恩智浦 (NXPI) 2008 Q3 法說會逐字稿

Welcome to the NXP Semiconductor Third Quarter 2008 Results Investors and Analysts Conference Call on October 21, 2008. (Operator Instructions).

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

Thank you very much. Ladies and gentlemen, welcome to NXP's third quarter 2008 results conference call. I hope you have all seen a copy of the results, press release, and presentation on our Website.

Before I commence today's presentation, please be aware that forward-looking statements will be referenced during this call. 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 only give guidance for sales for the next quarter to be reported and no further detailed guidance.

As there are a number of areas you may be interested in discussing in more details, we may take some extra time in the Q&A part of this call today.

I will begin now with an overview of our third-quarter results and give the summary of the market conditions that we face. I will also talk about some of the key developments during the period and provide a progress report on our recently announced redesign program. This will be followed by a review of the operational performance of the business units.

I will then hand over to Karl, who will provide you with more detailed information on our financial performance and the financial impacts of the major corporate actions in the quarter.

All of you will be well aware that the macroeconomic climate has deteriorated significantly during the third quarter, against a background of truly extraordinary events in the financial markets. Many industry sectors are being affected by slowing consumer demand and challenging credit markets. In many cases, this has a direct impact on the demand for our products. This slowdown is seen on a global basis, although some markets will be impacted more than others.

The automotive industry, for example, an important customer base for NXP, is witnessing a significant deterioration, particularly in the investment markets. In the past quarter, we have seen a number of manufacturers announce cuts in their work forces and production levels, and the indicators do not point to any significant recovery in the near term. Slowing consumer demand and access to credit is also impacting our Home division, which is showing no signs of the usual seasonal uptick.

That said, in September 2008, NXP Semiconductors announced a large redesign program targeted to reduce its annual cost base by $550 million through major reductions in the manufacturing base, the right-sizing of the central R&D, and reduction of the support functions in order to improve our Company's financial strength, as well as to position NXP for future growth in the core businesses. I will come back to this in a moment.

Turning to the numbers, I would like to point out up front that the Q3 numbers include the wireless activities of Mobile & Personal until the end of July. Our third-quarter sales were roughly in line with our guidance at $1.336 billion, representing a comparable quarter-on-quarter increase of 1% and a comparable year-on-year decrease of 4.2%. The sales were driven by stronger comparable quarter-on-quarter performance in both multi-market semiconductors and the remaining activities of the Mobile & Personal business unit.

On the other hand, the Automotive & Identification and Home business units recorded weaker sales compared to the second quarter, primarily as a result of the factors that I've already mentioned. It is clear that the operating environment could become even more challenging, and NXP has to be prepared for this.

Therefore, during the quarter, we have taken a number of actions to better manage our costs, improve our cash position, and also to redesign our business in order to improve the financial strength of the Company and return to profitability.

As already said, the redesign program is focused on improvement of the Company's financial strength and position it for future growth in our core business. We are convinced of the necessity to lower our cost base and be prepared for a difficult market. We believe our plans are adequate, given the current environment, and we will not hesitate to take further action should the market deteriorate further.

Let me now take some time to give a progress report. We are pleased that our redesign plans are being deployed rapidly and to the satisfaction of our customers. They understand the necessity for management to take these actions in order to make NXP stronger and return the Company to profitability.

In the third quarter, $500 million has been provided for the redesign program. The consultation process with our European works council and national works councils in European countries, mainly The Netherlands, France, and Germany, are well underway. And we have started negotiating social plans. Our goal is to finalize a large part of these consultations and negotiations in the fourth quarter. The redesign will result in annualized savings of $550 million. And the cash-out of the restructuring is estimated at $800 million; of this $600 million in 2009. Our cash position is sufficient to handle these restructuring charges, even if we move towards a more challenging market.

Karl will provide further details of the financial impacts of the program.

Another key landmark in the quarter was the announcement on July 28 that NXP and STMicroelectronics closed a joint venture agreement, bringing together the key wireless operations of both companies to form ST-NXP Wireless. The transaction resulted in a gross payment of $1.55 billion to NXP. As you have seen in the past weeks, the industry has been moving, and now similar steps are being announced in the wireless arena. This once again underlines that NXP has been a first mover in the industry consolidation. Things have moved fast since the closing of the deal, and, on August 20, STMicroelectronics announced an agreement to merge Ericsson mobile platforms and ST-NXP Wireless into a new joint venture.

In relation to this, STMicroelectronics is expected to exercise its option to buy NXP's 20% stake in ST-NXP Wireless in the coming period. We cannot give you any further update on the timing of this.

As you will remember, in our last quarterly call, we talked about the improvements envisaged in cash management. We have taken further actions in cash management that are providing considerable benefits. Despite the difficult conditions in the quarter, we have realized lower inventories as a percentage of sales, as well as lower CapEx. Both have contributed to the positive net operational cash flow in the quarter. Our cash position has improved considerably to $1.535 billion, even after the repayment of $450 million under the revolving credit facility and the acquisition of the set-top box operations of Conexant for $108 million.

Now let me give you some detail on the operational performance of the individual business units. In the Mobile & Personal business, we have completed the disentanglement of the wireless activities of NXP into the ST-NXP Wireless JV. The remaining activities within the business - sound solutions, mobile infrastructure, and amplifiers - showed a sequential comparable sales increase with particular strong performance from sound solutions. Going forward, these activities will be grouped into the multimarket semiconductor business units.

For the Home business, the market continues to be weak, given the current weak economic environment and the absence of a seasonal uptick. Though CRT continued to decline, we have made good progress in digital TV, largely driven by European and Japanese customers.

During the period, we also completed the acquisition of Conexant's set-top box operations, making us a top-three player in the digital video activities. We also established a joint venture for can tuners with Thomson called NuTune to become the skilled player in this mature market.

As I said earlier, market demand in automotive declined in the third quarter, especially in the developed countries. We see reduced car production and shifts from bigger cars to smaller cars, causing a negative effect on semiconductor demands in the near term. Identification continued to increase sales, largely due to e-government business. The sales were negatively impacted by an over-stock situation in the transport market.

