Earnings Call: Q4 2016

Jan 26, 2017

Ladies and gentlemen, good morning. Welcome to the STMicroelectronics fourth quarter and full year 2016 earning results conference call and live webcast. I am Selena, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it is 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. This live webcast and presentation materials 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 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. 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. Now I would 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 the Internet of Things. 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 the 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 of origin, 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 cooperation with Mobileye, featuring level 5 autonomous driving capability and based on 7 nanometer technology from foundry. And several design wins with our new 77 gigahertz 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 infotainment, 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 a 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 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 automotive and non-automotive 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, with 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 is enabled by our long-term design win 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 a LoRa kit, a USB Power 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 embed near-field communication connectivity while complementing our NFC RFID square Chrome tag 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 continue to diversify our customer base with strong sales of our six-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-gigahertz RF for smart things and smart home and city applications. In smart metering, we ramped up volume shipment for a major European program with Enel, 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 resonance wireless power transfer products. For smart industry, we introduced an intelligent motion control 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 autofocus 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, full year 2016 marks a year of important progress for ST, exiting the year with 8.2% operating margin before impairment restructuring on $1.86 billion of revenues in the fourth quarter. The synchronization 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. In the fourth quarter, all the key financial metrics improved with revenues and gross margin better than the midpoint 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 four points higher than Q4 2015. Operating income before impairment 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 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 innovation, 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 products momentum, and sales channels, revenues for 2016 increased 1.1%, even higher at a positive 2.4% when excluding our discontinued businesses. Second, thanks to 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 restructuring up 36% to $307 million, and net income up 58% to $155 million. Third, we made progress in improving our operating margin before impairment 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 operation. Free cash flow before acquisitions was $390 million for the year. In 2016, we invested $78 million in acquisition. Small in size, but very important for IP 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 specific products like those in time-of-flight technologies and product innovation with an expanded customer base across all of the product families are fueling that rebound. We started to make progress in the quarter and more so in Q4, 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 revenues in 2016. Here, we saw a significant restocking as we progressed through the year. Point of sales at our distributor sales were up double digit year over year. Point of sales in the year largely exceeded our sales to distributors. So we exited the 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 midpoint, better than our normal seasonality of down about 5%. Our current visibility, our positive booking trends, and the strong point of sales at our distributors give us confidence that the positive momentum of the semiconductor industry started in the second half of 2016 will continue entering in 2017. Additionally, for the current 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 midpoint. In the second half of 2016, we slowly started to grow with that, synchronized across all the product group, 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 the set-top box business and legacy FD-SOI 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 efficiencies, lower unused capacity charges, better product mix, and favorable currency effect net of hedge. Increasing revenues translated, among other advantages, into better loading through there. Nevertheless, we incurred $33 million of unused capacity charges in fiscal year 2016, due to weak loading in the first nine months. Fab loading has recently improved, with fourth quarter unused capacity charges below $4 million. 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 midpoint, which would represent an improvement of about 360 basis points compared to one year ago, consistent with the four points of year-over-year improvement delivered last quarter. Overall cost reduction will be a key priority in 2017, leveraging our investments to scale up production into a range and on technology evolution, as Jean-Marc Chery will mention shortly. We have been very focused on operating expenses discipline over the last years. 