STMicroelectronics N.V.

Ladies and gentlemen, welcome to the ST Microelectronics Q2 2020 earnings results conference call and live webcast. I am Alessandro, the course call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Celine Berthier, Group Vice President, Head of Investor Relations. Please go ahead.

Thank you, Alessandro. Good morning. Good morning, everyone. Thank you for joining our second quarter 2020 Financial Results Conference Call. Hosting the call today is Jean-Marc Chery, Assistant President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President of Finance, Infrastructure and Services and Chief Financial Officer, Marco Cassis, President of Sales, Marketing, Communications and Strategy Development. This live webcast and presentation materials can be accessed on ST's Investor Relations 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 these results to differ materially from management 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 SE'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. And I would like to turn the call over to Jean-Marc, ST's President and CEO.

Thank you, Celine. Good morning and thank you for joining ST on our second quarter 2020 earnings conference call. I trust that you, your families and your colleagues are staying safe and healthy. especially those localized in most infected regions. Now, to ST results and plans for the rest of the year, let me begin with some opening comments. Starting with Q2. During the quarter, we returned to normal operations, supporting our customers' demand, and continuing to ensure the health and safety of our employees. Net revenues were $2.09 billion, down 6.5% on a sequential basis. As expected, this was due to a decline in automotive, analog, and imaging products, partially offset by growth in microcontrollers, digital, and power discrete. Growth margin at 35% included 310 basis points of unsaturation charges. Our operating margin was 5.1% and our net income was $90 million. For the first half of 2020, net revenues grew 1.6% year over year to $4.32 billion driven by higher sales in analog, imaging, and microcontrollers, partially offset by lower sales in automotive and power discrete. Our operating margin was 7.8% for H1 2020, and our net income was $282 million. Looking at Q3 2020, At the midpoint of our guidance, we expect net revenues in the third quarter to be about $2.45 billion, representing sequential growth of about 17.4%. Growth margin is expected to be about 36% at the midpoint and includes about 200 basis points of unsaturation charges. For the full year 2020, we will drive the company based on an updated plan for full year 2020, net revenues in the range of about $9.25 billion to $9.65 billion. With growth in the second half over the first half to be in the range of $610 billion to 1 billion and 10 million dollars. We expect this growth to be driven by engaged customer programs, new products, and improved market conditions. Our capex plan for 2020 is now 1.2 billion dollars. For H1 2020, we invested 578 million dollars. Now, let's move to a detailed financial review of the second quarter. The quarter was impacted by the weak demand environment, especially in automotive, as well as the operation and logistics challenges due to the governmental regulations related to the COVID-19 outbreak that started in Q1 2020. Net revenues decreased 4% year-over-year, with lower sales in imaging, automotive, and MEMS, partially offset by higher sales in microcontrollers, digital, analog, and power discrete. Year-over-year sales to distribution increased 9.7%, and sales to OEMs decreased 9.7%. On a sequential basis, net revenue decreased 6.5%, 380 basis points better than the midpoint of the guidance we gave at the end of April. By product group, revenue increased sequentially for MDG, while ADG and AMS decreased. Our gross profit was $730 million, decreasing 12.2% year over year. Gross margin was 35%, decreasing 320 basis points year over year, mainly due to unsaturation charges, including the impact of COVID-19 workforce-related restrictions, and Price Pressure. More specifically, unsaturation charges were 310 basis points. Our second quarter margin was 40 basis points higher than the midpoint of our guidance, as unsaturation charges were better than expected. Moving on to net operating expenses. As we outlined last quarter, we are maintaining strict discipline on expense control while protecting our R&D, sales and marketing programs, and transformation initiatives. Net operating expenses at $620 million were below what we anticipated when entering the quarter. Our second quarter operating margin was 5.1%, decreasing by 390 basis points on a year-over-year basis. Both ADG and AMS operating margins decreased, while MDG's operating margins improved. Our net income decreased to $90 million and EPS to $0.10, compared to $106 160 million dollars and 0.18 dollars respectively a year ago. Turning now to the revenue performance of the product groups on a year-over-year basis. ADG revenues decreased 17.8% on weaker demand in legacy automotive, while power discrete grew. revenues decreased 10.1% with MEMS and imaging lower while analog sales were higher. MDG revenues increased 24.1% reflecting strong growth in microcontrollers. In terms of operating margin by product group on a year-over-year