STMicroelectronics NV at Morgan Stanley European Technology, Media & Telecoms Conference Transcript

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

Question: Lee Simpson - Morgan Stanley - Analyst : I think maybe just to start off, we've clearly had the Capital Markets Day earlier this week. And there was some clear messaging coming out of the event. So maybe you could share with us what that messaging was and maybe some of the key assumptions behind it. Thanks. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee Well, I will start, and Lorenzo will give complementary input. So we can -- we have defined -- at the Capital Market Day, we shared an actionable target of revenue at $18 billion and with an EBIT margin at 22%, 24% with a planning horizon of '27, '28. The main revenue driver -- addressing a market that is supposed to grow at 5% compound average growth rate, the main growth driver for us will be the analog and the sensors, that are mainly related to our high premium personal electronics business with one of our key customers. The second main driver will be power electronics and inside power electronics, mainly the power MOSFET and the diode on silicon carbide and here, driven by, clearly, the electrification of the mobility and the industrial market. And the third growth driver will be the general-purpose microcontroller after 2024 and 2025 [correction] year, but I will come back on it. Then the main success factor of the EBIT margin target will be, on one side, reshaping of our manufacturing footprint and infrastructure. For silicon technology, will be some capacity, let's say, a removal on mature technology 6-inch or 8-inch and accelerating the 300-millimeter or the 12-inch. And on silicon carbide, will be the conversion to 200-millimeter, doubling the capacity and removing the 6-inch capacity. Then, of course, the other side will be some cost base initiative, resizing, to leverage our growth and to leverage our productivity improvement. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 22, 2024 / 9:40AM, STMPA.PA - STMicroelectronics NV at Morgan Stanley European Technology, Media & Telecoms Conference So $18 billion, 2022 -- 22%, 24% EBIT. Growth driver -- based on the three main points I mentioned. And a critical success factor is the execution of our plan. It is clear that we consider '25 as still a transition year, and we will see '6 and '7 as an acceleration. Well, '25, overall, we have a good visibility on automotive markets and on personal electronics, and computer and communication. Indeed, on automotive, some risk still exist. If there is, let's say, the competition with the Chinese carmaker maybe in Europe, what is related to famous CAFE, so the fine on the non-electrical vehicle if the carmaker are not at a minimum point. But basically, what we have as a visibility is really appropriate. We will operate still in '25 with low visibility is what is related to the industrial market. And I would like to recall very simply that for semiconductor, industrial market is power energy, is automation robotics. It is, let's say, white goods. It is a battery-operated tool. It is healthcare and medical. It is space and military. Here, the visibility is pretty low. There are two possibilities for '25. There is a bear approach, where we see the stock market flattish. And there is a more bull view where, moving forward, in Q2 and H2, we see an acceleration of the growth, resuming a situation where inventory has been corrected and the end demand is growing smoothly. So this is '25 as a transition year, acceleration. To close the main message, we believe that beyond '27, '28, we will have booster mainly driven by the megatrend, so electrification of the mobility, decarbonation of the industry. But AI, and AI basically, two ways. This is AI related to the servers, where ST want to be a key player in the power supply of AI server and want to be a key player in the connectivity and communication with silicon photonics. And we believe that beyond '27, '28, the edge AI, ST edge AI, will start to be boosted because application now will fly. And for each of blocks -- so connectivity, edge AI, and, let's say, power -- we believe we can extract $1.5 billion, $1.7 billion additional revenue. So that's the reason why exiting '27, '28 with $18 billion. We do believe we can reach $20 billion-plus by the end of the decade. I guess, this is the main message.

