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STMicroelectronics N.V. (NYSE:STM)

Q4 2009 Earnings Call Transcript

January 27, 2010 9:00 am ET

Executives

Tait Sorensen -- Director, IR

Carlo Bozotti -- President and CEO

Alain Dutheil -- COO

Carlo Ferro -- CFO

Philippe Lambinet -- EVP, Home Entertainment and Displays Group

Carmelo Papa -- EVP, Industrial and Multisegment Sector

Analysts

TDA Sharma [ph] -- RBS

Tristan Gerra -- Robert Baird

Gunnar Plagge -- Nomura

Janardan Menon -- Liberum Capital

Simon Schafer -- Goldman Sachs

Peter Knox [ph] -- Vintage Capital Markets [ph]

Guenther Hollfelder -- UniCredit

Operator

Good morning and good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the STMicroelectronics fourth quarter and full year 2009 results conference call. As a reminder all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator instructions)

At this time I would like to turn the conference over to Mr. Tait Sorensen, Director, Investor Relations. Please go ahead, sir.

Tait Sorensen

Thank you, Dino. Thank you for joining our fourth quarter and full year 2009 conference call. Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer. Joining him on the call are Alain Dutheil, our Chief Operating Officer, Carlo Ferro, our Chief Financial Officer; Philippe Lambinet, Executive Vice President of Home Entertainment and Displays Group; and Carmelo Papa, Executive Vice President of the Industrial and Multisegment Sector.

This call is being broadcast live over the web and can be accessed through ST's Web site. 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 Also, please note that today’s earnings webcast is available as well and should be on the Web site from our Paris presentation just a few hours ago. As a reminder, please limit yourself to one question and a brief follow-up.

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

Carlo Bozotti

Well, thank you, Tait. Thank you for joining us on the call today. And thanks to those of you who attended our presentation and joining today in Paris. Certainly, 2009 was unprecedented with the steep downturn in demand in the early part of the year and then a sharp reversal where it is a challenge to keep up with demand.

As we speak with you here today ST is on track to continue to deliver results within its transitional financial model. The industry is recovering faster than expected and we believe as a result that 2010 should be a period of growth for the semiconductor industry and ST. A key ingredient that gives a good deal of optimism regarding 2010 is that we have remained focus on research in technology to advance our product of the volume.

We have steadily increased our percentage of sales coming from new products and I would like to expand on three important blocks. Microcontrollers, analog and digital platform.

During 2009 ST introduced 32-bit microcontrollers for industrial, Smartcards and the automotive markets and we are making very good progress here. We have extended our success in 32-bit low power MCUs applications by expanding our range of STM 32 micros with new families including the STM 32 connectivity line and recently we achieved an industry first for devices based on the ARM Cortex-M processor cores with new microcontrollers featuring 90 Nanometer embedded flash.

As you know in digital consumer we have been introducing and shipping our cost optimized 55 Nanometer, our set-up-box is for cable, satellite and IPTV. In addition, we have a number of design wins for set-up-box platforms with major cable and telecom companies for their deployment of high-definition TV.

At a Consumer Electronics Show we recently demonstrated our focus on delivering the energy efficient platforms and announced 11 new products including our next-generation recorders which include our 3D video and graphics ready devices. We also introduced our Freeman integrated digital TV Systems-on-Chips.

In analog our innovative product portfolio is quite diverse. Looking at the power applications we have introduced many novelty devices that can save power and increase energy efficiency in a broad range of application. We have developed chips to preserve battery life in mobile products produce advanced power transistors that can significantly improve power velocity and efficiency power supply. And their shipping complete smart-metering solution for remote power management systems that are now being deployed by large utility companies.

We are also working on electronics for a hybrid and the electronic vehicles and we will surely be telling you about exciting and innovative products for those vehicles in 2010. In medical our products are being used in diagnostic systems, insulin nano pumps and other microfluidics applications.

Our MEMS division has aggressively expanded its leadership introducing new families of gyroscopes, accelerometers and active microphones. MEMS offer significant opportunities for us as they target and are being designed win a wider base of customers and very high volume application.

And finally in wireless ST-Ericsson is well along with its new product strategy and new product launches. ST had a solid finish to 2009 with continued improvement in our financial metrics including revenue, gross margin, operating income and cash flow. If we look back to what we discussed together at our analyst day last night made our results for the Q4 are well-aligned with our expectations at that time. In fact, we achieved all key targets of our transitional financial model at our most aggressive date expected.

