意法半導體 (STM) 2006 Q1 法說會逐字稿

Hello and welcome to the STMicroelectronics first-quarter conference call.

All participants will be in listen-only mode.

There will be an opportunity for you to ask questions at the end of today's presentation.

An operator will give instructions on how to ask your questions at that time. (OPERATOR INSTRUCTIONS).

For your information, this conference is being recorded.

I would like to turn the call over to Stan March.

Mr. March?

Thank you, Andrew, and welcome to STMicroelectronics' first-quarter 2006 results conference call.

Joining us today in Paris and hosting the call are Carlo Bozotti, our President and Chief Executive Officer; also joining us on the call are Alain Dutheil, our Chief Operating Officer;

Carlo Ferro, our Chief Financial Officer;

Philippe Geyres, our Executive Vice President responsible for the product groups; and Andrea Cuomo, our Executive Vice President responsible for Strategy.

Just a couple of housekeeping items -- you've seen our release clearly, or if you need to, it's available, but you should've received a copy or received from the wires.

In there, we list risk factors, and as so, the statements we're making today are forward-looking.

They're covered by these risk factors listed there and also in our 20-F, so if you have any questions, please give myself or the Investor Relations team a call.

In the interest of everyone's time, if we could limit your questions to one question and a follow-up, and as we've been able to get through the queue with relatively good speed lately, you can go back to the queue and perhaps come back a second time.

With that brief [fit] of housekeeping, I'd like to turn the call over to Carlo Bozotti for his introductory remarks.

Thank you, Stan.

First of all, I would like to welcome all of you to this conference call.

This first quarter was a period of solid progress for ST.

From a financial perspective, revenues came in at the top end of our guidance.

Gross margin came in above the middle of our targeted range, and earnings per share were substantially above that of the year-ago quarter and, I believe, higher than most of your expectations.

Importantly, our return on net assets, or RONA, was the highest first-quarter performance since 2001.

So, clearly we're making steady, continuous progress in improving the financial performance of the Company.

Let me take you through the details, and then we will open the call to your questions.

In the first quarter, net revenues decreased just 1.1% sequentially, compared to our guidance of a decrease of 1 to 7%.

First, we benefited from sequential growth in automotive and in the digital consumer application.

Secondly, wireless product sales were stronger than initially expected.

I would emphasize that this was a strength in the first quarter, reflected good volumes (indiscernible) and expanding customer base.

On a year-over-year basis, net revenues performance is showing good progress with growth of 13.5%.

Wireless sales increased over 40% comparing last year, and automotive increased double digits.

I believe our figures are a good indicator that 2006 will be a year of market share gain for ST.

The product group -- Application Specific product groups accounted for 56% of the net revenues in the first quarter.

On a sequential basis, sales increased about 1% while, year-over-year, they were higher by almost 11%.

The operating margin was 7% in the quarter, compared to 10% in the fourth quarter.

Seasonal factors, including new contract pricing and lower R&D fundings, explained most of the decline in operating profit.

As of January 1, we had renamed our Energy Group as Microcontrollers, Power and Analog, or MPA, to better reflect product emphasis and capabilities and the significant efforts we have underway to improve our offerings and competitive positioning.

MPA sales [decreased] 0.5% sequentially and increased 7.4% compared to the year-ago period.

The operating margin was 13%.

MPA accounted for 21% of net revenues in the quarter.

MPG reported a sales decline of 5.9% sequentially and 28% year-over-year growth, maintaining an operating profit (indiscernible) breakeven.

Results in the quarter reflected lower volume and lower prices, offset in part by a more favorable mix.

Flash memory sales in the quarter, in the first quarter were $407 million.

The gross margin result of 35.4% was solidly in line with our outlook of 35%, plus or minus 100 basis points.

This result was lower sequentially, largely reflecting seasonal factors.

In comparing to the year-ago quarter, the gross margin has increased by 250 basis points, demonstrating our solid progress over the last five quarters.

As you noticed in the press release -- (technical difficulty) -- we are in the final stage of phasing out three 6-inch fab lines.

The result gives rise to inefficiencies which are actually increasing in the first and the second quarter of 2006.

By the way, that is one of the reasons for the sequential decrease in Application Specific Power Group's operating margins, as much of the impact (indiscernible) on automotive products.

On the expense front, first-quarter figures were in line with our expectations with operating expenses representing 28.1% of net revenues, compared to 32.1% in the year-ago quarter.

Our cost initiatives in 2005 are the most important contributors to this improvement.

Looking head, we believe ST is positioned to have operating expenses (indiscernible) net revenues for the rest of the year.

As stated -- (technical difficulty) -- progress on improvements in the return on assets and cash flow.

Our net operating cash flow in the first quarter was $187 million, compared to a negative net operating cash flow of 216 million in the first quarter of 2005.

And, this is after a $70 million (indiscernible) transaction into the memory joint venture (indiscernible) China.

Our net cash position for April 1 was $400 million, an improvement of over 600 million compared to the prior-year level.

Just a few comments on our recent financing activity -- we proceeded with two offerings in order to essentially prefund in advance the likely redemption of our 2013 convertible bonds in August of this year.

In the aggregate, we raised $1.6 billion with a combination comprised of 974 million zero-coupon convertible bonds and EUR500 million senior unsecured bonds.

We achieved three key objectors that are important to us and to the ST shareholders.

First, there is no incremental dilution to equity holders, as the underlying share count on the new convertible bonds remains the same as the 2013 bonds.

Second, we extended the minimum average life of the financing to nearly six years.

