Ladies and gentlemen, welcome to the STMicroelectronics first quarter 2020 earnings release conference call. I am Alessandro, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Céline Berthier, Group Vice President, Investor Relations. Please go ahead.
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 expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results 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, ST's President and CEO.
Thank you, Céline. 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. 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. 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 points of underutilization 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 the 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- $ 1.04 billion at the midpoint of our Q2 guidance based on the evolution of the market. As a consequence, we have reduced our CapEx expectations for 2020 from $1.5 billion to between $1 billion and $1.2 billion. 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 brought 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 underutilization charges, including the one associated with the COVID-19 workforce related restrictions. More specifically, underutilization charges were 150 basis points in Q1 2020, compared to zero in Q1 2019, and to our estimate of 80 basis points in our Q1 2020 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 points on a year-over-year basis with the improvement of AMS operating margin compensating the decrease in NDG 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%. AMS operating margin increased to 20.8% from 7.8%, and NDG 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 a year ago period. Free cash flow was + $113 million, including $266 million of CapEx, compared to - $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 28th, 2020, stable compared to $672 million at December 31st, 2019. It reflected total 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 Lumpia line with the European Investment Bank. 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, seven day above what was already planned, two days in Muar, Malaysia, and one 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 underutilization charges. Let's now discuss the market and business dynamics. In automotive, during March, we started to see signs of slowdown in demand, especially for legacy automotive in Europe and in the U.S., as a consequence of the shutting down of many car makers and Tier 1 production lines around the world. We are starting now to see 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 application. 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 earned wins for two programs for battery management systems. We had an important development in our wide bandgap 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 roadmap, 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 counts for a total of $2.8 billion in the 2024 period. The next wide bandgap technology we are investing in is gallium nitride. On April 7th, 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. We broaden and accelerate our power GaN roadmap and business for automotive, industrial, and consumer applications.
We also announce 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. These 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 sign of demand slowdown, appliance lighting, while others such as healthcare, as could be expected, but also automation remained 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 remain 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 product 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 intelligent power 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 receive 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 as 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 light sensing, motion and waterproof pressure sensors, secure solutions 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 drive 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 on 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 the 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 underutilization 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, aims 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 billion and $40 million. 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- $1.2 billion related to reduce 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 initiatives, we will keep a strict discipline on controlling operating expenses. However, as the company is taking up non-recurring expenses for solidarity initiatives, donation, both in cash and equipment/materials, or for exceptional incentives for our employee at work. We have also launched an internal initiative whereby the management team will reduce their base salary for the next two quarters as their own contribution. In order to further increase our financial flexibility, we will not execute any transaction on 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. Before starting the Q&A session, I would like also to mention the other press release we have issued this morning.
Taking into 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 the 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 17th, 2020. Thank you, and we are now ready to answer your questions.
We will now begin the question and answer session. Anyone who has a question may press star and one at this time. The first question comes from Matt Ramsay from Cowen. Please go ahead.
Thank you very much. Good morning, and thanks for the messages of health everybody sending to everyone at 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. 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. Maybe you could talk a little bit about that and your visibility to your previous silicon carbide targets through the remainder of the year. Thank you.
Well, thank you for your question. I will let Marco first to make the first comment about the automotive market, and I will complement if needed.
Yes, thank you. As you have said, clearly, the automotive market having a complicated supply chain has been hit by closures at car makers and Tier 1. This is happening, let's say, with different time schedule around the world. The first that was hit in Q1 was clearly China. 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. Automotive seems to be recovering in China, while during Q2, Europe and U.S. will be hit the most. Our view for the full year, our modeling, is for the automotive to be down between 25%-15% in terms of car production, which means a range between 67 million unit light vehicles and 77 million units light vehicles.
We do believe again that Q2 is going to be the most difficult quarter and from Q3 and Q4 to see a recovery in automotive. Thank you.
Silicon carbide. One silicon carbide.
Yeah.
