意法半導體 (STM) 2009 Q1 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 first quarter 2009 results conference call. (Operator Instructions).

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

Thank you, Dino. Thank you for joining our first quarter 2009 conference call. Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer. Joining him on the call are Carlo Ferro, our Chief Financial Officer, Philippe Lambinet, Executive Vice President of Home Entertainment and Displays, 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 statement contained in the press release that was issued with the results last night and also in ST's most recent regulatory filings for a full description of these risk factors.

Additionally, STMicroelectronics will host our Annual Field Trip/Analyst Day on May 15, in New York, so please let us know if you need additional information regarding this event.

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

Thank you, Tait, and good afternoon and good morning to everybody. Thank you for joining us on today's conference call.

As you -- as we have all seen the global macro environment weakened significantly in the first quarter on top of the deterioration already witnessed in the fourth quarter of 2008. Similar to other companies, we saw this in our own business with significant year over year declines in higher than usual seasonality in all of our market segments.

While we have recently begun to see some indicators of improvement in booking activity and visibility, we believe it is still too early to determine how sustainable these signs are across all applications and geographies. For that reason we prefer to remain cautious. And so we will not give formal guidance for the second quarter.

Within this difficult environment our revenues and gross margins generally track to the plans we had at the beginning of the first quarter.

We were encouraged by the progress of our cost saving initiatives, by the significant reduction in our inventory level, by the backlog build up for the second quarter of this year, and as anticipated, by the turnaround in our net financial position as we returned to a net cash position from a net debt position.

Looking at our revenue results in greater depth, all application and market segments were affected. Automotive products and the automotive market however, showed the steepest declines on a year over year basis, reflecting the tough conditions in the automotive industry.

Distribution in the channel also saw a significant distorting in Q1 '09, and represented only 12% of our revenues compared to 19% on both a sequential and year over year basis.

At the same time there were some product families that performed well. In particular, one area that stood out was MEMS where we had good year over year growth, demonstrating the demand for this product family, and the interest in our accelerometers and gyroscopes for game controllers, smart phones, laptops and industrial applications.

Although our gross margin of 26.3% has been hit by over 8 percentage points of unused capacity charges as we managed to substantially reduce inventory and by the negative effect of volumes and price, there are two points I would like to underscore. The first is that we had a positive product mix, both sequentially and year over year. Our product mix is another positive sign of progress in strengthening our product portfolio. And secondly, I am pleased to report that the addition of EMP to our consolidated results was accretive to our gross margin.

Our first key priority during this economic downturn is managing our cash and our liquidity in order to maintain a strong and flexible capital structure. We made major progress on this front during the first quarter.

First, as anticipated, we returned to a positive net cash position following the completion of the ST-Ericsson joint venture. Also we are still waiting to collect the proceeds from the arbitration award related to the auction rate securities, and we have not yet adjusted our financial statement. The collection of the award will significantly strengthen our balance sheet, and will continue to give our customers the confidence to award us new design wins in the current environment and for the long term.

Second, a key ingredient to maintaining a strong capital structure is the careful management of our investments. In this regard first quarter CapEx was $92m as we continue to take a very strategic and modulated approach to capital expenditures. At this point we are well below our initial investment plan of $500m for 2009, which already represented a 50% reduction from 2009. So we clearly are on track for more at this stage, depending on the industry evolution in the second half of the year.

Third, our Supervisory Board has proposed to the General Assembly to maintain a cash dividend. But they are also proposing, on a temporary basis, to reduce its level. We believe this is prudent in the current environment. And at recent stock price levels this dividend of $0.12 per share still represents a relatively attractive dividend yield.

A fourth component is the management of our inventory levels. During the first quarter we took aggressive actions to reduce inventory, we sharply reduced our fab loadings to about 50%. Thanks to this we were able to lower inventory by $184m during the first quarter.

And looking ahead, to the second quarter, we will continue with our efforts to reduce inventory levels, with fab loadings levels of about 50%. Due to that, for planning purposes, we are assuming the gross margin may be in the mid 20s as a percentage of sales during the second quarter also.

Our second key priority is focused on reducing our cost through the realignment of our manufacturing operations as well as the streamlining of expenses. We are tracking to our $700m savings program, which we discussed in detail last quarter.

On the manufacturing front we closed our Ain Sebaa assembly plant in Morocco during the first quarter. And in mid-April we closed our six inch Carrollton facility in Texas.

Looking to maximize our research efforts in a cost efficient manner, we are pleased to announce that the expected additional support technology R&D is now a reality. The framework agreement related to the Nano2012 R&D program has been signed and confirmed ST as the leader and coordinator of the program and allocated around $450m to ST over the 2008 through 2012 timeframe. This quarter other income includes $70m of R&D grant.

We continue to execute our plans to lower the breakeven point of ST, including reducing headcount by 3,200 in the first quarter. As part of the announced savings plan we intend to continue to bring the Company into better alignment from a staffing perspective.

And on top of the previous ST-NXP cost synergies of $250m per year, ST-Ericsson announced a major program in the amount of $230m annualized savings, which is anticipated to be completed by the second quarter of 2010.

Wireless is our third key priority. Many of you have had the opportunity to listen to the ST-Ericsson joint venture call earlier today, so I will not repeat here. But I do want to emphasize the point that success in the wireless business requires significant scale in order to be able to leverage the important R&D investment required to be a leader.

