ASML Holding's Management Presents at Credit Suisse 2011 Annual Technology Conference (Transcript)

| About: ASML Holding (ASML)

ASML Holding N.V. (NASDAQ:ASML)

Credit Suisse 2011 Annual Technology Conference

November 29, 2012 6:00 PM ET

Executives

Peter Wennink – Chief Financial Officer

Unidentified Participant

Good, our next presentation today is from ASML. ASML as a lot of you will not need any introduction the company is by far in a way the leader in lithography, which is the most crucial step of manufacturing semiconductor chips. The company has had a tremendous increase in their market share over the last several years now close to about 80% market share in the lithography market. From ASML we have the CFO Peter Wennink, we are happy to have him here. He flew in from Netherlands and also Craig DeYoung from Investor Relations. Peter welcome.

Peter Wennink

Thank you.

Unidentified Participant

I guess like I will first start off with what you are seeing sort of near term in terms of business trends it feels like almost an eternity since you reported almost two months ago, you were the first one to report. It feels like there have been a lot of things that have changed certainly from a macro perspective people have gotten more concerned on Europe. But also some of your peers that have reported since have sounded at least on face value a lot more optimistic about near term order trends and perhaps you sounded, so perhaps you could talk a little bit about how things are in the near term.

Peter Wennink

Yeah, sure. When we reported the Q3 results we did two months ago or close to two months ago. We were still in a situation where customers actually indicated to us quite specifically what they needed for 2012. And in summary that was in every segment memory segment NAND or DRAM or logic very clearly that they want to do the technology transitions. So, which means for DRAM they wanted to go for 3X to advance to the 2X and for logic to the 28 and 32 nanometer node.

Having said that, they talk a lot less about what it is that we didn’t see a lot of orders. And that of course at that time we at the end of Q3 beginning of Q4 are probably understandable because they didn’t allocate their budgets yet. There were still a lot of uncertainty issue as alluded to but since then and especially since the last couple of weeks I think customers are putting their money where their mouth is. And they haven’t changed their forecast as much if anything that have pulled a few tools in here and there in their forecast. But they are at least following up with in orders. I think that’s also the major driver of why I think our peers in the industry feel more positive that I think customers are stepping up. And so what I said is means that technology transitions will actually happen, on top of that we see some larger players in every segment putting also capacity type orders in for the leading edge, so that’s memory and logic.

Unidentified Participant

Got it is the strength coming more from I guess the foundry side or is it perhaps more coming from the logic side.

Peter Wennink

Its foundry and memory I think also in memory there are challenges DRAM used to go through the 30 nanometer node like I said enhanced to the 20 and that of course needs the new type of the quality equipment. And also leaders in that segment I clearly see an opportunity to expand their market share by investing more heavily in leading actual quality. So its memory and foundry not so much later process.

Unidentified Participant

Got it, got it I guess ASML has a longer cycle time and lead time than the average semi cap equipment company and typically and you don’t want to see your backlog run too low I guess, it might take a little longer to restart the supply chain. I guess when you think about from a shipment perspective it to me feels like sort over the next year should be close to this $4 billion sort of level in terms of system shipments perhaps more. How do you sort of see the pipeline or shipments building out into the first half of next year for you?

Peter Wennink

I would say the roll out of the technology investments by our customers will be gradual throughout the year. I mean there are many customers that need to do all those transitions that I just talked about. On top of that we are like I said we see the leaders in those segments that having also the financial capability and the opportunity to invest more in the leading edge technology.

They tend to and which make sense if you see an opportunity you don’t want to wait. So basically there is a tendency to see that more in the first part of the year while at least the major part of it. That made the first half of 2012 I would say healthy one of the way that we look at it now and also expect that of course that needs to be supported by the orders, which are the next few quarters we will probably see that happening. But it’s very difficult to say anything about the second half of 2012, not so much because there is uncertainty but simply because our customers don’t have the visibility. So they don’t talk about it if they need extra capacity and are seeing opportunity they want it sooner rather than later that’s where we are today.

Unidentified Participant

Right, I guess for a long time a lot of investors have felt that lithography is going to grow faster than the overall semi cap industry. And for a long time that was not actually happening and you were growing not faster because you were taking shares. But this year seems to be a big breakout year for lithography your shipments are growing 20% versus most other semi cap companies are flatter down. Why do you think that is you think it was just because of the big backlog ending last year people are concerned on lead times last year or are we truly planning to see lithography adoption start to increase faster than the (Inaudible)?