Our automotive identification teams continued to drive innovation in the car industry. And, today, we announced together with BMW the world's first smart car key prototype. This key ensures secure contractors' payments with our SMartMX chip sets. Further highlights include the joint development by iBiquity and NXP of HD radio solutions for in-car entertainment and share gains in US electronic passports.

Our multimarket semiconductor business executed a target program to increase the sales of existing products to boost our near-term market share. In this context, we are pleased to note that we have made inroads with a new customer, like HuaWei in China as a supplier for the [export and] telecom infrastructure.

Thank you. I now would like to hand over to Karl Sundstrom, CFO, to take you through the financial details of our performance in the third quarter of the year.

Thank you, Frans. It has been a busy quarter, as evidenced by the announcement of the NXP redesign program, the closing of the joint venture agreement with STMicroelectronics, bringing together the key wireless operations of both companies in ST-NXP Wireless and the closing of our acquisition of Conexant set-top box operations and the start of our new entity, NuTune.

On today's call, I intend to run through the overall financial performance of NXP, as well as the financial performance of the individual business units. In terms of the overall financial performance, I will provide both sequential and year-on-year comparisons for the quarter. All figures are quoted in US dollars.

We reported a sequential comparison sales increase of 1%, and in [nominal] sales, [a giant] 12.3%. The nominal sales [in time] is largely caused by the carve-out of the wireless activities on July 28, 2008. As Frans previously mentioned, our sales for the quarter were $1.336 billion. This includes $120 million sales in July 2008 of the divested wireless business and excludes subsequent wafer sales to the ST-NXP Wireless joint venture, and represents a comparable decrease of $4.2 million when compared to the third quarter of 2007.

We have a significant decline in gross margin in the third quarter compared to the third quarter of last year. This largely relates to lower utilization of our [cash] and negative currency impact of $22 million and a $321 million restructuring provision in manufacturing operations as part of the previously announced redesign program.

The third-quarter adjusted EBITDA, excluding the effect of PPA, came in at $147 million, down from $310 million in the third quarter of 2007 and a sequential increase of $33 million. Adjusted EBITDA for the quarter was $60 million compared to a profit of $136 million in the third quarter of 2007 and a loss of $29 million in the second quarter of 2008. The improved financial performance of the third quarter compared to the second quarter is mainly explained by tighter cost controls and the [trends to run] wireless business for ST-NXP Wireless.

Now let me turn to the financial performance of the individual business units. [One thing I called] excluding the effect of purchase price accounting and incidental items, and I'll provide them on a comparable basis, unless stated otherwise.

In Mobile & Personal, sales amounted to $282 million compared to $471 million in the second quarter of 2008. The number of issues include $120 million of sales in July 2008 and a corresponding negative 90% EBIT contribution of the divested wireless business and excludes subsequent wafer sales to the ST-NXP Wireless joint venture. On a comparable basis, sales actually grew by 10.5% sequentially and 1.9% year on year.

Adjusted EBIT amounted to $21 million compared to a loss of $43 million in the second quarter of this year and compared to $38 million in the third quarter of 2007. The lower profit was mainly driven by the lower sales and an unfavorable currency effect of $6 million.

In whole, sales amounted to $212 million compared to $196 in the second quarter of this year and compared to $241 million in the third quarter of 2007, a comparable year-on-year decrease of 20.5%, mainly caused by the continued decline in CRT and the weakness in the retail and can tuner markets.

Adjusted EBIT showed a loss of $40 million compared to US$90 million loss in Q2 this year and a loss of (inaudible) in the corresponding period last year. Despite the effects of the lower sales, the improvement in adjusted EBIT was actually due to the benefit of higher margins and lower operating expenditure resulting from the ongoing restructuring in the Home business.

Automotive and Identification came in at $326 million compared to $359 million in Q2 2008, a comparable decline of 7.2% and $329 million in the third quarter of 2007. The decrease was largely driven by the deterioration of the automotive market during the quarter. Identification reported year-on-year comparable growth.

Adjusted EBIT amounted to $72 million compared to $78 million in the second quarter of 2008 and $74 million in the third quarter 2007. While there was a positive impact of improved project margins, this was largely offset by increased investments in R&D and lower sales volumes.

Marked to market semiconductor sales amounted to $425 million compared to $416 million in the second quarter of this year, a comparable increase of 3.5%, and $417 million in the third quarter of 2007. Adjusted EBIT came in at $74 million compared to $63 million in the second quarter and $88 million in the same period 2007. Adjusted EBIT during the period was impacted by higher investment in R&D and increased selling expenses.

Sales in manufacturing operations amounted to $107 million compared to $61 million in the second quarter and $50 million in the third quarter of 2007. The increase mainly relates to the wafer sales in conjunction with the divestiture of our wireless business and sales to DSP Group in connection with the sale of our cordless and voice-over-IP terminal operations in the third quarter of 2007.

EBIT in the third quarter amounted to a loss of $453 million compared to a loss of $88 million in the second quarter of 2008 and a loss of $12 million in the same period last year. Included are incidental items of $324 million, largely related to the restructuring charges resulting from the NXP redesign program.

Adjusted EBIT was a loss of $43 million compared to a loss of $55 million in the second quarter of this year and a profit of $29 million in the same period last year. Adjusted EBIT was strongly impacted by the lower utilization rate - 68% in the third quarter of 2008 versus 78% in the second quarter of 2008. The impact of the strong euro on the organization (inaudible) [and price solution]. This was partly offset by the realized cost savings in the manufacturing organization. The disappointing decline we have experienced in utilization rates is largely due to the decrease in demand. However, actions being taken in our redesign program will work to greatly restore higher loading levels.

