STMicroelectronics N.V. (STMPA) Earnings Call Transcript

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 27th Global Tech Conference. Thanks for joining us, and I do hope you and your loved ones are safe and healthy. Before I move on to introducing our main speakers, I would like to highlight that we are keen to take questions from investors joining us on this chat. So please do e-mail those across to me, amit.harchandani@citi.com, and I shall ask them on your behalf. Alternatively, you can even type those in yourself in your interface. So with the housekeeping out of the way, it is my privilege to introduce our main speakers, STMicroelectronics' CEO, Jean-Marc Chery; STMicroelectronics' CFO, Lorenzo Grandi, and we actually have a surprise guest with STM President, Marco Cassis, also joining us for this fireside chat session. Gentlemen, thank you for joining us and supporting our conference every year. So in terms of the plan for the session, if I may. We aim to structure it across four broad segments. We shall actually start by talking about sustainability, which we at Citi firmly believe is becoming increasingly important, and then move on to talking about the near-term dynamics. Later, we shall dive deeper into the key business segments and close the session talking about financials in greater detail.

So starting with sustainability, Jean-Marc, ST has called sustainability 1 of the 3 pillars of its value proposition. Give us an overview of how ST is contributing to the United Nations Sustainable Development Goals?

Thank you for the question. Now obviously, first about sustainability. Our strategy itself steps with key enablers of fulfilling the critical societal needs. I would like to speak about smart mobility for greener and safer, let's say, vehicles. I would like to speak about power and energy because the world will continue to consider the economical growth. And you see, but consuming much less power in energy, generating less waste or by-product. And third, it's IoT, 5G, artificial intelligence, why? Because we do believe that we generating more data. Data will be used either at the edge with artificial intelligence or, let's say, from the cloud in order to improve the efficiency of the various processes. So smart mobility for energy IoT, 5G, artificial intelligence will really be the key enablers for societal needs. So -- and practically, ST strategy is contributing to the corporate, let's say, to the sustainability strategy. Now then out of the 17, let's say, sustainable development growth -- development goals of the United Nations. We do believe ST can, let's say, really contribute to 10 of them. And this is where we focus. Five are, let's say, more, let's say, social oriented. So around people. And five are more [indiscernible] related. And we provide our initiative where we are, our goals in what we call the Corporate Sustainability Strategy Report. And this report is regularly, let's say, available in order to detail where the company is and where the company is going. Well, then the third is legacy, building our credibility because as ST has been one of the first semiconductor company in 1994 publicly providing a report about the environment. I remember, it was what we call our [indiscernible] so for our decade of objective with a clear objective, and it has been done under the leadership of Pascal [indiscernible]. In 2000, we were, one of the first company moving to what we call compact. And in 2005, I remember well, our company with 5 other company, we were the first to join what we call RBA. So really, we have a legacy, it's not a defensive approach. We have a legacy, which is building our credibility about our corporate sustainability, and let's say, strategy. And we report it really very regularly. This is where we are.

Fantastic. Thank you for the -- thanks for the comprehensive answer, Jean-Marc. Very quickly, if you could tell us, is sustainability a factor in driving management compensation at STM now?

Well, clearly, we have set up goals. We have 2025 goals, so long-term goals about people, about environment, about innovation, about education. And this year, there is a part of the variable, let's say, dimension of the remuneration of the management well deployed across all the eligible people for variable, which are focusing on the 4 subject, CO2 emission. Then gender diversity at the various level of management. So we have, let's say, clear objective and metrics to measure ourself here. There is a people engagement index because you know regularly, every year, we are making people survey across the company. And for us, our engagement about our people, both rational engagement but emotional engagement as well is very important. And it's our duty to take action to improve this index. And last, but not the least, obviously, is safety, security of our people. So a recordable case, all this kind of metrics. So there are 4 index, which are clearly part of the -- contributing to the variable scheme of the management revenue in 2020.

Thank you very much for that. Jean-Marc. I'm just looking at the questions coming in, so we'll jump into our next segment, which is on near-term dynamics. So firstly, Jean-Marc, could you give us an update on the overall business for the September quarter based on the data points so far? How are the bookings shaping up?

