意法半導體 (STM) 2012 Q2 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon.

Welcome to the SCM second-quarter 2012 earnings results conference call and webcasts.

I am Goren, the conference call operator.

I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded.

After the presentation there will be a Q&A session.

(Operator Instructions).

The conference must not be recorded for publication or broadcast.

At this time it is my pleasure to hand over to Mr. Tait Sorensen, Director, Investor Relations.

Please go ahead, sir.

Thank you, and thank you to all for joining our second-quarter 2012 conference call.

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

Joining Carlo on the call today are Philippe Lambinet, Chief Strategic Officer and Executive Vice President of the Digital Sector; Mario Arlati, Chief Financial Officer; Carmelo Papa, Executive Vice President of the Industrial and Multisegment Sector; and Lorenzo Grandi, Corporate Vice President, External Reporting.

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?

Thank you, Tait, and thank you for joining us for our second-quarter conference call.

Let me share some key points before going into a review of the quarter.

First, net revenues and gross margin were in line with our guidance, and we saw a significant improvement in our net results.

However, in June we did see a negative impact on our second-quarter earnings as a result of the macro-driven changes in the market environment.

Second, we had an active quarter with respect to our core portfolio, as we will hear from the level of new design wins and product ramps.

Third, we have set three key priorities with which we will manage the business during the second half of 2012 and beyond.

Priority number one is to gain market share, and we want it to be profitable market share gains.

As part of this, we want to continue to expand our customer base, which will allow -- which will also help reduce the risks in our business.

Priority number two, we are focused on moving our VLSI businesses, meaning our digital assets at ST, including ST-Ericsson, towards self-sustainability to drive improved financial performance.

And priority number three, we are focused on carefully managing our assets and investments, and we can see this evidence in our revised CapEx spending and in our net financial position remaining strong.

All these actions will enable us to improve our profitability and to enhance our flexibility to adjust to market changes.

Turning now to the second quarter in detail, revenues were up sequentially 6.5% to $2.15 billion, and gross margin improved 470 basis points to 34.3%.

We had expected the growth to be broad-based, and it was, with all product segments reporting sequential growth even with the macro-driven change in customer demand in June.

Revenues from our wholly-owned businesses increased 4.4% on a sequential basis, with APG and AMM somewhat below our expectations, while digital and power discrete came in at all above our expectations.

AMM's second-quarter net revenues increased 2.2%, led by our analog and microcontrollers applications.

Our automotive business grew sequentially 3.4%, driven by market share gains and growth in China, Japan, and the US.

Digital revenues increased about 5% sequentially thanks to our set-top box products and despite a decrease in imaging due to the situation that specific customers which has also significantly impacted the profitability of the digital segment.

Power discrete saw a 12.3% sequential growth in the quarter, led by power MOSFETs.

ST-Ericsson had been expecting low double-digit sales growth and came in higher at 19% as the NovaThor U8500 [modart] systems started to successfully ramp at major customers, including Samsung and Sony Mobile communications.

As I outlined at the start of the call, a key priority for the second half of the year is gaining market share, profitable market share growth.

We had a number of new design wins in the quarter -- healthcare and wellness, power management and energy savings, trust and security, for instance.

And we had a number of new product ramps during the second quarter.

We are winning for a number of reasons -- breadth of our technology, internal manufacturing, lower power management capability, and others.

And let me begin with examples of our design wins in smart consumer applications.

For our MEMS and sensor business, I'm proud to announce we ramped production of a new pressure sensor and an iNEMO module containing an integrated gyroscope in the Accelerometer for Samsung's latest and most advanced smartphone.

However, we have won many sockets for Russian MEMS, temperature sensors, and MEMS microphones.

We shipped in volume in the second quarter AMOLED drivers for smartphones, and we have also enjoyed fast production of the new 40-nanometer [Intech 4 set-top box chips worldwide in cable, terrestrial, satellite, and IPTV markets.

In the trust and data security marketplace, we announced the Wasion Group is using our Near-Field Communication contactless interface and tamper-proof secure elements in a smart meter that the customer will deploy in Chongqing, one of China's largest cities.

In the power management and energy-saving sector, we started deployment of STarGRID powerline communication system-on-a-chips in China for new smart metering programs, as well as collecting important design wins in the automotive marketplace for a range of body and powertrain applications in the US and in Europe.

Our discrete products also made progress.

For example, our extra-low capacitance protection devices won sockets in high-speed applications with several leading smart phone and consumer electronics manufacturers.

On top of the new design wins, let me share important products that have been now been launched.

