STMicroelectronics Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 11 speakers on the call.

Operator

Ladies and gentlemen, welcome to the STMicroelectronics Q2 2023 Earnings Results Conference Call and Live Webcast. I am Moira, 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 not be recorded for publication or broadcast.

Operator

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

Speaker 1

Thank you, And good morning. Thank you, everyone, for joining our Q2 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 Brandi, President of Finance, Purchasing, and Resilience and Chief Financial Officer Marco Tessis, President of Analog, MEMS and Sensor Group and Head of STMicroelectronics Strategy, System Research and Application Innovation Office. This live webcast and presentation materials can be accessed on ST'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 Neste's results to differ materially from Adjutman'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, ST's President and CEO.

Speaker 2

Thank you, Celine, And good morning, everyone, and thank you for joining ST for our Q2 2023 earnings conference call. In Q2, our balanced end market approach, our broad product portfolio and strong customer relationships enabled again a double digit year over year growth. This performance came along with a year over year increase of our profitability. And as already anticipated, 2023 will be another year of progress So on, our $20,000,000,000 plus revenue ambition and related financial model. Now let's start with the financial highlights overview.

Speaker 2

2nd quarter's net revenues of $4,330,000,000 came in above the midpoint of our business outlook range, And Q2 gross margin of 49% was in line with guidance. Q2 net revenues increased 12.7% year over year. The revenue performance continued to be driven by growth in automotive and industrial, partially offset by lower revenues in personnel electronics. Looking at our year over year performance, Gross margin increased to 49% from 47.4%. Operating margin increased to 26.5% from 26.2 percent and net income increased 15.5 percent to $1,000,000,000 On the first half of twenty twenty three, net revenues increased 16.1% year over year to $8,570,000,000 driven by growth in all product subgroups, except the analog and MEMS subgroups.

Speaker 2

We reported gross margin of 49.3%, Operating margin of 27.4 percent and net income of $2,050,000,000 On Q3 2023, our 3rd quarter business outlook at the midpoint is for net revenues of about $4,380,000,000 increasing 1.2% year over year And by 1.1% sequentially. Excluding the impact of the change in product mix In an engaged customer program in personnel electronics, I mentioned in January, the QT revenue growth at the midpoint would be 3.5% year over year and 3.2% sequentially. Gross margin is expected to be about 47.5%. For the full year 2023, We will drive the company based on the plans for revenues of $17,400,000,000 plus or minus $150,000,000 This represents a year over year growth of about 8%, and we now anticipate the gross margin to exceed 48% for the full year. Now I will move to a detailed review of the Q2.

Speaker 2

Net revenues increased 12.7% year over year. This performance was driven mainly by ADG, Up 34.4 percent and NVG up 13% and continued strength in automotive and industrial. As expected, year over year sales increased 9.8% to OEMs And 18.3 percent to distribution. On a sequential basis, Net revenues increased 1.9% with ADG up 8.2%, MDG up 4.3 percent and IMS down 11.9%. Net revenues came in 110 basis points above the midpoint of our outlook, mainly due to automotive.

Speaker 2

Gross profit was $2,100,000,000 increasing 16.5% year over year. Gross margin increased to 49% compared to 47.4% in the same quarter last year. The 160 basis points expansion was driven by product mix, favorable pricing, Positive currency effect net of hedging and partially offset by higher manufacturing costs. Year over year, the 2nd quarter operating income increased 14.2 percent to $1,150,000,000 In the quarter, net operating expenses included negative non recurring non cash items Amounting to $34,000,000 Operating margin was 26.5 percent, increasing from 26.2 percent in Q2 2022. On a year over year basis, Q2 net income increased 15.5 percent to $1,000,000,000 compared to $867,000,000 in the year ago quarter.

Speaker 2

Earnings per diluted share increased 15.2% to $1.06 compared to $0.92 Looking at our year over year sales performance by product group. 8 digit revenues increased 34.4 percent and double digit growth in both automotive and power discrete. AMS revenues decreased 15.7% with lower revenues in the 3 subgroups. MDG revenues increased 13% with growth in microcontrollers and RF communications. In terms of operating margin, 2 of 3 product groups Deliver year over year improvement, ADG operating margin increased to 31.9% from 24.7%.

Speaker 2

MDG operating margin increased to 35.4% from 33.6%, while AMS operating margin decreased to 14.8% from 24.1%. Net cash from operating activities increased 24.1 percent to $1,310,000,000 in Q2 versus $1,060,000,000 in the year ago quarter. CapEx in the Q2 was $1,070,000,000 compared to $809,000,000 in the year ago quarter. Free cash flow was $209,000,000 compared to the $230,000,000 in the year ago quarter. During the Q2, ST paid $50,000,000 of cash dividends to stockholders, And we executed an $86,000,000 share buyback under our current share repurchase program.

