know you can't say a great deal about ASM Pacific, but wondered if you could give us some sense--you said that they've seen some component shortages. Can you give us some sense of how their business outlook is, given what we have seen, such as yesterday's book-to-bill on the backend was down under parity, and we have seen the sluggishness across the assembly and test sector? And then finally, if we could turn to the financial, if you could give us a sense of--first of all if you hadn't had component shortages, what might the quarter have looked like? And, once we get past these shortages, given the strong bookings, what level of revenue do you expect to be able to achieve? What kind of sequential growth might we see in the quarter after this one?

DE JONG: OK. I think the level of activity at ASMPT, compared to their very high level activity in Q2 ,was somewhat below that, but less so than could be read into the numbers published yesterday. Component shortages are a factor in this, on and off. If I would take that factor out, I think we would probably be at par, certainly for the back-end segment with Q2. It's difficult to think what might have happened if those limits would not have been there. I know that for front-end we would have shipped a couple of machines more, that's for sure. If you go forward on revenue increase, I said a limited increase. I think you should take that quite literally. (We) discussed a similar outlook I think the quarter before. We were unable to quite meet that, but I think we are more or less in the same situation. I also said in my text that we are qualifying additional subcontractors. I think that if we look to year 2001, we can pick up on the growth rate again, and certainly start to ship more volume going into the second quarter of next year. I think I would leave it at that.

BILLAT: Thank you very much.

BYRON WALKER, UBS WARBURG: Nice quarter. I've got a number of questions if I might. Any large orders and large revenues contributed by single customers? Large being defined as, say, ten percent or more of the quarter?

DE JONG: I would have to check all individual orders, but I think there may be one or so that is about ten percent, but no more than that.

WALKER: That would be on the order side, or on the revenue side?

DE JONG: Order.

WALKER: And can you update us with what the RTP product is doing?

QUEYSSAC: With the RTP we are continuing to do demos with customers and starting to exchange the process integration data, and we are still ready to ship two machines before the end of the year. We are going to look at putting some products in the R&D of key customers starting early next year. So we have satisfactory results with the RTP. We think, so far we have not found any show stopper with this breakthrough technology. We are very pleased with the results we are getting so far, and the machine is keeping the promises that we were looking for during the design. So things are going according to plan. We would like to accelerate the introduction of the machine into the market next year by trying to get some more products built, many more. It's what we are trying to do right now.

WALKER: When do you think that product will be in the production facility? Not in R&D facility?

QUEYSSAC: Well, we are probably looking at end of Q2, beginning of Q3 next year.

WALKER: OK. And on silicon germanium, you mentioned that this was a large contributor. Can you give us a rough idea of the amount of revenues and or profit that that business is contributing?

QUEYSSAC: Well, we are probably looking at a contribution in terms of one-third of the sales for the quarter, roughly, for this application, and this is the highest margin contribution product we have on the front end.

DE JONG: Just to make sure, Byron, this is Rinse, one third of front-end.

WALKER: OK, one-third of front-end. Right, I understand. Then on the 300mm furnace--my understanding is that you're doing particularly well there. Do you want to take a guess at what your market share might be at this time?

QUEYSSAC: Well, I think we are right now probably above 30 percent for the 300mm segment. Our goal is to establish ourselves at 30 percent, because obviously when all the manufacturers' orders will come, it will be difficult to keep our share. But definitely we will be around 30 percent during the manufacturing stage, which is a very nice position to have. We will look to further growth after that. But we want to establish ourselves at the plateau of 30 percent market share, and so far, we are above that, so we are OK.

WALKER: Good. And lastly, on the hi-k, can you give us an indicator on the ALCVD™? How many sites you've placed your equipment in the semiconductor space?

QUEYSSAC: Right now we have shipped 4 Polygon™ cluster machines and many more single reactor Pulsar 2000™ and cluster for non I/C applications, and we have some orders coming in for 6 more Polygon™. We are discussing with an additional 5 or 6 customers, and all of those are first-tier customers.

WALKER: Right. Rinse, are you comfortable you can hold your gross margins in the current quarter? Or build upon them?

