意法半導體 (STM) 2006 Q3 法說會逐字稿

Hello and welcome to the STMicroelectronics third quarter 2006 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. [OPERATOR INSTRUCTIONS].

For your information, this conference is being recorded.

I would like to turn the conference over to Mr. Stan March, Group Vice President Investor Relations for STMicroelectronics.

Mr. March, please go ahead.

Thank you Vicky.

And thanks to all of you for joining us for this STMicroelectronics conference call.

Hosting the call today is Carlo Bozotti, the President and Chief Executive Officer of ST.

And joining Carlo in Milan are Alain Dutheil, Chief Operating Officer, Carlo Ferro our Chief Financial Officer and Philippe Geyres our Executive Vice President responsible for the Product Groups.

And I'll just cover two housekeeping points before we begin.

First, for your questions, which will come at the conclusion of Mr. Bozotti's comments, in the interest of moving through as many questions as possible and to get everyone who has a question able to ask at least one, please limit yourself to one question and one follow up.

And then if you need to, return to the queue.

And then also, please know that many of the comments today are forward looking and, as such, are covered by the disclosures that were in our release that was issued last evening, as well as the risk factors that are in our most recently published 20F.

And with that bit of housekeeping, I will now turn the microphone over to Carlo Bozotti for his comments, Carlo?

Thank you Stan.

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

As our financial results for the third quarter and nine months demonstrate, ST continues to make steady progress improving the performance of the Company.

First, we have regained market share.

This began about one year ago and we have continued since then.

Revenue for the first quarter improved 11.8% year-over-year and is up by the 2.5% for the year to date.

In comparison, the industry has grown approximately 8.5% so far this year.

Based upon our outlook for the fourth quarter, we expect to grow the top line approximately 11 to 13% in 2006.

And we believe our strengthening product portfolio and customers' initiatives position ST to continue this market share growth next year.

Secondly, we have made great strides in improving our profitability, specifically, ST has delivered significant year-over-year growth with third quarter operating income up 90%, operating margin expanding 320 basis points and earnings per share more than doubling.

In fact, I would also like to emphasize that this is the fourth quarter in a row of earnings per share growth on a year-over-year basis.

Thirdly, we have clearly repositioned the cost structure of the Company over the last year and a half.

Improvement in profitability is not the result of higher revenues alone.

Both our gross margin for the third quarter and our fourth quarter gross margin outlook demonstrate that our cost restructuring initiatives are delivering.

Even with limited sales leverage from Q3 to Q4, we expect to show sequential gross margin improvement.

In addition, to some extent, currency volatility has clouded the level of underlining improvement in our cost structure.

And finally, the careful management of capital investments has been a key priority.

This is evidenced by both the improvement in the return on net assets or RONA, as well as capital intensity trends over the last two years.

We have seen growth in RONA in each quarter of 2006.

For the third quarter our RONA was about 10% and is now at a similar level to our weighted average cost of capital.

We have more improvements to come, but we are clearly showing progress on this front.

Our capital spending trends have important indications for the depreciation levels going forward.

Based upon our fourth quarter plans, we anticipate that our 2006 capital spending will be approximately $1.6b or $200m lower than we had previously communicated.

I am pleased to say that we have been able to meet our investment requirements by more efficiently utilizing our worldwide resources.

And for the second year in a row, our annual capital spending level will be below depreciation.

A lower depreciation level in 2007, set to decline by approximately $150m from 2006, will be an important level together with greater manufacturing efficiency and our richer product portfolio for gross margin improvements in 2007.

Now, let's turn to our financial review for the third quarter and the nine months.

Our largest sector, representing over half of our revenues, is the application specific product groups.

Their products are the core focal point of our R&D reorganization which occurred last year.

We have started to see the benefit of an improved product portfolio in our figures and anticipate even more benefit as we move in 2007.

While ASG's revenues were essentially level with the second quarter, operating income rose 16% to $125m from $108m.

We benefited from an increase in Wireless volumes as we had some mix improvement.

For the first nine months of this year ASG's revenues are up 10% with operating income slightly higher, posting a 50% increase.

Our operating margin for this group was 9.1% for the quarter and 8.1% year to date demonstrating substantial progress in comparison to the year ago period.

Advances in ST's product portfolio are already visible in the results for MPA.

As we stated last quarter, we are absolutely delivering on plan for growth and for margin expansion in this Group.

MPA sales increased 6.3% sequentially.

Looking at the year to date performance, MPA sales are up almost 19%, higher than any other group.

And the operating income is up even more at 27%.

From a profitability standpoint, MPA is also the leader with an operating margin of 15.7% year to date.