Thank you very much for that commentary there. I really appreciate it. Just as my follow-up question, No surprise at 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 caller. Thank you.
Good morning to everybody. If I well understand, your question is about the evolution of our underloading charges for Q2. Yes. As you have listened from the remark of Jean-Marc, our guidance for Q2 is impacted by a significant level of underloading charges. We have underloading charges that are impacting our gross margin in the range of 400 basis points. When we look to the second quarter, we guide at 34.6%. Our gross margin is impacted by this 400 basis points of underloading charges. These underloading charges, we estimate, are around 130 basis points 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 points.
On top of that, we are modeling a negative impact coming from price and a negative impact also coming from mix. At the end, we have this decline in terms of gross margin.
Did it answer your question, Matt?
Did I answer your question?
Yes, partly. I appreciate the details there. 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. Thank you.
Also, in the second part of the year, we'll be impacted by underloading charges. Second part of the year, we do expect to not have any longer underloading charge related to workforce, because we do expect to come back in a more normal situation. Currently, based on our plan, we estimate to have, in the year, something in the range of between 180, 190 basis points on our gross margin for the year impacted by the underloading charges. It means that that will remain also in the second part of the year. This is at the high end of our, let's say, plan. Means at $ 9.5 billion. A base of $8 billion, this underloading charge will impact in the year for more than 300 basis point our gross margin.
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 underloading charges in the year, is to be at the high end of the plan at 9.5% in the range of 37%, and the low end in the range of 35% in terms of gross margin.
Thank you very much. All the best.
Thank you, Matt. Next.
The next question comes from Alexander Peter from Société Générale . Please go ahead.
Yes, good morning, thank you for taking my question. Can I just ask on silicon carbide, do you stick to your current guidance? 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? Just finally on OpEx, how should we think of modeling OpEx going into the remainder of the year? I know you do the puts and takes here, but, if you could just give us a figure of the average OpEx for the remaining quarters. Thank you so much.
Maybe Jean-Marc.
Logistics?
The logistic and the OpEx.
Yeah.
Starting from the logistics. The logistics is our Q1 result significantly, especially toward 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, especially in 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 logistics. In the last week of the quarter, we had also the closure of two important site, was mentioned in the remark of Jean-Marc, that were in Malaysia, Muar, and Calamba in the Philippines. This was impacting logistics plus lost manufacturing in the very last days in the range of $40 million. What will happen in Q2 moving forward?
For sure, for logistics, situation is getting better. Also because we are starting to find, let's say, alternative routes, alternative ways to serve our customers, is getting a little bit better. We will, for sure, still be a little bit impacted. 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 problems in logistics impacting our quarter in Q2. In terms of expenses. When we met last time at the Q4 earnings release, I was giving you an indication that expenses for the year as an average in the quarter would have been in the range of $640million-$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. 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.
About silicon carbide, okay, can you repeat your question, please?
Yes. I just wanted to finally see if your look for silicon carbide sales in the current year are modified in any way by the current recession.
Okay. Well, if you remember well, okay, when we answered this question entering in the year. Our plan was supposed, okay, to reach revenue about $300 million linked to silicon carbide, diode and MOSFET. Clearly, with the current plan, okay, 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.
Excellent. Thank you very much.
Thank you. Next, please.
The next question comes from David Mulholland from UBS. Please go ahead.
Hi. Thanks, guys. 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 trend. Have you seen much in the way of cancellations from customers? How has 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 a China comment at this stage, or have you seen any stabilization in Europe as well? I'll maybe come back with a follow-up afterwards.
Yeah, okay, Marco, I guess, okay, you take the question.
Yes. Your question is about bookings. During Q1, our book-to-bill had been above parity. The trend 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. The backlog in this moment seems to be stabilizing, and we are looking forward the recovery to come during the Q3.
That's great. Thanks. 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. Just, there's obviously a lot going on between supply challenges you're facing, but also demand disruption. Is that having much an effect on a more generalized basis on pricing in the market, or are people generally remaining quite disciplined?
