STMicroelectronics N.V. Q4 FY2021 Earnings Call

Ladies and gentlemen, welcome to the STMicroelectronics Fourth Quarter and Full Year 2021 Earnings Conference Call and Live Webcast. I'm Myra, the Chorus Call operator. The conference has been recorded. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Celine Berthier, Group Vice President, Investor Relations. Please go ahead, madam.

Thank you, Myra, and good morning, everyone. Thank you for joining our fourth quarter and full year 2021 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 and Chief Financial Officer; and Marco Cassis, in his new role since January 1 as President of Analog and Sensor Group. 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 these results to differ materially from management's expectations and plans. We encourage you to review the sale of our statement contained in the press release that was issued with the rise this morning and also in ST's most recent regulatory filings for a full description of these risk factors. 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, President and CEO.

Thank you, Celine. Good morning, everyone, and thank you for joining ST for our Q4 and full year 2021 earnings conference call. Let me begin with some opening comments. Starting with Q4. As announced on January 7, net revenues and gross margin came in better than expected, primarily due to better-than-anticipated operations in an ongoing dynamic market. Q4 net revenues of $3.56 billion were up 9.9% year-over-year and 11.2% sequentially, coming in 140 basis points above the high end of our business outlook. Q4 gross margin was 45.2%, 20 basis points above the high end of our guidance. Our operating margin was 24.9%, and our net income was $750 million. Looking at our full year 2021, net revenues increased 24.9% to $12.76 billion in 2021, reflecting a strong performance across all the end markets we address and our engaged customer programs throughout the year. This performance progressively strengthened versus expectations we provided during the year despite the challenges faced by the global semiconductor industry supply chain. All three product groups achieved double-digit growth in 2021. Our profitability further increased. Full-year '21 gross margin was 41.7%, and operating margin was 19%, compared to 37.1% and 12.9%, respectively, in full year 2020. Our net income nearly doubled to $2 billion. Free cash flow for the year was $1.12 billion, and CapEx was $1.83 billion. Our net financial position was $977 million at December 31, 2021, compared to $1.1 billion at year-end 2020. On Q1 2022, at the midpoint, our first quarter business outlook is for net revenues of $3.5 billion, representing an increase of 16.1% year-over-year. Gross margin is expected to be about 45%. For the full year 2022, we will accelerate the execution of our strategy and value proposition; a strategy which stems from three long-term enablers: smart mobility, power energy management, IoT, and 5G. Our value proposition is based on sustainable and profitable growth, providing differentiating enablers to customers, supporting them with an independent, reliable, and secure supply chain, committing to sustainability for the benefit of all our stakeholders. We plan to invest about $3.4 billion to $3.6 billion in CapEx to further increase our production capacity and to support our strategic initiatives. This includes the first industrialization line of our new 300-millimeter wafer fab in Agrate, Italy. Based on our strong customer demand and increased capacity, we will drive the company based on the plan for full year 2022 revenues in the range of $14.8 billion to $15.3 billion. Now let's move to a detailed review of the fourth quarter. On a sequential basis, Q4 net revenues increased 11.2%. This was driven by both ADG and MDG, which were up 22% and 15.4%, respectively, while AMS revenues were substantially flat. On a year-over-year basis, net revenues increased 9.9%, with ADG and MDG growing 28.6% and 23.7%, respectively, and AMS decreasing 11.2%. Gross profit was $1.61 billion, increasing 28.3% on a year-over-year basis. Gross margin increased to 45.2% from 38.8% in the year-ago quarter and was 20 basis points above the high end of the company guidance, possibly driven by improved product mix, favorable pricing, and manufacturing efficiency. Net operating expenses in Q4 were $720 million. Q4 operating margin was 24.9%, up from 20.3% in Q4 '20, with ADG at 17.6%, AMS at 26.6%, and MDG at 29.9%. Net income and diluted earnings per share increased about 30% in comparison to Q4 '20, with net income of $750 million versus $582 million, and diluted earnings per share of $0.82 versus $0.63. Looking now at our full year results in greater detail, net revenues were $20.76 billion for 2021, increasing 24.9% year-over-year. Sales to OEMs and distribution returned to a more balanced split in 