Question: Lee Simpson - Morgan Stanley - Analyst : Pretty clear. So Jean-Marc, it seemed to us, at least, as you guide out to next year on sales, Q1 does seem to have a below seasonality profile. And clearly, there are inventory corrections out there, both industrial and potentially in the autos as well. Can you walk us through the dynamics that you're currently seeing -- maybe reference distribution and perhaps, visibility to end market as well? Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee 2025, yes. First of all, on Q1, the usual seasonality is minus 11%. Then we have, especially in 2025, a mechanical one, which is 6% of calendar day less, which is impacting as well. You see one of the -- our competitor share minus 18% on their Q1 forecast. So clearly, we will have -- that's a pretty significant Q1 below seasonality. Then moving forward, I repeat, entering in 2025 on automotive, personal electronics, and, let's say, communication equipment and computer peripheral, we have a visibility which is the usual [one]. So it means between 70% to 80%. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 22, 2024 / 9:40AM, STMPA.PA - STMicroelectronics NV at Morgan Stanley European Technology, Media & Telecoms Conference Again, we know that automotive is mainly on the frame orders, and that frame order could be adjusted. Here, I repeat, the risk is, maybe in Europe, if the carmakers -- they have to adjust their production to avoid the fine. We expect that the story of CAFE will be fixed sooner or later. On personal electronic and computer and communication, honestly, the visibility is appropriate. So we are confident. Here, it's clear that it will be backloaded. It is backloaded as usual. And it is more backloaded than as usual. Why? Because for us, H1, with our main customer, will be really the lowest point. And in H2, we have a new device [permission] with our first customer that will accelerate the H2 revenue. Well, then the critical point is, again, clearly, industrial. Industrial, as I said during my summary of the Capital Market Day, there are two scenarios. One scenario is a bear scenario, means 2025 flattish versus '24. And basically, all the quarters, very similar, except Q1 because Chinese New Year, because less calendar day and then, the sequential growth in Q2 and then very, very light in H2. This is a bear scenario. Bull scenario is, yes, acceleration in Q2 and acceleration in H2, showing somehow a significant growth of the industrial market in 2025 versus '24. But I repeat, for us, '24 was minus 40%, 45%. And the overall industrial market, minus 30% of semiconductor. So these are the two ways we have. It is clear that the current consensus of analysts versus ST for 2025 is in between bull and the bear scenario, yeah, I have to say; more close to a bear scenario than to a bull scenario, I have to say. This is the way I can today classify. But of course, we will communicate more visibility most likely in April as usual, maybe in January. But you have to understand that for industrial, the visibility is very short term. And it is valid for our customer and the customer of our customer.

Question: Lee Simpson - Morgan Stanley - Analyst : Makes sense, makes sense. I'll ask one more question before I open it to the floor. And I wanted to just maybe go a little bit off piece with this question, if you don't mind. China for China was an interesting development at the Capital Markets Day, Jean-Marc. And I noticed the tie-up with Hua Hong this week, which makes sense. You want local production. But tell us a little bit about your vision for China for China, how this will impact -- what you see this will do towards getting to the $18 billion number, how it all fits in. Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee Here, I would like to repeat what's the substance of the strategy. First of all, the semiconductor market in China will be one of the main one. We like you don't like is the reality. Then for us it's vital, as a diversified semiconductor company, playing in the field of automotive and industrial markets, to be present on this Chinese market and to compete. Because today, what is the situation against the local semiconductor companies -- I have not spoken about the Western company competing against us in China. I have spoken about the local. If we look what is happening on other industries, industrial power and so on, it's always the same scheme. They compete on the low end and middle end part of the business. Then they learn very fast, and then they compete against on the high end. And then they attack you on your domestic market, when I say domestic Western market. So this -- we don't want to face this scenario. We want to compete in China in a pragmatic way because our customers are super pragmatic. If you offer quality, cost productivity, and lead time, they will work with you. China for China is the way to compete against local player with the same competitive advantage: cost base, speed of implementation, speed of innovation because they are super-fast in innovation, and a local supply chain, which could be protected against constraints on importation, exportation, and so on. So it's very simple. We want to compete on this market in order to not let growing the semiconductor in China that will complete later on our domestic market because they are super good. So this is our strategy. Then what we will do, to be more accurate, we will implement in China the critical technology that are the critical enabler for the automotive and industrial. So it means silicon carbide, IGBT, low-voltage MOSFET, BCD technology, and 40-nanometer microcontroller technology. So -- and here, we have either our JV with Sanan in Chongqing, or we have now a partnership with (inaudible). So these are the two key partners with whom we will work together for a longer strategic period of time, I have to say, in order to enable ST to be the most competitive Western company in China. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 22, 2024 / 9:40AM, STMPA.PA - STMicroelectronics NV at Morgan Stanley European Technology, Media & Telecoms Conference

Question: Lee Simpson - Morgan Stanley - Analyst : In China, what is the dynamic today? Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee Today, they are basically a domestic market of 21 million, 22 million vehicles. 60% is a new energy vehicle. And what they call new energy vehicle is battery-electrical vehicle, hybrid -- plug-in hybrid and battery-based extended range. It means they have a small thermal combustion engine that is loading the battery. It is clear today that the most growing part is hybrid and extended range. Of course, for these two kinds of vehicle, the content, and mainly in terms of silicon carbide or power electronic, is a bit less than the two other one. However, the carmakers, they are not crazy. They know that they will have to manage this kind of mix. And more and more, they are, in fact, designing platforms that are flexible. They can adapt their manufacturing process to offer the platform that is growing versus the one that is not growing.

