意法半導體 (STM) 2009 Q3 法說會逐字稿

Good morning or good afternoon.

I am Dino, the Chorus Call operator for this conference.

Welcome to the STMicroelectronics third quarter 2009 earnings results conference call and live webcast.

Please note that for the duration of the presentation all participants will be in listen-only mode, and the conference is being recorded.

After the presentation there will be an opportunity to ask questions (Operator Instructions).

At this time I would like to turn the conference over to Mr.

Tait Sorensen, Director, Investor Relations.

Please go ahead, sir.

Thank you, Dino.

And thank you for joining our third quarter 2009 conference call.

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

Joining him on the call are Carlo Ferro, Chief Financial Officer, Philippe Lambinet, Executive Vice President of Home Entertainments and Display and, Carmelo Papa, Executive Vice President of the Industrial and Multi-segment sector.

This call is being broadcast live over the Web and can be accessed through ST's website.

A replay will be available shortly after the conclusion of this call.

The 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.

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.

As a reminder, please limit yourself to one question and a brief follow up.

And now I'd like to turn the call over to Carlo Bozotti, ST's President and CEO.

Carlo.

Well, thank you, Tait, and good afternoon and good morning.

And thank you for joining us on today's conference call.

As you have seen from our result, the third quarter was a period of progressive improvement in most areas for ST.

Revenue grew, gross margin expanded, cash flow improved and our net financial position strengthened.

As we move into the fourth quarter of 2009 we are beginning to reach some important targets of our transitional financial model.

At the same time we still have some areas where we would like to see a faster rate of progress, which I will cover in greater detail later in the call.

Now let's move to a review of the quarter.

First, from a revenue perspective we had a very solid performance coming in at the high end of our targeted range with 14% sequential growth.

As you recall, we came in above the high end of our internal plan last quarter, so we have had two very solid quarters where improvement in booking activity translated into higher sales.

The sequential revenue improvement was evident across all the market segments.

Computer and Automotive led with 21% and 18% growth respectively, followed by Telecom and Consumer.

Distribution was up 20% on the better alignment of our inventory in that channel to the increasing demand levels driven by improved market conditions.

Importantly, on a regional basis the strength we saw last quarter in Greater -- in Q2 in Greater China and in Asia Pacific has begun to expand to other regions of the world, in particular America and Europe.

Looking at the numbers, revenues in Asia Pacific and Greater China grew 20% and 15% respectively.

America grew 14% and Europe 9%.

Also Japan improved sequentially, but it somehow lagged behind other areas with its 4% revenue growth.

We are also excited about the opportunities with our new key customers.

Revenues from new key customers increased sequentially 29% in the third quarter.

Our new key customers, in addition to our traditional customer base, are leaders in their industries and represent an important growth driver for ST.

Overall, from a market share perspective, we are on track to gain share this year based upon year-to-date results.

Second, our sequential revenue growth in the third quarter was broad-based and driven by many product families.

In ACCI computer revenues were boosted by advanced solutions in computer systems and microfluidics, while Automotive was led by car multimedia devices.

Smart card, advanced analogue and power management drove the growth within IMS.

In wireless at the end of Q3 ST-Ericsson had shipped over 3m cumulative units of the TD-SCDMA devices.

Third, we have been aggressively managing inventory in order to bring it into alignment with market conditions.

Based upon our excellent progress during the third quarter, we registered inventory turns within our targeted range of 4.5 to five times.

Year to date we have reduced our inventory by $541m.

While having completed this phase of our inventory adjustment affecting Fab loading, we will continue to focus on accelerated inventory turns.

Weak industry conditions, as well as our inventory management efforts, have negatively impacted our gross margin.

As reported, gross margin was 31.3% in the third quarter compared to 37.7% in the year-ago quarter, excluding the inventory step-up related to the former NXP wireless business.

Underloading charges and volume inefficiencies represented a negative impact to gross margin of 6.5 percentage points, followed by mix and price.

These negative influences were partially offset by the strengthening of the dollar and the benefit of the formation of the Wireless JV with Ericsson.

However, on a sequential basis we were pleased to report a strong improvement compared to the 26.1% in the prior quarter.

This significant sequential improvement was in line with our expectations and reflected better Fab loading.

Fourth, cash flow is a key area of focus.

Our goal had been to return ST to positive quarterly cash flow in 2009, and now it is to deliver an overall positive net operating cash flow for 2009.

In the third quarter we expanded our cash flow from operations.

Specifically, during the third quarter net operating cash flow, excluding M&A, was $100m, up from $45m in Q2 and after a negative $139m in Q1 2009.

Importantly, I think this demonstrates the strength as well as the significant progress that we have made in the various strategies impacting cash flow.

As a result, during one of the worst global recessions and one of the most severe cycle downturns ever for the Semiconductor industry, ST is sustaining a positive net operating cash flow for the year.

Cash flow is one of the key financial targets of our transitional financial model and, excluding payments for restructuring, we are expecting net operating cash flow of at least 6% of sales in the fourth quarter.

Fifth, we have strengthened our capital position over the course of this year.

In the first quarter we turned a net debt position into a net cash position, thanks to M&A activities.

In the second quarter we returned to generating net cash even within an extremely tough economic environment.

In the third quarter we accelerated our cash generation to post, at the end of September, a net cash position of $266m.

This amount represents a net improvement of over $800m since year-end 2008, where we had a net debt position of $545m.

And we continue to expect further improvement in the fourth quarter.

