Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Tait Sorensen - Director of IR

Carlo Bozotti - President and CEO

Alain Dutheil - COO and CEO ST-NXP Wireless

Carlo Ferro - CFO

Analysts

Tristan Gerra - Robert Baird

Glen Young - Citigroup

Simon Schafer - Goldman Sachs

Francois Meunier - Cazenove

Jonathan Crossfield - Merrill Lynch

John Dryden - Charter Equity

Gunnar Plagge - Nomura

Martino De Ambroggi - Equita SIM

Didier Scemama - RBS

Mark Lipacis - Morgan Stanley

STMicroelectronics NV (STM) Q4 2008 Earnings Call January 28, 2009 9:00 AM ET

Operator

Welcome, and thank you for joining the STMicroelectronics fourth quarter and full year 2008 results conference call. (Operator Instructions). At this time I would like to turn the conference over to Mr. Tait Sorensen, Director Investor Relations. Please go ahead Mr. Sorensen.

Tait Sorensen

Thank you, Dino and good morning and good afternoon to everyone. Thank you for joining our fourth quarter 2008 conference call. Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer. Also joining him on the call today are Alain Dutheil, ST's Chief Operating Officer and CEO of ST-NXP Wireless. We also have Carlo Ferro, our Chief Financial Officer on the phone as well; Philippe Lambinet, Executive Vice President of our Home Entertainment & Displays Group; and Carmelo Papa, Executive Vice President of the Industrial & Multisegment Sector.

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 question.

I would now like to turn the call over to Carlo Bozotti, ST's President and CEO. Carlo, please?

Carlo Bozotti

Good afternoon and good morning to everybody. Thank you for joining us on today's conference call. The company’s fourth quarter results were within our revised guidance, but were substantially lower than our original outlook.

As many companies have stated, the demand environment weakened dramatically as the quarter progressed. The high level of uncertainty in the global economy and the relative effects on the key application markets and customers we serve led to substantial order push outs, cancellation, and lower demand [being doubled] for our products. Unfortunately, we expect this weak environment to continue for some time.

From a revenue perspective, all application segments were negatively affected. Results for both wireless and computer peripherals shown a significant drop in demand on a sequential basis. Consumer and unfortunately Industrial also decreased. In the fourth quarter, MEMS, Smartcards and microcontrollers registered solid level of growth on a year-on-year basis.

Gross margin came in just below the midpoint of revised outlook and this was mostly due to our final product mix being below our expectations, in particular, due to wireless. We benefited from currency on a sequential basis. In fact, the lower utilization of our fabs has a negative impact on gross margin estimated at about 200 basis points.

You may recall that at the end of Q3, we anticipated taking down fab utilization given the change in demand environment, but in the end the downturn movement was much greater than we or our customers in the market had anticipated. I will come back to the operating margin guidance when addressing the 2009 first quarter.

Despite the weak environment, we've delivered net operating cash flow of $153 million in the fourth quarter.

Now, let me turn to a review of 2008. A quarter ago this time we shared with you that our outlook in 2008 would be focusing on the four primary goals: Sales expansion, broader portfolio management, an asset-lighter strategy, and a further restructuring manufacturing.

We made significant progress during 2008. Let me review several key points. First, with respect to sales expansion, we indicated that we expected to grow over the top line in 2008 and gain market share. We achieved this goal. Organically, we grew our full year 2008 revenues by 4.8%, excluding the FMG and NXP Wireless, a market that in our estimated again – in our estimation declined overall in 2008. In fact our core business, which now includes NXP Wireless grew by 10% in 2008. Consequently, we estimate we are approaching adequate level amount of share.

Second, with respect to portfolio management, we indicated that we were working diligently in our product portfolio positioning. In 2008, we focused on our resources on two major blocks, power applications and multimedia convergence and we made significant progress specifically within the wireless segment.

Importantly, we concluded the consolidation of our flash memory business and made giant steps in the consolidation of the fragmented wireless semiconductor market. This is an exciting time for ST as we are rapidly moving toward the creation of a true world player in the semiconductors and platforms for mobile applications first with the ST-NXP Wireless JV, and in the immediate future with the closing of the JV with Ericson mobile platforms.

Third, with respect to our asset lighter strategy, we have made steady progress over the last three years. For 2008, our initial capital budget targeted the CapEx to sales ratio at 10% of revenues. We reached our goal, even when considering the sharp drop in sales in the fourth quarter.

In 2008, capital expenditures were $981 million or 10% of net sales, which represents a significant reduction in investment when compared to the 13.4% average of net sales in 2005 to 2007 timeframe. In 2009, we expect to continue the strength with a CapEx budget of $500 million or 50% reduction from the 2008 levels.

Fourth, we have continued to work hard on improving our cost structure, many of our actions were started before the recent economic slowdown, and we will start to see the benefits in 2009.

We are making a steady progress on our plan to restructure our manufacturing facilities in the US and Morocco. Additionally in November, we announced an accelerated plan to capture synergies related to the ST-NXP Wireless merger, which included the reduction of 500 jobs in 2009.

In the fourth quarter of 2008, we have reduced our headcount by 1,200 people, with the majority of the reduced jobs were (inaudible) areas.

Finally, we focused on cash flow, and closed the year with a solid financial position. For the full year, we generated close to $650 million, excluding the $1.7 billion paid for M&A and $153 million in the tough fourth quarter environment.

