意法半導體 (STM) 2004 Q4 法說會逐字稿

Good morning and welcome to the STMicroelectronics fourth-quarter conference call. This call is being recorded. After management's prepared remarks there will be a question-and-answer session. At this time I would like to turn the call over to Stan March of STMicroelectronics. Sir, you may begin.

Thank you for joining us. Today we have STMicroelectronics' fourth-quarter and full-year 2004 financial results conference call. Hosting the call today will be Pasquale Pistorio, our President and CEO. And joining Pasquale around the table today we have Carlo Bozotti, our new CEO designee; Alain Dutheil, the Company's new Chief Operating Officer designate; we have Carlo Ferro, the Company's Chief Financial Officer; we also joining us Philippe Geyres, who is the Executive Vice President responsible for the HPC Groups, and Aldo Romano, the Corporate Vice President responsible for Telecommunications Peripherals and Automotives Group, and also Andrea Cuomo, the Executive Vice President responsible for Strategy.

I'd like to make two administrative announcements before we begin. First, some of the statements we will make today are forward-looking and as such are covered by the risk factors identified both in today's press release and also in our most recent filings with the SEC.

Secondly, in interest of all participants on the call today, if you could please limit yourself to one question and a follow-up. If you have a subsequent question, please go back to the end of the queue and we will be able to get through everyone's questions in a timely fashion.

With that bit of housekeeping, I'd like to turn the call over to Pasquale.

Thank you, Stan, and good morning and good afternoon, ladies and gentlemen, and thank you for joining us to review Q4 results and discuss our outlook for the 2005 first quarter.

During today's call, in addition to presenting (indiscernible) performance, I would also like to bring you up-to-date on our manufacturing restructuring plan and to review several new initiatives under way.

As you read in our news release, ST's fourth-quarter revenue growth came in at the high-end of our initial guidance of flat to 5 percent growth sequentially. Given the difficult market environments, we were pleased to report revenue of $2.33 billion, representing a 4.3 percent sequential increase and year-over-year growth of 10.2 percent. Our revenue performance reflected the stronger end-market demand, driven primarily by wireless, data storage and automotive applications, all areas where ST's product leadership positions are well-known.

Wireless revenues increased 20 percent sequentially to 27 percent over total revenues and were 15 percent above the 2003 fourth quarter. For the full year, wireless sales grew 23 percent.

Automotive revenues posted an 11 percent increase sequentially, and represented 15 percent of the total ST revenues. The year-on-year growth rate was 27 percent. We believe this indicates further market share growth for the Company in this important application.

Data storage had solid double-digit growth and sales in the fourth quarter, a nice recovery from the early 2004 performance.

Revenues from strategic partners represented 43 percent over sales in the fourth quarter and 39.5 percent for the full year. Additionally, our initiative to expand the customer base continues to deliver impressive results. In 2004, ST sales outside of our traditional top 50 customers grew 31 percent from 2003 levels. Our fourth-quarter flash memory sales of $310 million were practically flat with the third quarter level.

While we are pleased with our revenue performance, we were disappointed that our sequential revenue increase did not result in a sequential improvement in our gross margin. Our gross margin came in at 36.6 percent, below our fourth-quarter objective. First, pricing pressure continued, and it was somewhat greater than we had anticipated. Second, manufacturing was negatively impacted by reduced utilization in the performance of certain fabs in December.

Due to the over-inventory situation in the marketplace, we shared our plans with you last quarter to reduce our fab loading somewhat to improve inventory turns. Excluding the impact of currency, our inventory turns level did increase to 4.7 times.

Currency exchange rates is a significant impact on the quarter-to-quarter performance of our gross margin. For ST, the strengthening of the euro resulted in an average exchange rate of $1.27 for one euro in the fourth quarter compared to $1.23 that we had before our (indiscernible) that was done at the time of the third-quarter press release. We estimate that the currency changes reduced the gross margin by approximately 120 basis points in the fourth quarter compared to third quarter.

R&D expenses increased 4.8 percent in comparison to Q3, and SG&A increased 5 percent quarter-over-quarter. In spite of the (indiscernible) mitigated by some aging, the Company was able to tightly monitor total operating expenses. As a result, both R&D and SG&A were comparable to the third-quarter levels as a percentage of net revenues, in line with our goal shared with you last quarter. Operating income was practically flat with the third quarter. We incurred a $10 million impairment restructuring charges in the fourth quarter, related to our ongoing 6 inch restructuring initiatives. Net income and earnings per share were also level compared to the third (ph) quarter, although up 25 percent from the year ago level.

