BorgWarner Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, welcome to the STMicroelectronics First Quarter 2023 Earnings Release Conference Call and Live Webcast. I'm Andre, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. At this time, it's my pleasure to hand over to Celine D'Arquier, Group Vice President, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Andre, and good morning. Thank you, everyone, for joining our Q1 2023 financial results conference call. Hosting the call today is Jean Marc Sherry, ST's President and Chief Executive Officer. Joining Jean Marc from the call today are Lorenzo Blondi, President of Finance, Purchasing, and Resilience and Chief Financial Officer and Marco Casis, President of Analog, Men's and Sensors Group and Head of STMicroelectronics Strategy, System Research and Applications, Innovation Office. This live webcast and presentation materials can be accessed on Hesiod's Investor Relations website.

Speaker 1

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 STA results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor statement contained in the press release that was issued with the 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 have an opportunity to ask questions during the Q and A session, Please limit yourself to one question and a brief follow-up. I'd now like to turn the call over to Jean Marc, SG's President and CEO.

Speaker 2

So thank you, Celine, and good morning, everyone, and thank you for joining ST for our Q1 2023 earnings conference call. So let me begin with some opening comments, Starting with Q1. So 1st quarter net revenues of $4,250,000,000 came in better than expected in Automotive and Industrial, partially offset by lower revenues in Personal Electronics. Gross margin of 49.7 percent came in 170 basis points above the midpoint of our guidance, mainly due to product mix in a price environment that remain favorable. Looking at our year over year performance, net revenues increased 19.8%, Gross margin at 49.7 percent was up from 46.7%.

Speaker 2

Operating margin increased to 28.3% from 24.7% And net income grew 39.8 percent to $1,040,000,000 On a sequential basis, net revenues decreased 4%. On Q2 2023, At the midpoint of our 2nd quarter business outlook is for net revenues of about $4,280,000,000 representing a year over year increase of 11.5% and a sequential increase of 0.8%. Gross margin is expected to be about 49%. For the full year 2023, We will now drive HD based on a plan for full year 2023 net revenues in the range of $17,000,000,000 to $17,800,000,000 representing a year over year growth range of about 5% to 10%. Now let's move to a detailed review of the Q1.

Speaker 2

Net revenues increased 19.8% year over year, driven mainly by ADG and MDG, while AMS revenues decreased slightly. Year over year sales increased 17.5% to OEMs and 24% to distribution. On a sequential basis, Q1 net revenues came in 110 basis points above the midpoint to our outlook. This performance was driven by better than expected results in ADG and continued strength in automotive And in MDG with general purpose microcontrollers remaining strong in Q1. Overall, Q1 net revenues decreased 4% on a sequential basis with ADG up 6.5%, MDG lower by 1.1 percent and AMS decreasing 20.3 percent, reflecting lower than expected revenues in personnel electronics on top of seasonality.

Speaker 2

Gross profit was $2,100,000,000 increasing 27.5% year over year. Gross margin increased to 49.7 percent compared to 46.7% in the same quarter last year. The 300 basis point expansion was driven by improved product mix, favorable pricing and positive currency effects, net of hedging, partially offset by higher manufacturing costs. Q1 operating margin was 28.3%, up from 24.7% in the year ago period, with LDG and LDG contributing to the 360 basis point growth in operating margin. On a year over year basis, net income increased 39.8 percent to $1,040,000,000 from the $747,000,000 and diluted earnings per share increased 39.2% to $1.10 from $0.79 Looking at our year over year sales performance by product ADG revenues increased 43.9 percent On the double digit growth in both automotive and power discrete.

Speaker 2

AMS revenues decreased 0.9% with lower revenues in analog and MEMS offsetting an increase in imaging. MDG revenues increased 13.2% with growth in both microcontrollers and RF communications. In terms of operating margin, 2 of 3 product groups delivered year on year expansion. MDG operating margin increased to 32% from 18.7%. MDG operating margin increased to 36.2% from 33.7% And Hermes operating margin decreased to 20.4% from 22.9%.

Speaker 2

Net cash from operating activities increased to 39.7 percent to $1,320,000,000 in Q1, compared to $945,000,000 in the year ago quarter. 1st quarter CapEx was $1,090,000,000 versus $840,000,000 in Q1 2022. Thanks to the strong growth in net cash from operating activities, free cash flow grew to $206,000,000 in Q1 2020 3 versus $82,000,000 in Q1 2022. Cash dividends paid to stockholders in Q1 2023 totaled $54,000,000 In addition, Feet executed share buybacks of $87,000,000 as part of our current repurchase program. ST's net financial position of $1,860,000,000 as of April 1, 2023, reflects total liquidity of $4,520,000,000 and total financial debt of $2,660,000,000 Now let's now discuss The business dynamics.

