Ladies and gentlemen, welcome to the STMicroelectronics Q2 2021 Earnings Results Conference Call and Live Webcast. I'm Andre, the 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 Celine Berthier, Group Vice President, Head of Investor Relations. Please go ahead, madam.
Thank you, Andrea. Good morning. Thank you, everyone, for joining our Q2 2021 financial results conference call. Hosting the call today is Jean Marc Seri, ST's President and Chief Executive Officer. Joining Jean Marc on the call today are Lorenzo Grande, President of Finance, Infrastructure and Services and Chief Financial Officer Marco Cassis, President of Sales, Marketing, Communications and Strategy Development.
This live webcast and presentation materials can be accessed on ST's Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward looking statements that involve risk factors that could cause ST's results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor statements contained in the press release that was issued with the results this morning and also in Neste's most recent regulatory filings for a full description of these risk factors. Also to ensure all participants I'd now like to turn the call over to Jean Marc, ST President and CEO.
So thank you, Celine. Good morning, everybody, and thank you for joining ST for our Q2 2021 earnings conference call. Let me begin with some opening comments, starting with Q2. Net revenues and gross margin came in at Year over year, net revenues grew 43.4 percent to $2,990,000,000 Our gross margin of 40.5 percent and operating margin of 16.3% improved From 35% and 5.1 percent respectively. Our net income rose to $412,000,000 On a sequential basis, net revenues decreased 0.8% due to the normal seasonality in personnel electronics.
On H1 2021, Net revenues increased 39.1 percent year over year to $6,010,000,000 Driven by growth in whole product groups, except the radio frequency communications subgroup, H1 operating margin was 15.5 percent and net income was $776,000,000 On Q3 2021, at the midpoint of our outlook, We expect net revenues in the Q3 to be about $3,200,000,000 representing an increase of 20% year over year and 7% sequentially. Gross margin is expected to be about 41% at the midpoint. For the full year 2021, we will now drive the company based on the plan for full year 2021 revenues of about $12,500,000,000 plus or minus $100,000,000 Year over year increase of 22.3% versus our prior plan of 18.4% growth at the midpoint. This growth is expected to be driven by strong dynamics in all the end markets we address and Our Engage customer programs. We also now plan to invest about $2,100,000,000 in CapEx to support the strong market demand and our strategic initiatives.
Now let's move to a detailed review of Net revenues increased 43.4% year over year with higher sales in our 3 product groups And all subgroups, except as expected, the RF Communications subgroup, Year over year sales to OEMs increased 38.4% and 53.1% into distribution. On a sequential basis, net revenues decreased 0.8%, but we are 300 basis points above The midpoint of our outlook, ADG and MDG reported increase in net revenues On a sequential basis, while AMS liquid. Gross profit was 1.21 Sorry, dollars 1,000,000,000 increasing 66.1 percent on a year over year basis. The gross margin increased by 5.50 basis points year over year to 40.5%, mainly driven by the full saturation of our FAS, compared with the high level of unloading charges last year, driven as well by manufacturing efficiencies, favorable pricing and improved product mix. These positive drivers were partially offset by negative currency effects, net of hedging.
Our Q2 gross margin was 100 basis points above the midpoint of our guidance, mainly thanks to more favorable pricing and improved product mix. 2nd quarter operating margin increased to 16.3% from 5.1% in Q2 2020 With improvements in all three product groups, net operating expenses were $725,000,000 Net income increased to $412,000,000 from $90,000,000 in Q2 2020, And our diluted earnings per share were $0.44 Looking at the year over year performance, All product groups registered double digit growth. ADG revenues increased 48.2% On growth in both automotive and in power discrete, Hermes revenues increased 62.3% on higher analog, NEMS and Imaging product sales. MDG revenues increased 22.3% on growth in microcontrollers, partially offset by the expected By product group, on a year over year basis, all product groups Showed improvement in operating margin. ADG operating margin increased to 9.5% from 2.3%.
AMS operating margin increased to 18.6% from 9% And MDG operating margin increased to 22.9% from 15.9%. Net cash from operating activities increased to $602,000,000 in Q2 compared to $387,000,000 in the year ago quarter. Free cash flow increased to $125,000,000 compared to $28,000,000 in the year ago quarter. With CapEx of $438,000,000 versus $312,000,000 in the year ago quarter. During the Q2, we paid $52,000,000 of cash dividends to shareholders, and we executed $156,000,000 share buyback, completing our $750,000,000 share repurchase program launched in 2018.