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 are a year 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 quarterly 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 improvements 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 commitment 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 margin, and there is a very significant and roughly equal sized contribution from manufacturing efficiencies, including better loading and the combination of volume and mix net of price effect. There is also the positive and initial contribution from the set-top box restructure. All of the product groups have positively contributed to this improvement. Automotive and discrete group operating margin in the fourth quarter was 7.3%, still room here to improve towards the over 10% margin midterm target. Microcontrollers and digital IC group operating margin in the fourth quarter improved to 9.7% compared to the over 10% target level. Excluding digital, our microcontrollers and memories 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 digits. In other, 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 a 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 push through opportunities to further improve along four drivers. Next slide, please. Operating leverage, revenues growth to translate into a reduced OPEX to sales ratio from our 32.3% level in 2016. Fab loading. In fiscal year 2016, our gross margin was negatively impacted by about 50 basis points of unused capacity charges. We expect these charges to substantially disappear starting in Q1. Manufacturing scale and technology evolution, reducing step cost, especially through to big programs. The expansion of our 12-inch capacity in the front-end share, as well as the 6 to 8-inch conversion in analog and power. Growth fueled by innovation will boost the product mix improve. In fact, the new products are significantly accelerating, and we expect a revenue contribution in 2017 growing faster than the others. ST 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 $670 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 investment we are 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. We see 2017 as this respect a special period. After several years missing growth and with the unique new product opportunities, which require internal manufacturing due to technology specialization. We anticipate returning from 2018 onwards to our strategic capital spending model with CapEx at or below 10% of sales to the sector. To describe our technology and manufacturing strategy and the related CapEx, I will now turn the stage to Jean-Marc. Before doing this, knowing your understandable interest in our cash flow, I want 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 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 driving our technology R&D and manufacturing investment. In technology R&D, ST's strategy to invest selectively in a core group of proprietary technology and differentiated one that presents us with competitive advantages 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 wafer fab, 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 efforts, 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 wafer cost. In particular, our full 12-inch fab is now reaching a better balance and loading, which resulted in a significant reduction of unused capacity cost by the fourth quarter of last year. In full 12-inch, we are also moving to extend equipment capacity scale within the current and existing infrastructure, which will allow to significantly reduce wafer cost. Our 2016 capital spending of $607 million came in at the low end of the $600 million-$670 million budget range. Investments made support our strategic focus areas and specific key new product plans. 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 12-inch, a mixed evolution towards advanced BCD and new MEMS actuators in Agrate, improving our cost structure for more mature technologies, which measures such as the expansion of our 8-inch capacities as part of the program of conversion from 6-inch, and selected investment in probing, assembly, and testing in backend 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 phase change memories and FD-SOI, which are strategic technologies for our microcontroller. Second, advanced BCD technology, which is used for smart power devices. Third, imaging and time-of-flight sensor, serving a variety of end markets. Fourth, silicon carbide, an emerging and disruptive technology gaining strategic importance for MOSFET and diode, both for the automotive and industrial markets. Our embedded non-volatile memory technology is a key enabler for advanced microcontroller, addressing a wide range of applications. We are expanding our capacity in 40 nanometer and are now in production in Crolles 12-inch wafer for all the flavor of 32-bit microcontrollers. Embedded non-volatile memory is important in our 28 FD-SOI offering, allowing us to embed phase change memory to deliver a competitive, low power, high performance technology platform to address automotive and IoT applications. Another key technology for ST, a longstanding strength, is BCD, where we are a leader. Key application areas include automotive and industrial. While we are now in production with our 110 nanometer called BCD9, we continue to work towards our 10th generation, including the integration of a system on the single piece of silicon. 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, precise analog functions, 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 memories in BCD. A new core technology which we developed and patented in FlightSense, our time-of-flight technology, enabling true distance measurements 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. ST new time-of-flight sensors were present in 70 smartphones, including a new product in flagship phones launched on the market during the second half of 2016. The expansion we are enjoying 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 its 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 MOSFET, we are on track to ramp production in the second half of 2017. Let me now share our current view on how our strategy will translate 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 a major product launch. We have already started some of these investments during 2016. Specifically, the company is investing in 12-inch front-end manufacturing and in backend assembly and test to support new products. In particular, we anticipate a newly won program to ramp with substantial 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 position, 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 processor costs. With the progress we have made and the progress we expect to make, we are confident in our technology and manufacturing investment. I would like now to hand over to my colleague, George Daniel. 