Overall, this impressive performance by MPA confirms the soundness of our strategic decision to focus on advanced [analogue ITs] and complete solutions for the industrial market.

In MPG our primary day-to-day focus is in on maintaining the positive operating income through technology migration and manufacturing excellence as we continued to do this quarter.

The environment remains tough, especially in NAND, with price pressure ongoing.

On a sequential basis Flash Memory sales, which are about 15% of total ST sales decreased 7% to $375m.

Just briefly touching on operating expenses, you can see from our numbers that we continue to manage carefully where and how we invest, and this focus will continue.

We did increase R&D spending in the quarter by 3%, driven by important efforts in process technologies and dedicated products.

On inventory we saw terms decline slightly to 4.1, as shipments in the third quarter were below initial expectation.

Given this deterioration in terms, we will be carefully managing the factory ordering and plan the holiday closing of certain plants to improve inventory levels.

However, within the current environment we do not expect to meet our 4.5 inventory target in the near term.

I would like to highlight one additional area of significantly improved performance for ST, and that is cash flow.

We have continued to systematically generate positive cash flow for the past five years.

And, as you have seen, ST generated over $0.5b in net cash from operating activities in the first nine months of 2006.

We expect this trend of positive cash generation will continue.

Now, let's move to our outlook for the fourth quarter.

For the first nine months of this year, the semiconductor industry has grown about 8.5%.

We expect growth to moderate for the remainder of the year as we see some correction in the current semiconductor cycle that may last a few quarters.

As a result, we would expect that ST's sequential growth will be below our historical levels with wireless and automotive sales anticipated to be below normal seasonal trend.

Automotives will be affected by market weakness, particularly in the United States, while wireless will suffer from a product mix towards the low end.

This will give an expected fourth quarter revenue growth range between minus 1% and plus 5% on a sequential basis.

Importantly, even so our fourth quarter revenue outlook reflecting industry conditions is somewhat lower than what -- than we would have anticipated earlier in the year, we expect to continue to see gross margin progression.

Our fourth quarter gross margin is still expected to be about 37%, plus or minus 1 percentage point.

This guidance demonstrates the leverage of translating over 90% of incremental sales to gross profit.

Our revenue and gross margin outlook assumes an average effective rate of the -- of EUR1 to $1.265 for the fourth quarter.

So, ST is making important progress across our three major initiatives.

We are strengthening our product portfolio, increasing our market share and improving our returns on invested capital.

However, these results are not the end of our efforts.

As I just touched upon, there is a correction underway in the current semiconductor cycle, which has caused us to lower our 2007 market growth expectation to about 6 to 7%.

Despite this tougher environment, ST is poised to again significantly outperform the market.

In the drive towards this level of performance, we will continue to execute our customer, regional and new product initiatives.

Now, let me show you our most important strategic initiatives underway.

First, in technology R&D we are addressing the likely changes in the Crolles2 Alliance.

We are not waiting.

We have potential solutions in our hands already.

And through these new partnership options we will continue to lead the way into [mask] technology development below the 45 nanometers.

Second, in Flash Memory we are pushing industry consolidation and financial reconsolidation.

Let me just say that we have dedicated to a solution here and believe the current environment better positions ST to achieve these objectives.

Once completed this will increase our asset terms, as well as increase operating margin.

And third, ST has evolved into a net capital intensive company.

As you know, in the past, ST's CapEx to sales ratio has been in line with the industry average, over 20%.

We have been successful in improving our capital spending levels over the past two years, bringing this ratio down from 22% to 16% or so by the end of this year.

Looking forward, we are working to shift this ratio towards a new target of 12% through a combination of a less capital intensive product portfolio, increased usage of current risk for non-proprietary technologies and the optimization of our manufacturing resources.

In summary, we are pleased to see the progress in the return on net asset over the past seven quarters from 1.5 to 10%.

These additional actions are being implemented to further expand our RONA as we strive to move into and remain within our targeted range of 12 to 20%.

My colleagues and I would now be happy to take your questions.

Thank you.

Thank you Carlo.

Vicky, we'll now go to the question and answer session.

Thank you. [OPERATOR INSTRUCTIONS].

The first question is from Mr. Didier Scemama from ABN Amro.

Please go ahead sir.

Hello.

Hello Didier.

How are you?

Good.

How are you?

Good.

Thanks very much for taking my questions.

Two things, I would just like to clarify, if I may, your comments you made this morning regarding Catania M6.

And perhaps if you could give us a bit more details on the alternatives you have for [quarter two].

So, my question about M6 is did I understand well that because you think that [Friscan] and XP are potentially going to get out of Crolles2, you don't need M6 for logic and you're going to allocate that capacity for flash?

