STMicroelectronics N.V.

Ladies and gentlemen, welcome to DST Microelectronics Q2 2022 Earnings Result 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 Céline Berthier, Group Vice President, Head of Investor Relations. Please go ahead, Madame.

Thank you, Moira. Good morning. Thank you, everyone, for joining our second quarter 2022 Financial Results Conference call. Hosting the call today is Jean-Marc Chéry, SE's President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, our President and Chief Financial Officer, and Marco Cassis, President of Analog, Ment, and Census Group, and in his global corporate role, Head of Strategy, System Research and Applications, and Innovation Office. 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 course. This course will include forward-looking statements that involve risk factors that could cause ASCIS 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 ASCIS 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'd like to turn the call over to Jean-Marc as his president and CEO.

Thank you, Céline. Good morning, everyone. And thank you for joining ST for our Q2 2022 earnings conference call. Let me begin with some opening comments, starting with Q2. So Q2 net revenues of $3.84 billion and gross margin of 47.4%, came in above the midpoint of our business outlook range, driven by a continued strong demand for our product portfolio. The other year, net revenues grew 28.3%. This revenue growth was accompanied by improved profitability, growth margin at 47.4%, up from 40.5%, Operating margin at 26.2%, up from 16.3%. And net income more than doubled to $867 million. On a sequential basis, net revenues increased 8.2%. On the first half of 2022, net revenues increased 22.9% year-over-year to $7.38 billion, driven by growth in whole product groups and subgroups. H1 operating margin was 25.5%, and net income was $1.61 billion. On Q3 2022, Our third quarter business outlook at the midpoint is for net revenues of $4.24 billion, increasing by 32.6% year-over-year and by 10.5% sequentially, with a gross margin of about 47%. For the full year 2022, We will now drive the company based on the plan for full year 2022 revenues in the range of $15.9 billion to $16.2 billion, above the high end of our previous expectation. We now anticipate gross margin to be about 47% for the full year. Now let's move to a detailed review of the second quarter. Net revenues increased 28.3% year-over-year, with higher sales in our three product groups and all subgroups. Year-over-year sales to OEMs increased 31.7% and 22.2% to distribution. On a sequential basis, net revenues increased 8.2% and were 240 basis points above the midpoint of our hot loop. Gross profit was $1.82 billion, increasing 50.2% on a year-over-year basis. Gross margin increased by 690 basis points year-over-year to 47.4%, mainly driven by favorable pricing and improved product mix. partially offset by inflation of manufacturing input costs. Our second quarter growth margin was 140 basis points above the midpoint of our guidance, driven by similar pricing and product mix factors. Second quarter operating income doubled to $1 billion, Operating margin was 26.2%, increasing from 16.3% in Q2 2021, with improvements in all three product groups. Both net income and diluted earnings per share more than doubled year over year, with net income reaching $867 million from $412 million, and diluted earnings per share increasing to $0.92 up from $0.44. Looking at the year-over-year sales performance by product groups, ADG revenues increased 35.1% on growth in both automotive and in-power districts. EMS revenues grew 11.3% on higher analog MEMS and imaging product sets. MDG revenues increased 39.5% on growth in both microcontrollers and RF communications. In terms of operating margin, all product groups demonstrated year-over-year expansion, with ADG operating margin of 24.7% up from 9.5%, AMS operating margin of 23.8% up from 18.6%, and MDG operating margin increasing to 34% from 22.9%. Net cash from operating activities increased to $1.06 billion in Q2 versus $602 million in a year-ago quarter. On a training 12-month basis, net cash from operating activities totaled $3.78 billion, increasing 45.8% from $2.59 billion. CAPEX in the second quarter was $809 million compared to $438 million in the year-ago quarter. After the strong investment in CAPEX, free cash flow was $230 million compared to $125 million in the year-ago quarter. During the second quarter, ST paid $54 million of cash dividends to stockholders. and we executed $87 million share buyback under our current share repurchase program. Our net financial position was $924 million at July 2nd, 2022, compared to $840 million at April 2nd, 2022. It reflects the total liquidity of $3.44 billion. and total financial debt of $2.52 billion. Let's now discuss the market and business dynamics of the quarter. Overall demand for ST products continue to be strong. Let me share with you a few data points. Our backlog exiting Q2 covered six to eight quarters of planned capacity, depending on the product type. Book-to-bill is well above parity. Our manufacturing capacity is fully saturated. From a hand market standpoint, demand both in automotive and in what we call the business-to-business part of the industrial market, so factory automation, robotics, and industrial infrastructure remains strong, driven by semiconductor provision and structural transformation. In the consumer electronics and PC markets, there are some broad signs of softening, but demand for ST products remains strong in the selected areas where we target in this market. Going now in more detail on the automotive market, we continue to see strong demand in Q2, still reflecting 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 now above 18 months and well above our current and planned manufacturing capacity through 2023. The accelerated transformation of the automotive industry with electrification and digitalization and semiconductor provision continued to drive wins for ST during Q2. For car electrification, we again increased the number of ongoing silicon carbide programs. Between the automotive and the industrial markets, we now have 102 projects spread over 77 customers. These projects are roughly equally split between the two end markets, and we are in line with our revenue target of $1 billion silicon carbide revenues in 2023. We had a number of new design wins in Q2 with a range of silicon and silicon carbide power discrete. This includes generation 3 silicon carbide MOSFET, DICE with a module maker, rectifiers, ultrafast and silicon carbide diode, and our SPAC power modules for traction inverter, on-board charger, and other electrical vehicle-related applications. We also want sockets for power management ICs in onboard chargers, DC-DC conversion, and electronic parking brake application at multiple tier ones and car makers. In car digitalization, we announced last week a new cooperation model with the Volkswagen Group for our next