意法半導體 (STM) 2005 Q2 法說會逐字稿

OPERATOR INSTRUCTIONS I would like to turn the conference over to Stan March, VP of Investor Relations for STMicroelectronics.

Sir, you may now begin.

Thank you, and thanks to all of you for joining us today on our conference call for STMicroelectronics second quarter financial results.

Joining us today on the call is Carlo Bozotti, our President and Chief Executive Officer, Alain Dutheil, our Chief Operating Officer, Carlo Ferro, our Executive Vice President and Chief Financial Officer, Philippe Geyres, our Executive Vice President responsible for -- in representing the product groups, and Andrea Cuomo, our Corporate Vice President responsible for strategy.

Two pieces of housekeeping business before I turn the microphone over to -- to Carlo, and that is first, many of the statements made today are forward looking, and as such are covered by the safe harbor provisions that you'll find in our press release or our most recently filed 20-F, so please look there for relevant risk factors, and secondly, in the interest of time and to answer as many of your questions as possible, please ask that you restrain yourself to one question and one follow-up.

If you have additional questions, please go back to the end of the cue and we'll try to -- to take care of you.

And please -- please work hard at following this rule so thank you very much.

With those brief introductory comments I'd like to turn the microphone over to Carlo Bozotti our President and Chief Executive Officer.

Thank you, Stan. (indiscernible) everybody.

First of all, I would like to thank you all for joining us on this call today, and of course I appreciate your interest in ST.

I would like to cover several topics, in my (indiscernible ) remarks today, including the second quarter financial results and business activity, our -- our outlook for the third quarter, an update on the statements and our manufacturing costs, reduction initiatives and the progress report, and our actions to sharpen ST's product portfolio and increase our market leadership in targeted obligations.

Now, let's begin with a review of our second quarter financial results.

Net revenues for the second quarter increased 3.8% sequentially, starting in line with our guidance range of minus 1 to plus 7%.

Sequential (indiscernible) reflected higher savings of wireless and automotive applications.

Application specific product groups represented 57% of net revenues for the company, up from 54% in the year ago quarter.

We've seen application specific product groups result were mixed with revenues increasing sequentially 8.9%.

Wireless sales increased 12% sequentially and were the key driver of revenue improvement in the group.

The 12% increase was due to good performance in multiple product -- multiple product (indiscernible), including traditional (indiscernible), imaging management and imaging products.

Automotive sales increase 5% sequentially, led by core outer market and safety products. (indiscernible) performance is showing signs of better dynamics, both sequentially and year-over-year.

On a sequential basis, we benefited from traditional seasonal strength in (indiscernible) application, and on a year-over-year basis, (indiscernible) performance improved significantly, growing over 40%.

A different story to resolve to demonstrate the continuation of the progress we reviewed with many of you on our analyst day in New York in May.

I believe ST's in position to gain market share in computer (indiscernible) in the coming quarters.

The overall consumer market was soft for us, particularly in the adult consumer.

In these consumer the cyclic (indiscernible) market was slow in the second quarter.

However, (indiscernible) improving environment in Q3.

More importantly, we were pleased to receive the multiple design wins for the next generation of products not only for the (indiscernible) with the ST 7100 and the 71 (indiscernible) products as these consumers is one of our strategic growth drivers over the mid-term.

Operating profitability for application specific product groups increased sequentially by 11%.

Mix was the middle driver of this improvement.

While we made progress, there is still work to be done to get this group back up to the operating profitability level of several quarters ago, and that will come as we start to benefit from our actuals completed today, as well as from a continued focus on driving new product initiatives.

In our (indiscernible) group, the news is generally positive despite of tough market conditions.

First, in this environment the group revenues were flat sequentially, the positive news here is that the (indiscernible ) in distribution market at the end of the second quarter provides room for increased overflow for the remainder of the year.

From a product perspective, (indiscernible) revenues increased in the high single digit -- digits on a sequential basis, and the mid-single digit year-over-year, growing faster than corporate average.

Finally, operating performance winds down sequentially, remains the highest of the company.

The (indiscernible) product group experience an 8% sequential increase in total sales, fresh sales -- fresh memory sales, were up 16% sequentially.

We are moving forward with our internal operation initiatives to improve margins, in particular, our (indiscernible) migration to a 2 bit for sale is in line with our progress, with production of wireless mix at 25% this quarter, to 80% by the fourth quarter.

Nonetheless (indiscernible) mix improvement today has been more than upset by continuing price pressure in this market.

In our prior communications we have shared with you our intent to explore our options, non-excluded to include (indiscernible) in this business-- we are intentionally active in this exploration and we will share with you the details when we have something to report.

Gross margin was 33% compared to our midpoint guidance of 33.5%.

We did see improvement in volume and manufacturing with slightly higher utilization rate, however, these factors were partially offset by pricing pressure, particularly in fresh memories and standard products.

Looking ahead, we are encouraged that our initiatives underway should lead to continuing improvement in the gross margin on a sequential basis, as ST moves through the second half of the year.

And we believe the revenue growth and the mix improvement in the second half will also contribute to strengthening of our gross margin.

Turning to the operating expenses, SG&A expenses were in line with our initial expectations going into the quarter.

In R&D we increase the spending (indiscernible) approximately to technology and product development activities.

Combined SG&A and R&D expenses in the second quarter were 31.4% of sales and 32.1% of sales in the first quarter.