Turning briefly to the balance sheet, we continued to improve our financial position over the course of the year, buying back a portion of our outstanding debt. As a result of this action, the Company has begun to realize a positive impact from interest income. Our net financial debt was just $8 million at year end. Shareholders' equity was 9.1 billion. The result is net-debt-to-equity ratio of about 0 percent.

Looking to the first quarter, we expect the environment to continue to be tough as the semiconductor market goes through this correction phase. Therefore, we think it is prudent to assume a sequential decline in both revenues and gross margin due to seasonal dynamics, coupled with similar factors present during the third quarter. First, the pricing pressure continues across many of our product families as a result of the over-inventory situation in the semiconductor industry. Second, we would expect lower utilization rates at our fabs, reflecting lower Q1 sales compared to Q4. And third, we are assuming a stronger euro with an average exchange rate for the first quarter of $1.32 compared to $1.27 in the fourth quarter. These assumptions lead to a revenue sequential decrease of 4 percent to 12 (ph) percent, and a gross margin of 34 percent plus or minus 1 percentage point. Currency accounts for approximately 140 basis points of the anticipated decrease in the gross margin in Q1 compared to Q4.

The Company is continuing to improve its competitive position through the strategic initiatives we began in 2002. These initiatives were designed to improve the Company's competitive position in light of a strengthening euro and increased worldwide competitiveness in the industry. I would like to remind you briefly that these strategic directions are aimed, as we have reported before, at three specific objectives.

A, improving our cost structure by shifting the geographical balance of the manufacturing and certain non-manufacturing activities toward non-euro zone areas. Our 6 inch manufacturing restructuring plan will be completed by mid-2006, a six month delay in our completion timeframe due to qualification requirements by our customers. Additionally, by targeting Singapore for 6 inch and 8 inch increases in capacity, the Company should receive over 50 percent of its wafers sourced from Asia by the end of 2005 versus only 19 percent in Q2 2002. B, improving our product portfolio by accelerating R&D expenditures into strategic product areas and selectively pruning (ph) the marginal families. E (ph), expanding our customer base beyond the traditional Top 50 customers, leveraging our portfolio with little incremental marketing costs. I'm pleased to report solid progress on these factors containing the negative impact of currency and other competitive factors.

In addition to those ongoing strategic efforts, ST has several near-term actions underway that we believe will improve the Company's financial position. These are, first, we plan to eliminate certain low-volume low-strategic product families whose return on net assets in the current environment does not meet internal targets, freeing up valuable engineering resources available for redeployment to accelerate high-margin product development. We have already decided to scale back the access efforts focused on CP modem (ph) products. This will result in a first-quarter charge of approximate $60 million.

Second, the Company will also accelerate cost reduction initiatives, including being more selective in dedicating capacity to new orders with priority to higher-margin products, optimizing the product and production mix in memory, consolidating certain central-function activities to control overhead, and launching an aggressive cost savings focused on manufacturing materials, including purchasing. These actions are not exhaustive and only represent those efforts already underway.

Ladies and gentlemen, in addition to reporting our recent results today, we have concentrated much of our discussions on cost reduction and efficiency (ph). But, as you have seen from our press release, the Company is coming out with an accelerated development of new, innovative high-margin products resulting from recent increases in R&D spending. In fact, we believe in the end the success of the Company will be a balance of cost-effectiveness and a highly competitive product portfolio, both of which require to properly service customer application requirements and to meet the high expectations.

At this point the ladies and gentlemen, my colleagues and I will be happy to take your questions.

Allison, if you would begin to build the queue please?

(OPERATOR INSTRUCTIONS) Uche Orji.

I have two questions. The first is regarding to delays in the transfer of products which came from the qualification requirement of your customers. Were these unanticipated when we had initial guidance about the transfer of products? Or was there anything that came up to cause the delay? That is the first question.

The second question is, can you please give us an idea about flash memory within the memory group, how much of the revenue was flash and how did your margin perform in the light of Company's duty pressures from (ph) Intel?

Alain Dutheil will comment on the 6 inch restructuring and Carlo Bozotti and/or Mario Richobello (ph) will answer about flash memories.

About our 6 inch restructuring, we mentioned that we are going to go (technical difficulty) the major reason (technical difficulty) qualification of certain of our products, mainly in the (technical difficulty) are taking longer than what we've (technical difficulty) (indiscernible) discussed not only (indiscernible) product we are transferring, but they also meet the qualification from their own customer. And this is going to take a bit longer than what we (technical difficulty).

The fab in Singapore is ready. We have already transferred a lot of equipment there. And fab is waiting for a transfer of new equipment, coming either from our Rousset plan or from Agrate. So therefore, we know that we need another run with those two fabs, another year (ph) or so. And we will start decreasing the production the second half of this year, reaches 0 product on this fabs by the end of the second quarter. Therefore, we will be able to close both our fab of Castilltto (ph), moving to production to our Agrate in plant in Italy, and our 6 inch Orsay (ph), moving the production to Singapore (ph) for some product or some technology.