DE JONG: Yes sir.

WALKER: Great. Nice quarter. Thank you.

ALI IRANI, CIBC WORLD MARKETS: Good morning, gentlemen and congratulations on the bookings, quite nicely above the industry average. I was hoping that you could share with us a little bit, some discussion of the geographic mix of bookings and revenues and of course, particularly, you have a very strong exposure to Japan where manufacturers are coming back. If you could share with us some comments about the quarter and the outlook from Japan. I was hoping also that you could talk to us a little bit about PECVD and where that is going and some of the progress there in terms of under productivity or just further technological developments outside of low-k that you think positions you for market share gains as well.

DE JONG: Shall I take the geographic mix, Daniel? If I look, and I limit my comments to front-end, because I think if you look at back-end, it's kind of an easy guess to say that 75 -80 percent comes out of Southeast Asia. If I look at front-end and I look at the distribution of the products, the two strongest markets we had in Q3 were the United States and Europe, with Japan and Southeast Asia, somewhat slower. I base this on the fact that, if I look at the distribution over the products for front-end orders, furnace was the largest single product in terms of orders, followed by Epitaxy and Eagle 10, the plasma machine, as the third largest. That is somewhat, at least relatively speaking, lower than in the first half, where Eagle 10 was probably the largest single product in terms of orders and shipments.

IRANI: And Rinse, your Eagle 10 product has potential exposure to the Taiwanese market. When would you expect to see the Eagle 10 bookings pick up again, or do you have any visibility at this point on that particular product?

DE JONG: I think we're still looking forward at orders from our customers in Taiwan. I think maybe less in terms of volumes than they have done in the last 12 months. We were seeing new customer demand coming out of Japan. So far, I'm not sure that, if I compare Japanese orders, order levels with the first half-year that that has really shown any slowdown. If they would continue at this pace, I think we would be quite happy. I don't know if Daniel has anything to add to that or maybe link it to the other PECVD processes.

QUEYSSAC: We are still seeing reasonable outflow of orders coming from Taiwan. This has not been growing, but it's holding up. And we are breaking through with a couple of smaller customers there, as well as in Korea. So I think that we are going to see nice steady growth with this product for the foreseeable future. Also we have to address your second question, Ali. We have made significant progress in terms of productivity to cut the cost of ownership for this tool. Since last year, we probably doubled the throughput of the machine through a combination of improvement in the process, mostly in the cleaning cycle of the tool, and mechanical improvements, in terms of the way we treat the overhead to load the wafer. So we have still a very competitive tool that is fully mature, very reliable, that is using very limited amount of spare parts and consumables. We are still in a very good competitive position with this tool.

IRANI: So, Daniel, these same improvements that you talked about -- we should expect to see the same ones provide the benefit on the low-k version of your tool as well?

QUEYSSAC: Well the low-k will not be as spectacular because, obviously, we are just at the beginning of introducing the process, but we can certainly expect some improvements in the low-k also, yes.

IRANI: Daniel, a follow-up question for you, You talked a lot about the hi-k dielectrics and the demand for that as we go to next generation processes. We haven't spent a lot of time or heard a lot from you about the metalization part of ALCVD™ and the opportunities both for thin aluminum and translucent layers with next generation sub-130 nanometers products as well as the copper seed and barrier. Can you share with us some of the opportunities there, specific to process, and where are you seeing the market evolve? Is there a pull both from the copper side, as well as the aluminum side onto the ALCVD™?

QUEYSSAC: Well, we have started some programs in barrier seed, mostly the copper with titanium nitride type of barrier layer, and seed layer for copper. This is something that we are currently working on. We think that we will come with this process during the first quarter next year. So there is also a lot of interest, and I think this will be the second phase of application for our tool. It's very easy, we have the hardware already, we have the basic process capability in place with the tool. What we have to do is to characterize the process, which is something we are in process of doing, and this would be an additional application area for this tool, that we will open up during the first quarter next year.

IRANI: Daniel, there are some pretty complex issues with cleaning and surface preparation when it comes to both the copper barrier and seed deposition, prior to electrofil. Are there any specific advantages to ALCVD ™that allows manufacturers to also get benefits in that respect?

