Ladies and gentlemen, welcome to the STMylacor electronics First Quarter 2020 Earnings Release Conference Call. I'm Alessandro, Corus 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 And A session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Salinda Pierre, 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 Marcierry, 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 Cassie, President of Sales, Marketing communications and strategy development. This live webcast and presentation materials can be accessed on ST's Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward looking statements that involve risk factors, that could cause ST's results to differ materially from management's expectations and plans. We encourage you to review the arbor 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.
Also, to ensure all participants have an opportunity to ask questions during the Q and session. Please limit yourself to one question and a brief follow-up. I'd now like to turn the call over to Jean Marc Santi Estee's President and CEO.
Thank you, Celine. Good morning, and thank you for joining ST on our call. First of all, I hope you, your families and your colleagues are wholesale and LC. 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 $2,230,000,000. Our operating margin increased to 10.4% and our net income rose 7.9 percent to $192,000,000. On a second short basis, net revenues came in about 5% below the midpoint of our outlook when entering the quarter. The COVID-nineteen outbreak and sub segment 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 percent was largely in line with our midpoint target. Our free cash flow during the first quarter was $113,000,000 including CapEx of $266,000,000. We exited the 1st quarter with a stable net cash position of $668,000,000, available liquidity of $2,700,000,000 and available credit facilities of $1,100,000,000. On Q2 2020, At the midpoint of our guidance, we expect net revenues in the second quarter to be about $2,000,000,000 leading to a gross margin of about 34.6 percent that includes about 400 basis points of un saturation charges. Our guidance is taking to account the declining demand of enrollment, 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 $8,800,000,000 $9,500,000,000. We plan for growth in the second half, over the first half of the year to be in the range of $340,000,000 to $1,040,000,000,000. 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 $1,500,000,000 to between $1,000,000,000 $1,200,000,000. 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-nineteen outbreak and subsequent containment measures by governments around the world both 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 $846,000,000, representing a year over year increase of 3.5%. The gross margin of 37.9 percent decreased 150 basis points year over year, mainly impacted by price pressure and unsaturation charges, including the 1 associated with the COVID-nineteen workforce related restrictions. More specifically Un saturation charges were 150 basis points in Q1 2020 compared to 0 in Q1 twenty nineteen and to our estimate of 80 basis points in our Q1 twenty twenty 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 percent, increasing 20 basis points on a year over year basis, with the improvement of AMS operating margin compensating the decrease in MDG and ADG. Net operating expenses at $610,000,000 were below what we anticipated when entering the quarter. Our net income increased 7.9 percent to $192,000,000 on a year over year basis, and our diluted earnings per share 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 percent 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%. IMF's operating margin increased to 20.8% from 7.8% and MDG operating margin decreased to 11.5% from 13.4 percent. Net cash from operating activities in with 17% to $399,000,000 in Q1 compared to $341,000,000 in a year ago period. Free cash flow was positive $113,000,000 including $266,000,000 of CapEx compared to negative $67,000,000 in the year ago quarter. During the first quarter, we paid $53,000,000 of cash dividends and we repurchased shares in the total amount of $62,000,000 as part of our existing programs.
Our net financial position was $668,000,000 at March 28, 2020, stable compared to $672,000,000 at December 31, 2019. It reflects a total liquidity of $2,710,000,000 and total financial debt of $2,040,000,000. We also have committed credit facilities for $1,100,000,000, equivalent which are current undrawn, including a new 1,000,000 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 top priority assembly and test site closures to 14 days in Shenzhen, 7 day above what was already planned, 2 days in Muir, Malaysia, and one day in Colombia Philippines. We did not close any WAFFA app. 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 and 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 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 carmakers and Tier 1 production line around the world. However, We are starting now to see some signs, some early signs of recovery in China.
I have to classify quite sharp. In the meantime, we continued to support the electrification and digitalization trends of our customers' design for smart mobility applications. In current 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 2 programs for Berkeley Management Systems.
We had an important development in our white bond gas technology strategy, key for our automotive business and also for other end market 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 fifty-fifty between automotive customers and industrial customers. The silicon carbide awarded projects counts for a total of $2,800,000,000 in the 2024 period. The next white bond gas technology we are investing in Escallium nitride.
