意法半導體 (STM) 2008 Q4 法說會逐字稿

Good morning and good afternoon. This is the Chorus Call Conference operator. Welcome and thank you for joining the STMicroelectronics fourth quarter and full year 2008 conference call. (Operator Instructions).

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

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

This call is being broadcast live over the web and can be accessed through ST's website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST's results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor statements contained in the press release that was issued with the results last night and also in ST's most recent regulatory filings for a full description of these risk factors.

As a reminder, please limit yourself to one question and a brief follow up question and as now I'd like to turn the call over to Carlo Bozotti, ST's President and CEO. Carlo, please.

Well, good afternoon and good morning to everybody. Thank you for joining us on today's conference call. The Company's fourth quarter results were within in our revised guidance but were substantially lower than our original outlook. As many companies have stated the demand environment weakened dramatically as the quarter progressed. The high level of uncertainty in the global economy and the related effect on the key application markets and customers we saw led to substantial order push-outs, cancellations and lower demand in total for our products.

Unfortunately, we expect this weak environment to continue for some time. From a revenue perspective, all application segments were negatively affected with automotive wireless and computer peripherals showing a significant drop in demand on a sequential basis. Consumer and [portion of] industrial also decreased. In the fourth quarter, MEMS, Smartcard, and microcontrollers registered solid level of growth on a year-on-year basis. Gross margin came in just below the midpoint of our revised outlook and this was mostly due to our final product mix being below our expectations, in particular due to wireless.

We benefited from currency on a sequential basis but the low utilization of our fabs had a negative impact on gross margin estimated at about 200 basis points. You may recall that at the end of Q3 we anticipated taking down an entire (inaudible) given the changing demand environment but in the end the downturn movement was much greater than we, our customers, and the market had anticipated. I will come back to near term margin trends when addressing the 2009 first quarter.

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

Now, let me turn to a review of 2008. One year ago at this time we shared with you that our efforts in 2008 would be focused around four primary blocks. Sales expansion, product portfolio management, an asset-lighter strategy, and further reduction in manufacturing. We made significant progress during 2008. Let me review several key points.

First, with respect to sales expansion. We indicated that we expected to grow the top line in 2008 and gain market share. We achieved that goal. Organically, we grew our full year 2008 revenues by 4.8% excluding FMG and NXP Wireless in a market that in our estimation declined overall in 2008. In fact, our core business, which now includes NXP Wireless, grew by 10% in 2008. Consequently, we estimate that we are approaching a record level of market share.

Second, with respect to product portfolio management we indicated that we were working diligently on our product portfolio positioning. In 2008, we focused on our resources on two major blocks, power applications and multimedia convergence, and we made significant progress, specifically within the wireless segment. Importantly, we concluded the consolidation of our flash memory business and made giant steps in the consolidation of the fragmented wireless semiconductor market. This is an exciting time for ST as we are rapidly moving towards the creation of a true world player in semiconductors and platforms from our varied applications. First, with the ST-NXP wireless JV and in the immediate future with the closing of the JV with Ericsson Mobile Platforms.

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

In 2008, capital expenditure were $981m or 10% of net sales which represents a significant reduction in investment compared to the 14.4% average of net sales in 2005 to 2007 timeframe. In 2009, we expect to continue this trend with a CapEx budget of $500m or a 50% reduction from the 2008 level.

Fourth, we have continued to work hard on improving our cost structure. Many of our actions were started before the recent economic slowdown and we will start to see the benefits in 2009. We are making steady progress on our plan to restructure our manufacturing facilities in the US and Morocco. Additionally, in November, we announced an accelerated plan to capture synergies related to the ST-NXP Wireless merger, which included the reduction of 500 jobs in 2009. In the fourth quarter of 2008, we have reduced our headcount by 1200 people with the majority of the reduced jobs located in high cost and Eurozone areas.

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

Our strong balance sheet includes about $2.2b of cash and equivalents, even after paying cash dividends totaling $240m and repurchasing shares in the amount of [$315m]. Importantly, we have a clear plan in place to move again to a net positive cash balance from today's net debt balance.