2021, representing 66% and 34% of total revenues. This compares with a 73% and 27% split in 2020, influenced by the first phase of the pandemic affecting the industrial end market. By region of origin, 41% of our 2021 revenues were from the Americas, 34% from Asia Pacific, and 25% from EMEA. In terms of revenues by product group on a year-over-year basis, ADG revenue increased by 32.5%. Both subgroups, Automotive and Power Discrete, recorded double-digit growth. EMS revenue grew 18.8%. Analog & MEMS recorded double-digit growth for 2021, supported by continued growth in Imaging product sales. MDG revenues increased by 24.3%. Microcontrollers, our largest subgroup, reported double-digit growth partially offset by the expected decrease in radio frequency communication revenues. Gross margin increased to 41.7% for 2021, expanding from 37.1% for 2020, reflecting manufacturing efficiencies and loading improvements, favorable pricing and product mix, partially offset by negative currency effects. Our operating margin also significantly increased during 2021 to 19% from 12.9% in 2020. Net income increased 80.8% to $2 billion for 2021 from $1.1 billion in 2020. Diluted earnings per share were $2.60 from $1.20. Moving now to other financial indicators. Net cash from operating activities increased about 46% to $3 billion for 2021. CapEx was $1.83 billion compared with the 2020 CapEx of $1.28 billion. Our 2021 investments were about $300 million lower than we had expected, mainly due to later-than-planned equipment deliveries. Our full year free cash flow was $1.12 billion compared to $627 million in 2020, up almost 80%. Cash dividends paid to stockholders in 2021 totaled $205 million. During 2021, we repurchased shares totaling $485 million under our prior and new share repurchase programs. Our net financial position was $977 million at December 31, 2021, reflecting total liquidity of $3.52 billion and total financial debt of $2.55 billion. Now let's move to our 2022 first quarter outlook and our plan for the full year 2022. In 2022, we will accelerate the execution of our strategy and value proposition strategy which stems from the three long-term enablers: smart mobility, power energy management, and IoT and 5G, as well as a value proposition based on sustainable and profitable growth, providing differentiating enablers to customers, supporting them with an independent, reliable, and secure supply chain, and committing to sustainability for the benefit of all our stakeholders. We plan to invest approximately $3.4 billion to $3.6 billion in CapEx to further increase our production capacity and support our strategic initiatives. Looking in greater detail, our CapEx plan includes: approximately $2.1 billion for capacity additions and mix change in our manufacturing footprint, particularly, for our wafer fab; digital 300-millimeter in Agrate, Italy; analog 200-millimeter in Singapore; Silicon carbide power in 150-millimeter in Catania and Singapore, as well as assembly and test operations. About $900 million for strategic investments. This includes the first industrialization line of our new 300-millimeter wafer fab in Agrate, Italy, as well as gallium nitride technology and silicon carbide raw materials initiatives. The remaining part of the CapEx plan covers the overall maintenance and efficiency improvements of our manufacturing operations and infrastructure, as well as our carbon neutrality execution program. On this latter topic, a key element of our sustainability strategy, we are moving ahead in our environmental roadmap to be carbon neutral by 2027. In 2021, we improved our total greenhouse gas emissions efficiency by 27% versus 2020, and our use of renewable energy reached about 51%. Based on strong customer demand and our planned investment to increase capacity, we will drive the company based on the 2022 revenue plan of $14.8 billion to $15.3 billion, representing revenue growth of approximately 16% to 20%. To conclude, in 2021, ST delivered strong revenue growth and increased profitability. We work alongside our customers, continuing to adapt our supply chain to support their strong demand. For 2022, we continue to work on making ST stronger. We believe that we have the right strategy and resources in place, our balanced end market focus, and a solid product IP technology portfolio. Our integrated device manufacturer model, transformation programs, and focus on high-growth applications will continue to accelerate their strong positive dynamics. We are investing significantly to support this acceleration in order to capture new opportunities and prepare our goals for the years to come. Before we take your questions, I would like to mention that we will be hosting our Capital Markets Day on May 12 in Paris. We hope to be able to hold an in-person event and will also webcast live. Thank you. We are now ready to answer your questions.

