U.S. Markets closed

Edited Transcript of STM.MI earnings conference call or presentation 22-Apr-20 7:30am GMT

Q1 2020 STMicroelectronics NV Earnings Call

Geneva May 20, 2020 (Thomson StreetEvents) -- Edited Transcript of STMicroelectronics NV earnings conference call or presentation Wednesday, April 22, 2020 at 7:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Celine Berthier

STMicroelectronics N.V. - Group VP of IR

* Jean-Marc Chery

STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board

* Lorenzo Grandi

STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO

* Marco Luciano Cassis

STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development

================================================================================

Conference Call Participants

================================================================================

* Achal Sultania

Crédit Suisse AG, Research Division - Director

* Adithya Satyanarayana Metuku

BofA Merrill Lynch, Research Division - Associate

* Aleksander Peterc

Societe Generale Cross Asset Research - Equity Analyst

* Amit B. Harchandani

Citigroup Inc, Research Division - VP and Analyst

* David Terence Mulholland

UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware

* Dominik P. Olszewski

Morgan Stanley, Research Division - Research Analyst

* Jerome Andre Charles Ramel

Exane BNP Paribas, Research Division - Analyst of IT hardware and Semiconductor

* Johannes Schaller

Deutsche Bank AG, Research Division - Research Analyst

* Matthew D. Ramsay

Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst

* Sandeep Sudhir Deshpande

JP Morgan Chase & Co, Research Division - Research Analyst

* Stephane Houri

ODDO BHF Corporate & Markets, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to STMicroelectronics First Quarter 2020 earnings release conference call. I am Alessandro, the Chorus Call operator. (Operator Instructions) And the conference is being 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 Relation. Please go ahead.

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [2]

--------------------------------------------------------------------------------

Thank you, Alessandro. Good morning. Thank you, everyone, for joining our first quarter 2020 financial results conference call. Hosting the call today is Jean-Marc Chery, ST 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 Relation 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 statement contained in the press release that was issued with the result this morning and also in ST's most recent regulatory filings for a full description of these risk factors.

(Operator Instructions)

I'd now like to turn the call over to Jean-Marc, ST's President and CEO.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [3]

--------------------------------------------------------------------------------

Thank you, Celine. Good morning, and thank you for joining ST on our conference call.

First of all, I hope you, your families and your colleagues are all safe and healthy. Also, beginning this call, I would like to highlight the extraordinary efforts of our employees, and to thank them again for their dedication and professionalism to overcome the challenges this pandemic has created.

Now to ST results and plans, let me begin with some opening comments. Starting with Q1, year-over-year, net revenues grew 7.5% to $2.23 billion. Our operating margin increased to 10.4%, and our net income rose 7.9% to $192 million. On a sequential basis, net revenues came in about 5% below the midpoint of our outlook when entering the quarter.

The COVID-19 outbreak and subsequent containment measures by governments around the world brought challenges in our manufacturing operations, and especially in the last few days of the quarter, logistics. Our Q1 gross margin of 37.9% was largely in line with our midpoint target. Our free cash flow during the first quarter was $113 million, including CapEx of $266 million. We exited the first quarter with a stable net cash position of $668 million, available liquidity of $2.7 billion and available credit facilities of $1.1 billion. On Q2 2020, at the midpoint of our guidance, we expect net revenues in the second quarter to be about $2 billion, leading to a gross margin of about 34.6% that includes about 400 basis point of unsaturation charges.

Our guidance is taking into account the declining demand environment, especially in automotive as well as the operational and logistics challenges due to the current regulations.

For the full year 2020, we will drive the company based on a plan for full year 2020 revenues between $8.8 billion and $9.5 billion. We plan for growth in the second half over the first half of the year to be in the range of $340 million to $1.040 billion at the midpoint of our Q2 guidance based on the evolution of the market. As a consequence, we have reduced our CapEx expectation for 2020 from $1.5 billion to between $1 billion and $1.2 billion.

Now let's move to a detailed review of the first quarter. Net revenues increased 7.5% year-over-year, with higher sales of imaging, analog and microcontrollers, in part offset by lower sales in automotive, Power Discrete and digital. Year-over-year sales to OEMs increased 22.5% and to distribution, decreased 21.4%. On a sequential basis, net revenues decreased 19%, about 5% below the midpoint of our guidance. The COVID-19 outbreak and subsequent containment measures by governments around the world bore challenges in our manufacturing operations, and especially in the last few days of the quarter, logistics. All product group revenue declined on a sequential basis.

Our gross profit totaled $846 million, representing a year-over-year increase of 3.5%. The gross margin of 37.9% decreased 150 basis points year-over-year, mainly impacted by price pressure and unsaturation charges, including the one associated with the COVID-19 workforce-related restrictions. More specifically, unsaturation charges were 150 basis point in Q1 2020 compared to 0 in Q1 '19 and to our estimate of 80 basis point in our Q1 '20 guidance.

Our first quarter gross margin was 10 basis points below the midpoint of our guidance, as product mix and price evolution were better than expected. Our first quarter operating margin was 10.4%, increasing 20 basis point on a year-over-year basis, with the improvement of AMS operating margin compensating the decrease in MDG and ADG. Net operating expenses at $610 million were below what we anticipated when entering the quarter. Our net income increased 7.9% to $192 million on a year-over-year basis, and our diluted earnings per share were $0.21.

Looking at the product group revenue performance on a year-over-year basis. ADG revenues decreased 16.6%, mostly due to the supply constraints, and particularly in automotive, to a weaker-than-expected demand. AMS revenue increased 54.3% on higher imaging and analog sales, mainly for personal electronics applications, while MEMS sales were essentially flat. MDG revenue increased 1%, with growth in microcontrollers, mainly driven by distribution in Asia, partially offset by lower digital IC sales.

By product group on a year-over-year basis: ADG operating margin decreased to 3% from 10.6%; IMS operating margin increased to 20.8% from 7.8%; and MDG operating margin decreased to 11.5% from 13.4%.

Net cash from operating activities increased 17% to $399 million in Q1 compared to $341 million in the year-ago period. Free cash flow was positive $130 million, including $266 million of CapEx, compared to negative $67 million in the year ago quarter. During the first quarter, we paid $53 million of cash dividends and we repurchased shares in the total amount of $62 million as part of our existing programs.

Our net financial position was $668 million at March 28, 2020, stable compared to $672 million at December 31, 2019. It reflected total core liquidity of $2.71 billion and total financial debt of $2.04 billion. We also have committed credit facilities for $1.1 billion equivalent, which are current undrawn, including a new EUR 500 million long-term line with the European Investment Bank.

