Earnings Call: Q4 2015

Jan 27, 2016

Ladies and gentlemen, good morning. Welcome to the STMicroelectronics fourth quarter and year-end 2015 earnings results conference call and live webcast. I am Moira, 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, Moira, and thank you to everyone for joining our fourth quarter and full year 2015 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, and Carmelo Papa, the General Manager of the Industrial and Power Discrete Group. 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 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. Now I would like to turn the call over to Carlo Bozotti, ST's President and CEO. Carlo? Thank you, Tait. Today, I will begin with a summary overview. Then Carlo Ferro will review our financial results in detail. Jean-Marc Chery will then cover today's announcement related to our set-top box business, and importantly, our continued focus on the business derived from digital technologies. Georges Penalver will then discuss the market opportunities related to the application areas of our focus. Finally, I will conclude with our 2016 priorities. Let us begin. 2015 was a year where we made important steps, both from a strategic as well as a financial point of view. First, we focused our product portfolio and application strategy on key investment areas. We also conducted an extensive review of our digital products. Today, digital ICs from general purpose and secure microcontrollers to digital ASICs, digital automotive ICs, specialized image sensors, represent more than $2.8 billion of our revenues. They are at the core of our strategy, and they are also a major growth opportunity for us in the year to come. However, within this digital, we acknowledge the need to reconsider our set-top box business, declining in revenues and loss-making. Second, we made progress in a number of financial metrics, even if, overall, we did not achieve the level of progress we were expecting at the beginning of the year. To a large extent, our performance was limited due to a weak semiconductor market, particularly in the second half of the year, but also changes in customer plans, as we already outlined a few quarters ago, did not allow us to grow revenues as we had expected. However, from a financial perspective, we consistently delivered results overall in line with our quarterly outlooks, and we well managed expenses and capital investments. We saw an improvement in operating and net income, excluding the catch-up of the R&D funding in 2014, and made very visible progress in terms of free cash flow, as Carlo Ferro will detail. Most importantly, with the work accomplished, we enter 2016 with a sharper strategic focus. In fact, during 2015, we increasingly focused our R&D and sales and marketing efforts on two areas: smart driving, enabled by digitalization and electrification, and the Internet of Things, including portable and wearable systems, as well as smart homes, city, and industry applications. Our products, technologies, and system application capabilities are optimized for these areas, which we address with the digital ICs I have already mentioned, and with our analog products, power discrete, and MEMS. Looking at our revenues, our performance was mixed during 2015. We had businesses that performed well during the past year, despite the unfavorable market dynamics, particularly in the second half. Other businesses were instead more affected by the market, and we also had businesses that were affected by specific transitions. Starting with our microcontrollers, during 2015, we delivered year-on-year growth of over 7%, driven by our general purpose STM32 family. This growth was possible thanks to a combination of new innovative products, now totaling over 600 part numbers, as well as a strong customer base expansion. We broadened our product range with the new ultra-low power STM32L4 series and the very high performance STM32F7 series, while strengthening the surrounding ecosystem with the extension of STM32Cube software tool to the complete product portfolio. We had success across a broad customer base, including important wins in many wearable applications. Our STM32 series are at the heart of many Internet of Things applications, and they now serve over 40,000 customers worldwide. Another area of solid performance was our automotive product group, which after having grown by 8% in 2014, was stable year-on-year in 2015, when excluding currency effects. Based upon preliminary data, we believe this performance is better than the automotive semiconductor market overall. Key to our results was the strong progress with our individual products as well as with our complete system solutions. For example, to help make driving safer, we had multiple ADAS wins, including vision processing and new 24 and 77 gigahertz radar-based products. During 2015, seven out of the 10 ADAS-equipped cars on the road had our system on board. Our third generation ADAS vision processor for Mobileye went into full production, and we saw the first design wins with the fourth generation, which is being developed with our FD-SOI technology. In 32-bit microcontrollers for automotive, we recorded strong growth, materializing business from our impressive design win pipeline that covers body, powertrain, and engine management applications also for hybrid vehicles such as the new Toyota Prius. In smart power, we enjoyed strong market momentum based on our important BCD9s and VIPower technologies. Moving to IPD, our industrial and power discrete product group was the one most affected by the market slowdown, driven by an industry correction in the channel, leading to a sales decrease of 6% in 2015 when excluding currency effects. At the same time, we moved forward during the year, seeding our future growth with a strong pipeline of new products well focused on the fastest-growing applications. In automation for smart factories and homes, we broadened our offering of smart power ICs and transistors, and we further developed our ecosystem to make the designing of the complete ST portfolio for motion control, including MCUs, sensors, and connectivity, even easier. For power conversion, we launched new solutions for digital power and LED lighting and server power supply, including silicon carbide-based products. In the area of energy management, we secured wins in automotive in various electric and hybrid vehicle applications, while continuing to develop innovative solutions for energy harvesting and energy management. Finally, in portable, we grew our business of protection devices and introduced innovative antenna tuning solutions. Our Analog & MEMS and sensor business continued to go through a difficult revenue transition in 2015. However, during the year, we made progress building a more diversified portfolio and broader customer base that should ultimately allow a gradual return to growth. In analog, our low-power connectivity solutions were well received by the market, with volume sales of our Bluetooth low-energy solutions for a top-tier wearable manufacturer and wins with our sub-gigahertz RF transceiver for smart home applications. In MEMS and sensors, we grew on automotive MEMS business with sensors for in-car navigation and telematics applications and with first shipments for airbag applications. We also had motion MEMS wins in active safety for vehicle dynamic