As I mentioned earlier, we have some areas in which we still need to improve.

In particular, we need to accelerate the capturing of operating expense savings even more in light of the deteriorating currency environment.

Indeed, we have a sense of urgency related to this issue and we are committed to this effort.

At this point I would like to give you an update on our three major headcount-programs impacting operating expenses in our organization, including the ST-Ericsson JV.

The restructurings are unfortunate as they impact people, but this is something we must do.

The first set of initiatives involves approximately 750 people at ST, where we are about 70% complete, with the remainder expected at year end.

The second initiative is the Phase 1 of ST-Ericsson restructuring programs, and was related to ST-NXP Wireless.

This program involved approximately 500 people, plus the equivalent of over 850 people retained by NXP but temporarily charged to ST under transitional service agreements, and was substantially completed at the end of September.

The third program, approximately 1,100 people net, is Phase 2 of the ST-Ericsson program, which is currently in progress and is expected to be completed by mid-2010, but had a very limited benefit to the third quarter result.

Turning to our outlook, we believe the final three months of the year are shaping up to be a stronger than seasonal quarter for ST.

Based upon our backlog and visibility we expect IMS to grow faster than the Company average, boosted by strong growth of microcontrollers, Smartcards and across all families in advanced analogue, power and MEMS.

Within ACCI we are anticipating important growth to continue to come from Automotive and from Digital Consumer, where the economic recovery and new products will drive growth in contrast to normal seasonal Digital Consumer patterns.

We would expect wireless to show a normal seasonal pattern.

In combination, this leads to potential sequential revenue growth of about 5% to 12%, representing a revenue range of about $2.39b to $2.55b.

After a year of negative year-over-year results, we expect the Company to return back to positive year-over-year comparisons in the fourth quarter as the mid-point of our revenue guidance is about 9%.

We are seeing strong improvement in our gross margin, from 31.3% in Q3 to an expected gross margin of about 36.5%, plus or minus 1.5 percentage points for Q4.

While we still expect to have some unused capacity charges, although at a much lower level than in Q3, our fourth quarter gross margin outlook reflects somewhat normalized Fab utilizations, the benefit of an improved product mix from our wave of innovative new products and the capture of operational efficiencies.

These positive contributors should more than offset the headwinds from currency rates, which are at the record levels for the 2009 year.

We continue to use hedging programs to mitigate the impact and we are assuming an effective dollar to euro exchange rate -- or better euro to dollar exchange rate of $1.42 -- $1.43 compared to $1.38 in the 2009 third quarter.

We also see an improving operating expenses to sales ratio as we move into the fourth quarter.

SG&A and R&D costs will be slightly higher on a sequential basis, reflecting the impact of the stronger euro as well as an increased number of days in Q4 in comparison to the third quarter.

However, thanks to further progress in executing the outcome -- the ongoing restructuring initiatives we should be able to largely mitigate those impacts.

As a result, we expect higher sales to translate into substantially lower operating expenses to sales ratio in the fourth quarter compared to that of the prior quarter.

In summary, we believe the worst of the economic crisis is behind us, but for the first time the Semiconductor industry will register a decline in revenues two years in a row.

During this timeframe we have remained focused on our key priorities which have helped us to navigate the downturn and strengthen the Company in comparison to one year ago.

Importantly, we continue to emphasize our cash generation, and this is evident in our capital expenditure level, inventory progress, cash flow from operations and positive net cash position.

In the last nine months we have limited CapEx to $261m, achieved an inventory reduction of $541m, returned to $100m in operating cash flow from a negative $139m in Q1, and improved our net financial position by over $800m.

We presented at our Analyst Day in New York in May, a transitional financial model.

Today, I would like to discuss where we stand.

Based on our fourth quarter revenue guidance, we are very well positioned to meet the key financial targets of the model already in the fourth quarter of 2009.

In fact, revenues are expected to be at a level higher than our key assumption of $2.3b to $2.4b.

Currency, of course, is unfavorable as the dollar has significantly weakened from our assumed rate of $1.33 to EUR1.

However, our key actions to streamline our cost structure and maintain a disciplined capital spending program are underway, and our restructuring initiatives will be completed by mid-2010.

We also expect to achieve our goal of net operating cash flow, excluding payments for restructuring, of at least 6% of sales in Q4.

And, of course, we will not stop at this level, and we will continue to target the higher end of the range.

2009 has been an important year for product and technology innovation.

We are building a stronger product portfolio and we continue to focus accelerating our products' time to market.

This year we have made significant progress in many product areas.

I would like to highlight just a few.

Our progress in 32-bit microcontrollers in the Industrial Smartcard and Automotive markets has been rewarding.

We have received very positive feedback from customers on our product offering.

In Automotive we are developing energy-saving products and we are renewing our commitment to developing innovative solutions for hybrid and electric vehicles.

In MEMS we have tremendous opportunities for growth as we have new families of gyroscopes and active microphones targeting a wider base of customers in very high-volume applications.

In Healthcare we are developing the market and have good opportunities, for example, with our low-power sensors, offering world-class performance.

Additionally, we are ramping shipment of analogue controllers and power MOSFETs for power management in computer motherboards, and we are benefiting from the expanded range of our competitive high-voltage power MOSFETs for switch-mode power supplies.

In Digital Consumer we are now shipping our advanced 55 nanometer low-power technologies for set-top box, and we gained design wins in multiple markets for set-top box platforms, including several top-tier telecom and cable operators for their deployment of high definition TV.