Sales in corporate and other were $22 million, relating to IT licensing and software compared to $22 million in the second quarter of 2008 and $24 million in the same period last year. Adjusted EBIT was a loss of $103 million compared to a loss of $62 million in Q2 2008 and a loss of $73 million in the third quarter of 2007. The adjusted EBIT included in noncash loss or evaluation, or [currency] contracts of $42 million and includes a noncash charge for share-based compensation programs of [$40 million]. Adjusted EBIT stood at a profit of $60 million in the third quarter of 2007.

Moving to our cash management, cash at the end of the second quarter stood at $1.535 billion, up from the $660 million at the end of the second quarter, a figure that includes the $450 million that was drawn under our revolving credit facility in Q2. That full amount has been repaid in the month of September.

Net cash provided by operating activities in the reporting period was [$170 million], and it was primarily related to decreased working capital. Specific actions taken to improve working capital have been effective, especially in terms of higher inventory turnover and reduced overdue receivables. In addition, net cash provided by operating activity are positively impacted by the timing of salary payments of September, which provided a positive impact of approximately $60 million for next quarter.

Net cash provided by investing activities was $1.299 billion, which was comprised of net cash proceeds of $1.463 billion from the divestment of the wireless activities, which was partly offset by the acquisition of the Conexant set-top box business, which was $108 million and the capital expenditures of $62 million.

The closing of the joint venture agreement bringing together the key wireless operations of both companies to form ST-NXP Wireless transaction resulted in a gross payment of $1.55 billion to NXP. As said, the net proceeds related expenses in Q2/Q3 were $1.453 billion.

The overall result of the transaction was a [lump] of $402 million, as you might have seen in the quarter reported table showing the calculation of the net available cash and the use of proceeds related to this transaction.

The number does not include any amount for taxes yet. We are still in the process of finalizing the global tax analysis. Our current estimate is that the total tax charge is in the range of $200 million to $250 million. Around $100 million is the short-term cash impact. We will update this table on a quarterly basis. It's on page 17 in the report.

It is also worth noting that, even at one stage of the preparation and deployment of our redesign plan, we have taken a provision of $500 million of the total previously announced $800 million during the third quarter in conjunction with our annual impairment test based on US GAAP and taking into account the implementation of the redesign program, the current market environment, and the divestiture of our wireless business. We have written down intangible assets and tax assets for an amount of $960 million. $706 million is related to intangibles, and $264 million is related to tax assets.

One other aspect of our financial management that I would like to share relates to our hedging policy. Our policy remains to hedge all permitted transaction against the functional currency of the relevant entity. Furthermore, we're [exiting] certain longer-term hedge transactions by anticipated exposures where we have sold US dollars versus euros. We do not use hedge accounting. So the result of our longer-term hedges are booked immediately into the P&L.

And, finally, our book to bill stood at 1.0 in the third quarter of 2008 compared to 1.03 in the previous quarter.

In terms of our outlook, the stability of sales development going forward is limited as a consequence of the deteriorating macroeconomic conditions. In combination with the overall consumer sentiment and recent order book development we expect an 8% to 14% sequential sales decline in the fourth quarter on a business and currency-comparative basis.

Thank you, and I would like to hand over-- I'd like to open up to you guys for questions. Jan Maarten, can you take over?

Thanks, Karl. This is Jan Maarten, you host, and, as usual, I will facilitate this Q&A session, and I will address the questions both to Frans and Karl. Again, please would you limit yourself to one question, as this will give more people the possibility to ask questions. There are many people on the call again. Any further questions may be answered after an eventual second Q&A call by the operator or may be addressed directly to me after the end of the call. With that, I would like the operator to start a Q&A session.

Thank you, sir. (Operator Instructions). The first question comes from the line of Sundar Varadarajan from Deutsche Bank.

I just had some questions on the utilization. Given your guidance for the next quarter -- 8% to 14% sequential decline on a comparable basis -- and the fact that you would be heading into what is normally a seasonally weak quarter, combined with your [first to reduce] inventory, how do we see-- Where do we see utilization kind of bottoming out? And, as a second part of that question, given the restructuring actions we are taking in terms of consolidating (inaudible), when do you see that having any impact on your utilization levels? Is it more towards the back half of next year or perhaps even into 2010?

Pretty good questions. As you know, the throughput time for manufacturing in the semiconductor business is approximately three months. That means, in effect, see a reduced loading in Q3 already the weaker sales of Q4 expressed. Normally, Q1 is also a weak quarter, and that will have some affect on loading going forward. At the same time, we are working on transferring products from the factories that will be closed to the factories that we want to continue with. We will have some bridging stock being prepared for that. So those are the factors that you should keep in mind in thinking about our loading. We do not give a precise guidance for loading in the forward period.

Your second part of the question relates to when we actually will see the benefits of the factory closings - in the remaining factories. We're working as fast as we can to take out the capacity, in the United States, Fishkill, and, in France, Caen, especially the Fishkill facility would provide loading for our factories in The Netherlands and Singapore, and that's [going to be] visible in the second half of next year. The loading consequences for the more automotive-related products-- That will be especially visible in the course of 2010.

Just to follow up to that, if you-- Based on the current kind of demand environment -- If you actually had already consolidated the Fishkill facilities and the consolidation in Europe that you are currently planning, where would utilization have been in this quarter, if in fact some of those factories were closed?

We do not give a specific number for a hypothetical loading in this quarter. But we have said during the announcement of our redesign plans on September 12 that it is our goal to strive for a loading of our remaining factories in the high 90s.

And one housekeeping question. The $500 million charge you took this quarter -- Can you break it up between cost of goods sold and SG&A, just so that we can work on our actual, normalized gross margins.

In my presentation, I mentioned $321 million in costs. That is operating expenses.

And could you give a split between selling and R&D?

I don't have it on the top of my mind. The question was -- What is SG&A, and what is R&D? I don't have that. And, at this moment, we are not giving that out, but let us see, because we have the information.

Thanks. I'll get back into queue.

Thank you. The next question comes from the line of Lee Zeltser from Merrill Lynch. Your line is open.

A quick question. Your sense of inventory in the channel in the end markets -- Where do you think inventory is at your customers? Is it at normal levels? Would you expect further destocking? If you can comment on that a little bit?

