意法半導體 (STM) 2010 Q2 法說會逐字稿

Good morning and good afternoon.

This is the Chorus Call conference operator.

Welcome, and thank you for joining the STMicroelectronics second-quarter and first-half 2010 earnings results conference call.

(Operator Instructions).

The conference is being recorded.

(Operator Instructions).

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

Tait Sorensen, Director Investor Relations.

Thank you for joining our second-quarter 2010 conference call.

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

Joining him on the call today are Alain Dutheil, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; Carmelo Papa, Executive Vice President of the Industrial and Multisegment Sector; and Philippe Lambinet, Executive Vice President of Home Entertainment and Displays.

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.

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.

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, ST-Ericsson will host a conference call shortly after the conclusion of our call.

Also, please limit yourself to one question and a brief follow-up.

Now I would like to turn the call over to Carlo Bozotti, ST's President and CEO.

Thank you, Tait, and thank you again for joining us today to discuss STMicroelectronics' financial results for the 2010 second quarter.

All in all it was a very solid quarter of financial performance and progress for ST.

First, sequential revenue growth of 8.9% was well in line with our guidance of 6% to 12%.

Second, we posted our best gross margin performance in 37 quarters.

Third, we completed the sale of Numonyx to Micron, registering a gain which led to a steep reducing net income of $356 million, the highest quarter net income figure since the fourth quarter of the year 2000.

Setting aside restructuring costs, and the gain on the sale of Numonyx, our adjusted earnings per share figure of $0.18 showed significant improvement from the first quarter, consistent with our focus on growing earnings substantially throughout the year.

Finally, our net financial position at the end of June was strong and will be even more so after the monetization of the Micron shares.

Our new products have been well received in the marketplace, and consequently have had a strong positive impact on our revenue progression.

Among the new product areas which grew significantly during the second quarter, let me mention advanced 55nm set-top box solutions that combined top performance at low power and leading-edge functionality, such as the 3D graphics and 3D video, 32-bit microcontrollers, as well as power and analog.

Looking briefly at our product segments, ACCI and IMS are tracking well to our near-term and year-end financial targets.

ACCI revenues were up 15% sequentially, and 47% in comparison to 2Q, the second quarter of last year.

And IMS revenues were up 17% sequentially and 56% over the 2009 second quarter.

While independent marketshare data is not yet available for the first half of the year, we believe we are making good progress in both ACCI and IMS.

We are strengthening our positions across the various targeted applications within these two market segments.

Overall I believe we are on track to grow these two businesses above the market averages for 2010.

Turning to wireless, obviously, we are not satisfied with the results of ST-Ericsson in the quarter, especially as revenues are concerned.

ST-Ericsson is progressing on track with its restructuring plans, and as we all know, is in a transitional period for its product portfolio.

Major transitions cannot be completed overnight, and this is the case here.

However, we are encouraged with their progress in achieving key design wins, as well as restructuring towards a progressive recovery.

Gross margin in the second quarter increased 60 basis points sequentially to 38.3%.

This improvement is thanks to manufacturing efficiencies and the contribution of new products and comps on top of the first quarter sequential improvement of 70 basis points.

Inventory turns increased to 4.8 times in the second quarter, compared to 4.6 in the first quarter.

Looking ahead, let me reiterate our objective to manage inventory turns between 4.5 and 5.

So good results at the revenue level, gross margin level and also in inventory turns.

Our operating profitability and the return on net assets are also showing positive trends.

Since ST-Ericsson is 100% consolidated in revenues and operating results, and the share of loss or profit with our partner is recorded just above the net income line, we think it is consistent to measure our operating margin and RONA attributable to ST.

In the second quarter our operating margin and RONA attributable to ST stood at 7.7% and 11.9%, respectively.

These returns are moving in the right direction towards our target range of 16% to 22% RONA attributable to ST.

Turning to capital expenditures, in the second quarter we invested $134 million compared to $175 million in the first quarter.

This is below what we had anticipated, and it is due to extended leadtimes for capital equipment.

Since June the delivery of our equipment has been accelerating and payments for this equipment will be reflected in the second half of the year.

So looking ahead we expect capital expenditure levels in the second half to be significantly higher than the first half.

Again, our priority is to capture demand and serve our customers, while our CapEx to sales model of 5% to 7% remains the reference through the cycle.

We are increasing internal capacity and fund resourcing.

In fact, our silicon foundry is going at a faster rate than our internal ramp.

In 12 inch wafers for advanced CMOS technology we are increasing capacity on a modular basis in our Crolles fab, as well as through foundries.