Before we take your questions, please remember to ask one question with a brief follow-up.

Congratulations on great results. I guess the first part I would have would be on how we should think about your gross margin developing throughout the year. I think you mentioned last year there could be some near-term headwinds from higher input costs. But it’s clearly not the case in Q1, where you guide for flat gross margins at this high level. So how should we expect this to develop over the year? Do you expect the pressure later? Or will you build on this strong gross margin in the first quarter? And then just very quickly, secondly, if you could comment on why R&D was so low in the fourth quarter? And how should we think about OpEx modeling for the year?

Sure. Good morning, everybody, and thank you for the question. Yes, about gross margin, what will be the sustainability of the gross margin that we have posted during the last quarter in Q4 and what we have announced for Q1? For sure, you have seen that in Q4, gross margin was stronger than expected. This was mainly thanks to a more favorable product mix and definitely also due to the price environment. We continue to see our gross margin at this level for Q1 as well. With the current market environment that we see at the level of the revenues, we think that we should be able to maintain our gross margin around the current level as an average for the whole year. Of course, we expect some seasonality in our gross margin. For instance, we do expect a slight decline in Q2 in respect to what we stand in Q1, and then maybe some recovery in the course of the year in the second half. The dynamic of the gross margin will be impacted by various elements. Some of them are positive and some negative. On the positive side, we expect further revenue price increases and positive impacts from improving manufacturing efficiency. On the negative side, we will see the full impact of the increase in production material costs and energy costs, alongside increased depreciation in our COGS as a consequence of our CapEx plan which will impact our gross margin in the short term. All in all, we expect that we may stay at different levels of gross margin with some fluctuations in terms of seasonality during the year. The second question was about expenses in Q4, which came in lower than we originally expected. This was mainly driven by lower discretionary expenses and some positive one-time items linked to remeasurement of some accruals. What we do expect for Q1 is an increase in our expenses related to increased activity in our R&D programs along with adjustments from the low expenses in Q4. We expect our expenses, including other income and expenses, to be in the range of $800 million to $820 million.

Yes, thank you very much.

Jean-Marc, I wanted to take a moment to ask a multi-part question. In 2021, your company achieved remarkable results, growing revenue by about 25%, and it appears you're forecasting high teens growth for 2022. I would like to understand what factors are driving that growth. Is it primarily due to long-term trends like electrification and digitization in the automotive sector, how much is it a result of expanding capacity, and how much is due to pricing increases? Additionally, there are many questions from investors regarding the sustainability of these price increases throughout the economic cycle. I would appreciate any insights you can share on that.

Thank you. I will discuss the megatrends, and then Lorenzo can address the volume mix and pricing. Regarding ST's growth from 2019 to 2021 and our outlook for 2022, there are basically two main factors. First, if we categorize the electronics market into standalone electronics, which includes personal electronics, consumer electronics, and communication, our strategy has been consistently clear for many years. We are selective with certain engaged customer programs to leverage high volume applications using our general-purpose MCU and analog and power devices. ST has consistently capitalized on high volume in this area since 2016. The second part, which is central to our strategy, is embedded electronics, focusing on the automotive and industrial markets. After 2020, it becomes evident that these two markets are recovering, but more importantly, they are transforming rapidly. The acceleration of mobility electrification is happening much faster than anticipated in 2020, driven by a global demand to minimize environmental impacts, relevant to all vehicle manufacturers worldwide. In the automotive sector, we continue to witness unprecedented demand across all regions. This rebound is broad-based, influenced by vehicle production volumes and the replenishment of inventories throughout the automotive supply chain. We anticipate that this transformation will unfold over several years, generating a long-term demand for semiconductor content. The industrial sector is experiencing similar trends, with electrification and digitalization becoming essential components for increasing semiconductor content in this market. Demand for factory automation is a significant driver, alongside power-related applications. In summary, ST is well-positioned to benefit from these long-term transformations, which serve as the primary growth drivers for the company. Now, I'll let Lorenzo provide some insights on volume and pricing.

