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

All right. Good morning, good afternoon, everyone, and welcome to Jean-Marc Chery and Lorenzo Grandi, CEO and CFO, respectively, of STMicro. Gentlemen, thanks for coming to San Francisco this year. We've got a quick disclosure that I should read out to you. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep.

Gents, let's turn to the questions here. Q4, first of all, just to kick us off, can you just walk us through the key messages that came out of the last print and what was behind some of the guide that you gave for the subsequent year?

Okay. So I will answer, okay, from the angle of business and revenue. Well, first of all, okay, we are still facing a challenging environment in industrial market, where there is on top of different dynamic from a region, there is clear still end demand pretty soft or weak especially in Europe, becoming more and more solid in China. And I have to say fair but still soft in Asia Pacific and in America. This is for industrial. For automotive, we are still facing, okay, some inventory adjustment and some risk about Europe, but that I will speak in a few minutes that looks like are now mitigated. About personal electronics, computer, well, I will not speak about the AI dynamics, okay? But personal electronics and communication, so far, our visibility is good. Our custom design engage customer program are running at the speed we expect. So here, we have no surprise. What we have seen after the end of January earnings announcement is the following: Overall, okay, I can say today, that the booking we hunter make us comfortable to say that Q1 is the bottom, clearly. It is as well making us comfortable that in Q2, we will show a growth. At this stage, I would like to keep the position to say it will be a growth consistent with the mechanical seasonality. And still too early to say that it will be above this, Why? Because, okay, there is still some uncertainty related to one important customer in automotive for electrical vehicles. And Yes, even recently today or yesterday, we acknowledge that Europe will give some flexibility on the application of the CAFE norm. So it means 3 years for carmaker, okay, to go to the direction that is mitigate the risk to see production decrease in H2. It's a bit early to say Q2 will be materially growing versus Q1. But the positive point is the dynamic is making us confident that Q1 is the bottom, okay? Then for H2, okay, we confirm that we are still looking to scenario. One scenario, which is a bull scenario where H2 will grow both for industrial and automotive. Automotive, maybe now with the European, the risks are mitigated. Industrial is still a matter of the overall economy. If the overall economy shows some sign of recovery early 2026, we will have impact, okay, in H2 2025. So an acceleration. So it means the inventory will be digested faster, and we could show a growth. If the economy is still questionable next year, of course, okay, H2 will be similar H1 on the industrial market. So takeaway is the following: compare January. Confident Q1 is the bottom, positive news. Second positive news, [ looks ] Europe risk on automotive is operated. But the visibility is still very low in industrial market, and we are still very confident on personal electronics and on the computer and communication because of our engaged customer program. So this is what I can summarize.

Okay. That's a very clear summary. And maybe if I go through another 2 or 3 questions for yourself, Jean-Marc Chery. So looking at Industrials in particular, let's double-click there. It does look as though you're giving us every suggestion that the inventory correction is bottoming out. But can we maybe talk about the general purpose microcontrollers and other dynamics that are playing in that inventory channel right now?

No. Overall, industrial, we need to go by region. So I spent 2 weeks in Asia -- last 2 weeks. So China inventory came back normal situation. And this year, the Chinese New Year has been really 2 weeks, 2 full weeks. Post Chinese New Year, okay, we see a positive sign on booking and POS. Look, China is growing steadily, but it is not a [indiscernible], it is something that will grow steadily, but soft -- I have to say softly, smoothly. And inventory are clean in the channel. About Asia Pacific, we are still seeing other inventory, not yet digested. The distributor mass market, they claim H2 will be better than H1, but they want to continue to decrease their inventory in H1. Europe is weak. Europe is clearly weak and inventory are still too high. So it means, okay, we have to really adjust our POP to the POS in order to continue to decrease inventory. So far, U.S. deepens the segment when it's related factory automation, renewable energy and so on and so forth. So far, so good, but not very strong. Okay. So microcontroller specific, I confirm to you that, yes, in China, the inventory are clean. But in China, the challenge is not the level of inventory is a mainstream microcontroller 8-bit or mainstream low end 32-bit where the price is under pressure because with the new Chinese player. When we spoke about high performance or high-end microcontroller, we go back to normal price pressure. Overall inventory worldwide on microcontroller are still too high and must be continued to be digested. The speed of the digestion will be related to the economy, okay? So this is the situation.

