STMicroelectronics N.V. Q4 FY2020 Earnings Call

Good morning. Thank you, everyone, for joining our fourth quarter and full year 2020 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 of Finance, Infrastructure and Services and Chief Financial Officer; Marco Cassis, President of Sales, Marketing, Communications and Strategy Development. 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's expectations and plans. We encourage you to review the safe harbor statements contained in the press release that was issued with the results this morning and also in ST's most recent regulatory findings 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 1 question and a brief follow-up. I'd now like to turn the call over to Jean-Marc, ST President and CEO.

So, thank you, Celine. Good morning, and thank you for joining ST for our Q4 and full year 2020 earnings conference call. Let me begin with some opening comments. Starting with Q4. As announced, on January 8, net revenues at $3.24 billion were up 21.3% sequentially, significantly above the high end of our guidance. Our engaged customer programs in Personal Electronics, as well as continuous acceleration in demand, especially of automotive products and Microcontrollers, were the main factors that contributed to these results. Q4 '20 gross margin was 38.8%, 30 basis points above the midpoint of our guidance. Our operating margin was 20.3%, and our net income was $582 million. Moving to the full year 2020. Net revenues increased 6.9% to $10.2 billion for 2020, progressively strengthening versus the expectations we provided during the year. This was due to the stronger and faster than expected restart of demand during the second half. Full year '20 gross margin was 37.1%; operating margin was 12.9%; and net income, $1.1 billion. Free cash flow for the year was $627 million, and CapEx was $1.28 billion. Our net financial position increased to $1.1 billion at December 31, 2020, from $672 million 1 year earlier. On Q1 2021. At the midpoint, our first quarter business outlook is for net revenues of $2.93 billion, representing a year-over-year increase of about 31.2%. The gross margin is expected to be about 38.5%. For the full year 2021, we plan for solid revenue growth outperforming the markets we serve. Smart mobility, power energy management, the IoT, and 5G are driving demand for semiconductor content, and these trends have accelerated during 2020. ST's strategy stems from these long-term enablers, and we are very well positioned to support our customers across them. We plan to invest about $1.8 billion to $2 billion in CapEx in order to support the strong market demand as well as our strategic initiatives. Now, let's move to a detailed review of the fourth quarter. During Q4, market demand accelerated sharply versus expectations. As we preannounced on January 8, net revenue came in 580 basis points above the high end of our outlook range. On a sequential basis, net revenues increased 21.3%, with all 3 product groups performing above expectations. AMS was up 42.4%, ADG up 12.1% and MDG up 5.3%. On a year-over-year basis, Q4 net revenues increased 17.5%, driven by all product subgroups with only RF Communications decreasing as expected affected by the U.S.-China trade war. AMS grew 30.8%, MDG grew 15.7% and ADG saw a return to year-over-year growth increasing 3.2%. Our gross profit was $1.25 billion, an increase of 16% year-over-year. Gross margin was 38.8%, 30 basis points above the midpoint of our guidance. In comparison to the year-ago quarter, the gross margin decrease of 50 basis points was mainly due to usual price pressure and negative currency effects, net of hedging, partially offset by improved mix and lower unloading charges. Net operating expenses were $598 million; included in this amount, other income and expenses improved to a net income of $131 million compared to a net income of $54 million in the year-ago period, mainly due to a nonrecurring favorable impact of some R&D growth catch-up. Q4 operating margin was 20.3%, up 80 basis points sequentially. On a year-over-year basis, Q4 operating margin was up 360 basis points with an improvement in AMS and MDG, partially offset by a decline in ADG. Net income was $582 million, and diluted earnings per share were $0.63. Let's look now in more detail at our full year results, starting with the recap of the market and business trends we saw during 2020, which was clearly an unprecedented year with a material swing. During the first half of the year, our business continuity plans enabled us to support our customers and to continue to execute our R&D programs while maintaining the most stringent health and safety measures. Then from Q3, we saw a much faster and stronger-than-expected restart of demand for our products, which further accelerated in Q4. In automotive first. The negative impact on demand was particularly strong in Q2, especially for legacy automotive in Europe and in the U.S., with many carmakers and Tier 1s shutting down for a period. Importantly, even at that time, we didn't see any substantial slowdown of customer activity on long-term strategic smart mobility projects. After the summer, global demand started to pick up sequentially much faster and stronger than the industry had anticipated. We then saw a further acceleration during Q4, driven by car production volumes, replenishment of inventories across the automotive supply chain and more broadly, semiconductor content increase related to electrification and digitalization. Then in industrial. During the first half, we saw a demand slowdown in some applications, like appliances and lighting, while others, such as healthcare, remained positive. From the end of Q2 onward, we started to see improved dynamics in key application areas for ST, such as power-related applications, renewable energy, motion control, and factory automation. This continued in Q3. And during Q4, the situation improved strongly across all geographies. Distribution is a key element of our go-to-market strategy in Industrial. Here, we saw different regional dynamics. China was hit first by the pandemic effect in Q1 but started to recover as soon as Q2. While the slowdown in Europe and in the U.S. came a bit later in Q1, but continued during Q2. From Q3, we saw improvement in Asia overall with healthy levels of inventory in our distribution channel across all product families and recovery in the Americas and Europe. In Q4, this positive trend accelerated; inventories of our products in distributors are currently climbing across all product families and geographies with very high inventory turns. Now in Personal Electronics. During the first half, consumer demand for devices like smartphones