On ARPC7, we closed the acquisition of a majority stake in French GaN Innovator, Exagon. Exagon's expertise is in epitaxy product development and application know how. We modern and accelerate our power catalog 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 gas device to the market. Moving to car digitalization.
Here, we had wins in a variety of applications, This included 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 protocols for a V2X communications application. Moving now to industrial. The dynamics in the quarter were mixed with some application already showing signs demand slowdown, appliance lighting, while others 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 restart of operations, but a slowdown in Europe and in the U.
S. On a year over year basis, point of sale 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 another in embedded processing solution. To support this, we are continuously strengthening our offer in terms of hardware, software and ecosystem, around our microcontroller and microprocessor families.
During the quarter, we announced many additions to the SCM32 microcontroller portfolio. New product in our low power and high performance MCU families and the world's 1st LoRa system on chips. With our power discrete products, for industrial applications, we had wins with high and low voltage silicon phosphates and intelligent power modules for power supplies solar power converters, home appliances and power tools for many manufacturers. We also won several new designs 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 industrialgradments 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 that sustainable semiconductor demand during the quarter. This is also driven by increased demand for tablet 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 volumes smartphone applications as well in wearables accessories and gaming devices. During the first quarter, we continued to win designs and more production in flagship customer devices.
Some examples include 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 want designs were 5G modems. We were awarded several 5G designs with our HorF mixed signal technologies. This is in line with another of our stated market objective. In our last end market communication equipment and computer perishables.
We had many design wins ranging from time of flight and motion sensors for personnel 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 oncology 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 $2,000,000,000 and a gross margin at about 34.6%. This outlook is taking into account the declining demand of 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 and saturation 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 base of the plan for 2020 full year revenues between $8,800,000,000
$9,500,000,000.
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 $340,000,000,000 to $1,140,100,000. 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 $1,500,000,000 to a range of between $1,000,000,000 to $1,200,000,000 related to additional reduced additional capacity needs.
Our strategic initiatives are all confirmed, although with some short term scheduled adjustments. While we are protecting our R And D, sales and marketing programs and transformation initiatives, we will keep strict discipline on controlling operating expenses. However, as the company is taking up non recurring expenses for solidarity initiatives. Donation both in cash and equipmentmaterions or for exceptional incentives for our employee at work. We have also launched an internal initiative whereby the management team will reduce their best salary for the next two quarters as their own contribution.
In order to further increase 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 the challenging year, targeting growth in the second half over the first half. ST is in a solid position from the capital liquidity and balance sheet capacity. 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 And 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-nineteen outbreak, FT's Supervisory Board is now proposing a decrease in the 2019 dividend from $0.24 to $0.68 per share, with authorization to consider during September 2020 to increase such dividend resolution up to a maximum of $0.24 per share. At the 2020 AGM, which is now postponed to June 17, 2020. Thank you, and we are now ready to
session.
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 seemed 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 with smartphones, etcetera, 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 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. Thank you.
Well, thank you for your questions. So, I will let Marcru 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 carmakers and the TS1. This is happening, let's say, with different time schedules around the world. The first that was hit in Q1 was clearly China, and now it's happening in Europe and the U. S.
We have seen in this moment, 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 it 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 1,000,000 unit light vehicles and 77,000,000 units light vehicles.
So we do believe again that Q2 is going to be the most difficult quarter and from Q3 and Q4 to see recovery in the automotive.
Thank you.
Commentary there, I really appreciate it. Just as my follow-up question, no surprise that the tightened under utilization charges in the 2nd quarter. Lorenzo, maybe if you could talk a little bit about how if you guys execute to the plan and the second half guidance how do you feel like those under utilization charges will come off the P and L and what that trajectory looks like into next year? Appreciate the color. Thank you.
Good morning to everybody. If I understand that your question is about the evolution of our unloading charges for Q2. Yes, as you have, let's say, least from the remark of Jean Marc, our guidance for Q2 is impacted by a significantly level of unloading charges. So we we have a loading charges that are in the range of, impacting our gross margin in the range of 400 basis points. When we look to the 2nd quarter.
2nd quarter, we guide 34.6 our gross margin is impacted by this 400 basis point of unloading charges. These unloading 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 plan set, 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 the negative impact also coming from mix. So at the end, we have this decline in term of gross margin.
