意法半導體 (STM) 2007 Q2 法說會逐字稿

Hello, this is the Chorus Call operator.

Welcome to the STMicroelectronics second quarter 2007 conference call.

(OPERATOR INSTRUCTIONS).

At this time, I would like to turn the conference over to Stan March, Vice President, Investor Relations for STMicroelectronics.

Please go ahead, Mr.

March.

Thank you very much, Vicki, and thanks to all of you, ladies and gentlemen, and welcome to STMicroelectronics' second quarter and first half 2007 conference call.

Hosting the call today from Geneva is Carlo Bozotti, ST's President and CEO.

Joining him on the call are Alain Dutheil, our Chief Operating Officer, Carlo Ferro, our Executive Vice President and Chief Financial Officer, Tom Uhari, our Executive Vice President and General Manager of MMC, who is representing the Applications Specific Group, and Carmelo Papa, our Executive Vice President and General Manager of the IMS segment.

On today's call there will be statements made that are forward looking and, as such, are covered by the forward-looking statements discussion in the earnings Press Release that was issued yesterday.

I'd also like to point out that in addition to the earnings release which was issued, you should also direct your attention to the jointly announced initiative between STMicroelectronics and IBM.

Finally, as a matter of housekeeping, please limit your initial question to just one, and then with a follow up, in the interests of all on the phone, and then we'll begin working our way back through the queue again.

With that brief introduction, I'd like to turn the call over to Carlo Bozotti, our President and Chief Executive Officer.

Carlo?

Well, hello, and thank you for joining us on this call today.

I appreciate your interest in ST.

This has been a very important quarter for ST from a strategic perspective.

Just one quarter ago we were making progress but did not have a final resolution to our objective of financial reconsolidation, and possibly industry consolidation of our Flash business; now we do.

Just one quarter ago, we did not have a final resolution to our development of core 300mm CMOS processes choice, and now we do.

And from an operational perspective, in addition to the resolution of these key strategic initiatives, we have also clearly identified the next important actions to further improve the efficiency of our manufacturing assets.

So let me begin my remarks with a discussion of our strategic announcements, and then move to a review of our second quarter and outlook for the third quarter and the rest of the year.

First on Flash, as you know, we entered into a definitive agreement with Intel and Francisco Partners to create an independent semiconductor company, Numonyx.

We will be selling our Flash memory assets to this entity, and Intel will be selling its NOR Flash memory assets through the new company.

Subject to customary conditions and regulatory approvals, we anticipate completing the transaction in the second half of 2007.

While some of you would have liked to see a resolution sooner than we achieved, I believe the extra time has enabled us to put together a very strong company with a significant market position.

As we outlined at the time of the announcement in May, we expected to incur an impairment loss of between $850m and $900m associated with this transaction, and that we would recognize the significant majority of that in the second quarter.

As you can see, we took a charge of $857m, primarily consisting of non-cash impairment charges.

And at closing there would be the final [2 up].

From a reporting perspective after closing, this will be an equity investment and appear on the operating income line.

And based upon assumptions which we believe are reasonable, we anticipate the equity impact of Numonyx to be positive on ST earnings from the first year after closing.

Second, on technology R&D, as anticipated a few months ago, we have just announced reaching an agreement related to the development of core 300mm CMOS processes at 32nm and below.

ST will join the IBM consortium for this cooperative effort at the end of 2007.

It is anticipated that both companies will have teams at both IBM's East Fishkill site in the U.S.

and our Crolles facility in France, working together for core and value-added derivative technologies respectively.

We believe this alliance will bring a number of benefits to ST.

This is a new model for us in advanced logic which should bring greater efficiency.

This will also enhance our ability to master technologies, accelerate time to markets and enable us to increase our use of foundries.

Finally, it will reduce our overall spending on CMOS technology.

In combination with a reduced spending on Flash technology as a result of the divestitures, we anticipate from 1% to 2% of sales will be redirected from technology R&D spending towards product innovation when freed up in 2008.

Moving now to the second quarter, net revenues for the period increased 6.2% sequentially and, excluding FMG, net revenues increased 6.8%.

We came in slightly below the midpoint of our range of between 4% and 10%.

Turning first to ASG, the quarter progressed very much in line with our expectations, which we shared with you at the time of the first quarter release.

Sales increased 6.8% sequentially, driven by double-digit sales growth in Wireless and Digital Consumer.

Wireless sales increased over 11% sequentially, reflecting volume growth and good performance across several product fronts, including connectivity and 3G digital base-band.

Consumer also had a very good quarter.

Areas of strength, including set-top box and digital television products, driven by our single chip offerings for H.274 -- H.264 and high definition applications, as well as strong box demands in emerging markets.

These two divisions combined were up over 20% sequentially.

This was a record quarter for sales levels in the Automotive group.

Sequentially, Automotive increased about 4% on our strong product offerings.

Finally, Computer Peripherals decreased sequentially on quarter-end shipments shifts, [although] we see growth resuming from here.

Turning to operating profitability, we saw a significant environment in operating profit for ASG in the second quarter over the first quarter, benefiting from volume and mix improvements which more than offset the sequential pricing pressure.

[Literally] all product areas within ASG had positive mix improvement, with the most important coming from Wireless and Digital Consumer.

While not yet at the year-ago level, the sequential volume and mix improvements indicates that the plan we articulated is delivering the anticipated results.

Based upon our third quarter outlook and fourth quarter visibility, we expect to see substantial improvement in the operating margin for ASG as we move through the third and the fourth quarters of this year.

Moving to IMS, it was a record sales quarter.

On a sequential basis, net revenues in IMS increased by 6.2%, driven by our high single-digit sales improvements in the industrial market segment.

The operating margin was 13.4%, compared to 14.8% in the first quarter.

This margin reduction is largely explained by two factors; substandard manufacturing performance, which has been resolved and our decision to accelerate investment in the business, with a focus on increasing our resources in advanced analog products.

