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

Yes. Hi, everyone. My name is Alex Duval, and I head up the European tech hardware and semis research team here at Goldman Sachs in London. Delighted to be joined today by Jean-Marc Chery, CEO of STMicro; and Lorenzo Grandi, CFO. I'd like to make a quick disclosure upfront that this conversation is not intended for the media and is off the record. So great. Thank you so much for joining us today, and we'll get straight to it with Q&A.

Firstly, Jean-Marc, it would be great to touch on this topic to do with semis tightness. We've been hearing about semi shortages, obviously for a while and obviously debates over whether the cycle could turn. So given we've seen several players comment that tightness could persist until 2023, what's your view on how long it could take for the situation to become less tight in the various markets like automotive, industrial and consumer? And to what extent do you see a risk of correction before the end of this year?

Well, first of all, I will start with the last question. So I confirm to you that we drive the company with a sales and operating plan which will support a revenue between USD 14.8 billion to USD 15.3 billion. Let's say, it will be built with a solid H1 and with H2 growing versus H1. Thanks to the solid market growth, let's say, double-digit on automotive and industrial market, and thanks to the ongoing engage program, we have with important customer on personal electronics, communication infrastructure and computer peripheral. This is first about the risk if we see something arriving in H2 2022, the answer is no. Then I confirm to you that for 2022, the backlog on request date by customer firm and frame is well above our capacity, saturated at 100%, in the range of 30%. So our capacity is below 30%, the backlog and the demand. Then the booking overall, and then I will go more accurately by verticals. The booking for ST is well above 1 since the beginning of the year after the year 2021, which has been unprecedented. So still well above 1. And clearly, where the order booking of our customers now are [ planify ] to start to book capacity for 2023. And here, it's important I move to verticals now. Well, clearly on automotive and industrial, which are representing all together in the range of 20% of the total market -- semiconductor market, I would like to confirm to you that the demand is very, very strong. And why? Because they are facing a major transformation. Again, the smart mobility transformation calling for much more semiconductor to enable electrical powertrain to enable ADAS and connectivity, to enable new architecture of cars by zone, by domain. Now customer, they want to secure themself for 2023, and they start to discuss with us long term to be sure that all the investment they will put in place to achieve successfully this transformation will be supported by semiconductor supply chain. And we are working more -- much more, let's say, at product development, at R&D relationship and then at supply chain relationship in order to support it. And this behavior is very, very similar on industrial market. With big OEM, of course, you know that the important part of the industrial market is served through distribution. But it is clear that the big OEM of the industrial market are exactly the same behavior than the automotive one. We don't see here any sign of a downturn of, first of all, the lead time of diversified semiconductor like microcontroller for automotive, general purpose, secure, industrial MPUs, power solutions, so power switches, power driver, analog, precision analog sensor. All these diversified semiconductor lead time are still equal or above 1 year. And this is not changing. And there is no, let's say, inventory at OEM level. There is no inventory at EMS level, which are, let's say, the manufacturing service supplier of the OEM, both for automotive and industrial market. At distribution, inventory turns are still very, very high, well above the normal. So the distributors, they are [indiscernible]. There are no inventory flexibility, and they have no capability to build out inventory. And for a simple reason, it is generally speaking, the capacity allocated are going to a global OEM and then are supporting the distribution. Well, for the other verticals like the personal electronics and computer and communication infrastructure, well, clearly, here we see a situation for personal electronics driven by the 5G. And again, we do not see a reason why, in H2 this year, the 5G device conversion will slow down. So we do believe that -- and this is the data point we have and the feedback we have from our customer and analysts that smartphone 5G will continue to grow, let's say, materially in 2022 and will continue at a similar path of what they have done in 2021. And then, of course, with the related accessories. So true wireless handsets, smart watches, this kind of stuff. But clearly, after the 2, let's say, unprecedented year of 2020 and 2021, where we see some potential slowdown in terms of growth, not in terms of downturn, but in terms of growth, it is on computer, Chromebook and tablets. Looks like they are not growing at the unprecedented growth rate of 2020 and 2021. And clearly, you see -- we see some situation going back to normal. Infrastructure are driven by 5G and some other specific communication infrastructure like the low orbital satellite, let's say, infrastructure. So all in all, I have to say, we confirm to you that automotive and industrial, no sign of, let's say, slowing down. Still very solid book-to-bill, well above 1. Customers are [ loading ] 2023 now. They are discussing with us about the long term. They are facing a major transformation, calling for more semiconductors. Personal electronics is growing solid. Of course, the situation is more, let's say, normal. No emergency day-to-day meeting, prioritization at the shop floor level, let's say, emergency shipment with logistics and so on is more, let's say, more normal flow, but still a very, very solid demand and communication as well. Now on computer, let's say, peripheral, Chromebook and so on, yes, situation is softening, but here we are facing what we call the post-COVID effect.

