意法半導體 (STM) 2004 Q3 法說會逐字稿

Good morning, my name is Judy, and I will be your conference facilitator.

At this time, I would like to welcome everyone to the STMicroelectronics third quarter conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker’s remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS].

Thank you.

I will now turn the call over to Miss Lynn Morgan of STMicroelectronics.

Miss Morgan, you may now begin your conference.

Thank you, and thank you for joining us today for the STMicroelectronics third quarter 2004 conference call in respect of the company’s operating and financial performance.

Hosting the call today will be Pasquale Pistorio, our President and Chief Executive Officer of ST.

Joining Pasquale on the call today from Catania are Alain Dutheil, Corporate Vice President responsible for Strategy and Carlo Ferro, our Chief Financial Officer.

Participating from [Rousset] are Aldo Romano, Corporate Vice President and Head of TPA, Carlo Bozotti, Corporate Vice President and Head of Memory Products Group and Philippe Geyres, Corporate Vice President of CMG.

As an important reminder before we start our call today, some of the statements that we will make are forward looking and as such, are subject to the risk factors that are identified and listed in today’s press release and also available in our most recently filed 20-F.

And ladies and gentlemen, in order to allow for maximum participation on this call, please limit your questions to one primary and one follow-up.

We thank you in advance for adhering to this policy, and I’d like to now turn the call over to Pasquale Pistorio.

Thank you, Lynn, and good morning and good afternoon, ladies and gentlemen, and thank you for joining us to discuss ST’s Q3 2004 results and our outlook for Q4.

We are pleased by ST’s solid performance in Q3.

Despite the progressive decline in market demand that began midway through the period, ST was able to report revenues of $2.26b, equivalent to a 2.7% of sequential increase, and 23.7% year-over-year growth.

These revenue levels were within our guidance range, although at the lower end, due to the industry inventory adjustment that began in the quarter.

Sequential revenue growth in Q3 was driven primarily by the consumer market segment, particularly [these came from] consumer applications such as set-top box, imaging and display and TVs.

We also saw a pick-up in demand for applications specific ICs serving the wireless, paper storage, printer and certain automotive and audio applications.

In fact, in the 2004 third quarter, revenues from strategic customers increased by 5.2% sequentially, to account for 38.4% of net revenues compared to 37.5% in the prior quarter.

At the same time, we continued to post solid sales from the new market initiatives we developed in mid 2002.

For the first nine months of 2004, revenues from customers beyond our traditional top 50 were just over $2.4b, a 38.6% increase on a year-over-year basis, significantly ahead of ST’s nine months of revenue growth of 25.5%.

The 3 key applications which are served by several of our other major product groups also performed well in Q3.

Wireless revenues increased to 7% sequentially, to 24% of the total revenues and were 23% above last year’s third quarter.

Revenues from Digital Consumer were up 11% sequentially, to 16% of the total revenues and increased 29% on a year-over-year basis.

And Automotive, although slightly down on a sequential basis, accounted for 14% of our revenues and was up 27% over last year’s Q3.

These results were achieved on flat sequential revenue performance from Flash memory products.

We succeeded in expanding gross margin in Q3, to 37.9%, which was the high end of our guidance range.

The 50 basis points of the sequential growth is primarily attributable to a more favorable product mix, and total manufacturing efficiencies.

Importantly, we were able to give [indiscernible] this to generate significant operating leverage and increase the profitability levels.

Our R&D expenses were flat in absolute dollars [indiscernible] and SG&A costs declined sequentially.

Combined, R&D and SG&A represented a 27.6% of the [future’s] net revenues, a reduction of 110 basis points from the prior quarter, enabling us to achieve a sequential growth of over 19% in operating income on a comparable 2.7% revenue increase.

This was accomplished while maintaining the accelerated pace of our product design and development activities.

Third quarter net income was up 28.4% from Q2 levels to $189m, [indiscernible] for a reduce of the interest expense and a lower effective tax rate.

Excluding the special charges in bond [yields] Q3 2004 net income increased 95% from year ago levels.

I believe it is noteworthy that in the first nine months of 2004, we have succeeded in progressively bringing a greater percentage of our incremental revenues down to the bottom-line, moving it from fully diluted EPS of $0.08 in Q1 to $0.16 in Q2, and totaling $0.20 in Q3, and as we stated in today’s earnings release, we expect to continue to generate operating leverage in Q4.

Of course, the fourth quarter will be more challenging that we had anticipated.

Demand is uneven.

Inventory [reductions] are present in certain markets and pricing pressure has again become very strong.

Within this dynamic environment, we are focused on leveraging our product and application strengths, while controlling costs in capital expenditures.

ST’s Q4 revenues should be flat to 5% ahead of Q3’s levels.

The best performances are expected to be wireless, data storage, and automotive applications.

Also, we should see a sequential increase in Flash memory product revenues, and in consumer applications.

We are disappointed that one of the key elements in our gross margin roadmap, namely the volume, will not be high enough in Q4 to get us to the 40% target we set for ourselves.

As a result of the lower than anticipated sequential growth revenue prospects for Q4, we have reduced our gross margin guidance to 38%-39%.

Embedded in this expectation, however, is the effect of the de-loading of certain of our fabs in order to keep or increase inventory totals at the 4.6 times we reported in Q3, which was within ST’s target range of 4.5-5 times.

We are also committed to a progressive reduction in our operating expenses to net revenue ratio on a comparable calendar basis.

Despite the absence of a system of revenue up-tick in Q4, and despite the longer quarter, we expect R&D and SG&A as a percentage of the net revenues to be substantially in line with Q3 levels.

To address the current market situation, we turned back our 2004 capital spending budget by 10% to $2b from the $2.2b previously announced.

In addition, we are taking a cautious approach to 2005 CapEx, recognizing that industry analyst estimates for next year are now hovering around middle single digit growth.

Therefore, we are targeting $1.5b in CapEx, with a built-in flexibility to adjust this amount in either direction to accommodate market trends.