In the second quarter we increased headcount by over 100 people, to ensure the necessary resources are on hand to continue our product development and growth plan.

Looking at some other key metrics for ST, first, we saw good improvements in sales through our targeted key accounts, which increased 27% year over year, excluding Flash.

Secondly, we had strong sales results in Japan; up 38% year over year, and good progress in the [mass] market, with sales up 12%, also in comparison to the year-ago quarter.

Gross margin was 34.7% in the quarter and, excluding FMG, was 37.8%, improving from 37% in the first quarter.

Carlo Ferro asked me to provide a brief explanation to our figures regarding depreciation and amortization.

You may have noticed that our second quarter figure is lower by $24m.

It was $396m in the first quarter, and it is $372m in the second quarter.

This almost exclusively benefits FMG inventory at the moment.

Indeed, in connection with the signing of the Flash agreement, we moved the Flash assets to a new category; assets held for sale.

As a consequence, we suspended depreciation relating to those assets beginning in June.

You may be wondering where this amount went.

I want to be clear that this reduction did not benefit our gross margin results during the second quarter.

Under accounting, the offset benefits will first go to the inventory and then to cost of sales, depending on the timing of the product sale; a quite limited amount in Q3, and the bulk in Q4.

Moving to currency, we continue to manage the business through adverse currency conditions.

One year ago, the U.S.

dollar was at $1.23 exchange rate per euro, and over the last 12 months has weakened further by over 8%.

We estimate that this had about a $90m negative impact on our operating profit, with a little less than half of this reducing our gross margins and the rest impacting operating expenses.

Specifically, the year-over-year gross profit impact was approximately 170 basis points.

Looking ahead to the third quarter, we expect to face further pressure on margins from currency as the dollar continues to weaken.

As discussed at our field trip in May, we started a new round of initiatives to further reduce costs, manage the exchange rate challenge, improve our financial returns and further optimize our asset utilization.

Specifically, we announced in early July plans to rationalize three of our manufacturing operations.

We intend to wind down operations at our 6 inch fab in Carollton, our 8 inch fab in Phoenix and our back-end packaging and tests facility in Ain Sebaa, Morocco.

We estimate that it will be approximately two to three years before all products at these sites are re-qualified as other facilities.

We have estimated pre-tax impairment and restructuring charges in the range of $270m to $300m.

At the end of this period, we expect the potential benefit to cost of goods sold would be approximately $150m per year.

And finally, let me turn to cash flow for a minute.

We continue to improve our cash returns with a strong increase in cash flow from operations for both the second quarter and the first half of 2007.

Our net cash from operations in the first half represented an 8.4% cash yield on sales.

This, we think, is pretty good for ST, and a good figure in comparison to our industry.

The strong cash flow has enabled us to increase our cash dividend by nearly 150%.

In the second quarter we paid cash dividends totaling $269m and ended the quarter with a net cash balance of $870m, similar to the one we had entering the period.

RONA was over 9% in the quarter, excluding Flash.

Looking to the second half of the year, we expect to see further significant improvements.

Turning to our third quarter outlook, let me first step back to the start of the year.

For ST we did, indeed, reach a [crux] in the current industry correction during the first quarter and we saw a resumption of growth in the second quarter.

Looking forward, based upon our current order visibility, we see sequential sales growth in both the third and fourth quarters.

With respect to the third quarter, we are anticipating sequential sales growth in the range between 2% and 7%.

Also, based upon our order visibility, we expect ASG to continue to show a sequential growth a little faster than the corporate average.

Based upon our third quarter sales outlook, spending plans and currency assumptions, we anticipate the gross margin for ST, including FMG, to expand to about 35.5%, plus or minus 1 percentage point.

The midpoint of this gross margin outlook would represent an 80 basis point improvement, with the drivers being sales expansion, product mix and operating performance.

Regardless of the accounting impact for the Flash assets, our gross margin for the rest of the Company will improve in a similar, or better fashion.

With respect to capital expenditures, we are well on track to spend less than 12% of sales this year, as we continue to progress with our [asset-light] strategy.

We also expect that we will be able to meet the low end of our inventory turns target range of 4.5 to 5 times by the end of this year.

This is, of course, based upon our current visibility into the fourth quarter, as well as currency assumptions.

In summary, ST reached a resolution on key strategic initiatives and we look forward to closing the Flash transaction and working with our new R&D partners in the days ahead.

Importantly, I believe we have reached the best resolution for ST and our shareholders.

At the same time, our top priority is to continue to drive improvements across the Company by focusing our efforts and resources on leadership in multi-media convergence applications and power solutions, advancing our light-asset business model, driving towards a higher RONA and continuing to enhance our cash generation from operations.

I would like to stop at this point and, with my colleagues, take your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

The first question is from Mr.

Sandeep Deshpande, JPMorgan.

Please go ahead sir.

Yes, hello, Carlo.

A couple of questions.

Firstly, regarding the cash balance on your balance sheet, you've got a significant cash balance on your balance sheet.

What are the plans to -- are there any specific plans to do anything with this cash on the balance sheet in terms of returns to investors?

I'd like to talk about that, and I have a follow up actually.

Yes, of course.

I think that the first priority for us to close the deal on memory, and this will allow us to cash in another $500 -- approximately $500m.

And then I think that our plans are on three fronts, and it is clear that we want to have flexibility in terms of additional dividend, potential acquisitions [and/or] potential buybacks.

I believe that it is important for us to maintain this flexibility, and we want to move on now rapidly with closing the Flash deal and enjoying the additional cash in.

Secondly, Carlo, about Crolles 2 what happens?

You've announced the deal with IBM on the process.

What happens to the fab itself?

NXP will get out of the Crolles 2 fab by the end of this year.

We are not entirely sure what Freescale is going to do.

Do you have a plan going forward on Crolles 2?

Will you continue to invest, at least replace these companies' investments in that facility, and how do you see that playing forward, particularly in association with your CapEx-light strategy?