First, we indicated that we expected ST to return to operating profitability before restructuring charges once we reach revenue level of 2.4 billion and assuming a Euro 1.33 to dollar exchange rate level. Our fourth quarter revenues were $2.58 billion above our outlook range and we posted a clean operating profit of $90 million or 3.5% of net revenues. Adjusting for the joint ownership of ST-Ericsson we estimate a clean operating margin at 5.7%. We achieved this level of performance despite a much weaker U.S. dollar.

Second, we said we expected our product segment to return to profitability. We achieved this with IMS in the third quarter and the segment continued to improve in the fourth quarter to post an operating margin of 10.6%. IMS is an important driver of revenue growth for us and the key contributor to our operating margin target performance.

ACCI turned profitable in the fourth quarter with an operating margin of 5.7%. All of ACCI is product groups except imaging were profitable. Going forward we see the opportunity for a substantial improvement in the level of profitability in IMS and ACCI.

In wireless ST-Ericsson is committed to delivering on its cost realignment plan and is striking to its timeline. And they are well-aligned on transitioning to their new product strategy as they outlined on their conference call last week.

Third, from a cash flow perspective we were targeting net operating cash flow before restructuring of between 6% to 10% of net sales. Looking at our fourth quarter results we came in at 8.6%. Clearly, our progression over the year has been good from a negative $139 million in the first quarter to a positive of $221 million in the fourth quarter.

Fourth, we are well-aligned with our asset lives of strategy. Total CapEx for 2009 came in at $451 million under our 500 million target. Our CapEx to sales ratio for 2009 was 5.3% of net revenues well-aligned to our target ratio of 5% to about 7% over the next three years.

Fifth, despite a very difficult year we return to a positive net cash position as we had targeted. In fact, we delivered a significant improvement in our net financial position, almost a 1 billion shift going from net debt of 545 million at the end of 2008 to net cash position of 420 million.

Sixth, as a result of our ability to generate cash ST was able to retire about 30% of its convertible debt early with no need of refinancing. The repurchase of the bonds from an earnings per share perspective reduce our share count by 13 million shares on a fully diluted basis.

Now, let’s turn to a detailed review of the fourth quarter. Revenues increase about 14% for sequentially and on a year-over-year basis. Revenues came in about the high end of our outlook range of 5% to 12% and it was the third quarter in a row where revenue grew by double-digit.

The sequential growth in net revenue was broad-based as demonstrated by our results by market segment, by geographical region and by (inaudible). By market segment computer increased 22%, industrial and automotives 19% and consumer by 12%. Distribution increased 35% and here the growth was reflective or improving market conditions and underlying a strong demand.

Looking at our regional performance on a sequential basis, Japan was strongest, up 28% as they are starting to benefit from the economic recovery. Greater China increased 22%. America is 20% And Asia-Pacific and EMEA by about 8%. I would point out that year-on-year Japan is still down sharply while all the other regions are moving in a positive direction. Now, with EMEA showing a significant improvement this should have a positive effect on our margin as we move to 2010.

Our product segment performed as expected. In fact, ACCI and IMS better than anticipated. We expected IMS to grow faster than the company average and it did with a sequential increase in revenues of 23%, bringing revenues to $854 million. This performance benefited from strong growth in microcontrollers, analog, smartcard and power transistors.

ACCI revenues increased 17% sequentially and reflected important growth from automotive, set-top-box and computer peripheral. Digital consumer benefiting from new products as well as improving market condition grew sequentially in contracts to normal seasonal digital consumer pattern. And finally, wireless increased 1% sequentially in line with expectation.

We ended the year with a healthy inventory position. We have reduced inventory by 565 million since the end of 2008. Inventory turns has been progressively improving as a result. In fact, for the fourth quarter we had record inventory turns of 5.1 times, improving sequentially from 4.8 times. Looking ahead, inventory turns levels will value by quarter as we prepare for future periods as we continue to target inventory turns within the range of 4.5 times to 5 times.

Our gross margin in the fourth quarter is also a point of good news coming in about a mid point to our range. Specifically, the gross margin was 37%, 570 basis point sequential improvement, thanks to higher volumes, increase fab loading and improve efficiencies. And it was above the year ago period level of 36.1%. We are still not a cool situation. So the margin continues to reflect some unused capacity charges.

Turning now to the business outlook for the first quarter of 2010 we started a quarter with a solid backlog and indeed we are working hard to serve our customers demand. We are anticipating a normal historical revenue pattern leading to a sequential decrease in net revenues between about 7 and 15% which corresponds to 35% to 45% growth when compared with a year ago period. Our Q1 is in terms of calendar days about 10% shorter than Q4.

