Freescale Semiconductor's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Executives

Mitch Haws – VP, IR

Gregg Lowe – President and CEO

Alan Campbell – SVP, CFO

Analysts

Jim Covello – Goldman Sachs

Ambrish Srivastava – BMO Capital Markets

Glen Yeung – Citi

Jeff Harlib – Barclays Capital

Ross Seymore – Deutsche Bank

John Pitzer – Credit Suisse

Steven Eliscu – UBS

Franklin Jarman – Goldman Sachs

Raji Gill – Needham & Co.

Ranjit Ramachandran – Sanford Bernstein

C.J. Muse – Barclays Capital

Doug Freedman – RBC Capital Markets

Freescale Semiconductor, Inc. (FSL) Q4 2012 Earnings Call January 29, 2013 5:00 PM ET

Operator

Welcome to Freescale’s Fourth Quarter and Full Year 2012 Results Conference Call.

[Operator Instructions]. Today’s call is being recorded. If anyone has any objections, you may disconnect at this time.

I would now like to turn the call over to Mitch Haws. Sir, you may begin.

Mitch Haws

Thanks, [Kim], and welcome to all of you to our fourth quarter and yearend 2012 conference call. With me today are Gregg Lowe, our President and Chief Executive Officer, and Alan Campbell, our Chief Financial Officer.

Before we begin today’s prepared remarks, I’d like to remind everyone that today’s discussion does contain forward-looking statements that are based on our current outlook, and as such, do include certain risks and uncertainties. Please refer to the cautionary statements in today’s press release and review our 10-K and other SEC filings for more information on the specific risk factors that could cause actual results to differ materially. The company does not assume an obligation to update any forward-looking statements made today to reflect subsequent events or circumstances.

Finally, in the course of today’s discussion we will refer certain non-GAAP financial measures and we have posted the appropriate GAAP financial reconciliations to our website at freescale.com.

With that let me turn the call to Gregg.

Gregg Lowe

Well, thanks, and good afternoon. I’ll spend a couple of minutes highlighting our Q4 and calendar 2012 results, after which Alan will provide some additional commentary and insight into the financials. Following Alan’s comments, we’ll take your questions.

Now looking at Q4 results, revenues were $957 million, modestly ahead of our outlook and down 5% from Q3. Gross margins were 39% and the adjusted loss per share was $0.15. For the year, revenues were $3.95 billion, 14% below last year. Gross margins for 2012 were 41.6%.

Our Q4 and 2012 results do reflect the impact of the weaker trends in the semiconductor market. Despite that we continued to make solid progress this year in improving our capital structure and building the foundation for future growth.

With that, let me turn the call over to Alan.

Alan Campbell

Yes, and good afternoon, thank you again for joining today's call. As I review the Q4 financial results in more detail, please note I will be focusing on the results excluding the impact of certain one-time items and adjustments. We believe this is a more meaningful representation of our ongoing financial performance.

In addition, as we highlighted in the earnings release, we have realigned our product groups and are now reporting revenues as follows: microcontrollers, digital networking, automotive microcontrollers, analog and sensors, RF, and other which primarily includes IP revenues and cellular handset revenues. We will post on our website the historical revenue trends based on this reporting format. This breakout out provides more detail than we've provided historically and we think the additional transparency will help you track our progress in our major product groups.

Now looking at Q4 in 2012 in more detail, revenues were $957 million, representing a sequential decrease of 5%. Sales declined by 6% compared to Q4 of last year. Microcontroller and RF revenues grew sequentially, offset by declines in digital networking, automotive MCUs, and analog and sensors. The IP and cellular revenues also declined from the third quarter. On a year-over-year basis sales declined by 6% compared to the same period last year.

Looking at the product groups now in more detail, microcontroller sales grew 3% sequentially and 15% over Q4 of last year. Sales benefited from the design win momentum we've seen in our 32-bit ARM-based MCUs sold in the industrial market as well as growth in our 8-bit portfolio sold into Asia Pacific through both distribution and OEM accounts. On a year-over-year basis MCU sales declined 11%. The decline in sales was attributable primarily to lower sales in the industrial markets which experienced lower demand in the first nine months of 2012. Additionally, sales of our application process has declined from the prior year.

Digital networking revenues declined 14% from the prior year and were 7% below the prior year. Enterprise and wireless spending, compounded by some pockets of inventory in the US and Europe, was weaker during the year, particularly in Q4. On a year-over-year basis, digital networking revenues declined 8%. Outside of investments in infrastructure in China, CapEx and wireless declined during 2012 compared to the prior year which was the primary driver of the decline over last year. Looking ahead, we are cautiously optimistic for both the wireless and enterprise CapEx trends in China and the US and expect our sales to benefit from these trends going forward.