Nonetheless our goal is to continue to push to bring operating expenses as a percentage of sales to our objective range of 25 to 28%.

You will notice in the press release we refer to an effective exchange rate for the company in the second quarter which is -- which was similar to Q1 levels.

This is due to existing currency hedging position, which provided benefit in the first quarter, while they were presented the strengthening dollar from quantitatively affecting manufacturing or operating expenses in the second quarter.

These hedges implemented when the Europe dollar rate was well above 1.3, we were at growth at the end of August and therefore we also effect the third quarter's effective average currency exchange rate.

Moving briefly to the balance sheet, investor returns were 4.2 times this quarter with some help from federal currency movement.

We believe we're on the track to reach our capital branch or corporate side to five by the end of this year.

Turning to cash flow, let me review some figures.

Net operating cash flow improved in the second quarter by $259 million as we went from a negative position to a positive position of $22 million -- $23 million.

Most of this resulted from a significant reduction in cash outflow for capital expenditures during the second quarter.

For the first time capital expenditures totaled $927 million.

We expected expenditures around $600 million for the second half, we are on track for 2005 capital spending plan of $1.5 billion.

Looking ahead, I believe we are in a position to show continued sequential improvement in both revenue and gross margin for the third quarter with an acceleration in the fourth quarter.

Specifically with our present visibility, we expect sequential sales growth between 0 and 6% for the third quarter.

Based upon this sales range, we expect our gross margin will be about 34% plus or minus 1 percentage point.

Now I would like to review briefly where we are with our manufacturing and cost initiatives.

The program to reduce cost by $100 million by the fourth quarter, compared to the same feeling as 2004 through positing centralization increase and increased efficiency continues to progress well.

We are encouraged by result of this effort and we are confident in achieving the targeted reduction.

The restructioning program is continuing on the lead 2006 completion timetable with the bulk of the remaining cost savings to be derived at that time.

Regarding the most recent announcement concerning discount reduction, I have fully defined with my managers the entire plan.

We have begun the negotiations with the (indiscernible) and label representatives.

We continue to expect a $90 million annualized cost savings by mid-2006 and we will communicate the timing of the remaining charges approximately 85 to $115 million when operate.

Now I'd like to review with you the progress we are making in strengthening our product portfolio and expanding our customer base.

First we have completed the redeployment of the 1,000 R&D engineers, as you know this is almost 10% of ST's total R&D resource pool.

This is not a small implemental plan.

It is an integral part of our effort to improve product competitiveness and accelerate innovation.

There is a high level of activity on the product side.

New design activities are increasing and the number of design wins is increasing.

I believe these provide clear evidence of the wave of new products that are on their way, and I would like to share of few of them.

First in wireless, expanding corporation increase the (indiscernible), volume ramps on the peripherals, the Bluetooth and, the FM radio solution.

As well as two major peaks -- two major peak sales auto focus cameras.

And increasing nomadic design activities including with another major Asian handset supplier.

Second, in digital consumer a number of (indiscernible )products for IP set box, high definition DVD recorders and digital TV offerings.

Third in computer peripherals the (indiscernible) for the storage system on a chip. (indiscernible) Including our spare reconfigurable single chip (indiscernible) engine.

Fourth, video to markets, a wave of new products on VCD technologies, our Smart Power technology for significant global customers.

And all of this is in addition to industrial and advanced analog product offerings where (indiscernible) is creating about 40 products per day.

Finally in memory, we start to manufacture 90-millimeter products, and we are centering our state of the art 512 megabit 2 bit per cell device on the same technology.

These new products present us with the opportunity to expand our list of key customers.

This an important program for the company, and it is one area where I am increasingly spending my time and the responsibilities for the product and cost efforts now and the accessory (indiscernible) and clear line responsibilities as well as quality.

This proof to expand the customer list is beginning to bear fruit as we start to see design links and increased contact between our sales and the targeted companies.

I am optimistic that these early indications will continue to moves -- to move positively for ST.

I think this is a good place to conclude my remarks.

I want to assure you that all of us at ST have a clear sense of urgency about what needs to be done.

We have excellent plans with responsible senior managers executing these plans and we are all committed to improving the financial performance of the company.

With that I would now like to stop and answer your questions.

Thank you.

OPERATOR INSTRUCTIONS Our first question comes from Jonathan Dutton of UBS.

Yes, thanks very much.

I wonder if you could let us know what your capacity utilization rates were for your 8 and 6-inch fabs in the second quarter, and based on your current visibility where you see this going in the third and fourth quarters.

Yeah, maybe I should take this question.

This is Alain Dutheil.

In -- in the second quarter, utilization rates for 6 inch was 84% and for the 8 inch was 88%.

The average will be 85%.

What we are going to do during the third quarter is to decrease a little bit of our (indiscernible) of the 6-inch fab as we have some inventory and we take credit (indiscernible), down to about 76, 77%.

While the 8 inch we gain about the same as in second quarter, about 86.

Therefore, the average would be 80%.

With visibility we have for fourth quarter today, probably we increase a little bit our production in the fourth quarter, but I think it's a bit early to talk about it.

All right.

Thank you very much.

Thank you.

Next question is from Nav Sherra of Citigroup.

Thank you.

Good afternoon gentlemen.

Question on flash memory.

