意法半導體 (STM) 2007 Q1 法說會逐字稿

Hello and welcome to the STMicroelectronics first quarter 2007 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, Vice President Investor Relations for STMicroelectronics.

Mr.

March.

Thank you, Vicky.

Hello and thanks to all of you on the call for joining us for STMicroelectronics' first quarter 2007 earnings discussion.

Hosting today's call is Carlo Bozotti, our President and Chief Executive Officer.

And joining Carlo on the call today are Alain Dutheil, our Chief Operating Officer, Carlo Ferro, our Chief Financial Officer, Tommi Uhari, our Executive Vice President representing the application-specific product groups, and Carmelo Papa, our Executive Vice President responsible for the Industrial and Multisegment Sector.

As you know, many of the comments made on today's call will be forward-looking and as such they're covered by the Safe Harbor provisions and risk factors on the most recently issued press release last evening, as well as discussed in our 20-F.

Should you have any questions concerning these risk factors, please make sure you look at these appropriate documents.

In terms of housekeeping, we'd like you to keep your questions to one initial question with a follow up.

And then, should there be subsequent requests for information on your side, if we just ask you to go to the rear of the queue to make sure we can move through as many callers as practicable in the allotted time today.

So with that brief bit of introduction and small amount of housekeeping, I'd like to turn the microphone over to Carlo Bozotti to discuss the quarter's performance.

Carlo?

Thank you, Stan, and thank you for joining us in our conference call today.

As you have observed, the trough of the multi-quarter industry correction has been somewhat different than estimated by us and other industry participants.

As a result, our first quarter sales and operating results were negatively impacted by declines in the telecom and consumer segments, a tougher overall pricing environment and unprofitable product mix within the wireless segment.

While I do not want to underestimate the impact on the results these last two quarters, I believe ST has done a fair job of navigating operations through this period while staying focused on advancing our key strategic initiatives in sales and marketing, in carving out and pushing the financial deconsolidation of our flash business, in moving towards a lighter asset model and in generating increased cash flows.

Looking ahead, we see a resumption of sales growth in the second quarter and believe this semiconductor -- this sector semiconductor industry correction is coming to an end.

Turning to the first quarter, I would like to begin with the Application Specific Group, which was not affected by the industry correction.

ASG sales declined 9.1% sequentially, with operating income essentially at breakeven compared to $111m or an 8% operating margin in the fourth quarter.

We saw double-digit sequential revenue decreases in both telecom and consumer products.

Importantly, telecom results reflected weak wireless demand, limited mix shift to higher-end products, as well as, similar to other industry players, weakness in the networking market.

The sequential decrease in the Application Specific Group operating income was due to telecoms and to a lesser extent consumer, while automotive and computer peripherals maintained similar profitability.

Lower volume, down approximately 5% sequentially, was the largest ingredient.

A tougher pricing environment, down about 3% sequentially, included the impact of January 1 new pricing contracts.

In addition, ASG's inventory decreased in the quarter.

As we look to the second quarter for ASG, we expect to see sequential revenue growth and this will positively impact volume, resulting in improved operating income.

We also expect that the mix will improve in the second quarter and this will continue through the year, with important new products increasing in volume for all our converging applications.

Our Industrial and Multisegment Sector, IMS, had a sorry performance in the quarter.

Sequentially, sales were down 5.1%, in line with normal seasonality, and year-over-year sales were higher by 16%.

IMS had an operating margin of 14.8%, demonstrating some benefit of shifting of our portfolio to higher-value-added products, such as our power conversion and advanced analog.

We expect IMS to continue this strong performance as we move through 2007.

Since our January 1 reorganization, our NOR and NAND flash businesses have been combined into a standalone segment.

During the first quarter, FMG sales decreased 13.4% sequentially and it posted an operating loss of $17m, due to a gross margin of about 19%.

Internal carve-out activities are essentially completed and we are progressing towards the consolidation.

Moving to inventory, we actively managed to control inventory levels during the first quarter, taking into account the swing in currencies as well as the more severe market conditions.

Since the end of December, inventory is up $37m on the balance sheet.

However, approximately $17m is currency related.

Therefore, the net of currency inventory is up about $20m, exclusively due to flash memories.

We would expect to see improvement in our inventory returns Q1 to Q2 and this improvement will continue to advance as we progress through the year.

Turning now to our outlook, currently we believe we have reached the trough in the current industry correction and that the overall semiconductor industry situation should begin improving some time during the second quarter.

As we look to our second quarter, we see a resumption of growth for ST.

More specifically, our revenue target is for a sequential growth between 4 and 10%, giving a mid point of about 7%.

Based upon information released by other companies and industry analysts, we expect to show somewhat better sequential improvement in sales compared to the industry overall.

We expect to see a strong recovery in consumer and in telecom, with high-single-digit to double-digit sequential growth.

IMS will also certainly be a key factor and automotive, which had a good first quarter both sequentially and year over year, is also anticipated to have sequential growth in the second quarter as well.

Our gross margin is expected to be approximately 35% plus or minus 1 percentage point, at an average expected exchange rate of $1.34 to EUR1.