control applications. This led us to be identified by IHS as the fastest-growing automotive sensor supplier. We grew revenues for our micromirror business for Intel Perceptual Computing Initiative, as well as for our touchscreen controllers. While our Piezoelectric MEMS technology helped poLight to develop a fast focus smartphone camera lens. Our diversification also included new environmental sensors brought onto the market, such as the smallest, most accurate pressure sensor in the industry. Of course, smartphones continue to remain a focus for us, and we are confident that products such as our smallest, the latest 6-axis device, and our gyroscopes for optical image stabilization will soon be found in flagship devices. In digital ASICs, a remarkable result was our strengthened position in the networked market with record billings in optical modules and a strong ramp of ASICs in leading-edge CMOS technologies. While in our imaging business, we started to demonstrate success with our refocused strategy of specialized image and photonic sensors. In fact, our FlightSense technology was integrated in over 20 phones during 2015, and we passed the milestones of 50 million units shipped. These are some of the key product achievement in 2015, supporting our focus on smart driving and Internet of Things. Just recently, we took two further steps in aligning our organization with our focus. First, we took the difficult decision on our set-top box and home gateway business that Jean-Marc Chery will explain in more detail later. Second, we have today announced the reorganization of our business into three product groups, and we will align our financial reporting in Q1 accordingly. The first group, Automotive and Discrete, is led by Marco Monti and includes all our automotive ICs, both digital and analog, and our discrete products. As you know, power discretes are increasingly important in the growing segment of car electrification. The second group, Microcontrollers and Digital ICs, is led by Claude Dardanne and includes our general purpose and secure microcontrollers, our EEPROM memories, and all of our digital ICs outside of the automotive ICs. Clearly, technical synergies between microcontrollers and the other digital ICs will benefit ST in terms of technology leadership and time to market. The third group, Analog and MEMS, is led by Benedetto Vigna and includes our low-power analog ICs, smart power products for industrial and power conversion, and all of our MEMS activity. The technology and the manufacturing organization is now under the leadership of Jean-Marc Chery, our Chief Operating Officer. I would like to conclude this organizational update by deeply thanking a colleague who is here with us today, and whom of you all know very well, Carmelo Papa. He is going to retire after a long and successful career. We will miss his business drive and dedication. We warmly thank him for the great business foundation he has established with his management team and colleagues that will drive our business towards future successes. So thank you, Carmelo. Thanks. We have now to move forward and turn our strong application and product focus into revenue growth. I will come back to that, but in the meantime, let me hand over to Carlo Ferro for the financial review. Carlo? Thank you, Carlo. Good morning, everyone. As Carlo said, 2015 has been a year of progress across most of our financial metrics, in line with the journey towards a higher profitability that we are taking in what we call the post-Nokia phase of our company. Despite missing a revenue expansion in a market much weaker than expected, particularly in the second half of the year, we managed to slightly improve operating income, to consolidate a net profit, and to expand free cash flow generation. Our operating income before impairment and restructuring charges totaled $174 million. This represents a year-over-year improvement of $13 million, excluding the $97 million of R&D funding included in 2014 operating income, but related to the prior year. Moreover, we turned from $173 million operating losses in 2013 to a sustainable profit. Also, the P&L bottom line turned into a sustainable profit from the severe losses incurred two years ago, and we posted $104 million of net earnings. Importantly, on an annual basis, free cash flow again increased significantly. In 2015, in fact, we generated $327 million of free cash flow, reaching the highest level we have recorded in the past five years. As a result, we ended 2015 with a solid capital structure, with a net financial position positive by $494 million and total liquidity of $2.1 billion. However, the revenues line is not progressing yet due to a combination of market conditions, particularly the overall semiconductor market correction in the second half of the year, and a few specific product and customer circumstances, in addition to the progressive wind down of legacy products. For the fourth quarter, revenues were $1.67 billion, sequentially down by 5.5%. This is slightly better than the midpoint of our outlook. For the full year, the $6.9 billion of revenues was below the initial expectations. Year-over-year revenues were down 6.8% as reported. I would rather say the 3.3% as a meaningful reference when excluding unfavorable currency effects and mobile legacy products. By group, MMS recorded a remarkable performance, increasing 7.2% year-over-year, or 9.4% excluding the currency effect. MMS represented 23% of our total sales for 2015 and is a very strong and healthy portion of our portfolio. Similarly, we are well-positioned in automotives, which represent 25% of our total revenues. APG was stable, excluding the currency effect, and reflected market uncertainties, particularly in China and in Japan, and particularly in the second half of the year. Uncertainties that now look to be behind us. Turning to industrial power and discrete. ST has a stronger portfolio of products. They represent 25% of net revenues during 2015. IPD sales decreased in the year, closely linked to the market weak conditions, especially in China and in the computer and in the lighting market. AMS saw a continuation of the transition we experienced in 2014 with MEMS, I would say temporarily aggravated by specific issue with a supplier delaying our ability to ramp microphones at the major customers. Revenues for AMS in total were just under $1 billion. DPG was clearly reflecting different trends, with networking ASIC growing and set-top box and imaging declining. Looking forward to the current quarter, we anticipate a sequential revenue decline by about 3% at the midpoint, reflecting the further impact on the ongoing industry corrections. However, we are happy to see APG expected to return to growth with a pretty healthy sequential increase. Turning to our customer base. Our 10 largest customers were distributed geographically and by end market, accounted for approximately 34% of our total revenues in 2015, with no one exceeding 10% individually. Our customer base continued to evolve, and as a testimony of our customer expansion efforts, we saw Huawei enter our top 10 customers for the first time. We continue to make progress in terms of our mix of OEMs and distributions. Revenues from distribution were 32% of net revenues in 2015, compared to 31% the year before. We are encouraged that this trend will continue as we advance on our strategy to strengthening our mass market programs. Moving now to our gross margin. We delivered Q4 at the midpoint of our quarterly guidance. 