Automotive microcontroller sales were 6% below Q3 of 2012 and 7% below Q4 of last year. On a year-over-year basis, sales were down 8%. The year-over-year sequential declines resulted primarily from lower European production volumes which offset more favorable trends in the US and China.

Analog and sensor sales were 3% below Q3 and 8% below Q4 last year. For the year, our analog and sensor sales declined 8%. The decline in sequential and year-over-year revenues was again based primarily on lower sales to automotive given the weakness in Europe.

RF sales into the wireless infrastructure grew 33% from Q3 and down 4% from last year. The increase in RF sales on a sequential basis is attributable to the growth from infrastructure investments related to the TD-SCDMA Round 6 in China. On a full-year basis, sales declined 28% as investment spending in most regions moderated during 2012.

Finally, other products declined 34% both sequentially and year over year. Both IP and cellular revenues declined sequentially. On a full-year basis, net sales declined 35%. The primary driver of the annual decrease in revenue was related to the plan wind-down of our cellular handset business.

Finally, sales-to-distribution declined 3% sequentially and were up 15% compared to Q4 of last year. On a full-year basis, sales-to-distribution declined 8% from the prior year. Distribution inventory declined by $4 million compared to the third quarter and weeks of inventory were at 9.7. This compares to 9.8 in the prior quarter and 11.1 in the same period last year. Our book-to-bill ratio in the fourth quarter was 1.03 compared to the 1.0 in the third quarter.

Let me now look into gross margins and operating expenses. Our gross margins were 39.2% compared to 42% in the third quarter. Gross margins were impacted sequentially by lower IP sales and a planned decline in capacity utilization as we worked to reduce inventory dollars in the quarter. Partially offsetting the impact of lower sales and utilization were procurement savings and operational efficiencies including product yields. Compared to Q4 of last year adjusted gross margins were down 470 basis points, primarily again due to low sales volumes, lower utilization and the impact of product mix.

Our internal front-end factory utilization was approximately 71% in the fourth quarter. This compares to 78% in Q3 and 80% in the same period last year. The major change in utilization was related to the reduction in our facilities to reduce inventory.

Now looking at operating expenses, our operating expenses were down $1 million sequentially and down $5 million from Q4 of last year. In total, our operating expenses were 31% of sales. On a full-year basis operating expenses declined by $127 million. The key drivers were lower incentive compensation and overall reductions in discretionary expense. Adjusted operating earnings were $79 million or 8% of sales, and this compares to $127 million in Q3 or $144 million in the same period last year which is approximately 14% of sales.

For calendar 2012, adjusted operating earnings were $461 million or 12% of sales, and this compares to the $761 million and 17% of sales last year. The adjusted net loss in Q4 was $37 million exclusive of reorganization charges, stock-based compensation and adjustments included in today's earnings release. This compares to adjusted earnings of $10 million in Q3 and $18 million in the same period last year. The adjusted net loss per share exclusive of these adjustments was $0.15, and again this compares to an earnings per share of $0.04 in Q3 and $0.07 in Q4 of last year. For the year, the adjusted net loss per share was $0.08 compared to an earnings per share of $0.96 in 2011.

EBITDA in Q4 was $140 million or 15% of sales. This compares to $186 million or 18% of sales in the third quarter and $216 million or 21% for Q4 of last year. For the year, EBITDA was $701 million. Again, this compares to $1.07 billion in the prior year. Our adjusted EBITDA was $839 million on a trailing 12-month basis.

Cash, cash equivalents were $711 million compared to $763 million in Q3. We [didn't make] progress in Q4 with working capital which represented a $21 million source of cash in the quarter. Inventory dollars declined by $13 million. Inventory days were at 122, and this compares to 124 in Q3. Excluding the inventory related to the Toulouse transition, inventory days were at 114.

Recall we used about $100 million of our cash in Q4 to reduce our 2014 maturities. This will save approximately $9 million in annual interest. In 2012 we reduced our annual interest expense by a run rate of $40 million. Our capital expenditures for the quarter were $38 million or 4% of sales. For calendar 2012, capital expenditures were $123 million or 3% of sales.

As indicated previously, we did anticipate certain cash costs and future savings associated with our plans to reduce operating expenses. During the fourth quarter, we recorded approximately $40 million in severance and other employee costs. The corresponding savings of approximately $40 million will phase in over the course of 2013.

We also incurred other charges associated with the change in strategic focus such as accelerated amortization of certain purchase licensees as well as some remaining costs related to the closure of 150-millimeter manufacturing operations. These charges were partially offset by the cash we received following the closure of our business interruption insurance claims associated with the impact of our Sendai Japan earthquake in 2011.

Also, we reported an income tax benefit of $37 million for the fourth quarter and a normal tax expense of $2 million. These amounts include the release of certain reserves for uncertain tax positions in our foreign jurisdictions due to a successful resolution of tax audits. After adjusting for these and other non-cash items, our cash tax income tax expense from the fourth quarter was $1 million and cash expense for the year 2012 was $9 million.

