STMicroelectronics N.V.

Good morning. Thank you everyone for joining our first quarter 2022 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 and Chief Financial Officer, Marco Cassis, President of Analog, MEMS and Census Group, and Head of ST's Strategy, System Research and Application and Innovation Office. These live webcasts and presentation materials can be accessed on ESSI'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 ESSI'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 this morning with the results. and also in ESSI'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. I'd now like to turn the call over to Jean-Marc, ESSI's President and CEO.

So, thank you, Celine. Good morning, everybody. and thank you for joining ST for our Q1 2022 earnings conference call. So let me begin with some opening comments. Starting with Q1. So Q1 net revenues of $3.55 billion and gross margin of 46.7% came in above the midpoint of our business outlook range. This revenue performance, driven by strong demand in microcontrollers, was partially offset by temporarily reduced operations at our Shenzhen, China, manufacturing facility due to the pandemic, which impacted specifically our KDG revenues. Looking at our year-over-year performance, net revenues grew 17.6%. Revenue growth was accompanied by improved profitability Gross margin at 46.7%, up from 39%, and operating margin of 24.7%, increasing from 14.6%. Net income more than doubled to $747 million. On a sequential basis, revenues were substantially flat. On Q2 2022, our second quarter business outlook at the midpoint is for net revenues of $3.75 billion, increasing year-over-year by 25.3% and sequentially by 5.8%. Growth margin is expected to be about 46%. For the full year 2022, Based on a strong customer demand and increased capacity, we will continue to drive the company based on a plan for full year 2022 revenues in the range of $14.8 billion to $15.3 billion. Now, let's move to a detailed review for the first quarter. Net revenues increased 17.6% year-over-year, with higher sales in our three product groups and whole subgroups, except, as expected, the imaging subgroup. Year-over-year, sales increased 14.4% to OEMs and 24% to distribution. On a sequential basis, net revenues decreased 0.3%, Coming in 130 basis points above the midpoint of our hot look, this performance was mainly driven by MDG, with revenues up 12.8% on better-than-expected manufacturing efficiencies for microcontrollers. ADG revenues increased 2.5%, impacted by the temporarily reduced operations at our Shenzhen, China manufacturing facility due to the pandemic. TMS revenues decreased 13.8% sequentially, substantially in line with our expectations. Gross profit was $1.65 billion, increasing 40.8% on a year-over-year basis. Gross margin increased year-over-year to 46.7% from 39%, largely driven by favorable pricing and improved product mix. Our first quarter growth margin was 170 basis points above the midpoint of our guidance, driven by similar pricing and product mix factors. First quarter operating margin was 24.7%, increasing from 14.6% in Q1 2021, while supported by improvements in all three protocols. Both net income and deducted earnings per share more than double year-over-year, respectively reaching $747 million and $0.79 from $364 million and $0.39 per share in Q1 2021. Looking at the year-over-year sales performance by product groups, ADG revenues increased 20.5% on double-digit growth in both automotive and in power districts. EMS revenue increased 0.4%, with growth in both analog and MEMS, while Imagine Products sales decreased as expected. MDG revenues increased 35.2% on strong growth in both microcontrollers and in RF communications. In terms of operating margin, all three product groups delivered year-over-year expansion. ADG operating margin increased to 18.7% from 8.2%. AMS operating margin increased to 22.6% from 17.2% and MDG operating margin increased to 34% from 19.4%. Net cash from operating activities increased 38.6% and many more. CapEx in the first quarter was $840 million compared to $405 million in the year-ago quarter. After the strong investment in CapEx, free cash flow was $82 million In Q1 2021, it was $261 million. During the first quarter, we paid $49 million of cash dividends to stockholders, and we executed an $86 million share buyback as part of our current share repurchase program. ST's net financial position, non-US gap. was $840 million at April 2nd, 2022 and reflected total liquidity of $3.4 billion and total financial debt of $2.6 billion. This includes a $107 million increase in total financial debt in connection with the adoption on January 1st, 2022 of the new US GAAP reporting guidance applicable to convertible debt. At December 31st, 2021, ST's net financial position was $977 million. Let's now discuss the market and business dynamics during the quarter. Overall, demand continue to be strong. Starting with the automotive market, we continue to see strong demand in Q1, with a lower number of vehicles produced worldwide compared with initial expectations. This strong demand reflected the combined effect of replenishment of inventories across the automotive supply chain and the ongoing electrification and digitalization transformation of the industry. Bookings remain strong across all customers and geographies. Backlog visibility is still about 18 months and well above our current and planned 2022 manufacturing capacity. The accelerated transformation of the vehicle industry towards more electrification and digitalization brought additional wins and opportunities for us during QA. Silicon carbide devices are a key component of car electrification. During the quarter, we again increased the number of ongoing silicon carbide programs for the automotive and industrial markets to 98, spread over 75 customers. These projects are mostly equally split between the two end markets, and we are in line with our revenue targets. We had a number of new design wins in Q1 with ST power modules as well as with a module maker using our generation 3 silicon carbide MOSFET technology for electrical vehicles, traction inverters applications. We also had success with complementary technologies in a range of electrical vehicle applications. This includes with electrical vehicle car makers and tier 1 for microcontrollers, silicon mosfets, battery management solutions, and ultrafast