恩智浦 (NXPI) 2008 Q2 法說會逐字稿

Welcome to NXP Semiconductors' second-quarter 2008 results, investors' and analysts' conference call, on Tuesday, July 22, 2008. During the introduction by Mr. Frans van Houten, CEO, and Mr. Karl-Henrik Sundstrom, CFO of NXP, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS). Please note that this call will be recorded.

I will now hand the conference over to Mr. Frans van Houten. Please go ahead, sir.

Thanks very much. Ladies and gentlemen, welcome to NXP's second-quarter 2008 results conference call. I hope you have all seen a copy of the results, press release and presentation, which you can find on our website.

Before I commence today's presentation, please be aware that forward-looking statements will be referenced during this call, and I refer you to slide number 2 of our presentation, where you will find a short Safe Harbor statement.

Regarding guidance, I remind you that, as before, we will mention only guidance for sales for the next quarter to be reported and no further detailed guidance.

Let me start by officially introducing you to Karl Sundstrom, NXP's new CFO as of May 2008. Karl brings to NXP a great deal of experience, primarily from his time at Ericsson, where he was CFO between 2003 and 2007. In the short time that he has been with NXP, he has already demonstrated his strong qualities, and I'm looking forward to working with him in the time ahead.

Let me also take the time to relay my thanks to Peter van Bommel, our previous CFO, for his dedication to NXP during the founding period.

As you may have seen, we have announced two more management changes in the last weeks. Theo Claasen, Head of Strategy, will retire as planned, which is in fact three years beyond his statutory retirement age in 2005, as he stayed with NXP on my personal request. Theo is succeeded by Mark Hamersma, who was already with the Company since four years.

Furthermore, Hein van der Zeeuw, Chief Operations, was succeeded by Chris Belden. Chris, who joined us in March 2008, is a very seasoned semiconductor manufacturing executive with extensive experience at Applied, Freescale and Motorola. Both Hein and Theo have contributed considerably to NXP, and it is very good to note that we have excellent successors in place.

Now, ladies and gentlemen, turning to the second quarter, it is clear that we continue to operate in a weak market, where the strong impact of the weak dollar negatively affects our profits. To illustrate this, the US dollar is down by 16.7% in the second quarter of 2008 compared to the second quarter of 2007, resulting in an EBIT impact of approximately $70 million.

This challenging currency environment substantially offsets our successful efforts to reduce cost and improve gross margins as part of the business renewal program, as you will see in the numbers that we present today.

Essentially, with the current currency volatility, and despite the progress in our business renewal program, our cost savings target has been a constantly moving target. We have to assume that the challenging global environment and the weakness of the US dollar will continue to hamper our efforts over the coming quarters.

Therefore, a core management priority for the remainder of the year is to take additional decisive steps to mitigate our currency exposure and realign our business to better suit our reduced size following the creation of the ST-NXP Wireless joint venture. We are currently preparing a range of additional measures in this area, which we plan to announce later this year.

Now to the results themselves. Second-quarter sales were in line with guidance, primarily as a result of solid sales performance by both the MultiMarket Semiconductors and Automotive & Identification businesses. Sales came in at $1.524 billion, a comparable decrease of 1.9% on the second quarter of 2007 and a comparable decrease of 0.6% over the first quarter.

The continued focus on business renewal has resulted in significantly reduced costs this quarter and in another year-over-year improvement of the gross margin. The gross margin in the quarter amounted to $534 million compared to $393 million in the corresponding period last year.

Excluding the PPA effects and incidental items, the gross margin improved in the second quarter to 36.5% from 34.7% in the second quarter of 2007. The gross margin also benefited from the higher utilization rate, 78% this quarter compared to 74% in Q2 2007.

I'm very pleased that the business continues to deliver on the cost savings target that we have established. However, as I said before, savings continue to erode as a result of the weak dollar. To reiterate, we will take additional decisive steps to deal with this over the coming quarters.

One of the most pleasing aspects of this quarter is the speed and efficiency with which we have moved forward in the creation of our wireless joint venture with STMicroelectronics. You may have seen that we recently announced the new name for the venture, ST-NXP Wireless, as well as the management team. We have received regulatory approvals, including from the European Commission, and we have finalized labor council consultations. We expect the ST-NXP Wireless joint venture to close soon.