The continued weakening of the U.S.

dollar, that our expected effective average exchange rate is 9% lower than the year-ago figures, will limit the second quarter margin expansion opportunity.

In addition, this continuous logic product unloading in Singapore coming from the flash carve-out will negatively impact the gross margin by about 40 basis points.

This situation is caused by our removal of logic products from Singapore manufacturing portfolio as we focus this fab entirely on flash memory products.

We are also continuing to manage our inventory levels, so while we would expect to see somewhat better fab loadings for ST excluding Singapore [inaudible] in the second quarter, market condition has now resulted in three quarters in a row where the gross margin will not reflect optimal loading of the fabs.

While the second quarter our Group shows the resumption of the growth, we will not be back to the fourth quarter 2006 profitability levels, given the depth of the correction as well as currency exchange factors and their impact on ST.

Nonetheless, the second quarter performance will be a good step forward, and we expect to make progress through the second half of 2007 and to improve our financial metrics quarter after quarter.

Before taking your questions, I would like to share a few financial points with you.

First, we continue to focus on cash flow and a lighter asset model for ST.

In spite of a significant sequential decrease in the net income due to the severity of the correction, our net operating cash flow increased $20m to $172m during the 2007 first quarter, one of the best-ever quarterly results of net operational cash flow to sales.

Our first quarter capital expenditures of $285m represented a decrease of 26% from the prior quarter and for the full year.

And for the full year we are driving towards our CapEx to sales ratio target of 12%.

Based upon our first quarter investment, we are solidly on track.

In addition to helping cash flow, this strict capital control will reduce the vulnerability of our internal manufacturing assets to market fluctuations.

Due to our focus on better managing our capital expenditures and moving to a more flexible manufacturing structure, we are generating more cash and we are positioned to return some of that cash to shareholders.

At our annual meeting scheduled for tomorrow, shareholders are expected to approve a 150% increase in the annual cash dividend to $0.30.

Second, we continue to advance our sales and marketing initiatives.

We have spent our time fruitfully building new relationships and extending existing ones, so that our relative market position will be stronger as market conditions improve.

For example, excluding telecom accounts, strategic customer sales were up 1% sequentially.

We continue to extend our sales presence in emerging countries and emerging markets.

For example, our sales to Japan are up 35% year over year.

Third, our product portfolio is strengthening.

This is evident in the market share gains we achieved during 2006.

As you see from our result, we have a strong foundation in the Industrial Multisegment and in the Automotive.

During 2007 the work we have been doing in ASG should become more evident.

In particular, new ASG products introduced in the first quarter, most importantly the 3G digital baseband, saw limited sales impact so far, but are expected to run nicely through the year, coupled with planned introductions during the remainder of 2007, including new connectivity products, data storage System-on-Chips, digital TV offerings and progressive growth in multimedia processors, we believe our product roadmap and strategy are gaining traction.

With that, my colleagues and I will be happy to take your questions.

Thank you.

[OPERATOR INSTRUCTIONS].

The first question is from Mr.

Cody Acree, Stifel Nicolaus.

Please go ahead, sir.

Thank you and congratulations on a good outlook, guys.

Carlo, could you talk a little bit more about the timing of your flash deconsolidation?

Obviously you're making very specific structural loading plans to get this taken care of, it sounds like some time in the near term, but we've been talking about this for some now.

So can maybe you talk about the timing, and then maybe what the gross margin impact would look like if you were able to get this done tomorrow, what would that impact be to gross margins in Q2?

Well, let's start on the gross margins.

Q2 would be 3 points.

This is our vision.

So I think rather than 35 plus/minus one it would be 38 plus/minus one.

So, as I indicated in January, that we would move forward on the carve-out internally and now this is essentially completed.

And as far as the update on the financial deconsolidation, at this point in the process I would simply say that we are making good progress to our objectives.

But of course we don't have any, let's say, specific announcement to do today.

We are moving in the right direction and we'll come back to you as soon as practical.

All right, very good.

And a follow up, if I may.

Please.

Okay.

Could you talk about your end applications and it sounds like we're ending the inventory correction, but obviously not all segments will happen at the same time.

Can you talk about where you still believe you're shipping below consumption trend lines and maybe those markets where you believe you're back to consumption trend lines?

Yes.

Well, I think that, first of all, as I said, as I read in fact, the increase [we saw in the] inventory in Q1 was due to flash, of flash memories.

And I am starting to comment on our product and then I'm going to the market.

So during the month of March there was a strong negative adjustment on the flash demand.

There was a significant reduction of the flash demand.

And this has impacted the overall inventory level.

Of course the flash, but also for the Company.

And we are going to cure this in the second quarter, as we said, in our [inaudible] facility.

If we go through now the various market segments, I think that in the area of Industrial Multisegment I would say that overall the inventory position that we see, for instance with our distributors, is under control.

We see increasing demand in this area; bookings are getting stronger.

And what we see in the first week of April is confirming this trend.

So the demand that we see from our mid-sized and small-sized customers, including distributors, is a good trend overall and we expect IMS will contribute significantly to the growth in the second quarter.

Same trend we see in consumer.

Consumer was a challenge.

Particularly after Christmas was very difficult, during the period of the Chinese New Year, very difficult.