On July 1, 2021, we announced The launch of a new share buyback program of up to $1,040,000,000 to be executed within a 3 year period. Our net financial position was 1 €800,000,000 at July 3, 2021 compared to $1,190,000,000 at April 3, 2021. It reflected total liquidity of $4,250,000,000 and total financial debt of $3,170,000,000 During Q2, we exercised the call option for the early redemption of our 2024 Trangibles convertible bond issued in 2017. The settlement of the $750,000,000 principal amount bond is expected to be completed in Q3. Let's now discuss the market and business dynamics.
During the Q2, we were again operating with the backdrop of strong demand, stretching the global supply chain. We have continued to work closely with our customers across all verticals and channels to adapt to this difficult allocation situation. At the same time, we were and are optimizing our investments to increase our manufacturing capacity. COVID-nineteen continues to be a challenge for the world. During Q2, we saw the spread of new variants, especially in some of the countries in Asia where we operate, such as in India earlier and more recently in Malaysia.
Over these days, we feel particularly close to and we strongly support our colleagues And their families in Malaysia seriously hit by this new wave. Due to this situation, we recently temporarily closed our assembly plant in Mala, Malaysia. Following approval from the authorities, we resumed operations after 11 days of closure. Moving to Automotive Verticals. Bookings remained strong in the 2nd quarter with Demand still well above our current and planned manufacturing capacity.
Bookings now cover about 18 months of demand, and We are working on allocating our planned capacity for next year. Our customer activity related to the long term Trends of electrification and digitalization continue to be stronger in Q2. In clarification first, we added to our list of design wins for silicon carbide devices in applications such as DC DC converters and onboard chargers. We announced a strategic cooperation with Renault Group Androno, key innovation partner, ST will benefit from significant volumes of this power modules and wideband gap power transistor from Overall, our silicon carbide engagements increased again During the quarter, now with 81 ongoing programs equally split between industrial and automotive with 68 Customers, our strong pipeline of design wins continues to support well our target of $1,000,000,000 of silicon carbide revenues by 2025. We are progressing with our manufacturing investments in silicon carbide, in line with our plan To increase tenfold the front end capacity versus 2017 and to have 40% of our substrate needs internally sourced by 2024.
We are ramping production in our Singapore factory and earlier this week announced that we have manufactured in our Sweden site Our first 200 millimeter of silicon carbide wafer, a key step in our capacity increase plan. We are also investing in growth of our internal back end manufacturing capacity for SiC products With expansion of our Bouzkura site in Morocco alongside our plan in Shenzhen, China. We are maintaining our technology lead in silicon carbide, helping in high volume our 3rd generation transistors for multiple automotive customers globally. This represents a major improvement in performance and in competitiveness versus the preview generation. We are also progressing on our next generation transistor designs in line with our plans.
We are taking steps to accelerate our 300 millimeter power strategy. We produced in cold our first IGBT 300 millimeter wafer load For engineering qualification, this technology will be transferred to Android AirTree with production ramp up as soon as the fab is ready. Moving to other complementary technologies In Electrification Subsystems, the high power products for motor control and module control modules, 32 bit microcontrollers for IGBT Inverters and Electronic Fuels Technologies for Electrical Vehicle Power Distribution. Moving to car digitalization. We are focused on technologies and solutions for driver assistance and autonomous driving, V2X communication and embedded processing solutions supporting new car architecture.
During the quarter, we announced new additions to our next generation automotive MCU family, so called Stella, which provides a scalable integration processing platform for advanced vehicle electronics. Also, in our automotive sensor business, we won multiple sockets with motion sensors for GNSS modules and navigation units, telematics, infotainment system, as well as key fob. Let's moving now to industrial. During Q2 demand, we are also very strong in high end And Consumer Industrial, both as distributors and OEMs. Factory Automation continued to be one of the main demand drivers, Together with Powertools, home appliances, motion control and power related application, including Renewable Energy.