Yes, I think that, as you know, we have the flexibility to decide about the equipments that are presently on by NXP and Freescale, and we have an option -- and we have a co-option this equipment, and the deadline for us to decide is at the end of this year.

I believe that, today, we see a strong demand, and a strong demand increase on CMOS logic products, particularly in the area of Digital Consumer, in the digital core of hard disk drives and wireless applications.

So we believe that the loading opportunities that we have and for the Crolles 2 facility are important opportunities and, of course, we will take this into consideration when deciding on the co-option on the equipment.

I'd also like to mention that the co-option is at very favorable conditions, because we will be able to access, in case we decide to make the call, pretty new and innovative equipment at a price that is about 50% of the market price for that equipment.

All of this is absolutely compatible and truly congruent with our asset-light strategy, and I'd like to reconfirm that we have set a target; it's 12%.

We are below this target, and we will remain below this target.

So you have no plans to get new partners into this JV -- into the fab, I mean?

This is, of course, an opportunity but, at this point, I believe I cannot describe further here.

And in any case, we believe that the volume of -- the increased opportunities that we have are very significant and, for sure, we have also to extensively work with foundry partners, because the capacity -- the internal capacity is just a portion of what we need overall in the advanced CMOS area.

Thank you.

Next question, please, Vicki?

The next question is from Mr.

Tristan Gerra, Robert Baird.

Please go ahead, sir.

Yes, good morning.

Could you talk about 45nm production and whether you are on track to ramp in the first half of '08?

Yes, I think that our 45nm technology is in line.

I believe this is part of the previous objectivity, with the previous alliance that we had in Crolles.

And the most important products for us in this area is, of course, the digital base-band in the cellular phone.

We have important projects in this area on the 45nm, and we expect that we will have a production volume -- important production volume on the digital base-band at 45nm in the year 2010.

Okay, and also, could you talk about your lead times currently in commodity products, including [Mofeds] or NOR Flash, and how does that compare with last quarter?

Well, maybe I start with the more standard products.

Carmelo, that is here with me, would comment?

Thank you very much for my first question.

I appreciate it very much!

The lead times are improving.

The sales, they are shortening, so there is not such strong pressure, but still there is some pressure in some [niches].

For instance, on power [most] we have very long lead times.

Now we are going to more -- become reasonable, let's say, type of lead times.

So, overall, there has been an issue for the entire Group.

Great, thank you.

Okay, as far as NOR, I don't have any specific comment.

I think that it is very much for the Wireless and for major customers, so I don't have any specific comment here.

[But further] in terms of capacity.

Okay, Vicki, next question please.

The next question is from Mr.

Cody Acree, Stifel Nicolaus.

Please go ahead, sir.

Thanks guys.

With the IBM agreement, can you really talk about the financial impact, when we could start to look, and maybe what we should be expecting from a gross or operating margin impact long term?

How does this kick through and change the way we look at profitability?

Well, of course, the three initiatives that we have concluded in the course of the second quarter are very, very material.

I think you are aware about the weight of the separation and the value of the separation of the Flash memory; this is more than 3 points of gross margin.

In terms of technology R&D, it is also significant, and I did mention this in my introductory remarks.

We expect that with the Flash separation and with the new model in the CMOS logic, the development of the CMOS -- the advanced CMOS logic, we expect that our technology R&D effort will decrease by 1 to 2 points of sales.

And, of course, we retain the flexibility to reduce and redirect this portion that is now technology development into a stronger effort in product development and systems R&D.

And finally, I think we have also quantified the savings that we'll be achieving by relocating the manufacturing activity from the United States and Morocco into Asia.

Last year we closed two fabs in Europe.

This year we are separating another fab in Europe with the memory transaction.

And in addition, we have these three fabs; two in the U.S.

and one in Morocco.

And the impact of the relocation from these three fabs, the two American and the Moroccan fab, is about $150m on the cost of goods sold.

Thank you very much, and a follow up for me?

Please, Cody.

Okay.

Carlo, you've obviously taken on a huge amount of changes structurally within ST, within the last, give it 12 to 24 months, and a lot of these are in their infancy.

If we look out the next 12 to 24 months, are we now focusing on getting these implemented?

Are we focusing more on implementation, or should we -- do we think there are more structural changes to come, there are more efficiencies to ring out?

Do we have more restructurings that are going to be on the table, or is it going to be more about execution from hereon out?

Well, I think, of course, the table is very rich and the priority is on executing, but a very short-term execution, but for us is absolutely crucial of course, is the closing of the memory deal but also the relocation of the manufacturing activities from these three fabs into Asia.

I believe that the challenge that we have in these days, and I want to be very frank with you, with all of you, is the strength of the euro.

I think that we will not stay still in case the euro will start [to reinforce], or the dollar weakening, and I think this is business, so if the euro becomes even stronger, we will take more actions.

I believe that what we have done is compatible with the euro/dollar rate of today, but in case there will be a further deterioration of the dollar, we will take more actions to mitigate that impact.

In parallel, I think this quarter is a certain point, so we will focus much more on new products and we will focus much more on growth, but I do not want to, how can we say, underestimate the challenge of the currency.

So if the dollar would become weaker, we will take more actions and we will mitigate the problems related to the dollar.

And Carlo, I know it's over my two limit, but could you, along that line, with the closing of the couple of facilities in the U.S., does that not mathematically increase your euro exposure?

Or have there been other things that help to keep that percentage of gross and operating expenses leveraged to the euro about the same?

Well, overall and of course this is a complex matter, looking at the separation of the memory and the reduction in Europe for certain volumes on memory, and even the transformation of our present R2 facility that is also a manufacturing facility; this has become the R&D center of the new company!

Overall, we will not deteriorate.

I believe it is even with what we have today but, of course, the manufacturing cost that we have in the United States, and the manufacturing cost that we have in Morocco, is much higher than what we will have in Asia on [single] technologies, [similar] products, similar strategies, both in Singapore and in China, where we want to focus our operations.

Right, great.

