意法半導體 (STM) 2008 Q2 法說會逐字稿

Hello, this is the Chorus call conference operator.

Welcome to the STMicroelectronics second quarter 2008 conference call.

As a reminder, 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).

The conference is being recorded.

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

Mr.

March, please go ahead.

Thank you Vicky and thanks all of you on the phone for joining us at STMicroelectronics second quarter 2008 conference call.

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

And joining him on the call are Alain Dutheil, ST's Chief Operating Officer, Carlo Ferro our Chief Financial Officer.

We have Tommi Uhari joining us, our General Manager of the MMC Group, Philippe Lambinet the General Manager of our Home Entertainment and Display organization, and Carmelo Papa who's the General Manager of the Industrial and Multisegment Sector.

Before we begin I'd like to make a few housekeeping points, following Carlo's introductory comments we will have time for Q&A, and please limit yourself to one question and a brief follow-up in the interests of all participants.

That way we can get through as many of your questions as possible.

Also, this call will include forward looking statements that involve risk factors that could cause ST's results to differ materially from management's expectations and plans.

And we encourage you to review the safe harbor statement contained in the press release that was issued with the results last night, and also in ST's most recent regulatory filings for a full description of these risk factors.

With that, the preliminary bit of housekeeping completed, I'd now like to turn the call over to Carlo Bozotti, ST's President and CEO, Carlo?

Well, thank you Stan, and we like to welcome all of you to the conference call.

ST continued to make important progress in the second quarter across a number of fronts.

Looking at the quarter let me review some key highlights.

First, it was a solid quarter from an execution perspective, with the revenue, operating and earnings exceeding or tracking to plan and showing good improvement sequentially.

And, on a constant currency basis, we likewise had very significant improvement in our financial gearing year over year.

We had continuous positive momentum on our strategic initiatives and our financial results demonstrate this progress.

Our sales increased nearly 15% in comparison to the year ago quarter, exceeding the estimated growth rate of the semiconductor market.

On a sequential basis our net revenue growth of 9.7%, significantly exceeded that of the market.

And for the first half of 2008, we also outperformed the market as well with ST's net revenue growth of 13.2%.

ASG posted a strong sequential revenue growth and an improved operating margin.

And IMS delivered double digit sales and operating profit growth, both sequentially and year over year.

ST's operating margin shows improvement from the first quarter, taking advantage of our higher sales level, but also demonstrating leverage from careful control of our ongoing cost.

On sequential basis, the operating margin increased to 6.7% from 4.6%, certainly moving in the right direction, although not at the targeted level.

We accelerated our restructuring effect by entering into advance negotiations to sell our Phoenix fab with the potential for a significant operational financial input upon completion.

We increased the cash dividend to shareholders, again quarterly payment of the dividend, and started a share buyback program, spending $83 million on share repurchases during the quarter.

From a credit rating perspective both Standard and Poor's and Fitch reaffirm our credit rating at A minus, after evaluating our $1.55 million ST and NXP Wireless investment.

In light of their recent review regarding the strategic merit and the associate financial terms of the deal, we are very pleased with this outcome.

So all-in-all, ST made important progress across a number of metrics.

Unfortunately, the significant strength of the euro continues to mask our gross and operating margin improvement.

Because of this, I believe it is important to also examine our performance from a constant currency perspective.

In particular, one area where we have a constant currency basis, we estimate that our gross margin would have been 39.9%, 310 basis points higher than it was, and would have represented a 200 basis point improvement over Q2 2007, excluding FMG.

Secondly, at the operating level, operating income before charges would have been $293 million and, based upon our second quarter net revenues of $2.39 billion, would have equaled an operating margin of 12.3%.

This analysis helps gauge the true value of the significant changes we have brought to ST; improving our manufacturing, strengthening our product portfolio, expanding our marketing effort and focusing on execution.

Now, let's look at the quarter in more detail.

Net revenues increased 14.6% year over year to $2.39 billion.

We had been expecting growth of between 10% and 16%, so we were well above the mid point of our outlook.

Looking at the revenue growth by market segment, both Telecom and Industrial delivered almost 20% growth compared to the 2007 second quarter.

A growth rate I suspect very few of our competitors will match.

We also saw good growth in both computer and consumer, up 12% and 11% respectively.

And automotive was up 7%.

By product segment, ASG's net revenues increased 15.9% year over year, on strong wireless result with our 3G Digital Baseband unit growth in connectivity and imaging leading the way.

ASG grew 8.4% quarter on quarter on wireless strength, as well as consumer market segment that grew double digit on strong sales of portable navigation devices.

IMS net revenues increased almost 13% year over year and 11.9% sequentially, led by MEMS, Advanced Analog and Smartcards/Microcontrollers.

As I had indicated previously, we expect a stiff ramp up of our MEMS products in 2008.