By, I am -- let's say, happy and pleased to share with you today that our revenue in Q3 will be above the midpoint of the guidance we disclosed to the market end of July. Well, if you remember well, our midpoint of the guidance was already a nice sequential growth compared to Q2 slightly not yet year-over-year growth in Q3, but really material sequential growth. And it was based on, let's say, increasing of personal electronics due to the start of the new device from Apple. I think I have to say, we can disclose the name. But as well from the other player of the personal electronic industry. And most on the, let's say, smartphone, but wearable and accessories. So good, it was based on the continuous sequential growth and now year-over-year growth for mass-market industrial, especially for STM32 and Power Discrete and our MEMS. And last, but not the least, it was based on the start of recovery of the automotive. But if you remember, well, what I said, I said, well, we plan a recovery in July in automotive. But before to see an acceleration, we want to wait August because generally speaking, and especially in Europe, August is a seasonal impacted most. But I have to simply say that automotive is better than expected. Clearly, the run rate should see to date in term of component consumption from the consignment stock of Tier 1 is really a breakthrough compared to Q2. So Q2 certainly was now so bottom. It is a great increase versus Q2, but of course, still a deep impact versus last year. Most probably, this year, the carmaker industry will produce about 70 million vehicles compared to 90 million and above last year. But sequentially, yes, there is a material breakthrough in the run rate of the consumption. Personal electronics is better than what we expected from the guidance. Well, there is certainly a fully effect linked to the Huawei ban. Most probably, you ask me a question later on specific to Huawei. So I do not want to anticipate this question. But the other player are doing well and are doing on time according the plan. And again, on STM32, I have to say, it's also better than what we expected. And it's doing better in a healthy situation. So means we really see the POS increasing as inventory level really under control and the POP follow accordingly. So the billing is very linear, will be above the midpoint of the guidance. And on top of that, the booking to sales ratio is well above 1, but well above 1 and very consistent with the overall picture I just described to you. So this is where we are about Q3 in terms of business dynamics.

Thanks for sharing that, Jean-Marc. I mean, I can only imagine what the share price must be doing right now after you making those strong statements, but coming back to -- you talked about bookings being well above 1. So how does that set us up for 2021 then, can you talk about that?

Now well, this is, obviously, what we call the billable from the booking we monitor. And what was, let's say, really healthy from the booking Q3 to date is a breakdown in term of billable for the current quarter, the next quarter and the quarter after next. And so the demand is short term. It is not linked long term demand because excessive lead time. The demand is short term. It was for term business on Q3 up to August because after short term business in September is only on inventories. You have no time to react. But Q4, loading of backlog dynamic, so far, so very good. So today, we see a good loading of Q4. And let's say, a loading of Q1 and then Q2. So the bill level, the breakdown of the booking in July and August is also something we like. So book-to-bill well above 1 and good bill level breakdown in the current quarter, next quarter and the quarter after next.

Thank you. And you talked about inventory. When you listen to all of this, I mean, just to be clear, are you comfortable when you see all of this in the context of the inventory in the supply chain, inventory at distributors? You touched upon it briefly in your earlier answers. But just to be clear, you don't think this is inventory buildup or holding because of pandemic or geopolitical reasons?

No, I -- let's be straightforward and maybe Lorenzo can comment more deeply. Where certainly there is an inventory buildup effect, it is related to the falling production, direct product rules of U.S.A. with Huawei. Since May, we know that if you have not an export license on custom product you will not be able to ship anymore starting September 15. And since August 17, this rule has been extended to standard products. So yes, of course, it's a simply good sense of understanding of the business. That this decision has triggered a pulling effect on Q2. It is certainly one point. And when you have this effect, especially, on communication equipment infrastructure and mobile device. But yes, you have a pulling effect across. Well, then after, I can say also on the, let's say, to our [indiscernible] business continuation -- continuity despite, let's say, COVID-19 situation and various lockdown decision in countries, it is clear that, let's say, more digitalization, cloud business was solid in Q3. And certainly, the certain aspect, Q3 was certainly epic from this perspective. But then after on all the other KPI, we are monitoring again, from distribution, the inventory at distribution level, but also beyond distribution, the POS, the POP is quite healthy. When we see the kind of V-shape recovery we are seeing on the automotive means the carmaker and the Tier 1, they were not under excess of inventories. Because today, the current run rate of consumption from the consignment stock is well sustaining an increase of production of car, about 80 million cars, certainly next year. So mix, there is no excess inventory in the channel is a value chain on automotive. Carmaker and Tier 1, they reacted very strongly starting March. And now they are reacting because we are on the reverse mode. So we don't see this, let's say, effect of inventory and lead time as far as I know, are, let's say, still, let's say, standard there is maybe here and there some specific case, but overall the [indiscernible]. So my takeaway is that expect -- sorry, the two case I mentioned to you, we don't see in Q3 inventory buildup, [indiscernible] for the future business dynamics.

Thank you, Jean-Marc. Thank you for that. I guess I now probably have to go to the topic on which I've got most questions. Huawei to begin with and before we transition into diving deeper into the segment. Firstly, Jean-Marc, could you give us a sense for what your level of exposure to Huawei was before this crisis began? And secondly, what's been the kind of pull-in impact that you have seen in Q3? And then I have a few follow-up questions, which are coming through on Huawei.

