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.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question or a comment may press star and one at this time. The first question is from Alexander Petric from Societe Generale. Please go ahead.

Good morning, and thank you for taking my question. The first question would be really on your four-year guidance upgrade and the very strong traction in the third quarter. With all your supply constraints for the rest of the year, and although there may be some price hikes, those were already baked into the previous guidance, I suppose. So could you explain where this extra billion of revenue is coming from? in the year. Is it improved sound capacity access or better internal efficiency, more internal capacity? Although your CAPEX plans unchanged and H1 was pretty much in line or a little bit below expectations. So if you just explain where, what's driving this additional revenue for the year. And my quick follow-up would be on OPEX, which actually came in a little bit below expectations for the second quarter. So no sign of undue inflationary pressure there. How should we think about OPEX for the remainder of the year? Thanks a lot.

Thank you for your question. So, Lorenzo will answer on OPEX. About the second half, let's say, improvement with our, let's say, indication for the year. Well, basically, there is two cumulative effects. One effect, of course, is moving through the year. It is clear that we are able to secure our, let's say, supply chain, both the equipment arrival set up, which were supposed to add capacity in our home manufacturing. So now we have better visibility, so it was for us the opportunity to increase our manufacturing. As an example, the production value of ST in Q3 will increase by 12.5% versus Q2. So this is the reason why we have this capability to increase our revenue target. We have better support from Fondry from Fondry partner, I have to say. The second effect is pricing and mix. Clearly, we have still a favorable environment and pricing and mix is also contributing to this one billion additional target revenue for the full year.

And Lorenzo, you want to start on OPEX? Yes, good morning to everybody. In terms of OPEX, what we model now for the current quarter for Q3 will be to have OPEX, net OPEX, including also other income and expenses similar to the one that we had in the previous quarter in Q2. So now we are, let's say, in a range between 810 and 850 million dollars. Of course, we are benefiting also from the seasonality this quarter, because as you know, in Europe, there is vacation, and this is a benefit for our expenses, as well as also for the exchange rate. For the year, I would say that if I look for the year, the total year, and in the average, as you know, usually what I share with you is the quarterly average Expenses in the year, but I would say that the level will stay more or less in this range between 810 and 850Million dollars. This is where we see today, let's say, landing our expenses for the full year. So this means that that will be an increase in Q4 as usual due to the seasonality, but in the average we will be there.

Thank you very much.

The next question is from from Credit Suisse. Please go ahead.

Yeah, good morning, guys. Congrats, firstly, on a great guide. Just two questions. Firstly, can you give us some color on how you're thinking of growth by division in the third quarter and for the rest of the year? And secondly, I just wondered, when I look at the seasonality for the fourth quarter at the midpoint of your guide, it looks like you're assuming 4% sequential growth in the fourth quarter. versus five-year seasonality of 12%. So you're assuming some kind of underlying demand slowdown, or is that driven by your capacity increase plans? What is driving that seasonality that you're assuming in the fourth quarter? Any color there would be helpful. Thank you.

Maybe I comment on the Yeah, no, no, no problem. I can comment. So overall, for H2, so Q3 and H2, clearly we continue to see a strong growth in ADG, definitively, both automotive and power discrete. and it is clearly sustained by our capability to increase our manufacturing supply chain. AMS will grow in H2, but you know that here it is the usual attraction of our engaged customer program, which are, let's say, increasing in Q3 and then in Q4. We will grow as well for analog and MEMS, but clearly this field of product group, here we are limited by our own capacity. Microcontroller will grow, but similar to analog and MEMS, we have also limitation in capacity. And we will grow quite materially our RF communication division related to customer-engaged programs. And Lorenzo, you comment on this?

I think you have a cover, but at the end, if you want a little bit more color about Q3, for sure Q3, there is our seasonality in personal electronics that is a strong driver for our growth. The driver of the growth in the current quarter on a sequential basis definitely will be AMS. AMS is enjoying, let's say, is one of our group that is more exposed to personal electronic, as you know, so at the end it will be the driver of the growth. Anyway, all the groups will contribute to the growth in the current quarter. We continue to see traction, strong traction in ADG. that we will continue to grow, let's say, as well as also in MDG. But on Q4 and on the second half, Jean-Marc was covering, let's say, the evolution.