First, we announced full production of our STM32 F0 microcontroller family at the beginning of the quarter, and then a few weeks ago announced the new STM 32 F3 family that combines exceptional analog peripheral integration with digital signal processing capability.

In MEMS, we also announced an Accelerometer for safety applications and new gyros and Gyro Accelerometer combos that are among the world's smallest.

Small size and low power are consistent themes for ST.

We also introduced a tiny antenna-sharing chip that will enable faster and more accurate location-based services while allowing WiFi, Bluetooth, and GPS receivers in a smartphone to share one antenna, saving space and reducing power consumption.

We also took an important step towards creating a unified processing platform, thanks to the recent combination of ST's strong existing competencies with those of the ST-Ericsson application processor development team.

Turning now to our gross margin, our results were on track at 34.3%, improving 470 basis points sequentially or 210 basis points, excluding the one-time charge related to the NXP arbitration award last quarter.

We benefited from a level of saturation, product mix, and some currency benefit on the order of 30 basis points.

We still are not optimally loaded, with about 70 basis points of unused capacity charges in the second quarter, and we are still running at less efficient levels from a manufacturing perspective.

Looking at our spending, overall, operating expenses decreased by $34 million, mainly driven by cost realignment programs at ST-Ericsson.

In combination with ST-Ericsson, our goal is to deliver continuous improvement in spending levels throughout the remainder of 2012.

In the second quarter we saw a significant improvement in our net result, with a net loss of $75 million compared to a net loss of $176 million in the first quarter.

Of course, substantial progress remains to be made.

A critical component of our capability to improve our financial results is ST-Ericsson and the reduction of losses [by two] at ST-Ericsson moving from Q1 to Q4 of this year is on track.

At the beginning of my remarks I indicated that another key priority for the year is careful management of our assets.

You may recall we started 2012 with the assumption of a much lower CapEx plan compared to 2011.

In the first quarter we spent $125 million, and in the second quarter, $70 million.

And last night we stated that with our current visibility we will reduce our CapEx plan by 25% this year compared to our original plan for 2012.

Our focus will be on manufacturing improvements that bring productivity gains.

So our spending will be in the range of $500 million to $600 million for the full year 2012.

The careful management of our assets includes our cash.

So with a reduction in capital expenditures; reduction in operating expenses; focus on profitable market share gains, and moving our DSI business to self-sustainability, all these steps should help us to substantially improve our free cash flow over time.

For 2012 our goal remains to be positive from a free cash flow perspective on a consolidated basis.

The first quarter we had a positive free cash flow, and in Q2 it was negative, including a large amount related to the NXP arbitration award payment.

If we look at the first half in total, it was a negative of $31 million.

However, it included the $60 million one-time payment to NXP.

While we expect free cash flow to be negative in the third quarter, we are on target to achieve full-year 2012 free cash flow goal.

Now let me turn to the market environment and our third-quarter outlook.

If we look back, the first quarter was clearly the bottom of the inventory correction.

In Q2 we started to see growth, and our view is in the third quarter, when we start in April, were based on strong bookings data.

In May, at our investor day in New York, we indicated that bookings were still pretty good.

At that point we continued to track solidly towards the midpoint of the Q2 sales range, if not even a little higher.

Since then we have seen a change in customer sentiment and more volatility, driven by macroeconomic uncertainties.

Of course, trying to assess the potential impact of a macro environment on the third quarter as difficult, as the uncertainty is high and visibility is more limited.

Nevertheless, we expect sequential revenue growth of about 2.5% at the midpoint, plus or minus 3 percentage point.

ST-Ericsson has indicated flat sequential revenues.

Growth in the third quarter will be coming from ST's wholly owned businesses, with our new product momentum, notably, in MEMS, microcontrollers, and power MOS and IGBT.

We have a high level of confidence in our new products and value they bring to customers.

With respect to the gross margin, we are expecting 35.3% plus or minus 1.5 percentage point, including a similar level of unused capacity charges as in the second quarter.

To conclude on the call today, we have shared our key areas of focus.

With respect to revenues, our objective is to deliver innovative designs and products in a timely fashion to gain market share in several strategic product families; to carefully manage our balance sheet during this expected market softness in the second half; and to evaluate and be selective in our investments with regard to exit the year with a net financial position similar to or better than at the end of 2011.

And most importantly, we are focused both at ST and at ST-Ericsson on aligning our resources with their respective market opportunities.

In the third quarter we expect to significantly reduce the level of operating expenses compared to the second quarter.

Our goal is to become a much leaner company, better able to navigate the highs and the lows of our industry, reduce our earnings volatility, and significantly improve our financial performance.

