STMicroelectronics N.V. (STMPA) Earnings Call Transcript & Summary

[Audio Gap] semiconductor space at JPMorgan in London. And I'd like to welcome Lorenzo Grandi, Chief Financial Officer at STMicroelectronics this morning. Thank you, Lorenzo, for joining us at this conference.

You're welcome. You're welcome. Unfortunately, you cannot see me, but I hope you can hear me well.

Yes, Lorenzo. We can hear you well. So thank you, Lorenzo, for joining us.

Maybe I will start off. I mean you had results a couple of weeks ago. Maybe you can start off by helping us understand your guidance for the second quarter. You guided revenues down sequentially 10% at the midpoint. Can you give us the puts and takes associated with that guidance in terms of the different divisions of STM, what you're seeing in the market?

Yes, sure. I can comment, our guidance of Q2, let's say, splitting a little bit the dynamic between the 3 groups, AMS, ADG and MCD. I will start from AMS. AMS will decline in Q2 in terms of revenues quite significantly. We do expect AMS go down in the range of 30%, and this is mainly impacted by personal electronics. And in particular, if we look at the product lines, we will be impacted in imaging and in analog. When we see the result of Q1, let's say, in Q1, personal electronics were sustained by strong demand from our customers. This demand most likely was also due to the need from their side, from the customer in personal electronics, to secure their supply chain and most likely also impacted by good final demand for their products. When I look at the second quarter, the second quarter is definitely weaker, and this is impacting mainly our AMS group. And this is due to the transition as Q2 is the transition quarter from -- we move from the old models, let's say, the one of last year, to the new one, the one of this year. So the one of this year are not still in full production when we have the decline revenue state of the old one. The next quarter, Q3, is expected to significantly recover in this group. But Q2, we will see this decline. Then if you want, at the end, it's quite in line with the normal seasonality for personal electronics. Looking now at ADG. ADG will decline in the quarter, and our expectation is that will decline in the mid-single digit. As well in ADG, we have 2 different dynamics. On one side, we have automotive, and automotive will significantly decline, will decline double digit and will be not far from a decline of 20%. And this will be impacted by weaker demand and impacted especially on legacy products. On the other side, we have the Power Discrete product line that will partially offset the decline of automotive. The Power Discrete growth is more driven by the fact that there is a removal during the Q2 of the supply constraints. Here, indeed, the Power Discrete were the line of product that was most suffering for production interruption on our Chinese Shenzhen plant as a consequence of the outbreak of COVID-19 in China during February. Now Shenzhen is back at full pace -- full production. So we will have a sequential revenue for this product line that will be driven mainly from the not existence of the constrained production then strong demand increase on the final mark. Looking finally to MCD. MCD will be the only group that will experience sequential growth. And this will be both sequential and year-over-year growth. Here, we see a strong demand for our micro STM32 products and as well as also for the STM8. And this demand is mainly driven by distribution in Asia and in particular in China, where we see today quite clean inventory in the channel, and we see also a stronger POS. So for these products, next quarter will be -- not next quarter, sorry, this quarter, Q2, will be a quarter of growth. And as I said, this growth will be particularly strong in the distribution channel and particularly in Asia.

Okay. Can I understand overall in terms of the -- before we're going into demand, I mean, in terms of the supply, Lorenzo. There were supply constraints, as you said, in the power products, in the discrete products. Whether those supply side constraints have been removed. There were many shutdowns in multiple Asian markets and in other countries, I mean, including in Lombardy, et cetera. So how were you impacted by it? And are you continuing to be impacted by supply-side constraints?