Finally, I believe we optimized the cost of funding and the impact on our weighted average cost of capital.

Moving to capital expenditures, in the first quarter, we invested $297 million, and we continue to maintain our 1.8 billion capital expenditure budget for 2006, reflecting our plans to expand 300mm leading-edge capacity (indiscernible) our advanced propriety 8-inch technologies.

Inventory turns were 4.1 times in the first quarter, reflecting increased stock levels needed to meet order flow requirements in the second quarter.

We expect to make steady progress increasing our turns throughout the year and still expect to exit 2006 within our targeted range of 4.5 to 5 turns.

Moving to our outlook for the second quarters, from a revenue perspective, our current backlog supports an increase in second-quarter revenues between 2 and 8% sequentially.

These would represent year-over-year growth of between 11 and 18%.

From a gross margin perspective, we believe it is appropriate to set an objective of about 35.8%, plus or minus 100 basis points.

We expect to see sequential improvement in the gross margin, but our view is tempered by the second-quarter revenue mix and as anticipated, higher sequential inefficiencies related to the phaseout of the three 6-inch fab lines.

With respect to this revenue mix, we expect MPA to cost comparatively stronger sequential results.

In addition to its positive impact on revenues, growth of MPA sales benefits our revenue per share and RONA performance, but not necessarily gross margin.

From an earnings per share perspective, we expect to see further sequential improvement and significant year-over-year growth in the second-quarter results.

Our revenue and gross margin outlook is based upon a EUR1 to US$1.21, average tax rate assumption for the second quarter, compared to approximately US$1.20 average effective rate in the first quarter.

Our effective exchange rate includes the impact of existing hedging contracts.

Before closing and taking your questions, let me share some key points from a business perspective.

First, on the product front, we are introducing a wave of new products throughout the year. 2005 was a year of reshaping policy.

Our goal in 2006 is to make it a year of new product successes, which in turn will in fact grow our market share.

I am certain that our product portfolio will be much stronger at the end of 2006.

Additionally, these new products will be important drivers of revenue expansion for the Company, beginning in 2006 and continuing into 2007.

Just to mention a few highlights of the impressive list of product announcements we introduced in the first quarter, in wireless, we introduced the third generation of our Nomadik multimedia processor, the (indiscernible), which, as you may have seen, was endorsed by Nokia.

In connectivity, we are now in volume production of our Radius low-power wireless LAN device and began assembling the next generation of our Bluetooth, which integrates FM radio functionalities.

In imaging, we have announced two new devices which offer low-power consumption and a very small form factor.

In digital consumer, as a complement to our high-definition products, we introduced a new leading-edge local set-top box decoder for high-volume, (indiscernible) markets as well as our digital TV 100 solution.

In automotive, we're also generating (indiscernible) design wins for video application in the car (indiscernible) Powertrain and (indiscernible) awards for audience in Japan, China, Europe and the U.S.

For computer applications, we have a new design win in 90 mm as well with our System-on-a-Chip solution in datastorage, as well as two new [wafer] products in our [leveraging] offering.

I would also point out to our announcement yesterday of a new microcontroller product for the disk drive market.

In the area of multiple segment products, we have a new 4 gigabit multilevel (indiscernible) NAND Flash, a solution for the ZigBee wireless networking market, a new 32-bit microcontroller for (indiscernible) application, and a number of new advanced analog products.

I mention this list to emphasize the scale of our network and the important results today.

At the same time, we are also growing our customer base.

As you know, we have put in place a target list of 12 major OEMs around the world that we have identified as new potential key customers.

In the fourth quarter, we had sales to this group of nearly $300 million, and in the first quarter, sales to this target group of customers increased by 12% on a sequential basis and 66% year-over-year.

In summary, I would like to leave you with a few key thoughts on ST for 2006.

First, we want to strengthen our market share with our capital initiatives, new product roll-out in place and our (indiscernible) resources focused in key areas, I believe we will make headway on this objective both in 2006 and even more so in 2007.

Secondly, we want to drive revenue and margin expansions to the bottom line.

As our results indicate, we are positioning to see significant growth in earnings per share in 2006.

Finally, RONA -- here again, I am optimistic that we will make significant improvement as we move throughout 2006.

At this point, my colleagues and I will be happy to answer your questions.

Thank you.

(OPERATOR INSTRUCTIONS). [Remy Thomas], Cheuvreux.

Good afternoon.

Can I go ahead and ask my questions?

Please go ahead; we couldn't hear you at first.

Okay.

First of all, I'd like to have a point of clarification on the gross margin guidance for Q2.

To be honest, it's a bit below what some of us expected.

I was wondering if you could give us some quantification if possible of the impact that you expect from the phasing out of the three 6-inch fab, which I suspect are (indiscernible)?

In other words, what would it have been -- what do you expect to be the gross margin without this impact in Q2?

Secondly, in digital consumer, it's been a rough couple of quarters for anybody who shipped into DirectTV.

Some of the leading set-top box makers are now announcing they're starting to ship high-definition boxes, including [Thompson].

I want to know if ST is involved in that.

Thank you.

I think that Carlo will take the first part of the question, Carlo Ferro, and of course Philippe on high-definition products.

Good morning; good afternoon, everybody.

This is Carlo Ferro.

So (indiscernible) your point is what would have been the second-quarter margins (indiscernible) more significant impact of the 6-inch manufacturing fabs.

Indeed, we have already announced two quarters that we talked about that the gross improvement in shifting wafers from U.S. and Europe into Asia is in this quarter affected by the efficiencies of running (indiscernible) models in the phasing-out phase.

