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Executives

Tait Sorensen – Director, Investor Relations

Carlo Bozotti – President and CEO

Philippe Lambinet – Chief Strategic Officer and EVP, Digital Sector

Mario Arlati – Chief Financial Officer

Carmelo Papa – Executive Vice President, Industrial and Multisegment Sector

Lorenzo Grandi – Corporate Vice President, External Reporting

Analysts

Kai Korschelt – Deutsche Bank

Gareth Jenkins – UBS

Sandeep Deshpande – JP Morgan

Didier Scemama – Merrill Lynch

Andrew Gardiner – Barclays

Peter Knox – Société Générale

Francois Meunier – Morgan Stanley

Jerome Ramel – Exane BNP Paribas

Stéphane Houri – Natixis

Amit Harchandani – Citigroup

Simon Schafer – Goldman Sachs

Cody Acree – Williams Financial

Lee Simpson – Jefferies

STMicroelectronics NV (STM) Q2 2012 Results Earnings Call July 24, 2012 9:00 AM ET

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the STM Second Quarter 2012 Earnings Results Conference Call and Live Webcast. I’m Gordan. The chorus call operator. I would like to remind you that all participants will be 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's my pleasure to hand over to Mr. Tait Sorensen, Director, Investor Relations. Please go ahead, sir.

Tait Sorensen

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?

Carlo Bozotti

Thank you, Tait, and thank you for joining us for the -- 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 product 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 evidenced 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 or above our expectations.

AMM’s second quarter net revenues increased 2.2% led by our analog and microcontroller applications.

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

Digital revenues increased about 5% sequentially, thanks to our set-top box products and despite a decrease in Imaging, due to the situation at specific customers, which has also significantly impacted the profitability of the Digital segment. Power Discrete saw 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 ModAp 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 have 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.

On our MEMS and sensors business, I’m proud to announce we ramped production of a new pressure sensor and an iNEMO module containing an integrated gyroscope and accelerometer for Samsung’s latest and most advanced smartphone. Moreover, we have won many sockets for motion MEMS, temperature sensors and MEMS microphones.

We shipped in volume in the second quarter AMOLED drivers for smartphones and we have also enjoyed fast adoption of the new 40-nanometer MPEG4 set-top box chips worldwide in Cable, Terrestrial, Satellite and IPTV markets.

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

In the power-management and energy-saving sector, we started deployment of STarGRID Power Line Communication System-on-Chip 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 U.S. 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 smartphone 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 STM32 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 Wi-Fi, 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 competences with those of the ST-Ericsson’s 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 higher 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 results, 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 carefully -- 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 to $600 million for the full year 2012.

The careful management of our assets includes our cash, so with the reduction in capital expenditures, reduction in operating expenses, focus on profitable market share gains and moving our VLSI 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. In 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 you 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 our 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 views on the third quarter when we spoke in April were based on strong bookings data.

In May, at our Investor’s Day -- Investor Day in New York we indicated that bookings were still pretty good. At that point, we continued to track solidly towards the mid-point 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 macro-economic uncertainties.

Of course, trying to assess the potential impact of the macro environment on the third quarter is difficult as the uncertainty is high and visibility is more limited. Nevertheless, we expect sequential revenue growth of about 2.5% at the mid-point plus or minus 3 percentage points.

ST-Ericsson has indicated flat sequential revenues. Growth in the third quarter would be coming from ST’s wholly-owned businesses with our new product momentum, notably in MEMS, Microcontrollers and Power MOSFET and IGBT.

We have a high level of confidence in our new products and the value they bring to customers. With respect to the gross margin, we are expecting 35.3% plus or minus 1.5 percentage points, 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 the goal 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 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 now like to take your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Mr. Kai Korschelt from Deutsche Bank. Please go ahead, sir.

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’s still weakness in June, but I’m just wondering if maybe in the first few weeks of July, if there has been any sense of stabilization relative to the June run rate or whether it’s continued to deteriorate, that would be my first question.

And my follow-up, please, I’m just wondering on the automotive outlook for the third quarter? Could you probably give a bit more color on the seasonality and also maybe some of the trends that you are seeing in China? Thank you?

