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STMicroelectronics NV (NYSE:STM)

Morgan Stanley Technology, Media & Telecoms Conference Call

November 16, 2012 5:15 am ET

Executives

Carlo Bozotti – President and Chief Executive Officer

Unidentified Analyst

Let’s get started. Thanks for waiting, everyone. Carlo, thanks for coming.

Carlo Bozotti

Thank you very much. Thank you.

Unidentified Analyst

So Carlo, what’s going on in semis at the moment, it’s a bit – it’s not surprising in general, what are the big trends at the moment that ST is taking?

Carlo Bozotti

Well, we’re going through a phase of stability, but on the low end. Okay? We had in the first five months of this year strong bookings trend and this trend changed, I’d say, pretty dramatically starting from the month of June and then the bookings is on the low side since then. And I think that in Europe clearly, there is the macroeconomic situation, there is certainly a slowdown of the growth in Asia and in China.

I believe that in relative terms, we should end the fourth quarter very, very much at the same level we have done in Q3 and in Q2. So we see, at least for ST, stability. We are benchmarking with our 10 major competitors in our industry that are reporting, so moving into Q4, we should perform better than the rest of the pack.

And then we know, we all know that, of course, the western economies are on the very narrow – walking on a very narrow path, where it’s very difficult to balance out between austerity measures and on the other side on a monetary policy that is more aggressive to support the growth.

The new stimulus package in China is going to be very important. They’re formulizing a stimulus package as $100 billion. Anyhow, what we plan is stability over four quarters from Q2 to Q1 next year and then hopefully back to some growth in Q2 and a stronger second part of 2013.

Unidentified Analyst

So, a bit of gain of no more – maybe stability?

Carlo Bozotti

In Q1.

Unidentified Analyst

Okay, okay. Actually Q4, your guidance was, compared to the others, I’m not saying it was great in absolute terms.

Carlo Bozotti

No, it was not.

Unidentified Analyst

But in terms of compare to traditional competitors like TIs, and the like, actually it was better. So is it because of you’re a bit later cycle or it’s because you think you take market share?

Carlo Bozotti

No. I think we’re taking market share. I think we are – as I just said, we are systematically tracking of course. We are tracking our major – the ten major competitors and they are all reporting. So we have all precise numbers every single quarter and I think we will end up this year with some growth, we believe. And then talking on the core business of STM, that does not include wireless, with some growth compared to what we have achieved in Q4 last year. So this is Q4-over-Q4. Despite I have to say some significant decline of certain products at our former major customers.

Unidentified Analyst

Sure. So there is a business I like a lot, it’s the MEMS business, because I think the barriers to entry in this business are actually quite high. What are the trends currently and how do you see this business evolving next year?

Carlo Bozotti

Well, first of all, it’s an important growth. We are moving from Q3 to Q4 on the MEMS business, I think we are working on three vectors and also this is now with analog, I mean, we have organized in MEMS and analog in one group, analog is low power analog, this is one group, and in the other group we have all our power products, power – Ethernet power products.

So now the analog and MEMS group is the biggest group of the company and we have just commenced about almost $1 billion sales this year. And the effort is very wide as I said these three vectors; the first obviously is miniaturization of what we do with these products.

The second is the variety of sensors, I think it’s really very massive. So we got from in our actual remediation magnetometers, we have a rotational MEMS, the famous gyroscope. But we also have environmental sensors like the pressure sensors, humidity sensors, temperature sensors, and we have new entry like very recently we have introduced the first touch sensing solution for finger tip, and we have new technologies there to even drive the screen at distance. And we have proximity sensors, we have e-mail sensors. So is a major effort in terms of a variety of products, and the combination of this product, or certain of these products in one package. So this is the second vector.

And the third vector clearly is new application, because of course this is not only games and smartphones, but is now more and more also automotive applications, is also healthcare applications, fitness, and wellness.

Unidentified Analyst

Okay, that’s probably high margins?

Carlo Bozotti

Yeah and is very broad, this is very broad and then I think we are quite unique in this respect. We have such respect range of sensor products. And we have more confident we’ll continue to grow successfully in this area.