And thanks for [allowing] the [last question].

Thank you.

Okay.

You're welcome, Cody.

Next question Vicki.

The next question from Mr.

Simon Schafer of Goldman Sachs.

Please go ahead, sir.

Thank you very much.

Hello guys.

Hello.

I was wondering whether you could comment a little bit on the pricing environment in NOR Flash.

Your partner, or one of your partners, Intel, has made some comments on their call and so did [Spansion].

I was wondering whether you could make a similar range of remarks on -- in terms of what you see in terms of outlook there?

Yes, I think Carlo will take that.

Yes, good afternoon everybody.

Simon, (inaudible) particular quarter for pricing pressure on Flash when including both NOR and NAND.

At the end we're used to this kind of pressure, which is in the mid single digit range.

What maybe is some how peculiar it has been -- how peculiar this quarter is that the price pressure on NOR has been [from] how higher than price pressure on NAND.

Yes, but the major issue in Q2 on Flash is volume, and specifically in the Wireless and, of course, the specific customer where our presence is very important, and I think that the major issue that we had was the lack of volume at this customer, or that customer.

Understood, thank you.

Spansion actually talked specifically about some measures that they're taking with respect to their production measures, that it can actually improve their gross margin in times of falling pricing.

Are you doing similar things?

Could you share a little bit what the Company is doing to improve that positioning?

Well, of course.

We are merging the activity with Intel, and --

I meant more from a near-term manufacturing capability.

Yes, absolutely.

So I think that the [most] significant difference between the two Flash organizations and, just to be precise, is the NOR Flash organization in Intel and the NOR Flash NAND activities in ST.

I would say that the most difficult -- the most significant difference between what it is today and what will be in the future is the simplification of the manufacturing infrastructure with a very, very strong, let's say, presence in Asia of the new company.

This is the most significant change that we will have by merging the two organizations.

So absolutely, it's simplification of the manufacturing infrastructure and this relocation to Asia.

Understood, and my follow up would be, I noted Texas Instruments' announcements on the relationship with [EMP] for 3G.

I was wondering how this may or may not impact your own business plan that you have set out for 3G with that particular customer?

I think Tom, you can comment on that?

Yes, sure.

The way that we understand this arrangement is that basically, currently when TI application processes are sold, they are at that book, one of the currently available commercial modems.

Typically, that would be [Qualcom].

So I think that this is a positive for us, in the sense that the EMP modem that we will be supplying will be replacing Qualcom in those custom designs.

Understood, thank you very much.

Next question please, Vicki?

Next question from Mr.

Martino De Ambroggi, Euromobiliare.

Please go ahead, sir.

Yes, good afternoon and good morning everybody.

A follow-up question on the U.S.

dollar weakness.

You said we are ready to take additional measures in case of further weakness.

Are we far from the level you consider unavoidable such an intervention, first?

Well, obviously it would be better a specific indication of the level, but I can imagine it [if] possible.

And the second question is on the inventory turn.

Under the new Group structure, excluding FMG, you are starting from 3.9, but I can imagine that you have to restate the guidance you gave under the old Group structure.

Yes, I think Carlo Ferro will take the question on the inventory turn.

And, well, concerning the dollar rate, I believe that we have a lot on the table to do, right?

So -- and this of course will -- the Flash separation is more than 3 points of the gross margin.

The new restructuring plan is $150m from the bottom line.

The new model on the CMOS development is from 1 to 2 points of expenses.

So we believe that this is congruent, even at this level of dollar.

And we have, of course, accelerated and we have tried very, very hard to do what we have said we would have done in the second quarter.

And, of course, a further motivation for us to accelerate on these three prongs is the present weaknesses of the dollar.

I think, of course, if there will be a further deterioration we will take more actions.

This is our duty and we will not accept that the Company does not go back into a situation where there is a continuous generation of cash flow, which is already significant but we can [be] better, and with a return on capital employed that is much higher than what it is today -- I believe you have the range.

It is from 12% to 20%.

But we will take all necessary actions to save the further deterioration of the dollar rate.

I think this is our duty and we will do it.

Okay.

On the inventory at Flash, and thank you for the question again.

I believe really we should start to look at the business, [take] like Flash to prepare for what is going to be [a shortfall].

Remember that Flash at the end of June at $1.33b.

You may -- before talking about the target, Martino, I would also highlight what is the current dynamic.

In the prior earnings call, I believe we have anticipated that in Q1 we have reduced in absolute dollar amount the inventory ex-Flash.

And in this current quarter the increase is in the range of $20m, excluding the exchange rate impact.

So you may have noticed that on these product families, sales increased by 6.8% and inventories increased by 1.5%.

So there is another strap on accelerating sales.

Turns, at 3.9, at this stage are below our range target of 4.5 to 5.

And I would say that, for us now, the [proposed] execution is to reach as soon as possible turns within that target.

But you are confirming the range?

Yes, that's not changed at this stage.

Okay, thank you.

Next question please, Vicki.

The next question is from Mr.

Jonathan Crossfield, Merrill Lynch.

Please go ahead, sir.

Yes, good afternoon.

I was just looking at the sequential revenue growth in Q2 and the guidance for Q3, and Q2 was broadly in line with your historical sequential average.

Q3 is a little bit better, but I would have thought, coming out of an inventory correction and with so many new products ramping in the second half, that we might see slightly stronger growth.

Can you help me to understand why the growth in the second growth in the second half isn't looking a bit stronger?

Well, first of all I would like to comment on Q2.

I think, indeed, this is probably in line with our historical performance in the second quarter.

But the expectation that we have for the overall semiconductor market today on the second quarter is flattish, compared to Q1, maybe even slightly declining.

So I feel that we need to compare the 6.2% sequential growth with the dynamic of the market, and I believe the 6.2 would be significantly better than the dynamic of the market.

Today, we have a Q3 visibility.

We are giving the visibility that is based, of course, on the current backlog.

I think it's better than our seasonal average.

