STMicroelectronics N.V.

Ladies and gentlemen, welcome to the STMicroelectronics Q3 2021 earnings release conference call and live webcast. I'm Moira, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference has been 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, Investor Relations. Please go ahead, madam.

Thank you, Moïra. Good morning, good morning, everyone, and thank you for joining our third quarter 2021 financial results conference call. Hosting the call today is Jean-Marc Chery, ST'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, and 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 completion of this call. This call will include forward-looking statements that involve risk factors that could cause ST'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 yourself to one question and a brief follow-up. With this, I'd now like to turn the call over to Jean-Marc, the Vice President of STO.

So, good morning everybody, and thank you for joining ST for our Q3 2021 earnings conference call. Let me begin with some opening comments, starting with Q3. Net revenues increased 6.9% on a sequential basis, and more. The revenue performance was driven by strong global demand and by our engaged customer programs in personal electronics. This was partially offset by lower than expected revenues in automotive, Our growth margin at 41.6% and operating margin of 18.9% improved from 36% and 12.3% respectively. Our net income nearly doubled to $474 million. On a year-to-date basis, net revenues increased 31.8% to $9.2 billion Driven by growth in whole product groups except the radio frequency communications subgroups. For the nine months period, we reported a growth margin of 40.4%, operating margin of 16.7%, and net income of $1.25 billion. On Q4 2021, at the midpoint of our hot look, we expect net revenues in the fourth quarter, to be about $3.4 billion, representing an increase of 6.3% sequentially. Gross margin is expected to be about 43% at the midpoint, representing a sequential increase of 140 basis points. For the full year 2021, based on the midpoint of our Q421 guidance, We now expect full year revenues of about $12.6 billion, representing a year-over-year increase of 23.3% at the high end of the launch we provided in July. This growth is expected to be driven by continuing strong dynamics in all the end markets we address and our engaged customer programs. Our 2021 CAPEX investment plan of about $2.1 billion remains unchanged. Now, let's move to a detailed review of the third quarter. The revenue performance was driven by strong global demand and by our engaged customer programs in personal electronics, partially offset by the impact of the pandemic in Malaysia. Net revenues increased 19.9% year-over-year with higher sales in our three product groups and all subgroups except, as expected, the radio frequency communications subgroup. Year-over-year sales to OEMs increased 9.9% and 48.6% to distribution. On a sequential basis, net revenues increased 6.9% Substantially in line with the midpoint of our outlook, this growth was mainly driven by IMS up 25.2% and, to a lesser extent, MDG up to 2.6%. While IDG decreased by 6.7%, caused by more severe than anticipated reduced operations at our Malaysian manufacturing facility due to the pandemic. Specifically, the incremental revenue impact in Q3 related to Muar is about $100 million above our initial assessment, mainly for the automotive subgroup. Gross profit was $1.33 billion, increasing 38.7% on a year-over-year basis. Growth margin increased year-over-year to 41.6% from 36%, mainly driven by manufacturing, both efficiency and better loading, as well as product mix and more favorable pricing. These positive drivers were partially offset by negative current effects, net of edging. Our third quarter growth margin was 60 basis points above the midpoint of our guidance, driven by product mix. Third quarter operating margin was 18.9% from 12.3% in Q3 2020, with improvements in all three product groups. Both net income and diluted earnings per share nearly doubled year over year, respectively reaching $474 million and $0.51 from $242 million and $0.26 per share into $3.20. Looking at the year-over-year performance, all product groups recorded double-digit growth. EDG revenues increased 18.1% on growth in automotive and power districts. EMS revenue increased 27.1% on higher analog MEMS and imaging product sales. MDG revenues increased 12.9% on growth in microcontrollers, partially offset by the expected decline in radio frequency communication. By product group on a year-over-year basis, all product groups showed improvement in operating margins. ADG operating margin increased to 10.8% from 5.8% IMS operating margin increased to 24% from 17.5% MDG operating margin increased to 23.9% from 17.4% Net cash from operating activities more than doubled to $895 million in Q3 versus $385 million in the year-ago quarter. CAPEX in third quarter was $437 million compared to $390 million in the year-ago quarter. Free cash flow improved to $420 million compared to a negative $25 million in 2023. We exercise the call option of the early redemption of our 2024 tranche B convertible bond issued in 2017. As a consequence, bondholders exercise their conversion rights on the total of $750 million, principal amount of the bond. In the third quarter, we fully settle this bond, delivering about $5.8 million Treasury Shares, and paying $1.26 billion in cash, which includes the $750 billion principal amount. During the third quarter, we paid $55 million of cash dividends to shareholders, and we executed an $87 million share buyback, in connection with our new share repurchase program, initiated on July 1st of this year. Our net financial position was $798 million at October 2, 2021, reflecting total liquidity of $3.46 billion and total financial debt of $2.66 billion. Let's now discuss the market and business dynamics. Similar to the second quarter, the backdrop of strong global demand continued, with supply chain remain In automotive, bookings remain strong in Q3 and the backlog still covers about 18 months of demand. Demand continues to be well above our current and planned manufacturing capacity. One of the biggest challenges in the quarter for the whole automotive industry has been the pandemic situation in Malaysia. A country accounting for 13% of the worldwide ship assembly testing production. This had an impact also on us. First of all, to our deepest regret, it impacted our employees and their families at our site in Murat. Then, there was the operational impact. With the worsening of the situation in July and August, the impact of reduced operations in our facilities in Muar became more severe than anticipated when providing our Q3 2021 business outlook. Our site went through a period