Speaker 2

During the Q1, demand in the automotive market And in the power and energy production of the industrial market remains strong, driven by continued semiconductor provision and the ongoing structural transformation. Factory Automation, Robotics and Building Control grew revenues in line with our strong backlog, While new orders normalize, demand in Consumer Networking, including data centers and servers, softnet, and demand for personal electronics and Computer peripheral further weakness. Our backlog is now about 6 quarters at the midpoint of our full year 20 In automotive and industrial, we are still well above the capacity we can serve on some technologies and packages. In the other end markets we serve, we are back to a more normal level of coverage. Moving now to our Q1 review by the end market.

Speaker 2

In automotive, demand in the Q1 remains strong. Against this backdrop, we continue to execute our strategy for car electrification, in particular in silicon carbide. The number of ongoing silicon carbide programs increased again during Q1. Between the automotive and the industrial markets, We now have 130 projects spread over 85 customers. About 60% of these projects for automotive customers.

Speaker 2

We now expect to generate about $1,200,000,000 of silicon carbide revenues in 2023, broadly spread among many different customers. We had designed wins in Q1 with both silicon and silicon carbide power discretes in automotive applications. This included an HSTAC power module and silicon carbide MOSFET for traction investors as well as projects with silicon MOSFET in battery management system. In mid April, we announced that we signed a multiyear supply agreement with ZF for silicon carbide devices. Under this agreement, we will supply a volume of double digit millions of devices that will be integrated in ZF's new modular inverter architecture going into production in 2025.

Speaker 2

Speaking more broadly about our automotive portfolio serving car electrification, we won designs for multiple vehicle makers, including our stellar automotive MCU, for our onboard charging application. In car digitalization, we have a number of design wins in key areas. In next generation car architectures, our eFuse products, For a Zonal controller solution gained traction. In driver monitoring system, we were successful with our Global Shutter Automotive image sensors. Legacy automotive remains dynamic And silicon perversion continues to increase.

Speaker 2

Here, we had several wins for our SPC5 microcontrollers for VEQ Body Control as well as our latest product for the secure door zone platform. In our automotive sensor business, we won several new designs for VEQ dynamics, airbags and anti theft applications. Moving now to industrial. Across the industrial market, we see 2 main trends Driving a structural transformation in the market and accelerating the increase in the semiconductor content, Digitalization of devices and systems and energy management and power efficiency improvement. During the quarter, demand remained strong overall in both OEMs and distribution with different dynamics across the areas we serve.

Speaker 2

In B2B Industrial, we continue to see strong demand in Power Energy, Factory Automation and Robotics, Building Control grew revenues in line with our strong backlog, but while new orders normalize. Consumer industrial touch size battery operated tools and home appliances softened. During Q1, we continue to see an expansion of design wins across 3 areas of the industrial market we focus on: B2B, Consumer and Specialized. Our broad offering enables us to support our customers with full solutions, Combining power, analog, sensor and embedded processing products, leveraging ST Unique position. Wins include the system solution comprised of power district, power management and STL32 MCUs in renewable energy applications and multi product solution for smart meters at Smart Grid Applications.

Speaker 2

We also won SUCCESS with intelligent power switches, motor drivers, industrial sensors and secure solution in applications such as industrial automation, asset tracking and cyber power supplies. In the quarter, we made a number of announcements related to our STM32 product portfolio and ecosystem. This included a new highly affordable MCU series to replace 8 bit MCUs, A new high performance MCU service with health security features, a new IRNSS MCU and a new MPU products. We also continue to build the best developer ecosystem with 2 industry thirds. We introduced a certified MCU security platform that combines hardware and software to simplify development of secure embedded application.

Speaker 2

And we launched the world's 1st MCU Edge AI Developer Cloud that includes An online benchmarking service for edge AI models on MCM32 boards. Moving to Personal Electronics. During the quarter, our products were selected for flagship smartphones, Wedgees and other wearable devices, this include NFC controllers and secure element solution, Wireless charging products, MEMS sensors and time of flight changing sensors. In communication equipment and computer peripheral, New wins here included products for EDO satellites, a number of products for computer peripherals, including secure solution, time of flight sensor and MCUs and ASICs for communication infrastructure based on our proprietary technologies. Now I would like to mention that we issued our annual Sustainability report last week.

Speaker 2

A couple of key points. We are on track with our program to be carbon neutral by 2027, and We further increased our global sourcing of electricity from renewable energy, growing to 62% in 2022 from 51% in 2021. We were recognized by environmental nonprofit CDP, so Carbon Disclosure Project, as a global leader in corporate transparency and performance on water security, being one of the few companies to secure a place on its annual A list. Now let's move to our Q2 2023 financial outlook and our plan for the full year 2023. For Q2, we expect net revenues to be about $4,280,000,000 at the midpoint, representing a year over year growth of about 11.5% and a sequential increase of about 0.8%, both driven by solid growth in automotive and industrial, partially offset by the decline in personnel electronics.