Speaker 2

ST's net financial position of $1,910,000,000 as of July 1, 2023, Reflected total liquidity of $4,560,000,000 and total financial debt of $2,650,000,000 Let me go through a recap on the main Q2 Corporate and business highlights. We had 2 important announcements in Q2 related to our 300 millimeter in First, we announced the conclusion Of the 3 party agreements among the State of France, GlobalFoundries and our company, as approved by the European Commission. This relates to the new 300 millimeter semiconductor manufacturing facility in Kroll, This agreement will contribute to our $20,000,000,000 plus revenue ambition and related financial model. And we further reinforce the European and French FPSOI ecosystem. We will build more capacity for our European and global customers in advanced technologies and the transition to digitalization and decarbonization.

Speaker 2

The total investment for this project is expected to be about €7,500,000,000 And we benefit from French state financial support up to about €2,900,000,000 in line with the objectives set out in the European Ship Act. In silicon carbide, We announced a joint venture with Cenan Optoelectronics for high volume 200 millimeter silicon carbide device manufacturing in China. The joint venture will support the rising demand for ST Silicon Carbide Devices in China for car electrification and industrial power and energy application. Sanan will build separately a 200 millimeter silicon carbide substrate manufacturing facility To fulfill the JV's need, the combination of the 200 millimeter substrate facility to be built by Sanan With the front end JV and ST's existing back end facility in Shenzhen, we'd enable ST to offer our Chinese customers a fully vertically integrated silicon carbide value chain. A significant competitive advantage in the silicon carbide landscape.

Speaker 2

The new joint venture of silicon carbide fab is targeting to start Production in Q4 2025 and full build out is anticipated in 2028. It is an important step to further scale our global silicon carbine manufacturing operations, coming in addition to our continuing significant investment in Italy and Singapore. It will be one of the key enablers of the opportunity we see to reach above $5,000,000,000 silicon carbide yearly revenues by 2,030. In this corporate development overview, I would like also to mention a change in our executive committee. During the quarter, Aurelio Bellezza, President, Quality, Manufacturing, Technology and Supply Chain and member of ST Executive Committee announced his retirement from the company.

Speaker 2

Oyu will remain Managing Director of the company's Italian subsidiary until the expiration of its mandate Fabio Guelandres, ST Executive Vice President, Head of Backend Manufacturing and Technology and Deputy to Aurelio Belezza is appointed President, Quality Manufacturing and Technology. Upon my proposal, ST Supervisory Board approved the appointment of Fabio to the company executive committee. I would like to thank Aurelio for his engagement in the numerous roles he has played at ST. And I wish Fabio all the best in his new role. I will now go through a short update on some of our strategic focus areas.

Speaker 2

In silicon carbide, we continue to increase the number of engagements. We are now working with 90 customers and 140 projects. Silicon carbide based power systems for electrical vehicle traction and industrial drives are completed by our industry leading ST GaP galvanic isolation drivers based on ST's unique IP And Advanced BCD Technologies. We announced an R and D cooperation collaboration with Airbus on 1 bond GAAP Semiconductors for aircraft electrification and decarbonization. This confirms ST's leadership and the strength of our silicon carbide technology roadmap.

Speaker 2

In car digitalization, we saw continued design win momentum with our later generation of automotive microcontrollers, called STELAS, Across multiple applications, in parallel in Headas, we continue working closely with our long time customer and partner Mobileye. The RQ6 product is now in production and IQ Ultra at the AMD phase. Volumes of preview generation are ramping up. In May, We had our annual STM32 submit event for industrial customers in China with 2,700 customers in person and a record breaking of 80,000 online. During the event, we made announcements related to HAI, namely AI running on microcontrollers, Microprocessors and sensors.

Speaker 2

We launched a new family of microprocessors for SecooIndustry 4.0 and Edge AI to allow our developers to address higher performance applications. We also gave further details on the upcoming STM32N6 microcontroller. This is ST's first MCU with our novel processing unit hardware accelerator, And we will bring the best in class computing power, power consumption and cost of ownership for the application we target. 1 of the industrial application demos we built with the customer performs up to 75 times Faster for AI workloads versus today high performances MCUs. We will start to sample the STM32 and 6 from September onwards.