So let me now address the supply chain situation during the first quarter. During Q1, all countries where we operate decided to apply lockdown measures. In coordination with local authorities, we have been able to limit the temporary assembly and test site closures to 14 days in Shenzhen, 7 day above what was already planned; 2 days in Muar, Malaysia; and 1 day in Calamba, Philippines. We did not close any wafer fab. During this period, we managed to keep all our manufacturing sites operational at reduced workforce levels, keeping the most stringent health and safety measures. Our business continuity plans enabled us to continue to support our customers and to continue to execute our R&D programs. However, this unprecedented situation created logistic challenges, as well, impacted revenues and resulted in higher unsaturation charges.

Let's now discuss the market and business dynamics. In automotive, during March, we started to see sign of slowdown in demand, especially for legacy automotive in Europe and in the U.S. as a consequence of the shutting down of many carmakers and Tier 1 production line around the world. However, we are starting now to see some sign -- some early signs of recovery in China, I have to classify, quite sharp. In the meantime, we continue to support the electrification and digitalization trends of our customers' design for smart mobility applications.

In car electrification, during the quarter, we won several sockets for automotive-grade diodes for onboard chargers at major Tier 1s and OEMs as well as a project with high-voltage silicon MOSFETs for inverters and charging stations. We also announced wins for 2 programs for battery management systems. We had an important development in our wide-band gap technology strategy, key for our automotive business and also for other end markets.

For silicon carbide, we are progressing with our technology, manufacturing, and portfolio road map and with customer programs. As of today, we are engaged with 56 customers in 62 ongoing key programs. These programs are split around 50-50 between automotive customers and industrial customers. The silicon carbide awarded projects accounts for a total of $2.8 billion in the 2024 period.

The next wide-band gap technology we are investing in is gallium nitride. On April 7, we closed the acquisition of a majority stake in French GaN innovator, Exagan. Exagan's expertise is in epitaxy, product development and application know-how, will broaden and accelerate our power GaN road map and business for automotive, industrial and consumer applications. We also announced that we are collaborating with TSMC to accelerate the development of gallium nitride process technology and the supply of both discrete and integrated GaN device to the market.

Moving to car digitalization. Here, we had wins in a variety of applications. This include our 32-bit automotive MCUs in car access, switching, braking, and steer-by-wire applications, a major win for power management IC in an ADAS system and an award through our partner, AutoTalks, for a V2X communications application.

Moving now to Industrial. The dynamics in the quarter were mixed, with some application already showing signs of demand slowdown, appliance, lighting; while orders, such as health care, as could be expected, but also automation, remain healthy. The situation in the distribution channel is showing some recovery in China after a restart of operations, but a slowdown in Europe and in the U.S. On a year-over-year basis, point of sales at distributors remained stable, with an improvement in Asia, offset by the Europe and the U.S.

One of our objectives in Industrial is leadership in embedded processing solution. To support this, we are continuously strengthening our offer in term of hardware, software and ecosystem, around our microcontroller and microprocessor families. During the quarter, we announced many additions to the STM32 microcontroller portfolio, new products in our low-power and high-performance MCU families, and the world's first LoRa system-on-chips.

With our power discrete products for industrial applications, we had wins with high- and low-voltage silicon MOSFETs and introduction for our modules for power supplies, solar power converters, home appliances and power tools for many manufacturers. We also won several new design with our analog products for industrial applications. For example, we received awards from multiple metering customers for smart power and ASIC products; by home appliance makers for power conversion and motion control products; and by machine manufacturers for vibration and environmental monitoring with industrial-grade MEMS sensors.

Moving now to personal electronics. While short-term smartphone consumer demand is clearly impacted by retail lockdowns and the inability to purchase devices, we observed sustained semiconductor demand during the quarter. This is also driven by increased demand for tablets and gaming devices as well as accessories. Importantly, customer demand for innovation-driven content is still solid. In this end market, we are leading in very specific high-volume smartphone applications as well in wearables, accessories and gaming devices.

During the first quarter, we continued to win designs and ramp production in flagship customer devices. Some examples include a variety of sensors, time of flight, ranging sensor, ambient licensing, motion and waterproof pressure sensors; secure solution such as ESIM and secure elements; and analog solutions such as smart power, touch display and charging products. A number of the smartphone in which we won designs were 5G models. We were awarded several 5G designs with our RF mixed signal technologies. This is in line with another of our stated market objective.

In our last end market, communication equipment and computer peripherals, we had many design wins ranging from time of flight and motion sensor for personal computers, to industrial inertial sensors in mobile infrastructure with multiple leading manufacturers. In this market during the quarter, we saw a stable situation for hard disk drives and enterprise servers as well as demand for 5G-related products in China.

Now let's move to a discussion of the second quarter and some comments of the full year 2020. For the second quarter, we expect net revenues to be about $2 billion and a gross margin at about 34.6%. This outlook is taking into account the declining demand environment, especially in automotive as well as ongoing operational and logistics challenges due to current governmental regulations. We anticipate that all our manufacturing sites will continue to be operational. However, some of them will run at reduced capacity, leading to about 400 basis points of unsaturation charges embedded in the gross margin guidance.

For the full year, we are driving our company with a clear plan. It is a sales and operating plan based on our current view of the market as well as on continuous customer interaction. It is also a plan that in the framework of an already solid financial situation and to further increasing our financial flexibility, acknowledging the short-term global challenges, while also supporting our unchanged long-term strategy and its objectives.

We will drive the company based on the plan for 2020 full year revenues between $8.8 billion and $9.5 billion. With Q2 expected to be the most challenging quarter, our plan anticipates growth in the second half over the first half to be in the range of $340 million to $1.040 billion. This growth will be driven by already engaged customer programs and by the removal of supply constraints. The growth range is linked to the evolution of the market. As a consequence, we have reduced our CapEx plan from $1.5 billion to a range of between $1 billion to $1.2 billion related to additional -- reduced additional capacity needs. Our strategic initiatives are all confirmed, although with some short-term schedule adjustments.

While we are protecting our R&D, sales and marketing programs and transformation initiative, we will keep a strict discipline on controlling operating expenses. However, as the company is taking up nonrecurring expenses for solidarity initiative, donation both in cash and equipment/materials or for exceptional incentives for our employees at work, we have also launched an internal initiative whereby the management team will reduce their base salary for the next 2 quarters as their own contribution. In order to further increase our financial flexibility, we will not execute any transaction under our current share buyback program in the second half of the year.

To conclude. In response to the global COVID-19 pandemic, we will continue to ensure the health and safety of all our employees and to execute our business continuity plans, working with our customers, partners and the communities where we operate. We have a sales and operational plan for this challenging year, targeting growth in the second half over the first half. ST is in a solid position from a capital liquidity and balance sheet perspective. We will maintain our financial strength. We will also continue to advance our long-term strategy and objectives, together with our employees, for the benefits of our customers, partners, communities and for our shareholders.