Computer peripherals have improved enormously, expanding the geography if its customers with advanced product solutions in hard disk drives.

And in Wireless customers and partners have well advanced -- have with advanced product solutions in hard disk drives.

In Wireless customers and partners have been endorsing ST-Ericsson's integrated solution portfolio.

The JV is experiencing good momentum with key customers for the U8500, the industry's first open OS 3G/HSPA single chip smartphone platform.

Recently, ST-Ericsson also reinforced strategic relationships with key players in the computing market, such as Dell, centered around their modem portfolio.

Before moving to questions, I would like to highlight the evolution of some key management positions.

After successfully leading ST-Ericsson, Alain Dutheil will be returning full time to his position as ST's Chief Operating Officer.

Alain succeeded in the difficult job of integrating the operation through the initial phase of the formation of our two Wireless JV's over the last 13 months, and we thank and congratulate him.

Taking over as CEO of ST-Ericsson is Gilles Delfassy, a wireless industry veteran with a record of success.

We welcome Gilles to his new position of November 2.

In Automotive, Ugo Carena is retiring and Paul Grimme, following a smooth transition period, is now taking over as the new General Manager of APG.

Ugo has been instrumental in the development of the Automotive products group, and I would like to stress my deep appreciation for his dedication all along these past years for the benefit of the Company.

And we welcome Paul to his new position.

With that, my colleagues and I are now available to answer your questions.

We will now begin the question and answer session.

(Operator Instructions).

The first question is from Mr.

Gunnar Plagge of Nomura.

Please go ahead, sir.

Yes, hello.

Thanks for taking my question.

If I look on the savings plan you've announced seven programs, of which five are related to OpEx.

We've, in the previous call, talked about the ST-Ericsson Phase 1 and Phase 1 -- Phase 2 programs.

So I was wondering whether we could quickly go through the remaining three programs and just say where you stand today.

And the first one would be the rationalized OpEx program where you said you would save about $140m by year end.

Absolutely.

Sorry, I think we have all the details here and Carlo Ferro will cover this portion.

Yes, good afternoon, and good morning everybody.

Thank you for the question, Gunnar.

So it has to address those specific program on the ST part and also on the benefit of all the audience to [wrap up] on those for ST-Ericsson as they affect the [concerns] of ST.

So the first block is the St plan in the OpEx area.

You may remember that this is addressing a 750 headcount and targeting $140m of annualized savings.

This plan at the end of September is accomplished by 70%.

The balance will be completed at the end of December 2009, and I would say that this will be more a bullet event at the end of the year, due to the adoption of certain instruments that occur with the close of a fiscal year.

So, here, we have some further potential of savings by several times of million dollars on an annualized basis.

On the rest of the ST initiative there are also those initiative of reducing the non-manufacturing sites, and in this respect we have so far reduced by about one-third the number of sites, non-manufacturing, from about 150 to less than 100 sites.

And this plan also is on its path of completion.

I would estimate about 60% the percentage of completion at this stage.

And, of course, you are familiar on the fact that the expected support of our process technology efforts by the French Government has been very well materializing and is already in our number for the current quarter, with an overall benefit which we do estimate in a range of $130m for the current year.

And then maybe on the benefit of those that did not attend the ST-Ericsson call, let me also quickly wrap up about these other two plans.

The first one is the one aimed at capturing the synergies between ST and the NXP Wireless business.

This was addressing a 500 headcount plus an equivalent of about 850.

Those are headcount that remained into NXP at the time of the closing last August, and has continued for a while to be charged to ST-Ericsson under a transitional service agreement to be discontinued.

This plan is substantially completed at the end of September, and we may expect in Q4 to see the full economic impact.

I would remember that this plan target and is achieving $250m of savings per year.

Then we have the Phase 2 of the ST-Ericsson plan, and this is addressing a 1,100 net headcount, targeting $230m of savings per year.

As our colleagues of ST-Ericsson said during the call, the plan has just started, is progressing, but most of the headcount reduction is expected to occur in the first half of 2010.

Indeed, at this stage, only at the end of September, only 40 headcount exited under the Phase 2 plan.

And, then, this is very important.

This is targeting $230m savings per year.

So ST-Ericsson has over $200m annualized cost reduction out of Phase 2 that still has to materialize in their profit and loss, and in the profit loss and the income statement of the ST consolidated.

And you have, for sure, noted the comment from ST-Ericsson management reaffirming that the plan will be completed by mid-2010.

So in this respect, as a shareholder of ST-Ericsson, we are anxious to see these very substantial improvements in the cost structure partially in Q4 and for the largest portion in the first half of 2010.

Thank you.

And Carlo spoke about the Q4 OpEx.

Could you maybe clarify, or be a bit more specific, what we should look at the OpEx line in Q4?

Yes.

I think Carlo will take again.

I mentioned qualitatively.

I think there will be a significant leverage, but I prefer Carlo gets into some more details here.

Yes, here, we have also some technical ingredient that Carlo has mentioned in his introduction.

You know the Company is adopting a calendar -- a quarterly calendar based on 13 weeks, but close the fiscal year on December 31.

And since, unfortunately, the number of weeks in the calendar is not always closing on a Saturday, we always incur a fourth quarter which is somehow longer than the prior quarter, and a Q1 which is somehow shorter than the following quarters.

So, in this respect, this year the calendar effect is quite consistent.

This is about more than a 5% impact in the number of days and the related expenses.