But today the trend in consumer is very strong and we expect seeing a significant jump in the second quarter on our consumer products.

And talking to customers in this area, we do not have evidence at this point of real issues in terms of inventory position.

Wireless is going to be a more mitigated improvement.

I think it will take some more time to go back.

In fact, we believe for us it will be in Q3.

The inventory position was difficult during the first quarter.

I think it is improving but at a slower pace and will increase in Q2.

But we expect a stronger growth in wireless in the second half of this year.

Automotive we grew in Q1 a little bit.

We expect to grow.

We do not have any evidence of inventory build up in the automotive industry.

So I would say that, overall, well, Computer will not contribute to the growth in the second quarter.

I think in the second quarter we expect a beginning of stability in our Computer business.

And I believe that overall it will take some more time to go through the inventory correction in wireless.

We also have in wireless some evidence that the mix is now improving.

And for us of course this is very important, due to the effort and the new products that we have on 3G.

But, as I said, the improvement in the second quarter will be somehow limited and we expect a strong increase in the second half.

Excellent.

Thank you.

Very helpful.

Thank you.

Vicky, please, next question?

The next question is from Mr.

Amit Kapur, Piper Jaffray.

Please go ahead, sir.

Great.

Thank you very much.

Obviously the handset market is being impacted by some inventory overhang from one of the major OEMs out there, as well as some shifting market share, that the vendor focus is more in profitability.

With a lot of these changes happening very quickly, could you discuss how you're adapting STMicro to these changes, and maybe some of the opportunities and risks that it brings up in the second half of this year?

I think, Tommi, would you like to try to answer that question?

Sure, Stan.

So this is Thommi Uhari.

Tommi, can you talk louder, please?

Sure.

I think overall for the wireless we see the situation very much like you outlined in your question, that the particularly high-end product -- end product inventory in parts of the market and the way that we see is that that's mostly affecting the low-end part of the market.

Our product portfolio is very much geared towards the medium to high end of the market, so we think that -- we think that this situation does not impact us in any particular way.

And we continue to be very confident in the successful ramp-up of our 3G products during the second half and also the strong demand that we are seeing for the existing product portfolio at the moment.

Great.

Thank you.

And then, maybe as my follow-up question, could you walk us through some of the major factors that should impact the gross margins later this calendar year?

Well, this will be double and you can take, of course, in the second quarter, and then I leave the word to Carlo, in the second quarter the major limitation for us is the strength of the U.S.

dollar.

Right?

So the impact here is almost 1 point.

But I would like to ask Carlo to comment this part of your question.

It's Carlo.

We have characterized already in our press release these two specific factors.

The currency factor was an effect that is negative in a range of 1 point, and this peculiar situation of unloading of a fab in preparation of fully dedicating this fab to the flash business after we removed other products, which of course is an unusual change of [inaudible].

And for these reasons we felt appropriate to specifically highlight this negative 40 basis points of impact.

So you may appreciate that in the situation dynamic after these events we have some significant factors boosting and improving the margin.

First of all is the [greater costs] in all the other fabs.

This is already included in the first quarter with respect to the first quarter.

And of course the impact on margin will be more visible as the base of product manufacturing in the first quarter occurs next quarter.

But one is the fab loading, which apart the case of [Amocio] is in the second quarter substantially normalized, I would say.

And the third one is the positive contribution of the mix of the products.

And one of the key ingredients also positively contributed in the second quarter will start to have a more visible volume of shifting of the [inaudible] basic.

All of that on the positive direction, while also still offset by price and we see the price environment still under pressure also in the second quarter, mainly for flash and for the wireless applications.

Great.

Thank you.

Vicky, please, the next question.

The next question is from Mr.

Nicolas Gaudois, Deutsche Bank.

Please go ahead, sir.

Yes.

Hi there, gentlemen.

Just as a first question, and actually my two questions relate to margins, what is somewhat surprising really is Application Specific Group having an EBIT loss of $1m.

As far as I go back in my coverage of ST, I just cannot recall, overall TPN/CMG put together, never ever getting close to these levels, effectively doing a downturn.

If I was to look at the sequential operating margins in -- or incremental operating margins Q-over-Q, you had a decline of revenues in the division of $122m and effectively $112m flew through the P&L.

Could you help me rationalize that?

And how should we look at the profitability of your ASSP and ASIC business going forward?

Yes, this is Carlo Ferro.

[Yes, apparently] ourself as well were not so much experienced at this operating level of -- of this level of operating result in the Application Specific Group.

We consider this first quarter 2007 really a specific event where values negative, the [inaudible] altogether, concurred to the best match.

Carlo in his introduction has mentioned already that, in general, Application Specific Group has been affected by a 3% price pressure.

This is a combination of wireless environment and side effect also on other applications when entering in the first quarter with the new yearly contract, the new price, like for instance in Automotive.

The second one is the volume, and volume has been significantly depressed, being 5% sequentially down.

The third ingredient is that, despite having not matched the objective to reduce overall inventory this quarter, due to the dynamic in the flash demand and in the flash inventory in this specific group, in Application Specific Group, the inventory went substantially down from end of December to end of March.