Now before starting the Q&A session, I would like also to mention the other press release we have issued this morning. Taking to account the increasing global, societal and economic turmoil caused by the COVID-19 outbreak, ST Supervisory Board is now proposing a decrease in the 2019 dividend from $0.24 to $0.168 per share, with authorization to consider during September 2020 to increase such dividend resolution up to a maximum of $0.24 per share. The updated dividend resolution will be proposed at the 2020 AGM, which is now postponed to June 17, 2020.

Thank you. And we are now ready to answer your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Matt Ramsay from Cowen.

--------------------------------------------------------------------------------

Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [2]

--------------------------------------------------------------------------------

And thanks for the messages of health to everybody. Same to everyone in ST. I think, Jean-Marc, my first question is regards to the automotive business. I appreciate what some of the drivers you have is with smartphones, et cetera, that the second half will be better than the first half. But maybe you could talk about the second quarter and through the summer, your expectations in your automotive business. Obviously, there's lots of macro commentary and things out there about auto factories being closed globally. So maybe you could talk a little bit about that and your visibility to your previous silicon carbide targets through the remainder of the year.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [3]

--------------------------------------------------------------------------------

Thank you for your question. So I will let Marco first to make the first comment about the automotive market and I will complement if needed.

--------------------------------------------------------------------------------

Marco Luciano Cassis, STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development [4]

--------------------------------------------------------------------------------

Yes. Thank you. As you had said clearly, the automotive market, having a complicated supply chain, has been hit by closures at carmakers and TS-1. This is happening, let's say, with different time schedule around the world. The first that was hit in Q1 was clearly China, and now it's happening in Europe and U.S. We have seen, in this moment, a sharp recovery, as Jean-Marc was saying during his address. China now is moving back, so automotive seems to be recovering in China, while during Q2, Europe and U.S. will be hit at the most.

Our view for the full year, our modeling is for the automotive to be down between 25% to 15% in terms of car production, which means a range between 67 million unit light vehicles and 77 million unit light vehicles. So we do believe, again, that Q2 is going to be the most difficult quarter and from Q3 and Q4 to see a recovery in the automotive. Thank you.

--------------------------------------------------------------------------------

Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [5]

--------------------------------------------------------------------------------

Just as my follow-up question. No surprise that the heightened underutilization charges in the second quarter. Lorenzo, maybe if you could talk a little bit about how -- if you guys execute to the plan in the second half guidance, how do you feel like those underutilization charges will come off the P&L and what that trajectory looks like into next year? I appreciate the color.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [6]

--------------------------------------------------------------------------------

If I well understand, your question is about the evolution of our unloading charges for Q2. Yes, as you have, let's say, listened from the remark of Jean-Marc, our guidance for Q2 is impacted by a significantly level of unloading charges. We have unloading charges that are in the range of -- impacting our gross margin in the range of 400 basis point.

When we look to the second quarter, second quarter, we guide the 34.6%. Our gross margin is impacted by this 400 basis point of unloading charges. These unloading charge, we estimate are around 130 basis point due to the reduced demand, but there is still a significant impact coming from the unavailability of the workforce, not only in our front end plants, but also in back end. This is estimated to impact our gross margin for around 270 basis point. On top of that, we are modeling a negative impact coming from price and the negative impact also coming from mix. So at the end, we have this decline in term of gross margins.

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [7]

--------------------------------------------------------------------------------

Did it answer your question, Matt?

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [8]

--------------------------------------------------------------------------------

Did I answer your question?

--------------------------------------------------------------------------------

Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [9]

--------------------------------------------------------------------------------

Yes, partly. I appreciate the details there. In addition, like -- I guess the next part of the question, Lorenzo, was if you execute the plan, and you guys have laid out a guidance range for the second half of the year, any kind of understanding as to the trajectory of the underutilization charges coming off of the P&L would be really helpful.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [10]

--------------------------------------------------------------------------------

Yes. Obviously, the second part of the year will be impacted by unloading charges. Second part of the year, we do expect to not have any longer unloading charge related to workforce because we do expect to come back in more a normal situation. Currently, based on our plan, we estimate to have in the year something in the range of between 180, 190 basis point on our gross margin for the year, impacted by the unloading charges. So it means that, that will remain also in the second part of the year, while in -- and this is at the high end of our, let's say, plan, so it means at EUR 9.5 billion.

Based off the EUR 8 million that is unloading charges will impact in the year for more than 300 basis point our gross margin.

So anticipating maybe another question, what do you, let's say, model your gross margin for the year?

At this moment, our visibility for the gross margin, including this impact of unloading charges in the year, is to be at the high end of the plan at EUR 9.5 billion in the range of 37% and the low end in the range of 35% in term of gross margin.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

The next question comes from Aleksander Peterc from Societe General.

--------------------------------------------------------------------------------

Aleksander Peterc, Societe Generale Cross Asset Research - Equity Analyst [12]

--------------------------------------------------------------------------------

Can I just ask? On silicon carbide, do you stick to your current guidance?

And secondly, on the logistics issues that you experienced towards the end of the quarter, how do these issues look right now? Are they the same, worse, or are they being sorted out?

And then just finally, on OpEx, how should we think of modeling OpEx going into the remainder of the year? I know you do have the puts and takes here. But if you could just give us a figure of the average OpEx for the remaining quarters.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [13]

--------------------------------------------------------------------------------

Maybe, Jean-Marc, I will take the...

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [14]

--------------------------------------------------------------------------------

Logistics.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [15]

--------------------------------------------------------------------------------

The logistic and the OpEx. And then starting from the logistic, the logistic is our Q1 result significantly -- especially toward at the end of the quarter, toward the end of the quarter when many countries start with the lockdown and the closing of the borders, we experienced many flights grounded, difficult terrestrial transportations with border closed.

We estimate that in the quarter, and in especially the very last days of the quarter, this was impacting our result for around $20 million, $25 million due to the fact that it was difficult to manage the logistic.

As well as in the last week of the quarter, we had also the closure of 2 important site, was mentioned in the remark of Jean-Marc, that were in Malaysia, Muar; and Calamba in the Philippines. Overall, this was impacting logistic plus lost manufacturing in the very day -- in the very last days in the range of $40 million.

What will happen in Q2 moving forward? For sure, for logistic, situation is getting better, also because we are starting to find, let's say, alternative routes, alternative ways to serve our customers, so it's getting a little bit better. We will, for sure, still be a little bit impacted. And overall, we do estimate that we will have still something ranging between $80 million, $100 million between loss of manufacturing, and let's say, some problem in logistic impacting our quarter, Q2.