was clearly impacted by retail lockdowns. But demand for our key products remained strong, thanks to our engaged customer programs. From Q3, we saw the strongest start of consumer demand for smartphones, driven by the introduction of 5G devices. This trend accelerated in Q4. Demand related to accessories was strong throughout the year, with IC dynamics related to wearables, tablets, hearables, true wireless stereo headsets, and game consoles. In communication equipment and computer peripherals, we saw solid demand throughout the year for products related to working from home and enterprise servers, while the overall market for all these was softer. This was also true in Q4. The 5G equipment rollout faced a significant slowdown in China during Q4. Looking now at our full year financial results. Net revenues were $10.2 billion for 2020, increasing 6.9% year-over-year, progressively strengthening compared to the full year expectation shared in April and the regular updates we provided during the year. Sales to OEMs represent 73% of total revenues, while distribution represented 27%. By region of origin, 42% of our 2020 revenues were from the Americas, 34% from Asia Pacific, and 24% from EMEA. In terms of revenues by product group, two groups grew while one declined. ADG revenue decreased 8.9%. Revenue from the automotive products subgroup decreased, mainly due to a decline in legacy automotive, partially offset by growth in ADAS. Revenues for the power discrete subgroup saw a lower decrease with soft market conditions for industrial in Europe and in America, partially offset by growth in car electrification. AMS revenues increased 18%, mainly driven by imaging and analog products for Personal Electronics. MDG revenues increased 14.9%, driven by strong growth in Microcontrollers at both OEMs and distribution and partially offset by a strong decline in RF Communication products in Q4. Gross margin was 37.1%, 160 basis points lower than 2019, possibly reflecting higher unsaturation charges of about 150 basis points compared to about 70 basis points in full year 2019. Our operating margin for 2020 was 12.9%, in line with the double-digit target we had shared. AMS posted an operating margin of 20.8%, MDG was 16.6%, and ADG was 5.5%. Net income increased 7.2% to $1.1 billion, translating into diluted earnings per share of $1.20. Moving now to the other financial indicators. Net cash from operating activities increased 12% to $2.09 billion. CapEx was $1.28 billion, substantially in line with the updated investment plan we announced last April and further refined in Q2 from the initial expectation of $1.5 billion. Free cash flow in Q4 was $512 million, bringing the full year free cash flow to $627 million, up 26%. Cash dividends paid to stockholders totaled $168 million. As part of our existing share buyback plan, we repurchased shares totaling $125 million during the year. During Q3, ST exercised the call option for the early redemption of its $750 million 2022 tranche A of the convertible bond issued in 2017. Simultaneously with the exercise of the call option, ST issued a new $1.5 billion dual-tranche senior unsecured convertible bond due 2025 and 2027. Our net financial position exiting the year was $1.1 billion, up from $672 million at the end of 2019. Now, let's move to our first quarter 2021 outlook and our perspective on the full year 2021. For Q1, we expect, at the midpoint, net revenues of $2.93 billion, increasing year-over-year by about 31.2% and decreasing sequentially by about 9.5%. On a year-over-year basis, all product groups will contribute to the growth. On a sequential basis, the decline will be lower than the usual seasonality. We expect a decline in AMS due to the seasonality in Personal Electronics, stable revenues in MDG, and a mid-single-digit increase in ADG, driven by strong demand in automotive. Our gross margin at the midpoint is expected to be about 38.5%, representing a sequential decrease of about 30 basis points. Year-over-year, the increase of about 60 basis points is mainly due to the much lower unloading charges. For the full year, we plan for solid revenue growth outperforming the market we serve. The broad long-term trends in electronic systems that we are focused on have accelerated during 2020 and are driving demand for our products. These trends include smart mobility, power and energy applications, and IoT and 5G. We are also facing an unprecedented market situation. Semiconductor demand is increasing across the entire industry, driven by car production volumes and replenishment of inventories across the automotive supply chain, very lean inventory levels at distributors, and steady FX, boosting demand for Personal Electronics and communication products. In terms of CapEx, we plan to invest about $1.8 billion to $2 billion in 2021 in order to meet the strong market demand and also to advance our strategic initiatives. This amount includes mainly the addition of capacity for our existing 300-millimeter fabs; mix evolution for our most advanced 200-millimeter fabs; and silicon carbide, a strong capacity expansion. It also includes about $400 million of investments for strategic initiatives as well as the support of R&D activities and the maintenance required by our manufacturing operation. These strategic initiatives are continued investments in our new 300-millimeter SAM, R&D for gallium nitride power technologies, and the fabrication of silicon carbide substrate. To conclude, on 2020, we returned to solid revenue growth outperforming the market we serve. We maintained our profitability with an operating margin of 12.9% and net income of $1.1 billion. We strengthened our net financial position with strong growth in operating and free cash flow. ST demonstrated both resilience during the first half of this unprecedented year and the ability to support the strong and sudden upswing in demand during the second half. Working alongside our customers and partners here, I am thinking about distributors, OSAT, foundries, and, of course, various vendors. During all the different phases we had to go through together in 2020. For 2021, we are better aligned to continue to make ST stronger. We are convinced that we have the right strategy and resources to do this, our balanced market position, our focus on high-growth applications, and our solid product IP technology portfolio. These are supported by our operating discipline and agility, now more important than ever in such a dynamic market and by the improvement programs and transformation programs we are engaged in. This will translate into solid revenue growth and improved financial performance. Thank you. We are now ready to answer your questions.