Gross margin is expected to be about 37.5% plus or minus 1% point. We anticipate a better than normal historical pattern, thanks to better manufacturing loading as well as improve efficiencies and a more favorable product mix. Indeed, this is the first time since 2002 with our gross margin is higher in the first quarter than the fourth quarter.

With respect to CapEx we would continue to follow our asset lives of strategy targeting an average CapEx to sales ratio of between 5 and about 7%. Of course, this level may vary on a quarterly basis depending on what we need to prepare for. Based upon our current plans we expect to add some further capacity so we would accordingly expect the first quarter CapEx ratio to reflect that.

In summary, ST has emerged from the recession in a stronger financial position. Our balance sheet is among the strongest in the semiconductor industry with receivables healthy, inventorying line and the solid net cash position. Two of our three polar segments are back to profitability and should continue to improve their level of operating margin performance as we move through 2010. And we expect ST-Ericsson to complete its cost realignment plan during this year. Overall, we are very confident all product segment will contribute to further improvement in our operating results.

During 2009 we estimate we gain market share within our served markets. We expect to see further progress in 2010 and this leads me to the final two key objectives. I would like to share with you for the upcoming year. In 2010 we will gain market share within our served markets. Based on our current visibility we expect a sum to increase by a low double-digit number. Also we believe this will allow us to bring back revenues back to the pre-crisis level.

We will continue to improve our financial performance. As I mentioned we achieve our transitional financial model in the fourth quarter of 2009, but we can and much do more. We expect to make progress on the key financial target and we are still confident in our ability to achieve our long-term financial model. At this point my colleague and I would like to answer your questions. Thank you.

Question-and-Answer Session

Operator

(Operator instructions). The first question is from Mr. TDA Sharma [ph] of RBS. Please go ahead, sir.

TDA Sharma – RBS

Hey, good afternoon, gentlemen. Thanks for taking my question. I’ve just a one question, one follow-up. Just to start with your gross margin guidance very impressive indeed. I was just wondering if you could elaborate a little bit on what you just said, you mentioned higher production levels in the first quarter. Can you maybe give us an indication on your utilization rates for Q4 and what you expect for Q1? And also whether you expect inventories to increase in any so by how much in the first quarter? I got a quick follow-up.

Carlo Bozotti

Yes, I think we’ll call Alain who will describe the pattern and the trend of the utilization rate in our facilities.

Alain Dutheil

Yes, in fact, you may remember that the beginning of the year utilization rate was very poor, a little bit more than 50%. The bottom was in March, 35%, but with first two quarters we’re about 50%. In Q3, we moved to about 75%. And in Q4 we were at 85%. So we have already increased our utilization rate and what we are forecasting for Q1 of this year is about 90%.

TDA Sharma – RBS

Okay. Would that lead to an increase in inventories and if so be how much roughly?

Alain Dutheil

Well, Carlo will take this. Of course, at this point the quarter is very short. It is about 10, 11 less sales. And we need to respond I think we will stop declining inventory at this time and Carlo will comment on the evolution of this stock turn.

Carlo Ferro

Really we have reached at the end of 2009, a quite great performance in terms of inventory turn at 5.1 times. Then I would expect individually each of the quarter in 2010 to remain in the 4.5 times to 5 times range which is our target range and then each quarter you may have also some fluctuation within this range also depending how we are preparing for the sales of the following quarter. And of course, today, we saw we are encouraged on the backlog going forward, so maybe in Q1, inventory turns will remain in the range but for sure have to go down in respect to the current five times level.

TDA Sharma – RBS

Great. And just a quick follow-up if I may. Carlo, you mentioned microcontrollers is in a real focus going forward in your prepared comments I was just wondering if you could give us a sense of whether the growth will mostly come from the ARM-based microcontrollers or whether they will come from the power-based microcontrollers or those…?

Alain Dutheil

We come from the ARM-based I think. Of course, we are very pleased of the progresses in terms of design wins and on the automotive products but as you know the time cycle, the (inaudible) for qualification, etc., is much longer here. No, no, it is an accelerated growth in the area of 32 microcontrollers for mostly for industrial but not exclusively for industrial, and this is based on our ARM products.

TDA Sharma – RBS

Great. Thanks so much.

Carlo Bozotti

Thank you.

Tait Sorensen

We move to the next question, Dino.

Operator

The next question is from the line of Mr. Tristan Gerra of Robert Baird. Please go ahead, sir.

Tristan Gerra -- Robert Baird

Hi. Just looking at the Q1 visibility and I think you commented today that some of the end demand trend that you are seeing is unsustainable. What end market do you think will be more prone to a slowdown and is that something that you would expect in Q1 that you see signs of that or just the speculating at this point based on this trend that you’ve seen so far in Q4?