By the way, just to the status of what is was happening, as you know we have closed one factory (technical difficulty) and also we have transferred more than 50 percent of the production of our Carrollton factory already (technical difficulty) and in Singapore on top of that, we have increased production because for this type of technology we were also needing additional capacity.

Cody Acree (multiple speakers)

What about flash?

Cody, if you will just standby for a minute, there's a second question that was asked by Uche.

Our flash revenues for 2004 were $310 (indiscernible) our market share position last year grew 1 full point of market share gain for memory. Today our presence in NAND is still very marginal. Price pressure is accelerating, and we expect longer acceleration of the price pressure on this year, particularly on NORD memory. (multiple speakers) we are accelerating rebalancing of the manufacturing activity (technical difficulty) Asia (technical difficulty) our memories, our fab (technical difficulty) have almost completed exit from (indiscernible) and also are starting to (technical difficulty) second line Europe (indiscernible). But this migration of course will give us the opportunity to benefit (technical difficulty) cost advantage our Singapore 18 (ph).

Do you think that flash will remain (indiscernible) profitable in Q4 or not, and do you think you will at least be profitable through 2005 (indiscernible) pricing pressure?

(indiscernible) I cannot comment (technical difficulty) for the family of (technical difficulty) but our (indiscernible) to have the overall memory group of profitable.

Thank you very much. Final question. How much of the current guidance of -4 to -12 percent sequential decline is covered by bookings for the moment? Just want to get a sense of how much turns business you need to make the midpoint of the quarter. That's the last question.

(technical difficulty) you have noticed that the range we gave was pretty wide. And the reason for that is that our (indiscernible) last year. Today our coverage (ph) is a little more than 85 percent, close to it (ph).

Thank you very much.

Compared to the midpoint.

Let's get Cody.

You've given a long list of initiatives, both existing and new initiatives that are supposed to improve gross margins and efficiencies. Can you talk about the impact below the gross margins, and maybe also go back and talk about what impact you expect near-term and long-term on the cost structure? How long is it going to take to get some of these things to work into? Maybe give us more details on the operating model.

We described two classes of initiatives (technical difficulty) the first being more aggressive (technical difficulty) family performance, the (technical difficulty) This of course (technical difficulty) financial performance. Opportunity to (technical difficulty) So of course, while sector pruning (ph) has very short-term (technical difficulty) on (indiscernible) profit (technical difficulty) gross margin.

The second class of initiatives are looking at short-term cost margins (technical difficulty) mention some (technical difficulty) in terms of manufacturing material cost reduction. Of course this is associated also with our (technical difficulty) stronger focus there is overall the cost of (indiscernible).

Second, we mentioned -- I already comment that, balancing the memory (technical difficulty) of course we were doing this without unloading the European fab (technical difficulty) full separation of this batch (ph).

Third, we will work on some repatriation (ph) our silicon foundry (technical difficulty) finally being dedicated -- dedicating manufacturing capacity to various product lines (technical difficulty) stronger effort and priorities higher-margin lines. All of this is based on (technical difficulty) acceleration of (technical difficulty) I can say it is significant (technical difficulty) able to quantify all of that (technical difficulty)

I have one clarification and then a follow-up, if I may. So do you expect, then, absolute operating expenses in the next quarter or so to decline or are we simply growing as a percentage of sales lower than revenue over the remainder of the year?

We're entering Q1 with an expectation of average rate, as you see from the press release, was 10-to-1 (ph) occurring in Q4. (indiscernible) now operating expenses. I would say that actions are ongoing in order to target to keep expenses (indiscernible) flat to Q1 over Q4 and also to straight say that this is a challenging objective. We're working to meet these -- this is a challenging objective anyway.

Very good. And then just finally, can you talk about the recent announcement from Texas Instruments that an integration of, I believe it was a radio frequency (ph) supplied by STMicro for Nokia? Obviously this is not something that happened immediately. But if Nokia is moving towards a fully-integrated platform even on a portion of their handsets, what is the expected impact to you and what's your strategy to address that long-term?

First of all, I want to congratulate the people that made this technical achievement in TI. (indiscernible) be very honest and want to devaluate the (technical difficulty) product.

Second, what I think has been largely overestimated (technical difficulty) for one simple reason, that this product is addressing the very low end of the market, and therefore is addressing a segment (ph) that today represents for ST a marginal part of our total (indiscernible). And in addition, (indiscernible) the only solution feasible. We will continue with the (indiscernible) present also in this segment of the market.