Great. Well, thank you very much indeed for those comments. And just some housekeeping on my part, in addition to stating this conversation is not intended for the media and off record, should also state that any participants who want to submit a question, please do so via the portal, and I'll be happy to put those to STMicro as well. So if we continue on this question around the semi cycle, Jean-Marc, I guess one question we had from the investor community just is around double ordering. Clearly, we are, as you characterized it in a situation where supply and demand are very tight. And in the past, historically, we have seen these situations of double ordering. So to what extent, if at all, should we be worried about that? And to what degree is there a risk that there are customers placing orders for some of these segments where maybe there isn't actually the demand and they're just trying to hedge themselves a bit? Any perspective on that would be really helpful.

Clearly, this is not something we are seeing today, double ordering, again, for the short term, the gap. And again, I have spoken about the even wider product portfolio we are managing in ST, I repeat, embedded processing solution, MCU base, power solution. So power switch and power driver, analog, precision analog and so on. Here, we don't see a double ordering -- mass double ordering. Of course, here and there, we see spot market availability, means that somebody go through the control -- the very strong control we have put, but it is very marginal. It's -- honestly, it's really, really marginal. Now what is important today at customer level, it is not to track a double ordering, it is to protect the [ original ], it's to protect the future. And -- because you know when you have so difficult challenge short term to supply, what is important also is to protect the future and gauge product development, technology development to enable the future program. And we see more customer rather than trying to make double ordering, which will be tracked by the supply chain, more challenging. So in future, please allocate capacity according to the long-term relationship about, let's say, the development we can do together rather than to try to protect themselves with short-term double ordering. So now I confirm to you that we don't see for the business and product we have, and we manage this kind of behavior.

Super helpful.

Again, material behavior. I cannot warranty to you that here and there is not a smart guy who goes through.

Absolutely. And obviously, at your results, you talked about spending on CapEx and sort of announced a larger number there. And one question we've also received is about what underpins that. So what structurally is the driver behind that build? And secondly, to what degree we should be worried that those kind of moves and also from some other players in semi could lead to an overbuild in the industry, maybe not this year, but maybe in the next year or 2? How do you sort of satisfy yourself around that, that's not a risk?

Well, first of all, on CapEx, the first challenge a semiconductor company has is to execute the CapEx and transform in wafer [ halt ]. And this is the first challenge we have. The challenge is not to beat our capacity. For the time being, the challenge is really the reliability of the delivery of equipment maker, which today is not so great; and the operation of semiconductors. So purchasing, manufacturing are really working hard to secure the fact that the sales and operating plan constraints on which we have based our revenue indication will be executed. And this is valid for ST, and this is valid for everybody. More than clearly -- again, we drive our company with a 2 years' rolling sales and operating plan. Then we drive with an extended planning horizon, 5 years and beyond, and with the data we have. Again, ST is positioned on quite well-balanced verticals. First of all, what we have to manage? We have to manage 2 verticals, automotive and industrial, in a massive and major transformation, where basically there is not so many IDM, let's say, being capable to provide the full spectrum of device. And then we know that the foundries are not investing purposely for this market. Now they react under pressure, but they are more investing on advanced technology like TSMC or Samsung and other one. So we do believe that the short-term risk to build overcapacity for diversified semiconductor is new, point number one. Point number two, our supply chain is a limiting factor. So our supply chain is limiting the speed and the capability of IDM -- diversified IDM to build further at the expected speed they want, and to have the risk of overcapacity building. Now then about the other verticals, so advanced CMOS technology, so it's still FinFET, [ well, it would be gate ] all around and memory and so on and so forth. We know that here there is massive investment. And -- but the demand will be massive. The digitalization of the world is intense. We see 2 major megatrend in the world. It is electrification of the world because of the environmental challenge we have, and this is the digitalization of the world because it will be a major productivity opportunity in order to control inflation risk and so on and so forth. So these 2 major, let's say, drivers long term will support a massive investment. Now maybe for advanced technology at a certain moment, you could have some well balance between demand and offer and the semiconductor market going back to a single-digit growth for a while, but not for, let's say, a massive downturn because mass excess of capacity. This is what we are seeing from ourselves, from our customer and to our exposure in terms of verticals.