Speaker 2

Gross margin is expected to be about 49% at the midpoint. For 2023, We confirm our plan to invest about $4,000,000,000 in CapEx with about 80% of this amount mainly related to increase of our 300 millimeter wafer and silicon carbide manufacturing capacity, including for silicon carbide, our substrate initiative. The remaining 20% is for R and D, laboratories, Manufacturing Maintenance Efficiency and our Corporate Sustainability Initiatives. Based on our visibility, we will now drive the company based on the plan for full year 2023 revenues in the range of about $17,000,000,000 to $17,800,000,000 representing a growth Over 2022 of about 5% to 10%. Automotive and Industrial will be the key growth drivers of our revenues in 2023.

Speaker 2

To conclude, as we have discussed, we are operating in an environment with Significantly different dynamics depending on the end markets we sell, But based on our leadership position, strategic approach and current visibility, we anticipate 20 2023 Another year of revenue growth and profitability improvement, so on our $20,000,000,000 plus ambition and related financial model. Thank you. And we are now ready to answer your questions.

Operator

We will now begin the question and answer session. The first question comes from the line of Didier Cheneurman with Bank of America. Please go ahead.

Speaker 3

Good morning. Thank you so much for taking my question. Jean Marc, I've got maybe a first question looking at the second half and sort of changing dynamics that you highlighted. There's been a number of sort of conflicting reports when it comes to the automotive market during Q1 earnings season. So can you just give us a sense of what your orders look like for the second half of twenty twenty three and perhaps the visibility you're having to 2024?

Speaker 3

And then a question for Lorenzo. I think you mentioned previously that gross margins would be broadly flat for calendar year 'twenty three. Obviously, your first half is running Quite a lot above that guidance. So any reason to change the full year guide on gross margin to raise that? Or do you have any other additional headwinds that you want to flag in

Operator

the second half? Thank you.

Speaker 2

So I will answer about the revenue for the year in H2 versus H1. And Lorenzo will speak about gross margin. But let's say, in H2, at the midpoint of the Point of the indication we provided, we anticipate a growth of 4% H2 versus H1. And again, it's important that in H2, as I warn you during our Q4 earnings announcement in January, we will have a specific mix change In important 2 ks customer program in Personal Electronics. And this mix change is material.

Speaker 2

Here I have spoken H2 year over year in personnel electronics of an impact of €400,000,000 And despite this impact, the company will grow in H2 driven by automotive and industrial market 4% H2 versus H1. And we grew year over year H2 2023 versus H2 2022. So this is okay, the demonstration that okay, we are really resilient in front of the personal electronic market. Well, about the backlog, it is clear that the backlog coverage is following exactly the market dynamics. We are fully covered in backlog for automotive and basically industrial power energy related And B2B Automation, Robotics and, let's say, building controls, well, where, okay, we are still to Hunter order For the 2nd part of the year, it's more on consumer industry, it's more, let's say, on servers And definitively on pure consumer related like personal electronics and computer pre sale.

Speaker 2

So that's the reason why our confidence level to have raised the low end of our indication From $16,800,000 to $17,000,000 is very good. We have not raised the occurrence Because on Power, Energy and Automotive, we are still facing some capacity limitation in the key technology cluster at 40 nanometer, Silicon Carbine, IGBT, all okay, which are really driven our goals. So this is H2 versus H1 dynamic And the complexity, let's say, of the environment we are facing. Now about gross margin, okay Lorenzo?

Speaker 4

I take the question. Good morning, everybody. About the gross margin, for the gross margin at midpoint of our At midpoint of our revenue indication for the year, we do expect to have a gross margin ranging between 47% 48%. In the year, of course, the positive product mix, we have manufacturing productivity improvement. Substantially, we will see an overall price stability.

Speaker 4

This will be offset by increase in food cost in our manufacturing. And then we have not to forget that in the second part of the year, we will have the impact of the ramp up of the 300 millimeter in Agrate that there will not be their optimal capacity and this will impact our COGS in the This is the dynamic, let's say, when we look at the current year with last year. If we go a little bit more in specific to Let's say the first half with the second half of this year. Of course, in H1, gross margin has benefited from a sequential positive price We had also a strong positive impact on the product mix. While in the first half For the year, our gross margin has not yet been significantly impacted by the increase of the input and manufacturing cost.