I think, as I said in my remarks a few minutes ago, we expect that ASG may grow faster than the average of the Company in this period, and I have to say that we have a very, very strong backlog for Q4.

This is just in the numbers.

It is a very strong backlog, so I believe that the opportunities for growth in the second half are there, and they are based on the numbers.

They are based on the new products, based on the marketing effort and the marketing initiative.

So I believe, of course, we would like to do more.

However, Q3 is better than our average.

Q2 is, for sure, much better in the market and our backlog that we have now for Q4 is very, very strong.

Okay.

This is Carlo Ferro.

Just to complement on -- to make sure that we are all on the same page on the numbers.

Since 2003, the seasonal Q3 to Q2 sequential growth average of the Company has been at 3%.

The midpoint of our guidance being 4.5%, that is 50% higher than -- we're not here to discuss (inaudible).

I don't know whether this is a little or, as I read this morning on some report, a very modestly.

At the end of the day, the average in the last four years for the Company has been 3% at the midpoint of the guidance, so this year it's 4.5%.

Okay, thank you.

And then maybe just as a follow up, with the new restructuring program in place, at what stage would you expect us to start seeing the benefits of that program coming through on the cost savings side?

Will it all come through at the end, or should we start to see that being phased in over the course of the next couple of years?

Yes, this is -- the question is -- is to me, and I am to say that at this stage I would like to be conservative on the outlook.

The $150m will build up progressively and we will complete the result as the plan will be completed.

However, we have experienced on the 6 inch restructuring that the process of unloading fab, qualifying products and all these related disruptions sometimes result in possible [dichotomies] that over the transitional period may hit a portion, or a significant portion of these total savings.

So I would say at this stage that the $150m will be fully visible at completion of the plan, without excluding the opportunity that something more will materialize through the period.

That's great.

Thank you very much.

Sure.

Right, Vicki, next question please.

The next question is from Mr.

Odon De Laporte, Cheuvreux.

Please go ahead, sir.

Yes, good afternoon everyone.

To me, the deal between EMP and TI is a setback for your Application Processor business.

How do you see the situation?

And could you clarify if you are the single supplier, or if there are two suppliers for the base-band part to EMP?

Thank you very much.

Okay, so, this is Tom.

First of all, on the Application Processes side, we are making very good progress with all of the three customers that we have announced in that, so LG, Samsung and Nokia.

So I expect that the business plan we have in that area continues to be one that will deliver a strong growth.

Then, on your particular question of how many sources are there at EMP, publicly EMP has said that they will have more than one source.

I believe that our position for the foreseeable future is very strong in that area.

Okay, so overall, you see this deal more as an opportunity for you?

I think that it really is fair to say that it would be, of course, better if this deal would have been together with our [nomelic] application processor.

But at the moment we are seeing it also as a positive thing in the sense that it secures a bigger market opportunity for the digital base-band part that we are supplying.

Okay, thank you very much.

Okay, Vicki, next question please.

The next question is from Mr.

Janardan Menon, Dresdner.

Please go ahead, sir.

Yes, hello.

Just going back to the previous question, can -- on the connectivity side, you are shipping quite a lot of volume on Bluetooth to Sony Ericsson, and I was just wondering whether this deal with TI which also includes connectivity products could have any impact on your Bluetooth shipments to that customer?

I think, no.

And the reason is that when you are using the digital base-band as the main processor of the system, the Bluetooth is attached to that particular part and that's the type of business that we do.

Already in the current application processors that are sold, the Bluetooth part is often attached to that and this is, let's say, in a different market segment where our Bluetooth business is.

And you had earlier said that you will see a strong ramp at EMP to about 10m units, base-band, most of which will be in the second half of this year.

Can you just confirm that that is on course, and your 4.5% midpoint guidance includes that kind of a strong ramp that you're talking about right now?

I confirm that this 10m is the right number to quantify the business, or business that we see for the latter part of the year.

Okay.

And just one last question -- second question if I may.

Can you just clarify, there is a comment which says that regarding the closure of the Numonyx Flash memory deal that, if the estimated loss of $857m related to our Flash memory business materially changes at closing as a result of significant developments in the Flash memory business, just wondering what can be those significant developments?

Is that a situation which takes a look at the possible losses in Flash memory, or is it regarding something else outside of what can happen in the market?

Yes.

This is Carlo Ferro.

I guess your question is related to the Safe Harbor language and, of course, there is some cautionary ingredient there that we cut and paste from our lawyers' language.

To be more concrete on the point, the term of the deal to combine our Flash business with Intel Flash and sell our Flash business to Numonyx are designed [firm] and are not contingent to any significant possible change, other than minor adjustments like inventory amounts at closing date, and these customary kind of adjustments.

So I would not expect a significant difference from this respect.

The $857m is an estimate done this quarter based on certain assumptions of a closing date, based on certain assumptions of ST assets at closing date, including, for instance, the [current] amount of inventories or the capital expenditure to be incurred from end of June to closing date, or the currency impact, the currency fluctuation adjustment on our assets and, for this reason, may change from the Q2 estimate to the final [true asset] closing.

Okay.

Thank you very much.

Vicki, next question, please.

Next question from Mr.

Didier Scemama, ABN Amro.

Please go ahead, sir.

Good afternoon, gentlemen.

I have a couple of questions, if I may.

To start on with the restructuring program announced a couple of weeks ago, with the closure of these two fabs in the U.S.

and the back-end plant in Morocco.

During the previous restructuring program, effectively, when you ramp down your fabs and you were ramping up at the same time other fabs in Asia, you had a quite negative impact on gross margins.

So I was wondering if you -- or if we should expect something here over the next 18 months before we see a potential positive impact on gross margins.

And I have a follow up.

Thank you.

Didier, as I said earlier, frankly, I would like -- and you are among those who are following ST since long time, so I would not like to have to run every quarter the gross savings, net savings chart and all the related explanations.

