意法半導體 (STM) 0 Q0 法說會逐字稿

Good morning or good afternoon.

This is the Chorus Call conference operator.

Welcome and thank you for joining the STMicroelectronics Q3 and first nine months 2011 earning results conference call.

As a reminder, all participants are in listen-only mode and 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.

Please go ahead, sir.

Thank you, Dino, and thank you to all for joining our third quarter 2011 conference call.

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

Joining him on the call are Didier Lamouche, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; Carmelo Papa, Senior Executive Vice President of the Industrial and Multi-Segment Sector; and Philippe Lambinet, Chief Strategic Officer and Senior 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, 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 thank you for joining us on today's conference call to discuss our financial results, product advances and outlook.

I would also like to share with you our initial views on the early part of the 2012.

Turning first to an overview of the third quarter, as you have seen from our press release, our third quarter results were substantially in line with the outlook we had provided.

At that time, when we set the third quarter range in July, our outlook may have surprised people, but, in fact, we were subsequently proven correct by the number of semiconductor companies that pre-released in the September timeframe.

Looking at the STS result, net revenues decreased 4.9% sequentially at the low end of our range, reflecting the overall weaker economic situation in different regions and end markets we had begun to note in June, as well as further progressive weakening over the course of the third quarter.

Gross margin also came within our guidance range, in fact slightly above the midpoint with a gross margin of 35.8%.

One of the key components of the sequentially decrease relates to the anticipated under-loading of our wafer fabs and the resulting unused capacity charges.

Here we were responding to lower demand from a major customer, as well as working to bring down our inventory levels in general due to the softening we were seeing in several product families, including digital consumer and microcontrollers.

Beyond revenue and gross margin, our results (inaudible) with revenues and operating results also tracked to our expectations.

In line with our approach to the third quarter, let me share our outlook for the fourth quarter and directionally for the 2012 first quarter.

We think it is appropriate to report the broader and more significant weakness in the semiconductor market environment that we are experiencing.

There is a good deal of macro uncertainty and so we think it is reasonable to take this level of caution going into the fourth quarter and the beginning of 2012.

Today, our best judgment is that fourth quarter net revenues will decrease sequentially approximately 8% within an overall revenue range of about $2.15 billion to $2.3 billion.

We expect weakness in most of our product segments with the exception of wireless, where a slight sequential increase in net revenues and new product penetration is anticipated.

Our fourth quarter gross margin outlook is about 33.5%, with a plus or minus range of 1.5 percentage points, compared to our normal 1 percentage point assumption to take into account increased market uncertainty.

Our gross margin outlook mainly reflects lower volumes and further substantial unsaturation charges, higher than those experienced in the third quarter.

Our goal had been to bring inventory into full alignment or close to in the third quarter.

While we did make progress, given the further weakening of the semiconductor market, we are continuing to take aggressive actions.

For example, we have initiated programs to significantly reduce activities at our fabs, using the highest flexibility provided by the local laws in each jurisdiction we operate, during the fourth quarter to align with where we believe the market will be.

With respect to capital expenditures, we anticipate the second half expenditure, in total, will be substantially lower than the first half, as we outlined last quarter and that remains our expectation.

The third quarter level of $384 million reflects equipment that was delivered in the first half and paid for in the third quarter, so there is some lag to the reduced spending.

Looking to the fourth quarter, the figure will be very significantly reduced.

Without giving a specific free cash flow outlook, based upon our investment plans and fourth quarter revenue outlook, we anticipate very substantial improvement in our free cash flow during the fourth quarter, following the last two quarters of negative free cash flows.

Based on our experience with the industry cycles, we proactively took action steps last quarter to help navigate through this period and maintain our solid financial position rather than wait for more concrete signs of more than multi quarters (inaudible) inventory correction.

At October 1st, cash and short-term deposits equaled $2.55 billion, total debt, including 100% of ST-Ericsson debt, as consolidated by ST, was $1.71 billion and our net cash financial position was $827 million.

Our about $1 billion in committed credit facilities remain in place and we plan to continue in the near term to reduce debt, including the potential redemption of our convertible debt in February 2012.

And let me be very clear here.

Even with the heavy investment to support R&D at ST-Ericsson, our financial position is strong and will remain so.

We do anticipate at this point that fourth quarter market conditions will likely impact sequential revenue trends into the first quarter.

So our caution extends into 2012.

At the gross margin line, based on current visibility, further under-loading will continue into the first quarter of 2012.

At this point, now I would like to turn back to the third quarter sales in further details.

As I indicated, total revenues were substantially in line with our expectations.

Looking by product segment, ACCI revenue came in slightly below $1 billion.

Sequential result reflected market weakness and also our anticipated exit from hard disk drive system on chip.

We did benefit from year-over-year growth in both automotive and imaging, which were also two areas of strength during the second quarter.

As we outlined last quarter, our Power Discrete Product sales are being negatively impacted by lower demand, largely related to a major customer, and softer-than-expected demand in the industrial markets.

AMM was lower sequentially but posted year-over-year growth thanks to our MEMS business.

We remain on track for our MEMS business to double in 2011 compared to 2010, as MEMS sales for the first nine months have grown by almost 130% compared to the year-ago period.

Wireless, showing the progress of ST-Ericsson, posted a sequentially increase in net sales of 18.8%, but it is down significantly year over year with substantial operating losses.

Let me turn now to a brief review of our nine month results, which demonstrate the sales advances and improved profitability for all of our wholly owned businesses.

Looking at the top line, net revenues from our wholly owned businesses increased over $0.5 billion or 9.3%, which is clearly higher than the expected market growth.

AMM net revenues increased by 18.6%, ACCI rose by 5.7% and PDP by 3.5%.

When you think that this sales expansion was made while also facing headwinds, including the market softening and customer-specific issues affecting several product segments, it is certainly a solid result.

In particular, we saw growth in MEMS, automotive, ICs, microcontrollers and imaging products.

