意法半導體 (STM) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Amy, and I will be your conference facilitator. At this time, I would like to welcome everyone to the STMicroelectronics Fourth Quarter and Year End Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press *, then the number 1 on your telephone keypad. If you would like to withdraw your question, press * then the number 2. Thank you. I will now turn the conference over to Mr. Stan March. Sir, you may proceed.

Thank you, operator, and hank you to all of you for joining us today for STMicroelectronics' fourth quarter and full-year 2003 Financial Results Conference call. I'd like to introduce the participants in today's call. First of all, as you know, Pasquale Pistorio, our President and Chief Executive Officer, will host today's call. He's joined here in Geneva around the table by Alain Dutheil, our Corporate Vice-President in charge of strategy; Aldo Romano, Corporate Vice-President responsible for telecom, peripherals, and automotive groups; Philippe Geyres, Corporate Vice-President responsible for the consumer microcontroller group, Carlo Bozotti, the Corporate Vice-President responsible for the memory products group, and Carlo Ferro, our Corporate Vice-President and Chief Financial Officer.

Before we begin, I'd like to make two announcements. First of all, the requirement to point out that many of the statements we'll make today are forward looking regarding future business and financial performance of STMicroelectronics and the semiconductor industry. These statements are predictions that involve risk and uncertainty, and actual results may vary materially. We'll refer you to certain pages of our Page 20 App[?] and to previous announcements, including our press release today, for important risk factors you should consider in evaluating this information. And secondly I'd like to ask that, in the interest of time and for the benefit of all the participants on the call, that you limit yourself during the Q&A session to one question and a short follow-up. If you've got some others, please come back to the queue, but this way we'll maximize the benefit and the opportunities for all participants. And at this point I'd like to turn over the call to Pasquale Pistorio.

Thank you, Stan, and good morning and good afternoon, ladies and gentlemen. Thank you for joining us to review Q4 results and discuss our outlook for the 2004 first quarter. As you saw in our news release, ST's fourth quarter top-line performance surpassed our initial expectations, coming in at over $2 billion and $110 million, exactly $2 billion and $110 million, a 17% sequential increase over Q3, and 18.3% above last year's fourth quarter.

Approximately one-half of the growth was attributable to TPA and CMG products, and about one half to MPG and EDSG products, all driven by key applications within our target market segments, including wireless, data storage, automotive and audio, set-top box, and smart cards. Also, we saw some early signs of a pick up in wireline. Our investment in accelerated marketing programs continued between to enable ST to sell products in the broader number of key customers in Q4. As you may have recall, in 2003 we supported this new sales drive. We did it by creating regional competence centers to focus on specific applications, by increasing the design activities in advance of the products with multiple applications, and by launching a generation[?] of tools for customer support.

Today we are seeing the tip of the iceberg. Namely, an increase in multi-socket product sales. In the 2003 fourth quarter, this means that while we enjoyed a very respectable 12.2% sequential revenue growth from our strategic customer alliances, much of our sequential growth was fueled by product sales to a broader group of key customers. As we discussed in detail in our news release, we were disappointed by Q4 gross-margin performance, which came in at the low end of our guidance range. If you compare our actual Q4 gross margin with the expectations we had three months ago, about 80 basis points of the volumes were split evenly between the increasing value of the euro and product group mix in pricing. Additionally, the blackout in Italy penalized our gross margin. There were costs associated with our restructuring plan, which was larger than in the third quarter, and we increased our outsourcing in Q4 to meet higher demand requirements.

Research and development expenditures and selling and general administrative costs in [aggregate?] equated to 27.5% of Q4 revenues compared to 27.4% of the prior quarter's revenues, but increased 17.7% in dollar amounts. Approximately 4 percentage points of this increase was attributable to the increase in the euro versus the US dollar, and with respect to our primary driver of sequential increase, was the acceleration of strategic programs, and there was an addition of $5 million of in-process R&D from the recent acquisition of Synad.

SG&A included the certain quarter-specific costs as well as expenses related to the accelerated marketing programs I mentioned earlier. Additionally in Q4, we incurred the $12 million in impairment and restructuring charges [inaudible] associated with our previously announced restructuring plan. Thus, we ended Q4 with a net income of $144 million or 16 cents per[?] share. This was of course a significant improvement over the prior quarter even after adjustments for restructuring costs, but did not reflect the earnings power we know we should and will achieve.

I would like to make a few comments on our full-year 2003 results, and then I will spend some time discussing our view on the industry outlook and ST's Q1 2004 guidance. ST's four major product groups successfully worked together to provide products and solutions [inaudible] report net for 2003 [inaudible] revenue [inaudible] went up 18%[?] percent year by year, to about $1.75 billion. Our revenues to digital[?] consumer exceeded $1 billion, an increase of 27% over 2002, and revenues to automotive group, 22% year-on-year to also surpass the $1 billion mark.

At year end of 2003, ST's balance sheet[?] was stronger than it was at the year end of 2000, reflecting our long-standing commitment to sound financial management, as well as the timely financial transactions we completed during the year. Thus the marketable securities actually[?] matched the long-term debt, and our net debt to shareholders' [indiscernible] ratio was a very modest at 0.012.