We will now begin the question-and-answer session. The first question is from Andrew Gardiner from Barclays.

Jean-Marc, I was hoping you could perhaps sort of compare and contrast some of the statements you had made in December at the final CMD session compared to what you're saying this morning. I mean, if we look at how you outperformed in the fourth quarter and the very strong guidance you've given for the first quarter of this year plus your statement about 'solid growth' for 2021, you're already annualizing at that $12 billion target today. And yet, back in December, you gave what, I think, if I remember rightly, you referred to as a prudent or conservative guidance of calling for $12 billion by 2023, hopefully a bit sooner, but certainly by 2023. Like I said, it feels like you guys are already annualizing there, and the solid growth expected for this year, could be very well near that in 2021. Have things changed since you gave us that outlook in December materially enough to drive that kind of upside? Are you -- how do you see the balance of your business and why still be so cautious on that long term?

Thank you for your question. Well, clearly, what we are seeing is, let's say, an accelerated path to our trajectory to deliver $12 billion of revenue. It is clear that with the backlog we have, the current dynamics of the market we have -- I would like also to recall that in December, what I told you is that we have lost one important customer due to the implications of the trade war between the U.S. and China. And our visibility at that time was that the other verticals we address, so industrial and automotive with data points we had at that point in time, would not certainly offset this customer. Now it is clear that after a very strong order booking in Q4, which has accelerated in November and December on automotive and the industrial market, yes, I confirm today that we are clearly on an accelerated path versus this trajectory. And we are working; we update every month our sales and operating plan for a rolling 12 months. So we see clearly this accelerated path. That's the reason why we have decided to increase our CapEx plan versus the model we have in order to fulfill the strong market demand and to continue our strategic initiatives. Another point that is important to mention is Personal Electronics. While it is clear that something happened in the overall Personal Electronics, which is, let's say, at the same time, the 5G deployment of devices and we know that our major customer is very successful in this area, we see all the accessories. The variable level is very successful. And this is certainly one of the effects of the work-at-home, stay-at-home situation, which will remain definitively, whatever the pandemic evolution during the year. So yes, I confirm that the mega trends we are seeing are accelerating more than expected. Certainly, this mega trend in automotive, industrial, and Personal Electronics will offset the fact we lost this important customer due to the trade war. Today, our current view is, clearly, yes, we are on an accelerated path.