Based upon these figures, our wholly owned businesses have clearly gained market share.

Secondly, operating income from our wholly owned business totaled $775 million for the first nine months of 2011.

This represents an increase of 28% year to date.

Again, we did this with headwinds, not all clear sailing.

And from a profitability perspective, ACCI, AMM and PDP all saw important improvement in their operating margin with AMM at 21%, PDP at 12.5% and ACCI at 9.7%.

So, all in all, we made very good progress on a year-to-date basis with our wholly owned business.

We think there is more value to be extracted and so we are making some changes to our product segments internally, in order to further sharpen our focus and leverage our resources.

We intend to grow and capture value across analog and digital.

Specific to digital, in order to further enhance R&D effectiveness, reduce time to market and better exploit synergies, we have decided to combine all efforts in our wholly owned businesses in the area of multimedia processors in one unit.

Therefore, effective January 1st, 2012, we will bring together all application processor activities related to non-wireless platforms in a new product group named Multimedia Convergence Platforms.

And we have decided to combine all activities concerning imaging and ASICs in a new group called IAG.

The microfluidics division and the BCD power division, today in CCI, will be moved to AMM.

These transfers will create important synergies in the area of MEMS and BCD technologies and will support our goal of ensuring we have the (inaudible) focus on key parts of our digital business.

So, our objectives are clear.

For analog and mixed signals, we want to respond to our sales opportunities over the mid term and in digital businesses our goals are both higher sales and improved profitability.

Before concluding, just a few brief comments on some of our new products and design wins.

We are continuing to build our leadership in sense and power.

During the quarter, we introduced our new family of microcontrollers, the world's fastest microcontroller based on the ARM Cortex M4 and the low-cost discovery kit to help customers get started using it.

In MEMS, we are committed to maintaining and growing our leadership position in consumer and portable applications and in Q3 we launched several new members of the iNEMO family of advanced motion-sensing modules, as well as the iNEMO engine sensor fusion suite.

We also announced two new gyroscopes, including the world's smallest, and another with exceptional noise immunity.

Step by step, we continue to strengthen our position in multimedia convergence.

This has been a quarter of breakthrough launches for this pillar of our vision.

We introduced and demonstrated Orly, the most powerful set-top box system-on-a-chip on the market.

Because it is able to record four full high- definition streams simultaneously, Orly enables a truly connected home where consumers can seamlessly stream content across their TV set, tablets and laptops with the highest performance and speed, while accessing operators application stores as well as open-market stores.

Moreover, we launched our latest generation broadband TV home entertainment platform, which recognizes that TV is the center of our connected homes and allows a more personalized and socially interactive viewing experience, with amazing 3D graphics and easy-to-use mouse navigation.

In automotive, we achieved major design wins for an embedded microcontroller from a leading Korean automaker for a chassis-controller application and in car body applications with a major US tier-one customer.

We also won a major anti-pollution system design with a worldwide leader in automotive safety and we were awarded the main processor socket in a multimedia car radio for a leading global automotive supplier.

To wrap up, I want to be clear that we anticipate that the fourth quarter and early part of 2012 will reflect a weak semiconductor market environment.

Also, ST-Ericsson is currently in a transition from legacy to new products.

The Company innovative product roadmap will position ST-Ericsson for success as an industry leader and will translate our current efforts into a great opportunity in the future.

As you saw last week, ST-Ericsson's third quarter results show progress in that respect.

However, in the event of a significant worsening of the current market conditions or a lack of results, we will consider additional actions to improve performance.

At the same time, we have made solid progress in a number of areas so far this year in an environment that is quite mixed.

Our financial position is strong and will continue to be the case in the quarters to come.

We would be happy to take your questions now.

Thank you.

(Operator Instructions).

The first question is from Mr.

Stephane Houri of Natixis.

Please go ahead, sir.

Yes, good afternoon.

One question, if I may.

Yesterday Texas Instruments said that they were seeing some kind of cyclical bottom forming, especially with the pace of decline in orders, which are slowing down in August and September.

It seems like you don't exactly see the same thing.

Can you confirm that?

Well, of course, it depends whether you talk about bookings or billings.

I think during the last two or three weeks we have experienced the same in terms of some form of bookings resurrection.

Of course, this is relatively good news, but, first of all, we need to understand whether it is sustainable, because it's recent.

As I said, it's two, three weeks.

And, of course, this will not have necessarily a very short-term impact in terms of billings.

So, I think, of course, we will watch and see.

I think, again, last week was better in terms of bookings.

I'm just reporting the most recent -- on the most recent data that we have, but we need to understand whether this is sustainable.

It's two, three weeks that is going better, but we do not know for sure whether this is sustainable.

All right.

And can you update us on the capacity utilization rate for Q3, but also what you're seeing for Q4 and Q1, because you're guiding for, also, a really below seasonal Q1.

Thank you.

Yes, I think we have two priorities, let's say from now 'til the end of the year.

The first is on the business that we control 100% is to go on gaining share.

As I said, the first nine months of this year we grew 9.3%.

That is better than the market.

We want to continue to do so.

So, priority number one in market share and priority number two is definitely inventory reduction.

So we are focusing on cash and cash flow and, of course, there will be a degradation of our fab loading and Carlo Ferro will provide the most updated figures.

Yes, good morning, good afternoon, everybody.

Thanks, Carlo.

So, to offer the data point loading in the third quarter of the fabs has been, in average, at 83% and, as you know, we measure this on the standard utilization, utilization rate.

So this is very much in line with the expectations we shared with you three months ago in entering the quarter.

For the fourth quarter, we expect it to go down, as anticipated, and for the reasons that Carlo has mentioned, in the range of between 70% to 75%.

Then, when talking about the first quarter, at this stage it's a little bit early to anticipate an expectation.

The visibility we have is that some under-loading will continue through the first quarter, but, again, also given the booking situation was mentioning, it's a little bit early to offer you further visibility on this respect.