Speaker 2

For developers, We are expanding our STM32Cube AI software offering, including the launch of a collaboration with NVIDIA around the TARO, so TrainAdapt Optimize toolkit, now available. AGI is not only SCM32. We have the same approach for sensors with the release of a new toolkit and associated software for our intelligent MEMS sensor for activity recognition and anomaly detection directly in the sensor. Now let's move to our Q3 2023 financial outlook And our plan for the full year 2023. Wait a minute, please.

Speaker 2

For the Q1, at the midpoint, We expect net revenues to be about $4,380,000,000 representing year over year and sequential growth of 1.2% and 1.1% respectively. As anticipated in January, we are entering in H2 2023 With a significant change in product mix in an engaged customer program in personnel electronics. Excluding this change, our Q3 'twenty three revenues at the midpoint would grow year over year by 3.5 percent and sequentially by 3.2%. And based on our indication of $17,400,000,000 revenues for full year 2023. H2 2023 revenues would grow by about 6% compared both to H1 2023 and H2 20 22.

Speaker 2

Q3 gross margin is expected to be about 47.5 percent at the midpoint, including about 150 basis points of unused Capacity charges. For 2023, based on our visibility, We will drive the company based on the plan for full year 2023 revenues of $17,400,000,000 Plus or minus $150,000,000 this represents growth of about 8% over 2022. The full year 2023 gross margin will exceed 48%. We confirm our 2023 CapEx plan of about $4,000,000,000 Thank you, and we are now ready to answer your questions.

Operator

Participants are requested to use only handsets while asking a question. The The first question is from Jerome Ramell from Exane. Please go ahead.

Speaker 3

Yes. Good morning. Thank you for taking my question. First question, maybe, Jean Marc, if you could help us to understand the dynamic per division for The dynamics for Q3 sequentially and

Speaker 2

So, dynamic for Q3, sequentially and year over year, I have to say that Year over year, ADG and let's say, will grow significantly, let's say, well above 20%. MDG will slightly grow Year over year, Q3 over Q4, it is linked, okay, to the fact that China We'll not start slower than expected. Well, NIMS will decrease year over year By 31%, okay. But also, this must be also corrected by the fact that We have this change in product mix. Well, secondarily, if we look Q3 2023 versus Q2, ADG will continue to grow, I have to say, a single digit.

Speaker 2

IMS will be basically flattish and MDG, okay, will slightly decrease again for the same reason because In China, we do not see the expected restart is slower than expected.

Speaker 3

Okay. Thank you. And maybe a question for Lorenzo on the OpEx. It probably came above expectation for Q2. How should we think about the OpEx for Q3 and maybe the second half of this year?

Speaker 3

Thank you.

Speaker 4

In terms of OpEx, this quarter let's say last quarter in Q2, we were coming with a little bit higher level of OpEx. As We said that we had some one time that we are not forecasted entering the quarter and actually the level of grants that we were expecting And we are not materializing due to the fact that they were little bit postponed for administrative reasons, we were not in the position to recognize. What will happen in Q3, next OpEx including other income and expenses will decline In respect to Q2, we do expect a net OpEx in the range of $8.18,000,000 $890,000,000 For Q for this quarter, for Q3. This is the combination of seasonality and let's say the fact that the level of other income and expenses will be Significantly positive, thanks to the fact that we will be in the position to recognize R and D grants. That was not the case in Q2.

Speaker 4

But for the year, I think we will position Q4 for sure in term of OpEx, there will be some increase. Usually, it's a quarter that is a little bit In terms of seasonality, more high level of in terms of operating expenses, I think at the end of the full year, the range Quarterly OpEx will be in the range of between $910,000,000 or $930,000,000 something like that.

Speaker 5

Thank you.

Speaker 1

Next question please.

Operator

The next question is from Francois Bouvignies from UBS. Please go ahead.

Speaker 6

Thank you very much. So I have 2 quick ones. First one is on automotive. I mean, obviously, very strong performance, thirty 4% growth year over year. Now if I look at the peers, I mean, NXP is growing 9%, it's automotive.

Speaker 6

Renaissance is growing 3% year over year this quarter. So you seem to outperform by far your peers In terms of growth rate, now I understand that silicon carbide is a big growth driver, but even if I try to exclude silicon carbide from this growth, I get definitely more than 25% growth year over year anyway. So I was just wondering, can you explain the strong Outperformance versus some of your peers, Texas is also growing like 20%, Excluding silicon carbide as such. And I'm asking because the U. S.

Speaker 6

Peers essentially they are saying that they don't Want to fill the industry with inventories and they are managing basically this. So is there a risk That you feel too much near the channel with inventories? Or yes, that's why I'm asking the drivers behind this strong performance? Thank you. And I have another one after.