Just one quick follow-up, if I may. As we look forward throughout this year, based on what you just said, can we expect somewhat normal seasonality? I know it's a -- things are, as you said, unprecedented in some end markets, but would you still say that the second half should be up on the first half?

Well, okay, we try to be quite disciplined in the way we drive, and we give indication to you, the best indication. So in January, we gave our Q4 earnings and the guidance of Q1. We provided important information about the CapEx, which is, of course, linked to the expectations we have on the full year revenue for 2021. Then in April, we will provide you with the full visibility of 2021. Yes. Most likely, we will have a different breakdown between H1 and H2 in 2021, more simply because today, we have a very strong demand in automotive. I think everybody is well aware about the automotive supply chain situation. So the demand is very strong, which will boost definitely the first half of the year. This is also valid for Personal Electronics and industrial markets.

The next question is from Jerome Ramel from Exane BNP Paribas.

Yes. Two quick questions. The first one, how should we model the OpEx for Q1 and maybe for the full year? And a follow-up question on automotive. Jean-Marc, you mentioned the disruption in the industry. Could you shed some light on what's going on, where the bottleneck is and what is STMicro doing to address this issue?

So, the OpEx, Lorenzo, you start with OpEx.

I will start to talk about our OpEx expectations for Q1. You have seen -- usually, when we guide, we guide including other income and expenses. And as you remember in guiding, as you have seen, clearly, in this quarter, the number of other income and expenses has been quite significant. Here, we have a key chapter that was expected on our R&D grants in one jurisdiction due to the change of one law, and we were in the position to recognize. This is for around $100 million. So Q4, for sure, we benefited from this in our overall expenses. What do we expect for the next quarter? For the next quarter, there will be some headwind for our expenses. One is definitely the exchange rate. The guidance we gave for Q1 is the euro-dollar exchange rate at 1.20, compared to 1.16 in Q4, and the level of other income and expenses is much more normalized in respect to what we saw in Q4. So the expectation is to have expenses that will range in Q1 between $705 million and $715 million, something in this range. This is our expectation. There should be no significant change moving forward, let's say, some ups and downs in the year, but the expectation will be substantially to be in this range moving forward.

So then, Jerome, it's a question about industrial and automotive, what we are doing to support the current demand. Well, it is clear that the demand for automotive has been quite sudden. I don't want to repeat myself each time, but it is clear that coming after summer with this strong acceleration definitively has put the supply chain under stress. As far as this is concerned, we are supporting our customers very closely in daily contact with them, in order to be sure that each single piece we produce goes directly to a production line. So we are under emergency task force mode with close relationships between the Tier 1, ourselves, and the carmakers. The second action is the capability of the company to synchronize all our manufacturing assets, supply chain, and the foundry to make the best triangulation between all the manufacturing sources we have in order to maximize the number of wafers we can deliver to our assembly plants to support this demand. While it is clear that this is what we are doing, there is not much flexibility because all the foundries are basically fully saturated, whether they are 8-inch or 12-inch. There is no more equipment available on 8-inch, making it impossible to increase 8-inch capacity now. The situation is quite similar on OSAT, so assembly and test. There is also some shortage of materials like substrates. This is a situation which is very strange. As usual, the recipe is for all the actors to increase their capacity steadily over time to support their customers with the best visibility we can discuss with them to fairly balance capacity across all the verticals we address: automotive, industrial, Personal Electronics, and communication equipment. So it's a pure operational job, but we are pretty well-equipped to manage it.

The next question is from Matt Ramsay from Cowen.

