STMicroelectronics NV Q4 2024 Earnings Call Transcript

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

Question: Francois Bouvignies - UBS - Analyst : Thanks a lot. So my question would be, I mean, given the outlook that you see in Q1 and the book-to-bill, that doesn't bring a lot of confidence at this stage, especially in terms of visibility, what should we think about the rest of the year? I mean, Jean-Marc, you said at the Capital Markets Day, you were comfortable about the consensus numbers, which has minus 3% at the time following these results. How should we think about the rest

Question: Francois Bouvignies - UBS - Analyst : Yeah. (technical difficulty) been weakening and the channel has been fairly high. How do you see the level? I mean, do you see any evidence of strong destocking? If you can maybe disclose in the channel where you are versus a normal or if you see any light in the destocking part this quarter in Q1 and of course, Q4 as well. Thank you. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee I will pass the question to Lorenzo. Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee In term of inventory in distribution in the quarter, we have not seen a significant destocking, let's say, still situation, I would say there is some excess of inventory. This excess of inventory stays in the range of one or two months, let's say, depending on the product higher in respect of what we consider a normal situation in distribution. So at the end, still, we see inventory in excess inventory in distribution. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee The only positive point is that our distributor POS, so their whole sales increased slightly versus Q3. By geography, it has been driven by improvement in Asia, while Europe and America did not improve. But however, according the input and the visibility we have, the POS will decrease in Q1 versus Q4. So that's the reason why inventory correction is still in front of us.

Question: Andrew Gardiner - CITI - Analyst : Good morning gentlemen, thanks for taking the question. Jean-Marc, given what you have just described in terms of both the lack of visibility, but also your current expectation about, let's say, steady 2Q. How are you planning for fab loadings, the underutilization charges. And then also, if you've got any steer on the net OpEx as we move beyond first quarter, starting the year at 850, effectively implying zero adjusted operating profit. It would be helpful to understand what your plans are for the next couple of quarters in terms of the net OpEx as well. Thank you. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee Lorenzo will take the question. What I can say also share with you immediately that in Q1, we have already taken significant closure of production day across our fabs and assembly and tax plans. Then after there is a number related to on load charges and OpEx. So Lorenzo will comment. Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee The loading, let's say, this quarter, the impact of the unloading charges is above 500 basis points. So it's quite heavy. We have a plan also for temporary closing of many of our fabs during this quarter. Our expectation is that in Q2, we will continue, let's say, to have a significant amount in terms of unloading maybe slightly improving in respect to the first quarter, but still impacting significantly our gross margin. But in term of OpEx. In terms of OpEx, as we said, in this quarter, we do expect to have a net OpEx around $850 million. Then you know that we have started now our program in terms of resizing our OpEx. We think that in 2025, we will start to see some first benefit of our cost saving program on OpEx. Overall, the saving program, we said this should be over the horizon of the three years at $300 million, $360 million compared to the cost base of 2024. We think we estimate that for 2025, we will have compared to the basic cost at 2024, something in the range between $100 million, $120 million impact reduction on our expenses. On the other hand, you have not to forget that there will be the impact of the inflation, that means salary increase, these kind of things. Overall, we expect that net OpEx should decrease low single digit in 2025 compared to 2024 despite the fact that we have a lower R&D grants in the -- as expected lower R&D grants in 2025 compared to the 2024.

Question: Andrew Gardiner - CITI - Analyst : Thank you very much. It's just a separate one. I was just interested, Jean-Marc, on the comment you made regarding the visibility. I mean on the Industrial side, I think that's pretty clear given the weakness you saw in the fourth quarter and what you're seeing in terms of the channel. But in 4Q, Automotive was let's say, okay, was in line with your expectations. But you're also pointing out that the visibility there, looking into this year is particularly weak. What has perhaps changed for the worst? Or is it just the customers are so uncertain, they're not giving you visibility on a normal lead time? Just a bit of color around what's happening in automotive would be helpful. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 8:30AM, STMPA.PA - Q4 2024 STMicroelectronics NV Earnings Call Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee No, we are coming to the -- all the way of working between carmaker and Tier 1. So it means order coming within two, three weeks visibility. So this is the point number one. It is also clear that taking into account the current situation of the overall automotive industry between mix change on the turbo combustion engine, high end, okay, middle end, exchange on electrical vehicles, battery based versus hybrid one. In Q1, okay, we see a phenomena of inventory adjustment. That's the reason why we anticipated and we share, okay, with the market that Q1 will be significantly below the seasonality that generally speaking, are only due to personal electronics and China and Asia, okay, because of Chinese New Year, but this year, amplified by an inventory correction at automotive. After Q1, okay, we know that some Tier 1 have already adjusted their delivery forecast but again, which is only a forecast, but the visibility of the pooling from the consignment inventory are very short term. So we are not protected against some fluctuation on this pooling. That's the reason why we come back on this situation.