Inventories of our products at distributors continue to be lean across All product families with high inventory turns, point of sales remained strong in the 2nd quarter across all products and all geographies. We address many applications across industrial end market With our general purpose and secure MCUs, power and energy management solutions and our sensors and analog products. In embedded processing, we are continuing to strengthen our leadership by expanding our SCM32 family with a particular focus on wireless connectivity, security and artificial intelligence. During the quarter, we took an important step. We acquired Cartesium, The company is specialized in software enabling artificial intelligence from the edge, adding Their machine learning technology to ST existing solutions will provide the best edge artificial intelligence solution portfolio We had many design wins for our SCM32 products during the quarter, and I would like to mention just one where we design in multiple products in a drone for home security.
Our second objective in Industrial is expansion in Power and Energy Management. Here we capture a number of wins with our power discrete portfolio. For example, again, with silicon carbide transistors and modules, with high and low voltage silicon MOSFET and with IGBTs. These were in applications such as solar inverters, energy storage, Charging Infrastructure, Industrial Power Supplies, Power Adapters, Home Appliances And finally, air conditioning and lighting. The 3rd objective is to accelerate on growth in analog and sensor for industrial.
In the quarter, we had many new designs with our analog products with awards in application like We also continued to win business in sensors for industrial applications. One win I would like to mention is for circuit breaker products for the major player with the low power industrial grade accelerometer. Moving now to personal electronics market. We saw the same trend as Q1 with strong demand both for smartphones and other connected devices, including wearables, tablets, mirrorable, 2 wireless stereo headsets and game consoles. In Personal Electronics, we continue to progress with our 2 strategic objectives.
1st, to lead in selected high volume smartphone applications with differentiated products and custom solutions. In Q2, we won sockets in flagship devices with motion sensor, Multi zone time of flight ranging sensor for laser autofocus, wireless charging products, touch display controllers and secure solutions such as embedded SIM and secure elements with Near Field Communication. Our second objective is to leverage our board portfolio to address high volume application, including wearable devices. Here, we are the wins with a broad range of light, motion and environmental sensors, including a new generation waterproof pressure sensor, as well as with analog and power products and microcontrollers. We are gaining traction with our 60 gigahertz transceiver products for very fast contactless data transfer, the famous ST60.
Here, we achieved key design wins and production launch for projects with multiple customers in different applications. We progressed with our solution for augmented reality based on laser scanning and we signed a development agreement with a leading player for laser driver ASIC to be used in next gen smart glasses. In Communication We continue to see the adoption of 5 gs related products as well as sustained demand, especially for notebooks and Chromebooks. We also saw low cost orbit satellite programs launched in a number of countries. We have 3 strategic objectives in our approach to this end market.
1 is to address selected application in cellular and satellite communication infrastructure. In this area, we received multiple RF SOI front end module awards, as well as several RF ASIC projects for Telecommunication Infrastructure. We also started production for a 2nd generation RF front end IC for the user terminal of a satellite system from a leader in this area. Our other objectives are to address selected high volume application with differentiated products or custom solutions, while leveraging our broad portfolio. Our wins here include time of flight and motion sensors for laptops and tablets, as well as many general purpose MCU design wins.
We also run production of our global shutter image sensor for a computer vision application at a major OEM. We also ramped production of the first ST design Pietro Mims printed in a commercial inkjet printer following a multi year development with a leading printing company. Now let's move to a discussion of the Q3 outlook. For the Q3, as a midpoint, we expect net revenues to be about $3,200,000,000 representing year over year and sequential growth of 20% and 7%, respectively. Gross margin is expected to be about 41%, representing a year over year and sequential increase of 500 basis points and 50 basis points respectively.
Looking at the full year, we will now plan to drive the company base on 2021 net revenues of $12,500,000,000 plus or minus $100,000,000 This plan will translate into year over year growth of 2.3 percent at the midpoint. Drivers of this expected growth are the continued strong dynamics in all the end markets we address and our engaged customer programs. Our updated 2021 CapEx plan of about $2,100,000,000 will help increase our manufacturing capacity to continue to support the strong global demand of our customers. It will also support our strategic manufacturing initiatives such as our AgroAmp 300 millimeter fab. We were recently announced that we are bringing Tower Semiconductor on board to accelerate the ramp up to large volume and scale.
To conclude, in the Q2, our net revenues and gross margin came in at the high end For the full year 2021, we are driving the company with a plan based on net revenue of $12,500,000,000 Plus or minus $100,000,000 This growth stems from the expected continuation of strong dynamics In all the end markets we address and our engaged customer programs, we will continue to focus On our customers, adapting our supply chain to support the current strong demand and to fuel longer term growth. Thank you. And we are now ready to answer your questions.