In term of expenses. In term of expenses, when we met last time at Q4 earnings release, I was giving you an indication that expenses for the year is, on average, in the quarter, would have been in the range of $640 million, $650 million, more or less as an average per quarter. For sure, as anticipated during the presentation of Jean-Marc, we have revised down a little bit these numbers as, of course, we will take some action in order to be more disciplined, let's say, to refrain on discretionary, to be more selective on some of our programs. So today, what we are modeling for the year is more something in the range of $635 million, $645 million as a level of expenses per quarter, in average.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [16]

--------------------------------------------------------------------------------

So about silicon carbide, okay, can you repeat your question, please?

--------------------------------------------------------------------------------

Aleksander Peterc, Societe Generale Cross Asset Research - Equity Analyst [17]

--------------------------------------------------------------------------------

So I just wanted to finally see if your outlook for silicon carbide sales in the current year are modified in any way by the current recession?

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [18]

--------------------------------------------------------------------------------

Okay. Well, so if you remember well, okay, when we answered this question entering in the year, our plan was supposed, okay, to reach a revenue of about $300 million linked to silicon carbide diodes and MOSFET. But clearly, with the current plan, okay, I have shared -- we share with you a few minutes ago, this year, okay, silicon carbide revenue will be below the $300 million, but will be well above the $200 million we have executed last year.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

The next question comes from David Mulholland from UBS.

--------------------------------------------------------------------------------

David Terence Mulholland, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware [20]

--------------------------------------------------------------------------------

Just a couple of questions. Firstly, obviously, things were changing pretty rapidly through the end of the quarter. But I just wonder if you could give us some color on how you've seen bookings trends? Have you seen much in the way of cancellations from customers? How's that been trending over the last couple of weeks as I guess things have settled down? And particularly in automotive, I think you made a few comments that things have stabilized and started to improve, but I assume that's just the China comment at this stage. Or have you seen any stabilization in Europe as well? And I'll maybe come back with a follow-up afterwards.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [21]

--------------------------------------------------------------------------------

So here, okay, Marco, I guess, okay, you take the question?

--------------------------------------------------------------------------------

Marco Luciano Cassis, STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development [22]

--------------------------------------------------------------------------------

Yes. So your question is about bookings. So during Q1, our book-to-bill have been above parity. So the trend in that -- from that point of view is overall positive. We have seen, in automotive, some alignment of the backlog with the existing situation, as you have highlighted, mainly in Europe. And the backlog in this moment seems to be stabilizing, and we are looking forward the recovery to come during the Q3.

--------------------------------------------------------------------------------

David Terence Mulholland, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware [23]

--------------------------------------------------------------------------------

That's great. And then just in terms of -- there's been a couple of comments on pricing. I think one where you said it had been a bit of a help to margins in Q1, but then some headwinds to margins in Q2. So just -- there's obviously a lot going on between supply challenges you're facing, but also demand disruption. Now is that having much an effect on a more generalized basis on pricing in the market? Or are people generally remaining quite disciplined?

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [24]

--------------------------------------------------------------------------------

Maybe I take the question as I was introducing this point. First of all, let's put in this way. In the first quarter, in respect to what we were modeling in our gross margin, pricing came a little bit lighter than what was expected. But this was not driven by any opportunistic, let's say, situation driven by lack of supply chain. At the end, there is -- this was mainly driven by the fact that in respect to the pressure on pricing that we were expecting, we actually -- we managed to be a little bit less impacted.

In respect to our second quarter, and then maybe Marco will, for sure, complement. What we are expecting is the normal price pressure. For the time being, we don't see any significant impact, both in the, let's say, price decline or, let's say, maybe price increase due to the fact that we are for some products and for some situation in supply constraint. I don't know if, Marco, you wanted to add some more color in respect to the price dynamic that you see in the market?

--------------------------------------------------------------------------------

Marco Luciano Cassis, STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development [25]

--------------------------------------------------------------------------------

Yes. Lorenzo, yes. Thank you. Yes, I confirm what Lorenzo is saying. We are not seeing any special, let's say, price pressure. The dynamics are quite normal and are also driven from the fact that the market is looking in some way also to get parts in this moment with -- we have the logistics and the supply chain is a little bit constrained. So nothing special in terms of price pressure in this moment, just the normal pattern. Thank you.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Jerome Andre Charles Ramel, Exane BNP Paribas, Research Division - Analyst of IT hardware and Semiconductor [27]

--------------------------------------------------------------------------------

Yes. Question, Jean-Marc, with the visibility you have for the second half of this year, how much is coming from your view on the market, and your specific programs/new products, new clients?

And maybe if you could give us a hint of where you see demand to be the strongest among your division for the second half versus the first half.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [28]

--------------------------------------------------------------------------------

Well, okay, if we put ourself at the high end of our plan, it is clear that the second half growth that we have sized at $1 billion, basically. I would like to say that half is related to our top 10 OEM in which -- for which we develop, okay, some custom design product. And but not only custom design product, okay, we have also, okay, more application-specific standard product. And the visibility, okay, is, of course, better than the other 100,000 customer we address. So half will be the contribution from this top 10 customer and the other half will be more linked to the overall market, automotive and industrial. So this is basically what we are seeing today and what we have planned today. And the second question was?

--------------------------------------------------------------------------------

Jerome Andre Charles Ramel, Exane BNP Paribas, Research Division - Analyst of IT hardware and Semiconductor [29]

--------------------------------------------------------------------------------

Which segment do you see being the strongest in the second half of this year? Which end market?

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [30]

--------------------------------------------------------------------------------

Okay. Well, clearly, I think -- okay, I have to say that if you, let's say, look, you make an assessment between a product line and a market, clearly -- and which product line are a key contributor to the fact that ST plan assume we will overperform our plan. So the product line which contribute positively, okay, to the overperformance of ST are clearly microcontroller, so general purpose and secure; and imaging sensors and MEMS. They are the key contributor.

Detractor, clearly, of course, are ASIC, our application standard product in analog linked to the automotive legacy market. If you look, okay, on this angle of market, clearly, personal electronics, thanks to our assumption both in term of overall volume, volume related to the key customer and the fact that the new program we have the design win are linked to the 5G phone, clearly, the overall personal electronic application segment will be a key contributor to the overperformance of ST.

Then after we have some specific part of our portfolio and market which will contribute, I would like to speak about Power. It is clear that our Power Solutions covering silicon carbide, but IGBT, but low voltage power MOS will also contribute to the overperformance of ST in the automotive market. And I guess here, it is thanks to our focus on electrification of the car as well our ASIC in digital linked to the digitalization of the car and our application-specific MCUs for automotive linked to the digitalization will contribute to the overperformance of ST.

Well, last but not the least, okay, one detractor will be pure digital ASIC linked to a, let's say, legacy communication equipment, which will be a detractor to the company.

So this is overall, let's say, picture I can share with you about which product line market contribute to the overperformance of the company, which product line market are detractor of the performance of the company.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

The next question comes from Stephane Houri from ODDO.

