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

Thank you, operator. Good morning, everybody, and thank you for joining us on 1 of the first sessions at Barclays Global TMT Conference. My name is Keagan Bryce, and I cover European tech Hardware at Barclays. It's my distinct pleasure today to introduce Jean-Marc Chery, CEO of STMicroelectronics; and Lorenzo Grandi, CFO of STMicroelectronics. Thank you both for joining us.

Hello. Thank you. Good morning.

We have about 30 minutes for this fireside chat. And if anyone in the audience wants to ask a question, please do e-mail me and I'll try and incorporate it into some of my prepared comments. With that said, let's dive straight into Q&A. Perhaps starting with the near term, it would be great to get both of your perspectives as to what ST is currently seeing in terms of demand and supply across its key-end markets from electronics, PCs to automotive and industrial where is inventory on your own book? Where is it in the channel? And how are lead times trending?

So for sake of understanding, okay, so I would like to simply break down the electronic market in 2 big part classified stand-alone electronics. So Personal Electronics or smartphone accessories. And then computer, computer peripheral and then what is relative to communication equipment. And then what we call the embedded electronics, automotive and industrial markets. So on stand-alone electronics, okay, I would like to confirm that, okay, from our view about the overall industry. The demand is still okay. CD is very solid. -- related to 5G phone, smartphone definitively and smart accessories, okay, like the smart watches. And clearly, in terms of, let's say, near-term development we are seeing some other smart accessories coming like the smart glasses, okay, which will be certainly a key enabler of the, let's say, what we call the nomadic okay experience. On server and communication, very similar. The demand is really solid and steady. We know that the investment in the cloud, cloud computing. And we know that the deployment of base station for 5G has restarted, okay, as in a good pace. And so the demand is as well soon. where we see, okay, the demand coming back to not normal, okay, where you have a balance between demand, supply and progressively going back to, let's say, lead time, okay, consistent with the production cycle time. It is on personal computer, okay, not comms kind of device, and we do believe this is consistent also after the peak related to the stat effect and education, okay, at all this kind of stuff. About embedded electronics. It is another story, embedded electronics, okay. So automotive and industrial, clearly, we have let's say, a 3 cumulative effect. Effect, number one, okay, more and more, the transformation, these 2 verticals have to achieve is really unprecedented. For automotive, okay, what is related again to the electromobility. So whatever is a full battery-based vehicles, or hybrid vehicles for digitalization. So what is related to more safety and entertainment. But as well, okay, what we are seeing on legacy, okay, so break ABS, okay, brake system, lighting control is requesting more and more component. The overall vehicles, okay, we know on automotive this year will be EUR 77 million, okay, limited by the shortage of semiconductor. Certainly, okay, we'll go back to EUR 90 million, okay, depending on the semiconductor supply. But the content okay, is really increasing, driven by electrification, digitalization, but also a change in architecture and the legacy. Industrial market, okay, is basically quite similar because what is related to power energy efficiency and all the stimulus, okay, which has been provided or will be provided by the various continents and government, okay, is really pushing the demand in terms of semiconductor for, let's say, a industry, but for smart cities, okay, smart home. Clearly, okay, now the 5G deployment -- again, acceleration will be the bigger point for the IoT. More and more, smart device capability for the network to enable and clearly opening many cases, okay, for a consumer experience. So definitively, the demand, okay, is very solid. I have to confirm as well that the channel, the inventory for embedded Electronics is totally empty. We know that when the supplier will try to match with the demand, we will have to fulfill also some inventory level simply in order that the various supply chain or manufacturing involved in the supply chain, okay, we'll have to operate in a normal decent condition, which is not the case today. Okay. Today, between the shortage. And the logistics, okay, we know that many plants a carmaker or important OEMs are struggling, okay, because of the ratio, supply of components. So even if at a certain moment, okay, you have a convergence between the demand and the plant supply, we will have to fulfill a certain level of inventory, which basically today at OEM module electronics side or through the distribution channel is really totally lead and. And also data point, okay, we monitor, okay, are showing exactly this situation. So this is overall industry view. As far as the is concerned, we continue to operate with an unprecedented backlog of order. So let's say, firm order, noncancelable order frame order, particularly we never have because book-to-bill is above one. We continue to increase the backlog definitively. As far as the verticals we address, I can confirm to you that this year, we will perform. At the midpoint of the indication, okay, on the guidance we have given for Q4 and overall growth for the full year at about 23%. The automotive and industrial market we address will perform better for us above the average And the Personal Electronics below Personal electronic, we know why, okay, there is important let's say, impact, okay, from Huawei and HiSilicon definitively, but also because we allocated our capacity consistently with our strategy to be a broad range leader, okay, on automotive and industrial market. And to address selectively the Personal Electronics market, okay, with our engaged customer programs and when we have the opportunity with General proposal for it. So this is the overall situation. So as a takeaway, some applications coming back to normal on stand-alone electronics and that should improve steadily across 2022. Still very, very strong backlog and demand on embedded electronics because the transformation, because the supply chain is totally empty and the demand -- the end demand is very strong. So this is the situation today.