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 successes 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 few years. We can see that the highest areas of growth are firstly in safety, driven by the trend of ADAS proliferation, 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, power tools, and protection devices. The electrification of cars is accompanied by a significant increase in silicon content. As car makers 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 benefits for car electrification compared to the solutions available today. This allows car makers to deliver vehicles with greater range and faster-changing 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, this is about the evolution of manufacturing and other industrial sectors through the application of smart technologies to achieve better efficiency, flexibility, and safety. This groups 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 industry automation, the largest market here, we can see that the number of industrial robot ships is set to increase significantly in the next three years, particularly in Asia. This provides opportunity for ST broad portfolio of products for this application area, including actuation and motor control, power conversion, data communication, sensors, and input-output devices. Moving now to the second area in our IoT focus, the smart home and the smart city. Here there are a number of vertical applications, such as home and building automation, security and surveillance and metering, which require tailored semiconductor solutions. ST's portfolio and system solution approach is well adapted to offer solutions involving multiple ST products that make our customers' designs 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 represent significant business for ST moving forward. Our third area of IoT focus is what we call smart links. Here, on top of the established markets like smartphones and wearables, we see a huge opportunity for new types of smart connected devices and a common 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 connected device 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 one millionth development board for the STM32, which includes our most complete ecosystem, the STM32 ODE, Open Development Environment. 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 auto focus, wireless charging, protection devices, display-related components and of course, our general-purpose microcontrollers. To summarize, the markets addressed by our key application focus areas are forecast to undergo a period of sustained growth, and we are well positioned to take advantage of the opportunities it offers. Well, thank you, George. After a long presentation, I will be very synthetic in my final remarks. Building on the results of 2016 and on the opportunities that we are targeting, thanks to our technology, product and application focus, I would like to highlight the priority for 2017. It is basically one key priority for all of us. The priority is delivering sustainable and profitable growth. This means deliver year-over-year sales growth across all of our main product families, of course, excluding discontinued businesses and regions, both with our key OEMs, but also with our distributors in the mass market. Continue to lead in innovation, supporting our customers through product leadership and optimize the application-oriented solutions. Invest for growth, maximizing innovation with our R&D spend and turning our manufacturing investments 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. We will now Next question, please. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets when asking a question. Anyone who has a question may press star and one at this time. The first question is from Mr. Andrew Gardiner from Barclays. Please go ahead. Good morning. Thank you for taking the question. I just had a few around the heightened capital intensity that you are planning for 2017. You have a number of initiatives that seem to be coming together at literally the same time. If I could pick up on something I think you mentioned, Jean-Marc. Is this a one-year spike in capital spending, and should we see it sort of revert back to the type of intensity that we have seen in prior years or Are you, given the type of contracts you have underway, are you anticipating a slightly heightened level of CapEx from here on out? Also, in particular, for the comment that you made regarding the newly won program that is 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. Okay. I think maybe Carlo takes on the CapEx first, and then Jean-Marc will comment on the commitment. Yes, Carlo. Andrew, I see your point, and really, you are correct on both understanding 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, both 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 that eventually this is a bit underestimated in respect to the overall effort this program requires when combining what we have already spent starting last year and this year program. Of course, the other point is the return to us from these important specialized programs on which Jean-Marc addressed the second part of your question. Yeah. We are investing both in wafers fab, wafers cost, and assembly and test, for this big program. And, of course, for the generation, which will either provide new payroll, but also improvement of the figure of the merit of this current generation. Yes, we will invest for 2017 and beyond, of course. Thank you. Absolutely. I also like to underline that for us, it is absolutely crucial to make sure that this is a long-lasting business. A second point I would like to underline, that there are a lot of positive implications to another businesses. Let us face it is not the first time we discuss it. We have a certain infrastructure, and even if today we have been able to significantly reduce the unloading charges, it is not yet optimized. The existing infrastructure would require a little bit more in terms of equipment to significantly reduce wafer cost. This is a unique opportunity, because I believe it is a great business. On top, there is the associated, let us say, opportunity to significantly reduce that cost. That of course would positively impact this business, but also other businesses in ST. Thank you, Andrew. We'll take the next question, please. The next question comes from Mr. David Mulholland from UBS. Please go ahead. Hi. Thanks for taking the questions. One if I may, and then I'll make it 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 you 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, that 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. Then just one quick one. I wonder if you could comment on what the book-to-bill was in Q4. I am sorry, what was that, David? The book-to-bill level that you saw in Q4. Book-to-bill? The book-to-bill is positive. I will say is materially above one. So there was a continuation, let us say, of the good booking trend that we had been in Q3, with some further growth in bookings during the course of Q4. As I said, with good synchronization among the various product groups, but also from a regional point of view. If I take our sales organization that is organized by customer or region. We have three regions. EMEA, America, and Asia. If you look at their performance, I think the group was material, about 11% each. Also the booking trend was pretty good for all. It is valid for products, it is for regions, and also is for big customers, but also for 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 restocking in our distribution channel. 