Speaker 4

In H2, on the contrary, we expected to be impacted by some increased sales price pressure, even if in the year This will be, let's say, substantially neutral, but in the second part of the year, we will see negative price pressure when looking sequentially. Manufacturing input cost will increase, then there will be also some less optimized production leveling in some specific FETs, the one that are more exposed to consumer or personal electronic, and as I was saying before, in the second part of the year, there is the impact of our 300 millimeter graph that we today is in the start up, but In the 2nd part of the year, we'll enter in our cost of goods order. So at the end, let's say, the visibility I repeat that the visibility for the year will be we have a gross margin that will be ranging between 47% 48%.

Speaker 3

Got it. I just wanted to clarify, Jean Marc, did you say the headwind from your the Marquee, Customer and Personal Electronics hit $500,000,000 year over year in the second half. Is that what you said?

Speaker 2

Yes.

Speaker 3

Okay, got it. And then maybe quick follow-up. I just wondered if you could discuss a little bit The pricing environment in the second half in microcontrollers, there's a number of sort of reports out there in Asia that pricing is getting Weaker, especially in the consumer and PC peripherals, etcetera market. So first of all, maybe remind us So where you play in those markets and whether you are tempted to follow this price action or to Automotive and Industrial Multi Controllers to Protect Pricing.

Speaker 2

Yes, my first comment is you cannot speak about price Generically across the board. As we described, okay, we are really facing A complexity with really significant different market dynamics. And of course, okay, you have to manage your price, Let's say, being selective, it is clear when you face, let's say, competition on pure consumer connected device It's absolutely not the same when you are competing in a power box where you are managing the power solution. So we cannot speak about the price across the board. Yes, we do believe that in H2, in the field of consumer, where you will have, let's say, lead time of production supply coming back to normal and potentially here and there in some specific Pick location, some capacity flexibility to see price pressure.

Speaker 2

And ST, we will manage it selectively. Overall, okay, it will land on what described Lorenzo. So, Icosaier, We should see a price, okay, basically substantially. So naturally,

Speaker 4

NIL product with respect to EBITDA.

Speaker 2

And in H2, yes, okay, we will see some minus.

Speaker 3

Okay. Thank you so much.

Operator

The next question comes from the line of Matt Ramsay from TD Cowen. Please go ahead.

Speaker 5

Thank you very much everybody. Good morning. Guys, my first question I wanted to ask The silicon carbide target, I guess you guys had talked for a while about $1,000,000,000 in 2023 and And I think in January, you had said greater than $1,000,000,000 and now you're talking about $1,200,000,000 which is great. I I think all of us saw the announcement with ZF and what that could potentially mean. I guess my question on that is For the industry ramping material supply, we get a lot of conflicting reports, Some bumps with your primary material supplier, some news of Potentially ramping supply at other sources.

Speaker 5

So Jean Marcin, maybe you could talk a little bit about your near term plans For getting silicon carbide material supply to support that revenue ramp and if there's any update, I think you mentioned in the script increasing investments on your Internal substrates, if you could give us an update on the timelines there where you guys can start to supplement Your supply with internal supply, that would be helpful. Thank you.

Speaker 2

Well, okay, I will not comment, okay, The other competitor and supplier clearly, I really confirm the $1,200,000,000 We know that I see, okay, according some number we see that in 2022, we have about 40% of market share. And with this $1,200,000,000 looking like according to market data we have that we will increase our market share. Thanks to our capability to deliver wafer cloud and module and package out according customer expectation And thanks, okay, to the multiple sources we have in raw material. Saying that, we are Really on track to be in position starting 2024 to produce raw material for our own needs and going forward, okay, to achieve 40%. This will be first in 6 inches definitively.

Speaker 2

We are preparing the 8 inches conversion. So we have already produced 18 inches ingot from our former North Stell, okay, let's say, facilities. And we are qualifying the 8 inches device according to our qualification protocol. So we anticipate that we will start 8 inches activities, let's say, in the second half of twenty twenty four. Well, then after we have, let's say, other opportunity for silicon carbide, first to qualify also the technology, which will be very, very instrumental for cost decrease, but for 8 inches wafer size conversion.

Speaker 2

We will qualify in the 2nd branch of 2023 our Generation IV silicon carbide that we will start to ramp up in 2024. So this is what I can confirm to you. Well, then looking at the market evolution And the number of program and the number of customer we have, we are very confident to deliver About $2,000,000,000 in 2025, 2026 and then okay to have a target okay long term Well above $5,000,000,000 but the market will reach $15,000,000,000 So this is really the roadmap. We execute, I don't say clock watch, but we execute every quarter and every year fully consistently with what we said since the beginning.

Speaker 5

Thank you, Jean Marc, for the detail. I realize the sensitivity on some of the near term stuff there. As my follow-up, Lorenzo, you had talked about some of the potential gross margin impacts in the second half of The ramp of 300 millimeter capacity, so I wanted to ask about that a little bit, maybe just kind of follow on to Didier's question. There's Certainly some angst in the system around pricing and margins. So I guess the first one is could you maybe quantify If you could, the gross margin impact just from the 300 millimeter ramp in the second half of the calendar year.