And based upon our progress in the first half of this year, I can confirm that is certainly the case.

Looking more closely at IMS, our focus on Advanced Analog is clearly paying off.

I think we had an impressive result, given the size of the business with IC sales growing 20% year over year, reaching $531 million.

Discreet products of IMS increased 4%.

Our product initiatives and R&D focus are clearly visible in our sales performance.

Revenue results also reflect the very strong progress we are making in sales and marketing on our new key strategic customer accounts.

These accounts were important drivers of our 14.6% year over year growth.

More specifically, sales from new key customers -- well, there are 16, in fact, that we have identified two years ago, increased over 70% year over year.

Sequentially new key accounts sales grew 36%.

These strategic accounts are also important as they represent repeatable revenues, with new design wins continuing to grow and helping offset potential weakness in other portions of the market.

In addition, we saw further improvement in all the key sales initiatives, including our regional initiatives in Japan and in China, and in targeting the mass market.

Turning to gross profit, it was up 12% year over year.

Our gross margin at 36.8% came in closer than mid point of our targeted range of 37% plus or minus one percentage point.

As mentioned, negative currency impact weighted heavily on the gross margin, absorbing 310 basis points on a constant currency basis year over year.

On the cost side, we are continuing to be conservative with respect to our expenditures.

SG&A increased 3% year over year excluding currency impact, or about $0.03 for every dollar of incremental sales.

R&D net of currency increased 8.6% year over year; looking more closely at this amount, a full 6 points of the 8.6 points increase comes from acquisition for Genesis and the wireless IC design team addition.

So, net of currency and acquisitions, related incremental costs, operating expenses grew less than 3% year over year.

Before leaving the topic of these two acquisitions, I can confirm for you that we are tracking to plan on our integration and design activity effort related to the wireless design team we acquired from Nokia at the end of 2007.

The 45 nanometer SoC they are involved in developing are coming along nicely, as is the multimedia integration.

We are also on track with our integration of Genesis.

Synergies are developing as planned, and we expect Genesis to be accretive to the ST's results in 2009.

In total, combined SG&A and R&D represented 31.4% of net revenues, improving from 33.3% in the first quarter.

We continue to push to our target level of 28% by the fourth quarter, which is achievable despite the current high level of the euro to US dollar exchange rate, assuming no disruption in demand.

Let me remind you of some key initiatives to improve our operating expense evolution from Q1 to Q4 of this year.

On a quarterly basis, we are targeting Genesis savings of about $10 million and SG&A estimated savings of $10 million, and the [first] FMG realignment of about $10 million.

And I can confirm that all of these efforts are tracking to plan.

Net operating cash flow was $128 million in the quarter, primarily reflecting the higher expenditures related to Crolles2 weighted towards the first half of 2008.

For the first half, net operating cash flow was $347 million, excluding the $170 million used for the purchase of Genesis Microchip.

Operating cash flow overall continues to be a key priority for us.

Our CapEx to sales ratio for the year will be well aligned with our target of being at or below 10%, a further improvement from our CapEx ratio of 11.4% in 2007.

Again, significant progress towards our asset lighter strategy, which we have been pushing on a steady and consistent basis.

We are intensely focused on our inventory level.

Importantly, we saw improvements in our inventory terms during the second quarter, improving to 3.8 times from 3.5 times in the first quarter.

During the third quarter, the absolute inventory level will rise slightly, reflecting seasonal factors, as we prepare for the fourth quarter.

But from a terms perspective, we expect to see some further sequential improvement.

Our return on net asset, or RONA, was 8.6% in the second quarter, with asset terms reaching 1.3.

On a constant currency basis year over year RONA would have been 16%, well within our targeted range of 12% to 20%.

Looking ahead to the 2008 third quarter, we expect to have three reporting segments during the quarter, ASG, IMS and ST-NXP Wireless.

Additionally, we will also be reporting Numonyx financial results on a deconsolidated basis.

First, as you may recall, we will be reporting Numonyx results on our equity line item with a one quarter lag commencing in the third quarter.

The first reporting period will have some initial period costs that will impact the results, primarily from purchase accounting dynamics.

Secondly, turning to our joint venture with NXP, we have received all the required anti-trust clearances and the joint venture is on track for closing during the third quarter.

The management team is in place, led by Alan Dutheil as CEO of ST-NXP Wireless.

The teams are now working together on product alignment and customer service matters, and we are tracking to our plan for integration and synergies.

In short, we are executing on our initial plan in line with the information we have shared with you in the recent past.

At closing, we will contribute most of our mobile, multimedia and communication group to ST-NXP Wireless and make a $1.55 million payment, fully funded from existing cash to NXP in exchange for 80% of the common equity.

And NXP will contribute its wireless business in exchange for 20% of the common equity.

Our goal is to improve the return in our wireless business, while being in a much better position to serve the needs of our customer.