For smart power and MEMS products we are increasing our eight-inch capacity in Italy.

And at our six-inch power and analog facility in Singapore we are substantially increasing capacity during 2010.

Our net financial position continues to improve and at the end of the second quarter was $702 million, excluding the shares of Micron, up from $420 million at the end of 2009.

In the future we expect to further strengthen our net financial position from the sale of Micron shares and the $358 million we are due from Credit Suisse related to our legal action regarding the purchase of unauthorized auction rate securities.

So in total these factors lead to a pro forma net financial position of over $1.5 billion before expected positive free cash flow, net of cash dividends.

Now let me turn to our product segments in detail.

ACCI net revenues exceeded $1 billion in the quarter.

Sequential growth was led by the consumer and automotive product groups.

ACCI's operating income doubled in the second quarter compared to the first quarter.

It came in at $99 million, representing an operating margin of 9.5%.

As we outlined for you in London in June at our analyst day, our goal was to reach a high single-digit operating margin for ACCI by the end of this year, so we are very pleased with our progress.

Looking forward to the second half of the year, we think there will be some further improvements in ACCI operating results, so we are well on track here.

In ACCI some of the new design wins and products I would like to highlight include our 32-bit automotive MCU family had continuous success with major design wins, including a body electronics platform from a leading OEM and other manufacturers in both North America and Europe for body control and safety applications.

In addition, we strengthened our leadership position in navigation with production deployment of our Cartesio+ processor system-on-a-chip.

In consumer applications our set-top box chips gained significant design wins in terrestrial and cable set-top box markets in Europe and in China.

We are now ramping production of our latest cost optimized platform for markets in India and Latin America.

Concerning India, we are contributing in a significant manner to the first deployment of the high-definition TV set top boxes.

And the end of the second quarter our cumulative shipments of 55nm set-top box platforms reached more than 10 million units.

Also, as we indicated in London, in June we have design wins for Freeman system on a chip, enabling 3D TV in a single chip for 120Hz mainstream integrated digital TVs.

In communication infrastructure and computer peripherals applications, we unveiled SPEAr1300 architecture that will be the backbone for new members of the SPEAr family of microprocessors targeting high-performance connectivity and embedded applications.

Here we already gained a design win for this family from a major communications infrastructure OEM.

And we gained two design wins for motor-controller ICs implemented in the Company's BCD power technology from two leading customers for next-generation enterprise and desktop hard disk drive applications.

Now IMS.

IMS' net revenues were $945 million in the second quarter, driven by strong growth in all product groups and distribution.

IMS operating income was $137 million, representing a sequential increase of 49%.

Operating margin was 14.4%, up substantially from 11.3% in Q1.

Looking to the second half of this year we anticipate further positive progression towards our Q4 high teens operating margin goal for IMS.

Let me share some highlights of new products in IMS.

In MEMS we had several design wins for accelerometers with leading mobile device makers.

And we have introduced a new accelerometer that offers drastically reduced power consumption, miniature footprint and enhanced functionality.

With respect to gyroscopes, we gained design wins for our 3-axis gyroscopes with several top-tier mobile phone makers, and we are starting high-volume production of 3-axis digital gyroscopes to be used in next-generation smartphones.

In addition, or 2-axis analog gyroscopes has been qualified by Japanese game manufacturers.

While I have given a few examples here, I would like to remind you that our gyroscope technology is quite broad with target applications, including smartphones, robotics, navigation, cameras, gaming and medical devices.

In power and analog we introduced many new and innovative products for key areas such as radio frequency transceivers, amplifiers, high-performance audio, smart grid systems and complex ICs for medical applications.

In addition, we achieved many design wins in power conversion advanced analog and other sensor devices.

We also enlarged our general-purpose 32-bit MCU family, sampling the STM32L series to lead customers.

This family of microcontroller is the industry's first ultra-low-power ARM Cortex-M3 MCU family, delivering industry-leading energy-saving performance, and is part of the ST EnergyLite platform of ultra-low power products.

Ultra-low-power products.

In addition, we unveiled a new touch sensor controller designed to improve the performance and styling of mobile products.

As I mentioned at the beginning of this call, the transition of ST-Ericsson is underway.

The restructuring plans are on track and, in fact, helped to mitigate the lower level of revenues in the second quarter on their operating loss.

We remain committed to the wireless joint venture, and currently we are sharing 50% of the losses with ST-Ericsson, but we look forward to sharing 50% of the future opportunities.

The value of the ST-Ericsson [site] is the new product portfolio and the solid customer base give us the confidence that their strategy is the correct one.

