STMicroelectronics NV Q2 2012 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Gareth Jenkins - UBS - Analyst : 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. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Gareth Jenkins - UBS - Analyst : Yes, thank you.

Question: Sandeep Deshpande - JPMorgan Chase & Co. - Analyst : 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.

Question: Sandeep Deshpande - JPMorgan Chase & Co. - Analyst : 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?

Question: Didier Scemama - BofA Merrill Lynch - Analyst : 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.

Question: Didier Scemama - BofA Merrill Lynch - Analyst : 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.

Question: Didier Scemama - BofA Merrill Lynch - Analyst : All right. Thank you so much.

Question: Andrew Gardiner - Barclays Capital - Analyst : 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?

Question: Andrew Gardiner - Barclays Capital - Analyst : Thank you very much.

Question: Peter Knox - Societe Generale - Analyst : 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.

Question: Peter Knox - Societe Generale - Analyst : Okay, thanks.

Question: Francois Meunier - Morgan Stanley - Analyst : 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. Unidentified Company Representative 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.

Question: Francois Meunier - Morgan Stanley - Analyst : 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?

Question: Francois Meunier - Morgan Stanley - Analyst : Okay, thank you, Carmelo; thank you, Carlo.

Question: Jerome Ramel - BNP Paribas (Exane BNP Paribas) - Analyst : 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? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. Unidentified Company Representative 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.

Question: Jerome Ramel - BNP Paribas (Exane BNP Paribas) - Analyst : Thank you very much.

Question: Stephane Houri - Natixis Securities (Natixis Bleichroeder) - Analyst : 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. Unidentified Company Representative 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?

Question: Stephane Houri - Natixis Securities (Natixis Bleichroeder) - Analyst : Okay. And the loadings?

Question: Stephane Houri - Natixis Securities (Natixis Bleichroeder) - Analyst : Okay. Thank you very much.

Question: Simon Schafer - Goldman Sachs - Analyst : 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.

Question: Simon Schafer - Goldman Sachs - Analyst : 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.

Question: Simon Schafer - Goldman Sachs - Analyst : Got it. Thanks, Philippe.

Question: Cody Acree - Williams Financial Group - Analyst : 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?

Question: Cody Acree - Williams Financial Group - Analyst : 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?

Question: Cody Acree - Williams Financial Group - Analyst : Thank you very much.

Question: Lee Simpson - Jefferies & Company - Analyst : 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? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. Unidentified Company Representative 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.