ST will meet the challenges in 2005 with a significantly enhanced product portfolio, developed over the past few years.

The products and technology section of today’s earnings release summarize the top [percent] wins and milestones over just the third quarter.

There you will see news on Nomadik, which is supporting the Nokia Series 60 Platform, and which was designed into a major 3G OEM.

Design wins for single and dual-chip Bluetooth products, a new single-chip for high-definition set-top box, our designing at TCL-Thomson of a new digital tuning module, the creation of a joint venture with HDIC China in the middle part of this year, and many other interesting items that speak to a [indiscernible] product range of serving increasingly convergent applications.

In fact, in late September, we announced organizational changes at ST which reflect our continued emphasis on developing applications specific to products and platforms for an increasingly convergent marketplace.

To better align the [indiscernible] for the groups with the market trends, we have combined our consumer and telecom businesses.

The new entity, the Telecom and Consumer Sector, or TCS, together with the Automotive and Computer Peripherals groups, will focus exclusively on applications-specific products, essentially system and chip and [indiscernible] solutions, and will be able to leverage ST’s comprehensive system know-how.

We have created a new group called MLD, for Microcontrollers, Linear and Discrete, which will emphasize high-performance analogue and other products.

MLD’s offerings are consistent with our marketing initiatives to product multi-socket products and applications solutions to a broader customer base.

The Memory Product Group, or MPG, is our third area that remains essentially the same as it is today, with respect to its products and markets.

This new organization is in line with the market trends and ST’s focus.

We believe it will enable ST to more fully leverage its resources from R&D to manufacturing to marketing and so on.

In summary, we expect ST to have relatively good results in Q4, in the difficult market environment we anticipate for this quarter.

And we believe we have put in place the necessary measures to enhance our product portfolio, increase manufacturing efficiencies and fine-tune our marketing and organizational structure, to be able to regain our ability to outperform the market in 2005.

And now we are glad to take any questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from Nav Sheera with Citigroup.

Hello, can you hear me?

Yes.

Thank you, sorry.

The $1.5b CapEx for 2005, would you be able to detail where you will be spending it, and do you think it’s going to be enough to cover all of your needs?

Thank you.

Well, as I said, we have been demonstrating in the past our flexibility in order to adjust to market trends.

This is what we are getting into our budget entering 2005 because we want to be very cautious in the approach.

But then, if the market will demand we accelerate, we can accelerate.

We have the infrastructure open to do it, and if the market will decelerate, we can further decelerate.

So this is the point we do with the present market, this ability in order to be cautious.

But again, we are flexible, and in any case, I think that with the capital investment we have done this year, and with the expected growth for next year, if the expected growth for the market would be as anticipated now by most analysts, the $1.5b should be adequate to meet our needs.

And how would you spending in terms of 300mm versus 200mm and technology generations?

Well, of course the priorities will be this new generation of products, particular R&D and the leading edge technologies.

The rest will be to continue to expand as necessary, the established product base.

But again, the priority will be the leading edge technologies.

On the [terms of the perimeters] we have our core plans, and the rest is now, as you know, the under 16 [indiscernible] are still going at a slow rate in facilitating, because we still don’t need the capacity next year.

Thank you very much.

The next question comes from Cody Akri (ph) with Legg Mason.

Thanks, guys.

Can you hear me?

Yes.

Okay, great.

Can you talk a little bit about order trends over the last few weeks, maybe among your different end-markets and also, what is your view of what remaining levels of excess inventories that obviously impacted some of the September quarter, what kind of visibility do you have as to what’s left out there in the channel, how long it will take to clear those up?

Alain, can you comment?

Yes, what we saw at the end of Q3 is the slowdown of [order] intake, and therefore, we have [the] visibility we had there before.

This was mainly due to the distributors, the distribution segment, so we saw another slowdown which we attribute to a somewhat kind of a volume entry there, and probably also some of our inventories at our customers.

Now, you know, the slowdown was mainly during the second part of Q3, and now we have a kind of stabilization at the beginning of the quarter.

Do you believe that there was any significant difference in those order patterns or in that stabilization among your different end-markets?

No, what was really very clear was the deceleration on the distributors.

You’re right, you know, we didn’t see [somewhat] deceleration in the major end-markets like the Consumer, like the Telecoms or like the Peripherals.

And yes, we are expecting some growth there, by the way.

And what about pricing, as you’ve gone through those, as you said, sort of stabilization there?

How has pricing, I guess, philosophy changed?

You know, pricing is still under pressure, and in fact, the price pressure has increased since the middle of Q3.

As well, at the same time we saw also, mainly on the standard products – there I am talking about the products of [DOG] mainly, a decrease of 3 times.

Thanks, guys.

Your next question comes from Jean Danjou with CSFB.

Good afternoon, gentlemen.

I have another question on a very strong EBIT margin reported by your Discrete and Standard Group in Q3, above 25%, if I remember well.

Could you explain to us what drove the improvement in margin, whereas at the same time revenues were pretty flat, and do you expect that to be sustainable, given your comment on pricing?

Well, DSG has done in the past several years, two things.

One is strengthening the core portfolio, leveraging the higher portion of value added, then demand has been strong, and then we are a very competitive manufacturing machine.

It’s a combination of those things and it’s been very significant even the high performance of the financial performance reported by DSG.

We also have noticed, however, that the slowdown in distribution mentioned before by Alain, will impact primarily this product base because those are, say, something like 40% to 50% are sold through the distribution channel, so in the Q4, it will be one of the sectors that will not grow sequentially.

Okay.

I would have a follow-up on CapEx.

If you had a good visibility on industry revenues growing 10% next year, what would be your CapEx?

It would be more than $1.5b.

How much more?

Well, I think that, as I said during my remarks, I believe that we have been putting in place our machine and our situation in product portfolio manufacturing, costs structure to regain the ability to outperform the market.