In the second quarter ST-Ericsson announced important developments in their product portfolio, including a number of design wins from Nokia for HSPA+ and LTE modem solutions for new products, as well as new design wins related to the U8500 and the selection of ST-Ericsson multimedia EDGE platform by Samsung.

In addition, ST-Ericsson introduced its feature-rich mobile Internet platform, enabling the development of cost effective and power efficient multimedia TD-HSPA handsets aimed at the Chinese market and the expansion of its x500 family of smartphone platforms to enable mobile device manufacturers to quickly develop a range of smartphones covering different price points and supporting different access technologies.

Of course, ST-Ericsson will give you additional color on the quarter when they host their call shortly after the conclusion of ours.

Turning to our third-quarter business outlook, based upon our current visibility we expect revenues to increase on a sequential basis between 2% to 7%.

This would represent strong year-over-year growth of 13% to 19%, so still showing a good dynamic for demand.

We continue to work to fulfill demand from customers.

Based upon improved manufacturing performance, the anticipated mix of revenues and an effective currency rate of $1.32 to 1 EUR, we anticipate a gross margin of about 38.8% plus or minus 1 percentage point.

At the midpoint of the guidance this would represent a further 0.5 point of sequential progression.

In summary, ST delivered a solid quarter and improved key financial metrics.

ACCI and IMS are progressing on track to our financial objectives.

ST-Ericsson results remain unsatisfactory as anticipated, but we are encouraged by their progress towards a progressive recovery.

We continue to focus on our product pipeline and product innovation.

We are working to expand capacity utilizing both internal and foundry resources as demand requires.

Looking at the second-quarter operating margin and RONA applicable to ST, we stood at 7.7% and 11.9%, respectively.

This is a substantial step towards achieving our RONA attributable to ST target range of 16% to 22%.

Our outlook for the third quarter is one of further sequential improvement.

Now we would be happy to take your questions.

Thank you.

(Operator Instructions).

Sandeep Deshpande, JPMorgan.

A couple of questions.

Firstly, on the gross margin.

You have guided to gross margin going up into the next quarter, but given the change in currency the increase that you're guiding to in the gross margin doesn't seem to really reflect the shift that has occurred in the currency.

Is this because of the hedging or is it that you don't -- is this that there are some other impacts to the gross margin?

Second question is on ST-Ericsson.

Clearly there is a restructuring program ongoing, but given the level of revenue decline that you are seeing at ST-Ericsson, the challenges ahead for a breakeven of ST-Ericsson looks even more daunting.

What is it that -- that something -- in terms of the integration of these different companies to create ST-Ericsson did not go correctly?

Is it that now there is some new plan to make this not -- to stop the hemorrhaging in terms of the sales, because unless the sales stop dropping, I mean, the turnaround will be difficult.

So Carlo will take the first question.

Good morning, good afternoon everybody.

Our gross margin is (inaudible).

I believe everybody anticipated when meeting in June that [in the end] our hedging policy over a 12-months horizon by declining a percentage of hedging would have left very little room for taking advantage of currency environment in the third quarter, and indeed 60% about of the cost of goods sold is already hedged.

So basically you're correct on expecting that there are some benefit, but very limited benefit, from currency in the progression of gross margin from the 38.2% to the about 38.8% plus or minus 1 point outlook for the third quarter.

By the way, this is still 0.5 point of -- for the progression, and this improvement this quarter mostly came from the manufacturing.

There is nothing, frankly, particular.

There are no particular detractors.

As anticipated, the currency impact will take a little longer to be visible on the gross margin.

Consider the effect of the hedging.

Consider also that the manufacturing cost affected by the new currency rates goes first to inventory and about a quarter after into the cost of goods sold and into the gross margin.

Thank you, Carlo.

So for ST-Ericsson, of course we are focusing on two important elements.

One is the transition from the ASIC business model into the platform business model.

I believe that the new platforms are absolutely competitive products.

This is covering, of course, the 3G multimedia mainstream for smartphones.

It is covering the lower end 3G, and is also covering with -- it is covering the LT, the high end.

So it is an important R&D effort.

I think this is, of course, a priority of the Company, and they need to move on with the transition, and then of course accelerate into production of new products.

It is also clear that this transition takes time.

It is -- some of these products are already available.

And we are working with customers to ramp up their production, but this will happen next year.

Some are not yet available, but it is an intense and focused R&D effort on very, very competitive and innovative new products.

Then, of course, from a short-term point of view, we have indicated that we expect some slight improvement in the revenues in the course of the second quarter -- in the course of the third quarter.

Now this is the first element.

The second element is the restructuring.

The restructuring is on track.