Our inventory too has continued to improve in 2003 to reach 4.8 times in Q4. As anticipated, the capital expenditures were $1.2 billion for the year, and free cash[?] flow for 2003 was $477 million, and $655 million before acquisitions.

With respect to 2004, our economists project that the semiconductor industry will grow 23% on a year-over-year basis, in line with many other industry analysts, and this growth is expected to [inaudible] by a combination of unit demand and price increases. ST has entered this recovery period with a solid order backlog comprised[?] of a diversified end-market demand, which we expect will enable us to post Q1 2004 revenues that are far less seasonally impacted than usual. Thus, we anticipated that ST's revenues for the first quarter of 2004 will be at least $2 billion, and could possibly come in flat with the over $2.1 billion of 2003 fourth quarter. This will defend[?] growth of somewhere between 24% and 31% over last year's first quarter, and would be a good beginning.

The challenge we are addressing is gross margin, where there is a certain lag time, and where the benefits of our restructuring program and our initiatives take hold. The outlook section of our earnings release includes our expectation of a 2004 first quarter gross margin of approximately 35%, and the illuminates the elements evidence we believe will lead to the progressive improvement of this important metric during 2004. Acting to what we have already said, I believe it is important to mention here that we are working very closely with our strategic customers on new product designs as well as leveraging our system know-how in order to further cultivate the relationships with the expanded customer base that we have developed over the past year. These efforts should benefit ST's overall performance as 2004 unfolds. At this point, ladies and gentlemen, my colleagues and I would be glad to respond to your questions.

Ladies and gentlemen, if you would like to ask a question, please press * then the number 1 on your telephone keypad. Again, that's * then the number 1. We'll pause for just a moment to compile the Q&A roster.

Once again, if you would like to ask a question, please press * then the number 1 on your telephone keypad. Again, that's * then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

We are continuing to queue the roster.

Your first question comes from Adam Parker with Sandford Bernstein.

Hi. You alluded to getting margin expansion from unit growth and pricing. Can you talk about how you're going to improve the pricing environment, or how do you plan to improve the product mix during 2004 to get a better pricing environment?

There is one respect on the price environment; that is the industry itself. As you know, in the last three years, capital investment has been quite modest, and now that the recovery is in full steam, there is a situation where capacity is in balance, particularly in leading-edge technology. In fact, we are starting to experience shortages in the 0.13 micro. In those conditions, there is a better pricing environment.

As far as we are concerned, we create a better pricing environment by the migration into finer geometries and by the pushing of new products. There is a long series of new products that we are introducing in each one of our end markets, as well as in the standard products, and all those products will contribute to improve the pricing situation, contribute to the gross margin. And if you want to know about some specific segment, my colleagues here can address that in each one's sector.

Okay. Maybe just as a follow-up, to follow Stan's directions, what percent of your current output is .13, and what percent of revenue is from new products? What do you expect to get from new products in 2004?

Historically, new products depends on the group. For example, the group that has the highest percentage of new products is usually CMG, with more than 40% of the products that are new. We define new products as those that three years ago were not on the market.

Did you say three years?

We define new products as those that were not yet generating billings three year from ago. Today is 2004, 2003, 2002. There were no sales in 2001.

Gotcha.

Those introduced in 2002 or later represent more than 40%. Philippe, can you comment?

I think 40% is the average [inaudible] the groups. In my case it's over 70%.

In the case of CMGs, 70%. It's 40% for TPA. It's about 50% for MPG, and is about 30% DSG. So there is very large percentage of our revenues that are generated by the new product introduction. As far as the 0.13 micron, of course at the end of last year the percentage was very small. We are running right now our Flash[?] in 0.13 micron, and this is through Europe and in Asia. And this will be bought for system [and cheap?] products for the consumer, and in the wireless and the disk drive; essentially those three sectors are leading. And therefore Flash, by the end of the year, I suspect that at least 40% of the Flash will be in 0.13 micron. No, sorry. Why don't you say, Carlo?

I think that on Flash we are right now something zero to [indiscernible]. Only in one of these steps, one portion of the facility will remain on mature technologies. The rest will be basically 0.13 micron, so it will be from 60-70% overall.

At the end of this year, 60-70% of Flash will be on 0.13 micron?

Exactly.

Okay, thanks. Good luck, guys.

Thank you, and what about system-on-chip? If you could make a comment, also CMG and TPA will ramp up to 0.13 micron system [on chip?]

Yes, but the ramp up will be not as cheap as in Flash. I think in CMG we are starting the year at 15% and we finish the year, I'd say, at 25%. We have image censors; have other things. [Break in audio] For TPA, if we consider that the storage example, and if we consider the [inaudible] of the storage, because we are also present with as much power which is at 0.13. [In this sale?] the majority of all our shipments are in 0.13, 0.15 micron.

Your next question comes from [Oshe Orgey?], with JP Morgan.

Good afternoon. [Inaudible].

Jay[ph], could you speak up, we're having a hard time hearing you, I'm sorry.

Can you hear me now? Alright. Okay, just a couple of questions; one is on Flash. Carlo, after your migration to 0.13 micron, what should be the sustainable margins for memory product group from next year? The margin [background noise] 0.13 migration [inaudible] start this year, and then also hopefully by next year you will have done [inaudible] also to Singapore. What sort of margins should we be expecting from this business on a clean basis?