I think that over the last ten years since we are a public company, we did outperform the market seven years in a row to 2001 and we were with the market in 2002 and we were worse than the market in 2003 and we’ll see how 2004 will close, but not better than the market.

But I think we have turned the corner, and in 2005 we’ll be able again to outperform the market.

So if the market would grow thin, we expect to grow more than 10%, and therefore to support the growth at our volume of sales, we will need more than $1.5b.

But we don’t want to anticipate, because as I said, we have the flexibility built in.

So at this point, the $1.5b is cautious, and as was discussed, is based on the fact that most analysts expect now middle single digit growth for the market next year.

We will be looking very carefully at the evolution, and by the end of this year, or early next year, by the time we have our Q4 release in the second half of January, I think we will have a much visibility of the market, in particular when the Christmas season will be already done.

At that time, we can have a better visibility.

I think $1.5b is good because it’s cautious, and there is always time to revise it [upwards] if necessary.

Okay, thank you.

Your next question comes from Uche Orji with JP Morgan.

Oh, it’s just a couple of questions, gentlemen.

First of all, can you tell us what your capacity [position] was for Q3 and what you think it will be by the end of the fourth quarter?

During Q3 our capacity, and here we are talking about [inaudible], right?

Yes.

Was about, let’s say, 4%, in Q3.

Okay, and what do you think it will get to by the end of the fourth quarter, given your guidance?

About the same, you know, about the same.

About the same?

But of course, you know, the capacity increase is coming mainly from [measures] that are already in, so at least we have a good visibility.

Fine.

Just in terms of what you have seen for demand into the fourth quarter, what’s your sense as to what your inventory times will be at the end of the year, and also, if you can make a general comment in the industry, when do you think we will come to normalized inventory levels, given the excess situation we have at the moment?

Carlo, Carlo Ferro?

Yes, our inventory terms as at [sometimes] discussed at each quarter closing are targeted to be between 4.5 to 5 times.

We have achieved the highest of the range in the second quarter.

In the third quarter, at 4.6 we are suffering a sustained inventory increase, but we do expect that on the fourth quarter to confirm or improve this [ladder] so we expect inventories to be at or above 4.6.

Okay, and just [finally] on the industry, when do you think we can get this inventory correction on that control?

Just to give you an idea, a few other companies like [indiscernible] Philips talk about inventory being corrected by the end of the fourth quarter.

A few other companies are also talking about between the fourth quarter and the first quarter.

What’s your view as to when the [inaudible]?

Well, let’s say that a lot will depend on how the Christmas season goes.

I think the industry inventory will depend strongly on what the Christmas season will be.

If there is a good Christmas season, I am convinced that we’ll be worth about, by the end of Q4.

If it is a poor Christmas season, then we will see what happens, but I think we have to wait, and be prepared in order to avoid surprises.

What is nice, however, and I think this is good for the health of the industry, I think that the reaction has been very quick, by our customers, in correcting inventory imbalances, and by the semiconductor industry in tailing back capital expenditure.

I think it’s helped because we’ll avoid next year the imbalances that [we have had] in the past like in 2001, the big imbalances that there were in the industry.

So I think this is helped for the medium-term, which means 2005, that both customers and the ST manufacturers are taking corrective measures regarding inventory and capital spending.

But again, to see what is the start or the end of a year, I think we have to wait for the Christmas season.

Thank you very much.

Your next question comes from Matt Gehl with Goldman Sachs.

A question from Carlo, on depreciation.

I think depreciation in the quarter was around 40m below the commentary you were giving on it back at the Q2 report and now with you cutting CapEx in 2004 and 2005, could you give us a sense for what depreciation you’re expecting in Q4 and then what are you looking for, for the full year 2004?

Okay.

The depreciation path remains very similar to the one that we have discussed at the end of third quarter.

For Q4, we expect between depreciation and amortization in the range of $500m, between the $490m and $500m.

Of course, [it won’t go towards] to 2005, the level of CapEx of the year would result in some increase in depreciation and under the current estimate, we would anticipate that between $1.9 and $2b [indiscernible] the depreciation and amortization for the full year 2005.

So you actually expect the quarterly run-rate could go down going into next year?

Oh, it’s about in line.

It’s about in line.

Okay, so it’s going to peak out in Q4 and then stabilize?

Yes, [intrinsically], yes.

Okay, and then a question for Philippe on performance in CMG.

You posted considerably stronger revenue growth than many of your competitors in the industry and a much higher margin than I think most people were looking for.

Your competitors are making some pretty cautious comments on the consumer market as well, and in fact one of them this morning, looking into Q4.

You’re guiding for pretty strong growth in Q4 but can the margin be maintained at this level, given the tougher industry environment, or would you expect margins in CMG to trend back down towards the Q2 level, whether it be in Q4 or as we go into the early part of 2005?

Well, first of all we have had a very good Q3, and we are forecasting a modest growth for Q4 for some seasonal reasons, so not a strong growth for Q4 like you were indicating.

Nevertheless, we plan to continue to grow just a little in Q4, which I think in the current market conditions is not so bad.

Well, what has been driving that?

Several things – we continued to enjoy good levels on the TV, traditional TV business.

This is slowing down as we see some customers pushing out some models.

On set-top box, we still continue to see a good demand from the operators while on the [fixed wire] business, it is not bad, but we have very little visibility on the backlog, so we need to get some more business, but it’s not unusual, given the current market conditions.

We have been also helped by the increase of the digital cameras, in particular, for the cell-phones, so the whole Q3 was a good quarter.

In Q4 on the margin, we continue to see some price pressure.

We have competitors which are very hungry, but you know, we don’t expect margins to go back to the level of Q2.

In fact, I was expecting the profitability to improve a little sooner than Q3, and it finally arrived in Q3.

And so as you look into 2005, is this a normalized profitability rate that you think for CMG is going to bounce around in the year, at 10% level?

I’m not sure we want to give guidance on the profitability by product line, but I think it’s a good goal, yes.