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. This was not driven by any opportunistic, let's say, situation driven by lack of supply chain. At the end, this was mainly driven by the fact that in respect to the pressure on pricing that we were expecting, we actually managed to be a little bit less impacted. In respect to our second quarter, 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 or 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.
Yeah, 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 where the logistics and the supply chain is a little bit constrained. Nothing special in terms of price pressure in this moment, just the normal pattern. Thank you.
That's great. Thanks very much.
Thank you, David. Next telephone call.
The next question comes from Jérôme Ramel of Exane BNP Paribas. Please go ahead.
Yeah, good morning. Question, Jean-Marc. With your 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? 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. Thank you.
Well, okay. If we put ourselves 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, for which we develop some custom designer products. Not only custom design product, okay? We have also more application-specific standard product. The visibility is of course better than the other 100,000 customer we address. 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. This is basically what we are seeing today and what we have planned today. The second question was?
Which segment do you see being the strongest in the second half of this year? Which end market?
Okay. Well, clearly, I have to say that if you, let's say, you make an assessment between product line and the market. Which product line are a key contributor to the fact that ST plan assume we will overperform ourselves. The product line which contribute positively to the overperformance of ST are clearly microcontroller, general purpose and secure, and imaging sensors and MEMS. They are the key contributor. Detractor, clearly, of course, are ASIC or application standard product, in analog linked to the automotive legacy market. If you look on the angle of market, clearly personal electronics, thanks to our assumption, both in term of overall 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. More, 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, both IGBT, both low voltage power MOSFET, will also contribute to the overperformance of ST in the automotive market. 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. Last but not least, okay, one detractor will be pure digital ASIC linked to, let's say, legacy communication equipment, which will be a detractor to the company.
This is overall, let's say, a picture I can share with you about which product line market contribute to the overall performance of the company, which product line market, okay, are detractor of the performance of the company.
Thank you very much.
Thank you, Jérôme. Next, please, Alessandro.
The next question comes from Stéphane Houri from ODDO BHF. Please go ahead.
Yes. Good morning, everyone. Thank you for taking the question. 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 inventories can go at the end of Q2? Linked to that, about the CapEx, what project did you put on hold to reduce the CapEx level? Thank you.
Maybe I take this question. Thank you for the question. Utilization rate, I start from here. In Q1, I'm talking about the front end, of course. You know, in back end, usually, we don't have this metric. Of course, we had also problem in back end, sorry, this quarter, and we will have also in Q2 for the utilization rate. Talking about our fabs, 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 year, as I was commenting before, we will still have underloading charges. 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 see that the inventory grew substantially as expected in Q4, 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 two folds. On one side, we will have the finished product inventory that will decline. You can easily understand why, because we have these constraints on our back-end plant, we will have really declining in our inventory as a finished product. 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. 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 95-100 days by the end of the year. There was another question or not?
On CapEx.
On CapEx.
On CapEx, sorry.
Which program we take?
Which program?
Yeah.
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. 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 at Valvinci in north of Italy, this has been strongly, let's say, was much slower in term of activity than what was originally expected.
Okay. Thank you very much.
Thank you, Stéphane. Alessandro, another question, please.
The next question comes from Adithya Metuku from Bank of America. Please go ahead.
Yes. Good morning, gents. Two questions. Firstly, just on the Huawei issues. 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%-4% of your revenues come from Huawei at the moment. 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. Thank you.
It's difficult to comment about the impact of this potential decision versus wafer. I can only comment what is intrinsic ST, then, okay, what will happen linked to the global situation so far. This is a scenario that today we do not consider. What is intrinsic ST? Very simple. If you read carefully the possible impact, it is linked to technology with a metal pitch below 80 nm. It will affect, potentially, technology like 14 nm- FinFET and below. You know, ST strategy on personal electronics is to focus on subsystems like sensor, specialized imaging sensor, secure solution, analog RF, mixed signal, and power management. All this technology are enabled by technology with a metal pitch well above 80 nm. Intrinsically, ST will not be impacted. I cannot, let's say, forecast, gamble, what will be the overall impact if such measure will occur.