Carlo Bozotti

Yeah. Well, in July, so far is very much stable versus June. Of course, when we met in New York, the 23rd of May, the booking trend was better. Then, in June we saw softening of the bookings condition and in July is pretty much stable versus June. And as far as automotive is concerned, what we see in Q2 at this point is degree of stability, pretty much stable versus Q2.

Of course, it’s not the same as in the various regions. In Europe for instance, there is part of Europe that is 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 third quarter compared to the second quarter.

Kai Korschelt – Deutsche Bank

Okay. Thank you very much.

Carlo Bozotti

Thank you.

Tait Sorensen

Thank you. Next question, please.

Operator

The next question is from Mr. Gareth Jenkins from UBS. Please go ahead.

Gareth Jenkins – UBS

Yeah. 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 rest of the year and maybe into next year just moving around at the moment.

And then just secondly, I wondered if you could just give us 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 OpEx to be down this quarter and in Q4, and given Digital was, I guess quite a bit weaker and the new remodeling in terms of profit. Could you give a sense of whether ST-Ericsson’s costs are coming into that business already or whether that’s still to come? Thank you.

Carlo Bozotti

Well, let’s start from OpEx. What we expect in Q3 is a significant reduction of the OpEx. I think the visibility we have is to be in, let say, in the -- is around 5% and is around 5% in expense degrees.

Of course, there is a number of contributors to these significant degrees of the OpEx. Number one is, of course, the restructuring plan that we’ve announced with ST-Ericsson in April.

The second is a 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 the 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 product 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 to show that the Digital block of the company that is of course the Digital sector and ST-Ericsson, and those things [become 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 in -- during the course of the second quarter in April are important for three reasons. Reason number one is the merge of the two applications processor’s activities, are very relevant from a strategy point of view, open into new market, open into synergy structure opportunity.

Number two, ST-Ericsson announced -- did announced a $320 million saving package, which is in execution at this time. And the third element is related to the flexibility of a new strategic plan of ST-Ericsson that is also considering additional partnerships, different schemes in terms of licensees of product -- blocks of products.

And having said all of that, it is clear that what we have today, looking at our Digital sector business and ST-Ericsson is not sustainable. With the aspiration of the topline that we have at this moment without a contribution from our former major customers and therefore the key priorities 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 is very simple. Here, the point is for the ST only on business, the effective exchange rate, it is as usual, is about 16% plus/minus something. Unfortunately, the ST-Ericsson losses do not -- cannot contribute to offset our wholly-owned business profit and therefore our tax rate is higher at this moment and this is also visible in our result and also there is a systemic gap between our tax rate, including ST-Ericsson at the consolidated level and the model that we receive from many of you. So, I think, I did cover the three things, right?

Gareth Jenkins – UBS

Yeah. Thank you.

Carlo Bozotti

Thank you.

Tait Sorensen

Thank you, Gareth. Next question, please.

Operator

The next question is from Mr. Sandeep Deshpande from JP Morgan. Please go ahead.

Sandeep Deshpande – JP Morgan

Yeah. Hi. Two questions if I may. Firstly, I have a question on ST-Ericsson itself. You’ve 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 I mean, 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?

Carlo Bozotti

Yeah. We cannot comment on all of this. I think is that, it’s of course not possible for me to comment, our motivation of course and the motivation of the management of ST-Ericsson is to rapidly change the pattern that we have in terms of financial results, but I cannot get entity to this kind of discussion in details concerning one of our major customers. So which is, let’s go to the second question, Sandeep?

Sandeep Deshpande – JP Morgan

Okay. Maybe I’ll ask the second question. I mean, in terms of, in the Digital business itself. I mean, how is the profitability going to improve in the Digital business in face of the weakness in the end markets at this point?

Carlo Bozotti

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 now which are the two customers. One is our former major customer but there is another one that is [AMM].

Trust me this is not helping at all. But the good news is that we have won four new major customers and with a number of new products. And this is not only in the area of smartphones. So this is a result of the diversification effort then -- that we started few years ago, maybe couple of years ago in fact.

And despite the pressure that we have on the topline in the short-term due to the specific performance of our two major customers, I’m confident that we have a great opportunity to grow this business even with significantly higher margin, because as I said, it’s 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 and merging the two application processors activities. We expect to extract significant synergies in the Digital sector and of course, we are focusing on this at the very moment.

Tait Sorensen

Thank you, Sandeep. We’ll move to the next question.