Question: Lee Simpson - Morgan Stanley - Analyst : Perfect. And you just touched on AI server at the end there. Maybe if we look at AI more generally. So you've got the opportunities with the server. It looks as though there may be interconnect opportunities as well. And then edge AI, of course, TinyML is coming into view. Maybe help us with the last one, TinyML, because it did come out in the Capital Markets Day as an opportunity set. Where do you see your strengths? I mean, you've got the whole tool chain. But where's the real strengths for STMicro? Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee But today, you have -- as usual, you will have two, let's say, stack dynamic. You have one dynamic that will be on the existing use case, whatever the application, industrial, consumer industrial, or pure consumer, where -- to have a hardware accelerator and then to have AI capability running the whole network would be an enabler. People say, no, I need this because I want, if it is an example, motor control. I want to have a system that is capable to analyze some weak signal and according a neural network to make some predictive maintenance or something like that. So enabler. But then later on, you will have, what we call in high tech, the use case expansion because of the capability of this microcontroller, which will be much more powerful. It will self -create demand. And this is a systematic, let's say, trend on high tech. That's the reason why we do believe that on top of -- to be an enabler, the edge AI will have its own market. And we estimate that for ST, that this should generate about USD600 million by 2030, specific markets linked to our edge AI microcontroller, on top of -- that will be a booster of the growth of microcontroller, addressing the usual, let's say, point of use.

Question: Lee Simpson - Morgan Stanley - Analyst : (inaudible) Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee Then after, for ST, clearly, silicon photonics will be also beyond '27 -- '26, '27. And we -- and it will be mandatory because the usual, let's say, connectivity technology will be no more capable because of the footprint, I have to say. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 22, 2024 / 9:40AM, STMPA.PA - STMicroelectronics NV at Morgan Stanley European Technology, Media & Telecoms Conference And for us, it could represent a USD500 million business by end of the decade, more or less, but not the least. Today, clearly, we are incumbent competitor of the leader on AI server for the power stage. But we have all the technology blocks and the product know-how, and we want to achieve 10% of market share, which means roughly USD500 million by end of the decade. That's the reason why, I repeat, the potential of growth of ST in the next three years with a market growing at 5% is to achieve $18 billion. If we achieve $18 billion in '27, it means we grow twice the market, so 10% to 11%. If we achieve in '28, it means we grow 7%; so 1:2, 1:3. And that boosted by what I just shared with you, that the reason why the $20 billion-plus is really actionable.

Question: Lee Simpson - Morgan Stanley - Analyst : I see we're in red time, but I wanted to squeeze one last one in. But specifically -- well, for both of you, really. All of this seems to be coming from organic growth. But there is -- and I think you entertain it yourself -- the possibility that we may need bolt-ons or perhaps not transformative acquisitions, but perhaps bigger than you've seen in the past. Can you give us a sense for the appetite for that perhaps, the availability of cash perhaps for this? And where do you think there might be a relevant area to focus on at all? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 22, 2024 / 9:40AM, STMPA.PA - STMicroelectronics NV at Morgan Stanley European Technology, Media & Telecoms Conference Jean-Marc Chery - STMicroelectronics NV - President, Chief Executive Officer, Sole Member of the Managing Board, Chairman of the Executive Committee No. First of all, I would like also to repeat why we are still a strong believer of our capability to grow organically. I'll give you another example. Thanks to what Lorenzo mentioned a few minutes ago about the way we have reorganized the company. Putting under the same umbrella our embedded processing solutions business. Immediately, we have taken decision on some high-end standard microprocessor for industrial to rebalance the resources and to redefine very fast a more aggressive road map on automotive microcontroller. Now the company is equipped and will be equipped with three family of microcontroller. One microcontroller will be super-efficient on 28-nanometer with PCM to address what we call the X-in-one concept of powertrain. X-in-one -- for the most sophisticated, it's eight-in-one, where you have the full powertrain in one system. And here, you need really efficient real-time micro. It's done. So -- and it will grow between '27 to 2030. So second one is a microcontroller that is completely complementary and suitable for software-defined vehicle architecture. It was not existing. It has been developed, and we will sample very soon. Done. And the last one is to put a 32-bit microcontroller based on STM32, not a real-time micro. But it is suitable for many applications in the car we call STM32A. This will boost the growth of ST beyond 2027, for sure. So you see we are strongly believing that on organic path, we can continue to grow. Then saying that -- yes, if Lorenzo allocate to me some capital, I would be ready to make some acquisition more at a bigger scale than what we have done up to now as far as it is accretive on our EBIT or/and accretive on our market share on automotive or industrial market. And yes, there is some target. So it is in our radar screen. But we are working on it, and if we need to move, we will move.