Under the current visibility, we are preparing for a first quarter manufacturing activity below normal.

If I can take the opportunity of Carlo having passed the word on that to go on the first part of your question, Stephane, I noted many comments in the reports this morning about our outlook for the fourth quarter, other competitors' outlook for the fourth quarter.

And I did a quick math and if you measure the second quarter revenues of, as you mentioned, TI, TI and National combined, and their expectation for the fourth quarter and you measure at the midpoint of expectation compared to the $2.57 billion revenues of Q2, the sales decline is very, very similar.

It's very, very similar.

So we believe that at the end what we are currently anticipating for the fourth quarter is no different from other major competitors.

Okay and, if I may, a last question.

You seem to say that the situation is much different today from 2008.

Can you give us some color about this comment?

Yes, we do not expect -- I mean, what we are talking here over a six months period is a drop of 10%-plus, right?

So 10% to 15% over a six-months period.

I mean, if I go back to 2008, the drop over six months was much, much more important.

Also, I think we do not see the same panicking at the major accounts.

I have to say that during the crisis at the end of 2008 many of our top customers physically closed their doors.

They stopped buying anything and this is not the case today.

Of course, we have concern about the macroeconomic situation overall, but from what we see from the booking trends, form the decline over six months, from the more stable behavior of our top customers, we do not see the same pattern.

Okay, thank you very much.

Thanks, Stephane.

Thank you.

Next question, Dino?

The next question is from Mr.

Andrew Gardiner of Barclays.

Please go ahead, sir.

Thanks very much.

I was just interested in following on to the utilization question a little bit.

You had mentioned on the second quarter call that you were working to reduce your level of foundry sourcing, as well, but that it would take time to do that.

It wasn't possible on a very short-term basis.

But how are you thinking about that now as we look through to fourth quarter and into early next year?

And also, distribution sell-through was weaker, understandably, in the quarter.

I'm just wondering how you're seeing the channel at the moment, as well.

Thank you.

Okay.

Thank you for your questions.

Didier Lamouche speaking.

Yes, we are starting to repatriate, clearly, the volume that we have subcontracted outside and mainly at the (inaudible) foundry.

We are clearly boosting the effort today.

We anticipate, roughly, to reduce by a factor of 2, roughly, compared to the high-point level of outsourcing in --

Q2.

Q2, yes, the level of activity outside.

We are in the middle of it.

We should reach the maximum, I would say, somewhere in the fourth quarter.

But I want, also, to mention that this is a very dynamic environment, because we are qualifying new products every day, developing new products every day, so, of course, we cannot ensure maximum flexibility at one point in time.

So that's the reason why it takes time to requalify new -- I mean, products that are manufactured outside into our own factories.

So, this is an ongoing effort on which we have put a lot of focus and that will continue through Q4 and Q1.

Do, you have a follow up, Andrew?

No, just in terms of the channel inventory as well.

But that was clear on the foundry sourcing.

Thanks.

Right.

Yes, in terms of, let's say, position at our distributors, I would say that probably the bottom of (inaudible) was in Q3, the point of sales of our distributors.

And, of course, again, we will have to see, because we are tracking this at a monthly level at every distributor in any of the regions where we operate.

And in terms of inventory, we had some adjustment, but we will continue to adjust and this is clearly for our own inventory, but also for the inventory of our distributors.

So, on one hand, I think in terms of POS, probably the bottom was Q3.

But, again, we'll have to see.

And, on the other hand, the actions started in Q3 in terms of adjustment of the inventory at the distributors, but will continue during the course of the last quarter.

Thanks very much.

Of this quarter, yes.

Thank you, Andrew.

Dino, next question?

The next question from Mr.

Niels Zwart of ING.

Please go ahead, sir.

My first question is basically one of clarification on what you mentioned about the bookings trend over the past three weeks.

Did you mention that bookings improved compared to the weeks thereof or did the rate of decline improve?

And then I have a short follow up, please.

No, the bookings did improve.

Okay.

The bookings did improve and it is -- as I said, it's basically three weeks, two, three weeks.

Last week was a more significant improvement, but it had really bottomed.

It was really low and this is factual.

Now, we'll have to understand the sustainability, but there is a net increase in the booking rate.

Does that mean we could see a book-to-bill again above 1 for Q4 or is that too early to say that?

(laughter)

Too early for that.

I think it's too early to say.

It's clearly was very -- we do not provide a book to bill, the book-to-bill information, but it was clearly below 1 in Q3 and I would say it's too early to anticipate it's going to be above 1 in Q4.

Okay, thank you.

That's clear.

My follow up would be on your operating expenses.

I mean, you're clearly prepared for a lower level of revenues in Q4, likely in Q1 as well.

Are you prepared to take any action on the operating expenses side?

In other words, what should we take into account for the models for operating expense for the coming quarters?

Yes, Carlo Ferro is taking the question and if you allowed me, I would bifurcate about the very short term in the fourth quarter and 2012.

It is better for the current quarter as we are exiting a third quarter, that, as you know, is somehow affected by seasonality as we have vacation in Europe.

And, indeed, I believe we did in the third quarter what we had anticipated to you to do, operating expenses in all remained substantially flat.

They have absorbed about $40 million of increase, due to the fact that ST-Ericsson has no longer these R&D services sold to a third party that reduced expenses by $40 million.

Too, it's -- they have absorbed about $10 million negative currency impact.

So we have been able to deliver a substantial savings due to the third quarter seasonality for vacation in Europe, but also due to some other, more structural factors, like initial savings from the ST-Ericsson ongoing restructuring and cost control measures in ST.

So, overall, we entered the fourth quarter with an expectation of some seasonal increase.

Overall, I should anticipate a moderate quarter-to-quarter increase in operating expense in the fourth quarter.

We are preparing for a 2012 taking in account the market seasonality.

It's quite early at this stage to state a guidance, however I believe -- I can anticipate that we target some significant reduction in absolute dollar terms in respect to the current rate, to the level of expenses we're incurring this coming quarter, of course assuming a similar currency rate.