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 growing with this level of growth. Thank you, Davide. We will take the next question. The next question is from Sandeep Deshpande from JP Morgan. Please go ahead. Yeah. Hi. You have talked in the past about your silicon carbide initiatives. Can you comment on when that initiative is going to start ramping up at your customer? In terms of margin, how do you see that? Is that positive or dilutive to margin at this point? Thank you. Yeah. I think it is a major effort. I think, as you know, Sandeep, it is 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 on, of course, on the R&D, on the industrial aspects, capital investment, of course. I believe it is a new wave of products, and we expect that, of course, with the opportunity that we see in terms of characterization, this is the start of a new important business. I think the margins opportunity are there. Of course, there is the startup, let's say, all the startup work. This is a normal work when we start up a new line and a new business, a new technology, et cetera. But certainly, we believe there are good margin prospects here. Thank you. Thank you, Sandeep. We will take the next question. The next question is from Achal Sultania from Credit Suisse. Please go ahead. Hi. Thanks for taking my question. First one, just to 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 around 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 CapEx, the content, the timing, the implication, et cetera. But we cannot give more information on the product and the product application. Okay. Understand. Maybe another question on your imaging sensor business. If I look at your revenues in the other segment, revenues were actually down sequentially from Q3 to Q4. 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 when should we start to see a meaningful ramp in that part of the business? No, I think it's more a seasonal pattern with Q4 and Q1 that are weaker. And I believe it's a normal seasonal 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, particularly for automobiles, to new areas like the multi-zone approach that is opening up, I believe other opportunities in terms of growth. So we are encouraged. I think it's part, 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. Thanks a lot. That's helpful. Thank you, Achal. We'll move to the next question. The next question is from Mr. Kai Korschelt from Bank of America, Merrill Lynch. Your line is open. Yeah. Good morning, gents. I had a couple. The first one was giving you confidence on the second half ramp. Would it be feasible to assume that 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 going up. So I'm just wondering, what sort of OPEX run rate 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. Yeah. Carlo will say. Okay. Thank you, Carl. On the second half of the year, we will meet for the Capital Markets Day in May, and this is the right time also to set expectations there. Then obviously, we start from 8.7% with $1.86 billion revenues. Yeah. Then, certainly, we have the opportunity with the new ramp to boost revenues towards further growth. This leverage on the overall expenses, the expenses more than I have anticipated for the average in 2017 is very much in line indeed with what we have already experienced in the actual of the fourth quarter operating margin. There is still room from the restructuring of the set-top box towards completion, which is about maybe south of one point of further improvement on the margin. There is a couple of tenths of basis points in Q4 from the unused capacity charges that would not be there one year from now and not be there currently or so in this current quarter. If currency stays at this level, there are some tenths of additional basis points from currency as well. All the ingredients are there. Now it is up to us to cook and to deliver well on all these ingredients. On the operating expenses, on the quarterly projection, we may have some seasonal effect 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, either is this level of a few million dollars higher or wherever, really, we want with lot of focus and discipline to continue to keep the net operating expenses for the full year at that level of average of $550 million per quarter. Okay, thank you. Thank you, Carlo. We'll move to the next question. The next question is from Mr. Amit Harchandani from Citigroup. Please go ahead. Thank you. Good morning, everyone. Amit Harchandani from Citi. 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. Could you maybe comment, Arden, 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 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 is materially higher than the second part of 2016. I think it's a positive input that we have from our automotive customers. It's covering the new applications, the new digital applications, as we said, the microcontrollers, the safety, the advanced safety products, but it's also covering the more traditional BCD products for the smart power applications in the car. I think we have a positive input in general from our automotive customers across the various regions. Another important indicator for us, and of course, we want to keep going, is from our distributors. The POS was good. We have a very strong POS in Asia, pretty good POS in Europe, a little bit less in the United States, but overall A 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, and with all our distributors, we are tracking the inventory, we are tracking the booking of our distributors. All the signs that we have so far are positive in this respect. Of course, we need to remain vigilant, and we do not expect that this may go forever. However, I believe that the opportunities in terms of new product introductions and the opportunity in terms of new technologies are giving us the comfort that this positive trend will continue during the course of 2017. Thank you, Carlo. Just maybe on talking or continuing with that positive trend, you have obviously shown a lot of confidence today, and you have made some commitments in terms of capital intensity and investments. 