Yes, Jean-Marc, I wanted to dig a little deeper on the first question that Andrew asked to kick off the call. I think a lot of us in December and many investors were struggling to square the circle of the strength that you're seeing in the business with pushing out the long-term revenue target. You addressed some of the things about conservatism and the challenges at Huawei. But maybe you could just confirm for us or address if there have been any changes to your key customer program visibility with a few folks, namely the large smartphone customer, the silicon carbide programs, and also what's going on with Mobileye. If you could confirm that there's no changes there in your view that I think that would help a lot of us in our forward modeling. And then I have a follow-up on gross margin.

Well, coming back a bit to the 2021 accelerated path, I would like to mention a few points. Clearly, the production of cars in 2021 is expected to be between 85 million to 90 million vehicles, with a notification related to inventory replenishment. It looks like the industry in Q2 and early Q3 had inventory levels close to zero. So clearly, the run rate of what we are seeing today in terms of semiconductor demand for the automotive market is more aligned with 98 million vehicles rather than 85 million to 90 million. So there is clearly an inventory replenishment, which was not the data point we had in November. In November, we were more around 80 million vehicles to be produced without this amplification factor of inventory replenishment. So this is point number one. Then about our engagement with ongoing applications we address. First, smart mobility. I would like to clearly confirm to you that our programs with Mobileye and silicon carbide are running very well. Our plan for 2021 is to generate revenue between USD 450 million and USD 500 million for silicon carbide. Mobileye, I will not comment because we never comment specifically on customers, but we will increase our plans. Regarding imaging and Face ID, again, I don't comment on customers and customer programs. However, I can confirm to you that we do not plan any material or significant change in our revenue in 2021 with our imaging business. So I hope I am quite clear.

I really appreciate the candor there. And don't shoot the messenger; I had to ask the question. I guess the -- and my follow-up question, Lorenzo, I wanted to talk a little bit about gross margin. Obviously, there was an inventory correction in 2019 and then all the turmoil that happened in the supply chain around COVID and demand in the automotive sector. You've been kind of chasing underloading charges in your margins for a while. Maybe you could talk a little bit about what your expectations are for gross margin trends. Tightness in the industry seems to indicate that the underloading charges would go away. Additionally, we've heard some rumblings of potential price increases for ST and other vendors. Anyway, the puts and takes on gross margin would be really helpful.

Yes. Maybe I can comment on that. Yes, it's true that during 2020, the combination of lack of demand in the first half and the lower workforce has impacted significantly our gross margin. We said that there is around a 150 basis point impact on the gross margin with the combination of these two elements. What happened now? In Q4, we already started to see some reduction in respect to the original expectation of our unloading charges. This is one of the main factors of having exited Q4 slightly better than was the expectation, 130 basis points mainly driven by the fact that the unloading charges are lower. When we look at Q1, unloading charges are substantially down. We do not have material residual unloading charge, mainly driven by the fact that we are not yet ready to fully utilize some of our plants. We are talking about 10 basis points of unloading charges in Q1. The expectation is that, definitely, for this year, unloading charges will not be a material number, already in Q1, contrary to what was expected. On the other side, there are two headwinds for us. For sure, one is the exchange rate. This doesn't play in our favor; it's negative. You see that now we are guiding in the range of 1.20. You see how the stock rate is. It means that we are in this exchange rate level. Last year, the average for the year was 1.13. Q1 in 2020 was 1.11. It definitely means that there is a significant change in this respect concerning the impact of FX. I was modeling this, if you remember during the Capital Markets Day, as impacting our cost in our COGS. Additionally, the cost of precious materials is another important component of our costs. True that, on the other side, this is in terms of revenue pricing, shares somehow with our customers. So there is a visible impact on the guidance of this quarter, less seasonality in terms of price than what is customary. Indeed, when I look at gross margin, the combination price/mix is substantially neutral. We do not have the usual negative impact, a significant negative impact that we normally encounter at the beginning of the year. So there are all these ingredients that are combining together. Moving forward, we will see the evolution. I do expect some improvement, but it's a little bit early now to size the level of improvement.

The next question is from Sandeep Deshpande from JP Morgan.