With the merger of ST-NXP Wireless and Ericsson Mobile platforms, Ericsson and ST are leading the way. Importantly, the joint venture is working with urgency to align its cost structure for sustainable profitability while developing and protecting its technology leadership.

Turning to the second quarter we are planning our operations based upon net sales in the range of $1.73b to $1.93b. This would represent a potential sequential increase in net revenues of between 4% and 16%.

We believe our product portfolio is positioned to outperform the market in the second quarter. Some of the growth drivers for the second quarter are industrial, wireless and automotive.

This brings me to our fourth priority, product innovation that will allow us to drive market share gains. There are four blocks of products I would like to discuss today.

The first block is a series of 32-bit next generation microcontroller families, where our effort is both broad-ranging and strong. Our MCUs are focused on specific applications and markets, and they steered a number of important design wins; industrial, with the ARM Cortex core, smart card with securance use, and automotive with the PowerPC architecture for safety, ABS and power train.

The second block of products is for the new generation of specific devices for the set-top box application. We continue to introduce a variety of new products in an area of traditional leadership for ST. We are once again leading the way, as we are ramping now our new cost optimized product family based on advanced 55-nanometer low power technologies. These new products have been well received by customers, and should allow us to strengthen our positions in cable, satellite and IPTV.

The third block is combined under the common brand sense and power. This is a long term initiative, which stems from our traditional leadership in power conversion and industrial applications, where we are the world's number one player, and foresee the introduction of a wide range of new devices such as high-end analog sensors, interface circuits, motor controls or new PowerMOS IGBT, and IPAD products, realized with low dissipation innovative technologies.

Our aim is to serve a very large spectrum of customers worldwide, offering them advanced system solutions, supported by innovative online tools.

A few examples of new products include high-performance MEMS gyroscopes for use in a wide range of applications, including consumer and industrial as well as gaming and smart user interfaces for advanced pointing devices.

PowerMOS, utilizing our MDmesh V and low voltage strength technology, representing a performance breakthrough for devices that target power conversion systems where small size and low energy consumption are major goals for design engineers. Active microphones and our low noise microphone preamplifiers for notebooks, PDAs, video and cameras. And in advanced analog we have a number of recent design wins in temperature sensors and smart reset ICs.

And last but, of course, not least the fascinating sector of medical applications where we are putting some high-level R&D resources, and are working on several promising projects. These range from non-invasive image based diagnostic systems, to insulin nanopumps and other microfluidic based applications. Not to mention the enormous potential of our existing line of more traditional ICs and discrete devices in the widening healthcare market.

In order to ensure that the increased strength of our product portfolio turns into higher market share, we have recently launched 13 marketing and development initiatives with our regional sales and marketing organizations, in combination with our product groups.

In summary, we are going through a transitional period for ST as we focus on strengthening the company as we navigate the economic downturn. At the same time we are also focused on advancing our market position, clearly evidenced in the completion and formation of ST-Ericsson as well as in the higher than seasonal growth we are managing our business to for the 2009 second quarter.

We are devoting significant time to the re-engineering of our manufacturing operations and cost structure. This is evident across both ST and ST-Ericsson as we collectively target over $1b in annualized saving programs.

And finally, from what I have shared with you today, it is clear that we continue to strengthen our leadership positions in both power applications and multimedia convergence.

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

We will now begin the answer and question session. (Operator Instructions). The first question is from Mr. Nicolas Gaudois of UBS. Please go ahead, sir.

Yes, hi there. I've got two questions. Firstly maybe if Carlo Ferro could help us a little bit on how to think about operating expenses going into the second quarter and the rest of the year.

And also with [in respect] of the R&D grants, because your (inaudible) value you had a bit of a catch up this year, and when we should see a normalization for this towards around $60m next year, so if you come back to that it would be great.

Second question is maybe some -- just to gather your thoughts a little bit on ST-Ericsson. I am aware this is not sort of primary purpose of the call, but maybe to come back to the actual economic performance of the entity on a pro forma basis where your EBIT are -- was minus 7.9% last year, this is a year where you did shipments for mobile phones peaked at 1.2b units, so not a bad environment, so maybe a bit of a disappointing performance there, if you could share your thoughts?

And also what you could do beyond costs savings you've announced today and before to improve margins of your business. If we were to plug what you've said so far on last year's revenue we'd still have only a low single digit positive EBITDA margin. Thank you.

Okay, so I think Carlo will take the question on operating expenses.

Good morning, good afternoon, everybody. Thank you, Nicolas, for the questions. So your first question is on operating expenses going forward. And indeed you may have noticed that the first quarter has been, how say, a quite good quarter as operating expenses at ST are concerned.

We have a decline by over 5% in respect to the prior quarter. This is despite the addition of Ericsson Mobile's platform consolidated for two months in February and March. Without that, how say, it would have been even a double digit expense, sequential expenses of reduction.

And here we have three major drivers. The most important are the structural actions that are progressing as we have anticipated. There is a temporary one that you should be aware, and normally in our five -- four week calendar Q1 is shorter in number of days of the other quarter. And this is a technical ingredient that has favorably impacted expenses in Q1. And currency sequentially has somehow helped.

So going forward what we do expect, for Q2 we do expect that, of course, there are two technical ingredients, one is we are going to have one more month of expenses for the Ericsson, the former Ericsson Mobile platform business in our ST-Ericsson 50/50 joint venture.