and silicon carbide based diodes. In car digitalization, during the quarter, we are doing across the key application we address. We designed our next-generation Stellar Automotive microcontroller into a new zonal architecture for software-defined vehicles. We signed a deal for a V2X chipset with a player in China in cooperation with Autotalks. And we had a design in for Mobileye IQ technology from an electrical vehicle maker for an helpful ADAS platform. In our automotive sensor business, we earned a first win for our six-axis sensor with Argodon Machine Learning Core in an advanced automotive anti-theft system, while continuing to secure wins for other automotive sensors. Moving now to industrials. In industrial, we saw strong demand throughout the quarter, especially in factory automation, power and energy applications, as well as building and home control. Demand was strong both with distribution as well as OEMs. Also in industrial, electrification and digitalization are the main trends, accelerating the increase we see Food Q1. Inventories of our products at distributors remain lean across all product families, with high inventory terms. Although, points of sales were strong across all products and geographies. We address the industrial and market with our general purpose and secure embedded processing solutions, power and energy management products, and our sensors and analog portfolios. In embedded processing, we are building on our market leadership in 32-bit MCUs. I am pleased to announce that in 2021, we were ranked Number one worldwide in general purpose microcontrollers. We continue to invest to further strengthen our STM32 family, offering an ecosystem with a particular focus on wireless connectivity, security, and artificial intelligence. In these three areas, we are accelerating our customer engagement, driving design wings with our latest product and solutions. We are also building momentum with our STM32 microprocessor offer, the natural evolution path for our customers needing higher performances and computing power. Here we want a number of sockets in applications such as lighting, programmable logic controllers, and smart grids. In power and energy management, we address industrial applications with a range of products, including silicon-carmide-based transistors and modules, as well as silicon-based transistors, IGBTs, diodes, and rectifiers. Here we have wins across a number of applications, including renewable energy and power-saving technologies. We also have many new designs with our industrial analog products with ours in applications where we are focused. These include motion control, power line communication, factory automation, and home appliances. Here, our industry-leading products for smart motor control, galvanic isolation, and power conversion are driving Design Week. We continue our momentum in sensors for industrial applications with wins for products like our industrial-grade pressure and waterproof sensors. We introduce our first intelligent sensor processing unit, launched together with the Generation 3 MEM sensors. Moving now to personal electronics. Demand during the quarter was in line with seasonality for this end market. The market for accessories continues to be strong, especially for connected devices, such as wearable, embedding health features, driving more semiconductor content. Tablets, earables, and true wireless stereo headsets. Our first strategic objective in Person Electronics is to lead in selected high-volume applications with differentiated products or custom solutions. During the quarter, we want sockets in new flagship smartphones with motion and environmental sensors, time of flight ranging sensors, wireless charging products, touch display controllers, and secure solutions. Our second strategic 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 the smart watches and other wearables from leading players. In communications, equipment and computer peripherals, we continue to see adoption of 5G-related products and further deployment of low-Earth orbit satellite programs and services around the globe. The PC market continues to show signs of normalizing demand. We have several strategic objectives in our approach to this end market. First, we target selected high-volume applications with differentiated products or custom solutions while leveraging our broad portfolio. New wins here include secure trusted platform solutions and time-of-life sensors for laptops. General purpose MCU design-ins as well as further wins in our master GAN family for high power density smart charging adapters. I would also like to highlight our goal to address selected applications in cellular and satellite communication infrastructure. In this area, we continue to progress well with our key customer engagement program. Now, let's move to our 2022 second quarter outlook and our plans for the full year 2022. For the second quarter, we expect net revenues to be about $3.75 billion at the midpoint, representing a year-over-year growth of 25.3% and a sequential increase of 5.8%. Growth margin in Q2 is expected to be about 46% at the midpoint. Our guidance includes the impact of the temporary reduce operations in Krol, France caused by the power outage external to our site that occur at the beginning of April. For the full year 2022, we confirm our plan to invest about 3.4 to 3.6 billion dollars in CAPEX to further increase our production capacity and to support our strategic initiatives, which includes the first industrialization line of our new 300mm wafer slab in Agrate, Italy. Based on our strong customer demand and our planned investments to increase capacity, we continue to drive the company based on a plan for 2020-2022 revenues in the range of $14.8 billion to $15.3 billion, representing a growth of about 16% to 20%. To conclude, our first quarter results and plans for 2022 underscore our tight focus on accelerating the execution of our strategy and value proposition. We are on track with our 2022 plans, both in terms of revenues and capex investments, to sustain our short- and long-term growth objectives. Finally, we look forward to your participation, either in person in Paris or via our live webcast at our Capital Markets Day on next May 12th. Thank you very much, and we are now ready to answer your question.

The first question is from Didier Shimama from Bank of America. Please go ahead.