And this also has affected overall the margin.

And I would say that at the end those are the three ingredients and their impact on the margin, not only for the Application Specific Group but for the overall ST, are really the most reasons in the business of this dynamic, in addition to the different characterization of the margin change sequential among the four groups that encompass this segment, with the Automotive and the Computer groups, that substantially [drag] the margin similar to the prior quarter and a swing, mostly due to the telecom.

And all of us know the condition of the telecom market this specific quarter and to a lesser extent consumer, where the consumer business is substantially driven by the level of sales.

This is an application very intensive in terms of R&D and very sensitive to the level of sales.

The reduction in sales this quarter is, I would say, [very good] for a dynamic of the margin in consumer which this quarter is not [inaudible].

Okay.

Thanks for this, it was very useful.

Now, the -- just rebounding on what you said, Carlo, on inventories and moving to the positive surprise, I would say, in your divisional margins, which was probably flash where you had 5% against your margins.

We saw expansion at 12 negative.

We think internal was minus 45, whereas Spansion mentioned a worse number than that.

And your gross margins were 19, Spansion was 14.

But you also said that you build up inventory.

So should we expect a flow through of inventory as an impact in margins for flash going forward, at least for the quarter?

And also, could you help us contrast your sales versus Spansion and Intel as much as we can, in terms of whether there is anything else in terms of mix, for instance, which could have helped ST perform better?

You know, Nicolas, I don't know how much I can.

The way I can is to base on the public released information under which it is evident, I believe, to everybody that the performance of our flash business is -- we cannot say; we're not happy for that.

But it's for sure the stronger-performing flash business in the industry.

And you have already highlighted, I believe, these couple of points of difference in gross margin from our flash business with the other competitor flash business.

This specific quarter also is characterized by heavy pressure on the NAND market and I would add that -- I would say the loss in flash is driven by NAND this quarter, while our NOR business is [inaudible].

The case of inventory does not -- has been substantially related, really, to the adjustment in demand occurred at the very end of the quarter and is absolutely unrelated, I would say, to managing the loading of the fab through the quarter.

We've managed the fab based on the expected demand.

Could this case affect somehow next quarter?

Yes, so we have anticipated that we have also this effect of unloading in Amocio, which is a combination of the current inventory situation in flash.

But moreover, and most importantly, it's due to the fact that approximately 15% of capacity of this fab was dedicated to logic, and we have removed logic from Amocio.

Does that answer your question?

Yes, it does somewhat.

Thanks very much, Carlo, for that.

Thank you for your question, Nicolas.

Okay.

Vicky, next question, please.

The next question from Mr.

Mark Lipacis, Prudential.

Please go ahead, sir.

Thanks so much for taking my question.

A question on depreciation.

The depreciation and amortization was $398m this quarter.

I was hoping that you would be able to break that into the two components, depreciation and amortization separately.

And looking forward, if you look at your CapEx it seems that you continue to underfund depreciation expense, which suggests that your depreciation expense should continue to trend down.

And I was hoping that you'd be able to give us some guidance, or more concrete guidance, regarding depreciation expense this year and maybe even a trend line into 2008.

Okay.

Yes, we are able to split the $398m - $378m depreciation and $22m are amortization.

For the year we expect depreciation at a level around $1.5b, which is $150m lower than prior year.

And unfortunately our current management of capital is not fully reflected on the depreciation projection, due to the negative impact of the exchange rate.

You are familiar about this effect and you are very aware that at the end it is something that affects negatively our gross margin, however is a non-cash effect.

So depreciation this year is $1.5b.

Going through next year we can expect they may continue to go down.

We are at the first quarter.

In the first quarter we have spending capital $285m.

Last year the capital spending of the year was more.

So that -- just so I'm clear, the $1.5b, that would be for the depreciation line only, not depreciation and amortization.

Is that --?

Yes.

On the amortization, please refer to a flat trend this quarter, so 22 times 4 is in the range of $88m and $90m in the year.

Okay.

Roughly.

Okay.

And a follow-up question, if I may.

The inventory's at about 100 days.

According -- as far as I can tell, that's the highest since 1998.

Is there a target level that you're modeling to?

And if you assume the mid point of your guidance in Q2 and you look at seasonal growth going forwards, how long do you think it will take to get the inventory levels down?

And I'm assuming that that's -- that that will impact the fab loadings.

Thank you very much.

I guess this is again a question for me, not Carlo, and I will go to your question not to put a [inaudible] before.

Please also consider the first quarter performance overall has not met, the others and the specific flash event, our objective to reduce inventory in absolute dollar in the quarter, also based on the demand dynamic for the following quarter, as we have told about three months ago.

At the end our inventory in absolute dollar increased by $37m.

There is $17m which is a currency translation adjustment, $20m which is the real effect of the operation.

And, believe me, the flash inventory increase is higher than this $20m.

Going forward, we expect that leveraging on revenue growth and continuing to manage inventory [greatly] carefully, inventory turns would increase quarter after quarter.

For the second quarter we target turns similar to the one of fourth quarter 2006.

And going forward we expect to continue to improve quarter after quarter, keeping in mind and firm the Company target to run the Company at inventory turns between 4.5 and 5 turns.