We have seen two trends in the market firstly that you yourself have stated that you are doing a process reduction to 19-nanometer, at the same time as we have seen some degree of stabilization in the pricing environment.

Is there any likelihood that you could see a positive e-bit by fourth quarter, by the end of this year?

Thank you.

I think -- because this morning we had a press conference, and maybe I was a little bit too bullish in my press conference.

Well of course we have a direct target.

I think we are all working with very strong innovation, we pulled the performance in our memory business and our -- our target naturally stretch, and I think we are confident that we get to the (indiscernible) relatively rapidly.

I can reconfirm what I said this morning.

We have a very stretch internal target to be given before, but I would like also to state that this is not a guidance -- I mean this is an internal target we stretch and we get there.

We know that to achieve this in Q4 is very, very challenging.

Just as a quick follow-up in terms of your capital spending environment would you envision seeing an increase in your $1.5 billion of CapEx budget.

No, we do not foresee that at this point.

I think we have -- of course the opportunity to maneuver in case of very significant changes in the market environment, in the market trends, but this is something that is not under discussion at the moment, and really convert our plan of $1.5 billion dollars for the (indiscernible) with a significant reduction in the second -- in the second quarter, very much driven by expenditures on -- on capital acquisition.

Maybe what I can answer is that of course before committing more capital investment if we need some capacity increase, we go to subcontractors, before committing, let's say a long-term capital investment increase.

Thank you very much.

The next question is from Remy Toma of Chevra.

Thanks for taking my question.

When I look at your revenues by end market application, I calculate that revenues from the consumer markets decline sequentially by about 7% and your new by about 19%.

I know this is a rough calculation because the number is not as precise as it was in the past, but can you comment on this, and in particular you believe that in the set top box market which is doing extremely well you may have lost some market share because of the late introduction of an mpeg 4 chipset.

Phillipe Geyres speaking.

Our numbers are showing a quarter over quarter decline, not 7%, but between 4 and 5.

So doesn't change the picture, but a small decline, and a year on year smaller 16% decline, and there are several reasons for that.

The first is that in the second quarter we had the traditional TV and audio business, which was particularly slow, and here we have seen that reported by our competitors and our customers.

This was a general market trend.

In the -- in the set top box, we see that the -- the very cyclical (indiscernible) set top box market was very slow in Q2.

However, at the end of Q2 we took significant orders, and this is going to contribute to significant growth in Q3.

While on the operator market, it's more stable and there was some good news.

There was some bad news, there was no particular trend.

Now if we look at the -- are we losing share in set top box and are we well positioned for in particular in H.264, H.264 for us is going to be a reason for continued increase in market share.

We are the first company which has introduced a one chip, high definition H.264 chip in 90-millimeter.

This is being sampled mpeg 4-inch 264 chip and the thin chip in a few weeks we'll have another version that is VC 1, windows media capable.

So we view the shift to mpeg 4 of the traditional operators, plus all the new services being offered in IP set top boxes for sale as a major opportunity for an investor having being the first in Mpeg 2 ten years ago we are repeating a success story with the first efficient product in 90 millimeter for the demand.

Thank you very much.

The next question is from William Conroy of Sanders Morris.

Can you address a little bit more specifically the manufacturing restructuring and specifically what I wanted to ask was how far along are you at qualifying the products whether they're actually moving or not by qualifying them in the fabs to which they will eventually be produced.

In fact as you know with manufacturing restructuring program, (indiscernible) first phase of 6-inch restructuring was started now about 2 years ago, and of course all of the product which are non-automotive are qualified in our Singapore plant, and of course most of them are already moved.

What we still have to do, and this is ongoing, is to complete the true qualification of the automotive product, and this will be done -- let's say during the first half of 2006 -- 6.

This will be completed during the first half of 2006, and therefore, the effective closing of the plants which are directly concerned by this product, which are our (indiscernible) and our Castelletto plant near (indiscernible) will be closed mid-2006.

So this is the first phase.

Again, it's ongoing -- it's taking more time than what we were expecting when we saw the program because of the automotive.

Now if we talk about the second phase of the restructuring that we have announced at our New York conference, here we are -- we are moving, so it's not -- let's say so in term of product qualification, it's not so important, so we -- we have started to move.

We are preparing the floor in our Singapore plant and we start moving in the US now, and that also should be completed by the end -- by mid-2006. (indiscernible )in our language.

That's helpful.

As a follow-up, and admittedly it's unrelated did you disclose the revenue from strategic partners in the June quarter?

Actually, no, we didn't but as a percentage of sales it was approximately 44%, but remember we're shifting our -- our focus from -- to -- to key markets, but that's the strategic partners were approximately 44% of sales.

Great.

Thank you very much.

The next question is from Janardan Menon of DRKW.

I just have a few small clarifications actually.

One is you just made a comment that the 2 bit for sale will be 20% now and it will move to 80% in the quarter, is that -- were you stressing the 2-bit for sale in wireless or was that flash as a part of -- a wireless as a part of flash's 20% and it will go to 80%.

No.

This is Carlo Ferro.

He's referring to the wireless flash, as opposed to (indiscernible) flash.

Okay.

By the -- by the end of this year (indiscernible), our plan is to have 80% of the non-flash wireless on 2 bit for sale products.

Okay.

And in -- in your consumer numbers are you also including the CMOS sensor today or is that entirely in wireless.

It's mostly in wireless.