We will now begin the question and answer session. The first question comes from the line of Alexandre Peterk from Societe Generale. Please go ahead.
Yes, good morning and thanks for taking my question. Just firstly on your revenue guidance Could you help us understand if this is mostly driven by pricing or volume or is it really both? And then as point of detail, at what point do you expect the RF business to return to growth within MDG? And Again, on this division, what explains the strong margins? Is it mostly microcontroller's pricing or anything else at play here?
Thank you so much.
Thank you for your questions. So Laurent, Lou will answer.
Thank you, Jean Marc. Thank you and good morning to everybody. About our guidance on the revenues, yes, we have increased in respect to the Previous visibility, how it comes to this increase? Well, I have to say that it's a combination. It's a combination definitely of volumes.
There is more volumes that we see. You will see also that our gross margin is improving and here we have Positive efficiency from our manufacturing machine. Of course, we are trying to get The maximum that we can get from the investment that we are doing, so this will translate also in a little bit Higher volumes that will help. And definitely it's also true that we are enjoying an environment in pricing that It's a little bit better than we were expecting. The combination of these two factors definitely are the one that allow us, Let's say to have increase in our guidance as well as also a better visibility on some, let's say, engaged customer products That at this stage, we see, let's say, materialize with a little bit higher level in Second question was about the radio frequency.
When we will see, let's say, radio frequency, Let's say improve on we do expect, let's say, that Already with our guidance of next quarter, there will be an improvement in terms of revenues for the radio frequency. And definitely, our expectation is that next year, there will be a significant change in the trend on this subgroup. And we will see, let's say, with the engaged customer progress that we have definitely an improvement in the revenues. But I would say that Q3 will be still a difficult quarter. Q4 will start to see, let's say, a Significant improvement and then the trend there will be improvement trend all over the next year.
And just briefly on margins?
The margin of MDG, the rationale for the strength of the operating margin in MDG?
MDG, let's say, is improving the margin, especially in the areas of microcontroller. We had positive impact on the product mix, let's say, In this area, positive. And definitely also, let's say, it's thanks to a balance with a good, let's say, level of Price environment that we are experiencing in this area, let's say, of course, this is where we have Increase and stability in terms of pricing. This helped the market. Then for sure also thanks to the fact that our micro Controllers are bringing more and more added value to our customers and here is very visible also the return that we have done In our investment in R and D and also we started to see some return in our investment that we have done, let's say, in the new acquisition.
So at the end, this is where we were expecting to have a good return and these are materializing.
Very clear. Thank you very much.
Thank you, Alex. Next question please.
The next question comes from the line of Matt Ramsay from Cowen. Please go ahead.
Yes. Thank you very much. Good morning, everyone. Guys, I just wanted to ask about The seasonal patterns in some of your divisions, there's going to be some flagship product from one of your large Customers that maybe launches on time versus a little bit of a delay last year, but in particular your AMS division seasonality is much, much stronger In the results that you just reported in the Q2 than it was seasonally last year, and I wonder if you might comment on that. Is it internal versus external supply that was imbalanced?
Is there a different change in sort of buying patterns? And maybe how we can expect seasonality in some of the businesses in the Q3 guidance? Thank you.
Thank you for your question. I already anticipated during previous calls, okay, that this year, Okay. The profile of the revenue for Personal Electronics will be rather different than last year. Because last year, you know that from, let's say, February to April in Asia, the COVID impacted a lot Activities, okay, and also delayed, okay, some programs development. And as a matter of consequence, okay, push out, Let's say, program start and the revenue, okay, in Q2 last year was very low.
And when we entered in the year, okay, I already announced that this year, okay, we see a much better profile. And then, okay, after I do not comment customers, let's say, results and success, I guess you have seen this year One of the major announcements, okay, of 1 customer over performing. And of course, okay, the vendor attached To this customer are benefiting of better seasonality this year in Q2 2021 versus last year.
Thank you, Jean Marc. Just as my follow-up question, Lorenzo, I mean, 41% Gross margin, I guess, thinking about things up 5 full points year over year, obviously, the under loading charges have But as we look out forward and you increase CapEx, add more capacity, potentially get more capacity at foundries And there are some rumblings of increased pricing from some of the foundries to their customers. How do you Think about gross margins trending from here as we look forward and the business grows? Thank you.