Operator

The next question is from Mr. Didier Scemama from Merrill Lynch. Please go ahead.

Didier Scemama – Merrill Lynch

Yeah. Good afternoon. Thanks for taking my question. A few question 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 topline? And 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 inventory, at the car dealer level for both the foreign brand and local brands, they are quite materially above long-term averages. So, I was just wondering if you heard any production cuts or any meaningful change in bookings from your local OEM customers? Thank you.

Carlo Bozotti

Well, let’s start on the second one. As I said, we-- today the visibility for us is to be stable and moving from the second quarter to the third quarter, I have to say that if we go back two, three months ago, our visibility was to grow even in the third quarter. And despite the seasonal factor in Europe in summer and of course, this is certainly related to the overall microeconomic situation.

If you look at AMM, we did not grow in AMM. I think that 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 that 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 are -- for Q3 is for a great expansion in this business related to new models from our customers and new products from ST.

We also decided really to focus on MEMS and a good example is a new product that we are introducing. I mean, we are moving from accelerometers and drivers up to a much lighter portfolio.

Again, the effort that we have done to ramp up the pressure sensors each to 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 new starts to be pervasive in many, many customers. So it’s really the effort that we are putting in both around parts 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 apple with apple and as we do not see an improvement here. But there is a very significant improvement in the line of others, okay, that is very material and this is related to 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.

Didier Scemama – Merrill Lynch

Okay. Got it. And then, I was just wondering, when you look at, obviously, no one’s got a crystal ball as to how things are going to turn 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 remained a bit higher, I would say relative to historical norms? Thank you.

Carlo Bozotti

Yeah. 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 May -- at the end of May, our plan was more aggressive for Q3, 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 the Christmas time.

Didier Scemama – Merrill Lynch

All right. Thank you so much.

Carlo Bozotti

Thank you.

Tait Sorensen

Thank you, Didier. Next question please.

Operator

The next question is from Mr. Andrew Gardiner from Barclays. Please go ahead.

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 said that some areas were clean 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?

Philippe Lambinet

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 sometime significantly everywhere. The approach is prudent and they are very cautious in giving more of this.

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

Andrew Gardiner – Barclays

Thanks very much.

Tait Sorensen

Thank you, Andrew. Next question, please.

Operator

Next question is from Mr. Peter Knox from Société Générale. Please go ahead.

Peter Knox – Société Générale

Thanks for taking my question. Could you give us a bit more color about the gross margin guidance for the third quarter? Does it seems that currency benefits would actually account pretty much all the 100 basis gross margin improvements here outlining. Presumably, it makes us slightly positive, if STX is going to be flat in terms of sales and are you going to see any reduction at all under your utilization cost?

Philippe Lambinet

Well, on the gross margin…

Carlo Bozotti

I can take the question on Q3. Gross margin, on the dynamic of the gross margin, we see actually in the Q3, gross margin on increase of 100 basis point, as we said before let say in terms of loading, we will be similar to the loading of Q2 and this -- actually the use that we expect is slightly higher and this will impact around 20 basis point negative gross margin then we will have a positive effect on the efficiency.

Overall, let’s say between use and efficiency, we should gain 60 basis point, then there will be an impact, positive impact of course on the dollar and the exchange rate of 70 basis point, while, let’s say, we will have between prices mix around 30 basis point negative.

So this is the dynamic for the gross margin in the next quarter moving ahead. So we see, let’s say, an improvement of around 100 basis point overall.

Philippe Lambinet

So the dollar effect is not yet really the major contributor because as I said due to the hedging perfection, it’s very -- we move from an average of about 131, 132 into two to an average of about, I mean, at this point, we have estimated at 127…

Carlo Bozotti

127 yes.

Philippe Lambinet

So today in the modern world, there is slightly deterioration in terms of acceleration cost, the significant improvement in terms of efficiency.

Peter Knox – Société Générale

Okay. Thanks.

Tait Sorensen

Thank you, Peter. Next question, please.

Operator

The next question is from Francois Meunier from Morgan Stanley. Please go ahead.