Carlo Bozotti

First of all, I also said that we believe our billing is sustainable. In fact, we want to go back to a level of billing in the course of this year that is largely at the level of what we have before the start of the crisis. The backlog today is in fact is very, very strong is across the board. I appreciate it is across the board is not one specific sector. So, we expect that there will be some adjustments here and we do not count, we do not believe that this level of backlog is sustainable.

On the other hand I repeat we are confident that the trends that we are in Q4 and then now what we are showing for Q1 repeat with the quarter than 10, 11% shorter in terms of calendar days is sustainable. And our objective is to go back to the pre-crisis quarterly sales level during the course of the year. To say where the adjustment will come first I think would be probably a general adjustment because what we see today is that very, very strong demand indeed across the board both geographically and also from market segments point of view.

Tristan Gerra -- Robert Baird

Okay, and then how should we look at SG&A and R&D for the whole year? Is there anything preliminary guidance you can give us or even medium term for Q1?

Carlo Bozotti

Carlo will take this.

Carlo Ferro

So, Tristan, let maybe start from this current quarter. In this current quarter we do expect that the fact SG&A and R&D to go down in absolute dollar in respect to the level of the prior quarter. And then maybe to project on the full year what I may want to share with you as we have said this morning is that well stand with this initiative of cost restructuring measures. At the end the combination and now I am more talking about all the initiative and some of them are still in cogs but the bulk is in effect what we said this morning we have anticipated is that we expect the completion of the announced restructuring plan including the portion of ST-Ericsson to fall in Q4 2010 into a cost reduction in a range of $70 million in respect to Q4 '09. And then all the rest would be to be modulated I would say in between also based upon the time of execution of this plan that as ST-Ericsson has announced for the complete in for Phase II by mid of this year but for the newly announced phase that by the very end of 2010.

Tait Sorensen

We move to the next question, Dino.

Operator

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

Gunnar Plagge – Nomura

Hi, good afternoon. I was just wondering whether you could talk about the advanced logic outsourcing level that you have reached now at the end of the year and maybe you could give us also a view where we’re maybe at the end of 2010.

Carlo Ferro

As you said we will take your question. In fact, today, our total outsourcing in Q4 were about 13% and it’s going to be about the same in Q1. I would like to mention that here we are talking about total outsourcing, which include but we are buying out of NXP. You remember that when we form ST NXP wire we had a supply coming from the NXP plant and this is including when it will be what we are getting out of NXP. So it’s about 14% I would say. And our plans is still the same. I’m really sorry to repeat myself. Because we have been saying many time like we want to reach 20% in order to avoid the fluctuation of the market. Like the impact of fluctuation market like we had by the way end of 2008 and in 2009. So our goal is stick to go to 20%. And I think this time this year is going to be all that easier to reach over 20% because the demand is there and of course we are limiting the capacity.

Gunnar Plagge – Nomura

I mean I was specifically referring to the advanced logic to below 90 Nanometer.

Carlo Ferro

Sorry I was answering the total. So we have advanced logic represent about let’s say 2/3 of the total I was mentioning.

Gunnar Plagge – Nomura

Okay, thank you.

Carlo Ferro

2/3rd of the 13%.

Gunnar Plagge – Nomura

Thanks. And with regard to wireless profitability do you think it’s possible that we reach that in the second half?

Carlo Bozotti

I will take this and of course we cannot describe the approval by the ST-Ericsson in this conference call. On the other hand I think we have been very clear not just in the description of the restructuring plan that is taking place and that we need to move on with this. And I like to say that we are also being very clear on the commitment than management is showing the determination to move on with this restructuring plan. And that this is another unfortunately 1,500 people reduction was in all high cost of very high cost areas. And I think it’s probably better than that you look at this potential positive impact in terms of people reduction. It’s clear that we are also using our manufacturing assets and technology asset to serve ST-Ericsson and we have contribution in ST that is coming from this activity. So I think you need to look at all the ingredients here.

Of course, moving from bottom Q1 in terms of revenues to some good growth in the second half of the year a very significant reduction of headcount that we’ve quantified this is all in high cost, very high cost areas of the hand. Also you need to take into consideration some contribution to the manufacturing support that we provide to the new company.

Gunnar Plagge – Nomura

Thank you.

Carlo Bozotti

Thank you.

Tait Sorensen

Thanks. Dino, we’ll take the next question.

Operator

The next question is from Mr. Janardan Menon of Liberum Capital. Please go ahead, sir.