From a financial perspective, we plan to move quickly to make this opportunity accretive to ST.

With respect to 2008, we continue to expect that it will substantially contribute to sales, have some positive impact on average gross margins and have a minimal impact on our non-GAAP cash earnings per share.

And it is expected to be accretive in 2009 and beyond.

Turning to our outlook for the third quarter, we expect to see very good year over year revenue growth comparison.

Our revenue and backlog give us confidence in our prospects.

At the same time, we think it is appropriate to be vigilant and careful, considering the overall macroeconomic environment.

Accordingly, to take into account the somewhat increased uncertainty in the marketplace, we have expanded our revenue outlook range to 7 percentage points.

Our visibility is quite similar in both ASG and IMS, with sequential growth expected to be driven by Industrial, Wireless and Consumer segments.

Looking specifically at our guidance range, we expect sales growth to range between minus 1% and plus 6% sequentially compared to our second quarter net revenues of $2.39 billion.

This represents year over year growth of between 7% and 14%.

For the gross margin, we are expecting to be equal to the second quarter 2008 level of 36.8% plus or minus one percentage point.

Our outlook is based on an assumed average effective exchange rate of dollar -- EUR1.57 to dollar compared to EUR1.55 -- to EUR1 actual rate for the 2008 second quarter, and representing a 15% decrease in the value of the US dollar compared to the 2007 third quarter when it was $1.36 to EUR1.

In summary, ST had a solid second quarter performance with revenues up strongly, market share growing and strategic initiatives moving forward and tracking to plan.

Now let me stop here to take your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

First question from Mr.

John Dryden, Charter Equity Research, please go ahead sir.

Hi, thanks for taking my questions.

Carlo, could you just comment by region on both your sales performance and your outlook of up 2% to 3% versus your long term goals of growth in both China and Japan?

Yes, I think that Carlo Ferro will detail.

I think that the growth in Japan was impressive; very, very, very strong growth.

And in China was also good but we had a mix of customers that has decided to move their procurement activity from China to what is now for us Asia Pacific.

I think Singapore.

And that was a transfer of business for us but Carlo will provide the numbers.

Yes, indeed, in Japan year over year sales increased by 33%, which is impressive, as Carlo said.

For China if we look at sales by destination, the year over year growth is slightly below 10%, where this includes some significant repositioning of a couple of transactions or customers.

And the net of this impact also in China we have experienced a solid double digit revenues growth.

A question for Carmelo Papa if I may?

Broad strengths in your business, can you talk about the growth amongst analogue, MEMS and controllers versus the up 12% sequentially?

And do you source or manufacture MEMS internally?

Of course, the MEMS had a much higher growth, starting a couple of years ago from basically the small numbers.

But still they will report a strong growth this year and next year, I would say.

And as Carlo said at the very beginning, the analogue reported 20% growth between year over year.

So, these two things -- these two micro areas, MEMS and overall high end analogue, which we are pursuing as strategic objectives for IMS, are performing -- starting delivering results and more and more will be more or less like this with the new product --the wave of new products that we are introducing on the market.

If I may to add up, Carmelo?

Yes.

This is Alain Dutheil speaking.

Your question about manufacturing, we are manufacturing 100% of the MEMs in our factories

Yes, (multiple speakers), yes.

Thanks for taking --

Yes.

And this is the first time -- this is the comment that I would like to make, that we report the split or ICs and discreet sales in the IMS.

And I think it's a good piece of information.

And, of course, the strongest focus is on the IC.

That is very much a [brand] analogue, MEMS, and also 32 bit microcontrollers.

And we reported $531 million of revenues on this IC portion; with 20% growth 2008 over 2007, which is a very significant growth on this very important area for us.

Thanks for taking my questions.

Thanks John.

Next question please Vicky.

Next question from Mr.

Nicolas Gaudois, UBS, please go ahead sir.

Yes, hi there.

The first question is on margins looking into Q3.

If I take the mid point of your revenue guidance it's plus 2% and currency is going to cost you about 20 basis points sequentially.

But still it's difficult to rationalize why your midpoint of gross margin guidance is flat Q3 versus Q2, which suggests that incremental gross margins are basically in existence.

So, are you seeing a worsening mix?

And if so, is this for a longer period of time?

Or -- and/or are you seeing pricing pressure effectively coming back stronger?

Thank you.

Maybe I take the question, Carlo.

It's Carlo Ferro answering your question, Nicolas.

Yes, on how you say, the exchange rate impact I believe your estimation makes sense.

Eventually it will be a few tenths basis point negative impact.

More negative impact than the 20 that you have mentioned.

I think more than 30, 40 basis points.

But frankly, here we are talking about detail.

On the south plants we have two very significant positive contributors from the second quarter to third quarter gross margin.

One is the product mix and the other one are the manufacturing performance in the second quarter.