Just a quick follow-up question with respect to your balance sheet strategy. Do you expect to be repurchasing bonds or looking at repurchasing bonds, given the current discounted levels?

I think inventory is on everybody's mind and, certainly, also on mine. Let me start by the inventory of NXP itself, which I think we have done a very good job in reducing, and we are now at around 12%. So we have significantly improved our own inventory position.

With regard to the typical distributors, we see that there is between two and a half and three months of inventory in the channel. For a quarter three, normally, that would not be totally abnormal. But, given the fact that we don't see seasonal uptake, it is on the high side. And you can see that reflected in the immediate actions of the distributors to try and reduce that and lowering their orders.

So I think the industry is acting responsibly to deal with inventory. But, in the market, it is on the high side. Similarly, with OEMs, we see behavior of immediately reducing their orders. This is also why, I think, the outlook of many semiconductor companies, including our own, gives you quite a wide range as the long-term order book is very limited and people are basically living hand to mouth.

And the second part of your question, if we are intending to buy back bonds -- The answer is no. In the current market environment, we want to keep the liquidity. It's also important to realize that we are going into a restructuring period. And, when it relates to eventual excess proceeds in conjunction with the deal with ST, we intend to stick to the conditions in the bond.

Thank you.

Thank you, sir. The next question comes from the line of Robert Hopper from UBS Financial. Please go ahead.

It's Bryan Pierce for Rob. The first thing was just a quick clarification on the 8% to 14% guidance for fourth quarter. I just wanted to make sure that that excluded the one month of wireless sales from the third quarter.

And then my question was about operating cash flow. It was better than we had expected for the quarter. It seemed like there was benefit from receivables, payables, as well as inventory. On the inventory side-- On the balance sheet, the inventory was down about $280 million. The benefit on the cash flow was about $68 million. So I wanted to-- If you could just talk about the difference there and how much inventory was transferred to the wireless JV versus, perhaps, currency impact there--

And, then, the follow-up to that is, on the redesign call, you guys had sort of talked about using operating cash flow for the next four quarters through the first half of '09. Given the progress that you've made on working capital this quarter, have you changed those expectations at all? And was there additional improvement that you think you can make, even in a difficult environment - sort of, generate some cash before that timeframe?

On the first question, some inventory was part of the deal made when we struck the deal with ST. That's slightly more than $200 million which was transferred. We are now back on a level of inventory over sales that we think is in the right area. Last quarter before this, we were at [15.9%] of our sales. We're now down to 12%. And that's an area where we are working hard to maintain it at. So the focus on cash management will continue and making sure that we run lean and mean in inventories.

You had too many questions.

The second was about the improved cash flow.

We always are saying that, when you run a semi business, you run it in weeks, which means that with those $60 million of salaries, which was coming into Q4 means that we will have in certain countries double salaries. And we don't give any guidance on cash flow. The only thing I can say is this is one of the top priorities to get with the redesign program in the Company.

So you're sticking by the prior commentary on the redesign call about the expectation to burn cash flow through the first half of '09?

Yes. We stick by the statement that the second half of '09 will be cash flow positive. But we are extremely focused on preserving cash, wherever we can, through the operations, and we will be very, very careful.

Okay. And then just a clarification on guidance. Does that exclude wireless for--?

Yes, that is. That is basically [1260], if you take away the 120.

Thank you, sir. The next question comes from the line of Frank Jarman from Goldman Sachs. Please go ahead.

The first question I had was on CapEx. It came down pretty significantly in the quarter. I'm just wondering if that's sort of the number I should think about on a run-rate basis going forward. Thanks.

I have said previously when we have had the call on September 12 that, with low growth going forward, I think the range you should look upon is around $300 million. But, obviously, that has to do with how the market is going and whatever we can get a very tight machine. So that remains, that guidance.

Okay. And just a follow-up. Given the swing we've seen in the US dollar/euro exchange rate, how should we think about the headwinds going forward? Is there a certain point you can help me think about when you may actually see currency be a tailwind instead of a headwind?

I think that is a very good question. As you see on page number 7, we have actually made a little exhibit explaining how we get to the effect on EBITDA for the different quarters. And there is one called "Currency Contracts." As I said in my introduction speech, we don't have hedge accounting. So the row called Currency Contracts, that hit us immediately. And we had a fairly big swing in the third quarter where there has been a strong movement in the currency contracts. If those swings doesn't continue in that direction, because I don't have any crystal ball, the translation effect will, over time, continue to be positive, if the currency stays at this level that it is today. So you get the one-time effect from the currency contracts, since we don't have hedge accounting. And, then, you get concentrated over time with translation effects.

Okay. Great. Thank you.

Thank you. The next question comes from the line of David Smith from Citigroup. Please go ahead.

Can we talk a little bit about some of the takedown for what we're looking at in the operating expenses with R&D and SG&A? It looks like your R&D didn't come down as much as I was expecting, and SG&A actually trended higher. As we look forward to this, should we be thinking about it coming down pretty rapidly very early in 2009? And how do we think about it as we go through the next couple of quarters?

And, then, on the CapEx question, is 63 to 75-- Is that kind of the new level that you would expect to go forward for the next few quarters?

First of all, you should be aware of that some of the R&D people sometimes works in selling, depending on how active you are on certain projects, like a design win. So I don't think this has to be very, very detailed on exact-- if it's selling and G&A or R&D.

The other thing is, when you take down R&D, you have to do it on a very regular basis, making sure that you keep the [confidence] and finish [our] product.

When it comes to CapEx, I've said, if you're in the level of operation that we are today on a no-growth basis-- I think the number of CapEx, as I said September 12, is about $300 million. Did that answer your question?

Maybe drill down one more time on the R&D and the SG&A. If we're going to be at a lower sales level, would we expect SG&A to be at a meaningfully lower sales level, at about $500 million? And, backing down the gross margin where you are from last quarter was 22%. It's making it hard to make the numbers positive in the fourth-quarter outlook.