Janardan Menon -- Liberum Capital

Yes, hi, thanks for the question. I just want to go a little bit more into the gross margin guidance of Q1 and wondering how that shapes up into Q2 and beyond. What I’m trying to get at is if you assume normal seasonality in revenues into Q2 and Q3 would you say that the 37.5% is a sort of low base for the year and you’ll be able to build up on that or do you forecast any changes in your utilization levels over the next few months any other changes which could drop that to a lower level in any future quarter? And I have a follow-up if I can.

Carlo Ferro

Carlo Ferro speaking, I take the question. First of all, at the end really to add some color out of these progression from Q4 into Q1 from 37 to the midpoint of 37 (inaudible). I really believe what is happening in 2009 has been that our business has really developed in 2009 substantial drivers of gross margin improvement in terms of product portfolio that have been hidden on other performance by the manufacturing, the impact on manufacturing cost of these underloading combine with the accepting in a way the operation of the fab that these rationing operation. When identifying why Q1 this year and against season of pattern is better than Q4 I would say the reason is really now that manufacturing is normalizing, the manufacturing machine is now working at coolest steam we have, the cool effect of those ingredients in terms of value of our product portfolio.

And indeed the end improvement in manufacturing is the most important factor of the gross margin dynamic from Q4 into Q1. Prices are expected to be negative and this is not a surprise when entering the first quarter we’ve a new year price list with several customers and the product mix hold partially recovery that will contribute positively. So going forward on the year we are encouraged about the opportunity for mix continue to improve and the manufacturing that now effect to full functionality to enter again into the very positive continuous improvement that has always delivering.

Additionally, you know that we will complete in the second half of the year the closure of Phoenix, we are continuing to move and shifting capacity mostly increasing capacity in Asia in respect to the European-Mediterranean area for us. With all these ingredients are making our quite optimistic about the fact that you may see through 2010 or some further progression in gross margins.

Janardan Menon -- Liberum Capital

Okay, that’s very clear. And just a follow-up on your industrial and consumer sales. These are the only two end markets that you ended last year still quite significantly down year-on-year whereas automotive, computer and to some extent telecom was also up year-on-year. So was that just the fact that these end markets themselves were extremely weak and haven’t recovered as much as other markets or was there any market share losses that you’ve suffered in the segments? Or on the other hand were there market share gain to the other segments like automotive and computer which made those divisions go up year-on-year by the end of the year?

Carlo Bozotti

Philippe would comment. I think industrial is almost back at the level we were before. And the peak for IMS I think was 900 million, right….

Philippe Lambinet

C'08.

Carlo Bozotti

C'08 and in Q4 we have done about 850 million. So we’re almost back and we expect to go back or even exceed. On consumer I will ask Philippe to comment.

Philippe Lambinet

I can comment on digital consumer, in particular, which is really our area of focus. In fact, Q4 had a good sequential growth compared to Q3. If you look year-on-year which I believe is your question clearly, still below because in fact consumer was the last one to enter the crisis and in a way it respond to exit the crisis, because Q4 2008 was still a very strong quarter for in particular our set-top-box sales. Now, in Q4 2009 we start to recover quite strongly and the recovery will continue in Q1 2010. So it’s not a result of share loss in terms of our set-top-box presence in particular it’s more than the market actually was resilient at the end of 2008 and it’s only coming back now in to where it was before in Q1 2010. So we’re a bit shifted compared to the other markets value about 1 Crore.

Janardan Menon -- Liberum Capital

Yes, thank you very much.

Tait Sorensen

Thanks, Janardan. Next question, please.

Operator

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

Simon Schafer -- Goldman Sachs

Yes, thanks so much. Also wanted to ask on gross margin. Perhaps it’s a follow-on. If I just contextualize some of these numbers in the second half of 2007 when the currency environment was sort of broadly similar around 140 or so slightly above I think your gross margin was tracking around 38%, 39% excluding pneumonics but of course then you didn’t have the fully consolidated in ST-Ericsson business. And I was wondering on a like-to-like basis then as you look into the second half of this year with the utilization rate perhaps kicking and so on what sort of net improvement do we actually see on the gross margin line giving the credit for some of these restructuring issue programs that you have executed against throughout the downturn. I guess I’m just wondering whether it’s significantly higher than it used to be in the second half of '07 or is ST-Ericsson still too much of headwind?