Hi. Can you hear me? My first question is regarding what we've been hearing in the automotive market that there have been shortages in the market. Maybe STMicro can give a view on this market? Are you able to supply this market? Or are there other suppliers who are not able to supply to the market? And then secondly, reverting to that question on CapEx and revenue guidance in your CMD. If you look at your CapEx figure at the moment, or then it would -- you guide to 6.5% CAGR growth on the plan at that time. I mean maybe you could help us understand what new customer programs have engaged. Why has suddenly the CapEx gone up to this even higher than what was guided in December at this point? And will this be sustained because otherwise this huge spending at this point could later on hurt ST?

So I will take the CapEx question. There is no CapEx question. And for automotive, well, let me answer both. As for automotive, the first point I would like to mention about ST's view is that on the electrification of the car, so silicon carbide, we see a total share situation than on the legacy automotive. Despite the tremendous growth of our key customer on silicon carbide, we are supporting them steadily. As I mentioned a few minutes ago, we plan to have this year revenue between USD 450 million and USD 500 million with strong growth in H2. For silicon carbide, yes, it will show strong growth in H2 versus H1. Our legacy customers have a significant gap between the short-term demand of the automotive industry, so carmakers and Tier 1s versus the capacity installed in the semiconductor industry. So far, wafer fabs and assembly capacity are shared with other verticals. Clearly, other verticals, Personal Electronics, servers, computers, and industrial markets are demanding capacity. Unfortunately, the car industry woke up very late, and the lead time of semiconductors is what they are. You cannot increase capacity overnight. Yes, it is an industry problem. There is an overall industry problem showing an important gap between the demand and the capacity. As in the past, ST has managed this kind of situation well, delivering and supporting our customers at best while fairly balancing our capacity across all verticals to protect customers from the automotive market, industrial, Personal Electronics, and computer peripherals. I must not mention a specific bottleneck from a company or another one; that's not my job. But it is an industry problem for sure.

Does this answer your question, Sandeep?

For the full year, the contribution of our revenue for the sales and operating plan of 2021 will be pretty well balanced across cash programs. I confirm that silicon carbide will be one of the main drivers of our revenue growth. However, clearly, in 2021, we will enlarge our customer base, and they will start to contribute to the revenue. Now coming back to the CapEx, you know our model is well known. For every $1 growth, we invest at least $0.8. We must keep 6% to 7% of our sales for maintenance, R&D, and corporate sustainability. We need to invest to go to 0 carbon neutrality and our strategic initiatives. Yes, between our model what we said at the Capital Market Day was $1.6 to $1.7, which was spread with $400 million for strategic initiatives, around $300 million to $350 million for maintenance, and the rest, $800 million for capacity increase. But we have increased the CapEx for capacity increase. So now the CapEx for capacity increase will be between $1.1 billion to $1.2 billion in order to support the automotive industry, the industrial market, and the Personal Electronics. We will continue to maintain high levels of outsourcing production with our main foundry partners, so TSMC, Samsung, and others. This CapEx supports our capacity needs, which we anticipate will grow as demand increases.

The next question is from Stephane Houri from ODDO.

I have a clarification to ask and a question about diversification. The clarification is, when you talk about your main customer on the engage program and you said that basically that the relationship is unchanged, does it suppose that you expect growth on this aspect? And the following question is about diversification. You've been talking during the CMD about the fact that now the game with your main customer was also to diversify your revenues. So can you highlight some of the initiatives there? And same question basically about silicon carbide because there is going to be some growth this year. But so far, it was only on one customer, basically. And is the diversity coming this year?

Regarding silicon carbide, in 2021 we will start to see an enlargement of our customer base, and they will begin to contribute to our revenue, along with this order of magnitude of USD 500 million. I will not communicate the breakdown because you can make a correlation with our main customer, and I think it's not fair for me. For diversification, yes, I confirm. When we see what happened in 2020 and when we look at the revenue we have generated with our main customer in Personal Electronics: ST addresses all the major platforms of this customer, such as personal computers, pads, phones, and accessories, and our product consistency aligns with our strategy. We want to be selective on some custom design in imaging sensors, secure solutions, analog products, but we leverage our general portfolio like microcontrollers and power. Now ST is very well positioned across all platforms of our major customers, which is the same strategy we had with uncertainty with Huawei, which unfortunately has been disrupted for reasons you know about. This is a good diversification and a leverage of our product portfolio definitely.