Am I incorrect there?

And second, what are your alternatives for the Crolles2 Alliance on the -- basically next generation manufacturing process technologies?

Okay Didier, this is Alain Dutheil answering.

In fact, on Catania M6, what we said is that Catania is going to be within the perimeter of the initiative we will take on the Flash Memory.

And, therefore, yes, you're absolutely right.

Catania will be devoted to flash and the ramp up of production will occur when we need it.

But, yes, it's not going to be initiated to [simmer] solely, but to Flash Memory.

About the Crolles, what we said this morning is that, of course, there might be some new things happening with the change of shareholders in both our partner.

We are not sure about it.

But we need to get prepared.

And, therefore, we have explored several possibilities.

And, therefore, whether or not the alliance, or a partner in the alliance, stay with [them] or not, we will have a solution and we have prepared for a solution.

In fact, we have several solutions which are possible, in order to keep developing the technology and, of course, all the derivatives in [core] two.

Okay, I completely understand.

Is there anything that we should read into the steepness of the ramp up for Nomadik and the 3G base-band as a result?

Meaning perhaps the ramp up is slower than expect again.

So, therefore, you don't need to ramp -- get any M6?

Yes, no, today we have the [inaudible] share.

Today we have a mix currently that is more about the [low end form], but we believe this is an issue for one or two quarters.

The global trend of the evolution towards 3G or towards high end phones has not changed.

And we are not changing our medium term plan for this, not even 2007 in total.

Okay.

Final question maybe for Carlo Bozotti.

If you could give us an idea of the number of parties you are talking to for your JV in flash, whether that includes the NAND business with high mix in [Wuxi]?

And I'm sure I'm asking too much, but if we could have an idea of the timeline for this potential deconsolidation.

Yes, I think that we are talking to a number of potential partners on this.

Of course, it is limited numbers, but it is few of them.

And I believe that the vision that we have is that this would concern all the flash activity in ST, including both NOR and NAND.

And in terms of, let's say, a timeframe what we have in mind is a few months from now.

Okay, thanks very much.

Thank you.

Okay, Vicky?

The next question from Mr. Nav Sheera, Lehman Brothers.

Please go ahead sir.

Thank you very much, good afternoon gentlemen.

Carlo, I just wanted to come back to your long term targets or goals, the return on net asset of 20% and double digit EBIT margin.

Would these be with the Company structure having legally separated out the Flash Memory business?

Am I reading that correctly?

So, would that be for the remainder for this?

Well, we are two Carlo's here.

So, I take the question.

There are two Carlo.

No, I think that, for us, it's important to show a continuous improvement trend.

When we -- when I started with a new management team, of course, we started at the beginning -- in the second quarter of 2005, our return on net assets was below 2%.

In six or seven quarter we move from 2% to 10%.

And we believe that with or without memories we have more opportunities to improve in terms of return on net asset.

And I believe that we have presented for the first time -- well, in fact, we have presented for the first time in London within the Analysts' Day our financial model.

And we want to be consistently above 12% RONA.

We have given a range from 12 to 20%.

And, of course, this -- then the performance may depend on the specific semiconductor cycle we're within.

I believe that we have gone from 2% or less than -- to 10%.

We need to do more progresses from 10% now up into the mid point of the range.

And I believe that we will not change this model, depending on the results of the Memory initiatives.

Thank you very much.

That's clear.

Thank you.

Just a quick follow up.

Would you envisage 2007 capital spending to be down versus 2006 at this stage?

Yes, [quarterly] our percentage of sales is going to be down.

And then, of course, this will depend on the level of our savings.

But, for sure, the percentage of sale is going to be below 16%, yes.

Thank you.

And my final thing, I think I heard this morning that you had reached your goal of 10% of the Bluetooth market already.

I just want to confirm I heard that correctly.

Yes, this is in Q4 we believe we are on this run rate.

So, we are -- we did not achieve it in Q3.

But we believe right now we are now there on this run rate.

That's brilliant, thank you very much.

Okay, Vicky, next please.

The next question from Remi Thomas, Cheuvreux.

Please go ahead.

Thanks and good afternoon.

I understand from this morning's presentation --

Remi, can you --

Remi, can we hear you a little bit better?

Is that better now?

Yes.

Okay.

I understand from this morning's presentation that you were quite bullish on the fourth quarter for digital consumer.

I remember that there were some technical issues with the ramping up of high definition set-top box in Q2.

I understand some of the large suppliers of set-top box that there are still some issues, although they're working around them.

But they don't expect a new version of the ST7100 to be available until earlier next quarter.