Okay, thank you.

Your next question comes from Remi Telmar (ph) with Cheuvreux.

Good afternoon.

Just going back to the wireless [chip-set] market, can you tell us a little bit about customer wins you might have had in reference design outside of the joint venture between Alcatel and [KCL] and can you also give us some update on how the Nomadik processor is doing?

Are you still [indiscernible] or are you starting to ship in decent volumes there?

We have gained some customers concerning the chip-set that we have, the present chip-set that we have.

This is addressing mainly the China market.

What, sorry?

I couldn’t hear it.

The what market?

Chinese.

Chinese market?

Okay, great.

While in addition, we are [competing] the developments of the second generation of our standard chip-sets, the one we call [Telma] and we have in our hand now the digital based band that DRF and [DMG] management and we are starting now sampling this new chip-set which, apparently, is well suitable for addressing the [steady] mid-range, multi-media mid-range of the telephone [bonds].

So overall, the perspectives, particularly on this second generation, in my view, are positive.

Concerning the Nomadik we mentioned a few things in the press release.

One is that certainly it is positive the fact that we are introducing the Nomadik in some 3G phones, and it’s not, however, yet, and this is for me a bit disappointing business that we have today.

So it’s a business that the Nomadik overall is a business on which we count a lot.

We are confident with our progress, but it is materializing in the medium-term, let’s say, in the middle of next year, and not immediately which is not what we would have preferred, clearly.

So you don’t expect volumes to ramp up there before Q2 or Q3 of 2004?

No, we will start earlier, but it depends on what we call the volumes.

There are also new, interesting applications like the video phones materializing, and in this case, I count myself on starting earlier, but it’s not the volume you could consider a high volume yet.

So the significance of the [terms] will become really, as you said, in the second part of the year.

We have also seen some interesting potential in non cell-phone terminals.

As Aldo mentioned, video-phone, but also the video portable terminals is a retail business, falling to some set-top box operators, so the market scope of Nomadik is widening.

Okay, and if I just may ask a follow-up, are you guys getting any initial indication as to what the growth might look like in 2005 in the handset market from your large customers, because everybody has reached – it looks like it’s going to stay quite healthy in Q4, but then, as we enter Q1 2005, the basis of comparison will look much more demanding.

Anything you’d like to say on this?

Well, I would be pleased to tell you exactly the figure of next year, but it’s better not to advance a number on which we have limited visibility.

Personally, I think that in any case, not only Q4 but also the beginning of the year, will be with some significant [infra] growth compared to the year 2004.

What will happen later, to be honest, I prefer not to comment.

Okay, but Q1 2005 looks okay?

It seems that to me, yes.

Thanks a lot.

Your next question comes from Stuart Adrian with Morgan Stanley:

Yes, hi there.

Could you just update us on where we are with NAND [Flash].

Stuart Adrian, your line is open.

[Inaudible].

Hello?

Operator, maybe you could move on to someone else in the interim?

We’ll go to the next question, Uli Pelzer with Lehman Brothers.

Please go ahead.

Yes, hello gentlemen, just a question on the gross margin outlook.

I think, Pasquale, you said that the gross margin in Q4, one of the reason why there’s very limited gross margin expansion is that you are reducing [FAB] loadings to work down inventory and then Alain said the utilization rate in Q4 would stay pretty much flat with Q3.

I’m a bit confused on that.

Could you please clarify?

And then in terms of guiding to 38% to 39% now against 40% previously, how exactly – what are the drivers for the lower guidance?

Yes, I think that I can recall, I don’t know if you were in our field analyst meeting in May of this year.

Anyway, at the time, we presented a kind of a road map to move to the 40% in Q4.

At the time, we reported some expectation, an expectation that the price would be neutral, that the currency would be positive for [our performance] and the mix would be positive for one point, and the volume [officials] would be higher than 3 percentage points.

This is what we said in May, to move up in the road map.

When we look now and compared to that road map, the biggest change is the pricing.

The pricing, in fact has been substantially lower than I just stated, rather remaining 1 point negative impact would be more significant than that, and the mix will be about the same and the currency would be worse, while the efficiency would be about in line.

So the biggest driver is the pricing, and of course, the volume, the impact of the volume is that if we go in the expectation of the volume and we have invested for a higher volume, and now this volume will be much less than anticipated, we will [indiscernible].

If the conditions [over there] materialize and the volume had been there, we would have exceeded the 40%.

So those are the combinations that will make us to at least the 40% that we had in mind, and to be in the range of 38% to 39%.

When I say [part of the holding] is because again, the capacity for Q4 is in place.

There is the very equipment that’s already there, and then of course, if the capacity is there, and Alain mentioned before that the capacity would increase Q4 versus Q3 by 4%, the Q3 versus Q2 increased by 4%, and then the sales would not materialize as expected because we are giving the range in [2005] we will see what happens, of course, we have to deliver some FAB if we want to maintain the [indiscernible] as Carlo Ferro previously stated.

So when you deliver FAB you impact the gross margin.

I would like to add that I have not made yet any comment on the utilization rate as far as manufacturing.

I mentioned the 4% increase in capacity.

In fact, you see our utilization rate was about 88% but of course, we are planning to have a decrease in Q4 of this utilization rate, and probably what we are going to do is during the Christmas end of the year vacation, to close some of our FAB.

So we will have a decrease of our utilization [inaudible].

Okay, that’s clear.

And then just one final clarification, perhaps, for Carlo Ferro, the D&A target for next year, that excludes any potential, say, provisions on receivables, right?

It’s just pure depreciation and amortization?

This is pure depreciation and amortization, and then we have the usual run rate of non-cash P&L items and provisions which is in the bulk of $20m to $25m per quarter.

Okay, great, thank you.

You’re welcome.

Your next question comes from Nicholas Gaudois with Deutsche Bank.

Yes, hi there.

I’ve got a first question on capacity and restructuring, and then a short follow-up.