QUEYSSAC: We have cleaning module integrated with our tool--the Polygon™, so you can do the cleaning in situ, inside the tool in the vacuum, and transfer the wafers to the ALCVD™, or you can do the cleaning after ALCVD™. This is also a major advantage. We have this patented technology which is using acetic acid that gives you the capability to do an integrated clean inside the tool when you do your process.

IRANI: And of course this process is not dependent on the size of the substrate.

QUEYSSAC: ALCVD™ is basically independent. The deposition is a surface reaction, so size doesn't matter, as long as the precursor is present, you have a deposition. So the topology or the size doesn’t matter.

IRANI: Great, thank you very much. And again, congratulations on the booking strength.

MARCEL VAN DE HOEF, AFX NEWS: Yes, good morning, good afternoon, I've got a question about the transaction you were mentioning and the discussion with the SEC. Can you clear that up a little bit?

DE JONG: We have filed what we call a registration statement with the Securities and Exchange Commission, following the conclusion of the transaction in July. The registration statement is a requirement under US securities laws to enable the shares to being traded. That gives an opportunity to the SEC to see whether they agree with all the ins and outs of the transaction. They have some concerns on how we have structured the transaction, and have requested us to go back and address some of these concerns, which we are, of course, in the process of doing. The formal side of that requires that we withdraw the registration statement and file a new one. In practice this will not be a big deal. But there are certain formal steps to take.

VAN DE HOEF: OK. What are their concerns in this case?

DE JONG: I think, in general, the SEC is concerned with an equal treatment of all investors, so any concern they have would be in that field.

VAN DE HOEF: OK. And this registration statement has got nothing to do with the $140,000 million facility?

DE JONG: It is the registration statement under which we register the shares that we could issue under that $140,000 million equity line.

VAN DE HOEF: OK, Thanks very much.

MIKE O'BRIEN, WIT SOUNDVIEW: Hi. Just a quick question with regard to 300mm. You've obviously had some really strong early successes in the pilot line. What's the general tone that you're hearing on 300mm? Will these pilots aggressively go into production? Or are you seeing any kind of digestion before they go into full production?

QUEYSSAC: Well, what our customers are telling us right now, is that they are going full speed ahead. We have not seen any kind of slowdown going on for 300mm. In fact, there are a few customers that are asking us for anticipating shipments by a couple of months. If anything, people are still pulling in the 300mm project.

O'BRIEN: OK. And what are you seeing in general on 200mm projects? And if 300mm gets accelerated, what happens to some of the 200mm?

QUEYSSAC: Well, so far no impact. We have not seen any sign of slowdown or reschedule from our customers at this point.

O'BRIEN: And finally, on the back end. In the back end, we've seen some disappointing results from some of your competitors and other companies in the back end. What's enabling you to have such strong results that, really what you're suggesting is, would have been flat if it weren't for some component and some contractor issues?

DE JONG: I think that there is a combination of factors that play in our favor. We are only a recent substantial player, so we have a very broad customer base, also with many smaller players in this field and are only penetrating at the real large accounts since the end of last year, and then mostly as a second supplier. So we have a very diversified customer base. On the other hand, I think we have, certainly with the AB339 Bonder, a superior product. And if you look at the cost structure of ASMPT, with its manufacturing base in China, we can offer a very competitive price to our customers, and still have a very nice gross margin, because our cost base is relatively very low. I think if you combine technology plus a cost advantage, it's very compelling for customers.

O'BRIEN: OK, Thanks.

BERT SIEBRAND, SNS SECURITIES: Good morning, good afternoon. I have a question on 300mm products. Can you give us an idea how large a percentage of your total sales is now in 300mm?

QUEYSSAC: Well, I will speak for the front-end only.

SIEBRAND: Yes?

QUEYSSAC: Right now, it's probably less than 10 percent. I would say probably around 5 to 6 percent. But this is for our sales. In terms of our bookings, it's starting to show significantly higher--probably between 15 and 20 percent.