Also we have the currency that is evolving from $1.38 effective rate actual in Q3 into $1.43 effective rate expected for the current quarter, which assumes that the euro/dollar stays at the around $1.50, as it is today for the rest of the quarter, and takes benefit of the hedging contracts that are outstanding for the quarter.

Overall, these two mechanical ingredients would play some $60m of negative impact on our expenses.

However, the planned progression of the restructuring will recover the largest part of this amount.

So, as a result, we will incur this quarter in OpEx, I mean SG&A plus R&D, some increase in the absolute dollar amount, some, but how say, a part and the minority part of the mechanical impact.

And the leveraging on sales growth you will see a further substantial improvement of the OpEx to sales ratio.

As I've mentioned some transitional ingredient, some transitional factor into the fourth quarter calendar, maybe I should go one quarter beyond and talk about Q1 very briefly.

And on this respect what we currently see is, assuming the current currency rates, that operating expenses, SG&A plus R&D, in Q1 in absolute dollar amount will be lower than Q3.

Thank you.

Sure.

Next question, Dino.

The next question is from Mr.

Francois Meunier of Cazenove.

Please go ahead, sir.

Hello.

Yes, it's Francois.

Just a quick question about the new structure and potentially some sensitivity [I know] exists on the dollar.

I understand it's got some impact on OpEx obviously in Q4, but maybe could you give us what you think a 1% change on the exchange rate could have on the gross margin and OpEx going forward, so that we can see what's going to happen in 2010?

Yes.

Well, first of all, the comment of Carlo that he just made for Q1 refers to a dollar at $1.50.

So this is for Q1.

Net of aging.

Net of aging, of course.

I think Carlo will comment on the key indicator here that is one percentage point how much impact has.

But what I would like to underline is that in May we gave a financial model.

The financial model was, as you, I think, remember, it was with revenues in the range between $2.3 -- the financial model was a transition financial model.

Of course, hopefully, we can go back rapidly to the level we had in revenues that it was in Q3 last year $2.7b.

But we gave a transitional financial model with revenues in the range of $2.3b to $2.4b and, overall, a free cash flow in the range from 6% to 10% before cash related to restructuring activities.

And we also said in New York that we would have achieved this model either in Q4, at the best, or in Q2 next year.

I think we also said that the model was based on a dollar rate of $1.33, a euro/dollar rate of $1.33.

And I believe that, despite the fact that we have now as a forecast an effective dollar rate in Q4 of $1.43 that is substantially worse than the $1.33 of the described model in May, we will be in the condition in Q4 to meet, to achieve the key ingredients, the key elements of the model that we described in New York.

Now, well, maybe I can finish also giving you the key indicator.

I think one percentage point is for us -- overall, is between $8m to $10m of operating income per quarter.

This is the effect.

Okay, thank you very much.

Maybe just (multiple speakers) --.

Operating income and not expenses.

Maybe just as a complement, let me also add some consideration on the first part of your question, Francois, about the cost structure.

Of course, you may have noted that in the last three years we have moved about 10 points of our cost structure out of the euro area and into the dollar area.

And we are continuing on these efforts.

However, meanwhile also the integration in the Wireless have occurred.

They, of course, have a lot of strategic and value merit for the Company, for our shareholders.

For sure, they have not helped in respect to the natural hedge in respect to the euro-based presence of both the NXP Wireless and the Ericsson Mobile platform businesses.

The restructuring plan that ST-Ericsson is executing is also somehow addressing the cost structure in this currency respect.

And this is somehow the reason why the exposure and the sensitivity remain, as Carlo said, very similar to the one of the prior quarter.

This is, how say, a slow progression.

I appreciate every quarter on updating on this respect but, of course, we cannot have breakthrough changes in three months on this respect.

What is important going forward, maybe also the current and outstanding hedging that are quite comfortable in this respect.

For Q4 we are hedged at about $1.37 per euro for the portion, which is more than half of expenses in euro which is covered.

For Q1 we have at this point basically hedged 40% of expenses at a rate which is in the range of $1.38 in expenses, $1.40 in the cost of goods sold.

And, of course, we have also started to cover somehow Q2 and Q3.

Okay, thank you very much, Carlo.

Thank you, Francois.

Thanks.

Can I just quickly -- a quick question about the Q4 again, if I may?

Sure, sure.

Inventories have gone up a lot in the past three quarters, and that's a very good achievement from your side.

Do you expect inventories to go up again in Q4?

And maybe, linked to that, have you seen any sign of customers trying to double-order some of your components?

Well, I think we want to improve inventory turn.

I think we have done a big effort here, a painful, but I think we have done it.

And moving forward we want, of course, to maintain the focus very strongly with a target to improve our stock turn, okay.

As far as the market, because the second question is really the market, I think, frankly, we do not count on all the orders that we have today on Q4.

I just want to be clear.

We were at the level of $2.7b in Q2 -- in Q3 last year and, of course, we are very, very keen to go back to that level of revenues quickly.

But we are not yet there.

And the visibility that we have today is more in the range of the $2.5b.

In fact, the mid-point is $2.47b.

And I think, for sure, there is some speculation, and we believe, however, that we do not count these form of speculations, neither in the Q4 guidance that we are giving nor in the run rate of the business that we see for Q1 and Q2 next year.

But, of course, our motivation is to go back very quickly to the $2.7b per quarter that we had in Q3 last year.

So the $2.5b or so is a passing point.

Looking at the backlog, we could do more.

