STMicroelectronics N.V. (STM)

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STMicroelectronics NV (STM)

May 16, 2013 4:00 am ET

Executives

Tait Sorensen - Group Vice President of Investor Relations

Carlo Bozotti - Chairman of Management Board, Chief Executive Officer and President

Georges Penalver - Executive Vice President, Corporate Strategy Officer and Member of Corporate Strategic Committee

Didier Lamouche - Former Chief Operating Officer, Chief Executive Officer of ST-Ericsson and President of ST-Ericsson

Jean-Marc Chery - Chief Manufacturing & Technology Officer, Executive Vice President, General Manager of Digital Sector and Member of Corporate Strategic Committee

Philippe Lambinet - Former Executive Vice President, Corporate Strategy Officer, General Manager of Digital Sector and Member of Corporate Strategic Committee

Robert Krysiak - Executive Vice President and President Americas Region

Marc Cetto - Senior Vice President of Smart Platform Solutions

Gian Luca Bertino - Executive Vice President of Digital Convergence Group

Celine Berthier - Director of Investor Relations

Carmelo Papa - Executive Vice President, General Manager of Industrial & Multisegment Sector and Member of Corporate Strategic Committee

Fran├žois Guibert - Executive Vice President and President of Greater China & South Asia Region

Paul E. Grimme - Executive Vice President, General Manager of Sales & Marketing for Europe, Middle East & Africa and Member of Corporate Strategic Committee

Marco Monti - Executive Vice President and General Manager of Automotive Product Group

Andrea Cuomo - Executive Vice President

Marco Luciano Cassis - Executive Vice President and President of Japan & Korea Region

Claudia Levo - Corporate Vice President of External Communication

Benedetto Vigna - Executive Vice President and General Manager of Analog, MEMS & Sensors Group

Eric Aussedat - Executive Vice President and General Manager Imaging of Bi-CMOS ASIC & Silicon Photonics Group

Claude Dardanne - Executive Vice President and General Manager of Microcontroller Memory & Secure MCU

Carlo Ferro - Executive Vice President of Corporate Projects

Analysts

Simon F. Schafer - Goldman Sachs Group Inc., Research Division

Kai Korschelt - Deutsche Bank AG, Research Division

Janardan Menon - Liberum Capital Limited, Research Division

David Mulholland - UBS Investment Bank, Research Division

Stephane Houri - Natixis S.A., Research Division

Presentation

Tait Sorensen

So good morning, everyone. Thank you for joining us today at our ST 2012 Annual Investor and Analyst Day and also Media. So thank you for your interest, and we appreciate your attendance today.

Today, you will have a unique opportunity to meet with many of our executive management team, also ST-Ericsson and the technologists outside with the demos. I think it's a very good opportunity to certainly make sure that your questions are answered today. And please do not leave this event without those questions being answered.

So as a housekeeping item, for those of you that would like to use Wi-Fi, the access code is STM. Okay. Skipped a slide already, sorry.

So the first slide is the forward-looking statements, as usual, when we start off these types of event. So let me just tell you that the event is being broadcast live over the web and can be accessed through ST's website. A replay will be available shortly after the conclusion of this event.

Today's event will include forward-looking statements that involve risk factors that could cause ST's results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor language that's contained in our press releases and also in our regulatory filings for a full description of these risk factors.

Also as a bit of housekeeping, the agenda, which is located in your booklet, you can see here that we have a full day of plenary sessions, and we also have panels, and then finally, a Q&A session again to answer all of your questions. We'll have a lunch at approximately 1:30, then we'll have breakout sessions this afternoon, where you'll have a chance to really meet the individuals responsible for the product groups and the business units as well. That runs in 30-minute increments, and I can show you the breakout sessions. And then we'll conclude with a reception right outside, so that, again, you can have a chance to look at the demos.

So here's the breakout session. Again, this is in your booklet. All of these will be held on the ninth floor. And ultimately, there is a matrix approach, so pick and choose as you like. We do have individual presentations that the gentlemen will run through. And ultimately, it's a chance for, again, for you to ask some questions, dig into the technology and get a better understanding of ST. And as I've mentioned, with the reception, we'll have that here on the fifth floor.