Given our consistent execution in managing cash, we continue to have solid liquidity. Our cash, cash equivalents coupled with our undrawn revolver of approximately $400 million affords us the opportunity to continue to invest in the business, fund our capital expenditures, and continue to de-lever.

Let me now take a few minutes to discuss the first quarter of 2013. Based on our current outlook, we expect Q1 revenues to be in the range of $945 million to $985 million. The revenue guidance would imply at the high level that overall our microcontroller revenues will be down from Q4 driven by seasonally lower sales of our application processors to the consumer market. MCU revenues will be essentially flat with that of the fourth quarter. In digital networking, our revenues will grow modestly due to continued solid trends in our enterprise business and improved wireless infrastructure activity assumed during the first quarter.

Automotive microcontroller revenues will also grow sequentially. Our analog and sensor revenues will essentially be flat with that of Q4. And our RF revenues will decline sequentially following the 33% sequential increase in Q4. Our IP sales are expected to slightly increase in the first quarter.

Finally, we expect gross margins to be up 75 to 100 basis points sequentially.

At this point, I'll now turn the call back to Gregg.

Gregg Lowe

Thanks, Alan. Before we move to the Q&A session, I wanted to offer a few closing comments.

2012 was clearly a challenging year for Freescale and the rest of the semiconductor industry. Despite the challenges, we made good progress in improving our capital structure. We have built the foundation for future growth by charting a new course that has the bu- in of our customers and our employees. We've assembled a management team that is committed to helping deliver the growth and profitability that we know we can achieve.

We are at the beginning of the change process and I'm sure there will be a lot of issues to tackle. We'll face those issues together as one Freescale team. We look forward to sharing our success as we move forward. And at this point we'll open up the call to any questions you might have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

And our first question comes from Jim Covello with Goldman Sachs. Your line is open.

Jim Covello – Goldman Sachs

Great, guys. Good evening, thanks so much for taking my question. I guess first question, some of the other companies in the industry who are broadly related in your space have commented about your improving monthly order trends in the months of December and January. Is that consistent with what you're seeing and is that what's really driving the upside in the guidance, or is the guidance more related to share gain in the segments that you're talking about?

Gregg Lowe

I think it is consistent with that, and I'll let Alan give you a little more color on that.

Alan Campbell

Yeah, Jim, I think as we entered into the fourth quarter, we've seen a continued strengthening of orders as we've progressed through the quarter. So this is a phenomena that we have seen throughout the 12, 13 weeks in the quarter and not just in December, which gives us obviously confidence of the guidance that we've given in the first quarter.

Jim Covello – Goldman Sachs

That's helpful, thank you. And then relative to your expectations on utilization rates in Q1 and then your expectations for inventory in Q1, obviously you've been running at pretty low utilization rates to keep inventory under control, you think you'll stay at the same level or will utilizations tick up?

Alan Campbell

Our utilization will be flat to slightly up and we would anticipate that we would continue to drain a little bit of inventory in Q1.

Jim Covello – Goldman Sachs

Terrific. Thank you and congratulations on the solid outlook.

Alan Campbell

Thank you.

Operator

Thank you. Our next question comes from Ambrish Srivastava with BMO Capital Markets.

Ambrish Srivastava – BMO Capital Markets

Hi. Just a question on the gross margin guidance for the March quarter, and then more importantly as we look through the year, how should we be thinking about the leverage? Thanks, guys.

:

Ambrish, the guidance for the last quarter, we did give guidance of 39%, actually down a few hundred basis points from the prior quarter in Q3. We actually executed a 39.2% so pretty consistent with the guidance. The main issue there, as we communicated in the past, really was one of utilization. We saw the utilization of our front-end facilities drop from 78% down to 71%. That was the major driver. There was a little bit of product mix with our IP revenues as well. As we go forward into Q1, we have given guidance on our 75 to 100 basis points. That is predicated on a number of issues between utilization, Toulouse savings, operational efficiencies, procurement, et cetera, as we've communicated also in the past. And we expect that type of progression to continue. We've historically said 50 to 75 basis points. And a lot of that will be dependent upon utilization as we move forward.

Operator

Thank you. Our next question comes from Glen Yeung with Citi. Your line is open.

Glen Yeung – Citi

Thanks. Alan, again back to gross margin, at what revenue levels do you think you'll start to see utilization rates start to pick back up and therefore that incremental benefit to margin?

Alan Campbell

Yes. I think what we've said, that the 10.50, 10.75 level we could be in the 80% utilization. One other situation at the moment, Glen, that even with our current utilization, we are reducing inventories, so we're keeping kind of careful, cautious eye on that and kind of taking it gently. As Gregg said, we are going to slightly improve our utilization payment to the first quarter, but it's very conceivable we could see utilization rates 80%. That represents a 900-basis-point improvement from where we are in Q1. And as we've said before, we can model roughly 30% of that impact to gross margin so there'd be over 300 basis points improvement as a result of that.