I think there are some speculations.

For instance, there are areas like the Notebooks.

I just visited Asia, and there are areas like in the Notebooks.

And, for us, of course, it is mostly computer peripherals and some power supply and similar, where there is a degree of overheated situation, but we do not count on those.

Okay.

Okay, that's good.

Thank you.

Thank you.

Thanks, Francois.

Next question, Dino.

The next question is from Mr.

Andrew Gardiner of Barclays Capital.

Please go ahead, sir.

Thanks very much.

I just wanted to clarify some of the statements regarding the transitional model and where you see things in fourth quarter.

Just to be clear, what you'd outlined in May at the Capital Markets Day that was if we were to hit that $2.3b to $2.4b revenue mark that all segments would be at or above break even.

Yes, this is what we said, indeed.

Well, I think, of course, we should start on the Company before the segments.

I think, as you know, we do not give formal guidance for the operating income.

And it was not in the press release, and we are not to give a formal guidance, of course, in the conference call.

But what I can say that we are encouraged by the progress in the top line that is better than what we thought in New York, but also very encouraged by the progress in the gross margin.

By the way, the gross margin of Q4 is a significant improvement compared to what we had in Q3, but it's not enough.

We understand this is not enough.

And I believe that, particularly in the second half of next year, by continuing with our strategy in controlling capital investment that we are doing, and I think we have potential for expansion there.

In any case, we are encouraged by the progression on the top line and also by the progression of the gross margin to allow us to go back soon in Q4 of this year to some level of profitability.

Now if you go to the segments, I think there are some -- there are two blocks in the Company, and I would like to present in this way.

There is a big block that is -- that, of course, is APM and MMS.

They are now back, big way, in terms of revenues and in terms of also new products.

And this, for sure, will post a very material profit in the course of the Q4 of this year.

Then there is the other block of the Company that is more the VLSI, and this includes our ACCI and the Wireless sector and, overall, I think also in this second block of the Company we should be around [the ceiling], I would say.

Okay, that helps.

Thanks very much.

Of course, more details we'll see later.

Thanks, Andrew.

Next question please, Dino?

The next question is from Mr.

[Stephane Houri] of Natixis.

Please go ahead, sir.

Yes, good afternoon.

Just a question regarding the visibility going forward, because you are guiding towards a more than seasonal sales increase in Q4.

So I know that it's still far away but, with the visibility that you have now regarding Q1 seasonality, would you say that it's going to be a normal drop in Q1, or not?

And what would you, by the way, consider as a normal Q1 decline?

Thank you.

Well, of course, I have to say that here we need to be cautious.

I think we need another month.

Today, what we see, and we look at these very important indicators every Monday morning, is our rolling backlog.

I think that today what we see, despite the very short Q1 because -- in fact, Q1 is almost 12 weeks.

It's 12 weeks plus a Saturday and a Friday, and that's it, so it's very short.

It's a very short quarter.

I think, looking at the number today and, again, I need -- we need another maybe month to understand better here, a month or so to understand better.

I believe that despite the relatively short Q1, at this point we are more or less around normal seasonal drop.

And I think you can go back and look at the history but, if I am not mistaken here, our normal seasonal drop is in the range of 7% to 8%, something like this.

Okay.

And regarding the utilization rate in Q3, did you give it, or did I miss it?

We didn't say.

We didn't write in the press release.

I think I can say, like Carlo, it's --

Absolutely.

75%.

It's around 75% [at this time].

Of course, the loading is an important indicator, but really we went through a massive -- what we have done with Fab was brutal to control inventory, of course, to reduce inventory.

And I think the loading is a good indicator, but it's not all.

We have [a week] that is not balanced.

We went through a very, very -- in April, our loading was 35%, so it is a brutal swing.

And in Q3 it was around 75%, but with a lot of disruption.

Okay.

Thank you very much.

Thanks, Stephane.

Next question, please.

The next question is from Mr.

Jonathan Crossfield of Merrill Lynch.

Please go ahead, sir.

Thank you.

Hi, a couple of questions.

First one would just be on the long-term targets for OpEx as a percentage of revenues.

Historically, it was 25% to 28%.

I guess with the Wireless mergers, that's maybe gone up a bit, but could you just comment on where you think a reasonable long-term level would be?

Yes, of course.

I think it is obvious that Wireless is more intensive.

In fact, I think what would be important -- what is important for me to track is really in a sense what are we spending or investing in R&D, plus capital investment, and it's a major turnaround in the Company, because the Company was very heavy capital investment and much lower in R&D.

And, today, we are much less in capital investment, and much higher in R&D, and this will pay off.

But I think, overall, I believe that we have potential of expansion on the gross margin, of course, compared to the Q4, particularly in moving from the $2.5b into the $2.75b per quarter.

But I would say that in terms of overall OpEx it is in the range of 30% to 32%.

Great.

And then just a follow up would be Texas Instruments have recently purchased some equipment to start producing analogue products on 300 mm wafers and claim that this will create a 30% cost reduction.

How would ST intend to compete with that?

Do you think there will be foundry capacity available that you can use, or do you think it's a bad move?

Yes.

Well, the way that we want to compete is to ramp up our Singapore Fab to 18,000 wafers per day, so we can always say that it is a six-inch Fab.

But, trust me, at 18,000 wafers per day is a very, very competitive manufacturing machine, and this is our way to respond.

We want to grow a big way in Asia and, of course, we have a lot of tools.

We have all the tools that we need.