Okay, thank you.

That's clear.

Thank you, Niels.

Next question, Dino?

The next question, Mr.

Gunnar Plagge of Citi.

Please go ahead, sir.

Yes, hello.

I was wondering, you made a couple of comments last week about competitors saying that they see under-shipping to the end markets.

I don't -- I was wondering to what extent do you see that and, in particular, I was interested about your outlook for the automotive industry going into Q4?

Gunnar, you said under-shipping?

By whom?

We did not understand.

By a competitor?

Oh, by a competitor.

No, under-shipping into end markets, that the industry is under-shipping into end markets.

Do you understand?

Gunnar, maybe you could rephrase that question.

Sorry.

So, basically, that the semi industry is, at the moment, under-shipping what end markets really need, that we should see a snap-back in the semi industry at some stage.

Listen, I -- let's go through for a moment.

I mean, take -- I mean, we have a strong position in distribution worldwide.

We are one of the major players in distribution in Europe, of course, but also in Asia and also in the United States.

What we have experienced in Q3 is a significant decline of the resale activity by our distributors to small and mid-size customers and typically these customers, they hold their inventory at the distributor premises.

So this is a real decline of the underlying demand.

If we move to other things, Asia is not great any longer.

Taiwan is weak.

The consumer business in Taiwan is weak.

The display business is weak.

Of course, the PC industry is also weak and the -- during the third quarter, even the power supply business weakened.

The growth of the automotive market in China is at a different level.

It was a tremendous growth and now there was a very, very important deceleration of the growth.

Indeed, there are areas where the tablet market is relatively good or the infrastructure market, the communication infrastructure market is good.

Now, there is an under-shipment?

Well, I think these two things.

I think there is, for sure, an inventory correction in the semiconductor business.

So, in this sense, somehow is under-shipment, because overall, after six, seven quarters of very strong performance, I think it's clear, very likely, that there is an important inventory correction, but we believe there is also an underlying weaker demand.

So, I think it's the combination of the two things.

Okay, thanks.

Thank you.

Thank you, Gunnar.

Next question, Dino?

The next question, Mr.

Jerome Ramel of Exane BNP Paribas.

Please go ahead, sir.

Can you hear me?

Yes, very well.

Yes, good afternoon.

Good afternoon.

Maybe a question for Philippe.

I just want to have an update on where the set-top box market and digital TV market is?

What's your view on the fact that Intel is exiting the business?

So, I can understand that on one hand you might be happy to see Intel leaving the business, but on the other hand, I remember that you were, in a way, happy to see Intel be the high ASP/high margin competitor.

So, I'd just like to understand the competitive landscape in digital TVs and set-top box going forward.

Thank you.

All right.

Well, I don't think I will surprise to tell you the market this year isn't the best, yes?

Consumer market is quite weak due to general economic conditions.

Now, this is a global sector.

Now, looking more precisely inside the market, there were two major news recently, Broadcom exiting digital TV and Intel announcing something quite vague, but, anyway, some form of exit of some part of their targeted markets, which I think is good news for ST.

The fact we introduced, as Carlo mentioned earlier, Orly, the fourth generation platform, I think is a very strong indication that we intend to take the high end of that market, which now is very much available to us.

So I think our product announcements come exactly at the right time to fill the expectations that had been created by other people.

So, it's actually good timing and we are the first to introduce such powerful platforms in 32-nanometer and we definitely have created a lot of interest and we have, already, recording some very good design wins that we -- of course, we will generate some business next year based on this.

So for us, the macro environment is very unfavorable at the moment, but the micro environment is very favorable and we are recording a number of design wins which led us pretty optimistic for the medium term.

I hope I answered your question.

Yes.

And maybe just a follow up on capacity utilization rates, specifically for Crolles 300-millimeter.

Can we have an idea where you are today?

I don't think we give -- Jerome, we give information fab-by-fab.

Clearly, the utilization is not the best, especially due to the weakness we see with ST-Ericsson and products, but going forward I'm sure you captured the fact that ST-Ericsson has won a key design win with HTC recently, which is, obviously, a product which will be manufactured in -- is manufactured in Crolles at 300-millimeter.

Second point is also our imaging product line, if you look to our numbers, is doing pretty well and this is a key product, which is also manufactured over there.

And today, without giving you a specific number, this is not the factory where we suffer the most, which is, for the future, good news, because this is obviously future products and products for future business, which are manufactured over there.

Okay, thank you very much.

Thank you, Jerome.

Dino, next question, please?

The next question is from Mr.

Tristan Gerra of Robert Baird.

Please go ahead, sir.

Hi.

Good afternoon.

Just looking at the wireless JV.

You see some encouraging progress in terms of design wins, including the HTC one that's been advertised for some time.

Could you just reframe, perhaps, long term how strategically that wireless JV is important for ST and whether that strategic importance has changed, given the changes at Nokia since the beginning -- earlier this year.

Yes.

Well, I think for us there are two things that are important.

Of course, this business, from a strategic point of view is important because it's part of -- it's one of the two pillars of our vision that is the multimedia convergence and we are focusing on high-end consumer products using VLSI platforms.

So this is clear and very strategic to us.

But also what is very strategic to us is the financial performance.

So it's clear that we must make sure we get the two.

I mean, we cannot disassociate the two things, right?

So, I think we are encouraged by the progress in one of the ecosystems.

Of course, HTC now, we are mentioning HTC, because its the first result which runs in the shops, which is good.

It's good that it's on our NovaThor platform.

It's good that it's a prestigious name in the platform area.

It's in Asia, so it's a good example that we can make good products, also, for innovative and competitive markets.

But I think we have done good progress, in general, in the ecosystem on Android and, as I said, it's not only HTC.

We have one restructuring plan that is not yet giving any benefit.

Business was basically nothing, close to nothing, in the third quarter.