Yes. So we see In the next quarter, gross margin in the range of 41%. I would say that what is our expectation is on this level considering the situation of our fabs manufacturing fully loaded For sure to remain stable this year on these kind of levels, at the end for the total year, we do expect it to be a little A bit higher than the 40% gross margin with the Q4 that will be similar to Q3. Moving forward, we do We expect that we have all the ingredients to remain on this level of gross margin Constantly, of course, it will depend on the evolution of the market. But for the time being, let's say, we see the Very positive, continuing to be very strong moving forward.
These days more or less what we can say about the level of gross margin.
For this year. For this year, yes.
Thank you very much guys. Appreciate it.
Thank you, Matt. Next question please Andrea.
The next question comes from the line of Sebastian Sabovich from Kepler Cheuvreux. Please go ahead.
Yes. Hi, everyone, and thanks for taking the question. What kind of visibility do you have for 2022 at this time of the year, basically, do you start to receive any substantial orders That will be around during 2022. Any specific verticals? And as a follow-up, On the OpEx side, how should we model the OpEx in Q3 and in Q4?
Thank you.
So thank you. Marco Cassis will take the question for the other booking and Lorenzo for the other questions.
Thank you very much for your question. Yes, in Q2 and this is to across all the segments, We have seen our orders booking extending 18 months, so basically covering all the 2022. And I have to say that The demand is higher than our capacity and our plant capacity. So we are working now to allocate the
In terms of expenses, So to model, let's say, but we I'm talking about net expenses, not including also the grants in the other income and expense. So in the Q2, we were landing at the range of $725,000,000 in the quarter for the We continue, let's say, to really push on our programs in R and D. We try, let's say, to accelerate our effort in this respect. So my expectation for the 2nd part of the year Is that we will land our expenses in the range Per quarter in the range between $735,000,000 $740,000,000 expenses as per quarter. This is The current visibility that we have, I would say both, let's say, definitely for Q3 And also for the year, when you look at the total year, we will end the year, let's say, with the quarterly expenses in that range.
So just to complement the question about the coverage. If you take the backlog on the requested date from customers, we have in our hand, Basically, it is covering 30% above the planned capacity we have for this year. And it is covering above the full capacity we plan for next year already. And based on the capacity CapEx, we have this year on the CapEx we will, let's say, plan next year. So you see the coverage, okay, for 2021 2022 is very, very strong.
And of course, okay, let's say, the additional dynamic is that this coverage is more and more done with, let's
The next question comes from the line of Sandeep Deshpande from JPMorgan. Please go ahead.
Yes. Hi. Thanks for asking. Let me on. Congratulations on good results this morning.
I have a question Your microcontroller business, I mean, when you look at your microcontroller business, it is growing incredibly strongly year on year when you look at the headline numbers, especially when you say that there is RF there, which has So given that the market is saying that there are shortages and you are supplying the market with Potentially 30% up year on year in microcontrollers. Is there not a risk of oversupply here happening sooner than what And I have one quick follow-up.
So here, Again, what we are monitoring on microcontroller is really the consistent dynamic between the POS, the POP. We monitor also the inventory level at the distributor, clearly, and we are monitoring, okay, let's say, the very Both market because we know it could happen. All these, let's say, KPI are on the green. So and are on the green Because for the time being, overall, there is a shortage, okay, because microcontroller are basically using capacity Either from 8 inches wafer fab on, let's say, 180 nanometer technology up to 130 Or massively, they are using 12 inches fab from 90 nanometer to 40 nanometer. And this capacity is fully saturated.
So there is no risk of other supply. And also simply because no new fab, okay, will be put On the market, before a longer period of time, except, okay, fabs or FST.
I mean, my other question is regarding your CapEx. I mean, you raised CapEx again. Can you Highlight where the spending is occurring from here. Is this to do with your particular programs with some customers? Or is this more general CapEx associated with your Agrate Fab, etcetera?
No, it's our global capacity Increase adaptation, okay, on test, okay, on assembly and yes, in a certain Then in WhatsApp, okay, now part of the $2,100,000,000
of CapEx,
Okay.
We had lost use on this. Sorry for that. I forgot. Thank you. Thank you very much for this.
Next question, Andrea.
The next question comes from the line of Stephane Houri from ODDO BHF. Please go ahead.