So with that, I'm going to be brief. And now, at this point, I'd like to bring up Carlo Bozotti, ST's President and Chief Executive Officer, to help you better understand ST.

Carlo Bozotti

Thank you, Tait. Good morning, ladies and gentlemen, and thank you again for your participation today. I think we will spend a lot of time to tell you today where we are, and of course, you will have the opportunity to meet some of our colleagues here, particularly in the afternoon in the breakout sessions, where we will go very deep in many of the products and applications that we cover. I also want to thank all participants to the webcast is -- in fact, is many, many people on the web at this very moment.

But before I start, I would like to introduce to all of you Didier Lombard. Didier Lombard, as you know, is the Chairman of the Supervisory Board of ST, and I would like to thank him, of course, for the participation today here in New York City, but more importantly, for the continuous support to the company and to the present and the future success of ST. So thank you, Didier.

In my address, to start the meeting, I will cover 3 main topics. The first is where we are in the cycle, where we are in the semiconductor cycle. The second is about the main priorities for 2012, and the third is about the major opportunities that we have in terms of top line evolutions, our program to expand the customer base, the opportunities in terms of new product introduction, in terms of new exciting applications.

So let's start with the first one, where we are in the cycle. As you know, after 6 consecutive quarters of good results, the last 2, 3 quarters have been pretty difficult, particularly the last 2 quarters, and there are 3 main reasons for this. The first is the downturn in the semiconductor market. The second is the overall macroeconomic uncertainty, in particular in Europe, and the third is more specific to ST, is the situation with our former largest customer. This is, as you know, is a significant challenge for us in ST.

It's important to underline that in the course of the last 18 months or so, we have absorbed a drop in our revenues with this major account by about $1 billion. And this major account did account for 18% of the company in 2009; 14% in 2010; 10% last year; and significantly below 10% this year. So this is the reason. It's not -- it's very specific to ST, and we are absorbing this major, major swing.

Now again where we are in the cycle. We believe Q1 is the bottom. There are many indicators. First of all, our booking trends is positive. And since we met 4 weeks ago, in fact, there was a further improvement in the booking situations, for you to know, I am continuously tracking 6 families in ST that are those families with the highest level of elasticity in the market. And on these 6 families, families like discrete products, microcontroller, like the set-top box or Analog but without MEMS, that is more specific, so it's a number of families that are fragmented wide customer base.

So on these families, at the beginning of 2011, we were running at about $75 million per week of bookings, and now we are back at the same level, which is, of course, good news. Our backlog is also an important indicator. As you know, if we compare Q2 with Q1, our backlog is 7%, 8% up. But the good news is that also Q3 is significantly better, with 12%, 13% at this very moment, stronger backlog at the same time, when we compare sequentially with the second quarter.

But we have other indicators. The performance of our distributors, their point of sales is improving across the regions, particularly in Asia. The situation of their inventory is getting better again, particularly in Asia. So this is giving us the confidence to say that Q2 is -- will be a better quarter compared to Q1, and Q3 would be a better quarter compared to Q2, very much across-the-board on our products and also very much across-the-board from a geographical point of view. We will enjoy a better fab lollies [ph] in most of our facilities, and there are a number of areas, in terms of product families, where we expect a second half of this year that is much, much better than the first half. Products like our MEMS, for instance, where we expected very strong acceleration in H2 compared to H1.

Another block is our Microcontrollers, both the general purpose and secure microcontrollers, where we expect a strong improvement into -- in the second part of this year, and our discrete products. Furthermore, we expect that ST-Ericsson will cut, by 2, their losses moving from Q1 this year to Q4 this year. And this is significant improvement in the, of course, economic performance, very materially impacting the performance of ST overall.

Well, of course, we need to remain prudent. Of course, the macroeconomic situation in Europe remains uncertain, and for this reason, we want to manage with careful, our capital. We want to manage with careful our assets overall.

So this is the first block, some good news compared to what we discussed already 4 weeks ago now. So good, good, good trend on many different indicators.