I think that you can get the next quarters... Our plan is to be the average of the company by the end of the year.

By the end of this year?

By the end of this year. Of course. This is the plan, and we have two major contributors. One is the migration to 0.13, and the second is also ramping up the two [inaudible] in Singapore and Usay[?], where, while at the level of equipment utilization we are in a relatively good position today, we are not yet in a good position in terms of utilization of the infrastructure and the facilities, and our web[?] cost will decrease. These are the two pillars, in the memory group, particularly in Flash. As I said, I expect progress in the year, taking us close to the average of the company by year end.

I'm just trying to make sure I understand that. If you look at Flash, for example, none of the Adapt[?] [indiscernible] players manage to make money NAND[?] Flash. AMD's not making money even though they have a commanding market share. Intel didn't make money. What gives you the confidence that you will be able to achieve this in a market that is very competitive like NAND Flash?

I think that, first of all, we have a track record that is indicated that we can make money in memory sector. After[?] 1999 and 2000, because in the year 2001 we were profitable sometimes.

I think we are competitive. We are competitive in the manufacturing costs, ramping up these [indiscernible] we will have to become more competitive. I think we have a wider coverage of various applications, working also trying to exploit the strength of the company in various areas from wireless to digital consumer, from automotive to computer [indiscernible], so it's wide. I think we have not enjoyed yet, not even in Q4, the migration to 0.13 micron in terms of real impact on the P&L. This will happen starting at the end of this quarter. I think at the 1.8 bulk[?], which is the bulk of the wireless products and applications, we have not enjoyed yet the 2-bit [indiscernible]. We believe there are a number of reasons; they are opportunities for us to improve, and show good progress there. But there are more MPGs, not only Flash. So overall, I think our objective is to get closer to average of the company in terms of grosswth margin by the end of the year.

Just one more question on Flash and NAND Flash. You [indiscernible] at 0.12 micron. Are you also at the same time tipping[?] out at 90[?] [inaudible] given that Samsung and Toshiba already announced plans to start producing at 90. When are you going to start to tip out or start to manufacture 90mm[?] for NAND Flash?

We have a 512Mbit test chip running at 90mm. Excellent yield. We expect to have the first real product at the end of the second quarter, which will be a 1Gbit NAND. Our gigabit is packing 512Mbit products, and the program is to provide our customers with a 90mm products, but in the third quarter, starting the production at the end of the third quarter or the beginning of the fourth quarter of this year.

Just one last question to the CF1 tax. How should we think about tax this quarter? Should we assume the EPS for this quarter should be compared[?] on a fully taxed basis, or is there any benefit coming from the structuring charges in this quarter?

This is Carlo Ferro. A word on our effective tax rate in the year 2003 that may help to understand the guide answer. There are two ingredients in our effective tax rate. One is the tax benefit from restructuring, and this is in the range of 30-35%, if[?] it occurs under the higher tax rate jurisdiction. The other component is arguably the effective tax rate on the ongoing operation, which for the year 2003, closed at 15.5%, below the 16% guide we provided for you. And the reason for that is that the euro is hitting the profit in the European entities, and those are the entities at the highest rate. I would suggest for the year 2004 to look at the range of 15-18% as far as ongoing operations are concerned, and to consider from 30-35% for tax rate charges. And this of course depends on the mix of incoming ingredients of the two.

Fair enough. Thank you very much.

Your next question comes from Cody Acree[?], with Legg Mason.

Pasquale, can you maybe go on a segment-by-segment basis and give us a little look on your seasonal expectations? You talked about company-wide muted seasonality, but could you give some granularity for the different divisions as to what you expect seasonally?

I think the best thing is to have the responsible people answering. Maybe we'll start with Aldo, which is the largest group.

I'm following three segments: telecommunications, computer peripherals, and automotive. In all three cases we have some seasonal effect. Certainly, it's much stronger in cellular phone, which is the large majority of our telecom market. So, our vision of the first quarter is certainly related with bringing some decline after a strong increase in the last quarter, because SG&A[?] grew 16% or 17% sequential. We will have a decline, which is just seasonal. In the other segment, the computer peripheral, in spite of the season, we hope to be able to generate some stability. Because there are just in this quarter, particularly in the printer division, some new product coming and will start in this quarter, the digital engine. In the automotive we are expecting growth. The automotive is certainly more stable than any other segment from this point of view. In any case, for what we are concerned essentially to... Again, our new presence in the microcontroller segment we're counting sequential growth after 8% growth in Q4 something very similar in Q1 of this year.

In consumer, we have the same seasonal effect, usually Q1 is 10% below Q4. This year we're going to have a Q1 much better than that. It will be at, or slightly declining from, Q4. This is respecting good market conditions. Came out of the Christmas season. We're anxious to see the customers' reactions, and the good opportunity to build the market if the consumer showing that they [indiscernible] every year. And here the mood was positive. And in fact, the orders we've been receiving in January are at a good level.