You can imagine that these inefficiencies are eventually increasing quarter after quarter as we phase out the fabs.

So finally, the (indiscernible) quarter, the second quarter (indiscernible) is the one of having eventually the highest (indiscernible) for these efficiencies.

In the Q1, the benefit of moving the wafers has been very significantly outpaced (indiscernible) by the inefficiencies.

We expect a similar to occur in the second quarter, so not at all a progression from Q1 to Q2 due to the 6-inch manufacturing, while we do expect the impact to be much more significant in the third quarter (indiscernible) as an effect of course of the manufacturing costs than the shifting occurred when selling the product manufacturing one quarter and sold it the quarter after.

Overall, our original plan of generating $150 million realized savings from cost of goods sold from this plan is well confirmed, so we are optimistic that these 36, $38 million per quarter will occur and will be fully visible to our gross margin the day that these inefficiencies are discontinued.

That would be partially in Q3 and completely evident in Q4.

In consumer, we've seen a good Q1 for the high-definition rollout and also for the shift to the new [collects] like (indiscernible).

So we see a strong business more on the operator market than on the fleetwear market, and this renewal for (indiscernible) is now paying off.

We are in full volume production with our one-chip high-definition decoder in 90 nanometer, and we see a good traction there from IT set-top box.

Also we had a good quarter in cable, also satellite specifically for DirecTV.

We are in design with -- for our boxes in high-definition, and we have not yet started production.

Matt Gehl, Goldman Sachs.

Yes, I also wanted to follow up on the gross margin question.

Carlo, could you address what the depreciation benefit, if any, you're seeing in Q2 on your gross margin?

More importantly, what is that benefit going to be sequentially in Q3 and Q4?

Then I have a follow-up.

Okay. (indiscernible) first of all, the dynamic of our depreciation quarter after quarter this quarter is one of total depreciation, including the amortization were 428 million.

We do not expect a major change in Q2, while they will be below 420 million in Q3.

That will go to around the 400 million in Q4 '06.

Of course those looking forward data are based on the cost (indiscernible) exchange rate.

As the impact -- to the impact of the depreciation on our margin performance (indiscernible) consider when looking at the overall depreciation on that, not before the depreciation goes to the cost of goods sold, and when measuring the difference in depreciation from in Q1 '05 to Q1 '06, let me give you the (indiscernible) data.

Depreciation in cost of goods sold in Q1 '05 were 414 million.

In Q1 '06, they were 372 million.

There is a true-up from benefit resulting from the depreciation.

You may appreciate that these are not all the 250 million (indiscernible) of gross margin improvement that the Company posted year-over-year.

Great, and then a follow-up question -- I think I heard you said on the call that there would be a negative mix effect in Q2 because you would have a higher proportion of MPA business in the quarter.

(multiple speakers) -- start again.

Are you going to say it's a negative mix?

It's a different mix, but not such a negative, because (indiscernible) we improved the return on capital employed.

Okay, just interested because if you look back historically, we only have about 2.5 years of data looking back at the way these divisions have performed, but looking at historically and looking at your competitors, I would imagine that the MPA group actually would have had one of the highest gross margins of your different product groups.

So I was just a bit interested in why a higher mix of MPA is actually going to negatively impact your gross margin in Q2.

Yes, I think that this is of course very important for us to comment.

In MPA, we have a combination of analog products, now some advanced analog products, microcontrollers, discrete products, special discrete products, power products.

All of these products are exploiting mature technologies.

So they are, let's say, more using, let's say, depreciated fabs.

They are in areas, however, where competition is important in general.

I think there are several suppliers.

They do not require heavy investment, and on the other hand, they do not require a very intensive R&D effort.

So this is a cover-up.

So as a result of all of that, we position the (indiscernible) and we still have a position in MPA where RONA, return on assets, is very strong; today it is in the range of 20%, which is much better than the average of the Company.

The gross margin is slightly below the average of the Company.

And, of course, expenses is much, much limited.

Now, having said that, I think here we have two great opportunities.

Opportunity number one is to sell more of these products, because in doing that we will improve return on capital employed.

Opportunity number two -- definitely we're making a very strong effort in research and development within inside this group to improve, let's say, the portion that is on advanced analog, that is on higher-end products where we will also enjoy -- will also enjoy very high gross margin, let's say, performance.

So this is the (indiscernible) I think is another point to mention here is MPA is a group where our market share is at the lower level.

Among all our groups, MPA is enjoying the lower market share.

I think it's about 5%, and this is giving opportunity of course to improve and do better.

This lower gross margin than the Company average -- historically has the been the case, or is this something that is more a factor since the EBIT margin has declined in 2005 -- it's been a recent phenomenon?

No, no, no.

This is really historically has been relatively, as we say, still and always very good, excellent performance in terms of return on capital employed, even in tough periods.

Say for instance 2005 was a difficult year; this was a family with 20% run-up.

This is a family (indiscernible) when the market is booming, when the market can go back to a strong double-digit -- strong double-digit drop, we will enjoy a much, much stronger RONA.

Today, is already 20%.

[Nicholov Shatwa], Deutsche Bank.

I've got two questions.

Let us come back first of all again to gross margin, if I may?

Your guidance is 45.8%, midpoint, in Q2.

If I remember well, the incremental cost savings you've seen (indiscernible) realize from a 6-inch plan are around $15 million, 1-5, per quarter, so if I add this back to gross margin guidance, I'm still around 36.1, arguably at or below where consensus was.

Could you try to help us a bit more here in terms of understanding there are any other factors which effectively are still impacting your gross margins and may actually linger, or not, into H2?