So, those achievements are the foundation on which we intend to continue to build our immediate future.

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

Second, to help us manage through the current severe industry downturn we are targeting to reduce our costs by over $700m in 2009 in respect to the Company's fourth quarter 2008 cost base. As I mentioned, the bulk of this number is comprised of several major cost initiatives began before the current downturn. The second portion of the cost savings are new comprehensive programs focused on resizing our manufacturing operations and streamlining our R&D effort.

In total, the cost program affects approximately 4,500 jobs on a net basis. Of the total about 3,500 relate to our manufacturing areas as we work to realign our manufacturing operations, including resizing six-inch capacity to some extent eight-inch operations and maximizing utilization of our [company] meter by bringing in-house some of the work previously handled by (inaudible). Out of the total reduction in jobs about 1,000 across R&D and SG&A will be affected.

Our third priority for 2009 is to maintain a strong and flexible capital structure. A key ingredient is careful management of our capital investment. We plan to continue to advance our asset-lighter strategy and in view of the downturn we have set an initial CapEx budget of $500m for 2009, this would represent a 50% reduction compared to 2008.

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

Again, I see two major blocks for ST as our domains for excellence -- power applications on industrials and power conversion and multimedia convergence. Our goal is to maintain or increase our leadership position.

To help achieve this goal, I would like to mention a new initiative which we have recently launched aimed at promoting our vast offering of devices such as sensors, microcontrollers, (inaudible) and power activated devices for the industrial and multisegment sectors. As you know, for some time we have been accelerating our investment in new product design in the field of smart power and (inaudible) and that investment is paying off.

We have also invested in microcontrollers, particularly in the 32-bit MCUs, where our effort is very strong and broad ranging. We have solid (inaudible) in our team of [innovative] designers and a synergistic approach to innovation between product design and application that gives us confidence in our ability to accelerate growth in that way.

And since I am discussing this product group, I would say a few words on MEMS, which is a very promising product family. Here we are rapidly growing in sales ranking and are bringing to market innovative solutions such as accelerometers and gyroscopes for game controllers and other applications. We have also been very active in the area of multimedia convergence. I have briefly discussed the advances we have made in our wireless business, so let me reconfirm our technological leadership and leading position in consumer set-top boxes. In 2008, we benefited from our early transition to H.264 technologies and we have now really strong market share position.

Now, let's discuss the first quarter of 2009. As you have heard from other companies in the semiconductor industry as well as in a number of other industries, the lack of visibility is unprecedented so it is very hard to assess to what level end market demand is resetting to. This becomes a chain reaction as we then need to take measurable actions to align our resources with the near term market demand. We are not giving formal guidance for this quarter. We are sharing instead our internal planning assumptions.

First, from a revenue perspective we are assuming a much larger impact from the global economic downturn in Q1 2009 than we saw in the 2008 fourth quarter. Specifically, for internal purposes we are planning our operations based on revenues in the range of $1.5b to $1.85b during the first quarter. In order to significantly reduce the level of our inventory, beginning with the month of December 2008 and then moving into this quarter and the next quarter, we have begun to strongly reduce the loading of our fabs to levels of about 50%. We estimate about 10 points of gross margin deterioration due to fab under-loading. Consequently, our internal planning for Q1 '09 is estimated to be in the mid to high 20s as a percentage of sales of [gross] margin.

In summary, I would like to share a few closing points. This is a very difficult time for individual companies and markets as the global economy appears to be resetting itself in a very compressed period of time. Nonetheless, environments such as these are also present opportunities. Looking at the ST, we have a number of strengths. First, we have a solid balance sheet, a good credit rating, and flexible funding alternatives. And post the closing of the JV with EMP our net cash position is expected to turn positive.

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

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

I believe that we at ST have made the right strategic choices and are correctly executing on them. I also believe that as we started our restructuring process ahead of the severe economic downturn we have a good momentum in place and we are well positioned in 2009. We are determined to take all of the applicative initiatives required to face the new challenges we are confronted with. And, therefore, I am confident we are correctly positioned to be among the companies that will emerge from the downturn in a better competitive position than before.