It is targeting savings for $30 million per quarter, so it's $120 million per year.

But, again, this is not enough.

So we need to do more in terms of covering more customers and it's strategic as long as financial performance will come in a reasonable timeframe.

Very good, thank you.

And just a quick follow up, how much revenues would you expect from your MEMS business this year?

I think it will double compared to last year.

This -- I mean, through the end of the third quarter I think I read before we grew 130%, but I think it's-- overall in the year, we will double.

And we have, of course, we have new products.

I mentioned here this fusion kit, this iNEMO, but we have two new families of -- two new families of product that are not really moving in terms of revenues.

One is our microphone, a digital microphone family.

The other one is the pressure sensor that is very important, particularly for Android smart phones.

And on top, the e-compass.

So it's a good business.

We are performing well, but there is more to come and, of course, it's important to move on here with all of these new families quickly.

Thank you, Tristan.

Dino, next question?

Next question, Mr.

Francois Meunier of Morgan Stanley.

Please go ahead, sir.

Yes.

Thanks for taking my questions.

Carlo -- Carlo Ferro, you were talking about improving the free cash flow in Q4.

Does it mean that actually you will turn free cash flow positive in Q4?

And maybe you can help us with two important numbers.

I mean, CapEx has remained quite high, actually, in Q3.

I thought you would have cut it.

So how much do you expect to spend in Q4?

What's your budget?

And maybe if you could give us a glimpse into the CapEx budget for next year, because I think -- for instance, I've got $800 million for next year.

I don't know, given what you've spent this year, it would be a sharp drop.

And inventory days, if my calculations are right, it was 98 days in Q3, down from 99.

Maybe you've got some slight difference, but that's roughly ballpark where we are.

Do you think inventory days will go down in Q4?

I understand inventories will go down in absolute terms, but inventory days, do you expect them to go down and maybe if you could tell us how inventory could go down in terms of absolute dollars?

Thank you.

Okay, Francois.

We'll take your sole question, right?

(laughter)

But it's all around the acceleration of generating free cash flow.

So maybe I'll start from this point and then elaborate on the capital expenditures and the inventory.

We -- in the second quarter, again, we have incurred negative cash flow and in third quarter we are substantially reduced from minus $250 million to minus $136 million.

The other data point on the third quarter, as you may have noted from the ST-Ericsson press release, the figures for all of ST-Ericsson is publicly disclosed, is ST-Ericsson use of cash in the quarter has been higher than $136 million, which means that the wholly owned businesses, obviously, in the third quarter generated some positive free cash flow.

Not yet enough and we have planned on accelerating it.

The key point is we have started to reduce capital expenditures in May-June, but in terms of payments, as you see from the press release, $384 million payment in the quarter is still a significant -- was still a significant amount in the third quarter.

We are now going really to substantially reduce.

We have already reduced so far in the fourth quarter, I would anticipate a very minor amount of payment for capital expenditure.

Overall, we believe we will position the year in the range of $1.250 billion of paid capital expenditures.

The received tools are much less, as you can expect, since Q4 2010 has been quite intense in receiving tools and Q1 '11 very intense in payment of capital expenditures.

So, in this respects, also, (inaudible) that the overall CapEx situation at a constant exchange rate, a current level of exchange rate, should not translate into a significant change in depreciation from '11 into '12.

Indeed, we do expect depreciation at the current exchange in '12 to very similar to the one that we have this current year.

Then for 2012.

For 2012, frankly, what we know is the first part of 2012 and capital expenditures for the first part of 2012 are planned to be very, very low.

However, at the end, from second quarter on, of course, we will moderate based on the need of capacity and the visibility we're going to have for the second half of the year.

Finally, on inventory.

On inventory we have reduced inventory in Q3, not as we have originally planned since, evidently, we did not meet the midpoint in terms of revenues, while we remain within the guidance.

And we can continue to plan to reduce inventory by a more significant amount for the fourth quarter.

Obviously, assuming constant exchange rate on the inventory valuation.

In terms of days and terms, we plan some acceleration, but at this level of revenues, frankly for us, the key focus is on extracting cash by reducing inventories in dollars and this is what we're currently doing, what we plan to do, what would help to have on the fourth quarter a level of overall cash flow that I cannot grant whether it would have a positive or a negative sign overall.

It depends, also, on ST-Ericsson's use of cash, but however, it will be a very marginal amount, either positive or negative.

Okay, thank you.

Can I ask another question about automotive in China to Carlo Bozotti?

Actually, you were mentioning a bit of a slowdown in the growth rate over there?

Can you, maybe, quantify that if you could?

And also, if you could tell us who you're shipping to in the Chinese automotive market?

Is that to local guys?

Is that to the Peugeot-Citroen type or is it to the German manufacturers?

Well, I think for us the -- we have really a very important position locally.

So we are the first supplier in the automotive business in China.

So, what we ship into China.

So we are the biggest.

We are the biggest supplier there.

And, of course, we also have a very important business with certain Western companies, particularly with the German companies that ship and sell high-end cars to Chinese consumers.

The decline that we see in the growth is not a bit, I think.

It's more material now, probably.

Paul is not here, Paul Grimme, but if I recall well, the projection for car volume growth the next year in China is in the range of 3%, which is well below what it was in the past.

So, yes, it's still growing, but at a pace that is well below what it sued to be.

Okay.

Maybe we should reconfirm this number with Paul Grimme.

I said 3%.

This is what I recall, which is a -- yes, which is a significant decline of the pace of the growth.

And you're seeing weakness across the board, so both with Chinese manufacturers and the Western guys?

Well, in Western -- in the Western it's not black and white.

I think in US it's relative okay and I have to say that there are companies in Europe that are still performing well or very well and there are -- and the other companies in Europe that are performing very less well.

There are countries in Europe that still okay and there's other countries, but it's obvious.

I mean, I would say that Italy and France in these days is weaker.