That's super helpful. And I guess another question we get is to put the sort of guidance you put out there on revenues for 2022 into context a bit. Obviously, you've given a strong revenue guidance this year and put a range there. What would need to happen to hit the top end of the guidance? How should we think about the parameters there?

A, is there equipment vendors? Clearly, this is not our capability to ramp up. I don't say it with arrogance because this year if we are on the high end of our indication means we will grow 20%. Well, I think the company has demonstrated the capability to digest, from operational point of view, a growth of 20%. It's challenging, but honestly for a company like ST is a no-brainer. Now the bottleneck is more the equipment makers. So that's the reason why we are in a tight and very close relationship to help them to supply according to their commitment.

That's very helpful. And since we're on the topic about supply constraints and so on, how do you expect -- or how do you think about the shape of capacity ramping up internally and externally this year? I mean in particular, to what degree is there scope for maybe more foundry supply to come on stream this year than you might have anticipated? How should we be thinking about that side of the equation?

Well, ST, let's say, in 2021, basically, we had ratio between -- for wafer fab, and then I will speak on the assembly. For wafer fab, we have on production value, not on the wafer [ halt]. Production value, it's 75% internal, 25% external. And for assembly, assembly, it is basically 65%-35%. Our 2022, let's say, sales and operating plan will continue to support this ratio, more thanks to a better support from our major foundry partner and thanks to the support of that partner. We will grow, let's say, synchronously and, let's say, at a similar path between internal and external. And I confirm to you that this is the ratio make or value that we want to continue to sustain. Because first of all, I repeat that for ST at wafer fab level, we do not intend to develop advanced CMOS technology. We will continue to develop CMOS [ deliver ] technology, power technology, let's say, sensor technology according to request of this technology up to a certain technology node. But for technology more advanced, we need for vision processor for ADAS. Everywhere we need advanced technology, our strategy is to be fabless and techless and to work with the foundries. So simply, because of this reason, we continue to have this ratio. Then on assembly, it is similar. We concentrate ourself on packages for power solutions, for embedded solution -- embedded processing solution MCU base for our optical sensing solution, MEMS because clearly, it is our core activity. For more complex package, we rely on, let's say, our OSAT partner. Then maybe on test, certainly, we will increase the ratio external versus internal. So our medium-term plan, long-term plan, we'll continue to follow this ratio because we consider it is the right balance and it is really consistent with our strategy to be, let's say, basically IDM developing propriety technology for our core embedded processing solution, power solution and sensor solution and to be fabless, techless on advanced, let's say, CMOS-based technology or MOS standard technology where GLOBALFOUNDRIES are, let's say, totally adequate to our product portfolio.

Great. I really appreciate that color. And I've got a couple of questions that have come through on the portal. So I'd like to relay those, firstly around gross margin actually. So how sustainable are the margins that you've talked about, i.e., sort of mid-40s? And another investor asked, what can make your margin revert below 40% other than a temporary cyclical underutilization? Any color on those would be really helpful.

So maybe I'll let...