The calendar will come back to the normal 91 days obviously. But we will continue the execution of the structural actions. We do not expect a major impact by currency given the current rate. So, bottom line I would anticipate some tens of million dollars of expenses in Q2 above the first quarter, coupled with a somehow evident reduction in the OpEx to sales ratio.

Then going forward, going forward and this visibility, let's go quarter by quarter. Maybe I can just add that normally third quarter is a quarter where the summer vacation gives some seasonal impact. And the continued execution of the structural actions would also help, so we may expect under the current visibility, also some improvement in the expenses from the second into the third quarter.

The second of your questions is about the R&D grants, and indeed this is a good question since the good news of the signature of the R&D grants program in France covers a period from 2008 to 2012. As such in the first quarter we have recognized a catch up for grants related to expenses incurred in the prior year, and this is about a $50m favorable impact.

So going forward you may at the end expect and anticipate the contribution of grants to our P&L to continue to be favorable in a range of $20m, $30m in the second and into third quarter, and a much substantial amount in the fourth quarter, which is normally seasonally higher.

The third of your question is about the ST-Ericsson profitability. But let's, if you don't mind, revert to the question that we wanted to take at the ST call, which is about the profitability for the wireless segment in the ST perspective on the consol of ST.

Maybe I would set the starting point in respect to what is a pro forma of these impacts for prior quarter, and then I am sure Carlo may want to conclude on the perspective going forward.

I would, if you don't mind I would start from -- and I would comment on the third quarter 2008, to take a quarter that at the end has been in advance of the substantial hit on the revenue stream given market conditions.

And you have noticed that ST-Ericsson has reported in their press release $59m of pro forma operating losses for that quarter. For those of you that had the chance to attend the call of ST-Ericsson a few hours ago Alain and Timothy Lucie-Smith, the CFO, have expanded on this respect.

In particular, Timothy has also explained that this amount includes amortization of acquisition related intangibles. Includes that ST-Ericsson obviously recognize ST sustained margin in respect to the manufacturing services, which at the end are irrelevant for the ST consol as operating profit is concerned.

So without entering in details about those individual numbers, that both of these two ingredients are very substantial, and without them the pro forma operating income in Q3 2008 for ST would be at or above breakeven.

Of course, at the time there were not yet the R&D grants. In Q3 also has been affected by some stand up cost after the NXP merger. But moreover there is the restructuring plan. The combination of phase one restructuring plan already announced by ST-NXP in November, and the one just announced by the joint venture with ST-Ericsson as a new phase is a total of $480m annualized savings target.

Okay. I guess the obvious comment to that is frankly I mean -- it's nice to analyze Q3, but Q3 is very seasonally strong for your business. In particular, if I recall from experience with the NXP business, which has always been double digit growth in Q3 for as long as I covered Philips before.

Yes, and I at this point, this is Carlo Bozotti, I would like to conclude to give some prospects. So despite the, of course, the major crisis in this sector and the other sectors, the objective that we have for the impact on ST on the wireless business is to see substantially a breakeven in Q3 this year. With unfortunately revenues that, due to the market, are not yet at the level they were in Q3 last year.

So this I think is good to say, because of course, is our internal plans. And we are going to as a shareholder of this new company, of course, to track the results. But, the objective for ST is, at the consolidated level, to be substantially at breakeven on wireless in Q3 of 2009, despite the major decrease in revenues due to the market crisis.

Okay, thank you very much, Carlo. That's helpful. Thank you.

Thank you.

Thank you. We'll move onto the next question, please.

The next question is from Mr. Sandeep Deshpande of JP Morgan. Please go ahead, sir.

Hi, good afternoon. Thanks for taking my call. With respect to your savings plan that you announced in your last release, I'd just like to go through, in terms of cost synergies with ST-NXP as well as the rationalization of the SG&A and R&D where you had $200m and $140m of savings, estimated savings in 2009, what is the current progress on that? As well as -- in terms of how much has been achieved and how much more has to be achieved on that.

Yes, Carlo Ferro will take this.

So, Sandeep, I will take again your question on the overall ST perspective since this is what we want to comment, of course, the plan of our joint venture is part of the overall ST plan, but it's not all.

So maybe I should make a reference to the cost savings opportunity that we have anticipated in January. That was a $700m cost saving package when comparing 2009 to the Q4 2008 cost structure. And that was basically divided in three blocks. The cost of goods sold, the operating expenses and the R&D grants.

In cost of goods sold and actually we have attributed about $200m to the cost of goods sold portion, here the planned progress absolutely on track. As Carlos mentioned we have closed the end of the quarter the assembly plant in Morocco. And a few weeks ago we have completed the phase-out of the operation in the wafer fab in Texas.

We will obviously -- those savings are not frankly visibility in the income statement of Q1 '09 given, on one side, the completion of the action at the end of the quarter, and on the other side of course, the very heavy unloading that at the end washed this effect when talking about manufacturing cost.

In operating expenses, if you will recall, we have attributed about $370m at the time of the full package to the operating expenses plan. Here our estimate is that about 30%, 35% is in the income statement of Q1, the rest has to come on the next quarter.

