STMicroelectronics N.V. (STM)

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STMicroelectronics N.V. (STM)

Q2 2011 Earnings Call

July 26, 2011 9:00 AM ET

Executives

Tait Sorensen – Director, IR

Carlo Bozotti – President, CEO and Chairman

Philippe Lambinet – Chief Strategic Officer and SVP, Home, Entertainment and Displays

Carlo Ferro – SVP and CFO

Didier Lamouche – COO

Analysts

Gareth Jenkins – UBS AG

Kai Korschelt – Deutsche Bank

Janardan Menon – Liberum Capital

Sandeep Deshpande – JPMorgan

Simon Schafer – Goldman Sachs

Didier Scemama – RBS Capital

Odon de Laporte – Cheuvreux

Francois Meunier – Morgan Stanley

Tristan Gerra – Robert W. Baird

Jerome Ramel – Exane BNP Paribas

Peter Testa – One Investments

Dinos [ph] – Citi

Cody Acree – Williams Financial

Niels de Zwart – ING

Presentation

Operator

Good morning or Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the STMicroelectronics Second Quarter and First Half 2011 Earnings Results Conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Tait Sorensen, Director of Investor Relations. Please go ahead sir.

Tait Sorensen

Thank you Dino. Thank you for joining our Second Quarter 2011 Conference call. Hosting the call today is Carlo Bozotti, ST’s President and Chief Executive Officer. Joining him on the call are Didier Lamouche, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; Carmelo Papa, Senior Executive Vice President of the Industrial and Multisegment Sector; and Philippe Lambinet, Chief Strategic Officer and Senior Executive Vice President of Home, Entertainment and Displays.

This call is being broadcast live over the web and can be accessed through ST’s website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST’s results to differ materially from management’s expectations and plans. We encourage you to review the Safe Harbor statement contained in the press release that was issued with the results last night and also in ST’s most recent regulatory filings for a full description of these risk factors.

As a reminder, please limit yourself to one question and a brief follow-up. And now, I’d like to turn the call over to Carlo Bozotti, ST’s President and CEO, Carlo?

Carlo Bozotti

Thank you Tait and first of all I want to thank you for your interest in STMicroelectronics and for joining us on this call today to discuss our second quarter results and our outlook for the third quarter. Let’s begin with a brief overview. Overall, second quarter total revenues and gross margin were substantially in line with the outlook we shared with you in April, despite entering the second quarter with few but important headwinds.

Total revenues increased 1.3% sequentially, and 1.4% year-over-year. Automotive was a key driver of our growth in comparison to the first quarter as well as year-over-year. From a regional perspective, Americas led the results sequentially, and in comparison to the year ago second quarter, the Americas and Greater China, South Asia performed the best. The situation in Japan which we saw as a headwind entering in the second quarter is no longer a significant concern. In fact, due to the changes underway at certain companies ST is now well positioned to capture market share.

Looking at our wholly-owned businesses, the sequential and year-over-year progress was much stronger with sequential revenue growth of 3.2% and the year-over-year growth of 11%. In total, net revenues for ACCI, AMM and PDP were $2.22 billion, and accounted for 86% of our total sales in the second quarter. ST’s gross margin came in at 38.1% in the lower half of our range reflecting unfavorable currency and less favorable product mix and the impact on manufacturing of a change in demand by a major customer.

Our operating margin before restructuring attributable to ST was 9.1% in the second quarter decreasing from 9.9% in the first quarter, primarily due to higher losses at ST-Ericsson. However, year-over-year, the 9.1% figure represents an improvement of 140 basis points coming from higher revenues and stronger profitability of ACCI, AMM and PDP. With respect to our capital investment, we have largely completed selective important capacity additions that we were making particularly for our automotive business, MEMS and wireless new products.

These additions temporarily elevated our capital expenditure level and were part of the reason for the negative cash flow that we had anticipated for this past quarter. Our CapEx during the first half of 2011, totaled $798 million. We expect to have a much lower level of capital expenditures in the second half. At the end of June, our net financial position at $1.1 billion continues to be strong and is similar to where it was at the end of April and significantly above last year at this time.

We received a $357 million cash payment from Credit Suisse in the second quarter. While it took some time litigation with Credit Suisse with respect to certain auction rate securities has finally ended making ST whole by recovering an amount slightly higher than the full amount initially invested plus lost interest and expenses. Talking about the key facts of the past quarter, I wanted to briefly highlight that in June we began to have some challenges impacting our business and our manufacturing, as a result of weaker demand, and a much weaker than planned outlook for wireless products from one major customer.

This change in demand has and will in the near-term negatively affect sales in power discrete, imaging and in the wireless JV as well as our manufacturing, as I will discuss later. Additionally, we saw some signs of softening demand in some of our businesses, such as digital consumer and microcontrollers. Turning now to ST-Ericsson, there are several points I would like to make and they fall into three blocks, legacy sales, new product traction and the timeline of the anticipated new product ramps.

First, with respect to legacy sales, the situation with a major customer of the legacy product portfolio is making the transition quite challenging with Q2 sales down 10% sequentially and 34% year-over-year and the first half sales also down 34%. Taking into account the joint ownership, our wireless operating loss excluding non-controlling interest was $102 million in the second quarter.

Second, the quality of ST-Ericsson’s product roadmap to develop innovative solutions has enabled the company to gain traction with existing customers and to expand its customer base. So the focus is on execution, delivering new products to customers in the targeted high-growth smartphone and tablet applications they are addressing. We continuously monitor how design wins will evolve with the existing and new targeted customers.

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