Unidentified Analyst

Okay, I agree. What’s going on at the moment in the automotive market? We are hearing lots of chat about production cuts in your part, how you are seeing your market there?

Carlo Bozotti

Clearly, we see suffering on the market in Q4. We have a good backlog for Q1 in the automotive, but we have a clear decline in Q4. We are not aware about any new closing plants compared to what we had few weeks ago. The rumors in these days there are new plants coming, we don’t see that.

Unidentified Analyst

Okay.

Carlo Bozotti

I mean is the same plant of a reduction of inventory and some shutdown at the end of this year that we had some weeks ago. So there is nothing new, but clearly Q4 is going to be lower than Q3. And this time is also our biggest customers in Germany and not only the rest of Europe or…

Unidentified Analyst

Italy…

Carlo Bozotti

Yeah, and also there is a slowdown in Europe and China for sure, but the softening is also impacting our German customers during this quarter. Overall, I think the volume of cars this year is around, in the world in 2012 is around 80 million cars. That is somehow below what were the expectations at the beginning of this year. But we see some growth moving into 2013.

Unidentified Analyst

Okay, okay, very good. So we talk about the digital business now, obviously we’ve got (inaudible) this year.

Carlo Bozotti

Yeah.

Unidentified Analyst

And sort of you had the ambition in this business in particular in the Italy market and it looks like it didn’t really come out as well as we thought. What do you think is the plan basically for the digital business going forward?

Carlo Bozotti

Well, first of all as you know we would present our new strategic plan in December, right. So this is now coming soon in fact, by the end of this month. We will also define exactly the date, because we wanted to invite you, we will have a video call, and then road show during the month of December.

Unidentified Analyst

That is actually in December or actually before the end of the year?

Carlo Bozotti

No, we thought it will work on this plan at the end of last year and then the main reason of course, is certain dynamics in the wireless industry and position with our former major customers. So we had a number of steps during the course of this year, and the new plan will be announced in December of course, then not only the announcement of the plan is important that those are the implementation, the rapid implementation of the plan is important, because this is very clear to us.

So I think the objective is of course, to the risk of our plan, but anyhow, we will be presenting new vision and new strategy, new model and clearly, the risk of our plan to take into consideration, some industry dynamics.

Unidentified Analyst

The things that change…

Carlo Bozotti

So things that change and we need to move on, and we have been working in this year very hard on this plan, and steps have been already taken, but the final step is in December. I think coming back to your point on TV; I think what we want to do. first of all, we have a merge TV and set-box in one unit and what we want to do in the TV is to focus on a limited numbers of very important customers in Korea and Japan and being absolutely aligned with them, sharing IPs and developing products together.

Unidentified Analyst

Okay. Now obviously, talk about this because there are a lot of people over there. Was that a potential piece of the company and we need to end it up? Well, to me it’s a bit ridiculous; it’s like that you have been doing with that product portfolio has built 15 to…

Carlo Bozotti

Now again, I mean this may be the 50 times that they say. I want to say again, we do not have any initiative that can compromise the unity of the company. this is just not through. Okay, this has never been presented to our Board. and in last night, I realized again, something around these, I mean even positioning myself with a certain view and allocate the Chairman of the Board with different view is absolutely not through. We are completely aligned. the market is thought for everybody. I think for ST, we are observing a major swing with our former major customer.

Unidentified Analyst

Yes.

Carlo Bozotti

We are doing this protecting fully our net financial position. at the end of this year, we will have a net financial position that is positive close to $1.2 billion that was exactly the same that we had one year ago. we wanted to have of course, the two blocks of the companies that is the analog block and the digital block fully sustainable more rapidly and we are working on this and we will present this in December. But there is absolutely no program, no initiative to kind of go back to – to compromise the unity of ST this would be, but there are a lot of synergies between analog and digital. we are not the only company, and there is our major competitor that’s in one of our major competitors that in these days they have been very vocal in presenting their products, and some are analog, some are digital, even MEMS when we sell a gyroscope in the MEMS, that is digital and micro machinery and there is a digital chip in this part of the same package.