The swift progress we have made on the ST-NXP Wireless joint venture is a good indication of our commitment to the efficient execution of our scale and leadership position strategy. We're also making progress in strengthening our Home business with the announcement of the acquisition of the Conexant set-top box business, which will create a top three player in digital video systems.

We also announced in June that we have signed the final agreement for the formation of a joint venture with Thomson. This joint venture will create the leader in so-called can tuners and gives us a 55% holding in a new venture that posted combined sales of approximately $250 million in 2007.

Now let me give some detail on the operational performance of the individual business units. And I will leave it to Karl Sundstrom to present the financial performance details.

The Mobile & Personal business, while it focused its effort on the formation of the joint venture, suffered this quarter from soft market conditions, as you may have seen in the various announcements. I am pleased with the good progress in creating the combined venture that will create a leader that will be able to compete effectively with TI and Qualcomm. It will be among the few companies with the scale and expertise to continue to make the R&D investments necessary to achieve market leadership in the wireless and mobile multimedia markets.

We saw continued design-in traction in 3G, EDGE and ultra-low-cost phones with Samsung in this quarter. The Home business overall made progress in digital television, in particular through important design wins with Loewe, as well as production ramp-ups with Phillips and another leading CE brand.

However, the decline in analog TV continued, where, as you know, we have a substantial share, and this had a negative effect on overall sales. Adjusted EBIT came in weaker versus the first quarter, although year over year we saw improved gross margins and lower operational expenses as a result of ongoing restructuring.

Both the MultiMarket Semiconductors and Automotive & Identification business units posted solid sales in the quarter. Within MultiMarket Semiconductors, all activities, including general application, power management and standardized CEs, contributed to the increased sales. Also, Automotive sales continued to outgrow the market, and the division enjoyed some important car radio design wins with Japanese customers.

Furthermore, we are very pleased by the Strategy Analytics report that showed that NXP Automotive outgrew the competition between 2005 and 2007 and that we are ranked number one in car infotainment.

Identification is operating in a soft market at the moment, and overall market share declined slightly. As you may have understood, scientists, from a Dutch university have discovered the working of the algorithm of the MIFARE Classic chip, which is the entry model of an extensive range of highly secure identification chips. NXP has done its utmost to prevent the publishing of the algorithm by the university. NXP regrets the decision of the court to allow the publication and are working closely with our MIFARE Classic customers and partners to mitigate this.

Meanwhile, we are pleased to have received a very positive response to the secure MIFARE Plus launch for contactless transport ticketing that provides an easy upgrade path for our existing customers. On a separate note, Le Coq Sportif launched an RFID and NFC application for fashion in their stores based on our ICs.

Thank you. And now, I would like to hand over to Karl Sundstrom to elaborate on the financial performance in the second quarter of the year.

Thank you, Frans, and thank you for your kind words of introduction at the beginning of this call.

Ladies and gentlemen, my name is Karl Sundstrom. As you know, I recently took over as the CFO of NXP. I'm looking forward in time to meet you in person, but in the meantime, on this call, I intend to run through the overall business performance, as well as the financial performance of the individual business units.

In terms of the overall performance of the business, I will provide both year-over-year and sequential comparisons for the quarter. However, when discussing the individual performance of the business units, I will focus on the year-over-year figures. All figures are quoted in US dollars.

As Frans already mentioned, our sales for the quarter was $1.524 billion, which represents a decline of 1.9% on a comparable basis compared to the second quarter of 2007. This represents a sequential sales decline of 0.6% and a nominal sales decline of 0.9%.

Second-quarter adjusted EBITDA, excluding the effects of PPA, came in at $114 million, down from $190 million in the second quarter of 2007 and a sequential decline of $69 million. Adjusted EBITDA represented a loss of $29 million compared to a profit of $9 million in the same period of 2007 and a profit of $41 million for the first quarter of 2008.

Although costs were significantly reduced in the quarter, leading to improved gross margin, the strong negative impact of the weak dollar, which had an EBIT impact of approximately $70 million, offset these gains and led to a decreased EBITDA.

Now, let me turn to the financial performance of the individual business units. All figures exclude the effect of purchase price accounting and are provided on a comparable basis.

In Mobile & Personal, sales amounted to $471 million compared to $538 million for the second quarter of 2007, a 3.3% year-over-year decrease. Adjusted EBITDA amounted to a loss of $43 million compared to a loss of $3 million in the second quarter of 2007. The increased loss was mainly driven by lower sales, decreased gross margins and a favorable currency effect of $90 million. Please note that in the reporting period, additional costs were incurred, among others, for increased design-in activities for 3G and the formation of the ST-NXP Wireless joint venture.