Glen Yeung – Citi

Okay. That's helpful. Thanks, Alan. And just as a follow-up, you made the point that basically for the entire fourth quarter you were seeing business conditions pick up. Just want to clarify that that's still true of January. And I wonder if within that, there are any particular areas of strengths or weakness?

Alan Campbell

I say it's very consistent. We closed out the month of January and we saw continued patterns with the orders. I think it's fair that we would say that that's basically across the board with our portfolio and not specific to any one of the five product groups that we've mentioned.

Glen Yeung – Citi

Okay. Thanks so much.

Operator

Thank you. Our next question comes from Jeff Harlib with Barclays.

Jeff Harlib – Barclays Capital

Hi, good afternoon. Were there any unusual IP receipts during the quarter? And what do you see with that in 2013, IP royalty receipts?

Alan Campbell

Yeah. There was a small amount of IP receipts, Jeff, in the quarter. I would say there is a lot of moving parts because offset with the IP receipts, we also had some severance also in the quarter which more than offset it. So in terms of the cash flow, which is probably where your question is coming to, we were able to generate 82 million from cash from operations in the fourth quarter, and that number is about 350 for the year. As we move into '13 there will be puts and takes, obviously with IP and from severance, but we feel reasonably confident with the current outlook that we'll manage ourselves through that pretty well.

Jeff Harlib – Barclays Capital

Okay. And just the flow through of both the Toulouse savings and the restructuring action savings through the first couple of quarters.

Alan Campbell

Yeah. So we still have approximately $95 million to $100 million of severance associated with both the Toulouse and the actions we announced in Q4. The profile of that would roughly be about $20 million in the first quarter, $40 million in the second, and the balance in the second half thereafter. The savings, we will see savings coming through as a result of the Toulouse. We did see a little bit of that in the fourth; we'll see a little bit more in the first. And that will continue to increase till we get to the $70 million of annualized savings. I don't expect we'll get to that full impact by the fourth quarter of 2013, but we would see probably about 70% of that coming through this year.

Jeff Harlib – Barclays Capital

Okay. And just then, do you have targets in terms of bringing down your inventories in terms of days or amounts?

Alan Campbell

Breaking down inventory days?

Jeff Harlib – Barclays Capital Yeah.

Alan Campbell

Yeah, I mean, we actually, at the beginning of 2012, we communicated we would build inventory in anticipation of the market increasing. The market didn't take off so we had higher inventory days. Our inventory days today are running at 122. That includes eight days for the end-of-life inventory in Toulouse, so, you know, roughly about 114 days. I think as we progress through the year, we're going to keep a careful, cautious eye on this one. But I think we could expect it to be in the 100 range by the end of the year.

Jeff Harlib – Barclays Capital

Okay, great. Thank you.

Operator

Thank you. And our next question comes from Ross Seymore with Deutsche Bank.

Ross Seymore – Deutsche Bank

Hi, guys. Just one clarification, Alan, on what you just said on inventory. Is that 100-day target excluding or including the Toulouse inventory?

Alan Campbell

That's including Toulouse. Again we'll continue to monitor this, Ross, because we know that as the market could pick up, inventory days can be compounded, if you like, or the reduction could be compounded. So we'll continue to monitor. I think net would be about 100 days though.

Ross Seymore – Deutsche Bank

Got you. And then I guess switching gears a little bit over on to the OpEx side, any color you can give for the first quarter? And I know the restructuring plan is kicking in as we go. How should we think about OpEx dollar spend through the remainder of this year?

Alan Campbell

Yeah, I think we've said that with the actions that we have taken in the fourth quarter we would expect to see annualized savings of $40 million. That equates to about $10 million per quarter obviously. And we would see about $6 million or $7 million of that come into the first quarter and then ramping up to the $10 million quarter thereafter.

Ross Seymore – Deutsche Bank

Great. And then I guess the final question, and you might have touched on this earlier, but the bookings that have been strong, I know you said it was relatively broad based by your end-markets, what about your customer type, distis versus OEMs, any difference in how they're behaving?

Alan Campbell

I don't see any difference between -- we haven't seen any difference between disti and OEM. As we've said, the backlog strength, interesting, really is across the full portfolio.

Ross Seymore – Deutsche Bank

Great. Thank you.

Operator

Thank you. Our next question comes from John Pitzer with Credit Suisse.