Our strong balance sheet includes about $2.2 billion of cash and equivalents, even after paying cash dividends, totaling $240 million and repurchasing shares in the amount of $315 million. Importantly, we have a clear plan in place to move again into a net positive cash balance from today's net debt balance. So those achievements are the foundation on which we intend to continue to build our immediate future.

During 2009, we have the four key priorities for ST. First, 2009 will be a year focused on improving our competitiveness as we execute on our plan to completing the wireless joint venture with Ericsson mobile platforms during the first quarter. All important steps are tracking to plan.

Second, to help us manage through the current severe industry downturn, we are targeting to reduce our costs by over $700 million in 2009 in respect to the company’s fourth quarter 2008 cost base.

As I mentioned, part of this number is comprised of several major cost initiatives begun before the current downturn. The second portion of the cost savings are new comprehensive programs focused on resizing down manufacturing operations and streamlining our R&D efforts. In total, the cost program effects approximately 4,500 jobs on a net basis.

Of the total, about 3,500 relates to the manufacturing area, as we work to realign our manufacturing operations, including resizing 6 inch capacity, to some extent 8 inch operations, and maximizing the utilization of the 300 mm by bringing in-house some of the work previously done by silicon foundries.

Out of the total reduction in jobs, about 1,000 across R&D and the SG&A will be affected.

Our third priority for 2009 is to maintain a strong and flexible capital structure. A key ingredient is capital management of our capital investments.

We plan to continue to advance our asset lighter strategy and in view of the downturn, we have set the initial CapEx budget of $500 million for 2009. This would represent a 50% reduction compared to 2008.

Fourth, thanks to our strong and consistent investment in our product portfolio, we are in solid position to offer to our customers, innovative products to position the company to gain share in 2009.

Again, I see the major blocks for ST is our domain structures, power applications in our industrial and power conversion and multimedia convergence. Our goal is to maintain or increase our leadership position.

To help achieve this goal, I would like to mention a new initiative which we have recently launched aimed at promoting our best offering more devices, such as sensor, microcontrollers, advanced analog, and power actuator devices for industrial and multisegment sector.

As you know, for some time we have been accelerating our investments in new product design in the field of smart power and advanced analog, and that investment is paying off.

We have also invested in microcontrollers, particularly in the 32 bit M series, where our effort is very strong and broad. We are showing now a large team of (inaudible) designers the synergistic approach to innovation between product design and application that gives us confidence in our ability to accelerate growth in the domain.

In the future discussion in this product group, I would say a few words on MEMS, which is a very promising product family. Here, we are rapidly growing in sales and ranking and bringing to market innovative solutions such as accelerometers and gyroscopes for games controllers and other applications.

We have also been very active in the area of multimedia convergence. I will briefly discuss the advances we have made in our wireless business. Let me reconfirm our technological leadership and leading position in consumer set-top boxes. In 2008, we benefited from our early transition to H.264 technologies and we are now (inaudible) to our market share position.

Now, let's discuss the first quarter of 2009. As you've heard from other companies in semiconductor industry, as well as in a number of other industries, the lack of visibility is unprecedented, so it is very hard to access to what level end market demand is resetting to. This becomes a chain reaction as we don’t needs to take measurable actions to align our resources with the new upturn measure of demand.

We are not giving formal guidance for this quarter. We are sharing [instead] our internal planning assumption. First, from a revenue perspective, we are assuming a much larger impact from the global economic downturn in Q1, 2009 than we saw in the 2008 fourth quarter.

Specifically for internal purposes, we are planning our operations based on revenues in the range of $1.5 billion to $1.85 billion during the first quarter. In order to significantly reduce the level of our inventory, beginning with the month of December 2008 and then leading to this quarter and the next quarter, we have began to somewhat reduce (inaudible) about 50%.

We estimate about 10 points of gross margin deterioration due to fabs [under leverage]. Consequently, our internal planning for Q1, ‘09 is estimated to be in the mid to high 20s as a percentage of sale, of course, in the gross margin.

In summary, I would like to share a few closing points. This is a very difficult time for individual companies and markets as the global economy appears to be receipting itself in a very conquest period of time.

Nonetheless, environments such as these also present opportunities. Looking at ST, we have a number of strengths. First, we have a solid balance sheet, a good penetrating and flexible funding objectives, and plus the closing of the JV with EMP, our net cash position is expected to turn positive.

Second, over the course of the last few years, we have significantly strengthened our product portfolio leading to a record market share.

Third, we have made major advances in our overall cost structure and today we have articulated a cost saving program that will translate into $700 million in savings in 2009, compared to the cost structure with the cost structure of Q4, 2008.

I believe that we at ST have made the right strategic choices and are correctly executing on them. I also believe that as we started our restructuring process ahead of this severe economic downturn, we have a good momentum in place and we are well positioned into 2009.

We are determined to take all of the appropriate initiatives required to face the new challenges we are confronted with, and therefore, I am confident we are correctly positioned to be among the companies that will emerge from the downturn in a better competitive position than before.

With that, my colleagues and I are now available to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions). First question comes from Mr. Tristan Gerra, Robert Baird. Please go ahead, sir.

Tristan Gerra - Robert Baird

Hi. Could you give us a break down of the $700 million savings that you expect by quarter in terms of ramp by quarters, is it going to be deeper more often, first half unloaded or second half and also expectation between COGS and SG&A?

Carlo Bozotti

Yeah. Carlo Ferro with you take the question.

Carlo Ferro

Yeah. Hi, Tristan. Starting from the second part of your question about the manufacturing and cost of goods sold and OpEx break down of the savings I pull to revert on the presentation which I believe is on the web. Now that we sure did more (inaudible) where at on page 23 you may find the break down of the $700 million by the major initiative, and quickly wrap up on these numbers. $120 million are associated with the manufacturing initiatives, and those relate fully to cost of goods sold.