Did I answer your question, Matt?
Did I answer your question?
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 and L would be really helpful.
Yes. Also in the 2nd part of the year, we'll be impacted by unloading charges. 2nd part of the year, we do to not have any longer unloading charge related to not to have any longer unloading charges related to workforce because we do expect to come back in a more normal situation. Currently based on our plan, we estimate that we have in the year something in the range of between 108, 190 basis points on our gross margin for the year. Impacted by the unloading charges.
So it means that that will remain also in the 2nd part of the while, and this is at the high end of our let's say plan. So means that 9.5000000000, a day to day 1,000,000,000 that is unloading charge will impact in the year for more than 300 basis points gross margin. So anticipating maybe I have a question on what do you, let's say model your gross margin for the year. At this moment, our our visibility for the gross margin including this impact of loading charges in the 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.
The next question comes from Alexander Peter from Societe Generale. Please go ahead.
Yes, good morning, and 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? And then just finally on OpEx, how should we think of modeling OpEx going into the remainder of the year?
I know you do it as the puts and takes here, but, if you could give us a figure of the average OpEx for the remaining quarters? Thank you so much.
The logistic and the OpEx and then, starting from the logistic, the logistic 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 patients with border closed, we estimate that in the quarter, especially in the very last days of quarter, this was impacting our result for around 20,000,000 dollars, $25,000,000 due to the fact that that was difficult to manage the logistics. As well as in the last week of the quarter, we had also the closure of 2 important sites that was mentioned in the the remark of Jean Marc that were in Malaysia Muir and Kalamba in the Philippines. Overall, this was in think logistic plus lost manufacturing in the very day in the very last days in the range of $40,000,000. What will happen in in the 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 way 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 $81,000,000 between loss of manufacturing and let's say some propylene logistic impacting our quarter. Expenses, when we met last time at the Q4 earnings release, I was giving you an indication that expenses for the year is an average in the quarter would have been in the range of 604 $650,000,000 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 much 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 6 35,000,000 dollars, $645,000,000 as a level of expenses per quarter in average.
So about silicon carbide, okay, can you repeat your question, please?
I just wanted to finally see if if your look for silicon carbide sales in the current year are modified in any way by the current recession.
Okay. Ma'am, so if you remember well, okay, when do we answer this question, answering in the year? Our plan was supposed, okay, to reach a revenue about $300,000,000 linked to Silicon Carbide, the 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 that $300,000,000 that will be well above the $200,000,000, we have executed last year.
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? Has that been trending over the last couple of weeks? As I guess, things have have settled down, and particularly in automotive, I think you made a few comments that things have stabilized and started to 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 might be coming back with a follow-up afterwards.
So, yeah, okay, Marco, I guess, okay, you take the question?
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 background in this moment, since to be stabilizing and we are looking forward the recovery to come during the
That's great. Thanks. And just in terms of there's been a couple of comments on pricing. I think when you said it had been a bit of a help to 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.
Is that having much in 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 introduced in this point. First of all, let's 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 we expect the pressure on pricing that we were expecting. We actually we manage it to be little bit less impacted.
In respect to
our second quarter and then maybe Mark
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 your respect to the price dynamic that you see in the market.
Yeah. Lorenzo. Yes. Thank you. Yes.
I confirm what Lawrence is saying. We 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 some way or so to get parts in this moment with, we have the logistic 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.
The next question comes from Jerome Rommel from Exane BNP Paribas. Please go ahead.
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 slash 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 2nd half year to the have? 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 signed at 1,000,000, basically, I would like to say that half is related to our top 10 OEM in which, for which we develop, okay, some custom designer product. And, but, but not only custom design product, okay, we have also more application specific standard product and the visibility, okay, is, of course, better than the order 100,000 customer we address. So half will be, the contribution from top 10 customer and the other half will be more linked to the overall market, automotive, and in industrial. So this is, basically, what, what we are, what we seeing today and what we have planned today. And the second question was
which segment do you see being the strongest in the summer half of this year? Which end market?
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 the market. Clearly, and which product line, okay, are a key contributor to the fact that ST plan, assume we will overperform ourselves. So the product line, which contribute positively, okay, to the over performance of ST are currently a microcontroller general purpose and secure and imaging sensors and names. They are the key contributor.