What is driving this relatively good period? Set-top-box continues to be strong, helped by the US market, both satellite and cable, now that news[?] has taken over DirecTV, there is a fierce battle in marketing between DirecTV and Ecostar[?] applied[?] to both, so we enjoy that. In cable, our estimates in [inaudible] continues to gain share especially in the high-end boxes, which have high semiconductor content. Finally on TV, on the traditional TV the volume is good, reflecting a good Christmas season. And also, the move toward LCD and Plasma TV is helping a lot both our plasma driver and our sole[?] video processing activity.

In the memory group we can divide our product portfolios in four categories. The first is [inaudible]; the second is NAND. We see for the first time part of the portfolio. The third is mature memories, traditional mature memories; and the fourth is mark-up[?]. The one we'll have some decline on is mark-up. We had two strong quarters in Q3 and Q4. I think it's a seasonal line. While on memory products, the demand is strong and will be relatively flat. Overall, I think that the memory group will be very similar in terms in Q1 over Q4 pattern, similar to the average of the company.

Just following up there. First off, Pasquale, was that everyone?

We are all here, there was also the [inaudible] group? A word about [inaudible], because it's not a segment. It's cross-products. So, Salvo?.

I like to say first of all that while the market between 2000 and 2003 was down about 20%, the DSG reflect what I think[?]. This year we [inaudible] the same billing like the year 2000. Next quarter, so the first quarter, I will be more than 25% of growth[?] the first quarter of 2003. This means that I will be flat or one or two points lower than Q4, but we will continue to grow and to grow strongly as we have done for the past.

Just following up on the strength of the orders across the board, can you give a little of granularity into where you think those orders are coming from? Obviously, you have a lot of distribution leverage. You have a lot of direct OEM leverage. Are you seeing orders more pronounced one or the other? Are you seeing efforts by the supply chain to resupply after a strong holiday period, and is that in line with the sell-through, or are we trying to get back to some heavier buffer level throughout the inventory channel?

What we saw during the fourth quarter was very strong order intake. We were asking ourselves, is this because of the Christmas season or what? What we saw starting the year is continuation of the same, so it's across the segments. It's across the product families. Some more, some less, that I could not distinguish because there are customers that order on-demand. There are customers that give your forecasts, and you have to get ready. But I can say simply that there is a wider spread strong order intake, and also commitment from the customers even [inaudible], so it's quite widespread.

Distributors versus direct customers, any difference in those?

Usually our direct customers, because the distributors also place orders, but they place short-term, today for delivery tomorrow.

How do you believe the inventory levels are in the distribution channel today?

They are normal. In fact, in some cases, because we get pressures, even shrink.

Great. Thank you for all the detail.

Once again, ladies and gentlemen, if you would like to ask a question, please press *, then the number 1 on your telephone keypad. Again, that's * then the number 1. Your next question comes from Stuart Adrian[?] with Morgan Stanley.

Hi there. You talk about a time lag in the improvement of gross margins through 2004. I was wondering whether you could give us an idea as to when we'll begin to see the positive impact of some of your longer term contracts reflecting some of the better pricing environment; and also when we are going to begin to see the effects of the rationalization that you've had in place, which particular quarters you think we'll be able to see that?

One thing we that we have to specify is the currency. We do not plan currency variations, so we are looking at the present value of the exchange rate between the dollar and the [inaudible] currency which we operate. Which is already unfavorable toward the average in Q4, and that is one impact on the gross margin on Q1. Now, with this kind of a situation, assuming this will remain constant through the year, and returning to the exchange rate, then we see the 35% we anticipated for Q1 at the bottom, and then our gross margin will increase sequential growth quarter after quarter, and the process will accelerate in the second half, when ramp up to 0.13 micron and when the restructuring of the [inaudible] will be much more evident and bigger in volume. So we will end the year, I'm convinced, with a gross margin of above 40%.

And when you provide you guidance, do you simply use the spot FX rate, i.e. the foreign exchange rate today?

No. We use the exchange rate of the moment we make our projection, our guidance, so the one of yesterday.

Right, thanks. And maybe just a quick follow-up. You mentioned the impact of outsourcing toward the end of the quarter, and the fact that that probably had a negative impact on the gross margins. Do you think that's going to play an impact through the first half of 2004 as well?

Not significantly. Maybe Alain, you want to comment?

No, I don't think so. In fact, we mentioned it because we spike[?] in order during the end of quarter, so we had to get more capacity out of the second quarter, but frankly we don't see any effect. And by the way, you know, even if the price of a subcontractor [inaudible] of course, they need to make their money from the retail net asset point of view, it's even.

Great, thanks Alain. How much of your production was actually outsourced in Q4?

A little bit more than 8% of the total.

Perfect, thanks.

Our next question comes from Tori Spanberg, with Piper Jaffrey.

This is Jeremy Quann calling for Tori.

I'm sorry, could you speak up? We have a hard time hearing you.

Yes, this is Jeremy Quann calling for Tori. Can you her me now?

Jeremy, go ahead.

I had a question regarding your expectations for peak gross margins. You mentioned that you expect something around 40% by year end. Can you talk about your long-term target and also your operating margins, please?