Thank you, Jean-Marc. I mean just on this comment now, if you sort of confirming the point of guidance for this year. Obviously, last quarter, you saw, let's say, larger than anticipated headwinds from the COVID situation in Malaysia. I understand those facilities have been operational since September. But are you seeing any more bottlenecks? Obviously, there's a lot more uncertainty now around the new COVID variant. But do you see any new potential bolternecks that could be impacting you either this quarter or into Q1 next year?

Well, clearly, we have fixed, okay, since early September, the situation in Asia, mainly in Malaysia. And now -- We know that this famous delta variant wave is impacting Europe. But where we operate, okay, for sure, in terms of, let's say, employee vaccination, okay, we are better equipped than to 5 months ago, okay, in Asia. So today, we have absolutely, let's say, no impact on the variant, okay, we manage the production. Okay? We manage people stay at home for a certain percentage in order to respect all the rules, regulations and so on. So clearly, we don't see impact, okay, today related to this fifth wave in Europe related to the [indiscernible].

Very clear. And then maybe sort of turn into '22. I mean Jean-Marc, you've been pretty clear that you as a business intend to outgrow your addressable market next year, and you're obviously adding capacity, particularly in 12-inch to achieve that goal. But it feels like even with that new capacity, and I know you guys are going to give us that in January in terms of what you're going to spend, but it feels like even with that new capacity, there's still going to be a gap between demand and supply here for you. So what do you think needs to happen for you to get closer to where demand is? Is it going to be better equipment supply, better materials, maybe more allocation of foundry? Any kind of color here, I think, would be helpful.

When you operate, okay with the backlog, which is a order -- which is well above $20 billion. And for sure, you are limited by supply. Both, okay, what you need to make the production. But clearly, in terms of equipment supply, okay? Clearly, there is a limitation, okay, from -- for fire equipment. Lead time for scanner is well above 1 year. We know that the manufacturing capacity on the stretch any random event is a concern. So today, the limitation for the semiconductor industry and a company like ST is related to our own supply and to the own supply of our supplier. As an example, for scanner lens is a concern, but also some chemical molecules and so on and so forth for specialty chemicals product. So today, the overall supply is quite stretched. And on top of that, you know that the logistics is pretty saturated as well. So we have to work. Clearly, first of all, okay, we have to concentrate ourselves on the execution of the capacity increase related to the CapEx, okay, we spent this year in Q4, and we will spend in Q1, in Q2, in Q3 that should contribute, okay, to the revenue and the service to customers. We have to work, okay, very closely with our customer within our allocation process and to work on the mix and to be sure that, okay, we do not miss any opportunity to support our customers, building inventories on another side. So that's the reason why also we are very confident that our customer are not trying, okay, to build inventories because they know the situation is so stretch that if we want to optimize, okay, the overall asset the semiconductor industry has. We need to work in this very close relationship on a lean approach in terms of inventory center.

That kind of ties into my next question on the inventory front, right? So you obviously talked about your relationships with OEMs improving. You communicated better, you're planning better in terms of longer term. At the same time, I think once there is belief that once supply normalizes, you might see the Tier 1s and OEMs build a structurally higher level of inventory going forward as to avoid the kind of drastic cuts that we saw this year. And so therefore, there is this concern that some investors have that with a structurally high level of inventory, maybe there's more misalignment between end demand and what demand ST eventually sees on the chip side. Is that a concern that you potentially share? Or do you think that this improved channel of communication kind of offsets that concern?

No, this is not a concern we share. I think, okay, the communication is so close now in order to really optimize the situation and avoid damage okay, number of vehicle produced, okay, number of, let's say, equipment for charging infrastructure or smart cities, okay. The damage is so important that, okay, we are working very closely. Then again, I repeat today, the inventory pipeline is really lean and weak and not at the safety level to offer normally plant. What the industry and especially the semiconductor company like us and our customers, so Tier 1 OEM or OEM has to manage. It is a transformation of their own logistics, okay, to all together exactly understand the right mix of the application, the right mix of product in order to make them successful. And this is a challenge because, okay, you cannot rely on what was the 2019 situation for the car industry. The structure of car changed radically. What you have in an electrical car is totally different what you have on a nonthermal combustion engine car. So this mix -- this anticipation of what is the demand working together is really the challenge we have and not about customer, okay, over raising the inventories. And clearly, okay, this is what we see at least for the next 2, 3 years.