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

Excuse me, this is the Chorus Call operator. We will now begin the question and answer session. (Operator Instructions).

The first question comes from Mr. Tristan Gerra, Robert Baird. Please go ahead, sir.

Hi, could you give us a breakdown of the $700m savings that you expect by quarter in terms of ramp by quarter. Is it going to be more first half end loaded or second half? And also the expectation between COGS and SG&A?

Carlo Ferro will take the question.

Yes. Hi, Tristan. Starting from the second part of your question about the manufacturing cost of goods sold and OpEx breakdown of the savings, I could revert on the presentation which I delivered on the web. Now that we shared this morning at the conference here in Paris where on page 23 you may find a breakdown of the $700m by the measure initiative and quickly ramp up on this number.

$120m are associated with the manufacturing initiative and those relate fully to cost of goods sold. $200m are associated with the ST-NXP wireless cost synergies and these are mostly (inaudible) in OpEx and within OpEx the R&D portion is larger than the SG&A portion. Then there is $140m of rationalization of SG&A and R&D, again operating expenses. Then we had $120m for the rationalization of numbers of sites, extra savings on procurement and level cost (inaudible). These I would split about 50/50 in the two categories, eventually a little bit higher in the cost of goods sold given the [big] amount of the savings procurement.

And finally, we are incorporating the reduction of the R&D costs in the [higher grants] in 2009 and this accounting what is against R&D, in reality accounting wise you will see this number in the line other income and expenses.

In respect to the allocation to the distribution by quarter. Also what we shared this morning is that the $700m is the effect of the difference of cost structure in 2009 in respect to the annualized Q4 2008 and does not fully reflect the overall impact what this initiative will be fully completed during the year. This is net of an effect of ramp up. And what also this morning we shared is that at the end we may consider some 15% reduction due to this ramp up in the year so the overall effect is more in the range of $800m. I would say the overall effect will occur substantially in the last quarter of the year and then on this basis you can model the ramp up from Q1 to the next quarter.

In Q1, we start to have some quite significant impact, especially on the operating expenses portion. We do expect operating expenses in Q1 to go substantially down in respect of third quarter.

Okay, thanks, that helps. Also with regard to EMP what is your EPS expectation once the integration closes, is that going to be, do you think it's going to be EPS neutral after that? Or do you expect some dilution near term?

I would say that overall, you know that the strategic perspective is such that we focus more in this case on the midterm and we are sure that this will be a very accretive integration.

On the very short term what we may expect is that without an anticipated number of this stage, is a sort of neutral effect in the first quarter after the integration when considering the contribution to the gross margin, which is very accretive, higher expenses for the R&D efforts of the EMP platform. Some improvement in [retread] given that at the end of closing we will collect some substantial amount of money and the difference in the minority interest when the difference is sharing the current result of the wireless operation.

One additional comment, it's Carlo Bozotti. In the $700m package, that we have formalized for 2009, does not include any of the cost synergies that we will exploit when merging with EMP.

Great, thank you.

Thanks, Tristan. Next question please.

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

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

Well, I think that, of course, we want to go back at the level of turn that is the normality. And which, of course, is above 4. And the target is between 4.5 and 5 but we need to go as soon as possible above 4. We started having the loading in Q4 was about 70% in this [tranche] and it was very much in our strong decrease in the second part of the quarter, particularly in December. 50% is of course the number that we have in the system today in Q1 and I expect that we will have to run at this level of loading also given the poor situation of the second quarter.

I think that it's very, very difficult from the turns of [trend] so this is the concern, this is the major question that we have, I think for us it's crucial to see what is going to happen after the conclusion of all the -- premature closing of the company closing -- that, particularly, in these days in China, in Asia, related to the Chinese New Year. So, for us it's absolutely crucial to understand the trend in the month of March this will be a good indicator.