2015 gross margin of 33.8% was 10 basis points higher than the prior year. This is not so much. It reflected manufacturing efficiencies as well as favorable currency effect. Also, we still have the opportunity to capture an additional 80 basis point of gross margin from the current currency rates, not evident yet due to the hedging. Gross margin is moving in the right direction, but not fast enough, particularly due to the drag of unused capacity charges. In 2015, we lost 90 basis points of gross margin due to unused capacity charges, affecting both of our segments, SP&A and EPS, particularly in the fourth quarter. We continue to take action to improve the loading of our fabs, particularly for our 12-inch fabs. Looking at our first quarter 2016 gross margin, we are estimating a midpoint of about 33%, mainly reflecting both unused capacity charges in the range of 70 basis points and less efficient manufacturing performance we have experienced during the last quarter. The expenses. Net operating expenses in 2015 remain well on track with our objectives. Net of grants, operating expenses in the year average about $545 million on a quarterly basis, while we kept an R&D effort of about 21% of sales to boost future growth. Currency played an important role in 2015. Despite some unfavorable effect on the top line, due to our euro-denominated contracts, we began to progressively benefit through the year from the stronger US dollar as our existing hedges are rolling off. We estimate the further operating margin improvement from currency, assuming the euro-dollar rate to stay around 1.08, in the range of one percentage point. Turning to the balance sheet. ST, again, maintained a solid net financial position. As anticipated, through the year, we adjusted our capital expenditure, net of proceed of sales of assets to $467 million, to ensure we spent the appropriate level of investment. In the year, we reported $174 million in operating income before restructuring the impairment, or 2.5% as a percentage sale. Sense & Power and Automotive margin at 6.5% was compressed by lower revenues, and also hit by unused capacity charges. Only IPD operating margin has been resilient compared to the prior year, thanks to the manufacturing initiatives in six and eight inches and in the back end, as well as thanks to the turnaround of the Power Discrete division. In EPS, we saw MMS well progressing into the high teens operating margin. DPG still posting substantial losses, lower than the previous year. And this result reflected the lack of profitability of the set-top box businesses, which generated about $250 million of losses in 2015, and the ongoing investment for the transition of imaging from the camera modules to the specialized image sensors. As Carlo said, we have entered 2016 with a renewed focus on our product portfolio and with revised organization targeting growth in smart driving and the Internet of Things applications. To start to introduce the new product groups, we will be more detailed and more specific with the Q1 earnings release. Here you have an initial picture of the pro forma revenues in 2015 and their relative weights on the ST sales. Automotive and Discrete, $2.73 billion revenues. This is 40% of the total company sales. Microcontrollers and Digital ICs, $2.02 billion revenues, is 29% of the total ST sales. Analog & MEMS, $1.67 billion revenues, is 24% of the total ST sales. You see this not match to 100%. Indeed, the remaining balance on ST total sales is related to the discontinued businesses like the former wireless legacy product, camera modules, and now the set-top box. It also included the initial sales in the new field of specialized image sensors. More importantly, you see in the chart the strong synergies among the new product groups and their comprehensive breadth to serve smart driving, smart homes, smart cities, smart industry, and smart things. To conclude, we are encouraged by the profitability of each of the three new reporting segments as a starting point for future improvement in operating income. All three groups in 2015 are profitable. Before unused capacity charges, the Microcontroller and Digital ICs group, excluding the set-top box, had a double-digit operating margin, and the other two were mid to high single digits, while we continue to invest in the specialized imaging business. All in all, ST made important steps during 2015. Our potential to generate operating income is much stronger than our bottom line indicated in 2015, and we are focusing on creating growth and creating shareholders value. At this point, allow me to hand over to Jean-Marc to share with you the details of today announcement. Thank you, Carlo. Good morning, everybody. Today's announcement to discontinue the development of new platforms and standard products for set-top box and home gateway is a result of an extensive review of various options that started in May last year with the objective to fix the loss-making situation for DPG in a sustainable way. You may recall that in 2013, we put in place a turnaround plan for our set-top box and home gateway business. The plan was based on a combination of the fast market adoption of our new product and high success rate with those products through on-time execution. However, the turnaround could not be completed for a number of reasons, including a much slower than expected market take-off primarily at the operator and box manufacturers delaying rollouts, increasing competition on low-end boxes, and high level of R&D costs. Losses are unsustainable. About half a billion dollars cumulatively in the last two years. As a result of this plan, we have announced a global workforce review, including the redeployment of about 600 employees currently associated with the set-top box business to support principally ST growth ambition in digital automotive and microcontrollers. A global workforce realignment that may affect approximately 1,400 employees worldwide, of which about 430 in France through a voluntary departure plan, about 670 in Asia, and about 120 in the U.S. Deployment of the plan by country or site will be subject to applicable legislation and will depend on local negotiations. In 2016, the workforce realignment is anticipated to affect about 1,000 employees, out of which about 150 in France. Annual savings at completion are estimated at $170 million per year. Restructuring costs are anticipated to be about $170 million. We expect to recognize savings progressively through 2016, and by the end of 2017. We should have completed over 85% of the estimated savings. The remaining 15% of savings will depend on the lifespan of the residual products. But now let me recap for you our digital business. Digital, analog mixed-signal and power technologies are clearly all instrumental to the strategy and the future of ST. Therefore, our commitment to digital is very material. Digital ICs, including our microcontroller, are at the core of the car digitalization trend and of all Internet of Things applications. As Carlo mentioned, in 2015, our digital ICs revenue were about $2.5 billion of total revenues. Our general purpose and secure MCUs, our memories, our digital ASICs, our specialized imaging sensors, our digital automotive ICs, our