Q4 2008 Earnings Conference Call Remarks
Wednesday, January 28, 2009
President and Chief Executive Officer
Good afternoon and good morning. Thank you for joining us on today’s conference call.
The Company’s fourth quarter results were within our revised guidance, but were substantially lower than our original outlook. As many companies have stated, the demand environment weakened dramatically as the quarter progressed. The high level of uncertainty in the global economy and the related effect on the key application markets and customers we serve led to substantial order push-outs, cancellations and lower demand in total for our products. Unfortunately, we expect this weak environment to continue for some time.
From a revenue perspective, all application segments were negatively affected, with Automotive, Wireless and Computer Peripherals showing a significant drop in demand on a sequential basis. Consumer and portions of Industrial also decreased. In the fourth quarter MEMS, Smartcards and Microcontrollers registered solid levels of growth on a year-on-year basis.
Gross margin came in just below the mid-point of our revised outlook and this was mostly due to our final product mix being below our expectations, in particular due to wireless. We benefited from currency on a sequential basis but the lower utilization of our fabs had a negative impact on gross margin estimated at about 200 basis points. You may recall that at the end of Q3 we anticipated taking down fab utilization given the changing demand environment, but in the end the downward movement was much greater than we, our customers and the market had anticipated. I will come back to near-term margin trends when addressing the 2009 first quarter.
Despite the weak environment, we delivered net operating cash flow of $153 million in the fourth quarter.
Now let me turn to a review of 2008.
One year-ago at this time we shared with you that our efforts in 2008 would be focused along four primary blocks: sales expansion, product portfolio management, an asset-lighter strategy and further restructuring in manufacturing. We made significant progress during 2008. Let me review several key points.
- First, with respect to sales expansion we indicated that we expected to grow the top line in 2008 and gain market share. We achieved that goal. Organically, we grew our full year 2008 revenues 4.8%, excluding FMG and NXP Wireless, in a market that in our estimation declined overall in 2008. In fact, our “core business”, which now includes NXP Wireless, grew 10% in 2008. Consequently, we estimate we are approaching a record level of market share.
- Second, with respect to portfolio management, we indicated that we were working diligently on our product portfolio positioning. In 2008, we focused our resources on two major blocks, power applications and multimedia convergence and we made significant progress, specifically within the wireless segment. Importantly, we concluded the de-consolidation of our flash memory business and made giant steps in the consolidation of the fragmented wireless semiconductor market. This is an exciting time for ST has we are rapidly moving towards the creation of a true world player in semiconductors and platforms for mobile applications, first with the ST-NXP Wireless JV and, in the immediate future, with the closing of the JV with Ericsson Mobile Platforms.
- Third, with respect to our asset-lighter strategy we have made steady progress over the last three years. For 2008, our initial capital budget targeted a capex to sales ratio at 10% of revenues. We reached our goal, even when considering the sharp drop in sales in the fourth quarter. In 2008 capital expenditures were $981 million, or 10% of net sales which represents a significant reduction in investment when compared to the 14.4% average of net sales in 2005 to 2007 timeframe. In 2009, we expect to continue this trend with a capex budget of $500 million, or a 50% reduction from 2008 levels.
- Fourth, we have continued to work hard on improving our cost structure. Many of our actions were started before the recent economic slowdown and we will start to see the benefits in 2009. We are making steady progress on our plan to restructure our manufacturing facilities in the US and Morocco. Additionally, in November we announced an accelerated plan to capture synergies related to the ST-NXP Wireless merger which included a reduction of 500 people. In the fourth quarter of 2008, we have reduced our headcount by 1,200 with a majority of the jobs located in high cost and Euro zone areas.
- And finally, we focused on cash flow and closed the year with a very solid financial position. For the full year we generated close to $650 million, excluding $1.7 billion paid for M&A, and $153 million in the tough fourth quarter environment. Our strong balance sheet includes about $2.2 billion of cash and equivalents even after paying cash dividends totaling $240 million and repurchasing shares in the amount of $313 million. Importantly, we have a clear plan in place to move again to a net positive cash balance, from today’s net debt balance.
So…those achievements are the foundation on which we intend to continue to build our immediate future.
Turning to 2009, we have four key priorities for ST.
First, 2009 will be a year focused on improving our competitiveness as we execute on our plan to complete the wireless joint venture with Ericsson Mobile Platforms during the first quarter. All important steps are tracking to plan .