$200 million are associated with the ST-NXP Wireless cost synergies, indeed these are derived mostly – I’d entirely in OpEx and within OpEx the R&D portion is larger than the SG&A portion.

Then there is $140 million of rationalization of SG&A and R&D, again operating expenses. Then we had $120 million for the rationalization of number of sites, extra savings on procurement, and labor cost dynamic. This I would split about 50/50 in the two categories, eventually a little bit higher in cost of goods sold given there is a ramp of the savings procurement.

And finally, we are incorporating the reduction of the R&D cost. It needs higher grants in 2009, and this is – accounting wise this is against R&D; in reality accounting wise you will see this number in the line other income and expenses.

Carlo Ferro

In respect to the allocation – to the distribution by quarter, so what we shared this morning is that the $700 million is the effect of the difference of cost structure in 2009 in respect to the annualized Q4 2008, and does not fully reflect the overall impact to what these initiatives will be fully completed during the year, since it's net of NXP’s ramp-up.

And what also this morning we’ve shared is that at the end we may consider some 15% reduction due to this ramp-up in the year, so the overall effect is more in the range of $800 million. I will see the overall effect of that in or substantially in the last quarter of the year, and then on this basis you can model the ramp up from Q1 to the next quarter.

In Q1, we started to have some quite significant impact especially on the operating expenses portion, since we will expect operating expenses in Q1 to go substantially down in respect to third quarter.

Tristan Gerra - Robert Baird

Okay. Thanks. That helps. Also with regards to EMP, what is your EPS expectation, once the integration closes? Is that going to be – do you still think, it's going to be EPS neutral off the bat or do you expect some integration, near term?

Carlo Bozotti

I will say that overall, as you know the strategic manager – management mid term strategy is that that we focus more in this case on the mid term and for sure this would be a very accretive integration. On the very short term, what we may expect is without anticipating number of this stage is sort of neutral effect in the first quarter after the integration when considering the contribution to the gross margin which is very accretive, higher expenses for the R&D exports of the EMP platform, some improvement in the interest given that at the end of closing we would collect some – a substantial amount of money, and the difference in the minorities (inaudible) differently sharing the current result of the wireless operation.

Alain Dutheil

Obviously, one additional comment – to scale up results here. The $700 million package that we have formalized for 2009 does not include any of the cost synergies that we will exploit when merging with EMP.

Tristan Gerra - Robert Baird

Great. Thank you.

Carlo Bozotti

Thanks Chris, and next question please.

Operator

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

Simon Schafer - Goldman Sachs

Thanks so much. I think you mentioned this morning in Paris that you’d probably stay around 50% fab loading until your inventory is reduced. I was just wondering whether you’d be able to share what the desirable level of inventory would be in the next quarter and beyond, and how that may reach here in terms of gross margin recoverability then after the first quarter?

Carlo Bozotti

Well, I think that, of course, we want to go back at the level of return that is in the normalcy. And which of course, is above four, and the target is between 4.5 and 5, but we need to grow as soon as possible above 4. We started writing the loading in 2004 was about 70% in this range. And it was very much our strongest – strong at least in the second part of a quarter, particularly in December. 50% is – of course, is the number that we have in the system today, Q1, and I expect that we will have to run at this level of loading also during the course of the second quarter.

I think that is very, very difficult to understand the supply. So, this is the concern, this is the major question that we have. I think, for us it's crucial to see what is going to happen after the conclusion of all the (inaudible) and closing of – the temporary closing particularly in these days in China and in Asia related to the Chinese New Year. So, for us it's absolutely crucial to understand the trend in the month of March. This will be a good indicator.

So, I think that personally I believe that a severe massive stocking is happening with our customers that's why I think it will take more time to understand the trend, and at this point we will drive down the loadings as long as needed to return to a level of inventory that is in terms of stock turn of 4 with a target of course that these above 4.5 and reality is cash.

So, we will minimize all the cash cost and we will move on as long as needed. And of course we will try to track and monitor closely the market evolution and as I said, for us the month of March is absolutely crucial to understand the trend.

Simon Schafer - Goldman Sachs

Thank you. Just to clarify Carlo, did you say, it would be your target to of 4 times inventory times in Q1?

Carlo Bozotti

In Q1 2009 it is impossible. It's absolutely impossible. I think it will take a longer time. Of course, we can do is that aim to be more aggressive in difficult times if needed, but we cannot go to zero. And I think here as you know very well, it is always compromise between customer service and new product introduction and the consumption of cash and also anywhere up some like that they consent apparently. I think that is clear and we have let's say clear understanding today that stock turn of 4 is not possible by the end of Q1.

Simon Schafer - Goldman Sachs

Got it, thanks. And my second question would be just on this discussion about your breakeven point. I understand the target of roughly $700 million annualized cost savings, but what does that mean in terms of breakeven point and then once you have gone through those measures looks as if it's about $2.3 billion in quarterly revenues at the moment, how low would that go?

Carlo Bozotti

I think it would go significantly lower than that. For sure, there are two (inaudible). In the present frame, I think that it even would be materially below $2.3 billion. I would say it is a few hundred million dollars below the 2.3 range and then, as I said before the $700 million does not include the package, the correction package does not include the addition of that EMP and their cost synergies that we want to exploit when merging with NXP.