They are offset, not only by the currency factor for a portion, but also from price pressure continuing in the industry.

And as an additional factor, the further saturation in the third quarter is, how you say, seasonally less than optimal and we are experiencing some slight decline in loading that affect us [rather] much.

Okay, and maybe if you could comment a little bit as well on the NXP deal.

We had results yesterday from, I think, mobile and personal, for NXP, were -- operating margins excluding acquisition related costs were 9% negative.

And more significantly, the guidance was also, I think, in turn quite cautious, in particular for makes of [hand] solutions sold to Samsung.

His very points were you have any option at this stage to revise the valuation of the deal?

And if not, how should we think about margins for (inaudible) going forward?

Maybe I will -- Nicolas I will take the last part of your question and eventually Alain helps me on the more specific -- on the situation of the business and their performance.

Of course, we cannot here comment about the results of the business that shortly will be an ST business, but today it's not.

So, it's for next earnings quarterly call.

In respect to the specific provision consideration and the key terms of Phase 1 of the deal assets, as they have been anticipated in April when announcing the deal, on top of that you know that ST and NXP have entered into an agreement under [accountancies] and timing for ST to take over the 20% ownership in -- residual ownership in the joint venture.

And this -- the pricing for this portion is tightly linked to the operating results of the business.

Okay, okay, that's great.

Just one initial comment Nicolas, in fact, visibility we have today is at least on the perimeter, which is a perimeter which is going to be part of ST-NXP Wireless.

Is that the second half should we see an increase and in line with the business plan that we had and, of course, there will be also the synergies.

As you may remember, we told you before that there will be at the day one already some synergies which will be, of course, included in Q3 and Q4 results.

Okay thanks very much Carlo and Alain.

Thank you Nicolas.

Vicky next question please.

Then next question is from Mr.

Sandeep Deshpande, JP Morgan.

Please go ahead, sir.

Yes hi, thanks for taking my questions.

Firstly regarding your inventory, you've had a slight increase in inventory in absolute terms in the second quarter and you're saying that there's going to be further increase in the third quarter.

Given the industry environment at this point, why are you raising inventory, despite the issue of potential seasonal up take in the fourth quarter?

And I also have -- I want to talk a little bit about -- you did say something about the utilization led to a response on early question.

How much is the utilization rate in the third quarter?

And how much of a decline are you going to see in the utilization?

On inventories -- it is Carlo Ferro who is answering your questions, Sandeep.

On inventory I appreciate your characterization about a slight increase of inventory sequentially.

In the end these resulted into accelerating the inventory returns from 3.5 to 3.8 turns, which is something that is not in line with our target, or where there is a significant increase.

So, in this respect those considerations about planning alignment to the revenues dynamic and the mid point of the revenues guidance expectations, and also some ingredient of cushion in building inventory under current macroeconomic [inaudible] apart, also of this performance that I would measure more in terms than in absolute dollar value.

So, about the utilization rate of our manufacturing machine, in Q2 overall it was 85%; and about the same on the 6 inch fab and on the advanced fab both about 85%.

While in Q3 our focus is to decrease between 83% and 84% as an average, and both will be about the same 83% to 84%, both 6 inch and 8 inch.

So, a slight decrease there, as Carlo mentioned.

Thank you.

Sandeep.

Yes hi, I have another follow up on your sales.

You had a strong sales performance in the quarter.

Going forward are these design wins?

Is there going to be a tailing off of these very strong design wins, particularly at -- in the P&D market as well as in the 3G Baseband market?

Or should we be seeing just seasonal impact in your future guidance?

Thank you.

You mentioned wireless, right?

Yes.

Yes, Tommi can you comment please?

Yes I'll make the comment on the 3G Baseband and Sandeep was also asking about the P&D, so Carlo, if you want to complement me on that?

But overall on the 3G Baseband that -- we see that, let's say, between, let's say, first half and second half of the year we are still in the ramp up there.

And, let's say, we'll have to see after that that, let's say, for next year it will be more of a question of customer direction on the products.

But I think that our share progress continues to be positive for the second half.

Yes, as far as our navigation system products, I think we are very pleased about the evolution.

And I think this is a wave of new products, of new applications.

It is, of course, there is a major customer here, but there are more coming.

And we expect to see, let's say, a continuation of this business.

I think this is a good addition.

Sales, as you know, on our nomadic processor but with a lot of [features] that are coming from our navigation system knowledge and product development.

So we see a continuation and also we see the opportunity to expand the customer base.

On the other hand, in general, the Automotive, we see some decline [softening] on the market in the western world, while a stronger position in both Japan and China.

Thank you, Carlo.

Thank you Sandeep.

Next question please Vicky.

The next question is from Glen Yeung, please go ahead.

Thank you, I think the point was made on -- some maybe uncertainty about where the share gains will be for next year in handsets.