So assuming that this market represents -- just to get (ph) around 30 percent of the total market, and let's assume that this impacts a third of the total volume, we're talking about 10 percent to our total revenues on what -- on product, on (indiscernible) (technical difficulty) So overall I cannot say this is not affecting (technical difficulty) order of magnitude below what has been estimated by some (indiscernible) on the estimation.

So (indiscernible) technical point of view, my competitors think (technical difficulty) is largely (technical difficulty) I would like Philippe, who is taking responsibility of Telecom to comment on what we intend to do with this future segment (ph).

The trends followed by TI technically (technical difficulty) and to do the RF more and more in (technical difficulty) integrated (indiscernible). The trend that we also follow maybe is a big difference between TI and ST, that rather than focusing on the low-end, low-margin part of the market we have similar (technical difficulty) but addressing what is going to be the bulk of the market. And we have our own RF (technical difficulty) and we're going to address directly the (technical difficulty) at the low end (technical difficulty) the drawback of that is that we shall not be (technical difficulty) there's something in production that (technical difficulty) but clearly we are also very active rearchitecting (technical difficulty)

Next question.

Didier Scemama.

Good afternoon, gentlemen. It's Didier Scemama from ABN Amro. I would just like to come back to three points, really. First of all, maybe a question for Alain. Can you give us an idea of the saturation of your 8 inch fabs, particularly Rousset and Singapore, to have an idea of the progress of the ramp in these two fabs?

The second question is if I understand correctly to your strategy going into '05 is going to be to focus on higher gross margin products in your 8 inch fabs. And I read that putting more emphasis on the logic side as opposed to flash. I would like you to confirm, because I think you were breaking up quite a lot and I did not understand everything.

The third question would be with regards to the pruning of your portfolio. You're talking about discontinuing the ADSL modem business, which I think is a sound decision. I also read between the lines that you're going to do more of that, so I would like you to be maybe a bit more precise if you could give us an idea of which of the businesses you may choose to discontinue, if you would like to share those thoughts with us.

And the final question is with regards to your performance in wireless and in disk drive. You had a relatively robust performance. I'm just wondering if this performance is entirely driven to the performance of your own customer. Or is it because you are also gaining share within those customers or outside of Seagate and Nokia? I think that's the names we are talking about.

That is a long wave of questions. Thank you very much. I will ask the colleagues to identify themselves for the portion they want to answer and let each one answer his portion. Why don't we start with Alain?

I will start with the first question that was clearly addressed to me about the saturation (technical difficulty) fab. Our 8 inch fab (technical difficulty) saturation (technical difficulty)

Sorry, I couldn't hear.

Sorry. You don't hear me.

You're breaking up.

So I was saying that the utilization of our 8 inch fab has decreased in Q4 from 87 to 85, so a slight decrease. And if you look at the two specific fabs you were mentioning, which are Rousset and Singapore, while Rousset was fully utilized, because we reached 93 percent, Singapore was a little bit less utilized with close to 75 percent utilization rate. Both of these fabs are going to be pretty well saturated in Q1, reaching both of them about 85 percent. Rousset is going to decrease a little bit, but Singapore will increase.

Okay. Can you talk about the strategy on wafer allocation?

Carlo Bozotti here. I think I did comment already on the flash memory (technical difficulty) flash memory (technical difficulty) of the activity. And we will accelerate (technical difficulty) our action (ph) of flash memory ownership or loading (ph) in our (technical difficulty) and Agrate. Of course the (technical difficulty) manufacturing costs. At the same time (technical difficulty) Agrate 2 with higher-margin products, sometimes repatriating these products (technical difficulty) environment that is becoming more difficult, of course we will have to put more attention (indiscernible) when we dedicated manufacturing capacity to product lines, and we will try to prioritize those products with higher margin.

I think there was a question also on product prunings.

Yes.

This is not new. Now we need to be more aggressive because of (indiscernible) deterioration of certain (indiscernible) the exchange rate in the market. And this pruning exercise (indiscernible) focus on lower-volume, non-strategic families. We have announced (indiscernible) but of course this is an area where (indiscernible) of the more difficult (indiscernible) conditions have to address more aggressively.

I also have to say that these initiatives that we mentioned today are significant. And I think they are underway (indiscernible) quantify (technical difficulty) also on the bottom-line, and also on the gross margin by (technical difficulty)

(multiple speakers) the last question (multiple speakers) the sequential growth in the wireless. At this time it is very good, as you say. (indiscernible) that on both cases we will have the two effects combined in this quarter, so clearly on wireless before there is always a seasonal effect which is a part of the (indiscernible). However, we had also some new products that gave this time a significant contribution, like the BlueTooth (indiscernible) and also some growing in (indiscernible) management outside our traditional customer. So this helped in this growth this quarter.