So I want to clear the state that is absolutely groundless, not through the management of the companies along with the broad. and I think it’s better to focus on the execution and look forward rather than continuously talking about this regulation to the…

Unidentified Analyst

Yeah. Thank you, Carlo. Is it good to reiterate on that, it was kept in U.S.

Carlo Bozotti

Yeah. Existing and repeating this, but don’t execute.

Unidentified Analyst

In terms of new products I have been always CEO on last night and you’re one of the (inaudible) for the 64 bit code.

Carlo Bozotti

Yeah.

Unidentified Analyst

And how do you see your relationship with, I mean it’s really like straight of the improvement and I think you benefit from the strength as well, which you’ll view on this?

Carlo Bozotti

Yeah. I think that our there is a very, very strong focus in ST now. We have managed to strongly rationalize our portfolio of microprocessor cost, today is basically with one exception that is the automotive business everything else is on ARM of course I’m talking about the 32 bit. We have been the first to introduce ARM-based microcontrollers for the general purpose.

We have aligned our general purpose microcontrollers and those are our secured microcontrollers in terms of roadmap we have before announced, and of course all our digital consumer activity has been moved into ARM. So our only platforms that is complex chip 1 billion transistors for a common gateway set-top box, is a chip with a capability to run for high definition streams at the same time, with transcoding capabilities where you can see on one TV screen something on your tablet something else et cetera at the same time, and this chip is based on ARM.

So for us is of course is a strong momentum. I think it is strong opportunity, you mentioned ATLAS, I think clearly in combination with our FD-SOI technology is a major asset. But we are very, very pleased about microcontrollers. I think it was great to move to ARM, everybody stopping us, but now this year we will be selling 1.5 billion microcontrollers. We were number 17 in general purpose, today we are in the top five and I think we measure element of differentiation was the very early introduction of 32 bit microcontroller based on ARM.

Unidentified Analyst

Actually you just touched on something which is Fully Depleted Silicon-On-Insulator and you just said actually quite take on stage this morning. It costs more and more basically to move to the lower this is a fact to move to the lower 28nm, 20nm, and actually it obviously it looks like interesting alternative, how do you see the core factor in the future.

Carlo Bozotti

Well just to roll, I have three comments here. The first comment is we have been working on the advanced technologies not in isolation, but in partnerships with important companies like Samsung, IBM Global Services okay and of course we have shipped broaden to develop technologies and we will continue to do in the future and as we have described in our press release Q3. We believe that the model that we have over the period 2013 to 2017 will be less demanding in terms of cash growth.

The second comment that I want to make here is about our FD-SOI technology. We believe it is a good technology. We have now the products based on this technologies of 28nm and everything that we had models is confirmed by real life. And in few words I think we can run the same processing power saving 30% of power consumption or vice-versa, and is the same manufacturing cost, because indeed there is an evaluation in terms of SOI substrate, but there is also saving other manufacturing steps particular in the numbers of in plan of the wafers.

So this group where products with 29nm where we have the evidence now that the model was right. Again on the same technology we also have activated a second source that is global strategy. And the final point is on Crolles. I think we see Crolles focusing on three technologies one, clearly microcontroller technologies.

Unidentified Analyst

In terms of millimeter or in terms…

Carlo Bozotti

300 millimeters moving to 55nm and 40nm microcontrollers must be both for general purpose and automotive must be 12 inch and we believe this is a very important competitive advantage because particularly in the automotive market, customers do not want to rely exclusively on foundry, foundry is good but not as an exclusive base and I believe that ST is the only company outside foundry that will manage 40 nanometer embedded flash technologies for microcontrollers. So this will be 30% of the fare, then there will be another 30% of the fare imaging solutions, Fairborn imaging products and here we are a corporation also with UMC. And of course that after 40% of the fare would be on logic and on FD-SOI.

Unidentified Analyst

Okay. How do you get the windows of question recently that subsidies and nano plans. And for us from London it is a bit complicated during the storm how it is worked the government (inaudible). If you could just explain a bit (inaudible) I’m not sure you can get what are the implications?