And now my colleagues and I would like to take your questions.

Thank you.

(Operator Instructions).

Kai Korschelt, Deutsche Bank.

Yes, thank you for taking my question.

My first one was on bookings now.

You've obviously said that, similar to your peers, that there has been weakness in June, but I'm just wondering if maybe in the first few weeks of July, if there's been any sense of stabilization relative to the June run rate or whether it has continued to deteriorate.

That was my first question.

And then my follow-up, please, just wondering on the automotive outlook for the third quarter.

Could you maybe give a bit more color on the seasonality, and also maybe some of the trends that you are seeing in China?

Thank you.

Yes, well, in July, supply is very much stable versus June.

Of course, when we met in New York May 23, the booking trend was better.

Then in June we saw a softening of the bookings condition, and July is pretty much stable versus June.

As far as automotive is concerned, what we see in Q2 at this point is the greater stability, pretty much stable versus Q2.

Of course, it is not the same in the various regions.

In Europe, for instance, there is a part of Europe that is very, very weak -- very, very weak, while certain customers, Germany -- they are still okay.

And in China, what we see is a slowdown of the growth.

So overall, despite the seasonal period in the third quarter, we see a degree of stability in the course of the third quarter compared to the second quarter.

Okay, thank you very much.

Thank you.

Next question, please.

Gareth Jenkins, UBS.

Yes, thanks.

One housekeeping question, if I could, and then a couple of other quick ones.

Just on the housekeeping side, I wondered if you could help us with the tax rate through the course of the rest of the year and maybe into next year.

Obviously, it's moving around a fair bit at the moment.

And then just secondly, I wondered if you could just give a sense, following up on Kai's question on -- in terms of the profitability, I guess, within digital and the movement going forward.

Can I just confirm that you said you expect all packs to be down this quarter and in Q4?

And given digital is, I guess, quite a bit weaker than certainly we were modeling in terms of profit, could you give a sense of whether ST-Ericsson's costs are coming into that business already or whether that is still to come?

Thank you.

Well, let's start on OpEx.

What we expect in Q3 is a significant reduction of the OpEx.

I think the visibility we have is to be in the, let's say, in the -- is around 5% expense degrees.

Of course, there is a number of contributors to this significant decrease of the OpEx.

Number one is, of course, the restructuring plan that we have announced with ST-Ericsson in April.

The second is the contribution from a more favorable euro/dollar rate.

Our Q1 -- sorry, Q2 effective rate, including hedging, was 1.315.

In Q2 we expect to be in the range of 1.27.

And the third ingredient on the OpEx, of course, is summer in Europe.

So typically, the vacations are concentrated more in July and August.

So overall, we expect a material reduction of the OpEx during the course of the third quarter.

As far as digital and ST-Ericsson, this is the priority of this year.

As you know, during the last couple of years we have lost in terms of revenues $1 billion of sales with our former major customer.

And we are -- this is the top priority for ST this year, is to make sure that the digital block of the Company, that is of course the digital sector and ST-Ericsson, and those things that are common -- like, for instance, the application processor.

On all of this block we want to get into a sustainable business model from a cash point of view very, very rapidly.

And it is important to underline that the actions that we have announced during the course of the second quarter in April are important for three reasons.

Reason number one is the merge of the two application processors activities are very relevant from a strategy point of view, opening to new markets, opening to synergy extraction opportunity.

Number two, ST-Ericsson announced the $120 million saving package, which is in execution at this time.

And the third element is related to the flexibility of the new strategic plan of ST-Ericsson that is also considering additional partnerships with different schemes in terms of licenses of products, blocks of products.

And having said all of that, it is clear that what we have today, looking at our digital sector of business and ST-Ericsson, is not sustainable with the escalation of the top line that we have at this moment without the contribution from our former major customers.

And therefore, the key priority for ST this year is to make sure that also this block of the Company becomes sustainable.

And from a tax rate point of view, it's very simple.

You know, here the point is for the ST, really, on business, the effective exchange rate is as usual, is about 16%, plus/minus something.

Unfortunately, the ST-Ericsson losses do not, cannot contribute to offset our earlier-on business profit.

And therefore, our tax rate is higher at this moment.

And this is also visible in our results.

And also there is a systemic gap between our tax rate, including ST-Ericsson, at the consolidated level and the model that we received from many of you.

So I think I did cover the three things, right?

Yes, thank you.

Thank you.

Thank you, Gareth.

Next question, please.

Sandeep Deshpande, JPMorgan.

Two questions if I may.

Firstly, I have a question on ST-Ericsson itself.

