STMicroelectronics NV Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Francois Bouvignies - UBS - Analyst : Jean-Marc, I wanted to come back to Q1 comments. Obviously, you mentioned less calendar days, but the sharp decline in Q1, could you highlight maybe some drivers? And importantly, it is the first quarter of the calendar year which is the pricing we set and you know that we have a lot of fear in the market right now, especially given the oversupply and the demand environment that pricing could fall significantly into next year. How should we think about that as negotiations started and you guided a weaker Q1, what is the pricing impact here? And how should we think about the next year's pricing environment? Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee On the pricing, I will let Lorenzo comment, but here is not a warning about pricing, absolutely not. It's more warning about the customer backlog and the order dynamic. And the fact that, okay, you know that in Q1, we have it is the usual seasonality of personal electronics. And including on personal electronics, potentially this year could be worse. Well, unfortunately, it will be significantly this year amplified by the fact that the quarter will be shorter, 88 days compare 94 days in Q4. So this impact also significantly the run rate of the revenue. Well, so usually, we have, let's say, a low and double-digit sequential growth. This year will be amplified by the 6%, is more related to the customer or the dynamics and backlog, maybe worse specifically on personal electronics rather than something trigger by the price. So Lorenzo, you want to comment? Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee Yes. You know that when we look at the price dynamic today in this quarter, substantially the pricing is similar to what was expected, I would say, low single-digit decline. Next year, as was Jean-Marc remarking, we don't see a dramatic price environment. Yes, it's a little bit, let's say, there is a

Question: Francois Bouvignies - UBS - Analyst : Yeah, the follow-up would be on the microcontroller side. I mean, obviously, it has been a big decline through the year. I mean Q4 might be also declining a lot. I was wondering where are your inventories in the channel? I mean where are you in this inventory correction versus your normal level, where you think you should be? And do you see any light in the tunnel here with regard to microcontrollers Industrial particularly? Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee For general purpose, okay, it is clear that it is a very significant decrease this year, above minus 50% and '24 versus '23. We have to say that about more than half of this decrease for microcontroller is really connected to an inventory correction. But the point is that this inventory correction is lasting more than expected because the end demand of our customer, okay, moving along the year was also decreasing. So we also have said that 30%, 35% of the decrease of microcontroller is ultimately linked to the end demand weakening of our customers. It is true that we have lost some market share in China, linked to the fact that during the shortage of semiconductor, okay, we squeezed some Chinese company, okay, to support, let's say, automotive and other big OEM and industrial. So we squeezed distribution in China in 2021 and 2022 and now we have lost this market share. About the inventory correction in the channel, it is not decreasing at the expected speed. And why? Because decreasing our POP, we didn't see, unfortunately -- globally, I've spoken, there is a value dynamic by region, the POS is not, let's say, behaving sufficiently to decrease inventory faster. So we expect that in Q1, the inventory correction will continue and especially in Asia, amplified by the Chinese New Year vacation impact, should continue to decrease a bit in Q2 and discussing with our distributor, we should expect a normalization in H2 2025. So this is where we are today.

Question: Sandeep Deshpande - JPMorgan - Analyst : I have a question on the automotive market. In the first half of the year, you saw a slowdown from your big EV customer as well as you saw a slowdown due to Mobileye. And now you're saying in the fourth quarter, you're seeing further slowdown. Can you quantify where this slowdown is occurring? Is it in legacy parts? Is it in silicon carbide? So where is this slowdown occurring in the automotive market? And associated with the slowdown, are you seeing the Tier 1 suppliers reducing their inventories now, given that they have been holding such high levels of inventory in the automotive supply chain? Are we now seeing that correction in the automotive supply chain in terms of inventory? And is that what are the reasons why -- of course, there's a consumer angle as well, but -- or the personal electronic angle, but is that continuing into the first quarter of the year? And I have 1 quick follow-up. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee So thank you. If you don't mind, I will share the answer with Marco Cassis. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 31, 2024 / 8:30AM, STMPA.PA - Q3 2024 STMicroelectronics NV Earnings Call