Carlo Bozotti

Listen, I think the implications are very clear. We have certain programs. I think this is just – very recently I met customers in Phoenix, Arizona. They were working on batteries and they were developing new technology for batteries and they are strongly support of the U.S. dollar. I think it is normal. Anyhow the support that we have is also related to deliverables, particularly in terms of technology milestones right and ST is a company that under core business on what is now ST, without STEricsson we want to focus on the R&D and the effort that we will have maybe in the range of $1.5 million R&D per year.

This is the core business of ST and the maximum contribution of the grants is in the range of $80 million, $90 million. By the way, out of $1.5 million and if not only one country, also more countries. Of course the biggest share is in France. So it is important but I think we need to see this industry where we are investing $1.5 million to R&D and the grant would be in this range that is important.

Unidentified Analyst

Okay. Always a bit confusing…

Carlo Bozotti

Yeah, but I think we have also said during the last conference call that this year grants will be in the range of $90 million overall for the company.

Unidentified Analyst

Okay, very good. Now the difficult subject, STEricsson.

Carlo Bozotti

I think STEricsson, we need to look in the frame. For me STEricsson plus is still the same and we need to…

Unidentified Analyst

You want to abide the 50% from Ericsson?

Carlo Bozotti

No, it is something that of course will be part of the presentation of the five year plan and strategic plan.

Unidentified Analyst

So it’s really combined. So what you are looking at today is the digital thought and STEricsson, there is no solution which can be separated. It’s everything…

Carlo Bozotti

Of course…

Unidentified Analyst

No, I’m not trying to make you say, anyhow…

Carlo Bozotti

We will give the date of this new strategic plan. The presentation will be one day in December. We will find the date by the end of this month. So there will be a couple of weeks of (inaudible). And as I said, there will be a video conference call plus a road show. We will present the new vision, we will now present the new strategy, the new business model without the key drivers; the plan of course is go much more rapidly grow our financial model, both for analogue and digital, and this includes of course ST Ericson.

Unidentified Analyst

Okay, great.

Carlo Bozotti

And now we cannot talk today something that we would announce in December, but of course it is something good to see this level, and I think we need to set that our – for sometime our aspiration on the top line or not the same that we had before, because things have changed particularly in the wireless industry, and it is not just customers, it is also somehow business model, the polarization the verticalization, et cetera. We have started to work on this program at the end of last year. We had steps, and the final steps would be in December, and this is very, very important to us, but we talk in December.

Unidentified Analyst

Okay. But not sure?

Carlo Bozotti

Yes.

Unidentified Analyst

Okay. Carlo, mean a few changes in the top management of the key following in much of the people I believe. So there are new people, that’s a key, so could you talk about them a bit, because it’s interesting to see, because of new blood in the company?

Carlo Bozotti

Well, fine, I think we had good additions in the company and from other companies including free scale, and including also pivots for instance I think it’s our recent addition and now George Penalver, he is the new Strategic Officer; and this is another addition. Of course, we also have people growing inside, like for instance, Benedetto Vigna or Joel Hartmann, and Joel Hartmann is managing all the technology and manufacturing in [Grolier] and Benedetto Vigna is managing our MEMS business, so it's normal toward these changes, I think first of all, I think we have a good base of management is our most important process together with all our employees and for that can I do, I mean I'm very pleased about the changes, and what that's can I say, I am very pleased about the changes, and we need to walk.

Unidentified Analyst

Okay, very good. Is there any question? I know its last day and the presentation. But maybe what about your CapEx plan and the cash for next year and the dividend and do you feel quite confidence about that?

Carlo Bozotti

Well, I think on the CapEx plan this year, we would end up with about $500 million that is what is left and what we expected to spend, and of course, we had fully adjust, I also mentioned before that one of the priority for the year is – before Q4 is to finish the year with the level of net financial position, the difference between the gross cash and the debt about $1.2 billion. And moving into next year of course, we will be prudent particularly in the first half of the year now, we do not have the budget for next year, but I think they are underwriting the first half of next year is similar to what we're spending in 2012 and then we will see in the second half evolution of the business.