generation digital automotive solution. The Stellar microcontroller family. This will include the direct usage of our high-performance Stellar microcontroller family and the joint development with Volkswagen Cariad for a system on ship Stellar microprocessor. Both the MCU and the system-on-ship MPU will address multiple applications within the new zonal architecture platform of the Volkswagen Group, which is called Volkswagen Trinity Project. In our automotive sensor business, we have multiple wins for devices in our six-axis automotive sensor family, including our embedded machine learning core sensors. We continued to gain traction for our automotive global shutter product family with major OEM program design wins. Moving now to industrial. Here we saw strong demand through the quarter in business-to-business industrial from both distribution and OEMs. with distribution inventories of our products remaining lean across all product families and high inventory terms. Across the industrial market, we see two main trends accelerating the increase in semiconductor content. Digitalization of devices and systems and energy management and power efficiency improvements. These trends are driving a structural transformation in this market. We address the industrial and market focusing on three areas. The business-to-business industrial segment, the largest part, which includes automation, robotics, power energy, and transformation. Consumer industrial, which includes home appliances, smart buildings, and power tools. and a more specialized part addressing, for example, healthcare. Across these three areas, we have important wins with our broad portfolio. In business-to-business industrial, we have multiple design wins for products such as intelligent power switches, industrial sensors, high and low voltage MOSFETs, wireless charging solutions, and our STM32 embedded processing solutions. Application includes programmable logic controllers, robotics, energy storage, and wind turbines. In consumer industrials, we have design wings in applications such as major home appliances, power tools, cleaning robots, consumer power supplies, point-of-sales terminals, and building air conditioner systems. And in the specialized path, I would like to highlight just one innovative example in health care, where we add on the incorporation of an NFC tag into a connected syringe by NP-Plastiber. Before closing on Industrial, a few words on Embodied Processing, where we continue to build on our number one position in 32-bit MCUs, and where we enhance our security offer with Amazon Web Services, extension of our support for Microsoft Azure RTOs across the product range, and addition to our NanoHedge artificial intelligence studio. Moving now to personal electronics. Demand for our products in the selected areas we target in the smartphone market was above expectations. In this market, we focused on selected high-volume smartphone applications, addressing them with differentiated or custom products, while leveraging our broad portfolio to address other high volume applications during the quarter we want sockets in these devices with motion and environmental sensors time of flight ranging sensors touch display controllers and secure solutions we also made progress with our wireless charging solutions with wings in flagship smartphones and smart websites in communication equipment and computer peripherals. We continue to see deployment of 5G infrastructure products and of low-health orbit satellite programs and services around the globe. Here, we target selected high-volume applications, again, with differentiated products or custom solutions, while leveraging our broad portfolio. New wins here include pressure sensor for hard disk, time-of-life sensor for laptops, and our MasterGAN family for high-power density charging adapters. I would like also to confirm our continued progress with key customer engagement in addressing selected applications in cellular and satellite communication infrastructure. Now let's move to our 2022 third quarter outlook and plan for the full year 2022. For the first quarter, at the midpoint, we expect net revenues to be about $4.24 billion, representing year-over-year and sequential growth of 32.6% and 10.5% respectively. Growth margin is expected to be about 47% at the midpoint. Looking at the full year, we now plan to drive the company based on 2022 net revenues in the range of $15.9 billion to $16.2 billion, representing growth of about 25% to 27%. This plan includes a growth margin of about 47%. We confirm our 2022 CAPEX investment range of $3.4 billion to $3.6 billion. Before concluding, I want to highlight the recent announcement we made together with GlobalFoundry. We signed an MOU to create a new 300 millimeter semiconductor manufacturing facility. adjacent to ST's existing 300mm facility in Choron. This is a projected multi-billion euro collaborative investment that will include significant financial support from the State of France. The project is subject to the execution of definitive agreements and various regulatory approvals, including from the European Commission As you know, we are transforming our manufacturing base with a significant expansion of our 300-millimeter capacity, a major enabler supporting ST's $20 billion-plus revenue ambition. We already have a unique position in our 300-millimeter water-saving roles, which will be further strengthened by this important initiative. We continue to invest into our new 300-millimeter Wasserfab in La Gratte near Milan, Italy, ramping up in H1 2023 with an expected full saturation by the end of 2025, as well as in our vertically integrated silicon carbide and gallium nitride manufacturing. This new facility will enable us to support even more our European and global customers across all end markets and to advance our leadership objectives in automotive and industrial, as well as our focus activities in communication infrastructure. Importantly, we are targeting to make this new FAB a leader in sustainable semiconductor manufacturing. For example, it is designed to be 10 to 20 times less emissive in terms of greenhouse gases than similar projects in Europe and in the rest of the world. And of course, working with GF will allow us to go faster, lower the risk thresholds, and ultimately reinforce the European FDSOI ecosystem. To conclude, our Q2 financial results and plan for the full year 2022 are aligned with our ST's strategic focus on core business and targeted high-growth areas. We continue to leverage our early investments in smart mobility, power and energy management, and IoT and connectivity. We are building on the unique strengths of our integrated device manufacturer models, complemented by partnerships with Fondue and suppliers, customer relationships, and our established end market and application strategy. This initiative will support the $20 billion plus revenue ambition we outlined at our Capital Market Day. Thank you, and we are now ready to answer your questions.