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

Hello, everyone. I'm Amit Harchandani, Head of Citi's European Tech Research team and your host for this virtual fireside chat session on STMicroelectronics as part of Citi's 2021 Global Technology Conference. Thanks for joining us, and I do hope you and your loved ones are safe and healthy. Before I go on to introducing our main speaker, I would like to highlight that we are keen to take questions from investors joining us on this chat, so please do send them over, either via the option on your screen or directly to me, [email protected], and I shall ask them on your behalf. So with the housekeeping out of the way, it is my pleasure to introduce our main speakers, STMicroelectronics' CEO, Jean-Marc Chery; and STMicroelectronics', Lorenzo Grandi, accompanied by Celine Berthier and Tait Sorensen from the Investor Relations team. Team ST, thank you for joining us and supporting our conference every year. So in terms of the plan for the session, we aim to structure it across 4 broad segments. We shall actually start by briefly talking about sustainability and then go into detail on the near-term dynamics. Subsequently, we should look at some of the longer-term aspects of the story and round off with questions on financials.

So starting with sustainability, Jean-Marc, ST has called sustainability 1 of its 3 pillars of value proposition. Please remind us of what the key targets are for ST around sustainability and how are you progressing against those targets?

So thank you. About sustainability, I think we see 3 points. Well, first of all, okay, is to create a sustainable technology and a product that enable customers in a sustainable way, giving priority to our people and to the planet. And as a sustainable company, it means creating, let's say, long-term value for our shareholders, for our partners and communities. Well, clearly, we can speak -- because we have defined for the overall, let's say, policy, 24 KPIs where we monitor very carefully and we have fixed target for 2025 and 2027. But I would like, let's say, to highlight, let's say, a few of them for attrition. But of course, okay, this subject will [ start ], certainly a communication at our next Capital Market Day, as an example, okay, where we are clearly, we will detail everything. Well about sustainable product and technology. I have to say that ST by ourself, we have defined a methodology and we have defined a level about what we consider a sustainable technology, a responsible product. Of course, okay, the challenge is to conform this methodology and to conform this level to external, let's say, a stakeholder which will, okay, feedback us if it is the right way to go. But assuming this statement is okay -- okay, we have defined clearly a level and a methodology. So today, I can disclose to you that according this methodology and the level, we have 63% of our new product, okay, fulfilling this level out of a total of 250 products. And this 250 product represented in 2020 about 18%, 18.5% of our revenue. And we have defined milestones. So we want to have at least by 2025, okay, more than 20% of our new -- with this, let's say, responsible product and 30%, above 30% by 2027. So the first point is, again, the sustainable technology and product. Then the second point I would like to highlight is about our people and about the planet. Well, about our people, we have many, let's say, programs and KPI, but I would like to highlight the one about human rights. And clearly, here, we have 100% of our site assessed by RBA audits. And we want to be -- to have all the sites classify platinum by RBA audits by 2025. Then the second aspect is diversity. Well, clearly, okay, on diversity, by ST by essence, we have, let's say, more than 100 nationality, okay, from this nationality diversity, it's an important factor. And no one of nationality are above 25% of the total of the company. But the also important factor is the gender diversity. So today, we have set up a woman in action program in order to prepare the future management and leaders in the company. And we want that at a management level. So from experience management level, group management and executive and president, women will represent at least, okay, 20% in each level. Today, we are starting from 10% to 20%. So 10% in executive and 20% in professional experience. We want to be across the board minimum at least 20%. Going to planet. Planet, clearly, I confirm we want to be on what we control so carbon neutral by 2027. So it will be a combination between greenhouse gas emission strong reduction. Renewable energy, 100% usage. And of course, we will offset the emissions, which are related to the logistics and transportation by 2 things: improvement program definitively, but also we will put, okay, let's say, action to offset the impact of the emission related to the logistics. Well, then after related to the continuous value creation, long-term value creation to our shareholders, okay, to partners and community here is the same. So we have a really important set of KPI. Simply, I would like to say that, okay, we will maintain our presence in the main indices like Dinozzo, SI or other indices. And clearly, our target is to be recognized as, let's say, an excellent company in this field. So 24 KPIs total. So sustainable technology in a sustainable way and sustainable, let's say, value creation to our stakeholder. And I have just illustrated a few of one, a definitive -- okay, Celine and the team of Investor Relations during the Capital Market Day next year, okay, we'll organize a specific session on it.

Thank you, Jean-Marc, for that comprehensive overview on sustainability. Right. So picking up pace and moving on to our second segment, near term dynamics. At the second quarter results, your comments suggested that demand is running 30% ahead of ST's own capacity plants. Can you please tell us if that's the case today? What's the latest update from your side on the demand pipeline across different end markets?