So, the effort is massive. We had a thinking that third quarter of last year as reported we were at the level of $2.7 billion as you know, pro forma including the additional amount of NXP and of course including EMP is above that level and we are remodeling, and resizing the company to enjoy a good level of profitability below -- at the level that is much lower that we had in Q3.

So this is deployed at the level of all the groups. We are resizing the manufacturing machine of the company in such a way we can run efficiently manufacturing at the volume to support the revenues that are well below the peak that we had in Q3.

It's also important to say that this is an assumption, it is based that we believe on some conservative hypothesis. In case the market will may at the horrible level of today, I think we will have to revisit the assumption and take additional actions to align a new priority that is not what we have assumed. But the package of $700 million will give us opportunity to run profitably at the level that is significantly below the peak that we had in Q3 last year.

Simon Schafer - Goldman Sachs

Thanks so much, Carlo. Thank you.

Tait Sorensen

Thanks, Simon. Next question please.

Operator

The next question comes from Mr. Glen Young of Citi. Please go ahead, sir.

Glen Young - Citigroup

Thank you. I want to clarify upon last question, so is –

Tait Sorensen

Glen, you’re breaking up on it.

Glen Young - Citigroup

(Inaudible)

Tait Sorensen

No.

Glen Young - Citigroup

(Inaudible)

Tait Sorensen

Yeah, you’re really – you’re breaking up on us.

Glen Young - Citigroup

(Inaudible)

Tait Sorensen

Okay. Operator can we put him back in the queue, and then we’ll take the next question.

Operator

Yes, sir. Next question comes from Mr. Francois Meunier of Cazenove. Please go ahead, sir.

Francois Meunier - Cazenove

Hello. Just the first question regarding your competition and especially your competition in Germany, it looks like Infineon is having some problems with its balance sheet at the moment. And I mean, how much business can you take from them this year, and how fast can you – can we implement this market share gain, especially for automotive and industrial customers?

Carlo Bozotti

Well, I think, of course, we are not in the position to speak about any specific competitor. It is obvious that we believe – I believe that the financial position, the capital structure overseas is a competitive advantage. Also, from our customers, our customers these days are concerned about the solidity of many of their suppliers, and I believe that our plan this year is to improve our capital structure despite the very severe crisis.

I think, it’s an opportunity that we have. I would like to mention that last year it was a very good year in general in terms of market share. In fact, we – I have seen the results through the month of November, the result are coming from WSTS, through November, because December is not yet available officially.

But we are at the end of November at our record high in terms of market share that is about 6.7%, 6.8%, and this is on the market that we share (inaudible) and does not include memories any longer for instance. And I believe that one of the priorities for 2009 is to go on with this trend on market share growth.

In fact, some of our customers will give us more business because they have some concern about potentially weaker suppliers, weaker financially, I think it’s normal, and of course, I believe it is our duty to do everything that we can to help the customers. So this is something that of course is a factor – is affecting the business.

Francois Meunier - Cazenove

Thank you.

Tait Sorensen

Do you have a follow up, Francois?

Francois Meunier - Cazenove

Yes, two more question for Carlo Ferro, regarding Numonyx, could you please share with us what was the net debt on that cash position of Numonyx?

Carlo Ferro

Yes, Numonyx closed – those are, Francois, still unofficial number, given different calendar of Numonyx closing, being a private company, whether the number -- the financial number have been verified obviously at this stage. Numonyx closed fiscal year 2008 with available gross cash which is in the range of $500 million is very similar to the one that the company started with – at the inception in late April this year. Then Numonyx debt is comprised by 450 million of a term loan plus a note, a long term note to Intel and to ST.

So, the overall is at the end if you exclude that to the current, the current net position of Numonyx is a 500 million net cash. If you include that to the balance on the long term note, this is some – a few hundreds of million of dollar of net debt, and so, this is (inaudible).

Tait Sorensen

Thanks, Francois. We will move on to our next question please.

Carlo Bozotti

Maybe – let me speak – I’m sorry, let me take the opportunity of this question to address another point. Since we received this morning a lot of questions about possible exposure of ST towards Numonyx, and really if that was the case, and I believe that German case is [spreading funny consideration], but first of all, are not necessarily applicable to Numonyx.

Second, do not agree. There is – what I want to make clear is that there is now exposure of possible recourse from employees that have been transferred from ST into Numonyx towards ST, and there is no better ways that these – those employees being in Italy or in Singapore do not carry any kind of pension rights or severance rights to be paid by the employer in these countries where those pension and severance are paid by the state while the company contribute.

I wanted to make it clear since I've got several questions during the day in these results indicates that some of you may have in mind that which is occurring somewhere else will not occur even in the very, very worst possible case and will not occur for ST in its best of the mind.

Tait Sorensen

Thank you for that Carlo. We will move on to the next question.

Operator

The next question comes from Mr. Glen Young of Citi. Please go ahead, sir.

Glen Young - Citigroup

Hi, can you hear me now?

Carlo Bozotti

Yeah, we can.

Carlo Ferro

Perfect

Glen Young - Citigroup

Okay. Just a follow on from question that happened earlier; trying to just clarify that as utilization rates stay at 50% for the second quarter, do you think in that environment gross margins can go up given all of your cost cutting?

Carlo Bozotti

Carlo.

Carlo Ferro

Frankly, we Glen, we provide such a growth sharing of internal planning, will not aim of guidance respect to Q1 given lack of visibility that frankly I see somehow premature to anticipate about the gross margin in Q2. Of course, if utilization remains at this level also Q2 will be heavily impacted as Q1 is by the cost of (inaudible).