John Pitzer – Credit Suisse

Yeah. Good afternoon, guys. Thanks for letting me ask the question. I guess, Gregg, that my first question is, you know, the industry's clearly at or approaching a bottom. I guess as a high level, as you guys think about managing cost structure, fab loadings, what type of growth beyond the March quarter are you managing to? Should we think seasonal, above seasonal, below seasonal? And I guess I'd be specifically interested in your view on kind of the auto vertical and then the CapEx -- infrastructure CapEx side of things as the year unfolds.

Gregg Lowe

Well, John, thanks for the question. I guess a couple of things. Obviously we're talking about first quarter right now, and while we are seeing some signs of strength and so forth, we also want to be very cautious. There still is a very cloudy macroeconomic situation. So the way we're thinking about the rest of the year is that it will be something that will be difficult to completely predict, and therefore from an OpEx standpoint we're keeping a pretty tight rein open what we're doing from an OpEx spend standpoint. And if the market picks up, we've got the capacity right now that's sitting at 70% utilized, we've got inventory in place to be able to absorb any kind of upside. So we're just trying to be ready for anything, to be honest with you.

John Pitzer – Credit Suisse

And then, Gregg, as my follow-up, a key part of your strategy is to kind of refocus the R&D efforts to first stabilize and then start to regain share in some of your core markets. I guess, can you help us understand what milestones we should be looking at, either by end-market or product segment? And I guess importantly, when and where do you start to see the fruits of your labors first in your opinion?

Gregg Lowe

Well, first off, we're obviously monitoring that very, very closely and we are, if you take a look at what we had said we would be doing, which is taking more of our R&D and shifting it from areas where we don't believe we can drive growth and profitability to areas that we believe we can drive profitability, that progress combined with the expansion of the sales force, the increase of the sales force in China that we had talked about, some of the various different things that I outlined in our last call, we are essentially ahead of plan on nearly all of those metrics. We're going to be over 80% of our R&D spend moving into those areas already by the first quarter of this year. So we've made some pretty significant changes already and I think that's obviously a positive thing. So we announced the strategy and now we've been driving it very, very quickly.

You know, in terms of when that turns into top line results and increased margin and so forth, from a top line perspective, obviously many of the markets that we attack, whether it's networking, automotive or what-have-you, have different kinds of gestation periods, mostly longer gestation periods and, you know, the positive to that is they stay in production longer as well. So I would anticipate the very specific things that we're doing right now will begin to see some modest amount of impact perhaps next year and a stronger impact as we move into the 2015.

John Pitzer – Credit Suisse

And then, guys, if I can sneak one more in for Alan, if networking starts to come back stronger than we anticipate, can you help me or just remind me the margin leverage of networking versus some of the other segments that you're in on the gross margin line?

Alan Campbell

Yeah. I think from a product mix standpoint, we don't actually disclose the absolute margins by product group. But we have said in the past that margins are higher. Gross margins are certainly higher in the digital networking side, so increase there will help us overall. I think the other issue to mention is that in the digital networking space, that that capacity is primarily outsourced. But in terms of gross margin, we should see some benefit there as we mix more into the networking space.

John Pitzer – Credit Suisse

Great. Thanks, guys. I appreciate it.

Gregg Lowe

Thank you.

Operator

Thank you. Our next question comes from Steven Eliscu with UBS.

Steven Eliscu – UBS

Yes, thank you. First question, I wanted to focus on the growth in non-automotive microcontrollers. It appears that you're turning the corner to now gain some share, and maybe you could give us some insight as to what are some of the specific drivers of this. Is this related to what you're doing with your distribution partners? Is this related to the new Kinetis products? And can you give us some anecdotes so we can gain some confidence that this isn't just a short-term bleep?

Gregg Lowe

Yeah. Okay. Thanks for the question. And it's obviously a real important part of our strategy moving forward. And I think it's one where, you know, you mentioned distribution, the reception we've had from our distribution partners based on some of the new product that we've announced, specifically the Kinetis that you had talked about, but some of the other ARM-based platforms has been outstanding. We have a substantial following in third-party network that works well in a distribution type model.

And so our position with our three -- with the three major distributors that we have is actually quite strong in the microcontroller market. We have a number one type position with those three guys. I think the rejuvenation of this -- of the microcontroller platform would be announcement of Kinetis and some of the low-power products that have come out there, the infrastructure around supporting that, is really driving a pretty significant amount of design win traction. Our design wins, as a point of reference, our design wins for Q4 of this past year were an all-time high for a microcontroller business, general purpose microcontroller business.

So I think there's a lot of good traction. If you take a look at those design wins and you look at the business itself, it's kind of a -- it's a very good business from a fragmentation standpoint, lots and lots of customers, no single customer driving some abnormally high percentage of the business, nor the design wins. So I think what we're seeing right now is broad-based traction. It's something that's going to be very important for us as we move forward and it's something that I think we're going to continue to drive.