Detractor, clearly, of course, our AISC or applications for their product, in analog link to the automotive legacy, legacy market. If you look, okay, on the hunger of market, clearly, personal electronics thanks to our assumption, both in term of overall volume, volume related to key customer and the fact that, the new program, we have the design win, are linked to the 5G fold. Clearly, the overall personal electronic application segment will be a key contributor to the overall performance of ST. More than, after we have some specific part of our portfolio end market, which will contribute. I would like to speak about forward it is clear that, our power solutions, covering, silicone carbide but highgbt, but low voltage power modes, with also contribute to the performance of ST.
In the automotive market. And I guess here, it is safe to, our focus on electrification of the car. As well, our ethic in digital linked to the digitalization of the car and our application specific MCUs for automotive linked to the digitalization will contribute to the performance of ST. Well, last but not the least, okay, one day tractor, will be a pure digital ethic linked to, let's say, legacy communication equipment, which will be a detractor to the company. So this is overall, let's say, a picture I can share with you about which, product line market contribute to the other performance of the company.
Which product line market, okay, are the factor of the performance of Ecopet.
Thank you, Jerome. Next please, Alessandro.
The next question comes from Stephan Hori from ODDO. Please go ahead.
Yes. Good morning, everyone. Thank you for taking the question. I have a question about the the digitization rate. Can you remind us what was the digitization rate in Q1 where you think it will go in Q2 and and also where you think your your inventories 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?
Thank you.
Maybe I take this question. Okay. Utilization rate, I started from here. In Q1, our I'm talking about from 10 in for say, you know, in Buchanan, 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 both in Q2 for utilization rate. But talking about our affects our utilization rate averaging in the 1st quarter in the range of 79%.
Q2 will be worst. Q2, we are modeling something more in the range of 70%. This utilization rate will increase in the 2nd 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 2nd 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 this the past quarter Q1 a little bit higher than what I was anticipating. I was anticipating something in the range of 110,100,011,000,000 days of inventory is mainly driven by the fact that we have the lower level of revenues. In the second quarter, the inventory will have 2 folds. On one side, we will have the finish a product inventory that will decline.
And you can easily understand why because we have these constraints on our backend plant. And so we will have a really declining in our inventory as a finished product. But on the other side, we will have an increase in inventory for what concern at the semi finish what we produce in our fab, because we are preparing also the growth for the 2nd 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 event 3 ranging between 95, 100 days by the end of the year. There was another question or not. CapEx.
On CapEx, sorry, which program we've kept and which program.
But on CapEx, of course, the reduce the 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 Asia. So this is a portion of CapEx that has been definitely reduced and this is impacting both front end and backend. 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 delays. During, for instance, Q1 and some of our activity like, for instance, the building up of our facilities at 12 inches although, Italy, this has been strongly, let's say, was much slower in term of, activity than what was originally expected.
Thank you, Stefan. Alessandro, another question, please.
The next question comes from Aditya Metuku from Bank of America. Please go ahead.
Yes. Good morning gents. So two questions. Firstly, just on the Huawei issues recently been a lot of news flow around the US requiring licenses, from, global semiconductor companies to shift 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.
He is a difficult, okay, to comment about the impact of this potential decision, versus Huawei. I can only comment, what is and trans scarcity. 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 the transce case is very simple, okay, if you read carefully the the possible, okay, impact. It is linked to technology with the metal pitch, below 80 18 nanometer.
Means, it is, it will affect potentially technology like 14 nanometer FinFET, and below. And, you know, ST strategy on personal electronics is to focus on subsystem like a sensor specialized imaging sensor, secure solution, analog, RF, mixed signal and power management. And all this technology are enabled by technology with a metal pitch well above 18 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 measure will occur.
I can move to the second part of your question.
We can move it. Yes.
Very clear. Very clear. Thank you.
Thank you very much.
So I move it 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 at by group, I would say that there are different dynamics inside the various group. On one side, we have an MTG 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. Is inside on ATG. There are 2 different dynamics. On one side, we have Automotive that will decline significantly.
