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January 27, 2005 5:12 pm

STM lays out fresh cost-cutting drive

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Carlo Bozotti, the incoming chief executive of STMicroelectronics, on Thursday promised to be "more aggressive" in shutting down underperforming activities at Europe's largest chipmaker and reducing its exposure to the euro.

As the Franco-Italian chipmaker presented its annual results in Paris, Mr Bozotti said the measures were needed to tackle the negative impact of the weaker dollar and the increasing price pressure in STMicro’s main markets.

“This is very material and very significant. It shows our strong motivation is not just to gain market share compared with last year, but also to guarantee a better financial performance by the group,” said Mr Bozotti.

Mr Bozotti said the first underperforming activity to be closed down would be the access programmes in its modem business. He said the move would trigger a $60m impairment charge in the first quarter.

He said other businesses, such as its memory unit, would need to prove they could achieve a desired level of profitability, or they could also face the chop.

His comments were backed up by Pasquale Pistorio, the 68-year-old veteran due to step down this year after 18 years as STMicro chief executive. “Of course, these are things you do every day, but we need to push on the accelerator as the dollar keeps falling,” he said.

About 60 per cent of the Geneva-based chipmaker’s operating costs are in euros, while about 80 per cent of its sales are in dollars. Consequently, the fall in the dollar wiped $175m off STMicro’s gross profits last year, causing it to miss its end-of-year targets.

To cut its cost exposure to the euro, STMicro is moving large parts of its older chip production from Europe to Singapore. It expects more than half its silicon to be made in Asia by the end of this year, against 19 per cent in 2002.

But Mr Pistorio stressed it was not abandoning its European roots, as its “absolute level of production” in France and Italy would be stable. He also said it would start using financial hedging to reduce euro exposure.

In the fourth quarter, the company rode a downturn in the sector to produce higher revenues, boosted by demand for its wireless, data storage and automotive products.

STMicro said revenues rose 4.3 per cent to $2.33bn, against $2.23bn in the previous quarter and up from $2.11bn a year earlier. Net profits fell slightly to $187m for diluted earnings per share of 20 cents.

For the year, STMicro recorded sales of $8.76bn, 21 per cent higher than the $7.24bn recorded in 2003. Net profits were $601m, or 65 cents per diluted share, compared with $253m in 2003 when there were large restructuring and interest charges.

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