Speaker 2

No, I think there is a first reason fundamentally that we over From our peers, basically tourism is Headas. Okay. Do not forget that we Partner with Mobileye. Mobileye is the leader worldwide of ADAS system. No, ADAS is more and more perusing the car industry, also driven by regulation.

Speaker 2

And if you want to be a 5 star end cap, This kind of stuff. So you must embed some ADAS feature. And ST as a partner of ADAS, and this is what I say in my script, The current generation of Idas, mainly IQ4 and IQ3 are really ramping materially. And just second reason, I know we are focusing on silicon carbide, but versus Fresenas and NXP, On top of that, we have, let's say, a richer portfolio, a larger portfolio On the analog and microcontroller and MEMS, don't forget power. So IGBT, low voltage MOSFET, high voltage MOSFET, VI Power, more and more we are purchasing Via Power, which are very adapted device for the new architecture in this car, our Two competitor, okay, have not this kind of technology.

Speaker 2

So this is the two main reason why we have over performed our peer. It is EDAS and the remaining portfolio we have in power, including the VI Power.

Speaker 6

Thank you, Jean Marc, very clear. And my follow-up question would be on IMS. I mean, I expected The share loss happening in the second half of the year, and I was a bit surprised on the Q2 year over year decline. And more importantly, the margins that decreased significantly. So I understand the top line, you Some kind of drop through, but can you explain a bit more what's going on in IMS this quarter?

Speaker 6

And also margin bridge would be Amazing. Thank you.

Speaker 2

No, I may. IMS from an overview, let's say, point of view, I received a Sirius hit by Personal Electronics on the whole in Q2, I have To say, you know that smartphone, okay, this year overall will decrease. But more important, the inventory correction in Electronics is going on. We still continue in Q3 as well. On another side, IMS is also exposed to RD Drive.

Speaker 2

And RD Drive is in the Computer verticals and computer peripheral is also, let's say, very weak. So unfortunately, this is really the 2 main reasons at this stage of the, let's say, decrease Significant decrease of IMS revenue year over year. About margin, maybe Lorenzo you can comment.

Speaker 4

At the end, let's say, this impact on the margin is mainly due to the volume, is mainly due to the fact that, of course, Our, let's say, level of top line is declining and for sure the leverage on our And this is worsening in this group. I would say this is the main driver. Then, of course, it's also by some, let's say, deterioration in our manufacturing, especially, let's say, related to the activity that is Lower for our MEMS, for this kind of products. But the main driver of our Operating margin is related to the fact that the volume decrease and the expense to sales ratio for sure is worsening for this group.

Speaker 6

Great. Thank you very much.

Speaker 1

Thank you, Francois. Next question please.

Operator

The next question is from Alexandre Peterc from Societe Generale. Please go ahead.

Speaker 7

Yes, good morning and thank

Speaker 8

you for taking my My first question will be on inventory, which rose 226 days. How would you qualify this level of inventory? Is it elevated or needs to be worked down in the second half? Or is it more reflecting usual seasonality for your business? And I have a follow-up.

Speaker 8

Thank you.

Speaker 4

Renzo, I take this question. But we judge this a little bit too high. It's true that in Q2, our inventory for seasonality is increasing. Anyway, let's say, at this stage, 126 days of inventory is on a little bit on the high side. This is also the reason why in the 2nd part of the year as we have already anticipated Q3 and Q4, we will reduce Our activity, our production activity, especially on that fabs that are more exposed to personal electronic and the consumer.

Speaker 4

This will bring unloading and these unsaturation charges and this is visible in our gross margin this quarter Where we are hit by 150 basis points of unloading in our guidance of 47.5. If you take it out, this impact will be more or less similar to the one of Q2 in terms of gross margin.

Speaker 2

And we finish the year in terms of inventory?

Speaker 4

In terms of inventory, yes, thank you. We will with this, let's say, we think to bring down our inventory more in a range of 101 110 days of inventory with respect to the 126.

Speaker 8

Thank you for the follow-up questions, Jean Marc. Yes, absolutely wonderful. My second question would be on smartphones. You talked about this already in your introductory remarks. There's a lack of recovery, let's call it this way, so far.

Speaker 8

How would you qualify the market now? Do you see any evidence of any bottoming out of the smartphone market, particularly in China In the current quarter? Or is it too soon to call it? Thanks.

Speaker 2

No. This is what I said. I think in terms of demand, The data points we have looks like this year, the market, okay, with The demand of smartphone will slightly decrease, I think 1.5% or 2%, with still a changement of mix between the 4 gs and the 5 gs. The point is this industry is still paying Last year, a strong decrease, minus 9%. And of course, the inventory, which has been built up, okay, last year Are not yet digested.

