Welcome everybody. I'm Joe Moore, Morgan Stanley Semiconductor Research. Very happy to have with us here today the CEO of GlobalFoundries, Tom Caulfield.
Thanks, Joe.
Yeah, thanks for being here. So I wonder if, you know, you could just maybe give us a little bit of an overview of the company priorities. You know, you've come a long way in a lot since you became CEO a few years ago. You transformed the company, going through a difficult cyclical patch right now. But maybe you could just kinda talk in general how you guys are doing relative to the priorities you laid out at the IPO.
Yeah, that's a little bit out of the order we talked about, but I like the question. The priorities for us is to, you know, stick to the discipline of our model. We, first and foremost, provide solutions that need to be differentiated and make our customers' products better. So the fact that, you know, capacity could be added all over the world, as long as it's not capacity that, you know, mimics our capacity, it's irrelevant to us and our customers. So our job is to make sure that every dollar we spend in R&D is in partnership with customers because we're doing something unique for them. I think a great example of that is that we made an announcement, I need to speak up. I'm sorry about that.
Announcement not too long ago in January with one of our automotive customers, Infineon, about a long-term agreement. That's on a technology platform we started developing with them in 2014. It takes that long to get the technology ready for our customers to not have it on their roadmap to start to use it. So stay very focused with the right end markets, right customers to develop that unique single-source business. That's the priority for the customer, for the company. Now, how do we deliver that to the customers? It's through a disciplined matter of adding capacity. We're a manufacturing services company. We're able to do as a result of the 2021 chip crisis, working with our customers, is we all got ahead of ourselves to add capacity.
No one, you know, saw in 2021 that 2023 was gonna be a down year for the industry. We're sitting today shipping revenue last year on the equivalent of 2.2 million wafers. At the end of 2024, we will have capacity worldwide in our global footprint to 3 million wafers. So we have the ability to grow our top line in a very capital-efficient way, which means for the next X period of quarters until we actually can use all that capacity, we're gonna have a disproportionate amount of free cash flow versus we've had in the past. Very consistent to our, you know, our investment thesis around the IPO, and that's what you brought up. And then I tell you the last thing of that.
What's really important about this 3 million wafer-type capacity is it gets us to a point of scale where not only can we invest at 20% of revenue to grow our business in a meaningful way, we can also maintain that free positive cash flow. So we're really at a very unique point for the company, the investment part to get to scale that's sustainable is behind us. Now it's about the industry and the world cooperating, getting the economics around semiconductors growing again.
Yeah. Thank you for that overview. Yeah. Sorry, I just wanted to start with more of an overview question. But, maybe if you could also talk well, I got loud, specifically to the, you know, the 2024 environment and how you see things playing out. I know you've already kinda guided for a correction of sorts. Can you just talk through that?
Yeah, I think to talk about 2024, you have to look back into 2023. If you think of the industry and how GF performed, like for like, so our competitors that are they either just do 28 nanometer and above or 12 nanometer and above or the TSMC, the, you know, their portion of that business, that's where we play. You could argue we, we outperformed. We were down 9% year-on-year where others were down somewhere between 15%-20%. Now, a lot of that has to do with the fact, the nature of our business being a single-source business, having long-term agreements with our customer, creating capacity for their needs, and us working with them to figure out how to, to minimize the impact.
I'd rather if I'm gonna run a business in through a cycle, I'd rather have a cycle that runs a little bit longer but has less amplitude to it. It's just a better way of managing your business. You get, you know, why go down very fast and then have to come right back up? How do you be more resilient business? I think that's what we've done through the cycle. What does that mean? We entered 2024, and we sit here, Joe, for me, it's a little bit of Groundhog Day for you and I. We did this a year ago. We sat here and we were like everybody else. At least I was. The second half of 2023 is gonna be this big hockey stick. Why? Well, 'cause everybody's saying that. You know, this is what we've seen in the past.
At least for 2024, I think we have good data points to feel good about the second half. We saw in Q4 inventory, if it wasn't peaked, it was peaking. In many cases, we started to see it come down. That's the good news story. The bad news story was still historically high. I think we have one quarter, two quarters or so of getting that inventory across a broad range of end markets more normalized. We have a good sense why the second half could be stronger for our industry.