Makes sense. And we'll come back to maybe pricing pressure that you mentioned there later on. But if I stay with the inventory channel, but look instead of automotive, is the picture different here? What would be the relief relative to industrials?

No. In automotive, we have seen some OEM and Tier 1 correcting the inventory in Q1. And most likely, they will continue a bit in Q2. Again, our biggest fear was the story of the European norms Why? Because, okay, the behavior of the customer would have been in front of the norm, keep as it was, okay, to cut the production in H2, okay, to cut the production of internal combustion engine model and raise the price, okay? If it would be the case, okay, production cut of course, okay, they would have adjusted our frame order. If this risk is evaporated, okay, we believe that the inventory correction of automotive will last in Q2 and starting H2, we'll see a growth.

Okay. That's pretty clear. And so maybe just one last one before we turn to Lorenzo. Silicon carbide, always a question that comes up for STMicro. At your last print, you did talk about silicon carbide growth being a little challenged, if not even absent this year and that there were different dynamics therein. So maybe you could help us understand what are the dynamics? How is the shifting stages there? Are we seeing less of automotive with any specific customer? And surely, Gen 4 should be offsetting some of this decline, if not?

On silicon carbide, okay, the year '25 is a transition year for the following reason. First of all, okay, in our main customer, we are coming now to our contractual market share. So this is something I would like to clarify. We have not lost market share as you are losing market share because you are not competitive, because your price because you have done mistake. No, it was a contractual market share that was planned forever. And in 2025, okay, this is the time schedule where we have to go to our contractual market share. Unfortunately, it is happening at a period of time where this main customer is not going and is basically maybe decreasing. So of course, it impacts us. But this is nothing structural. It is something that is linked to this dynamic, okay, point number one. Point number two, it is clear that we have given priority to support this customer since the beginning, plus the Western car maker ecosystem, both in America and in Europe. Well, everybody, okay, acknowledged now since a few quarters that the appetite of the end customer on electrical car is well below what was expected, okay, 2 years ago or 1 year ago. And all the programs that we were awarded on, but now the run rate of this program are performing below the expectation. And the only place in the world where you have still a growth, which is significant in China, where, okay, not strategically, but tactically, we decided to not be super active 3, 4 years ago, but we recently so means 2 years ago, being much more active that will grow beyond '27 or '26, '27. But in '25, we will not enjoy a strong growth in China, except a few programs where we are. At the end, it is a transition year with no growth. But I confirm that with the dynamic we are seeing today to do $2 billion '27 or '28 is actionable by ST, and we will do it.

So still holding the $2 billion target?

Yes.

Okay. That's pretty clear.

This, I confirm.

Maybe Lorenzo, if I turn to you now on the margins. I mean, when we're looking at the fiscal year '25 profitability, what level of underutilization charges are we thinking about when putting that together? And what will be the other disparate parts that make up this year's number?

Yes, about the margin for 2025, of course, the starting point for us in Q1 is 33.8% of our guidance. We will -- I confirm that we will be around that number. This number is impacted by 2 main headwinds. The first one definitely is the unloading charges. Unloading charges will wait for more than 500 basis points on our gross margin. The second one is the mix. Mix still continue to be, for us, not accretive as we have suffering in industrial, in particular, on our STM32, the microcontroller that for us is very accretive in our mix. These 2 elements are the main impact on our gross margin in this quarter, definitely. What it will happen moving forward. But for sure, let's say, a lot will depend on how the revenue will evolve because these 2 elements are really strongly depending on how this will go. Clearly, let's say, we see a mitigation at the level of the unloading charges moving forward. One element will be, for sure, let's say, the dynamic the seasonality, I would say, of the personal electronic that will help. Personal Electronic, by the way, is mainly addressing in our production footprint, the 300-millimeter in France, Crolles that is the one that has the biggest fixed cost. So this will be a mitigation factor. The second one, it will be the mix, as I was saying. The mix, if definitely in the second part of the year, we will be in the position to increase revenues in the industry, in the microcontroller, this will be a positive impact. Of course, the sizing of this impact will depend on the evolution of the revenues that at this stage is still not clearly enough to give a size of the improvement in our gross margin. So the expectation is that, definitely, Q1, we think it will be the bottom in terms of gross margin. Q2 will be slightly improving, but it's still mild the improvement. This is my expectation today. Second part of the year, we should see a better, let's say, level of gross margin improving exiting the year. But I repeat this will be strongly depending of the level of our revenues.