Our product portfolio is going to keep strengthening, and therefore long-term we want to go well over the 40% margin. This will be a combination of moving into more complex[?] chips in CMG and EPA. We'll be making the movement toward final geometry[?] in the memory and also broadening the product portfolio. And in the disputed[?] standard, which by nature is a lower margin, keeping or reaching, for example, with the addition of higher volume content [discrete], like the iPod or vertical integrated power or high-performance analog. So all the company is moving into higher value-added products in their sector, and the mix between groups will be favorable. So we intend to continue to grow, and in a good year should be well over the 40%.

Can you talk about your operating margin targets?

Operating margin targets, we were very pleased when it was in the range of 20%. We are a little bit far, but that's where we have to go back some time, but very difficult this year. Incidentally, since you are speaking of the operating margin. [As a pure exercise, no excuse?]. The operating margin for total 2003, if we excluded impact of restructuring costs, and if we would put the exchange of the dollar at the same average value it was in 2002, our overall operating margin would have been more than four points above what is before restructuring, so it would be close to 12%, which would be much more decent than what it was. Okay, this is not to call excuse, but simply to what the impact of the currency can be in the short term, so once we cure this by rebalancing our structure, then we will re-enjoy these kinds of operating margins.

Okay. Last question regarding utilization rates. I think you mentioned it was 78% last quarter. Can you talk about where it is right now? Where you expect it to go.

[Crosstalk]

It was 78% in the third quarter, and in the fourth quarter it was 80%. Our utilization rate in the [inaudible] is still very high, about the same as in the third quarter, 87%, while our utilization of the 6-inch with [inaudible] increased to 78%. From 78% to 80% as an average, 87% flat for 8-inch, 76% to 78% on the 6-inch. And by the way, the 80% applied on a capacity which has increased competitively.

Thank you very much.

[Break in audio] Matthew Gell, with Goldman Sachs.

Hello, a question for Phillipe on the margins in the CMG division. You mentioned the strength that seemingly was across the board in just about every one of the end markets, and yet on the upside surprise for revenues and [inaudible] unit the margins were down. Could you go into a bit of detail on what exactly you're seeing, what was pulling margins down in the CMG group? And then maybe a bit of a forward-looking question. We're now seeing utilizations have decreased across the board for the IDMs or the foundries, where you're competing against a lot of the [inaudible] companies, where they're sourcing their production. What is it going to take for the pricing pressure to alleviate in this space and for you to see margins go back into the double digits in the CMG space?

If you look at one quarter after the other, and you look by groups, you may have some little ups and downs due to some specific reasons that happened one quarter. I think if you look at 2003, the history of CMG has been significant improvement of the operating margin between the first half and second half. And those variations between third and fourth quarter are a combination of things between the dollar rate and some inventory ups and downs. I would not say significant. So in the CMG space, of course the prices have not rebounded. They don't go down significantly. They are not cyclical like the memories. But we are in a better position when negotiating new contracts, and clearly here the major industry factor is that the foundries[?] are saturated, and clearly there are some crazy businesses; we did not follow on DVDs six months ago, and we have some customers coming back to us willing to re-discuss how we could quote[?]. So we see what has been the worst product lines from the margin point of view, like the DVD, less [inaudible], clearly indicating that the [indiscernible] are not going to get the great deal that they had a year ago. Also, I believe the margin of CMG will continue to improve [inaudible] in 2004. As Pasquale was saying, due to new products and a shift of the production from 0.16 micron to 0.13, which is starting right now.

Maybe a question, then, on the overall company. You said at the end of the quarter you had to increase your outsourcing. And you can get your utilization on the 8-inch sustained flat at 87%. Can you just update us, is the 87% or the 88% range the top level you feel comfortable going up to in utilization, and is there not much further leverage from increased utilization range in your 8-inch fabs[?]?

You need to keep in mind that when we are talking about utilization rate we are comparing ourselves with what we call standard line capacity, which is a kind of ideal situation, which we never reach 100 percent. In some numbers, [you can be around?], you have no[?] utilization rate at 100%. In our case, comparing ourselves with standard line capacity, we'll never reach 100%. We think that 85% is a kind of ideal situation. So 87% is already very good saturation of a plant. This situations are quite different depending on the plant, and for sure we can increase that a little bit, probably another 2 or 3 percentage points, without putting too much in trouble the service to our customer. Again, you need to keep in mind that we keep investing, and we keep increasing our own capacity. [Inaudible] and leading edge.

The final question: you mentioned ramping up Usay[?] and Singapore and the 8-inch fabs[?]. Can you just update us on the plans for ramping up the Catania 300mm facility this year?

The Catania 300mm facility. The building is ready. Now we start equipping the facilities and depending on the market condition, of course, beginning of 2005, end of this year, we start [indiscernible] with some silicon there. By the way, the building being ready and the facility being put in place, we have some margin there, if needed, to accelerate. We don't have anything planned today, but we have this capability.

So there won't be any capacity additions for 300mm until 2005?

Until 2005, our total 300mm capacity will be quite small. It's going to only be our [call to?] facility, which is, as you know, shared between Phillips[?], Motorola, and ourselves.

Thank you.

Thanks, Matt.

Your next question comes from Mark Lupassis with Prudential.

Thank you. Could you help us think about how we should think about modeling operating expenses in Q1 and for the rest of the year?