Could you update us on your planned ramp for [Russa 18] in Singapore, considering that I’m assuming the $200m difference in CapEx budget this year is coming from your delaying equipment for 200mm for this year.

And also on where you are in terms of closing capacity in [indiscernible] in Carlton as well as de-phasing 60 inch in [indiscernible].

Yes, in fact, you are absolutely right.

One of the reasons why we are going to decrease our CapEx this year is just pushing our capacity increase that we were planning in 2004 to 2005, and there have been some changes and canceling some equipment.

But most of it is pushed into 2005, and not committing more in 2005, and it’s mainly 8 inch, and it’s mainly, as you said, before Singapore 8, 10 [also 8].

As far as the program on our 60 inch [rationalization] program is concerned, it’s moving.

As we mentioned last quarter, it’s not moving as fast as we were planning a year ago, the main reason being the qualification that we need to have, mainly from our automotive customers which are taking a little bit longer than we were expecting, but things are moving.

If you look at the [power plant] for example, we have already moved a lot of [possessions] from that to our Singapore plant, and we are starting to move some production of [indiscernible].

[Castalesto] is one of the plants where, you know, the qualification I was mentioning before [indiscernible].

Okay, great.

And [that] is closed now, as you know.

I mean, it’s closed.

The equipment has been moved to Singapore and most of the people now are out.

Okay, great, Alain, thank you.

And just as a quick follow-up, could you, or do you have any visibility on where inventory days at your distributors outstanding are stood at the end of September versus the end of June?

And just remind us what is your total distributors’ exposure in terms of revenues?

Thank you.

Frankly, we don’t know the number of days of our inventory of our distributors.

That we know is that they have increased their number, their days of inventory, and we are correcting it [as they were] not to very well what we were expecting.

Would you quantify that it went either up or down in the quarter, sequentially, in your view?

Inventory levels in the distributors?

Absolutely, yes.

In the correct of that, is that what you mean?

No, if it went up at inventory levels in the distribution in Q3.

I don’t think so, but they are not placing more orders, so we reflected much more in the delayed shipments on our part in Q3, and even more in Q4, but I don’t know, frankly.

We don’t know and I don’t know at this moment what is the [purpose] of getting it to a level.

Clearly, it’s higher otherwise they would not be pushing out orders.

Okay, just as a reminder, how much of your revenues currently in total go to distributors?

Thank you.

[Indiscernible] around 20%, and of course, it is different from group to group and Pasquale mentioned before [indiscernible] is closer to 40% [inaudible].

But the average is 20%.

Thank you very much.

The next question comes from Didier Scemama with ABN Amro.

Hi, good afternoon, gentlemen.

I’d just like to start with a question on your storage business.

It seems like your semi-custom business with a HDD OEM is getting better, at least the [end-demand] is getting better.

I was wondering if you had made any progress in qualifying your re-channel or your SOC into non desktop applications, and if so, at what time that would ramp in 2005?

And I have also a follow-up, please.

Okay, you are right that the data storage business shows significant sequential growth, and we plan to have something similar in the next quarter, by the way.

We also qualifying one of our major customers, our single-chip, what do you call, the SOC, so the controller with the [indiscernible], our [right] channel and also our [single] interface, high-speed single interface.

So this is a chip of which I am proud, personally, because it is 100% SP IPs, 100%, and this product is available now from some weeks or months, I’d say.

It is under qualification and will go in production at the end of the second quarter of next year.

So it takes always almost one year from the moment we have a product to the moment on which we start the volume production, okay?

So from this point of view, I am certainly confident that in the year 2005, particularly the second part of 2005, we show tremendous progress in our data storage.

What we are shipping, what we are going to ship is our [intellectual] or indirect channel, which is [indiscernible] in micron.

We are already completing our new [indirect] channel on 90 nanometer, so the perspectives from this point of view are certainly much better than in the past.

Okay, any wins in notebooks or small phone factors, 1 inch, 2.5 inch?

Okay, sorry, this was the second part of your –

Yes.

Of your question?

Let’s say, there is the new market which is developing, and this is the [thing], let’s call it the consumer market, the application of values from set-top box [to the] and also we are developing products, together with our customers for cellular applications, for future cellular applications, cameras, and so on.

So it’s a micro drive.

But it’s not for us, however.

The channel is always that we stay true to our traditional customers.

So we are developing low cost, very low cost solutions that I am sure will expand dramatically in the market.

By the way, this is the segment that is foreseen to grow more in the display market in the next year.

It is already significant, this amount.

Right.

My second question was about wireless handsets.

Normally you have quite a strong seasonality in Q4 and a strong marked seasonality in Q1 because of your dependence on a certain customer.

I was wondering, given that you’ve started to qualify your GPRS chip-set and I think earlier, I mean, earlier in July you meant to start shipping this GPRS chip-set in the fourth quarter.

Should we expect a less pronounced seasonality in the first quarter in wireless handsets?

Can you repeat this last question, sorry?

Well, I’m just wondering if the first quarter will be less down than normal seasonality because of one, new products like the [semo] sensors that you may or may not be shipping in higher volumes into your customers, and two, because of the qualification of your GPRS chip-set and starting volume production to more Chinese ODMs or EMs.

No, there are, frankly, two effects that we have to consider.

First of all, you know very well this is a very seasonal – well, Q3 has been, by the way, good for our products.

It has been in the sequential growth more than 10% for our products, and expect even more in Q4.

It is seasonal, but only that.

We have some new products that are starting or growing, for example, our Bluetooth for cellular phone applications.

This is one.

Energy management outside our traditional customer, Nokia, this is also growing.

The chip-set, it is true, that we have something, some deliveries but as I was saying before, Q1 is still in volume and not contributing in significant ways back to the level of sales that we have this year.

Okay.

Next year, the growth will be related to two effects, some growth of the market, still to be qualified, quantified, and new products which are Bluetooth, [Y5] FM radio, energy management and so on.