Speaker 2

And this will continue in Q3. Martel, we hope Okay. Progressively moving forward Q4 and Q1 next year To see 1st inventory digested and to be exposed to the end demand, so the B2C demand of a smartphone. So this is the scenario most likely, okay, we expect.

Speaker 8

Very clear. Thank you very much.

Speaker 1

Thank you, Alex. And Marika, next question please.

Operator

The next question is from Andrew Gardiner from Citi. Please go ahead.

Speaker 5

Good morning, guys. Thank you for taking the question. Can I ask one on pricing, please? We covered this with 1st quarter But it would be great to have a real time update here with 2Q. Jurend, if I look at the gross margin guidance you've given, Particularly, as you just highlighted, adjusting for the underutilization charges, gross margin is flat into 3Q and still remaining strong in 4Q.

Speaker 5

It suggests to me that there hasn't been much change in pricing, but if you can just walk us through some of the moving parts there, that would be helpful. And then I do have a quick follow-up. Thank you.

Speaker 2

No, we absolutely see no significant pricing impact sequentially, Q3 versus Q2. Well, again, the gross margin dynamic we have We will move clearly from 49% in Q2 to 47.5% in Q3, But it is impacted by the unused capacity. So in fact, okay, in Q3, basically, without this unused capacity, That we have decided by ourselves, okay, to decrease inventory level described by Lorenzo a few minutes ago, Our gross margin is still ballpark at 49%. Now all the other effect, okay, you know that our input parameter Like the product mix, the pricing, the manufacturing efficiency, all these parameters offset each other. So, no, Q3, okay, we don't see any significant impact on the pricing.

Speaker 5

And so just related to that quickly, how much is the AGRAT 300 millimeter fab ramp a headwind in 3Q?

Speaker 2

McCarthy, in Q3, okay, has been included in the manufacturing efficiency, okay, as The 8 inches which are, let's say, exposed to consumer, but Lorenzo you No.

Speaker 4

In Q3, it started to be, let's say, increasing, but it's not yet very Significantly, it will be a little bit more during Q4 because of course the activity will start to be more visible. As we said, let's say, this is one of the detractors of our second half gross margin. Manufacturing overall and let's say the impact of the Grate are let's say the main Drivers of the declining, of course, together with the unloading charges, now this is obvious, but of our gross margin in the second half Of the year. But still it's not, let's say, super strong. It's not yet, let's say, is part Of this degradation, but it's not yet in Q3, so visible.

Speaker 5

Okay. And then sorry, just a quick clarification. Jean Marc, you gave us the adjustments related to the product mix And the customer program in 3Q saying that instead of 1% year on year and quarter on quarter, it would be sort of lowtomid3% On both those, sort of year on year and Q on Q, rough math, that's sort of $80,000,000 $90,000,000 worth of impact. Earlier in the year, you told us it was going to be $500,000,000 in the second half. Is there and I admit, you broke up a little bit on my line in When you're talking about the full year impact, are you saying that sort of more of the impact is in 4Q?

Speaker 5

Or is it actually less than you previously anticipated?

Speaker 2

It's a bit less than anticipated, but it is still very material because again, I repeat, This module we accepted to support our important customer. The revenue was really concentrated on H2 Q2 2022 and H1 2023 and basically disappear in, Let's say Q3 and Q4 2023. The difference Between the H2 2023 and H2 2022, impacted by this But the device is a $100,000,000 below the number I gave in April, yes, It's a below, but it's $100,000,000 That's the reason why, okay, if you make the math, We have confirmed this number of significant change in the revenue dynamic H2 2023 versus H2 2022. And I have to say in Q4, If you make the math at the midpoint, it's more important because if you compute our Q4 at the midpoint of $17,400,000,000 It's a growth H2 Q4 'twenty three versus Q4 'twenty two of 0.7%. Corrected By this module, the growth is 7%.

Speaker 2

So it's really material. But the impact, Difference H2 to H2 is $100,000,000 below the number I gave in April.

Speaker 3

Thank you very much.

Speaker 1

Thank you, Andrew. Maura, next question please.

Operator

The next question is from Josh Buchalter from TD Cowen. Please go ahead.

Speaker 7

Good morning. Thanks for taking my questions. I wanted to ask about gross margin as well. So So the guidance implies sort of a very modest decline from the Q3 to the Q4. I think you previously called out 3 drivers, half of half over half The start up costs under utilization charges and mix, it all seems like those should be peaking around the 4th quarter.

