STMicroelectronics Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 13 speakers on the call.

Operator

Ladies and gentlemen, welcome to the STMicroelectronics Q3 2023 Earnings Results Conference Call and Live Webcast. I'm Andre, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must now be recorded for publication or broadcast.

Operator

At this time, it's my pleasure to hand over to Celine Berthier, Head of Investor Relations. Please go ahead, madam.

Speaker 1

Thank you, Andre. Good morning, and thank you, everyone, for joining our Q3 2023 financial results conference call. Hosting the call today is Jean Marc Sherry, ST's President and Chief Executive Officer. Joining Jean Marc on the call today are Lorenzo Our Chief Financial Officer and Marco Cassis, President of Analog, MEMS and Sensors Group and Head of STMicroelectronics' Strategy, System Research and Application Innovation Office. This live webcast and presentation materials can be on SP's Investor Relations website.

Speaker 1

A replay will be available shortly after the conclusion of this call. This call will include forward looking statements that involve risk factors that could cause these results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor statement contained in the press release that was issued with the results this morning and also in Neste's most recent regulatory filings for a full description of these risk factors. I'd now like to turn the call over to Jean Marc Estis, President and CEO.

Speaker 2

Thank you, Celine. Good morning, everyone, And thank you for joining ST for our Q3 2023 earnings conference call. Let me begin with some opening comments, Starting with Q3. The 3rd quarter net revenues of $4,430,000,000 came in above the midpoint of our business outlook range and Q3 gross margin of 47.6% was 10 basis points above guidance. Q3 net revenues increased 2.5% year over year.

Speaker 2

As expected, the revenue performance was driven mainly by continued growth in automotive, partially offset by lower revenues in Personal Electronics. Looking at our year over year performance, Gross margin remained stable at 47.6%, while as expected, operating margin decreased to 28% From 29.4 percent and net income was stable at $1,090,000,000 For the 9 months period, net revenues increased 11.1% year over year to $13,000,000 driven by growth in the ADG and MDG product groups and partially offset by a decline of the AMS product group. We reported gross margin of 48.7 percent, operating margin of 27.6 percent and net income of $3,140,000,000 On Q4 2023, Our 4th quarter business outlook is for net revenues of about $4,300,000,000 at the midpoint, Declining year over year and sequentially by about 3%. Gross margin is expected to be about 46%. For the full year 2023, the midpoint of our Q4 guidance translates Into revenue growth of about 7.3 percent to $7,300,000,000 with a gross margin of 48.1%.

Speaker 2

Now I will move to a detailed review of the 3rd quarter. Net revenues increased 2.5% year over year. This performance was driven mainly by On total strength in automotive and to a lesser extent by FDG. As expected, AMS revenue decreased mainly reflecting lower revenue in personnel electronics. This includes the impact of the change in product mix in an engaged customer program in Personal Electronics that I first mentioned in January.

Speaker 2

Year over year, sales increased 2.1% to OEM and 3.4% to distribution. On a sequential basis, Net revenues increased 2.4% with ADG up 3.6%, IMS up 5.3% And MDG down 1%. Net revenues came in 130 basis points above the midpoint of our outlook, mainly reflecting higher sales than expected in personnel electronics. Gross profit was $2,100,000,000 increasing 2.4% year over year. Gross margin of 47.6 percent was stable year over year as improved product mix was offset by higher manufacturing costs and unused capacity charges.

Speaker 2

Year over year, 3rd quarter operating income decreased 2.4 percent to $1,240,000,000 Operating margin was 28%, decreasing by 140 basis points versus 29.4% in the year ago quarter. This was due to a higher OpEx to sales ratio as we continue to invest in innovation and in the digital transformation of the company. On a year over year basis, both net income and earnings per diluted share in the quarter were stable at $1,090,000 and $1.16 respectively. Looking at the year over year sales performance by product group. ADG revenues increased 29.6 percent on a double digit growth in both the automotive and power discrete subgroups.

Speaker 2

MS revenues decreased 28.3 percent with lower revenues in the 3 subgroups. MDG revenues increased 2.8%. Revenues grew in RF communication and were substantially flat in the Microcontroller subgroup. In terms of operating margin by product group on a year over year basis, ADG operating margin increased to 31.5 percent from 25.9%. IMS operating margin decreased to 18.8% from 27.2%, While MDG operating margin decreased to 35.1 percent from 36.7%.