Great.

Thank you very much.

Okay.

Vicky, next question, please.

The next question is from Mr.

Odon de la Porte, Cheuvreux.

Please go ahead, sir.

Yes.

Good afternoon, everyone.

I've got a first question with respect to equity affiliates.

In your P&L we can see that you booked $7m.

Does it mean that your JV with Hynix is profitable?

Am I correct in saying that?

Yes, yes, yes.

You are correct.

This gain on equity refers to our 30% -- 33% interest into the books vis-a-vis with Hynix.

Having said that, I would not anticipate that you have every quarter these results.

I'd say that this specific quarter also, based on the final closing of the joint venture financial report for fiscal year 2006 has the same ingredient of, I would say, extraordinarity.

Apart that, the joint venture is profitable and this joint venture will continue to be profitable through the year.

However, it is not more than this very significant level of dollar amount.

Okay.

Thank you.

And I have --

On the other hand, if you want word from my side, we need to look at the overall end business overall, not just the equity, at a good return on equity.

As Carlo said before, unfortunately in the course of the first quarter our losses on NAND exceeded the $17m that we have lost overall on the flash memories.

Okay.

Thank you very much.

And I have a follow up, please.

A very specific question with respect to combo solutions integrating Bluetooth WiFi on the FM tuner.

Tommi Uhari can answer that question.

Please go ahead.

Okay.

Some of your competitors, Broadcom and TI, said there have already something, some solutions.

You said you will sample one in H2.

Do you think they have a significant advantage on you?

I have understood similar from their announcement and -- but they said, all in all, the same that you mentioned.

So basically we are planning for our combo availability, in terms of first half, around the middle of the year -- sorry, sorry, about the end of the year for the WiFi Bluetooth system, and then the first step of that in the middle of the year with the Bluetooth system.

So in this technology, however, what seems to take a long time is the software integration to the platform.

And here we have a lot of experience and a lot of key design wins, both on the Wifi and the Bluetooth.

So, I think that on when does this materialize into business, one aspect is the [system] availability, and the second one is really the time that it takes to integrate the software.

And we believe that on the software side we are in a very strong position.

So, I'd say that the jury is clearly still out on the schedules of us versus the competition here.

Okay.

Thank you very much.

That's very helpful.

Okay.

Vicky, next question, please.

Next question from Mr.

Tristan Gerra, Robert Baird.

Please go ahead, sir.

Hi.

Thanks for taking my question.

Just going back to the ASIC possibility you mentioned, the unfavorable mix within wireless, I understand the lower volumes and how this had an impact on profitability in the quarter.

But what about the wireless mix at a time when the 3G baseband is supposed to ramp in EMP?

Any color on the mix issue within wireless would be useful.

And also I was wondering if there was any pricing pressure outside of your wireless business.

Yes.

I think Tommi will take this question.

Tommi, please.

So, for sure I think that wireless is a very competitive market, and in terms of price pressure that continues.

And we are working actively to create more competitive product solutions by improving the product competitiveness all the time also.

And also on existing products, introducing more, let's say, the [part] manufacturing technology on those.

And then manufacturing is improving, it's improving constantly for all the products.

On the mix side, clearly with the EMP ramp process using [inaudible] will weigh the 3G portfolio of ours more versus the 2G.

Okay.

Also, could you quantify the impact that you expect from currency on your gross margin Q2 guidance, based on the assumption that you've made in the press release?

Yes.

Well, I can mention I think, yes, it's a simple product to quantify.

I think compared to Q1 of this year it is about 1 point.

And compared to Q2 last year it is about 2 points.

Great.

So I think it's very clear.

And of course, this is something that we are addressing.

Not easy, but we will address.

And I think the memory separation will drop some repositioning of our manufacturing infrastructure, of course, both in the kind and in content.

And we are addressing this repositioning requirement that is part of the carve-out.

Also taking into consideration, into account, the need to reduce the exposure to the euro.

We are doing, for instance in terms of manufacturing today we have about 30% of our manufacturing costs in euro.

But still, as you see, the impact has been significant, also because the swing has been significant.

I was mentioning that compared to Q2 last year the swing is almost 10%, in fact 9%.

And it's almost 2 full points of gross margin Q2 over Q2.

But we are working on it, we have worked on it, and we will work more.

So this is part of our life and we believe that the memory carve-out will, as I said, prompt some retuning of the manufacturing infrastructure.

And we will take into consideration the need that we have to become less exposed to the euro.

Great.

Thank you.

Maybe one day it will be the other way around.

Thank you.

Thank you.

Thank you, Tristan.

Vicky, please, the next question.

The next question is from Mr.

Didier Scemama, ABN Amro.

Please go ahead, sir.

Thank you for taking my question.

I have an easy one to start with and then a follow up.

Can you confirm that you still have ongoing discussions regarding your NOR flash business for a carve-out -- sorry, for a joint venture?

Thanks.

Well, I confirm that we have decided to deconsolidate from a financial point of view this business.

And I can confirm that, yes.

But you can't confirm that you are still having discussions?

Yes.

I cannot comment on any discussion, of course.