Carlo Bozotti

I’ll expect that the utilization cost it will be very significant both in the second quarter as Carlo was speaking is of course is the fact I mean the loading is very low. I already described that major initiative that we have this year is back to the $700 million of that. If we resize the volume, we are at the level that in Q1 that these are much, much lower than what we had in Q3 is I would say that at this point its less than 50% than what we had in Q3 in terms of manufacturing volume, and I am not of course, we cannot remodel and resize the manufacturing machine at this level, because we expect to grow revenues, of course.

But there is a system, I would say there is a permanent resizing in the manufacturing machine and this is very significant when we compare to what we had in Q2 or in Q3 of last year. So, it is in overall permanent downsizing of the manufacturing machine, manufacturing volume.

Glen Young - Citigroup

Sure. That actually kind of leads into my follow-up which is, so now we have CapEx that's down 50% for 2009, as you're now think longer-term strategically or obviously you're already (inaudible). The impact of this downturn leads you to one of continued and accelerate than moving towards a more asset light strategy. Did it make you rethink the use of capital in the years to come?

Carlo Bozotti

You know what then, first (inaudible).

Tait Sorensen

Glen, can you take up that question because you started break up again?

Glen Young - Citigroup

Yeah, just as you got CapEx down 50% this year, any thoughts about using this down cycle as a way to change or accelerate your view towards asset light, maybe move more towards asset light or even faster?

Carlo Bozotti

Yes. of course. I mean this decrease is a very drastic decrease and that I have two comments. We want of course we want to this trend is a very I think, if I go back I mean we move from 20 to 15 to 10, and this will even with low revenues that we have running out, it would be significantly below 10% in the course of this year, we want to move on.

Of course the trend is to reduce in terms of CapEx to sales ratio. There are areas, however, like testing for instance where it's obvious that we need to master our work (inaudible). There are areas where we are also very competitive. For instance, if you take the bulk of our (inaudible) activity is enormously better than anything we can buy thereon, so there some investment piece is very fast.

So, it is a trend we would go on. We have gone from 20 to 10 in, I believe in three years. This is in addition in 2009, there is another step in terms of CapEx to sales ratio, and I think we will move on with that.

Glen Young - Citigroup

Thank you.

Carlo Bozotti

Thank you.

Tait Sorensen

Thanks Glenn. Next question please?

Operator

The next question is from Mr. Jonathan Crossfield, of Merrill Lynch. Please go ahead, sir.

Jonathan Crossfield - Merrill Lynch

Yes, thank you. Good afternoon. I just had a quick question on the balance sheet. When you reported your gross cash equivalents, you include the long-term marketable securities and the restricted cash. I mean, could you just give us a feel for, how liquid those assets are in practice given you have been impairing some of those marketable securities over the past twelve months or so?

Carlo Bozotti

Yes. On the marketable securities of course, what we reported in marketable securities is our floating rate notes, so are items that are repeated. Then what you made – I believe, you referred to are those auction rate securities that are structured to the ongoing litigation with financial institutions, which is under arbitration. If you allow me, I will not comment about that given the specific case other mentioning that at the end what currently we carry in the book is really substantial – substantially below what is the notional amount, and this is due to the fact that obviously we impair quarter after quarter, but we do not recognize any contingent assets on the possible recovery until this is finally settled.

And then, the other reference, I believe, you are making is to the $250 million restricted cash, which is deposited at the Development Bank of Singapore collateral to loan from the bank to the former Hynix-ST, now Hynix and Numonyx joint venture in China was before mind which at the time, we have finally supported the Hynix-ST JV. This has eight year maturities from when we start, and it was may be 2003 or 2004, so will mature in 2011.

And here the exposure defense is very solid, since first of all it’s a asset itself, then it’s collateralized (daily) on the assets of the joint venture, the manufacturing operation in China, and also the structure of this joint venture is such that at the end the covenants, they have to take the production, so it’s –

But I recognize your point, Jonathan, on when reporting $2.2 billion at the end for reason of simplicity we do not specifically make a reference to all these specific ingredients, there are $250 million of restricted cash that may have a different time line.

Jonathan Crossfield - Merrill Lynch

Okay. That was very clear. Thank you, Carlo. Maybe just as a quick follow-up. I think, you gave the record dates of the $0.09 dividend in February. And given that you made it clear your focus this year is on cash preservation and moving back towards a net cash position. What are your sort of considerations in terms of dividends going forward and also perhaps buybacks?

Carlo Bozotti

We have not taken any decision at this point. I think, I believe, it’s very premature. And we will come back to this before the General Assembly.

Jonathan Crossfield - Merrill Lynch

Great. Thank you very much.

Carlo Bozotti

Thank you.

Tait Sorensen

Thanks, Jonathan. Next question, please.

Operator

The next question is from Mr. John Dryden of Charter Equity. Please go ahead, sir.

John Dryden - Charter Equity

Thanks for taking my questions. You've completed the wireless product roadmap alignment for NXP, when do you expect the same to be done for Ericsson Mobile Platforms, and have you accelerated timeline for your STM 3G platform at your number one customer?

Carlo Bozotti

We understand very well the first portion of the question, we need the second one.

Carlo Ferro

Accelerating the 3G digital baseband at our number one customer?

Carlo Bozotti

Okay. Yeah.