Got you. And maybe just thinking about that margin trough and the inventory correction trough as well. How is pricing playing out in the background? And in particular, are we seeing material changes in the automotive pricing or for STM32s? Any color that you can give us?

In terms of pricing, today, what we see in average for the company is a price impact of mid-single digit. That is, I would say, is averaging among the various, let's say, industrial and automotive. Of course, in terms of pricing, actually, we do not include in the pricing, but we include more in the mix that there is also the famous capacity reservation fees that this year is going down. And this is already visible, let's say, in our gross margin over the first quarter. And here, we will remain substantially stable over the year. So it will not worsening, but not even improving over the level of capacity reservation fees that substantially is having in respect to last year. In terms of pricing, I would say that this is the dynamic that we see. Clearly, significant impact of the price reduction is already factored in Q1 because when we look in automotive, automotive, let's say, price agreement is taken, let's say, at the end of the year. So at the end of 2024, we were discussing pricing with our customers, the Tier 1, especially, let's say, and this is already factoring in our, let's say, level of profitability of Q1. For Industrial, for sure, the discussion is ongoing, let's say, so pricing could be somehow impacting also the following quarters.

Okay. Maybe one more for yourself, Lorenzo. On the restructuring program, just looking at that, I think you've talked about high triple-digit millions as we exit '27. But if we look at the nature of this restructuring, should we expect head count cuts? Or is this facility rationalization? How does this play out?

It's a combination because on one side, we have, let's say, the somehow resizing of our expenses. And here, clearly, let's say, our expenses were more than more to achieve our $20 billion earlier than what is happening today based on the market evolution. So yes, we need to somehow resizing. And this will take place, let's say, over the next 3 years. In an evenly way, let's say, the savings. The savings that we are expecting gross savings compared to the cost structure of 2024 is ranging between $300 million and $360 million. Here, let's say, we will have these savings progressively entering in our P&L, I would say, let's say, in an evenly base. Most likely, the first year will be a little bit less because you -- we start now. But then it will be substantially, let's say, around 1/3 over the 3 years. When we look the remaining portion of the saving is, let's say, the reshaping of our manufacturing infrastructure. And here, let's say, we are talking about closing some fabs, 200 millimeter, the less efficient fab that we have moving production, let's say, from the 200-millimeter to the 300-millimeter, concentrate the remaining production of 200-millimeter in few mega fabs in 200 millimeter, let's say. So here, it will take more time because you need, let's say, to transfer process, requalify products, qualify customers. So actually, these savings will not fall in our P&L in 2025. This will not be possible because it will take between 12 to 18 months in order to requalify the process and move the products and so on. It will start to fall inside our P&L next year in 2026 -- in the second part of 2026 and mainly in 2027. This will be, let's say, definitely, clearly, the major impact in 2027 on this action of the restructuring of our manufacturing footprint.

So it seems as though capacity is moving away from 200- to 300-millimeter, probably biasing bigger facilities. And then maybe write-downs, would the write-downs happen in '26 or '27 because you did suggest it's going to be later. So it feels like '27.

Yes. You have also to consider that the biggest portion of the investment that we have is already there. Let's say, we have already prepared the infrastructure for that, let's say, we have invested in the last couple of years in our facility in Crolles in order to host this transfer. We are prepared also our facility in the North Italy in Agrate, let's say, the 300-millimeter. So yes, there will be still some investment. We have some equipment that we can reuse from the 200-millimeter to the 300-millimeter because they are 300-millimeter equipment downgraded to 200. So there is also this opportunity. But yes, again, let's say, most of the impact will be visible, let's say, in 2027 for this action.

Makes sense. I'll pause there, see if there's any questions from the floor. We got a question at the front here. We've got a mic coming over.

Jean-Marc, I know probably you just came back from Chongqing of joint venture between STM and Sanan. So my first question about this one. So considering right now, the silicon carbide in China basically is overcrowded. And how confident do you think like this designated the new joint venture can hit the designated utilization rate and to contribute to STM numbers? And also bear in mind, like I remember when you start to have a joint venture, you mentioned about China for China. So do you allow this like a joint venture to sell abroad? And how does it to match the...

