STMicroelectronics N.V.

Good morning. Thank you, everyone, for joining our third quarter Financial Results Conference call. Hosting the call today is Jean-Marc Chéri, Estes President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, our President of Finance, Purchasing, ERM, and Resilience, and our Chief Financial Officer, and Marco Cassi, our President of Analog Mems and Censor Groups, and also head of STMicroelectronics Strategy, System Research and Application, 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 conclusion 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 ERIZA this morning, and also in SE'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. And I would like to turn the call over to Jean-Marc, Assistant President at SEER.

Thank you, Celine. Good morning, everyone. And thank you for joining ST for our Q3 2022 earnings conference call. So, let me begin with some opening comments. So, starting with Q3. Q3 net revenues of $4.32 billion and gross margin of 47.6% came above the midpoint of our business outlook range. driven by continued strong demand for our product portfolio. Year over year, net revenues grew 35.2%. This revenue growth was accompanied by improved profitability, growth margin at 47.6%, up from 41.6%, operating margin at 29.4%, up from 18.9%, and net income more than doubling at $1.1 billion. On a sequential basis, net revenues increased 12.6%. For the nine-month period, net revenues increased 27.2% to $11.7 billion, driven by growth in whole product groups and subgroups. We reported a gross margin of 47.3%, operating margin of 26.9%, and net income of $2.71 billion. On Q4 2022, our fourth quarter business outlook at the midpoint is for net revenues of $4.4 billion, increasing by 23.7% year-over-year and by 1.8% sequentially, with a gross margin of about 47.3%. For the full year 2022, both revenue and gross margin expectations are in line with the plan we shared in July. The midpoint of our Q4 guidance translates into a full year 2022 revenue growth of about 26.2% to $16.1 billion with a gross margin of 47.3%. We are on track with our 2022 CAPEX plan of about $3.4 billion to $3.6 billion. Now, Let's move to a detailed review of the third quarter. Net revenues increased 35.2% year-over-year with growth across all product groups and subgroups. Year-over-year sales to OEMs increased 34.1% and 37.4% to distribution. On a sequential basis, net revenues increased 12.6% and were 210 basis points above the midpoint of our outlook. Gross profit was $2.06 billion, increasing 54.7% on a year-over-year basis. Gross margin of 47.6% coming in 60 basis points above the midpoint of our guidance, increased 600 basis points year over year, mainly driven by favorable pricing and improved product mix, partially offset by inflation of manufacturing input costs. Third quarter operative income more than doubled to $1.27 billion. Operating margin was 29.4%, increasing from 18.9% in Q3 2021, with whole three product groups contributing to the growth and expansion in both operating income and market. Both net income and diluted earnings per share more than doubled year over year, with net income reaching $1.1 billion from $474 million, and diluted earnings per share, increasing to $1.16 from $0.51. Looking at the year-over-year sales performance by product groups, ADG revenues increased 55.5% on growth in both automotive and in power districts. EMS revenues grew 9.7%, with growth in analog, in MEMS, and in imaging. MDG revenues increased 47.7%, with growth in both microcontrollers and in RF communication. In terms of operating margin, all product groups demonstrated year-over-year expansion, with ADG operating margin of 25.9% up from 10.8%, EMS operating margin of 27.2% compared to 24.3%, and MDG operating margin increasing to 36.7% from 23.5%. Net cash from operating activities increased to $1.65 billion in Q3, compared to $895 million in the year-ago quarter. For the nine-month period, net cash from operating activities increased 67.6% to $3.65 billion. CAPEX in the third quarter was $955 million, compared to $437 million in the EuroGo quarter, and $2.61 billion for the nine-month period, compared to $1.28 billion in the same period of last year. Free cash flow was $676 million up, from $420 million in the year-ago quarter. For the nine-month period, free cash flow increased 22.6% to $988 million. During the third quarter, ST paid $55 million of cash dividends to stockholders, and we executed an $86 million share buyback under our current share repurchase program. FT's net financial position increased to $1.46 billion at October 1st, compared to $924 million at July 2nd, 2022. It reflected total liquidity of $4.09 billion and total financial debt of $2.63 billion. Let's now discuss the market and business dynamics of the quarter. Demand for ST products continued to be strong in Q3. And let me share with you a few data points. First, our backlog still covers six to eight quarters of our planet capacity, depending on the product type. Book-to-bill remains well above parity, and our