We -- we do have some CMOS sensors in other consumer applications, but by far the largest top of the sensor is in wireless.

By the way it was a very good quarter.

We sold a lot of cameras in Q2.

Okay.

And so in -- you are saying that you have taken some orders in set top box towards the end of Q2.

So your guidance is 0 to 6% into Q3.

What areas would be key drivers of that?

Yes, in -- in Q3, there will be -- CTG computer peripheral contributing significant to the -- to the growth of course, and our consumer group which is part of HPC is particularly in digital consumer as we said this is another important driver for the quarter, and -- and MPG, so these will be the three main drivers, computer peripherals consumer in particular digital consumer and memory products.

And not wireless, yeah?

We believe that wireless will be very strong then in Q4, so -- but the three main drivers in Q3 is of course what I told you.

The big season for wireless really starts for us in September so it has little affect in Q3 but we get the big benefits in Q4.

My last question is, your manufacturings partner in NAND Flash announced results (indiscernible) -- it seems to be some level of profitability on NAND Flash in that company the results.

Can you confirm that you are also profitable or not yet at this point?

No we would not disclose the financial performance of the flash memory and activities we have never done and we -- we do not intend to do in the future.

Okay.

Thank you very much.

Thank you.

The next question is from Cody Acree of Legg Mason.

Thanks.

I want to talk a little bit about the gross margin.

Obviously pleased to see the margin expanding into the September quarter but it -- the expansion is maybe a little less than we initially would have expected.

Can you talk about some of the constraints of the margin expansion is this primarily the utilization rates or yields, or the pricing?

What's the constraints and what's fixable within those constraints.

This is Carlo Ferro speaking.

The question (indiscernible) Indeed, we feel that expansion in the third quarter from price pressure more moderate than what we're experiencing the last 2 quarters we expect to price pressure.

We expect the ongoing initiative to continue to lose the efficiency and the performance at -- and the about 1 point improvement expect.

This is the combined effect of those ingredients.

Can you maybe give some ranking of what you believe is maybe likely to roll off or to -- to be able to allow for some further expansion?

I think Carlo pointed to more expansion in Q4.

Are you expecting heavier utilization rates or are you expecting abatement of pricing pressure.

That of course is good question showing that also you follow with that further expansion -- expansion on our gross margin another ingredient that of course would benefit our gross margin the fourth quarter should be the exchange rate assuming that your dollar rate will remain singled out to the current rate.

We have already mentioned about our policy on which basically the effect of the current -- the current environment, proves that in fact that our fourth quarter result while is very, very marginal on our third quarter result in respect to the second quarter and of course in the fourth quarter other significant benefit came from volume and efficiencies as our initiative and our plan continue to be deployed and materialize well as expected.

In addition, our overall profitability of our product portfolio starting from the fourth quarter and even more in the quarter beyond in 2006, we continue to be boosted -- or we started to be boosted again by the introduction of the new products.

This is Carlo, Carlo Bozotti.

Digital consumer.

We have a wave of new products in digital consumer for 90 millimeter we start some manufacturing at the end of Q3 but this would be then important and significant in Q4.

So of course, new products is crucial.

Carlos we originally had a target of 40% by the end of the year.

Obviously that's definitely under review.

Are you wanting to put out a new target for what you think we could get to by the end of the year.

No, I have to say that we did not have -- I have -- this year we never set a target of 40%.

I would like to make it clear because I think is not the first time we -- we covered this item.

I -- I think that what we said and we like to reconfirm during this discussion is that starting from the bottom of Q1 we will progressively improve the gross margin, and we expect an acceleration of this improvement in the second half of this year, but we never stated that our target of 40% was for Q4 this year.

Great.

Thank you.

Thank you.

The next question is from Martino De Ambroggi of Euromobiliare.

Good morning.

Good afternoon to everybody.

I was on price pressure, is it possible to quantify what was mainly discussing on division by division in Q2 and what you expect for Q3.

If I'm not wrong you were mentioning a reduction in price pressure, but you are in which segment.

The second question is on optics, just to give an idea of what could be the level of optics in Q3 and why not in Q4.

Thank you.

Okay.

I think -- Carlo Ferro again -- I think you are questions number 1 in respect to the price pressure in the second quarter.

The overall impact of pricing on our gross margin considering the price impact on our sales net of the ability to recuperate portion of that, even a significant portion of that, through our purchase savings initiative, as the negative factor of the margin in the range of 1.5 point.

And so you may expect that the overall price impact on sales that have been significantly higher than the present age, and this has been driven mostly on those standard commodities application, the memory business, and in the discrete businesses.

In the third quarter, we expect these price trends to be moderated, more moderate.

Also as we see that the inventory of the distribution which is significant effect the market dynamic for this product is working up over all and on these day that we expect in the third quarter still some price pressure but much more moderate.

The second question is on the optics, on the optics the second quarter has been a -- how say -- a mixed feeling why we have met our objective to reduce the factor to save SG&A.

In R&D we feel have some trend which is we're not completely happy with in term of R&D to (indiscernible)

There are two results, one is this effect of the exchange rate dynamic, and the hedging dynamic since R&D's line were hedging the largest portion of expenses has been more significant in R&D, so we have experience in R&D, a negative exchange rating factor, quarter to quarter, and the second reason is that obtain technology for memory, for mixed technology application and the product development we have continued to -- to keep export ongoing in order to accelerate a good return on the product.