What we do currently expect is that, overall, during the execution of the plan the effect could be neutral and, going forward, slightly positive, as the gross savings, the savings from moving the wafers or the packaging units, start to materialize and are partially offset by the dichotomies at these sites, which is a similar experience than what we have incurred with the [fixed feature] restructure.

Got it.

Okay.

And just going to some comments that Carlo Bozotti made on Bloomberg, I think this morning, you say that you're going to outperform the market this year, growing by more than 2%, I think, or I think you expect the market to grow by 2%.

If I take the midpoint of your guidance for Q3, to grow 2% you say you need to grow Q4 by 12% sequentially.

Is that more or less what you imply when you say you have a strong backlog for Q4?

Well, I think that my comment this morning was ex-Flash.

That was ex-Flash?

Okay.

Well -- Okay.

And, okay, my final question is on computer peripherals.

You were talking in the past about a ramp of your 90nm SoC in Q3.

Is that on track?

This is referring to what, sorry?

The HDD SoC.

Didier, our comments were always that that product was to ramp in the second half.

Okay, so it's coming --

The SoC -- the hard disk drive SoC was a second half 2007 ramp [of that].

Yes.

We confirm that.

Sorry, I did it [in these slides], yes.

Okay, great.

Vicki, next question, please.

Next question from Mr.

Paraag Amin, Citi.

Please go ahead, sir.

Yes, good afternoon, guys.

A quick question on depreciation going forward.

What level can we expect going forward?

And then a quick question on NOR, in terms of how do you expect to -- or what are the measures you're going to be taking that means you can break even?

And does the asset write down help this from an accounting perspective?

Okay, I -- This is Carlo Ferro.

I take the question on depreciation and -- Depreciation this quarter, [excludes] depreciation, excluding the amortization, are $350m (inaudible) in second quarter $350m.

Then, as a result of the asset held purchase accounting for Flash, they will go down to approximately $300m in each of the third and the fourth quarters.

I would say that, at this stage, it may be beneficial for your modeling to look at the total depreciation excluding Flash.

Total depreciation excluding Flash this second quarter are in the range of $270m and (inaudible).

I would expect they remain level for the next couple of quarters.

The second question is which measures we are taking to improve the profitability in Flash.

I would say that the combination with -- [leading to] contributing the business into Numonyx is the measure.

And under this perspective, of course, we will continue to run the business as an ongoing concern, to focus on expanding the market presence, continuing to improve manufacturing efficiencies.

Of course, so this is a business that very shortly we expect could be contributed to a new company.

It could be deconsolidated from ST and our focus [in execution] is also to accelerate as soon as possible the closing of the deal.

Okay.

Thank you.

Vicki, next question, please.

Next question from Mr.

Thomas Brenier, Societe Generale.

Please go ahead, sir.

Good afternoon.

Carlo, could you be a bit more specific in terms of the rebound in margin that you expect for ASG in Q3 and Q4?

You said, earlier in the call, a significant rebound.

Could we come back to the more normative level that we've seen in 2006 as soon as Q3?

Well, I think that, of course, we do not provide the guidance by product line, but the expectation that we have for Q3 is another significant jump, (inaudible) jump in the operating margin of the ASG overall.

And I would not want to provide a number.

I think it will be a significant improvement in the third quarter.

Another way to ask the question, would I be fair to assume that the improvement in the overall Group margin will come mainly from ASG, that for example what you [put] in the guidance --

No, no.

It is no, because we consider -- I consider, we consider the margin of IMS in Q2 a glitch, so I believe that there will be a recovery in the margin of IMS, both in the third and in the fourth quarter of this year.

Okay.

And then Flash, would that be fair to assume that it shouldn't move that much?

Commenting Flash at this stage is [somehow] difficult also considering the effect of accounting of assets held for sale.

And I would say that, incorporating these effects and these contributions, we are optimistic that the margin will improve in Flash as well.

Okay.

A follow up if I may, on the currency impact.

You commented earlier in the call that, if the euro was going to strengthen again, and it looks like it's the way it's taking currently --

Not today.

Well, not today, but these days, I would say.

Yes.

-- you were ready to take more actions.

Yes.

Could you maybe give us a general view on how your exposure will have changed when all the actions that you are currently taking will be closed and what kind of further actions you could take if the euro goes to, for example, 1.50 or even more.

Carlo Bozotti Of course, we naturally have some, how can we call it, plan b, if the euro is strengthening (inaudible).

And we have some idea on what to reduce, which industrial line we could move to Asia, additional industrial line we could move to Asia.

And of course we will disclose that if needed.

As far as the -- When this plan is finished, is put in place, our exposure to the euro in G&A is not going to change too much.

It's going to be -- since -- it's going to be around 60% to 65%.

And the exposure to euro in manufacturing at the end of the plan, within three years, probably it is going to be less than it is today, as we have more production moved to Asia.

But, frankly, what we are planning to do now is more a cost reduction plan than a rebalancing of our own production between the euro and the dollar.

It's cutting manufacturing [plants] where [the costs] (inaudible).

Well, in practice, last year we closed two fabs in Europe.

With the separation of the memory, that is one fab this year.

And we will not grow in Europe.

I think that's -- The growth from ASG will come from Asia.

Okay.

Thanks.

Vicki, next question, please.

Next question from Mr.

Jerome Ramel, Exane BNP Paribas.

Please go ahead, sir.

Yes, good afternoon.

Can you just confirm that you still expect ASG Division to grow by 25% Q4 versus Q1 [this] year?

Well, we are very close, yes.

We are very close.

I think we'll rather -- maybe overall it will be between 20% and 25%, and Wireless and Consumer well above 25%.

Okay.

And just a final question.

What was the level of outsourcing this quarter?

Carlo Bozotti The level of outsourcing was higher than in Q1.

In fact, it was slightly above 12%.

And just to give you an idea of what it's going to be this quarter, it's going to be above 13%.

It [would] move from a little more than 9% to 12.4%, to be precise, and will move to 13%.

And this of course, just to clarify, includes Flash memory.