Carlo Bozotti

Well, of course, we cannot give guidance for the second half of this year. I like to mention two things. The first is that in terms of product portfolio we’ve done a lot of work as you know. We still have about $1.2 billion discrete that we believe is a very important business for us, is, of course, diluting the gross margin performance but it is a very good business in terms of return on asset and free cash flow. Having said that and moving to manufacturing I believe that we have a very good opportunity and now that our manufacturing machine is back to almost normal to really focus on performance and we expect some very significant improvement particularly in the second half of this year.

Again, I cannot give a guidance of the second half of the year margin here. But I like to mention that opportunity to our manufacturing are very significant to improve our cost structure now that we are in a more stable position and we believe that 2010 is a very important year because this is kind of bridge for us and of course, what we want to do is to go from the 3.5% operating profit that we had in Q4 last year and progressively move into double-digit configuration for the operating income. And the same for free cash flow. Of course we started from a base that it is more competitive but we have the same objective. So ST-Ericsson is not (inaudible) gross margin. And I think this is an important comment to make.

Simon Schafer -- Goldman Sachs

Understood. Thank you very much. My follow-up question would be more related to an OpEx basic question about the near-term. Carlo Ferro, I think this morning you commented that in absolute dollar term, obviously, OpEx would be coming down in Q1, but I was wondering given your comment about the 70 million savings run rate by Q4 compared to the OpEx run rate what sort of savings run rate are we looking at into the first quarter?

Carlo Ferro

I do confirm this morning I said and the guest also said that earlier in this call that operating expenses, R&D plus G&A in Q1 will go down in absolute dollar in respect to Q4. And then frankly I did not had any other call or in respect to how much. Otherwise you do not have any wrong belief of exercising your skills if I give numbers I am not.

Carlo Bozotti

I think we are progressing on our restructuring plan. I think ST-Ericsson in Q4 they did what they said they would have done in terms of headcount reduction. There was the completion of our headcount reduction plan in ST. So we are moving on the right direction. Of course, the reduction of 1500 people in ST-Ericsson is very material this year. The economic impact is very significant. The Euro-Dollar rate also place at all. Obviously, I think that 140 is better for us than 150 as you know. So I think we are encouraged by the progress.

Simon Schafer -- Goldman Sachs

Okay. Right sir, Thank you.

Tait Sorensen

Thanks, Simon. Next question.

Operator

The next question is from Mr. Peter Knox [ph] of Vintage Capital Markets. Please go ahead, sir.

Peter Knox -- Vintage Capital Markets

Thank you for taking on the call. Can we just drill a bit more into gross margins? What’s going to be about it? But in previous quarters you quantified the utilization cost and the manufacturing inefficiency cost and of course can you just give us the number for the fourth quarter please?

Carlo Bozotti

Yes. Similar in the fourth quarter the combination of unused capacity and (inaudible) efficiencies in the manufacturing driven by this ration in the functionality of the fab. We do estimate in about 70 basis points there combining factor to the gross margin in Q4.

Peter Knox -- Vintage Capital Markets

And am I right in assuming the winners of charges again in Q1?

Carlo Bozotti

No, very, very marginal, very, very specific utilized to technological-based. It’s a little bit. It’s something but this is not a social material. But the opportunity for the rest of the year is more now that unsaturation cost of course is an important element. But other even more important element is (inaudible) in the facts and I think now we are almost back to normal and now in our fabs we will improve on the fundamentals moving on and not laying off people or re-hiring people and the sort. We expect that there will be a continuous improvement, which as I said before is significant step forward in the second part of this year.

Peter Knox -- Vintage Capital Markets

Okay, that’s very clear. Could I bit just turn to a follow-on about cash? Cash generation in fourth quarter despite strong and I can see with a rise in possibility increasing cash generation moving forward. Should we be expecting an increase in dividend payouts or we would like to see cash accumulating the balance sheet of the coming year?

Carlo Bozotti

Well. I think of course the decision is not taken and I think as we do every year, we will do in April and I can here underline the fact that we are very encouraged by the progress in terms of cash flow performance. In fact if I look back at last year, it was a very difficult year. Our loss was very significant unfortunately. But from the cash position point of view it was a very good turnaround. We have improved our net financial position by almost $1 billion and we had three major contributors. One, of course, was the initiative with Ericsson, the second one is the reduction of inventory by $565 million and the third important ingredient I would say is a remarkable pretty performance in Q4. So all of this is encouraging and of course, all of this is giving us more confidence to move on with increased dividends when the time will come for decision.

Peter Knox -- Vintage Capital Markets

Okay. Thank you.

Tait Sorensen

Thanks, Peter. Next question.

Operator

The next question is from Mr. Guenther Hollfelder of UniCredit. Please go ahead, sir.