Then there was a portion on the R&D grants, the $130m for the year on the grants, out of which $70m including the last year portion and the Q1 portion, are in the quarter. So you can notice that we have somehow about $0.5b of unrealized savings that are not visible in the ST P&L yet.

Of course, those initiatives, as anticipated in January, will continue to be completed in 2010. And this could be an additional, as we said in January, about $100m annualized cost savings. And on top of that, today, our joint venture ST-Ericsson has anticipated the additional cost realignment plan targeting $230m savings at completion in mid-2010.

So I would say some things in the Q1 numbers on track here with respect to the execution of the plan. But frankly the bulk and the upside opportunity has to come.

Okay, thanks. And one follow-up question on -- continuing on the restructuring theme, in terms of the businesses which were underperforming there was some plan to separate some of the business -- some business or business units. What is the update on that or is that under -- on hold at the moment given the current market environment?

No, I think that we have, let's say, made some progresses on certain product lines that we have stopped internally ourselves. On the other hand on some more important product lines I think I -- I would say that the discussions that we were having have slowed down due to the current businesses, but they are not on hold.

So I think there are some, let's say, present discussions and opportunities that we are exploring. And I think while the problem is less urgent because, of course, we are focusing on more basic things due to the very significant decline of revenues, I think the program is on and we are pushing it.

Thanks, Sandeep, for your question. We'll move onto the next, please.

The next question is from Mr. Kai Korschelt of Deutsche Bank. Please go ahead, sir.

Yes, good afternoon. I have a question regarding the gross margins in Q1. If I understand correctly then those would include two months consolidation of EMP who I believe have gross margins in excess of 60%. Can you tell us what the ex-EMP gross margin was in Q1, please?

We do not provide this kind of detail. What we said is, for sure, is accretive. I think the contribution will improve with time. But we do not provide the details of the gross margin by unit.

Okay. Just one follow up if I may, then on the inventory reduction if I take the midpoint of your Q2 revenue guidance and your gross margin guidance by roughly how much do you expect to reduce inventory? Thank you.

Yes, Carlo will take. Of course, will be a material decrease, be another significant decrease. But Carlo Ferro will elaborate on that.

Yes, what we currently target based on midpoint of the revenues internal plan is to continue to substantially reduce inventory in second quarter, and to substantially reduce for us this quarter it should be a double digit number in millions of dollars, or will be at least an additional $100m. This quarter we have reduced by $184m during Q1, we have reduced $184m.

So at the end this focus on reducing inventory while supporting unfortunately unloading of the fab continues to the second quarter. The bad news is that the gross margin guidance, as you saw, cannot show progress in respect to the prior quarter because of continued charges for unused capacities, very similar to the one that we have incurred in a prior quarter. However, as we focus on cash management this reduction in inventory will continue to benefit on the capital structure of the company.

Thank you.

Thank you, Kai. We'll move to the next question, please.

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

Good afternoon. Thanks for taking my question gentlemen. I'd just like to ask you a question about gross margins. I am just a bit surprised you are not a bit more optimistic on gross margin ramp for basically three reasons.

First, you've got one more month of contribution from EMP. Second, you've got obviously a bit higher utilization rates in your fabs even though you are going to lower inventories sequentially. And I was wondering about the third point in fact, is pricing, because last quarter obviously you seem to have suffered from pretty heavy price pressure.

And looking at the foundries which are guiding for -- in the range of 100% growth in volumes in the second quarter, a much higher utilization rate, it sounds like pricing has sort of become a bit more friendly when it comes to foundries. I was just wondering if pricing is starting to become a bit more friendly for you guys too.

Yes, well, first of all, I would like to -- this is Carlo Bozotti, and I would like to comment on utilization. We do not plan to increase. So I think we are very nasty again with fab loading, and we want to move on with the rate of Q1 to significantly cut inventory. And if markets will allow us to be close to the high end of the internal plan indication that we have given that would be a very significant cut.

So the utilization rate does not improve. There is, of course, a positive contribution that you correctly mention that is the additional amount of EMP. On the other hand, the -- what we said in Q2 is basically the production of Q1 as you know very well.

And the efficiency -- the manufacturing efficiency in Q1 reached a negative peak in the sense that, of course, due to the very low volume the efficiency was very poor. And this is paid in Q2 gross margin.

And in terms of prices I would say that the major difference that we see is more on the mix. I think that in Q2 there will be some significant increase on certain products in China that have intrinsically a good run but a little bit less in terms of gross margin. So this is why we have given overall an indication of stability. But we are not going to improve the loading in Q2 by design.

Got you, sorry about that.

No problem.

My follow up is on the -- just on the product portfolio and potential review of that. I think, Carlo, you alluded in the past that you were obviously looking with a critical eye any underperforming businesses you may have. So I was just wondering where your thoughts were on this product portfolio at this point and if anything may occur in the course of 2009. I was particularly thinking about the imaging business.

Yes, I think -- of course, we entered due to the crisis into another order of magnitude problem, and you may appreciate that today we are actively working on a correction package of $1b that we will do, okay.

And priority is really cash protection. I think surely you have noticed that our cash -- net financial position has improved from minus $550m at the end of Q4 last year to a positive of $250m at the end of Q1, and this despite the fact that we have not enjoyed yet the result of the arbitration on the -- student loan securities.

So the priority, of course, is very much on inventory reduction, on the way to structure the company and to run the company with a capital investment that is systematically below $100m per quarter, and on the $1b corrective measure package.

Having said all of that, our discussion on the specific product line that you mention are not over and I think we are moving on at a pace that is not what we expected, but we are intending to move on there.

Okay, thanks very much.

Thank you.

Thanks, Didier. We'll move onto the next question.

The next question is from Mr. Jerome Ramel of Exane BNP Paribas. Please go ahead, sir.

Yes, good afternoon. One question is what is your OpEx on sales ratio going forward? In the past we were talking roughly 27%, 28%. Is it still valid? And obviously it all depends on the sales level, but do you have any idea when you could achieve this?

And second question is do you think that you need to close more fabs?

Well, I think that, of course, our run rate in Q3 last year was much, much higher compared to what we have achieved in Q1 last year. And it is obvious that we are working -- we have worked, and we will spend much time with you guys in New York on the model, and we -- the way we see the evolution, etc.

But it is obvious that thanks to the, let's say, consolidation of the EMP business we see an expense model that is higher compared to the 27%, 28% that you mentioned. But we also expect a gross margin, and particularly a cash gross margin that is higher than what we had in our model before.

But I will be pleased to, of course, to discuss with you and with the team of ST how we see the evolution and the opportunity for ST to generate significant free cash flow, and this without going back, of course, to the level of revenues that we had mid of last year.

Okay. And do you think you need structurally to close another foundry fab, or do you think you have the adequate --

No, I think we have done a lot. And there will be some additional tuning of -- particularly, let's say, in Singapore we are working on merging and rationalizing what we are doing there. We have another five-inch facility.

So we are converting and -- all the activity into the six-inch. And I think, of course, this is something that we are doing today. But we do not have any plan at this moment to close any other fab.

I think -- as I said we will describe the model in a context of market that unfortunately is not any longer what we had either 2007 or Q2 -- excuse me, mid 2008, Q2 2008. But you will see that it makes a lot of sense. And we have the opportunity to generate significant free cash flow with the structure that we have.

Okay, thank you.

Thanks, Jerome. We'll take the next question.

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

Yes, thanks so much. I'm just going to come back to this point about inventory reduction in the June quarter. Carlo, let's just assume you can reduce that by an additional $150m, and we kind of take your gross margin, not targets but planning at face value.

That would mean that your inventory turns would at best be, let's see, some time -- somewhere between 3 and 3.5, which would still be substantially below, number one, your peers and also below your target levels I think of around 4.

So does that mean even your gross margin will be structurally more depressed even in the second half, even if things pick up more substantially?

No, I think really the way that we see it is that we leave -- we give priority for sure during the second quarter, we are giving priority for sure during the second quarter to inventory reduction, and maximization of the net financial position of the company.

And if at the end of the second quarter the inventory turn performance is not adequate we will, during the third quarter, take another, let's say, strong action to get back on track at the end of the third quarter. We see today that at the end of the second quarter there will be a significant improvement in terms of stock turn. It is obvious that this is also related to the fact that it is the bottom of the gross margin.

But the point that I want to make is that the priority is on cash flow, so we'll drive, let's say, aggressively during Q2. If at the end of Q2 the inventory turn is not satisfactory, that for us is as you know to be at least close to 4 and then move up from there, we'll take another strong step in Q3.

It is also fair to say that we expect a significant improvement in the gross margin in the course of Q3. And this is, of course, from the bottom up and not yet supported by backlog, but for sure from the bottom up of our groups. So we expect to have a significant improvement in gross margin in Q3 related to much lower [unsaturation] cost during the course of Q3.

Simon, did you have a follow-up?

Yes, if I could. The second question would be more to the breakeven point and maybe the way to look at it is more on a fab loading basis. I think historically your breakeven point was probably somewhere in the 70% range or so in terms of utilization. Is that right and by how much would that be coming down, assuming that you fully realize your cost savings target?

Well, I think this is going to be the major topic we'll describe and -- to the financial market very soon now, in a couple of weeks, and with particular focus on the capability of the Company to generate significant cash. I think we will describe how we want to run a Company with a CapEx that is systematically in the range of $100m per quarter.

And I -- of course, the level of this I think it's pretty complex and of course I would like to invite all of you to join our Analyst Day in New York. And I'm sure that we'll have all the time to describe the model, as I said, of a Company that in this market context, we cannot dream to go back to right away to the level of revenues that we had in Q3 last year. But despite that, I think, with the plans that we are executing, we are confident that the generation of cash will be significant.

Maybe as a follow-up question, am I right in assuming that previously, under your previous cost setup or your historical cost setup, your breakeven utilization rate was in the 70s? Is that right?

Well, of course, the breakeven is -- there are -- is complex, because of course there is the impact of the utilization rate, but there is also the impact of the expenses. I think that indeed we have run for many years with a utilization rate that was ranging from 75%, I would say, to 90%. This was -- this is the range.

But we are also reducing capacity. This is important for you to know, because there is a -- when we talk about remodeling or resizing manufacturing is reducing the capacity and at the end achieve a machine that is more flexible and more capable to absorb swings in revenues. And we are using all the instruments that are available, including cassa integrazione in Italy, chomage -- chomage technique in France and of course also reduction of the workforce. We have reduced by 3,200 people in Q1 and we are moving on with our program as announced previously, with the addition of the new program from ST-Ericsson.

So I -- we never went below 75%. This is true. I think you are correct. But the loading of the fab is not the only element, of course, driving the breakeven point, on one side. And on the other side, we are actively working on reducing the overall capacity of the Company and realigning the capacity of the Company to a business opportunity or a business reality that is not any longer what we had in Q2 and Q3 last year.

Thank you, Simon.

Thanks a lot.

We'll go ahead and take our next question.

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

Hi. Good afternoon. So if we assume your production run rates are back in line with end demand in Q3, yet you should still be significantly below the 85% run rate. You mentioned on the call that you don't plan on additional capacity cuts at this point. But what room is left if we see basically a stabilization in end demand in the second half as opposed to a continuation of the strong trends we see in Q2?

Well, I think for us what is important to understand is the evolution of the top line, of course. And today, we are relatively confident on the short term. Of course, it is still very difficult to give a narrow indication, is -- as you have seen, is an internal plan indication is very broad, but it is supported at this point by backlog.

And I have to say that, during the last few weeks, we have seen significant, let's say, signs of improvement in three areas. One area is China, Taiwan and Korea, particularly in industrial. Not yet in Japan, which is still very, very weak. The second area is overall our wireless activity. And the third area, starting from a level that was very low in Q1, is the automotive. So the range is broad, is an indication, but is supported by backlog, and the backlog has been built up, let's say, during the last few weeks.

It is more difficult for us to understand whether this is now a new trend. And we want to be cautious and we need another two, three months to understand whether this is a sustainable improvement trend. The bottom-up from our organization, the indication from our customers, is that Q3 will be better than Q2, but these bottom-up figures are not yet supported by backlog at this time. And therefore, we expect that, during the next eight to 12 weeks, the order intake will go on at the rate of the last few weeks to build up properly the Q3 backlog. As you know, the lead time is very short, because everybody's very prudent. So this is the way we see the trend on the top line.

In terms of capacity planning, we have decided that we want to reduce inventory in Q2 and therefore the loading in Q2 is at the same level as the loading in Q1. However, based on the bottom-up plan that we have for Q3 and Q4 that is not yet supported by backlog, at this point we plan an improve of the loading situation in Q3 and in Q4. But we would be, of course, in the condition to change those loading plans in case the backlog for Q3 will not materialize as planned. So this is to give you an overall picture.

What are the drivers in the short term? Again, are three. Industrial, particularly in China, Taiwan and Korea. This is of course industrial, but is the multi-segment. And the second area is wireless. And the third area is automotive, but of course from a very weak level in Q1.

Tristan, did you have a follow-up?

Just a quick one. So fair to assume that the fab-lite strategy is on hold with probably not more outsourcing until next year?

No, I think that -- of course, we have some outsourcing, particularly in wireless. I would say that we are cutting -- in our remodeling and resizing, we are cutting internal capacity, so this is giving the opportunity to have more outsourcing. But of course, in Q3, we were at the level of $2.7b, so -- Q3 last year, so it is obvious that, as a first step, we have used all the flexibility in the outsourcing to mitigate the problem overall, but this was not enough, because the swing was too brutal.

On the other hand, conceptually, I think what we want to do is build up a manufacturing machine that is aligned with our model and is not $2.7b, okay? We'll discuss this in New York. It is of course at a lower level. And this will give us more opportunity to exploit outsourcing and to be in the condition to absorb the swings more, let's say, flexibly.

Thank you for your question, Tristan. And just as a reminder, we do have Carmelo Papa and also Philippe Lambinet from a product standpoint. But we'll take a few more questions, here, operator. Thank you.

The next question is from Mr. Martino de Ambroggi of Equita SIM. Please go ahead, sir.

Yes, thank you. Good afternoon, good morning, everybody. Follow-up on the price effect, just to understand what could be the impact in Q2 and what was in Q1. I don't know if Carlo -- if it's possible to have a rough split of the 10 percentage point reduction in gross margin. We know 8% comes from lower load factor. I'm trying to understand which is the composition of the remaining 2 percentage points. This is for Q1, but also a projection for pricing in Q2. Thank you.

Martino, at the end, we are experiencing a really heavy market. We have experienced in Q1 heavy market conditions as volume were concerned, while at the end the price followed a sort of usually seasonal pattern. It's obvious that, for us, the Q1 -- Q4 to Q1 is a much heavier impact that given entering with many customers on new (inaudible) concept. We are not experiencing really particularly higher price pressure than the normal seasonal pattern. And this is -- has been true from Q4 to Q1 and this is also what we are now experiencing from Q2 -- from Q1 into the second quarter. Obviously, this is some erosion on the gross margin.

On the other side, we have also some improvement in the product mix. In the first quarter, the product mix has been a very good contributor to the margin dynamic. Here, the real effect on the gross margin when talking about Q1 and Q2 is the unloading on the fab, the charges for the unused capacity. And of course, as you can imagine, when a fab operates under substantial disruption on the sequence on the shift, on the sequence of the working days, this triggers several sub-optimization in the cost structure, the efficiency, of the fab that are also reflected in the gross margin.

So frankly, I will point on really the volume as the larger driver of the gross margin dynamic from Q4 into Q1 and then Q2, while of course what has been mentioned earlier, I guess, by Didier is also very correct. The Ericsson Mobile Platform business has added accretively to our gross margin in the first quarter, to a certain extent, is also a positive from Q1 into Q2.

Okay, thank you. A follow-up on two quantitative elements. One, the US dollar impact in Q1 at both the gross margin and EBIT level and the expected D&A for the full year.

Okay. On the currency impact in Q1, frankly, the impact on the gross margin is somehow marginal. We talk about some tens of basis points, is slightly positive and is somehow marginal. At the EBIT level is a little bit more positive, but frankly it's not a big deal in the difference from Q4 into Q1.

Then, in respect to some housekeeping on the number for the depreciation, total depreciation in Q1 '09 has been $286m. For the full year, anticipating costs and currency rates to the current level, we may expect about $1.1b to $1.2b.

Okay. Thank you.

We could go to the next question, please.

Sorry, maybe let me add another ingredient, which is important when modeling the ability of translating EBIT into cash. The EBITDA now started to became somehow substantial, also the amortization line. We do expect over $200m of amortization this year as a result of the various acquisitions in wireless, acquisitions and mergers and a transformation of our portfolio in wireless.

Next question, please.

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

Hi, many thanks. I have a question, actually, for Carmelo Papa. Could you give us your view on the inventory situation --

Guenther, can you speak up, please?

Yes. Hi, it's a question for Carmelo. Could you --

That's very good, since finally Carmelo has a question I could not hear.

Okay. I was wondering whether you could comment on the inventory situation in the different regions regarding the distributors.

Well, in Q1, we had a very big decrease in inventory, not forget that Q1 was much lower than Q4 and therefore it was a very hard task. But we made it. And we plan to have another step in inventory reduction for the present quarter. At the same time, this is played by two factors. On the one side, we are increasing sales. This helps. The other side is product pruning. We are working from the inside. So this will work again for Q2. So we expect it's boosted mainly by the increase in sales.

And Carmelo --

Then, of course, we see orders coming from distribution, which if you watch the distribution network, as we monitor weekly, week after week, there is a very clear path in their stock, the final stock declining. This is in Asia, in particular greater China, what we call the rest of Asia. It's also very comfortable in the United States. Not as evident as in greater China and Asia in Europe, but also -- there is a positive sign everywhere in the world in the sense of declining inventory.

So we expect more of this, because there is some revamping on the final market of distribution. At the same time, there is optimization inside with the factories from our side and we hope we can materialize the sales that we are doing. This will play a major role again. So I feel comfortable that we can repeat the strong stride for Q2 that we made in Q1 again.

In terms of inventory reduction.

Inventory reduction.

Okay. Many thanks.

Thanks to you for the questions.

Next question, please.

The next question is from Mr. James Crawshaw of Standard & Poor's. Please go ahead, sir.

Hi. Thanks for taking my questions. The first one was just on the structure of the wireless joint venture with Ericsson. If you can give us a sense of how the revenues and profits split between the two different businesses, one of which is consolidated and the other of which is accounted for with the equity method.

Yes, I think this of course is very technical and Carlo Ferro will take this.

Okay. Maybe I promise or I would ask Alain to share with you when meeting in New York a clear chart, since I understand it's very important for you to have some clear understanding on the model of the relationship. Here, we are basically, in ST, consolidating a company, which is the marketing development and commercial company, whereby 100%, substantially 100%, of revenues fall in substantially all the gross margin fall in. And at the end, ultimately, it reflects basically all the operating income of the joint venture, other than some marginal numbers.

The other joint venture, the one which is not consolidated by ST, since ST owns 50% minus one share of this company, is a R&D company which is focused on specific area of fundamental technology development and serves as a mission the commercial joint venture on top of providing certain R&D support also to the other parent of the joint venture, the Ericsson Group. This company at the end charges substantially all its costs to either the commercial joint venture, which is consolidated by ST, or to a lower extent to Ericsson.

So frankly, as a result of that, when looking at the impact on the ST consol, you may -- you find that the consolidation of the commercial company and you'll find substantially all the result of the ST-Ericsson joint venture, other than for certain arrangements while ST is a provider of manufacturing services and wafers to the joint venture that obviously trigger certain market price related margin in ST that are not part of the result of ST-Ericsson, but are part of the operating income for the wireless segment of ST.

And finally, of course, under the methodology of integral method of consolidation, whereby we do report 100% of revenues, gross margin and operating income of the joint venture in the ST consol, we do recognize the minority interest, the now -- non-controlling interest, in a lower line of our income statement, as you have noted. So you may have noted that at the end that this quarter in wireless we have reported $170m --

$107m.

$107m, yes -- $107m operating loss and $54m income in controlling interest. And of course, the impact on the net earnings for ST is the net of these two numbers, so is about $50m, $54m.

Okay. Thanks. And as a quick follow-up, I didn't quite understand the language in the press release explaining why there wasn't a cash flow statement this quarter.

Well, frankly, also last quarter we have released earnings with no cash flow and frankly as many other very important US blue chips releasing earnings without at the time of the earnings the cash flow. The technical reason, frankly, is the implications of the purchase accounting of the various joint ventures in the current quarters making some, how say, different timing in the calendar -- in the closing of the quarter, and this is the reason. So you will see the cash flow statement when filing our quarterly MD&A in a couple of weeks from now. And obviously, the press release already report the cash flow performance and the net financial situations, as they are relevant for reading the performance of the quarter.

And as -- one final question, just -- I don't think anybody's asked so far, but it was asked on the Ericsson call. People are a little bit concerned that the cash balance at ST-Ericsson is low and is heading lower, and Ericsson was asked how would they feel about topping that up. They gave a rather noncommittal answer. I wonder if ST can say something a bit more reassuring about willingness to support the joint venture if it does need further cash.

I would say that people should not be more concerned that, as we are as shareholders, [in the end], we own 50% of this joint venture. ST-Ericsson has closed the quarter with a $360m cash amount, which is not at all a negligible amount. Any management team may want to have as high as possible, but $360m cash is not a negligible amount. So we are, as a shareholder, driving the joint venture to optimize its cash management with a clear objective of not needing any further financial assistance by the parents. And I believe this is also what Alain has presented as a key objective for ST-Ericsson.

What about in case they need some support? Frankly, it will be some support for temporary working capital needs and, in this case, we are prepared to support under form of bridge financing by the parents. And as ST is concerned, but also as I understand we can I believe anticipate for our partner, obviously this would not result at all in any change in the 50/50 equity structure for the joint venture.

Having said that, when looking at the total of ST, let me remember -- remind that the cash flow of ST-Ericsson is included in our consolidated cash flow and consolidated net financial position. So when earlier Carlo Bozotti talked about ST keeping a positive net financial position, having a net cash balance at the end of the next quarters, this obviously also includes the financial plan for ST-Ericsson.

Absolutely.

Okay, that's great. Thanks very much.

Thank you. And we'll take one more quick question.

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

Thank you. This is Peter Karazeris for Glen Young. Two questions. One, I -- with distribution down to about 12% of sales, for 2Q, do you think they can get back closer? Are you -- within your internal planning? Are you expecting distribution to get back closer to the 19% you've typically seen, or do you think they're still running at a subnormal rate?

Well, I think it will improve. It will improve. Carmelo can comment also. I mentioned three drivers. And the one concerning industrial and multi-segment, it is also about distribution, particularly in Asia, particularly in China, particularly in Taiwan, in Korea, but not yet in Japan. We see some initial recovery in this area in the United States, very initial. And frankly, not yet in Europe. So the -- yes, we believe that this percentage will improve and Carmelo, I think, will give more color to this.

Well, the other comment I can make is that -- there will be an increase for sure and the 12% is much higher for my group. 12% is referred to total ST. My group is much more evident. So it will materialize more robustly in Q2. The real problem is that distributors, with so much capacity available around the world, go around the shop for business, so the real key element is the capacity, capability to intercept these orders short term, because everything is a request for tomorrow at the last minute.

So you really aren't seeing -- so they haven't really had to start restocking yet because there's enough available capacity.

For the long term, we cannot say if this is a robust demand from the market or it's really restocking, or maybe a combination of the two things together.

And could I ask one other question, then?

Sure.

Just as we think about utilization around 50%, relatively flat with last quarter, you've seen some uptick in orders, but not enough to necessarily say you're ready to take your -- to call a recovery.

Yes.

If you were to see this level of orders continue on through the first month or two of the quarter, would that be enough to keep you -- to get you to increase your fab loading for quarter end?

Well, I think -- let's put in this way. First of all, we are pleased that our average midpoint of the internal plan indication that we have given is 10.3%. So this is -- I think is a good increase and I -- as I said, we are more comfortable because it's supported now by a backlog that has been built up during the last few weeks.

Indeed, we need to continue. So by continuing the present run rate of order intake, I think we will be in the condition to meet our bottom-up target for Q3 of this year that is not yet supported by backlog, but is the best visibility that our groups and our customers have at this point. So what we need is, for the month of May and for the month of June, to continue to see the order intake written that we had during the last, let's say, four, five weeks. If this is happening, then I would say this is a trend. And of course, it's important and very, very crucial for us to understand whether this is a trend or not.

We have the flexibility to adjust in terms of loading. I think we want to go with a prudent approach, but of course we have the flexibility, if things do not improve, to go on with 50% loading and we have the instruments to do that in place. But hopefully this will not be required and, hopefully, this trend of order intake is continuing. And then, of course, our loading in Q3 will be significantly higher compared to the loading that we have in -- that we had in Q1 and that we have in Q2.

Thank you, Peter. I think at this point, Carlo, if you'd like to make some closing comments.

Well, I think, first of all, again, I would like to invite all of you at our field trip day. I think is May 15, in New York City. I think, of course, this is a transition point. It's a very important transition point for ST, because there is of course the new joint venture activity, the accelerated plan in the joint venture to restructure and to go back to breakeven. There is the focus on cash and improving our net financial position in ST. There is the $700m corrective package in ST and, of course, very importantly, our effort in terms of new product introduction, improving innovation.

So we want to have a successful ST at a level of revenues that is well below what we had in Q3 last year. And this is the main target for us in New York, to explain to all of you how we are achieving that and why we are confident to achieve that. But this is the target. So we do not dream that we can go back quickly to the $2.8b that we had pro forma in Q3 last year, but of course we do not plan to stay at $1.7b pro forma that we had in Q1.

So this is very much the topic that we want to cover, on top of course of the usual description of the new product introduction and the strategy, etc. So I think will be an important moment for us to let you know how we are moving on and driving this important transition in the Company. Thank you all.

Thank you and we'll conclude the call.

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