Francois Meunier – Morgan Stanley

Yeah. Hello. It’s Francois from Morgan Stanley. Yeah, I have got a question but your power chips division looks like IGBTs and MOSFETS have done there very well in Q2 about 12% sequentially. I think you are gaining for good growth in Q3 as well. I was wondering, you got a competitor not far from you in Germany, Infineon, 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 you are gaining share from anyone else on -- what was going on in this space if it’s basically good chips in the low end or maybe moving as a value chain, may be with power devices and power modules.

Philippe Lambinet

Well, I do not want to comment directly on my competitor because I cannot. What I can tell you that we have today very competitive technology for IGBT both for discrete devices and applications and for modules, which is a plus that we have been in the past and considering that we are small in that area, power modules which can be an area of harvesting for the future.

However, having said this and considering that we grew more than 12% in discrete, we’ll remain cautious for two simple things, the stocks and distributors though they measured in absolute volumes, we do not foresee any further lowering for the moment. And on the top of that, we do not see big interest from distributor to place order of 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 improvement in the trend of movings in July versus August, possibly in the next couple of quarters, sorry, weeks, we need to see if there is any changes again.

But for the time being, we remain very cautious. So we are actively pursuing new products, new developments but the market outside the -- let us be -- advise us to be still very, very cautious.

Carlo Bozotti

We are gaining market share in Q2 for sure.

Philippe Lambinet

April and May for sure.

Carlo Bozotti

And we do not have June. This is unsure. And in Q3, we will grow, of course, it depends on the markets we would see. But this is an area…

Philippe Lambinet

Volatile.

Carlo Bozotti

…which is still, is one of those areas where being more standard products, it is more difficult for instance to predict Q4 at this point. For sure, we expect to grow in Q3 and in this market condition after the gain in Q2, it’s likely to gain market share in Q3.

Francois Meunier – Morgan Stanley

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?

Carlo Bozotti

Not in Q3. Q3 at this point, the visibility did grow. I think…

Philippe Lambinet

Was a medium term…

Carmelo Papa

We have more limited visibility for Q4. For Q3, at this point, the visibility is to grow. And it is in our forecast, it is in our backlog, it is in the portfolio of orders but of course, as I said before, we do not have the same sentimented 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. So this is pretty important for ST.

Francois Meunier – Morgan Stanley

Okay. Thank you, Carmelo. Thank you, Carlo.

Carmelo Papa

Thank you.

Carlo Bozotti

Thank you.

Tait Sorensen

Thank you, Francois. Next question, please.

Operator

The next question is from Mr. Jerome Ramel from Exane BNP Paribas. Please go ahead.

Jerome Ramel – Exane BNP Paribas

Good afternoon. Just to come back to the OpEx, you said it will be done roughly 5% Q3 versus Q2. Usually, the seasonality bid on Q3 in terms of OpEx, so in the 5% decline, what did you do this structural ongoing restructuring and seasonality? And going forward in Q4, should we also expect Q4 to continue to decline?

Carlo Bozotti

I will take this -- of course, I cannot -- I cannot quantify everything but I think if you take Q3, I would say is about one-third, one-third, one-third. So one-third is the restructuring, one third is the euro dollar rate and one third is diversification effect.

So you see the contribution of various elements. Moving on, we master use expenses. Now, of course, we cannot -- I mean, we started from 943 in Q1 this year. We went through 909 in Q2 this year. We will make another step in Q3 that would be visible. I think we have the opportunity to -- not deteriorating in Q4, let’s put it this way.

However, it’s 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.

Now, I cannot say that every quarter, we will go down of course but I think, this is one of the priority. We’ll become a leaner company through, let’s say, September, October of last year, we had different aspiration. These aspirations are not there any longer. Therefore one of the priority that we have is to significantly reduce OpEx and making sure that this OpEx is aligned with topline aspiration that cannot be resembled before due to Nokia and due also to the market condition.

Jerome Ramel – Exane BNP Paribas

Thank you. And maybe just one followup, with the current environment and booking you are seeing, extrapolating to 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?

Carlo Bozotti

Well, I mean, in -- today we had an -- during the last two days, we had several visits. I think overall with the 2.5% increase, we probably have better than the average and today there was one that was particular (inaudible) and I think we want to get market share in the second half.

As you know, we had a very strong market share in the -- we really gained market share in 2010 big way. We end up talking about the business in STM, not talking about ST-Ericsson of course but we regained 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 number through May. There is some improvement and our motivation and our of course strive is to make sure that we gain market share.