Germany is stronger and in Germany, maybe, somebody is stronger than others, but, of course, I cannot make the names of the customers.

Okay, thank you, guys.

Thank you.

Thank you, Francois.

Thank you, Francois.

Next question?

Next question is from Mr.

Bernd Laux of Cheuvreux.

Please go ahead, sir.

Good afternoon, together.

Good afternoon.

Can you hear me?

Yes.

Okay.

In your introductory presentation, you mentioned the reorganization for the digital processors and the imaging and I wonder if you could shed some additional light in the expected benefits, the -- if possible, a quantified progress in that respect and the timeline you have in mind in order to make that working?

And are there any capacity adjustments attached to that reshuffle or not?

Thank you.

Yes, the organization is what you see as ACCI, is our segment defined as ACCI.

So it's, of course, touching ahead, CCI and so basically what we have done, we have put all the application processors for car navigation, TV and set-top box in the same unit.

Today we have the same structure in terms of cause for what we do, for instance, in TV and the set-top box.

It was not the case in the past, so we managed to convert and thanks to this convergence of the utilization of the Arm cores for car navigation processors, TV processors and set-top processors, we are going to centralize this platform effort in one unit and particularly in one R&D unit.

And this will be what I have called, in fact, a Multimedia Convergence Platform Group and this group will be managed by Philippe Lambinet.

Then there is the second part of our digital activity that is the traditional ASIC business for communication infrastructure, for the digital core of the printers, but this must be CMOS ASICs, plus the imaging products and this is combined in another group and this group will be called Imaging and ASIC Group, therefore IAG.

So, the two groups will be part of a segment, will form a new segment, basically, that is the digital segment of the Company and starting from the beginning of next year we will report using this methodology.

The new organization will be effective at the beginning of next year.

There are two axes of value for us.

The first, of course, thanks to the effort that we have done in the past, for instance in the convergence of the Arm core, we expect more effective R&D and reduced time to market, but there is a second vector and, of course, it's about synergies and we believe will be able to extract synergies from what we do in digital, but also from what we transfer from the existing CCI into analog.

In fact, from CCI we are transferring our microfluidics activity into our MEMS operation and we are transferring the module control activities for computer peripherals into our BCD activity that is, of course, in IMS.

So, there will be more focus on digital on one side and there will be more focus on analog on the other side.

This focus, the intention, as I said, is to gain in terms of effectiveness of the -- in the R&D effort, but on the other side, also, to extract more synergies.

And the new organization is effective the 1st of January and, therefore, I'm going to say that the IAG Group will be managed by Gian Luca Bertino.

Thank you.

Thank you.

Thank you, Bernd.

Next question, please?

The next question is from Mr.

Didier Scemama of RBS.

Please go ahead, sir.

Hi, good afternoon.

Thanks for taking my question, gentlemen.

Good afternoon.

I'm wondering -- good afternoon.

Yes, I'm just wondering, as regards the first quarter of 2012, I know, Carlo, you said you were a bit cautious on that and I can understand that, but if I've done the math correctly, you've under -- your 2Q, 3Q and taking into account your Q4 guidance, you're about 25 points below normal seasonality.

I understand some of that is due to ST-Ericsson and also exiting the (inaudible) market, but don't you think you're slightly, if not massively, under-shipping end consumption?

And secondly, relative to some of your peers that have already said that Q1 is shaping up to be better than normal seasonality, do you think you can participate in that, as well?

I think one of your peers said that he has -- they've never seen more than two quarters of inventory correction in the disty channel.

Thanks.

Yes.

No, I -- of course, we are not giving a guidance today for the first quarter of next year.

I think the assumption we are taking today is, as I said, we do not believe it's just corrective -- a correction on inventory.

We have some evidence, I think it's for us and it's for everybody in the world, of weaker underlying demand.

And, of course, this is what of concern.

I am sure that this is clear.

It was clear and it is clear to many other countries.

It is not just an inventory correction because we see it.

The POS of our distributors is for ST but is also for our competitors, is declining and this is not really just an inventory -- not an inventory correction.

I think that for sure we will go on clearing inventory and today the priority is, as I said, twofold.

One is market share and the other one is the cash and, of course, is the inventory reduction and today we expect that there will be a further significant reduction of inventory in the course of the fourth quarter, but we anticipate to go on and take all the necessary measures, also, in the first quarter of next year so we expect a sub-optimal loading situation in Q1 next year again to make sure that we go back to a very clean position in inventory and, again, priority is cash.

I want to come back to market share.

In the first nine months, apart ST-Ericsson, we grew 9.3%.

I believe it's higher than the market drop and I also have to say that 20 semiconductor companies made a profit warning in the course of Q3.

We did not.

I mean, we were a little bit more cautious in July.

So, indeed, there is a massive inventory correction, but there is also something at the level of the underlying (inaudible).

At the same time, you're not cutting any costs.

So, I'm just wondering why you're not doing that if you think that demand is weak?

No, we are definitely cutting costs.

We are cutting costs.

Today it's a little bit among the lines and we have not quantified and we will not quantify it, but it's not immaterial what we are doing in a certain area of our business.

We have a running restructuring plan in ST-Ericsson that is at the level of $120 million saving per year.

We have -- we are ready to take all necessary measures to go back to an R&D level is that is congruent and compatibles with the level of revenues, of course.

And we are very aggressive in terms of repatriation and we are using all of the tools that we have in Europe to reduce cash costs.

Some of these tools are very competitive.

I think what we can do in France and in Italy in terms of using such tools for a reduction of the activities in the fab are pretty competitive.

So, we'll really focus on the cash and we have on the table a number of initiatives to make sure that if the market will not resurrect all the necessary actions will be taken.

We know it's a cyclical market, but it's going to come back at some point.

Can you say again?

Cyclical.

It's cyclical.

It's going to come back one day.

Yes, it's going to come back but 2009 is close enough and so we need to make sure that we are better prepared to manage these cycles.