SIEBRAND: So, can you tell me how many lines, how many different customers you now have in 300mm?

QUEYSSAC: Well, in terms of getting officially selected for vertical furnace, we have 3 sites right now. Although our machine is in evaluation to many more. For 300mm PECVD we have one site for one customer and for EPI we also have one.

SIEBRAND: But this is for more and more volume shipments, not for pilot lines of course?

QUEYSSAC: Yes, those I'm talking about being qualified by a customer as a supplier for 300mm. I'm not talking about customers evaluating us.

SIEBRAND: How many evaluation projects do you have now? Because I think there must be many more--

QUEYSSAC: Yes. I would say we probably have an additional 8 to 10 customers evaluating our 300mm tool between EPI, PECVD and vertical furnace.

SIEBRAND: All right. Looking toward the end of 2001, would it be a fair assumption to make -- would you be looking for, say, shipments, in excess of 20 percent in 300mm?

QUEYSSAC: Yes that's probably correct, twenty to twenty-five percent....

SIEBRAND: OK. Then perhaps a few additional questions. Can you tell me how many new customers you gained during the third quarter?

DE JONG: We track it, our marketing department, I should say, tracks it specifically for furnace. So I have that answer at hand. In the third quarter, we added 5 new sites, customers for our furnace product.

SIEBRAND: Right.

DE JONG: The highest number ever, I think, in the history of the product line.

SIEBRAND: Wow. Perfect. Then a little question on the outlook of the industry. You must have seen some signs of slowdown, particularly in the back-end. Looking toward the front-end perhaps you can also add a bit on that. Do you see some weakness at the DRAM suppliers? What's your feeling on the semiconductor outlook for 2001? Because you sound so bullish on everything. How do you reconcile this with, say, some signs of warning that we have seen the last couple of weeks from semiconductor manufacturers?

QUEYSSAC: If you look at what the industry is projecting, the semiconductor industry's still forecasting growth in the order of 30 percent for the semiconductor business next year. SEMI is also forecasting some growth for the equipment industry next year. The number is starting to vary a little bit, depending on whom you are talking to. But still some growth is forecasted for both markets. So far, what we have seen, seems to confirm that, on top of this year, which will be a very good growth for semiconductors, but even better for equipment, we will still see some additional growth in 2001. As far as we're concerned, we have not seen any signs of slowdown. But obviously, if there is any slowdown, it will manifest itself in the semiconductors first. Maybe we have been lucky that we didn't do a lot of business with DRAM’s manufacturers before. So we have not been affected by the decreasing price in DRAM. But I think the DRAM’s price weakness will correct itself and we are still, according to industry predictions, looking for some growth next year for the industry, and obviously some bigger growth for ASM.

SIEBRAND: When you look at your high order intake during the first quarter, and looking at what you expect for the whole industry, is it fair to assume actually you have grown more confident on 2001 than you were 3 months ago?

QUEYSSAC: Well, definitely, if I look at my open orders, and here I'm talking about front-end, it's a very good reason to feel confident with open orders starting to grow and starting to build up the billing for the first quarter 2001 already. So yes, we have a reasonable level of confidence for continued growth.

SIEBRAND: OK, thank you.

RONNIE HENRY, PRIVATE INVESTOR: Can you tell me what the expected tax rate will be in the fourth quarter of 2000, and the whole year 2001?

DE JONG: I said that the tax rate will creep up somewhat, because front-end is moving seriously into profit, I think I said literally. To give an exact tax rate, no, We have a planned rate of course. But for guidance on exact tax rate, I don't think I would do that on this call. You can take that it will slowly increase and that it will continue in 2001.

HENRY: OK, Thank you.

MARCEL VAN DE HOEF, AFX: Yes, I have another question about the equity line. You withdraw the registration with the SEC , but are you going to register again if you did it over again?

DE JONG: Yes, I mentioned in my text that we are in discussions with the investor, with our counterparty in the transaction, and I said:”we are working with the investor to structure the transaction and plan to file another registration statement in due course”. This will be issued later today.

VAN DE HOEF: OK, Thanks.

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