I can move to the second part of your question.
You had your answer? We can move.
Yes. Very clear. Thank you.
Thank you very much.
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. We will have, let's say, ADG. ADG will decline in the low single digit. This inside on ADG, there are two different dynamic. On one side, we have automotive that will decline significantly, and on the other side, we will have a recovery in power and discrete.
You have to keep in mind that power and discrete has been one of the most hit product line by the constraint that we had in China during Q1. Portion of this recovery is also related to the fact that now in China, our manufacturing site in Shenzhen is working at full steam. We have a significant decline in revenue in AMS. In AMS, this is mainly driven by seasonality in personal electronics. AMS will decline significantly revenue on a sequential basis, moving from Q1 to Q2. There was another question, or this is covering?
It's a question for full year, if I recall well.
For the full year.
For the plan, if you can give a sense, a color.
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 $ 9.5 billion, just to give you some color on this. On the $9.5 billion, I would say that we will have a decline in revenues compared to 2019 when we look at ADG. 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 digits.
At the end, we will have a decline on the ADG and the other two 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.
Understood. Very clear. Thank you very much.
Next question.
The next question comes from Sandeep Deshpande from JP Morgan. Please go ahead.
Yeah. Hi. Thanks for letting me on. My question is back again to the guidance. When you look at Q1, 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. The point I have is that you're guiding second quarter to $2 billion in sales at the midpoint, 10% down, which i s approximately $170 million or $180 million down year-on-year. You've given how that is broken up from Q1 to Q2.
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? If autos are going to be down 21%, you could see continuing impact into the second half of the year.
I understand your point. Actually, when we look at the dynamic of the second quarter, 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 low single digits. But it's also true that it's very different inside 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, you see. ADG is declining significantly.
At the end, 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, on which our power discrete is quite exposed, was in a shorter quarter of 88 days, 14 days closed. You have to consider that seven days were embedded in our guidance, but seven days were not embedded. Then to consider that after seven days of closing, they don't start production from zero to 100 in one day. There was also the problem that the workforce was not available due to the constraining movement. We start, and we had three, four weeks of production that was not full steam during the quarter.
Actually, there is also this kind of dynamic that you should embed, when you look at how the revenues evolve moving from Q1 to Q2. I hope to have clarified a little bit between what is the market and what is related to intrinsic issues that we had as a company for our production.
Thank you, Lorenzo. Maybe I'll clarify somewhat. 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. 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're 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 order declines?
Look, when we look at the backlog that we have for Q2, is definitely a backlog that is significantly higher than our guidance. 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. We do think that, let's say, we have taken inside our guidance, the best of our, let's say, assumption, and here Marco can also complement in terms of the dynamic of the market and what is, let's say, the feedback of our customers. 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 two ingredients, let's say the demand from customers and let's say a dynamic of our capability to produce. I don't know if you want to come up.
Yes.
I think we can share as a data point that we assess the impact of the supply chain constraints in Q2, still related to, let's say, some lack of workforce attendance, because as it is clear that in Shenzhen, now we are running full speed. In Philippines, Calamba, and in Muar, these country are still under lockdown, a minimum up to end of April, and for some of them, maybe mid-May. Similar situation we have in the Bouskoura. All the impact we have assessed on revenue is in the range of $ 70 million-$80 million. Means, without this constraint, our, let's say, guidance would have been more in the range of $2 billion 70 million or $2 billion 80 million.
The rest, again, about the demand, as Lorenzo said, we have with us a backlog. Clearly, okay, 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 safety stock constitution or let's say, or because in Q1, okay, people put a frame order in order to secure ourselves. This is something we have seen. In fact, will not be transformed in real revenue. That's the reason why, okay, 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.
Thank you very much.
Thank you very much. Next question, please.