Speaker 7

Is that the right And I guess, is there any reason why the Q4 wouldn't sort of be the trough of gross margins as you see things right now assuming again Stable market conditions. Thank you.

Speaker 4

At the end, let's say, when we look at the H2, the gross margin That we will have in average in H2 will be slightly above 47%. And this is impacted by more than 100 basis of temporary unused capacity charges. Then at the end, let's say, The remaining 100 basis points of decline in compared to H1 are due to the full impact of our manufacturing increased input cost, As we said many times that we will let's say be very, very let's say visible In the second part of the year and the main part of the ramp up of the Agranta 300 millimeter, I would say these The key ingredients for our dynamic of our gross margin.

Speaker 7

Got it. Thank you. Just my follow-up, I was hoping to ask about silicon carbide. Any color you could provide on the JV announcement in China? In Particular, how much capacity are you expecting to get out of that?

Speaker 7

And what's your confidence in being able to get enough volumes of 200 millimeter wafers from your partner there? Thank you.

Speaker 2

So the capacity at the full build out will be 10,000 wafer per week, 200 millimeter in 20.28. The confidence level On 200 millimeter, it's very high, because, okay, there are the process we know very well, Because, okay, this process is similar our process of Northwell. And I never forget that we bought Northwell From Sanath. And we know exactly our process and we know that our equipment, Which has been designed for 200 millimeter in Norsen, okay, do not represent any specialty difficulties, Okay. To move to 100 millimeter, contrary, equipment which has been designed purposely only for 150 millimeter.

Speaker 2

So now our confidence level is very high. So that's the reason why we have done this deal.

Speaker 7

Thank you. I appreciate all that color.

Speaker 1

Thank you very much, Josh. So next question, please.

Operator

Next question is from Lee Simpson from Morgan Stanley. Please go ahead.

Speaker 3

Hey, good morning everyone and thanks for squeezing me in. Just a couple Classification questions really. You mentioned at the top there OpEx, I think, right about 8.80, 8.90 Going into the second half, just trying to maybe break out or clarify any changes in other income, particularly as we look at The start up costs on Agrati should be moving out of other income and into COGS. But are we allowing for that in that overall number? That's my first question.

Speaker 3

I've got a quick follow-up.

Speaker 4

No. As I said before, let's say, what we see In the Q3, in term of expenses and net expenses is in the range of $8,800,000 This is set for the Q3. A little bit higher, we will be in the next quarter in Q4 in term of expenses due to the seasonality. In terms of other income and expenses, in Q3, we will have a benefit coming from the R and D grants That we're not, let's say, in the 1st 2 quarters of this year due to the fact that all of the conventions that we needed to have signed We're ready in order to be recognized. We're, let's say, there because the agreement was already done.

Speaker 4

But the point is that we needed to have the documentation as you I understand. And this will be done during this quarter. So at the end of this will be the dynamic. In term of other income and expenses this year, Our expectation is to be overall in the year positive $70,000,000 $80,000,000 as Slightly above what was my indication entering the year. So it will be a little bit better in this respect.

Speaker 4

In term of yes, in term of startup costs, these other income and expenses are impacted by the startup Cost of AGRATE 300,000,000, but this startup cost progressively will become a manufacturing cost, let's say. And here, of course, there is on the other side the fact that we are going to start to produce wafer. So it will not be a pure Fostik will be also contributing to our top line, this activity. For sure, at the beginning, The 300 millimeter will have an efficiency that is not at the best. This is clear.

Speaker 4

The manufacturing The efficiency of this Pepe will progressively improve in the course of next year.

Speaker 3

Great. Thank you very much. That's quite clear. Jean Marc, I think you were also very clear on some of the rationale around the San Particularly as it sort of carries on from the design understanding or the work at least that Northstar would have done prior inside Sanan. But it does seem to just gel a little awkwardly with your stated aim to verticalize move more things internally for silicon carbide.

Speaker 3

And also it stands out a little bit to me that you've involved yourself in a bit of a tech transfer. Admittedly, it brings in your back end business quite nicely. But I wonder if you could just maybe talk through a little more broadly the rationale for this JV, Particularly from that tech transfer risk and really as it works with your existing strategy for internalization? Thanks.

Speaker 2

The technology transfer, okay, I would like to be very clear. DGV is a foundry. And this foundry will work exclusively for ST. So it's exactly the same model that is still used, okay, of an EDM, Transferring technology to a foundry for its exclusivity usage. So this is this model, okay, Clearly, so there is absolutely no transfer of IP.