Alain Dutheil

Yeah, maybe I can take this one. This is Alain Dutheil. Of course, as you know, we have completed the alignment of ST and NXP platform as you were mentioning. This has lead us to – led us, sorry – to decrease the total headcount, and this is mainly by 500 people. The JV with Ericsson is not yet started. So we hope to start it during Q1, and of course, we are at – the two teams are actively working at looking at the different platform, but for the time being we have not come to any conclusion. But for sure, there would be some synergy to be found and then when we – when the company is created, we let them go and running. We can't give you more detail over decisions which are collectively taken between ST-NXP and EMP.

Now, about our number one customer, yeah, we are actively working there on the wireless, let's say multimedia platform. We are actively working and we are absolutely in line with our original plans that we had. In fact, I reviewed the plan a few days ago, and we are few days late compared to our program from two years – I think, we started already two years ago, so we are absolutely doing that.

Tait Sorensen

Do you have a follow-up question, John?

John Dryden - Charter Equity

(Inaudible)

Tait Sorensen

Hey, John, you’re cutting out on us.

John Dryden - Charter Equity

(Inaudible).

Tait Sorensen

Hey, John, we’re going to need to put you back in the queue. Unfortunately, you are breaking up for some reason. Operator, if we can go to the next question, please.

Operator

Yes, sir. The next question is from Mr. Gunnar Plagge of Nomura. Please go ahead.

Gunnar Plagge - Nomura

Yes, hello. Good afternoon. We have previously modeled TI regaining market share, EMP's next generation program, so partly coming from basebands and also application processes. So, is it prudent to put something into the revenue line for you this year for this program?

Carlo Bozotti

I think of course, it's a bit strange to think about TI to gain market share on this program.

Gunnar Plagge - Nomura

There must be (inaudible).

Carlo Bozotti

During this process, we and EMP and of course you should consider the other way (inaudible).

Gunnar Plagge - Nomura

No, I mean we had to put that into the TI model before the JV was announced.

Carlo Bozotti

Okay. Sorry. Yeah, I think of course when the company is up and running, we do our best to let's say to gain market share compared to the competition with the one company up and running and of course we'll have to fight against all our competitors.

Gunnar Plagge - Nomura

Okay. Thank you. And there as a follow up, on the other income line. And you talked last time about the $200 million R&D contract with the French Government and could you give us an update when it likely will be signed?

Carlo Ferro

I can take this one also. We signed a MoU at the beginning of the summer and this was an MoU with the French Government and we have deposited a file at the European Community and we are awaiting for their final answer. Hopefully, this final answer is going to come in the next few days and then it will be possible, a few days or few weeks and then it will possible to sign with the French Government when they are ready. But, for the time being the contract is not yet signed.

Tait Sorensen

Thanks, Dino. We are going to take our next question please.

Operator

The next question is from Mr. Martino De Ambroggi of Equita SIM. Please go ahead.

Martino De Ambroggi - Equita SIM

Good afternoon, good morning everybody. Thank you for taking my question. Two questions; one short-term, and one long-term. The short-term is on Q1 internal target. If you could quantify first, what the impact in terms of gross margin for the lower fab loading and second, I estimate obviously depends on what will be the trend of US dollar that if you see the current levels, there should be, in any case a .two, three percentage point of benefit in terms of currency. And third was an short-term question, what is your best estimate for OpEx in Q1?

Carlo Bozotti

Yes, Carlo Ferro will take.

Carlo Ferro

I am assuming the result of the duration of fab in Q1 is estimated in the range of 10 points on the [utilization] management. With respect to the currency to the currency factor, the average rater for Q4 was 1.4p. The one for Q1 is in the range of 1.56, 1.57. So, in these basis my math is less effective than yours. So, it's about one point just above the one point of positive contribution.

Carlo Bozotti

Yeah, the factor of January, I mean when we started January, the exchange rate was at 1.40, 1.41.

Carlo Ferro

Then moving to the second part of your question on the operating expenses; this is we really think a very good progression from Q4 into Q1 and we may expect it in absolute dollar amount under the current currency assumption expenses is to go down by a low double-digit percentage.

So, it could be 10, 11 between 10 to 11%-12% of quarter-to-quarter reduction. In this respect, let to me alert that there are two ingredients. One which is the structure and again strong the differential of the $700 million and another one, which is more essentially for Q1, we even expect currency of number of calendar days in the first quarter that indeed the Q1 also plays and how February, but I will say that this portion is more important than the second in your back progression from Q4 into Q1.

Martino De Ambroggi - Equita SIM

Okay, thank you and the follow-up on long-term issue. Don’t you foresee that the current much lower volumes will imply much higher price pressure going forward or probably you already are suffering from such a kind of affect?

Carlo Bozotti

Well, of course, there are always two blocks of products and there are products where the price pressure will be more intensive and there are products where they are more unique and proprietary and we are expecting this product to more a standard (inaudible) indeed on the commodity portion there will be more price pressure.

I think on the other hand everybody is stretching their capacity and we cannot survive with the drop, the swing that in the demand has been very significant and they have to say that especially with automotive. Automotive was the first. In the course of third quarter automotive already declined compared to the second quarter. And then in Q4, it was very much wireless and computer peripheral kind of products. But now it's generalized. So I believe that the drop of the demand is very much across the board, both from the applications point of view and from the geographies point of view.

So one way to respond to this, of course, is to systematically catch manufacturing capacity, and I think everybody is working on these problems.

Tait Sorensen

Thanks, Martino. We’ll move to the next question.

Operator

The next question comes from Mr. Didier Scemama of RBS. Please go ahead, sir.