Maybe I can take [indiscernible]. In terms of sustainability of our gross margin, I would say that when I look at the evolution of the gross margin over last year and bringing our gross margin in the range of 45% in Q4, there were 3 main drivers on this gross margin. On one side, there was, for sure, the impact of the efficiency of our fabs that were more and more loaded and more and more, let's say, running at full capacity. And this for sure is definitely strongly improving the efficiency for them. Then, of course, there was also other 2 important effects. On one side, there was the price, on the price increase definitely that we enjoyed in 2021. That is definitely different in respect to the normal trend when we see, say, pricing -- curve of the pricing going down. And then there was also another important effect, that is the mix, the mix in terms of product. So we were moving our mix toward more accretive products. And this was something else that was benefiting in terms of gross margin. When I look at the sustainability in Q1, we have already given an indication for this quarter that we will stay substantially at this level, in the range of 45%. In terms of sustainability, for sure, there are some, let's say, tailwinds and some headwinds that we have to face. On the tailwinds, we think that in terms of efficiency of our, let's say, manufacturing footprint, this will continue to give some positive impact on our gross margin. On the other side, let's say, the pricing is still in a situation that it will be a positive effect on our gross margin. The environment in terms of pricing remains positive, especially when I look at, let's say, the OEMs more than the mass market. The mass market was positive last year. This year, let's say, we think that the mass market will be substantially stable, slightly improving, while we see, let's say, improvement in OEMs where the renegotiation of the content is there. Product mix will contribute, not probably at the same pace of last year because last year, we went up significantly. This year, I think it is holding, but maybe will not be the factor on the gross margin, but not giving a significant boost. On the other side, we have a negative effect. And definitely, the biggest one is the one related to the inflation. There is a significant impact of the inflation that is somehow partially offsetting the positive of the pricing. Because at the end, the inflation is -- the pricing -- positive pricing that we see in the top line is also going to pass this inflation to our customers. So at the end, we see that all in all, this is a level of gross margin that can be sustainable. And our, let's say, visibility for sure for 2022 is that it will remain in this range of gross margin, mid 40s, something in this range. Then moving forward, of course, let's say, there will be also some impact related to the increased level of depreciation, so that will come from the investment. There will be a time lag between the moment in which we do the investment and the moment, let's say, in which this investment translate in higher output and better efficiency. This is an impact that we do expect to substantially make our gross margin stable and not give us the possibility in a very short term, let's say, to have, let's say, opportunity to significantly increase our gross margin. While medium term moving our production, thanks to this investment that are mainly addressing the 12-inch, medium term, we see that the efficiency of our 12-inch will then start to contribute again positively to our gross margin. So we see some stability in terms of gross margin at this level in the short to medium term, while, let's say, more medium, long term, moving up our gross margin, assuming of course that we will continue to work on our mix. That is what we do. And we will be back in a normal dynamic of pricing.

Great. Very helpful, Lorenzo, really appreciate that. And another question that stems from, at the moment, is around geopolitics. And there have obviously been some proposals at a European level to materially increase investment into the European semiconductor industry. I wondered if you could provide some perspective on this and what this could mean for STMicro either directly or indirectly.

Alexander, I think it is clear that we welcome this kind of initiative to know -- we have already, in the past, a deep cooperation with our 2 states, France and Italy, and approved by Europe at the level of R&D. And very recently, there is what we call the IPCEI project. And there is a new IPCEI initiative. So we are already engaged on this subject. But now also, we want to see the detail because we have seen the 3 big blocks. There is 3, let's say, chapters inside this, let's say, in terms of European Chips Act. So yes, we welcome it, and we will work closely with the European Union and, let's say, Commissioner, in order to, let's say, clearly understand where it will go. Then I would like to confirm that ST will contribute definitively to the increase of production in Europe, but simply because you know that our strategy, I repeat, is to remain IDM, but IDM with make-and-buy strategy. So 75-25 for the wafer firm. You know that the biggest ecosystem we have for, let's say, embedded processing solution and analog mixed-signal is Crolles and now is Agrate. You know that for power solution, it is more Catania and Tours. And on Agrate and Crolles, we have the capability to grow on the 12-inch, which are, let's say, the wafer side, which is totally adequate to the future technology development to address this business. So definitively, we will grow Crolles beyond 10K wafer per week. We will grow Agrate at the maximum 8K wafer per week. So yes, we will contribute massively to the semiconductor growth in Europe. In Catania, in Tours, we will grow silicon carbide and gallium nitride. In Catania, we will grow IGBT and BCD technology. So ST would be, let's say, a key success factor of the objective to grow semiconductor. But then for the detail, we will see what will be going on in the next few quarters because to understand what is really within this European Chips Act.

That's very helpful. You mentioned silicon carbide there, so I'd love to focus a bit on that as we go into the last 5 minutes of discussion. I think in the last quarter, you've talked about your sort of continued leadership there. And it'd be great to sort of get your perspective on what's going on competitively, particularly as we see a number of players, for example, in the U.S. doing more in the space. How do you feel about your competitive position? Maybe you could talk a little bit about your vertical integration strategy, where of course you talked the last quarter about producing more wafers as part of your approach. I'd love to get your perspective on those.