manufacturing capacity is fully saturated. From an end market standpoint, automotive and what we call the B2B part of the industrial market, namely factory automation and industrial infrastructure, remains strong, driven by semiconductor provision and structural transformation. The consumer industrial and personal electronics markets are softening. The demand for ST products remains solid in the selected areas we target in those markets. The computer peripherals market is softening as well. Let's now go into more detail on automotive. We continue to see strong demand in Q3, reflecting the combined effects of the ongoing electrification and digitalization transformation of this industry, semiconductor provision in legacy automotive, and replenishment of inventories across the automotive supply chain. Bookings remain strong across all customers and geographies. Backlog visibility remains above 18 months and well above our current and planned manufacturing capacity through 2023. The accelerated transformation of the automotive industry continued to drive our design wins during Q3. For car electrification, we again increased the number of ongoing silicon carbide programs awarded. Between the automotive and the industrial markets, we now have 110 projects spread over 79 customers. About 60% of these projects are for automotive customers. We will achieve about $700 billion of silicon carbide revenue this year, well in line with our revenue target of about $1 billion of silicon carbide revenue in full year 2023. We have new design wins in automotive application in Q3 with both silicon and silicon carbide power discrete. This includes business for an S-PAC drive power module based on 1,200-volt silicon carbide MOSFETs and Generation 4 silicon carbide MOSFETs for traction inverter projects. We also want designs from multiple electrical vehicle makers. with rectifiers and protection products, and with ultrafast and silicon carbide diodes. With our broader automotive portfolio, we want several sockets in electrical vehicles with solutions for battery management systems, zone control units, and car headlight control. This includes a win with our innovative data bus solution in an OLED lighting application that supports simpler most cost-effective implementation of next-generation car architectures. In car digitalization, we also secure a number of design wins. This includes a smart power chip for power supply in a zone architecture vehicle control unit, a win for an automotive microcontroller for a battery management system, and an advanced chipset for satellite radio receivers. In our automotive sensor business, we run several new designs for six-axis sensors and with our recently announced global shutter image sensors for driver monitoring systems. Moving now to industrial. Here, we continue to see strong demand through the quarter, especially in business-to-business industrials. with some slowdown in consumer industrial, that is bringing the level of demand closer to what we can effectively serve. Demand was strong with both distribution and OEM. During Q3, we saw normalization of inventories of our products and distributors, with terms averaging around 4, but totally consistent with the hand market dynamics. Across the industrial market, we see two main trends driving a structural transformation in the market and accelerating the increase in semiconductor content. Digitalization of devices and systems and energy management and power efficiency improvements. We address the industrial market focusing on three areas. Business to business, the largest part which includes automation, power energy, and transportation. Consumer industrial, which includes home appliances, smart buildings, and power tools. And specialized industrial addressing, for example, healthcare. Across these three areas, we had key wins thanks to our broad portfolio. In business-to-business, we have design wins for products such as motor driver, metering and power line communication solutions, industrial sensors, power discrete, and our STM32 embedded processing solutions, including our industrial microcontrollers and microprocessors. Applications include electrical vehicle charging stations, next-generation smart water and electricity meters, industrial lighting, remote wireless monitoring, and photovoltaic systems. In consumer industrial, we have design wins with power, analog sensors, and embedded processing products. In applications such as home appliances, e-bikes, power tools, vacuum cleaners, consumer power supplies, and air conditioners. One innovative win I would like to highlight here is our high-performance STM32H7 dual-core MCU to perform artificial intelligence predictive maintenance in a refrigerator from a major appliance manufacturer. And in specialized industrial, I would like to highlight the win in a medical-grade remote care wearable device with an STM32 wireless MCU supporting Bluetooth and other short-range wireless protocols. Before closing on industrial, a few words on our continued investment in building the best ecosystem around