Still there are significant synergies to extract from the restructuring, and this will happen in the course of the second -- sorry, again, in the course of third quarter and in the course of the fourth quarter of this year.

So it is the combination of the two elements.

It takes some time.

On the other hand, we are absolutely convinced that what we are doing here is top class -- top class products, and we are committed to move on with our strategy that, as you know, is a strategy to share today the important R&D effort and, therefore, the burden with the Ericsson Group, and in the future to share the opportunities.

Despite this effort in wireless, I think we have done a significant improvement in our RONA performance.

We are now for our portion for the ST, including 50% of wireless.

Of course that is the [third] part.

It is now 12% RONA.

And as you know, our goal is to grow quickly in our target range that is in between 16% and 22% RONA.

Stephane Houri, Natixis.

I would just like to ask a question about the ST-Ericsson financing issue.

And obviously if they are going to do more losses in Q3, it is our view that they're going to get in a net debt situation.

What are your options there?

Are you ready to put more financing in the Company?

Maybe I take the question.

Carlo Ferro speaking.

You may have noted that ST-Ericsson has started this quarter to sell accounts receivable without recourse.

We believe this is a cost efficient financing option, and ST-Ericsson can at this stage rely on some substantial additional amount on these facilities.

So they will continue to utilize this financing tool.

Additional, and I believe it is already public, we have disclosed in our 6-K, Ericsson and ST made available a bridge credit facility for ST-Ericsson.

On another topic, could you make some comment for the backlog in Q4, how do you see it building so far?

This is Alain Dutheil speaking.

Our backlog is building pretty nicely in Q4.

Of course, usually we are not guiding for a quarter after -- or six months after the end of the quarter, but what I can say is that today we are not disappointed at all.

Q4 is building very nicely.

So we don't see any slowdown in other words.

So we should see more sequential growth in Q4, right?

Hopefully.

Yes.

Absolutely.

This is our plan.

Janardan Menon, Liberum Capital.

Just a quick clarification first.

The currency exchange rate that you have used is $1.23 to the euro for the non-hedged part of it.

Is 40%, which you said is non-hedged, will that be a big difference if the euro stays at current levels, closer to $1.30, or will that be quite a negligible effect on your margin trend going forward in the current quarter?

Second question is when I look at the last either three years or seven, eight years of ST's Q3 that 4.5% quarter-on-quarter growth is a bit below your normal seasonal patterns.

So I was just wondering what would you attribute that to add, and which of the areas would you see as being relatively stronger and relatively weaker into the current quarter?

Maybe I take this.

I think more or less we are in line with our historical trend.

I think there was a good growth in Q2 despite the decline.

And you saw the core part, let's say the non-ST-Ericsson part growing 15% in the course of the second quarter.

There is other growth at the end as we just said, (inaudible) growth in Q4, the visibility today is very good I would say for Q4.

We are building up capacity progressively quarter after quarter.

We are doing this in Asia, of course, at our (inaudible) and testing facilities in Singapore.

We are buying much more from our subcontractors and silicon foundries.

We are also expanding capacity in Europe.

So I think we're moving on, building up capacity progressively quarter after quarter, and we are confident that it is going to be a good Q3.

Other sectors, apart from wireless -- that is more a transition problem -- a business transition problem -- all the sectors are pretty strong and we expect another jump in Q4.

Anyway, if we have an early indication it is not coming from the order entry, it is coming from our capability of manufacturing today.

On the currency?

I take the question on the currency.

I believe really we were talking about the tale about there is no substantial impact in this.

Maybe we have developed these forecasts a couple of weeks ago, and the reference here in the press release is somehow outdated.

I already mentioned 60% of costs -- euro denominated cost for the quarter is hedged.

One month is substantially now already behind us, and the (inaudible) euro] exchange rate remain at the current level of $1.28, $1.29 for the month of August and September.

Of course, there is some mechanical effect, but it is not really a big deal.

It is one among the many several factors that are normally embedded into our forecasting.

So please consider the outlook at the guidance absolutely (multiple speakers) also in respect to today euro/dollar exchange rate.

Jonathan Crossfield, Banc of America - Merrill Lynch.

My first question would just be about capacity and lead times.

I think there was a fairly well-publicized issue with Hitachi and Milton in recent days.

I just wondered what your leadtimes are doing, whether you're seeing major capacity constraints and other issues with customers, and whether that has any bearing on the level of sequential progress on the gross margin in Q3?

I do not understand the relation with the gross margin, but I think as we just said, demand is very strong.

Of course, we honor our commitment and we honor our agreement, and we try always to fully respond to the demand of our customers.