digital technologies that are increasingly integrated with traditional analog and power products to provide smart solutions. All of that is a proof of the value of the business for ST today and in the future. And you will see some example of the digitalization opportunities in our next sessions with Georges Penalver. Thank you, Jean-Marc, and good morning, everyone. As Carlo mentioned, we are firmly focused on two areas, smart driving and Internet of Things, addressing a serviceable market of about $150 billion. As ST is already a leading provider of product systems and solutions for these areas, we are starting from a very good foundation. The next few years are expected to be a period of growth for many application areas served by the semiconductor industry, and ST is focused on those that are expected to grow the fastest, as you can see in the chart. So how are we going to address them? Let's start with smart driving. Smart driving is about making driving safer, green, and more connected. This is very much in line with the forecast development of the automotive market in the coming years, with areas such as safety and infotainment showing above-average growth. Both mixed-signal and digital technologies here are key. A key example are the ADAS applications that are fully digital, and we are addressing a very large portion of them. Smart drivers covers all of the key application areas in the car, active and passive safety systems, electric and hybrid vehicle electrification, infotainment and telematics, and all the body, chassis, and powertrain-related subsystems. ST is very well-positioned here with the right portfolio to be an ideal partner for established and new car makers and for all their suppliers. Our broad range of technologies allows us to build every kind of part, and our deep system knowhow enables us to offer complete, optimized subsystems. Moving now to Internet of Things. As you know, the Internet of Things is an umbrella covering a number of application areas. For example, the smart industry is about the evolution of manufacturing and other industrial sectors through the application of a range of smart technologies to achieve better efficiency, flexibility, and safety. Factory automation is an example of an area where Internet of Things is bringing ST new opportunities to add sensors, intelligence, and connectivity, while continuing to lead in power and motor control. Moving to the smart home and the smart city, ST's portfolio is very well adapted, and our ability to offer solutions involving multiple ST products tailored to specific vertical applications, positions us well to address this area of the Internet of Things. With our sales channel and customers, we will benefit from the above-average growth forecast for home and building control, LED lighting, and metering, and this is among many principal opportunities. Finally, the connected devices in the Internet of Things that we call smart things, alongside the existing well-identified markets like smartphone and wearables, we see a huge opportunity for new connected devices. Some will be products we already know that become smart and connected, and others will be completely new categories of devices. What they all have in common is a need for the same core electronics building blocks, which ST offers, as well as the need for fast and easy development tools, such as our STM32 Open development environment. Thank you for your attention. Well, thank you, Georges. As you see, this is our market-driven focus based on our system application capabilities, our products, and our analog and digital technologies. Let me now close with our three main priorities for 2016. First, of course, sales growth. Here, we have set a number of objectives, and we are targeting growth both with major OEMs, including smartphones and automotive customers, and in the mass market, especially in Asia. We believe that our stronger system and application approach, on top of our leading-edge products, allows us to have much more opportunities than in the past. In the mass market, across all the regions, and particularly in Asia, we have recently strengthened our local marketing applications and sales teams. We plan to grow this set of competencies even more during this year. With sales growth, our manufacturing efficiencies can and will significantly improve, and the unused capacity charges can and will be significantly reduced, benefiting our financial performance. Second, with our anticipated capital expenditures of about $600 million in 2016, combined with our product roadmaps in R&D, we will make sure that we benefit from the resources devoted there, and from the about 600 talents moving to our strategic focus areas of digital, automotive, and microcontrollers. Third, we need to flawlessly execute on our decision to discontinue platforms and standard products for the set-top box and home gateway. We expect a meaningful portion of the plan to be well underway during 2016, which will benefit our cost structure. There is lots of work ahead of us, but we are moving forward with a clear strategy and plan and a sharp and deep focus on execution. Now, my colleagues and I would be happy to take your questions. Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Mr. Jerome Ramel of Exane BNP Paribas. Please go ahead. Yeah. Good morning. Good morning. Carlo, with the restructuring plan you are implementing, what could be the mid long-term target of the business model of STMicro? You have been chasing the 10% EBIT margin for a while. Do you think the implementation of the restructuring plan you announced today will be enough to get back to 10% EBIT margin eventually? Is it also a question of the top line? What kind of revenues level do you need now to get back to the 10% EBIT margin with a new parameter of STMicroelectronics? Good morning, Jerome. Carlo Ferro speaking. Perhaps I take the question. I believe that certainly the strategic review on the product portfolio will move in the direction of expanding margin, and certainly, the model we have set, targeting a 10% operating margin, is within the potential of the company. There are many ingredients on top of the mechanical one on the currency, on the unused capacity, the contribution of this plan that, as you see, is quite significant. We consider the impact as a combination of lower expenses at completions and improved average gross margin of the company to be in the range of about three points. The various initiatives we have in manufacturing, all moving in the right direction. Of course, we need more in term of volume, of growth. At the end of the day, I believe that we need at least $1.8 billion of revenues per quarter, not only to, I would say, leverage on the revenues growth, but really to give our manufacturing machine all the comfort to smoothly run. It's not only a matter of the unused capacity, it's also a matter of the overall efficiency of the fabs and their performance and the scale that very much affect the wafer cost. Overall, we remain comfortable on this model. We have a lot now of ingredients to work on. We have also some detail to be finalized, including at the end, the modality and the timing of the deployment of the revised plan for set-top box. That is subject to a consultation process, and it is not final yet. Give us a little bit more time. I believe that we have already a good date in