Didier Scemama - RBS

Good afternoon, gentlemen. Thanks for taking my questions; very kind of you. I just wanted to just go back to the question about the second quarter. I mean at this point, I know the visibility is incredibly low. And what I'm just trying to understand is, obviously you're cutting your CapEx and you've got in depreciation this morning.

I am just wondering, do you intend to generate cash actually on a free cash-flow basis for '09, given your working capital reduction expected for the first half at least? That's my first question. And a follow-up to that is, do you expect to make a profit, given your cost reduction, and I suspect some of that will be passed on to your customers on a cost-of-sales basis in 2010?

Carlo Bozotti

So, Didier, I think the first part of your question, you have noted that earlier already on a prior question about the gross margin for Q2. We (inaudible) to move forward on time on guiding on the expectations. So you can imagine this is even a more difficult than you'd expect a true projection for the full year.

So frankly, if you don't mind, it's very premature at this stage and given the lack of visibility to share projection on the full year. Normally, in normal time, and either way, we do not provide guidance and projection on the full year, and this lack of visibility would be really frankly not beneficial to anybody to do so.

Carlo Ferro

Yes, for the second part of the question, the answer is of course yes. We are resizing. I mean we must resize. We must resize the manufacturing machine. We must resize the overall structure. And I have already mentioned the fact that in addition to this $700 million package, there would be another wave of opportunities to be exploited between ST-NXP and the EMP.

So, yes, we must go there, and I want to be clear. Of course, we do not want to kill the company capital involved in the R&D programs, et cetera. This is obvious. But I think that we want to rapidly understand the trend of the demand, because based on the assumption that we are second, the $700 million package plus the cost synergies that we will have between ST-NXP and the EMP are adequate.

But it comes out during the course of the next few months that we do not see any sign of improvement in the demand. This is not what we expect. So if there would be no sign of improvement, we will take more measures. So timing is important. I think we should not panic. We're getting to a panic mode, but time is important. And absolutely, we want to be profitable in 2010.

Didier Scemama - RBS

The reason why I am asking about '010 is because it looks like obviously with the amount of capacity at hand at foundries, obviously at ST, at your competitors, we all think that obviously demand will recover at some point in 2009. What I am really worried about is the pricing element in 2010, similar to what we had in 2002, where units actually recovered dramatically. The pricing was so bad that revenue growth was basically zero because of the overcapacity in the system.

So that is the reason why I am asking about profitability, because I can see that you are taking cost out. But I don't see that the gross margin will recover to a certain level enough to actually generate operating profits?

Carlo Bozotti

Yes, I believe that the root cause of the crisis here is really different, and it is impacting both commodity products and it is also impacting the more proprietary products, single sales products, custom products. If we take this demand that (inaudible) if I compare the some of the crisis with what we saw in the past, the pressure was absolutely intense on the commodity portion because of the overcapacity.

But indeed there will be more price pressure. I believe that the price pressure will be more intense on commodity and more on track with normal on the proprietary and also with the custom products. We've taken a lot of actions including the wireless joint venture to change the configuration of our asset volume moving into higher margin products and of course the [venture] with EMP would be very aggressive on gross margins from this point of view, so I think we will have to change.

I think the point that you are making is a valid point. The most important I believe is the overall demand and the overall top line. Then price pressure is important, but also to see to rationalize the manufacturing machines in every industry is important. I think that then there is an (inaudible) and also to rationalize and to attach and reduce manufacturing capacity.

Carlo Bozotti

If you can’t come out with one comment into there but did you said that is increasing related to the theoretical points of the industry scenario is, don’t you believe Didier that the industry has substantially changed in 2002 and in 2002 at the end of price ratio that has been driven by each of us and then [IBM] to (inaudible)?

Carlo Ferro

Today also the capacity is at the silicon advantage and then I’m not so sure how semiconductor companies may really wants to be very aggressive on pricing in order to low of the fab of the silicon foundry in the future. So under these respects eventually, I’m not sure that it will be operated in 2002 I mean exactly repeats in 2010 as well.

Didier Scemama - RBS

I think the problem is that your customers see that the price that the SMC is going to transfer wafer, and I think they are going to try to negotiate pricing on that basis for you guys, those guys who have got fabs?

Carlo Ferro

So, with that debate, why don’t we move on to the next question? Thanks Didier.

Operator

The next question is a follow-up question from Mr. John Dryden, Charter Equity. Please go ahead, sir.

John Dryden - Charter Equity

Hi. A clarification for Alain on the response to my question on ST and 3G platforms. Can you confirm that that’s 2010 schedule or you are going to accelerate that? And then for Carlo Ferro, are there any questions or any conditions on a timely receipt of the $700 million at the close of EMP JV? And was the equity investment decline of $200 million all mnemonics or a sale of investments?

Alain Dutheil

On the first part of the question, I can answer yes, the 2010 schedule is too longer. I was mentioning one of the programs, which is a two years program, was three, four days late. I mean we are perfectly on time.

Carlo Ferro

The question about the $700 million payment from [DGB] into ST at the closing of the Ericsson mobile platform deal that is depending whether that is contingent. No, not contingent, but there are customary provisions based on throughout observing financial abilities or adjustments, possible adjustments on the level of assets. There are quite customary conditions that eventually may change the amount plus or minus of many thousand and million of dollar not substantially and it's not the contingent (inaudible).

Of course, this is a key relationship between DGB to pay $700 million to ST, while that the $1.1 billion cash injection from Ericsson into ST is fixed and firm.

Tait Sorensen

Did that answer your question, John?

John Dryden - Charter Equity

Yes. Thanks for taking my questions, and fitting me back in.