I will take the question, Nicholov, just to point out that our expected benefit from the 6-inch restructuring, when we will be at full speed, is $150 million per year, which is 37, 38, actually 37.5 million per quarter.

So far -- (multiple speakers).

Yes, but I'm looking at incremental here, so as you know, this plan was announced in September '03 so I'm assuming some of that has been realized already.

Yes (inaudible).

So far, we have, last quarter, disclosed that the (indiscernible) realized that net of the efficiency that was 6 million.

I just decided that this quarter in Q1 we are progressing with the results that the inefficiencies are higher, and indeed the net in Q1 is 2 million, so from 2 million to 37.5% (indiscernible) detail.

There are approximately $36 million.

So you can notice this is in a range of approximately 1.5 (indiscernible) of gross margin.

Okay, fine.

On the Micro, Linear discrete (indiscernible) MPA, you guided initially to revenues up in Q1, if I remember well, and until then, we saw strong results from (indiscernible) from the equivalent business at Philips Semiconductor.

I'm wondering if you faced some capacity limitation issues, notably for 6-inch and specifically for iPOD.

If that's so, if any of these issues have been solved and if they actually led to you incurring some penalties potentially with your customers.

We are enjoying a good situation with our fabs, so the fabs are loaded.

We can still go and grow the share.

We have had no issue relative to penalty or a customer crisis due to that, so there's nothing to report on that.

So the difference between guidance and realized came from where?

Since effectively MPA was down 1% sequentially?

Well, I think it's what (indiscernible).

I think these -- I have to say that the demand is there, the demand is increasing in this family, and we have not been able in Q1 to respond at the level we expected.

Okay.

Then lastly, one more product question I guess for Philippe.

There is obviously a discrepancy between your customer revenues down I think 7, 8% sequentially, and digital consumer reported up.

So could you help us?

Again, it seems like effectively you had a very strong and very encouraging start on the HD and (indiscernible) set-top box side, and maybe some product legacy issues on the (indiscernible) side.

Is that a way to look at it?

First, the numbers, the correct numbers in consumer, total, the sequentially decline is 2%, while in digital consumer, there is a sequential growth.

It is clear that we see very good traction in digital consumer.

As I said earlier, we are fully benefiting from the digital (indiscernible) set-top box, MPEG-4 (indiscernible) you seeing high-definition.

This we continue to gain momentum around that during the year.

While on the overall consumer, Q1 is always and particularly (indiscernible) consumer with Chinese new year, the seasonal low quarters, so to decline 2% sequentially in total consumer I would say is (indiscernible) trend.

Yes, and the decline was more on standard products rather than on the dedicated products.

In fact, the dedicated products grew sequentially, while standard products declined.

Okay, great.

Perfect.

Thank you very much.

Tristan Gerra, Robert W. Baird.

(indiscernible) a little pricing trend --

Tristan, this is Stan.

Could you speak up?

We can't really here you at all.

Can you hear me now?

Go ahead.

Could you talk about -- I don't know -- the pricing trends in the quarter, and what you see for the rest of the year, including the second half of the year?

And also if you could comment on your utilization rates.

We did not hear the first part of the question, sorry.

Analog pricing trends.

The question was could we comment on analog pricing trends in the quarter and perhaps -- (multiple speakers).

Yes, I will comment on that -- prices, and Alain I think will cover the (indiscernible) in our fabs.

But we see now stabilization and some opportunities for some price increases in analog and similar products, in generally MPA.

This is now evident, and as far as the types of concerns --.

Yes.

In fact, if we wanted to be specific about our utilization rate in our fabs, it's quite in line with what I mentioned when (indiscernible) guidance a quarter ago. 6-inch and 8-inch are about the same, 87 to 88%, so you have variable costs in (indiscernible) [87], 28%.

Of course, we keep adding some capacity in the (indiscernible) we will be able to respond to (indiscernible).

In 2006 -- I'm sorry, in Q2, we are expecting this utilization rate to be slightly higher, so when I'm talking about slightly higher, I mean a couple of points or more. (indiscernible) again increasing our capacity.

What we have happening also is we are using a subcontractor.

Subcontracting activity (indiscernible) representing about the 10% of our total volume, and of course we have room to increase that.

Great.

Then as a follow-up question, you mentioned a new wave of products in computer peripherals next quarter.

Any details?

Can you elaborate on this quarter?

We just -- as was said by Carlo in his initial remarks, we introduced yesterday -- we announced yesterday the introduction of a new motorcontroller for the disk drive.

So, this was -- so we continue to have new products, both in the disk drive and in the printers.

I must say that, at the same time, we continue to renew some basic products we have with large customers, and we expand the catalog of ST products for the general market.

This is both in disk drive and in printer engines.

Great.

Thank you.

Andrew?

[Nab Shira], Lehman Brothers.

Thank you very much.

Good afternoon, gentlemen.

Nab, could you -- we're having just a little bit of difficulty hearing year, too, so I have to ask everybody -- (multiple speakers) -- sound off but I know no one is shy out there, so please, sound off!

I know.

Is that better?

Yes, it is.

Thanks, Nab.

I just had a question.

How is the expansion IPO?

Have you seen any listening in pricing competition or pricing pressure from NOR Flash memory, especially in the quarter -- (multiple speakers) -- reported?

If you don't mind, Nab, I will rephrase it, because I could pick it up but I don't think everybody in the room could.

The question was, since expansion IPO, have we seen any moderation in pricing pressure in the NOR Flash market?

Is that correct?

That is correct.

Well, I don't know whether we should link to (indiscernible) IPO.