And I take that on the context of looking at your year over year growth -- revenue growth in your guidance for third quarter, which actually shows some deceleration from Q2.

So, my question is what's your sense as to what your year over year revenue growth pattern's going to look like beyond the third quarter?

Do you get the sense that you start to decelerate from the high levels you set in Q2?

Well we expect that -- well first of all you see what we have done in the first half.

In the first half we grew to 13.2%, which I believe is significantly above the market growth.

The -- as far as the third quarter is concerned we are projecting through our guidance still a 10%, which I believe is not too bad in this market environment.

And overall, at this point, having achieved 13.2% in the first half and then 10% total in Q3 we clearly target double digit growth for the year.

Okay, great, no don't get me wrong.

That's spectacular growth in this market.

You refer to the market or -?

In the context of this market that's very good growth.

Yes, of course.

I think we see, let's say, weaknesses also in the market.

It's obvious.

I think I already mentioned the Automotive.

I would like to mention also that in general, both in Europe and in Asia there is a decrease of the booking trend in Distribution.

This is also clear and some spots of weaknesses also at certain customers in the wireless domain.

On the other hand, I think this year is very good for us with the introduction of all of these new products.

It was a major effort in ST during the last few years to focus more and accelerate the development, but also the customer base.

These 16 new customers, I think, is really paying off.

The growth is 70%, which is a very, very remarkable on these 16 new customers that we have identified and targeted.

Absolutely.

Just as a follow up, you've had some -- your customers have had some time to digest the ST-NXP joint venture that's upcoming.

I wonder if you can just give us an update as to what the customer reaction has been and where you think new opportunities can come as a result of the joint venture?

Well, it's either me or Alain, but I think it's good the reaction of the customers, but Alain will comment.

No, I think the reaction was very positive.

Of course, we are going to cover three major customers and I think all of them are very pleased with this move.

I am sure you have seen the quota of Nokia, which was, of course, very positive.

And if you look at the other customers they are really appreciating that we are creating one of the world leaders in this field of application; so, a very positive reaction overall.

Yes, from a strategic point of view, I just want to make the point.

It would be very simple for ST to say that we are just a power application company.

We want to be a company focusing on two main blocks and in both blocks we want to have a strong leadership position.

The first one is power application and power application is many things.

Of course it's a lot of industrial applications, factory automations, motor control, but also auto power applications in the automobile, particularly in the body of the car.

So, this is a big block of ST that is several billions of dollars.

We're already number one in Industrial, number one in Power Conversion.

So, this is very solid and strong.

But on the other hand, we also want to, as we said, during the last few years now, we want to be a strong leader also in the area of wireless and digital consumer.

We are converging, by the way, and this is why we define as converging, Multimedia.

And here we need scale, because the intensity of R&D is important, particularly in the area of platform development.

So, this is the second area of strong leadership that we are targeting.

Okay, thanks.

Okay, Vicky, next question please.

Next question from Mr.

Simon Schafer of Goldman Sachs.

Please go ahead sir.

Yes, thank you very much.

If I may I did want to ask a follow up question on NXP.

I'm not sure I understood the previous answer correctly.

But did you say that there is scope for you to alter the terms, given that the previous arrangement was based on performance?

No Simon, what I said answering Nicola's question is that the deal is comprised of two blocks.

First, a step of the transaction whereby ST will own 80% of the joint venture and the economic terms of these first steps are [peaks] define and there are those that have been anticipated when announcing the deal in April.

Then there is a second step, which is the mutual put and call options, offering a (inaudible) options under a certain timeframes of the accountancy to take over the residual 20% and NXP the option to sell to ST, the residual 20% after a given period of time.

And this is the specific portion of price in the deal, which is, how say, strictly subject to the function of operating performances, and especially the EBITDA of the combined business.

I see, thank you.

My second question would be what percentage is the Advanced Analogue business now as of Q2?

The percentage of advanced analogue, well I think we have decided now to give one more information compared to the task.

I think it's good that we, from now on, continue to provide this and it is the split in IMS between discreet and ICs.

The ICs there's really three main blocks.

I think that there is a portion that is on Advanced Analogue, there is a portion that's on --

Micros --

Microcontrollers and there is other portion that is (inaudible - highly accented language) overall is smaller.

So, I believe that on this portion, we have done 531 million in the second quarter and with a growth year over year of 20%.

And we will continue to report now this figure, because it is more than $2 billion business for us; is -- most of this is very specific and application oriented products, like Advanced Analogue, industrial ICs and MEMs and advanced microcontrollers.

And I think it's remarkable to grow 20% and we move on from here.

Carlo thanks, just a final question on the outlook statement.

When I look at the range of the guidance, what is the element that allows you to come in at the low end, thus the high end?

In other words, I'm just trying to gauge as to what the biggest area of uncertainty is.