So, can you just clarify what has been happening with the technical issues that you've been -- you and the others obviously have been meeting?

And also, can you tell us about the ramp up that you expect in terms of output for that chip set going forward and how we see -- you see the business evolving sequentially in Q4?

Well, first on the 7100, this chip we still have some customers who are still de-bugging their boxes.

But we have customers who are using this chip in volume, by volume I mean the millions, since several months.

So, this chip is today deployed in volume and shipping.

And there are many boxes, many specific issues related to specific condition, or access, or operators, or customer software.

So -- but the 7100 today is shipping in volume.

So, regarding the evolution of the market and the growth, this morning we were commenting on the trend this quarter and next year.

Now, if we look, let's say, 2007 yes, we like to be confident it on a good growth on 2007, because of deployment of HD, in particular in America but also in Europe.

Deployment of IP set-top box, everywhere in the world with telecom operators being very bullish in deploying this service to keep their subscribers.

We are also seeing a good growth from cable in China, in the U.S.

So the 2007, yes, we are positive in the specific [Q4], but it's not particularly strong.

I would say it is normal seasonality, maybe a little less than -- less strong than usual.

But this is really a spot -- a [spot due].

May I just ask why you would expect seasonality to be less strong than usual?

And what would be normal seasonality in this specific segment?

Yes, we're referring to Q4 2006.

So, we are already in the middle of the quarter.

So, we start to have some visibility in the quarter.

And when we see the level of backlog we have and the level of activity, I would say it's a quarter normal.

In summer we had a little soft serving, particular in the areas of analogue TV.

Okay.

Alright, thanks a lot.

Thank you Remi.

Thank you.

The next question from Mr. Nicolas Gaudois, Deutsche Bank.

Please go ahead sir.

Yes, hello there, good afternoon.

The first question would be on utilization rates, and if you could give us the usual levels for 6 and 8 inch in the quarter.

And how you would see this evolving into Q4?

And linked to that how long do you think it will take for the excess inventories you currently have on the balance sheet to be effectively absorbed?

Yes, utilization rate in Q3 was [I think we said] 89%.

And [part of that] the 6 inch and the 8 inch were in the [favor of].

Now, what we are planning to do in Q4 is to shut down some of our plants, and I would say most of our plants during -- between Christmas and New Year so this, of course, will help the decreasing of our inventory.

And outside this shut down our utilization rate will be probably the same as in Q3 or a little bit below.

So, brief shut down.

So a decreasing overall production and at the same time probably our utilization rate will be slightly below or about the same as in Q3.

On top of that, we are going to have a little bit less of the contractor activity.

It was about 10% in Q3.

And it's going to be between 9 and 10% in Q4.

So, there is a slight adjustment.

How much total capacity internal would you shut down for these couple of weeks basically?

We are probably going to be probably 60% more than the seasonal estimate, because in some technology we've seen it to run around production, but 60 to 70% will shut down.

Great, excellent.

Just on the operating charter side, we've been reasonably predictable recently.

Could you give us an idea on how this is developing into the fourth quarter, both R&D and OpEx?

And maybe also next year what level we should think about?

Carlo will answer you.

Yes, [inaudible] we'll close the third quarter we're 27.2% OpEx to sales ratio, which is well in line with our objective and we have not decided as the [main] dollars are -- a few million dollar lower than final quarter.

And R&D shows some increase there which is mostly to accelerate the process technology and so on, and dedicate to further development.

Good program for the next quarter, I would not expect very significant changes in respect to the current rate.

So, other than two ingredients, one is that Q3 is somehow benefiting from seasonality or vacation in Europe, so normally it would fall in absolute dollars is somehow higher than the Q3.

But this is something that we are also controlling and trying to mitigate it.

And the second one is a technical point, which I'd like to anticipate in respect to the stock compensation charges this year.

The grand [core] of 2005 [profit] is well incorporated in our third quarter expenses, while the 2006 plan has been just recently granted.

The effect of that is that for the first -- the cost of the first year for the 2006 stock [trade] plan instead of being distributed on four quarters, it's going to be distributed in two quarters that are Q4 '06 and Q1 '07.

So, in these two quarters we are going to have approximately $15m, one five, of additional expenses for stock compensation charges.

So, if we --

Having said that, we remain going towards 2007 focused on our objective to continue to keep and improve OpEx to sales ratios.

Okay.

So, effectively excluding these heavy stock comps basically, the ratio of OpEx should be largely the same into Q4 basically, OpEx?

Yes, correct I would say.

Okay.

And just very, very briefly, a clarification on the -- again on the wireless side, you were basically saying a softer than normal seasonality.

Softer means for you a growth but not as much as usual?