The next question comes from Achal Sultania from Credit Suisse. Please go ahead.
Hi. Good morning. 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 listed is growing in that RF part of the business? Is all of that business predominantly still coming from smartphones or infrastructure is starting to become a contributor to that? Secondly, on the GaN side of things, obviously you've had partnerships 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, will be helpful. Thank you.
I will answer about GaN and Marco will answer about RF mixing signal for mobile phone and infrastructure. About GaN it is clear that, okay, 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. We do believe that, in the, 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. Okay, thanks to Exagan acquisition, we can specifically generate revenue sooner. Here I will communicate more, okay, at our capital market day, in September.
Yeah. Thank you, [Jean].
Yes. I will take the part on the RF modules. First of all, as you know, our model is mainly COT business, and the RF modules can cover both the 4G and the 5G. 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, in Europe on the 5Gs. The biggest portion of our business is clearly in the mobile, but can be applied also for the 5G base stations. Did it answer your question?
Yeah. 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? Thanks.
No, we cannot comment so specifically, I guess you understand why.
Okay. Makes sense. Thanks a lot.
Thank you.
Thank you very much, Achal Sultania. We have another question. We take time to take a few more questions, even if we have passed the one hour. Any other question?
We have a question from Amit Harchandani from Citigroup. Please go ahead.
Thank you. Good morning, all. Amit Harchandani from Citi. Two questions, if I may. My first question relates to what we saw in Q1 and what you're 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? That is impacting how you're thinking about Q2 and second half? In other words, how do you assess the inventory in the supply chain today and customer buying behavior? I have a second question.
On the first question, okay, I will, let's say, pass the answer to Lorenzo, okay, which will provide, let's say, some data point and technical comment. I would like just to pass some overview from the CEO. It is clear that in Q1, what the industry faced. Industry faced here and there, lockdown measures from various governments. Some of customers, unfortunately, and partners as well, were obliged to totally shut down their plant. Some of them, like ST, has been able to operate at lower capacities rather than maximum capacity. When you face such, let's say, unprecedented challenge, the normal behavior is to secure your own supply chain. Means, you are not looking to optimize your inventories.
Your first reaction behavior is to secure yourself, to be sure that you will not be impacted by components, 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 to assess and to comment the inventory in the supply chain, because of this, let's say, totally normal behavior. I have to say that for ST, it has been done 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 you know that if you shut down a wafer fab, the impact is really material. In such a case, you are trying to warranty that your supply chain will be up.
After you optimize the inventory level. I would like to share with you this overall comment, and then I pass the ball to Lorenzo.
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. 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. The situation is so complex from a supply standpoint that we cannot exclude that some customer 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.
That's helpful, gentlemen. 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? Thank you.
You mean beyond when we are back to, let's say, normal or whatever? I just said, if this is the question.
Yes, Céline. Beyond, say, 2020, 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?
Okay. What I can comment. The plan we have set up with this range of revenue is based on the usual data point we have, backlog, booking dynamics, POS, POP at the distributor channel. It is based also on clear, let's say, intimacy we have with our top OEM, for the current ongoing programs, but also for next generation. I commented during my address that we still see intense R&D and innovation activity. Ballpark, maybe there is one program or two here and there which has been postponed. Overall, the innovation and the R&D activity is really solid. Our plan is based also on the various discussion we have with industry analysts, providing various scenario about the economic impact of the COVID-19. What is important 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 long-term sustainable and profitable growth. All these program are protected. All these program are, let's say, consistent with the view and the discussion we have with our customers. Doing that, we do believe that our long-term strategy and its objective remain. 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 to September. Believing that the visibility and about the midterm will be better at this stage. My main message is whatever will be the visibility, the company will move stronger from this outbreak, keeping our R&D program running, our sales marketing program running, and our transformation role program running. This is what I can tell you.
Thank you, gentlemen.
Thank you very much. We have time for two more questions. Time is running a bit now.
The next question comes from Johannes Schaller from Deutsche Bank. Please go ahead.