the month of May for our capital market day, and we'll be happy to take back the question at that time. Well, certainly growth is our most important priority. I think we are targeting, as we said, a market that is about one half of the semiconductor market, is about $150 billion, on two areas that are growing. The digitalization trend in the automotive is very important to ST. It is our major effort, particularly in the area of advanced safety and, in the future, nearly autonomous driving on one side, but also the electrification of the car. We have all the products. For instance, we will exploit better the synergies between our specific ICs for automotive applications and our power discrete that are certainly instrumental to the electrification of the car, including very promising non-silicon technology like the silicon carbide. All the rest of the company is very much centered around our microcontrollers. Our microcontrollers are successful. We are now moving many more resources. We will have more products, we will have more peripherals, we will have more application boards, reference designs for our customers. We will try more and more to provide solutions to our customers, centered around our microcontrollers and complementing the microcontrollers with our sensors, with our power products, and with our analog and connectivity devices. I think it's a little bit more focused, but broad and portfolio pretty much optimized to serve these two major block in the electronic field, where we expect growth will be significant, and we certainly want to participate to this and starting growing again. Thank you. Maybe just a quick follow-up. Any update on the dividend following the announcement of today? Are you going to adjust it, or how should we think about the dividend going forward? Well, this is premature. I think we will start working on this, in fact, at the end of March. The process is always the same. Based on our results, the projected capital requirements, the business conditions, the prospects, the management board will make a proposal to the supervisory board of ST for dividend distribution. Then our supervisory board would decide and propose to the annual general meeting. So the process for us will start as normal later on and towards the end of the month of March of this year. Thank you. Thank you, Jerome. Next question, please. The next question is from David Mulholland from UBS. Please go ahead. Hi. Couple of questions, if I could. Just firstly, on the cost savings, I wonder if you could give us some breakdown as to how much of that should be expected through the cost of sales line and how much is coming through from OpEx savings. Also just on that, if you can give us a new expected OpEx run rate for the business once you've completed those savings, and then I'll come back with the follow-up, if it's okay. Yeah, I'll take your question, David. Indeed, the detail of the cost savings resulting from the set-top box plan that Jean-Marc Chery has presented refers to the operating expenses only. You are right to ask, thank you for asking the question, as of course, there is another ingredient, which is the fact that the set-top box gross margin is below company average that will contribute to the company profitability progressively towards the execution of the plan, and wind down other, the residual lifespan of this product in the next years. In general, at the end of the day, I have to say that for our operating expenses, we are quite comfortable that we have executed our target of, for expenses net of grants at the low level of the range of $550 million-$600 million. Indeed, that was the result of the prior quarter, that was the result of the average for 2015. This additional contribution, of course, will move expenses down and perhaps below the low level of that range progressively. Again, it's a matter of now working on the detail of the deployment and eventually reverting to you at our capital market day about some more specific indication on this respect. Meanwhile, we remain, at the end, confident that for the current year, at the end, we can run expenses at the low level or below the low level of our range, below the $550 million in each of the quarter of 2016. Of course, talking about operating expenses net of grants. That's great. Thanks. Then just on the revenue run rate within DPG, you mentioned in the comments that it might improve sequentially in Q1. Can you just clarify if that is within the set-top box business, given the Sky Q launch that you have coming up? Also, if you can just then give us some color on how you expect the revenue ramp down within the set-top box business to progress from the sort of $220 million level you had, or $209 million level you had last year over the next two, three years? Okay. First of all, a clarification. If you refer to my introduction on the first quarter 2016 outlook when talking about the group coming back to a healthy sequential dynamic, I was talking about APG, the Automotive Product Group. This is very much welcome, and it is also very much related to the overall situation of the industry, which is clearly improving after some correction in the second half of last year. Going to your question about the revenues dynamic for the set-top box business, of course, those products are, at the end, very much established on the final devices. So we see, frankly, a phasing out which is very progressive. Should I say the estimate of revenues lost this year in respect to the about $210 million of prior year, I would say between $60 million to $70 million under Jean-Marc Chery's control. That's great. Thank you very much. You're welcome. Thank you, David. Next question, please. Next question is from Andrew Gardiner from Barclays. Please go ahead. Good morning. Thank you for taking the question. I was interested in some of your comments around the first quarter. Carlo, you just mentioned the improvement in the automotive segment. Is that the main sort of source of strength or relative strength within first quarter, or can you talk us through some of the moving parts around some of the other end markets that you see? Perhaps from a regional standpoint, what you guys are seeing. There's certainly some comments out there, particularly overnight from one of your bigger customers talking about China and showing more recent signs of economic softness. Anything you can sort of talk about what you're seeing within the food chain in the last few weeks as we started 2016? Thank you. Well, of course, it is not that simple to interpret. Let's be as much as we can factual here. The point of sales of our distributors during the fourth quarter was not bad. We had some, let's say, decent performance with a moderate sequential growth, quarter-over-quarter, including a pretty good performance in China on the POS. I mean, in what we define Greater China and South Asia as a region. On the other hand, the inventory adjustment was pretty important. Of course, POS is an important indicator. Another important indicator is the formation of the backlog. In terms of formation of the backlog, what we saw is an important recovery, but more driven by Europe in our automotive business. Therefore, this is driving us to be more positive and confident on a significant sequential growth of our automotive business overall, but driven by major European customers. I think to go through, well, of