Speaker 2

There is no license. There is nothing. It's a transfer of manufacturing process In a foundry, that will work exclusively for us to address vertically the Chinese market, which is booming. I know it's there is a common consensus that the electrical car in China, but as important, The related infrastructure, so loading charges, fast charger, loading charges in residential, Then all the power and energy related to the renewable energy because of the strong decarbonization in China, all these markets will move in the near future. And it's important for ST to address this market with a local production end to end.

Speaker 2

So from the bare wafer, epitaxy, wafer processing, wafer salt, assembly and test. For SMD and Test, of course, we will leverage our long lasting JV we have in Shenzhen, called STS, that will assemble and will test our product. So the rationale is point number 1, this market will be the fastest growth market In the field of electrification and decarbonization, we want to address locally this market, okay, end to end. So that's the reason why with this well known partner, Sanan, we have just set up a JV working as a foundry exclusively for us, And we will transfer production process, not IP, that will be processed for us and assembled in our factories.

Speaker 1

Does that answer your question?

Speaker 3

Yes. That was a great response. Thanks so much.

Speaker 1

Thank you. So next question please, Mariana.

Operator

The next question is from Didier Schemmel from Bank of America. Please go ahead.

Speaker 9

Thank you so much. Actually, I just wanted to go back to a question that was asked previously. Lorenzo, you said On the last earnings call that there would be 300 basis points of gross margin contraction H on H in the second half and of which 100 basis points is pricing pressure, 100 basis points is Input cost in 100 basis points is under loading over the past. So can you reconcile what is the new What are the new components of that H2 gross margin? And then related to that, and again, the question was asked but was not really answered.

Speaker 9

Is there a scenario where your first half gross margin in 2024 actually lower than the second half of this year? And I've got a follow-up. Thank you.

Speaker 4

In terms of dynamic of the gross margin, I would say that you see that Our indication for the year is now, let's say, exceeding the 48% gross margin. That means that Today, let's say, in term of impact of pricing, we don't see any significant, let's say, impact. As we were saying before, let's say, social market, this was the dynamic seen in Q3 and Q2 moving forward. So at the end, I would say that as I was saying before, the second half of the year will be mainly impacted by 2 components. Let's say, the first one is the unloading charges.

Speaker 4

This is clearly something that is driven by the fact that we wanted to control our inventory. And here today, the visibility is that this impact will be slightly above the 100 basis points. The remaining is mainly By the impact of the manufacturing efficiency and this impact of the 300,000,000 Mix price or the other substantially offset each other. So at the end these are the main drivers that today

Speaker 2

This is clearly The baseline, the solid baseline we have in our end, so 48%, it is what I communicated in April as well. And this is totally consistent, okay, with our trajectory to reach a 50% gross margin Associated with our $20,000,000,000 plus revenue ambition in 2025%, 27%.

Speaker 9

So 48% is the baseline going forward. Interesting. I wondered if you could give us an update also on Agorati 300 millimeter ramp And on Catania, silicon carbide, and what I mean by that is could you give us a sense of the timeline through which those fabs Maybe individually will contribute to gross margin positively if that's the second half of next year or if it's further out? Thank you.

Speaker 2

So on silicon carbide, well, first of all, in Catania and Singapore, we are increasing continuously Our capacity, I repeat this year, okay, we will deliver about $1,200,000,000 revenue, And we have the ambition to be at €2,000,000,000 in 2025. So this is already contributing, Let's say to our operating margin, okay, because it's MOSFET. Never forget that The MOSFET is not the gross margin of MCU or digital IC. Mondele, okay, the internal supply, We target to have 40% internal supply. As a run rate, It will happen end of 2024 and will, let's say, significantly impact Our cost starting 2025.

Speaker 2

And

Speaker 9

for Agrate? Hello.

Speaker 2

Then for Agrate. So for example, today, we are sticking with our plan. So we have installed capacity basically about 1,000 which is linked to the single of a kind tool we have installed. We have qualified our Pathfinder technology. These are very similar than Yes, very similar than call, which is a great news.

Speaker 2

And we are starting the ramp up. Again, the objective from this 1,000 wafer per week is to achieve by end of 'twenty five The half full build off of what we have targeted in association with TowerJazz.

Speaker 4

We think that at the end already the 2nd part of next year, Algrate will start to contribute.

Speaker 2

To the gross margin and the gross margin,

Speaker 4

not to be the track.