We see some moderation in the price decline in the NOR Flash, particularly in the non-wireless flash, but really I cannot give any comment on the fact that this is (indiscernible) related to the expansion IPO.

This is what we see on the market.

Just as a follow-up, did you -- (technical difficulty) -- profitability in your flash memory business during first quarter of '06?

I'm sorry.

One more time, sorry, say that one more time.

We couldn't quite hear you.

Sure, no problem.

Was your flash memory business profitable during one -- (multiple speakers)?

Was flash memory business profitable in the quarter?

You know we don't break out profitability by family or product or division.

We do not like to break out, to break by family.

What we can say is that, in MPG, memories were profitable and smartcards losing money.

This is Carlo.

If we can go back one second to our prior question is also to highlight that despite the NOR price environment that this is the third quarter in a row that our average selling price for flash is improving.

This is a sign of the ability of the product innovation to more than offset the pure market price pressure.

Thank you, Carlo.

Just as a very last one, would that then imply that you would consider keeping the business in your portfolio?

Well, I think that we have commented this on several occasions here.

I think we are working on expanding our partnerships in memory products.

I do confirm that we're making good progress.

Of course, we are not yet in the condition to announce anything, otherwise we would have done.

Why we do that?

I think we wanted to give more scale to this vision and to (indiscernible) activity.

Of course, this would be through venturing, partnering, and this is something that we are (indiscernible) but we are not yet ready to make any announcement at the time.

That's great.

Thank you very much.

Didier Scemama, ABN AMRO.

Good afternoon, gentlemen.

My question -- sorry to come back on gross margins, but if I understand correctly, your gross margins in the second quarter, in terms of guidance, if I would exclude the impact of the 6-inch phasing out, would be more in the range of 36.5%.

Would that be correct?

Second, could you maybe help us model for the second half of this year?

If I take into account the depreciation comments you made and the better mix as well as the 6-inch fab closure, would it be fair to expect the higher 30s towards Q4?

Well, I think -- as Carlo will maybe comment on the first portion. (multiple speakers) -- to quantify the 6-inch impact in the second quarter.

More in general, I think we will not comment on the roadmap of the gross margin.

You know, I think gross margin is a very important indicator, of course;

I think even a better indicator is earnings per share.

Our motivation is to progressively improve -- progressively and significantly improve earnings per share throughout 2006.

I think that our (indiscernible) MPA, if we would double the business in MPA from one moment to the next, our gross margin will slightly deteriorate and our return on assets will improve fantastically.

So yes, we are motivated to improve the gross margin, but we are also motivated to sell more MPA products and improve our RONA, okay?

So I think, as you know, we will not give a guidance of gross margin.

I think you have several millions, including the depreciation running off the 6-inch other initiative.

I will leave to Carlo to comment on the impact on the 6-inch in the second quarter.

Yes, again, as I said earlier at the end, that the net effect of the 6-inch in the second quarter is substantially known.

At the end already in Q1, the (indiscernible) was, as I said, 2 million.

This quarter, wafer (indiscernible) will ultimately increase but the inefficiency would increase as well.

So I would not expect that significant a change in the effect of 6-inch starting from Q1 to Q2, while the full impact of 36 to 38 million is confirmed and this is approximately 150 basis point.

Now, this change with respect to more than the expectation (indiscernible) for the quarter of course depends on how much was (indiscernible) incorporated in your model already for the second quarter.

I believe that we need to take into account that the plan is completed at the end of the second quarter.

Then the full effect can occur on manufacturing costs, occur in the third quarter.

As you may appreciate, knowing the cycle time of this industry, what manufacturing in the quarter is (indiscernible) same quarter, (indiscernible) sold in the quarter after.

So what I would expect is the full impact on gross margin to materialize in Q4, but to see a very substantial step-up already from Q2 to Q3.

To be honest, I'm a bit confused now.

Are you saying that the growth in the second half will be more driven by MPA?

Because I thought, from all the things you said in the last 18 months, that the Application Specific Group was the driver for the top line.

I'm just talking about the 6-inch retraction.

No, no, I'm referring to Carlo Bozotti's comments.

No, I didn't say that.

What I said is that we never said that our growth will be on application-specific products. (multiple speakers) -- we have a business at 20% of our revenues is MPA, it's 20% RONA.

Of course we will expand as much as we can this business, because it has the best RONA in the Company.

This is at the gross margin level that is below average.

This is what I said.

So of course, we will improve the gross margin, but I think what is more important for us is to improve the return on capital employed and return on assets. (indiscernible) MPA, we will achieve this objective.

Okay.

Maybe just a question for Philippe then on the Application Specific Group.

Can you talk about your expectations for the second quarter for the different subsegments?

Well, we continue to see good market conditions in several segments.

Wireless was starting the year quite good, and we see this momentum continuing in Q2.

Of course, here we are helped in wireless also by new products.

Last year, we were not in (indiscernible) Wireless LAN and today this is contributing now significantly.

So, wireless -- we had a good surprise in Q1; it's usually the lowest seasonal quarter, and it was lowered in Q4 but it (indiscernible) still are much better than we anticipated, and much better than usual seasonality.

This -- we see the momentum continuing in Q2.

In the consumer, in consumer, we, like I said earlier, we continue to see good market conditions in digital consumer and in particular operator set-top box as opposed to retail.

We benefited -- we benefit clearly from a shift to new (indiscernible) high-definition, higher mix of [PGR], good cable conditions in the U.S..

Then in computer, I would say is no more -- a little less, maybe a little less positive but it's still positive.

Automotive here depends on the continuance.