I -- of course, it's not possible for me to comment.

But this result is part of our strategy.

It is an important pillar of our strategy because, as you know, we have decided to operate in ST with a CapEx to sales ratio that this year will be 12% or better.

It was more than 20% a couple of years ago.

This will go on.

This will go on and I believe this will bring a very significant great step forward in the net asset turn of the overall Company.

And as part of this strategy, we have decided to deconsolidate the flash business.

And I can confirm that we are active in this process.

Okay.

I have a follow up on the wireless business.

It's a bit -- let me ask it in, maybe, two parts.

With regard to the first quarter, you mention that you were impacted by weakness in the low end.

But if I remember correctly, I thought your exposure was much more in the mid and high.

At least you've always indicated that you were much more geared towards 3G.

And obviously Nokia had a very strong quarter in Q1.

So, maybe can you reconcile the two effects, especially given Texas Instruments reported 10% increase sequentially in 3G revenues?

The second part, in the wireless part, is that it seems like two of your competitors are ramping their Edge RFs at your largest customer in the second half.

Is that having an impact already on your Q2 revenues and maybe explaining why you see a mitigated development in the second quarter?

Let me comment on the trend, and then Tommi will, let's say, be more specific on answering your question.

I think we have [secured a niche] in Q1.

I think that was very much related to the market.

It was particularly difficult for us on cameras, is a family where we believe we'll come back very strongly in the second half of this year.

But we had a [decent] Q1 and this is impacting our wireless figures.

I think that overall there will be some increase in Q2.

And we expect a very strong increase in the second half, very much driven by the wave of new dollars that we have introduced.

And the impact of the other production.

But the impact in Q1 was not material, in fact.

So, Tommi, if you want to comment further.

Yes.

I'd just repeat that, let's say, the 3G demand was very --

Can you speak a bit louder?

Yes.

3G demand was very solid.

What I mentioned on the 2G was that what we saw that in the end equipment we think that it's difficult to, let's say, do the end product inventory.

It is difficult to determine that what is the exact 2G market outlook for the first quarter, due to the inventories carrying over from the fourth quarter.

But, like Carlo mentioned, the camera issue was one of the items impacting our Q1.

Then, on the Edge RF, that has no impact on our forecast.

Okay.

Thank you very much.

Thank you, Didier.

Vicky, please, the next question.

Next question from Mr.

Jonathan Crossfield, Merrill Lynch.

Please go ahead, sir.

Yes.

Good afternoon.

My first question is on the gross margin impact of unloading logic products in Singapore.

Is that not offset elsewhere by increased loading of those logic products, or what's happening to those products?

Well, Carlo, you --

Yes.

Jonathan, thanks for the question, it has to address the point, and I'm sorry for entering in too much technical accounting detail.

What's happening is that when you move products out of Amocio to other logic fabs, of course this higher loading is somehow benefiting the wafer cost to a certain extent.

While in the meantime this is bringing the fab in Singapore to a level of loading which trigger accounting for expensing the [alteration] cost.

So what's happening is that with the Singapore fab below the threshold to capitalize inventory where one hit of these alteration costs in the second quarter, due to the unloading of Amocio.

In the meantime other fabs, well, of course, these productions have been moved, enjoy better, slightly better manufacturing costs, wafer costs.

This is, by the way, mostly capitalized and over time will be reflected in the next two quarters into the P&L.

Hopefully I have been clear and it is an easy technical accounting aspect.

Yes.

That's very helpful.

Thank you, Carlo.

My follow up was on the flash carve-out.

Now it's largely completed, can you give us an idea of the value of the asset base associated with the flash memory group, and so what proportion of net assets we should assume is linked to that?

Well, I am afraid Carlo is taking it again.

We -- I am not sure we can provide these figures, but --

Jonathan, thank you.

I am happy to take another accounting technical question instead.

Thank you.

Okay.

Well, I don't have one of those just at the moment, but thank you very much.

Sorry for not having met your [petition].

Thank you very much, Jonathan.

Vicky, do you have another question, please?

The next question is from Mr.

Janardan Menon, Dresdner.

Please go ahead, sir.

Good afternoon.

Just going back to the ASG Group, some of the points you said which affected your margin, like the 5% volume drop and the renegotiation of pricing contracts.

Technically these are issues which can come up every Q1, effectively.

So, I was just wondering if you want to move the ASG Group, say to the high-single-digit EBIT margin range across the cycle, or across the year, is there anything more structural that you need to do to get to that level?

Or do you think that, given the current steps that you have in motion, will get you there in due course of time?

Of course there are structural things that we are doing here.

The most important structural thing that we are doing is to make sure that we do not suffer, like we have suffered in Q4 and Q1, on unloading all sub-optimal loading in our fabs.

And what we are doing, of course, is to increase the portion of business that we are allocating to silicon foundries, where the most significant, how can we call it, flexibility platform to use in case of swings in the demand.

The way accounting is done, and I do not want to be -- I cannot be too specific here, but of course the result of ASG overall was severely impacted by the poor loading that we had for instance in the month of December, in the month of January.

In fact, the inventory in this family has been reduced.

And this poor loading situation has hit the bottom line, the gross margin.