Is it the Automotive order book, which is slowing down a little bit?

Or is it uncertainty on the wireless side or is it in fact on the Printing and Hard Disk Drive business, where there's the most amount of inventory balancing going on?

But what is the most meaningful swing factor as to where you're come in do you think?

I would say that, of course, I mentioned that you held distribution bookings.

So, this is one of the things where the term business is more important.

I think at the same time, term business is also in general in consumer.

This is another area where we need to move on with the bookings.

And I think that Automotive -- the second quarter for us in the Automotive is not described in the press release, because it's part of ASG.

But the performance of ASG was good.

It was very good in Q2 and also considering the seasonal part in Europe, we expect a decline in Automotive in the third quarter.

As far as wireless is concerned, all the (inaudible) orders and the forecast is there, so we expect to do what is in the book.

But overall, I think it's the industry dynamic across all applications, very much driven and based on the general macroeconomic environment now.

So, in terms of products, of course, we have term business from distribution and consumer.

We know fairly accurately what is going to be Automotive, because it's very long term and we are relatively comfortable on the wireless, based on the forecast and the (inaudible) orders from our customers at this time.

But the concern is also the overall macroeconomic environment.

Thanks very much.

Thank you.

Next question please Vicky.

Next question from (inaudible - highly accented language).

Please go ahead sir.

Thanks guys, maybe a follow up there as you were talking about distribution obviously MTI earlier in the week --

Please, [Cody], can you -- [Cody] just a little weak on the volume.

Could you get a little closer or pick up for us?

Yes I'll try to move Dallas closer.

There you go.

The comments on the Distribution order trends, the inventory levels following the problems that we just had out of Texas Instruments earlier in the week.

Obviously turns are going to be an issue with consumer orders, but can you talk about where ST stands as far as order trends, today the inventory levels of the distribution channels and maybe how that's impacting your guidance to fab loadings coming in just a couple of percentage points.

Yes.

Well, I think that there are some differences region by region.

We are in a good pattern in the US.

I have to say, as far as distribution and mass market is concerned.

Overall, there is a good trend; is moving on.

There are a lot of new products, new customers, so this is giving us good comfort.

(Inaudible) I think it is very much related to the season and the slowdown I think is a seasonal slowdown.

And in Asia, there is some slowdown, particularly in China and this is what we see.

Despite this, I think that we expect significant growth in -- sequential growth in what we define as MMS.

That is part of our IMS activities within the third quarter.

MMS stands for microcontrollers and the mature memory base (inaudible) and this [mark up].

So, we see some good growth there during the third quarter and some more limited growth in the area of (inaudible), particularly on the more standard products.

But I would say that geographically we see a better trend, for us at least, in the United States, and a seasonal, let's say, environment in Europe and some slowing down of the bookings trend in Asia.

And, of course, this is an area of business where turn business is more important.

And this is why we are being a little bit more cautious in the guidance, moving from five or six points to the seven percentage points of the same guidance.

Great and then maybe just a quick follow up.

Can you speak specifically of inventory levels within the Distribution channel and direction that you're seeing, covered with those [ST] levels?

Yes, we have reviewed about two weeks ago now during our corporate staff meeting, and we do not notice any real problem there.

Of course, the point of sale is very important and this is very much related to the overall macroeconomic environment, etc.

But at this point, we are not -- we do not believe we are in a (inaudible) situation in terms of inventory power distributors.

Great, thanks and congrats guys.

Okay, thanks [Cody].

Next question please Vicky.

Next question Mr.

Didier Scemama, ABN Amro.

Please go ahead sir.

Good afternoon gentlemen and thanks for taking my question.

Just two or one clarification, two clarification maybe, starting with perhaps EMP, if you look at Sony Ericsson history or seasonality for inventories, normally they clear inventories in Q4, which I suspect means that suppliers basically get lower revenues Q4 versus Q3.

So, I was just wondering if your -- you intend to grow your 3G Baseband in Q4.

That was my first question.

And second question is related to Carlo Bozotti's comment this morning on Bloomberg; that you plan to diverse or separate three product families.

I was wondering if you could maybe comment -- maybe clarify which products we're talking about and what separation you're looking at?

Many thanks.

Well, Didier, this is Tommi on the EMP case.

So basically it's not really a Sony Ericsson comment, but looking at overall the 3G digital Baseband.

And today I'm comfortable to say that the second half sales will be higher than the first half.

I do not want to comment on a particular customer's inventories for the quarter.

Yes, well I think that what we expect in revenues from this business is that Q3 is growing and then we see another step in Q4.

And the rest, of course, is up to our customers to manage.

In terms of a separation, yes, indeed we are working on two fronts.

We are working on the restructuring of our manufacturing infrastructure.

We want to move from the 25 manufacturing centers that we had in 2005 to 12 or 13 manufacturing centers.