Question: Didier Scemama - BofA Global Research - Analyst : Good morning. Thank you for taking my question. Jean-Marc, if you could give us an update also on the manufacturing footprint. Obviously, the company structured for a substantially higher level of revenue. Obviously, you communicated your OpEx cuts over the next three years. Can you help us on just a little bit the rest of the OpEx or COGS, I should say, a reduction and where the manufacturing footprint will be reduced and that would be helpful. Thank you. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee Lorenzo will comment on the -- Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee Yeah, maybe I'll take this question. As you remember, at our Capital Market Day, we were indicating that we wanted to accelerate our transformation of the manufacturing footprint accelerating our 300 millimeter. So moving from 200-millimeter for silicon to 300-millimeter and for Silicon Carbide from the 150-millimeter to the 200-millimeter. So this plan, of course, cannot yield a significant benefit already this year because definitely, we

Question: Didier Scemama - BofA Global Research - Analyst : For my follow-up, I just wondered if you could give us an update on where you are in terms of general purpose and controller market share. I think Jean-Marc, you mentioned last quarter, if I remember correctly that about a quarter of the revenue contraction came from market share loss in China, I think, in consumer. Do you have any sort of fresh thoughts on this? And I guess the question from here on is the magnitude of the decline is such that people are starting to wonder whether it's much more than a cyclical downturn? And how much market share you've actually lost in China and elsewhere. So just give us a sense of comfort level that this is cyclical and not structural. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee No, we confirm basically the relative weight of the root cause of the revenue decline in '24 versus '23. So inventory correction, 60%. Then lower market, 30%. And market share loss clearly in -- mainly in mainstream Microcontroller in Asia in China with the competition and mainly on EBIT. There is no reason that this may change. And by the way, we believe of how we wait really, we will wait the last picture. But we believe that in Q4, we have restarted to win market share. This is our view and what we are convinced about. Then I repeat, in order to comfort ourselves about this statement the recipe, to control and to continue to grow in this market remain the same. So the most comprehensive hardware and software stack. ST has the most comprehensive hardware and software stack. In the industry, we have the most advanced ecosystem. We have basically more than 1.2 million developers around our ecosystem. But you know that our technology road

Question: Janardan Menon - Jefferies - Analyst : I was just trying to get a feel for the gross margin possible progression through this year. Lorenzo, you were saying that you won't get much of the effect on the COGS reduction in 2025 and you have the -- you have a 500 basis point on the utilization charge, which is hitting you right now in Q1. So assuming that the underutilization gradually improves through the course of the year, are we in a situation where even by Q4 you may be 100, 200 basis points below the 40% level because there's no other factor there? Or is there any other factor which could come into play in the second half of the year in terms of product mix or cost reduction or anything like that, which could improve your gross margin as you get to the end of the year. Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee Thank you for your question. Clearly, let's say, at this stage, it's a little bit difficult, let's say, to give an indication for the gross margin. And this is also related to the fact that at this stage, our visibility on the evolution of the revenues is not yet there. But I think regarding the unused capacity charges, for sure, we will have a significant level of unloading in H1. But we think it should improve in H2, benefiting from the additional content in personal electronic, that this is supporting fab floating, especially, let's say, loading on our 3-millimeter that are the one that are impacting more the unloading charges as you can image. Clearly, the level of unloading, it will also depend on the magnitude of the recovery in industrial, this is another important factor. Then you have to consider that when we look at the year, we will have some tailwinds. Definitely, one is the price dynamic in COGS. We have a positive impact there due to the cost of energy, low cost for our foundry. There is stronger US dollar that will gradually materialize during, let's say, the year, you know that we have not the full benefit due to our hedging policy. But assuming that the dollar will stay at this level, we will see positive impact materializing during the year. But then it will also be also the mix. The mix has been one of the main detractor in 2024. Clearly, depending on the recovery in the industrial, the mix will play a positive impact over the gross margin moving forward. But then we have some headwinds. One of this is the capacity reservation fees. If you remember, the capacity reservation fees will decline this year. This year will be declining by more than $200 million compared to 2024. And then we will expect the price erosion. Price erosion is expected in the range of mid-single digit. I would say these are the dynamics to quantify at this stage is a little bit cost of sale.