I don't give any guidance in the fourth quarter. But you have to see that the reduction we've had now between Q2 and Q3 is just a cost control. You have no effect of the redesign yet. That's still to come.

And, as you worked through that cost control, is that something that you're implementing now that will happen early in 2009, or is it kind of--?

What I'm trying to say is the cost control that we've been running since April is paying off now. And then you will start to see the effects, first in OpEx. And, of the $200 million or $250 million of savings in OpEx, as we announced September 12, the majority will be implemented during 2009.

Fair enough. And just one more clarity point. On the tax charge that you're estimating, could you state that again -- what you're thinking about for the cellular business?

Yes. All in all, we've said it's going to be between $200 million and $250 million, which is not included in the exhibit in the table on page 17. You know, which $100 million will lead to a direct short-term cash impact.

Does that mean it's $100 million of cash taxes that are coming out of that and the rest are the accounting taxes?

They are also taxes, cash out, in the longer term.

Okay. Got you.

Thank you. The next question comes from the line of Jeff Harlib from Barclays Capital. Please go ahead.

Hi. Just on the cash flow, the $246 million charge you took related to wireless-- Can you talk about how that's spent. Is that over the next few quarters? And, also, how you're looking at the $600 million of cash costs for '09 on the restructuring? Should that be front-end loaded just for cash flow purposes?

At $246 million, you're referring to the exhibit on page 17, right? The big part of that is actually over a period of time because part of it is provisions that we have made in conjunction with the deal. And the [lesser] part of it is actually an M&A cost. Okay?

Okay. So that's over a several quarters or--?

Yes. Some of it is over the next three or four quarters. Some of it is over a longer period (inaudible). Some of it is the M&A costs that we are paying to bankers and stuff. And some of it is actually liabilities and pre-billed settlements.

Okay. And the $600 million?

The $600 million, what we have said, of the $800 million is going to be mostly in the first half of 2009. You might even get small effects already in Q4.

Okay. And just on the euro-- I just want to make sure I understand this. You had a significant-- The $42 million in currency contracts, that's some of the hedging--?

As to the valuation of the hedging contract, it has no cash impact.

Okay. But it is included in your EBITDA, right?

Yes.

Right, okay. And how do your currency contracts look going forward over the next few quarters? How much have you hedged so we wouldn't see the benefit of the weak euro?

What we have hedged is order book, balance sheet, and then, with a probability of future floats coming in, up to a year, but with a lower probability in the fourth quarter--

Okay. Can you say about what percentage, then, of your--?

If I remember right, it's 25% in the four quarters ahead and then going to back to 100% of orders booked. (Inaudible) and those balance sheet items.

Okay. And the last question would be - Have you seen much pricing pressure across your businesses with the revenue weakness?

Well, we usually distinguish between two types of business. We have commodity business, where the pricing pressure is almost immediate because our stock markets. That accounts for approximately 20% of our portfolio. And the rest is design in business, where you must more work with annual contracts and quarterly contracts and where there is no immediate price pressure in a down period.

The second half of the year is the usual period in which annual contracts are being renegotiated. And it is a somewhat confusing period because we saw very high costs of energy and gold and all these things earlier in the summer. And it suddenly came down. So we also see customers reassessing their position as to what they would like to negotiate. As a consequence, negotiations between customers and suppliers are a little bit late. And there is not yet a definitive statement to be made. Certainly we are trying to limit price erosion wherever we can, unless it really has an effect on sales going forward. I realize that I'm not very precise. Apologies for that, but you realize that this is not something that can easily be explained over the phone.

I think customers will try everything they can to get the maximum. And we will be very careful.

Thank you, sir. The next question comes from Michael Boam from BlueBay Asset Management. Please go ahead.

Hi. I just wondered, if you assume that your entire wireless business transaction has been completed, what would pro forma sales and the EBITDA be for the last 12 months, please-- and the CapEx?

The last 12 months?

Yes.

I don't have that (inaudible). 2007? Yes. The last 12 months from now.

Or you can give me sort of the nine months.

Bear with us for a moment.

That's fine. Don't worry.

You have to be very clear. To take out that kind of business, out of the accounts-- because it's basically open-heart surgery-- because you're referring to the divested business, right?

Yes. I just want to know for continuing operations.

That's why we, in this call, gave you an indication of the $120 million and the negative EBIT margin of 19% to give you information. We are working now, trying to get to some sort of information that we can help you going forward. But the ongoing operations-- We don't have that ready now.

I had a call with Jan Maarten last Friday. The wireless business, although it's effectively been sold, you are still producing at least for the front end of that, which is still generating sales to the Group, although at very negligible margin. Is that correct?

No. What we do is we have a wafer supply agreement, which is what we estimate to be some $125 million according to those prices that we have agreed with them going forward. But you have to remember also from previous calls that the wireless business that wedivested, was the business who had the highest part of third-party because it was very much in [345], which we don't have in our [past]. That gives you only an indication of what front end we are selling to them. And that is according to a price formula that we agreed when we signed the deal.

So in terms of ongoing sales, you will be providing $125 million, annual, to the venture.

No. The offer is per month. And it will depend on how the business develops in the JV and what they order from us.

But will you be making margin on that, or are you providing it on a cost-plus basis?

You have already said a negligible margin. That's pretty close.

These are what we have on page 7 that we intend to continue to share with you. So, for Q3, it was $38 million. On page seven you have (inaudible). And then you have wireless business wafer, page 38.

Okay. Just on the tax side, when do you expect to have to pay the $200 million to $250 million?

I said $100 million is in the next couple of months because it has to do with the transaction. And the remaining part, which is then $100 million to $150 million, is over a longer period.

Any idea of what a longer period is? Is it two years, five years?

It's more than one year.

Okay.

Thank you, sir. The next question comes from [Arum Sheshablie] from Credit Suisse. Please go ahead.