And on the other side, we will have recovery in power and discreter. You have to keep in mind that the power and discreter has been one of the most heated product line by the constraint that we have in China during Q1. So, portion of this recovery is also related to the fact that in China, our manufacturing site in Shenzhen is working the full steam. Then we have a significant decline in revenue in AMS. In AMS, this is mainly driven by seasonality in person and electronics.
So AMS will decline a significantly revenue on a sequential basis moving from Q1 to Q2. There was another question or this
is
For the full year?
If you can give a sense of 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 I'd like to propose that we talk about the 9.5 just to give you some color on this. On the 9.5, I would say that looking to the, we will have a decline revenues compared to 2019. And when we look at ADG and this decline you can easily understand it is related to automotive. Looking at, let's say, in AMS, we will have some slight increase in our view and MDG should increase also also in this case low single digit.
So at the end, we will have a decline on the ADG and the other to group a little bit stable, a little bit increasing. This is the plan, we have a frame of the plan for 2020. By group, the evolution of the revenues by group.
Next question?
The next question comes from Sandeep Deshpande from JP Morgan. Please go ahead.
Yes, hi. Thanks for letting me on. My question is back again to the guidance. And 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-nineteen impact was really and fully known. So the point I have is that you're guiding second quarter to $2,000,000,000 in sales at the midpoint, 10 and down, which is approximately $170,000,000 or $180,000,000 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 the automotive market for you in terms of, the orders or rather in the sales because this trade, it 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 2nd quarter, if this dynamic, you needed 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 ATG is down on a sequential basis. Let's say on a single digit low single digit. But it's also true that is very different inside ADG, the portion of automotive and the portion of our discretes.
The portion of power and discretes, let's say, is increasing significantly, mainly driven by the availability of the parts then the market, the market you see. ADG is declining significantly. So at the end, the 2, the decline of ADG more than offset the is our in this case. And the increase of power in this case, as I repeat, is mainly driven by the fact that while in Q1, our factory insurance then that is on which our power density data is quite exposed was in a shorter quarter of 88 a 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, they don't 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 and movement.
So we start and we had 3, 4 weeks of production that was not a full steam during the quarter. So actually there is also this kind of dynamic that you should embed when you look at the 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. I mean, maybe I'll clarify somewhat. I mean, I understand the point you're making because it seems to be very much driven by what inventories are in the system and what, you know, your shutdowns and startups of your facilities. But it is not to me doesn't look like a reflection of end demand because historically ST has been very good in terms of guidance when you give a guidance you achieve it. Maybe you do 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 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 on the decline?
Look, when I when we look at the, at the, at the, at the backlog that we have before Q2, is 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 that in a normal quarter, this we acknowledge, I think everybody acknowledged that. But we do think that, let's say, we have taken inside our guidance, the best of our, let's say, assumption and Danie and Marco can also complement in terms 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 was, for instance, in Q1, just to make an example, in Q1, as I was mentioned before, we had mainly problem on the Shenzhen plant a while in Q2 probably this will be more on Philippines and more than that are different product lines. We are taking into consideration and we think that 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
I think, okay, we can share, okay, as a, at that point that we assess the impact of the supply chain constraints in Q2 terminated to, let's say, there's some lack of workforce attendance because, okay, as it is clear that in Shenzhen, no, we are running full speed in the Philippines in Kalumba and in Russia, this country, are still under lockdown, a minimum up to, for some of them, maybe mid May, similar situation we are in the Buscora. So all the impact okay, we have assessed on revenue is in the range of $70,000,000 to $80,000,000. Means, okay, without, okay, this constraint, okay, our, our, let's say, guidance would that be more in the range of $2,000,000,000 $70,000,000 or $2,000,000,000, $80,000,000. The rest, again, about the demand, as Lorenzo said, we have a with us a backlog. And 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 variable, And maybe, okay, part of the backlog and especially for automotive is more linked, for step stock execution or, let's say, or because in Q1, okay, people put a framework in order to secure ourselves, This is something we have seen.
And in fact, will not be transformed in real revenue. So that's the reason why, okay, we are, we are really confident 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.
The next question comes from Achal Suntania from Credit Suisse. Please go ahead.
Hi, good morning. Just put a couple of questions, one on our website of things. I guess, can you help us give some color on, what is the size of the business now and and how is the customer traction? I know you had good traction with 1 Chinese customer last year. Are we seeing signs that, the customer listed is growing in that RF part of the business?