Unidentified Analyst

Okay, further details on the plans but?

Carlo Bozotti

Yeah, exactly; I think we expect to grow, but we also have importantly invested in 2011. So we need to make sure that we exploit also in investment that we have already done.

Unidentified Analyst

Okay. A new question, how does we have to do a strategy review, actually you think like advisors from making the strategy, these type of people and invent them on the BlueCat, and I’m very interesting on how the process were actually?

Carlo Bozotti

Well, I think it’s normal to have advisors.

Unidentified Analyst

Okay.

Carlo Bozotti

I think particularly on this is very normal when you establish a new strategic plan that is important discontinuity with the best. It’s normal to have advice and I think they have conceptually two kinds of advice.

Unidentified Analyst

Okay.

Carlo Bozotti

One is, if as part of the plan you have some M&A moves, typically you have the financial advisors from the bankers and if that on the other hand there is also the overall plan with integrations on several aspects, including technology and manufacturing and what we also do here is that more favorite and specific for more advice and this is what we do, in fact in these days we are working with two advisors.

Unidentified Analyst

Okay, ask the question.

Unidentified Analyst

The question that…

Unidentified Analyst

Yeah, go ahead and on the back. Thank you.

Unidentified Analyst

You mentioned that you’re not using for your automotive segment, could you explain why?

Carlo Bozotti

It’s a little of legacy and also of course is what we see from our customers and the requirement from our customers. And therefore in 2007, we have decided to join forces with the scale, and we have been working on variety of products now.

Unidentified Analyst

It is the (inaudible)?

Carlo Bozotti

Yeah, we cannot use the power cutting terminology, but…

Unidentified Analyst

Yeah.

Carlo Bozotti

Power and Microcontrollers is a very successful initiate. I think it’s not the first time. But as I mentioned that we measure the commodities design wins that we have on this new product and it is in the range of $2 billion, which is a lot of money of course this is commodity and automotive is typically long-term and the rents are gradual. But it’s an important effort is based on this architecture. It’s good also to have two poles from two different regions and also with two different manufacturing infrastructure to support this, I would say for the 40 nanometer is from Taiwan and from Croll. And I think this is a very important opportunity because of course with American and European customers which is very, very nice and more and more also with Japanese customers.

Unidentified Analyst

Okay. So you are not using your three minutes? Three questions.

Carlo Bozotti

Do you want to ask another question? Okay, please go. No, no, go, go, go please.

Unidentified Analyst

Carlo, just a few comments on your chip business what you are currently seeing in Q4 and now towards the first half of next year?

Carlo Bozotti

We see strong opportunity to grow on the secure microcontrollers. We have announced significant win yesterday I think it is probably great. So we – Google announced and I think there is more to come, I think there is a significant opportunity to grow with this 32 bit secured secure microcontrollers for this one application.

And it is again I think is I am happy about the performance of this unit which is under (inaudible), it is managing at the same time microcontrollers and secure microcontrollers. This year we are shipping 1.5 billion units of the two combined in the same technology base at the same time and in our 8 inch but move into 12 inch and is the same ARM Cor, about (inaudible) secure. So we are at the…

Unidentified Analyst

Carl, I’ve got questions on STX consensus dynamics within mobile CPI is moving away from that business, you see Apple and Samsung making their own chips, how do you feel about competitively our industry is going to look in the next three years.

Carlo Bozotti

Is the way that you are seeing and frankly also the way TI is seeing, I think in the double business we have been very impacted by this dynamic very significantly clearly that is the equalization of the market clearly there is a trend in terms of vertical integration of the market and of course we are taking all these elements into consideration in the preparation of our new plan that we will present in December.

Unidentified Analyst

Okay, Carlo?

Carlo Bozotti

Thank you very much. This concludes our presentation, as a tradition. Thank you. It is our tradition, thanks everyone for coming and see you next year.

Unidentified Analyst

Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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