Guenther Hollfelder – UniCredit

Hi. I was wondering whether you could give us an update for the performance of pneumonics in the December quarter just to get an impression for the first quarter and on the other hand I was also wondering the guidance in line with normal seasonality. So isn’t there any let’s say like automotive for industrial business, extending demand into the first quarter should help here, and may be as the last one, if Carmelo could give an update on the distribution channel situation from a regional perspective it would be grateful. Thanks

Carlo Bozotti

So let’s have Carmelo.

Carmelo Papa

We see a very under control situation in the distribution network. They keep ordering, the deliveries are very tight. So we keep the stock under control by measuring week after week the run rate. Making sure that what we deliver goes not to doubling stocks but to fine applications and customers. So the situation is very tight. The demand is much higher than what we can offer. In this demand that comes not only all from distribution but from make your OEM as well. So I would say that this time of the year we see for the medium-term very good demand coming from all across the board that we monitor because it’s going to be sustainable at current level that for a longer period of time. We see it’s growing too fast. And so it must be controlled then we do this continuously. But it is coming from all segments right now.

Carlo Bozotti

Next part of your question is about the Q4 for pneumonics. I would say that Q4 has been a pretty good quarter for pneumonics as well. I saw substantial sequential increase in revenues of not anticipated a result, but they are reaching a substantially break even at operating income level and you noted in our press release the gross cash balance at the end of the year which is $572 million which is noted much higher than the one that pneumonics had at inception of the company. So in respect pneumonics is somehow well on track and we are encouraged to see their gross cash building up and these could be also an opportunity of eventually for us through the year to reduce our exposure to the guarantee of pneumonics.

Philippe Lambinet

Do you want to address automotive and industrial as well?

Carlo Bozotti

Well, I think on automotive and industrial in this very moment the demand is very, very strong. So it is absolutely no doubt I think pattern is similar on the two segments. I think it is on a variety of technology, on variety of products, and very much across the board geographically. So I have nothing more to say. There is strong demand and broad range on these two segments.

Guenther Hollfelder – UniCredit

Okay. Thank you.

Tait Sorensen

Thank you, Guenther. Next question, please.

Operator

(Operator instructions.). We have a follow-up from Mr. TDA Sharma of RBS. Please go ahead, sir.

TDA Sharma -- RBS

Yes, thanks for taking my question. Carlo, I think I had asked you a question last quarter but I would like to have maybe some more thoughts on that this quarter. You have actually achieved quite a lot in terms of portfolio pruning already with ST-Ericsson joint venture, the NAND flash joint venture as well. Do you think that some of your other applications specifically been computer peripherals, consumer obviously and obviously the imaging business would require more scale and would you consider similar joint venture or perhaps sell of those businesses you can achieve the scale required to make money in those markets?

Carlo Bozotti

I think at this point I was making the point of course this morning. For us historically is execution. So 2010 must be the year of execution. I was mentioning in my initial address here in the afternoon I spoke about two objectives. But this morning I was mentioning the four key priorities that we have. So Priority No. 1 is the restructuring of not in order of importance, but the restructuring of ST-Ericsson that is a lot of money. Priority No. 2 is what I said on manufacturing. We have great opportunity to improve the manufacturing efficiency and decrease manufacturing variations and decrease manufacturing cost particularly in the content. Priority No. 3 is the market share. The market will grow 10% to 12% and I am confident we can do better or much better than the market this year. And Priority No. 4 is to get the value that we deserve on our products, particularly on the new products. Here, I think we see a lot of progresses.

For instance, you mentioned digital consumer we are very pleased today about the profitability in the area of certain portion of digital consumer products and of course there are other families that are is a part we have recently launched our three months platform for high quality new applications and the internet TV. We are very pleased about the progress. In general, in the ACCI products that we are in the computer peripheral sector. We are all ACCI you know is that is for printers, is for drives, is for computer application infrastructure. They are all ACCI products.

We are pleased about our progresses in analog and MEMS. We will have two important families this year. The gyroscopes, the active microphone, a lot of new power products, discrete power, (inaudible) power products. We mentioned before the 32-bit microcontroller, etc. So all of this is very good. I think at this point we do not expect any significant move. Imaging we said I think we have lost money in Q4 is the only family as part of ACCI where we lost money and of course we have two options either we fix it or we dismiss it. The third option is like this is not a good option.

TDA Sharma – RBS

Right. Yes, I’m going to be a bit more precise in my question. If you look where ST is very, very good at is in IMS and somewhat basically the horizontal markets and in all the verticals basically our struggle historically to make money on a sustained basis. So I just like to understand what’s going to be different this time in consumer and computer peripherals, imaging, over the next cycle how are you going to make (inaudible) basically in those markets over the cycle?