Clearly, in the U.S. market conditions are not the best.

In addition to application-specific, you know the other application in the industrial market in general, the conditions are (indiscernible) (inaudible).

Okay, thank you.

Titus Menzies, Jefferies & Company.

Good afternoon, gentlemen.

If I could ask three questions?

Firstly on your Memory division, have you made decisions on -- I missed speaking with you back (indiscernible) Q1 results regarding your (indiscernible) two installations for going forward, as you expand the capacity in your memory area, and you're looking to change suppliers.

Have you made a decision on that as of yet, or is that still ongoing as of current status?

Titus, this is Stan.

I have to say, it was difficult to pick up all the parts of your question.

You said something about changing suppliers and that was about as much as we got.

So can you come at again?

Sure.

Back in Q1, I remember speaking with management regarding the decision to change suppliers for certain tools for the sort of Singapore facilities.

I was wondering whether a decision has been made on that, or is that still ongoing?

I think, you know, traditionally, we (indiscernible) our memories we are using Canon for the rest of our business in the SML and of course to Bluetooth (indiscernible) technology on memory, we have not yet made a final decision.

Okay, if I could ask you two more questions regarding your leadtime currently and the sort of level of inventory in the channel, if you could give some color on that possibly.

If we talk about time, especially on (indiscernible) product, (indiscernible) increasing not only in (indiscernible) but I think for the rest of our industry.

Here, I'm talking about mainly the product of MPA and also some memory.

Now, if we look at the inventory situation, we think that the inventory is that our customers, as well as the our distributors, are at normal levels, I would say, you know.

After the inventory adjustment that we (indiscernible) I think now, both our customers and our distributors (indiscernible) normal level of inventory. (indiscernible) mention them.

Thank you very much for your time;

I appreciate it.

Van Ngoc, Exane BNP.

Hello.

It's about your, again, just restructuring of the 6-inch lines.

Did I hear you say it's (indiscernible) about automotive?

If so, is there a risk that the qualification process could be again delayed as you have already seen in the recent quarters?

No, I don't think there is any risk.

I mean -- (multiple speakers)

No, I think you know, we are following this program on a daily basis, and of course, this program was delayed due to the heavy automotive content of the production in these fabs, but now we have a very clear understanding of (indiscernible) product (indiscernible) qualified, and of course we are maintaining our schedule, which is to have these three fabs stopped in Q2, or most of it.

Okay, I have a second question regarding the restructuring charges.

What kind of restructuring charges can we expect in Q2 and Q3 and Q4?

Because, in Q1, it was a pretty low number.

Okay, this is Carlo Ferro.

On restructuring charges, on the 6-inch, the original plan was 350 million out of which 300 million already occurred, including the 6 million in the Q1, '05.

I would say that this 350 million remains our estimated eventually is somehow a conservative estimate.

After (indiscernible) out the three fabs modules, we will eventually pay the final decommissionings and the transfer (inaudible) the equipment, so we will continue through the current quarter and a couple of other quarters after.

On the headcount restructuring, I will say that I have good news.

The first one is that the plan is on track and the other one is that the (indiscernible) plan is materializing in execution, costing -- how say -- (indiscernible) the low level of our original guidance that was 100 to $130 million.

On this plan so far, we have incurred 48 million.

The completion for that (indiscernible) middle of the year, middle of the year is according to the (indiscernible) the month of June or the month of July, so we have a portion in Q2 and a portion in Q3.

To be straight, on your point for current quarter, I think that I appreciate (indiscernible) calculating all that in modeling the numbers.

Therefore the Q2 '06 (indiscernible) I could suggest to consider any number between 25 and to $35 million, and for the overall fiscal year, we will see -- I see most of you are more (indiscernible) in the range of $100 million for property to plant, and these are -- how say -- that at this stage, it makes sense.

All right.

If you will allow me a final question?

On the ASP impact on gross margin, in terms of basis points, I remember you said in Q4 it was something like 100 basis points versus a bit more in Q3.

What was that number in Q1?

I'm sorry, Van.

We missed the first part of the question.

You're talking about 100 basis point improvement.

Could you -- or 100 basis point comparision.

Please one more time?

Yes, you usually used to split your gross margin improvement from quarter-to-quarter with different factors, including price pressure, mix and Forex.

Could you do that for Q1, please?

Sure, the variance you are interested in. (multiple speakers) -- sequentially, correct?

Yes, correct.

From Q4 to Q1?

Sorry, to make sure about your question, it is about Q4 to Q1?

That is correct, the split of the difference in gross margin from Q4 to Q1 by different elements.

Okay, yes.

So, the good news on this quarter is that there is a significant positive contribution of the total mix, even higher than what we had originally expected.

On the other side, we see (indiscernible) pure price (indiscernible) we talk about memories but also on other group substantially when entering the new year -- (technical difficulty) -- yearly contract -- (technical difficulty) -- our customers, so we have incurred a negative pricing effect.

Exchange rate impact is very, very much -- (technical difficulty) -- so at the end, the two key major factors have been positive in the product mix and negative in the fuel pricing market that they have.

The reason for having missed your question is that, anytime you're asking the question -- sorry for that -- my colleagues were (indiscernible) suggesting me to take the opportunity of your question on modeling about the restructuring charges, also to provide you some insight in respect to our other income and expenses.

That sometimes in the model may have maybe a question mark (indiscernible).

You may have noticed that, this quarter, we have reported a $19 million expense balance, which basically is comprised of the (indiscernible) costs and very much in this quarter (indiscernible).