So I take this question. So Huawei. So more clearly Huawei is in our top 10 customer list and it was in our, let's say, top 10 customer list because we address Huawei and its affiliates, so mainly HiSilicon, consistently with our end market strategy. So I repeat, we address personal electronics very selectively with some custom design solution on optical sensing solution, secure solution and power management. And for the specific case of Huawei, it was on the RF front end modules in cooperation with HiSilicon. And we address Huawei with custom design solution, very specific also on the base station. And we leverage our general-purpose portfolio. So general-purpose MCU, power discrete or, let's say, MEMS to address accessories, to address tablets, to address keyboards, pencils, tracker, watches because with this ecosystem, the appetite of this kind of product was great. So for sure, Huawei was fully consistent with the strategy of the company. So this was the dynamic, let's say, before May 15. And in our, let's say, 3 year sales and operating plan, the weight of Huawei was a material one. So then what happened May 15. May 15, if everybody remember well, clearly, what was concerned was, let's say, product design or deeply specified by Huawei using NIS affiliates, using American software-based. And foundry producing wafer or package using American equipment. And to continue this business, following May 15 rules, it was monetary to apply for a license request to American administration and waiting for the license, let's say, feedback. At this period of time in end of July, when I communicated to the market based on this May 15, let's say, foreign production so rules. First of all, I confirm that Q3, we have no impact. So no negative impact and no excess of positive impact. But why? Because for sure, we have seen Huawei asking more. But first of all, what was started after May 15, following the whole without license, it was $4 million to ship, point #1. And also because of our capacity are limited. So we have to supply a wide scope of customers. So we were not able to, let's say, to fulfill the level, of course, with the engagement to support the customers. So then I say Q3, no impact, positive or negative. And Q4, I say, Q4, which is what was our assumption for the year indication. I say, we have taken into consideration the worst case. What does it mean? No license for custom design product. So then we have August 17 update of the direct product rules, which are more, let's say, severe because now it's addressed the standard product as well. So here, I confirm there is no impact on Q3, positive and negative. And what I can confirm to you that ST will be in over 1 year indication. But this time, with a worst-case assumption, means in Q4, we will have no billing with Huawei. So this is the situation related to the 2 step of direct product rule and the dynamic of ST. So as a takeaway, we confirm we will be above the midpoint of our guidance in Q3. And I confirm, let's say, your indication assuming we will have 0 revenue with Huawei in Q4.

Thank you, Jean-Marc. So just to clarify, so you're saying 0 revenues in Q4 with Huawei, but you'll still be within the range you have talked about for full year 2020?

For sure. Yes. This is what I strongly confirm.

Okay. And I was planning to ask this later, but maybe I can weave it in right now. You obviously have a plan for the medium term. You said you had a plan, which baked in substantial contribution from Huawei. There's a $12 billion number that has been talked about in the past. Could you give us a sense for what this means for 2021 and beyond? Should we assume the 0 contribution to Huawei continuing into next year? And what does this mean for the $12 billion number?

Again, it is a business -- it is a product case scenario. And when you built, let's say, sales and operating plan within a 3 year's planning or reason. Of course, you are looking at the different business case scenario. And this is a scenario possible, definitively. However, whatever are the scenario. When we look at the strategic objective of ST and the current market dynamic in automotive, in industrial, personal electronic and communication equipment and computer operation. I confirm to you that we will not change our value proposal and our strategy. We will confirm our strategic objective and we will confirm our economical goals and see within the planning of reason. Then definitively, after the various session, we will have between us for the Capital Market Day about product in September, October and November. I will present myself with Lorenzo and Marco for the final one, where we will disclose our model, our strategy and model. And of course, it will encompass the most likely scenario in which we believe we can execute and is actionable. But at this stage, I am confident in the strategy of the company. It's a market in which we focus. It's just a matter to adapt ourself about the market dynamics and various headwinds and tailwinds. And to be agile, to mitigate and compensate. But it is not putting and [indiscernible] our capability to confirm our strategic objective and economical growth.

And maybe a last one, again, because of questions coming in before we move on to automotive, Jean-Marc. Surely, it's not all negative because the strength of your portfolio means that the other companies who may benefit at the expense of Huawei, you may be potentially supplying to those customers as well. So what you lose with Huawei, you can potentially gain with some of the other customers, are you already seeing signs of that?

No, it is -- again, I will not disclose the plan in detail. But let's share together a good sense of assessment. Smartphone and let's say, personal electronics. Well, it is clear that under the assumption and I am, let's say, on balance to share with so huge, let's say, attendance, that Huawei will be completely linked to the ban will disappear. But let's say, under this assumption, but it is obvious that other player will win market share. So whatever are in China, Vivo, Xaiomi, maybe Oppo, but Samsung and Apple as well worldwide, they will win market share. But it will not change the strategy of ST. Again, ST is addressing this market very selectively on optical sensing solution, secure solution and power management. And broadly leveraging our general-purpose portfolio for the other one. And here, we are doing this business. Believe me tablets, pencils, keyboards, watches are really booming now with a new introduction of augmented reality, virtual reality device, all this accessory will move. Here we address really will see this business. So yes, we will have a mitigation effect of this perspective. Where we will have no mitigation effect is when we are really in custom design product like the RF front end module, it will be honest for us for sure on, let's say, base station, let's say, specific as well. But when it's matter of, let's say, general-purpose product, well, for ST, we will have mitigation effect. And definitively, this mitigation effect will be part of our business scenario. We'll believe that it is the most likely one when we will disclose our next, let's say, 3 years' operating plan.