You have possibly seen this deal Samsung has done to acquire IP in the connectivity space.

It is potentially likely, given what they are saying to their investors, that they may do so in the baseband space as well.

Given that, if Samsung were not to buy IP from outside, like they do at the moment with ST-Ericsson, would there be a reason for ST-Ericsson to be the entity it is, given that Samsung may decide to internally source baseband IP?

And I have a follow-up question.

Yes, you know, we cannot comment on all of this.

I think it is, of course, not possible for me to comment.

Our motivation of course, and the motivation of management of ST-Ericsson has rapidly changed in the pattern that we have in terms of financial results.

But I cannot get into this kind of discussion and details concerning one of our major customers.

So this is -- so let's go to the second question.

Okay, maybe I'll ask the second question.

In terms of -- in the digital business itself, how is the profitability going to improve in the digital business in the face of the weakness in the end markets at this point?

There are two elements.

The first element, of course, is referring to our imaging business.

Today we have two customers, and I think most of you know what are the two customers; one is our former major customer, but there is another one that is RIM.

And trust me, this is not helping at all.

But the good news is that we have won four new major customers with a number of new products.

And this is not only in the area of smartphones, so this is a result of the diversification efforts that we started a few years ago-- a couple of years ago, in fact.

And despite the pressure that we have been applying in the short term due to the specific performance of our two major customers, I am confident that we have a great opportunity to grow this business, even with a significantly higher margin because, as I said, it is a more diversified business in terms of final applications.

The second element is very clear.

The second element is related to the move that we have done in April, merging the two application processors and activities.

We expect to extract significant synergies in the digital sector.

And of course, we are focusing on this at the very moment.

Thank you, Sandeep.

We'll move to the next question.

Didier Scemama, Merrill Lynch.

Thanks for taking my question.

A few questions for me, if you don't mind.

Just going back to the second quarter profitability of the core business, can you just explain the reasons why autos and AMM EBIT was virtually unchanged sequentially, despite a pickup in top line?

Your gross margins are in line with your guidance, so I was just trying to understand exactly what happened there.

And then I've got a second question with regards to automotive and the outlook for the second half.

I know -- I think Kai asked a question about China -- but if you look at the inventories at the car dealer level for both the foreign brands and the local brands, they are quite materially above long-term averages.

So I was just wondering if you heard any production cuts for any meaningful change in bookings from your local OEM customers?

Thank you.

Well, let's start on the second one.

As I said, today the visibility for us is to be stable moving from the second quarter in the third quarter.

I have to say, if we go back two, three months ago, our visibility was to grow even in the third quarter, despite the seasonal factor in Europe in summer.

And of course, this is certainly related to the overall macroeconomic situation.

If you look at AMM, we did not grow in AMM.

I think the key reason for this is a new mix of products that is ramping up.

And while certain customers, their ramp-up was pretty rapid -- for instance, the pressure sensor that we have announced.

There are other customers where the pattern is not exactly the same.

But I can say that the visibility that we have for degrees for a great expansion in this business related to new models from our customers and new products from ST.

We have also decided to really talk with some MEMs, and a good example is the new products that we are introducing.

We are moving from accelerometers and gyroscopes to a much wider portfolio.

Again, the effort that we have done to ramp up the pressure sensors an inch or two from nothing to very high volume was an impressive effort.

This is a good example where we are investing in this area.

But of course, we have more, like for instance, the microphone that now starts to be pervasive in many, many customers.

So it is really the effort that we are putting in both there on top and the R&D on many new products, including automotive for the MEMS family.

As far as automotive is concerned, of course we are comparing apples with apples.

And we do not see any improvement here, but there is a very significant, very significant improvement in the line of others that is very material.

And this is related to a much better, a much better loading in our fabs, and these fabs, of course, are working for automotive, are working for MEMS.

This is not visible as reported, but is in the line others.

Okay, I got it.

And then I was just wondering, when you look at -- obviously no one has got a crystal ball as to how things are going to pan out in the second half in terms of the macro environment.

What is your expectation when it comes to production or utilization rates moving into Q3, Q4?

And at which point will you decide to take down your production level given the inventory days that you have, which have come down, but remain a bit high, I would say, relative to historical norms?

Thank you.

Yes.

Well, as far as Q3, the plan that we have is a plan of stability.

I have to say that if we go back to the end of -- I mean, the middle/end of May, our plan was more aggressive for Q3, so some corrective actions were taken.

If we look at Q4, today again the visibility in terms of loading is a visibility of substantial stability.