Question: Janardan Menon - Jefferies - Analyst : And just on the last two points, the capacity reservation fee and the price erosion. The capacity reservation fee, is that a linear steady effect through the four quarters? Or is there some kind of a limit where it improves or reduces into the second half of the year? Can you give us the same issue on price pressure? Is price pressure higher now? Is there any expectation that it could reduce in the second half if demand recovers or something like that? Lorenzo Grandi - STMicroelectronics NV - Chief Financial Officer, President - Finance, Purchasing, Enterprise Risk Management and Resilience, Member of the Executive Committee In term of the capacity reservation fees are substantially linear over the various quarter. You may have a plus or minus, but not significant changes in the quarter. In terms of pricing, yes, Q1 is impacted on a sequential basis mainly for the renegotiation of the contract in Automotive. So it will be a step down that is not repeatable over the other quarters. So at the end, let's say, in the year, we will see price down, we expect in the mid-single digit, which a significant portion has been already, let's say, factor in already in Q1.

Question: Stephane Houri - ODDO BHF - Analyst : Actually, I have a question on Automotive and on the Silicon Carbide scenario, you made a few comments about the fact that you had some wins, notably in China. So I'd like to understand if you think you can growth this year in Silicon Carbide? And what would be the mix between new customers and the main customer that has been using your product? Thank you. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee Overall, I will not comment full year 2025 on silicon carbide. Similarly, okay, we don't want to comment the full year with the visibility we have more than specifically on Silicon Carbide, I will let Marco to comment a few points. Really, on Silicon Carbide -- crucial for the following. First of all, okay, we want to convert as fast as possible our manufacturing in [8-inch]. This is what we -- we have engaged in Catania. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 30, 2025 / 8:30AM, STMPA.PA - Q4 2024 STMicroelectronics NV Earnings Call And I repeat, okay, by H2 2025, we will start the production in 8-inch in Catania. Partially, okay, integrated with the raw material and this to address, okay, mainly the Western market. In China, okay, I would like to insist that we will start in H1 2026 (inaudible) directly into a [1 millimeter], and we will be fully integrated in China, okay, with our Shenzhen fab. And similarly to the Microcontroller, we will be, let's say, a China-for-China strategy for manufacturing for product development and support and for business development and support. 2025 will be a transition year, but again, it's too early to speak. And we expect, okay, then to accelerate the growth, '26, '27, and moving. In more detail, okay, Marco can make some complement information. Marco Cassis - STMicroelectronics SA - President - Analog, MEMS and Sensors Group Strategy, System Research and Applications, Innovation Office Yes. Thank you, Jean-Marc. As we presented during the Capital Market Day, the positioning that we have in this moment in terms of sockets where we are in with the Chinese makers is surely strong. I think we are relative to peers we are the strong positions in terms of sockets, how this will develop during 2025 in terms of top line, considering and overall slowdown in terms of battery electric vehicles is too early to say. What I can say is that our growth and our ambitions in the long term to retain a 30% market share either, and this will be driven by four elements that are innovation because our technology roadmap is extremely strong. We just introduced our generation four and we are continuing to work to implement further generations. Our manufacturing footprint, Sanan, China, and Catania is helping us to position ourselves strongly to serve both, let's say, the Asian and the Chinese market and the Western world. And we expect that beyond this transition period during 2025, to see a recovery and acceleration of the EV. And we will, of course, push not only for the automotive market, but in terms of Silicon Carbide, we want to enlarge also our positioning in terms of industrial and AI data centers. I repeat again, the position in terms of sockets where we are present in the Chinese market, which is at this stage the -- let's call it the healthiest is relatively to our piece, extremely strong.