Now today, well for 2021, I confirm to you that the backlog we have September and Q4 is well above 30% in excess of our planned capacity, above 30% on the requested debt from the customer. And this is valid, okay, for, let's say, all -- let's say, customer channel, region. We address verticals, we address end product. Then about the booking, okay, the book-to-bill is really still strong, okay, quarter-to-date, okay, well above the priority. Again, well spread [ everywhere ] we are. Well about next year, what I can tell you, it is clear that, as usual, the summer period is a moment where we start to elaborate on the plan, the sales and the operating plan. We want to set up, okay, for the next 3 years and specifically for next year to drive the company, to drive the financial model of the company, our resources, our CapEx, our labor force. And clearly, we have done it in this market condition. This sales and operating plan, will represent, a material growth compared, what we announced for 2021. And I repeat, we announced revenue, let's say, midpoint about $12.5 billion. Next year, we are setting a plan which will show material growth. And what I can confirm to you that this plan for next year is already covered by the backlog, so far and in fact already covered. And when we compute, with our methodology, with the values that are a point we have bottom up what we call the unconstrained [ amount ] it's still above -- it's still materially above. So this is where we are. Important to say that, next year, to support this scenario, we are working on contrary H2. This year, we will have a balanced support from our external manufacturing and internal manufacturing as well, okay? Unfortunately, we faced in H2 this year a lower supply in terms of wafer from the foundry partners versus H1 because they have decided to allocate it -- more -- to allocate, sorry, more to automotive verticals versus the industrial one. But next year, the external partner, the foundry partner will support us in a very similar way than our internal manufacturer. So yes, this is where we are. That's the reason why, I very candidly communicate that, I see the situation improving in 2022 is the feel of the supply, definitively. Still driven by the mega trend of the both standalone electronics and model electronics. But to come back a normal situation where you will have safety stock fulfilled in the supply chain, lead time coming to a quarter or similar, it will not happen before, let's say, early 2022. 2022 will be still a year where here and there, the supply chain will be under stretch.

And if I could just sort of try to dig a little bit deeper into that. If I understand correctly, you're looking to add capacity in the range of $1.4 billion to $1.5 billion based on your CapEx plan this year. Assuming that comes online next year and you talked about a material uplift and everything being covered, plus there is price increases, which are being talked about in the industry. Is it fair for us to say that the uplift would be at least $1.4 billion plus price increases? Is that the kind of level we are thinking about looking towards next year?

This year, yes, I confirm we will invest about $2.1 billion and $1.4 billion to $1.5 billion is dedicated to capacity increase, but also mix change because, we have not to ignore that we face also important mix change in technology cluster and package. Very simply, also CapEx, we have invested -- H1 are contributing to this year's growth and mix adaptation. And the CapEx, we are investing in H2 for wafer fab with, let's say, materially start to generate additional revenue in H1 next year, not in H2 this year. And for us, it will be a test, okay, the CapEx we have spent this year in H2 will start to contribute in Q4 and materially starting Q1 next year. Again, for next year, about the plan we have decided with the team based on all the data point we have, issuing something materially going versus this year. Well, we know that the sum next year according to WSTS, will grow 6% to 8%. And we are, let's say, confident, to perform more and we are equipping ourselves accordingly.

Noted. But I guess if I could just continue on from that. There are a couple of other factors, right? Firstly, I think there's been an impact from Malaysia this year, and we still continue to hear some noises about supply chain being impacted in Malaysia. So if you could help us understand the impact for this year and potentially that going away next year. And I guess you will also continue to spend some CapEx in the first half of next year, which might help towards the second half of next year?