Peter Wennink

What I think two sides of this one it’s exceptionally true what you just said I mean we started off the year with a backlog of $4 billion, where there are $700 million to $800 million of service sales of total cap at January 1 we had sales over not yet recognized. But potential sales more than we did in early 2010 as I know what was at January 1. So I do agree that is full of it being the case that they put in a lot of orders towards the end of 2010.

And also we saw very clearly a technology transition in Logic, Logic from 45 through 28 to 32 nanometers, which that investment is currently happening. Now if you look at the steep increase of emerging layers the leading X layers that you need when you go from 45 to 32 that explains a lot why lithography takes a bigger pie, which was specifically true for 2011 where the Logic segment or the foundry segment was the biggest segment this year. It has to do with the fact that the Logic transition just requires more leading edge.

I do have to disagree with you if you look at the data it’s the data that we have is that if you look at the diffusion rate of lithography or the percentage of lithography as a total of CapEx spent and you look at that over the last 10, 12 years then let’s say 2000 area in that timeframe we will have 12% and 13% of total CapEx spending is now around 20. That’s how it has been gradually growing clearly with ups and downs. But we see that also going forward with the introduction of EUV also adding a couple of percentage points. So we do see that trend going forward at the same rate.

Unidentified Participant

Got it. You know when I look at ASML versus other semi caps ASML historically tends to have a higher percentage exposure to memory than other semi caps do. And I think it sort of makes sense memory is very intensive in terms of lithography. And especially DRAM where there is a big oversupply right now and whatever little CapEx the DRAM companies are spending they are spending it mostly on lithography.

Peter Wennink

Yes.

Unidentified Participant

But as we look at that particular dynamic with this oversupply in DRAM is there sort of a risk that you might perhaps underperform because the memory portion of the business is not as strong in 2012 related to some of your peers?

Peter Wennink

Well I think it is basically a kind of add on, on the answer of the previous question. What we are seeing is that the Immersion I want to say the leading edge litho intensity in Logic i.e., foundry is going up particularly fast, that means that could probably give you the details. But when you look at the leading edge in Logic can add up to 45 total, they can add up to 45 they as well by 20%, 25% are leading edge, of which almost all of it is leading edge is emerged.

So that means that in terms of layers per chip we could have in leading edge logic to-date about twice the number of the emerging layers as you have the memory. And that change from less than 65, which was dry to 45 which was less Immersion to 32, 28 where you go to double-patterning Immersion that just gives a big boost to the initial requirements in the Logic area, which is the foundry area.

And that’s why as you actually see that foundry investments in 2011 are bigger than the memory investments and the way do we see it today that we will continue in 2012. This is foundry I would say Logic as we call Logic at this foundry is going to be also in 2010 as well a very significant if not the most significant segment for this amount. And that breaks the trend if you want to.

Unidentified Participant

The way things look right now do you expect that the foundry opportunity in 2012 is how would you compare to what it was this year?

Peter Wennink

Well I think in terms of total spend foundry spends next year will be less that has to do with the fact that it has been so high this year. This year is high because of this investment in the 28, 32 nanometer node and also we have seen new entrants in the leading edge foundry space. Two new entrants as you also need to build capacity I mean it’s not enough to have the technology there but you need to have capacity there.

And that means investment in flat capacity and that has started in 2011 and actually you could say has an impact on the capital intensity in the foundries or capital efficiency has to go down because there you have to have excess capacity available in the industry to deal with the requirements of the customers. That is going to continue in 2012 albeit at a lower rate because a lot of it has been done in 2011. And also individually I don’t want to discuss individually customers that are individual differences some customers will then do more because they are seeing the opportunities and other have to adjust to the current market share realities.

Unidentified Participant

Yeah, I think earlier on you mentioned that you are seeing some spent in the NAND Flash side is that a cross multiple customers or it’s really concentrating.

Peter Wennink

Yes, I think NAND Flash growth estimates of let’s say the research institutes but also customers indicate around 80% big growth for next year, which with the current investment profile that we saw in 2011, creates a market for 2011 that we think is at its best large in its, next year at least as large as we saw in 2011.

Unidentified Participant

Understood, I guess one on technology couple of things that are going on are EUV and focus period talk to EUV first, which is probably the most important product cycle that’s facing the semiconductor equipment industry. I was at a conference recently in Florida I mean EUV and one of your big customers talked about how the program has been pushed out for four times in the last two years and what have you. But at the same time I also got the sense that the industry is really putting tons of resources and effort and focus on getting it right this time around. Are we sort of turning the corner in terms of these slippages in terms of what’s happening with EUV?

Peter Wennink

Yeah, I think the real slippage was the slippage that we experienced last year where basically we should be around now let’s say the fourth quarter of 2011. You should have been at 60 wafers per hour and so is around 60 wafers per hour. Now we are planning to be there in the summer of 2012, which effectively is 9 to 12 months late. I think this is the biggest delay the reasons for that was clearly that our partnership delivers of the sources were basically not that to speak with the requirements.

We actually got involved with them at the beginning of the year and got much more insight into what needs to be done what actually means that we need to step up also behind the efforts that we at ASML had to put into it and to be honest we should have done this year. But we did rely on there is a lot of feedback that we got out of the source no suppliers, which actually they were falling basically behind the plan. And without the impact of ASML I think we could not have made the progress that we are seeing today.

While this is the progress that progress is very clearly that we know what to do. You know as a year ago we were relying on statements of sole suppliers and now we know exactly what the technical issues are we have divided those technical issues in work, in packages that we have found individual solutions for it. So we have test mention that actually proven those individual solutions and over the next few quarters, we need to integrate that all those solutions into the source to be able to show the 60 wafers per hour by December of 2012.

That’s where we are today and I think we are communicating that progress in detail to our customers and the reasons why our customers say this needs to happen is because they have found out that the double-patterning solutions that we are aiming at are very difficult in the day-to-day production process. Going to triple-patterning even that’s what people suggest will put big pressure on yields and using EUV even with the R&D tools that we have in the field today they show excellent imaging results. So it’s all a matter of can we get the productivity through the right level to make it economically viability.

That is what the industry is now focusing on because they are seeing EUV imaging; they are EUV overlay that actually is what they need for their production requirements next year and years to follow. It’s all about productivity and it’s driven by the power of the source. So this is where we put a lot of effort in together with our two source suppliers and we are making real progress and the clarity on what we need to do is now there. It’s a matter of execution and people asking me constantly tell me about the progress well the progress is that we are working on it because we know what to do. It’s not that we have there is not a few question marks how we are going to resolve this. We know what to do it’s a matter of execution and it will happen over the next few quarters.

Unidentified Participant

Next year that we do get the 60 wafer per hour that summer of next year. And you have 10 of the 3300 the next generation EUV systems in order. How would the ramp look like what devices would start using it, could we start to see a more meaningful ramp in terms of volume in the second half of 2013 or is it some more like 2014?

Peter Wennink

Yeah, it’s we are at we actually checked with customers what they need because we can think 60 wafers per hour is sufficient but what do customers need. And the feedback that we received from every customer especially DRAM customers they said if you can do 60 wafer per hour, we can use that tool for probably two layers two of the critical ones, which actually if that’s the case puts the orders on us not on the customer in terms it’s not a demand issue it’s going to be a capacity issue.

Because we technical was the learning curve we can between the summer of 2012 and the end of 2013 make approximately one tool per month. So it’s going to be 18 tools max of which 10 are already sold. Yeah, so it means that we have 8 tools left for the DRAM industry that ones who use this would have 2X that would have two layers. I think that’s not going to present any demand problem it’s going to present capacity problem. And since we will be capacity limited till the end of 2013 we can only alleviate that expression in 2014 by doubling the outputs of goal from one per month to two per month. And in 2015 we’ve made arrangements with ourselves and in the supply chain to go to four per month. So in 2015 we have the capacity of roughly 50.

And so by the second half of 2013 you won’t see any ramp because it won’t happen until 2014. It’s just a learning curve with us in the supply chain in 2010, ’12, ’13 will probably be at factory cycle times, in our own factory that have doubled of what we want to be and I think it needs to go down overtime.

Unidentified Participant

Any questions from the audience? I guess have you tried to size feel free to just start if you have a question. Have you tried to size the market I guess if you have two layers for DRAM and let’s say that’s not happening in 2013 for example and you hit the 60 wafers in the middle of 2012, 2013 you are ready to ship. How diverse was your engagement first off in DRAM between all the DRAM companies is it just one company doing it or is every DRAM company looking at EUV. And how can the market be with only two layers of DRAM start using it?

Peter Wennink

Yeah, I think most DRAM companies are looking at the EUV and I think the majority of them they are basically looking at EUV as the solution for those two critical layers. So that is not so much mention how big the size of that market is because if you look the size of the DRAM market and look at basically all the 8 tools being available don’t forget that those 10 tools are along orders with 8 different customers and they are divided over DRAM, NAND, Logic, microprocessors so it’s not that those 10 tools are already assigned to the DRAM industry. So it’s only a hypothetical question of what the end demand could be I think like I said this is going to be more a question of do we have enough capacity, which that will be limited because only 8 tools left.

Unidentified Participant

Okay, can you talk a little perhaps the mix of tools that are going out the first 10 tools between DRAM NAND.

Peter Wennink

Now, you could say its eight customers all the leading semiconductor customers take longer too. So it’s almost equally divided over DRAM, NAND logic and.

Unidentified Participant

I guess if we get past the DRAM opportunity and if you look at Intel for example has said that they don’t intend to use EUV at 15 nanometer, which will ramp for them they are ramping 22 this year so they will ramp 15 in 2013. And so at 11 nanometers or 12 nanometers whatever their next node is, they haven’t made a decision yet I believe on lithography. So that opportunity is a 2015 opportunity?

Peter Wennink

Yes.

Unidentified Participant

And then you look at TSMC they are ramping 28 this year or next year I guess 2012 and they don’t need EUV in 22 so they won’t need until 2016, which is only around 15 nanometer. Is that sort of how you see it and NAND is supposedly even beyond that?

Peter Wennink

Yeah, we see it as a bit that the DRAM will EUV it’s spot but we will also be seeing a difference in the recent discussion to feedback that we are getting is that, that’s around 20 nanometers. The difficulty that we currently having with what is happening are significant so there could also be layers and there will be layers and of course we believe and also make discussion that we have with customers. That there will be layers that will be used for EUV, EUV is much different than any other transition that we have seen, where we went from 65 to 45 nanometer we went from dry to wet it was almost (Inaudible) you couldn’t do anything else, which is not the case so it’s not the nodes to no transition.

The reasonably layer by layer transition so if you think the whole 15 nanometer node with all the critical layers probably have to be EUV when you go to a 22 nanometer node or a 20 nanometer node then you will see not all of those players will be EUV, will be the majority will be then double-patterning that the critical ones the critical, critical layers will probably be EUV. So you see a layer to layer transition instead of a node to node transition, which will make the adoption of EUV gradual and that’s why we believe that the capacity constrain that we potentially have is not so much an issue thus EUV adoption will be much more gradual wherever pool adoption will be like you said in 2015, 2016 and that’s where we need to have the capacity ready so we will be more gradual.

Unidentified Participant

The other topic I wanted to briefly touch up on was Immersion what innovations might be happening on the Immersion system right now. I guess like from a competitive standpoint Nikon has missed the boat on the first round of Immersion where you clearly gained enormous amount of market share. But now we are sort of coming back with another tool now 621S I believe is the name for that. I suppose it’s not going to ship this quarter if I’m not mistaken at some customers. What’s happening on the competitive front on Immersion specifically related to that too what innovations are you doing at on your Immersion platform that can sustain?

Peter Wennink

We will have clearly about 40% of our R&D budget is still Immersion and 60% is now EUV. So the majority is EUV but still a very significant part is still on Immersion. And that means we are coming out with the new architecture that will by the end of next year, will provide significantly over 200 wafers per hour with new requirements for overlay and for CD in the form of the (Inaudible). Those are new standards that customers need to be able to do double-patterning. But double-patterning is not only about those four things productivity, overlay, focus, CD it is much more about process control.

When you go down from let’s say 32 nanometer down to 22 process control is going to be vital. So everything that’s based under this banner of holistic litho products which comes out of the ASML/Brian’s table that is something, which is going to be absolutely necessary for our customers to use at the 22 nanometer node. And that’s something that our competitors don’t have. I mean we got at time and time again with confirmation from our customers that we have a unique position there and that together makes that we have this leading position in Immersion and that we are not afraid loosing it. We are investing significant R&D money and on top of that we do believe that that particular confidence that we have is rather unique.

Unidentified Participant

Is there ASPs on Immersion potentially moving a bit higher because you are bringing in a lot of capability like I said improving the overlay and the competition in software and all that that’s.

Peter Wennink

Every time when you provide value or you add value either through the project tool or through the addition of sales options that we just talked about the price of the tool the ASP will be go up. And it has an impact on positive impact on the gross margin as you have seen over the last few years, which as part of that is indeed a typical to those products which are software/hardware products, which of course have better margins than pure hardware. So it has the possibility to perfect on ASP builds along gross margins. And that has clearly shown in the results of ASP now.

Unidentified Participant

Okay, I think we just went out of time. There is not questions from the audience. Okay, we will stop there. Thanks.

Peter Wennink

Thanks.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!