Speaker 2

Net cash from operating activities increased to $1,880,000,000 in Q3 versus $1,650,000,000 in the year ago quarter. Net CapEx In the Q3 was $1,150,000,000 compared to $955,000,000 in the year ago quarter. Inventory at the end of the Q3 was $2,870,000,000 compared to $2,380,000,000 in the euro group quarter. Days' sales of inventory at quarter end was 114 days compared to 126 days in the previous quarter and 96 days in the year ago quarter. Free cash flow was $707,000,000 compared to $676,000,000 in the year ago quarter.

Speaker 2

During the Q3, ST paid $58,000,000 of cash dividends to stockholders, And we executed an $87,000,000 share buyback under our current share repurchase program. ST Net Financial Position of $2,460,000,000 as of September 30, 2023, Reflected total liquidity of $5,050,000,000 and total financial debt of 2.59 I will now go through a short update on some of our strategic focus areas 1st, whitebond gas semiconductors. We began volume production of Gallium Nitride transistors, which simplifies the design of high efficiency power conversion systems. We support the development of safe Enrollable whitebond gas based power systems for high power application with industry leading Galvan Micheli is a related driver. In the quarter, we introduced a new ST GaP products, specifically designed for power GaP transistors based on ST unique IP and advanced BCD technology.

Speaker 2

In silicon carbide, We continue to increase the number of engagements. We are now working with 94 customers and 150 projects, Up from 90 customers and 140 last quarter, which year range from electrical vehicle applications, Such as onboard chargers to power module in solar power system. We confirm our revenues For silicon carbide products, we reached about $1,200,000,000 this year. In car digitalization, we saw continued design win momentum with our later generation of automotive microcontrollers, called STELLA, across key applications. These include design wins in Zonal modules for software defined vehicle architectures and in next generation battery management systems in partnership with major carmakers.

Speaker 2

In Headas, the HiQ6 project with Mobileye is progressing to plan with early volume ramp up this year. We have also seen strong market interest in ST iPrecision GNSS solution, At the end of September, We held our annual Industrial Summit event in China. It do over 1300 customers in person and over 50,000 participating online. The theme of this year's event was following Your sustainable innovation and was focused on helping customers address climate related challenges. We showcased 150 demos in 3 market segments, automation, power energy and motor control, where ST has created dedicated competence centers located close to our customers.

Speaker 2

The registration of new designs in distribution we are receiving for our flagship STM32 family It's increasing year over year on all our products, including mature ones. This is a really positive indication on the market structural appetite for our product. Moreover, We will be the 1st ST Cellular narrowband IoT Ultra Compact and low power modules, combining cellular IoT connectivity and geolocalization capabilities for wide ranging IoT, smart metering and industrial application. We further enlarge the reach of application and use case for industrial customers by introducing new products such as time of flight and thermal more infrared sensors, as well as the 3rd generation of inertial sensors. To support our strategic focus areas in embedded processing, we have New ecosystem tools for our STM32 family.

Speaker 2

We also continue to expand our engagements with customers to deploy HCI for a growing range of use cases. This is based both on our extensive toolset allowing porting of AI algorithms to our existing MCU portfolio as well as the Alpha customer engagements for our latest neural processor enabled MCU. To conclude this review, In our radio frequency communication business, we are continuously expanding our strategic collaboration on SpaceX Starlink, which provides high speed Internet connectivity to a growing customer base in more than 60 countries around the world. They are ramping up their next generation products, which leverage our by Seboss 9 processes as well as Now let's move to our Q4 2023 financial outlook and our plans for the full year 20 For the Q4, we expect net revenues at the midpoint to be about $4,300,000,000 representing a year over year sequential decline of about 3%. Q4 gross margin is expected to be about 40 For 2023, our Q4 guidance at the midpoint translates into 2023 net revenues of about $7,300,000,000 This represents growth of about 7.3% year over year with a gross margin of about 48.1 percent.

