STMicroelectronics N.V.

Good morning, thank you everyone for joining our fourth quarter and full year 2020 financial results conference call. Assisting the call today is Jean-Marc Chery, SE's 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 ESTI'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 ESTI's 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 ST's most recent regulatory findings 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 your face to one question and a brief follow-up. I'd now like to turn the call over to Jean-Marc, ST President and CEO.

So, thank you, Celine. Good morning. and thank you for joining ST for our Q4 and full year 2020 earnings conference call. Let me begin with some opening comments. Starting with Q4. As announced on January 8th, net revenues at $3.24 billion were up 21.3% sequentially. Significantly above The high-end of our guidance. Our engaged customer programs in personal electronics, as well as continuous acceleration in demand, especially of automotive products and microcontrollers, were the main factors that contributed to this result. Q420 gross margin was 38.8%, 30 basis points above the midpoint of our guidance. Our operating margin was 20.3% and our net income was $582 million. Moving to the full year 2020. Net revenues increased 6.9% to $10.2 billion for 2020. Progressively strengthening versus the expectations we provided during the year. This was due to the stronger and faster than expected restart of demand during the second half. Full year 20 growth margin was 37.1%, operating margin was 12.9%, and net income 1.1 billion dollars. Free cash flow for the year was $627 billion and CAPEX was $1.28 billion. Our net financial position increased to $1.1 billion at December 31, 2020, from $672 billion one year earlier. On Q1 2021, at the midpoint, Our first quarter business outlook is for net revenues of $2.93 billion, representing a year-over-year increase of about 31.2%. The gross margin is expected to be about 38.5%. For the full year 2021, we plan for solid revenue growth, outperforming the markets we serve. Smart Mobility, Power Energy Management, the IoT and 5G are driving demand for semiconductor content and these trends have accelerated during 2020. ST Strategy stems from these long-term enablers and we are very well positioned to support our customers across them. We plan to invest about In order to support the strong market demand as well as our strategic initiatives. Now, let's move to a detailed review of the fourth quarter. During Q4, market demand accelerated sharply versus expectations. As we pre-announced on January 8th, Net revenue came in 580 basis points above the high end of our outlook range. On a sequential basis, net revenues increased 21.3%, with all three product groups performing above expectations. PMS was up 42.4%, ADG up 12.1%, and MDG up 5.3%. On a year-over-year basis, Q4 net revenues increased 17.5%, driven by whole-product subgroups, with only far-left communications decreasing, as expected, affected by the U.S.-China trade war. IMF grew 30.8%, MDG grew 15.7%, and ADG So, return to a year-over-year growth, increasing 3.2%. Our growth profit was $1.25 billion, an increase of 16% year-over-year. Growth margin was 38.8%, 30 basis points above the midpoint of our guidance. In comparison to the year-over-year growth quarter, The gross margin decrease of 50 basis points was mainly due to the usual price pressure and negative currency effects partially offset by improved mix and lower on-loading charges. Net operating expenses were $598 million. Included in this amount, other income and expenses improved and more. Q4 operating margin was 20.3%, up 80 basis points sequentially. On a year-over-year basis, Q4 operating margin was up 360 basis points, with an improvement in AMS and MDG partially offset by a decline in ADG. Net income was $582 million and diluted earnings per share were $0.63. Let's look now in more detail at our full year results, starting with the recap of the market and business trends we saw during 2020. which was clearly an unprecedented year with the material sweep. During the first half of the year, our business continuity plans enabled us to support our customers and to continue to execute our R&D programs while maintaining the most stringent health and safety measures. Then from Q3, we saw a much faster and stronger than expected restart of demand for work products, which further accelerated in Q4. In automotive, the negative impact on demand was particularly strong in Q2, especially for legacy automotive in Europe and in the US, with many car makers and tier ones shutting down for a period. Importantly, even at that time, we didn't see any substantial slowdown of customer activity on long-term strategic smart mobility projects. After the summer, global demands start to pick up sequentially, much faster and stronger than the industry has anticipated. We then saw a further acceleration during Q4, driven by car production volumes, replenishment of inventories across the automotive supply chain, and more broadly, semiconductor content increase and many more. Then in industrial, during the first half we saw a demon slowdown in some applications, so appliance, lighting, while others, such as healthcare, remained positive. From the end of Q2 we started to see improved dynamics in key application areas for ST, such as power-related applications, renewable energy, Motion Control and Factory Automation. This continued in Q3 and during Q4, the situation improved strongly across all geographies. Distribution is a key element of our go-to-market strategy in Industrio. Here we saw different regional dynamics. China was hit first by the pandemic effect in Q1, but started to recover as soon as Q2. While the slowdown in Europe and in the US came a bit later in Q1 but continued during Q2. From Q3, we saw improvements in Asia overall with healthy levels of inventory in our distribution channel across all product families and recovery in the Americas and Europe. In Q4, With this positive trend accelerated, inventories of our products at distributors are currently very lean across all product families and geographies, with very high inventory terms. Now, in personal electronics. During the first half, consumer demand for devices like smartphones was clearly impacted by retail lockdowns. The demand for our key products remained