our general-purpose MCU. In the quarter, we release a new version of our TouchGFX graphic interface creation tool, and we launch an update to our artificial intelligence development tools to bring support for deeply quantitized neural networks, enabling more accurate machine learning on existing microcontrollers. Moving now to person electronics. Demand for our products in the selected areas we target in the smartphone market was again above expectations. We have a selective focus in this market on high-volume smartphone applications and personal devices. We address them with differentiated or custom products while leveraging our broad portfolio. During the quarter, we want sockets in flagship smartphones and wearable devices with wireless charging solutions motion and environmental sensors, time-of-flight ranging sensors, touch display controllers, and secure solutions. We also had design wins with high-performance STM32 MCUs in gaming accessories for leading console makers. In communication equipment and computer peripherals, we continue to see deployment of both 5G infrastructure products and of low Earth orbit satellite programs and service around the globe. In parallel, we saw the computer peripheral market softening. The cloud market remains strong. In this end market, we target selected high-volume application, again, with differentiated products or custom solution, while leveraging our broad portfolio. New wins here include secure solutions, time-of-flight sensors, and general-purpose microcontrollers for notebook PCs and tablets. We receive awards based on our property technologies for optical and wireless infrastructure ICs with leading-edge mixed signal processes, as well as for a CPU for space application based on 28 FDSOA technologies. I confirm our continued progress with key customer engagement in our focus application in cellular and satellite communication infrastructure. Now let's move to our 2022 fourth quarter outlook. For the fourth quarter at the midpoint, we expect net revenues to be about $4.4 billion. Representing year-over-year and sequential growth of 23.7% and 1.8% respectively, growth margin is expected to be about 47.3% at the midpoint. Turning in the full year, our Q4 guidance at the midpoint translates into 2022 net revenues of about $16.1 billion, representing growth of about 26.2% year-over-year, with a gross margin of about 47.3%, both in line with the plan we shared in July. We confirmed our 2022 CAPEX investment range of about $3.4 billion to $3.6 billion. Before concluding, let me briefly summarize some recent key developments related to our integrated device manufacturing model and strategy. As we outlined at our Capital Market Days in May, we are transforming our global manufacturing operations, with additional capacity in 300mm manufacturing and a strong focus on wide-bandgap semiconductors. We have a unique position in our 300mm water supply in Troll, France, strengthened by the new project with GlobalFoundries, that we announced in July. And we continue to invest into our new 300-millimeter water farm in Agras, Italy. Here, our activities are progressing according to plan, with first volume ramping in H1 2023. I am also pleased to share with you that the first production lot has been successfully released recently from Agras. So successfully means yield at the best. And on October 5th, we announced that we will build an integrated silicon carbide substrate manufacturing facility in Catania, Italy to support the increasing demand from customers for silicon carbide devices across automotive and industrial applications. This initiative will be an important step in our silicon carbide vertical integration strategies. Production is expected to start in the second half of 2023. The investment in Catania of €730 million over five years will be partially supported financially by the state of Italy in the framework of the National Recovery and Resilience Plan. And it will create around 700 direct additional jobs at full build-out. All these initiatives will contribute to our sustainability strategy and commitments. These new facilities will provide our customers with the products and solutions they need to increase energy efficiency and reduce CO2 emissions. Our new facilities will contribute to our sustainable manufacturing commitment in terms of energy consumption and greenhouse gas emissions, air and water quality. To conclude, based upon our year-to-date financial results and fourth quarter outlook, 2022 will be another year of progress for ST in line with Our focus on smart mobility, power energy management, and IoT and connectivity within our core business and targeted high growth areas. Our commitment to our integrated device manufacturing model with strategic technology and manufacturing investments to support our customers' current and future needs. And our $20 billion plus revenue ambition that we outline at our capital market day. Thank you, and we are now ready to answer your questions.

First question is from Jerome Rommel from BNP Paribas Exxon. Please go ahead.