This is an effort that we are continuously doing, improving the capacity; it is not always possible.

Of course, there is sometime a gap between our confirmation of orders and agreement to ship and the request from our customers.

This is valid for us and is valid for all our competitors.

I think that we are working, as I said, to progressively improve and increase the capacity in -- during the course of the year, and to serve at our best our customers.

Then maybe just to follow-up.

Distribution sales sequentially was very strong again.

What is your sense of where inventory levels are in the channel and on the distribution side at the moment, given there seems to be some growing concerns about macro in the second half?

Carmelo Papa speaking.

There is absolutely no abnormal situation in all the regions.

The stock is absolutely under control.

I would say it is the historical minimum if we compare it to previous cycles in history.

We do not see any building up of stock for this time being and for the foreseeable future.

So the situation is absolutely under control, and they would like to have more parts than we actually are able to ship.

Simon Schafer, Goldman Sachs.

My first question is really a follow-up.

I wondered if -- is there real incremental cost that you have to expense just because of capacity ramps into Q3?

Again, I guess I'm trying to figure out as to why we wouldn't be seeing more gross margin leverage in the third quarter.

Carlo.

No, if your question refers to the dynamic of the depreciation, at the end you may expect that the depreciation in Q3 is slightly down in respect to the prior quarter.

So you are effectively saying that there is no real incremental cost associated with these capacity ramps in Q3 that should be impacting your cost of goods sold.

So again, I guess I'm trying to figure out as to why you wouldn't be seeing more operational gearing in an environment when your revenues are up almost 5%.

Obviously, there is no structure incremental cost.

And then the variable cost of the material and whatever is required in order to manufacture, obviously, follow the quantity.

But once again it is important when looking at the relationship between our gross margin dynamic and the manufacturing to consider that based on our inventory turns of about 4.8 times, at the end you may expect that basically one-third of the manufacturing activity of the quarter fall into the gross margin of the quarter, and two-thirds at the end fall in the gross margin of the following quarter as embedded on an inventory valuation at the end of the quarter.

So very basically what we have sold in the month of July was based on manufacturing cost of second quarter, and similarly for the month of August.

Understood, okay.

My second question is actually on the CMOS imaging business.

If you could maybe just update us as to what the latest is, just with respect to profitability, I obviously think it is below the Company average -- a long way below the Company average.

Maybe you could just update us as to where you are with that business, and if required, would there be other strategic options available to STMicro with that business?

Thank you.

Thank you for the questions.

It is regularly given that I will say the size of the business we have not a focus on this performance, but by the way, this quarter the imaging business has reached operating breakeven, which is very good news in respect to the prior period.

Having said that, obviously, we do continue to explore, to monitor and to be ready to extract the highest possible value from this business and values possible options that today are open.

Sorry, you mean strategic options as a sale or what else do you have in mind?

A strategic option that may either consist on partnership, sale or internal redirection of the business.

Vlad Shteynberg, Realm Partners.

I have a few questions.

First of all, exactly what impact in terms of basis points on gross margin is coming from the currency shift?

The question refers to which period?

To Q3 guidance.

So the midpoint is improvement of 60 basis points from the Q2.

How many basis points is that due to currency, when you take everything into account, your quarter lag in inventory versus manufacturing, as well as hedging?

I am sorry to ask again, you mentioned 60 basis points, is your question refer to from Q1 into Q2 or from (multiple speakers) the Q3 guidance?

Q2 into Q3.

Okay, I said earlier there is some benefit from currency.

We are talking about something between 10 to 20 basis points.

ST-Ericsson, do you expect it to keep declining on a sequential basis in terms of top line in Q3?

No, we expect a slight increase of the revenues.

What about Q4, is there any visibility into that?

We do not give guidance.

I think overall as ST, as we said before, we expect to have after the growth that we are projecting for Q2 to have another quarter of sequential growth in Q4.

This is the expectation overall for ST, and I would not comment for individual blocks of business now for Q4.

But I think overall this is -- we see a good momentum with, as we said, a slight increase in wireless in Q3, and the increase that we are projecting now for the Company and then another step in Q4.

What about European demands with everything -- with the macroeconomic uncertainty, have you seen any impact on the demand in Europe?

Not really.

The demand is very strong.

And as I was saying before, the demand is strong.

Let's say a part of the transition that we are having in wireless is very strong in all the geographies where we operate and also in other market segments, and this is continuing.

(multiple speakers).

Moreover, if I may add a point here.

Of course, we are -- 60% of our shipments are in Asia.

And of course, Asia there are a lot of our customers are producing for the world.