Got it. So essentially, AMS will be the main growth driver in the third quarter, followed by ADG and then MDG.

Correct.

Correct.

Let's say this is not a surprise, no, because at the end, you know that at the end in the second half, and in particular in Q3, for us is a strong driver. Anyway, I confirm that all the groups that will contribute, let's say, and the ADG and MPG will be two groups contributing as well to this growth.

Got it. Would you say that the growth in AMS would be abnormally strong this quarter?

But I don't know what means abnormally stronger.

You mean sequentially or?

Sequentially stronger.

Yeah. Is there any content growth that we need to think about when we're modeling AMS revenues in the third quarter? Any significant content growth?

Sorry? No, maybe I missed the question. Content growth. The content growth about? About the content, you know that now, let's say, in AMS, in personal electronic, we have a variety of products, let's say, that are contributing to the growth. I would say that is really, I would say, a matter of volume here. Let's say the content is what it is.

any abnormal signature in the profile of the revenue between H1 and H2 and related to the new device introduction. So, absolutely normal seasonality. Got it. Thank you.

Thank you, Eddie. Next question, please, Moira. The next question is from Anthony Stoss from Craig Allen. Please go ahead.

Morning, guys. Mike and Gretz as well on the exceptionally strong execution. Sean Mark, you talked about having visibility through 2023. I'm wondering if you can comment on your confidence level and maybe the percentage of orders that are non-cancellable or what percent you think could be at risk to be downshifted. And then when you look into 2023 on the gross margin side, again, 47%, darn impressive. for this year, do you think based on mix you can continue to grow gross margins into 2023?

So Lorenzo will comment on the gross margin. About the data points for 2023, I share with you the fact we have in our hands. So I repeat that the backlog we have requested by our customer basically is covering, depending on the product family, between 18 to 24 months of planet capacity. Not existing capacity, I have to say planet capacity, which are related to our capex we will spend this year, and a part of the capex we intend to spend next year. So first of all, okay, we have 2022 sold out and basically we have 2023 which is either sold out or particularly sold out, depending on the product group. On automotive, the full capacity of 2023 is sold out. So that's the reason why when I am questioned about when we do believe we'll come back to, let's say, normally time, okay, capability to replenish inventories. Okay, I always say, okay, of course, not before end of 2023 and then in 2024. So this is what we say. Then what other data point I can share with you? So we have, let's say, during H1 this year, a change of our policy of confirmation of order. So now we really schedule the order up to 2023, so on 24 months rolling. And for us, it was important, okay, to make this exercise because we have detected potential double ordering. And I have to say that it was very, very marginal, very, very marginal. So we are absolutely not seeing let's say double ordering in the channel, okay, we are using. The inventory level at our distributor is lean. Inventory terms are below the standard level, higher, sorry, very higher standard level to make business. So there is still potential of inventory replenishment. but that we are not capable to do at this present time. Then in the field of the two end market I have spoken about during my address, the automotive and the industrial B2B, the pressure of customer, the demand is huge. We have, okay, multiple call every day, every week to find solution, to supply. to supply them. Well, yes, we have seen some sign of softening, I confirm, in Chromebook, Notebook, PC, middle-end, low-end Android smartphone. Not too much in accessories. And the customers we serve, okay, in Q2, was above our expectation and will be strong and solid in H2. We know the engaged customer program we have for 2023. New socket we win. I confirm silicon carbide $1 billion revenue at least in 2023. Well, this is all the data points we have and I can share with you. So about the gross margin, Lorenzo?