Entering the second quarter, I would expect (indiscernible) likely higher (indiscernible) better R&D (indiscernible) so are likely better (indiscernible).

So I would expect some other income and expenses in the (indiscernible) or slightly better than the negative balance of Q1, '06.

The picture will change in the second half of the year, as they are in the (indiscernible) for seasonal reasons could start to materialize and (indiscernible) I expect the balance to be reversed in Q3 and Q4 to around breakeven for the third quarter, and some net income balance in the fourth quarter.

Okay, thank you very much.

William Conroy, Sanders Morris.

Thanks for taking my call.

A couple of just I think brief follow-on questions.

First, when do you anticipate ceasing production in the three 6-inch facilities?

When do we plan on ceasing production in each of the 6-inch lines?

Yes.

Okay, here we have three 6-inch lines that we have mentioned.

There is one in -- there are two in Italy.

One is in [Castanetto], and production will be over in June, the end of June.

Then there is another one in Italy, which is in (indiscernible).

This is the move from 6-inch to 8-inch.

Here also, the beginning of Q3, this will be open to (indiscernible) production on 6-inch.

Then there's the third one, (indiscernible) and (indiscernible) we're going to cut the production down to 95% or 90% in the second quarter -- sorry, at the end of the second quarter, and we keep (indiscernible) product for (indiscernible) for a few months more.

By the end of the year, it would be completely over and closed.

That's helpful.

Thank you.

Is there any more to that, Bill?

No, I will come back.

Thanks.

Jerome Ramel, [IXUS].

Yes.

I'm just looking to know what the proportion of your flash memory business which is now made in Asia.

The portion of flash made in Asia.

Yes.

We are just computing between ourselves, and (indiscernible) -- (multiple speakers) -- number but I think it's between 60 and 70%.

Okay, and maybe just an update on your NAND Flash memory business.

What question do you have, Jerome, about the NAND Flash -- (multiple speakers)?

(multiple speakers) -- let me comment about the production, and maybe Philippe will comment on the business as (indiscernible).

On the production here, our NAND production is today in Korea, is in (indiscernible).

As you know, in [9-inch] facilities, and we're starting a new plant with a joint venture in China, (indiscernible).

The production will start at the end of this year, the beginning of next year.

So, from a production point of view, most of the production of the NAND will come from (indiscernible) and (indiscernible) we are qualifying also some production in Singapore.

With regard to the evolution of the NAND business, nothing significant to report.

We continue to grow, of course, the NAND, where our position is still small with a small marketshare, so we continue to grow (indiscernible).

As you may have seen (indiscernible) on the pricing is a little tougher than it was last year, and for NAND like for (indiscernible) of course we have a good part of our business growing with the wireless market.

Here, we have a good traction -- (multiple speakers) -- this market as the volumes are a little better than expected from the beginning of the year.

Okay.

Maybe just one final question -- what was the weight of Nokia this quarter?

Around 22%.

Okay, thank you very much.

Jeremy Kwan, Piper.

Just one quick question -- I was wondering if you could just give us an update on your progress with your efforts in Bluetooth and WiFi, please.

Carlo?

Bluetooth and --

WiFi.

So, we started volume production in Bluetooth and WiFi at the end of the year 2005.

So last year, those products contributed for marginal sales of (indiscernible) million dollars.

This year, we are growing quarter-after-quarter significantly, and we're going to have a sales total for this year -- we don't give a precise guidance but it will be significant; it will be tens of millions of dollars total, 2006.

In addition to that, we continue, so this is the current billings -- w continued to gain designs, both in Bluetooth and in wireless LAN.

In Bluetooth, clearly the shift to [EDR] has allowed us to win designs at many customers as well as, now we are (indiscernible) combo solutions at Bluetooth plus FM radio and this is where we see it.

In the wireless LAN, we are in production with a generation of product and we have already started to sample the next generation of product with which we shall recover in addition to [BNG] will cover [ABNG] with two solutions, one towards performance and one towards cost.

And, we are, I must say, quite positively pleased of the attach rate that we see of the WiFi on the cellular phones, and this is coming from several reasons. (indiscernible) -- (technical difficulty) -- priced phones, but also for consumer phones to connect to the phone to the PC, or for some Voice-over-IP.

So, good (indiscernible) in this market.

Can you give us any key customers that you're working with in each of these areas?

We're not surprised.

We're also working there with our (indiscernible) Nokia but you find our connectivity solution at other customers.

We are in production at SonnyEricsson.

We are at other customers are in Korea, in France, in Japan.

So, we have, I would say, here we have a wide window (indiscernible) I think we have about ten customers with whom we are (indiscernible) volume or just in the initial ramp-up phase.

Thank you very much.

Janardan Menon, DRKW.

Sorry to go back to the gross margin issue, but Carlo Ferro, if I can understand you right, are you suggesting that if your revenue was sort of flattish for the next three quarters, then by Q4, you have a gross margin upside of 1.5% and Q3 will be somewhere in between what you're saying in Q2 and that 1.5%?

Would that be a fair understanding of what you are trying to say?

Of course, I (indiscernible) specific question on one of the (indiscernible) on our margin, which is the 6-inch manufacturing plants, and there aren't many others, so (indiscernible) these specific indications in effect (indiscernible) the 6-inch restructuring initiative on the gross margin.

Then on top of the revenue (indiscernible) the price dynamics, the mix dynamics, the currency impact, so many others.

And depreciation.

Yes, but just on the 6-inch alone, that would be a correct implication of the whole thing?

Yes. (multiple speakers) -- on the 6-inch, you are correct.