Yes. Hello, good morning. So the first question is to know that with your Full year 2021 sales guidance upgrade, you basically view Q4 at about €3,300,000,000 if I'm correct. So my understanding was that there was no available capacities anywhere, neither externally nor internally. So Is it new capacity that you're building up that are arriving faster than expected?
Or is it coming from foundries? And the second question is could you share with us your view on 2020 CapEx because as you said with the CapEx of this year you're adding €1,400,000,000 to €1,500,000,000 So if it's the same next It means that the €15,000,000,000 target could be within reach in 2023 under the current condition, if correct?
In fact, okay, our work capability, In fact, we achieved $3,300,000,000 in Q4. And when you assess capacity, in fact, okay, we can go up to $3,400,000,000 This is $100,000,000 of range we have provided, okay, for random event. But From capacity perspective, it is 3.4. Our capability to go to 3.4 is related For the Wafer fab side, to the CapEx, okay, we have injected in H1, okay, taking into account The time you hook up equipment, you qualify them in one cycle time. Basically, okay, we are enjoying The CapEx we had in H1, okay, to support the revenue definitively of Q4.
I have to say, unfortunately, That it has been it is offset by the commitment of some fund rates, Okay. We will receive less wafer in H2, mainly on our sub general purpose device From Foundry Partners because they allocate more to automotive based on the, I guess, okay, You know the overall pressure on the automotive market.
Not our automotive.
But not our automotive, unfortunately. So now, clearly, our The ability to grow mainly in H2 is related to our internal manufacturing, offset it for a while, Okay. Next year will be another story, offset for our current uptime by a decrease of volume supply of foundry H2 versus H1.
And the 2022 CapEx?
About 2022 CapEx, I will communicate As usual, we are working on it. We are working on it. We are working closely with our equipment vendor Because, okay, you know, cycle time of equipment increase a lot. So this is something we are working on, and we, of course, will communicate
The next question comes from the line of Andrew Gardiner from Barclays. Please go ahead.
Good morning all. Thanks for taking the question. Jean Marc, I had a follow-up to that last one in terms of CapEx, particularly as we look into next year And just the potential for capacity expansion, given the lead times on the equipment side that you mentioned and the fact that This equipment really needs to be installed in the first half of next year in order to give you sort of upside relative to the current plan that you might have for 2022. Isn't your effectively, you already know what your maximum capacity for next year is given that given those lead times? Or do you feel like you've got is there still some flexibility with your equipment providers to actually upside that or not?
Thank you.
No, no. We have a clear view, first of all, okay, where we have, let's say, cleanroom What's our fab expansion capability and where we can receive equipment? Well, first of all, It will be agrati because we will start to receive equipment in agrati end of this year. And agrati 300 millimeter will Start to contribute to ST revenue by Q4 of next year, 2022. Then we have engaged in parallel.
As soon as we have seen the market After in December, we have decided immediately an expansion of coal. You know when we share with you the manufacturing strategy, in coal, we are capable, okay, to In Kroll, we are capable, okay, to add on material surface of cleanroom in 1 year And grow very fast, okay. So starting end of this year, we will be capable Basically to increase the capacity of coal well, well above 9 ks wafer per week. So it will be, let's say, a very strong leverage to support the market we address. We will fully Fully saturated, okay, the 8 inches fab in Singapore, we bought, okay, 2, 3 years ago from Micron.
So from infrastructure point of view, okay, we know exactly where we can add equipment and we have booked for the slot. And so yes, I confirm to you, okay, the sales and operating plan, okay, of 2022 is well known. Now the challenge for us is allocation. It's all we allocate, okay, to verticals, region and customers. But From, let's say, volume point of view, technology cluster, package cluster, manufacturing location, For the feedback, we have a very, let's say, accurate view for next year and secure.
Understood. Thank you, Jean Marc. If I could just follow-up on the point you made on Kroll, you think 9,000 wafer starts per week by the end of this year. With that, I recall you saying in the Q1 that you
were in
for that?
Next year.
Next year. Okay. And then just quickly on the pricing point where you're highlighting that as part of the reason for gross margin outperformance in 2Q and 3Q. Is that you just given the time lines there, is that primarily on mass market distribution pricing? Can you comment perhaps on the difference between That versus your longer term contracts?
And how are those negotiations progressing? Are you given the tightness we see in the market, are you able to get more Better pricing after those longer term negotiations?