RF for CDMA and 3G, so that’s the area of growth for TPA next year.

All right, and just a final question on wireless.

I mean, this year has been pretty difficult for your semi-custom RF business at Nokia.

I was wondering if these market losses have stabilized and whether you could give us any insight into market share, a little direction into 2005?

Well, you are right.

Our market share is at this moment roughly stable, so we plan Q3/Q4 in terms of market share, not volume.

Q3, Q4 and Q1 are roughly at the same level in terms of market share.

However, if we go a bit more in detail, you see that for all next year, starting already in Q1, we foresee an increase in our market share.

So from now on, from Q1 on, the market share for RF will grow, and this is mainly due to our strong presence in 3G applications, so the more the 3G will be successful and in volume, the better it will be for our RF products.

All right, thanks very much.

[OPERATOR INSTRUCTIONS].

Your next question comes from Karsten Iltgen from WestLB.

Please ask your question, sir.

Yes, hello.

I was wondering whether you could update us on your Nand Flash [indiscernible] plans, whether you are still planning to move production to Singapore as you planned before, and also maybe whether you can say now anything about the [Heinix JV].

I think you told us previously you may say something in October.

Yes, we plan to [indiscernible] positively, our agreement with Heinix on the JV in China soon now, so the objective is in fact in November.

And I think you also can quantify what will be the financial [act] for next year.

I think it will be in the range between $100m to $150m and this will be equity participation, if the discussion will be positively concluded.

At the moment we are, in terms of products, we are moving full steam to the 90 nanometer production, and we are – and in fact, we believe that in Q1 next year the bulk of the production will be 90 nanometer, and we expect to transfer this technology, the 90 nanometer process, into Singapore for production in the second half of next year.

We have then the plan to move into the 70 nanometer in the second half of 2005.

I think that this is a summary of what we are doing, so it is number one, joint venture discussions to be concluded by the end of November, number two, the capital investment in the form of equity of next year which will be in the range between $100m and $150m, number three, the short-term move into 90 nanometer is now happening, and Q1 will be mostly 90 nanometer.

We shall start in Singapore mid next year, and then move into 70 nanometer in the second part of next year.

And I guess the equity investment is on top of your CapEx budget, right?

Yes.

And do you have new revenue targets you could share with us, like you did before in terms of percentage of the total Flash business or so?

No, we do not.

As you know, we do not specify how much is [known] and how much is Nand in Flash.

Fair enough.

Thanks a lot, thank you.

Thank you.

Thank you, sir.

Your next question comes from Martino Diambro (ph) from Euromobiliare Sim.

Please ask your question, sir.

Yes, good afternoon and good morning to everybody.

I have a question on OpEx, just to understand if you can give a guidance on Q4 and full year 2005.

I remember that in a previous conference call you gave a guidance for R&D between 15% and 16% of sales but probably this has to be revised upwards, considering that you have now lower expectation for market growth, and the second question is on TPA, just to understand if seasonality will have a recovery in a significant way in terms of return on sales or it has to be a little increase as it was in Q3, sequentially.

Thank you.

Let me comment on the operating expenses and then there will be Aldo commenting on TPA.

First of all, let me recall that in the third quarter, our combined R&D and SG&A expenses improved to 27.6% of the sales which is 110 basis points improvement versus Q2.

Of course the strength would have [completed] if the sales expectation for Q4 had been the same that they were in Q2.

Now, as I said in my opening remarks, with a combination of longer [times] in terms of days of Q4 and the sales peak has not been so substantial, we are striving to maintain the control in spite of the [indiscernible] of 27.6%, which I think is in the fact of a continued improvement in expenses as percent of days.

The primary focus is always on SG&A and R&D, it gets priority in the sense that we want to improve R&D efficiency of course, but we don’t want to back out of the expenditures.

So if you’re preferring to see our R&D expenses, they were flat, while SG&A declined, so with this concept, our target is to [indiscernible] in terms of expense also as a ratio in Q4 the levels that we were [anticipating].

And in full year 2005?

Okay, in answer to –

Excuse me, Aldo, there was a question about 2005.

I think that the [terms] that we have set for ourselves is to continue to improve the expenses of [sales ratio].

Thank you.

Sorry.

Okay, Aldo.

Concerning TPA, yes, the next quarter should be positive and the growth that we foresee is clearly driven by telecom, mainly, as you say, wireless in this case.

Data storage and also automotive, this was flat for TPA in this quarter of Q3, due to seasonality.

As a consequence, we plan to have a significant improvement in the bottom-line, which must not be at the level of what we did in Q3, but must be much, much better, for this quarter, so we should come back to the normal number, normal for TPA, I mean, that we had last year, for example.

17%?

You say that, but I really cannot comment.

Okay.

Thank you.

The next question comes from [General Daranmino] with Dresdner Kleinwort Wasserstein.

Hi, there.

My first question, I would imagine that you have already signed, or are in the process of signing some of your volume pricing agreements with your strategic customers for 2005.

I was just wondering if you compare what you see in terms of the price you’re going to give up with what you find one year ago, into 2004?

Would you expect your large customer pricing environment to be better in 2005, or would you expect it to be in line with 2004, or worse than 2004?

Well, gentlemen, my colleagues, you can comment on each one.

Okay, I can start myself for TPA.

We see a very strong price pressure, certainly not at the level of last year even, I would say even stronger, so the price pressure is there, there is no doubt, and therefore, for TPA products where we more or less know what is going to happen in 2005, we have to plan therefore, this price reduction.

However, up to now, we have been able to compensate it, so the gross profit, if you wish, of TPA has been relatively stable because in terms of manufacturing costs, with a series of actions, we have been able to compensate this strong price decline which is due to new technologies and cost reductions.

But if you look to pricing by themselves, that’s really a tough environment.

Yes, for MPG I think we do not see any real difference vis-à-vis the major accounts.

On the other hand, we see difference for the distribution and geographical accounts, the wider customer base, and we see here an acceleration of the price pressure.