The second topic that I want to cover is what are the 2 main priorities for ST this year, and I would like to underline that one of the first of this priority is a priority of continuity of what we are doing. And the second priority is a priority of discontinuity compared to what we're doing.

Let's start from the first one. We want to protect, and we want to further improve the net financial position of the company. We have been doing this despite severe headaches, the one that I mentioned, particularly the situation with our former largest customer, but we want to continue to do this. Even in Q1, our net financial position did improve compared to Q4 compared to the end of Q4 of last year by about $100 million, moving from $1.17 billion to $1.27 billion. And we want to do this by continuing also to distribute cash dividends at the same level as last year. In fact, we have submitted to the AGM, which will take place next week, the proposal to distribute $0.40 a share in installments or the $0.10 a quarter per share, and this is exactly the same as in 2011.

Now let's move to the second major priority. This is a priority of discontinuity. As you know, the strategy of the company is based on 2 major pillars. The first pillar we like to define as Sense & Power. It's our ambition to be the undisputed leader in all sensing application and in power applications, and there are several product families that are supporting this strategy. Of course, our MEMS, the Analog, the power products, the smart power products, our Microcontrollers, and this is very important for what we do in the industrial field, and this is extremely important for what we do in the automotive field.

Then there is a second block. The second block, we like to define as multimedia conversions. For us, is to provide consumer with information from the web, of course, but -- at the same time, provide consumer also exciting entertainment, and this, at any moment, at any time on any device and on any place.

This is based on what we do in ST-Ericsson. This is based on what we do in our digital sector, and this is based on most of our VLSI effort in ST. Well, if we take into consideration the new situation that we have with our former largest customer, what we are doing today in the VLSI area is not self-sustainable from a financial point of view. And therefore, we need to take care about this new situation, and the new major priority for the year is to make sure that also the VLSI block of ST including, of course, ST-Ericsson becomes rapidly self-sustainable in terms of cash flow.

During Q4 of last year and in Q1 2012, we have been working on a first major initiative, the new ST-Ericsson strategic plan and the merger of the application process of activities between ST and ST-Ericsson. These initiatives were announced in the month of April. This initiative has a strong strategic relevance for ST in the area of the Multimedia Convergence. For the first time, we can exploit the synergies among various technologies, various cores, various platforms to serve with a unified platform in a number of different markets from consumer to automotive, from wireless to industrial, et cetera.

It is very clear that delivering a similar experience across multiple screens is what service and content providers are looking for. Furthermore, this initiative has a positive impact on expenses. It's very material. We are committed to extract savings for about $320 million per year.

And finally, the plan that we have announced in April is giving us the flexibility to take additional measures, additional actions in terms of product refocus, by resizing of activities, redeployment of resources, new partnerships, license agreements, license in, license out, if and when needed. The bottom line is that this year will be a turning year. We are redesigning what we are doing in the VLSI area, taking into account the new reality with our former largest customer, and making sure that also this block, the VLSI block of ST will rapidly become financially self-sustainable.

And now let's move to the third topic, the wave of opportunities that we have to boost our sales in terms of new customers, in terms of new design wins, in terms of new product introductions, in terms of new important applications. Of course, as I've said at the beginning, this topic will be covered later in the day by my colleagues in the breakout sessions, and I invite all of you to attend these sessions.

So last year, we had an initiative to focus on new major accounts. And on this block of business, we grew in 2011 by 19%. This is still very, very important for 2012. We have new major accounts target in United States, in Japan, in Korea, in Greater China and in South Asia. And these major accounts are in several business areas, application areas from wireless to consumer, including gaming, PCs and communication infrastructures. We have established, at the beginning of this year, a new sales and marketing organization to better focus on this globally managed account and also to better cover the territory through a network of offices to serve with more determination, with more focus, with more attention the mass market and all our distributor branches.

New product introduction. This is very, very important here. For instance, let's start from digital, the digital sector of ST. As you know, during the last 2 years, we have been focusing on the diversification of our Imaging activity, our Imaging product division. I am very pleased to say that recently, we have won 4 major customers, 4 important major customers with 8 new products that we are developing. So we are very, very confident on the progress in this diversification strategy. And as you know, Imaging for us was mostly wireless in the past. It's not any longer.

