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|Q4 2010 Earnings Conference Call Remarks|
Tuesday, January 25, 2011
Carlo Bozotti - President and Chief Executive Officer
Thank you for joining us on our call to discuss ST’s progress during 2010 and our goals for 2011. We held our annual presentation in Paris earlier today and I want to thank those of you who also participated to that event.
2010 was a year of records. Record high revenues – the highest annual sales in ST’s history; record quarterly sales for two product segments; and a record year for the full range of our Sense and Power portfolio: advanced analog and MEMS, as well as microcontrollers and automotive applications.
2010 was also a year of recovery after the 2009 recession. We achieved a turnaround of more than $1.3 billion in operating income compared to 2009. In these two special years we made significant progress in improving our financial performance and as a result we improved our net financial position by $1.7 billion.
To achieve these solid results we focused on four key priorities which I outlined with you at this time last year.
First, market share: We said we would grow faster than our served markets. We did in ACCI and IMS where, in combination, ACCI and IMS grew 38% in 2010 or about 10 points faster than the estimated market.
Second, manufacturing: We said we would increase our total front-end manufacturing capacity in key strategic areas and we did. In fact, we increased our overall front-end capacity by about 20% in comparison to the fourth quarter of 2009. We planned to achieve significant cost reductions in manufacturing and to better serve our customers after having substantially streamlined our manufacturing resources – and we did both of these.
Third, ST-Ericsson: We said ST-Ericsson’s restructuring would be completed during 2010 and it was.
Finally, our fourth priority was to start to get the value ST deserves from its products and we are. As anticipated, 2010 was a very strong ramp of the gyroscope and, during Q4 we shipped our billionth MEMS device. It has also been a strong year for Microcontrollers, Industrial, Analog and our automotive products.
So today, ST today is a much stronger company. As a result of our actions in 2010, ST is significantly better positioned to achieve worldwide leadership in the two application blocks that are a part of our vision: Sense & Power and Multimedia Convergence. And we are well positioned to address the four key growth application areas we are targeting: energy management and savings, smart consumer devices, trust and data security, and healthcare and wellness.
Now, let’s move to our financial performance, where we delivered significant improvements all along the year in four major areas: revenue and earnings, financial returns, capital structure and strategic initiatives.
First, our revenues and earnings:
Looking at ST in total, we moved into our target return on net assets attributable to ST - here I mean taking into account the 50% of ST-Ericsson’s results which actually belong to ST - well ahead of our expectations. In the third quarter our RONA attributable to ST reached 19% and in the fourth quarter we were at 20.7%, compared to our target range of 16% to 22%. Progressively improving operating results and higher net asset turns enabled us to achieve our target. And again, we did this while also managing through this exceptional period of investment in wireless R&D.
Third, our capital structure:
Based upon our cash position and investment requirements we believe we can support an increase in our cash dividend in dollar terms. As usual, any decision regarding the cash dividend would be made by our Supervisory Board and would also be subject to approval by shareholders at our annual general meeting scheduled in May.
Fourth, our strategic initiatives:
Now let’s turn to a brief review of the fourth quarter and a discussion of 2011.
We ended the year with strong momentum, with fourth quarter revenues coming in at the high end of our objectives and our gross margin above the mid-point of our range. Revenue increased 6.6% sequentially and increased 10% in comparison to the 2009 fourth quarter.
ACCI finished the year with record sales. ACCI revenues increased 15% year over year and 4% sequentially. Automotive and Telecom drove these results. At the operating level, ACCI delivered a 29% sequential increase in operating income, leading to an improvement in the operating margin to 11.9%, so now two quarters with double-digit operating margins for ACCI. So we came in well ahead of our high single digit goal exiting 2010 and I remind you that we are driving to a mid-teens operating margin over the mid-term.
Similarly, IMS also completed 2010 with record quarterly sales. IMS is benefiting from advanced analog and MEMS becoming an increasing proportion of the whole portfolio as well as the success of its general purpose and secure microcontroller families.
During the fourth quarter IMS revenues rose 30% year over year and 12% sequentially, with MEMS, microcontrollers, power and industrial products up sharply. IMS delivered an operating margin of 22.5% in the fourth quarter, above the 19.7% achieved in the third quarter. Going forward, we see opportunities to improve the financial performance of IMS.
Wireless net revenues increased 3% sequentially as legacy products decreased. ST-Ericsson is continuing to see very good traction for it new, 2G/EDGE portfolio as well as initial HSPA+ modem sales. In fact, ST-Ericsson is seeing increased traction in the smartphone and tablet markets with products such as their U8500 smartphone platform, which they plan to ramp in the second half of the year with several Tier 1 customers.
Turning to our gross margin, we have progressively improved it in each quarter of this year. In the fourth quarter, gross margin was 39.9%, a 70 basis points sequential increase thanks to manufacturing efficiencies and contribution from new products.
We are comfortable with our year-end inventory position. Inventory turns during the fourth quarter were 4.6.
Turning to our capital expenditures, we increased our investments in 2010 to $1.0 billion, with a larger portion spent during the second half. Our investments were two-fold in nature: adding capacity to meet the higher demand for new products already in volume production like automotive and secondly, preparing for technology shifts on ramping new products, like MEMS and the U8500 smartphone platform.
In order to support our innovative product portfolio and to fuel revenue growth faster than the served market dynamic we expect to invest between $1.1 billion and $1.5 billion in 2011 based on revenue growth. Investments in the next quarter is planned at a level similar to this past quarter.
In summary, we have a number of very important product initiatives underway and we also want to be positioned to respond to higher demand which is driving our above market revenue growth. Investments will continue to be focused on MEMS, automotive and the U8500 smartphone platform and coupled with increased sourcing from foundry in the suitable technologies.
Turning to 2011, let me re-emphasize our four key priorities:
Second, we are anticipating a recovery of ST-Ericsson starting from the second half of 2011 and everyone involved is working toward this goal.
Third, we will continue to make well targeted investments in capacity for MEMS, Automotive and the U8500 and we will be placing additional focus on expanding our fast growing, higher profitability advanced analog and MEMS product portfolio.
Fourth, alongside our product strategies, our marketing encompasses expansion and growth of our customer base, with an additional emphasis on Korea and Japan, where we see excellent opportunities for ST.
Before concluding my remarks, let me outline our first quarter outlook. In line with normal seasonality, the high exposure to New Year holidays in Asia and the accounting calendar, we are anticipating a sequential revenue decrease by about 7 to 12%, which at the midpoint equates to a 10% increase when compared to the year over year period. As a result and based on prices entering the new year contracts, gross margin in the first quarter is expected to be about 39.0%, plus or minus one percentage point.
While ST-Ericsson’s call will follow after ours I would like to highlight several points. While the first half of 2011 will continue to be challenging, we think the company is well on track to ramp into volume production with U8500 in the second half of 2011. We believe the U8500 platform continues to strengthen future opportunities and is better positioned today than three months ago.In summary, as we look to 2011, we anticipate a good year ahead for ST. The semiconductor industry is expected to grow with our served markets increasing approximately 5% to 8% based upon the most recent industry data. Similar to 2010, we expect 2011 to be another year where ST grows faster than our served markets, by continuing to support our innovative product portfolio and moving forward with our marketing initiatives. Equally important we are focused on further advancing our financial performance, by improving our quarterly operating profitability and clean earnings. My colleagues and I would be happy to take your questions now.
Now we would be happy to take your questions…
President and Chief Executive Officer