STMicroelectronics N.V. (STMPA) Earnings Call Transcript

Hello, everyone. I'm Dom Olszewski from Morgan Stanley. I cover European semis and tech hardware. We're delighted this morning to present from STMicroelectronics, Jean-Marc Chery, CEO; and Lorenzo Grandi, CFO; with Celine Berthier from IR. We'll be discussing a range of topics, of course. But as with other sessions, please feel free to drop in your questions on the chat on the website, and we'll look to integrate those as we go through today's conversation. So without further ado, welcome, Jean-Marc.

Thank you.

And the first question is at a group level, perhaps could you comment on how you incorporate the view on the second lockdown, but also the auto revival as you think about the business going forward? What you're seeing in the latest demand trends and customer conversations?

Well, clearly, for the second -- what we call the second wave, okay, related to the COVID-19, we have adapt ourselves to the various, let's say, local decision from the countries. And of course, we are using extensively the work at home with clearly always the same objective. So the objective we set up, during the first wave, of course, it is protecting the health of our people. But here, we have, let's say, more experience in terms of, let's say, the basic rules you have to put in place and set up. And clearly, the first wave helped a lot. So we have taken a lot of lesson. For sure, we are not facing any issue in terms of supply chain for, let's say, protection equipment, so mask, for [ either ] alcoholic gel, for any test. So we well equipped ourselves to face the second wave. Fortunately, also, we pushed strongly our people to come back office end of June and July and in order to recreate really the sense of belonging and the social interaction across the various employees because we clearly acknowledge that during the first wave, many of them suffered. And that's the reason why we set up some psychological support when people feel bad staying permanently at home. And then the second objective, clearly, on top of the people is the business continuity because the situation is totally different, okay, H1 versus H2. If you remember, H1 ST delivered basically $4.3 billion revenue. And in H2, we will deliver about $5.7 billion -- close, okay, about $5.7 billion. So all our manufacturing infrastructure is really well loaded, well, except the pure legacy, mature legacy of automotive. But all the rest is really pretty well loaded. So the -- really the second objective is the business continuity and product supply chain for our customer. And then the third objective is protect, okay, the transformation programs and R&D programs we have for the company in order to put us in a condition for the future to achieve its strategic objective, either in terms of market share, in terms of customer and programs wins and in terms of the $12 billion objective that we have. So clearly, immediately facing the second wave, we moved to say, this is the 3 objectives, which are the top priority of the company. We moved massively at home, okay, for work for people which are not fully mandatory with adequate support in terms of IT tool and psychological support and management support, and really focusing a lot on manufacturing activities, R&D activities and transformation. Now, of course, we will have, let's say, learned many lessons from the first wave, which are very useful for the second wave. And -- but really market conditions for semiconductor are totally different. Because entering this year, 2019 was a challenging year with many uncertainties related to the trade-war between U.S.A. and China, related to China itself. Now second half of this year, we see some verticals with very strong dynamic, like personal electronic communication, infrastructure and computer. We see automotive coming back. We see electrification accelerating. We see digitalization in automotive accelerating. China, by the way, has recovered on V-shaped profile. And for the time being, Europe and America, expectations for next year are okay. So the way we manage the business and operation are really key in the current period. So this is the way we manage. And again, from an organization standpoint, all the management is, let's say, on board in the office to have all the infrastructure at our disposal. We have a corporate crisis team. We deployed this model in each site in the world. And we maintain a very close relationship with our business, with our customers in Europe and in America and in Asia, using all the tools, okay? So Zoom, Teams and Webex and so on. And fortunately, in Asia, people, they can travel again. So we can restart business development activities. And so this is the way we managed.

At the ADG divisional update, there were some comments around strong visibility into the first half of '21. So could you maybe touch on sort of the elements and the conversational topics that have come up with customers to give you that that view, obviously, despite what we just described in terms of what we've learned from second -- from potential wave 1 into wave 2, COVID.