To moderate expenses for Q1, please take into account two technical factors. One is that the exchange rate, which plays negatively. And the other one is the number of days, Q4 being longer than the average, and Q1 being shorter than the average. The two of them combined at the current exchange rate may result in a -2 or -3% in the dollar amount of expenses. Our research and development is continuing to increase the effort, in order to choose[?} innovation on the sales and the SG&A area, on the [inaudible], on the sales and marketing we are expanding the coverage of the market. On the SG&A[?] we continue to push improvement in productivity. I will say all these factors altogether may support a guidance for Q1 which is in dollars a few points below the previous quarter. Of course, looking at the full year 2004, we do expect some significant improvement in terms of operating expenses [inaudible] as the revenues leverage.

So looking past Q1, should we think about a growing op-ex[?] something like half the rate of the revenue line? Is that a fair starting point for thinking about operating expenses?

No. I think that we want to push the accelerator on R&D and also on the marketing costs, so we will be lowering the percentage, but not very much. As I said, it is very critical that we push the accelerator. So this year, total cumulative expenses would be slightly below in percentage but will be significantly higher in dollars.

Thank you very much.

Your next question comes from Jean Danu, with CSSB.

Good afternoon, gentlemen, I have two questions. First one is where do you see transitional[?] rates going into Q1? I know you're expecting production to increase sequentially, Q1 and Q4. And then back on the gross margin guidance for Q1 from 36% to 35%. I wonder if you could explore in detail what are the factors behind the decline besides the Forex?

Jean, I am going to take the first one. The transition[?] rate is going to increase in Q1, in fact probably by a couple of points, and this is going to come mainly from our 18-share with a fab[?]. As I said before, we can probably increase it, and the figure we have today would be an initial[?] rate of 91%, bringing the total to 82%. The second question.

Why the gross margin would decline in Q1 compared to Q4. Well, there is one point. There are some reasons. The first one is the sales will be slightly below. Second one, the most important is the exchange rate. Q4 average exchange rate was 1.18. In Q1, the exchange rate will be in the range of 1.25, which is what have at the beginning of the year. So this is a major impact. However, on the gross margin, I would like to repeat this. I'm repeating it several times because it's a major focus for the company. We realize the gross margin is inadequate, and this is a major focus for the company. The Q1 level will be the bottom. We will increase sequentially, quarter to quarter, and our aim is to reach through the year 40%.

I was asking this question, because basically, if I calculate the impact of a Forex, taking into account a 5% increase in the euro, giving me around 50 basis points, then you told me that the utilization rate is going to improve, so for that rate is going to improve Q1 compared to Q4. So I'm still wondering how you can have a 100 basis points decline, Q4, Q1, just with a Forex.

The pricing environment is improving, but this will be over the progress of a year. There are contracts already in the book that are a lower pricing than they were in Q4, so pricing, big surplus, competitiveness, and the fact that most of the production is already done during Q4. So we've not enjoyed yet the cost improvement.

Okay. Thanks for the details.

Your next question comes from Remy Toma[?] with Chevron.

Thank you. Good afternoon. First question. You mentioned, when we met in middle of the fourth quarter that the visibility for Q1 was improving. Can you talk today a bit about the visibility you have for Q2, and can you tell us whether or not you think you could have above average seasonality in terms of Q2 over Q1 sequential growth? And my follow-up is on the specific [white line?] markets. You said you saw some signs of improvement. Can you tell us whether it's specifically coming from DSL, or is it across the board, and what type of year-on-year growth would you like to see in 2004 for your [white line?] chip sales in value terms.

Let me answer both for the overall growth for the year. As I said before, the industry growth is expected to be 20 to 25. We believe we are positioned to go faster than that. I think that in Q2 we'll continue to grow more significantly. We are confident; we don't provide the stage guidance for Q2, but anyway the present situation, the order intake, the backlog indicates it should be quite a strong sequential growth on Q1. We will specify better when we meet again for the announcement of Q1 results, but the present expectations are positive.

Okay, thank you.

The other question, if I understood, was concerned with the [white line?]. Am I right?

That's correct. Which segments specifically you're driving in the recovery, and what sort of growth would you like to see?

Our presence in [white line?] is only driven by two areas. One is DSL, which by the way is enjoying a good moment. Our last quarter was a record quarter in DSL shipments. And we don't see a significant decline in Q1 also. So this DSL business will continue. In addition, we have some new product coming, particularly in the area of wireless infrastructure, which is very new for us. You know we are investing in this segment. We decided to invest one year ago, more or less, even more. And that the very first products are coming. So this year we are planning to make the first $10-$20 million out of this business. Not very important from an overall company standpoint. But it is important, because we start having some recovery.

If I may ask final question. Can you give us a guidance for depreciation for the group as a whole in 2004?

Yes. Despite keeping the capital expenditures at level of the prior year, the depreciation increased unfortunately due to the exchange rate impact. But these [inaudible] profit and loss does not take our cash flow. And this is also a reason why in Q4 we have been able to post a very positive cash flow, maybe more appealing than the income statement results. For the year 2004, we can now foresee at the current exchange rate depreciation and amortization in a range of $1.9 billion.

Thank you.

Operator, next one?