However, of course looking at Q4 in our business, particularly looking at the pattern of application, in case of need, there is always the opportunity to do something more at the end of the year, at Christmas time.

All right.

Thank you so much.

Thank you, Didier.

Next question, please.

Andrew Gardiner, Barclays.

Thanks very much.

Just in relation to the last question, in terms of your production and selling to the channel, how are you seeing the channel inventory at the moment?

If I remember rightly, at the first quarter you'd said that some areas were cleaner than others.

In particular, Asia was looking all right, but some of the other regions were not -- the channel wasn't quite as clean.

Given the lower bookings that you've been seeing over the last few weeks, where do we sit today?

We did improve.

I think the stock turn at our distributors did improve.

However, the sentiment is not exactly the same as the sentiment that we had in May.

And while just looking at the stock turn performance at the end of the quarter, we did improve; sometimes significantly everywhere.

Their approach is prudent, and they are very cautious in giving more orders.

So there is a clear improvement in the stock turn at our distributors, but their approach became more conservative in terms of the order flow in the month of June, despite the fact that the inventory position is much cleaner compared to the beginning of 2012.

Thank you very much.

Thank you, Andrew.

Next question, please?

Peter Knox, Societe Generale.

Thanks for taking the question.

Can you give us a little bit more color about the gross margin guidance for the third quarter, because it seems that currency benefits would actually account pretty much all the 100 basis points of margin improvements you're outlining.

Presumably, mix is slightly positive, if ST-Ericsson is going to be flat in terms of sales.

And are you going to see any reduction at all in the underutilization costs?

Thank you.

Well, on the gross margin --

I can take the question on Q3.

Gross margin, on the dynamic of the gross margin -- we see actually in the Q3 gross margin an increase of 100 basis points.

As we said before, let's say in terms of loading, we will be similar to the loading of Q2.

This actually -- the news that we offset is likely slightly higher, and this will impact around 20 basis points negative gross margin.

Then we will have a positive effect on the efficiency.

Overall, let's say between our news and efficiency we should gain 60 basis points.

Then there will be an impact, a positive impact, of course, on the dollar, the exchange rate of 70 basis points; while, let's say, we will have between prices mix around a 30 basis points negative.

So this is the dynamic for the gross margin in the next quarter and moving there.

So we see, let's say, and improvement of around 100 basis points.

So the dollar effect is not yet really the major contributor, because as I said, due to the hedging protection, let's say, we move from an average of about 131, 132 in Q2 to an average of about -- I mean, at this point we have estimated at 127.

127, yes.

Today in the model we have a slight deterioration in terms of acceleration plus the significant improvement in terms of efficiency.

Okay, thanks.

Thank you, Peter.

Next question, please.

Francois Meunier, Morgan Stanley.

It is Francois from Morgan Stanley.

Yes, I've got a question about your power chips division.

It looks like your IGBTs and MOSFETs have done very well in Q2 -- up to 12% sequentially.

And I think you are gauging for good growth in Q3 as well.

I was wondering -- you got a competitor not far from you in Germany, Infinium, which is not doing so well at the moment in power devices.

I was wondering if you are gaining market share from them directly or indirectly, or if you were gaining share from anyone else, and what was going on in this space?

If it's basically good chips in the low end, or maybe moving up the value chain, maybe you have power devices and power modules.

I do not want to comment tricky on my competitor because I cannot.

But what I can tell you that we have today very competitive technology for IGBT, both for those three devices and applications and for modules, which is a plus that we have in the past.

And considering that we are small in that area, our modules can be an area of harvesting for the future.

However, having said this and considering that we grew more than 12% in the eye of the street, we remain cautious for two simple things -- the stocks and distributors.

Though diminishing in absolute volumes, we are -- do not foresee any further lowering for the moment.

And on top of that, we do not see big interest from this symbol to place orders on the short term.

So we remain cautious for the present.

And this is the main changer versus what we said in New York, for instance.

The situation is changing, and we do not see any improvements in the trend of bookings in July versus August.

Possibly in the next couple of quarters -- sorry, weeks, we need to see if this changes again.

But for the time being we remain very cautious.

So we are actively pursuing new products with the new developments, but the market outside -- let us be -- advise us to be still very, very cautious.

We are gaining market share in Q2 for sure.

April and May, for sure.

Yes, we do not have June; this is for sure.

And in Q3 we will grow, because of course, this will depend on the market.

We will see.

But this is an area --

Volatile.

Which is still -- you know, is one of those areas where being more standard products, it is more difficult, for instance, to predict Q4 at this point.

But for sure we expect to grow in Q3.