basis, MDG operating margin increased to 15.9% from 7.6%, while ADG operating margin decreased to 2.3% from 8.2%, and AMS operating margin decreased to 9% from 10.7%. Net cash from operating activities increased 19.4% to $387 million in Q2, compared to $324 million in the year-ago period. Free cash flow was a positive $28 million, including capex of $312 million compared to a negative $67 million in the year-ago quarter. During Q2, we paid cash dividends totaling $37 million and executed a $63 million share buyback as part of the company's previously announced share repurchase program. Moving now to our business and end-market review, let me start with a comment. During the second quarter, we returned to normal operations, supporting our customers' demands, and continuing to ensure the health and safety of our employees. These have been our priorities since the start of the pandemic. In preparation for the return of all our employees to our sites worldwide, we put in place very strict safety protocols. Today we are back to full operation of our manufacturing activities worldwide. Our non-manufacturing employees, located in areas still under specific restrictions, are progressively returning to our offices, in line with local regulations. Our back-to-site plan, coupled with the engagement of our employees, enables us to keep all our committed programs on track and to maintain a high level of customer So, let's now discuss the market and business dynamics. The automotive market was hit by closures at carmakers and tier 1s at different times across the globe, first China in Q1, followed later by Europe and the U.S. Q2 is confirmed to be the bottom and the market was worse than expected, with lockdowns extended in some regions. China confirmed a recovery partially compensating for the worst situation in Europe and in the US. We have started to see benefits from automotive incentives in France from June and South Korea for the full year. supporting the anticipated recovery in Q3 and Q4. The legacy automotive market is clearly suffering, amplified by the pandemic situation. We did not see and do not see any substantial slowdown of customer activity as far as the long-term megatrends and ST strategic growth driver in smart mobility are concerned. Electrification and Digitalization. In car electrification, we had again a number of new design ways for silicon carbide MOSFETs. In a traction inverter and in an onboard charger and DC-DC converter for electrical vehicles. We are also seeing opportunities for silicon carbide in electrical vehicles and many others. An example is climate compressors, where the characteristics of silicon carbide allow it to address the efficiency and side challenges in this specific application. Beyond carbs, we also add an important design win for a battery management system for e-bikes, a real growing area. Our silicon carbide engagement with customers has increased during the quarter. There was no slowdown in already awarded projects and, as of today, we are engaged with 58 customers in 64 ongoing programs. These programs are split around 50-50 between automotive customers and industrial customers. Moving to car digitalization, where we are focused on technologies and solutions for driver assistance and autonomous driving, V2X communications, and embedded processing solutions supporting new car architectures. During Q2, we saw a continuous flow of awards for our 28 nanometer and Phase Change Memory Microcontrollers driven by the evolution of car architectures. On ADAS, we saw a strong level 2 and level 3 adoption in mid- and entry-level cars. We expect that during 2021, one third of cars produced will have a vision-based system We are also growing our share in automotive microcontrollers, including those for 77 GHz radar applications. During the quarter, we also want sockets for our global shutter automotive imaging solution for driver monitoring systems from two major OEMs. And this is an important step in our diversification strategy related to optical sensing solutions. Moving now to industrial. The dynamics of the industrial market remain mixed. Some applications like home appliances and lighting are still weak. But during the quarter, we started to see some positive signs in key application areas for ST, such as renewable energy and factory automation. Distribution is an important element of our go-to-market strategy in industrial. Here, the overall situation in the channel has improved. In Asia, and mainly in China, point-of-sales trends were strong sequentially, and now also up year over year. With a healthy level of inventory in our distribution channel, especially for microcontrollers and MEMS, from April, we also started to see positive signs for analog and power and discrete. America and Europe are still weak, Point of sales on a year-over-year basis is not improving and inventory levels are still somewhat high in general purpose analog and industrial power conversion. We address the industrial markets with our general purpose and secure microcontrollers, analog and sensors, power and energy management solutions. of our objective in industrial is leadership in embedded processing solution. We recently made two acquisitions for further strengthen the wireless connectivity capabilities of our STM32 microcontroller family. These acquisitions cover