strong, thanks to our engaged customer profiles. From Q3, there was a strong restart of consumer demand from smartphones, driven by the introduction of 5G devices. This trend accelerated in Q4. Demand related to accessories was strong throughout the year, with NFC dynamics related to wearables, tablets, and through wireless TRO headsets and game consoles. In communication equipment and computer peripherals, we saw solid demand through the years for products related to hardworking and enterprise servers, while the overall market for hard disk drive was softer. This was also valid in Q4. The 5G equipment rollout went through a significant slowdown in China during Q4. Looking now at our full-year financial results. Net revenue were $10.2 billion for 2020, increasing 6.9% year-over-year, progressively strengthening compared to the full-year expectation shared in April and the regular updates we gave during the year. Sales to OEMs represent 73% of total revenues, while distribution represented By region of origin, 42% of our 2020 revenues were from America, 34% from Asia-Pacific, and 24% from the EMA. In terms of revenues by product group, two groups grew while one declined. ADG revenue decreased 8.9%. Revenue from automotive product subgroup decreased. mainly due to a decline in legacy automotive, partially offset by growth in HEDAS. Revenues for the power discrete subgroup saw a lower decrease, with soft market conditions for industrial in Europe and in America, partially offset by growth in car electrification. IMS revenues increased 18%, mainly driven by imaging and analog products for personal electronics. MDG revenues increased 14.9%, driven by strong growth in microcontrollers at both OEMs and distribution, and partially offset by the strong decline in RF communication products in Q4. Growth margin was 37.1%, 160 basis points lower than 2019. principally reflecting higher on separation charges of about 150 basis points compared to about 70 basis points in full year 2019. Our operating margin for 2020 was 12.9%, in line with the double-digit target we had shared. AMS posted an operating margin of 20.8%, MDG was 16.6%, and Adigie was 5.5%. Net income increased 7.2% to $1.1 billion, translating into debuting earnings per share of $1.20. Moving now to the other financial indicators. Net cash from operating activities increased 12% to $2.09 billion, CAPEX was $1.28 billion, substantially in line with the updated investment plan we announced last April and further refined in Q2 from the initial expectation of $1.5 billion. Free cash flow in Q4 was $512 million, bringing the full-year free cash flow to $627 billion, up 26%. Cash dividends paid to stockholders totaled $168 million. As part of our existing share-buy-break plan, we repurchase shares totaling $125 million during the year. During Q3, ST exercised the call option for the early redemption of its $750 million 2022 Tranche 8 and many more. Our next final shunt position Exiting the year was $1.1 billion, up from $672 million at the end of 2019. Now, let's move to our first quarter 2021 hot look and our perspective on the full year 2021. For Q1, we expect at the midpoint Net revenues of $2.93 billion, increasing year-over-year by about 31.2% and decreasing sequentially by about 9.5%. On a year-over-year basis, all product groups will contribute to the growth. On a sequential basis, the decline will be lower than the usual seasonality. We expect a decline in HMS due to the seasonality in personal electronics, Our gross margin at the midpoint is expected to be about 38.5%, representing a sequential decrease of about 30 basis points. Year-over-year, the increase of about 60 basis points is mainly due to the much lower unloading charges. For the full year, We plan for solid revenue growth outperforming the market we serve. The broad long-term trends in electronic systems that we are focused on have accelerated during 2020 and are driving demand for our products. These trends are smart mobility, power and energy applications, and IoT and 5G. We are also facing an unprecedented market situation. Semiconductor demand is increasing across the entire industry, driven by car production volumes and replenishment of inventories across the automotive supply chain, very low inventory levels of distributors, and stay-at-home effects boosting demand of personal electronics and communication products. In terms of CapEx, So we plan to invest about $1.8 billion to $2 billion in 2021 in order to meet the strong market demand and also to advance our strategic initiative. This amount includes mainly the addition of capacity for our existing whole 300 mm fab, mixed evolution for our most advanced 200 mm fab, and Silicon Carbide Strong Capacity Expansion. It also includes about $400 million of investments for strategic initiatives, as well as the support of R&D activities and the maintenance required by our manufacturing operations. These strategic initiatives are continued investments in our new Agra 300 mm slab, R&D for Gallium Nitride Power Technologies, and the fabrication of silicon carbide substrates. To conclude, on 2020, by return to solid revenue growth, outperforming the market we serve, we maintain our profitability with an operating margin at 12.9% and net income at $1.1 billion, We strengthened our net financial position with strong growth in operating and free cash flow. SP demonstrated both resilience during the first half of this unprecedented year and the ability to support the strong and sudden upswing in demand during the second half. Working alongside our customers and partners, here I am thinking about distributors, Osad, Fondry, and of course, Marius Landau. During all the different phases, we have to go through together in 2020. For 2021, we are determined to continue to make ST stronger. We are convinced that we have the right strategy and resources to do this. Our balanced market position, our focus on high-growth applications, and our solid product IP technology portfolio. These are supported by our operating discipline and agility, now more important than ever in such a dynamic market, and by the improvement programs and transformation programs we are engaged in. This will translate into solid revenue growth and improved financial performance. Thank you. We are now ready to answer your questions.

The first question is from Andrew Gardner from Barclays. Please go ahead.