STMicroelectronics Flash Memory Initiative Conference Call (ST-only) - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Hello, and welcome to the Intel-ST Microelectronics and Francisco Partners Establish a New Leader in Flash Memory Conference Call.

(Operator Instructions.)

For your information, this conference is being recorded.

I would like to turn the call over to Mr. Stan March, Vice President, Investor Relations, for ST Microelectronics.

STAN MARCH, VP OF IR, ST MICROELECTRONICS: (Vicky), thank you very much, and welcome to all of you for this ST Microelectronics conference call. Thanks for joining us today. We're here to address specific items related to ST resulting from a definitive agreement which we previously had a call on, I think many of you had a chance to hear, between ST, Intel and Francisco Partners, for the creation of a new Flash memory company. By the way, we believe this to be the second largest cross-border semiconductor deal ever done.

Now, this presentation will be a little different than our past, in the sense that this call is accompanied by a presentation, which you can find in PDF format, on the ST website and, if you're viewing the webcast, will also be driven during Mr. Bozotti's prepared remarks.

It will serve as the basis of the outline for our comments today, and will be available for you to review at your convenience.

Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer, and joining him are Carlo Ferro, our Chief Financial Officer, Andrea Cuomo, our Chief of Strategy, and Mario Licciardello, our Corporate Vice President responsible for ST's Flash Memory Group.

The presentation that Mr. Bozotti is using is available on our website under "Investor Information."

It's important to note that, during our call today, we will be using several forward-looking statements, which describe plans and expectations for the timing and the closure of the transaction, future outcomes for the Company being newly formed, as well as for certain impacts on ST's expected financial performance. All statements that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially.

For further information on the risk factors that could cause actual results to differ materially from those mentioned today, please refer to the Risk Factors in our most recently filed SEC form 20F, filed on March 14th of this year.

And with that bit of introduction, I'd like to turn the microphone over to Carlo Bozotti, our President and Chief Executive Officer.

CARLO BOZOTTI, PRESIDENT AND CEO, ST MICROELECTRONICS: Well, thank you, Stan, and thank you again to all of you for joining us on this call. As you know from our joint release this morning, ST has successfully achieved our stated goal of industrial consolidation and financial deconsolidation in Flash memories. We have combined assets with Intel and Francisco Partners to create a global leader in the Flash memory system solutions. The new company, whose name will be determined in the near future, brings together approximately 8,000 talented and motivated employees, as well as nine manufacturing facilities, which in 2006 combined to generated $3.6 billion in revenues.

Building on this impressive collection of human and industrial capability, the new Company will also have the best current technology for (the following) in the industry. And given the years of research invested by ST and Intel, is extremely well-positioned for the next generation of non-volatile memory solutions. Our customers have already told us that they are genuinely excited about this combination and look forward to the continuation of the leading edge products and high-quality service levels they have experienced and expect from the industry leaders.

Finally, the new Company will be required and able to independently finance its own future capital needs, thus freeing ST from this capital commitment after closing.

So, what does this transaction consist of? ST will sell our Flash Memory Group, FMG, which includes our NOR asset and resources, as well as our interest in the (main) joint venture with Hynix to the new Company for 48.6% of the common equity, as well as a cash payment of $468 million at closing. Intel will sell their NOR Flash business for 45.1% of the common equity and, likewise, a cash payment of $432 million. Francisco Partners will contribute $150 million for a 6.3 ownership stake.

Finally, the new Company will finance, via long-term debt instruments, $1.3 billion to be used for the cash payment to the former parents, and to the fund the Company's operational requirements. This planned financing has already been addressed and firm underwriting commitments are in place.

In addition, the new Company has had a committed $250 million revolver.

The new Company will be governed by a Board of Directors, selected by all the three partners. Intel and ST will each select three members, while Francisco Partners will chose two. I will serve as the non-executive chairman of the Board. The CEO-designee is Brian Harrison, who is coming from Intel, while the COO will be Mario Licciardello from ST. The CFO will soon be named by Francisco Partners.

At this point, I would like to thank and congratulate Mario Licciardello for brining the ST Flash business to a leading technology and market position, and wish him and his team to continue and, in fact, enhance this success.

The FMG business that we are selling to the new Company has essentially already been carved out of ST. The ST units include three front-end sites, AMK 8, M6, and our interest in Wuxi. One R&D technology are in the site, the R2 facility, began operation (mover) and approximately 4,000 people.

The carried value of this asset is about $2.4 billion. The consideration in this contract is preliminarily estimated to be $1.55 billion. This consideration consists of the 48.6% equity stake in the new Company and the $468 million cash payment, mentioned earlier.

Accordingly, we expect to incur a one-time non-cash loss of approximately $850 million to $900 million. We expect this transaction to close in the second half of 2007, after customary closing conditions and regulatory approvals are obtained.

To give you a sense of what ST will look like in the future, it is instructive to look at the company's pro forma performance without the memory business. The chart shows the full year 2006 and Q1 2007 gross margin impact of FMG. As you can see, the reported gross margin results for the company would have been about 3% points better, but still not where we believe they can be.

We also include the capital and equity cash cost that FMG generated over the 2004 to 2006 period to give you a sense of the recent capital intensity of this group, which has been more than twice that of the rest of the company in the same period.

With this announcement today, we now see the impact of the transaction on the ST's income statement beginning in the current fiscal quarter. ST will post a non-cash impairment charge in Q2 2007, which anticipates most of the expected loss from the transaction. This amount will be through that at the closing.

Once the transaction is closed, ST will consolidate the ownership stake in the new company under the equity method. Accordingly, the financial results of the ST equity interest will be reflected below the operating income line as a component of gains and loss from equity investment category.

We expect the overall impact to our income …