And in this market condition after the gain in Q2, we will likely regain market share in Q3.

Okay.

So if I summarize, you're gaining market share, you're doing well in China, but you're cautious about what could happen in Q3?

Not in Q3.

Q3 at this point, the visibility -- (multiple speakers) So I think that --

To grow for the medium-term.

We have a more limited visibility for Q4.

And for Q3 at this point, the visibility is to grow.

And it is than our forecast; it is in our backlog; it is in the portfolio borders.

But of course, as I said before, we do not have the same sentiment at the customers in terms of order entry, so the visibility for Q4 today is limited.

But having said all of this, of course we have a new opportunity with IGBT.

That is a new family for us.

And of course we need to focus on the new things.

And this is pretty important for ST.

Okay, thank you, Carmelo; thank you, Carlo.

Thank you, Francois.

Next question, please.

Jerome Ramel, Exane BNP Paribas.

Just to come back to the OpEx, you said it will be down roughly 5% Q3 versus Q2.

Usually the linearity is better in Q3 in terms of OpEx, so in a 5% decline, what is due to the structural ongoing restructuring and linearity?

And going forward in Q4, should we also expect Q4 to continue to decline?

I will take this.

Of course, I cannot quantify everything, but I think if you take Q3, I would say it's about one-third, one-third, one-third.

So one-third is the restructuring; one-third is the euro/dollar rate; and one-third is the location effect.

So you see it is a contribution of various elements.

Moving on, moving on we must reduce expenses.

Now, of course, we cannot -- I mean, we started from 943 in Q1 this year.

We went to 909 in Q2 this year.

We will make another step in Q3 that will be visible.

I think we have the opportunity not to deteriorate in Q4, let's put it this way.

However, it is clear that this is not the level of expenses that we can bear due to the fact that we have material sales -- very material sales decline from our former major customer.

This is not enough.

So the expenses per quarter will be driven down materially.

And now, I cannot say that every quarter we will go down, of course, but I think this is one of the priorities.

We will become a leaner company.

Through, let's say, September, October of last year we had a different aspiration.

These aspirations are not there any longer.

Therefore, one of the priorities that we have is to significantly reduce OpEx and making sure that this OpEx is aligned with a top-line aspiration that cannot be rescinded we had before, due to Nokia, and due also to the market conditions.

Thank you.

And maybe just one follow-up.

With the current environment and the bookings you are seeing, extrapolating into Q4, do you think there is a scenario where Q4 could be actually lower than Q3, maybe not for STMicro, if you don't want to comment, but as a whole for the industry?

Well I mean, you know today, today we had -- during the last few days, we had several releases.

I think overall with a 2.5% increase we probably are better than the average.

Today there was one that was particularly -- but I think we want to gain market share in the second half.

As you know, we had a very strong market share -- we really gained market share in 2010 in a big way.

And I'm talking about the business in ST, I'm not talking about ST-Ericsson, of course, but we gained big way market share in the first half of last year.

And then we had some decline of market share.

And looking at Q2, as I said, we have the numbers through May; there is some improvement.

And our motivation and our, of course, drive is to make sure that we gain market share.

At this point the markets that we serve during the course of this year will decline.

This is the visibility that we have.

We are pretty sure about that.

Now is Q4 going to be less than Q3?

It's difficult to say.

But overall in the year, we see clearly a decline in the market that we serve.

Thank you very much.

Thank you, Jerome.

Next question, please.

Stephane Houri, Natixis.

Two questions, if I may.

The first one is to come back on the Q3 guidance.

I'd like to know by how much your Q3 guidance is covered by your current backlog?

That's the first question.

And then I will have a follow-up on the CapEx, if you like.

Listen, we are tracking back to back orders every week, of course.

And when we provide this kind of guidance we always compare what we have today with what we had three months ago at the same time.

In fact, we can do this every single week.

And so it is similar in this respect to what we had at the beginning of the second quarter.

We do not have any; otherwise, we would have been more careful in the guidance.

And of course, this is the visibility that we have today.

So we track on a rolling base, and we compare three months on a rolling base, week after week.

And we had a situation at the beginning of this quarter that was similar to the situation that we had at the beginning of Q2 in terms of turn business, additional requirements, let's say.

There was another question?

Yes, there was a question on the CapEx -- on your $500 million to $600 million CapEx budget right now.

What does correspond to maintenance CapEx?

Is it completely maintenance CapEx?

And also, if you could specify your loadings for Q2 and Q3.

Thank you.

I can take this.

There is some maintenance.

Actually, the CapEx, the $500 million, $600 million, there is no measure of capacity increase, because of course there is no need at this stage of any major capacity increase.