Speaker 2

The $7,300,000,000 is consistent With the indicated range we provided late July, the $100,000,000 difference at the midpoint Related mainly to the industrial end market in Asia, where the level of orders Materializing towards the end of Q3 to load our Q4 backlog has been below our expectation. We confirm our 2023 net CapEx plan of about $4,000,000,000 To conclude, in September, the Supervisory Board asked me to be available for a reappointment As a sole member of the Managing Board and President and CEO, I was very honored and pleased to accept the proposal. This will be proposed for shareholder approval at ST's 2024 Annual Meeting of Shareholders. Thank you for your attention, and we are now ready to answer your questions.

Operator

We will now begin the question and answer The first question comes from the line of Didier Shalamon with Bank of America. Please go ahead.

Speaker 3

Good morning, everyone. Thanks for letting me on. Maybe just a couple of questions. Jean Marc, if I may, on Q4, if you could give us A sense of the various end markets we're hearing, obviously, weakening demand in industrial. I think In the conference earlier this year, you've mentioned that you were fully booked for autos for 2024.

Speaker 3

So I wondered whether you could Maybe talk also about the rest of the business next year, any sort of early indication on revenue growth and also gross margins. Thank you.

Speaker 2

Well, for Q4, I repeat, clearly, we have seen on industrial market, Especially in China, Asia China, that the order booking, okay, Entering in the lead time window, we are not materializing at our expectation. And it has mainly impacted the General purpose microcontroller. This is for Q4. But now, okay, We have to acknowledge altogether that we went back to normal in terms of lead time and capacity utilization For this kind of device and for semiconductor industry, except very few product lines like silicon carbine as well. About 2024, currently we have a very good visibility for 2020 For automotive and for whole, I have to say the Engage customer program with our Global strategic key account, everywhere we have, let's say, a custom designed product or where we have proliferated our product.

Speaker 2

More than for, let's say, industrial market, both mass market distribution and OEM, Well, now the visibility is limited. And for sure, customer, let's say, wait to the EBIT To put order, okay, when they are in the lead time window. So we have to monitor very carefully the calendar entry in Q4. To understand, okay, all will be, let's say, next year For mass market industrial, both for OEM and distribution. Well, if you want to classify next year, Very, very simply, we are convinced that automotive will go Definitively, because we have the visibility.

Speaker 2

And again, okay, the demand will be driven By the mobility, by the digitalization, by the provision of, let's say, the electronic in legacy application. Well, it is based on the production volume that will remain around 85,000,000, 90,000,000 vehicles. We do believe that for personal electronics, we touched down sub bottom in Q4. And next year, like for like, because again, we have to remove the optical modules still present in 2023. Like for like, okay, we will slightly grow.

Speaker 2

Well, then again, on industrial and mass market and distribution, It's a bit early. So we have to monitor carefully what is happening in Q4 in terms of our under entry. But it is clear that discussing with some customer, okay, they are assessing their end demand. They are assessing, okay, their inventory level. And this could also trigger some inventory collection both in Q4 and maybe early next year.

Speaker 3

Okay, very well. And on the underloading of the fabs in Q4, is that where do you think your inventories will end up at the end of this year? And Do you expect the underloading of fabs to carry on into the first half?

Speaker 2

So I'll let Lorenzo to answer.

Speaker 4

Good morning, everybody. In respect to this quarter, we do expect, let's say, at the end of the year to be Substantial in terms of inventory in the range of between 100, 110 days, in the midpoint, 105 or something like that. So there will be A further decline in our inventory during this quarter. This of course is triggering as it's been Already done in Q3, some unloading charges. These unloading charges in this quarter will impact, of course, our gross margin are fully embedded in our guidance.

Speaker 4

But as I said, for sure, let's say, for The gross margin of the evolution of the loading in respect to the next Yes. A lot will depend upon what Jean Marc said about the evolution of the market or the entry for the industrial market. But we expect still some unloading charges continuing at least for the first half of next year. Thank you.

Speaker 1

Thank you, Didier. Next question please.

Operator

The next question comes from the line of Andrew Gardiner with Citi, please go ahead.

Speaker 5

Good morning. Thank you for taking the question. Just following on the cost side of things there, Lorenzo, obviously, you've given us some clarity in terms of unloading and how you expect gross margin to track. But given how the end market is Shaping up at the moment, what are your plans in terms of OpEx? I suppose specifically for Q4, can you help us there in terms of the breakdown?

Speaker 5

And then perhaps just more generally into 2024, again, I understand you don't want to quantify things too much, but just So your initial thoughts in terms of OpEx trends into next year would be helpful as well. Thank you.