If you go to disk drives, we had a contribution, let's say, of gaining back the share by our customers, by our traditional customers, that helped us clearly. And in addition, we have a series of new products that came on board in this period. (indiscernible) mention a couple. First of all, (technical difficulty) as you perhaps remember (indiscernible) in terms of R&D in the past quarter. Our results are coming. And the second is, for example, our fab (indiscernible) where we have margin of up to now the enterprise side of the disk drive business. There also we have new products for first time which are contributing to our growth.

And that's why we are particularly for this time we are certainly (indiscernible) share during 2005 will grow further, because we are introducing many new products, particularly the most important of which will start at the end of the second quarter (technical difficulty) is our SoC 100 percent based on our own IP (indiscernible) but also our own redirect (ph) channel, our own serial interface. This will go in production (technical difficulty) therefore, we will recover that income (ph), that momentum (technical difficulty)

That would be with the traditional customer or is that the new customer where you're ramping this SoC?

To the traditional customer (technical difficulty)

My last question is with regards to the Nomadik design when. Can you elaborate beyond the name of the consumer OEM you're talking about, and if that's significant volumes or if we're talking only about a few thousands of units?

Philippe Geyres speaking. In Nomadik we have design wins in the cellphones and we have design wins outside the cellphones. We cannot cite any names, but I can say in the cellphones we have two major manufacturers, plus another one. And in non-cellphone area we have several design wins. We're going to be, as we said, we're going to volume production the second half of this year.

And you think that could be significant in the second half?

It will start to be real volume in the second half of this year, yes. And (technical difficulty)

Thanks very much.

(technical difficulty)

Next question. And please try to limit your questions in interest of time on the call today.

William Conroy.

Good afternoon.

Bill, can you speak up a little bit?

Carlo, can you elaborate a little bit more on the pruning? And if you maybe comment in Pasquale's prepared comments, I missed dose. How much of the revenue base do you think ultimately you're looking to prune?

I have already said that we're going to look to low-volume, poor (ph) performance non-strategic families. So it's not a significant part of the volume. Very, very marginal impact. Carlo, please?

Yes, of course. I comment already on that. I think it's also important to underline the double objective that we have. Pruning the low-volume non-strategic family may have a total objective in our operational advances, but even more important I think that (indiscernible) to focus on higher priority products where we want to accelerate (technical difficulty) those products expected to yield higher margins and returns. So it is (technical difficulty) more important objectives (technical difficulty)

Thanks very much.

Janardan Menon.

A question of Carlo on a currency, actually. If you look at where the currency has moved from Q3 '04 to what you're forecasting for Q1 '05, that's about a 7 percentage point change, 1.23 to 1.32. And you are saying that that has affected gross margins by 260 basis points, 140 plus 120. I was just wondering, was there any hedging during that period at all? And if you did, what was the gross margin that you saved because of the hedging?

The answer to your question is yes to a limited extent. I would say that we started to address also for cost of goods sold to a limited extent in Q4 has somehow mitigated the exchange rate impact during the quarter, but I will say quite marginally mitigated.

Let me venture to take the opportunity of you're question to expand on the currency exposure of our cost of goods sold. First of all, this morning at the analyst presentation we took (indiscernible) as updated our model for euro to dollar exposure of the different P&L lines, and I would like to share with all the audience it is driving information on euro-denominated cost of goods sold in the range between 35 to 40 percent. It was in our prior communication 12, 18 months ago between 40 to 45 percent. So you may notice that this is somehow reduced. At least it is going in the right direction, despite the fact that we are (indiscernible) * eventually increase it.

And talking about the operating expenses, usually we have modeled between staying between 55 to 70 percent euro-denominated. Today this is more in the range of between 60 to 65. The natural hedging evolves in the right direction.

On top of the natural hedging we have started some financial hedging, which is designated hedging. And this is somehow also mitigating especially in respect to the line of research and development expense.

Again, one more -- sorry, maybe I take more time on (indiscernible) questions, but I'd like to add an additional point. I think that also during today's discussion many questions were raised on this exposure, is on our cost of the sold, please notice a significant portion of the impact is a non-cash impact. And this is due to the accounting effect of the exchange rate dynamics stepping up the value of the assets against increasing equity with no P&L benefit, while the higher amount of the assets trigger higher depreciation in our P&L. And this is an effect that in the year 2004 we have estimated to be as large as $100 million increase in depreciation. And in year 2005 this rate could be as large as $150 million.