Your next question comes from Carson Ilten, with [West LD?].

I would like to point to the Flash memory division again. I think last quarter you mentioned that you have selling prices in the quarter going up. Have you seen the same in the fourth quarter?

I said there is a stabilization. In fact, the price decline before is comparing with Q3, and this is particularly true on the low-end products, where we also see some price increases, not happening yet on the IM[?] products. I believe there is stabilization price pressure, after several quarters of more significant decline. We didn't have this decline in Q4. We had some decline, but not the at same level as before. And we expect this will signal in Q1 or maybe even better, but not yet overall price increases on Flash memories. What is true for [Inaudible] products is not yet true on the IM products.

Prices have not been that bad in the quarter. Why did profits not increase a bit more given the revenue growth that you had?

Well, I think first of all we had some price decline. The price decline was better than Q3 and Q2, but we had some price decline, number one. I think that the price [inaudible] more in Europe than the average of [inaudible] in relative terms, the dollar impacted MPG stronger than the company, and the true reason is that the ramp up of the 0.13 will start positively impacting the P&L from the end of this quarter, so there is something up in a number of fabs, but the impact will be at the end of the quarter. Also, the big growth in terms of revenues [inaudible] some general marketing and sales and marketing costs of the company. MPG grew faster than the average of the company. So there are a number of reasons. However, price pressure is easing. It is better than in Q3 and Q2, and we expect this trend is now continuing.

Did you have any ramp-up costs in the memory group that were significant in the quarter?

We are ramping up the 0.13, of course. This is the cost -

Was it significant, or was it -

What I'm saying is there is a lag, so we will see the benefit of this starting at the end of Q1.

One other question: obviously, you gained some market share with Flash during the quarter. Was it in a specific end-market, or was it overall?

I think the presence in the major market, that as you know is wireless, I think is relatively stable. Wireless is, again, in the range of 55-60% of the cash product, so it's pretty wide. The demand is very strong, indeed. There is a digital[?] consumer; I would say very, very strong. We have, I think, a good demand from the mid-size customers, a good demand from distribution, so it is a broad range. Is a number of new products. I think we have very good progress in the CD[?] of Flash, for instance, also for computer peripheral products. So I would say, it's wide. Of course, wireless is still the lion's share.

Okay, great. Thank you.

Ladies and gentlemen, if you would like to ask a question, please press *, then the number 1 on your telephone keypad. Again, * then the number 1. Your next question comes from Jan von Steinberg, with Deutsche Bank.

Morning, gentlemen. Just had two housekeeping questions. Firstly, on your strong order backlog, could you tell me what proportion of your mid-point revenue guidance for Q1 does that cover?

About the same as in Q4, something like 10-15%. No more pattern as of Q3 of last year. Starting at Q3 and Q4, it was 10-15%, and in Q1 it's about the same.

Okay. The second question would be on your differentiated wireless. Could you tell us what revenues were for Q4, and what your indications would be for growth in Q1, please.

We give an indication to the entire market. We don't go breaking into a market by families[?]. The total wireless grew substantially last year, 22% on a yearly basis and 25% sequentially. And this growth was contributed to by a variety of products. The most important in volume being of course the differentiated products, but we also ship camera, we ship Flash, we ship the discrete components, we ship microcontrol, we ship a lot of things. Therefore, we don't use details to break it down by product families.

Okay. Thank you.

Your next question comes from Marissa Balda with SG Securities.

Good afternoon. Two quick questions, please. One, could you give us an idea of the proportional fixed costs in total costs? And the second related to the first one: could we have an idea of the level of revenue you would need to reach a 40% gross margin?

Well, the second question is easy to answer. In Q4 2000, our gross margin was 46% with about the same level of revenues of Q4 2003. So it's not only revenue. It's a combination of revenue, product mix, price environment, product saturation. So we intended to push the gross margin not only through volume, which is of course a contributor, but more important through the migration to final geometries, the technology [indiscernible] and also introducing new products. So, I think that again the combination of those factors in a better pricing environment should allow us to surpass the 40% threshold before the end of the year. The first question I didn't catch.

What percentage of total costs is fixed versus variable?

I would say that between 50-65% percent is fixed cost on a short-term basis.

And we're talking about cost of goods sold plus SG&A and R&D?

Yes.

And one last if I may: could you remind us what the proportion of costs denominated in euro is presently and how could it change once your restructuring is completed?

You may consider that approximately 45% of our cost of goods sold is euro-denominated, either euro or with Visa carriers [indiscernible] fluctuated with respect to the US dollar like the euro. And in your presenting[?] this [inaudible] to 65-70%.

And how could it change once your restructuring is completed?

What we really expect from our restructuring is that the level of expenses and costs in low-cost areas who can immediately make the breakthrough[?] more than the current impact.

Okay, thanks.

We have time for two more questions.

Okay, your next question comes from Mark Edelstone with Morgan Stanley.

Good afternoon, Pasquale. We've talked a lot about pricing so far, and we've talked a lot about the currency as well. What I was wondering is how much of an impact is currency playing on some of your longer term pricing discussions that are taking place with customers made during the fourth quarter?