Going forward we see on the third quarter inability to mitigate overall expenses of (indiscernible )revenues, from both the SG&A expenses and the research and development.

We believe this trend will continue and we have actions in plan to continue this plan of reduction going towards the fourth quarter driven by the cost measures in the fourth quarter by (indiscernible) change environment and also coupled with leveraging on a higher place in the fourth quarter.

Thank you, Carlo.

Thank you.

The next question is from Christian Terra of Baird.

Hi, we have seen recently some pricing trends in low density NAND flash in the (indiscernible) market.

Are there any specific hand market that are acting as a driver in your NAND flash business into the second half besides wireless?

No, I think that of course there are various applications but by far the most important application for us is NAND to focus on these wireless, so I -- I -- I don't -- have in mind any specific driver in other -- in other markets, so the main -- the drive for our -- the main market for our NAND products is the wireless customers, where we are going to offer solutions, chipset, et cetera.

Okay.

And then a quick follow up in terms of Bluetooth and FM radio chip ramping in the second half, anything you could add in terms of the magnitude of the ramp, how many customers you are ramping with?

Yeah we come from ramping up in the second half of the year.

In the Bluetooth it will be several customers, and in -- in -- it's going to be a run rate of it's already double digit means (indiscernible) it's -- it's going up fast.

Yeah, we're speaking of Bluetooth and FM radio.

Yeah.

The -- the -- the rate of the the billing being much more on Bluetooth than FM radio.

Sure, thank you.

The next question comes from Antoine Badel of Credit Suisse.

Yes, hi.

In the wireless market, it seems most of the growth is moving toward the 3 G end of the market, and the very low end of the handset market.

How is your portfolio positioned to -- to respond to these trends?

Well, we are -- Phillipe Geyres speaking -- we are seeing all of the segments of the wireless phone.

Of course our product lines, like cameras connectivity, you know, wireless plan are -- are going to benefit from an increased share of the 3 G. Also our basic business to large customers we are much more semiconductor content in the 3 G form than in the 2 G form.

And we are in those forms also.

However, the 3 G has given a lot of hope, but if I'm been looking at the (indiscernible) for the number of the 3 G form this year, it's still below 10% (indiscernible).

On the low end phones, we are hopeful there , with (indiscernible) and a push in volume of even as a price pressure, and the -- the good thing is that it will boost the volume of the phones, and we're going to benefit from higher volumes in low end 2 G phones.

Ourself in wireless are not specifically one market segment.

They are all across the board.

Of course, like everybody we would benefit from a rapid shift to 3 G because there is a higher semiconductor content.

And -- and second question, looking toward the fourth quarter margins this year, could -- could you help us model those by maybe giving some indications as to how much of the cost savings you are expecting to make by Q4.

Do you think we'll slow down to the margins as opposed to going back to the customers through price pressure, and what are your -- your dollar assumptions for Q4.

Okay. (indiscernible) on your expectation, but you may appreciate that we are to (indiscernible) share with you initiative, the specific ingredients and the specific result of each initiatives of our quality (indiscernible).

So in respect of the overall initiative, from to (indiscernible) I believe Alain has already mentioned that we are all contracted to complete by mid-'06 and we are also already many times said that the bulk of the next opportunity for cost savings, which is in the range of 20 million on a yearly basis, we came while the plan is completed in -- in mid-'06 and for obvious reasons of running in this moment two tracts is not optimal conditions, and in respect to what we internally call the Q1 package, the $100 million savings in Q4 '05, in respect to Q4 '04, I want to remind approximately two thirds effect the cost of the goods sold.

We are on track that we are absolutely confident on making the full amount of the effected savings, and we have already achieved a sizable part of these savings in the second quarter but another sizable part remains to effect our fourth quarter (indiscernible)

On the exchange rate, in respect of the exchange rate in the fourth quarter basically what we had in the last couple of months is escalate in the range of 1.22 to advancing to the current rate, what we came in the next -- in the next month is hedging is what we came as the actual rate for the quarter, of course will depend on the margin dynamic, but you may appreciate that the current rate.

There is some significant room of exchange rate improvement that (indiscernible) that we may compute slightly below 1 part (indiscernible).

So of course the key -- the key question is the price pressure in the environment and in this respect we have already said that we're also confident that the introduction of new products, the enrichment of the mix can how we mitigate these industry prices situation.

Thank you.

The next question is from Karsten Iltgen, of West OB.

Yes, good afternoon.

I was wondering about your 2-bit for sale -- for sale and your yield or your margins or below the average.

Could you repeat the question, because I think there was a glitch in the telephone system.

Sure.

You mentioned that your 2 bits for sale to 8% of wireless flash by year end and I was wondering what the yield of the margin in that product area.

Is it below or above the flash (indiscernible) average margin.

Much -- much because improving because by architecture, many more using 2 bit percent technique rather than single bit percent technique.

The yield is also actually higher on 2 bit percent.

The yield is the same. (indiscernible) nothing specific that would later provide a higher yield, nor provide a lower yield for percentage of size of course and from the same technology.

From the same chip size -- there is approximately the same yield and of course in terms of (indiscernible) is many, many more moving from 1 to 2-bit of sale.

My understanding was that the reason 2 bits for sale is coming so late for ST and maybe MD is the yields were so low in that area, but maybe I misunderstood that.