Hi, gentlemen. Thank you for taking the call. Just two quick questions. First, you've spoken previously and said that your ongoing CapEx would be deducted from net proceeds before you kind of determined the definition of excess proceeds. Is there a view on how much of restructuring will also count against that?

We have not given any indication because it has to be-- how we can pinpoint that. And we will, as we said in the introduction, update the table on page 17. And it's not all CapEx where we [qualify]. CapEx in SSMC are not part of it and cannot qualify. And that's why we in the table call it relevant CapEx. So year to date, since the signing of the deal, we can deduct $17 million.

Okay. I appreciate that. Second, specifically, you mentioned during the redesign call that your view was that you don't expect to be looking at acquisitions until the redesign is sort of in good shape. Do you still maintain that?

Yeah. Indeed I said that. I said two things. First, we are totally focused on the redesign and getting the Company in good shape and navigate the tough weather around us. The second thing I said is that, structurally, we are interested to look at acquisitions to strengthen our portfolio. And, possibly, that would then happen sometime later next year.

Okay. And just a last question-- This is a housekeeping question. Of COGS and SG&A, how much of it in the third quarter was just purchase price accounting? We used to disclose what is PPA in each of those-- in each of COGS and SG&A in your MD&A. But I noticed that it wasn't there in this quarter.

I think it's in there.

I think it's [SG&A] plus the redesign, incidentals-- but just PPA, you don't disclose.

If you go to slide 6, I think you have it.

Okay. I will follow up. Thank you.

Thank you, sir. The next question comes from (Inaudible). Please go ahead.

Thank you very much. I have a question about your gross margin for the quarter. You have a table that talks about gross margin, excluding the wireless business. And it showed a 5.5 percentage point decline, sequentially, from the second quarter on a 10 percentage point decline in loading. So what I'd appreciate your doing is to reconcile how much of the drop in gross margin was attributable to the lower loading, how much to the price erosion that you mentioned, and how much to foreign exchange? I think I have the foreign exchange bit. But is that net negative $22 million? It appears to be. Can you confirm that?

Can you tell me where you're taking these numbers from?

Oh, I got that from your third-quarter report.

But we have told you how much the wireless faces. We have told you how much we have in negative EBIT margin of the divested, which is for the month of July. We are telling you how much the wafer sales are, which is $38 million. And then we are giving a currency table below that, which tells you what the EBIT-- EBITDA impact is on currency. Okay?

My question is really like a pretty basic question, which is - If your loading drops by 10 percentage points, from 78% to 68%, and your actual gross margin only declines by 5 percentage points, if we exclude the wireless business, then how do you reconcile that? Why shouldn't it be a 10 percentage point decline in gross margin? That's really the question.

No. We have had significant cost savings in operations. And, as you can see, if you take the sequential results between Q2 and Q3--

Right. So you're saying that the difference between a drop in 10 percentage points and your actual drop, which is 5.5 percentage points, is really cost savings? Am I understanding you properly?

I think you are reading something which was not the intention here because you do have page number 7, right?

I am looking for the actual table. I did go through your report quite thoroughly. But I'm human and could have made a mistake. You're directing me. No. No. I think you have a table that shows gross margin, excluding the wireless business. So that is what I'm referring to. Oh, yes, yes. It is page seven. Absolutely. Right. So your sequential gross margin, as a percentage of sales drops from 36.5% to 31% sequentially. Yes?

Yes.

It's on page 7, right? Actual loading dropped from 78% to 68%.

That's correct.

Okay. So if your loading drops by 10 percentage points, why is it that we don't see the full amount of the drop in your gross margins as a percentage of sales? And you said the answer is cost.

Yes. Cost of operation, which is being reduced. That is one.

This is a cost program that you aren't given detail on any longer?

No. But that's also normal in any kinds of operation, and we have done that all the time, when loading drops, you start to take out costs.

Look, I understand it's normal. And I actually thought that the gross margin was going to be lower than it was. So this is a good thing. And I'm trying to understand how to do the numbers for the fourth quarter. And I understand you're not giving us any guidance for that. But, you also mentioned earlier in response to a separate question that some of the drop in loading is done in anticipation of your order book. So I don't know whether 68% was the actual loading that you had through the quarter or whether it was the loading that you had at the end of the quarter.

That's the average loading for the quarter.

That's the average loading for the quarter?

Average loading for the quarter.

Okay. So we can, in fact, expect the average loading to decline, if your expected sales are going to decline. That's just a normal part of how your business operates. Is it not?

And I did make the distinction that, due to the transfer of factories, we will create on bridging inventory, and that will have some effect on the average loading. But, back to your question - 36.5% to 31% - there are all sorts of effects, because we have taken businesses out, we are adding businesses in; therefore, there's also mix changes. And we will take your question and see where we can make a simple answer for it.

Yeah. I think I see a reconciliation of that number. Again, using the factors that you've talked to us about - how much is loading? How much is foreign exchange? How much is price erosion?

(Inaudible) your question and we will see what we can do with it.

And there is another variable that you should have in mind doing this. And that is the line called gross margin currency contracts. You see there's this negative $42 million?

I'm sorry. Are you referring to the same page?

Yes, further down.

But that's not in gross margin. That's in your corporate expense. Is it not?

No. That's in gross margin.

It is?

Yes.

Even though in your business segment it breaks down as corporate, it's in your gross margin? Okay. Yes, that would be extremely helpful.

Could I just ask one more question, which is - How much cash tax you actually paid in the third quarter? Can you help me with that?

Cash tax?

Yes. How much in cash taxes did you actually pay?

Very, very, very little.

Okay. So less than $10 million?

No, no, no, no. I don't think it's a million.

Really?

When we talk about the cash tax of the $100 million in conjunction with the establishment of the joint venture, that is transaction tax.

Yes, understood, understood. But there was a large tax item in your income statement, and I just wanted to understand how much of that was actually tax. And the answer is--?

(Inaudible) deferred tax assets.

I'm sorry. Say it again.

DTA - as a write-down.

All right. So you don't expect any difference in your cash taxes, apart from the transaction - the transaction tax that you have to pay in conjunction with the joint venture going forward. I know you don't give guidance, but at a point in time--?