So the final impact of Europe, we don't know, but anyway, the customer we are selling in Europe, the demand is still very strong.

I think we will need to move to the next question.

But we can certainly follow up off-line now.

So can we move to the next question, please.

Kai Korschelt, Deutsche Bank.

I had a question on OpEx.

It looks like there is roughly $150 million in annualized savings left at ST-Ericsson.

How should we think about the phasing of those savings?

Should it be in equal parts in the second half or is it more H1 loaded for next year?

My other question then is on total wafer capacity.

I'm just wondering what the total increase in your wafer capacity will be by the end of the year relative to where we currently are?

Thank you.

On the savings from restructuring, I believe this quarter ST-Ericsson has been quite accurate on guiding you on where they stand, since really given our rounding they said that the $230 million plan was completed with 87% of the savings realized.

So really we have not missed in the (inaudible).

(multiple speakers).

What does it mean?

It means that overall when completing -- phase two is complete, but as I say, having been completed at the end of the second quarter, the savings are not yet visible in the Q2 (inaudible).

So the completion of visibility of phase two savings, plus the phase three for ST-Ericsson means an additional annualized $145 million about of savings to go.

The largest part will occur by the end of this year.

They will complete the plan by the end of this year, but as said for the second phase when completing by the end of this year, you may expect there is a portion to go into the first quarter as completed during the fourth quarter.

The largest part will be visible by the end of the year.

As far as the capacity.

As far as the capacity is concerned, as we mentioned in Q4 of this year we have increased the capacity by about 20% compared to Q4 of last year.

Of course, this is going to happen quarter after quarter.

By the way, in the first half of the year we were trying to increase our capacity more.

In fact, a lot of capacity increase is to come on the second half because of very quick on-delivery time.

So quarter after quarter we are going to keep increasing.

Could I ask just what the capacity increase is compared to current trends, please?

Well, I would say there is an acceleration in Q3, of course, as we said is happening progressively quarter after quarter.

There is some acceleration in Q3 compared to Q2, and then maybe a little bit --.

The 20% are not leaner, as I was saying before.

We had -- we didn't invest as much as we would like in our first half, and we are investing more in the second half.

Guenther Hollfelder, UniCredit.

I had a follow-up on the (inaudible) picture.

If you could elaborate a little bit on the different end markets, what sort of seasonality you're seeing.

For example, in the automotive industry your forecast indicates and seasonal weakness here going to the September quarter.

And also your Consumer business, given what we have heard from Philips and LG Display that there might be some excess inventories in the retail channels, whether you're seeing any impact here for your business in the coming quarter?

Well, I think we see strong momentum in all these sectors.

I think automotive is very strong.

We do not see any slowdown and we also expect to have a good 2011.

We are, of course, working with our customers to anticipate the need for 2011 and we see a good prospect.

We do not see at all any slowdown in September in automotive.

The demand is very strong.

It is particularly driven by Asia, by China, but also high-end cars.

So the industrial multisegment, again strong -- is strong demand across-the-board geographically, both on power, analog and microcontrollers is very broad.

And as Carmelo was saying before, the inventory situation at our distributors is very much under control.

They are at the minimum levels in history.

And the same is for digital consumer and for computer peripheral, it is very much across-the-board.

So of course, the challenge is the transition that we're having at ST-Ericsson moving out from the ASIC business model and getting into a massive platform coverage, and I think this is the overall picture.

I would say that the strongest today that we see are automotive and industrial, but consumer is very good, computer peripheral -- also, computer peripheral is also very good.

David Molowa, UBS.

I was wondering if you could just give us some guidance on what the utilization rates were in this quarter and what your expectations are for Q3?

Then after that just how that might change as capacity comes on stream later in the year?

About the -- I mean, the utilization rate, the only thing I can tell you is that all our fabs are fully loaded today, as we are producing as much as we can out of each fab.

Now I think about the capacity I already answered the question.

What I was saying is Q4 to Q4 we are increasing by 20%.

And we are increasing our capacity more in the second half that in the first half.

In the first half we didn't invest as much as we would like because of leadtime of equipment.

And the loss of capacity of over 20% I was talking about is going to come in the second half.

On top of that, what we are doing also is increasing our subcontractor, our subcontractor activity.

Which by the way, usually it is a question that we got also was a 15% in the total in Q2 is going to move to about 17% in Q3.

Otherwise of course, we are increasing our capacity.

So our capacity increase is coming from our interim capacity increase, but also from more availability from the subcontractors.

Then just a follow-up, if you don't mind.

That is a very strong net cash position you have, I was just wondering if you could give us some guidance what you might do with it and what level you would like to maintain.