Speaker 5

And then, I mean, really strong margins up to 49% in the guidance. I think folks are wondering if that's is that a peak? Is that a new normal? How would you consider that? And maybe if there's some price pressure, When do you feel like the 300 millimeter capacity will be at a scale to be a positive driver of margins rather Then a near term ramp up headwind.

Speaker 5

Thank you. Clearly,

Speaker 4

in the second part of the year, When the fab 300 millimeter fab in Agate will exit From the run fast accounting that today is bringing, let's say, the equivalent of the unsaturation cost or the excess Cost in the line are other income and expenses. We will see, let's say, this impact coming directly in our costs. How much this will impact? Of course, this is temporary because it's due to the fact that the The 300 millimeter is not at a reasonable, let's say, level that will reach In order to be substantially neutral and start to contribute positively to our gross margin in the course of the 2024. In 2023, for sure, this will not happen.

Speaker 4

We need to reach in 2023, our capacity We'll be still, let's say, at the level of below 1,000 wafer per week, let's say, significantly below. So at the end, this is a size for a 300 millimeter that is definitely not accretive for the gross margin, There will be an increase in the cost. Looking overall, let's say, the second part of the year, as I was saying before, there are 3 components that are impacting our gross margin. On one side, there is the impact of the 300 millimeter. On the other side, there will be the impact, Let's say of the fact that we will start to see materially the increased cost in our manufacturing That today is partially, let's say, suspended in our inventory, but then it will Comsat down in our P and L starting already partially in this quarter in Q2, but definitely with much higher Level of impact during Q3 and Q4 and the other side that there will be also let's say some impact related to the price pressure that we were discussing seen before and the mix.

Speaker 4

How this will account when we compare the first half and the second half of our gross margin? I would say that 1 third, 1 third, 1 More or less, let's say, we can see that this is the impact of these three main elements that on one side are The impact on pricing in our top line on the other side is the impact of the increased cost In our manufacturing cost, on the other side is the 300 millimeter. And I repeat just to clarify, this is a temporary impact, let's say. And then of course in the second part of the year as I was saying before there are some of our fabs that are not working at optimized production Why? Because of course, we are also keeping under control our inventory.

Speaker 4

And as you see, we have some of these fabs, the one that are more exposed to consumer or personal electronic, let's say, We needed to be sure that we are not inflating our inventory. So this is another impact that It's fully taken into consideration in our indication of gross margin of the year between 47% 48%, but will contribute in any case to add on our gross margin in the 2nd part of the year

Operator

The next question comes from the line of Stephane Hoppe from ODDO BHS. Please go ahead.

Speaker 6

Yes. Good morning. Thank you very much for taking my question. Actually, I wanted to come back on the prices Dynamic notably in the automotive segment because in the past you have explained that the relationships So we've deemed automotive industry had changed a bit and that you were not expecting prices to Collapse, but maybe come back to a more normal trend. So is that what you're seeing at the moment or not yet?

Speaker 6

And the question linked to that is with the temporary impact that you're talking about for the gross margin in the second half, Are you still comfortable with your target to get back to or to go to 50% gross margin within the time frame of your plan? Thank you very much.

Speaker 2

Yes. So definitively. So but of course Lorenzo will further comment. Again, we repeat what are the key drivers for gross margin improvement. I think Lorenzo elaborated that we have a temporary impact of agrati ramp up definitively, which is not Absolutely not a surprise.

Speaker 2

It is mitigated by the ramp up of Kroll at the same time. And each time we are increasing call ramp up according to the plan of record we have With the Liberty project, okay. For sure, we mitigate also agrati. When agrati will reach the adequate scale, Hi, Grate. We've contributed to the gross margin of ST.

Speaker 2

So the 300 millimeter is one of the main elements. I repeat, the second element Is the silicon carbide moving forward to 200 millimeter? And thanks to the SmartSeq technology, which is Really key to make the 200 millimeter successful, okay, we will have important leverage to decrease our cost And of course, okay, to contribute to the gross margin improvement. It is clearly the 2 important, let's say, contributor. Well, then after the loading of our fab, Temporarily, in H2, some fab, okay, will face, let's say, not fully optimized loading, But it is mainly related to Personal Electronics.

Speaker 2

Just to give you an order of magnitude, okay, in 2023, at the midpoint, Personal electronics, okay, will decrease 25%. And also the decrease is not silicon impact Because it is optical module product mix change with no impact on the loading, but as has an impact on the loading. So of course, okay, in H2, we have this temporary nonloading that we will compensate moving forward Because the demand on advanced BCD technology, advanced power technology for automotive industrial is more and more increasing. So then, okay, we will come back to a full loading of our fab starting 2024 definitively. So that is the reason why we confirm to you that the $20,000,000 plus ambition, we will deliver the 50% gross margin.