Steven Eliscu – UBS

And on the 8-bit side -- that's very helpful -- and on the 8-bit side, is that just reflective of seasonality? Because 8-bit, that's been a drag on your growth, and is there something more to your discussion that it grew last quarter?

Alan Campbell

I think it's -- Steve, this is Alan -- I think it's more than just seasonality. I think as well as the Kinetis, there were some 8-bit microcontrollers introduced. We have been making progress in Asia, as an example, so I think it goes beyond the normal seasonality and we are getting some traction there.

Steven Eliscu – UBS

Great. And just as a final question, switching to the automotive side, the automotive market in Europe is forecasted again to decline this year. And so what is your view overall this year for growth in that segment and how are you potentially offsetting some of the European weakness with content increases this year? Thank you.

Gregg Lowe

Well, I'll say a couple of things, and if Alan has some commentary to add. You know, you said an important thing which is content increasing. And I think that has been a trend and will continue to be a trend. If you take a look at the amount of automotive activity even at Consumer Electronics Show in the early part of this year, cars are becoming, you know, the rate at which content is increasing I think continues to increase. And so that will be one vector. The second vector is obviously we're expanding our footprint globally and expanding where there is, you know, obviously some more growth inside the market. So that would specifically be the opportunities we have in Asia and Japan and so forth where our penetration is lower.

We have had a very, very long history with the automotive customers. It's going on 40 years now. I've had an opportunity to meet with nearly all of our big customers. We had one visiting us last week and, you know, just very, very excited about not only the portfolio that we have but also the execution that this team has delivered over the last year or so. So I think it's a great business for us and it's one that I think we'll have a great opportunity to continue to grow.

Steven Eliscu – UBS

So the bottom line there is you do believe this year you can grow faster than the unit growth of the automotive market?

Gregg Lowe

I think we can gain share this year in the automotive business.

Steven Eliscu – UBS

Great. Thank you.

Operator

Thank you. Our next question comes from Franklin Jarman with Goldman Sachs.

Franklin Jarman – Goldman Sachs

Great. Thanks for taking my questions, guys. I guess just first, with most of the severance actions now behind us, can you just help us think about how much you might need to spend from a cash restructuring standpoint in 2013 and maybe how that compares to 2012?

Alan Campbell

Yeah. Frank, so the severance that we have remaining is roughly $95 million to $100 million for 2013. $20 million of that will be coming through in the first quarter and there will be a heavy impact in the second of about $40 million, and the balance thereafter. And that compares probably to about 2x where it was in 2012.

Franklin Jarman – Goldman Sachs

Got it. That's helpful. Thank you. And then just as a follow-up, from a balance sheet perspective, I know you guys purchased -- repurchased the $100 million of 2014 maturities in the quarter. But have you thought about what types of options you might have to get more aggressive on debt reduction at this point, you know, especially given some of your high coupon secured notes become callable now and a little over a year in the high-yield capital markets have certainly been very favorable? Are there any additional options that you guys are thinking about at this standpoint?

Alan Campbell

I think the best way of answering that is we continue to look at all options, as you can see from our past performance. In this year alone we did $100 million buyback in Q3, another $100 million in Q4. We did a refinancing in Q1 of 2012 of about $500 million. So we continue to look at the economics of this, Frank, and make sure that we are optimizing it for Freescale and pending market conditions of these are correct and obviously there's nothing that will preclude us from moving into the markets to do something.

Franklin Jarman – Goldman Sachs

Okay. Thanks very much. Congrats.

Operator

Thank you. Our next question comes from Raji Gill with Needham & Co.

Raji Gill – Needham & Co.

Yes. Thanks and congrats as well on very good results. Just a question on the guidance, the revenue guidance, and sorry if this is asked before, I was jumping on another call, it does indicate some sort of above seasonal patterns. Maybe if you could talk about typically in Q1 what do you see in the businesses and why is it above seasonal if that's the case? And on the comm infrastructure side, how would you describe the competitive landscape, particularly in the kind of the multicore processor market and where do you see you guys tracking with that particular segment?

Alan Campbell

Okay. Let me maybe take a respond to that and I'll ask Gregg to complement it. First of all, on a seasonality basis, Q1 is I would say, if we look at the last three, five, ten years seasonality for the company, I would say that probably a couple of percentage points down would be normal seasonality if there's such a thing as normal seasonality in this industry these days. So, yeah, we are slightly above.

A lot comes down to our customers and inventory situation and so we did give guidance for the first quarter in automotive and we will see growth in automotive. We did see a decline in automotive in the fourth quarter which was primarily driven again by inventory at some of our customers. So I think as we look on it, normal seasonality is really difficult in this type of environment.

In terms --

Gregg Lowe

Yeah, maybe I'll just add a little color to that. So we're obviously having an above seasonal first quarter. We came in at the high end of our guidance for the fourth quarter, and that certainly feels good. I will balance that out though by reminding everybody, we're coming off a year where we were down 14%. So we feel like there's still a heck of a lot of work for us to do here to be driving the company to getting the results that we know we can get.