It includes Flash, yes, of course.

A large part of Flash is outsourced, especially with Hynix, with our Joint Venture with Hynix to consider also for outsourcing.

And the capacity utilization rate?

Okay, the capacity utilization rate this quarter was 87%.

This is more or less flat compared to the quarter before, but there is also like the quarter before, a difference between the 6 inch and the 8 inch.

The 6 inch was 88% and the 8 inch was 83%.

And I just want to mention that among the actions which have been taken in the Flash is also starting to offload some of our fab to adapt our, let's say, industrial tool to the new reality of the Flash with the new (inaudible) being created.

What I mean by that is, for example, next quarter we'll have our R2 fab being slightly unloaded, because we are preparing the transition.

And we'll have also a decrease of our Singapore 8 loading, both due to the Flash.

The rest will be quite nicely loaded, with about 89% line utilization rate.

Okay, thank you.

Vicki, next question, please.

Next question from Stephane Houri, Natixis.

Please go ahead.

Yes, good afternoon.

I've got a question on the CapEx side.

You have spent $222m in CapEx in Q2, i.e., just a bit more than 9% of sales.

Should we consider this level as a new guidance going forward for the year?

I think, of course, we are trying to spend less than 12% of sales.

This is obvious.

I would not formalize a new guidance today but, of course, the effort that we are doing is to invest smartly and to make sure that we move on with our roadmap to become much lighter in terms of assets and depreciation.

Moreover, if I may, we are also adapting to the new reality of the market.

The market is [going] to grow 2%, there is no reason to [lower] our capacity, so we are very, very (inaudible).

Okay.

And on the Flash memory side, you said at the beginning of the call that the [JV] would be profitable during the year 2008 for ST.

Does it mean that you don't believe any more in the fact that the JV will be profitable at the first quarter of its creation, i.e., in Q1 '08, or is it -- it's not fair to think that?

This is Carlo Ferro.

I believe that what we said at the call of the Flash deal is to expect this company to be neutral, or accretive to our EPS starting from the second quarter after [inception].

And the reason is that, on the first quarter, for sure, they are going to incur in various one-time accounting items, like they have the write-offs and this kind of stuff.

So today, reference by Carlo to the first year, is absolutely consistent with this expectation.

There are no [plans to] change on the visibility of the new Flash company, of Numonyx, as an accretive ingredient going forward to our EPS.

Okay.

Thank you very much.

Vicki, next please.

Next question is from Miss.

Clara van der Elst, Standard & Poor's.

Please go ahead, madam.

Yes, hello, Standard & Poor's Equity Research.

Just wanting a clarification.

I think you said that IMS suffered manufacturing inefficiencies this quarter.

Could you -- Maybe I missed it but could you elaborate with the reason?

Well, I believe we do not like to comment the details but, of course, it is related to, let's say, some specific performance in certain fabs and I would like not to elaborate and describe those details.

I believe that I have also mentioned that the problems have been resolved and we expect now to go back to a higher level of profitability on this business, starting from the third quarter.

Okay, thank you.

And then I had a follow up on growth in Wireless in ASG.

How do you see -- In the second half, how do you see the high-end handset segment playing out versus the low end, in terms of share of total or growth rate?

Yes, Tommy?

Yes, sorry.

I think from what we see, that -- it seems that the overall mix -- The overall portion that the low-end handsets have of the overall market remains quite constant.

But then, within the mid to high range, we are seeing a good mix towards the high end.

Okay, so the top range is becoming more high end, is that a good way to summarize it?

Yes, so, basically, if you consider what is low, we would say that the ratio of that remains similar [to what it has been].

Okay.

But then, within the mid to high, I think that we are seeing some more shift towards the higher part of that category.

And -- Okay.

Yes.

Okay.

That's it.

Thank you.

Thank you.

Vicki, next question, please.

The next question is from Mr.

[John Greedan], [Tractor] Equity Research.

Please go ahead, sir.

Hello, good morning.

Good afternoon.

Carlo, could you discuss the OpEx targets for 2007 versus the 30% that we've seen in the first half of this year?

This is Carlo Ferro.

Yes, please.

I'm sorry.

Yes.

Well, I would say this quarter, basically, we did what was expected and anticipated, [not some] increase in absolute dollar terms and a reduction as a percentage of sales from 30.6% to 29.6%.

I believe that this is the path that we will continue to follow on the next quarters, going down in terms of OpEx to sales ratio quarter after quarter.

And I would expect that, overall, in the second half of 2007 the ratio will be within our target range, which is below 28%.

Of course, I'm talking at current exchange rate and the exchange rate may remain a threat, or may also become an opportunity in respect to this performance.

Thank you.

And then back to the IBM agreement, are there any restrictions for another company joining the party?

What factors drove you to this decision and is there a limit to volumes from another party being part of the alliance of the six firms?

No, there is no limitation.

Of course, here, there are two agreements that we have signed.

One is us joining the IBM consortium and the other one is IBM joining us in Crolles.

And there is no restriction in both sides.

Of course, you know very well the IBM consortium, as it were.

And as far as other companies joining the Crolles, let's say, [a new alliance], there is no restriction.

Thank you.

Okay, Vicki.

Next question, please.

The next question is from Mr.

Eric Reubel, Miller Tabak and Roberts.

Please go ahead, sir.

Good afternoon, gentlemen.

Thank you for taking my call.

A question on NOR Flash.

As you commented, volume was down due to a customer and pricing was weaker than normal.

Could I ask you to comment how things are shaping up in July?

And if you assumed flat to down demand from the weaker Wireless customer, how do you see the pace of price erosion in Q3, calendar Q3, in terms of at or below normal seasonal trends?

And I have a follow up.

I would say that is a very, I would say, short-term [question] at this stage.

That business is always on the path of a normal price trend.

We do not see, frankly, easing the price environment.

But, as I said, price environment in second quarter has not been significantly different from normal path and the price pressure we have experienced in the second quarter was in the range of mid single digit, and similarly [we have entered] the third quarter.