So this is -- I think this is structural.

So what we want to do is to ensure that we have a stronger portion of our manufacturing volume outside, and to prevent this to happen and this is [a problem] for us.

But another, of course, instance where I think -- element that I want to underline here is that the real problem was wireless.

I think Carlo mentioned that in other families there was a continuation of the profitability levels that we had in previous quarters.

And the [technique] in wireless has been severe and, of course, here the structural measure is to make sure that our presence on this family becomes wider, covering also the digital baseband that is a very important topic in the wireless domain.

And in Q1 the sales in this field where, of course, we have very intensive R&D work.

There was not material work yet.

But they will become material in the course of the year, with a very significant growth in the second half of this year.

So this is another important structural measure that we are taking.

So I think that -- I do not think there is nothing special with the 3% price decline in Q1.

I think this is not weakness in our industry.

But the [point] glitch in wireless was very significant.

The unloading conditions in our fab was very significant.

And I mentioned that we had a glitch in camera that was also significant; of course, it's part of wireless.

And it was the concurrence of these elements that has hit the margin serious in Q1.

We expect to be back to a more reasonable level in the second quarter, and then to move up in the course of the year.

And just to follow up on your guidance, it's quite a -- it's a very strong guidance.

It's unseasonably strong, I would say, on the revenue side.

But on the -- at the same time you are saying that the inventory correction in areas like wireless and consumer will continue into Q2.

So, what exactly is triggering that upside?

And also, is there a currency impact on your sales?

And if so, how much would that be into Q2 on the positive side?

Well, in consumer it's just that we do not have evidence at all of any inventory at this point.

I think that the demand of consumer was very weak in Q1 but now it's very strong.

So what I am saying is that wireless may be a little bit longer, but not in consumer, just to be more accurate.

So, on the top line impact I mentioned at the very beginning, there are many drivers in the second quarter.

There is a kind of recovery in wireless.

There is a very strong growth in consumer.

I think that the way of supporting that we have today in the area of Industrial Multisegment is very good.

And in the automotive it's more stable, but there is a continual drop.

So the area that we do not well -- we expect not to see a real growth in the second quarter is computer peripherals that is relatively stable.

In terms of currency impact, I will leave to Carlo.

But unfortunately, overall, the impact at the level of gross margin, including the small advantage that we have on revenues, is negative.

And we have tried to quantify this impact on the gross margin, and it is about 1 percentage point.

But, Carlo, if you can and want to comment more specifically on the top line?

Yes.

As you know, our non-U.S.-dollar-denominated revenues are less than 20% of total sales.

The euro portion is somehow over 15%.

So you can measure your own [matter].

At the end, the dollar impact on the top line is not a key driver of the guidance, I would say really well incorporated in all the various ingredients of the forecast plan, and a guidance as large as 6 points, as we do normally provide.

What is behind is the level of booking.

And you may have also noticed that this quarter ST came back to the usual approach to provide guidance on sales on a 6-point range.

And for a while, a couple of quarters, we have extended to 8 points.

And this is driven by higher visibility and a higher level of confidence on the sales when entering the quarter in this second quarter.

Maybe I can add a word on the dollar impact, because while of course it may have a small impact on, let's say, next three months, which was described by Carlo Ferro, two months after, as our prices are in dollars, our market is a dollar market.

Of course, if this [completely disappear] it's a smaller [grant] that you may have.

Sure.

Thank you very much.

Okay.

Vicky, do we have -- I think we have time for one, maybe two questions, depending upon -- in terms of the timing here.

So, please put up the next one.

Next question from Mr.

Simon Schafer, Goldman Sachs.

Please go ahead, sir.

Thanks very much.

I am sorry, I may have misunderstood the answer a little bit, but with respect to sustainability of target margins in ASG, if I look at 2005, let's say, you started off the year with a relatively low margin.

Also you have driven by inventory correction, but you still managed to get back to the double digits.

Is that still a target that is sustainable in -- or achievable in ASG?

Absolutely, yes, we must do that.

And I think we want to have in this family overall a return on capital employed above 12%.

And I believe that we have important families in these major groups where we're there.

There are families where we're not there.

And I have mentioned some of the structural measures we are taking.

There are others that we cannot mention.

But I believe absolutely, yes.

I think that on this family we need to go back to a return on capital employed that is above 12%.

Great.

Thanks, Carlo.

And maybe a question on flash again.

Some of your competitors, and actually I think yourself as well in the past, have commented that consolidation disappears; it's a matter of time.

But from your point of view, do you think your own flash business would be sustainable on a standalone basis without a partnership?

Well, I think we are better positioned than others but this is along the lines.

I think that -- I believe that consolidation is the way to go in this family.

I believe that with moving to 12-inch manufacturing I think this -- and also with the intensity of technology R&D, I think that the consolidation is the right way to go.

And this is what we are trying to do.

And, of course, the process is complex.

The carve-out has been a very complex exercise.

It's involving so many functions in the Company, from product related to technology R&D, fabs, backend plans and sales and marketing.

It is a very complex exercise.

But this is the way we want to do, this is the way we want to go.

So absolutely, yes.

Thanks.