Second, to help us manage through the current severe industry downturn, we are targeting to reduce our costs by over $700 million in 2009 in respect to the Company’s fourth quarter 2008 cost base. As I mentioned, part of this number is comprised of several major cost initiatives, begun before the current downturn. The second portion of the cost savings program are new, comprehensive programs focused on resizing our manufacturing operations and streamlining our R&D efforts. In total, the cost program affects approximately 4,500 jobs on a net basis. Of the total, about 3,500 relate to our manufacturing area as we work to realign our manufacturing operations, including resizing 6” capacity, to some extent 8” operations and maximizing the utilization of 300mm by bringing in-house some of the work previously handled by silicon foundries. Out of the total reduction in jobs, about 1,000 across R&D and SG&A will be affected.
Our third priority for 2009 is to maintain a strong and flexible capital structure. A key ingredient is careful management of our capital investments. We plan to continue to advance our asset lighter strategy and in view of the downturn, we have set an initial capex budget of $500 million for 2009. This would represent a 50% reduction compared to 2008.
And fourth, thanks to our strong and consistent investment in our product portfolio we are in a solid position to offer to our customers innovative products to position the Company to gain share in 2009. Again, I see two major blocks for ST as our domains for excellence: power applications around industrial and power conversion and multimedia convergence. Our goal is to maintain or increase our leadership position.
To help achieve this goal, I would like to mention a new initiative which we have recently launched, aimed at promoting our vast offering of devices such as sensors, microcontrollers, advanced analog and power actuator devices for the industrial and multi-segment sector. As you know, for some time we have been accelerating our investment in new product design in the field of smart power and advanced analog, and that investment is paying off. We have also invested in microcontrollers, particularly in 32-bit MCUs, where our effort is is very strong and broad ranging. We have solid know-how, a large team of talented designers, and a synergistic approach to innovation between product design and application labs that give us confidence in our ability to accelerate growth in the domain
And since I am discussing this product group, I will say a few words on MEMS which is a very promising product family. Here we are rapidly growing in sales and ranking and are bringing to market innovative solutions such as accelerometers and gyroscopes for game controllers and other applications.
We have also been very active in the the area of multimedia convergence. I have briefly discussed the advances we have made in our wireless business so let me reconfirm our technological leadership and leading position in consumer set top boxes. In 2008, we benefited from our early transition to H.264 technologies and are now in a very strong market share position.
Now, let’s discuss the first quarter of 2009: As you have heard from other companies in the semiconductor industry as well as in a number of other industries, the lack of visibility is unprecedented so it is very hard to assess to what level end-market demand is resetting to. This becomes a chain reaction, as we then need to take measureable actions to align our resources with the near-term level of demand. We are not giving formal guidance for the first quarter. We are sharing instead our internal planning assumptions:
- First, from a revenue perspective, we are assuming a much larger impact from the global economic downturn in Q1 2009 than we saw in the 2008 fourth quarter. Specifically, for internal purposes we are planning our operations based on revenues in the range of $1.5 billion to $1.85 billion during the first quarter.
- In order to significantly reduce the level of our inventory, beginning with the month of December 2008, and then moving into this quarter and the next quarter, we have begun to strongly reduce the loading of our fabs to low levels of about 50%. Consequently, based upon our various planning assumptions, our gross margin is estimated to be in the mid to high 20s as a percentage of sales.
In summary, I would like to share a few closing points. This is a very difficult time for individual, companies and markets, as the global economy appears to be resetting itself in a very compressed period of time. Nonetheless, environments such as these also present opportunities. Looking at ST, we have a number of strengths. First, we have a solid balance sheet, a good credit rating and flexible funding alternatives. And, post the closing of the JV with EMP, our net cash position is expected to turn positive. Second, over the course of the last three years we have significantly strengthened our product portfolio, leading to a record market share. Third, we have made major advances in the overhaul of our cost structure and today we have articulated a cost savings program of $700 million that will take effect in 2009
I believe that we, at ST, have made the right strategic choices and are correctly executing on them. I also believe that, as we started our restructuring process ahead of the severe economic downturn, we have a good momentum in place and are well positioned in 2009. We are determined to take all of the appropriate initiatives required to face the new challenges we are confronted with. And therefore, I am confident we are correctly positioned to be among the companies that will emerge from the downturn in a better competitive position than before.
With that my colleagues and I are now available to answer your questions.
President and Chief Executive Officer