We have closed so many six-inch Fabs around the world and they're all ready to go in Singapore, and this is where we want to build up these kind of products.

And I think is the growth in [MO26], is we are converting the five inch into the six inch.

It will be a major line.

Microlithography is not really a major issue if we are not taking about advanced CMOS here.

So there is a lot of things we can do in Singapore, and this is going to be a very important area for expansion for us but, keeping in mind, we basically have all the equipment.

Of course, we need to cut, but the equipments are available in the Company already.

Great.

Thank you very much.

Thanks, Jonathan.

Next question, Dino?

The next question is from Mr.

Martino De Ambroggi of Equita SIM.

Please go ahead, sir.

Yes, thank you for taking my question, and good morning, good afternoon, everybody.

The first question is still on the US dollar.

So should we expect any further restructuring if the US dollar remains around the current levels?

Or you believe the current cost structure is already optimal?

Well, let's be clear here.

I think, first of all, I am -- there is some noise now coming from -- okay, thank you.

So I think that the starting point is our model that we have given in New York, and I think that the first important message that we are giving today is that at $1.50 we will need the model.

Okay, this is the first point.

The second point is that, at the end, we have three major groups.

All the groups need to be profitable.

Of course, IMS will post some material and profitability already in Q4.

The other block of the Company is more on the VLSI, and is ACCI and Wireless, and I think that this will be break even or close to break even, or fully break even, if we include the minority interest related to the JV of the Wireless activity.

And I believe that if we have to do more in ST-Ericsson to get into the break even at $750m to $800m, we will do more, they will do more, because any of our major sectors have to perform at the end and provide the proper [pre-tax] growth.

Okay, thank you.

And the second question is similar to the previous one on the OpEx in the long term, the same question on the gross margin in the long run, considering the jump you made over the past few quarters.

Thank you.

Well, I think you know what is our goal in terms of free cash flow.

I think we have a model, it's a transitional model.

We want to be double digit, of course, and then you'll do the math.

And I think the transitional model is -- well, we want to be at least at 6% in Q4.

This is clear.

And then, of course, we want to improve from there, but we want to be double digit, hopefully.

We also need to grow our revenues.

We were at $2.7b.

We are only at almost $2.5b in Q3 -- in Q4, so we need to grow our revenues.

And by growing our revenues I believe we will be able to provide a double-digit return in terms of free cash flow.

Okay, thank you.

I tried.

Thank you.

Thanks, Martino.

Next question, Dino?

The next question is from Mr.

Glen Yeung of Citi.

Please go ahead, sir.

Thank you.

I think in the quarter we saw sales to your distributors increase quite aggressively, and I wonder if you could spend some time talking to us about your level of comfort with where distributor inventories are today, or maybe your level of discomfort, depending on how you feel?

Yes.

Well, I have to say that the inventory of our distributors are extremely low, and we are not able to -- in this very moment it's not too easy to -- the demand is pretty strong because the POS is strong.

So what is happening, particularly in Asia, is that -- and now our two first distributors in the world are Asian.

And particularly in Asia I think there is a good trend of POS, of point of sales.

And I think at this moment it's really not -- with the trend that we see in the POS in this very moment, it is really not refilling their inventory.

It is to support the POS, to support the business that they have.

This is what we see in this very moment.

Of course, we are cautious.

And, as I already said, we do not count on all the backlog that we have in Q4 to project our Q4 numbers and also to project the next quarters.

But in this very moment the inventory position of our distributors are on the low end and the POS has grown significantly.

We track the point of sales, of course, and so we are relatively confident here that there is no speculation at this moment.

That's great, thanks.

That's helpful.

Second question is on the contribution from equity from affiliates.

I'm specifically referring to Numonyx and what your expectations are for that contribution in Q4 at this point.

And I think I recognize they're doing some headcount reductions there as well.

Carlo will take this.

So, on this slide, we have the equity pickup for Numonyx.

We have also the equity pickup for the design joint venture in the ST-Ericsson field, which we do as well consolidate under the equity method.

On the Numonyx contribution, frankly, we do expect -- first of all, you know that we do report with one quarter lag.

So we have at this stage a quite good visibility of what the impact in Q4 could be, since this is based on the result on Q3.

And so in this respect we do expect some substantial improvement by substantially reducing the negative equity pickup for Numonyx.

And, of course, you know that these reflect the net earnings, so there are interests below the operating income, so we see very substantial improvement in Numonyx's operating income already achieved in Q3 and some substantial reduction of the equity loss for ST, when reporting it in Q4.

Great, thank you.

Thank you, Glen.

Thanks, Glen.

Next question, Dino?

The next question is from Mr.

Odon de Laporte of Cheuvreux.

Please go ahead, sir.

Yes, good afternoon, or good morning.

Thank you for taking my question.

Could you clarify is there a lagging impact from unused capacity in Q3?

So in Q4 do you expect a negative impact from unused capacity charges in Q3?

And could you quantify that, please?

Thank you.

Yes.

The impact of unused capacity in the second quarter has been in a range of four points of negative impact to the gross margin.

And this is, of course -- sorry, two points of negative --

Two points, two points.

-- impact to the gross margin.

For Q4, we do expect a very substantial recovery of loading, and not yet an optimal situation, with some, but marginal, impact of unused capacity.

It could be a few tenths of basis point of gross margin.

On top of that, when looking at the gross margin dynamic into the fourth quarter, we should consider that this situation of under-loading and reloading a Fab is, of course, not optimal for our manufacturing efficiencies at the Fab.