Tait Sorensen

Thank you.

Carlo Bozotti

Thank you.

Tait Sorensen

We'll go to the next question, please.

Operator

The next question is from Mr. Mark Lipacis, Morgan Stanley. Please go ahead, sir.

Mark Lipacis - Morgan Stanley

Yes, thanks for taking my questions. Can you hear me okay?

Carlo Bozotti

Very good, yes.

Mark Lipacis - Morgan Stanley

The – a couple of clarifications, you had mentioned earlier the inventory, did you say how much you thought you could burn through in Q1 or did give a turns target?

Carlo Bozotti

Well, I think that it would be a very significant reduction of inventory in Q1 and Q2. And I think that we do not want to give a target because of course the lack of visibility of the top line. But the cut is not fixed. We have mentioned utilization, but even a much stronger cash for – other elements like the procurement of wafers from silicon foundry or the subcontracting activity on backend. So, it’s a massive cut, and we do not want to give a target because of the uncertainty on the top line, but for sure, it will be material both in Q1 and in Q2.

Mark Lipacis - Morgan Stanley

Okay. Great. That's helpful. Thank you. Did you say whether or not you expect it to be cash flow positive in the first quarter?

Carlo Bozotti

No. We didn’t say.

Carlo Ferro

Good try, Mark.

Mark Lipacis - Morgan Stanley

The change in the macro environment and the acquisitions, longer-term, how should investors be thinking about the longer term target operating model for ST?

Carlo Bozotti

Well, I think that the longer term operating model is a company with more profits per product line really divided in two blocks, one block with a base of power products for industrial automotive and similar applications on appliances.

And the other products with major presence in the platforms, but wireless – particularly for wireless, but also for regional consumer. I believe that the gross margin of this second block will be higher than the first block. However in terms of adding the intensity, the block of platforms will be more intense, indeed.

Overall, the expectation is that we should have on the two blocks a return on invested capital, a return on invested assets that are double digits. But for us, frankly, it’s simpler to achieve this in the area of power – in the area of power applications. And this is why also we have joined forces with a partner in the wireless to share the R&D and also to improve the base of our royalties.

But the goal for the two blocks remain to have return on capital employed that is above the weighted average cost of capital, so above 10%.

Mark Lipacis - Morgan Stanley

Okay, great. That's helpful. Final question from me, are you – everybody understands that the demand environment is bad. Are you of the opinion that the inventories in the channel, and that your customers are at appropriate levels and the low visibility is purely a function of the weak demand environment or are you of the opinion that it's a combination? Thank you.

Carlo Bozotti

No, I believe, it’s a combination. I believe, it’s still moving. We know that some of our customers have made an effort particularly in the month of December to reduce inventory. I think, it’s still moving in the sense that – take for instance, industrial applications and what we've seen in Asia, I believe that there is a major de-stocking in this area that is happening in Asia in the first quarter. I think, maybe in other areas, it was somehow reduced, but overall I believe that Q1 is a quarter of very low demands, but it’s also a quarter of significant de-stocking inside of the application sectors.

Mark Lipacis - Morgan Stanley

Thank you very much.

Carlo Bozotti

Thank you.

Tait Sorensen

Thank, Lipacis. [Dino] at this time, I'd like to just to make a couple of final announcements. First of all, February 17th, we will have a joint presentation with EMP and also ST-NXP Wireless, and that will be February 17th. Of course, if you have any questions contact any member of Investor Relations from either ST or Ericsson. And then also, we have an announcement that Alain Dutheil would like to make at this time.

Alain Dutheil

Yeah, I had a question about our R&D financing from the French government, and I was mentioning that we are waiting for the EU approval, and I just got the message few minutes ago telling us that we are – the approval has been granted to us. So now it’s in the hands of the French administration to call us for the final signature.

And this is of course a step forward as we had already signed an MoU with the French administration and what was deposited to the EU was the exact figure what we had planned on with the French administration before.

Carlo Bozotti

So thank you for your questions, it has accelerated the process.

Tait Sorensen

With that Carlo, do you have any closing comments?

Carlo Bozotti

No, I think, of course, it is a very difficult time. I think, last year, we went through three major crisis, the credit transfers, and then the currency crisis at least for us with the Euro going to 1.60, and finally the strong swing on demand.

We start the year having in mind three priorities and we are really focusing on these three things. The first is, move on with market share. I think, last year, we gained market share, big way. We want to move on with this trend. We want to decrease less than our competitors.

The second priority is cash flow. We are taking the all possible actions. And of course, I believe that there will be pressure particularly in the first half, but – both on capital and (backlogging) and show that there will be a continuous effort to, let's say, profits on the cash flow, and we'll be aggressive in this respect for sure.

The third one is going back to profits rapidly. We have defined this package of $700 million. This does not include the ST-NXP, EMP merge. So, that will be additional. This package is based on certain assumptions, as I said. We believe those assumptions are conservatives. But in case it can be necessary, because in the end we state that [horrible level of today's] we are ready to take other steps, but we want to work back to profitability very, very, very rapidly.

And finally, the capital structure of the company soared during the course of 2009. We will improve our capital structure. Our vision is unchanged. I believe that we have the support from our customers, and I believe that we have the opportunity to get out from this crisis with a position that is stronger than what we had in the past.

Tait Sorensen

Thank you very much. And at this time [Dino] will close the conference call.

Operator

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephones. Thank you for joining and have a pleasant day. Good bye.

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: transcripts@seekingalpha.com. Thank you!

Source: STMicroelectronics NV. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts