意法半導體 (STM) 2016 Q4 法說會逐字稿

Ladies and gentlemen, good morning.

Welcome to the STMicroelectronics fourth-quarter and full-year 2016 earnings results conference call and live webcast.

I am Selena, the Chorus Call operator.

(Operator Instructions).

The conference must not be recorded for publication or broadcast.

At this time it's my pleasure to hand over to Mr. Tait Sorensen, Group Vice President Investor Relations.

Please go ahead, sir.

Thank you everyone for joining our fourth-quarter and full-year 2016 financial results conference call.

Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer.

Joining Carlo on the call today are Jean-Marc Chery, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; Georges Penalver, Chief Strategy Officer.

The slide webcast and presentation materials can be accessed from 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 this morning and also in ST's most recent regulatory filings for a full description of these risk factors.

Also to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow up.

So today Carlo Bozotti will begin with a summary overview of 2016 and then Carlo Ferro will review our financial results in detail.

Jean-Marc Chery will then discuss the strategy and key programs driving our technology, R&D and manufacturing initiatives.

From there, Georges Penalver will bring together how our application strategy supports our growth ambitions.

Finally Carlo Bozotti will summarize our priorities for 2017.

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

Carlo?

Thank you, Tait, and welcome and good morning to everyone.

One year ago we shared with you our focus for 2016.

First, sales growth; leveraging our strategy centered around Smart Driving and Internet of Things.

And, second improvement of our operating profitability through the combination of revenue growth, gross margin expansion and operating expense control.

The start to the year was challenging, reflecting both a soft market and the specific product transitions.

However, in May 2016 at our Capital Markets Day we announced our objective to restart year-over-year revenue growth in the second half of 2016.

We met our goal, with the third quarter making initial progress with year-over-year revenue growth of 1.3% and then, more significantly, in the fourth quarter where revenues increased 3.5% sequentially and 11.5% year over year.

The key word to describe our performance in the fourth quarter is synchronization.

First, year-over-year growth was broad based; all product groups except discontinued businesses contributed.

Second, looking at our fourth-quarter sales performance by region over region, we saw a synchronization in the growth for Asia Pacific, EMEA and the Americas with all growing at similar double-digit rates.

Finally, our sales performance was also well balanced both with key accounts and in the mass market.

Point of sales performance at our distributors was particularly strong in the fourth quarter.

This synchronization across products, regions and customers is what we were strongly aiming for.

Growth in the latter part of 2016 did not come just from more favorable market dynamics.

Execution on our application focus and on our product strategy were key to this revenue turnaround.

In automotive revenues year over year increased about 12% for the fourth quarter and about 5% for 2016.

The average ST content in a car has definitely increased.

To give you one example, today in some of the latest and more advanced car models in the premium segment, like the E-Class from Mercedes, there are over 800 components from ST.

In our focus on safer driving we had a number of achievements for ADAS-related components.

These include a next generation ADAS processor, in co-operation with Mobileye, featuring [Level 5] autonomous driving capability and based on 7 nanometer technology from Foundry, and several design wins with our new 77 giga radar solutions.

Using our technology to make driving greener, we had multiple design wins for our silicon carbide products for onboard and external charging systems, as well as for traction applications.

We also had many awards with our latest generation of smart power technology, both in Japan and in Europe.

ST is also bringing personalized entertainment and connected experience into the car in an easy-to-use manner, while enabling secure communications between vehicles and the infrastructure.

In audio and entertainment, our recently launched Accordo 5 multimedia processor is already achieving market traction in Europe, Japan and China.

This new product enables superior image, audio and video processing for all classes of cars.

We also signed a strategic agreement with the market leader for audio amplifier products, targeting the high-end premium sound market.

Finally, we landed important wins in vehicle-to-vehicle communication with multiple car makers in Europe, Japan and America.

Our discrete results in 2016 were affected by the weak peripheral and PC market, with full-year sales decreasing 1%.

Recovery was, however, visible in the second half of the year, particularly in the fourth quarter, with sales increasing about 14% year over year.

On top of silicon carbide for auto market and non-auto market applications, among the many discrete products introduced with which we had success during the year, I would like to highlight our protection devices for smartphones; sold in very high volume.

Moving to microcontrollers.

During 2016 we'd a year-on-year growth of 2.3%, with consecutive sequential growth throughout the year after Q1.

This growth was driven, once again, by our general purpose STM32 family, where we recently shipped the 2 billionth product.

This market traction was enabled by our long-term designing activities; our introduction of innovative products, now totaling over 700 STM32 part numbers; as well as our ever-broadening ecosystem.

We introduced a new high-performance STM32 series, which delivers record performance and advanced secure services for the Internet of Things.

We extended our ecosystem offering, with new development tools, including (inaudible), a USB-powered delivery middleware stack, and many new boards.

Here, I would like to mention that we recently passed the milestone of 1 million STM32 development kits shipped to the market.

This is a key indicator that we are on the right track to expand our customer base moving forward.

We also made an important acquisition to strengthen our secure microcontroller solutions, which embeds near-field communication connectivity, while complementing our NFC/RFID [square PROM] tech offering with RFID readers.

Our complete portfolio of secure solutions helps our customers meet the increasing need for security in mobile and other IOT applications and includes authentication solutions, like our STSAFE secure element family, which we introduced during the year.

In our MEMS sensor business revenue progression was significant in the fourth quarter of 2016; increasing over 30% compared to the year-ago period.

Alongside our success with long-time smartphone customers, both in their devices and accessories, we continued to diversify our customer base, with strong sales of our 6-axis gyroscope to Android-based players, especially in China.

Our sensor and actuator technologies for automotive and industrial applications were also successful, with growing sales and multiple wins with global automotive suppliers and a variety of industrial customers.

In analog the rebound started in the second half, driving 9.7% year-over-year growth in Q4.

During 2016 we introduced new products for Bluetooth Low Energy and Sub GHz RF for the Smart Things and the Smart Home and Things applications.

In smart metering we ramped up volume shipments for a major European program with [NL], confirming our position as a leader in this area.

We announced a number of partnerships that leverage our technology into innovative applications, such as the one with HMicro, for a disposable wearable wireless biosensor platform, and with WiTricity for resonant wireless power transfer products.

For smart industry we introduced an intelligent motion-controlled device in our STSPIN family and a number of analog products for industrial applications.

We are an important partner to support the transition to industry 4.0 and we are actively engaged with a number of customers worldwide, especially in Europe and in Asia.

In our imaging business 2016 was a year of success for our proprietary Time-of-Flight technology.

Our FlightSense technology for ranging and auto-focus applications is now being integrated in over 70 smartphones.

This is all about growth.

Now let me turn the presentation to Carlo Ferro to discuss in detail our business and financial performance.

Carlo?

Thank you, Carlo, and good morning to everyone.

Indeed, the full year 2016 marks a year of important progress for ST, exiting the year with 8.2% operating margin before impairment and restructuring on $1.86 billion of revenues in the fourth quarter.

The [implementation] of growth across all product families resulted into a return to revenues growth in the second half of 2016, as we have anticipated in May.

And in the fourth quarter all the key financial metrics improved, with the revenues and gross margin better than in this point of the guidance we gave you in October.

In summary, in the fourth quarter revenues were up 3.5% sequentially and 11.5% year over year; gross margin was 37.5%, or 4 points higher than Q4 2015; operating income before impairment and restructuring was $153 million, or $124 million higher than Q4 2015; 8.2% operating margin and accelerated asset turns translated into a 15% return on net assets; and free cash flow was positive $135 million.

We are clearly turning ST's financial performance towards growth and shareholder value.

Looking now at the full year 2016, our financial performance has progressively improved across all of our key financial metrics.

This progress confirms the soundness of our application-focused strategy; the result of our product innovations; and the initial payback of our restructuring effort, now substantially behind us.

Looking at our key performance metrics in 2016, three points.

First, we saw a return to year-over-year revenues growth.

The start of the year was affected by a soft market as well as by product transitions.

However, thanks to the strength of our portfolio, new product momentum and [safe churn], revenues for 2016 increased 1.1%; even higher, at a positive 2.4%, when excluding our discontinued businesses.

Second, through the combination of revenues growth, manufacturing efficiencies and operating expense control, together, we should say, with a euro/dollar effective rate at $1.11 average for the year, we improved significantly our profitability with operating income before impairment and restructuring up 76% to $307 million and net income up 58% to $155 million (sic - see slide 11, "$165 million").

Third, we made progress in improving our operating margin before impairment and restructuring for the full year at 4.4% and, importantly, we exited the year at 8.2%.

We also saw a strong increase in the net cash from operations.

Free cash flow before acquisitions was $390 million for the year.

And in 2016 we invested $78 million in acquisitions, small in size, but very important for NIC-complementarity point of view to strengthen our product portfolio in secure microcontrollers.

Again, a key point in 2016 was the return to year-over-year revenues growth.

As Carlo said, new strategic products, like those in Time-of-Flight technologies, and product innovation with an expanded customer base across all of the product [NVs], are fueling that result.

We started to make progress in the quarter and more so in the third quarter and more so we did in Q4, with a 3.5% sequential growth; better than seasonal and above the midpoint of our guidance.

Distribution represented about 33% of our revenue in 2016.

Here we saw a significant destocking as we progressed [today].

Point of sales at our distributors or our distributor sales were up double digit year over year.

Point of sales largely exceeded our sales to distributors so we exited 2016 with a lean and a healthy inventory situation.

Looking to the first quarter of 2017, revenues are expected to decrease sequentially about 2.4% at the mid-point; better than our normal seasonality of down about 5%.

Our current visibility, our positive-looking trends and the strong point of sales at our distributors give us the confidence that the positive momentum of the semiconductor industry started in the second half of 2016 will continue and [into] 2017.

Additionally, for the coming quarter we see opportunities for another quarter of sequential growth in automotive and microcontrollers.

We also see power discrete, MEMS and analog performing better than seasonal.

That guidance is translating to a year-over-year revenue growth of about 12.5% at the mid-point.

In the second half of 2016 we slowly started to grow with the [debt] synchronized across all the product groups excluding the discontinued business.

Our second-half revenues grew 10.3% over the first half and 6.5% over the same period of the year earlier.

In the second half of 2016 versus the second half of 2015 imaging posted a triple-digit growth and MEMS, benefiting from a strong recovery, posted a double-digit growth.

Automotive and microcontroller revenues continued on their growth trajectory and only digital decreased, due to discontinued set-top box business and legacy (inaudible) business.

In gross margins we saw a significant improvement in our gross margin over the course of 2016, thanks to the combined positive effect of manufacturing efficiency, lower unused capacity charges, better product mix and favorable currency effect net of hedging.

Increasing revenues translated, among other advantages, into better loading today.

Nevertheless, we incurred $33 million of unused capacity charges in FY16 due to weak loading in the first nine months.

Fab loading has recently improved, with fourth quarter unused capacity charges below $4 million and, based on the current visibility, we are expecting a substantially full loading in 2017.

Looking to our first quarter guidance, based upon our sales expectation we anticipate a gross margin of about 37% at the mid-point, which would represent an improvement of about 350 basis points compared to one year ago, consistent with the 4 points of year-over-year improvement delivered last quarter.

(Inaudible) cost reduction will be a key priority in 2017, leveraging our investment to scale up production into a [range] and on technology evolution and Jean-Marc will mention shortly.

We have been very focused on operating expenses discipline over the last year.

In 2016 we averaged $538 million per quarter in net operating expenses.

This level is well within our anticipated range of $500 million to $550 million per quarter throughout 2016.

We have been also progressing with our set-top box savings plan.

We actually mainly are ahead of our original expectation, achieving $110 million of annualized savings out of the total $170 million per year targeted upon completion.

In 2017 we expect our total net operating expenses, assuming current currency rates, to be in average about $550 million per quarter including a lower level of [tax].

While we remark on the improvement of our financial performance, we have to realistically recognize that these are benefiting from the upturn of the industry cycle and a milder euro/dollar rate.

Thus we remain committed with sense of urgency to further improve.

On the other side, if we look at the analysis of the operating income improving from $29 million to $153 million in the fourth quarter of 2016 versus the prior year's quarter, this shows both structural changes and consistent improvement across all the product groups.

As we see in the chart, the currency effect was marginal and there is a very significant and roughly equal-sized contribution from manufacturing efficiencies, including better loading, and the combination of volume mix net of price effect.

And there is also the positive and initial contribution from the set-top box restructuring.

All of the product groups have positively contributed to these improvements.

Automotive and discrete group, the operating margin in the fourth quarter was 7.5%.

Still room here to improve toward the over-10% margin mid-term target.

Microcontrollers and digital IC group operating margin the first quarter improved to 9.7% compared to the over-10% target level.

Excluding digital, our microcontrollers and memory's operating margin was double digit and consistent with our expectations for this business.

In digital we have to complete the set-top box restructuring plan.

Analog and MEMS operating margin in the fourth quarter significantly improved to 9.4%; within the range we anticipated of mid- to high-single digit.

In Others operating margin in the fourth quarter was 0.6%, so it's a slight profit.

It includes imaging delivering a profit and a negative balance from the combination of unused capacity charges, non-allocated R&D and other non-allocated items.

Growth in imaging is the principal reason for the significant improvement; in line with our expectation to turn this area to profit.

Overall, we still have more work to do.

Going forward, we see opportunities for revenues growth to contribute to margin expansion and we are working hard to pull through opportunities to further improve along four drivers.

Operating leverage revenues growth to translate into a reduced back to two-stage ratio from our [52.3%] level in 2016.

Fab loading in FY16 our gross margin was negatively impacted by about 50 basis points of unused capacity charge.

We expect these charges to substantially disappear starting in Q1.

Manufacturing scale & technology evolution reducing fab cost, especially through to big products; the expansion of our 12-inch capacity in the (inaudible), as well as the 6-inch to 8-inch conversion in our (inaudible).

And growth fueled by innovation will boost the product mix improvement.

In fact, the new products are significantly accelerating and we except a revenue contribution in 2017 growing faster than the average.

ST's financial position is solid and in 2016 we further improved our financial flexibility.

In 2016 we generated a free cash flow of $390 million before M&A and also in the year we paid a cash dividend to shareholders of $251 million.

Capital expenditure in 2016 were $607 million; at the low end of our expectations from one year ago.

2016 saw an important introduction of new products, including some of them relying on key proprietary technologies.

The investments we're considering for 2017 are aligned to the substantial revenue opportunity we see this year, particularly in the second half and beyond, and will result in a temporary increase in CapEx spending to $1.1 billion for 2017.

With this, 2017 will give the (inaudible) of special dividend.

After several years we see growth and with the unique new product opportunities, which requires internal manufacturing due to the technologies [specialization], we anticipate a return from 2018 onwards to our strategic capital spending model with CapEx at or below 10% of sales through the cycle.

To describe our technology and manufacturing strategy and the related CapEx, I will now turn the stage to Jean-Marc.

Before doing this, knowing you are understandably interested in our cash flow, I wanted to reassure you that, despite the increase in spending and considering the visibility we have today, free cash flow in 2017 is expected to be higher than the dividend that we pay at the current level.

I will now hand over to Jean-Marc Chery, our Chief Operating Officer.

Thank you, Carlo, and good morning to everyone.

Building on what Carlo Ferro has shared, let me highlight the strategy and key programs guiding our technology R&D and manufacturing investment.

In technology R&D ST's strategy to invest selectively in the core group of proprietary technology and different (inaudible) that presents us with competitive advantage we can leverage for sustainable growth in our strategic areas of Smart Driving and Internet of Things.

In manufacturing our strategy relies on the smart combination of our internal (inaudible), focusing more on specialized and proprietary technologies, providing a competitive advantage and the offering of the best-in-class foundries to mitigate our technology and capital effort, especially in digital technology at or below 10 nanometers.

Following extensive work, our internal manufacturing footprint is improving and in the course of 2017 we expect it to reach higher production at lower [workshop costs].

In particular, our cost driving chart is now reaching a better balance and loading, which resulted in a significant prediction of unused capacity cost by the fourth quarter of last year.

In [core] (inaudible) we are also moving to extend equipment capacity scale within the current and existing infrastructure, which will allow us to significantly reduce workshop costs.

Our 2016 capital spending of $607 million came in at the low end of the $600 million-$670 million budget advance.

Investments made support our strategic focus areas and specific key new product trends.

During 2016 we began to selectively add internal capacity, in line with expected demand.

More specifically, the main programs in 2016 included new technology in Crolles on 12 inch, a mix evolution towards advanced BCD and new MEMS actuators in Agrate, improving our cost structure for more mature technologies, with measures such as the expansion of our 8-inch capacities as part of the program of conversion from 6 inch, and selected investments in probing, (inaudible) and testing in back-end manufacturing.

Moving to 2017, our focus is on advancing and, in some instances, accelerating our capabilities; mainly in four key technologies: first, embedded non-volatile and phased change memories and FD-SOI, which are strategic technologies for our microcontrollers; second, advanced BCD technology, which is used for Smart Power devices; third, imaging and Time-of-Flight sensors, serving a variety of end markets; fourth, silicon carbide and emerging and (inaudible) technology gaining strategic importance for MOSFETs and diodes; both for the automotive and industrial markets.

Our embedded non-volatile memory technology is a key enabler to advanced micro controllers and listing a wide range of applications.

We are extending our capacity in 40 nanometer and are now in production in core on 12-inch wafers for all of the flavors of 32-bit microcontrollers.

Embedded non-volatile memory is important in our 28 FD-SOI offering, allowing us to embed sales change memory to deliver a competitive low-power high-performance technology platform to address automotive and IoT applications.

Another key technology for ST of longstanding strength is BCD, where we are a leader.

Key application areas include automotive and industrial.

While we are low in production with our 110 nanometer called BCD9, we continue to work towards our 10th generation, including the integration of a system on a single piece of silicon.

And, as we have mentioned in the past, we have a clear BCD Technology segmentation addressing high-voltage BCD, SOI-BCD and advanced BCD.

This technology allows us to integrate digital design, (inaudible) and power and high-voltage elements in a single system on chip.

Going forward we are progressing into the new generation of products, including integration of phase change memory in BCD.

A new cloud technology which we developed and presented is FlightSense, our Time-of-Flight technology, enabling true distance measurement and targeting a wide range of applications.

We have been vocal about this technology for quite some time.

During 2016 the initial business for this technology was in smartphones.

As Carlo Bozotti mentioned, we are seeing now a strong momentum globally as the new Time-of-Flight sensors were present in 70 smartphones, including a new product in flat chip phones launched on the market during the second half of 2016.

The expansion we enjoyed with [Asian] customers is particularly remarkable.

We are now working on our next generation of Time-of-Flight technology, featuring longer distance ranging, as well as multi-target and multi-zone ranging capabilities.

This will improve the performance in current application areas, as well as expanding it for use well beyond smartphones.

Finally, I would like to highlight silicon carbide.

ST has been investing in this technology organically for a number of years.

As a result, today we are one of the few semiconductor companies able to provide it.

In simple terms, our silicon carbide technology is more efficient than the other technologies available on the market today.

And we have seen a dramatic increase in the interest from current and potential customers.

For example, in the electrification of the car silicon carbide can bring up to 20% more autonomy for a significant reduction in the cost of the batteries.

During 2016 we received a number of design wins and we are now working to bring this technology to market and accelerate the development of the ecosystem to support its adoption.

In regard to the important design wins with our silicon carbide MOSFETs, we are on track to grow production in the second half of 2017.

Let me now share our current view on our strategy which translates into capital spending in 2017.

For 2017 we are increasing our CapEx to about $1 billion to $1.1 billion.

Much of this will be in the first half of 2017 as we prepare for major product ramp.

We have already started some of this investment during 2016.

Specifically, the Company is investing in 12-inch front-end manufacturing and in back-end assembly and test to support new products.

In particular, we anticipate a newly-won program to work with [Touchstone's] revenue in the second half of 2017.

To summarize.

In 2016 our technology and manufacturing strategies started to pay back and demonstrate visible results.

These strategies are helping us move forward, accelerating growth and contributing to the improvement of our product mix and operating profitability.

Our key proprietary technologies, which I described, are translating into leading competitive positions; both in established areas, like BCD and MCUs, and promising areas, such as Time-of-Flight and silicon carbide.

In addition, our lean manufacturing footprint is now bringing opportunities to leverage growth and reduce (inaudible).

With the progress we have made and the progress we expect to make, we are confident in our technology and manufacturing investment.

I would now to hand over to my colleague, Georges Penalver.

Thank you, Jean-Marc, and good morning to everyone.

Now I would like to describe the expected development for our focus areas in 2017 and beyond, presenting some examples of the specific applications we are targeting and where we already had important success in 2016.

Smart Driving.

Our Smart Driving focus is about making driving safer, greener and more connected.

This fits well with the development of the automotive market, which is forecast to have healthy growth in all areas over the next three years.

We consider the highest areas of growth are firstly in safety, driven by the trend of ADAS (inaudible), where ST offers products such as vision processing and radar; and secondly, in powertrain, driven by car electrification.

If we look into the area of car electrification and the longer term forecast, we see that the various types of hybrid and electric vehicles are set to grow from 5% of total car production last year to 16% in 2023.

This is a great opportunity for ST with our broad offering of power and Smart Power products, automotive microcontrollers, [EEPROM] and protection devices.

The electrification of car is accompanied by a significant increase in silicon content.

As carmakers add battery management, power conversion, inversion and charging functionality, the silicon content of the average car is forecast to increase by over $500.

This is also driven by the need for higher value silicon devices that can meet the higher power and voltage requirements for full electric traction cars.

Our silicon carbide technology, as mentioned by Jean-Marc, brings significant benefit for car electrification compared to the solutions available today.

This allows carmakers to deliver vehicles with greater range and faster charging capacity.

This will lead to a rapidly growing market for silicon carbide devices.

Moving to the first of three areas of focus in the Internet of Things, Smart Industry, for ST is driven by the evolution of manufacturing and other industrial sectors through the application of smart technologies to achieve better efficiency, flexibility and safety.

This [regroups] a number of application areas, including medical, aerospace and defense, and factory automation; all of which are forecast to grow in the coming years.

If we look at industrial automation, the largest market here, we can see that the number of industrial robots shipped is set to increase significantly in the next three years, particularly in Asia.

This provides opportunity for healthy growth of our portfolio of products for this application area into the actuation and motor control, power conversion, data communication, sensors and inputs; [also] devices.

Moving now to the second area in our priority focus, the Smart Home and the Smart City, here there are a number of vertical applications, such as home & building automation, security & surveillance and metering, which require tailored semiconductor solutions.

ST's portfolio and system solutions approach is well adapted to offer solutions involving multiple ST products that make our customers' design easier.

Smart Metering.

An example is Smart Meters, where ST has been developing solutions for over 20 years in partnership with key Smart Grid players.

We are shipping now the new generation of Smart Meters that represents significant business for ST moving forwards.

Our third area of priority focus is what we call Smart Things.

Here, on top of the established markets like smartphones and wearables, we see a renewed opportunity for new types of smart, connected devices and equipment need for the same core electronic building blocks which ST offers.

On top of these building blocks, there is a need for fast and easy-to-use development tools that are well integrated with cloud ecosystems.

Indeed, ST plays an important role as an enabler for connectivity by developers.

In addition to the hardware solutions, we provide middleware that enables key application functionality, such as local or cloud connectivity or sensor capabilities.

We also provide development ecosystems that allow fast and easy prototyping and support for developers to get their designs rapidly into production.

Worth repeating, we recently shipped our 1 millionth development board for the STM32, which includes our most complete ecosystem; the STM32 ODE: open development environment.

And, finally, I would like to mention the smartphone market, which remains an important focus for ST.

Here we have a number of product opportunities, including motion sensors, gyroscopes for optical image stabilization, Time-of-Flight ranging solutions, NFC and secure element solutions, environmental sensors, micro-actuators for autofocus, wireless charging, protection devices, display-related components and, of course, our general purpose microcontrollers.

So, to summarize, the market, as read by our key application-focused areas, are forecast to undergo a period of sustained growth and we are well positioned to take advantage of the opportunities this offers.

Carlo?

Thank you, Georges.

After a long presentation, I will be very sympathetic in my final remarks.

So, building on the results of 2016 and on the opportunities that we are targeting in terms of our technology, products and application focus, I would like to highlight the priority for 2017.

And it's basically one key priority for all of us.

And the priority is delivering sustainable profitable growth.

And this means delivering year-over-year sales growth across all of our main product families, of course excluding discontinued businesses, and regions; both with our OEMs but also with our distributors in the mass market.

Continue to lead innovation, supporting our customers through product leadership and optimize the application-oriented solutions.

Investment growth, maximizing innovation with our R&D spend and turning our manufacturing investment into timely ramp-up of our major programs.

Continue to be disciplined on operating expenses.

And, finally, as a result, continue to improve our operating profitability.

My colleagues and I would now be happy to take your questions.

Thank you.

(Operator Instructions).

Andrew Gardiner, Barclays.

I just had a few around the heightened capital intensity that you're planning for 2017.

You've got a number of initiatives that seem to be coming together at literally the same time.

If I can pick up on something I think you mentioned, Jean-Marc, is this a one-year spike in capital spending?

And should we see it revert back to the type of intensity that we've seen in prior years?

Or, given the type of contracts you've got underway, are you anticipating a slightly heightened level of CapEx from here on out?

And also, in particular, the comment you made regarding the newly-won program that's ramping in the back half of the year and that there is CapEx associated with that.

Do you have long-term commitments from the customer to support such a big spike in spending for their own capacity?

What kind of visibility do you have into that business continuing for years to come?

Thanks very much.

I think maybe Carlo takes on the CapEx for us and then Jean-Marc will comment on the commitment.

I see your point and really you are correct on both understandings that 2017 CapEx at $1 billion to $1.1 billion is a temporary spike.

I clearly said that the model and the strategic model of the Company from 2018 onwards is to go back to our model with CapEx-to-sales ratio at or below 10%.

Indeed, this program itself is very intense; the [bolster] for diffusion and for specialized assembling and testing.

I saw this morning some of you mentioning about a $500 million effort for investment on this new program and I have to say eventually this is a bit underestimated.

And it is better to (inaudible) what this program requires when combining what we have already spent starting last year and this year's program.

Of course, the other point is the return to us from these important specialized programs, on which Jean-Marc addresses the second part of your question.

So we are investing both in wafer fab (inaudible) and assembly and test for this big program.

And, of course, for the generation which will either provide new [favor] but also improvement of the figure of the merit of this current generation.

So, yes, we will invest up to 2017 and beyond, of course.

Thank you.

And I'd also like to underline that for us it's absolutely crucial to make sure that this is a long-lasting business.

And the second point I would like to underline is that there are a lot of positive implications to other businesses because, let's face it, it's not the first time we discuss it.

We have a certain infrastructure and even if today we are being able to significantly reduce the unloading charges, it is not yet optimized.

So the existing infrastructure would require a little bit more in terms of equipment to significantly reduce wafer cost.

And this is a unique opportunity because I believe it's a great business and, on top, there is the associated, let's say, opportunity to significantly reduce that cost that, of course, would positively impact this business but also other businesses in ST.

David Mulholland, UBS.

One, if I may, and then I may come back with a follow up.

But just on the new product win, I wonder if you could give us a bit of color on this.

Possibly if you could confirm the end type of product.

Is this a smartphone or what type of product do you expect it to go into?

And could you possibly help us with the ASP that you think it might be able to generate, just so we can try and put a bit more color to the potential revenue scope in the second half?

No, we cannot give more color.

I think we have been already quite explicit on the fact that it is important, of course the fact is material, the implications, the fact that we need to move on for extended time and the positive impact on other businesses.

But we cannot say more.

Okay.

And then just one quick one.

I wonder if you could comment on what the book-to-bill was in Q4.

Sorry, what was that, David?

The book-to-bill level that you saw in Q4.

The book-to-bill is positive.

I would say it's materially above 1. There was a continuation, let's say, of the trend that we have been entertaining, with some further growth (inaudible) during the course of Q4.

And, as I said, with internalization among the (inaudible) groups but also from a regional point of view.

Now if I take our sales organization that is organized by customer region, now we have three regions: EMEA, America and Asia.

And if you look at their performance, I think the [growth] was material, about 11% each.

And also the booking trend was pretty good for all.

It's not only for products, it's for regions and also it's for [new] customers but also distribution.

For instance, our point of sales in distribution was pretty good in Q4.

Inventories are certainly under control.

In fact, during the course of 2016 we managed to have an important destocking in our distribution channel.

So, of course, we are encouraged.

We need to be careful.

We need to remain very disciplined.

We are not at the level we want to be but, of course, we want to keep going with this level of growth.

Thank you very much.

Sandeep Deshpande, JPMorgan.

Can you comment on your -- you've talked in the past about your silicon carbide initiatives and can you comment on when that initiative is going to start ramping up at your customer?

And, in terms of margin, how you see that -- is that positive or dilutive to margin at this point as such?

Thank you.

I think it is a major effort.

As you know, it's something we've done organically and we expect the ramp in the second part of this year.

This is an important program for us.

So we are working, of course, on the R&D, on the industrial aspects, capital investment, of course.

And I believe it's a new wave of products and we expect that, of course, with the opportunities that we see in terms of car electrification, this is the start of a new important business.

I think the margins opportunities are there.

Of course, there is all the stepped-up work.

This is normal work when we stepped up a new line and then the new business and new technology, etc.

But certainly we believe there are good margin prospects here.

Thank you.

Achal Sultania, Credit Suisse.

So the first one, just a follow up on the new design win that you're talking about second half.

I know you can't give a lot of details but can you maybe just comment on which part of the business you're talking about?

Is it automotive?

Or is it sensors, microcontroller?

Any color that you can give -- if you can give around that that would be helpful.

Thank you.

No, we cannot.

I think we already gave a lot of information concerning, of course, the capital investment required and the [fabs], (inaudible), the timing, the [implication], etc.

But we cannot give more information on the product and the application.

Okay, understand.

Maybe another question on your imaging sensor business.

So if I look at your revenues in the other segment, revenues were actually down sequentially from Q3 to Q4.

And, at the same time, you're talking about Time-of-Flight sensors being used in about almost 70 smartphone models now, which I think is a significant increase.

So I'm just trying to understand the revenue trajectory for this business.

Are a lot of those models not shipping as yet?

Or why is the revenue -- when should we start to see a meaningful ramp in that part of the business?

No, I think it's more a seasonal factor with Q4 and Q1 that are weaker and I believe it's a normal pattern that we expected.

And we are encouraged, of course, by the number of design wins here and the opportunities that we have in the future to move to a (inaudible) focus to new areas like the new (inaudible) that is opening up, I believe, other opportunities in terms of growth.

So we are encouraged.

I think it's part of the evolution of the sales that we have seen in Q4 and that we will be seeing in Q1 is more related to the normal seasonality at certain of these customers.

Okay.

Thanks a lot.

That's helpful.

Kai Korschelt, Bank of America Merrill Lynch.

I had a couple.

The first one was, given your confidence on the second-half ramp, would it be feasible to assume you're going to hit your 10% operating margin target in the second half of this year?

That's my first question.

The second question was on OpEx.

Clearly, you have expectations for growth.

Certainly for this year CapEx is going up.

So I'm just wondering what OpEx run rates should we think about Q1?

But maybe if you can give some color around the rest of the year as well because I think also in Q4 the OpEx was only slightly down year on year, despite the set-top box savings.

Thank you.

Carlo will take them.

On the second half of the year, at the end, I guess we'll meet for the Capital Markets Day in May and this is the right time also to set this (inaudible) then.

Obviously, we see we start from 87% with $1.86 billion of revenues at yearend.

And certainly we have the opportunity with the new ramp to boost revenues towards further growth to leverage on the overall expenses.

The expenses more than I've anticipated for the average in 2017 is very much in line.

Indeed, we talked about (inaudible) expense in the actual of the fourth-quarter operating margin.

There is still room from the restructuring of the set-top box to also completion, which is about maybe south of 1 point of further improvement on the margin.

There is a couple of (inaudible) points in Q4 from the annual capacity charges that will not be there one year from now and not be there at currency also in this coming quarter if currency stays at this level and there are contents of additional basis points from currency as well.

So I would say all the ingredients are there.

Now it's up to us to cook and to deliver well on all these ingredients.

On the operating expenses, on the quarterly projection at the end, we may have some seasonal effects as usual.

So this average $550 million net operating expenses per quarter may eventually see, as usual, lower seasonality, lower level seasonally, in the third quarter of the year.

Normally fourth quarter is a bit higher and for the current quarter there is this level of a few million dollars higher.

However, really we want, with lots of focus and discipline, to continue to keep the net operating expenses for the full year at that level of average $550 million per quarter.

Okay.

Thank you.

Amit Harchandani, Citigroup.

My first question is with regards to this dynamic we are seeing in the semiconductor industry between end-unit growth and the rising semi-content growth.

Obviously, it's a lot of focus on it when it comes to automotive in terms of content growth versus unit growth driving the overall semiconductor revenue for that end market.

But could you may be comment in a broader sense across the various end markets that you're looking at right now?

To what extent is your confidence underpinned by content growth versus the unit growth?

If you could please share your thoughts on that and I have a follow up.

Thank you.

End markets, how are you feeling about those in general.

Well, of course, we have good visibility from many important key customers on one side.

And then we have, on the other side, also important indicators from our distribution channel.

I think the automotive industry, it seems to me that the trend is robust.

We have, let's say, positive information coming from many, many automotive customers across the world for strong demand with the first half of 2017 that it is, of course, with the better visibility that we have materially higher than the second part of 2016.

So I think it's a positive input that we have from our automotive customers.

And discovering the new applications, the new digital applications, as we said, the microcontrollers, the safety, the advanced [BCD] products; but it's also covering the more traditional BCD products for the Smart Power applications in the car.

So I think we have positive a input in general from our automotive customers across the various regions.

Another important indicator for us and, of course, what we want to keep going is from our distributors.

POS was good.

We have very strong POS in Asia, pretty good POS in Europe, a little bit less in United States but, overall, pretty good POS.

And we managed 2016 also in a way to significantly increase our stock turn in distribution, which is, of course, a good start for 2017.

We are tracking point of sales everywhere we operate with all our distributors.

We are tracking the inventory.

We are tracking the grouping of our distributors.

So all the signs that we have so far are positive in this respect.

Of course, we need to remain vigilant.

We do not expect that this may go forever.

However, I believe that the opportunities in terms of new product interactions, the opportunity in terms of the new technologies that are giving us the comfort that this positive trend will continue during the course of 2017.

Thank you, Carlo.

And just maybe on talking or mentioning that positive trend, you've obviously shown a lot of confidence today and you've made some commitments in terms of capital intensity and investment but, clearly, there is the element of competitive dynamics.

And we have seen consolidation amongst your peers within the industry.

To what extent do you feel, in terms of R&D, are you in a position to compete with and sustain some of the design wins you have today going forward?

Is scale a challenge for you, you think, relative to your competitors, given how diversified you are?

Or you think that's an advantage for you?

Well, I think that our R&D effort is very important and certainly with the scale that is giving us the confidence that we can go on organically.

You know we spent in R&D about $1.3 billion, which is a lot of money.

If we benchmark, and, of course, I do not describe the benchmark, with many of our competitors I think that we have the scale in R&D to compete.

I believe that our product portfolio is more focused.

We want, of course, to work on automotive.

We want to work on sensors.

We want to work on microcontrollers, on power.

But we're certainly more focused than in the past and we believe that the $1.3 billion R&D effort is what we need to succeed with these product lines.

Having said that, ST is not yet at the level it should be, in terms of financial results.

So the priority for us is to deliver.

Growth will contribute a lot.

It must contribute a lot.

So the priority is organic growth and better financial performance, but we also are willing to participate in M&A initiatives if the opportunity will come.

Thank you very much.

Jerome Ramel, Exane BNP Paribas.

Carlo, one question.

In your press release you said that you anticipate significant revenue growth in 2017 and beyond.

I think in 16 years this is the first time I'm hearing STMicro giving a qualitative comment on the growth for the full year and even beyond than that.

So my question is, and I know you can't quantify the size of this program, but would it be fair that it's one the opportunities you have every -- maybe once in your life?

I'm just trying to get a sense of how can you be so confident to give a qualitative comment for 2017 and beyond?

Thank you.

As I said, Jerome, I cannot comment more on this program.

Of course, I believe there is a direct relation between the capital intensity that you have seen that -- we are talking about proprietary technologies.

There are many technologies that we can buy from outside.

And when we can buy from outside, we buy a lot of microcontroller wafers from outside.

We are going to start buying BCD wafers from outside.

We want to buy more power [MOSFETs] from outside.

But when we have some good advantage with our proprietary technologies we want to leverage on this advantage and, of course, making these things inside.

Now there is a similar relation between the intensity of the CapEx that we have described and the opportunity with these new programs but, Jerome, I cannot describe more.

I'm simply not in the position to do that.

Understood.

Thank you.

Janardan Menon, Liberum.

I have two questions.

One is to Carlo Ferro on gross margin.

You've guided at 37% gross margin in the quarter and you're saying that underutilization charges have almost completely coming to zero.

So if we were to look beyond the first quarter through the second, third, fourth quarters of this year, what are the levers that you have which can take gross margin to a higher level from this 37% now that utilization is no longer a factor?

Is there -- do you have much in the tank which can take it up further in terms of efficiencies, etc?

And, in particular, when you expand capacity in the 300 millimeter fab you talked about lower wafer cost.

Will that be a driver of gross margin?

If you are able to fill that up, will that be a driver of gross margin into the second half because of the lower wafer cost?

And my second question is also, unfortunately, on your new ramp in the second half of this year, but let me try it in a slightly different way.

Is this product something that is entirely STMicro IP and, therefore, you are at liberty to sell it to any other customer in the years ahead, outside of your initial ramp customer?

Or does it have -- is it like an ASIC with some proprietary IP, which, therefore, gives you the visibility for many years but is for one customer alone?

The first question is certainly easier than the second one because, as Carlo already said, I guess that we have tried to really comprise all the comments and the indications on this program we can offer at this stage into the introduction and to the [initial answers] to the questions.

So I'm sorry not to be in a position to continue to comment and to say more on this new program.

Then on the question of the gross margin evolution, clearly there is in the first quarter some effect on entering the new year with the new price for some of our applications.

And this is something that, at the end, is somehow reabsorbed in the course of the year and the normal and average usual (inaudible) [endangers] on (inaudible).

On the other side, you are right.

Certainly the most relevant opportunities we have for gross margin progression is based on the manufacturing efficiencies, on the wafer cost, on the assembling and testing costs in our back-end plants.

And, in this respect, we are continuing the initiative of cost improvement that already is significantly to gross margin improvement in the second half of 2016 and the new strategic initiatives to scale up production, particularly in 12-inch, are very instrumental.

At the end of the day, as you know, wafer cost is a function of the scale of the fab, particularly in these more advanced geometries.

So, at the end, a short answer to your question, yes, Janardan, you are right, the highest -- there are opportunities of improving gross margin, particularly in the second half of the year, and those are very much driven by manufacturing efficiencies.

Got it.

Thank you very much.

Francois Meunier, Morgan Stanley.

Just going back to Jerome's question, please.

Of course, it's great to have this new project in line but I just wanted to remind myself of all the discussions we had more than 10 years ago with Philippe Geyres on camera modules.

And it was good for a bit and then it was not so good.

So, in terms of the new CapEx you're spending, is it more on the front end?

Is it more on the back end?

Why is this new program potentially different from what it could have been in the past?

That's the first question.

The second question is really regarding the distributors' inventory pulling, I would say, Carlo.

And, Carlo, you've been in the semiconductor industry for multiple decades.

How do you feel about this?

Is it a one-quarter thing?

Is it a two-quarter thing?

When do you think we will have to pay for this?

Because, usually, when distributors are piling a bit of inventories, then there is always a bit of a period of correction after that.

So is it something for 2017 or more like for 2018?

What is your best guess?

Okay, Francois, you were breaking up a little bit there but the first question was on the CapEx and then the second was basically on the distribution and then the restocking and when do you think that will end?

Is that correct?

Yes.

Well, on the CapEx in our chart we did in the presentation we give the split between front end and assembly and test.

So we can talk a little to that.

We do not want to -- we gave some details.

These are the details that we can give, of course.

So you'll see that there is a little bit more in terms of front end if you compare with 2016.

So the weight is a little bit more on front end but not much more.

Now if we look at the distribution business, the distribution business, as I said, we are very encouraged by the point of sales evolution in this business and by the fact that 2016, for us, it was a year where destocking was material.

So our sales, our billing to the distributors was materially less than our point of sales.

And, of course, this is calling for a healthier situation in terms of inventory starting 2017 compared to what we had one year ago.

So we want to keep going.

It's important to keep going the point of sales and, of course, it's important to remain disciplined in inventory management.

Gianmarco Bonacina, Equita.

Just one question about cash flow generation.

I heard before Carlo said you expect the free cash flow to fully cover the dividend.

So it will be fair to assume that, considering the dividend is a little bit more than $200 million and you have to pay for this CapEx, so you are expecting an operating cash flow of $1.3 billion, which is about $300 million higher than in 2016.

So this $300 million is, let's say, more or less what we should expect as your increase in EBIT or there are other items which will have a material impact on the cash flow in 2016.

Thank you.

You are expert of modeling and certainly very good enough.

However, at the end there are normally two ingredients: one is the EBIT and the EBITDA and the other one is the working capital management and the evolution of working capital.

I cannot work through the cash flow more for the year in all details.

Be careful on making assumptions that there are ingredients of EBIT, ingredients of depreciation, ingredients to working capital management and, certainly, when highlighting free cash flow we cover the dividend.

This year we did not intend to give a guidance on the EBIT for the full year.

Okay.

Thank you.

Robert Sanders, Deutsche Bank.

The first question would be on the Crolles fab.

I'm just trying to understand what your capacity is today and where that will be in the next 18 months?

And I have a follow up, thanks.

The current capacity, equipment capacity, is about 3,000 wafers a week in the (inaudible) production mix.

And it will increase about 5,000 per week, okay, with the (inaudible) mix.

Okay, great.

So you said 6,000 today and it will increase by 5,000?

Just to clarify, sorry, I --

No.

I will repeat.

3,000 wafers per week capacity, moving up about 5,000 (multiple speakers) equivalent (multiple speakers) --

From 3,000 to 5,000 (inaudible).

Okay, great.

And that's over the next 18 months.

No, in the next -- quicker than that, much quicker.

Much quicker.

Okay, great.

And just a follow up would just be on radar, on automotive radar.

I was just wondering whether you could give us an idea of the -- what your radar shipments grew in 2016 and what you think they might do in 2017.

Thank you.

Yes, I don't have it with me.

I think we have enjoyed (inaudible).

Of course, we have a pretty high market share [from the 24 years].

But also good progress on the 77 giga, as I described in the address before.

But I cannot quantify.

I'm sure that our automotive general manager can give you the information on the evolution of the sales on this specific line of our automotive business.

Okay.

Thanks a lot.

Lee Simpson, Stifel.

Maybe just two quick ones from me.

We knew at the CES presentation that MEMS were in full allocation in the second half of 2016.

And if we look at the AMG margin for 4Q at 9.4%, I guess the question we're asking here is can that stay in that high-single-digit/low-double-digit range through 2017?

And maybe, just as a follow up, the win that you've got on -- for an ADAS SoC with the Japanese Tier 1 carmaker, can you tell me if that's partnered with the 77 gigahertz radar solution and whether that will ship in 2018 or beyond?

Thank you.

At the end, any opportunity certainly we will push any [good] opportunity to gross margin we have to improve the margins from the 8.2% level and any opportunity will be captured.

At the end, what is great is that we have this level of activity [demand] has significantly improved the return on profitability than when we will see on another (inaudible) consideration on the strategy on the financial model.

At our Capital Markets Day we will update what is needed to get this.

Lee, can you specify your specific question on the ADAS?

Yes, sorry.

Do you want me to repeat it?

It was really just on that ADAS SoC, the win with the Tier 1 Japanese.

Just wondered if it was associated with a long-range radar win, 77 gigahertz; and whether or not this platform design could ship in the 2018 timeframe.

I am afraid I cannot comment on this.

I effectively did not give the name of the customer because we cannot give the name of the customer.

So I am sorry for that but I cannot comment on this specific product.

I know it is certainly a complex solution from an engineering technical point of view but I cannot comment on the customer and the design win.

Got you.

But maybe if I ask it a different way, then.

Would this be a direct win with a carmaker, an OEM in Japan, for their own ADAS module?

I think this I can respond.

I think it's a more traditional Tier 1 approach.

Okay.

Thanks very much.

Thank you.

Guenther Hollfelder, Baader Bank.

Just some housekeeping questions, I think, for Carlo Ferro left.

Concerning D&A, I think it was slightly below $700 million in 2016.

Do you have any guidance here for 2017?

Guenther, can you repeat that?

It's very hard to hear you.

Sorry.

On D&A, I think it was slightly below $700 million in 2016.

What should we model in here for 2017 for depreciation/amortization?

Slightly down, Guenther.

You may want more than about $660 million, including depreciation and amortization [bond].

Okay, great.

And concerning R&D grants and restructuring, what are you expecting for 2017?

We are not expecting since the several of this conversation (inaudible) some slowdown on the overall grants for 2017.

So for the full year you may want to consider something in the range of $50 million, plus or minus $10 million.

Okay.

And any restructuring charges left for the set-up box business for 2017.

In terms of execution of the plan, we are at about 55% of the reduction.

In terms of cost, we are not yet at this level, considering those that have to come are eventually a little bit more expensive than the average.

So we may go and see that back out of the $170 million restructuring cost that we have anticipated with the set-top box plan one-half are already incurred, one-half have to come and most of what it has to come will be in 2017 but not all.

Okay, great.

And two last ones.

Concerning the CapEx, do you think already in 2018 we will be back at the 10% level or below?

Can you repeat that, Guenther, again?

Very hard to hear you.

I got it.

The question is on the 2018 CapEx-to-sales ratio.

What we said is that starting at 2018 we will go back at a CapEx-to-sales ratio at or below 10% through the cycle.

Then the overall distribution, which here could be at a level and which one at another level, will very much depend on where we will position on the cycle.

So I believe it's a bit early now to comment on 2018.

It will depend on the overall demand evolution and where we are positioned on the cycle.

Okay.

The last one is on the tax reform in Switzerland.

Any relevance for STMicroelectronics?

Can you repeat again?

Yes.

The tax referendum in Switzerland that's going on, the vote we have on February 12, is it any relevance for STMicroelectronics in terms of the tax rate?

No, it's not material.

At the end, what the benefit of all the federal tax regulation in Switzerland requires (inaudible) reach a stage to adopt a unique tax rate for all corporate tax payers.

So this may challenge the differentiation between multinational headquarters and industrial players.

The good is that the cantons where we are established has elected a tax rate which is very close to the one already applied for the multinational and applied to us.

So this kind of ingredient of our overall very effective tax rate for the overall corporation will continue in the next year.

Okay, great.

Many thanks.

Stephane Houri, Natixis.

So I'd like to discuss -- would have loved to discuss the margins by division evolution, because I was a little bit surprised to see the ADG margin going down while you're talking about double-digit growth in automotive.

And, on the opposite way, MDG margin going up while you were a bit more cautious on the -- especially on the microcontroller side.

Can you bring some colors to us?

Thank you.

Well I think in automotive there are two things.

One maybe in Q4 the evolution of the mix, on one side, did not help but, on the other side, also on the investment that we are taking in the car digitalization.

So all the new programs and this investment with microcontrollers, (inaudible) microcontrollers and also on a advanced safety features.

So I think it was the combination.

Carlo clearly spelt that our objective is to go certainly above 10% but during the course of Q4, the need for -- I'm talking about ADG, the need was not what we expected.

And, on the other end, the effort on the R&D for the digitalization and the electrification of the car is continuing.

Okay.

Thank you very much.

So I believe that was our last question so we'd like to go ahead and close the conference call.

Just as a reminder, STMicroelectronics will be at the Mobile World Congress in Barcelona.

We will have our next investor event and media event on February 28.

Please contact Investor Relations if you have any interest or any additional information.

Thank you very much.

Thank you all.

Bye.

Thank you.

Ladies and gentlemen, the conference is now over.

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