Mark, I would reply to this one. As you can imagine, we cannot go into detail of how we are splitting the price increase. But overall, the approach is, let's say, fair And it is across the different segments. And of course, it is a price increase, which is happening through the full supply chain and The price environment is in this moment positive for us.
Okay. Thank you, guys.
Thank you, Andrew. Next question please, Andrea.
The next question comes from the line of Didier Shemama from Bank of America. Please go ahead.
Good morning. Thank you for taking my question. I'd just like to push on a little bit on pricing just to clarify things a little bit. 1 of your biggest competitors in Japan this morning just guided 500 basis points above on gross margins For Q3, I just wondered, clearly, 41% gross margin is a nice surprise. I'm just Wondering how much conservatism is actually baked in that relative to what these guys are saying.
And related to that, I just wondered if you could Quantify on the gross margin the impact of the Malaysia fab closure or back end site closure for 11 days, if it has an impact And whether that unwinds nicely in Q4? And I've got a follow-up. Thank you.
About Malaysia, the main impact that we are going to have in Q3 is on the top line and more than on the gross margin. On the gross margin, we will have a few Basis points impact, but at the end, let's say, it's not the main impact that we will got during this quarter. Actually, you can understand that with some days of Closing, let's say, definitely we will have impact on our ability to serve our customers. This is The main impact that we have for our Malaysia. Yes, about the pricing, Yes, for sure in our gross margin there is a positive impact in term of pricing.
You know, it's increasing in pricing. And also, let's say, I would say that Together with that, we have also positive impact on the product mix that is helping our gross margin. I can tell you that definitely the increase in price is not by 100 basis points, not we are not there. Let's say it's much less than that, but in respect to different situation, let's say, in the past in which substantially there was More balancing between capacity and demand and where the pricing impact was usually negative, Bringing down, let's say, and only, let's say, having a negative impact on our gross margin and Maybe, let's say, somehow offset by the product mix, by the innovation here, the two things together. And so there is definitely help in our gross margin.
For sure, let's say, I can say that compared To the level of the previous quarter, I can say that, I mean, in Q1, Where we were at an range of 39%, our price increase has contributed By the a little bit less than a half in improvement.
Okay. My follow-up is on Automotive. So I saw that you signed a supply agreement with Renault and it looks like Virtually all the other OEMs, automotive OEMs are now in sourcing the inverter. I asked that question last quarter and I think you told me that Jean Marc that The Tier 1s were your main customers, which I appreciate. It looks like the Tier 1s, at least some of them are going to get squeezed out in the Transition to electrical vehicles.
I just wondered who's going to
take the gross margin of those Tier 1s? Is it equally Split between the automotive OEMs and yourselves, or do you feel that your engineering capabilities are going to warrant Better pricing power. And is that part of the reason effectively why you feel confident now to sign long term contracts With some of your customers that are nonconsentable with some recent pricing, if I quote what you just said?
Normally, here I think the automotive industry, for sure, is facing, okay, 2 major transformation. Well, there is one transformation which is well known, which is, okay, the one related To the electrification, clearly, okay, with more and more battery based electrical vehicles, we are here clearly The powertrain and what is around the powertrain is total efficient, Okay. So and the sourcing of the electronic subsystems, the business model related to the electronic subsystems Could be really different, okay? And here, okay, one very great example is the model of Tesla. Well, the other transformation that now the automotive industry, okay, is doing better, I cannot comment too much, okay, because we are Not used to comment our customers, let's say, plans and actions.
Yes. We will see in the future, let's say, some certainly some carmaker, okay, Doing maybe more the software and the design of some electronic subsystem. And then we'll subcontract to EMS, and we'll not subcontract, okay, the Town Key solution to Tier 1. But we are convinced that Tier 1, let's say, model will remain. So that's the reason why, okay, for us, okay, What is important for the short term to do and for the long term to do?
First, the short term To supply them fairly and properly in full respect of the Tier 1, which are our customers. When you have a carmaker making its own system, they address us straight. This is an example of Tesla as an example. For the long term, ST to develop, let's say, technology package and module to enable this transformation. And here, We have to say, we are the both cooperation.
We have cooperation where we work on platform with Tier 1. And the most well known one. And we have example of cooperation, okay, like the one of Renault we have announced. So we are, let's say, convinced that in the future, okay, you will see, let's say, dual, hybrid or complementary model Living together, but more than that, okay, I cannot comment, okay, on my customer.