No.

No it's not a matter of yield I think it's matter of very, very -- let's say difficult design effort that -- that -- the design effort of -- of the -- of the 2-bit percent structure going wireless and particularly for very high speed memories is -- is a challenging design effort and I believe that we are second to (indiscernible) only.

I think that in the wireless -- we are better than aviation suppliers, for sure, but the problem is not yield.

The problem is the challenge in the design effort in the architecture of this 2 bit for sale and the very high speed performance that is required by wireless application.

Everyone, for a question on flash can you tell us how important NAND flash is in terms of revenue -- percentage of total flash or so.

Phillipe Geyres speaking.

We do not disclose -- the speed of the sales between NAND and no, I'm sorry.

OK fair enough.

Thank you.

The next question is from Thomas Brenier of SG Securities.

Yes, good afternoon.

I'd like to come back on your guidance for size growth and gross margin.

If I take the low end of the guidance, that's 0% sales growth, 32% gross margin.

Which would mean we would remain exactly stable from the current situation even if there's a slight improvement in the currency and as well in your cost structure shall I understand that this is all related to what (indiscernible) first question lower utilization rates or is it something else?

As -- as (indiscernible) you may expect the exchange rate moving from second quarter to third quarter to have a very, very moderate effect.

I'd say very marginal effect due to the fact that as already been shown we were until the last part of the third quarter at the higher rate.

And the other ingredient is, again, the price dynamic which we try to not continue to be negative and another ingredient, of course is the (indiscernible ) as Alain has mentioned and the so these points improvement is a significant factor of our ability of recovering through all of the measures that are under the plan.

Okay.

And if I can come back just briefly on the first question again on utilization rates, you said you are going to reduce the utilization rates in 6 inch fabs-- because of too high inventories, that the overall utilization rates will be decreased by 85 to 80%.

I guess this is what you said, and if that's the case, what -- what is the kind of level of inventories do you want to reach?

Because I think the inventories were stable quarter on quarter.

Of course on the inventory moderation you may have appreciated that those (indiscernible) production were much, much more than the 6 inch production.

So of course we're controlling inventory with a very high level of care in respect (indiscernible) and this is the reason of the 6 inch in term of the overall inventory value and the special rate we prefer to talk about the inventory return.

You may expect the third quarter to be eventually slightly better than the second quarter, where we are delivering the 4.2 terms, where you may have appreciated that it is an ideal factor to prefer the fourth quarter especially in the wireless business which by the way most of the inventories are (indiscernible) with our customers, so overall we're not in a position yet at the end of the third quarter to reach again our 4.5 to 5 returns without getting that will be reached as Carlo said earlier in the fourth quarter year -- at the end of the year.

Thank you very much.

The next question is from Matthew Gehl of Goldman Sachs.

Yes, hello.

I just wanted to look at one of the individual divisions in a bit more detail, and specifically MLD.

Could you talk a little bit about your expectations for margins in that division both in Q3 and Q4, because it sounds like with 6-inch utilization actually going down and not significant revenue ramp in Q3 you are likely to see margins flat to possibly even down in MLD but then a strong ramp in Q4.

I'm just interested is there anything to keep you from getting back above a 20% margin in the MLD group at some point in the next couple of quarters.

Well, first of all, as far as the 6 inches activities is concerned it's not only MLD.

We have very significant chunk of what we do in our automotive products that is 6 inch, and in fact we may have -- we have the need -- and we have the need to fuel the inventory more in the automotive than in MLD.

In other family where we -- where we are extensively using 6-inch is our (indiscernible) families for instance.

So they -- the overall -- the overall performance of MLD in terms of gain and loss and particularly in terms of return on capital employ is going to stay at the relatively good level for -- for the rest of the year.

We expect some decline to three, but, again, with very, very good return on -- on the net asset performance for the group in MLD, and then a significant improvement in Q4, of course both in terms of gain and loss and in terms of on net asset.

So you are saying you expect a decline in profitability or in revenues in Q3?

Profitability.

In profitability.

I was talking about financial performance, so there will be some decline in Q3 and a significant improvement in Q4.

And is a 20% level still achievable in this business, whether it be in Q4 or early next year.

Absolutely yes.

I think that -- you know, this is the phase of business where we believe the price pressure is the strongest for -- for products of certain products of MLD I think that there are a few things I would like to mention, the first is that despite this price pressure -- pressure and return of these (indiscernible) MLDs solidly two digit, and the second thing is that there is a very strong effort to boost the innovation export of products like industrial IT's or analog.

We have established new product divisions in the MLD group.

So I think absolutely yes.

I -- I think you can count MLD for sure.

Thank you.

Thank you.

The next question is from Van Voongock of XNBPN.

Yes, thank you.

Again, on MLD I'm not totally clear about the pricing pressure on Discrete, is it more related to product mix or competition.

If it is product mix, remember you were preaching bullish on product mix improvement.

Shall we expect an increase in R&D and SG&A sales?

The price pressure in MLD is related to the specific industry situation at specific (indiscernible) is the ability of supply demand plan, which I believe you may also learn from the announcement of our -- of our competitors in the field.

And in term of the mix amount of product, we continue to grow on these advancement, high volume, applications that we receive includes the mix of this group -- the product mix for this group.

I just want to make a slight correction, MLD is not Discrete, is not only Discrete, is microcontrollers, linear and analog, and Discrete.