That's very clear. And then maybe sort of stick in one last question on the automotive front. Silicon carbide has been a great business for you. You've brought -- you pulled in your $1 billion target sales number for the [ 24 ]. Could you maybe sort of spend some time walking us through the factors that led to that upgrade? Was it accelerated road maps for customers? Was it sort of higher industry forecast across silicon carbide adoption, both in the automotive and industrial level.

Well, you know that the past 12, 18 months, okay, I've seen an acceleration of the electrical vehicles, battery based introduction, okay? It's simply an pie in front of the media, Okay, you see the number of cars which are introduced and so on. Well, you know that, okay, ST has been a pathfinder semiconductor provider, okay, of this solution since now many years. We have seen one major carmaker. I don't think this technology, okay. The first -- We know that the other one in the first period, okay, has made design of investor, onboard charger or more based on IGBT. But now case, the new generation are moving massively on silicon carbide and really, okay, optimizing, okay, all the enabling features that this material is capable to do, okay, to switch, okay, the power for an electrical engine. And now we see a tremendous acceleration on automotive, but again, on industrial market as well. So the market, okay, you can address with the silicon carbide is where high-power switch is requested. It's great for silicon carbide. So the redemption of silicon carbide, the pervasion of silicon carbide now is everywhere where you need to switch on power at an acceptable frequency. So for sure, okay, when we scrutinize our business plan and our capability to invest and the capability to supply naturally, okay, we have anticipated our target of $1 billion, keeping sustainable, okay, what we consider, okay, decent market share at 30%. And because we are highly confident in our capability to execute and to have the demand in France, okay, we share this target to the market.

Thank you, Marc. I mean a couple of investor questions are coming around your automotive business next year. And so again, this question of how much growth into 2022 is going to come from electrification via xEV penetration? And how much is going to come in terms of digitalization in terms of sort of premium chip content increasing with higher tier cars?

You remember when we discuss altogether before the COVID period, basically, the ratio between legacy and what we consider electrification, digitalization and connectivity was 70-30. Certainly, okay, exiting this year and exiting next year, when we will compute or when we will meet, okay, certainly in May and June, I hope at the next physical capital market day we will be certainly now more in the range of 60-40, okay, with the dynamic, okay, going faster than expected, okay, at 50-50. Difficult to say today, okay, because, okay, there is also many implications, okay, with some limitation factor from other device. But clearly, this is the dynamic we see. We will go much faster to 50-50 and crossing the line than expected, okay, 1 year ago.

Thank you, Marc. Then maybe switching divisions on the Imaging side of things. I appreciate that, let's say, smartphone release cycle is a little bit different this year to last -- But if I look at how you've talked about your Imaging business, you clearly are a lot more optimistic this year if you're not calling for growth versus I think prior, you said it was going to be flat. Where has that change in tone come from? And then, I guess, longer term, what is your view around Imaging for '22 and '23, particularly given, a, the longer-term nature of some of these customer engagements and b, we know that you're trying to obviously add capacity in coal?

Well, this is not a question to be optimistic, it's the question to be fact-based. Okay. Again, we know exactly the engaged programs we have with our main customers. We know the diversification strategy we have engaged, okay, with our other customers. And I have to say that the predictability, okay, the way we compare it, okay, we plan our business together is pretty well, let's say, efficient. Even if the supply chain is as complex as any other application supply chain. But the relation we have established and the way we operate and we manage the supply chain is quite efficient. And again, this is what I have repeated across the various period, we have the visibility -- 3 years of visibility on what is going on. We know what is happening, okay? Again, I repeat I cannot disclose any detail whatever is our customer or the other customers because on this device, okay, the innovation is a very competitive factor, okay, addressing this market. So again, it's not a question to be optimistic or not. It's a question to be fact-based. And taking into account the data point we have the engaged programs we have we know that Imaging, okay, will continue to grow and contribute to the growth of the company. About this year 2021, well, never forget that in terms of competitive landscape this year has been a little bit, let's say, disturb. Okay. Remember, 1 year ago, in Q4, okay, we stopped our, let's say, shipment to important okay, Chinese customer, and this customer has been heavily impacted and modifying okay, the competition landscape. So for sure, 2021 has shown a different, let's say, profile in terms of competition landscape between the various actors. But more important for ST, I have to say that we go through very well selectively because I repeat to address this market very selectively with optical sensing solutions. Sometimes is MEMS, okay, we secure solution with analog custom design and we leverage our general propose MCU. So we go through this quite, let's say, transitory period because of this situation, really pretty well in another overall market, we are okay on capacity are limited.

Very useful. conscious that we should try to get Lorenzo involved here. Maybe turning to gross margins, right? Obviously, this year is going to be a record in terms of what ST achieved in terms of gross margin. But I think, Lorenzo, what's going to be more important is that you've identified several, let's say, structural features to your gross margin that kind of lead to a longer-term gross margin target even if some of these pricing trends subside. Could you maybe walk us through what the structural elements are in terms of that it gives you confidence to a longer-term gross margin? And then maybe also touch upon your expectations for gross margin into '22 and puts and takes around there?

