STMicroelectronics N.V.

Good morning. Thank you, everyone, for joining our first quarter 2023 Financial Resource Conference Call. Hosting the call today is Jean-Marc Chéry, ST's President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President of Finance, Purchasing, ERM, and Resilience, and Chief Financial Officer, and Marco Cassis, President of Analog Mems and Centers Group, and head of STMicroelectronics Strategy, System Research and Applications, Innovation Office. These live webcasts 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 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 result this morning, and also in SC'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, SC's president and CEO.

So, thank you, Céline. Good morning, everyone, and thank you for joining ST for our Q1 2023 earnings conference call. So let me begin with some opening comments, starting with Q1. So first quarter, net revenues of $4.25 billion came in better than expected in automotive and industrial. partially offset by lower revenues in personal electronics. Growth margin of 49.7% came in 170 basis points above the midpoint of our guidance, mainly due to product mix in a price environment that remains favorable. Looking at our year-over-year performance, Net revenues increased 19.8%. Gross margin at 49.7% was up from 46.7%. Operating margin increased to 28.3% from 24.7%. And net income grew 39.8% to $1.04 billion. On a sequential basis, net revenues decreased 4%. On Q2 2023, at the midpoint, our second quarter business outlook is for net revenues of about $4.28 billion, representing a year-over-year increase of 11.5%, and a sequential increase of 0.8%. Gross margin is expected to be about 49%. For the full year 2023, we will now drive ST based on a plan for full year 2023 net revenues in the range of $17 billion to $17.8 billion, representing a year-over-year gross range of about 5% to 10%. Now, let's move to a detailed review of the first quarter. Net revenues increased 19.8% year-over-year, driven mainly by ADG and MDG, while AMS revenues decreased slightly. Year-over-year sales increased 17.5% to OEMs and 24% to distributions. On a sequential basis, Q1 net revenues came in 110 basis points above the midpoint to our outlook. This performance was driven by better than expected results in ADG on continued strength in automotive, and in MDG with general purpose microcontrollers remaining strong in Q1. Overall, Q1 net revenues decreased 4% on a sequential basis, with ADG up 6.5%, MDG lower by 1.1%, and AMS decreasing 20.3%, reflecting lower than expected revenues in personal electronics on top of seasonality. Gross profit was $2.11 billion, increasing 27.5% year-over-year. Gross margin increased to 49.7% compared to 46.7% in the same quarter last year. The 300 basis point expansion was driven by improved product mix, favorable pricing, and positive currency effects, net of hedging, partially offset by higher manufacturing costs. Q1 operating margin was 28.3%, up from 24.7% in the Eurogroup area, with ADG and MDG contributing to the 360 basis point growth in operating margin. On the year-over-year basis, net income increased 39.8% to $1.04 billion from the $747 million, And diluted earnings per share increased 39.2% to $1.10 from $0.79. Looking at our year-over-year sales performance by product group, ADG revenues increased 43.9% on a double-digit growth in both automotive and power discrete. AMS revenues decreased 0.9%, with lower revenues in analog and MEMS, offsetting an increase in imaging. MDG revenues increased 13.2%, with growth in both microcontrollers and RF communications. In terms of operating margin, two of three product groups delivered year-on-year expansion. ADG operating margin increased to 32% from 18.7%. MDG operating margin increased to 36.2% from 33.7%. And AMS operating margin decreased to 20.4% from 22.9%. Net cash from operating activities increased to 39.7% to $1.32 billion in Q1, compared to $945 million in the year-ago quarter. First quarter capex was $1.09 billion versus $840 million in Q1 2022. Thanks to the strong growth in net cash from operating activities, free cash flow grew to $206 million in Q1 2023 versus $82 million in Q1 2022. Cash dividends paid to stockholders in Q1 2023 totaled $54 million. In addition, ST executed share buybacks of $87 million as part of our current repurchase program. FT's net financial position of $1.86 billion as of April 1, 2023, reflected total liquidity of $4.52 billion and total financial debt of $2.66 billion. But let's now discuss the business dynamics. During the first quarter, demand in the automotive market and in the power and energy portion of the industrial market remain strong, driven by continued semiconductor provision and the ongoing structural transformation. Factory automation, robotics, and building control grew revenues in line with our strong backlog, while new orders normalized. Even in consumer industrial, communication infrastructure and networking, including data centers and servers, soft net, and demand for personal electronics and computer peripheral, further weakness. Our backlog is now about six quarters at the midpoint of our full year 2023 indication, still above a normal situation, but with different coverage consistent with the various end market dynamics. In automotive and industrial, we are still well above the capacity we can serve on some technologies and packages. In the other end markets we serve, we are back to a more normal level of coverage. Moving now to a Q1 review by the market. In automotive, the first quarter remains strong. Against this backdrop, we continue to execute our strategy for car electrification, in particular in silicon carbide. The number of ongoing silicon carbide programs increased again during Q1. Between the automotive and the industrial markets, we now have 130 projects spread over 85 customers. About 60% of these projects are for automotive customers. We now expect to generate about $1.2 billion of silicon carbide revenues in 2023, broadly spread among many different customers. We had design wins in Q1 with both silicon