And our Fabs are currently suffering about this situation.

They have experienced some inefficiencies in the third quarter that will be reflected in the gross margin of Q4, as an impact on when selling the product.

And our guidance for Q4 gross margin will include also these experienced inefficiencies still related to this instability in the volume at the Fabs.

The good news is the stability six months ago was for going down.

Now the stability is for going up and the Fabs are approaching a full stability for entering on their performance at full speed in the next quarters.

Okay.

And can you quantify the impact of inefficiencies in Q4?

It's always difficult since, at the end, when you see that further result, frankly, should we listen to my colleagues in manufacturing because it's a very huge number.

Let's have the Fab re-stabilizing and see the evolution of the gross margin.

We are very positive on the fact that, once this problem will be solved, our gross margin will move towards another step of improvement.

Okay, thank you.

And just a very quick follow up for the other income and expenses line.

What do you expect in Q4?

In this other income and expenses line, as you know, we have various recurrent ingredients.

In Q3 also we have experienced in this line two one-time events.

One is positive, has been a proceed from a patent litigation that resolved in the favor of ST with a cash payment to ST, and the other one is a negative event related to prior-year grants.

The overall impact of the two of them is a slight positive, is some million dollar positive impact.

So if you look at the second quarter and you project in Q4, you may expect a net income in this line slightly below the one of the third quarter, given the effect of these one-time items occurring in Q3 that, of course, we do not expect again for the third quarter.

So look at the Q3 and expect something slightly below, but it will be still an income balance.

Okay.

It will be above 15?

Sure.

Yes.

Yes.

Definitively.

Thank you.

Thanks, Odon.

Next question, please.

The next question is from Mr.

Tristan Gerra of Robert Baird.

Please go ahead, sir.

Hi.

Good afternoon.

Good afternoon.

When do you think inventory normalization in the supply chain takes place, and what are you during currently to address some of the supply bottlenecks that your Analogue business is facing?

Well, of course, today there are bottlenecks.

I believe that, as I said, we do not count on all the demand, the backlog, because it's really important.

So what we are doing here is two things.

With the Company investment program that we have, and that we have described, we are working to improve our mix and we are working to remove bottlenecks.

It is very much related to the mix of the technologies, so it's not capacity.

We are not investing, per se, on capacity expansion.

I think it's to improve the mix.

For instance, we need some more in terms of copper equipment in certain facilities.

But, in any case, the focus is to work on this program, to improve the mix internally.

You know that we have already described and announced the capacity increase in Crolles 2.

This will be done in the period from 2010 and 2012, over three years, and will be overall, over three years, about $0.5b.

But for the rest, frankly, it's also -- I mentioned already the expansion in Singapore.

The expansion in Singapore and the migration from five to six inch in Singapore is going to be supported by a lot of tools that we already have, as a consequence of the several six-inch activities that we closed in Europe and in US.

But for the rest it's really increasing also outsourcing, so we will buy more from outside.

And so this is the strategy.

So, overall, I think in the short term it is using our capital investment in these days mostly to improve the mix in our F abs and to respond to the demand.

Okay, and just a quick follow up.

Is it fair to assume that your production ramp sequentially in Q4 could be a little bit ahead of your revenue guidance midpoint, as you're trying to reduce lead times?

Of course.

Here, there are two considerations.

One consideration, of course, is our ability to respond, but the other consideration is, is this sustainable?

And I was [bottled] already to say that we do not believe that all what we have is sustainable, because all what we have is too much in terms of backlog.

So we will be back to $2.7b, $2.8b, for sure.

We were at $2.7b in Q3 last year.

We need to be back hopefully in the second half of last year, but I think we do not count on all the backlog that we have.

But, indeed, as you are saying, we are under pressure.

We are under pressure and, of course, we need also to serve at our best and doing everything it takes to improve the service to our customers.

Thank you.

Thanks, Tristan.

Next question?

The next question is from Mr.

Guenther Hollfelder of UniCredit.

Please go ahead, sir.

Hi.

First, the computer end market with a just 5% decline compared to last year, could you help a little bit more to understand here what products these trends were driving?

Well, I think it's the Notebooks, the Netbooks and all of these things here.

Of course, we are not in memories, as you know.

We are not in the motherboard PC products, but we have a lot of other products that are important products.

In fact, I have to say that we have a task force in the Company on PC motherboards, and this is the combination of security products, it's the combination of power supply products, it's the combination of a lot of different interface products and so this is one block that is related to the PC motherboard.

And the other effect on ST is on peripherals.

And I have to say that Q2 was -- excuse me, Q3 was already a relatively good quarter for our computer peripheral activity that, as you know, is a combination of printers and disk drives.

Our focus is the expansion of the customer base.

I think we have the products there.

We have the power MOS.

We have analogue controller, we have the security products.

We have a lot of different interfaces.

Of course, we have the disk drives products.

We have a lot of the products for the printers.

And we want to expand the customer base from our traditional base of American customers to a more global presence in Asia and in Japan.

And a follow up on Numonyx.

You said, of course, you have visibility for the third quarter and now for your fourth quarter here, but just talking about the current environment for Numonyx in the December quarter, is this trend holding up?

I think we even saw some shortages here in the NOR flash area.

What's your view here going forward?

Well, going forward, I can comment on Q4.

Of course, going forward, it's more difficult.

But as far as -- of course, we know Q3.