It's an accounting impact. It's something that penalizes our gross margin because (indiscernible) we're going to depreciate in dollar on our P&L a dollar amount higher than the amount originally paid in US dollar for this equipment. Why? This is the rule and I believe our duty is to follow the accounting rule and to try also to restrain this effect.

I have two follow-ups, very small follow-ups. One is to Philippe on the integrated chips with the RF that he said will come out in 2007 on (indiscernible) 3G. Would that be with a base band or would that be with an application processor that you would be integrating it? And my last question is can you give some guidance on flash revenue trends and printer revenue trends into Q1?

We do have a program for digital FR, and the aim of this program is to address the bulk of the market, so not to limit it with (indiscernible) application processors, but to integrate the RF (indiscernible) market.

So when would you be introducing a WCNA (ph) baseband? Will that be in the 2006 or 2007 timeframe?

The product pending is not really precise today, but the 2007 timeframe.

Any comment on the flash and printer revenue in Q1?

Flash is declining as the average of the Company. Concerning printers, thanks for the question. I would like, first of all, to underline the (indiscernible) the results of the year 2004 (indiscernible) segment thanks to the (indiscernible) production of new products, both power devices, but mainly of engine (indiscernible)

If we consider the total 2005 we foresee further growth of these families. However, in Q1 there will be some seasonal effect because, as you well imagine, this business normally declining (indiscernible) total computer business, this will be roughly flat with Q1 with most data storage will now well compensate with an additional (indiscernible) in spite of the season (indiscernible) the decline in printer (indiscernible) family of product in Q1 is good.

Thank you very much.

Matt Gell.

A follow-up on currency. You mentioned that your exposure both on the gross margin and the operating margin line to euros reduced by around 5 percent in 2004. Could you give us what your expectation is for the reduction exposure to euros in 2005, and just comment on the impact an eventual ramp of Kitanya (ph) will have? Is there a chance that this the reverse a lot of the shift away from the euro area as far as your costs, whenever that does happen?

The evolution (ph) of the eruo exposure is the result of the many actions that the Company has started (technical difficulty) have been reminded by my colleagues earlier. I'll say that their continuing this action, we do expect that these natural hedges will continue to improve somehow quarter after quarter. Obviously (indiscernible) depend on the exchange rate dynamic (technical difficulty) affect some of these efforts (technical difficulty)

Let me comment on M6 (ph) because it's the module (indiscernible). Of course we will continue the ongoing completion of the modules, and we will ramp up along the line of demand. The 12 inch, by the way, is not something that is so sensitive to the cost of labor. And the leading-edge product we will start there will be very likely 90 nm to start. But mostly the volume will be in 65 nm and the prevailing product would be high-performance logic.

So we think that this will be a strong addition to our manufacturing portfolio. But in the meantime, we will continue to grow aggressively what we have in Singapore. Our joint venture with Hynix will be another component that will come much sooner. So the balance of manufacturing (indiscernible) by the coming in volume of this module. That will be gradual in the time.

A follow-up question related to the continued manufacturing switch from a 6 to 8 inch and moving out to Singapore. With the push out through mid-2006 for the entire program, can you update us on the charges you're expecting now on a quarterly basis throughout 2005?

(indiscernible) remind that when anticipating the plan we have anticipated and expected the charge in the range of 350 million. The plan is well ahead and on track (indiscernible) expected. I will say that these additional delay will not substantially change the amount. If you want (indiscernible) the model could be between 350 to 360. Out of this amount, 280 million has already incurred. And the remaining 80 million would be incurred in the coming (technical difficulty)

At a fairly equal rate over the six quarters?

I would say that that eventually it should be slightly declining quarter after quarter, but will be fair enough eventually to consider heavily on (technical difficulty)

Thank you.

Nicholas Gaudois.

Nicolas Gaudois from Deutsche Bank. First question on your hard disk drive IC product line again. The SoC will be launching in Q2 '05. Will this be -- is it being done to regain market share for customer at which you lost a lot of market share last year to essentially (indiscernible) in the industry? And I have got a follow-up question on the (indiscernible) as well, thank you.

This is a very decisive question and I prefer not to comment especially precisely which the customer (ph). The concept, however, that we're talking about in a high-volume product. We're not talking about as low quantities, but a (indiscernible) on our revenues (indiscernible) from end of second quarter.

That will do. And just on utilization (ph) rates, if you could have the indications for 6 inch as well for Q4 and the (indiscernible) for Q1. (indiscernible) like to know if there's any scenario whereby you actually have to close more (indiscernible) capacity if utilization rates don't recover meaningfully by H205.

First of all, for the number, the 6 inch wafer fab in Q4, utilization rate was about 83 percent from 88 in Q3, sorry. And we are expecting this utilization rate in Q1 to be more or less flat, about the same, about (technical difficulty).