Yeah.
Right? And this one's more data-based rather than historical. It always goes and comes back up. So for GF, we reset our, as you said, in our guidance for Q1 to a much lower level. And we think that's the low point for us. And the rate of pace of growth for the rest of the year really depends on how fast that inventory comes down and how strong the second half can be.
Yeah, I mean, some of the data's pretty compelling. If you look at particularly on the smartphone side, your customers took inventory down by around 20 days in Q4. And to your point, they probably have to do that again for like 1.5 more quarters. But, like, you're not gonna reduce more inventory next quarter than you did before.
No one can hear me?
Board operator ?
Thanks, Jack.
Thanks, Jack.
Sorry about that. I guess maybe it was good you didn't hear what I said before.
But you know, you've seen a lot of inventory reduction from smartphone in particular. And it looks like they have to do it again this quarter. But like, the pace of reduction doesn't seem like it needs to get worse. And they're gonna run out of inventory, you know, in the next couple of quarters.
No, and we're seeing that too. And I think that's the area where, I wouldn't say hopeful, but most optimistic for a second half. You know, it's, you know, two years in a row with handsets being down in volume, there's, there's gotta be some pent-up demand and some new features coming out that will drive some replenishment.
Yeah.
I don't know how much of it is hype on AI-enabled phones, but they are pretty cool features that we're seeing starting to come out.
Yeah, especially over a couple of years, there's probably more than hype, I think. Great. And maybe some other recent news. You know, you, you've got the CHIPS Act grant, kind of officially, denominated at $1.5 billion. Can you talk about, you know, what that process was like, what that means for you, and, you know, how that process of getting that money works if the CapEx is this low?
Yeah, it's, there's a lot there. So, you know, for me, this has been a, a real journey that's still a story to be told. It started with first, you know, being a constructive voice as, as an industry player to get the, the need to create more capacity in the U.S., more capability, and that it would need partnership investments, incentives, grants, whatever you wanna call them. What we just announced was we've come to terms on an MOU. It's not yet a definitive agreement, but the, the hard terms have worked out. Now it has to become, you know, a contractual type of commitment. Now, for us, I just spent the first part of my question for those who couldn't hear. You'll hear a little bit more of it. We have a lot of capacity we've already invested in, right, to grow our business.
This CHIPS bill is gonna allow us to do a couple of different things. One, in our U.S. Fab 8, the first part of that, we call it 8.0 Auto. And this is a really important part about having a globally diverse footprint. It's not enough to have a mailing address that you have a fab in the United States. You have to have a fab that can serve a bunch of customers in different end markets. Therefore, it needs a broad base of technologies. We don't want Fab 8 to be 12 nanometer FinFET. We want it to be that. We want it to be RF SOI. We want it to be silicon photonics. We want it to be 22FDX. We want it to be 40 nanometer embedded memory for auto markets.
8.0 Auto is part of the funding that'll take our Fab 8 facility and diversify it similar to what we do in Singapore and in Germany. Why is that important? We now serve many customers who wanna use in the U.S. It's not enough just to say, "I have a fab." If the answer is, "Well, what I build there, you don't need." So that's the first part of that funding. Second part of the funding for Fab 8 is when we get to that critical mass of needing new capacity, that funding will go a long way in closing the economic equation for investing in doubling that campus. Then about $130 million of that $1.5 billion is to reinvigorate and retool our 200-mm capability for wide-bandgap in Burlington with a really strong play on GaN.
And it really makes sense to do that there because 6-inch technology goes to 8-inch technology. You get that productivity improvement. And that's our play for both power and RF for the future in that site. And then the last thing I would tell you, while the CHIPS bill is tremendous and, you know, it's a 15% CapEx offset, the ITC adds another 25%. That's already in existence. And states participate. So when you're all said and done, you're getting somewhere north of 40% offsets to go create, you know, capacity and capability. And that's what the overall.
Yeah.
Funding program is about.