And with the separation of the Flash and the other initiatives, of course, we are making good progress.

The second action is very much on the product portfolio and there are a number of families that are under scrutiny.

Of course, the size of this business is not at the same level as the Flash Memory business.

That it's immaterial.

We are talking about hundreds of millions of dollars and the way to do is, I would say, three alternatives -- a combination of the various approaches.

The first one is, of course, to sell.

The second one is to venture, but in a -- let's say, guaranteeing financial deconsolidation.

And the third one is to simply close and discontinue the activity.

And what I cannot describe, of course, is just the names of these product divisions.

But I think this is an important program in ST and we want to move on, not only with the restructuring of the manufacturing facility, but also we want to move on with the optimization of the product portfolio of the Company.

Okay, if I may have just a quick follow up for Tommi, can you confirm that you're going to ramp Nomadik on the N96 in the third quarter?

And second, did I pick up a bit of hesitation on your market share at EMP in '09 or am I off the ball?

Well, first on the EMP share in '09 you are totally off the ball.

So, I'm extremely confident on our share.

Then on Nomadik, we are basically continuing the ramp in the product and let's let the customer confirm the final schedule on that.

Okay, thanks.

Okay, Vicky, next question please.

Next question Mr.

Jonathan Crossfield, Merrill Lynch, please go ahead.

Yes, good afternoon.

The first question would be how is your backlog shaping for Q4?

I think in April you said that the Q3 backlog has started to build quite nicely.

Have you seen visibility come in, or are you seeing backlog for Q4 building now?

Well, it's possible.

I have to say that the backlog for today is posting a potential growth, is -- so, is on the right track.

So, our concern is more the overall macroeconomic environment and those things that we have already mentioned.

But at this point the visibility that we have on the backlog for Q4 is showing some improvement, and I would say that is material, material improvement, sequentially and compared to last year.

Okay.

Just as a follow up, given the efforts you're making to expand your customer base and the push of chip inventory upstream to semiconductor manufacturers, do you still think your target inventory terms of 4.5 to 5 times is achievable in the next 18 months or so?

Well, I think so.

We also want to increase.

Of course, I agree with you.

The model of the pull out, the pull in whatever is not helping, even if it is very safe and very well studied from the point of view of the risk of [solid terms] and these other things.

On the other hand, I think we want to significantly grow our subcontracting activity and this will help the inventory position.

The good example is today after the memory separation I think overall we significantly decrease our -- the weight of subcontracting after the Flash Memory.

And now we want to move up to this level during the next quarters.

We are also penalized in these days by the heavy restructuring activity, because with all of this movement.

And I -- you know that there are three perhaps that we wanted to -- three plants that we wanted to close or sell.

But there other three plants that are under restructuring, reconfiguration or downsizing, and it is very heavy in terms of a products move.

And, therefore, there is an aggravation on our inventory position due to the restructuring.

So, I think we want to go at that level and I believe that despite the customer business model when completing the restructuring and with completing the restructuring, and also with more outsourcing, we will be able to get there.

Okay and then just a final quick one for Carol Ferro.

On the Phoenix fab disposal what's the timing on that happening and how does it affect your plans to save $150 million of cost?

Is that going to pull in the cost savings at all?

Yes, Jonathan thanks for the question.

This helps us to expand with some more color on this initiative, which I believe is a good ingredient to accelerate our restructuring plan.

Indeed, we are in advanced negotiation in respect to the sale of the fab.

So, we may anticipate some good news through the current quarter to be announced.

And frankly, we don't see a significant (inaudible) between signing and closing.

So, we will target to close this deal during the fourth quarter of this current year.

This does not at all change the overall sourcing structure for ST once the plan is completed.

So, the $150 million target savings of our manufacturing plan that we have anticipated when launching the plan last year remain our target.

And the best visibility currently is, at the end of the day, once the plan of phasing out from Phoenix is completed this -- the wafer too could be sourced from the Asian foundry, or from other mature 8 inch fab obviously delivering these effective savings.

Here where we see some substantial merit on top of some significant operational merit or so in the business relationship with customers that are less opposed to the migration of the processes is on the nature of the restructuring charges.

In certain respect we acknowledge $114 million of impairment charge this quarter is an amount significant.

However, this is mostly in anticipation of the restructuring charges that have been anticipated when launching the plan that were expected to occur through the severance of the retention bonds.

The transfer of the decommissioning of the tools to occur in the next quarters is then now almost, as Phoenix is concerned, they have occurred in this current quarter.

And also in this respect, I will say that the anticipated range of overall restructuring plan for the fab restructuring in the range of $270 million to $300 million is currently confirmed.

We go to maybe closer to the top end of this number.

What is positive is that we have anticipated on this plan last year $250 million of cash restructuring charges out of the range $270 million to $300 million.