Well, in Q2, let's say, if I look at Q2, the -- on the supply side, we have not completely fixed up all the problem. Even if now we are rapidly recovering on our level of production, Q2 will be still impacted by limitation on our capability to work a full stream in many of our manufacturing plants. In front end -- even if no one of our fabs were stopped, completely stopped since the beginning of the outbreak, however, we are running during March and April with workforce that is in the range of 50%, 60% of the attendance. This not translate automatically in the fact that our capacity is at this level. You know that the fabs are quite automatized. So it means that even with the 50% or 60% of attendance, our ability to produce is higher. But for sure, it's not at the full level. The situation in back end, if I look at the situation in back end, let's say, it's progressively come back to normality. In our Shenzhen plant, the one in China, now is back at full capacity after the, let's say, the closing that we had in February and the ramp-up that we experienced during the month of March. In Shenzhen, we are now running at full capacity. This is not the same for the Calamba, the plant that we have in Philippines, or the plant that we have in Malaysia and Morocco. Here, we have experienced some closure days. And in some of them, also some reduced personnel on the site. Situation is progressively improving, and it's coming back to normality by the end of May. This is our expectation. However, you know that Q2 will be still impacted by this supply constraint now because we estimate to have around 400 basis points impacting our gross margin in Q2 due to unloading charges. And these unloading charges, we have around 270 basis points that are due to the overall constraint in our supply chain. So it means that still, we see significant impact of this -- of the COVID-19 limitation for our production. What we estimate is that overall, around $80 million revenues will be impacted in the current quarter by this constraint in production. And another addition and another issue that we still are experiencing is on logistics because on logistics, today, the number of routes -- the number of flights is very limited. And by the way, I have to say that the cost to move goods is really skyrocketing. Today, we are experiencing cost for logistics. It's not a big number in the overall economy, but even so negligible, that is 4, 5x what it was before the crisis, the outbreak. So still, we are not out. We are moving progressively to normalization, but it will be still impacted.

Understood. Now moving on to demand. I mean you've given guidance for the full year in the last quarter's results. You are guiding to revenues of $8.8 billion to $9.5 billion, which at the top end is flat year-on-year, and at the bottom, down 8% year-on-year. Thus, the midpoint is down 4%. Lorenzo, this does not look like a normal sort of recession. So can we understand why this sort of behavior is being seen?

I agree with you, Sandeep. It's not a normal recession decline. This is -- you're right. But I would like to be clear here. What we do in ST, what we -- actually, we do not have the arrogance that we have a better crystal ball than anybody else. As a management team, we believe that we cannot run the company without a sale and operational plan. This is -- even if this plan is a quite large range in terms of revenues, $700 million revenue range in the second half if we do the midpoint of Q2. This plan will allow us to address how to engage resources and plan for our production. What is based at this plan? This plan is based on some data points. On one side, our intimacy with our biggest OEM customers. And there are plans, let's say, in discussion with them about what is their visibility. And the plan will give us a directional idea of what are our engaged customer programs. We work on our macro visibility. We have many discussions with industrial analysts, major business banks or consulting firms to understand and to try to guess what could be the economy evolution and allow us to identify the most relevant underlying assumption that we have in the plan. If we look at this assumption, what are the assumptions that are underlying our plan with revenues ranging between $8.8 billion and $9.5 billion. We expect that the market will see a decline this year, for sure. And the expectation is a decline that is in the range between minus 13% to minus 5%. And this is corresponding worldwide gross domestic profit decline between minus 4% and minus 1%. We assume a decline in the smartphone market between 15% to 10% that translates to substantially 1.3 billion to 1.4 billion for smartphones. And still also a decline in the automotive. The automotive -- in our plan, in our, let's say, assumption for our plan is declining, light vehicle declining in the range of minus 25% to 15%. These are the assumptions. We elaborate our operational plan that we, based on the communication practice that we have, we wanted to share with you, with the investors, with the stakeholders, to allow -- to understand the boundary inside the one that the company will move in the year. For sure, this assumption may become in better or in worst, moving ahead in the year. What we will do, for sure, we will promptly update if some of these assumptions will be materially different than what is today.