This year we gained market share so far in the first nine months, without ST-Ericsson.

We have two problems.

One problem is the market, of course.

The other problem is called Nokia and we need to be capable to absorb these swings that are now more frequent -- it's only two years -- and more rapidly.

All right.

Thank you so much.

Thank you.

Thank you, Didier.

Next question, please?

The next question is from Guenther Hollfelder of UniCredit.

Please go ahead, sir.

Hi.

Thank you.

I had a question about the customer-specific issues in the past quarter regarding your iPad business in PDP and, on the other hand, the imaging business I think where you were impacted by two customers.

So, I was wondering whether this business will remain on a lower level going forward or whether you would expect that at some time a rebound here?

Carmello speaking.

I'm answering you.

Actually, we clearly said in the outlook that the iPad was affected by one major customer but what we didn't say, there are lot of design wins that will materialize the next year and this will be pretty big.

So the iPad will be resurrected next year thanks to the larger customer base that we started identifying and designing at since earlier this year.

So, that's so far concerning the iPad.

Did you have any other question concerning PDP?

Well, I can cover imaging.

This is Philippe here.

On imaging, the impact is still relatively manageable because we are mostly focused -- at one of our biggest customers, we're mostly focused at the low-end phones and the feature phones, which haven't been so dramatically impacted.

So, this year is still a good year for imaging and this year, also, is a very active year into getting designs in other customers to diversify our customer base and our application base.

So, we have a strategy in place to diversify products and customers, but this year is a fairly good year for imaging because we cover markets that are not so affected.

Okay, thank you.

Thank you, Guenther.

Thank you, Guenther.

Next question, please?

The next question is from Mr.

Sandeep Deshpande of JPMorgan.

Please go ahead, sir.

Yes, hi.

Thanks for letting me on.

Just a quick question.

Carlo Bozotti, you answered, I think, a reporter question this morning where you said that this was not the right time to sell ST-Ericsson.

So, is there a right time to sell ST-Ericsson is my question.

I'm sorry.

I didn't say that.

The question was, have you -- are you planning to sell ST-Ericsson and, of course, I did not say that this is not the right time to sell ST-Ericsson.

I said that what I already described before, I think this is important because, of course, it's part of our global strategy.

We have these two pillars we want to be strong in two pillars.

One is about analog power, microcontrollers and MEMS, which is very simple for many markets, including automotive and the other one is high-end products for smart phones, tablets and digital consumer.

This is ST, right?

So, the first is simpler.

The second is more challenging.

Now, the second today is more challenging, is more challenges because we have a very important R&D effort that in digital consumer is 100% ST and in the area of wireless is shared with the Ericsson Group.

Now, what I said is that this is part of our strategy.

We support this strategy, but, on the other hand, we need to see the results and, therefore, of course, we will take all necessary measures to make sure that we are supporting the strategy.

The result will be coming sooner.

And I think I want to clarify here, so the interpretation is not -- this is not -- I didn't say this is not the right time to sell, assuming that there will be a good time to sell.

So, but, of course, we need to make sure that the results will be coming.

Okay.

Thanks for the clarification.

Thank you.

Secondly, on -- you've highlighted, I mean, your fully owned businesses, which have done better, but I mean, just looking through the operating margin of the fully owned businesses in this up cycle, overall the operating margins have been about 12.5% or so in that up cycle, starting January of 2010, I mean, which is, I mean, fairly good, but given that now you're already, I mean, the fully owned businesses moving into a loss-making territory into the fourth quarter and maybe remaining in that level in the first quarter, I mean, what is -- I mean, you've talked about, in the past, having 10%, 12% margin over the cycle and that has not been achieved in one of the best semiconductor cycles in 10 years.

So clearly, there is something about the product mix within STMicro, probably in the old ACCI business, which you're now breaking up into different bits, but which is not meeting the kind of margin structure that you have in the old IMM business, which, of course, has very strong margins.

(inaudible) maybe, Sandeep, we may expound more on how the (inaudible) sometimes with you on the understanding that was a (inaudible) of our business, but we do not provide the guidance of operating income as a company, we do not provide by segment, but, frankly, I can easily exclude your assumption that the wholly owned business is in a loss-making position this coming quarter.

Okay, thank you.

Thank you, Sandeep.

Next question, please.

The next question is from Mr.

Janardan Menon of Liberum Capital.

Please go ahead, sir.

Yes, thanks for taking the question.

Just going back to ST-Ericsson and your comment in your opening remarks and your press release saying that if there's significant worsening of market conditions, we will consider additional action to improve performance.

I was just wondering what those additional actions might be.

Well, of course, I think it is clear that there at least two axes and I'm talking conceptually, because there is nothing on the table and today the plan is to make the turnaround with what we have on the table that is a restructuring plan, that is an important restructuring plan, a good presence in Android and, of course, we want to expand more in terms of customers and systems.

But conceptually, there are always three things.

This is -- let's start from something that is very, very simple, for instance.

This is now ST-Ericsson is basically a separated company and there are certain level of overlaps, but if you take our G&A performance, for instance, in Q3 this year this was at the level of 4.5%, right, Carlo, our G&A without S, our G&A performance?

And for ST-Ericsson, this is definitely not the level.

So, this is one angle.

Of course, this has a lot of implications, because ST-Ericsson today is a separate company.

But this is one, again conceptually, potential thing.

Another potential thing, of course, again conceptually, is the product scope.

Today the product scope of ST-Ericsson is pretty broad and, of course, we are very fine to support this product scope with the vision that we have today, but, as we said, if the condition will change, we will take actions.

Another angle is a potential -- other potential cooperation with other partners.

So, you see, there are -- again, it's not on the table, but conceptually, a number of vectors that we can -- that we focus on in case we believe it's the time to make additional actions.

Okay, thank you.

Very clear.

Just to follow up on your weakest segment sequentially into Q3 was automotive, which is, to some extent, in contrast with many of your peers, both in Europe and the US, who have been seeing somewhat more stability in the automotive segment compared to industrial, distribution, et cetera.