None, because basically it's the dollar that drives all kinds of contracts. Even if you're doing euro more than any other currency, in this industry the dollar is what drives the end price of the customers.

I understand, but are you looking to be less aggressive on price negotiations as a result of that?

Well, the price negotiations are driven by the market, and not from our [inaudible]. We believe, however, that the market environment, being in a much better balance between demand and supply, will allow to have a reasonable price environment. Our industry has been always negative inflation industry. The price keeps declining. he problem is when the decline much faster than the learning curve. If they decline along the learning curve, that is fine. We expect in a year like 2004, with a market growing significantly and the capacity coming into quite a good balance in general, we should have a normal pricing environment. That's what we expect.

Thank you for that. Just this one follow-on. You talked a little bit about some of the computer peripheral businesses, but can you specifically talk about the hard-disk drive market and what type of demand trends you saw in Q4, and whether or not there's been an impact as you look into Q1, given what appears to be an inventory correction going on with some of the hard disk drive manufacturers themselves?

First of all, concerning pricing, because you were discussing pricing before, I don't perceive any change in the aggressiveness of the environment. I don't remember any quarter in my life there was not some aggressive nature in this segment. So no change from this point of view. In terms of volume, Q4 was a good quarter for our storage division, and if you go on to Q1, we don't see, in all our computer peripherals, a seasonal effect; or in other words, seasonal is there, but we will be able to compensate with the introduction of some new products, particularly in the printer business. We are introducing a digital engine in the multi-function printer, which is the model which is getting the wireless draw, the best draw, at this moment. So overall, in Q1, we perceive a roughly stable situation in the situation both pricing, with the usual aggressiveness, and volumes.

Thank you, and best wishes for this year, gentlemen.

Thank you, Mark. Last question, operator.

Yes, sir. Your final question comes from Jonathan Brockschild[?] with Casenove.

Good afternoon, gentlemen. Two of the factors you listed in the reasons for the slightly weaker gross margin in Q4 were ongoing pricing pressure and then the need to outsource some manufacturing. Could you tell us what products you had to outsource, and could you go through the divisions and tell us where the most serious pricing pressure is? And then just as a follow-up, could you tell us how much restructuring charges went through the cost of goods line and affected the gross margin?

Okay, I will start to answer. My colleague will continue. The first thing is that the pricing trend was quite similar in the various groups. There was some 2-4% price decline in the various groups. The group mix changes unfavorably, because in a nice way the memory product group always carries a lower margin and the company average grew much faster. So, there was not a particular choosing[?] situation [one over another?]. As far as the short-term orders surge that we had to respond mostly were consumer, and I will have Philippe commenting, and then for the restructuring cost I will have Carlo commenting.

In consumer, we got increase to 4, and increase with physically nothing from our customer. So if you look at what we give to foundries, first of all it's [indecipherable], and second it was those markets where we had to respond immediately, so we enjoyed this flexibility[?].

The restructuring charge, and I mean write off and federal[?], do not affect the cost of the [indiscernible] posted in the end-line of restructuring. Of course, their restructuring initiative affects the operation of the fabs, and what we refer to is that the fabs that are under restructuring initiatives did not run on the Q4 at the level of efficiency that they used to do [inaudible].

Thanks. Possibly just one final follow-up. I think Pasquale mentioned in one of the answers that he sees some areas where pricing is falling in Q1 versus Q4. Could you possibly tell us what those areas are?

There are long-term contacts where the price decline is written in already, and this is true in the differentiated products as well as in the standard products in the Flash. So when you take a long-term contract, this is the case, so it's not any specific product area, but it's true for this driver wireless consumer Flash. In general, there is some built-in price decline. Philippe was saying at a certain point that the pricing stability level comes when you negotiate a new contract in a situation where the environment is much more stable in terms of capacity versus supply, so we will enjoy this price stability more inside into the year.

And do you expect that to continue into Q2, or will it be second half that the pricing stabilizes?

I think the pricing environment will become much better during... negotiation[?] now, and then there'll be an effect on Q2, Q3, and Q4.

You could basically make the announcement [inaudible] they are 100% separated. This is a very important message to our customers. Foundry is important, like SMC, and I assume also you have seen, are now saying openly that in Q1 they have 100% separation. This is a big signal for our customer.

Okay. Thank you very much.

I think, Amy, that'll be the last question. Mr. Pistorio will make some concluding comments.

Again, thank you very much, ladies and gentlemen, for joining us today. I would like to sum up that our fourth quarter was very positive in terms of revenue growth, and I outline this, because it's a good way to enter a year of strong growth in the industry and demonstrate our ability to follow this growth and surpass this growth, as we expected.

It was disappointing in gross margin. We have debated largely the causes, but an important thing I'd like to leave as a message is that this is the top priority of the company, reversing the gross margin, correct the situation that causes it, including adverse currency impact. We have in place a series of measures from the restructuring and manufacturing, from the launching of finite[?] geometry technologies, ramping up the new plants, and also, more important than everything, the introduction of new products. So we think that when the year will unfold, we will see the effect so that we can have a much better outlook for our growss margin in the coming quarters. Thank you very much for being with us this afternoon.

Thank you for participating in today's STMicroelectronic's Fourth Quarter and Year End Conference Call. You may now disconnect.