--------------------------------------------------------------------------------

Stephane Houri, ODDO BHF Corporate & Markets, Research Division - Research Analyst [32]

--------------------------------------------------------------------------------

Yes. I have a question about the utilization rate. Can you remind us what was the utilization rate in Q1? Where you think it will go in Q2? And also where you think your inventory can go at the end of Q2?

And linked to that, about the CapEx, what project did you put on hold to reduce the CapEx level?

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [33]

--------------------------------------------------------------------------------

Maybe I take this question. Thank you for the question.

Okay. Utilization rate, I start from here. In Q1, our -- I'm talking about front end. Of course, you know in back end, you usually -- we don't have this metric. Of course, we had also problem in front end -- in back end, sorry, this quarter, and we will have also in Q2 for utilization rate. But talking about our facts, our utilization rate averaging in the first quarter in the range of 79%. Q2 will be worse. Q2, we are modeling something more in the range of 70%. This utilization rate will increase in the second part of the year. Our expectation, that will increase.

But in the second part of the -- as I was commenting before, we will still have unloading charges. So we will not get a full utilization rate in the second part of the year.

Moving to the second point, was about the dynamic of the inventory. You'll see that the inventory grew substantially as expected in Q4 in -- sorry, in Q1, during the past quarter, Q1, a little bit higher than what I was anticipating. I was anticipating something in the range of 110, 111 days of inventory. This is mainly driven by the fact that we have the lower level of revenues.

In the second quarter, the inventory will have twofolds. On one side, we will have the finished product inventory that will decline. And you can easily understand why, because we have these constraints on our back-end plant, and so we will have really declining in our inventory as a finished product. But on the other side, we will have an increase in inventory for what concern the semi-finished, what we produce in our fab, because we are preparing also the growth for the second half.

So overall, the expectation for Q2 is to have an increase in our inventory. This increase will be fully reabsorbed in the second half. And we do expect to end the year with an inventory ranging between 95 to 100 days by the end of the year.

There was another question or not?

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [34]

--------------------------------------------------------------------------------

On CapEx.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [35]

--------------------------------------------------------------------------------

On CapEx.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [36]

--------------------------------------------------------------------------------

On CapEx. So sorry.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [37]

--------------------------------------------------------------------------------

Which program we cut and...

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [38]

--------------------------------------------------------------------------------

Which program?

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [39]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [40]

--------------------------------------------------------------------------------

On CapEx, of course, the reduced level of revenues that we are now envisaging for the year are bringing us to reduce what was supposed to be our capacity increase for the year. So this is a portion of CapEx that has been definitely reduced, and this is impacting both front end and back end.

On top of that, there is some natural rescheduling of some of our strategic initiatives, mainly driven by the fact that in such a condition, as you can easily figure out, some of them have accumulated some delay during, for instance, Q1 in some of our activity like, for instance, the building up of our facilities that [Vincci] in the north of Italy. This has been strongly related, let's say, it was much slower in terms of activity than what was originally expected.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

The next question comes from Adithya Metuku from Bank of America.

--------------------------------------------------------------------------------

Adithya Satyanarayana Metuku, BofA Merrill Lynch, Research Division - Associate [42]

--------------------------------------------------------------------------------

Yes. So 2 questions. Firstly, just on the Huawei issue. Recently, there's been a lot of news flow around the U.S. requiring licenses from global semiconductor companies to ship to Huawei. I just wondered if you could give us some color on how you may be affected by this. I believe 2% to 4% of your revenues come from Huawei at the moment.

And secondly, I just wondered if Lorenzo could give us an overview of the growth rate by division in the second quarter and also at the midpoint of your view for the full year 2020.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [43]

--------------------------------------------------------------------------------

It's difficult, okay, to comment about the impact of this potential decision versus Huawei. I can only comment what is intrinsic ST and then okay, what will happen linked to the global situation so far? Okay, this is a scenario that today we do not consider. What is intrinsic ST? It's important.

If you read carefully the possible, okay, impact, it is linked to technology with a metal pitch below 80-nanometer. Mix, it is -- it will affect potentially technology like a 14-nanometer finfet and below. And you know ST strategy on personal Electronics is to focus on subsystem like sensor, specialized imaging sensor, secure solution, analog, RF, mixed signal and power management, and all these technology are enabled by technology with a metal pitch well above 80-nanometer. So intrinsically, ST will not be impacted. But I cannot, let's say, forecast, gamble, okay, what will be the overall impact if such a measure will occur.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [44]

--------------------------------------------------------------------------------

I can move to the second part of your question. If I...

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [45]

--------------------------------------------------------------------------------

You have your answer? We can move.

--------------------------------------------------------------------------------

Adithya Satyanarayana Metuku, BofA Merrill Lynch, Research Division - Associate [46]

--------------------------------------------------------------------------------

Yes. Very clear. Very clear.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [47]

--------------------------------------------------------------------------------

So I move to the second part of your question, talking a little bit about the dynamic of the revenues moving from Q1 to Q2. Moving from Q1 to Q2, as we said, we have, let's say, revenues declining by around 10%. Looking by group, I would say that there are different dynamics inside the various groups. On one side, we have MDG Group that will grow the revenues. And this growth is estimated to be in the mid-single-digit growth, let's say, in that range.

Then we will have, let's say, ADG. ADG will decline in the low single-digit. But this inside on ADG, there are 2 different dynamic. On one side, we have automotive that will decline significantly. And on the other side, we will have recovery in power and discrete.

You have to keep in mind that the power and discrete has been one of the most hitted product line by the constraint that we have in China during Q1. So portion of this recovery is also related to the fact that now in China, our manufacturing site in Shenzhen is working at full steam.

Then we have a significant decline in revenue in AMS. In AMS, this is mainly driven by seasonality in personal electronics. So AMS will decline significantly revenue on a sequential basis moving from Q1 to Q2.

There was another question or this is covering...

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [48]

--------------------------------------------------------------------------------

Yes. It's same question for the full year, if I recall well.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [49]

--------------------------------------------------------------------------------

For the full year?

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [50]

--------------------------------------------------------------------------------

For the plan, if you can give a sense of color.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [51]

--------------------------------------------------------------------------------

The full year, I would say that when we look at the evolution of the revenue, looking -- of course, we have a big range. We talk between $8.8 billion and $9.5 billion. Let's suppose that we talk about the $9.5 billion, just to give you some color on this.

On the $9.5 billion, I would say that looking to the -- we will have a decline in revenues compared to 2019 when we look at ADG. And this decline, you can easily understand, is related to automotive.

Looking, let's say, in AMS, we will have some slight increase, in our view. And MDG should increase also in this case, low single digit. So at the end, we will have a decline on the ADG; and the other 2 group, a little bit stable, a little bit increasing. This is the plan -- how we have framed the plan for 2020 by group -- the evolution of the revenues by group.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

The next question comes from Sandeep Deshpande from JPMorgan.