Can I squeeze a quick one on silicon carbide? The 8 inches substrate announcement, can you just clarify When you expect to be in volume production for that product? And what could be the impact on gross margin if and when you ramp that? That would be great. And congrats on this, by the way.
Thank you for the congrats. We will have to move to mass production. So we will move to mass production When our own fabs will be, let's say, set up in Catania, so this one will be done, okay, End of 2023, 2024. But we will start, okay, on 8 inches before And mainly sourcing from 3, okay? And we will start on Diodes, okay, next year, and we will start on transistor in 2023.
And then, okay, we will source internally, okay, transferring this 200 millimeter technology, Okay. To our Catania infrastructure, when it will be ready. And in Catania, we will have a mix between 150 millimeter and 200 millimeter, Because it will take time, okay, to have everything converted, okay, to 200 millimeter. Well, then about the contribution of 200 millimeter to gross margin. Well, you know, In semiconductor, okay, it's usual leverage for cost improvement is water size increase, so 200 millimeter.
It is a die shrink, so our 4th generation of transistor device we are developing will shrink our transistor. And then you work on the design on modules. And here on modules, okay, we are optimizing our design for custom design solution. And we are working in cooperation with important module maker, okay, also to decrease the cost. But I cannot tell you, okay, the detailed percentage of the contribution of the gross margin to Silicon Carbide.
But I confirm to you our cost reduction program for silicon carbide is very strong.
Okay, wonderful. Thank you.
Thank you. Thank you, Didier. So we have now it was a very long question, very interesting. So unfortunately, we have now time only for one more question. The last one.
The last question comes from the line of Amit Harshandani from Citi. Please go ahead.
Thank you. Good morning, all. Amit Harchandani from Citi. If you don't mind me squeezing in 2. The first question is really with regards to the semiconductor cycle, a lot of debate in the industry on peak cycle fears, but based on Inventory comments, pricing comments, your visibility, why shouldn't we think of ST growing double digit Purely based on some of the numbers you have given out there.
So your perspective on the semiconductor cycle and any thoughts on growth visibility into next And secondly, if I may, a lot of debate also about 3 d sensing. You have been a key player In the industry, there is talk of technological changes there. Could you give us a sense for visibility on your Engage programs? I think in the past, you have talked about a 3 year visibility. So any thoughts on 3 d sensing?
Where do you stand today? Thank you.
The first question is about?
About the cycle and the visibility we can get whether there is debate on peak cycles or these kind of things. So Maybe difficult to answer on the cycle itself, but the visibility of FTE growth in fiscal year 2022 as of today in this concept
This is what I said a few minutes ago. Today, we have a The coverage in terms of backlog, which basically this year is 30% above our maximum capacity plan. And with an increase of our capacity material increase of our capacity next year, The backlog already fully covered, okay? And more and more, you have non considerable order. Well, it is simply due to the fact that there is an acknowledgment of the electronic industry that the Capacity limitations and what we classify semiconductor shortage We last, okay, next year, okay, up to next year minimum, especially on the onboarded electronics, where you have, Let's say, specialty technology from 0.35 micron to 28 nanometer, We know that all this technology and capacity related capacity are very saturated and will be saturated for Next year as well.
So that's the reason why, okay, no customer acknowledges and put orders, okay, properly, let's say, plan. So we consider the visibility is unprecedented, okay? And the booking is really consistent, okay, with this fact. This is what we can say. Again, we monitor the inventories in the supply chain through our distribution channel.
And I confirm to you that whatever are the geographies, Whatever are the product group, these inventories are very lean. The inventory turn is incredibly high. There is consistent growth between what we supply to distributor and what they sell. So there is absolutely no, Let's say, indication of visibility, which decline or something like that. So this is what I can say about the visibility.
About, okay, let's say, face ID, I can, let's say, simply repeat what I say. You know this is a complex system. This is a you have software you have very complex software in, okay. You have hardware, let's say, which are, let's say, custom design components. And here, okay, we have visibility, okay, 3 years ahead of what is happening.
And And that's the reason why we are, let's say, comfortable with what I said for 20 21 and we have a very good visibility for 2022 and onward. But more than that, I cannot comment.
That's very helpful. Thank you, Jean Marc.
Thank you very much, Amit. And this will conclude the session for today.
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