And is all of that business predominantly still coming from smartphones or infrastructure starting to become a contributor to that? And then secondly, on the GaN side of things, obviously, you've had partnership TSMC, you've acquired, stake in, X again. I guess, how should we think about the the, the revenue ramp here is it more about 2021 or or or or 2022, any color around around potential for, revenue that part of
the business, would be helpful. Thank you.
So I will answer about GaN and Marco will answer about airbrush mixed signal for mobile phone and atmosphere. But no, I bought GaN, it is clear that, okay, the agreement with TSMC is to, let's say, accelerate the availability power solution using, again, Mosfet associated with an analog driver. To offer power solution. But we do believe that, in the, let's say, 2nd part of 2021, we we could, let's say, acknowledge the first revenues, but for sure, we'll be more for 2022 and beyond. And then, okay, thanks to a hexagon acquisition, we can specifically generate revenue sooner, but here, I will communicate more okay, at our Capital Market Day in September.
I will take the part on the RF, RF modules. So first of all, as you know, our model is mainly SOT, COT business. And, the RF modules can cover both the 4 g and the 5 g. And, clearly, what we are seeing now is in China while interest in the world 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 5 gs.
So 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?
Yeah. Just, on on the size of that business, if, you can provide some color. Is it like $100,000,000 less than that, more than that,
any color on that? Thanks.
Well, we cannot comment so specifically, and I guess you understand why.
Okay, makes sense. Thanks a lot.
We have another question. We take time to take care few more questions, even if we have passed the 1 hour. So any other questions?
We have a question from Amit Archardani from Citigroup. Please go ahead.
Amato Gendani 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? And that is impacting how you're thinking about Q2 and second half.
But 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.
So the first question, okay, I will, I will, let's say, pass the answer to Lorenzo, which will provide, let's say, some data for instance and technical comments. But I would like just to pass on, overview, okay, 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 shutdown their plan.
And some of them, okay, like ST has been able to operate at a lower capacity than the maximum capacity. When you face such, such, let's say, unprecedented challenge, okay, 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, okay, 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, to assess and to comment, the inventory in the supply shed because of this, let's say, totally normal behavior.
And 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 the welfare fab, okay, the impact is really, really material. So in such a case, okay, you are trying to warranty that your supply chain will be up. And then after one, you optimize inventory level. So 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, And this is reflecting orders from our customer, and that for sure has not been yet readjusted as a consequence of the COVID-nineteen outbreak. Of course, we are monitoring the level of stock. At our distributors, we are mainly monitoring the consignment stock at our large OEMs. Anyway, the situation is so complex from a supply standpoint that we cannot exclude 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 this cannot be definitely excluded.
That's helpful, gentlemen. And secondly, if if if I may, maybe this might 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, the creation, 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 the, when we are back to, let's say, normal or whatever, I did say, is there
any other questions?
Yes, Celine. So, beyond say, 2020, I mean, clearly, some things will change permanently. I'm just wondering, is there in a position to share any initial views on How are you thinking about that once we exit the crisis?
Okay. So what I can I can make a comment? The plan, okay, we have set up with this range of a new, okay, is based on the usual data points we have, okay, backlog booking dynamics, okay, POS, POP at the distributor channel. It's been also okay, on clear let's say intimacy we have with our top OEM, from the current ongoing programs, but also for next generation. And I commented during, okay, my address that, okay, we still see intense R&D And Innovation Activity ballpark, okay, maybe there is 1 program or 2 year and there, which has been postponed, but that's overall, okay, the innovation and the R and D, okay, activity is really solid.
And then our plan is based also on the value distribution we have with industry analysts. Providing, okay, various scenario about the economic impact of the COVID-nineteen. What is important to, okay, to share with you is that we are protecting our R and 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 programs are protected. All these programs I'm, 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 its objective remain. Now for sure, it's early to assess the mid long term impact of this COVID-nineteen outbreak. And that's the reason why, okay, 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 MD program running, our sales program boarding and our transformational program boarding.
So this is what I can tell you.
Thank you, gentlemen.
Thank you very much. We have time for 2 more questions.