--------------------------------------------------------------------------------

Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [53]

--------------------------------------------------------------------------------

My question is back again to the guidance. When you look at Q1, I mean your Q1 was slightly weaker than what you had guided, but essentially in line. And that was guided before COVID-19 impact was really and fully known. So the point I have is that you're guiding second quarter to $2 billion in sales, at the midpoint, 10% down, which is approximately $170 million or $180 million down year-on-year. I mean -- and you've given how that is broken up from Q1 to Q2. But given that IHS is at this point saying that auto units are down 21% year-on-year, how can you say with conviction that Q2 is going to be the bottom, given that at this point, given that there are multiple -- and most of the impact, as I can see in Q2 is coming in AMS and not in ADG, how is this the bottom in the automotive market for you in terms of the orders or rather, in the sales because this -- if autos are going to be down 21%, you could see continuing impact into the second half of the year.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [54]

--------------------------------------------------------------------------------

I understand your point. I -- actually, when we look at the dynamic of the second quarter -- in this dynamic, you need to also factor in that is not only driven by the market, but it's also driven by the fact that in Q1, we had the impact on the availability of the parts. As I was trying to explain before, it's true that I was saying that the ADG is down on a sequential basis, let's say, on a single digit -- low single digit. But it's also true that it's very different inside the ADG, the portion of automotive and the portion of power discrete. The portion of power and discrete, let's say, is increasing significantly, mainly driven by the availability of the parts than the market, the market that you see.

ADG is declining significantly. So at the end, the 2 -- the decline of ADG more than offset the increase of power and discrete. And the increase of power and discrete, as I repeat, is mainly driven by the fact that while in Q1, our factory in Shenzhen that has -- on which our power discrete as quite exposed was, in a shorter quarter of 88 day, 14 days closed, so you have to consider that 7 days were embedded in our guidance, but 7 days were not embedded. And then to consider that after 7 days of closing, based on start production from 0 to 100 in 1 day, because there was also the problem that the workforce was not available due to the constraint in movement, so we stopped, and we had 3, 4 weeks of production that was not at full steam during the quarter.

So actually, there is also this kind of dynamic that you should embed when you look at how the revenues evolve and moving from Q1 to Q2. I hope to have clarified a little bit the -- between what is the market and what is related to intrinsic issues that we had as a company for our production.

--------------------------------------------------------------------------------

Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [55]

--------------------------------------------------------------------------------

So I mean maybe I'll clarify somewhat. I mean I understand the point you're making because this seems to be very much driven by what inventories are in the system and what your shutdowns and startups of your facilities. But it is not -- to me, it doesn't look like a reflection of end demand because historically, ST has been very good in terms of guidance. When you give a revenue guidance, you achieve it. Maybe you -- not good in the long term, but definitely, in the short term, you're very good.

Do you think at this point your ability to forecast is impaired by the fact that things are changing so dramatically? Or do you think that the order decline has stopped now and that you will not see further rounds of decline?

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [56]

--------------------------------------------------------------------------------

Look, when we look at the backlog that we have for Q2, it's definitely a backlog that is significantly higher than our guidance. So through that -- at this stage, we may say that visibility could be a little bit more difficult than in a normal quarter. This we acknowledge. I think everybody acknowledge that. But we do think that, let's say, we have taken inside our guidance the best of our, let's say, assumption, and then here Marco can also complement in term of dynamic of the market and what is, let's say, the feedback of our customers and what is also, let's say, the constraint that are different than what it was, for instance, in Q1.

Just to make an example, in Q1, as I was mentioning before, we had mainly problem on the Shenzhen plant, while in Q2, probably, this will be more on Philippines and Muar that are different product lines. We have taken into consideration, and we think the guidance is reflecting the combination of these 2 ingredients, let's say, the demand from customers and, let's say, dynamic of our capability to produce. I don't know if you want to do another...

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [57]

--------------------------------------------------------------------------------

I think, okay, we can share, okay, as a data point that we assess the impact of the supply chain constraints in Q2 still related to, let's say, the -- some lack of workforce attendance because, okay, as it is clear that in Shenzhen, now we are running full speed. In the Philippines, Calamba and in Muar, these countries are still under lockdown, minimum up to end of April and for some of them, maybe mid-May. Similar situation we have in [Bukowa]. So all the impact, okay, we have assessed on revenue is in the range of $70 million to $80 million. Means, okay, without, okay, this constraint, okay, our, let's say, guidance would have been more in the range of USD 2.070 billion or USD 2.080 billion.

The rest, again, about the demand, as Lorenzo said, we have with us a backlog. And clearly, okay, a part of the backlog, we can assess it very well, okay, because of the intimacy we have with our, let's say, top OEM. Part of the backlog, okay, our duty is to, let's say, assess it and make some judgment, to consider if the backlog is fully reliable, and maybe, okay, part of the backlog and especially for automotive, is more linked for system substitution or let's say, because in Q1, people put a frame order in order to secure ourselves. This is something we have seen. And in fact, will not be transformed in the real revenue.

So that's the reason why we are really confident, okay, in this guidance. We are not happy with the guidance. We are very confident in the guidance. And we do believe it represents well the capability of ST to operate in Q2.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

The next question comes from Achal Sultania from Crédit Suisse.

--------------------------------------------------------------------------------

Achal Sultania, Crédit Suisse AG, Research Division - Director [59]

--------------------------------------------------------------------------------

Just a couple of questions. One, on RF side of things. I guess can you help us -- give some color on what is the size of the business now? And how is the customer traction? I know you had good traction with one Chinese customer last year. Are we seeing signs that the customer list is growing in that RF part of the business? And is all of that business predominantly still coming from smartphones or infrastructure is starting to become a contributor to that?

And then secondly, on the GaN side of things, obviously, you've had partnership with TSMC. You've acquired a stake in Exagan. I guess how should we think about the revenue ramp here? Is it more about 2021 or 2022? Any color around potential for revenue in that part of the business would be helpful.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [60]

--------------------------------------------------------------------------------

So I will answer about GaN and Marco will answer about for RF mixed signal for mobile phone and infrastructure.

Now about GaN, it is clear that the agreement with TSMC is to, let's say, accelerate the availability of power solution using a GaN MOSFET associated with analog driver to offer power solution. But we do believe that in, let's say, second part of 2021, we could, let's say, acknowledge the first revenues. But for sure, will be more for 2022 and beyond.

And then, thanks to Exagan acquisition, we can specifically generate revenue sooner. But here, I will communicate more at our Capital Market Day in September.