In Home, sales amounted to $196 million compared to $216 million in the second quarter 2007, a year-over-year decrease of 8.6%. Adjusted EBIT showed a loss of $19 million compared to a loss of $30 million in the same period last year. The improvement was mainly caused from the ongoing restructuring in the Home business and the improved gross margins, partly offset by unfavorable currency effects of $8 million in lower sales.

Automotive & Identification had another sound quarter. Sales amounted to $359 million compared to $360 million in the second quarter of 2007, a comparable decline of 0.5%. Please note that the nominal sales include the reclassification of the sensor operations from business unit MMS in Q2 2007.

Adjusted EBIT amounted to $78 million compared to $85 million in the second quarter of 2007. Higher sales in Automotive, improved gross margins and a favorable currency effect of $11 million were mainly offset by increased investments in R&D.

In MultiMarket Semiconductors, we have maintained market share and saw solid sales growth across all businesses. Sales amounted to $416 million compared to $358 million in the second quarter of 2007, a comparable increase of 3.9%. Please note that the nominal sales in Q2 2007 were understated as a result of the reclassification of the sensor operation to business unit Automotive & Identification.

Adjusted EBIT came in at $63 million compared to $67 million in the same period in 2007. Lower EBIT was mainly driven by higher investment in R&D and selling expenses, partly offset by better gross margins.

Sales in manufacturing operations amounted to $61 million compared to $46 million in the second quarter of 2007. Adjusted EBIT was a loss of $55 million compared to a profit of $9 million in 2007. We achieved a utilization rate of 78% compared to 74% in the second quarter of 2007 and down from 87% in the first quarter of 2008.

The positive impact from increased utilization year over year meant that the level of cost savings reached $26 million in the second quarter. This is ahead of that, but saving was more than offset by the $44 million impact of the weak dollar on the organizational cost and price erosion.

Sales in corporate and other came in at $28 million compared to $20 million in the same period of last year. Adjusted EBIT was a loss of $62 million compared to a loss of $125 million in the second quarter of 2007. EBIT includes the effects on the elimination of group unrealized inter-Company profit amounting to $1 million in the second quarter compared to a loss of $43 million in the second quarter 2007.

In 2008, costs were further affected by a $50 million charge for the share-based compensation program and costs related to the formation of the ST-NXP Wireless joint venture. In the same period of 2007, $33 million of operation development costs relating to Crolles alliance were included.

Clearly an area for the management is the effective management of the cash position and a rapid return to positive cash generation. We have significantly strengthened the cash management measure with a focus on reduction of working capital. These actions have shown the first result in the second quarter, with lower inventories and declining CapEx.

Net cash used for operating activities in the reporting period amounted to $281 million compared to $268 million in the first quarter. Excluding the unevenly distributed interest payments between the quarters, the net cash used for operations was reduced by $117 million.

Activity levels has been about equal in the first and the second quarter in sales. However, there were somewhat more back-loaded sales in the second quarter. Manufacturing operations, however, with the loading going from 87% in the first quarter to 78% in the second quarter had obvious effect on account payables and accruals.

Cash at the end of the second quarter stood at $660 million, which includes the $450 million drawn from the revolver. Including in the cash position and the unused part of the senior secured revolving credit facility, NXP had access to liquidity resources of $985 million at the end of second quarter, with a further $1.55 billion to come soon from the creation of the ST-NXP Wireless joint venture.

Net cash used for operation activities, as I've said before, for the period was $281 million. Cash used for investment activities was $15 million, composed of capital expenditure of $143 million. Proceeds from the sale of assets, mainly related to Crolles, were $139 million. Purchase interest in business was $4 million, and the net cash payments for other nonrecurring financial assets amounted to $7 million. Our book-to-bill ratio stood at 1.03 in the second quarter compared to 1 in the previous quarter.

In terms of outlook, we remain concerned about the ongoing currency volatility, as well as the global macroeconomic factors that could impact sales performance. Due to the overall market sentiment, we continue to see a relatively flat market. The Company expects a year-on-year comparable mid-single-digit sales decrease, translating into a flattish sequential sales.

Thank you. And we would now like to open up for your questions. Jan Maarten, will you now take over?