There is some R&D, of course, that we continue -- for which we continue to invest.

And actually, there is also some mix improvement.

We are growing in some specific area, like MEMS, in which we are somehow needed to upgrade our capacity.

So I would say that there is a portion that is maintenance.

There is a portion that is definitely R&D, and there is a portion that is related to upgrade our mix in other to follow our business.

Okay.

And the loadings?

As we said, the loading that we see, let's say for Q3, it will be similar to the one that we have in Q2 using the range of 80%.

And we do expect --.

Yes, it's going to be similar, yes.

About 80%.

Okay.

Thank you very much.

Thank you, Stephane.

Next question, please.

Amit [Hashindani], Citigroup.

Thanks for taking my question.

A quick one on the different market channels that you have.

So clearly, computer revenues were down 7% sequentially, as you highlighted.

And Gartner came out with a quant number earlier that PC shipments were down 2% in the quarter.

Could you maybe outline, talk a little bit more about your exposure to the computer segment, and how you're impacted by the this cannibalization of PCs by tablets?

Thank you.

Well, this is the way, of course, we categorize customers.

You know, there is a degree of I think comparing quarter after quarter is very accurate, because we do not change the categorization.

Sometimes it is not that easy to state that the customer is computer rather than something else, right?

So I think overall our computer exposure is relatively low.

We had, of course, indirectly some power management products that are used by chargers for computer applications, power supply for computer applications.

There is an area that is still sizable.

It is motor control applications for disk drives that are related to personal computers.

And we have some products for the motherboard, but they are pretty limited.

I would mention, for instance, the TPM to synchronize the access to the PC for transaction.

So I would say this is overall what we do here.

And I think is a pretty limited exposure to the PC applications in general.

Thank you.

Amit, did you have a follow-up question?

No, I think the other ones have been answered, thank you.

Okay, thank you.

Next question, please.

Simon Schafer, Goldman Sachs.

Thanks so much.

I guess from answering the previous questions, you're saying visibility is low into the fourth quarter.

But I just wondered, in light of the currency move and also in light of the OpEx reduction, do you think break even for the fully consolidated business is still a feasible target for the fourth quarter?

Thanks.

Yes, it is.

Understood.

Thank you very much.

And actually, I have a broader strategic question.

Now that you've gotten a little bit further down the line in terms of integrating the discrete efforts with the ST-Ericsson reintegration of some of those people, I just wondered how you're thinking about the strategic potential for the discrete business -- for the digital business overall.

Could this ever be separated?

Do you consider it core?

Or what is the strategic orientation for this business?

Thanks.

I will try to answer this question.

This is Philippe Lambinet.

As you well know, ST has had for quite a long time two pillars in its strategy -- sensor power on one side and multimedia convergence on the other side.

Now as we integrate the resources coming from ST-Ericsson -- and by the way, this is just starting, because we started to move people July 1, yes?

Of course, we are reinforcing the processing aspect in ST but not focusing it on any particular segment.

What we are doing is, in fact, creating a unified processing platform which will address all markets, including automotive, industrial, and of course, consumer and wireless.

So this is definitely a core of STMicroelectronics.

This is definitely one of the two axes of our Company and one of the important blocks of the Company.

Got it.

Thanks, Philippe.

Thank you, Simon.

Next question, please.

Cody Acree, Williams Financial.

Thank you.

Thanks for getting me in, guys.

Could we go back to the change in order rate as you come April, May, and into June?

You've given us some indications of some sectors that you still expect to grow, but just maybe from an end application standpoint, which ones did you see the most volatility in?

Which ones are still holding up?

Listen, for us, imaging is an important challenge in Q3.

Because the combination of the fact that today, as I said before, we started to diversify it two years ago, and we have won several new customers, several new products, but the important stuff next year.

So this year, this business is very much focused on two customers, and the performance at this very moment is pretty weak in terms of bookings and billings.

And this contributes materially in Q3 to the fact that our guidance is 2.5%.

I cannot describe in detail, so of course I cannot give all the details by product division, but it is material.

Of course, there is the market, but there is also the specific situation at these two customers in our imaging business that is a significant swing down in Q3 compared to Q2.

Therefore, there are other areas in the Company where we will grow as well.

And I tried for Q3, we tried for Q3 to give color to these.

And clearly, the three families where -- the three important families for the Company where we expect significant -- also, ST-Ericsson, that will not grow -- this you know already, right?

So it will not grow in Q3.

So the three families where we expect to have significant growth in Q3 is MEMS, microcontrollers, and power MOS and IGBT.