and silicon carbide power discrets in automotive applications. This included an AcePack power module and silicon carbide mosfets for traction investors as well as projects with silicon mosfets in battery management systems. In mid-April, we announced that we signed a multi-year supply agreement with ZF for silicon carbide devices. Under this agreement, we will supply a volume of double-digit millions of devices that will be integrated in ZF, New Modular Inverter Architecture, going into production in 2025. Speaking more broadly about our automotive portfolio serving car electrification, we won designs for multiple electrical vehicle makers, including our Stellar Automotive MCU, for an onboard charging application. In car digitalization, we had a number of design wins in key areas. In next-generation car architectures, our e-fuse products for a zonal controller solution gain traction. In driver monitoring systems, we were successful with our global shutter automotive image sensor. Legacy automotive remains dynamic, and silicon pervasion continues to increase. Here, we had several wins for our SPC5 microcontrollers for vehicle body control. as well as our latest products for a secure door zone platform. In our automotive sensor business, we want several new designs for vehicle dynamics, airbags, and anti-theft applications. Moving now to industrial. Across the industrial market, we see two main trends driving a structural transformation in the market and accelerating the increase in the semiconductor content. digitalization of devices and systems, and energy management and power efficiency improvement. During the quarter, demand remains strong overall in both OEMs and distribution, with different dynamics across the areas we serve. In B2B industrial, we continue to see strong demand in power energy, factory automation and robotics Building control grew revenues in line with our strong backlog, but while new orders normalized. Consumer industrial, such as battery-operated tools and home appliances, softened. During Q1, we continue to see an expansion of design wins across three areas of the industrial market we focus on. B2B, consumer, and specialized. Our broad offering enables us to support our customer with full solutions, combining power, analog, sensor, and embedded processing products, leveraging ST unique positions. We include system solutions comprised of power district, power management, and STM32MCUs in renewable energy applications. and multi-product solutions for smart meters and smart grid applications. We also want sockets with intelligent power switches, motor drivers, industrial sensors, and secure solutions in applications such as industrial automation, asset tracking, and several power supplies. In the quarter, we made a number of announcements related to our STM32 product portfolio and ecosystem. This included a new highly affordable MCU series to replace 8-bit MCUs, a new high-performance MCU series with health security features, a new wireless MCU, and a new MPU product. We also continued to build the best developer ecosystem with two industry firsts. We introduced a certified MCU security platform that combines hardware and software to simplify development of secure-embedded applications. And we launched the world's first MCU Edge AI Developer Cloud that includes an online benchmarking service for Edge AI models on MCM32 boards. Moving to personal electronics. During the quarter, our products were selected for flagship smartphones, watches, and other wearable devices. This includes NFC controllers and secure element solution, wireless charging products, main sensors, and time-of-flight ranging sensors. In communication equipment and computer peripherals, new wins here included products for EDO satellites, a number of products for computer peripherals, including secure solutions, time-of-life sensors and MCUs, and ASICs for communication infrastructure based on our proprietary technologies. Now, I would like to mention that we issued our annual sustainability report last week. A couple of key points. We are on track with our program to be carbon neutral by 2027, and we further increase our global sourcing of electricity from renewable energy, going to 62% in 2022, from 51% in 2021. We were recognized by environmental nonprofit CDP, so Carbon Disclosure Project, as a global leader in corporate transparency and performance on water security. being one of the few companies to secure a place on its annual A list. Now, let's move to our second quarter 2023 financial outlook and our plan for the full year 2023. For Q2, we expect net revenues to be about $4.28 billion at the midpoint, representing a year-over-year growth of about 11.5%, and a sequential increase of about 0.8%. Both driven by solid growth in automotive and industrial, partially offset by the decline in personal electronics. Growth margin is expected to be about 49% at the midpoint. For 2023, we confirm our plan to invest about $4 billion in CapEx, with about 80% of this amount mainly related to increase of our 300-millimeter wafer and silicon carbide manufacturing capacity, including for silicon carbide, our substrate initiative. The remaining 20% is for R&D, laboratories, manufacturing maintenance efficiency, and our corporate sustainability initiatives. Based on our visibility, we will now drive the company based on the plan for full year 2023 revenues in the range of about $17 billion to $17.8 billion, representing a growth over 2022 of about 5% to 10%. Automotive and industrial will be the key growth drivers of our revenues in 2023. To conclude, as we have discussed, we are operating in an environment with significantly different dynamics, depending on the head markets we serve. But based on our leadership position, strategic approach, and current visibility, we anticipate 2020-2023, another year of revenue growth and profitability improvement. toward our $20 billion-plus ambition and related financial model. Thank you, and we are now ready to answer your questions.

The first question comes from the line of Didier Chiamama with Bank of America. Please go ahead.