Raji Gill – Needham & Co.

On the -- just on the multicore processor roadmap?

Alan Campbell

Yes. So on the communication infrastructure, the competitive landscape, as with all of our businesses, is out there. So I think we hold the largest market share position, probably in the 50%, 60% at the moment, and then all our competitors, you know probably well who they are, are a lot smaller in size in nature. So we actually feel that we are in a very strong position with our market share position, and obviously it's going to be a function of how much we're investing and how much we're targeting to get out of that investment.

Gregg Lowe

And overall, you know, you can see the clarity of the digital networking business now with the way we're reporting, down about 8% year on year. We think that's most likely in line with the market and it'll probably be now a lot easier for you to measure you against whatever market indices you'd like to measure that against.

Raji Gill – Needham & Co.

And just last question real quick, Alan. It seems like there are several gross margin tailwinds throughout the year whether that's increasing utilization rates, the cost savings bleeding through due to the Toulouse fab, the procurement savings, the perhaps favorable mix shift. How do we look at kind of gross margins kind of exiting this year? If all these things occur and we get volume back up to a certain level, it would imply that gross margins could significant improve from here on out and going into 2014, if all those things hit on the right track. Thank you, Alan.

Alan Campbell

So we have been somewhat transparent with the different elements and opportunities for us to continue to enhance our gross margins. Again, in Q4 we did see our margins decline. We have given guidance of 75 to 100 basis points in Q1. As we move forward, I think minimum 50 to 75 basis points is kind of [table steaks] for us with some of those elements. And on top of that, there could be improvements as a result of utilization.

I don't want to get ahead of ourselves. We've still got a long ways to go and not just on the growth side but also in gross margin, but we certainly have some detailed plans behind the continued improvement in gross margin.

Raji Gill – Needham & Co.

Very good. Thank you, Alan. And congrats, as well.

Operator

Thank you. Our next question comes from Ranjit Ramachandran with Sanford Bernstein.

Ranjit Ramachandran – Sanford Bernstein

Yeah, hi. This is Ranjit Ramachandran standing in for Stacy Rasgon. A quick question, firstly on the distributor inventories. You mentioned the distributor inventories are lean, you know, or have reduced sequentially. How would you characterize it? And would you comment on whether you see inventory restocking possible over the next few quarters? Or any commentary would be helpful.

Gregg Lowe

I think the inventory is in -- it's lean. It's sitting at a little over nine weeks of inventory; that compares to I think 11 weeks around this time last year. I think this is a trend that probably continues to some extent. I think the distribution and the distributors have learned how to live with and manage with lower amounts of inventory. So I don't anticipate that there's any fundamental change to the stocking strategies. It will mainly be based on what they anticipate as happening in the coming quarters.

Ranjit Ramachandran – Sanford Bernstein

Okay. And just as a follow-up, on the cash levels I noticed you are down at 711. Generally for modeling, assuming anything about 750 would go to buybacks, I bet buybacks. Has that ratio been reduced or should we continue modeling anything about 750? And also, any color on the run rate for interest expense going forward and tax rates?

Alan Campbell

Yeah. So I think if we model 700 to 750 as the kind of normalized cash and anything in excess of that, we did in Q4 buy back 100 million. That's 100 million obviously in a very difficult environment. So we feel pretty good about being able to do that. So I think the 700 to 750 is reasonable. If you think about our interest as we go into, what, 2013, roughly 122 million, 123 million per quarter is good for modeling purposes.

Ranjit Ramachandran – Sanford Bernstein

And the tax rates quickly, if I may?

Alan Campbell

Yeah. The tax, our cash tax rate is still exceptional. Our cash tax is in 2012 was $9 million. I think from a performance standpoint, $10 million to $15 million cash tax is again good for modeling.

Ranjit Ramachandran – Sanford Bernstein

Okay, great. Thanks.

Operator

Thank you. And our next question comes from C.J. Muse with Barclays. Your line is open.

C.J. Muse – Barclays Capital

Yeah, good afternoon. Thank you for taking my question. I guess first question, when I look at your top line in calendar 2012, it looks like you underperformed overall semis by about nine points, and clearly there was well-known headwinds in cellular and networking. But now that you're restructuring the business, de-emphasizing DSP and potentially other areas, and it will take time on these other businesses, curious when you expect stabilization and when you think your business can grow in line with semis?

Gregg Lowe

Well, as I've -- I've talked to this point a couple of times, not necessarily on this call, but a couple of things. One is the actions that we're putting in place today are going to have an impact on top line revenue as we win designs and so forth and they head into production. Depending on which market we're after, those will have different gestation periods. But certainly the decisions that we made and the changes that we've made in the end of Q3 and Q4 of last year is not going to impact Q1 of this year from a top line revenue standpoint. So, depending on which market that we're winning in, the automotive takes longer, networking is a little bit shorter and so forth, we'll have different gestation periods.