course, there are also, on top of the Chinese question mark, as you mentioned, at the macroeconomic level, there are also some concern coming from certain major smartphone manufacturing on their volume that clearly remains a concern. I think to comment and go to the product group on top of automotive, certainly we do not see, during the course of Q1, the opportunity to maintain the same very strong level that we had in our microcontroller. We expect some decline of our microcontroller business after a fantastic rate that we have done in the second half, with two quarters in a line of record billing, historical record billing in our MMS. On the other end, a certain degree of stability for our, let's say, IPD, the industrial and power discrete products and AMS products, starting, however, from a pretty low base of Q4. Please consider that one other effect in Q1 is, of course, the Chinese New Year, and traditionally our IPD and AMS businesses are declining in Q1. This year, as I said, starting from a low Q4 base, we see more stability. I hope this is giving an overall view of the market trends and the way that we see our products in moving from Q4 to Q1. It does. Thanks, Carlo. Thank you. Thank you, Andrew. Next question, please. Next question is from Sandeep Deshpande from J.P. Morgan. Please go ahead. Yeah. Hi. Thank you for letting me on. My question is, again, similar to what earlier question was, but on the numbers itself, Carlo. If you look at your gross margin, your gross margin is at around 33%. It has been depressed by 100 basis points, you say, because of the lower utilization, but then it would be possibly 34%. You're doing 21% R&D to sales, which along with the SG&A, gives you a very small margin so that 10% is not achievable. Historically, you used to be at around 40% gross margin. What has happened with the mix in the product, which causes this 34% gross margin at the current time, and how will that shift over time towards a much higher gross margin, such that you can have more sustainable double-digit margin? Yeah. I see your question, Sandeep. Frankly, I'm not sure I could follow all the pieces of your math, so I don't want to imply number on my answer. Qualitatively, at the end, it's obvious that our gross margin is not yet where we want to see it. Again, when you have and you run fabs that are not enough loaded, you have, at the end, three major implications. Implication number one is the unused, and you have well captured it, I guess, in your analysis. Implication number two is that the overall efficiency of the fab is affected. Implication number three is that first you have to load, and then you have the opportunity of growing in scale. Growing in scale is one of the key factors in the semiconductor manufacturing model to reduce the wafer cost. Wafer cost reduction, at the end, in the model of this industry, has somehow also to be shared with customer over the time and the life of the product. What I believe at the end is happened in the recent quarters to our gross margin is that we lack enough growth in the revenues in order to take advantage of these virtuous processes of growing in scale, get wafer cost improvement, and improving margin. Overall, at the end, there is some ingredient, as you said, of the product mix. Today, the most dilutive division to our gross margin is the set-top box division, and this is something that, as I said, we are tackling. Finally, once all of this will be solved, the benefit from the currency could be, of course, and must be more visible in our gross margin evolution. Carlo Bozotti, one follow-up question to you. You've probably seen that there has been an M&A deal which will displace you in your top three position in the microcontroller market. Do you see that as a problem, or do you see that you will continue to gain share overall in the microcontroller business? No, we believe that we will continue to gain share. Now, we have this additional opportunity that, of course, is very important for our microcontroller is the deployment of, I would say, a significant part of the 600 engineers. We are working on new ARM core versions. We are working on many new peripherals, major effort in everything that is radio frequency for microcontrollers. Huge effort in building up more reference boards and application systems for our customers. Also secure microcontrollers is an area where we will certainly do more in the future. I think we are very committed. We have been able to anticipate the market by introducing first into the marketplace, the ARM for the mass market, for the general purpose applications. We have built up a strong ecosystem. As we said before, we have 40,000 customers. I mentioned the proliferation of the peripherals and the technologies, but I would also like to mention the major effort that we have in terms of expansion of the customer base. That is a very important priority. I am convinced that we would keep growing, and the additional resources, of course, will give another boost to our capability to enlarge the reach and cover more applications and expand the base of customers. Thank you. Thank you, Sandy. Next question, please. The next question is from Günther Hollfelder from Baader. Please go ahead. Yeah, thank you. The distribution channel situation you described. Do you expect in the first quarter, also in the non-automotive areas, in the distribution channel, that the sell-through is pretty much in line with what you will ship in the first quarter? Is this correction basically completed? No. Okay. I think that we expect in Q1 to keep going with a good point of sales. I would expect that the correction in the area of IPD and AMS would be completed by the end of the first quarter. This is in fact the same position that we had three months ago. The difference that we have seen is more in the automotive, where the backlog already built up pretty strong in Q1. But for both IPD and AMS, while we expect to keep going with a good point of sales performance, I think it will take another three months to complete the inventory adjustment. Okay. Concerning the car market, you talked about recovery, especially in Europe. I assume you also were affected with your infotainment business, car radio business aftermarket in China over the past months. Could you tell us what you see in this car radio aftermarket in China right now? Yeah, I confirm this is still one area of relative weakness. Even if we see in China opportunities for recovery in the automotive during the first six months of this year, certainly. While we do not see this yet in Japan, that is another area of weakness for the automotive. Maybe one more question on In the first six months, just to make sure. Okay. You mentioned CapEx for 2016. I was just wondering, will you get some tailwinds coming from D&A in 2016? So what should we model in for D&A to further decrease? Depreciation and amortization. Yeah. I would say that there should be something in the range of $750 million for the full year. Okay. Many thanks, and all the best for Carmelo. Goodbye. Thank you. Thanks, Günther. Ciao. Thank you, Günther. Next question, please. The next question is from Achal Sultania from Credit Suisse. Please go ahead. Hi, thanks for taking my question. First one is on the restructuring plan. Obviously, you said that there is $250 million odd of loss in the business, and you are planning