Speaker 4

But for the question, in about this quarter, the OpEx, let's say, last quarter in Q3 OpEx came Quite low in respect also to our expectation, but this is mainly driven, let's say, by the seasonality of You know that in Q3 we are positively impacted in terms of cost by the vacation period especially in Europe. Looking at the current quarter, our expectation in this quarter to have OpEx ranging between 950,000,000,000 9 This is including, I remind you always, the other income and expenses. So let's call it net OpEx. This is increasing compared to the previous quarter compared to the Q3. There is a lower level of grants, R and I remind you that the level of grants in Q3 was quite high also because there was a catch up over the previous quarter for grants That were possible to be recognized during Q3.

Speaker 4

And then for sure Q4 has, Let's say, unfavorable seasonality in respect to the previous quarter. This means that for this year, Our average quarterly net OpEx will be something between $925,000,000 $930,000,000 when we look at the full year. For next year, of course our OpEx will be in line with respect to the business evolution. We will maintain control on our operating expenses. For sure, we will continue to protect our R and D And we will continue to protect our digital transformation programs.

Speaker 5

Thank you. If I could also just follow-up on the comment you've made in terms of seeing weakness start in the industrial space, In China and that it's affecting general purpose microcontrollers. Clearly, I think that brings some flashbacks To September of 2018, where that was a part of the market that started to face troubles as we hit that particular down cycle. Things are a bit different this time around, but I'm just wondering how you're handling things, what you might be able to do a little bit differently this time around given that You're starting to see some of the same signs.

Speaker 2

Mark, compared to remember very well 2018 2019, well, first of all, okay, Overall economy situation and world is rather different. Here, I can only say fact, Okay. Again, the dynamic in Q3 of order, when customer, okay, acknowledge the fact That they are entering the lead time window were below our expectations. This is fact number 1. Fact number 2, yes, we discuss with our customers, OEM and distributor, and especially in China, but this is also Overall, a bit of global dynamic.

Speaker 2

We see our customers that are really reassessing They are in demand. They are revisiting their sales and operating plan. And of course, okay, as we Well, from supply chain point of view since Q4 2022, of course, they will certainly re adjust their Then again from the other side for the industrial market, clearly, that's the reason why I mentioned The registration on SCF32, the demand, okay, will be clearly driven by All applications related to renewable energy generation, energy storage, power conversion, Charge in infrastructure for in mobility, more factory automation and motor control, which are more related to CapEx. This will be related to the overall economy. So that's the reason why we have to monitor it.

Speaker 2

Consumer application for the time being are still weak, Okay. And discussing with our customer, they don't expect, okay, to have a strong recovery before Q2 next year. So this is a situation that we have to monitor. And now we know how to do it, okay. We clearly monitor the order entry.

Speaker 2

We adapt our supply chain. And for sure, entering in January, we will have a better visibility and moving forward as well.

Speaker 5

Thank you, both.

Speaker 1

Thank you very much, Andrew. Can we have the next question please, Humphrey?

Operator

The next question comes from the line of Joshua Buchalter with TD Cowen. Please go ahead.

Speaker 6

Hi, Hi guys. Thanks for taking my questions. Good morning. I wanted to ask about gross margins also. So I think last quarter you had called out mix, start up costs Underutilization is driving the sequential decline.

Speaker 6

As we go from the Q3 to the Q1, is it all underutilization charges or mix And start up also playing a role here. And then as we think about exiting the year, you should have inventory at your target, but the Q1 is seasonally down. And so I'm wondering how would underutilization charges trend in the Q1 of the year under that dynamic where you're at your inventory level, but you're also

Speaker 4

No, as I was saying also before, yes, for sure in Q4 We are impacted by some underutilization. You remember that we were preparing the year in the first half 2023, let's say, expecting a stronger second part of the year, second half of the year. So that was the reason why we were creating some inventory in order, let's say, to serve this Expected demand at this stage did not materialize as you see from our guidance of the second half. So this is the reason why we put under control our inventory. This is creating some unloading charges that We have in this second half of the year impacting our gross margin, bringing back to the level of days of inventory, as I was saying before, Our, let's say, I would say, standard normal level by year end, a little bit something, as I said before, that will be ranging 1 100 and max 110, but I think it will be closer to 100, 105 days of inventory.