Or, potentially I don't want to be -- and this is -- is this primarily some inventory absorption or more mix related?

Thank you.

Well, we see -- this is Philippe Geyres.

We see the total wireless volume in Q4 good and growing, but with a higher mix of low end 2G phones and less 3G high-end phones than expected.

But in total we expect the sales to grow in Q4 there versus Q3.

But an ordinary growth while, usually, in Q4 we have a stronger seasonal effect.

Okay, thank you very much.

Thank you Nicolas.

Next please, Vicky.

The next question from Mr. Simon Schafer, Goldman Sachs.

Please go ahead sir.

Hello there, good afternoon.

Hello.

I was wondering whether you could give us an update on the shareholder agreement, specifically the balance period that, in my understanding, still exists until 2008 -- the first quarter of 2008.

Could you give us an update of what the latest status is there?

Do you need shareholder approval to change any of those details?

No, I take the question.

Of course, it's difficult to comment on the answer of our shareholders.

The agreement among our shareholders are disclosed in our quarterly [domain], our quarterly reporting.

And there are no changes, at least there are not -- not to our knowledge.

But I would say in the case we should exclude that are changes in respect to what has been already reported in the prior [year] 20F and in the most different [fixed day] and remain high.

Am I right in understanding that under the current structure it's relatively difficult, if not impossible, to be receiving a hostile, or even friendly, bid in terms of consolidation, or a private equity interest that without a change in this agreement?

And do you require to hold an EGM in order to make changes to those details?

Your understanding came from having a Company that has all the disclosure and the reporting.

Also, implies some, I would say, legal interpretation.

And so, I prefer not to comment and believe that it is really for each interested person to look at the relevant documentation, which is public.

Okay.

And then you, in your remarks, have referred to some market share gains that you have been making.

Could you point us to some details?

I think maybe Bluetooth was one of the areas that you have mentioned already.

But what are the areas where you think you've been gaining market share?

Well, I think that overall [this when we come back to] market this year we grow 7 to 8%.

And with the guidance that we provided for Q4 our growth will be in the range between 11 and 13%, and for the first nine months, the market grew about 8.5% and we grew 13.5%.

I think that this year, the areas where we see some significant gain in market shares are all the MPA products, the analogue products, all these great products.

I think there is good improvement in personal market share and, in general, I think on the HPC portion.

That is a combination of dedicated wireless products, consumer products, some telecom infrastructure products, and through the second quarter, also a significant gain in the area of non-volatile memories which we believe it reached in Q3.

So these are the areas where the market share contribution was stronger -- the market share gain contribution share was stronger, so I think MPA in general on all the products that they own, HPC, so the combination of consumer and telecom, and through the first half of the year, also the non-volatile memories.

Great, thank you for that.

Thank you.

The next question is from Cody Acree from Stifel Nicolaus.

Please go ahead.

Yes, maybe I can just ask if you can follow up there a little more clarity in the consumer and telecom markets?

I know a lot of R&D has been spent to refresh product portfolios there.

Can you drill down into any specific verticals where you think you either have already made some significant share regains, or where 2007 promises to accelerate those gains?

Yes, if we talk about telecom in wireless, 2006 was the first -- is the first real volume year for connectivity, Bluetooth, Wireless [LAN] and, since it is a year of ramp up, we've continued to have good growth next year, and by good growth I mean nearly doubling, or about doubling.

Second, Nomadik is now shipping in volume.

You can buy a Samsung phone with Nomadik in the shops, so this is contributing a little now in Q4 and will be significant in the year 2007.

Then in the [middle] line that we have in Wireless, which is [ethnics], what they spend, we continue to see our traditional customers and products growing.

They have been growing this year.

They will continue next year, helped by hopefully now a shift accelerating from 2G to 3G where we have a higher content, and we are shipping in volume next quarter a digital based band, 3G to a new customer.

This is a major addition to our revenue for 2007.

We also won a significant energy management [ethic] as a first year customer, but this will be end of 2007, top of production.

Rapidly, on consumer, we see, of course, the high definition and [inaudible] connect is H.264 and VC1.

This is driving the growth, both in set-top box and in digital TV.

In all areas we see cable, we are gaining share in the U.S. through [inaudible] [Advanta].

That is itself gaining share.

We are enjoying the boom of cable in China, and [IP] set-top box is being developed by all telecom operators, and we have a very strong share there, about 50% or 60%.

And in 2007, we should come back stronger in the U.S.

Satellite, where we did lose some share in 2005, and we restarted significant design wins in 2006, and they will pay off, starting now.

On Wireline infrastructure, telecom infrastructure now, we also have a new strategic partner, Cisco.