Speaker 9

Very well. And just a quick follow-up, like a quick one, if I may. On the Sanam JV, I mean, I think the concern that everybody's got is that The track record of Western companies, I covered at Catalusant in the past, having JVs in China is not great because number 1, your cash It's trapped in China. And number 2, if something happens from an IP perspective, it's very difficult to actually get Reimbursed, so at least we have some compensation. So I think what sort of assurances did you get or can you give us that This is not going to end up

Speaker 5

badly for STI and STI shareholders.

Speaker 2

First of all, Sorry to be a bit, let's say, straight. We have a JV in China since more than 30 years. And Gigi, okay, of Assembly and Test is basically certainly one of the most performing Assembly and test plants in the world, they always perform at our expectation. We never faced any specific issue. They were very resilient during the COVID period.

Speaker 2

So we have this experience. More than from the financial flow, maybe Lorenzo, okay, you No, ma'am. We are

Speaker 4

not so worried in the sense that, as I said, As Remarko was saying, let's say, we have the experience. So we know how to handle. We know how to not to fall in a situation In which we may have a problem in terms of repatriating cash. It's 30 years that we work in China With the JV, to be honest, today, we don't have we are not facing this kind of problem with this JV. I do think that we will be able to manage similarly with the Sun.

Speaker 4

I repeat, we have Some experience that we work, we structure in a way that at the end is not creating a major risk in this respect. And also numbers

Speaker 9

Very clear. Thank you so much. Thank you

Speaker 1

very much, Edel. Now we have time for one last question, Moira.

Operator

The last question is from Johannes Schaller from Deutsche Bank. Please go ahead.

Speaker 10

Yes, good morning. Thanks for taking my question. The first one is on AGRATE again. I mean, you have a pretty wide range of products and And markets applications you can address with that fab. Can you maybe give us a bit of an update what you are targeting initially for the ramp in the second half of this Yes.

Speaker 10

And then obviously more into next year when volumes are starting, which kind of products, which kind of end markets. And then Not just one of your competitors has talked a bit more about Gallium Nitride in the first half of This year, there were a few others making comments as well. Can you just give us a bit of an update on your strategy and on your road map on the GaN side here and which And applications you think are the most interesting for ST? Thank you.

Speaker 2

So The Agrax submission is a mix around analog, Analog with either analog with digital content to address, let's say, personal electronics And Computer and Communication, this Main advantage is to, let's say, structurally long term add volume, important volume. Of course, okay, the short term is a bit challenging, but structurally, okay, this is what we want. And then the complementary mission of Agrad is analog for automotive and industrial. So at the end, We want our strategy is to build a grad capable to address basically the 4 verticals we address In order to guarantee a long term sustainable and stable loading, so first, of course, we start with Consumer and Personal Electronics Because we go very fast in the qualification, you know that for Automotive, it's taken more time, And it is followed by Industrial. So this is the mix of what the fab will manage, analog with digital content And or with more power content to address automotive and industrial.

Speaker 1

And then for Gen.

Speaker 2

Hello, Gen. The Gen strategy. First of all, I would like to repeat, We strongly believe ST that the successful leader in the field of power energy are companies which are capable to control the wide portfolio of technology, okay, again from a low voltage, high voltage MOSFET, Vertical integrated power, IGBT, GaN MOSFET and silicon carbide and modules. So this is our strategy. We started very fast on GaN to address, let's say, the consumer market.

Speaker 2

Basically, the fast charger of, let's say, personal electronics and computer. And in order to go fast, okay, we are using the technology of TSMC and we have already a business Linked to this technology and to customer, okay, enabling a fast charger in the field of personnel electronics. In parallel, we are developing GaN MOSFET To address both the power and energy market for inverters, And this technology is in development in tour where we have set up 8 inches line and where we have a strategy to build in the future our 8 inches capability to address massively this market. Then last but not the least, we have 2 other blocks where We intend to play a role. It is to address radio frequency product.

Speaker 2

So with RF GaN power amplifier, Based on our technology GaN on SiC that will be processed in Catania. And the latest one is what we call smart smartintegrate.gan, where we mix a BCD driver with an advanced controller and a GaN MOSFET. So as a takeaway, we say, we started very fast with TSMC technology to address the consumer market with fast charger. Now in parallel, we are developing our technology to address the power GaN MOSFET, mainly to address inverter for industrial market. We complement this strategy with RF Power and PVR on our own technology, and then we merged this technology with BCD to develop what we call smart integrated GaN, which will be a very differentiated technology to address multiple industrial application.

Speaker 10

That's very clear. Thank you, Jean Marc.

Speaker 1

And I think this concludes our call. It was the last question. Marika, are you around?

Operator

Yes. That was the last question. Would you like to conclude the call then?

Speaker 1

Yes, please.

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 Q2 2023
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