The next question comes from Johannes Schaller from Deutsche Bank. Please go ahead.
Yes, thanks for taking my questions. Maybe firstly on microcontrollers specifically. I mean, you've proven to have a pretty accurate view on what is going 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 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 STS, that would be helpful. And the 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, invest and roadmap both on the front and manufacturing side, but also on the North wafer side, how that is affected by the current situation? Thank you.
So, so, Marco will answer on the microcontrollers and, and the go to market, okay, the channel and I, Lorenzo will answer the CapEx and I will comment about the silicon carbide strategy.
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 we introduced during last year.
Let me remember you that we introduced 10 new products during last year. And now the pipeline of of, opportunities is transforming. So we have, the new families that are covering microcontrollers, sophisticated, etcetera. So overall, I think we are gaining market share and the situation is pretty healthy.
So I bought the silicon carbide and strategic program. As Lorenzo said, okay, it's abused that 2 strategic program are for the 300 millimeter fab in Agrade, so close to Milan Hill and the silicon carbide, the raw material silicon carbide facilities, we intend to set them up. It is clear that since March, early March, the workforce, attendance to this construction has been reduced to 0 because, okay, clearly, we have been successful to maintain workforce attendants inside our wafer fab, warranting, okay, the most stringent essence of the measure our employees, that, okay, it was not question, okay, to maintain the workforce attendance in construction building and facilities and for this program. So these programs have not yet resumed and, and, definitely, will be, early delay. For both of them, no impact, okay, ST short medium term will happen because I repeat for Aggrat Air Three we did believe that the contribution of FERC for the growth of ST was planned in the 22 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 Nortel, to focus on technology development, to improve, okay, our whole technology, working closely with the Northampton team and the Anwaro and also get to work on the future wafer size conversion of the technology from 66 to 8 inches. So all this program, okay, 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 agreements, so with 3 and with a cyclistan, aiming to cover our needs, for the period, okay, 2024. Where I repeat that we have award, which enabled us to make $2,800,000,000 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, as the ability of this new facility. So I think, okay, as a takeaway, well, the strategy program, they are delayed because, okay, lack of workforce attendance to protect, okay, people and, and their family, no impact, okay, 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 Klee and, and Secristat.
That's very helpful and reassuring. Thank you.
Thank you, Jonas. We're now taking the very last question. We're now running out time. As usual, for the ones of you that have not been able to ask questions, do not hesitate to go directly to investor relations team and we will seek to take your take to answer your question after this call. So at least not, please, can we have the last question?
The last question comes from Dominik Olsat Keane from Morgan Stanley. Please go ahead.
Hi, good morning. Thanks for taking extra time for the question. So firstly, I just wanted to clarify checking whether I heard correctly, did you mention that your full year 'twenty guidance and the second half recovery assumed a relaxation of restrictions by a certain date? And 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. 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 into Q2, to take advantage of future rebound. So could you maybe just discuss how you're thinking about, is there an upper limit of how way you would happy to see inventory go either in dollar terms in days of inventory or however you are thinking about that of bear in mind, your target to getting towards 100 days by the end of 2020?
Thanks.
So Dominique, the first question is, quantify the H2, the H2 over H1, we have indicated as part of our plan, whether there is still a portion which is related supplies constraints or weather. This is basically how it works. And the second part, I'm not sure, we capture well, it's about the fab utilization, but could you repeat the second first?
Sure. It's just to say, basically, is there an and 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 thinking about where global competitors are also You
mean the trend between the trend between inventories and running the fab, etcetera. So
Okay. I will try to answer. In our in our plan, we do assume that in the 2nd part of the restriction on our factories are removed. So means that the unloading charges that we are embedding in our plan is a fully linked to lower demand than our capacity. So, we do not expect to have a restriction of 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 invent Evo, 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 We do not, let's say, are aiming to protect or to produce in accessing to what is needed. Of course, we have a 22 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 the cash. So what we would like to do is to produce accordingly to our visibility in demand. And this is also the reason why we would be hit, unfortunately, during the year, by unloading charges along each H1 and H2.
This answer your question?
Yes. Thank
you. Thank you very much. This is now the end of this call, Alessandro.
Okay. Thank you.
Thank you. Thank you very much for your attendance.
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