Thanks, Karl. Hello. This is Jan Maarten Ingen Housz again, as you know responsible for Investor Relations within NXP. As always, I will facilitate as necessary this Q&A session, addressing the questions to Frans and Karl.

Would you please, and I say that again, please limit yourself to one question. This will give more people the possibility to ask questions. And obviously, any further questions may be answered after an eventual second Q&A poll by the operator or may be addressed directly to me after the end of this call.

With that, I would like the operator to start the Q&A session.

(Operator Instructions). Sundar Varadarajan, Deutsche Bank.

I just want to start off with the utilization level. It seems like it declined 900 basis points sequentially. When you kind of reported the first quarter and had the conference call, it didn't seem like your utilization levels were going to go down sequentially.

Could you talk a little bit about the linearity in the quarter, where you were from a utilization perspective in the month of June, and what that means for utilization levels in Q3? And could you remind us from your restructuring if there is any capacity that is coming out in Q3 that might actually help utilization levels improve?

Yes. Let me give you a few comments on the manufacturing loading. You need to take into account two factors. First of all, there is a structural gradual product mix change in our systems businesses that move to advanced CMOS, which we don't have in-house and which is procured from external foundries, such as TSMC and others. And this trend is autonomous. I mean, that will go on whether we like it or not, but of course it will result in less loading for our factories as a consequence.

Secondly, as you have observed in Q1, our inventories, we are on the high side, and we have started to take measures to reduce it. The average throughput time in our factories is around three quarters. The first effects were visible at the end of the Q2, with slightly lower inventory, and this of course then has an effect already on the loading.

We cannot give you much color on the forward-looking aspects of manufacturing. But as we will look towards a flattish sales Q-on-Q outlook and with my explanation on the autonomous move towards more advanced CMOS, which we don't have in our own factories, clearly I cannot promise you a significant positive change in the near term.

So going forward, as I have said in my commentary, we will look at decisive measures to be taken. And at this time, I cannot be more specific.

I understand you cannot give us forward guidance, but could you tell us if in June your utilization level was higher than the average for the quarter, or was it lower than the average for the quarter?

I don't have that detail right here at hand. Okay, I'll just get the answer from my team here, and it was it had a downward trend in the quarter.

Jeff Harlib, Lehman Brothers.

I was wondering if you could talk about where you stand on a lot of the cost savings, getting to the $375 million target. You had talked about R&D reductions, transition to independent IT infrastructure, the exit from [Boeblingen]. Can you just say where you stand with those and what remains to be done under that program?

So alluding a little bit to what Frans said of decisive actions coming up in the fall and for the rest of the year, so we are with a couple of new programs accelerating, and we are on track when it comes to the business renewal. And I think it is a clear indication the gross margin improvement that we had in the second quarter that the situation would have been far worse if we wouldn't have been working with this since 2007. So we are actually accelerating our programs to change the focus of the Company to be a little bit less exposed to this with the currency.

Okay. Follow-up, if I could. 3Q guidance, can you talk about the individual end markets, what you're seeing in terms of them?

Yes. I would like to give a little bit of color on that. Let me start with the consumer-related markets like Home and Mobile, where we, in the Home segment, we see that the television market is pretty weak, and that reflects, of course, on us. We see the further decline of analog TV.

Within that difficult market, we are gaining market share in digital, as we should, because that is part of our turnaround plan. But clearly, the market is not helping us in the performance of that business unit.

In the Mobile segment, we see a shift towards the lower end. So whereas volumes are okay, we see actually that the semiconductor content in these lower-priced phones is a lot lower. And that puts pressure both on the value and the mix.

In terms of MultiMarket, actually, we see a somewhat better picture, thereby the general industry continues to consume a good amount of semiconductors. And I can talk about it in a little bit more positive manner. Certainly compared to the other two, I'm more upbeat about it.

In terms of Automotive, I think we can start to see the effect of depressed consumer sentiment and less sell-through, of course, somewhat compensated by the fact that the semiconductor content, of course, continues to rise. And so there, I basically see the same flattish trend as we have also forecasted.

And then in the Identification business, I think you will remember from previous calls that that is very much a project-related business, where projects come and go. And as governments and ID cards get issued, we see spikes. And I cannot at this moment take an advance on how our project portfolio will develop. So that should give you a little bit of background.

Frank Jarman, Goldman Sachs.