Understood. Maybe -- I mean, another way to ask this question, Lorenzo, would be -- I mean, you're guiding to your second half revenues. The sequential increase into the second half is $340 million to $1,040 million. Clearly, there are some major design wins in this upside that you see in the second year, and then there is the second impact from just the normal growth of the business into the second half versus the first half. How can we understand how much of that is based on your new design wins that you have, which will almost certainly occur? Though, of course, the volume may be up or down slightly, but new design wins is a big a lump sum impact on your numbers into the second half of the year?

The second answer -- when I look at the second half growth, of course, inside the boundaries that we were discussing before. You remind this, the $340 million or $1.040 billion, and I look how this is split between, let's say, engaged customer programs. So it means that what -- you find design win and the market, this is quite balanced, let's say, between the 2. For sure, the magnitude, for sure, in the second half, as is usual for our company, we have a significant impact in terms of seasonality for what concerned the personal electronic. Personal electronic, let's say, you know very well, it's very strong in the second part of the year, while the first part of the year is less important. For sure, it's not a big contributor to the growth. For sure, also this year, there will be this, there will be also some increase in content in what is our engaged customer programs that will drive the growth. Then the remaining is based on assumption on some improvement in some markets. If you look automotive, for instance, we do expect automotive to reach the bottom during this quarter, during Q2, and then progressively improve on the year. For sure, the magnitude of the improvement in second half is linked to the market, how the market will evolve. I was mentioning before our assumption, for sure, there will be difference. And this range is based on the fact if the overall market in the year, the market that we serve, will decline 13% or minus 5%, this is, for sure, giving us the range in which the second half increase will be positioned, depending on the market evolution. For sure, when we will be more advanced in the year, we do expect for sure in July when we will have better visibility also in the order entry coming for the Q3. And for sure, also some idea in terms of Q4, we will be in the position to narrow a little bit this wide range.

Understood. Anybody in the audience, if you have questions, you can just go to the Q&A tab and send me a question through, and I'm happy to ask it here. I will continue, but if some questions come through, I'm happy to ask the question. So moving on -- I mean, continuing the focus on autos, Lorenzo. I mean when we look overall at autos, I mean, you mentioned 15% to 20% down is what you expect for the year. But if you look at the IHS forecast in Q2, IHS is expecting 50% decline in auto volume production in Q2. Whereas you're seeing maybe, say, 20% or slightly less than 20% decline in auto revenues in Q2. And you think that this should be the bottom of autos, and it should improve from the second half. Is this on the back of order intake that you see from your customers improving into the second half? Or is it that you are doing this calculation of second half improvement based on your macro outlook?

For the automotive, I would say that for sure, if I look at the backlog, as I was looking at the backlog for the current quarter, for Q2, demand is there. But now, as you know, let's say, we need a little bit to dig inside because the fact that we have demand -- and that this demand translates in revenues is a different story, let's say, in a sense that at the end, for sure, we needed to really work with our customers in order to understand exactly the dynamic and how is the evolution. On top of that, we see in the automotive for the time being, let's say, definitely, the macro trend is still there. It means that the digitalization, in which we are exposed, the electrification of the car, the increase, in general, of content of silicon, still continuing. So this is something that's coupled with some recovery. Today, we have to consider that many of carmakers and some of our tiers 1 have also closed their factory for 1, 2, 3 weeks. So for sure, Q2 will be more difficult. Let's say, in moving forward in the year, we see some recovery. No doubt that the recovery that automotive will have in the second part of the year will depend on the final demand and will depend on this range that I was mentioning before. So it could be, let's say, inside these boundaries. But between what we see in terms of macro trend, what we see in term of programs because, to be honest, at this stage, we have not seen a significant, let's say, delay or cancellation of this program, we do expect that in Q3, there will be some sequential increase, even if Q3 for automotive will definitely remain declining when we look year-over-year. And so far, the increase in Q4 -- where Q4, we increase sequentially on a year-over-year basis, it will probably depend on the overall dynamic of the market. Difficult at this stage to assess where we will stand. Most likely, we will be on the high side. We will be close to flattish on a year-over-year, but definitely will be low -- lower, let's say, and so declining if we will move to midpoint or on the -- or the low end of our indication for the year.