Carlo, take this.

It is a good question, since not only the cash position is quite brilliant, I will say with the $702 million cash balance.

But we have going forward opportunity of two very important one-time positive events.

One will be the monetization of the Micron shares, which is another about $0.5 billion current pricing, and the collection of (inaudible) bank of the award from the litigation and the values arbitration and judgment on this respect.

I believe that this Company may really carry a very solid capital structure with a level of gross cash in a range of 15% of sales.

So I let you to make your math.

There is, for sure, some excess of cash going forward.

We haven't [saw] some event.

We have an event of redemption of the convert for about $670 million of residual amount that we will incur at the latest in February 2011.

The next one is -- in 2013 is more (inaudible), the [EUR700] million euro bond.

So in this respect, how said that, what is now important for the Company is to materialize these further events of cash collection, to continue to generate positive free cash flow.

Obviously, also to insure at the end that also the wireless business move towards a cash breakeven.

And then at this point we will absolutely consider what to do with the excess of cash in the usual trade-off between further distribution and strategic options.

Tristan Gerra, Robert Baird.

Since you are currently operating at full capacity, how should we look at the main catalyst driving gross margin growth beyond Q3 for ST outside of currency?

I will say that there are important positive drivers to our gross margin into the current quarter, but also going forward.

Manufacturing, manufacturing costs improve quarter after quarter and the product mix.

The product mix is also overall improving.

So we remain confident on opportunity to expand on our gross margin.

Any way to quantify this a bit further in terms of product mix and which area do you think --?

I think we have given during our analyst meeting a financial model that today -- we have a return on net asset, and this is a very important element, of course.

We have a return on net asset that is in Q2 was 11.9%.

I think we have important opportunities to significantly improve the return on net asset performance quickly.

In London during the analyst day we have given the model, the financial model, which is RONA return on net asset, return on net asset range in between 16% minimal and 22%.

So this is the range that we have given.

This, of course, is taking into consideration that 50% of ST-Ericsson is not ST, but it is the Ericsson Group.

And so this is the figures that -- the RONA figures that is attributable to ST.

So what we want to do is to grow up quickly from 12% in Q2 to a minimum of 16%.

So out which of this, of course, is a gross margin progression.

This is obvious.

And mix is in play -- is playing an important role.

Let's talk for instance about the gyroscope.

The gyroscope is going to be a booming business for us.

This is not yet yet there, and Q2 was limited quantity, practically zero, but it is going to start very high level of (technical difficulty).

I started now -- very high level of shipments.

And this will continue on this year and we will further expand next year.

So it is the overall product mix on one hand, but is also additional cost reduction and manufacturing.

So this is a driver.

The other driver, of course, we will continue to reduce expenses.

It is not immaterial.

I think ST-Ericsson reduction is in the range of $36 million per quarter, and of course, 50% of that is attributable to ST.

Then we have the sales growth opportunity.

We will grow in Q3 and the visibility that we have today is that there will be another growth in Q4.

So these are the drivers.

Bottom line is that we will continue to increase the earnings-per-share.

We went from $0.07 in Q1 to $0.18 in Q2, and there will be another step in Q3, and we expect a further step in Q4.

As a consequence, our RONA will significantly improve starting from the 11.9% that we have achieved at the end of the second quarter.

Then just a quick one, more detailed on your wireless business.

You mentioned design wins for the U8500 baseband.

Are those incremental to the two Tier 1 OEM design wins previously announced for that product?

And also if you could give us an update on the timing of the volume ramp for that product.

I think it would be unfair for me to respond.

I think we have now in half an hour we have the opportunity to attend the conference call with ST-Ericsson.

Yes, I think it is more than two customers but it is better that you discuss with [Jill].

It sounds good.

Thank you.

Didier Scemama, RBS Capital.

I would just like to ask a couple of questions quickly, if I may.

First of all, would be to Carmelo.

Can you maybe talk about how your leadtimes are evolving or have evolved in the quarter?

Secondly, since you have tremendous momentum in microcontrollers, I was just wondering if you could update us as to your sequential growth rate in ARM-based MCUs, and how you see the market, sort of the outlook for the rest of the year?

Then secondly is really a question to Philippe, if I may.

With regards to the old set-top box and DTV momentum, can you maybe update us on the progress of your next-generation ARM-based set-top box product and how you see that penetrating your revenues in 2011, please?

Carmelo, you start.

So answer the first part of your question, leadtimes, I would say they are not improving.

In the sense that we are adding manufacturing capacity, which is helping, but the orders are coming at a faster speed, and therefore I do not see any progress so far.