Okay. Again, I would like to repeat what is our strategic objective, which is consistent with the company. We want to sustain strategically a market share of 30% of our MOSFET diodes built on silicon carbide raw material, addressing mainly the automotive market in the market. Today, our market share is well above 50%. Because we are the unique source of the main electrical car maker, but we have 90 programs going on. Sooner or later, we will communicate about important, let's say, circuit [ win ]. And clearly, we are convinced that we can sustain long-term 30% market share. And this is what we are communicating, I am communicating as a strategic objective since now many years and quarters. Then our manufacturing strategy is built consistently. So first of all, in terms of wafer processing, so we have enabled 2 [ shops ] internally. So Catania in the existing plant and Singapore. In terms of assembly for package and modules, let's say, we have Shenzhen as the first source and Bouskoura in Morocco as the second source. And we have, let's say, negotiated and built some strategic partnership either with important OSAT or module makers. Well, then there is the raw material. So raw material, of course, the first approach is buy, where clearly we have done strategic deal medium-, long-term agreement with Wolfspeed and SiCrystal. We have maybe the opportunity to work with some others, but clearly, they are the 2 partners. And then you know that we decided 3 years ago to grow verticals in order to develop our capability and not limit the innovation wafer size increase, fast feedback from a wafer processing to raw material to increase the performance of the device and the yield. And the target is to sustain 40% of our demand. Now this plan is under execution. And we have demonstrated the first slot on 200 millimeters. So we will be ready. So we are building, let's say, the landfill. Last year, we prepared the landfill. This year, we will build the first industrialization line for raw material in Sicilia. And we intend to build a mass production for raw material to sustain 40% of our internal [ need ]. Then long term -- more long term or medium term, so 2024, 2025 and beyond, we have already identified the location where we will build another wafer processing, let's say, capacity to continue to support our strategic objective. And then thanks to our capability to process raw material, we are in direct relationship with the supplier of the raw material in order to check and make the stability check that we will not face limitation factor on the supply chain of our own supply chain. So this is the full strategy of manufacturing, consistent with our objective to achieve $1 billion in 2024, expected maybe before. So $700 million basically in 2022 and sustain long-term 30% market share on automotive and industrial market. So this is planned, let's say, 2 years rolling, 3 years, 5 years, 10 years we have in our hand.

Very clear. Really appreciate the color on that. Maybe as we go into the final 2 minutes, just -- we're here today, obviously, to talk about digital enablers and the role of tech in the European digital economy. And one important area appears to be digitalization of automotive and in particular ADAS in automated vehicles. Wondered if you could give us an update in the last few minutes just on how you see this developing and ST's position there. Clearly, an area where ST has been heavily involved in the past. So love to get a bit of a view on that.

Clearly, our strategy on ADAS is partnership. So you know that we are a main partner of Mobileye to address this, let's say, core digital, let's say, chips of -- because ADAS is a complex, let's say, set of semiconductor. And you have, of course, the vision processor. But then you have some gateway processor. You have power management ICs. Then you have radar, LiDAR. Then you have connectivity device. You have all this kind of stuff. We want to participate the full bill-of-material, providing product or solution except on the core chipset where we want to participate as a partner. And here, our value-added is our technology know-how, our capability, let's say, to, let's say, adapt the mission profile of the automotive with the technology offer for the big foundry for advanced technology, which is not, let's say, a piece of cake. And this partnership of Mobileye, we can, let's say, duplicate it very selectively with carmakers. So clearly, our strategy on ADAS is offer product and solution participating to the full system. So I repeat radar, LiDAR, connectivity, high performance, let's say, sensor fusion, so the microcontroller. And through partnership [indiscernible] to participate to the core chipset with Mobileye or directly with carmaker when they intend to do by themselves.

Great. Well, really appreciate that, and thank you so much for rounding off a fascinating discussion on the automated driving digitalization side. Really great to have STMicro at the conference. And thank you to both of you for answering my questions and being here. And thank you to all the investors for joining.

Thank you. Bye-bye.

Thank you. Bye.