I was just wondering whether you have any ideas on why you're seeing some more weakness?

Is it the customer base or is it more than the entertainment area is where you are exposed to -- is more volatile than some of the, as I recall, 50 power-train kind of areas in the car?

And so you have any -- can you give any ideas, any insight, into how the automotive segment will be into your Q4?

Yes, well, I think, frankly, looking at our performance in the automotive since the end of the 2009 crisis, we have definitely gained market share and this year we will grow faster than the market.

In Q2, we had some a fantastic quarter and we had a fantastic quarter because there was also an important business coming from Japan that -- coming from the Japanese disaster, in fact, as a consequence.

And, of course, then we saw the discontinuity in Q3.

I have also to say that our base is more in Europe, so seasonally Q3 is weaker.

But I think it's very, very specific to certain customers and really not related to our performance in the automotive.

And if we move on to on, I would look to Carlo what is the visibility in the next few quarters, but I think short-term there is a degree of stability, right, Carlo?

And then starting to grow again from the beginning of next year.

Yes, Carlo.

At the end, we need, also, to consider that the ST business in automotive is very much well geographically distributed, however, it has, also, a significant business in Europe and normally the activity in the third quarter for the automotive business in lower than -- is seasonally lower.

So, we have experienced in the third quarter, also, this ingredient.

Going forward, frankly, we expect at the end the fourth quarter automotive to move on as the overall situation of the industry is in the fourth quarter.

However, we have anticipated in entering the year that we were expecting the automotive business to grow in the range of 20% on a year-over-year basis from 2010 into 2011.

Maybe it will not exactly be 20%, but it will be very, very close to 20%.

So, a significant year-over-year growth for 2011 over 2010.

Okay, thank you very much.

Thank you, Janardan.

I think we have time for one more question.

(Operator Instructions).

The final question is from Mr.

Gareth Jenkins of UBS.

Please go ahead.

Yes, thanks.

I guess just a couple, if I could.

Firstly, just on the microcontroller market, I wonder whether you can say whether you've lost market share there or whether that's a market dynamic that it's weakening?

And likewise, in the industrial space, I wonder whether you could just give a sense of how the industrial markets are moving for you into Q4 and Q1?

And then secondly, I just wondered whether you can call out any kind of one-off-related under-saturation charges, both in Q3 and into Q4, whether you'll see any inventory write-downs, et cetera?

Thank you.

So, market share on microcontrollers?

No, we are gaining definitely market share, big time, especially in this (inaudible), which is where our major effort has been put on digital devices.

This is for the digital portion, same as already said for MEMS in the analog portion.

So --

We do not have -- I mean, we saw a real (inaudible) for several quarters, very strong growth, and I think this is a market adjustment, is a global adjustment, but we are absolutely convinced we are gaining share in the area of microcontrollers.

It's a good business.

It's a healthy business.

You have seen that we have introduced the new family M4 a few days, I mean, a couple weeks ago.

It is a higher performance 32-bit Arm core.

So, I think it's a significant adjustment of the market after the impressive growth for several quarters.

There was another question on last year, right?

No, the second question, the answer was about the effect of unused capacity to the gross margin, right?

Yes.

Yes, for the third quarter, the impact is in the range of 1.5 to 2 points, obviously negative to the gross margin dynamic.

On the fourth quarter we expect it to raise in a range of 4.5 points.

So it's quite significant.

We have about 2.8, 3 points of higher impact in the fourth quarter in respect to the third and it is just very much just like the guidance for the fourth quarter gross margin.

I'm sorry.

Could you just suggest how that will move in Q1, please?

Well, on Q1, I repeat what we said earlier.

It's a little bit early to have a full visibility.

Under the current manufacturing plan, we expect the fab not to be loaded at the optimal level and some unused capacity to continue through the quarter.

How large it could be, frankly, we need a few more months of booking building and demand to be more accurate on this point.

At the current level of visibility, what we anticipate is that some charge for unused capacity will continue through the first quarter, 2012, as well.

Thanks.

I'll just confirm that you see no inventory write-down at all for Q4?

I'll say that, as usual in these phases of market demand and booking decline in the third quarter, the overall impact of inventory write-down and inventory risk has been a little bit heavier than what it normally is and this is, at the end, what (inaudible) obviously absorb and all what is needed under current circumstances.

Thank you.

Thank you, Gareth.

We'll take one more question.

The last question for today is from Mr.

Johannes Schaller of Deutsche Bank.

Please go ahead.

Yes, thank you for taking my question.

Just, really, one on the HDD SOC exit that you're basically doing.

Could you remind us what, roughly, your annual revenue run rate is here?

Is it roughly, I think, $400 million?

Is that the right number to think about?

And then, maybe you can give some color about the timeframe you think or you plan to ramp that down from here?

So, I think the first question is on the run rate of the billing and Carlo will provide and I think, Philippe, can you comment on the Orly?

Hard-disk drive.

Hard-disk drive.

Oh, the HDD.

No, I think -- sorry, we understood [HED].

I think we -- as we had largely anticipated, I mean, anticipated, I mean, we are out from the SOC, so the contribution is basically zero and we have an important business in the area of motor control and we do not provide the figures here, because they are really very specific to very few customers and product line.

And this is the part of the business that we are now merging with the rest of the BCD in IMS, right?

So but it is absolutely not a new thing that we are exiting -- we have exited now, because in Q3, the revenues were already basically zero.

The system-on-a-chip market, the digital core of the disk drive, so this is now the past for us.

So, it's done.

It's finished.

Okay, thank you.

Very clear.

Thank you, Johannes.

I think at this point we'll go ahead and close the call.

Carlo, any final comments, or --?

No, it's fine, I think.

Okay.

We'll go ahead and close the call.

Thank you, everyone, for participating and thank you, Dino.

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

Thank you for joining and have a pleasant day.

Goodbye.