Yeah, thanks for taking my questions. Maybe firstly, on microcontrollers, specifically. 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. 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? 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.
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 roadmap, both on the front-end manufacturing side, but also on the Norstel wafer site, how that is affected by the current situation? Thank you.
Marco will answer on the microcontrollers and the go-to-market, okay, the channel. Lorenzo will answer on the CapEx, and I will comment about the silicon carbide strategy.
Yes. 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 at lower level than the POS. We end up Q1 with a pretty clean inventory in terms of MCUs. The backlog for the second quarter is healthy, that's why MDG is going to show a growth quarter-over-quarter. This is fueled not only by, say, the legacy product that we have, but also by the new product that we introduced during last year. Let me remind you that we introduced 10 new products during last year. Now the pipeline of opportunities is transforming. We have the new families that are covering microcontroller, extremely sophisticated, et cetera.
Overall, I think we are gaining market share and the situation is pretty healthy.
About the silicon carbide and strategic program. As Lorenzo said, it's obvious that two strategic program are for the 300-mm fab in Agrate, so close to Milan, and the raw material silicon carbide facilities we intend to set up. It is clear that since early March, the workforce attendance to this construction has been reduced to zero. Clearly, we have been successful to maintain workforce attendance inside our wafer fab, warranting the most stringent health and safety measures to our employees. That it was not questioned to maintain a workforce attendance in construction, building, and facilities and for these programs. 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 R3, we did believe that the contribution of R3 for the growth of ST was planned in 2022 and beyond. We will have no impact, okay, in the next two, three years. For silicon carbide, okay, what was important for us is first, with the acquisition of Norstel, to focus on technology roadmap development, to improve, okay, our whole technology, working closely with Norstel team and their know-how, also, okay, to work on the future wafer size conversion of the technology from 6 to 8 in.
All these programs are running at full speed. 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 two strategic agreements. With Cree and with SiCrystal, aiming to cover our needs for the period, 2024, where I repeat that we have award, which enable us to make $2.8 billion of revenue. This plan are covered by our strategic agreement. It will be our decision to size the internal production ratio to the total needs, according, the availability of this new facility. I think, as a takeaway, the strategic program, they are delayed because, lack of workforce attendance to protect people and their family.
No impact short, medium term of our business, because one side it was planned like that, and the other side, okay, we are covered by strategic supply agreement with Cree and SiCrystal.
That's very helpful and reassuring. Thank you.
Thank you, Johannes. We're now taking the very last question. We are 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 answer your question after this call. Alessandro, please, can we have the last question?
The last question comes from Dominik Olszewski, from Morgan Stanley. Please go ahead.
Hi. Good morning. Thanks for taking extra time for the question. Firstly, I just wanted to clarify, checking whether I heard correctly. Did you mention that your full year 2020 guidance and the second half recovery assumed a relaxation of restrictions by a certain date? If so, could you perhaps clarify what timeframe were you thinking? For example, were you thinking of an easing of restrictions in June? That's the first question. 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 future rebounds.
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 100 days by the end of 2020. Thanks.
Dominik, the first question is to qualify the H2 over H1, we have indicated as part of our plan whether there is still a portion which is related to supply constraints or whether this is basically how it works. The second part, I'm not sure we capture well, is about the fab utilization. Could you repeat the second part?
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.
You mean the trade between inventories and running the fab, et cetera. This is part of it.
Okay.
Go ahead, please.
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. Means that the underloading charges that we are embedding in our plan is fully linked to lower demand than our capacity. 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.
We have to do as usual, due to the seasonality, some smooth during Q2, 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. What we would like to do is to produce accordingly to our visibility in the market. This is also the reason why we will be hit, unfortunately, during the year, by underloading charges along H1 and H2.
Does it answer your question?
Thank you.
Thank you. Thank you very much. It is now the end of this call, Alessandro.
Okay.
We're done now.
Thank you.
Thank you.
Thank you. Thank you very much for your attendance.
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