Not in the short period.

Okay. Thank you very much.

Thank you. The next question comes from Jake Kemeny from Morgan Stanley.

I just had a couple of clarification questions. The first one is-- I just want to be clear on the guidance for the fourth quarter. Should we think of that as the revenue less $120 million that was included in this quarter but was really from wireless that was divested? So, is the [down 8% to 14%] on top of a reduction of $120 million from this quarter?

$116 million minus $14 million.

Okay. So we're going to sift out the $120 million and then down 8% to 14% from there?

Yeah, if you compare (inaudible).

Okay. And then, on the tax for the sale of the wireless business, did I hear you correctly? It's going to be $100 million in cash taxes in the near term and then, potentially, another $100 million to $150 million in cash taxes over a longer period of time?

That's correct.

Okay. So $200 million to $250 million in cash tax over a year plus?

Yes.

Okay, And then one final thing. How much Conexant revenue was included in the Home business results for this quarter?

If I take NuTune and Conexant, it's less than $20 million.

Okay. Thanks. That's all I had.

Thank you. The next question comes from (Inaudible). Please go ahead.

Hi. Just a quick question - a follow up on R&D. Can you just help me understand better? You had R&D drop down as a percentage of sales to about 17.5%. But, going forward, you're still performing wafer sales. I just want to get a better sense of how much of that R&D is subject to decline given the wireless businesses now.

I think we should make two remarks. First, I would like to repeat the remark that Karl made. Some of the R&D folks can be working on design-in projects, and then their costs are being booked on the selling expenses. So there are communicating vessels between R&D and SG&A, depending on the job that the R&D people do. This is, I think, in the quarter, resulting in a quite low R&D, whereas, normally, it would have been a little bit higher and the selling expenses a bit lower.

Then the second part is how we have split out the JV. Maybe, there, Karl, can say something.

There are two parts of the R&D. Part of the R&D going forward (inaudible) actually transferred over to the joint ventures. And there's also part of the R&D that we for a number of quarters and months bill technical work for, which are sold to the joint venture on a [predefined] basis. Some of those people will when the job is over may be part of the redesign project, and some of them will stay in the Company.

Can you provide a little bit more color. I understand that they're bifurcated in sort of two categories. I'm trying to figure out what the scale would be.

Our intention over time, and when we are ready with the redesign, is that the R&D-- [nominal] amounts will be less than it is today.

We strive for an eventual percentage between 16% to 17% of sales in a normal business environment.

Okay, but that's roughly flat from what you're at right now. You're at 17.5%. So I guess what you're telling me is that we should expect R&D dollars to go down as a percentage of nominal. It will go down with sales declines. But, as a percentage, it should still stay flat. You're not going to really pick up any--

I think we have both tried to say that R&D in the quarter is under represented-- understated due to a relatively high percentage of design-in activities. And, hence, the selling expenses are overstated. There are a substantial part of R&D cuts in the redesign program. These are (inaudible), of course. So there will be significant R&D reductions.

The unit you normalized to Q3 '07 now that you're picking up maybe $13 million of R&D into [235]. That still represents 18.5%. You're only picking up maybe a percentage or a percentage and a half. So I don't see the significant drop that you're talking about.

Just to be very clear in what I said, when some of this technical work is over (inaudible) provide according to the technical service level agreements, we have to take those people up.

Remember that the TSJ, the transaction service agreements are not booked as sales but as negative costs. Hence, you don't see it.

Okay. Thanks.

Thank you. The next question comes from (Inaudible) from Deutsche Bank.

I just have two brief questions. The first one-- Would it be possible to break out the organic auto performance in Q3 and then also what you expect in Q4 and, if anything, if you expect Q4 to be worse than Q3 in automotive.

And then, secondly, on the 19% negative margin in wireless, is that an adjusted EBIT number, or is that the (inaudible) EBIT? And what would be the adjusted EBIT margin? Thank you.

(Inaudible) the last question. You have to remember that taking out this, as I said a couple of times, is like open-heart surgery. And that is the actual performance in the month of July. Of course, (inaudible) transformation have ups and downs. And I think I'll leave it there.

When it comes to the auto, Frans--

Look, with a guidance of minus 8% to minus 14%, obviously we expect that our businesses will do worse in Q4 than in Q3, and automotive is no exception to that.

Okay. Thank you.

Thank you. The next question comes from (Inaudible). Please go ahead.

Can we just quickly clarify the adjusted EBITDA currency impact that you talked about on page 7 of the report? I've got two 3Q numbers, and I've got one that's minus 62, one that's minus 13. If you could just clarify which is the correct amount for the third quarter on a standalone basis.

And then, on end customer concentration after the handsets (inaudible), at the time of the LBO, you talked about Sampson being around 8% of your customer base and Philips group about 7%. How does it stand pro forma, the handset business now?

Let me start with the second question, and then Karl can look at the first question. We have not made a detailed calculation of the customer split. It would be interesting to note that the sales to wireless customers after the divestment of the wireless business is still significant, and that is because our multimarket semiconductor activity as well, as the sound solution activities, are all supplying to the handset makers. In fact, post wireless transfer, Nokia is our largest customer. That is almost all MMS and sound solution related activities. Philips is percentage-wise now a little bit bigger than it was prior to the wireless handset, but it is not significant.

So (Inaudible) is 8% or more, and Nokia is in the sort of 10%-plus range?

Yes, something like that. Look, I don't mind giving in the next call-- to talk a little bit more about customers and to come back on this. I understand--

Obviously, for us, it's quite important because, if we have such poor visibility in terms of your guidance, it helps for us to have a feel for what are the pressure points.

Yes. So, what I do know by heart is that approximately 40% to 45% of our revenues is to end large OEM customers.

Okay. And on the currency impact?

The question was - Why do we have year on year minus 62?

Yes.

And why do we have sequential 13?

Because they're both exactly the same columns all the way down. I'm taking it that they're individual quarter figures.