Question: Sandeep Deshpande - JPMorgan - Analyst : And then, I mean, you mentioned earlier on the pricing environment at the moment, can you just comment on what you're seeing in terms of in the automotive space, in particular, what you're hearing in the current negotiations that are happening for pricing into next year, given how difficult the environment is for your customers and given also that they are holding quite high levels of inventory? Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee Lorenzo, you'll take that one. Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee Negotiations are ongoing. For sure, let's say, this year, the price pressure in automotive was there, but quite mild. I would say that at the end, let's say, was in the low single digit. It's true that starting negotiations, we see some more price pressure in automotive than in the one that we see in 2024. Of course, as you can image, is different in respect to the various customers. But I would say that assuming that at the end, the negotiations that are ongoing will end like the one that we are close already. We may say that in automotive now the price pressure will be mid-single digit, let's say, something in that range. Then we may have some more and less, but at the end, this is what we see today. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee Maybe if I can complement. It is clear that also it has been assessed in the perspective of a regional view. It is clear that today that's what happening in China, especially of the fact that the Chinese carmaker are really have excess of capacity. The price pressure in China, specifically around the ecosystem of passenger vehicle or light vehicle, is definitively high. So this is a different behavior compare the Western world or the region. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 31, 2024 / 8:30AM, STMPA.PA - Q3 2024 STMicroelectronics NV Earnings Call Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee Maybe if I can add just the last comment here, Sandeep. What we see, let's say, yes, this pricing environment and then you have also to consider in term of capacity reservation fees, let's say, in 2025 there will a further reduction because, clearly, let's say, is acknowledged by the market that now capacity is available. This will be an element that will be there definitely in 2025.

Question: Lee Simpson - Morgan Stanley - Analyst : Great. Just wanted to ask around the R&D number, I think $492 million, looks that gap down maybe about 10% relative to some of the expectations out there. So just trying to get a sense for, is this a sustainable level? Do we think this is the right level going into next year? And whether or not related to this, there was any change perhaps in the spend structure around silicon carbide as a strategy? Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee No, I would say that when we look at the expenses in the quarter, in Q3, you have to keep in mind that there are a few elements. First of all, the expenses came lower than expected for few reasons. Well, one reason is we know, let's say, is impact of the vacation in Europe, this was expected, were a little bit higher than what we were modeling entering the quarter, but this is not the main reason. There are one, let's say, an item -- one-time item in the cost of labor that was decreasing our expenses, and this was not expected in respect to entering the quarter. But then there is also, let's say, some more control during the quarter on our discretionary expenses. So that's the combination of these elements combined together were running our expenses lower. It is not something structural. We have not, let's say, especially when we look at our R&D change, our effort in terms of R&D. So we continue to invest. We continue to invest in the silicon carbide and we continue to invest, let's say, in the development of our products. It's true that, let's say, the new organization is bringing some efficiency in our, let's say, ability to follow our programs and somehow be more efficient in the way that we drive our expenses. This is also driven by the fact that we have reorganized our groups in a way that, let's say, today, we are avoiding overlaps between the activity in the group. And this is a portion also that is impacting our ability to have a better control of our expenses.

Question: Didier Scemama - BofA Securities - Analyst : Congrats, JTr(me, for your appointment. There's a couple of questions. First on the commentary, should we assume that your gross margins are going to take another leg down, a, because obviously, your volumes are going to be lower and you're going to lower your factory utilization to lower your inventories on the balance sheet are lingering at a high level? That's my first question, and I've got a follow-up. Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee You see that in this quarter, our, let's say, the impact of the unloading charges is very material because it's impacting our gross margin by 400 basis points. We start already, let's say, to take some measure in front of a weaker Q1, as we said before, let's say, this will be well below our normal seasonality. There is the impact of the calendar, but there is also the impact of the visibility of the backlog, but for sure, Q1, yes, we do expect it's early at this stage to give a precise guidance, but definitely it will be a difficult quarter in terms of gross margin also because we will continue to have a significant impact for. We wanted to keep under control our inventory. And this is something that, for sure, let's say, will have an impact in Q1. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee It is clear that our manufacturing activity in Q1 will not follow the usual activity profile. But in Q4, okay, we have to follow a strict process of discussion with representatives or personnel and people, okay, to plan this as Q1. But again, we will come back later on.

Question: Didier Scemama - BofA Securities - Analyst : Yeah, so it's a gross number. I mean -- okay. And maybe just a quick one. Last time, Jean-Marc asked you if you were still looking at M&A, you said that you're actively looking. So can you just give us an update on that? Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee No, we continue to operate within our organic growth strategy with bolt-on acquisition, okay? We have activity in our radar which are pretty active today. So we'll come back to you as soon as conclude on it.