On the other hand, I think we have prepared for the infrastructure in Singapore, in terms of manufacturing equipment and technology for next year, so I think we have what we need, and now we must improve in terms of technology migration, to [indiscernible] cell activity, [powder] screens, etc.

So I think on one side it is true that on the mass market, on the wider customer base, the price pressure has increased, and is increasing.

I think we also have the ingredients in our hands to continuously reduce our costs without significant further capital investment.

Okay.

Another question is just to follow up on that, on your margin trend.

When you talked to us at the analysts briefing earlier in the year, Analyst Day, you said that you were getting around 3% of margin improvement on the back of manufacturing efficiencies, which include both utilization as well as movement to 130nm.

Where are you right now on 130nm production as a percentage of your total capacity, and how is that going to move forward into Q1 next year?

And will that continue to be giving you some support on your margin environment into Q1 next year, even if your utilization is going to be slightly down or your sales are going to be slightly down?

Well I think I will comment from memory, this is of course using the loss of 0.15.

All our NAND activities, [0115], and as I said before is moving to 90 nanometer, and the bulk of the Q1 production will be 90 nanometer.

I think one half of our [indiscernible] Flash in Q4 will be 0.13 microns, but a very significant portion of the wireless, almost all of the wireless activity, will be 0.15 microns.

And of course this trend will continue and only overall 3,000 wafers per week will remain in other technologies, which is a combination of products also, from new plants to [indiscernible] etc. in 8-inch.

All the rest with 0.15 and more and more would be [indiscernible], and more and more would be 0.15-inch length.

And the rest of the company?

Will there be some support for margin in Q1 on the back of improving manufacturing capabilities?

Quite clearly the majority for TPA, the majority of the Group products, as I was mentioning, are at 1.13, so all products for better storage, for printers, the Bluetooth, the Wi-Fi, the [indiscernible], the product for [indiscernible] radio, the product for [Sirius], by the way, which is another important new achievement, all on 0.15.

So there will be a regular, I would say, increase of our 0.15 production during the period to 2005.

Concerning consumer where maybe it will be interesting also to note that on 0.15 we’re working up in volume now quite significantly, and we have already the first samples into customers on 90 nanometer products, and we expect in the second half of next year also to be in volume also on 90 nanometer, so we are accelerating the shift to the new [indiscernible].

And the last question from me is what is the current plan on the [Catania] M6 for 2005?

Will you be ramping it from Q1 also?

Let me comment on Catania in the sense that I think that we are competing with the [indiscernible] facilities while trying in the planning to put the production equipment and the next year with the present fiscal year just because we don’t need the capacity.

So we are competing our program, but before putting equipment in Catania, we have a potential rate of [indiscernible] who say, quote, [inaudible].

Therefore the expectation for next year is to continue to bring in the facilities and be ready to bring in equipment as the market demand will develop.

With the visibility we have at this stage, we don’t see production equipment to be moved in next year.

Okay.

Thank you very much.

The next question comes from Jonathan Dutton with UBS.

My question’s already been answered, thank you.

We’ll go to the next question.

Your next question comes from Jonathan Caulfield with Merrill Lynch.

Good afternoon.

Could you give us a bit more detail on the utilization rate in the 6-inch and the 8-inch valves in the third quarter, and how do you expect the 2 wafer sizes to change going into Q4?

Well, in Q3 the utilization rate was about 8%, similar for 8-inch and the 16-inch, which is a very high utilization rate, because if you remember we believe that 85% is the optimum.

In Q4, this development, of course, as we have said, because the growth is not materializing, therefore it will be [starting] to down, and for the quarter as a whole should be below 85%.

Thanks.

And just as a follow-up, could you maybe comment on the geographic spreads of your sales by origin and destination?

Okay.

Let me-- Okay, let’s see.

We can give it to you by location of shipment, but we are not disclosing anymore on the customer area of origin, just because our customers are basically global, and it’s very difficult to put them in one particular area of origin.

We’re giving it out-- You’ll see in the [indiscernible], but if you want it by area of shipment we can give it to you now.

Yeah.

By area of shipment is good.

Go.

You read better than me.

Well, let’s see [indiscernible].

Okay, thank you.

Area of shipment, so.

In Q3, 28.6% in Europe, 14% in America, 4.7% in Japan, 22.1% in Asia-Pac, and Emerging Markets 12.6%.

Thanks very much.

The next question comes from Sean Murphy with Nomura.

Hi.

You haven’t mentioned the pricing pressure in Flash.

We’ve seen some of your competitors talk about changing conditions there and even adjusting their product mix.

Would you have any comments on price pressure in Flash?

Well, I did comment, in fact, that we had increasing price pressure on all products that is not for the major accounts, and the major accounts, I would say that we had more price pressure quarter after quarter, but on the rest, particularly on the [indiscernible] products, we have enjoyed starting from Q4 last year to then Q2 this year some price increases.

And today the price pressure also on this question is becoming more important and more significant.

But as I said before, we also have opportunities to continue to reduce our costs, expanding our production to the 0.15, moving more products to the [indiscernible], and the shrinking of 0.15 microns and that most of this would be done in Asia, in Singapore, where we now manufacture, as you know, all of our MAN Flash, and I think in Q3 was close to 40% of our -- 35%-40% of our [indiscernible] Flash.

Okay.

Thank you.

Just one little question on liquidity.

You’ve paid back some of the LYON things.

What’s your liquidity needs for the next year?

You’re virtually cash-neutral at this stage.

Okay, this is Carlo.

I’ll say that the $1.63 billion of liquidity, that will still remain after having used $1.18 billion to [indiscernible] our investments, is a sound level of liquidity that we are comfortable with.

And we believe that this is a substantial [indiscernible] to force the company to continue to grow, and moreover whilst the company continues to plan is to generate a positive operating cash flow and to enter in 2005 and at this quarter in 2005 to deliver some positive cash flow, enhancing our liquidity position.