So, I think that -- personally I believe that severe massive disruption is happening with our customers, but I think it will take more time to understand the trend and at this point we will drive down the loading as long as needed to determine whenever inventory is in terms of soft turn above 4. And with the target, of course, that is above 4.5 and reality is cash. So we will minimize our cash flows and we'll move on as long as needed. And, of course, we will try to track and monitor globally the market evolution and, as I said, for us the month of March is absolutely crucial to understand the trends.

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

In Q1 2009 is impossible, absolutely impossible, and I think it would take a longer time. Of course, we can do -- perhaps a bit more aggression is indicated if needed. But we cannot go to zero and I think here is, as you know, the world is always a compromise between customer service and new product introduction and the consumption of cash. So, we -- and also in Europe some labor constraint, apparently, I think it's clear. And we have, with a clear understanding today there is a top turn of 4 is not possible by the end of Q1.

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

I think it will go significantly lower than that and for sure here there are two [breaks] in the present frame that the breakeven will be much material to your point of view. And I would say it's $200m, 2.3 range. And then, as I said before, the $700m does not include the package, the correction package, does not include the addition of the EMP and the cost synergies that we want to exploit when merging with NXP.

So, the effort is massive. We had a [meeting] in third quarter of last year as reported we were at a level of $2.7b, as you know, pro forma including the additional amount of NXP and of course, including EMP is above that level. And we have reorganized, recharging the Company, to enjoy a good level of profitability at a level that is much lower than the peak we had in Q3.

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

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

Thanks so much, Carlos, thank you.

Thanks Simon, next question please?

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

(technical difficult)

Glen, you're breaking up on us.

(technical difficult). Can you hear me?

Yes, you're really -- you're breaking up on us.

(technical difficulty).

Okay, Operator, can we have -- put him back in the queue and then we'll take the next question?

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

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

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

I think it is an opportunity that we have. I would like to mention that last year it was a very good year in general in terms of market share. In fact, I have seen the results through the month of November. The results are coming from WSTS. It's through November because December is not yet available, official, but we are at the end of November at our record high in terms of market share. It's about 6.7, 6.8%.

And this is on the market that we serve on the fabs. It does not include memories and (inaudible), for instance. And I believe that one of the priorities oforf 2009 is to move on with this trend on market share growth. The fact that some of our customers will give us more business because they have some concern about potentially weaker suppliers, weaker financially, I think is normal, and of course, I believe it is our duty to do everything that we can to help the customers, so this is something that of course is a factor -- is affecting the business.

Thank you.

Do you have a follow-up question, Francois?

Yes, a small question for Carlo Ferro regarding Numonyx. Could you please share with us what was the net debt or net cash position of Numonyx?

Yes, Numonyx closed -- those are, I would say, still unofficial numbers given the different calendar of Numonyx closing, being a [current] company or (inaudible) the number -- the financial number is very defined, obviously, at this stage. Numonyx closed fiscal year 2008 with a level of [drop] cash which is in the range of $500m. It's very similar to the one that the company started with at the (inaudible) session in late April this year.

Then the Numonyx debt is comprised by $450m of a term loan, plus a note -- a long-term note to Intel into ST so the overall is again that if you include the debt to the current net position of Numonyx is $50m net cash. If you include the debt to the balance on the long-term note, this is some a few hundred million of dollar of net debt. And so this is the [outlook].

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

Let me take -- sorry, let me take the opportunity of this question to address another point, since we received this morning a lot of questions about possible exposure of ST towards Numonyx in really the best/worst case, and I believe that the [German] case is a [comparatively funny situation] but first of all are not necessarily applicable to Numonyx, and second, do not exist.

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

I want to make it clear since I got several questions during the day in this respect in the case that some of you may have in mind which is occurring somewhere else. It would not occur even in the very, very worst possible case it would not occur for ST in respect of Numonyx.

Thank you, Francois, and we'll move on to the next question.

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

Thank you, Glen .

Can you hear me now?

Yes, very well.

Okay, just a follow-on from a question that happened earlier. Can I just clarify that if utilization rates stay at 50% for the second quarter, do you think in that environment, gross margins can go up, given all your cost cutting?

Carlo?