There's a lot of focus on CHIPS Act for you as a U.S. domiciled company, but you also have a lot of capacity in Dresden, in Singapore, and then also, you know, eventually in France. Can you talk to the subsidy environment in those regions as well?
I think everybody's being very competitive. And it really the offset has to be proportional to the cost difference to, to operate and to create capacity. So if it's an area where a part of the world where to add capacity because of regulatory environments or because of, the cost of labor, those offsets have to be higher to make it globally competitive. So if you look at what we get in Singapore, it's not dollar for dollar. We compare. We say, "How do we make sure that it creates the right global competitiveness?" And so we still, you know, continue to work and have expansion plans in, Singapore, working in close partnership with the EDB. We have the European CHIPS bill that we will participate in at the right time there.
The key is to grow our global footprint in a thoughtful way, making sure it's always about certainty, durability, and profitability as don't add capacity because someone's giving you money. Make sure there's real need for it. To do it in a way that's balanced across the globe and we have redundancy of capacity so it's truly resilient. Right? It's not, like, mailing address only capacity. It's capacity that can be found across the planet.
Great. I assume that subsidy environment happens because your customers are asking for it. Like, your end customers wanna be partnered with you, want you to have that capacity and not have to be reliant on Taiwan or things like that.
I think there's more and more of a recognition of the importance of supply chain resiliency. You know, it's beyond geopolitical and single point of failure. There's just too much at stake in the semiconductor industry to have such a high concentration. But resiliency doesn't come, you know, for free. And so there's a balancing act for our customers to figure out how do we go, you know, create the resiliency but still do it in a way that's economically efficient. And that's where government subsidies help out. Look, I think the analogy to our industry is going from fossil fuels to clean energy.
Mm-hmm.
We all know we need to do it, but the realization is it's not gonna be free. It's gonna require investments, but it's for a long-term good. And for our industry, it's gonna take investments to create global resiliency, and it's not gonna be for free. And we have to figure out how to do it at the best economics for everybody.
Great. You know, last year, right before this conference, I think you had inked a deal with General Motors. And I still, even though it's a year ago, I still use that deal as an example of how important your role is. I mean, General Motors, three years before that, probably didn't know who GlobalFoundries was, and now is kind of actively working to get a capacity commitment on behalf of fabless suppliers. A complicated thing. Maybe you could just talk to that. And is there – are you seeing that OEM pull through from other companies in autos or other areas?
Yeah, I think it comes in many different flavors. That was a very unique deal. It actually was a three-way partnership with a design company.
Mm-hmm.
GF and General Motors. But the overall, you know, overarching point was how do they plan their supply line well into the future? This was a long-term agreement that shipments wouldn't start for three years, and then it would be a 10-year deal.
Yeah.
The auto industry is unique in that it can, it has those types of timelines. We've seen deals similar to that but have the elements of how do they lock up long-term visibility and commitment to supply, but do it in a way where there is some flexibility. You know, we don't mind giving flexibility as long as it's symmetric, right, where.
Yeah.
is that you can't have it where we're all committed to something and make investments and have to be ready to ship where our customers are not there. And so what we're finding is, I mean, the customer's not committed to it. What we're finding is customers wanna start early, create a framework of boundaries of things that minimum this, maximum. As they get closer to when they really want the capacity, you know, honing in more and more on that gap between what we're committed to do and what they're committed to do is very small. And I think that's some of the model fine-tuning we're doing as the industry's getting more accustomed to, you know, creating supply chain security through long-term agreements.
That really showed up in your numbers. I mean, you nearly tripled your automotive business last year, versus the average semiconductor company in autos that grew about 10%. So, you know, I know we're going through a bit of a correction in automotive inventory as well, but you clearly have a lot of momentum there.
Yeah, and I think the story that you don't see is a lot of that business that started to ship last year began in development 10 years ago.
Mm-hmm.
We have three versions of embedded memory on 40nm that's auto-grade. Two of them are customer-specific variations of that that we did co-development to go to the marketplace. And one of those was that a deal we just talked about earlier with Infineon that we announced, a long-term agreement earlier this year. And so the, the, the reason why that's an important backdrop is our customers we have to be ready with technologies for our customers who think about their roadmap three, five years out. So we have to be ready three years ahead so customers are willing to take the risk to put it on their roadmap so that they can do the work they need to do to actually productize it.