Question: Gianmarco Bonacina - Banca Akros - Analyst : A couple of questions from me. The first one is, if you can specify what is the onetime charge related to your cost-saving plan? The second one is more strategic midterm. What -- given that we are seeing, especially in Europe, some change in the platform and factory closures. So makes you confident that in the mid to long term, we will see still a significant ramp-up in the penetration of EVs? Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee You refer the one-time that I was referring for Q3 or something different, sorry, I'm not sure --

Question: Gianmarco Bonacina - Banca Akros - Analyst : Okay. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee Well, for the second question, if I want to simplify, well, it is clear that for any semiconductor company to continuously improve its competitiveness and especially facing ultra-competitive marketplace that we are facing now due among many reasons some capacity that has been triggered by government incentive here and there everywhere. And unfortunately, as well with some, let's say, trade constraints. The other way is to increase the wafer size and to shrink the product. But then, okay, you know that when the industry is facing and our customers are facing this kind of down cycle, each time, okay, the exit period is asking for new product and new technology. So that's the reason why for ST, there is no other option to accelerate our 300 millimeter. And the reason why I have mentioned, okay, specifically, and we have to accelerate to reach as fast as we can the right scale in order to have benefits of the cost of goods sold about this 300 millimeter. Well, I would like to recall that basically, the benefits we can expect are moving to 300 millimeter with at least a 20% productivity increase. But directionally, this is ST what I see as engaged. Of course, we will update you timely [finally with this road map] because we have defined the critical milestone. And of course, we will give more color at our Capital Markets Day next November 20.

Question: Stephane Houri - ODDO BHF - Analyst : You have described the change in dynamic of the EV market. Can you please update us on your vision and your targets for silicon carbide for this year and the following years?

Question: Stephane Houri - ODDO BHF - Analyst : Yes. Well, in fact, you also talked about 2025, I think you were targeting $2 billion, but I think you decreased this target to $1.8 billion, so that was also the question, what do you see for next year?

Question: Stephane Houri - ODDO BHF - Analyst : Okay. And if I may, I have a follow-up. It's a specific question on the evolution of the tax environment, notably in France, where you've got significant operations. Have you thought already about the potential impact on your -- on the evolution of your tax rate of the new tax, let's say, increase in France coming? Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee Well, as you know, in this kind of things, it's always a little bit difficult because there are many ingredients, let's say, that are combining together. Of course, it depends also how the distribution of the profit of the company is among the various, let's say, country's jurisdiction. Definitely, yes, you see that today, our tax rate will be in the range of 17%. We think that more or less the impact that we may have if the law is enacted as has been announced, we need also to look in details how this will happen, but we may have an impact that will be below 1 percentage point on our tax rate.

Question: Joshua Buchalter - TD Cowen - Analyst : I wanted to ask about the accelerated move to 300-millimeter move in the cost cutting. How should we think about the implications to CapEx from this change? Are you guys shutting down more quickly 200 millimeter facilities and in the short to medium term, does this bring your CapEx up or should it lower it? Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee We will reduce our CapEx, let's say, next year and in -- on the next three-year planning horizon. But it is, of course, something that we will disclose during our Capital Market Day based on the market evolution and our capability, let's say, to grow over the market perspective. But yes, of course, we will decrease our capacity. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 31, 2024 / 8:30AM, STMPA.PA - Q3 2024 STMicroelectronics NV Earnings Call Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee If I may add to Marc, let's say, you have to think to consider that the big infrastructure to go to 300 millimeter are already there. The effort has been done. Let's say, we have already, let's say, put in place the infrastructure. So means that, yes, of course, we will have some CapEx, but we did lower in respect to what has been in the past. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee And the second, as we have accurate of this story, I would like to highlight that the concept of our wafer fab of silicon carbide 200 millimeter in is copy paste of the concept of means, okay, we can increase by getaway. So we don't need to build a big infrastructure to grow. We are building by module. So this is really a smart way to adapt ourselves to the market condition and investing in due time at the right time but never in excess. JTr(me Ramel - STMicroelectronics NV - Executive Vice President, Corporate Development & Integrated External Communication I think this is ending our call for this quarter. So thank you very much, all of you for being there. And we remain here to disposal should you need any follow-up questions. Sorry for the ones didn't have time to ask questions here. Thank you very much.