That being said, we're not starting from a standing stop. The team has been actively engaged with design wins and so forth and have been driving that. I guess the net-net of it is that the company has lost share, you know, overall for the last several years, and I think we're attempting to turn that around. I would anticipate that we would be able to at least begin to stabilize that in 2014. That's not to say that 2013 is a throwaway or anything, but I think we'll be fighting that, but I think we'll have some headwinds from an overall market share standpoint. And certainly 2014, we would attempt to stabilize that in 2015 to be driving market share growth.

C.J. Muse – Barclays Capital

Thanks, very helpful. And then, Alan, if I could ask a question on I guess inventory and the implications for utilization. If I look back a couple of years, your inventory was around 80, 90 days. And so curious, what makes you comfortable that 100 days is the right level and not potentially lower? And how should we think about that impact on your utilization as it runs through the year?

Alan Campbell

Yeah. So the 100 days first of all, C.J., we talked about 100 days going out of the year 2013, that doesn't necessarily correlate to see what's the optimum inventory level. In a period of positive environment we could easily see our inventory days significantly reduced just with the ramp-up in revenues. And we know in this industry that that's going to happen.

The utilization rate has been and will continue to be slightly dampened with the inventory that we currently have. And that's consistent I think also with the industry. And seeing that, we think Q4 was at the low point of 71%, and we mentioned that we expect utilization to be flat to slightly up in Q1, and even resting flat to slightly up, our expectation is we'll continue to reduce inventory in the first quarter. So this is something that we'll continue to monitor relative to the market, but we do think that 71% in Q4 was at the low point.

C.J. Muse – Barclays Capital

And is there a metric we should think about in terms of for every uptick in one-point utilization, what the impact would be for gross margins?

Alan Campbell

Yeah. So what we've said is that for every one-point increase in utilization, 30% of that would come through in gross margin. So if utilizations improve from 71% in today to 80%, that's 900 basis points which would create 300 basis points of gross margin.

C.J. Muse – Barclays Capital

Excellent. Thanks so much.

Operator

Thank you. Our next question comes from Doug Freedman with RBC Capital Markets.

Doug Freedman – RBC Capital Markets

Hi, guys. Thanks for taking my question. Can you talk a little bit about the turns that you presently need to hit the midpoint of your guidance? And if you could talk about the end-markets, where do you see them recovering the fastest at this point?

Alan Campbell

Yes. So, Doug, when we look at the backlog in the books as we enter into the quarter, we historically have, and it varies, but somewhere between 80% to 85% of backlogs on the book as we enter the quarter. That slightly improved as we exited the fourth quarter. So with the backlog in the books, it gives us a bit more confidence for the guidance that we've given for the first quarter.

When we look at it across the board as we gave guidance, we do see strength in automotive. Digital networking, we see slight strength. The RF we said would be slightly down after a very strong fourth quarter. Microcontroller would be relatively flat, with apps processors within that actually falling off due to seasonality. So it's quite a mix within that within the five product groups, but overall, you know, the backlog that's on the books as we exit Q4 is a little bit more improved than it was in the third quarter.

Doug Freedman – RBC Capital Markets

Do get the sense that any of your end-markets are -- you're under-shipping the demand that they are actually working through inventory? Or are we pretty much, you know, can you give us a sense of what you see your customers doing in terms of their own inventories?

Alan Campbell

Yeah, that's a difficult one. We've got such a broad portfolio of customers, so it really depends on the customer. But as we look at Q4 for example, we did see some of our automotive customers reduce inventory. So the reaction obviously in some media is we are under-shipping real end-demand. I think that's reflecting some of the backlog that we are seeing, the improving in backlog that we are seeing. You know, and it varies also obviously in the digital networking customers. It depends on what customer, if it's Asia, Europe or the US. It really does depend by customer. But overall, I think we feel that inventory is in reasonable shape at our customers at this point. although there's always pockets, and these pockets can impact as they did in Q4.

Doug Freedman – RBC Capital Markets

Great. Thanks so much for all the color. Very helpful.

Gregg Lowe

Thanks, Doug. And thanks everybody for participating in this call and your interest in Freescale.

We closed a difficult 2012 on a positive note and we're seeing some continued progress into the first quarter. That said, we're coming off a year where we were down 14%; we've got a long ways to go. We've got our strategy now outlined, we've got the teams onboard, we've got the customers onboard, and we look forward to continuing to make progress and we'll be giving you updates on that every quarter. Thank you very much.

Operator

Thank you. This concludes today's conference. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!

Source: Freescale Semiconductor's CEO Discusses Q4 2012 Results - Earnings Call Transcript