--------------------------------------------------------------------------------

Marco Luciano Cassis, STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development [61]

--------------------------------------------------------------------------------

Yes. I will take the part on the RF modules. So first of all, as you know, our model is mainly SOT -- COT business. And the RF modules can cover both the 4G and the 5G. And clearly, what we are seeing now is in China, while in the rest of the world, this is not happening, an acceleration on the 5G portion. The rest of the world is not happening because as you know, there are delays now in America and Europe on the 5Gs. So portion of -- the biggest portion of our business is clearly in the mobile, but can be applied also for the 5G base stations. Did this answer your question?

--------------------------------------------------------------------------------

Achal Sultania, Crédit Suisse AG, Research Division - Director [62]

--------------------------------------------------------------------------------

Yes. Just on the size of that business, if you can provide some color. Is it like $100 million, less than that, more than that? Any color on that?

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [63]

--------------------------------------------------------------------------------

So we cannot comment so specifically. And I guess you understand why.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

We have a question from Amit Harchandani from Citigroup.

--------------------------------------------------------------------------------

Amit B. Harchandani, Citigroup Inc, Research Division - VP and Analyst [65]

--------------------------------------------------------------------------------

Amit Harchandani from Citi. Two questions, if I may. My first question relates to what we saw in Q1 and what you are talking about Q2. In terms of inventory in the supply chain, do you get a sense that customers over-ordered or tried to build up some buffer supplies in Q1 because they were worried about supply disruption, and that is impacting how you're thinking about Q2 and second half? Or in other words, how do you assess the inventory in the supply chain today and customer buying behavior? And then I have a second question.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [66]

--------------------------------------------------------------------------------

So on the first question, I will pass the answer to Lorenzo, okay, which will provide, let's say, some data point and technical comment.

But I would like just to pass overall view from the CEO. It is clear that in Q1, okay, what the industry face, industry face here and there, okay, lockdown measures from various governments. And some of customers, okay, unfortunately -- and partners as well, were obliged to totally shut down their plant. And some of them, okay, like ST, has been able to operate at lower capacity than their maximum capacity.

When you face such, let's say, unprecedented challenge, the normal behavior is to secure your own supply chain, and means, okay, you are not looking to optimize, okay, your inventories. Your first reaction behavior is to secure yourself, to be sure that you will not be impacted by components, okay, mechanical, electrical, whatever, which will, let's say, impact you in your capability to ramp again. I think it is a total normal behavior. That's the reason why it's difficult, okay, to assess and to comment the inventory in the supply chain because of this let's say, totally normal behavior.

And I have to say that for ST, it has been known as well, part of our inventory increase of Q1 are linked to critical material we have put on inventory in order to be sure that we will be able to keep our wafer fab up, because that if you shut down the wafer fab, the impact is really, really material.

So in such a case, okay, you are trying to [guarantee] that your supply chain will be up. And then after all, you optimize the inventory level. So I would like to share with you this overall comment, and then I pass the ball to Lorenzo.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [67]

--------------------------------------------------------------------------------

What can I add is something that we have already commented before. What we saw in Q1 is that our book-to-bill is well above parity. And this is reflecting orders from our customer, and that for sure has not been yet readjusted as a consequence of the COVID-19 outbreak. Of course, we are monitoring the level of stock at our distributors. We are monitoring the consignment stock at our large OEMs.

Anyway, the situation is complex from a supply standpoint that we cannot exclude that some customers are increasing their safety stock, to secure their own supply chain, as was mentioned just now by Jean-Marc. In this situation, this cannot be definitely excluded.

--------------------------------------------------------------------------------

Amit B. Harchandani, Citigroup Inc, Research Division - VP and Analyst [68]

--------------------------------------------------------------------------------

That's helpful, gentlemen. And secondly, if I may, maybe this might be a bit too early, but could you share your current thoughts in terms of the various trends that you see out there driving your business? Once we exit this situation, the pandemic, do you have any early thoughts in terms of based on your discussions, where could you potentially see sustainable acceleration of demand for you? And where do you think you could see structural deterioration of demand for you?

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [69]

--------------------------------------------------------------------------------

You mean beyond the -- when we are back to, let's say, normal or whatever at this stage is your questions?

--------------------------------------------------------------------------------

Amit B. Harchandani, Citigroup Inc, Research Division - VP and Analyst [70]

--------------------------------------------------------------------------------

Yes, Celine. So beyond say 2020, I mean, clearly, some things will change permanently. I'm just wondering if you're in a position to share any initial views on how are you thinking about that once we exit the crisis.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [71]

--------------------------------------------------------------------------------

Okay. So what I can, let's say, comment. The plan, okay, we have set up with this range of revenue, okay, is based on the usual data point we have, okay, backlog, booking dynamics, okay, POS, POP at the distributor channel. It's based also on clear intimacy we have with our top OEM, for the current ongoing programs, but also for next generation. And I commented, okay, during my address that, okay, we still see intense R&D and innovation activity. Ballpark, okay, maybe there is 1 program or 2 here and there which has been postponed, but overall, the innovation and the R&D activity is really solid. And then our plan is based also on various decision we have with the industry analysts providing, okay, various scenario about economic impact of the COVID-19.

What is important, okay, to share with you is that we are protecting our R&D. We are protecting our sales and marketing programs, especially the initiative about industrial for a long-term, sustainable and profitable growth.

So all these program are protected. All these program are, let's say, consistent with the view and the discussion we have with our customers. So doing that, okay, we do believe that our long-term strategy and each objective remain. Now for sure, it's early to assess the mid/long-term impact of this COVID-19 outbreak. And that's the reason why we have postponed our Capital Market Day from May, okay, to September, believing that, okay, the visibility and about the midterm, okay, will be better at this stage.

My main message is, okay, whatever will be the visibility, the company will move stronger from this outbreak, okay, keeping our R&D program running, our sales marketing program running and our transformational program running. So this is what I can tell you.

--------------------------------------------------------------------------------

Operator [72]

--------------------------------------------------------------------------------

The next question comes from Johannes Schaller from Deutsche Bank.

--------------------------------------------------------------------------------

Johannes Schaller, Deutsche Bank AG, Research Division - Research Analyst [73]

--------------------------------------------------------------------------------

Maybe firstly, on microcontrollers, specifically. I mean you've proven to have a pretty accurate view on what is going on here in the channel and at the POS in the past. And I think a lot of your competitors are going out with quite different conflicting messages at the moment. So could you just update us here what you see in terms of channel inventory on the microcontroller side and also the trends you're seeing at the POS?

And then the strength you see in MDG, kind of how much of that at the moment is really the kind of broader market as opposed to maybe some specific wins that ST has, that would be helpful.

And as a second question, just in terms of your CapEx and also what you said in terms of strategic project delays in Italy. Can you update us on your silicon carbide investment road map, both on the front-end manufacturing side, but also on the Norstel wafer side? How that is affected by the current situation?