About the gross margin, for sure at this stage, let's say it's a little bit early to go and to discuss about 2023. What I can say is that definitely, let's say we will have some tailwinds that definitely will be, the exchange rate will remain at this level for sure will help. The mix, the product mix will be in the right direction in this respect. For sure, what I can say is that, yes, we see in terms of inflationary costs, these inflationary costs that, by the way, are impacting already the second half of the year in 2022. But what I can say is that, let's say, 2023 will be another year that will put us in our trajectory to be between 2025 and 2027. let's say, in the range of 50% gross margin.

Great. Thanks for all the detail, guys. Very helpful.

Thank you. Tony, next question, please. The next question is from Sandeep Deshpande from J.P. Morgan. Please go ahead.

Hi. Thank you for letting me ask the question, and congratulations on really strong guidance. Regarding the guidance, your guidance in revenue growth is almost 33% year-on-year, how much of that year-on-year growth is coming from unit increase and how much from pricing increase? And is pricing still increasing in terms of your product? And as a corollary to that, is pricing increases similar in all your end markets or in some particular end markets you're seeing much higher pricing increases than in other end markets?

Yes. Thank you for the question. But when we look at the dynamic in terms of increasing of our revenues, let's say, for sure there are three components, if you want. On one side, there are, yes, price increase, because price increase this year, when we look at 2022 compared to the previous year, is an important component, as well as volume. And the mix, because the mixer was another ingredient, but I would say that we are talking here, let's say, more or less in the range of 40, 60, let's say, for these pricing and rest could could explain for the rest. When I look at the current guidance for the current quarter, actually. We do not have embedded any significant price increase on a sequential basis. For sure, year over year, there is, because there's been increased pricing during the first half. But on sequential basis, there is no significant, we do not expect any significant price increase. We will be more or less stable in respect to that. Well, yes, of course, there are differences in term of pricing dynamic in the different market. I would say that for sure when we look at mass market, when we look at distribution is where, let's say, we have the highest level of price increase. Then we have a price increase also in the area of automotive that is material, mainly driven by the fact that, let's say, there is a significant, let's say, higher demand in respect to what we are able to produce. While when we look at market like the personal electronic, I would say that we have more a stabilization of pricing, more than price increase. Here and there, we have some, of course, price acceleration. But overall, I would say that in this market, there is no significant price increase. While in respect to the past, maybe there is no strong price pressure. We will say more or less, we can say that we are more or less stable.

And Sandeep, that's the reason why I share with everybody the number. In Q3, the production of ST will increase by 12.5%, supporting this sequential growth of 10.5% of Q3 and preparing Q4. Yes.

Does this answer your question, Sandeep?

Probably yes. Probably yes. I hope so.

The next question please.

The next question is from Sebastian Stavowitz from CAPEX Chevrolet. Please go ahead.

Hello everyone and thanks for taking the question. Regarding the 300 millimeter fab buildup with GlobalFoundry, what kind of CAPEX should we add to our model going forward for this specific fab? The second one is returning to the question on sequential growth in your main divisions in Q3. Could you provide a little bit of more granularity on the kind of growth we can expect sequentially by divisions for Q3? Thank you.

About the CAPEX, the project we intend to complete with GF, is consistent simply with our $20 billion-plus ambition. Of course, when we have prepared this plan, we assessed many scenarios of manufacturing supply to enable this $20 billion-plus ambition. And I have to say that a scenario to build an adjacent fab to crawl with global fundry, with significant support from France, is making the scenario competitive, clearly. And then, okay, we'll, let's say, also give to both ST and GS some scaling advantage. But the CAPEX, okay, will be simply consistent with the $20 billion-plus ambitions.

Maybe Lorenzo.

Sorry, sorry. No, okay. As I said before, AMS is the group that is driving the sequential growth. But I think that this will not be a surprise if I say that is our imaging products that are really, let's say, driving inside the AMS the growth. There will be contributions, sure, for analog and also MEMS that will be, let's say, less significant of the one of imaging. You know, in the second half of the year, our, let's say, customer engaged program that we have a person electronic with our main, let's say, customer is definitely one that is important for us. And definitely imaging is quite exposed on that. So at the end, let's say the growth comes from there in AMS. But I wanted to repeat that at the end, it's not the only one AMS. We have a still significant growth in ADG and in MTG as well. Let's say we will continue, let's say, to see growing these groups.