We have not talked yet about the subcontractor. Subcontractor activity in Q4 was (technical difficulty) about 10.5 percent of our total production (technical difficulty) and of course if (indiscernible) tougher in Q2 or later we have also some room there (indiscernible) for closing more fabs (ph).

You were breaking up. You decreased outsourcing to how much in Q4?

What I say is that outsourcing -- this is a total outsourcing -- went from 8 percent to 6.5 (ph).

Thank you.

Jean D'Anjou.

Good afternoon gentleman. I have a question on (indiscernible) and that EBIT margin around 14 percent you reported. I remember that (technical difficulty) quarter you were expecting and 17 percent, 17 percent plus. I understand ForEx has been negative, but could you shed some light on why it was worse expected, besides ForEx?

Congratulations for this precise knowledge of my plan. I agree with you that I was expecting precisely 2 points or more (ph) and what we had achieved is a 14 point something (technical difficulty) I was expecting about (indiscernible) and we had some lower shipments in the (indiscernible) the very last of the quarter. But in addition to that, we suffered from all the issues that has been already mentioned (technical difficulty) Company level. So 1 point has been lost on manufacturing roughly, 1 point on total expenses. It was mainly the dollar affected (ph), not exclusively (technical difficulty) this one.

And there's nothing else to mention after the fact that overall the 17 percent was more or less the traditional (indiscernible) of TPA (ph) and now we are a couple of points over. I repeat that this (indiscernible) of 2004 has been a year of strong investments (technical difficulty) day, and also of (technical difficulty) So the result of this is that some new product, some I already mentioned, and other will come. The difference in the position of today and the past is not so much on gross profit, but mainly our R&D effort (technical difficulty)

I'm sorry, but I couldn't understand the first reasons specific to GPA (ph) you mentioned.

The first reason is the kind of one point at level of manufacturing margin, so increasing costs due to (technical difficulty). And the second point is lower the gross profit due to the dollar increases in the total expenses, mainly R&D expenses for the same reason. So 1 point plus 1 point (technical difficulty) which is the difference compared to my (technical difficulty)

Thank you.

First of all, I owe you a beer for helping me in reminding and monitoring my colleagues and the general manager of the group about their target (indiscernible). On top of that, I would only like to add that as you have noticed from the press release, not only the exchange rate, but (indiscernible) higher-than-expected price pressure and manufacturing performance that have significantly improved in respect to Q3, but not at the targeted amount, have been affecting our ability to deliver the gross margin in Q4. And all these phenomenon has played on the gross margin of course of the largest of our group as TPA is.

Thank you.

Nav Shila (ph).

Just want to check that your capital spending budget for '05 was still $1.5 billion to start with. Thank you.

I'm not sure I understood your question. But I understand you want to check our CapEx for 2005 is still 1.5 billion?

That is correct, yes.

Yes, absolutely. We mention our CapEx for 2005 when we announced our results the last quarter, and we can confirm that this is the number 1.5 billion for 2005, yes. I just want to remind you that we spent 2 billion in 2004.

Just as a quick follow-up, many of your competitors have reported recently, and many of them have increased their capital spending budgets for 2005 versus '04 while you're maintaining 33 percent reduction. Are they being too optimistic or could you be being too conservative?

Of course we have -- when we're giving a number, usually we have a lot of flexibility on this number, depending upon how to market is evolving. What is important when you're in a situation like the one we're in, to keep this flexibility.

When I talk about flexibility, I mean that we still have a lot of square meters which are available mainly in our two wafer fab 8 inch, one in Singapore and the other one in Orsay (ph). More or less in Singapore we can increase our production there by about 40 percent putting more equipment and in Orsay about the same. So we could react very quickly if needed and if the market showed that (indiscernible) there will be an increase in second half like we are expecting. For the time being we prefer to be very careful and very conservative. On top of that, as Pasquale was mentioning before, we have our 12 inch fab which is ready to start whenever we like in (indiscernible).

So we have the flexibility. We can accelerate if needed or we can be more conservative if needed also. So this is what is important. So we will see. Next quarter, we see the market turning up, we could accelerate.

Thank you very much.

Ulrich Pelzer.

Just a quick one regarding the cost savings from the 6 inch restructuring. Could you please tell me how much of cost savings have been realized already, and how much there still is to come? And I couldn't hear how much in restructuring charges is still to be taking until mid-'06. And then I have a follow-up please.

First part of your question are on cost savings and the second on restructuring charge.