Well, again, there is, let's say, first, data point, okay, so fact we have. Well, first of all, okay, on the ADG, there is 2 parts. There is the legacy of the core electronic systems. And there is, let's say, the megatrend, so electrification and let's say, active safety, so intense digitalization towards Level 2, Level 2+ of ADAS. Well, these 2 megatrend -- I'll go fast, maybe you will have other question later on, on silicon carbide. So I will elaborate later on, on it. On legacy system electronics, okay? Well, we have seen since August, a sharp acceleration of the demand, so billing and booking. And on top of that, since August, the bookings are really following the dynamic of the billings with the book-to-bill ratio, well above the 1 -- let's say, well above 1.2. So means the visibility we have related to end of Q3 and Q4, I mean the breakdown of the booking now are, let's say, very adequate loading Q1. And the visibility we have on Q1 is really good. So that's the reason why we have a good confidence level on automotive, but also the rest of the business, about Q1. Moving throughout the quarter. So November and December, the order and entry now will start to address, let's say, end of Q1 and Q2. And looking at the dynamics, that's the reason why we say, well, the confidence level we have in Q2 is good. And also never forget that Q2 2020 was really the bottom. So for sure, Q2 2021 should be much better year-over-year compared to Q2 2020. Well, now, as usual, ST behavior is the following: we share with you this fact base. That's the reason why we say our sales and operating plan, which is covering Q4 to Q3 is driven by this element of fact, and we share with you. Then we know that to address the full year, we will have to wait, let's say, Q1 in order to confirm, overall, how 2021 will be. And that's the reason why we do not disclose yet any indication about 2021. But again, what we can say is looking at the dynamic we have, clearly, Q1 and most likely Q2 will be good. But now discussing with customers, Tier 1. All I can say, we do believe, we do prefer to discuss with carmakers, and clearly, what we are doing. Our assumption for next year for car -- so let's say, car produced production, the volume produced of car, our assumption is to be, let's say, between 80 million to 85 million vehicles, likely -- most likely 85 million of vehicles, which is, for sure, not yet the level of 2019, but certainly, going throughout the year after the lockdown we are facing today that smoothly we can expect to come back to 2019 level in terms of millions of vehicle produced more in 2022 or second half 2022 as a run rate of 2023. So this is what we try to assess discussing with carmakers. And basically, overall, this is what we can confirm today, based on our data point and discussing with carmakers to have an overall production vehicle of 85 million vehicles next year, will be certainly adequate as a tranche. But however, again, what will change is the mix. So first of all, the acceleration of electrical vehicle, either hybrid or fully-battery based, which basically should be able to double between 2020 to 2021. And for sure, here, it's good in terms of dollar content for silicon, including mild hybrid, hybrid and fully electrical base. Also, we are acknowledging that there is also innovation in the thermal combustion engine. Because never forget that the carmakers, they have to comply with the norms and regulation for environment average on the fleet. So clearly, they will ask more from electronics to help the thermal combustion engine to fulfill better the CO2 norms. And also, this is certainly the interest of the carmakers to produce and sell more mid-range and high-end vehicle rather than the low end. So there is also a mix effect, we have to take into account. So today, discussing with car maker. We are in this, let's say, mood as far as volumes are concerned. Well, that's the last element. For sure, this is a great industry, which is an industry of automobile of cars, are there to manage and face the biggest transformation ever done, so moving to electrification and active safety. And clearly, it will cost a lot of money for this industry in terms of capital expenditure but also R&D expense, engineering expense. And certainly, the pressure on the economics from cars to Tier 1, Tier 1 to Tier 2, will be huge. And we know this industry is working at 0 stock, is working with a strong price pressure because the affordability from -- of car for end customer is very important factors as well as a consumer experience, more and more, but the affordability is an important factor. So we prepare ourselves, let's say, to receive, let's say, price pressure most likely more bigger than in the past, which was already strong. So that is why we prefer to discuss with carmakers on forecast rather than with Tier 1 because with Tier 1, the discussion is a very fast-moving on price.

So you raised a very interesting point there in terms of the transition being sort of a once-in-a-generation type event for the auto market, right? And I'm very curious on your conversations then as you go direct the carmakers. There's one element here which is moving from the combustion engine to some form of new powertrain, whether that's mild hybrids or up to full battery electric. But given the acceleration in policies from a -- whether that's a European level or whether that's the Chinese targets or whether that's places like California. Do you sense that automakers are deciding in your conversations to say, well, we need to actually accelerate the pure BEV and for some of the hybrid opportunities are less appealing? Or do you think, no, this will be [ stuff ]. There is still a capital commitment to go down this spectrum over time.