Speaker 2

Now about the pricing in automotive, Now, okay, we position this business and the demand of the customer On technology cluster, that radically changed compared to years ago. Now, okay, we are at 40 nanometer technology, 28, Maybe tomorrow we will be at 18, technology, silicon carbide, GaN, IGBT, modules. So it's a Complete different mix compared to the base. And on this technology, there is no excess of capacity. And the investments are cautious.

Speaker 2

There are no excess of investments worldwide On all these kind of technology, let's say, clusters, because first it is either on 300 millimeter or it is on YbOM And this is calling for CapEx that companies are spending cautiously. And you know that in this field of activity, The foundry business is quite tight. There is no excess of foundry competition in Competing in the field of Automotive. So that's the reason why, yes, we will go back normalized Price discussion with the customers. More and more, we will have strong discussion with the carmakers.

Speaker 2

Clearly, it is a trend we are seeing. So the model, okay, moving forward, okay, is not the model we have 5 years ago or 10 years ago.

Speaker 4

Well, I think that's okay, Lorenzo. Yes, maybe just a clarification. When we were talking about the impact of pricing In the 2nd part of this year, it's not actually in automotive. Automotive has been rediscussed. The pricing, as I was saying, is Increasing indeed that there is some decline in price on a sequential basis on different areas than automotive that are The one that are most exposed to the difficulties of the market, we are talking here about maybe consumer portion of the industry.

Speaker 4

And indeed at the end between automotive increase in pricing, maintaining pricing and let's say some other areas in which there is a normal dynamic of price At the end of the price, it will be substantially flattish in the year. In respect to the gross margin, what I just confirm what Jean Marc said. And of course, also, let's say, we need to consider that reaching our target, let's say, Of the 50% gross margin of $20,000,000,000 plus is not linear. It means that we may have some quarter like you have seen in which we are very close Before, now let's say when we introduce our 300 millimeter not yet at the full size. So but at the end, the trend will be that 1, when we do when the one that will bring the company to Our gross margin at 50%, let's say, when the size of our top line will be in the range of the $20,000,000,000

Speaker 7

Okay. Thank you very much.

Speaker 1

Next question please.

Operator

The next question comes from the line of Andrew Gardiner from Citi. Please go ahead. Good morning, guys. Thank you for taking the question. Two follow ups to questions that have been asked, if I could.

Operator

First, Lorenzo, you mentioned inventories and making sure that you Continuing to manage inventories pretty tightly given the end market dynamics that you're seeing. Inventories rose quite a bit on your books In the quarter, yes, of course, it doesn't seem as though you weren't short of demand per se in the quarter at a group level, clearly you beat your guidance And you didn't pump the brakes on you didn't need to pump the brakes on the fabs in the Q1 at a high level, it was still delivering Gross Margins Well in Excess of Your Guidance. So Can You Just Sort of Describe What Was Driving the Inventory Increase In Q1, did that come as a bit of a surprise perhaps towards the end of the quarter? Or is it it's really there in preparation for what you're seeing across the different end markets in the second half? And then I have a follow-up on silicon carbide.

Speaker 4

Yes. For sure I take this question. Our Q1 came Better than expected in terms of revenues, let's say, mainly impacted by 2 elements. The first one was Better mix in respect to what was expected. And on the other side, let's say, a better price environment Means that at the end, let's say, we were modeling pricing already started to decline in some area, While you stated this did not happen, this had a positive impact on the two sides, I would say, on one side on the revenues, on the other side, of course, on the gross margin.

Speaker 4

Anyway, our Q1, let's say, inventory, as you rightly said, came above the expectation in Terre are Yes, because we were 100 we are at 122 days compared the starting point at the end of Q4 that was in the range of 100 This level is mainly associated to excess of inventory that has been done in personal electronic and in consumer, where the market were weaker than what we were expecting. So we were, let's say, producing You know the revenues came a little bit in a different way, let's say, with better mix, better pricing, but lower quantities in some product lines. And these of course bring an increase in our inventory that was not Forecasted, let's say, at the beginning of the quarter. We will correct during the year such excess Where we will land, let's say, at the end of the year, also considering That we will enter, let's say, the average 300 millimeter the width that we will have in aggregate 300 millimeter. At the end, we do think that at the end of the year, let's say, the number of days of our inventory, let's say, will be Slightly above the number of days that we had, let's say, at the end of 2022.

Speaker 4

So it will be something in the range of 105, 110 days of inventory at the end of 2023.