So we are increasing the manufacturing, that's true, and serving more customers, and trying to preserve the customer where we have a long-term partnership.

But the orders are coming faster than the incremental capacity increase, and therefore, we are not shortening this situation.

Then there was an another -- second portion of the question.

Yes, it was a number, but I would like to say, because it is impressive number.

I think the growth in the microcontroller is sequential is 24%.

It is two times what we have done last year.

It's a big growth.

We will continue.

I think this is a very successful family.

And then --.

That's very impressive.

Right.

It is so impressive that you can take it as an exception.

I will not (inaudible) revenues where the sequential growth be refuted, but you refute it once per year.

This year you have done with MCU.

Right.

Another (multiple speakers)[great achievement].

On the set-top box side, perhaps, if you could just update us on how -- first of all, how you see the second half?

I know you said it was going to be very strong, but I was just wondering the progress made with the DTV product, and on the ARM adoption in 2011, please.

First, we see the second half being very, very strong.

That is particularly true for set-top box, where our 55nm family is really now running full steam.

And huge shipments in the second half.

We have qualified two foundries and we have our own internal [co] wafer source there.

So we really are shipping a lot of volume on that family in 55nm.

Regarding the tarmac ARM-based products, as we have said, they are in design at the moment.

We will tape out early Q4.

We will sample in Q1 next year.

We already have customers starting to write software on a nonexisting silicon thanks to our simulation models.

But we have a tremendous response, both on DTV and set-top box of that 32nm or 28nm ARM-based family.

We think we're going to win a lot of share.

Now regarding 2011 numbers, they will be pretty limited, because by the time we sample those devices to our customers in Q1, and the time they design -- they finalize the design of their boxes, they qualify, they certify we are going to have some Christmas, let's say, in 2011 shipments, but not huge numbers.

So the big numbers will come in 2012.

And that is when we are going to ramp up 32nm, 28nm, really in the (technical difficulty).

But in 2011 it will generate some sales.

I count on those families to really win a lot of designs.

In terms of design win marketshare I expect 2011 to be a great year.

But for sure in terms of billings, it is going to be 2012 mainly.

As far as the progress in DTV, we have a lot of design wins now with our existing Freemen family, which is 55nm.

Clearly we see a lot of interest for the next generation 32nm, so I expect ST will be able to announce shortly design wins at Tier 1 manufacturers -- TV manufacturers around the world.

So everything is going very well.

We had an excellent Q2, by the way, with big sequential growth over Q1.

And definitely we expect further growth in Q3 and Q4.

Excellent.

Many thanks for your answers.

They were very helpful.

We will take one more question please.

Gunnar Plagge, Nomura

I just wanted to come back to OpEx.

Carlo, could you run us maybe through the q2 OpEx dynamics?

OpEx increased by $20 million.

I think you should probably have $15 million positive help from currency, given the 3% change in the effective exchange rate.

And calendar days should have been helpful.

You had probably some support from the Phase 2 program.

So it would be very helpful if you could run us through the dynamics.

And then a hint on Q3, what we could suspect on OpEx would be extremely helpful.

Thank you.

Okay, I am happy to help on reading this numbers again.

Frankly, what we did in Q2 in OpEx I believe what we have anticipated three months ago.

We said that expenses would increase in absolute dollar and substantially go down in term of -- as a percentage of sales.

And, indeed, we have reduced by 2.3 points the OpEx to sales ratio.

So what did happen?

You have already mentioned almost all the ingredients.

Second quarter is 6% longer in days than the first quarter.

So at equivalent number of days we have reduced expenses by $30 million overall.

This $30 million, what do they include?

It includes some positive from currency.

I am not sure your computation is not a little bit rich maybe.

(multiple speakers) because of the hedging is (multiple speakers).

Then there is a substantial benefit from ST-Ericsson having well progressed in their restructuring effort.

Excluding ST-Ericsson, the expenses in the second quarter essentially tracked the first quarter adjusted on the number of days on the non-ST-Ericsson part, with a very limited increase, which is well below the effect of the yearly salary increase that for us, of course, in the month of April.

(multiple speakers).

Hopefully, yes.

Hopefully this is helping to understand the second quarter.

For our Q3 I would say this quarter, I can say that we expect and target to be substantially down, both in dollar and as a percentage of sales.

That's very good to hear.

Thank you.

I think at this point we will close.

So, Dino, at this point we will close the conference call.

We would like to thank everybody for their participation.

Thank you all.

Thank you.

Thank you.

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

Thank you for joining us, and have a pleasant day.

Goodbye.