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 think, relative to your competitors, given how diversified you are, or you think that is 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. We spend in R&D about $1.3 billion, which is a lot of money. If we benchmark, and today, of course, I will not describe the benchmark with many of our competitors, I think 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. We are 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 we should be in terms of financial results, so the priority for us is to deliver. Growth will contribute a lot, must contribute a lot. So the priorities are organic growth and better financial performance, but we also have the need to participate in M&A initiatives if the opportunity would come. Thank you very much. Thank you. Next question, please. The next question is from Mr. Jerome Ramel of Exane BNP Paribas. Please go ahead. Yeah, good morning. 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 am hearing STMicro giving a qualitative comment on the growth for the full year and even beyond that. My question is, and I know you cannot quantify the size of this program, but would it be fair that it is one of the opportunities you have maybe once in your life? I am just trying to get a sense of how can you be so confident to give a qualitative comment for 2017 and beyond. Thank you. Yeah. 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 MOS 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 clear 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 simply am not in the condition to do that. Understood. Thank you. Yes. Thank you. Next question, please. The next question is from Janardan Menon from Liberum. Please go ahead. Hi, good morning. I have two questions. One is to Carlo Ferro on gross margin. You have guided at 37% gross margin in the quarter, and you are 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? Do you have much in the tank which can take it up further in terms of efficiencies, et cetera? 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? 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 is it like an ASIC with some proprietary IP, which therefore gives you the visibility for many years, but sort of is for one customer alone? The first question is certainly easier than the second one, Jonathan, because as Carlo already said, I guess that we have tried to really comprise all of the comments and the indication on this program we can offer at this stage into the introduction, into the initial answer to the question. I am sorry not to be in a position to continue to comment and to say more on this new program. Then on the question on the gross margin evolution, clearly there is, in the first quarter, some effect on entering the new year with the new yearly 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 price erosion in the industry on our side. 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 cost in our back-end plans, and in this respect, both continuing the initiatives of cost improvement that already yield significantly to gross margin improvement in the second half of 2016. 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. At the end, short answer to your question, yes, Jonathan, you are right. There are improved opportunities of improving gross margin, particularly in the second half of the year, and those are very much driven by manufacturing efficiency. Got it. Thank you very much. Sure. Thank you. Next question, please. The next question is from Monsieur Francois Meunier from Morgan Stanley. Please go ahead. Yes, thank you. Just going back to Jerome's question, please. Yeah, 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 Cher and 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 pull in, I would say. Carlo and Carlo, you've been in the semiconductor industry for multiple decades. How do you feel about this? Is it like a one-quarter thing? Is it a two-quarter thing? When do you think we will have to pay for this? Because usually when the distributors are piling a bit of inventories, then there is always a bit of a period of correction after that. 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 first question was on the CapEx, then the second was basically on the distribution and the restocking and when you think that will end. Is that correct? Well, on the CapEx, in our chart, in the presentation, we give the split between front-end and assembly and test. You can certainly refer to that. We give some details. These are the details that we can give, of course. You see that there is a little bit more in terms of content if we compare with 2016 now, so the weight is a little bit more on content, but not much more. Now, if we look at 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 this stocking was material. Our sales, our billing to the distributors was materially less than our point of sale. Of course, this is calling for a healthier situation in terms of inventory, starting 2017 compared to what we had one year ago. We want to keep going, and it is important to keep growing the point of sales, and, of course, it is important to remain disciplined in inventory management. Thank you, Francois. We will move to the next question, please. The next question is from Mr. Gianmarco Bonacina from Equita. Please go ahead. Yes, good morning. Just one question about cash flow generation. I heard before, Carlo said that you expect the free cash flow to fully cover the dividend. So, it would 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 about $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 you are increasing EBIT, or there are other items which will have a material impact on the cash flow in 2016. Thank you. Guys, you are expert of modeling and certainly very good in math. 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 evolution of working capital. I cannot walk through the cash flow model for the year in all details. Be careful on making assumptions that there are ingredient of EBIT, ingredient of depreciation, ingredient working capital management, and certainly when highlighting free cash flow to cover the dividend, the DBR, we did not intend to give a guidance on the EBIT for the full year. Okay. Thank you. Thank you for the question, Marco. Good try. Thank you, Gianmarco. Next question, please. The next question comes from Mr. Robert Sanders from Deutsche Bank. Please go ahead. Yeah, good morning. Thanks for taking my question. The first question would be on the Crolles fab. I am just trying to understand what your capacity is today and where that will be in the next sort of 18 months, and I have a follow-up. Thanks. The current equipment capacity is about 3,000 wafers per week with the current production mix. And it will increase about 5,000 per week, okay, with AM inaudible. Okay, great. So you said 6,000 today, and it will increase by 5,000, just to clarify. Sorry. No, no. No. It will decrease. No, it's 3,000 wafers per week capacity, moving up about 5,000. 