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [74]

--------------------------------------------------------------------------------

So Marco will answer the microcontrollers and the-go-to-market, okay, the channel, and then Lorenzo will answer the CapEx, and I will comment about the silicon carbide strategy.

--------------------------------------------------------------------------------

Marco Luciano Cassis, STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development [75]

--------------------------------------------------------------------------------

Yes. So as we already said before, the situation in the channel at the end of Q1 specifically for microcontroller is, I can say, extremely healthy. We had growth in POS year-over-year and the level of POP was growing, but much lower -- at lower level than the POS, which conclusion is we end up Q1 with a pretty clean inventory in terms of MCUs. And the backlog for the second quarter is healthy and that's why MDG is going to show a growth quarter-over-quarter.

And this is fueled not only by, let's say, the legacy product that we have, but also by the new products that have been introduced during last year. Let me remember (sic) [remind] you that we introduced 10 new products during last year. And now the pipeline of opportunities is transforming. So we have the new families that are covering microcontroller, extremely sophisticated, et cetera. So overall, I think we are gaining market share. The situation is pretty healthy.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [76]

--------------------------------------------------------------------------------

So about the silicon carbide and strategic program. As Lorenzo said, okay, it's obvious that 2 strategic program are -- so the 300-millimeter fab in Agrate, so close to Milano. And the silicon carbide -- the raw materials silicon carbine facilities, we intend to set up. It is clear that since March -- early March, the workforce attendance to this construction had reduced to 0 because, okay, clearly, we have been successful to maintain work force attendance inside our wafer fab, warranting, okay, the most stringent health and safety measures to our employees. That, okay, it was not question, okay, to maintain workforce attendance in construction building and facilities and for these programs. So these programs have not yet resumed and definitively will be naturally delayed.

For both of them, no impact, okay, on ST short/medium-term will happen, because I repeat for Agrate [L3], we did believe that the contribution of L3 for the growth of ST was planned in '22 and beyond, and so we will have no impact, okay, in the next 2, 3 years. And for silicon carbide, okay, what was important for us is, first, with the acquisition of Norstel, to focus on technology road map developments; to improve, okay, our whole technology, working closely with the Norstel team and their know-how and also, okay, to work on the future wafer size conversion of the technology from 6 -- 6 to 1 inch. So all these program running at full speed.

But then the, let's say, mechanical delay of the future facilities of raw material for silicon carbide will have absolutely no impact because I remind you that we signed 2 strategic agreement, so with Cree and with SiCrystal, aiming to cover our need for the period, okay, 2024, where, I repeat that we have award, which enabled us to make $2.8 billion of revenue. And this plan are covered by our strategic agreement. And then it will be our decision to size the internal production ratio to the total needs according, okay, the availability of this new facility.

So I think, okay, as a takeaway, but the strategic program, they are delayed because, okay, lack of workforce attendance to protect, okay, people and their families. No impact, okay, short/medium-term of our business, because one side, it was planned like that; and the other side, we are covered by strategic supply agreement with Cree and SiCrystal.

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [77]

--------------------------------------------------------------------------------

Thank you, Johannes. We are taking the very last question. We're now running out of time. As usual, for the ones of you that have not been able to ask question, do not hesitate to go directly to Investor Relation team, and we will seek to take your -- to answer your question after this call.

So Alessandro, please, can we have the last question?

--------------------------------------------------------------------------------

Operator [78]

--------------------------------------------------------------------------------

The last question comes from Dominik Olszewski from Morgan Stanley.

--------------------------------------------------------------------------------

Dominik P. Olszewski, Morgan Stanley, Research Division - Research Analyst [79]

--------------------------------------------------------------------------------

So firstly, I just want to clarify, checking whether I heard correctly. Did you mention that your full year '20 guidance and the second half recovery assumed a relaxation of restrictions by a certain date? And if so, could you perhaps clarify what time frame were you thinking? For example, were you thinking of an easing of restrictions in June? That's the first question.

And then just secondly, more broadly on capital allocation. Obviously, one of your global peers last night spoke about maintaining fab utilization rates at Q1 levels into Q2 to take advantage of few rebounds. So could you maybe just discuss how you're thinking about is there an upper limit of how -- where you would be happy to see inventory go, either in dollar terms, in days of inventory or however you are thinking about that, obviously bearing in mind your target to getting towards the 100 days by the end of 2020.

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [80]

--------------------------------------------------------------------------------

So Dominik, the first question is to qualify the H2 -- the H2 over H1, we have indicated as part of our plan, whether there is still a portion which is related to supplies constraints or whether this is basically how it fared. And the second part, I'm not sure we capture well, is about the fab utilization. Could you repeat the second part?

--------------------------------------------------------------------------------

Dominik P. Olszewski, Morgan Stanley, Research Division - Research Analyst [81]

--------------------------------------------------------------------------------

Sure. It's just to say, basically, is there a maximum level of inventory through the middle of the year, either in dollar or relative terms, where you'd be happy to run your fabs? Just thinking about where global competitors are also...

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [82]

--------------------------------------------------------------------------------

You mean as a trend -- the trend between inventories and running the fab, et cetera, so we discuss the...

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [83]

--------------------------------------------------------------------------------

Okay. I will try to answer. In our plan, we do assume that in the second part of the year, the restriction on our factories are removed. So means that the unloading charges that we are embedding in our plan is fully linked to lower demand than our capacity. So this -- we do not expect to have a restriction still in the second part of the year. This is the assumption, of course, that we have embedded here in our plan.

In respect to the modeling of inventory, no, what I would say is that our view is that in a year like the one that we are experiencing, we model our inventory only based on the needs, let's say, that we see in the market. We do not, let's say -- are aiming to protect or to produce in excess -- in respect to what is needed. Of course, we have to do as usual due to the seasonality, some smooth during Q2. But at the end, for sure, as I think most of our competitors and company around the world, we will be very attentive to the cash. So what we would like to do is to produce accordingly to our visibility in the market. And this is also the reason why we will be hit unfortunately during the year by unloading charges along H2 -- H1 and H2.

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [84]

--------------------------------------------------------------------------------

Does this answer your question?

--------------------------------------------------------------------------------

Dominik P. Olszewski, Morgan Stanley, Research Division - Research Analyst [85]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Celine Berthier, STMicroelectronics N.V. - Group VP of IR [86]

--------------------------------------------------------------------------------

Thank you, Dominik. Thank you very much. This is now the end of this call, Alessandro.

--------------------------------------------------------------------------------

Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [87]

--------------------------------------------------------------------------------

Okay. So thank you.

--------------------------------------------------------------------------------

Marco Luciano Cassis, STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development [88]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [89]

--------------------------------------------------------------------------------

Thank you. Thank you very much for your attendance.

--------------------------------------------------------------------------------

Operator [90]

--------------------------------------------------------------------------------

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.