No, frankly, we, Glen -- we provide such a broad sharing of internal planning, we're not able to give guidance in respect to Q1 given lack of visibility, that frankly I see somehow premature to anticipate about the gross margin in Q2. Of course, if saturation remains at this level, also Q2 will be heavily impacted as Q1 is by the cost loading the effect.

But I expect that the [aspirational] cost will be very significant also in the second quarter. It's Carlo Bozotti speaking. This of course is affecting -- the loading is very low. I already described the measuring (inaudible) but we have to see. I start with the $700m, also is to decide the volume. We are at the level that in Q1 that it is much, much lower than what we had in Q3. I would say that at this point it's less than 50% than what we had in Q3 in terms of manufacturing volume, and I'm not -- of course, we cannot remodel and resize the manufacturing machine at this level, because we expect to grow revenues of course.

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

And then --

Do you have a follow-up question?

Yes, that actually leads into my follow-up, which is so now we have CapEx that's down 50% for 2009, if you now think longer-term strategically, obviously you're already on (technical difficulty), but the impact of this downturn leads you to want to continue to accelerate the move towards a more asset-light strategy? Does it maybe make you rethink your use of capital in the years to come?

You know what, unfortunately your --

Yes, Glen, could you tighten up that question, because you started to break up again?

Yes, just as the -- you've got CapEx down 50% this year. Any thoughts about using this down cycle as a way to change or accelerate your view towards asset light, maybe move more towards asset light, or even faster?

Yes, of course. This decrease is a very drastic decrease, and there are -- I have to comment. We want, of course, to move on with this trend and it is a very, I think -- if I go back, we move from 20 to 15 to 10 and this will even with the law of averages that we have right now, will be significantly below 10% in the course of this year. We want to move on, so that of course the trend is to reduce in terms of CapEx to sales ratio.

There are areas, however, like testing, for instance, where it is obvious that we need to master our work and our know-how and our testers, there are areas where we are also very competitive. For instance, if you take the bulk of our back-end activity, it's enormously better than anything we can buy around, so the return on investment is very fast.

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

Thank you.

Thanks, Glen. Next question please?

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

Yes, thank you. Good afternoon. I just had a quick question on the balance sheet. When you report your gross cash and equivalents you include the long-term marketable securities and the restricted cash. Could you just give us a feel for how liquid those assets are in practice, given you have been impairing some of those marketable securities over the past 12 months or so?

Yes, on the marketable securities, of course, what we report as the marketable securities are floating rate notes or so are items that are liquid, but then what you may -- I believe you refer to are those portion of securities that are subject to the ongoing litigation with a financial institution, so which is under arbitration.

If you allow me, I do not comment about that, given the specific case, other than mentioning that at the end, what currently we carry in the book is really substantially below what is the [neutral] amount, and this is due to the fact that obviously we impair quarter after quarter, but we do not recognize any contingent parts that are not possible of recovering until this is finally settled.

And then the other reference, I believe you are making is to the $150m restricted cash, which is a deposit at the Development Bank of Singapore, collateral to a loan from the bank to the former Hynix ST, now Hynix Numonyx joint venture in China, was the form under which at the time we have financially supported the Hynix ST JV. This has a eight year maturity from when we started, and was in, I believe, 2003 or 2004. So it will mature in 2011, and here the exposure depends. It's very, very solid paper, first of all. It is [Hynix] and then it's collateralized by a lien on the assets of the joint venture, the manufacturing operation in China, and also the structure of this joint venture is such that at the end the partners have to take the production.

But I recognize your point, Jonathan, when they're reporting $2.2b at the end so for reasons of simplicity we do not make a specific reference to all these specific ingredients, as there are $250m of restricted cash that may have a different timeline.

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

We have not taken any decision at this point. I think -- I believe it is premature, and we will come back to this before the general assembly.

Great. Thank you very much.

Thanks Jonathan. Next question please?

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

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

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

Accelerating the 3G digital base band at our number one customer.

Okay, yes.