Just moving onto your [Chipcom] business, your competitor in Germany also seems to be struggling in that area.

But you used to be profitable in this area, as I remember, and now you've slipped a lot there.

So what is going on there?

Is this something that can be turned around in the near-term?

Well, here in (indiscernible), there are several different markets.

You have volume markets with very competitive pricing, in particular the (indiscernible).

Then we have a lot of other applications, more fragmented, (indiscernible) banking, transportation.

So clearly here, we have several, several activities going on to go and grow our business in market share, in (indiscernible) identification, which is a growing business and we have very good prospective.

So clearly here, to regain market and to regain profitability, new applications and the new products in those more fragmented areas (indiscernible).

Is that likely to happen through the remainder of the year or do you think you could travel for sometime in this area?

Well, we don't give guidance on how the profits will improve quarter-by-quarter, but it will happen.

Of course, in those applications like banking or identification, you will appreciate that the qualification time, the time to stop (indiscernible) volume production is significant, so this will happen gradually, quarter-after-quarter, but it will happen.

Then last question to Carlo Ferro again, which is you are hedging.

Can I just get a feeling of how much of hedging you've done into Q3 (indiscernible) say 1.21, because the currency is now 1.24.

So I'm just wondering how much can you sort of protect at 1.21 and much will be left to what happened to the currency in the coming months?

I would say approximately one-third of our Euro-denominated expense is involved in cost of goods sold and expenses.

But I was just asking how much of your currency hedges are currently extending into the third quarter.

Yes -- (technical difficulty) -- we're going quarter-to-quarter.

On the third quarter, we have so far hedged approximately one-third of the Euro-denominated cost of goods sold and one-third of the Euro-denominated operating expenses (indiscernible) 1.21, 21.5.

I think we have time, Andrew, for a couple of more questions here and then we will have to conclude.

Currently, our last question is from Jonathan Dutton, UBS.

Good afternoon.

Just a quick question -- I wonder if you could give us an update on Nomadik, and also give us some idea of the sort of revenue targets you have for this product in 2007.

Do you think it's going to be more significant than the combination of Bluetooth and Wireless LAN revenues?

Well, first, this quarter, we have good news.

This quarter, we start shipping Nomadik in (indiscernible) so that's a good sign.

It's not huge volumes yet but it is a good volume.

We announced some time ago that we have the design wins with three tier-one customers.

We confirm that; we continue to progress at those three customers.

Plus, getting new applications and working on new potential design wins, both in wireless (indiscernible) but also in portable multimedia applications, some other ones.

We must say here that, if we look at the evolution compared to, say, six months ago, we see good -- we confirm and we improve a little our prospective because we see that video on the cellular phone with mobile TV in particular is gaining momentum.

We need (indiscernible) provide (indiscernible) a lot of positive feedback, a lot of activity on the cellular phone to unload this function on the phone.

Here again, Nomadik is appreciated by our customers because of its power consumption on the (indiscernible) performance is -- (technical difficulty) -- in audio and video.

Here Nomadik is the superior solution.

To give an answer, quantified answer, to your question, do we see next year more sales than we would see this year on connectivity products?

Yes, yes.

Okay, thanks.

Just a follow-on question -- I think you've mentioned in the past you're targeting 10% share of the Bluetooth market.

For 2007, could you give us a kind of rough idea of what your market share targets are and what sort of revenue targets you have in the Bluetooth arena?

No, we're not going to disclose revenue targets by (indiscernible) segment like this one.

But, clearly 10% market share is not an aggressive inner goal.

We now have Bluetooth (indiscernible) product roadmap with the superior performance we have today on the Bluetooth CDR, the combinations of Bluetooth with FM radio and to mobile Bluetooth with Wireless LAN.

We believe will end up with more than 10% market share.

Just one final question, if I may?

I wonder if you could give us an update on your 3G digital baseband development.

So, in 3G digital baseband, we are the significant supplier of that in the ASIC mode.

Today, supplying (indiscernible) management and RF for 3G and before the end of the year, supplying also digital baseband for 3G.

This is in ASIC mode.

In parallel, we continue to work with several partners to have the complete baseband plus Nomadik solution offering, a complete reference design, including the modem for Nomadik.

But here, it is still too soon to announce something more precise than that.

But we are actively working on it and we are -- several partners who are extremely interested to (indiscernible) strategic technology with our Nomadik application processor.

Thanks a lot.

Thanks very much.

Andrew, I guess that takes care of all the questions in the queue, so I think we will now -- Carlo Bozotti to provide some concluding comments.

First of all, thank you for all of these questions today.

In closing, the first quarter I think that this was a good quarter for ST from several points of view.

First of all, I think we had solid improvements in our market share and financial performance.

Take, for instance, market share.

I think that, in Q1, the market will grow compared with Q1 last year at 6, 7%.

We grew 38.5%, so our growth was more than two times the growth of the market.

I think that, in terms of financial performance, it was a great improvement compared with last year.

Last year was a loss of $0.06 per share; this year, it is a profit of $0.14 per share, and we expect to continue (indiscernible) growing and improve quarter after quarter this year.

I think we have announced our financial stability and flexibility with the completion of our financings early this year.

We have accelerated (indiscernible) new product introduction, and I think what we have shown, in terms of the first-quarter results and performance, this impressive wave of new products, and also the expansion of the customer base, particular the focus on the new major accounts is paying off very, very nicely.

Of course, we will look forward to speaking with your next quarter and to report on our continuing progress.

In the interim, we also hope to see all of you at our annual field trip in London on May 23.

So with that, I wish all of you a very good day.

Thank you very much.