Cost savings enjoyed so far are in the range of 20, 25 million per quarter, as we have achieved in Q4. And this is perfectly in line with our plan. Our original plan was expecting the plan at completion to generate a benefit of -- by $120 million on net earnings, which means 145, $150 million on the cost of goods sold. And then there is of course of the tax impact. And we confirm that at completion these savings will materialize. So we're perfectly on track on this respect, as we are on track on related restructuring charges.

These delay, as from my answer to a prior question, may slightly effect the amount. Originally we have anticipated 350 million. You may want to tune the model between 350 to 360. And out of the $360 million, 280 million have been already incurred, and 80 million has to come in the next six quarters.

Cost savings now are roughly 100 million per year and. Is that net profit or COGS?

It is at the level of net profit. So COGS at Q4 is -- sorry, this is at level of COGS. At net earnings the Q4 is a little bit lower (indiscernible)

Thank you. Just one for Carlo Bozotti. Could you give us a quick update please on what your plans are for NORD flash on 90 nm and 70 nm, and perhaps the same for NAND?

90 nm we are starting production (technical difficulty) and actually starting now our fab in Agrate.

I want also to mention that we have started in Q4 last year high-volume production when (technical difficulty) and the top priority in 2005 is a massive migration to sell those products.

The other question was on (technical difficulty)

Sorry, you're breaking up there. You're breaking up. I can hear about 50 percent of what you're saying, to be honest.

I repeat. I'm saying that -- I said that 90 nm production is starting now at our fab 2 in Agrate. I also said that a key priority for this year is the 2 bit per cell (ph). For last year we started mass production of (technical difficulty) 2 bit per cell NORD products and we want possibly migrate into the 2 bit per cell during 2005, including our Singapore (technical difficulty) As far as the 65 nm NORD, the plan is to have the first product in Q1 '06. And as far as the NAND technology is concerned, the plan is to have the first volume on 70 nm by the end of this year, for '05.

That's great. Thanks a lot.

I think we have time for one more question, operator.

Jonathan Dutton (ph).

I wonder if you could just give us some indication of where you think gross margins will be by the end of this year if exchange rates remain where they are now.

We don't give guidance for the gross margin at the end of the year. We ventured in the past. It was not very wise in a very unstable environment. But all the (indiscernible) that we have taking are going to improve the gross margin quarter after quarter from the level we anticipated in Q1. This I think is a major driver of all the Company to work in that direction. And I'm convinced that you'll see a very positive evolution during the year.

Do you think 40 percent is achievable by the end of the fourth quarter?

It would be easy for me to comment because of (indiscernible) Carlo to answer, but I think it would be on unfair. (multiple speakers) this way. There is a strong determination that in 2005 we will beat market share performance that the Company had last year, not only on a global base, but I think we can do that on practically all major segments where we participate with. And also there is a strong determination to make sure that the financial performance this year, despite the more difficult dollar and also more difficult market environment, will exceed the financial performance of 2004.

One more (technical difficulty) and I'm looking Andrea. Andrea Cuomo is signaling this fact. We live in a very uncertain exchange rate environment. So all our assumptions are based on the dollar exchange rate as it is, because in the past when we ventured to give some longer-term perspective from the point of view of the gross margin evolution, then we had the (indiscernible) sliding dollar that was upsetting our expectation. So let's confirm that whatever we think is going to happen is of the base of the present exchange rate of the dollar, but we are not sitting and waiting that things happen. We are taking action day after day to make the Company absolutely less sensitive on the euro weight in our P&L by the actions that have been largely describes today.

At this point, operator, Mr. Pistorio is going to provide some concluding comments.

I think, ladies and gentlemen, you've heard directly from my colleagues that are the people really delivering the results, all the missions (ph) that the Company have taken. We're pleased with the sales performance of the Company in Q4 and the year. We are disappointed of course with the gross margins, but I believe the only way to change the situation is to implement with a lot of determination and focus on execution (indiscernible) that have been illustrated administrative today. I believe that acting in one side (ph) on the cost structure along with those missions I illustrated, and in other side of the acceleration of our R&D initiatives and focus on our R&D initiatives in the more important product families with higher margin, I believe the Company is going to be able to continue to grow more than the market and improve the financial performance.

So in conclusion with this conference call, let me bring to you my thanks, because as you know this will be my last conference call in the sense that I'm going to retire. And the management team that is in the room is going to be led by Carlo Bozotti that is going to be the CEO just after the analyst -- the shareholders meeting. And Alain Dutheil is going to be the new CEO. And they are together with the team Philippe Geyres and Andrea Cuomo and Carlo Ferro, etc., to mention just a few that are present in the room, are going to continue in my opinion what has been a success story. So I want to thank you all for having been constantly interested in our Company, following us, and thank you for continuing to be interested in the Company in the future. Thank you and good evening.

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