Maybe as a follow up and adjacent to that --

Simon, I don't mean to be rude, but we are trying to get through as many folks in the queue as we can.

So if you don't mind, can we follow up with you separately?

Sure, thanks.

Thanks a lot.

Vicky, next question, please.

Next question from Mr.

Stuart Adrian, Morgan Stanley.

Please go ahead, sir.

Yes.

Hi there.

Can you hear me?

Yes, really.

I am afraid I am going to go back to a couple of answers that you gave earlier.

Specifically just looking at ASG pricing, I think a year or two ago we talked about the price negotiations in the first quarter being particularly aggressive as a function of your product portfolio maybe not being as fresh as it could have been.

And we've subsequently seen you invest in R&D over the last couple of years as a way in which to refresh your product portfolio, but we are still seeing these big steps down in pricing.

Is this something that basically we will just need to see every first quarter, that there is a 300 basis point, give or take, pricing decline?

Or is it the fact that maybe some of your new products have not been part of these pricing negotiations that take effect at the beginning of this year?

Stuart, this is Carlo Ferro.

I would say that normally the pricing pattern from Q4 to Q1 is somehow related to the quality of the product portfolio.

And, believe me, our product portfolio is fresh enough to continue to keep ground on the relationship with customers.

However, there are potentially two different possible approaches in the pricing dynamic with the same clients in families that belong to the Application Specific Group.

We have clearly tried that encompasses some expected improvement on the cost structure to the learning curve and then is released across the year.

And for this specific reason, normally Q1 is less favorable and Q4 is more favorable, since we take upfront an average adjustment and receive this through the year, the cost structure of this, and overrun the objective of the learning curve.

Other -- in other cases we have a more continued price discussion quarter after quarter.

And, of course, in these cases the pricing pattern more follows the specific industry related [practices].

Also, we are not exposed, as Tommi said, so much to the low end of the wireless applications.

Of course, the overall situation and pressure existing for this reason with handset OEMs somehow translated in the overall pricing condition for, I believe, all the semiconductor suppliers to the wireless industry.

Okay.

And then maybe just a follow up, just going back to, again, inventories.

I think on the last call you said that it would be the top priority to manage inventories.

And I understand the FX impact and the flash impact.

But even if you back those two out, which were relatively small compared to the overall absolute level of inventories, inventories are clearly still high.

I'm maybe surprised that you are not doing a little bit more on the inventory side, other than kind of pointing to the forward quarter to move inventories down.

Would I be right in saying that that is the case, essentially we are just going to wait until end demand pulls this inventory off your balance sheet?

Again, Stuart, of course for us what is absolutely important is also the quality of our inventory and this is absolutely plain.

Then there are also different speed of turn in the various product families.

For instance, I could better anticipate that ex-flash our inventory turns could be somehow higher than the one that you see.

And my suggestion is, when benchmarking with competitors, making sure that we are talking exactly about the same product portfolio.

Having said that, there are also the same characterization of the current manufacturing situation that negatively affects inventory level or turns in respect to competitors.

A lower percentage of purchasing for families, since at the end the last part of our inventory is on the work in progress, given the length of the semiconductor manufacturing cycle.

And, of course, purchasing a higher volume from foundry will reduce work in progress inventory.

And another one is the number of fab and a certain fragmentation into the manufacturing chain.

And those are also a factor that are part of our overall strategy to make ST a lighter asset company.

Okay.

Thanks very much.

Okay.

Vicky, we have time for this last question, please.

Okay.

The last question is from Mr.

Martino De Ambroggi, Euromobiliare.

Please go ahead, sir.

Good afternoon, everybody.

My question is still on inventory.

Could you give us a rough indication on what could be flash memory Group inventory level?

And what could be the inventory turn target once you have deconsolidated FM Group?

Martino, just because of the question, I'll try to say again what I've just said in other words.

And you may appreciate at this stage, as we have not taken Jonathan's question on the assets, we prefer not to answer too much in this specific level of detail.

There will be the right time to share this information.

Inventory turns at flash are lower than the Company average.

And as I said, ex-flash our inventory turns could be somehow higher.

Okay.

And a follow up on second quarter guidance.

Could you give us an indication of the sales for flash division?

Normally we offer a 6-point-range guidance on the overall details.

To go to a detailed sales amount for a specific family is something that we prefer not to introduce this quarter.

Okay.

Thank you.

Thank you, Martino.

Sorry, I have not been able to answer your questions as you may have wished.

Well, ladies and gentlemen, this concludes the Q&A portion of our first quarter 2007 call.

I'd like to make one additional observation, however.

That is for all of you who still have questions remaining, or have further information about the Company that you'd like to explore, please attend our coming analyst and investor day, which we call our field trip, scheduled for May 10 in New York City.

If you have any questions about the date or the venue, or the schedule of the day, please contact myself or any member of the Investor Relations team.

We've got 90-some odd of you that have signed up and we hope to see plenty more.

So -- and we will continue with an informal and formal session there, with Q&A, and get through all the questions that might arise from the presentations we'll have there.

Thank you very much for your participation today and hope to see you in New York.

Bye.

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

Thank you very much for joining.

Goodbye.