But the same is for ASICs. We have won important 32-nanometer ASIC solutions for communication infrastructure products also based on complex ARM, quad ARM core, Cortex-A15. And of course, we have our Orly and Newman family for the set-top box and TV applications, 32-nanometer again very, very -- I would say, the most innovative solutions in these areas in the world.

MEMS. Our business is close to $1 billion now. It is a great achievement, but is also a great opportunity for the future in ST. We are focusing on 3 vectors. The first vector is miniaturization. We are trying to do these things smaller and smaller, and we have great technologies, both in front end and in back end, and this miniaturization effort is a top, top priority for 2012.

The second vector is, of course, new functionalities, plenty of new functionalities. For instance, the pressure sensor. For instance, the new digital microphones. For instance, the e-compass, but even the combinations, the combo of all of these functionalities in one single package.

And the third is a new application. As you know, in MEMS, we started from gaming first and then, of course, wireless. But today we have -- we are entering new applications, the automotive. Automotive is a big part of the MEMS market, and we are not yet -- despite the fact that we are #1 worldwide in MEMS, we are not enjoying yet a significant presence in the automotive market, or we'll talk later, healthcare, medical, a lot of sensors potential for these kind of applications, or new applications in the area of portable equipment, like image stabilization in optical -- for optical equipments.

Analog, advanced Analog. Again, a web of new products. I would like to mention 2 that are very, very important for ST. The first is touch sensing solutions with hovering functions for many applications. And the second is a wave of analog front-end for various variety again of medical applications.

Power, both smart power and discrete. One area of important focus is the smart grid. Our presence traditionally has been very strong in Europe, in Italy, in Spain, in France, but recently, we have won China. If we look at 5 years from now, there will be 200 million smart meters in China, and we are the leading supplier. We are the leading supplier across the geographies in China with our Power Line Modems, with our controllers for these applications. But also a strong focus on digital power management, both for lighting, for more modern and advanced lighting applications and for power supply applications.

And in discrete, for the first time, competitive IGBT modules and also a new family of low-voltage PowerMOS. ST, we are #1 in the world in the high-voltage PowerMOS, and we have now introduced a new low-voltage family that we believe is extremely competitive.

Microcontrollers. Our business today in microcontrollers is close to $1 billion. In fact, our target this year is $1 billion. This is the combination of the general purpose microcontrollers and the secure microcontrollers. It's all based on ARM 32-bit. And recently, we have introduced new cores, DM0, DM4, for lower power applications, for higher performance.

We have a wider range of peripherals. We are introducing from 2 to 3 new products per quarter on this family of products.

And finally, Automotive. Last year, we had 25 new components from ST in each new car that was produced in the world. I believe this is impressive, 25 products in any new car produced in the world. And I would like to mention here 2 main blocks. The first is our effort in the power microcontrollers. As you know, we have a corporation with Freescale, and I believe, this is a successful cooperation. And in ST, we have won design wins for more than $2 billion in the life on these products, and it is just at the beginning in terms of billings and revenues.

And of course, the progress with our new smart power platforms, including 110-nanometer micro lithography Smart Power Technologies, for powertrain, safety and body. A lot of exciting application, and the best I could do here is to invite you again to visit all our demos. There are some exciting applications, so please spend some time looking at our demos later on.

So let's move to the conclusion here. So all what I have described today, I'm absolutely convinced of a very significant margin expansion opportunities in the short-term and in the medium-term. Q1 is the bottom.

We have important efforts, important programs, important initiatives, discontinuity initiatives in VLSI to make sure that this area is retailored taking into account the reality of our former largest customer. That is a different reality. So we need to be pragmatic and move on. And do we have a wave of new opportunities in terms of customer wins, in terms of new innovative products, et cetera, et cetera.

All of these is good, and all of these give us significant, very significant opportunity to expand our margin. And this is giving me the confidence to underline that despite, as I said, the dramatic knock drop at Nokia, we will continue to gain market share in our core business, in our wholly-owned business. And we will go -- rapidly go back to our financial model that I want to reconfirm today.

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