Thank you. Thank you, Sebastian.

Next question, please, Moira. The next question is from Gianmarco Bonaccina from Equita. Please go ahead.

Yes, good morning. Just for me, a clarification on the cooperation you recently announced with Volkswagen. It was not clear how broad it is within the Volkswagen group because I know you announced, for example, some time ago a very important cooperation with Renault. So just to understand if it It's basically a broad collaboration with Volkswagen on the future platform, or it's just, let's say, will have a minor impact. And then related to this, I think you already mentioned that the Capital Market Day that you are changing the way you interact with automotive OEM. So I just wanted to know if you have continued in the last month to sign new long-term contracts with, let's say, attractive pricing for you. Thank you.

First of all, this is a public project called Trinity at Volkswagen, aiming to develop the software-defined vehicle architecture and zonal. And here, this platform will be deployed across the board in all the Volkswagen group, full And here, basically, ST will have, let's say, participation today, okay, awarded in two critical components. The MCU, so the high-performance stellar MCU developed on 28 FDSOI-embedded PCM technology, which is a product developed, okay, in our technology, manufacturing our technology. And then, okay, ST is participating to the development and the architecture of a complex system on ships, embedded, let's say, processor, but also real-time processor, which are IP of ST, called STELLA, which are also present in the MCU. And ST, okay, will have the ownership. of let's say the engineering, the manufacturing of this system on ship in cooperation with TSMC. It is exactly a very similar model of what we have with Mobileye. So when we had at Volkswagen group level, full deployment, the capability to have, like Mobileye, the ownership of the MPU system on ships in cooperation with Volkswagen, Cariad, and TSMC, plus all the MCU that we will manufacturing ourselves, starting 2026, it will be material forestry.

Okay, thank you. And with the other OEMs, you have continued to change, let's say, the relationship on LTA, that kind of contract?

It is clear that we see an evolution with the relation in the ecosystem between carmaker, tier one, EMS, and in ST. It is clear that our preferred, let's say, model is either the traditional carmaker, tier one, and us. Of course, okay, changing the way the value chain operate, okay, I guess now everybody has understood that the semi-conductor are not a commodity with infinite capacity and very short lead time. So I guess everybody has understood that you have to plan investment, you have to plan capacity, you have to give visibility. And when the value chain is car maker tier one, And semiconductor, okay, is much better to keep it as it is. Then what we are seeing, we are seeing some evolution in some carmaker that for some part of the system of the car, clearly there is an evolution where the carmaker run the IP, start to design the architecture of the system and the device. and will operate more in a mode like a smartphone, where you will have the carmaker using an EMS, but okay, with a straight relation with us, imposing the type of semiconductor that the EMS will have to use. And clearly, we see this trend, okay, increasing a lot, definitively. Well, this is basically the two models that we will see in the future. Well, then, okay, if there is some specific agreement between CARMECA ourselves, in any case, it must be done, okay, with the agreement of the Tier 1. Thank you.

Thank you. We have time for one or two more questions, depending on the length.

Moira, the next question, please. The next question is from Andrew Gardner from CT. Please go ahead.

Good morning, Jean-Marc. Good morning, Lorenzo. Thanks for taking the question. Just a clarification of your response, Lorenzo, to Sandy earlier in terms of the pricing. I just want to make sure I heard it correctly. You're saying of the year-on-year growth in revenue that you're seeing in the second half of this year, 40% of that is coming from pricing? Is that right?

Yes, broadly, yes, in the sense that when we look at the growth in terms of revenues, there is a component of pricing. There are three components, I said. The one is price, one is mix, let's say, and the other one is for sure volumes, let's say. When we look overall, the price component is in the range of 40%, yes, on a year-over-year. Got it. Okay. Why this quarter is very easy when you look at year over year, why sequentially are substantially stable the pricing?