Also we believe that (indiscernible) important improvement that we need achieve in terms of manufacturing efficiency in the second half.

All right.

And second question on automotive you have mentioned design wins in Japan in your press release is that new or existing customers?

Well, we -- we do not only have one customer in Japan.

I cannot -- I cannot, of course, disclose the name of the customer, but we have -- I believe at least three major automotive customers in Japan, and of course we are designing many other products at -- at the three.

And I would say that two of them are heavily on the core of the car, so engine management and safety applications.

Okay.

Thanks.

Thank you.

The next question is from -- excuse me -- Stewart Adrian.

One moment, please.

Of Morgan Stanley.

Hi, there.

Can you hear me?

Yeah.

Can I just go back to a comment that Carlo Ferro made there on the call.

Talked about sizable parts, and I may have misheard this, so I'm just asking for some clarification here.

A sizable part of the $100 million having been realized in the quarter in terms of cost savings.

First of all, did I hear that correctly?

Yeah.

Say that you heard that correctly and we'll say that the sizable part is achieved.

The sizable part has to be achieved.

You may expect that the two of them are practicing plus or minus of some points.

So -- if I just -- and I think this question was asked earlier, so I apologize for repeating it, but if we try to think about how much of the cost savings could be offset by pricing pressure I think you put up a chart at the Analyst Day that basically gave us a progression of the cost savings from a cost of sales perspective that we expected through Q2 through Q4.

I think in Q4 there was an impact on cost of sales of about 70 million so as you said two thirds of that total $100 million and in Q2 I think the cost savings we were expecting were around maybe 15 to $20 million from a cost of sales perspective.

Are we saying that you're ahead of that 15 to $20 million and that's what the sizable part means, or are you simply saying that actually we're on track with the original plan and there are reasonably significant additional cost savings we expect through the third and fourth quarter.

The deployment of the initiative is really ongoing and as a result of that that we are eventually delivering in the second quarter even a little bit higher than what was originally expected for the quarter and it is good also giving out a very high level of confidence about the overall $100 million.

Then as we have anticipated in May toward at the end a portion of these cost savings was expected to be by price pressure, and what in my opinion is now occurring is that since price pressure is declining quarter after quarter of this year, maybe the expect of price washing the savings is much more evident in the second quarter in respect to what it will be on the next quarter, and that on -- as a compliment the effect of the savings are now gross margin will be more evident in the next quarter, especially the fourth quarter in respect to what has been in the second quarter.

Okay.

I understand.

I have another comment here.

Carlo Bozotti speaking.

Of course this is not the only cost reduction initiative that we have in the company.

So we are talking here, and this is what we're prescribing in New York mostly about our procurement contain as far as gross margin is concerned, but we expect very significant work of cost reduction.

I mean, this is mostly in addition and not completely initial, but mostly on top of that, and this is something that maybe is not that visible during the last 2 years in ST, because of all of the cost reduction savings that we had in terms of worker cost reduction was eaten up by the dollar -- the favorable trend of the Euro dollar exchange rate, but in our business we -- we will reduce our worker cost quarter after quarter.

Uh-huh.

Uh-huh.

And then can I just ask Phillipe a question on the edict margin progression on the application specific group as a whole if it's possible just to generalize we saw a small sequential improvement in the calendar second quarter is there any one or two things in particular that we should be looking to to really provide a trigger for an improvement back up to what we could describe as more normal levels within the group as a whole or is it just going to be a case of waiting for more meaningful top-line growth within that division as a whole?

Well, I think in application specific product, the margin will increase from both the top line and a different mix.

On top of all of the manufacturing improvements already described.

Uh-huh.

Clearly, those products have good margin potential, so whenever we increase the margin, the volume on those products -- there is benefit to the gross margin and significant benefit of the bottom line.

Specifically on the gross margin, the shift to new products, which are most clear on new technologies is going to be generic, gross margin improvement.

We are ramping up in consumer 90 millimeter products.

It will be the starting in Q3.

It will have material effect as in Q4, and here we believe we are leading the way in the shift of effacy of consumers to 90-millimeter.

Also in (indiscernible) we have a new generation of products arriving, (indiscernible) but also moving from by CMOS to CMOS which is giving us a big margin improvement so yeah, we are -- we -- we are also introducing new technologies in this drive in 90-millimeter, so all of this is going to play a roll starting really in Q4.

Okay.

That's very helpful.

Thank you.

The next question is from Andrew Griffin of Merrill Lynch.

Hi, good afternoon, everyone.

A question for Carlo Ferro just to nail down the exact timing implications of hedging, if the exchange rate stays at a roughly one dollar twenty level to the Euro for the next few months, can we expect a $1.20 effective rate in Q4, or is it going to be slightly longer than that before the effect rolls through.

You -- you can expect a rate similar to the one twenty but not completely the 1.20 considering that as I have mentioned earlier that a portion of our hedging for the fourth quarter is already that, and this is more in -- in the range of 1.22.

So you can, I'll say, thirdly, average though two rates.

Thank you.

And -- and if I may, just a clarification from Phillipe Geyres.

You mentioned earlier that the consumer business fell sequentially 4 to 5% Are you specifically referring to digital consumer now or is that overall consumer, and I wondered if you could give me some indication of how digital consumer fared in Q2..

No the overall decline quarter over quarter was for the total consumer this is what we disclose.