Having said that, of course we remain very careful with monitoring the financial markets any opportunities that may arise, but at this time I do not plan to issue any kind of new debt [thesis].

Thank you.

The next question comes from Stefan Fanco with Oddo Securities.

Yes.

Thank you.

I would just have 2 small questions left.

Could you give us an update on your NAND Flash profitability right now, taking into account some price pressure that is occurring right now in this market?

And secondly, about profitability again, could you give us an indication of profitability in terms of gross margin of the new products you are selling, for instance on Bluetooth or on wireless [indiscernible].

I understand these are new generation products that should have better gross margins than the rest of your portfolio, but on the other hand you have also these are very competitive markets with a strong price pressure, so could you give us an order or magnitude of the profitability you get in these kind of new products, please?

Well, I think as we said, we do not provide any detail on profitability results by product families or product sub-families.

I think that we can say that overall we’ve been profitable in the memory group.

And of course, the weight of demand on top of Flash is small and seeing there is an effort in terms of R&D -- technology R&D and product R&D -- that, as you know, this effort is shared 50/50 by ourselves and [indiscernible].

Well and concerning the TPA products, you mentioned, let’s take, for example, just the Bluetooth that you mentioned.

This is really an excellent product.

It’s without a doubt the best on the market today, in terms of performance, with a single chip of 0.15 micron with [RF] and the [indiscernible] in the same chip.

So one, as you said, should expect a fantastic gross profit out of this, but the pressure still that we have in this market perfectly makes it impossible to, say, count on a big increase on the margin out of this and new products, even if certainly are better than the average or what we have today.

This is clear.

But I’m saying that the value of the product is bigger than what, due to the price pressure overall, that we are able to get in terms of [indiscernible].

So the conclusion is that there will be certainly [indiscernible] out of this new product, but it’s up to the market, as it should be.

Okay.

Thank you very much.

The next question comes from Michael Hollfeldger with HVB.

Hi, actually just 2 housekeeping questions left.

The first one would be could you give us an update for your restructuring charges for Q4 and also for 2005?

And the second would be the same for your tax rate, Q4 and also 2005?

Okay.

The restructuring charges are basically going as anticipated at the last quarter, and for the next quarter we expect an amount between $10 million and $15 million.

And the overall cost of our restructuring plan remaining in the range of $350 million and adding [indiscernible] of about $460 million if you count that some additional between $75 million and $80 million that was incurred in the year 2005.

Okay.

And with regard to your tax rate in Q4 and 2005?

What are you expecting?

On tax rate, this quarter’s tax rate, as you may have understood from Pasquale benefited from some one-time events that affected by $12 million the tax.

Extrapolating this, in fact our tax rate for the quarter is 14.3%, which is combined over 15.4% for the operating, the current income, and benefiting from restructuring at an higher rate.

So we are running in the range of between 15%-16% that we have always anticipated quarter after quarter for this year.

And this is a tax rate that we are substantially happy about.

Looking forward to next year, I would say that we may expect in this order of magnitude, and to be conservative I would anticipate a range of between 15%-18%.

And by the way, thanks for the question, since this is also a way of boosting earnings and mitigating the cash outflow, managing tax rate.

Okay.

That’s great.

Thank you.

I think we have time for only one or two more questions, operator.

Okay.

The next question will come from Jerome Ramel with KBC Securities.

Hi, good afternoon.

I just want to know what is the current capacity income of [indiscernible] stock per week in your Rousset and Singapore 8-inch fabs.

And then follow up.

You said that you expect to slow down the ramp at your 8-inch fabs.

Could it change your target for next year of having something like 50%-55% of the out book coming from Asia?

Well, in Rousset and the Singapore 8-inch plants, we have around 6,000 wafers per week of installed capacity [indiscernible], and there is still room to grow.

Rousset can grow to about 8,000 wafers per week, and in Singapore we can go to 10,000 wafers per week.

Better for modulating this one part, we can respond to the market demand, depend if we [indiscernible] the rate will slow down.

Our objective is to rebalance our capacity out book is on line.

We are proceeding with the restructuring stage.

We have been putting a lot of emphasis on the ramp-up [inaudible], so by the end of next year we should be certainly over the 50% out from Asia.

Now, the speed of the ramp-up may be limited by the market demand, but this is the trend, and we will continue to do this.

Okay.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Ms Morgan, are there any closing remarks?

I’ve turned the call over the Mr Pistorio.

Okay.

Again, thank you ladies and gentlemen for today’s presence in our conference call.

Now I would like to briefly summarize [indiscernible] conference.

I think in Q3, the company demonstrated its ability to react very quickly to change in the market environment.

And I think the most important result is our ability to leverage sales increases.

I will mention 3 numbers. 2.7% of sequential sales increase; 19% of sequential operating profit increase; 25% of sequential EPS increase.

This is the leveragability, which translated in about 70% of the sales growth and dropping in the bottom line.

I think this operating effectiveness will be attracting our focus in the short term and the continuing term, particularly in Q4.

If I look at a broader picture, I see all the [indiscernible] that we put in place in 2002.

The 3 branches and directions that we put in place in the second quarter of 2002, i.e., activated our [de-spending], particularly for [system and chip] and [indiscernible] applications in the convergence; manufacturing rationalization and rebalancing [indiscernible]; and broad market base, marketing approach.

Those 3 branches of strategies are working very well, and they are starting to show forth in several areas, but the full deployment of these results, particularly for what concerns the product portfolio in [indiscernible] [system and chip] and the manufacturer rationalization will be evident next year, with the time unfolding.

Therefore, we believe we have put everything in place, including the organizational structure, to cope with those market trends and with the focus that the company wants to give, so that I believe in 2005 we will be again in the position to be outperforming the markets we serve.

Thank you, ladies and gentlemen for being with us today.

Thank you, operator.

Thank you.

This concludes the STMicroelectronics third quarter conference call.

You may disconnect at this time.