No. It's a comparison. What is the effect of the currency rate translation-wise and hedging, or revaluation of contracts, compared to the rate a year ago, and what is it compared to the rate a quarter ago.

Okay. So, in effect, where, last quarter, you said it was a $17 million impact, what was the effect this quarter?

Now it is 62.

Okay. Tremendous. Thank you.

That's why we have detail on year on year and then on sequential.

Okay. Thank you.

Thank you. The next question comes from William Matthews from Canyon Capital. Please go ahead.

Just to clarify, the (inaudible) proceeds from the wireless business, you've outlined to redeploy in the restructuring program over the next two years. So none of that will be deployed for continued acquisitions. So it's your understanding as part of the bond indenture that you then do not have to make payments to the noteholders?

We have not said anything like that. We have just made a table available how you calculate the net cash, the excess proceeds, which is a part of the bond covenants. And what you can deduct from it to get to an amount that could be, if there are excess proceeds, deemed to be retained. That's what we do [under 17] on the table - nothing else.

Okay. So, as to the table, the net proceeds minus user proceeds is roughly $700 million.

At this moment. And then I think I'll note that any provisions, of course, directly linked to the creation of the wireless joint venture might be deducted. Then we are allowed to use proceeds for certain CapEx, which is in the [guarantee] group, acquisitions and repayment of the revolver. This is a question that was raised during the last call. How much are you going to repay, and how do you get there? And this is how it's defined in the bond covenants. And we intend to update that table every quarter to keep you informed about how we see upon this.

Okay.

Thank you. The next question comes from [Eric Moss] from (inaudible). Please go ahead.

Just a couple questions on your cash balance. How much of the cash that you have, the $1.5 billion-- How easily accessible is it? Where does it sit in terms of reside geographically? And then, also, on your liquidity of your unused revolver, is the roughly $730 million unused-- Is that fully accessible, even though it's unused?

We have all the cash in at least AA- rated banks. The majority of the cash is in Europe. Of the 500 million revolver (inaudible), EUR500 million is fully accessible. And we have in that-- 40 to 60 is in Asia on this 1635 in cash.

40 to 60 is in Asia?

Which is-- And 147 is sitting with [SMC].

Okay. So, when you say that most of it is AA- rated and is in Europe, have you had any problems accessing this cash at all?

The majority is actually on a higher rating.

Okay. So, just to repeat, the $729 million is fully accessible.

The EUR500 million, which is the denomination of the revolver facility, is fully accessible.

Okay. Great. Thank you very much.

Thank you. The next question comes from Jean-Yves Guibert from BNP Paribas. Please go ahead.

I have a follow-up question in respect to your net available cash concept. Could we assume that, within the $800 million of (inaudible) recurring costs, of which $600 million to be incurred within one year, that some of these costs will not have incurred without the asset sale of your wireless business? In other words, could we assume that a specific portion of those recurring costs would come in addition from the gross profits?

Some of them might come, and I will report if they come.

I'm sorry?

Some of them might come. That's why I made the asterisks very clearly in the table on page 17 in the report.

Okay. So the figure of $246 million as transaction-related costs could increase going forward?

Yes.

Okay. With respect to a (inaudible) figure as to the taxes, shall we factor in an expected figure in relation with tax of between $200 million and $250 million, or we could only take into account the tax portion, which will be paid out within one year?

$200 million to $250 million you should factor in.

Okay. That's it. Thank you very much.

Thank you. The next question comes from Andrew Brown from Conning Asset Management. Please go ahead.

Just a quick question on your bank covenants - where you stand, what the tightest covenant is, and if your agreement with the bank contemplates the redesign plan and possibly the expected downturn coming in the next quarter?

We have no such financial covenant in the bond documentation.

For the revolver, do you have any covenants?

No. We have no maintenance covenants.

Okay. Thank you.

The last question comes from [Adam Moss] from Columbia Management. Please go ahead.

You disclosed in your quarterly report that your remaining 20% investment in the wireless JV was going to be carried on the balance sheet at fair market value. I'm just curious if that fair market value equates to what you expect to receive on the remaining 20% stake.

I think I will answer that with the following. It's a very specific formula that will decide the value when ST calls their option, and that is a 12-month formula, depending on sales and EBITDA. And that is the number that will decide the value of the remaining 20%.

Okay. And then, just finally, within the Home segment, pro forma for the contribution of Thomson's tuner business, along with the acquisition of the set-top box assets, what percentage of your sales today, then, are from the CRT TV end market?

I think I'll answer that in a different way. That was that, combining the set-top box business from Conexant and the NuTune, those together were less than $20 million of sales in Q3. I think that's the same.

Okay. So not much from the new businesses. So how about historically then? What has analog represented in terms of overall sales within the home segment?

I think we have gone over analog in the past, and we have shared that the proportion of analog CRT was very, very high and, also, given the great market share that we have in analog CRT. Now, that has come down quarter on quarter, whereas now, finally, the digital part is growing rapidly. We see a very significant sales rise between Q2 and Q3. And we are now getting close to a 50/50 type of relationship between chips for flat-panel TVs versus chips for CRT TVs. So we have come through a very long journey, and it has been quite an arduous journey. But we do see progress in the digital business. At the same time, I would hasten to say that we still have a lot more work to do to grow the top line. And, certainly, the market conditions there do not help. But we remain very confident that, going forward, we can complete the turnaround of this business.

Thank you very much.

All right. Well, folks, this concludes our presentation and discussion. And I'd like to thank you all for your patience and very good questions. Rest assured that we will continue to work 24/7 to make this business healthy. And we believe that our plans are well positioned and catering to deal with the adverse economic environment. We take this very seriously, but we also are confident that we can handle it going forward.

We would like to welcome you back in the next call. Thank you.

This concludes the NXP Semiconductors first quarter 2008 results investors and analysts conference call on Tuesday, October 21, 2008. For any further questions, you may contact NXP's Investor Relations department. Please visit their Website at www.nxp.com/investor.

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