Speaker 4

Moving on the next quarter in Q1 and in the first half, Well, a lot of will depend on how the order entry will materialize during This quarter on the especially for the industrial market because as you know, as was said, for the automotive, we have a quite clear visibility where let's say the visibility is less is on the industrial. But our expectation and still we will have some level of unloading in Q1 and probably also Something in Q2 and the level of unloading in Q1 will be probably similar to the one that we added this quarter.

Speaker 6

Thank you for all that color. For my follow-up, I wanted to ask about silicon carbide. There's concerns Some slightly weaker commentary at your lead customer that silicon carbide growth could slow. Could you talk about the diversification efforts that you're undergoing? And in particular, how is your visibility into both into substrate supply both And your internal vertical integration efforts going for next year.

Speaker 6

Thank you.

Speaker 2

For us, next year will be, Let's say, a step ahead consistent with our objective to deliver $2,000,000,000 in 2025. And so we have the capacity installed, we have the supply chain secured, And we have customer base and backlog consistent with this objective. And I will communicate, okay, at Q4 earnings end of January, the objective of silicon carbide revenue we would have next year. But be sure it will be a consistent step with the $2,000,000,000 objective of 2025.

Speaker 6

Thank you.

Speaker 1

Thank you very much. Can we have another question, Andre, please?

Operator

The next question comes from the line of Sandeep Deshpande with JPMorgan. Please go ahead.

Speaker 7

Yes. Hi. Thanks for letting me on. I have two questions. Firstly, this is the Q1 that we are seeing since the whole COVID period that you're seeing a year on year decline in terms of your guidance in the Q4.

Speaker 7

How do you see this progressing? Clearly, you've seen this softness in the industrial space. 1st quarter is typically also a seasonally weak quarter for you. How do you see this progress on a quarter to quarter basis In the first and second quarter, will you go back to growth in the 1st or the second quarter of the year on a year on year basis? And then my second question is regarding the mix of the product into next year as such really.

Speaker 7

Now you've lost Some business in personal electronics, and maybe that goes up a little, as you said. But Automotive will be a larger part of this. So will the mix Overall, help the gross margin into next year? Or is it that the underutilization charges continue and so that the gross margin is more

Speaker 2

Thank you, Sandeep, for your question. So for next year, well, I repeat what we see. Again, On the every quarter, we will grow year over year, I have to say. For our engaged customer program, it's exactly Same. And I repeat, with our strategic accounts, so whatever are related to personal electronics, But also to communication equipment and where we have all this important program.

Speaker 2

So we have the full visibility. And again, on Like for like, okay, we should grow. Communication equipment and computer peripheral, Now here I have to say that next year will be a transition year because we will shrink also step after Our legacy activity where we want to be no more present, it is basically enterprise communication. But we will accelerate with our cash customer program with the SpaceLink StarLink and the other Opportunity we won. The important question is mass market distribution and industrial OEM.

Speaker 2

You know this market is fragmented. Yes, Q4 is a sign that again, I repeat, we discussed with customer. They are revisiting and assessing their end demand because it is related to the overall economy. It is related also to the Automotive. Of course, okay, making the test payment, it could trigger some inventory adjustment.

Speaker 2

And then inventory adjustment, it's difficult now to assess how long it would last. So this is what I can say. That's the reason why I say very candidly that Q4 order intake for industrial mass market will be very key To understand the dynamics, so this is what I can say at this moment.

Speaker 8

Thank you.

Speaker 1

And with your question on the mix?

Speaker 4

Well, the mix I think Somehow Jean Marc was answering, giving us some color. Of course, let's say, no doubt that when we look At the industrial market, for us, is very accretive. So it means that depending On the way that this will evolve will, of course, being positive for our gross margin irrespective to the What is now in Q4? In respect to personnel electronic, well, actually we have not lost Anything here, reality is a change of the architecture in Which we are present, so it means that at the end we have not any longer the optical module, but we have let's say silicon inside. For us, it's positive in terms of gross margin mix, let's put it this way, not in the revenues, of course, because The ASP is different, but definitely in terms of the gross margin is positive.

Speaker 9

Sandeep? Yes. Thank

Speaker 1

you very much. Next question please, Andreas.