We have been awarded the status of preferred supplier of Cisco, and this partly to contribute to additional sales in 2006, and with the long cycle times in this type of application, we are going to see -- continue to see positive effects in 2007 and beyond.

Great, that's extremely helpful.

Maybe a follow up on the income statement?

You have a lot of strategic initiatives, a lot of restructuring benefits coming through already, in gross and operating margins, but could you maybe, one of the Carlo's talk about some targets for gross margins through '07 and where do you expect operating expenses to start to stabilize, or at least where you'd like to see them, as you exit the year?

So, which Carlo?

Whoever would answer the question!

As some of you may know this morning, we have addressed some analysts, investors and press present here in Milan at our conference, and we have provided the values in the regions of our market going forward.

I would say that we are quite happy on having a few quarters ago elected to go step by step preventing mid-term vision of the model and quarter-by-quarter objective, and delivering these results quarter after quarter.

So I would say it would not be the appropriate time to throw a number for our gross margin on the next year or providing guidance.

At the end, the ingredients are that on ways the [inaudible] the one of the [inaudible], the one of the new product that some of the questions have already addressed, and the one of the opportunity in the manufacturing costs.

On the opportunity on the manufacturing costs, we are now facing the results of having completed with various plans.

In London I have talked about $350m of savings in costs of goods sold from Q1 '06 to Q4 '06.

In the third quarter result, we have $200m annualized costs out of this 350.

They remain $150m annualized that will mostly occur in the fourth quarter when the goods manufactured in Q3 will build [the net] result.

The effect of these additional $35m, $38m benefit in the quarter are the most relevant driver of our 1 point margin progression, from 36% in Q3 to the 37% mid-point anticipated for Q4, somehow, also mitigated the effect by some effect of loading of the [inaudible] due to the opportunity of mid of reducing the activity at the end of the year that Alain has introduced.

Going forward, towards 2007, our objective is to continue to reduce the manufacturing costs and the objective, therefore, on the [working] costs is 15%, one five, 15%, from Q4 '06 to Q4 '07, and this is based on our already identified opportunities [inductions].

First of all, the rollover of the depreciation on the 2001 investments, that coupled with mitigated capital spending in the last two years and, furthermore, in 2007, we will reduce the depreciation by at least $150m from 2006 to [2007].

Then there are opportunities of increasing volume and moving through the learning curve those manufacturing activities that resulted from the 6 inch restructuring, for instance, the Agrate 18 spread that Frankie just recently start up, the Singapore 6 inch, and these could be another significant contribution.

In regard to the move up towards higher increase of capacity revenues, so the wafer costs in 12 inch, for the internal [source] of logic, and the manufacturing Joint Venture in [Group C], our joint venture with [Heinrikson] for manufacturing a flash [demand] in China will provide in 2007 a low cost demand wafers in 12 inch.

That will be another contribution.

So just to mention some of the most important drivers on the costs structure.

Carlo, any thoughts on the operating expense line next year?

I said earlier, addressing Nicolas' question that other than, I would say a factor of these additional charges for stock compensation, some, I would say, normal and mitigated and well controlled dynamic on the expenses evolution, year-over-year, which obviously is always the case of a large company like us, we would not see any significant change in our cost structure, no upside, no downside.

And of course, leveraging on higher sales, we do expect to continue to move towards lower operating expenses to sales ratio in 2007 with respect of the one of 2006.

Carlo, thank you, very helpful.

Thank you Cody.

Okay, Vikki, the next question please.

The next question is from Stuart Adrian, Morgan Stanley.

Please go ahead sir.

Yes, hi there.

I just wanted to go back to your Nomadik comments earlier, and just ask, so Samsung has ramped and products are available.

Are we expecting another OEM to ramp in Q4 and when do we expect Nokia to ramp Nomadik based products?

And then on the 3G base-band, did we expect that in Q4, or was that always going to be a first half of '07 ramp plan?

Thanks.

On Nomadik first.

So on Nomadik, indeed, Samsung is in production.

We said that we have two other Tier 1 customers designing Nomadik.

We expect one of them to be in production next quarter, Q1 '07, and we expect the second one to be in production in the second half of '07.

And have they changed at all?

Is that?

No, no, this has been the plan.

Okay.

On the 3G base-band, we are going to ramp up very early in 2007.

It was supposed to ramp up at the end of this quarter.

It's delayed by one month or two.

It will start really in January '07.

Okay.

But it's in short shift of the start date globally.

It's the same type of ramp up which is significant volume quite fast.

And during the quarters of -- during the middle of '07.

Okay, and then can you just talk a little bit about the hard disc drive market?

I think you expected some softness through the third quarter.