Understood. I mean the last question from me on autos. Mainly because that's the most risky segment that you have at the moment in terms of the end market macro data. Is the content growth figure a factor in terms of your guidance? Are you seeing very substantial content growth this year, which is helping you? Or I mean maybe you've seen some trend, big V-shape recovery, for instance, in China, which is making you more bullish on what will happen in Europe and U.S. in the second half of the year.

We see some increase in the content. We see, as I was saying before, more, I would say, increase of content and more digitalization of the car. What we have also seen is some change in program, not actually delay or cancellation, but some change. If I take, for instance, the programs for autonomous driving, we see now that there is much more focus than to target autonomous driving car on the active safety. So maybe downgrading a little bit the project, let's say, on -- in terms of level of the chip, but still there. So these trends are there. We see, and this is what make us to think that anyway, in automotive, even in a difficult market, nobody will deny that because, for sure, automotive will be a market that will suffer significantly during this year. But still, we see for the silicon some area in which we may increase or at least there to be, let's say, more pervasiveness. We have also, let's say, increased our offer in terms of product portfolio, let's say, we have some opportunity. I'm thinking, for instance, in imaging, which we have one, let's say -- a factor in the car, and that this is increasing if you want our offer and our content in the car. This kind of things, let's say, is helping to have a decline in terms of revenues of silicon that is not actually 1:1 with the decline in terms of number of cars. And then we have also, let's say, the electrification that is playing for us an important role. You know very well our silicon carbide line that is really exposed to the electrification of it -- today, for sure, the level of revenue that we are expecting in silicon carbide is not the one that we were expecting at the very beginning of the year, in early January, still is a material growth in respect to last year, 2019. So all these ingredients bring us to think that, let's say, the level of revenues that we will have, as I was explaining before, will not be 1:1 with the level of the current number of vehicles declining.

Understood. Once more, I mean, if anybody in the audience has a question, please put down a question, and I'm happy to ask the question. My next question is on MCU. I mean you are indicating your MCU business is growing sequentially into the second quarter. Can we understand what's the driver there? Is this the inventory position in the supply chain? Or is there some particular design wins or something else which is driving this at this point?

What we see in our microcontroller, I would say, both lines, the STM32 and the STM8, is a strong demand. The strong demand is mainly driven by Asia and in particular, in China. In China, we see POS improving significantly. And moreover, what we see that in the channel, the level of inventory is very lean now, number of weeks is quite short. So this is definitely the main drivers of the growth that I was mentioning before of our group MCD and in particular, let's say, related to the microcontroller. It's true that this is not the same when we look by geographical area. When we look by geographical area, we see that Europe and America are not improving. In terms of POS, they are quite flattish if we look on a year-over-year basis. And the level of inventory, even if it's not dramatic, in any case, it's not comparable to the one that we have in Asia. Don't forget, that for us, Asia is quite important because when we look at the distribution, at least 60% of our revenues are coming from there. So it's important. When we look by in term of -- for sure, for us, it has been important, let's say, also for -- fuel this growth in production of new products because last year, we introduced many, many new product lines for our microcontroller, STM32, more than 10 product lines. For sure, there is a good advantage and a strong, let's say, ecosystem that it tells, of course, this product line to be well-accepted by the market. We see other product line, maybe in this case, are not related to MCD but -- or the microcontroller. For instance, if I look in the channel, the situation of our MEMS, also in this case, it's quite good. Inventory is very low and POS is very -- is strong. There are other lines, product lines, in particular, when we look at the analog. Here, the situation is less brilliant, for sure. Even if in April, we have seen some positive sign in Asia also for this line. But still, we have, for analog, significant inventory and POS, for sure, is not improving significantly.

Understood. Maybe I'll ask one longer-term question, Lorenzo. I mean at the Analyst Day last year, you talked about 17% to 18% midterm margin and EPS at the midpoint of around $2. And I mean $12 billion in revenue will cause this to happen. Is it still plausible that in the midterm, say that by 2022 or so, that this -- that you have big design wins coming in the next couple of years, which can make this happen despite the short-term issues associated with the current macro environment?