Yes. Sure. Good morning everybody. Thank you for the question. In terms of gross margin, it's true. This year, there has been a year in which the gross margin definitely increased significantly. Even if you look at the gross margin expected last year in 2020, and even if you look at the gross margin along the various quarters of the year. Here, there are a few components for this growth. On one side, that we know that pricing environment has been favorable this year. So it means that actually, let's say, our price, especially when we look at the price in the mass market in distribution were increasing. But it's not the only reason why, let's say, we see, we experience, let's say, this improvement in our gross margin. There are other components. On one side, for sure, is the manufacturing. Manufacturing was improving significantly performance, thanks to the fact that the loading was increasing in a significant way. And now all our fabs and all our sites are working at full capacity. And the other component that has not to be forget is the mix of our products. Product mix was another important component for the improvement of the gross margin. I would say, if you have to rank all these components this year, I would say that definitely the first one was the manufacturing improvement in terms of efficiency than the mix and then the price. Moving forward, what we see, especially when we look on 2022. Some of these will remain in terms of positive tailwinds. If I look at the pricing, the pricing is still in a situation favorable for us when we look at the top line. And here, I would say that on top of what has been -- what it happened during 2021, in which pricing were increasing. But I would say mainly on the price market. Here, we see that with the new renegotiation that we have with many OEMs pricing are increasing also for them because, of course, there is a recognition from their side on our effort in order, let's say, to increase capacity and to invest to follow their demand. So price will remain positive. We remain positive also the mix in our products. This mix will contribute again let's say, in improving our gross margin in the -- moving in 2022. It will be accretive. Then the third component, the one of manufacturing, of course, and now manufacturing is working at full capacity. But still, we have some room for improvement in terms of productivity in terms of efficiency. So I think these 3 components will remain there. On the other side, it's true that moving inside 2022, we have also headwinds. And the main one is definitely the one related to inflationary of cost. Today, definitely, we see that whatever we see, let's say, in terms of material, in terms of chemicals, in terms of what is needed for our production is increasing in terms of cost. This increase is progressively entering in our cogs along the year 2022. In 2021, we saw already some increase, but we were protected by some long-term agreement that we had with our suppliers. This long-term agreement are progressively expiring during 2022. And that means that the new renegotiation that we will have will, of course, impact a negative way our cost. The main components here are related to energy, are related, let's say, to the foundry, the increase in pricing in foundry and are related also to materials. All in all, anyway, we see in respect to the average gross margin of this year 2021, that the guidance of Q4 for the gross margin for the year is resulting in the range of 41%. We see still an increase moving in 2022. We will not be on the same magnitude that we saw this year moving from 2020 to 2021, but still we see increasing in our gross margin. On a structural way, moving forward, of course, an important component for our gross margin and improvement in the gross margin will be to move more and more our production from 18-inch from the 6-inch, 8-inch to the 12-inch. Today, investment in 8 inch are not really effective for an economic standpoint because you have to buy equipment, 12-inch downgraded. So with the cost of 12-inch but the productivity of an 8-inch. So it's very important that we continue to ramp up on our 12-inch facility in as of Italy in Agrate and expand our facility in Coriant. I see this together, of course, adding value to our customers with our products. extracting value from higher R&D. These 2 components are the main driver for our gross margin improvement in the medium term.

Thank you, Lorenzo Perhaps one quick one because I'm conscious we are running out of time. It would just be good to get your thoughts on shareholder return. Obviously, you have this sort of EUR 1 billion buyback program in the next 3 years or wait until the next AGM to see where the dividends that it pans out, it would be good to get your perspective on sort of the high-level thoughts around ST's policy to shareholder return, particularly given that if we go back a year ago, it feels like you guys are far ahead on sales, profit and in turn cash generation and where perhaps you thought you were going to be?

Of course, in terms of return to our shareholders, let's say, term of dividend policy, this is something that our Board and AGM will decide, of course, as a management, we see this as a good instrument, let's say, to return value to our shareholders. Definitely, I would say that in any case, our main stream for to return value to our shareholders is to increase the fundamental value of our company. And I think this has been quite visible in the last few years. the return of value for our shareholders, let's say, is mainly coming from the appreciation that we have in terms of equity value of our company. This is definitely the way that we intended to work in order to really, let's say, to make our company very strong in the fundamental of this value means in the foundation of these values. That means that the long-term profitability and long-term return for our shareholders.

Well, with that, we've come to the end of our fireside chat. Thank you both Jean-Marc and Lorenzo, for your time today. I think I really enjoyed the conversation. And thank you to all the investors that have bailed in, and I hope you enjoyed the rest of the sort of Barclays Global TMT Conference. Thank you and goodbye. Thanks.

Thank you.

Thank you very much