Operator

The next question comes from the line of Alexander Peterk with Societe Neral, please go ahead.

Speaker 8

Good morning and thank you for taking my question. My first question would be really on What we should expect on the price front? Usually, if I remember well, you had in the Q1 some customer reprice declines every year. So that was a little bit of a pressure on gross margins in Q1. That didn't really happen in this year because of the General price increases, but is the normal pricing pattern set to return in 2024 in the Q1?

Speaker 8

And then I have a quick follow-up. Thank you.

Speaker 2

Number about price, okay, and Lorenzo will comment, okay. What I can say, basically, I already said in April, We see some price effect, okay, in distribution, which is normal, okay. When you go back to non normal, Let's say, situation in terms of supply, POS, POP, that you have a well balanced, okay, Between demand and offer, you go back to normal, let's say, price effect, okay, Let's say, low single digit on a yearly basis, okay. We know it, okay. Everybody know it.

Speaker 2

This is something which is Antrancic, okay, is the semiconductor industry. So as Gerard speaking, it starts on distribution. We have seen it in Apeel. Okay. We see it in Q3 and we will see it in Q4, clearly.

Speaker 2

More than for the rest, okay, there is no specific price effect and price pressure From customer, we have contract, okay, we have new product, okay, we have engaged customer program. Well, there is no surprise, okay. There is a coming back to a normal situation. Well, more than that, okay, I cannot comment.

Speaker 8

Thank you very much. And a quick follow-up just on automotive where you have very good visibility. Can you tell me if excluding silicon carbide, is your automotive business set to grow meaningfully next year or not?

Speaker 2

Yes. I have well understood. So if I remove silicon carbide, yes.

Speaker 10

Short answer.

Speaker 8

Excellent. Thank you very much. Thank you.

Speaker 1

Thank you very much, Alex. Next question please.

Operator

The next question comes from the line of Francois Bouvigny with UBS. Please go ahead.

Speaker 10

Thank you very much. So I wanted to follow-up on Alek's question I mean, this quarter, you delivered 30% growth. I mean, if you look at TSMC, It was down 11% year over year, calling that the industry is going through an inventory correction. And also, I'm sure you saw as well the macro data with OEMs orders For auto, it's coming down significantly, especially in Europe. We also saw GM and Onda With the push outs of EVs.

Speaker 10

So it seems to be very different than what you report and also what you say into next What you just said, so I'm just wondering, do you see anything or is your guidance factoring Some maybe EV penetration slowdown into next year, because I guess it's something that you would see that happening Or is just your lead times so long that basically you don't see it yet? I'm just trying to reconcile basically what we see on the ground and what you are delivering and how it can be disconnected, if you see what I mean?

Speaker 2

Okay. Perfectly, I see there is no disconnection. Now if your question is, this year basically at 17.3, the automotive segment we support, basically will grow 36%. Well, clearly, also embedded in this fantastic growth, there is a specific item which are related To the period of shortage that ST has benefited in 2023 was the capacity fee reservation, and which is quite material. However, even if you remove This effect on our gross performance, our Automotive segment In 2023, okay, basically, we'll grow 28%.

Speaker 2

So next year, I have to say that this capacity fee reservation will be still present, But in, let's say, less order of magnitude than 2023, and it's normal because, okay, Except for product line, now we have the capability to better support the carmaker through the Tier 1 or directly. Well, then the Tier 1 and the carmaker, they are acknowledging as well that we are reducing Our lead time and reducing our lead time by step after step, okay, we could Booking of the with the book to bill below 1 on automotive, simply the fact that there will stop to load 18 months in advance and 24 in advance. And we could anticipate that in 2025, okay, instead to have a 100% backlog coverage, we will be maybe 80% backlog coverage. So So this is a trend we are seeing, point number 1. Point number 2, well, I'm sorry, again, with all the respect I have with SMC, they have a partial view of automotive, Okay.

Speaker 2

We have the full spectrum of product portfolio to see what is happening in automotive. And I confirm to you that except so like for like without the silicon carbide, we will grow. For sure, we will not grow at 28%. We will grow significantly, but not at 28%. This I can confirm to you.