So Malaysia. Well, first of all, okay, I am -- I feel entitled to speak about Malaysia because this morning, I land from Malaysia. I was in Malaysia yesterday. So it is clear that this country face from May -- April, May, June, July, August, a terrible wave of the variant delta. And the situation is still not fragile, it is still material. They have basically still 20,000 cases per day, new cases. And it has been spread, okay, progressively across the region. So starting with the North and then okay, coming to the center and the south. And the south is the state offshore, where we are, has been impacted at the end. And that's the reason why up to end of June, ST was not too much impacted, but the main hit occurred in July and August. And we faced, many, many days of total or partial closure, numerous number of people under quarantine and very sadly, some fatalities. Now I have to say the government, Malay, but I cannot comment too much on the, let's say, government and authorities. But, they have set up a clear strategy with some phase, the Phase 1, Phase 2, Phase 3, Phase 4. Okay, where they consider that the situation is severe and then they can move, on a totally controlled situation. And -- but, I encourage people to look at their web site, okay, what they're clearly [ dispatching ]. As far as the ST is concerned, what I can confirm to you very clearly. Today, we have 99% of our people totally vaccinated. So 2 injections, 99% of our people are totally vaccinated. And now we are engaging discussion with authorities to extend the vaccination to the family. Second point, okay, we are -- we have a clear policy in agreement, with the national authorities to prevent access to our site to people classify at risk. Why? Because, okay, they have set up a clear system application based on QR code, people -- based on self declaration, but also they have to well -- everywhere they are doing, they have to scan their QR code. Okay, they're smartphone, their profile -- at risk, not at risk and so on and so forth. To access to the site automatically on [indiscernible] to the badge, okay, you need to scan your QR code. And if you are classified at risk, you cannot access to the site. And I have the -- because to access Malaysia, you need to have in your smartphone this application. So the second important action is we have put in place in cooperation with the government this measure. Then the third one. When you are inside our plant, you have a tracker, which is able to monitor, if you are below 1 meter to anybody for a duration exceeding 15 minutes. So it's very important because in case of a COVID-19 new case, instead to put in quarantine, so full, let's say, building and all the shift, you put only on quarantine the limited number of people, which has been target. So it's a very, let's say, efficient, let's say, technology, preventing okay, any industrial to put people massively on quarantine because they have no other, let's say, way to do it. Every 2 weeks, we fully test our people with a PCR test to detect if there is a risk case. And in case we have unfortunately one case detected, we close the area where the people is for one shift, we completely sanitize, okay? And the shift after people are coming back. Of course, people which were not detected by the tracker. So you see with the 4 measures, so 99% vaccination rate, access control, tracking and sanitization in case of case, we are really confident that starting August, progressively up to end of September when we will come back to 100% production capacity, we can sustain it. But of course, it has requested, vaccination because at the average of the country, I guess the vaccination rate is below 50%. It is 47%, something like that and very unbalanced. So in area like Kuala Lumpur, it is close to 90%. In Johor where we are, it is below 20p. -- But okay, because the Malaysia faced shortage of vaccine definitively. Then to have all the protocol of social distance and access and so on, it has requested technology implementation, but all are going on. And clearly, the Malaysian authorities are really cooperating and there is a very good spirit and engagement with industrial. So this is what I can tell you. It's not noise. It is what I have seen, okay? So -- and what we have implemented in ST.

Thank you, Jean-Marc, for that very comprehensive response. And I must confess I did not realize you've had such a long journey coming into -- you don't look that jet lagged, I must confess.

Yes. Yes. It's my duty. Okay.

Moving -- right, we talked about pricing earlier very briefly. And I was hoping to maybe touch upon that before we leave sort of the near-term dynamics. How are you thinking about pricing in the industry today, Jean-Marc? We hear about foundries raising pricing, what does that mean for you? What are you telling your customers? When should we see the benefits of that coming through into next year?

Right. Lorenzo will complement what I will say. But of course, I will not comment on the one single information raised during the past few days. It is clear that our industry, and ST as well, we are facing since 1 year some tension on the purchasing price for materials, so process material for wafer fab, including silicon and direct material. Direct material for assembly, okay? So complex substrate, frame. Now, you know that there is also the raw material of our raw material with some price tension definitively. The model of capacity increase, the model of CapEx is above the compound average growth rate plan, okay? We set up during the past period and so on. So all these ingredients. Of course, are pushing for cost increase. Well, then definitively the fact we operate at 100% loading of our manufacturing, also enable good efficiency. So it is clear that we have to mitigate this inflation on cost by our improvement on productivity and efficiency. And then there is a value of our product, okay? So increasing number of product, sustainable product, more solution, microcontroller, to provide connectivity, security features, silicon carbide. The value we are providing to our customers is increasing. So in fact, our pricing policy to customer or our mix between the purchasing cost increasing, efficiency improving, value creation increasing. It is clear that the current situation of the supply chain is also creating a favorable environment for price. So this is what I can tell you. But we are not driven by one single event where we jump immediately. And of course, I do not comment on commercial discussion we had with our vendors, partners and customers. I never do it.

Noted, Jean-Marc, but maybe could I just summarize all of this by saying that you talked about the material growth next year, price increases volumes. It's hard to see how you can't grow double digit next year, right? When I look at the addressable market and the way you've outperformed it, if I put all the dots together.