Thank you, Jean-Marc. To provide some data points: last year, in 2021, we grew by $2.5 billion in revenue compared to 2020. When we look at the growth components, we can attribute about 80% of this growth to increased volume. Don’t forget that in 2020, we had significant unloading. This year, our fabs are running at maximum capacity. In 2021, we experienced a mix of price and growth, accounting for about 20% of our total growth, divided roughly equally between price increases and mix improvement. This indicates that while prices have played a role in our growth this past year, they are not the primary driver. We expect volume to remain a significant driver of growth in 2022.

Does that answer your question?

Just a couple of quick ones. We heard overnight from one of your big U.S. auto customers that they see tightness in automotive semis continuing until next year. I wonder to what degree you'd agree with that prognosis? And to what extent do you see a risk of some kind of correction or adjustment before the end of the year? Additionally, could you give a bit more color on the semiconductor inventory levels you're seeing? And finally, on silicon carbide, what is your assessment of the asset you acquired, and how do you anticipate the strategy of vertical integration will help STMicro? Also, do you have any updates on the new products or trends related to silicon carbide?

For your first question, Alex, you inquired about automotive and the trends, and how we think the situation will normalize, as well as inventory levels in the channel. The second question centered on the vertical integration strategy for silicon carbide. I will now turn it over to Jean-Marc.

First, on automotive from an ST perspective, our planned capacity for 2022 is sold out. There is no inventory buildup in the channel because the capacity is fully utilized. The challenges we face relate to the assembly materials and substrates. We anticipate some tensions in the supply chain but expect improvements progressively throughout 2022. Regarding silicon carbide, we are engaged with 90 ongoing programs addressing 72 customers, and we confirm our target of achieving $1 billion in revenue by 2024. We've initiated investments to increase our silicon carbide capacity, including wafer fabs in Singapore and Catania. Our ambition is to capture approximately 30% of the market share for silicon carbide.

One, what kind of visibility do you have on your large sensing design that your main customers are developing at this point of the year? How do you see OpEx evolving beyond Q1, and could you help us model the full-year 2022 OpEx?

Lorenzo will answer your OpEx question first.

What is our expectation for the full year '22? In 2022, we will strongly invest in our R&D activity. This year will see an increase in our OpEx due to our initiatives to transform the company internally. However, as we see it now, our expense to sales ratio for 2022 should improve compared to 2021.

Could you repeat your first question? We didn't hear it.

My first question was related to your three major sensing designs with your main customer. What visibility do you have on their next device launch?

We don’t comment in detail about specific customer projects, but we have visibility, which allows us to drive our operations efficiently. This customer will continue to contribute to our growth in 2022 and beyond.

Could you clarify the split between volume and price for your 2022 growth? Additionally, what is the timing for capacity release from your recent CapEx program?

For 2022, we expect volume to remain a significant growth driver while also factoring in price increase, though volume will still dominate. We are investing around $900 million in Q1 to support this demand. However, it will take some time for these investments to bear fruit in terms of capacity increases.

In 2022, around half of the CapEx is allocated to our 300-millimeter wafer fab, which will enhance our capacity and address the significant demand in automotive and industrial markets. We expect these investments to contribute significantly to our growth, and our assembly and test operations will facilitate a quicker return on investment in 2022.

Just a question on the similarities for Q1, which is much better than usual. Could you give us a bit of granularity per end market or division? Also, are you confident that this growth trajectory extends beyond 2022?

The strong revenue guidance for Q1 is primarily driven by the automotive and industrial markets. While we have the usual seasonality in personal electronics, the strong backlogs and customer demand make that we could have guided even higher if we had adequate available capacity. Yes, we are optimistic about our growth trajectory beyond 2022.

Thank you very much. This concludes the session. We appreciate all your attendance as usual.

Thank you very much. Goodbye.

Thank you. Goodbye.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.