We do not disclose by quarter the sales subsegments.

Now we can say that -- we can say that the weakest part of consumer was another consumer booth, analog TV and the audio.

Okay.

That's helpful.

Thank you.

I think we only have time for one more call -- one more question on the call, excuse me.

All right.

The last question, then is from Uche Orji of J.P. Morgan.

Finally.

Sorry.

Thanks for your patience.

Just for me to have confidence in the guidance for the next quarter, you don't give us a book to bill but can you tell us how much of the midpoints of that guidance is covered by today's booking?

That's the first question and I have a follow-up.

As -- if you --

No, go ahead.

Oh, okay.

Sorry.

I got some sign from my colleagues-- Uche, it's a very interesting question and everybody wanted to take it since this is the last question.

But it's now toward in the range of 90% .

Okay.

Just for me to also understand the inventory targets for Q3 (indiscernible) leverage your rates to as a way to manage inventories is there a target for next quarter or inventory date target and will absolute inventory come down next quarter?

You -- you can make the map and frankly these flat to slight improvement in inventory returns coupled with a 3% average growth in the revenues range, at say exchange rate of closing of -- of the period was not a result in -- in -- in material and was not the result in reduction, thank you, inventory and absolute dollar turn at the key reason of that is this is the end of the third quarter, which is preparing the fourth quarter the discount portion of our business is in wireless, in wireless we work on consignment with most of our customers at least the most recent one, and we are preparing inventory as they said on our title of ownership for the fourth quarter shipment inventory.

Okay.

Thank you very much.

One last question, please, for Carlo Bozotti.

Is this about flash man rate Inix (ph) came up with assembly that you talked to them about the -- some kind of joint relationship on your NOR Flash business.

Now I'm not sure what you can say at this point, but can you give us an idea what your thinking is around that business at this point, and if you can also confirm what levels of discussion you are about the potential activity around that business.

I don't expect much of an answer, really, but maybe take a shot at it.

Well, if we would have something to say, we would have already said.

But in -- in general term, I think that -- and this is not the first time that we have come to this point.

I think, of course, in this business the dimension of scale is a very, very important element, and we are exploring incorporation opportunities with some potential partners, and as you know I cannot elaborate on Inix (ph) but with Inix we have an existing -- an existing partnership on -- on the manufacturing.

So we are exploring opportunities.

What is turning out is of course the need to exploit better dimension of scale, but I cannot comment on Inix any -- say anything specific on any discussion with Inix.

Okay.

And just finally on flash, I guess on the profitability, if I reconcile -- if I assume that the auto nonflash memory product where say break even this quarter, I will be expecting that flash will have made a loss of 22% negative margin is that margin about correct-- and I'm just trying to understand how you expect to close that gap between now and the end of the year.

I know it's a stretch target.

But can you confirm to me about what level of profitability flash was and --

You know Uche, I'm going jump in on this one.

It's Stan.

We do as best we can at providing the detail of operating characteristics of the segments that we have but we don't get down to the details and the various mechanics in each of the divisions, so I think what we'll say on that one is we -- we give you the operating profit, we give you therefore, the percentage and we'll stop there.

All right.

Thank you very much.

I think as indicated that -- Uche was able to ask the last of the questions on today's call.

But Carlo Bozotti has come concluding comments.

Carlo.

Thank you, Stan.

Thank you everybody.

I think that we have reviewed during our discussion several elements of our business, and I would like to (indiscernible) some of them, but of course in my opinion very, very crucial.

The first is that we are diligently executing our cost reduction program.

I -- I think we have deployed in our organization the cost reduction programs.

It is work deposit as many things from manufacturing, restructuring, to procurement.

It seems like we have not completely described to you, of course the cost reduction or that are also very significant -- significant so this is deployed and we are focusing on these, and I think results are coming -- and the result will come.

Another point that we have underlined today is a different dollar.

Our Euro to dollar rate, let's say exchange rate level is at the level today that is -- let's say -- that makes a significant difference for us, and I think is clear now that we have not yet enjoined this different Euro to dollar rate because of earlier hedging contract that we have.

The third point that -- I would like to make, and this we did not elaborate intentionally during the discussion is our market initiative or expanding the customer base.

I think is a great opportunity for Europe, and because we have significantly declined our revenues on the distribution and the (indiscernible) to our customers, and all the evidence that we have today is that the inventory correction distribution -- and distribution has been completed, and I think that there will be -- there will be a real opportunity for us to significant -- significantly increase revenues in this domain.

In another element of discussion is the wave of new products.

We wanted to show to you today that there is a major interest in the company on new products and direction.

We are focusing heavily on R&D effectiveness.

We have completed the transfer of this 1,000 engineers, of course experienced engineers with the objective to improve the time to market of several -- several of our key products -- key projects and what we're shown to you and also mentioned during my initial speech today is an acceleration of the introduction of the wave of new products, and the last element that I would like to touch is major efforts that we are taking, the management, and my -- myself personally, on addressing new major customer opportunities.

We have significant opportunities here.

We are focusing on these new -- target -- new measure account opportunities, I'm sure this will pay off.

So you see the package of things that are few on cost control that of course the strong drive and product innovation and new -- new customers and market, and we are confident that this will pay off.

Thank you very much.

That concludes today's call.

You may now disconnect your lines.

Thank you.

You're welcome;