Well, when I look, let's say, what we said, let's say, last year at our Capital Markets Day, was that assuming that the market was growing in the midterm annually in the range of between 4% to 5%, our model was to reach, let's say, at the Capital Markets Day, I was saying, midterm. Then after, we try to say something more than midterm, we said by 2022 in the range of $12 billion. For sure, this year, the market will not grow, as we have seen before that we are expecting the market declining by minus 15% to minus 5%. In our view, the fundamental, let's say, in terms of ability for the company, let's say, to achieve our midterm model, the $12 billion with gross margin in the range of 40%, 41%, operating margin, 17%, 19%, are still there. Then in terms of timing, now it's difficult to say. And this is the reason why we moved our Capital Markets Day, let's say, in September. Why we did that, exactly to gain some more visibility in order to understand what could be the evolution in the midterm. What it appears to be, let's say, 2020, what it will be in 2021. At that time, we'll be more in a position to reconfirm our model and then maybe also to discuss with a little bit more data point about when we would expect this model to materialize.

Understood. Maybe one customer-related question. I mean, the U.S., if you've seen in the press, there has been -- that there are going to be lots of changes in terms of what can ship into China, also what -- I mean, and that has already gone into the books, I believe, of the commerce department. Also, there are supposed changes coming about shipments to Huawei and those who use U.S. semiconductor equipment and there -- and what they can shift to Huawei. Does this have any risk to ST in terms of the short term, that is second half of the year as well as potentially for the long-term -- or the midterm plan?

Huawei for us is an important customer, let's say. It's a customer in which we have gained ground significantly in the last few years. Today, Huawei is a customer that is definitely in the top 10, and I would say that is approaching the top 5. So this is a customer in which we are fast growing, let's say, and we serve products that are both, let's say, custom-designed products as well as application-specific standard products. This was mainly driven by our technology product portfolio. And also the fact that we have a supply chain and IP independence irrespective to -- when we look at the possible addition of restriction from U.S. administration on export license rule on the technology, what if -- let's say, what today is on the news, ST will not be directly impacted. As all the technology as the embedding, the products that we send to Huawei are above 20 nanometer. Anyway, for sure, it's difficult to assess other implications that this tightening of export rule can have for the customer, for Huawei. The fact is that could impact the access, for instance, to node, to application processor, modem or advanced ASIC. And this, for sure, if this is the case, yes, it's true that may have some reflect also for us. For me, a decision of the U.S. administration in tightening the restriction to export that is targeting some specific Chinese companies will trigger, for sure, many consequence and probably will impact negatively on top of the current COVID-19 pandemic, the overall economy. So it will be not only an impact directly to the customer. But I do think it will be more in general an impact, a negative impact for the economy.

Understood. Lorenzo, one last question for me because we're about to run out of time. How do you think about CapEx plans from here? This year, you've cut CapEx because of what -- versus what you said in January. How do you see CapEx from here with your Agrate fab to be ramped up, et cetera?

This year, we said, the CapEx that we are going to -- in our plan today, is between 1 billion and 1.2 billion. 1 billion to 1.2 billion. This translates substantially in our CapEx to sales ratio that will be approximately between 11.5 and 12.5. When last year, we gave an indication of the CapEx level, including our strategic projects that we were expecting over the period for our midterm model we were talking about $1.1 billion to $1.5 billion. Last year, in 2019, we spent 1.17 that was in the range of 12%. Our CapEx model to sustain growth is clear. In addition, what we want to do is to mitigate the investment, moving progressively our front-end foundry weight of production value around 30%. Today, we are more in the range of 20%. This will mitigate.

Thank you, Lorenzo. I think we're running out of time. So thank you so much for your answers. I'm going to have to cut you off here because we have essentially run out of time. But thank you so much for joining us today. Thank you.

Okay. Thank you, too. Thank you. Bye.

Thank you.