And this will be much lower since, frankly, the real synthetic of this transaction is that we exchange some non-cash impairment charges against cash restructuring charges when continuing the operation on the fab, and about 1,000 employees of the fab who are not required any longer additional extra (inaudible) or retention bonds for the period.

So, yes, the financial benefit is really shifting from cash into non-cash; a portion of the already budgeted impairment restructuring for the plant.

Thank you very much.

Thank you, Jonathan.

Vicky, next question please.

The next question Mr.

Francois Meunier, Cazenove.

Please go ahead sir.

Hello, thank you for taking my question.

Just to start with, before the EBIT line there is a $30 million of other income.

That's nearly 20% of the total EBIT for this quarter.

Could you please help us where it's coming from?

It is R&D grants only?

Yes, this is as usual a miscellanea of various item out of which you have correctly captured, Francois.

The R&D grant is one of -- is by far the most important ingredient.

And on top of that we have also some positive from certain effect of a financial transaction.

For instance, under the current interest environment we take some benefit on -- from the drop of a portion of our converter from fixed to floating rate that we have done a couple of years ago.

Frankly, normally the grant part -- the part of that grant materialize on our income statement is higher in fourth quarter and much lower in the first half.

Now, we incurred some good supplies on the first -- in the second quarter, but we still expect for the total year an amount of funding of under the current contract and under the current structure of our programs similar to the one anticipated.

As you know, the methodology -- the accounting methodology is such that we conservatively recognize the income once all the programs are signed under the final form.

So, certain programs already started result once the contract is signed in a positive impact on the front.

As you know, and as already publicly anticipated, is also under discussion a new contract, who's a new contract effective not signed yet.

So, the eventually possible substantial good news from this new contract is not yet in the number.

Okay, so we should expect some more in H2 with some upside as well?

Normally H2 is higher than H1 and I would expect similarly also this year, correct.

Okay, that's very helpful.

In terms of the integration of NXP in Q4, clearly that's quite clever to start in Q4, because probably that's the strongest quarter for NXP as well.

Could you confirm?

You say there will be a positive impact on gross margins from that?

And that it will be neutral at the EPS level of Q4?

Or was it a general comment for Q3 and Q4?

No, yes, I confirm.

I believe that once the deal will be closed and we will start to report on the ST consolidated income statement, the NXP wireless business the impact to the average gross margin of the Company will be slightly positive.

And as anticipated, when introducing the deal in April -- the transaction in April we expect for this year the EPS impact to be substantially material on the size of our numbers.

Okay, thank you Carlo.

Thank you.

Thank you.

I think we have time for one more question, Vicky, if you would please.

The last question from Mr.

Tristan Gerra, Robert W Baird.

Please go ahead sir.

Hi, I was wondering if you could give some light on your strategy in imaging.

Are you just going to outsource the camera module business or potentially [re-emphasize] the actual production of CMOS image sensors as this was not part of the NXP deal?

Well, I think that today the focus on imaging is very much on the true -- what's the name of it, true silicon [deal] technology.

So, there is a significant change in the business model and in the product strategy.

And I believe that while in terms of a technology (inaudible) there is always the need to move on and accelerate.

As usual, I think that in terms of packaging there is a significant change and we have an ST line that is devoted to the true silicon [VS] configuration.

So, this is one element.

The other element of the strategy here is the expansion of the customer base.

I think there we have good progresses.

It is not any longer one major customer.

So, we have more than one.

And also, I think we have some good news on our hardware acceleration, also with some addition in terms of customers.

Overall, the business is -- of course, is a challenging business and I think that we have the ingredient to succeed in terms of changing the structure of the way we do packaging, the customer base and also the expansion of the hardware acceleration business.

However, the business remain challenging.

If you would allow me, [there's] still a technical comment on this that basically the image sensor semiconductor stack is quite different from that of the other component in the mobile phone.

So, it does not really lend itself to physical integration together with the other pieces of silicone.

And that was really the main reason why we are, like -- that we used to draw the line in what do we put into that ST-NXP Wireless joint venture and what not?

Okay, and then a quick follow-up, what was outsourcing as a percent of revenues in the quarter?

Yes, I was expecting this one.

Yes, in fact, in Q2 it was 7.5% as expected.

But in Q3 we are planning to move to more than 9%.

And, as you know, we have always said that, let's say, the non-proprietary technology we are trying to outsource as much as we can, and this is exactly what my colleague from HED is doing.

So, he's increasing the -- his part of subcontracting in his business.

And, are you still on track for the 20% target end of '09?

Yes, absolutely, absolutely.

Great, thank you.

Thank you Tristan and thanks to everyone for participating in STMicroelectronics' second quarter 2008 results call.

If you have any questions please follow up with any member of the Investor Relations organization.

Thank you very much and have a nice day.

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

Thank you very much for joining.

Good bye.