Yes, maybe I can take this one. This is Alain Dutheil. Of course, as you know, we have completed the alignment of ST and NXP platform, as you're mentioning. This has led us to decrease the total headcount and this is mainly in Europe by 500 people. However, the JV with Ericsson is not yet started, so we hope to start it during Q1.

And of course, we are -- the two teams are actively working at looking at the different platforms, but for the time being we have not come to any conclusion, but for sure there would be some synergies to be found, and then we -- when the company is created, is up and running, we can give you more detail of the decisions which are collectively taken between ST-NXP and EMP.

Now, about our number one customer, yes, we are actively working there on a wireless, let's say multimedia platform. We are actively working, and we are absolutely in line with our original plan to do that. In fact, I reviewed the plan a few days ago, and we are a few days late compared to a program of two years. We started already two years ago, so we have (inaudible).

Did you have a follow-up question, John?

(technical difficulty).

Hey, John, you're cutting out on us.

Okay. (technical difficult).

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

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

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

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

No, that was before the -- before the --

Joining forces with EMP, and of course you should consider it the other way around, I think.

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

Yes, okay, okay, sorry. Yes, I think of course, when the company is up and running we do our best to, let's say, gain market share, compared to the competition. We'd be one company up and running, and of course, we'll have to fight against all our competitors.

Okay, thank you, and as a follow-up, on the other income line, you talked last time about the $200m R&D contract with the French government. Could you give us an update when it's likely it will be signed?

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

Thanks Gunnar. We're going to need to take our next question, please?

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

Good afternoon, good morning everybody, and thank you for taking my question. Two questions, one short-term and one long-term. The short-term is on Q1 internal target. If you could quantify first what the impact in terms of gross margin for the lower fab loading?

And second, I estimate -- obviously, it depends on what would be the trend of the U.S. dollar but if you consider current levels, there should be, in any case, 2 or 3 percentage points of benefit in terms of currency impact. And third, also a short-term question, what is your best estimate for OpEx in Q1?

Yes, Carlo Ferro will take --

Yes, Martino, the impact of the underutilization of the fab in Q1 is estimated in the range of 10 points on the gross margin. In respect to the currency impact, the average rate for Q4 was 1.40. The one for Q1 is in the range of 1.36, 1.37, so on this basis my math is less aggressive than yours. I would say it is about 1 point, just above 1 point of positive contribution.

Yes, the start was January, and when we started January the exchange rate was at 1.40, 1.41.

Yes.

When -- then moving into the second part of your question, on the operating expenses, this is really frankly a very good progression from Q4 into Q1, and we may expect it, in absolute dollar amount under the current currency assumption, expenses to go down by a low double digit percentage. So it could be 10, 11 -- between 10 to 11, 12% of quarter-to-quarter reduction.

In this respect, let me alert that there are two ingredients, one which is structural and came from the first tranche of the $700m, and another one which is more temporary for Q1 given effect of currency, of number of calendar days in the first quarter that in this Q1 also plays on how February, but I would say the first portion is more important than the second in the OpEx progression from Q4 into Q1.

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

Well, of course there are always two blocks of products, and there are products where the price pressure would be more intensive, and there are products where they are more unique and proprietary, and we expect on these products more a standard track. Indeed, on the commodity portion there will be more price pressure.

I think if on the other hand everybody's cutting back capacity, I think we cannot survive with -- the drop, the swing in the demand has been very significant, and I have to say that it started with Automotive. Automotive was the first. In the course of the third quarter, Automotive already declined compared to the second quarter, then in Q4 it was very much Wireless and computer peripheral kind of products.

But now it's generalized, so I believe that the drop of the demand is very much across the board, both from the applications point of view and from the geographies point of view. So one way to respond to this, of course, is to systematically cut manufacturing capacity, and I think everybody is working on these projects.

Thanks, Martino, and we'll move to the next question.

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

Good afternoon, gentlemen. Thanks for taking my questions. It's very kind of you. I just wanted to just go back to the question about the second quarter. At this point I know the visibility is incredibly low, and what I'm just trying to understand is obviously you're cutting your CapEx, and you've guided depreciation this morning. I'm just wondering, do you intend to generate cash, actually, on a free cash flow basis for '09 given your working capital reduction expected for the first half at least? That's my first question.