to achieve $170 million of savings. There is clearly some reinvestment going back into the autos and the microcontroller business. Then at the same point, I think, Carlo Ferro, you mentioned that ideally you want to get to $1.8 billion of sales per quarter, which would be $7.2 billion of sales per annum. When I look at the three core businesses that you have, you are basically doing about $6.4 billion of sales per annum. I am just trying to get a sense, is there a chance that at some point, if you think that the $7.2 billion revenue number looks difficult to get to, is there a chance that we probably can get some more savings at some point in time? Or what gives you confidence that we can see that kind of revenue growth in a market where clearly the macro environment is not supportive? Well, I think Jean-Marc Chery will take the first question on the plan of redeployment, but more importantly, on the opportunities. But I want to respond immediately to the second one. No, I think this is what we need now, certainly. I think what we need is this form of portfolio with the right balance between digital mixed-signal and, or digital analog and power to serve these two macro application blocks. That, as I said, is everything that is in the car, with the exception of very few products in the car, in fact. The Internet of Things, covering a variety of applications as we said. So I think the structure of the products, the structure of the R&D is what we need, and we will stick on it. Maybe, Jean-Marc, you want to comment on the plan and the redeployment and the opportunity to leverage these additional R&D resources. Yeah. For the redeployment plan, in fact, we have been driven by two points. Point number one is we would like really to continue to proliferate our microcontroller product portfolio, really to address the widest scope of application from ultra-low power microcontroller to the most performing microcontroller. And we would like also to complete the product portfolio, with some product which are a little bit above the high-performance MCUs. This is point number one. The point number two, as explained by Carlo during the speech, this is clear that in smart driving, the digitalization of the car is one of the key elements where we are fully committed. And we have exactly the people and the skill within the set-top box division to support this important ambition, to continue to have a leading position, as an example, in the ADAS system. Right. The main part of the almost 600 people will be redeployed in these two business, microcontroller and automotive digital ICs. Right. Okay. Thank you. And maybe just one clarification. What was the loading charge in this quarter? Was it 70 basis points that you said or? Yep. Carlo Ferro is taking your question. Yes, indeed, we anticipated it to be in Q4. Yep. He is talking the unused charge. The unused charges, they have been about $30 million for Q4. Did you give a guidance for Q1 also? For Q1, at the end, we can anticipate that unused capacity charges will be at or south of 1 point impact to the gross margin. All right. Okay. Thank you. Thank you, Ashar. Next question, please. The next question is from Francois Meunier from Morgan Stanley. Please go ahead. Hugh Humphrey here for Francois. Just to follow up on the capacity utilization issue, please. Can you tell us how digital in particular impacts the capacity utilization in the Crolles fab, what would capacity utilization in Crolles be if you assume the run rate today excluded the businesses that you are exiting over the next few quarters? Yeah. Maybe Jean-Marc, you comment on this and Jean-Marc? Yeah. So basically, what I would like to recall is that, we have engaged now since a few years, strategic diversification of our Crolles 300 in order to move this fab, which was basically a wireless pure digital fab, to become a specialty foundry fab, in order to support automotive microcontroller infotainment and active safety, and specifically with the 28 FDSOI, as mentioned during the speech of Carlo. So automotive. Second, microcontroller. First with some 80 nanometer technology and now moving very fast in the 40 nanometer technology and later on the 28. Third, our specialty imaging sensor. And as Carlo said, so we have just seen in Q4 important move with our new strategy, because we have a move above the 50 million unit sold. And the last but not the least, it is an analog mixing kind of BiCMOS photonics technology to address the communication networking infrastructure. This year we have still struggled with a new charge and let's say poor loading. We anticipate that starting the second half of this year, we will come back, to adequate loading of Crolles and we could envisage the saturation of the full build-out capacity by end of next year. Can you give me a number for what that loading would be today, excluding the businesses that you are exiting or not? Today, we have a loading in the range of 2,000-2,500 wafer per week for this fab. We will go close to the saturation in second half to the year to 3,300-3,500, depending to the mix. Okay. Thank you. Next question, please. Next question is from Janardan Menon from Liberum. Please go ahead. Yeah. Just as a follow-up to the previous question. As you lose the $60 million-$70 million of set-top box revenue during the course of this year, are you saying that some of the new product areas that you are expecting will grow at an even faster rate, which will take you to a much higher loading in the second half of the year than your 2,000 to 2,500 wafers right now? Is that the way we should understand it, that you're going to lose this, but something else, the other product that you're targeting are going to come up at an even faster rate, which will get you to a higher loading in the second half? Yeah, absolutely. I think it's coming, of course, from microcontrollers, secure microcontrollers, advanced EEPROM products. Also, the growth in the digital ICs, for instance, the vision-based products for ADAS. Another area is our digital ASIC products. Finally, this new effort on imaging that, of course, is completely different compared to what we had in the past. Now it is basically absorbed, the commodity camera module. These are completely new products and new technologies that will also contribute to the fab in this facility. This is an effort that started, in fact, three years ago and is a major effort. We want to make sure that this is becoming much more sustainable compared to what we had in the past that was very much focused on wireless, and now is covering a wider range of technologies and, more importantly, a wider range of applications and markets. Then Carlo, if I can complement as a data point to understand the implication. At the end, the set-top box is the division in ST taking the largest portion of the wafer need from foundry. There is a clear, at the end, diversification in sourcing for set-top boxes. Technologies, for instance, like 18 nanometers are fully at foundries. Technology like the 14 nanometer is a combination of the two sources. Technology like the 28 FDSOI or the 20 bulk, at the end, the new products have been mostly qualified at the foundry. At the end of the day, please do not translate the $50 million, $50, $70 million revenues, in fact, to the loading of Crolles 300. It is not at all the case. Can we understand from that, since your sort