12-inch equivalent. 12-inch equivalent. 12-inch, yeah. From three to five. 12-inch wafers. Oh, okay. Great. That is over the next sort of 18 months? 18 months. Yeah. In the next 18 months. No, in the next, quicker than that. Quicker than that. Much quicker. Much quicker. Okay, great. Just a follow-up would just be on automotive radar. I was just wondering whether you could give us an idea of what your radar shipments grew in 2016 and what you think they might do in 2017. Thank you. Yeah. I do not have with me. I think we have enjoyed good progress. Of course, we have a pretty high market share on the 24 gigahertz, but also good progress on the 77 gigahertz, as I described in the address before. I cannot quantify. I am 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. Okay. Bye. Next question, please. The next question comes from Lee Simpson from Jefferies. Please go ahead. Thanks for letting me on. Maybe just two quick ones from me. We noted the CES presentation that MEMS were in full allocation in the second half of 2016. 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? Maybe just as a follow-up, the win that you've got for an ADAS SOC with a Japanese tier 1 car maker, can you tell me if that's partnered with a 77 gigahertz radar solution and whether that will ship in 2018 or beyond? Thank you. Okay, thanks. At the end, any opportunity, certainly, we will push through any opportunity to boost margin. We have to improve the margin from the 8.2% level, and any opportunity will be captured. At the end, what is great is that with this level of activity managed has significantly improved return on profitability than when we will see on an overall consideration on the strategy, on the financial model at our Capital Markets Day, we will update what is needed to be updated. The question on automotive was on ADAS. Was on ADAS. Yes. Yeah. Yeah, Lee, could you specify your specific question on the ADAS? Yeah, sorry. Do you want me to repeat it? It was really just on that ADAS SOC, the win with a 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. In fact, we did not give the name of the customer because we cannot give the name of the customer. 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 timing. Got you. Maybe if I ask it a different way then. Would this be a direct win with a car maker, 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 so much. Thank you. Thank you. Thank you, Lee. Next question, please. The next question comes from Günther Hollfelder from Baader Bank. Please go ahead. Thank you. Just some housekeeping question, I think, for Carlo Ferro left. Concerning D&A, I think it was slightly below EUR 700 million in 2016. Do you have any guidance here for 2017? Gunther, can you repeat that again? It's very hard to hear you. Sorry. On D&A, I think it was slightly below EUR 700 million in 2016. What should we model in here for 2017, for depreciation, amortization? Slightly down, Gunther. You may want to model about $660 million, including depreciation and amortization involved. Okay, great. Concerning R&D grants and restructuring, what are you expecting for 2017? We are anticipating since several of these conversation times ago, some slowdown on the overall grants for 2017. For the full year, you may want to consider something in the range of $50 million plus or minus 10. Okay. Any restructuring charges left for the set-top box business for 2017? In terms of execution of the plan, we are at about 65% of reduction. In terms of cost, we are not yet at this level, considering that those that have to come are eventually a little bit more expensive than the average. We may consider that out of the $170 million restructuring cost that we have anticipated with the set-top box plan, half are already incurred, half have to come, and most of what it has to come will be in 2017, but not all. Okay, great. 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, Gunther? Again, very hard to hear you. Yeah, no, I got it. The question is on 2018 CapEx to sales ratio. Yeah. What we said is that starting 2018, we will go back at a CapEx to sales ratio at or below 10% through the cycle. The overall distribution, which year could be at a level, and which one at another level, will very much depend on where we position on the cycle. I believe it's a bit early now to comment on 2018. It will depend on the overall demand evolution and where we position the cycle. Okay, great. The last one is on the tax reform in Switzerland. Any relevance for STMicroelectronics? Wow. Can you repeat again? Yeah. Terrible connection. The tax referendum in Switzerland, that is what is going on, the vote we have on 12 February. Is it any relevance for STMicroelectronics in terms of the tax rate? No, it is not material. At the end, for the benefit of all, the federal tax regulation is recent, and it requires each canton, each state, to adopt a unique tax rate for all corporate taxpayers. This may challenge the differentiation between multinational headquarters and industrial players. The good is that the canton where we are established has elected a tax rate which is very close to the one already applied for the multinational and applying it to us. 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. Thank you, Gunther. Thank you, Gunther. Next question, please. The last question comes from Mr. Stéphane Houri from Adixis. Please go ahead. Hello. Very happy to have the last question. I 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 are talking about double-digit growth in automotive. On the opposite way, MDG margin going up while you were a bit more cautious, 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, that did not help. On the other side, also on the investment that we are making in the car digitalization. All the new programs and this investment that is microcontrollers, complex microcontrollers and also on advanced safety. I think it was a combination. Carlo clearly spelled that our objective is to go certainly above 10%, but during the course of Q4, I am talking about ADG, the mix was not what we expected, and on the other hand, the effort on the R&D for the digitalization and the electrification of the car is continuing. Okay. Thank you very much. Yep. Thank you, Stefan. I believe that was our last question. We would 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 need additional information. Thank you very much. Thank you all. Bye. Thank you. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.