I think the last part there was just to do with the capacity transfer to China, but also what impact it has in Crolles, I assume -- technology conference, right?

Fortunately, you are in the first row...

[indiscernible] this joint venture will be still abroad instead of the China-for-China strategy. How does it impact the ST numbers?

So maybe 2 corrections. The silicon carbide market today in China, first of all, you have to be careful to not mix the raw material maker and the device maker. Yes, the raw material maker, 6-inch and [indiscernible] 8-inch, there is, yes, many players and that are proposing super competitive price because, okay, they cut price at variable cost, I have to say. So for sure, okay, the right strategy in China is to buy raw material, okay, from the local player. About device means the capability to make the epitaxy and the wafer device. I'm sorry, in China, there is only 2 main players, it's BYD and Huawei. There is no other real significant Chinese player, after it's a competition between Infineon, ST or Analog. But only BYD and Huawei are pretty significant in terms of device player. That's the reason why the strategy of ST is to have a very efficient wafer fab, including epitaxy, including the wafer device and to have Sanan with a plant close to our JV plant capable to give us the best price in terms of raw material. Saying that, after we will supply any actors in China, mainly supplying die. And why supplying module? Because you have in China, many module maker at a low price, very competitive. So generally speaking, the carmaker or the industrial, either they are vertically integrated in terms of module or they prefer to use local player. So this is the situation today in China. We believe the fab we built is the 10,000 wafer per week capability. We believe that we can go very fast, okay, between 3,000 to 4,000 wafer per week. And then okay, to go at 5,000, and it will be our common work with Sanan and with Chongqing ecosystem because in Chongqing, you have many carmakers, okay, to develop the growth of this activity. Do we will use this capability to export in Asia Pacific potentially, yes. To export in Europe most likely not because we have our Catania fab to export in U.S. could be difficult, I have to say. So again, I repeat, mainly this fab is for the Chinese market. But the Chinese market will be the biggest one because on the electrical vehicle, okay, this is a most dynamic one, but it is also very dynamic in industrial, it is pretty dynamic also on server -- on AI server as well. So mainly these facilities. Then in Chongqing, okay, we have accepted from the partner to have the fab duplicated with another 10,000 wafer per week capability where we can do what we want in comparison with this partner. We can do IGBT, 300-millimeter fab. We can do microcontroller. We can do what we want, not yet decided, but we have option. We have option, okay, to have a mega fab totally automatized around on an ecosystem, which is very efficient. And around, okay, we have all the automotive ecosystem of Chongqing. So yes, okay, we believe that this initiative, okay, will enable ST to continue to compete as a semiconductor company to address efficiently this market that, yes, I confirm will be under pressure for price and margin, but under pressure on innovation because we are not in the Chinese market only for price and cost structure, we are in China for the innovation. They have the best ecosystem for gallium nitride. They have the best ecosystem for silicon carbide. They produce 16 million engineers per year. ST want to leverage this know-how. They want -- we want to play as a Chinese in China.

I just like to speak louder for my second question. Second question about the -- what's the exposure of what high real business for ST in the defense and aerospace. And to consider the -- because like ST is a kind of strategic partner with SpaceX, you have doing a lot of business with SpaceX. Does this one belong to industrial, automotive or other segments? Like how do you see the overall growth for your high [indiscernible] business as well as the business with LEO, L-E-O, application?

No, we have been always very transparent and clear that the low earth orbit satellite is a business we want to address. Just for your visibility, we started this strategy in 2014, not yesterday, in 2014. So more than 10 years ago. Why? Because ST, we have the product and the technology that enable, okay, this all this analog mixed-signal application. So it's point number one. We will not limit ourselves to Starlink, even if Starlink will remain our main customer. We will deploy under foundry model other major player, both in America and in Europe. About the rest of the space and military business, ST is addressing widely the space business. Why? Because we have in Europe an assembly plant, which is certified against European Space Agency but as well as the American one, which is pretty unique. But that's the reason why it has given us a competitive advantage to address the space business. About the military business, we are working, okay, today, mainly with our 2 native state. So France and Italy and some European, but we are not working with other worldwide player.

Okay. I see the clock hit zero. Gentlemen, thank you very much.

Thank you to you.

Thank you.