At this point, the market 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, Q4 is 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.

Jerome Ramel – Exane BNP Paribas

Thank you very much.

Tait Sorensen

Thank you very much. Next question please.

Operator

The next question is from Mr. Stéphane Houri from Natixis. Please go ahead.

Stéphane Houri – Natixis

Good afternoon. Two question, if I may. The first one is to come back under 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 I will have a follow-up on the CapEx?

Carlo Bozotti

Listen, we are tracking backlog on a rolling base 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 and so -- we track on a rolling base and we compare the three months on a rolling base week-after-week and we had situation at the beginning of this quarter that was pretty similar to the situation that we had at the beginning of Q2 in terms of turn business addition requirements, let’s say. There was another question, sorry.

Stéphane Houri – Natixis

Yeah. 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.

Philippe Lambinet

Maybe I can take this. There is some maintenance. Actually, the CapEx, the $500 million, $600 million, there is no major capacity increase because of the cost there is no need at this stage of any major capacity increase. There is some R&D of course that we continue to -- for which we continue to invest. And actually, there is also some mix improvement we are growing some specific area like MMC 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’s definitely R&D. There is a portion that is related to upgrade our mix in order to follow our business.

Stéphane Houri – Natixis

And the loading…

Philippe Lambinet

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 that is in the range of 80% and we do expect...

Carlo Bozotti

Yeah. It’s better to be similar, yeah, about 80%.

Stéphane Houri – Natixis

Okay. Thank you very much.

Carlo Bozotti

Thank you.

Tait Sorensen

Thank you, Stéphane. Next question, please.

Operator

The next question is from Amit Harchandani from Citigroup. Please go ahead.

Amit Harchandani – Citigroup

Hi, guys. Thanks for taking my question. Quick one on the different market channels that have. So, clearly, a computer revenue were down 7% sequentially as you highlighted and partner came out with a con number earlier that PC shipments were down 2% in the quarter. Could you maybe outline, talk little bit more about your exposure to the computer segment, and how you are impacted by this cannibalization of PC’s by tablets? Thank you.

Carlo Bozotti

Well, this is the way, of course, we categorized customers. There is a degree of I think comparing quarter-after-quarter is, of course, is very accurate to because we do not change the categorization. But sometime this is not that easy to stay that the customer is computer rather than something else, right.

So, I think, overall, our computer exposure is relatively low. I -- we have, of course, indirectly some power management products that are used to buy charges for computer applications, power supply for computer applications.

There is an area that is still sizable is microcontroller applications for this drives that are of course related to personal computers. And we have some products for the motherboard, but they are pretty limited.

I would mention for instance the TPM for -- to securized the access to the perceived 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.

Amit Harchandani – Citigroup

Thank you.

Tait Sorensen

Amit, did you have a follow-up question?

Amit Harchandani – Citigroup

No. I think the other ones have been answered. Thank you.

Tait Sorensen

Okay. Thank you. Next question, please?

Operator

The next question is from Mr. Simon Schafer from Goldman Sachs. Please go ahead.

Simon Schafer – Goldman Sachs

Yes. Thanks so much. I guess from answer on your the biggest question 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.

Carlo Bozotti

Yes. It is.

Simon Schafer – Goldman Sachs

Understood. Thank you very much. And I actually have a broad strategic question, now that you sort of gone further -- 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 wonder, how you are thinking about the strategic potential for the discrete business -- for the digital business overall, could this -- it will be separated, do you consider it core or what the strategic orientation to these business? Thanks.

Philippe Lambinet

I will try to answer this question. This is Philippe Lambinet. But as you well know ST has had for quite a long time two pillars in his strategic since power on one side and multimedia conversions 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 1st.

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 to 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 axis of our company and one of the important blocks of the company.

Simon Schafer – Goldman Sachs

Got it. Thanks, Philippe.

Tait Sorensen

Thank you, Simon. Next question, please?

Operator

The next question is from Mr. Cody Acree from Williams Financial. Please go ahead.

Cody Acree – Williams Financial

Thank you. Thanks for getting me in, guys. Can we go back to the change in order rate as you come April, May and ended June, can you -- you given us some indication 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 and which ones are still holding up?