Speaker 2

So as a takeaway, I can tell you that, yes, next year, we will have a little bit benefits Less on capacity fee reservation, we will see our customer acknowledging our capability in 2024 To better deliver with shorter lead time, so normally their booking will, let's say, decline in order to adjust themselves to this fact. So we will expect to enter in 2025 with 80% coverage on automotive. So this is the point number 2. Point number 3, we will grow overall in 2024 and it is based on Stable production car volume that we consider around 85. Yes, the feedback we have from our customer And the feedback there is from analysts is next year is more than 90,000,000 vehicles produced.

Speaker 2

This is not the base of our forecast. Then point number 3, I repeat, okay, this year is €11,000,000 to €12,000,000 of battery based electrical vehicle. Next year, we can expect, okay, to go well above 15% again. So this will call for big demand for power electronics and micro. Well, then, okay, you have the change of architecture that are coming for real definitively.

Speaker 2

And then the customer, I think, acknowledges that we can better supply, they come back to better sophistication of the legacy. So there is more and more semiconductor and electronics in legacy application. So all in all, this is building a scenario for next year

Speaker 10

Great. Very clear, Jean Marc. Thank you for the answer. And maybe my follow-up would be on the CapEx. I mean, as we see the orders, I mean, How do you think about the budget of your CapEx next year?

Speaker 10

And obviously, I don't expect you to give your CapEx. I mean, you can But is it something that you review given the current situation That may be a delay, some of the project CapEx. I mean, how flexible do you want to be on your CapEx side given the current environment? That's yes, that's the second question.

Speaker 2

No, we are running, let's say, Every 2 months, okay, let's say 2 years S and OP with different scenario and so on and so forth. I can confirm to you that We have the flexibility, okay, to adjust our CapEx. And yes, in current circumstances, okay, where there is, okay, not on automotive, I repeat, I repeat, not on our Global Key Account on Gas Customer Program, but on mass market distribution and, let's say, small OEMs, some Uncertainty that we have to monitor that the CapEx we will spend next year will be below the CapEx we have spent this year.

Speaker 10

Thank you very much.

Speaker 1

Thank you. Next question please, Andre.

Operator

The next question comes from the line of Stephane Urry with ODDO BHF. Please go ahead.

Speaker 11

Actually, the question is about the Chinese market and the competition you may face there because if You listen to the large equipment manufacturers. Basically, they are selling a lot of machines and those machines are Probably going to be used to manufacture or to build chips for automotive. So how do you See this happening, is it putting a bit more pressure? Is it changing your plans? And I have a follow-up.

Speaker 11

Thank you.

Speaker 2

Thank you, Stefan. I think I sometime already answered this question. We have Now since 2 years some, let's say, diversification in our source of this Microcontroller, but analog as well, including power analog, BCD, Mauricio Cobalt Carbide, okay, with our joint venture with Salab. We will use, okay, this we will take benefits of this Investment done in China to produce our microcontroller. And as I said during My address, we are building and we have already built, I have to say, an infrastructure in China To support this market, so foundry, we will use local foundry for microcontroller, including some of our technology.

Speaker 2

We have already built competence center to address the high growing application, So power energy, motor control, robotics, all this kind of stuff. So we have reinforced our application engineer. We have a deep relationship with distributor for demand creation and they have hired a lot of application engineer. So and then we have our ecosystem of the STM32 that we compete okay with all the different features of connectivity and AI. So in fact, We will we are competing in China, like Chinese, but stacking our ecosystem And our wide portfolio, which is a widest portfolio of STM32.

Speaker 2

And Well, at the end, it's competition, but very Chinese, but we saw a source of American. So it's competition, as usual, I have to say. But yes, we have adapted ourselves step after step since 2, 3 years when we have seen this trend To take advantage of the investments that are done in China.

Speaker 11

Okay. Thank you. Very clear. And then the follow-up is that maybe you have heard that one of your big European has said that even with a flat car market, they will grow more than 10%, basically they said low teens. I guess with that, with all the things that you all the elements that you've given for next year, the statement would apply probably to you also, right?

Speaker 2

I will give you indication only next year.

Speaker 11

Okay, fair enough. Thank you very much.

Speaker 1

Thank you, Stefan. Next question please.

Operator

The next question comes from the line of Jerome Ramell with BNP Paribasen. Please go ahead.