Thank you very much, Stephane. We are running now close to the end of the time. We will take two questions, two more questions. And I apologize for the ones that have any other.

The next question is from David Mulholland from UBS.

I'll keep it short from my side. But obviously, one of the discussions we had when we were talking in the past about the headwinds of Huawei was what opportunity you might have to gain other OEMs that might benefit from the challenges Huawei faces. I just wonder if you could give us an update and how you feel about your design win traction and penetration into, I guess, the range of other Chinese OEMs that are hoping to gain on the back of Huawei's challenges.

Well, our strategy for Personal Electronics with various OEMs was the following: Two OEMs, Apple and Huawei, were well-known. Our approach was to cooperate on R&D and product development and develop custom design solutions while being very selective in fields like optical sensing solutions, secure solutions, and analog power management. For other players like Samsung, Vivo, OPPO, and Xiaomi, our approach is complementary, focusing more on application-specific standard products. We do not develop custom design solutions for these customers but offer our solutions in areas like sensing, secure solutions, analog, and power management. We're very successful with our MEMS with these customers. This is how we address the Personal Electronics market. Accessories like wireless handsets, wearables, and others are in high demand. We address this market directly with OEMs when developing their own solutions and through the distribution channel for broader market access.

That's great. And just a quick follow-up. Obviously, you've been developing custom RF power amplifier content for Huawei, and that can't be sold anymore. Have you found ways to repurpose that? Can that be seen with a bit more development from yourself into a more standard product over time so that you can still gain some benefits from the investment?

It is clear that our strategy was in two steps. Step number one was cooperation on Huawei's technology. Following this, we plan to diversify into IoT when the 5G infrastructure is deployed, which will enable millions of nodes per unit area. Our goal is to offer the full product stack, including microcontrollers, connectivity, analog power management, and RF components, so we do not depend on third parties. Investments made with Huawei in technology and know-how will be repurposed and utilized in IoT. I would also like to recall that we acquired a startup last year called SOMOS, which has strong capabilities in designing RF devices like power amplifiers and transceivers.

Thank you. And we will now take the last question.

This last question is from Aleksander Peterc from Societe Generale.

We lost connection with the questioner. The next question is from Sébastien Sztabowicz from Kepler Cheuvreux.

On the market demand, the market is currently overreaching right now. What kind of visibility do you have for Q2? Do you see any potential risk of inventory correction moving into Q2 and maybe in the back half of the year? And secondly, on the time-of-flight sensors, could you provide an update on your roadmap? How do you see the demand building up in this specific market? Have you seen any slowdown in the adoption of time-of-flight sensors in the market? It seems that Samsung has stopped using these for wall-facing applications in the last GF 21?

First, the demand is very clear on H1, and H2 is starting to look very healthy. We don't see any inventory corrections because the inventory in the supply chain is very healthy. Again, I confirm to you that we have visibility on the distribution channel, and the turn of inventories are incredibly high well above four, five, or six. So inventories are low. The business is very dynamic. There's no inventory in the automotive industry, considering the number of inquiries we receive. Similarly, Personal Electronics is important. We know very well the supply chain of our main customers and monitor their inventory levels, with no detected inventory issues. Now again, the current situation is linked to the demand for Personal Electronics and other sectors driven by stay-at-home, work-at-home, and limited travel, which will last for a long time. The industrial market in China and Asia is very healthy and recovering in Europe and America. On automotive, the industry is undergoing a major transformation related to electrification to comply with various norms and regulations. This creates strong demand for components. The content required in vehicles is increasing, and production is expected to come back to levels seen in 2019, with inventory replenishment in 2021. This requires the semiconductor industry to manage capacity shifts well. Regarding the time-of-flight sensors, we won't communicate our strategy on this detail. But there's a need to offer the best components for applications on the front or back side of smartphones. We know that the direct time-of-flight can be more adequate than the indirect. The cost of ownership is major as well. The component's ability to fit under OLED screen displays is crucial. ST is working to meet these challenges, continuing to address our main customers while developing solutions for other smartphone players.

Okay. So this will end our call now for this quarter. Thank you very much.

Thank you. Thank you very much.

Thank you for your attention, and we keep in touch. Thank you very much.

Thank you. Bye, bye.