So can you rephrase exactly the question?

Just in terms of are automakers still committed to hybrid and mild hybrids along the way and the content opportunity there. And then -- or are you actually seeing, you know what, this is such a transformational moment that you sort of have to go from 0 to 1, so you focus on the BEVs. And what are your OEM conversations indicating there?

Okay. No, no, clearly, okay, we will face, let's say, a transition phase because also it's a question of economics because, believe me, the car architecture of a full battery car, electrical vehicles in terms of, let's say, powertrain is really different from a thermal combustion engine. So it costs us a lot of money. But there is no other way from carmakers to enter -- extensively insert in their fleet in each model, pure battery-based electrical car. And you see the Volkswagen Group, they have introduced their new car. I have seen recently Austin Mini. So you can imagine Austin Mini few years ago full electrical battery base. Most likely, Ferrari will do the same, Maserati. So nobody will escape this transformation. But then, there is the speed, you can adapt yourself, where you have a legacy in terms of supply chain based on thermal combustion engine, gasoline and diesel to a full battery-based. It will take 20 years. You cannot overnight do it. Or if some people are pushing to do it, well, they will have to explain to the millions of [ employed ] people, why they have done it. And so I do believe that the right recipe will be to go smoothly and the semiconductor industry will be a key enabler to support the car industry to make this transformation smooth, offering a mix of, let's say, electrical battery-based vehicles, hybrid and thermal combustion engine optimized. Now which relative percentage we will have by 2025, 2030, well, I think, okay, the carmakers, they are, let's say, in better position to communicate on it. But what I am pretty sure is that our industry, semiconductor and especially, ST because it is our strategy, we will be key to enable this transformation successfully, let's say, in a way where the car will be able to make this transformation at a decent, let's say, cost and expenses. And the semiconductor industry will be capable to self-finance the effort in order to support it. Well, other aspect, you have to take into consideration is that on top of this, let's say, electrical transformation, you will have 2 other aspects. It is the safety, the active safety. So all the cars will have to be equipped with Level 2, Level 2+ or Level 3, let's say, ADAS, let's say, features. If not, they will not be able to be compliant. And the third point, which will be important, is a consumer experience because more and more the consumer feelings, the new way to consume mobility will be, let's say, fragmented because you will have still some [ Dinozzo ] like me loving thermal combustion engine with the sound and so on and so forth and driving my car. And you will have generation sharing mobility, more interested by connectivity, feeling consumer experience. All in all, it will really transform the way the carmakers will design the architecture of the car. Again, one example, Marco Monti shared during the Capital Markets Day is architecture by domain. Because it is driven by 2 things: first, for the carmakers, to have the capability to easily upgrade the software -- to update the software over the year of the car because with the current very fragmented ECUs is basically impossible. This is point number one. The point number two, it's also modifying the software. You can modify the consumer experience with the same electronic platform from a hardware point of view. And this is also is important transformation. So that's the reason why I shared with you a few minutes ago that this industry is really facing the biggest transformation ever faced because they are playing 3 things in the same time, electrification, digitalization for active safety and digitalization for consumer experience, covering for important R&D and CapEx, transforming this industry because now this industry will be the fastest adopter of new technology. So whatever it's CMOS, advanced CMOS, now a vision processor must run on the 5-nanometer and tomorrow on the 3-nanometer technology. In same time, the application process are doing for smartphone. So this industry will adopt the new technology very fast. For power is the same. Look at silicon carbide. So the automotive industry adopt the silicon carbide before the industrial market. GaN will be the same. Most likely, automotive industry will adopt GaN in similar things. So you see this industry also will become the fast adopter of new semiconductor technology. So it's really a major transformation we are facing is really fascinating. And again, that's the reason why the semiconductor industry will be the key enabler of this transformation. And the reason why more and more, we have interaction, either with carmakers and Tier 1 in order to exchange about the way we will manage it.