And the second -- follow-up to that is, do you expect to make a profit given your cost reduction, and I suspect some of that will be passed on to your customers on a cost of sales basis in 2010?

So Didier, I think the first part of your question, you have noted that earlier already on a prior question about the gross margin for Q2 we were somehow embarrassed to move forward on time on guiding on expectations. So you can imagine this is even more difficult in that respect to give a projection of the full year. So frankly, if you don't mind, it's very, very premature at this stage, given the lack of visibility, to share a projection on the full year.

Normally, in normal times, by the way, we do not provide guidance and projections on the full year. In this lack of visibility it would be really, frankly, not beneficial to anybody to do so.

Yes, for the second part of the question, the answer is of course, yes. We are resizing. We must resize. We must resize the manufacturing machine. We must resize in all the overall structure. I have already mentioned the fact that in addition to this $700m package there will be another wave of cost synergies to be exploited between ST-NXP and EMP. So yes, we must go there, and I want to be clear. Of course, we do not want to kill the company cutting all the R&D programs, etc.

This is obvious, but I think that we want to rapidly understand the trend of the demand, because based on the assumption that we have taken, the $700m package plus the cost synergies that we will have between ST-NXP and EMP are adequate but if it comes out during the course of the next few months that we do not see any sign of improvement in the demand, this is not what we expect, so if there will be no sign of improvement, we will take more measures. So time is important, I think we should not get into a panic mode, but time is important and absolutely we want to be profitable in 2010.

The reason why I'm asking about '10 is it looks obviously with the amount of capacity at hand, at foundries, obviously at ST, at your competitors, we all think that obviously demand will recover at some point in 2009 but what I'm really worried about is the pricing element in 2010, similar to what we had in 2002 where units actually recovered dramatically but pricing was so bad that revenue growth was basically zero because of the overcapacity in the system. So that is the reason why I'm asking about profitability because I can see that you're taking cost out but I don't see that the gross margin will recover to a certain level enough to actually generate operating profit.

Yes, I think -- I believe that the root cause of the crisis here is really different and is impacting both commodity products and is also impacting more proprietary products, single source products, custom products, is the basic demand that has collapsed and if I compare with some of the crises that we saw in the past the pressure was absolutely intense on the commodity portion because of the overcapacity. But indeed there will be more price pressure; I believe that the price pressure will be more intense on commodity and more on track with normal on the proprietary and also with the custom products.

We have taken a lot of actions, including the wireless joint venture to change the configuration of our [product] volume, moving into higher margin products. Of course, the merge with EMP will be very aggressive in terms of gross margin from this point of view. So I think we will have to face, I think that the point that you are making is a valid point. The most important I believe is the overall demand and the overall top line, then the price pressure is important but also the speed to rationalize the manufacturing machines in the industry is important. I believe there is a major effort everywhere to rationalize and cut CapEx and reduce manufacturing capacity. We'll see.

If I can comment, really one comment is for the (inaudible) that is intriguing and really a theoretical point of the industry scenario, is don't you believe [yet] that the industry's substantially changed in 2002 and in 2002 at the end the price pressure had been driven by each of us as an IDM to load our own fabs. Today most of the capacity is silicon foundry, and I'm not sure how semiconductor companies may really want to be very aggressive on pricing in order to load the fabs of the silicon foundry in the future. And this we expect eventually, I'm not sure what happened in 2002 will exactly repeat in 2010 as well.

I think the problem is that your customers see the price that TSMC is going to charge per wafer, and I think they're going to try to negotiate pricing on that basis with you guys. Those guys who have got (fabs.

So with that debate, why don't we move on to the next question? Thank you, Didier.

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

Hi, clarification for Alain on the response to my question on STM 3G platforms. Can you confirm that's 2010 schedule or you are going to accelerate that?

And then for Carlo Ferro, are there any questions or any conditions on a timely receipt of the $700m at the close of the EMP JV? And was the equity investment decline of $200m all Numonyx or a sale of investments?