Q3 is not in our number because we report a one quarter delay in the Numonyx numbers, but I can say that, first of all, the cash position at the end of Q3, at the end of September, is $530m.

This is a material improvement and we are pleased about the improvement in the cash position here.

We see a solid Q4.

We see a solid Q4.

It is difficult.

They have some difficulties to respond to all their customers, let's put it this way.

Okay.

Thanks, Guenther.

Thank you very much, yes.

Next question, please?

The next question is from Mr.

Kai Korschelt of Deutsche Bank.

Please go ahead, sir.

Yes, good afternoon.

I had a question on inventory.

And I believe you said for distributors you're currently shopping -- shipping roughly in line with the end demand.

Could you give a bit more color around the direct OEM business?

Do you think there's still inventory reduction going on, or has that subsided now?

Thank you.

Inventory in the China with OEM.

Well, Philippe, maybe you comment what is your vision.

I have to say that in the computer peripherals for us, or these products for the PC motherboard, the demand is pretty strong and we have a lot of pressure.

Yes, Carlo, is true as well in Digital Consumer.

In particular, the demand is very strong.

There is no inventory correction any more ongoing and we are shipping as much as we can in line with the customer demand, which is extremely strong at the moment.

But there is definitely no signs of rebuilding inventory in any part of the channel, whether at our customers, the set-top box vendors or in the operators' hands.

There is very much a very low level of inventory at the moment.

Yes, of course, it is absolutely crucial to understand better Thanksgiving.

This is a very important moment, and later on Christmas.

But, again, we do not have -- at this very moment I do not believe our customers are building up.

I think that they have -- at least they believe they have a genuine demand to serve.

But I want to repeat again, we are not counting on all the backlog that we have in our hands at this moment.

Okay, that's great.

Thank you.

Thank you.

Next question, please.

The next question is from Mr.

Mark Lipacis of Morgan Stanley.

Please go ahead, sir.

Thank you for taking my question.

Just to drill down on the comments on discounting customer orders a little bit, how broad do you think the double ordering is, beyond Notebooks or types of products?

And can you talk about your own lead times?

Can you give us some more color about how broadly you think your lead times have stretched out and how long to get back to normal levels?

Thank you.

Well, Carmelo will take.

In fact, some of his products have stretching lead times in these days.

Yes, we are under pressure.

What I am doing, I am following every week the run rate of bookings from major customers, be them distributors or OEMs, and I do not see any major discrepancy with the last three months.

So there is a buildup of the -- there is a momentum, but their stock is down, particularly in Asia, so I feel pretty safe.

And one particular condition that I would like to mention is that this momentum is spreading to Europe and to the US now.

So this makes me feel a little bit more comfortable than three months ago.

So it's all over the world now, still driven by China, and there is no big stock anywhere in the world.

So there is a risk, of course, next year, that without an end demand there can be a reduction of our forecast, but for the time being there is no major buildup anywhere in the world, also because we are not able to deliver as much as they want.

And a follow-up question.

A lot of times when you see this kind of demand, you're able to get some increase in your prices.

Can you tell us to what extent you've been able to see a price improvement and how that's impacting the margins?

Thank you.

Price increase is a big word, but price decline is something we are controlling much better now than three months ago.

We resist more to price decline.

In some cases, we are revising price upwards, also.

Yes, there are some opportunities here.

Yes.

Short-term orders, for instance.

We take them at a higher price.

Thank you very much.

Thanks, Mark.

And we'll move to a final question, please.

The final question of today is from Mr.

Jerome Ramel of Exane BNP Paribas.

Please go ahead, sir.

Yes, good afternoon.

Carlo, any update on the CMOS sensors and any strategic decision there?

Well, of course, this is an area where we are still working.

I have to say that, of course, it has not been a priority in all of this last month, because we really had to focus on inventory and cash and the rebuilt the model with much lower revenues.

So, indeed, I think it remains an opportunity.

I think now, coming out from the emergency, we'll probably spend more time here.

But I would say that the focus during the last really two quarters was on protecting our cash and making sure that we end this year, that has been an horrible year, with a net financial position that is maybe $900m better than what it was one year ago, and with an overall free cash flow that is positive -- from the operational point of view, that is positive in the year.

So, indeed, it is an opportunity.

We are working on that.

It was not the focus during the last two quarters, and we'll see in the future.

And should we be updated in the coming future, or you think it will take --

But I am sure, Jerome, you're going to ask the question at each earnings call.

So, yes, we'll update.

Okay, thank you.

Also when we meet separately.

Okay, thanks.

Thanks.

Thanks, Jerome.

Carlo, do you have any closing remarks?

No, I think -- again, I think we believe that we have done progresses on the front of the free cash flow and important progresses in terms of inventory reduction.

I believe that the dollar is not helping but, again, I want to reconfirm the fact that we will meet the financial model in Q4, despite the unfavorable dollar.

And, starting from there, I think we have expansion opportunity, both in terms of going back to $2.7b or $2.8b per quarter, but also in terms of reducing our expenses, particularly thanks to ST-Ericsson, and improving our gross margin.

So we are motivated to start from Q4, of course, and hopefully with a normal seasonal Q1 that will give us a lot of hope for the rest of 2010.

Okay, thank you, Carlo.

Thank you.

Dino, that concludes the call.

Ladies and gentlemen, the conference is now over.

Thank you for choosing the Chorus Call facility, and thank you for participating in the conference.

You may now disconnect your lines.

Goodbye.