Is that the way that it played out, and what are your expectations going into the fourth quarter, specifically, as it relates to [C8]?

There seems to be quite a lot of commentary about relative market share shifts between yourselves and [Agia] there.

Could you provide some color around your expectations?

Yes, indeed, we were expecting Q3 to be soft.

It has been soft.

We were expecting Q4 to be better, benefiting in Q4 of the effect of Maxstor being acquired by [Siget] which is benefiting ST, and Agia versus [inaudible].

This positive effect, we shall feel it more in Q1 '07 than in Q4 '06.

Okay, thank you.

Okay, thanks Stuart.

Vikki, next question please.

The next question is from Mr. Jerome Ramel, IXIS.

Please go ahead sir.

Hi, good afternoon.

I just wanted to come back to your long-term target of CapEx on sales of 12%.

I just wanted to understand what will you - what was your implied target for outsourcing, to what foundries, and also more importantly, if you assume a 12% CapEx on sales ratio, what is the implied sales growth that you have in your model.

Because if we are talking about 5% or 6% sales growth, your capital intensity is not going to change, but if we are still talking about 8 to 10% then there is something changing, so I'd like to understand it a bit there, at this point.

Yes, in fact, we are assuming, at least next year, to move up to 14% in our outsourcing, so progressively from about 10% to 14%.

You need to keep in mind also that we are working on decreasing our CapEx [needed] and working on our portfolio and, of course, as you know, Memory is one of the product family which is very intense in terms of CapEx.

And you know, the assumption, the long-term assumption for the market today is more in the 8% than 12% in the past, or [like 6%] to where it is now.

Okay.

Okay, thank you.

Thank you Jerome.

Vikki?

The next question is from Mr. Titus Menzies, Jefferies & Co. Please go ahead sir.

Good morning, gentlemen, thanks for taking my call.

Just two questions, basically, one on the inventory.

Could you give some color on what the level entry is between you guys and your distribution channel, and in terms of lead times, that you're seeing right now?

And secondly, in terms of your booking of backlog, how much of that is reflected in your current top line guidance?

Yes, about the distribution channel, we think that when we are talking about inventory and our 4.1 channel which we judge as being of course too low or [inaudible] to high, this was not the comment on the distribution channel.

The distribution channel looks to be quite Normal.

In fact, we had a review a few weeks ago with all the sales and marketing guys in the region, and their judgment is that, frankly, the distribution channel is [inaudible].

So this is a good sign, and we should not see any adjustment of inventory there.

As far as the second part of your question is concerned, I didn't catch it, sorry.

Is our guidance in line with the backlog?

Yes, absolutely.

Our guidance is absolutely in line with the backlog.

Literally when we enter the quarter, we have about 90% coverage and I think Carlo is going to check what is the case also this quarter.

Thank you guys, I appreciate that.

Yes, I absolutely confirm what Alain said.

This is quite a low [inaudible] when entering the quarter in the ratio between backlog and a big point of our guidance, which is in the range of about 90%.

Thank you, and just one lastly, if I can just reconcile in terms of the -- your NOR Flash business, results of the pricing environments of pickups of late August and throughout September, so in terms of the weakness you saw in your MPG group, how much of that is on the back of pricing, and how much is that on the back of unit weakness, and are you seeing the same thing rolling out into the fourth quarter?

No, we have had, well, continuing price pressure and in this market there is no real price picking up.

The pressure is more or less intense, but it is always there.

So we saw that continuing in Q3.

Then there was also, in the specific case of NAND, some more selective approach, and the volumes in NAND have been less than usual, although, the price pressure is still in the range of mid single digit as it is every quarter.

Thank you gentlemen.

Thanks Titus.

Vikki, please, the next question?

[OPERATOR INSTRUCTIONS].

Okay.

The next question from Mr. Francois Meunier, Cazenove.

Please go ahead sir.

Hello, it's Francois from Cazenove.

A question for Philippe, just to come back to your market share in Bluetooth.

Could you confirm it's the market share in units in handsets, and that most of this market share gain came from basically a lower market share at Philips?

Well, we know the customers we win.

We don't know who we displace and I'm not sure we care!

So when I say 10% market share, it's 10% of the handsets.

Today our sales are done in handsets, as opposed to headsets and accessories.

Next year will be different.

We are working on major designs in the headset market, but this will be 2007 sales.

Today, we have achieved 10% of the handset market in units.

Okay, thanks.

Now, a question for Carlo, in terms of the schedule you were alluding to in terms of the NOR Flash business.

If I remember maybe last year at the same point, you were also saying that it would happen by the end of the year, and it didn't turn out to happen.