When you say mid to single digit, is that including the --

Minus 5%.

Is that -- I'm sorry?

Minus 5% (inaudible).

Okay.

If I could turn for a second to the image sensors, could you characterize your image sensor inventory in terms of weeks?

And could you break out image sensor shipments in terms of the mix between VGA and mega-pixel?

Tommy?

Yes, I think this is a level of detail that I am not comfortable disclosing.

Okay, gentlemen.

Thank you very much.

Thank you, Eric.

Vicki, next question, please.

Next question from Mr.

Peter Testa, One Investments.

Please go ahead, sir.

Yes, thank you very much.

I was wondering if you could give us some sort of feeling for your hedging position and try to understand in the comments you made earlier on looking to have -- be reactive to an extent that there's a big change in currency, as to how you might change your hedging policy to allow you to buy time to make that sort of change.

This is Carlo Ferro.

Our hedging policy is covering approximately 50% of the overall exposure in both cost of goods sold and operating expenses over a six-month period.

The instruments that we're adopting are forward contracts and options.

So the combination of the instruments depends on, how say, the market momentum.

So under this policy, we are -- we have taken advantage of our hedging to significantly mitigate the impact in respect to actual rate in both first and second quarter.

And at the current rate, our hedging will also positively contribute [it] in Q3 and Q4.

The current hedging for the third quarter, to the extent of our target exposure hedging, is substantially down, of course, at this stage, and is much less than current rate.

And also for Q4, the contracts that we have so far entered are at a rate which is between -- in the range of between 1.365 and 1.37 forward rate, so below the current rate.

I would say this is the financial ability of mitigating or deferring the exposure.

The discussion that has earlier occurred about the measures, of course, is much more structural in correcting the natural exposure of our construction.

Yes, so I was trying to understand whether you might lengthen your hedging policy to allow yourself to buy more time to implement the industrial part of the solution.

No, from what I understand, your question is should we expand the hedging period and go into [the batch] over 12 months as opposed to over six months or 18 months.

It's quite a risky decision on one side.

And by the way, (inaudible), considering that the difference of interest rate is still significant and the cost of hedging at the difference between the forward and [spot] rate over 12, 18 months is -- became material to our margin performance.

Yes.

No, I understand.

That's why I asked the question.

Okay.

Then the other question I had, please, was if you could talk a bit about, in your mobile communications business, the visibility that you have now, looking forward, as to the mix change between, say, the advanced communications products, whether they be 3G base-band or others mentioned, and 2G, as to how fast you see your mix changing, based on your visibility looking forward.

I think you referred to Q4 visibility, for example.

Yes, so bulk of the position that we have in the RS products as well as the digital base-band is naturally on the 3G.

On the mix signal we have -- maybe have products both on 3G and 2G and we see demand in both 3G and 2G strong for the end of the year.

Right.

Okay.

Thank you.

Thank you.

Vicki, we have time for two more questions.

We'll take the first of those, please.

Next question is from Mr.

Janardan Menon, Dresdner.

Please go ahead, sir.

Yes, just a follow up on your Q3 guidance.

In Q2, you've said that computer was down 4% quarter on quarter and I was just wondering was that from the printer side or was that from the hard disk drive side?

And how do you see that panning out into Q3?

Well, I think we expect in Q3 a significant growth in the Computer Peripherals business.

It was the correction in the disk drives and [it is one shot] and the Q3 forecast is solid with significant growth.

Okay.

And just going to Crolles again, to do your specialty derivative technologies, are you suggesting that IBM will be part of that as well?

And if not, will you be looking for -- are you still in the market to look for any other partner for that, or are you going to do it with Freescale Semiconductor?

You know -- Yes, I am not only suggesting that they are part of this [benefactor].

IBM is going to put about 20 people there in Crolles to work on the derivatives.

So they will be part of it and they will have [XL2] technology, which is [of course] developed there.

This doesn't exclude that other partner could come also.

As far as Freescale, more specifically, is concerned, they have not yet told us very clearly what they intend to do.

And of course they will probably tell us by the end of the year.

Okay.

Thank you very much.

Okay, Vicki.

Last question, please.

Last question from Mr.

Matthias Grossmann, WestLB.

Please go ahead, sir.

Yes, good afternoon.

I have to come back to this foundry utilization issue.

Where would the rate stand at if you do not take FMG into consideration?

Hello?

Yes, yes.

Probably, it will be around 10%.

10% excluding FMG.

FMG, yes.

Excluding FMG.

What would the target be by the end of 2008 excluding FMG?

By the end of 2008, frankly, we don't have any target but, for sure, by the end of 2009 we want to be above 20%, so it's going to be in between in 2008.

And a short clarification.

Earlier, with regard to this IBM collaboration you have a target of, I think, 15.5% to 17.5% in R&D spending.

So do you think you will decrease this ratio going forward with -- if you start with this IBM collaboration?

Will this ratio go down, or --?

I am not sure I understand your question.

In fact, what -- the number we have disclosed is that about one third of our R&D expenditure are on technology --

Okay.

-- and two thirds are on product development.

What we are going to have in the near future is that this one third/two thirds is going to change slightly.

We are going to spend less in technology development and more in product development.

So it's actually just a reclassification but you will --

[We will] maintain the flexibility, of course, but the [motivation] is to run more on products [than] systems.

But we have the flexibility because we'll spend less in technology R&D.

But going forward, this ratio will stay constant between 15.5% and 17.5%.

Yes.

No.

As a total R&D spending --

(Inaudible).

No, this is a reasonable assumption.

It's similar to the current running of the Company.

Yes, absolutely.

Okay, thank you.

At this point, this will conclude the formal portion and the Q&A portion of our conference call today.

We thank you very much for your participation, your questions.

And if you have any follow ups, please contact myself or other members of the Investor Relations team.

And with that, we wish you good day.

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

Thank you very much for joining.

Goodbye.