Carlo Bozotti

I would say that in computer peripheral, if you allow me, the general pattern was good and now it’s very good and there was a glitch for one year or two, but I think on a long-term decision this has been a good business for ST. Now, it’s a very good business for ST. And there was a glitch for one or two years. In digital consumer I think we have a lot of this business that is our traditional set-top-box activity that is very healthy. We do not publish the number but it’s a very healthy business. We have an intense effort to speed up the introduction of the platforms on the high quality digital TV and of course this is intensive in terms of utilization of the resources, but we expect to be successful there. Finally, there is wireless. When the wireless business was an ACCI mode of business, I think it was good performance for ST and then the business model changed completely.

So we had only two alternatives. One alternative was to abandon wireless and the second alternative is to join forces because we could not stay alone and to sustain this change in the business model, with a model in R&D that is more intense I think we are merging these three companies. Of course, it’s a transition. But we expect that we have all the ingredients to succeed. We are base why that it is unique. We will have a cost based that will be much more competitive at the end of this year and we have a strong customer endorsement. Of course it’s challenging. You’re right, there are two major portions in ST. One is what we like to call as power applications. And there is a lot of analog, is a lot of power, is a lot of microcontrollers, sensors, etc., We want to be a leader there.

We are already No. 1 in certain areas, in industrial, in power conversion and this is an area where more or less we are already today outside the crisis our profitability is double-digit we can grow. I think IMS in Q3 2008 they had 17% G&A, so we need to get back there of course on these areas and the same is for automotive. Now expected to be profitable, but of course they need to improve. But the second portion of the company is the one the multimedia convergence. We are absolutely committed to succeed both in terms of ranking and market share, but of course also in terms of profitability. And we have taken a lot of measures during these three years to make sure that our portfolio here is becoming more competitive and of course giving us the confidence that we can substantially turnaround from the point of view of the profitability.

TDA Sharma – RBS

Okay. Thanks very much.

Carlo Bozotti

Thank you.

Tait Sorensen

Thanks, TDA. I think we’ve got time for about one more question.

Operator

The final question for the day is from Mr. Janardan Menon of Liberum Capital. Please go ahead, sir.

Janardan Menon – Liberum Capital

Yes, hi, thanks for the follow up. Just a quick question on IMS margin. Your IMS margins are a bit disappointing in the quarter because you did 10.5% margin whereas in 2007 and first half 2008 at a similar level of revenue which is in the 700 million to mid 800 kind of range you did 15%, 16%, etc., So I was just wondering has anything structurally changed in that business or is that a temporary issue and you think that at these levels of revenue you can get back to that kind of a mid-teen margin in coming quarters?

Carmelo Papa

This is Carmelo Papa answering. So, first of all, the result depends very much on two things. The 2009 was a very depressed year especially in the first half of the year and therefore it was reflected in the price and have an immediate effect on the gross margin. Second, the manufacturing machine was absolutely disastrous again in the first half and again in Q3. Therefore, all this is there. But we are confident that this year will go back on track into the previous peaks and the target this time we can do a lot more because the manufacturing is now efficient, we have a lot of new products. Just to talk about MEMS, the last three years where the accelerometers are here. Now we have the new microphone year and the gyroscopes year along with the accelerometers.

And then if we move into the 32-bit, the last two years have done just a massive of designing. We will harvest this year. And if you want the analog there is a lot of more products. For power saving in the areas of smart metering. So these are the things will give the results. The manufacturing machine would be much more efficient, the price there would be customer, in a tight situation like this will have a better say versus our customers. Therefore, all these things put together we will put IMS back on track to the top as we did in the past.

Janardan Menon – Liberum Capital

Okay Thank you very much.

Tait Sorensen

Thanks, Janardan. I think at this time I will hand it over to Carlo Bozotti to close but before I do I would like to announce that on June 3rd of this year, of course, we will host our Analyst/Field Trip in London. Will send our information here shortly, but just wanted to get that on your calendar. So, now, Carlo if you would like to close out?

Carlo Bozotti

No. I’ll like to invite all of you in June. I think will be a good moment to review the progresses as I said before 2010 is a very important year for us. We are concluding most of our restructuring now the part of restructuring is discounting [ph] ST-Ericsson and I think that it will be a very good time to review the progress and to give you some good visibility for the second half of this year. Thank you again.

Operator

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

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Source: STMicroelectronics N.V. Q4 2009 Earnings Call Transcript
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