Can you address the working capital issues driving the free cash outflow this quarter, how that will change going forward? And what gives you the comfort that additional liquidity coming from the wireless JV proceeds won't be needed to fund future negative free cash flow, given you burned about $800 million in the first half of the year?

If you look upon some of the key performance indicators, we are still running almost at historic and very high inventory levels, which means that we were running the same period last year about 2.3 percentage of sales less in inventories. We're now at 15.6%. So there's clearly an area where you can reduce. We are working on receivables. We are making sure that we are making sure that we having very focused collections and that we also scrutinized CapEx.

Taking that into consideration, you also see from the description in the financial report that we also need to take what Frans alluded to, some more decisive steps to further address. First of all, the creation of the ST-NXP joint venture for wireless communication, which means that we're going to be a smaller company, which has to be addressed. And secondly, some more decisive steps regarding our cost structure in the European cost base, which is not helping us.

Along the lines of addressing the business post the STMicro JV, does that mean addressing the capital structure and shrinking the capital structure potentially?

That is part of it. We are going for an asset-light strategy.

Nicolas Gaudois, UBS.

I just want to get an update on when we should see the first WEDGE phones with NXP solutions shipping. And secondly, could you give us any progress on your roadmap towards HSDPA 7.2 and HSUPA? When could we start seeing you taping out and then sampling to customers firstly, and whether you've got an idea on the engagements there? Thank you.

All right. Actually, I'm smiling, because I have one of those WEDGE phones from Samsung in my hand as we talk right now. So I've been using it now for a few days, a couple of weeks, and I'm pleased with it. By the way, that is not the only mobile that uses our chips. So in the meantime, that customer has taken a few more models in the market with our WEDGE chip, as well as ramping up some ULC phones and EDGE phones. So our traction there continues to be good.

Your second question regarding HSDPA/HSUPA, we have that scheduled for 2009, although in the Chinese market we already have HSDPA available in conjunction with the TD-SCDMA standard, and we are shipping a combination chip in China as we speak.

Okay, great. Glad to see this phone is working, Frans.

Go to the next one, please. We have a long queue, I see.

Lee Zeltser, Merrill Lynch.

You talked about the currency impact year over year. I was wondering if you could tell us the impact on a sequential basis, so Q2 versus Q1 of this year?

It is actually in the release, and it is around approximately $20 million.

$20 million. Okay, great. Okay, thank you.

Michael Boam, BlueBay.

It's Mike Boam of BlueBay Asset Management. I'm a little bit -- well, extremely disappointed, but slightly confused as to how you manage to produce such bad sets of results. If I look at the exchange rate through the second quarter, there has hardly been any real move through the quarter itself. So you must have had a good idea at the time of the last conference call that this quarter was going to be tracking significantly below this time last year. And I'm not sure how it has managed to track below 1Q, given there was significant FX impacts in there.

So I am a little bit confused as to why it is, given you have had three months. You don't have any sort of further restructuring plan to offer us today. I would like to ask the same question or a follow-up question with respect to the inventory position of the Company. You are running with approximately $200 million more inventory this year than last year when you've said yourselves the operating environment is fairly weak. That seems like atrocious cash management. Can you explain why that is?

So let me start with the first question, and then the second one can be tackled by Karl. So your first question is when did we see this coming? I think we had all along an expectation that the second quarter would be quite back-end-loaded in sales. We also --

The sales don't really matter because you've hit your sales guidance. You are a million miles off with respect to EBITDA.

So this second loading also actually happened, but to a lesser extent than we expected, and the mix in the Mobile and Home units were certainly also different than we had originally expected. And we had some extra costs coming into the Company also in relation to the setting up of the joint venture and preparation of restructuring measures that I have alluded to.

So one thing to clarify, which I think is important, is the average exchange rates between Q1 and Q2 has actually gone from [14905 to 15675] when you calculate the income statement. So there has been movement in the currencies. What you are alluding to is probably the end of Q1 and end of Q2, where there has been not that much movement. I agree.

There was much more movement in Q1 than there was in Q2.

Yes, I agree with it. But it still is significant. When it comes to -- I cannot really speak from the previous conference call. What I can say is that the Company now is focusing very much on making sure that we collect as fast as we can, making sure we are running slim inventories, making sure that we are very, very diligent when we do CapEx expense, and then we make sure that we manage our payables in a certain way, which means that we are maximizing.

And this is something that takes time. And I can assure you that after slightly more than two and a half months in the Company, I see the team are really dedicated in this area. And I agree, we are running on a 2 percentage point or so higher inventory than we have done in the same period.

But how have you actually got there? Because the reality is I thought working capital had been addressed early last year as being low-hanging fruit for the Company after the LBO. And yet a year on, we seem to have massive working capital problems. How is it that your accounts payable were a $218 million outflow this year against a $262 million inflow last year? What happened there?

You have to remember, during last year, payment terms were extended. And then what is happening is when you go from an activity level with peak sales in the fourth quarter and when you have payment terms on the payables which are somewhere around 70 to 80 days, and then you go in in a lower sales quarter like Q1, you actually collect in a shorter period and you pay for the big payments you made in Q1.

And if you look at the difference on payables in Q2 compared to Q1, it is actually, on trade payables, $18 million down. The big change is in accrued expenses. And the reason for that is that we're having 12% of the bond payments in Q1, 38% in Q2, and then we have 12% again in Q3, and 38%. So it means that of those $222 million, which is outflow accrued expenses, $190 million is actually accrued interest. And then you have restructuring, and you also have, based on the lower activity level, going from 87% to 78%.

Will working capital --

You have already asked two questions. I see a long list in the queue, so if we may now move on to the next one.

Boris Korejtko, WestLB Mellon.

When do you see a stabilization in the working capital outflow?

I think we are seeing the first steps now and we are working hard to achieve further steps going forward. And just to get it into your models, remember, we have some 80, 90 days in payments. So it takes almost a quarter before you see the effects of your actions on the payment side.

And since Frans said that we have gone from 87% in factory utilization down to 78% and also have a lower utilization in the month of June compared to the average, which means that purchases will be reduced over time until we reduce the inventories, I think that gives you a fairly good answer.

So we should expect that the third quarter will be also in working capital outflow?

We don't give guidance on it, so I think I gave a fairly good picture there.

[David Fitz], Citigroup.

My question regards the closing of the joint venture. It appears you have all the regulatory approvals, and so can you give us some better guidance as to when you expect it to close? I know it's in the third quarter. I'm modeling it for the end of August. Do you have any commentary on that?

Yes. There is still some work to be done on finalizing contracts, and then there's a lot of procedures to go through. There's preparation, people transfers. So there is still quite a list of activities that we are working through diligently, together with ST.

And just kind of in following, I'm trying to interpret your guidance, because if you exit the business at the end of September, you will obviously have the sales from the cellular business for a month longer than I'm expecting. So what I'm trying to do is understood some of your guidance for the quarter. And perhaps you could tell me in the split-off how much cash you will be sending into the joint venture off your balance sheet.

We have said in the release that it will be in the third quarter. And I will need to stick to that.

Fair enough. Do you envision depositing some cash into that joint venture off your balance sheet, or does it go over with zero cash?

We explained in the April release that the cash will be contributed by ST. And therefore, there will not be NXP cash that will go in. Let me qualify my earlier statement. In my text, I actually said soon. It will close soon.

Mike Lanier, AIG.

Just a tag-on question on the JV. Does the soft performance in the cell business open up any possibility for repricing the transactions?

This is not an area where I would like to give a comment on.

All right. Then can I ask, on this smartcard business, what kind of liabilities might you have -- can your customers just demand a new product for free now that the algorithm has been disclosed, or how is that likely to work out?

Let me give you a little bit of explanation on this market. Typically, we sell chips to system integrators. System integrators contract with bus companies, governments, passports and so on. We have a whole range of chips, from low end to high end, the high ends having triple DES encryption and so on. And customers make a voluntary choice as to what chip to use, and they can go for higher security and pay a bit more to us or go for lower security and pay a bit less. And there has always been a very good representation from our side as to what the chip can and cannot do.

Moreover, security in an access system is not only determined by the chip, but also by the central computers. And if an access card is copied, the central computer should be able to detect that. So the security is not necessarily breached just because the algorithm is known. Moreover, we have worked with our customers to mitigate this.

Recently, there were inquiries in the Dutch parliament where, after study, the Dutch Ministry of Internal Affairs actually publicly made the statement that NXP cannot be held liable for the situation around the use of the chip in The Netherlands. So that is of course only one example. The chip is being used in a billion cases in the world, as it is highly successful. But I think it should give you a little bit of impression on how this looks.

Do you think you will be able to continue to sell this chip as is, or will you have to come up with a new algorithm before you can continue sales?

Well, we think the answer is both. Security is always a matter of price, and we think that some customers will continue with this chip. We have already developed an easy successor chip, which has higher security in the entry segment. I already mentioned we also have more secure chips. This MIFARE Plus chip is available for shipment in the second half of this year.

This is Karl Sundstrom saying maybe -- and it goes back to David's question about the guidance -- the guidance is as Mobile & Personal will continue until the end of Q3, just to be very clear about that.

Robert Hopper, UBS.

This is [Bryan Pierce] for Rob. I had a couple of questions. I wanted to revisit an earlier question about the cap structure. We know, as part of the wireless spin-off, that you will have a smaller asset base, and combined with your asset-light strategy you will be reducing your capital intensity, your CapEx going forward. I think the question was about the cash that you're receiving in from the JV. Do you have any intention or are you reconsidering reducing the capital structure with those funds? And then I have a follow-up.

So, I realize that the question was meant towards that. In the April call, I think we were extensively questioned on the use of the proceeds of the wireless JV. At that time, I said that we intend to use it in the Company for potential acquisitions and/or to also enable organic growth through R&D investments. We maintain the same point of view at this time.

Okay, thanks. Last year in the third quarter you got a significant uplift to the EBITDA line from the sequential revenue growth from 2Q to 3Q. This year the guidance is for a flat top line. Assuming the currency remains the same, is there anything that you can point to on the cost side of the business that would lead to some kind of uplift falling through to the EBITDA line?

We don't give guidance on EBITDA. We give only guidance on sequential sales, so I don't want to answer that question.

Elizabeth Fusco, CPM Advisers.

My question relates to the upcoming decisive actions you are planning to take to deal with the drop in loading. You mentioned earlier in your remarks that this has occurred for two reasons; one, because of the product mix shift; and the other -- I'm sorry, I'm just lagging on what the other factor was, but I know you mentioned two. The question is -- sorry, foreign exchange, I think, was the second piece of your -- of the problem.

So my question is twofold here. Is it possible for you to separate out the impact on loading from the product mix versus the foreign exchange issue? Secondly, is this an announcement we should be expecting in line with the third quarter results, or would it occur later on in the year?

Let me start with your second question. It will be, rather, a series of measures that we will take. There will not be one big bang announcement. As we talk about multiple countries and multiple situations, so over the second half of the year we will take a series of measures.

And with regard to, indeed, the effects of the dollar on our cost base, clearly, we will look at all elements of our cost lineup -- SG&A, R&D and in the manufacturing area. We will look both for quick savings as well as structural savings through restructuring. There will be restructuring charges associated with that. The product mix change I explained had an effect on the manufacturing utilization. The manufacturing utilization is, on the one hand, affected by the fact that products go to more advanced CMOS and therefore can only be produced at external factories.

Secondly, the factory loading is affected by the slowing down market. Semiconductor company every year increases autonomously its capacity. This is something -- this is our way to increase productivity and to compensate on, for example, salary raises and so on. So in a normal circumstance, the capacity increases by 8% to 10% as we leverage our asset base.

When the sales don't grow, that capacity improvement still happens and then it is idle, right? So we see that, as we have been diligently working on productivity enhancement, in fact it creates capacity that is not used. And therefore, year on year, the capacity utilization starts to go down, even though, let's say, the overall sales level can be flat. So I understand that that can be a little bit confusing. So it's a somewhat more complicated picture.

Then, the only way to deal with the capacity going forward, if the sales don't grow, is to take capacity out. And that can be done through consolidation, either by combining factories or taking capacity out, as we have done in the past, in Boeblingen and in Crolles. We will not shy away from any measure in that sense. But I don't want to give you now any further heads up on what these measures can be, which we are still studying.

Steven Pawliczek, Goldman Sachs.

It looks, per page 12 of your quarterly report you referenced $17 million of share-based compensation charges as unfavorably impacting adjusted EBITA. So I just wanted to confirm that you're not adding back share-based compensation to EBITDA?

This is a book entry which is no cash payment. So, in reality, what we do is we book up these new programs as they are being approved at basically book entries. We do cash impact, if that was the question you had.

The question, I guess, is that you are saying that -- in page 12 you're saying adjusted EBITDA was negatively impacted by unstable foreign currency, and then also $17 million for stock compensation. I guess I'm trying to understand, so that's not being added back towards adjusted EBITA?

No.

Mitch Reznick, Fortis Investment.

I think previously you had guided that the working capital offload in the second quarter would be drawn down from the facility, which has been done, but that that facility would get repaid by the end of the year. So are you still guiding toward that?

Can you repeat that question?

Do you expect to reverse the working capital [alpha] sufficient to repay the credit facility by the end of the year, as you have previously guided?

Are you referring to what I said previously in the conversation, or are you referring to some sort of a statement made in a previous conference call?

A statement that you've made in a previous conference call.

I think it's not possible for Karl Sundstrom to comment on what was said in the previous conference call. And I'm now digging in my own memory, but I don't recall that we have exactly said that we will repay it from a reversal in working capital.

Let's say, having said that, I'm confident that we can find improvements in our operating business, and these certainly are committed to bring the business back to a positive operating cash flow. But I do not tie a specific date to that, and moreover we are not going to discuss the uses of instruments in this call as to exactly when we repay back the revolver.

(inaudible), [Blue Mountain].

I'm just going back to a question earlier on your accrued liabilities line item on your balance sheet, you seem to imply that your bond coupon payments flow through there. That's a little confusing because you have another line item on your balance sheet that's called accounts and notes payable. Can you just clarify what exactly is in the accrued liabilities item and how you see that unwinding in your cash flow statement the next couple of quarters?

Yes. And, you also understand how, in the accrued expenses, we do have included the accrued interests for the bond facility. And that is that you pay, if I remember right, 12% in Q1, 38% in Q2, 12% in Q3 and 38% in Q4. And the lost payment was, if I remember right, in Q2 was $193 million.

So what's the other line item on your balance sheet that says notes payable? What would that be?

Accounts payable. That's what is actually being, so to say, coming in from our suppliers.

I'm sorry, but there's a line item called accounts and notes payable. I would assume the word notes refers to the bonds, and then there's a separate line that's called the current liabilities.

But remember now, because an accrual is something where you smooth out the income statement and then, when you get notes payables coming in, it is actually a note coming in, which is a -- not an accrual.

So the notes does not refer to your bond interest payments?

No.

Can you give us a better idea what's in accrued liabilities and what kind of (multiple speakers) big, major items you can expect to see?

It could be. It's interest, accrued interest. It can all -- restructuring the one-offs. It's salary, compensation for vacation salaries. It can be maintenance contracts that you are billed once a year, and then you accrue for the cost during the year.

And now do you see this line item developing for the rest of the year?

If you exclude the interest payments on the bond, if you take away that, because that you have to model separately, then it would fluctuate with two things. With the number one, obviously you have, plus the activity levels of the business. Okay?

I think these are just technical questions. Let's move onto the next one.

Nadia Yoshiyama, Societe Generale.

There have been comments from Infineon's CEO Peter Bauer regarding or saying that basically he doesn't see any benefits in size, while Theo Claasen's has made comments saying he sees the industry needing to consolidate. Could you discuss what are the arguments for and against?

Clearly, I don't want to comment on what somebody else has said. Theo Claasen's comments I can subscribe to because he's, until the end of the month, still part of my company. In an industry consolidation -- well, I'll say it differently. In a market that doesn't grow so much anymore, by consolidating activities, for example, by merging two companies you can take out an enormous amount of cost.

Typically, every semiconductor company invests in process technology, in systems, in tools, in libraries, in standard building blocks for semiconductors, in packaging know-how, having overhead structures, having sales organizations. It is all very similar and overlapping. Even when products are somewhat different, there is a high degree of overlap in the infrastructure that is required to run a semiconductor company. So therefore, we believe that consolidation makes somewhat sense.

This is also why, for example, in the case of the wireless joint venture, we could announce in April that the joint venture expects to have a very sizable synergy number which -- without affecting the product lineup of the Company. So clearly, what you can derive from my words is that I continue to believe that industry consolidation is a good thing. NXP has been actively pursuing it as we, in fact, this year have done three transactions that create industry leaders. So we are pretty proud of that.

Okay. Frans, Karl, thanks very much for your time. This is it. Operator, can you make the closing remarks?

This concludes the NXP Semiconductors second-quarter 2008 results, investors and analysts conference call on Tuesday, 22nd of July, 2008. For any further questions, you may contact NXP's investor relations department. Please visit their web site, www.NXP.com/investor. Thank you for participating. You may now disconnect.