narrowband cellular and ultra-wideband wireless technology from Riot Micro and Bespoon. These technologies are key wireless connectivity solutions that will enable a new wave of IoT-connected objects and innovative applications, especially in industrial. They complement our existing wireless connectivity offering. We have now shipped over 6 billion parts from our STM32 family. In parallel, we are continuously strengthening our offer in terms of hardware, software, and ecosystem. Some examples from the quarter include the launch of the STM32 digital power ecosystem for power supply controls, tools from partners that complement our artificial intelligence capabilities, and software packages that simplify development of safety-critical products. Another strategic objective is to accelerate our growth in analog and sensors for industrials. In Q2, we won several new designs with our analog products for industrial applications. For example, we received awards for motor drivers and smart power products From industrial equipment, lighting and home appliance makers, as well as metering customers. And in industrial sensors, our new industrial grade inclinometer was adopted by multiple large customers. We are targeting expansion in industrial power and energy management. and with our power discrete products for industrial applications, we landed design wings for high voltage MOSFETs in power supplies, solar, lighting, adapters and home appliances. We also captured several hours with silicon carbide again, IGBT and intelligent power modules for motor control, charging stations, and Renewable Energy. We also had design wins with our power management IC combined with an STM32 standard microprocessor. Moving now to the personal electronic market. Despite the slowdown in consumer demand for smartphones during the quarter, We saw increasing demand for anything related to accessories, wearables, gaming, and continued innovation-driven semiconductor demand for smartphones. We share this market with our sensors, secure solutions, power management, analog and front-end modules. We lead in a number of very specific high-volume smartphone applications. as well as in wearables such as smartwatches, true wireless stereo hearables and gaming devices. We also aim at capturing opportunities in 5G with RF mixed signals. During the quarter, we won numerous new designs and ramped production of our products in flagship devices, including an increasing number of 5G models. Some examples of our products include motion sensors, time-of-flight ranging sensors, secure solutions such as eSIM and secure elements with NFC, touch display, and wireless charging products. We ramped production of our new multipixel direct time-of-flight sensor for world-facing camera application in a new flagship device for a global smartphone leader. In communication equipments and computer peripherals, during Q2, we saw solid market demand for hard disk drives for servers, as well as continued demand for 5G-related products. Our strategic approach to this end market is focused on cellular and satellite communication. We were awarded a design based on ST-propriety technologies for a processor for a satellite application, as well as several RF projects for telecommunications infrastructure. Now, let's move to a discussion of the third quarter and brief comments on the full year 2020. For the third quarter, we expect net revenues to be about $2.45 billion. This sequential growth of about 17.4% will be driven by engaged customer programs, new products, and improved market conditions. Growth margin is expected to be about 36% at the midpoint and includes unsaturation charges of about 200 basis points fully related to demand. For the full year, I outlined earlier our sales and operating plan to drive FT to 2020 net revenues now in the range of about $9.25 billion to $9.65 billion and for growth in H2 over H1 between $610 million and $1.1 billion. This plan reflects an improvement compared to the previous range of $8.8 billion to $9.5 billion we expected entering Q2. Our capex plan for 2020 is now about $1.2 billion. Before concluding, I would like to share with you our updated plans and timeline for our Capital Market Day. During the ongoing pandemic, we will be conducting a virtual Capital Market Day, as it is not prudent to host a physical event, and we are aware that some of you are not yet in a condition to travel. With this decision, we decided to break The preliminary schedule is as follows. MDG September 15, ADG November 6, AMS November 20, and overall strategic update December 9. To conclude, I would like to reinforce two key points. First, while we continue to ensure the ongoing health and safety of our employees in response to the global pandemic, during last quarter we have returned to normal operations. Our Q2 results, along with our Q3 guidance, are a clear reflection of that. Second, ST fundamentals are solid. The strategic decisions we made years ago have enabled us to successfully serve secular growing market trends addressing key societal needs. We work alongside our customers both for the short and the long term. We are determined to continue to make ST stronger by consistently executing our strategy, quarter after quarter, with a clear sales and operating plan. Thank you, and we are now ready to answer your questions.