Operator

Thank you. And then just quickly on silicon carbide, Jean Marc, to the comments you made in your prepared opening, it's now $1,200,000,000 for 2023, That's a nearly 20% uplift relative to what you are explaining to us in the second half of last year. It's a 60% to 70% year on year growth rate relative to 2022, and that's coming at a time when some of your peers seem to be Struggling in terms of their silicon carbide ramp. So where are you able to get this extra capacity out? You also mentioned during your prepared comments that SiC remains pretty constrained, although maybe that was a high level comment.

Operator

Where are you able to eke out an extra 20% of wafer or module supply in silicon carbide? Thank you.

Speaker 2

First of all, internally, now we have really our 4 manufacturing locations, So 2 for fabs, so Singapore and Catania and 2 for Assembly, so Shenzhen And Boucoura in Morocco, running altogether full mass production. And thanks to the CapEx we spent in H2 2022 to increase the capacity. Well, then we have diversified our raw material source, Because also we anticipated some difficulties of 1 vendor in the second half of last year. So we secure ourselves in terms of success. Well, and last, okay, I think it's important I mentioned that now the demand we have is really well diversified.

Speaker 2

Our main customer is representing below 65% of the total revenue we expect. And we have the program we won during the past 2, 3 years that are starting to generate significant revenue for STI. So all in all, I would like simply to confirm that We invested last year and we have executed the capacity implementation properly. Now with 4 locations running full speed, we have our demand well diversified and New programs ramping up on top of the main customer we have. And we have secured worldwide with different Sources located in different places in the world to secure our ramp up, waiting for our internal stocks to be ready and to sustain our ambition to grow above €2,000,000,000 and towards €5,000,000,000

Operator

Thanks very much.

Speaker 1

Thank you. Next question please.

Operator

The next question comes from the line of Stavros Sebastian with Kepler Cheuvreux. Please go ahead.

Speaker 8

Yes. Hello and thanks for taking my question. On silicon carbide, could you please make an update on your technology roadmap there? And you mentioned that the Gen 4 is likely to ramp, if I'm right, by H2 this year. Could you provide a little bit of timing for the ramp of Gen 4, but also Gen 5?

Speaker 8

And what kind of improvement are you expecting from Gen 4 and Gen 5 versus your 3rd generation of silicon carbide technology? And the follow-up is on the inventory level on your 2 main markets, automotive and new sales. Where are the inventories standing versus the normative level? Thank you.

Speaker 2

So the Generation 4 It will be maturity what we classify maturity mass production in the second half of twenty twenty three. So and ready for production in 2024. And the timing will be, let's say, Consistent with the qualification time we need to do on the automotive, let's say, market, So we will ramp up smoothly in 2024 according to the timing of qualification. But internally, this technology will be qualified by the second half of this year. The Generation V will follow basically 18 months later.

Speaker 2

Generation IV and Generation V are still planar technology, Well, we significantly improved the performances

Speaker 4

and

Speaker 2

With absolutely no GAAP versus the best in class technology we can assess. Then we will move to Generation 6, okay, where we will make a decision, but okay, I will comment in due time Definitely. So again, Generation 4 and 5, let's say, will improve the performance On the device that is enabled by the technology. In parallel, do not forget that we will implement Two important, let's say, process change. The 200 millimeter That is not a piece of cake for silicon carbide.

Speaker 2

I don't want to be technical, but it is not a piece of cake. You have many mechanical effects, which are not so easy to control when you increase the wafer size of silicon carbide is point number 1. And for Isteed, point number 2, we will implement the SmartSeq technology, which will be really An important add on that will enable better performance on the device, Lower cost of the solution at substrate level and will make easier the conversion to the 200 millimeter. So 2 technology in the next 3 years implementation and 2 major process change, 200 millimeter and smart stick in production. And then, okay, later on, we will introduce the Generation 6, which will be a description in terms of architecture of the transistor.

Speaker 8

And on the inventory question on the autos in the fuel, where are we staying right now?

Speaker 4

Inventory, you mean in the channel, I suppose? Yes,

Speaker 8

definitely in the channel. Thank you.

Speaker 2

Well, you know that we monitor pretty well the inventory at the distribution channel. Well, here, okay, it's clearly following the market dynamic, okay. When you are Through distribution addressing mainly, okay, for us the industrial market, we are coming back now to a normal coverage in term Inventory, so means we have our inventory term between term of 3 to 4. Whatever are the devices, microcontrollers, analog, power overall, Of course, we have some inventory which are, let's say, as the upper limit that we Except generally like MEMS. Why?

Speaker 2

Because they have been impacted by the personnel electronic market dynamics. So that's the reason why, okay, we will control in our, let's say, revenue target, okay, the inventory at distribution level. Again, except the inventory in front of consumer market, we do not detect any excess of inventory. Inventory, our distribution are just at the level for distributor to manage their business to manage a situation, which is Normalize the situation. Well, then about our Tier 1 And let's say, the supply chain supplying the card maker, at this stage, especially, of course, On all the technology driven by smart mobility and electrification, digitalization, We do not expect absolutely any inventory in excess.