We will, let's say, give accurate visibility more first in January with the CapEx. And we will break down, the various part of the CapEx, okay? And we will provide the indication for next year, as usual in April. Again, what is important to -- I would like to confirm is the sales and operating plan is a decision. It's a management decision, okay, acknowledging a complex set of input parameters and objective. So I would like to have that. Our ST, our company is convinced that we can continue to create value for our shareholders, increasing the fundamental value through organic growth. Why? Because we have the differentiating enabler to propose to our customers. We will acquire small companies to boost our sales. But we are convinced we can continue to perform better than the average of our sub on a compound average growth rate over the period, okay? So this is what I would like to confirm. And we organize ourselves consistently. And then definitively, we oscillate when we are facing situation. I am not shy to confirm to you that despite I confirm to you $12 billion in 2023, we will achieve $12.5 billion in 2021. Why? Because we adapt our sales very fast. But, we drive the company by decision and by plan.

Noted, Jean-Marc. Moving on now, a few more questions to get through. We have passed the halfway mark. So longer-term aspects of the story, starting with silicon carbide, you're on track to do more than $550 million in revenues this year. Doesn't the $1 trillion -- sorry, $1 billion in 2025 look a bit conservative?

The $1 trillion? No. Now let's okay, it's clear what is important is we have this objective, which is a sustainable $1 billion in May 2025 and representing 30% of market share. And the milestone or revenue we generate every year, clearly, which must be consistent. So to be well above $0.5 billion in 2021, of course, is consistent with the $1 billion. More important is the amount of programs we have. So 81 programs awarded, well breakdown between automotive and industrial and the number of customers. Well then, of course, the supply chain, our capability to support internally in each resource. This is a business ambition. So we have 2 front end now. So we have Catania in Singapore, okay? We have 2 assembly plants for package. So we have a Shenzhen, and we have, let's say, Bouskoura. And we have set up strategic agreement with some module maker. So either was that like or a module maker, which are well known in the field of this market. So this is also an important aspect. Then the last one is sourcing and resourcing. So we have set up the strategic agreement, okay, we have expanded the strategic agreement with Cree very recently. We have another one with [indiscernible]. And this agreement, okay, will support our ambition. And last but not the least, because we want to take advantage of the opportunity of improvement from the raw material and we want to lead the 200-millimeter conversion and we want to target 40% of strategic independence from Europe for our silicon carbide, all this from the raw material. Let's say, landscape of ST is confirming to you that we will achieve this $1 billion and 30% market share. I will communicate, at the next Capital Market Day definitively, the main outcome of our strategic plan. I expect that maybe $1 billion will be achieved before. But I will communicate at this period of time.

Got it. I guess moving on to one of the other points now. Again, you've talked about, I guess, the word you used was unprecedented visibility. And in fact, you also talked about visibility over the next 3 years in case of your engaged programs. What's the latest you can share with us in terms of 3D sensing. I mean, I guess today is an opportunity given one of your large customers is out with an announcement but -- or going to come out with an announcement, but curious to know how you're thinking of imaging and 3D sensing into 2022 and beyond?

Yes. This is a, I think, okay, sooner or later, we'll see the announcement for our main customer, and I am pretty sure that the [indiscernible] are already read -- impatient to open the phone and we'll share with the architecture inside. But I confirm what I say, let's say, a few weeks and months ago, this subsystem of this, let's say, smartphone are quite complex. And then definitively, the software around the hardware architecture, then the constraints set up by the design overall of the device. All in all, okay, it's not something you can change overnight. Of course, you can, let's say, implement new flavor, you can marginally change, okay, some design and content, but not materially. And if you want to change materially the technology and the hardware and the software, which is around -- it's request, okay, many, many quarters. So that's the reason why I'm very comfortable to tell you that we have a clear visibility about this engaged customer program and specifically for this one, but for many other ones, also in the field of automotive, in the field of computer, okay. We have such programs. And when we engage -- when we decide ourselves in the operating plan for the next years, we know exactly what is going on. And I can confirm to you. And I can confirm to you that our Imaging division will contribute materially to the revenue of the company in the next 3 years.

Okay. So you would recommend ST holders to get the new phone and break it open, have a look at it. Right. I guess before we go on to financials, and I'm mindful we have not had Lorenzo chip in actively yet. I guess China before we go to financials. How are you thinking about China today, Jean-Marc, in terms of, I guess, demand, joint ventures, operations. You have back-end exposure. There's a fair amount of debate on the role of China in the semiconductor supply chain going forward.