Speaker 9

Yes, good morning and thank you for taking my question. First question, Jean Marc, if I look at your whatever your SAM going to be, and I understand the lack of visibility, Can you share with us what you think about your own market share trajectory versus your fan? And the reason I'm asking is because if I look at your Q4 guidance, I think for the first time in maybe 20 years, you're going to have higher reviews than One of your largest competitors in the U. S. So just to understand the dynamic of your market share gain for the coming years?

Speaker 9

And how much of that is embedded in your guidance or target of reaching $20,000,000,000 of renewal between

Speaker 2

Well, thank you for to have taken a note potentially in Q4 If we deliver the midpoint of our outlook and our main competitor delivers the upper range, we will be able. Thank you, Marc. It's good, but this is not the most important, okay? Yes. Certainly, this year, we have increased our market share most likely because we know that WSTS will Make a revision in November, so we will see what will be the market.

Speaker 2

For the time being, as I said, in August, Sam We grow 3.4%. So as by fact, we will grow 7%. So it means we will win market share. We have other indications from Colombia that are more firm, okay, this year we grow 1%. So this is confirming.

Speaker 2

So When I take this data, I have to say that this year, we will win market share. And again, it has been mainly driven by our capability to grow in automotive, to grow in silicon carbide, clearly $1,200,000,000 is quite We have taken benefits of this capacity reservation. We have been heavily impacted by the Personal Electronic But as everybody, okay, no more than everybody. And Q3, For sure, the industrial mass market was solid. But now, okay, we are entering this period.

Speaker 2

About next year, it's difficult again to say today, but our ambition It's to continue to win year after year market share driven by new product introduction technology differentiation. Yes, I confirm the $20,000,000,000 plus model in terms of revenue. But in the time frame, we indicated 25,000,000 to

Speaker 9

And just to make sure you're confirming also the gross margin target of 50%?

Speaker 2

Yes, we confirm the model, yes.

Speaker 9

Okay. Yes, thank you. And maybe just a follow-up question on silicon carbide. There were the rumors that you might need another silicon carbide fab in the French newspaper. I don't know if you can confirm or not, but maybe another way to add the question.

Speaker 9

With the current capacity you have, How much revenues can you target with the current capacity including the Fanon JV?

Speaker 2

Clearly, with the manufacturing footprint we have today installed, We can support, okay, above the €2,000,000,000 of €25,000,000 So it's a good news. Point number 1. Today, as you know, we are concentrating to ramp up our raw material fab in Catania In order to achieve as soon as we can 40% of internal production, it will be a good cost driver. Well, then if we plan to go well above $5,000,000,000 Between 28 to 2,030. And this is clear that we will need to have 2 additional fabs.

Speaker 2

1 in China that will support the Chinese market. So this is the JV we have just set up And progress are moving very well, and I will visit them very soon. More than We will decide when timely when we have to build another fab. And of course, we will communicate. But for sure, to go well above $5,000,000,000 between $28,000,000 to 2,030, we need Sanad and another fab.

Speaker 10

Thank you very much.

Speaker 1

Thank you. We have time for one last, I would say, short question, if possible. If you can, Andre, let's have another one.

Operator

The next question comes from the line of Simon Cowles with Barclays. Please go ahead.

Speaker 12

Hi, thanks for squeezing me in. You talked about the underutilization charges, but you didn't split out Agrate. So I was just wondering if you For McGrath a sort of peak drag in 4Q and we can continue to expect that to improve in 2024 and be accretive in the second half of twenty twenty four?

Speaker 4

Yes. The plan for the 300 millimeter in a graph is substantially unchanged. It's true that This year and in the first part of next year, Algrate will not be accretive. At this stage, we can confirm that Algarve will start to be neutral and then to be, let's say, adding a positive Contribution starting the 2nd part of next year and Q4 and then definitely in 2025. Yes.

Speaker 12

Thanks. And can I just quickly clarify, the 130 basis points impact on gross margin in 4Q, that doesn't include the drag from Agrate?

Speaker 4

No, it's only the impact of the unloading charges.

Speaker 12

Great. Thank you.

Speaker 1

Thank you very much. Very short. Thank you very much, Simon. I think that now this is the last question and we can

Speaker 2

Thank you. Thank you, everybody.

Speaker 3

Thank you very much. Bye.

Operator

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

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Earnings Conference Call
STMicroelectronics Q3 2023
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