of partial or complete closures with a progressive return to 100% production capacity during Q3. Moving now to car electrification and digitalization. In car electrification, we added to our list of projects for silicon carbide devices. Overall, our engagement increased again during the quarter, now with 85 ongoing programs and 70 customers, equally split between industrial and automotive. I am pleased to announce that Based on our strong pipeline of design wins and market dynamics, we now anticipate to reach our target of $1 billion of silicon carbide renews in 2024, one year earlier than planned. New design wins in Q3 include a Generation 3 silicon carbide MOSFET for an electrical vehicle climate control compressor, There were also a number of other electrical vehicle applications where we had success with complementary technologies. These include sockets for high and low voltage silicon MOSFETs and microcontrollers in battery management systems and traction inverters. MOSFETs in inverters, outbound chargers and DC to DC converters and VI power in electrical Vehicle battery packs. In car digitalization, during the quarter, we had a number of design wins with our 32-bit automotive microcontroller family in applications like body domain, smart gateways, as well as a win for our Teseo GNSS chipset in an audio-video navigation system. Also, in our automotive sensor business, we run sockets with automotive-grade inertial measurement units across multiple applications such as telematics, door control, and navigation. Moving now to industrial. We continue to see very strong demand both in high-end and consumer industrial. and with distribution as well as OEMs, in line with our broad approach in the highly fragmented industrial market. Inventories of our products at distributors continue to be lean across all product families with high inventory terms. We address the industrial end market with our general purpose and secure embedded processing solutions Power Energy Management Products, and our sensors and analog portfolio. In our model processing, we are continuing to strengthen our leadership through the SCM32 family, offering an ecosystem. As I have mentioned before, we have a particular focus on wireless connectivity, security, and artificial intelligence. We are seeing increasing success with our STM32 wireless product line, achieving design wins across a broad customer base. We strengthen support for wireless design with additional software tools, as well as new modules that will help developers go faster. In artificial intelligence, we release tools that add new artificial intelligence methods to our STM32QEI. In power and energy management, we achieve a number of wins with our power discrete portfolio. For example, with silicon carbide transistors and modules, with high and low voltage silicon MOSFETs, with IGBTs, and with diodes. Applications include solar inverters, energy storage systems, power adapters, home appliances, air conditioning and lighting, welding, and industrial power supplies. We also want a 1200sic base power module for an electrical vehicle charging station. In the quarter, we also add many new designs with our industrial analog products, with awards in applications like motion control, smart grid, factory automation, and home appliances. We continue to win business in sensors for industrial applications such as power tools and with our specialized devices like inclinometers. Moving now to the personal electronics market. In Q3, we continue to see strong demand for smartphones and for other connected devices, including wearables, tablets, wearables, through wireless TRO headsets and game consoles. Our first strategic objective in personal electronics is to lead in selected high-volume smartphone applications with differentiated products or custom solutions. During the quarter, we want sockets in a number of devices with motion sensors, ambient light sensors, time of flight ranging sensors for laser autofocus, wireless charging products, touch display controllers, and secure solutions. Our second objective is to leverage our broad portfolio to address high-volume applications. Here, we had wins with a broad range of light, motion, and environmental sensors, as well as with analog power and microcontrollers in applications such as smartwatches, 2IRS0 headsets, and smart shoes. We also progressed on engagements with several leading players for our laser beam scanning solutions for augmented reality. In communication equipment and computer peripherals, we continue to see adoption of 5G-related products, as well as a sustained demand for PCs, mainly for enterprise notebooks. However, following the recent Helios satellite launches, I can confirm that our programs and ramp-up are on schedule. We have three strategic objectives in our approach to this end market. One is to address selected applications in cellular and satellite communication infrastructure. In this area, we were awarded new sockets in a radio frequency designed for satellites. We also target selected high-volume applications with differentiated products or custom solutions while leveraging our broad portfolio. Our wins here include time-of-life sensors for laptops, many general-purpose MCU design hints, as well as a win with our MasterGAN family for smart charging controls in an ultra-slim power adapter. Now, let's discuss the fourth quarter outlook. For the fourth quarter, we expect net revenues to be about $3.4 billion at the midpoint, representing a growth of 5.1% year-over-year and 6.3% sequentially. Growth margin is expected to be about 43% at the midpoint, representing year-over-year and sequential increase of 420 basis points and 140 basis points, respectively. Based upon our year-to-date results and Q4 midpoint, we now expect 2021 net revenues of about $12.6 billion at the high end of the range we provided in July. This plan will translate into year-over-year growth of 23.3% at the midpoint. Drivers of this expected growth are the continuing strong dynamics in all the end markets we address and our engaged customer programs. To conclude, our results in the third quarter and higher sales plan for the full year reflect strong year-over-year revenue growth, translating in higher operating profitability, net income, and free cash flow. Revenue growth stems from the expected continuation of strong dynamics in all the end markets we address and our engaged customer programs. Our focus stays on customers. We continue to adapt our supply chain to support their strong demand. We also continue to provide leading-edge technology and product innovation to enable smarter mobility, more efficient power and energy management, The wide-scale deployment of IoT and 5G in a more sustainable world. Thank you and we are now ready to answer your questions.