First of all, okay, what -- where we are today. So today, our strategy in China, for sure, manufacturing is around the JV we have in Shenzhen, okay, with a Chinese partner, which is a long legacy and a long-lasting cooperation. A successful cooperation because Shenzhen them is a very, very efficient manufacturing asset for ST. Then what is maybe less visible that we have engaged since 2, 3 years is design center, application center and quality lab center close to our customer. But it is valid in China, it is valid in Taiwan, it is valid in Singapore, it is valid in America -- in U.S. So it is clearly something we have, let's say, understood since many years, but we have executed since a few years to develop, close to the customer ecosystem, our capability to design and to help customers on application and our customers to work with us. And China is important hub of design and application capability for us. Related to the future of -- about manufacturing, on wafer fab or on assembly and plant. Yes, it is part of the new strategic plan, which is, let's say, an update of what we are doing, but taking into account what happened during the past 2 years because nobody can say what had happened during the past 2 years is a nonevent. The tension between U.S. and China as the decoupling -- partial decoupling of the economy. The COVID -- the way various countries behave in front of the COVID. All in all -- okay, of course, are triggering strategic thinking about our manufacturing footprint. However, what I would like to confirm for the time being is for our own manufacturing footprint, we have the opportunity to expand in Kirkop, 300-millimeter. We have the capability to expand in Singapore, 200-millimeter. We have the capability to expand in Catania for silicon carbide. We will have Agrate coming on board starting end of 2022 to deliver mixed-signal technology, embedded flash technology for the next 5 years. And we have our foundry partners, which, after the difficult second half. We have acknowledged what they are facing because we face the same situation with the automotive industry will contribute to our growth in a better manner. So next year, they will enable our goals. So all in all, this is where we are, okay? We will still do something in our infrastructure or school partnership. We always said that we are open to partnership if our strategy requested. But okay, this I will comment when the time will come.

Thank you, Jean-Marc. Lorenzo, maybe to quickly bring you in now. In terms of financials and gross margins, give us a sense of how we should think about it into 2022. We have talked about price increases. Well, your foundry partners are increasing prices themselves. Are you able to pass it on? How should we think about inflation pressures on you from your suppliers and what that means for gross margins?

Our gross margin in the second part of the year, we were guiding Q3 2021 of 41%. And what we said is that in Q4, the level of gross margin will be substantially similar to the one of Q3. So at the end what I said is that for the full year, we will be slightly above 40% for 2021. How we see the evolution of the gross margin, let's say, moving forward. For sure, it's a little bit early to talk about a firm number for 2022. Anyway, what I can say is that our gross margin at this level is not only a matter of pricing to our customers. It's true that we see a favorable environment for pricing to our customers. On the other side, there we see, let's say, what you were mentioning, it's a tension on our supply chain, so from our supply. But we have to say that this level of gross margin is also coming from a good performance from our manufacturing, and this will be going inside the 2022 as well. And is also, let's say, related to the innovation of our product. We have a positive impact on our gross margin related to the product mix. This is something that is sustainable in the current environment, in the future environment. So what we see is that our gross margin is more likely related to the product mix. This be in the similar range, let's say, moving in 2022 as it was in the second half of this year. Of course, this is not the end of the journey for us for the gross margin let's say, for sure, medium term, when we will be -- we will have more weight of our production in 12 weeks, and this will come from, let's say, increased production in coal and definitely when are free. Our graphic 12-inch will be at the right size. For sure this will be another ingredient that will help us in order to be -- to increase our gross margin. This component will be definitely incredible for our gross margin. moving forward, medium, long term.

So it's fair to say despite the CapEx and the step-up in depreciation, you have other levers like top line growth, pricing, volume growth, 300, which should still keep the gross margin moving upwards, if I could call it?

Yes, let's say, that we see at this stage, let's say, a sustainability of our gross margin at the level of what we see during the second half of this year.

And actually on CapEx, again, you've commented on it being similar next year to this year. Is that still the right way to think about it? Or you think you might even need to spend a bit more, given that demand is now above 30% of where your capacity is today?

You know that for the CapEx, we are coming with the data point, precise data point at the beginning of the year in January. What I can say that we have 3 buckets fundamentally in our CapEx. One is the maintenance, and this is mainly related to overall our infrastructure that at the end will be similarly update. The second one will be related to capacity at mid change. And this will substantially follow the evolution of our revenue's growth, let's say. We have this -- this has been commented also by Jean-Marc. The third one is about our strategic program. And the strategic program here, we are talking mainly on our 12-inch in the North of Italy [indiscernible] and the silicon carbide substrate. Definitely, here, we will see, let's say, an acceleration path for these strategic initiatives for the next year.

With this, I guess we are out of time. So on behalf of Citi and its clients, thank you for joining us, Jean-Marc, Lorenzo, best wishes to you and the rest of team ST. Ladies and gentlemen, this concludes the session on STMicroelectronics.

Thank you. Bye-bye.

Thank you. Bye.