What makes you more confident this year that it's going to happen, or that something is going to happen?

Well, I think that first of all, it's good that, in the meantime, we have greatly improved our financial performance in the Memory products.

I think it is very positive, of course, for all of us.

I believe that the conditions that we see today in the market to move on and meet our two objectives, that are from the one side, industry consolidation, and on the other side, financial deconsolidation from [FC].

I believe that today, these conditions do indicate that we are getting closer to meet the objective.

Having said so before, and I already mentioned this a few minutes ago, we believe that this will take another few months to go, but it is a very important initiative for us.

It's a very important initiative for our Memory group.

The objective is to increase the dimension of scale, what we are doing, and then isolate and deconsolidate the business.

I believe that we have better conditions today than what we had a few months ago, and there is, from our side, a strong motivation to move on rapidly.

Okay, thanks.

Now, for the gross margin improvements in Q4, from 36 to 37, what is due to better product mix, and what is due to genuine cost reduction?

This is mostly due to better manufacturing performance.

It is very much driven by the improvement that we are having quarter after quarter in manufacturing, and I believe that the full impact of our 6 inch restructuring, we have not seen yet.

We'll see it in 2007.

We will have more running off of depreciation next year, so there is a continuous improvement quarter after quarter of our manufacturing performance.

Of course, the price pressure is there.

The price pressure has been significant this year, and I believe that one element of that, we have to compensate for the price pressure is to improve our mix.

We believe we are doing, both in terms of more important, higher ways of certain higher margin families on the one side, but in any of our product divisions there is a specific effort to improve the mix, and this is starting to pay off.

In terms of new product introduction, I believe that this year is a turning point.

Philippe has mentioned very much in detail earlier a wave of new initiatives, new customers, new products that we are introducing, and I believe that the full hit of this major effort of new products will be in 2007.

Okay, thank you very much.

Yes, we are pleased.

Well, as you know, we are not giving guidance in gross margin, but we are pleased with the progress, despite some currency aggravation, and we have moved from 33% to 37% in a few quarters, and we believe we have other potential for other expansion.

Okay, Vikki, we have time for two more questions please.

The next question is from Mr. Matt Gable, Weiss Advisors.

Please go ahead sir.

Hi, thanks.

Could you just repeat what you were saying about the Memory division in a couple of months?

Did you mean -- what do you expect to happen in a couple of months?

I did not mention a couple of months.

I think that the objective that we have with the Memory group is twofold.

Number one is to pursue industry consolidation, to provide the proper dimension of scale in our Memory activities -- to our Memory activity.

The second objective is from a financial point of view to deconsolidate this activity from ST, and I said that the conditions today are more favorable for us to move on with our two objectives, and I said that this may take a few more months.

So this is, of course, in the present picture is that it's a very important strategic initiative in ST, and we are very motivated to move on, on this line.

Okay.

Thank you very much for clarifying.

Thank you.

I appreciate it.

Okay, the last question please Vikki?

The last question is from Remi Thomas, Cheuvreux.

Please go ahead sir.

Remi, we did the cycle!

I know, but I did wait in the queue to get back.

Thank you.

You know the digital base-band, the 3G digital base-band?

First of all, does that come on top of the one customer that you already had before, which you never said the name, but some of us suspected might be [MP]?

And secondly, what sort of IPO would you own on this one?

In other words, would you still be acting as a foundry, although I know you denied that, or is it something that you'd design yourself?

No, we have been speaking of one new customer, with whom we would be doing a 3G digital base-band, so it is this one that is now nearly going into volume production, it will be in volume production in January.

Now, this chip is [amazing].

The design itself belongs to our customer.

But, of course, on this chip, it's a combination of system know-how and design from the customer, and a lot of process, library design blocks, know-how on it.

Okay.

But no, it's not a foundry.

It's much more than a foundry.

Okay, and are you hoping to get additional customers?

Is there anything we could find out in the coming quarters, or it's pretty much going to be the one customer?

No, until we reach 100% market share, we continue to try to work.

Okay.

No, we have more opportunities to add more customers in all our Wireless business, and I think it is great news, it's getting better, and it is a wider range in terms of products and is a wider range in terms of customers.

Alright, thanks a lot.

Thank you.

At this point, we'd like to thank everyone for participating in our conference call.

I'd like to make one additional comment, and that is that the webcast of today's presentation that was held at the [Borsa] De Milano is available on the website as well as the presentation available for downloading, and we appreciate everyone's participation, and we look forward to speaking to you soon.

Thank you very much.

Thank you.

Ladies and gentlemen, the conference call is now over, and you may disconnect your telephones.

Thank you very much for joining, and goodbye.