Okay. And in terms of your visibility into further price rises into next year, given that you are essentially fully booked, as you said, and particularly for the OEM-related business where you've got these longer-term contracts, I presume you've got visibility into further price rises into next year on a like for like basis.

But today, let's say we have some contract that of course are defining the evolution of the pricing. Let's say in term of mass market, I would say that probably will be a little bit more stable than this year, the price. But then this is what is our visibility today in term of evolution of pricing.

Okay. And then just a final one in relation to the comment you've made about the rise in production capacity, internal production capacity in third quarter, the 12.5%. Clearly, you're continuing to invest in terms of CapEx later this year and into next year. But is there any reason that that's not a good starting point for us to start thinking about the kind of capacity that you're looking to build into 2023 volume growth based on that kind of capacity increase plus a pricing element. Are those reasonable building blocks to start with for 2023?

Today, where we are? First of all, it is clear that we know where we want to position the company next year. For a simple reason that Our whole supply chain is, let's say, providing some constraints in terms of lead time. You know that for scanner, lead time basically is 24 months. Okay, for let's say, thin film deposition, etcher, all the process tool is basically 18 months. And then for assembly and test, and so on, is above 12 months. So it's clear that today we have put all the holders to book and we have a clear visibility on the level of investment that potentially we will put on the table next year. Today we are in the process to really secure it because this year we face a poor reliability in the delivery of equipment maker. And now, okay, this is something we are deep diving in because they are also their own constraints. Don't take it as a joke, but they are limiting by semiconductor, in fact. And it is a hand-to-hand exercise that is quite complex, but it is mandatory to make it because, as I said, We change also our policy. Now we are confirming the order to our customer on 24 months' rolling. So it's very important for us, okay, to have, let's say, a secure and reliable forecast from the equipment maker. Well, this exercise is going on definitively, and we will provide, as usual, the visibility of the CapEx spent and on the 2023 revenue indication, let's say in January, end of January during Q4 earnings. Well, what is important is, again, in H2 2022, we will have benefits of the CapEx we spent let's say Q4, Q3, Q4 last year and Q1 this year, sorry, and beginning of Q2, we increase our capacity and volume by 12.5%. And H2, okay, we will deliver a revenue of $8.7 billion.

Thank you, guys. Appreciate it. I had to try and ask a bit more about next year.

Thank you, Andrew. But we take a final question, not to stay with this. So, Moira, we take a very final question now, the last one.

The last question for today is from Didier Chimama from Bank of America. Please go ahead.

Oh, thank you for squeezing me in. That's lovely. Congratulations. Just one question for you, Jean-Marc. So clearly, imagining you're going to be a big driver in the second half of this year, you've said previously that your engagement with that top customer was going to, was at least extended through calendar year 23. So I just wanted to ask you a question. If you were to lose that contract in the later part of 23, given your current backlog and sort of book capacity, do you think that there would be much impact to the company in terms of top line or margins in calendar year 23? I've got a quick follow up, thank you.

This scenario is not existing.

So next question, I'm going to go back to Andrew's question and try very cleverly, so I'm going to try very clumsily. So if I take your Q4, add a bit of capacity, you effectively guiding at least everything being equal for revenues in probably 17 to $18 billion. And I'm probably being cautious there. Is that the right way to think about it? And then Lorenzo said pricing sort of flattish next year, presumably your depreciation will go up. So do you think gross margin would be stable? Would you think gross margins would decline even on a big revenue growth next year?

But at this stage, I don't know why we should decline. I mean, at the end, let's say, for the time being, what I said is that, let's say, today what we see is that we will be some tailwinds that are exaggerated. for sure some improvement in our manufacturing efficiency. There are, let's say, negative impact related to the cost, inflationary cost, these kind of things. But the rest, let's say, this is where we see. As I said before, I think that next year will be another year moving us to the path to the 50% gross margin in 2005, 2007. 20 billion next year.

Okay, great. Okay, thanks very much. Thank you.

I think this will complete our call. Thank you very much, everybody, for the questions. Moira, it's up to you.

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