On the first part of the question I can answer, yes, the 2010 schedule is still on. I was mentioning that the program, it is a two year program, was three or four days late, so we are perfectly on time.

The question about the $700m payment from the JV into ST at the closing of the Ericsson Mobile Platform deal is depending on whether there are contingents, no it's not contingents, there are customary provision based on true up of transfer financial liabilities or possible adjustments on the level of assets, so quite customary conditions that eventually may change the amount, plus or minus or by some tens of millions of dollars, not substantially and is not a contingent at all.

Of course, [it is in] the relationship between the JV to pay $700m to ST while the $1.1b cash injection from Ericsson into the JV is fixed and firm.

Does that answer your question, John?

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

Thank you.

Thank you.

We'll go to the next question please.

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

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

Very good, yes.

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

Well, I think that there would be a very significant reduction of inventory in Q1 and Q2. I think that we do not want to give a target because of course of the lack of the visibility on the top line, but the cut is massive, we have mentioned utilization but even tougher -- even much stronger in our cuts are on other elements like the procurement of wafers from silicon foundry or some contracting activity on back-end. So is a massive cut and I do not want to give a target because of the uncertainty on the top line, but for sure will be a material drop in Q1 and in Q2.

Okay, great, that's helpful, thank you. Did you say whether or not you expected to be cash flow positive in the first quarter?

No, we didn't say.

Good try, Mark.

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

Well, I think that the longer term operating model is a company with a more focused product line, really divided into blocks. One block with a base of power product for industrial, automotive and similar applications on appliances -- home appliance, and the other products with major presence in the platforms, both for wireless -- particularly for wireless but also for digital consumer. I believe that the gross margin of this second block will be higher than the first block, however in terms of R&D intensity, the block of platform will be more intensive indeed.

Overall the expectation is that we should have on the two blocks a return on invested capital, return on net assets that is double digits. For us, frankly, is simpler to achieve this in the area of power applications and this is why also we have joined forces with a partner in the wireless to share the R&D and also to improve the base of our IP. But the goal for the two blocks is to have a return of capital employed that is above the weighted average cost of capital, so above 10%.

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

I believe it's a combination. I believe that it is still moving. We know that some of our customers have made an effort, particularly in the month of December, to review inventory. I think it's still moving in the sense, take for instance, industrial applications and what we see in Asia, I believe that there is a major destocking in this area that is happening in Asia in the first quarter. I think maybe in other areas it was somehow already reduced but overall I believe that Q1 is a quarter of very low demand but is also a quarter of significant distorting inside of application sectors.

Thank you very much.

Thank you.

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

Yes, I had a question about R&D financing from the French Government and I was mentioning that we are waiting for the EU approval and I just got the message a few minutes ago telling us that the approval has been granted to us. So now it's in the hands of the French Administration to call [us] for the final signature. But this is of course a step forward as we had already signed an MOU with the French Administration and what was deposited to the EU was exactly what we had signed with the French Administration before.

So thank you for your question has accelerated the process.

With that, Carlo, do you have any closing comments?

I think, of course, it's a very difficult time. I think that last year we went through three financial crises, the credit crunch first and then the currency crisis, at least for us, with the euro going to 1.60 and finally the strong swing on demand. We start the year having in mind three priorities and we are really focusing on these three things. The first is move on with market share, I think last year we gained market share in a big way, we want to move on with this trend. We want to decrease less than our competitors.

The second priority is [cash flow]. We are taking all possible actions, of course I believe that there will be pressure, particularly in the first half but bottom capital and fab loading so that there will be a continuous effort to maintain focus on the cash flow and we'll be aggressive in this respect, for sure.

The third one is going back to profit rapidly. We have defined this package of $700m, this does not include the ST-NXP EMP merge, so there will be additional. This package is based on certain assumptions, as I said, we believe those assumptions are conservative but in case it will be necessary because demand will stay horrible level of today, we are ready to take other steps but we want to get back to profitability very, very rapidly.

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

Thank you very much and at this time Dino will close the conference call.

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