Carlo Bozotti

Listen, for us, Imaging is a nice, is an important challenge in Q3. Because the combination of the fact that today, as I said before we started to diversify two years ago. We have won several new customers, several new products, but the income will start next year.

So this year, this business is very much focus on two customers and the performance at this very moment is a pretty weak in terms of bookings and billings and this contribute 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 of, by product division that is material. And 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 much more. And I try it for Q3, we try for Q3 to give color to this and clearly, the three families where we -- that our three important families for the company, where we expect significant -- also ST-Ericsson that did not growing and this you know already right. So, we will not grow in Q3.

So, the three families where we expect to have a significant growth in Q3 is MEMS, microcontrollers and Power MOSFET and IGBT. And of course, booking is before. So, if I have to say the weakest area in terms of bookings is definitely Imaging because we will have savior decline in Q3 due to the specific situation.

There is a general softening of the booking environment this is clear and more prudent across from our customers and also from our distributors. But there are few lines, where we expect a very material growth during the course of Q3 and are the three lines as I mentioned. Automotive is kind of stable moving from Q3 -- Q2 to Q3, consumer, is post Olympics, so but again is a kind of stable, right.

So I try to go through, right. Is a general softening with some areas where we grow lot, but unfortunately there are no areas where we will not grow like ST-Ericsson, Automotive consumer. But there are areas, where we will also decline and Imaging is a significant decline.

So it’s not black and white. There is a general theme. General concern, I would say that is the macro economic environment, but then despite to the macro economic environment. We have areas of strong growth in Q3, but we have also area due to specific customer situation like Imagine whether is strong declined.

I’d like to underlying again, however, that thanks to the diversification strategy and Imaging, we have won four major new customers. We go from two customers to six very quickly, which is good and is not only for the [several front].

Cody Acree – Williams Financial

Carlo, thank you for that help. Maybe just one last question, the strength that you saw in April and May after you coming off of 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, but may be has not been consistent on through June and July?

Carlo Bozotti

This is what I -- 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 a more prudent approach in place of this.

So I -- because of course, we are tracking the stock turn and we know the volume and 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 the big shipment by the way was typically the last month, so it is not a replacement of inventory.

This happened before maybe this happened last year. Today is a very prudent approach with a different sentiment with our customers because of the uncertainty of the macro economic level.

Cody Acree – Williams Financial

Thank you very much.

Carlo Bozotti

Thank you.

Tait Sorensen

Thank you, Cody. Next question, please?

Operator

Next question is from Lee Simpson from Jefferies. Please go ahead.

Lee Simpson – Jefferies

Hi. Good afternoon, gentlemen. Thanks for taking my question. I just wanted to go back to CapEx, if I could and try and understand may be how long live that you expect the CapEx accounts to be here. I mean we’ve seen ongoing strength or you’re reporting ongoing strength and 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 from trying to say is beyond maintenance CapEx, beyond R&D commitments. Is there any sort of upward push likely in Q4 in the CapEx for things like Analog requirements and possibly Power semis?

Carlo Bozotti

No. It 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 equipment that we received. We received more equipment’s in Q2. This is not in -- 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.

Lee Simpson – Jefferies

Great. That’s very clear. Thank you.

Carlo Bozotti

Thank you.

Tait Sorensen

Next question, please?

Operator

The next question is a follow-up question from Mr. Didier Scemama from Merrill Lynch. Please, go ahead.

Carlo Bozotti

Didier, are you there?

Operator

Didier Scemama, your line is open. Please, go ahead.

Tait Sorensen

Looks like, he is not there. We will have to take it offline. I think at this point, we will conclude, so Carlo, if you have any comments?

Carlo Bozotti

No. I think I want to be clear of the three priorities that we have. We -- of course we were out in discrete before but I think it is 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 difficult sector and ST-Ericsson becomes sustainable from a cash flow point of view very rapidly. And of course, you will see this pattern of decrease expenses in Q3 and in the future.

And priority number three is the management of our asset and our cash. We want to continue to maintain and even improve our net financial position. Moving on, as I said before in Q3, their 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.

Tait Sorensen

Thank you very much. We will conclude the call at this point.

Operator

Ladies and gentlemen, the conference is now over. Thank you for choosing the Chorus Call facility and thank you for participating in the conference. You may now disconnect your lines. Good bye.

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