Speaker 2

On legacy automotive, It's difficult to say because for us, we are supplying 40 nanometer, we are supplying BCD-nine and BCD-eight And the demand is still very, very strong. So we do believe that on this kind of technology cluster, there are no inventory in excess across the supply chain.

Speaker 3

Thank you.

Speaker 1

Thank you. Next question please.

Operator

The next question comes from the line of Lee Simpson with Morgan Stanley. Please go ahead.

Speaker 7

Thanks very much for taking my question. Just Trying to sort of tease out a little bit more the pricing headwinds you're talking about going into second half of the year. So I think as others have suggested, we are seeing some signs of slowing demand in MOSFETs, lack of tightness being seen in various areas in power semis. And at the same time, the foundries are talking about slowing order book for autos. I'm just trying to understand Which side of the fence or if both perhaps are impacting in the second half?

Speaker 7

And what that means for order book momentum, particularly Q3 of this year. And maybe if I could just come back to the overall backlog. I mean, you've been very good in previous quarters to talk about the relative size of the backlog to the outgoing business in the next few quarters. Could you maybe just update us and give us a relative size of backlog? Thanks.

Speaker 2

Well, so I will start with the backlog. So today, The total backlog we have in our hand requested by customers represents about 6 quarters of revenue. I would like to say that it is pretty unbalanced versus the end market we address. Again, on automotive, overall, on power, energy and The backlog coverage we have are well above these 6 quarters. And the order entry we are seeing now are loading smoothly year 2024.

Speaker 2

Why? Because the lead time we can provide to these customers are still well above 1 year. So moving forward, quarter after quarter, They are loading our backlog consistently with the hand demand, which is very strong and the lead time we can offer. Then you have another dynamic where the demand is solid, Growing with the existing backlog, but clearly we are reducing our lead time. And clearly when you are reducing our lead time, The customer order, they take into account.

Speaker 2

So they are temporarily reducing their order in order to have a backlog coverage which is Consistent with our lead time, any year the coverage will be between 3 to 4 quarter total backlog. And on the Consumer industrial on servers, on this kind of activity, we are going in this direction. Well, then you have some market where clearly there is a weak end demand. There is clearly inventory correction. And then, okay, the backlog we have is reducing and the order we have are low.

Speaker 2

It is typically the computer peripheral, Computer related and the personnel electronic. And here, we are going back to a normal situation where we have, for some customer, which are, let's say, well in control with their supply chain. They give us a rolling 2 years visibility. And there is some customer that are giving you the usual 3 to 4 quarter visibility. So I have to say, if I would like to classify Overall, our backlog, we are at 6 quarter.

Speaker 2

We do believe we will finish the year 2023 With the coverage will be between 4 to 5 quarters, which is still above the normal situation. Normal situation is 3 to 4 quarters. So this is a dynamic, okay, I can tell you. And this is totally consistent, okay, with the Indication we have provided to the year to reach at the midpoint $17,400,000,000 but still with the possibility to go to the upper range.

Speaker 1

Did it answer your question?

Operator

Yes, it did. Just wanted

Speaker 7

to circle back on perhaps The evidence or perhaps the product categories where you're seeing those pricing headwinds, in particular as it relates to autos, I I mean, are we vectoring more on Power Semi's? Or do we see this starting to happen as perhaps a peak pricing dynamic around control. Thanks.

Speaker 2

To come back to your MOSFET point, You know, MOSFET is part of the power supply Of power management of some application in the field of servers and computers. Of course, here as this market is softening or is weakening, clearly, The demand for this specific MOSFET is weakening. But MOSFET is very large. Okay. You have high voltage, you have low voltage MOSFET, then you have IGBT, you have the silicon carbide.

Speaker 2

Again, and the MOSFETs are going everywhere And are going everywhere in all the applications. And I can confirm to you that on MOSFET overall, Addressing all the automotive application and importantly energy storage, energy conversion, Energy transportation, the demand is very strong and the capacity are fully loaded. And we are still struggling To support our customer at the level of what they demand on IGBT, on SiC Carbide, on Vi Power, vertical integrated power, On PCD9 for power switches and on low voltage and high voltage MOSFET as well, Everywhere it is for power management, for automotive and industrial application. Yes, On computer, the demand is weak, but this is not a surprise.

Speaker 7

Okay. Thank you.

Speaker 1

Thank you very much. And we have exceeded the time, so I apologize this was the last question. Thank you very much. All of this will and our participation at this time.

Operator

Thank you.

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Earnings Conference Call
BorgWarner Q1 2023
00:00 / 00:00
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