of newer products are in-house and your more lagging edge products are foundry, the initial drops in revenue will probably be more on the foundry side and less on the Crolles side? No, I just said that for set-top box, the newest product, for instance, 28 is mostly at foundry. While we have in Crolles 300, the 28, for instance, for the ASICs or the digital automotive. Understood. Just another topic, you said that there was a comment that in the automotive digitalization, you are moving the manpower over from set-top box there, and you are looking at products which are more powerful than 32-bit microcontrollers. Can I assume that is a reference that you are going to be attacking the sort of automotive apps processor market? If so, what is the kind of timeline for you to get a product out? No, I didn't say that. I said that- In the automotive, we have a very good coverage of almost all the products that you can find in a car. There are two exceptions. One exception is, of course, we will not have the modem. The second exception is the very high-end application processor that you can find in a car. For all the rest, we cover. That is a very broad offer from microcontrollers to advanced safety. We have very complex solutions for advanced safety, but we do not have a very high-end application processor for car infotainment. The two products that we do not cover is the modem and is the very high-end car infotainment processor. All the rest we cover, including electrifications with our power discrete, the silicon carbide. We cover all microcontrollers, we cover all ADAS, we cover the very large part of car infotainment, and of course, all the body, all the powertrain with our smart power technologies. Got it. Just a very small last question. The 80 basis points of additional margin from currency, which you mentioned, Carlo Ferro, what is the timeline where if the currency stays at this level for you to realize that? These will come through the next couple of quarters. I'll say between Q1 and Q2. Got it. Thank you very much. Yeah. Thank you. Perhaps, if they tell me, I would like to go back to Günther's questions about depreciation and amortization, to be more precise. Indeed, a $750 million rate is how we do beginning the year, and basically, this is a good reference for the first two quarters of 2016. Then we will have some substantial rollout of certain investment in the second half of the year. So for the full year, I would guide to model between $710 million and $720 million. Sorry for the inaccuracy of the prior answer. Thank you, Carlo. Thank you, Gennaro. Next question, please. The next question is from Francesco Provitera from Acros. Please go ahead. Thank you. First of all, congratulations to Carmelo Papa on his retirement. Yeah. Best wishes. Thank you. My question is, in your reporting, the exit of the set-top box operation will be an occasion for a restatement of the figure, or we will see a sort of décalage of revenues, and we will not have a segregation of revenues into a discontinued operation and an evidence of the restructuring cost? Today we announced also the new organization of the company based on the three product groups. Obviously, when we will sit together, also with independent accountants, the way of reporting the segment reporting on these three reportable segments, we would, at the end, accordingly realign for comparative purpose the result of the prior year. I intended today to give you really a very preliminary and not necessarily final indication of the revenue size and the operating margin of these new three product groups. For this pro forma purpose, I have reported the microcontroller and the digital ICs group, excluding the set-top box business in 2015. Then how actually will fall in the reportable segments in the accounting for each quarter from first quarter 2016 on, we will present when releasing the earnings in April. Of course, what we will do as we have done in the past, is to offer you the full comparability April to April to the prior periods. So the current guidance for first quarter is on the same reporting basis we were used to have? Absolutely. The current guidance has not changed in the perimeter of revenues and gross margin for the company. Okay. Thank you. Okay. At this point, I think we'll move on to our last question, please. The last question is from Aditya Metuku from Bank of America. Please go ahead. Yeah. Good morning, gents. I had a few. Firstly, on the revenues and the set-top box business in Q4, can you give us some color on what the revenues were and over what timeframe do you expect these revenues to roll off? Secondly, on the phasing of the cost savings and restructuring charges, how should we think about these? Also, if you could comment a bit on the contribution margins from the set-top box business, i.e., excluding depreciation in the fourth quarter, that would be really helpful. Thank you. Okay. Well, I will try to take your questions. On revenues, we have already indicated that in year 2015, the revenue for set-top box have been about $210 million. We expect a very progressive phase-out. For 2016, we anticipate between $60 million to $70 million revenues erosion. Then perhaps it could be about $100 million in 2017 and even going forward. But we still expect the revenues from this product based on the product lifespan in 2018 as well. So it will be very progressive as we have also experienced with prior cases in the past years. Second question is the restructuring charges out of the overall $170 million expected over the completion of the program. We may consider about $100 million, between $90 million to $100 million, to be posted in the P&L of fiscal year 2016. Of course, this also very much depend and is contingent to the discussion and the consultation around the execution of the plan, and the largest part of that will be in the first quarter. The largest part of the $170 million, so about $100 million will be in the first quarter? The first quarter, correct. Yes. Okay. The second question on the gross margin excluding depreciation. Oh, sorry. Yes, you are right. The third question. This, I believe I have already mentioned. At the end, the gross margin of set-top box is well below company average. It is substantially below company average, even without considering unused capacity charges as really a reference point, not a detailed indication. I would say that it is- What is it? about half of the average gross margin of the company. What is it? Around 22%. Oh, okay. No, it is even less. It is south of 20%. That is excluding depreciation? No, excluding unused capacity charges. Okay. But you know, there is a lot of wafers for set-top box coming from foundry. Yeah. What would the gross margin be if you exclude the unused capacity charges? Because at the end of the day, those charges are not going to go away when you Yeah. In the range of half of the company average, so south of 20%. Okay. Thanks. You're welcome. Thank you, Adi. At this point, we'll go ahead and close our fourth quarter and 2015 year conference call. We appreciate your participation. As a final note, STMicroelectronics will be in Barcelona for the Mobile World Congress. We will host an investor event on February 23rd, of which we'll send out the details shortly. Again, thank you for your participation. Thank you all. 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.