And of course, as you know, bookings is before.

So if I have to say the weakest area in terms of bookings is definitely imaging, because we will have a severe decline in Q3 due to the specific situation.

There is a general softening of the booking environment, this is clear.

The more prudent approach from our customers and also from our distributors, but there are a few lines where we expect a very material growth during the course of Q3.

And -- of the three lines that I mentioned.

Automotive is kind of stable moving from Q2 to Q3.

Consumer is post-Olympics.

And so, but again is -- it's kind of stable, right?

So I tried to go through, right?

So is a general softening with some areas where we grow a lot.

But unfortunately, there are no areas where we will not grow, like ST-Ericsson, automotive, consumer.

But there are areas where we mostly decline, and imaging is a significant line.

So it's not black-and-white.

There is a general theme, a general concern, I would say that is the macroeconomic environment, but then despite the macroeconomic environment, we have areas of strong growth in Q3, but we have also areas due to specific customer situations, like imaging, where there is a strong decline.

I'd like to underline it here, however, that thanks to the diversification strategy in imaging, we have won four major new customers.

If we go from two customers to six very quickly, which is good -- and this is not only for the cellular phone.

Thank you for that help.

Maybe just one last question.

The strength that you saw in April and May after coming off the inventory correction bottom in the first quarter, do you believe that any of that strength was driven by inventory replenishment?

Or was that simply just a level of demand increase that maybe has not been consistent on through June and July?

This is what I -- no, our inventory during the course of Q2, the inventory at our distributors, they typically decline.

So there was no replenishment during the course of Q2 at the inventories of our distributors.

What has changed in June is the sentiment and more prudent approach in place others.

So because of course we are tracking the stock turn, and we know the volume and the value of our inventory at all our distributors in the world.

So at the end of Q2 the inventory position is better than at the end of Q1.

And a big shipment, by the way, was typical in the last month.

So it is not a replacement of inventory.

This happened before -- I mean, this happened last year, you know?

Today is a very prudent approach, is a different sentiment at our customers, because of the uncertainty at the macroeconomic level.

Thank you very much.

Thank you.

Thank you, Cody.

Next question, please.

Lee Simpson, Jefferies.

Thanks for taking my question.

Just wanted to go back to CapEx, if I could, and try to understand maybe how long-lived do you expect the CapEx cuts to be here?

I mean, we've seen ongoing strength -- or you're reporting ongoing strength in the bookings for power semis and analog and MEMS, but you mentioned, if I heard correctly, that MEMS capacity is in the guidance, but possibly not power semis and analog.

So I guess what I'm trying to say is, beyond maintenance CapEx, beyond R&D commitments, is there any search of upward push likely in Q4 in the CapEx for things like analog requirements and possibly power semis?

No, there is not.

Today you will see an increase of the CapEx as paid in Q3.

What we report is the payment of the CapEx, right?

So at the end of Q3, you will see an increase of the payment of our capital investment initiatives, right, to our suppliers.

And then you will see a decrease in Q4 of the payment.

In terms of equipments that we have received, we received more equipments in Q2.

This is not in the CapEx of Q2; it will be in the CapEx of Q3.

And we do not expect any need for additional CapEx in Q4 this year.

Right.

That's very clear, thank you.

Thank you.

Next question, please.

Didier Scemama, Merrill Lynch.

Didier, are you there?

Mr. Scemama, your line is open.

Please go ahead.

Looks like he is not there.

We'll have to take it offline.

I think at this point we'll conclude, so Carlo, you have any comments?

No, I think -- I want to be clear of the three priorities that we have.

Of course we wrote in the script before, but I think it's good to underline them again.

Priority number one is to gain market share in the second half compared to the first half.

This is across the board.

Priority number two is really to work hard on making sure that our VLSI block, that is the digital sector, and ST-Ericsson becomes sustainable from a cash flow point of view very rapidly.

And of course, we will see this pattern of decreased expenses in Q3 and in the future.

And priority number three is the management of our assets and our cash.

We want to continue to maintain and even improve our net financial position moving on.

As I said before, in Q3 the cash flow will be negative.

This is a consequence of the CapEx in Q2, basically.

But our target is still the same.

And we want to achieve a positive free cash flow in the year, and maintaining or improving our net financial position moving from the beginning of this year to the end of this year, despite a big lack of revenues from our former major customers and absorbing this swing without deteriorating our net financial position.

Thank you very much.

We'll conclude the call at this point.

Ladies and gentlemen, the conferences is now over.

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

You may now disconnect your lines.

Goodbye.