What we're learning is what makes me excited today is we're seeing more and more the sockets we win today through partnerships, we say, "Wait, 3-5 years from now, we know what that looks like." And what's gonna feed us between then and now are all the things we did 5-6 years ago to get positioned for that. It's very sticky business, this, the kinds of markets we're playing in and as we keep remixing our business. And automotive's a key player. You called it, 2022. 2021 was under $100 million. 2022 was $375 million. Last year, $1 billion. And even today, as we sit here, knowing there's some, you know, inventory and a little bit of pressure on unit sales and cars, we still believe we have growth in automotive this year on a $1 billion base from last year.
That's great. And I think underlying a lot of what you're talking about is a key theme from, from again, predating the IPO: you're innovating a lot in these nodes. You know, you're not at the cutting-edge nodes that people talk about, but you talked about GAN. You talked about specialty auto processes. Is there still opportunity for you to push forward in that area?
Yeah, there's. I think the best way for us to know and to be successful there is with our customers. And I cannot tell you how many customers talk to us, "You've got to save us from single-digit nanometer. It doesn't fit into our we don't need the cost per transistor. We don't need the performance." More importantly, the volumes for the breadth of different products we wanna have don't support the design cost and the tooling cost. How do we work together to make sure that I, a customer have relevant products in these end markets and not being forced to go to a very expensive technology? And for us, the opportunity is to continue that differentiation. What does it mean? We have MRAM today on 22 nanometer, really, you know, auto-grade technology. But guess what?
For next-generation smart mobile devices, we need magnetic immunity. So we need Resistive RAM. So we need to go develop that technology and then spread it across our portfolios. We are not starved for the R&D programs that will add features that customers want. Our, our job is to make sure that we downselect in deep partnership with our customers to have the right ones in place.
Great. On that note of technology going to single-digit nanometer, there seems to be some anxiety now about that that and I know you've talked about there were always some, some programs that were gonna do that, particularly in the compute side. But, you know, now that we're sort of in a looser cyclical environment, people worried about, you know, more aggressive pricing on single-digit nanometer, that the TAM starts to shrink. Can you address that concern?
Yeah, I don't think the TAM is shrinking. And, you know, if you first start with, we're not over-indexed on that capacity on our 12 nanometer, FinFET. So we're not worried about filling, you know, millions of wafers a year type of capacity. I think what happens when transitions take place in the down market, the way the rate at which opportunities move, which you knew were gonna move because they were on that scaling time, can outstrip the rate at which you could bring technology in. And if this same transition was taking place in the up market, we wouldn't even be having this conversation. So what are we doing? We're gonna continue to, you know, invigorate and invest on the 12 nanometer program, platform to make sure that it's, you know, has a great future.
Recent deal announced between UMC and Intel, I think, demonstrates there's demand for 12 nanometer in the future, right? So when things migrate away, other things migrate in, but it's gotta migrate to the right capability. We need to accelerate that. But we also have the ability to take that 12 nanometer technology and broaden its capability. We could do more 28 nanometer. We could do 22FDX. These are all technologies we're bringing to that same site. And our customers now, seeing the success of 22FDX, are asking us to start working over the next couple of years to create a 12 nanometer version of FDX. Same lithography node, same tools, just a different way of creating transistors and capability. So I'm bullish on the capability of 12 nanometer.
We just, you know, the balancing of things coming in and coming out sometimes is not perfectly matched at any given time, and it's more challenging in the down market.
Yeah. Okay. That's helpful. Can you talk about the competitive dynamic? You mentioned Intel, UMC, Intel Power, relationships. So there's other people that are sort of looking to alleviate geopolitical concerns around that. TSMC's adding capacity. China's adding a lot of capacity, to do something. So can you talk to generally what you see from a competitive dynamic?
Yeah, I think there's the competitive dimension and, you know, how does GF navigate through that? I think the biggest part of it is you have to understand our strategy. We are, by definition, single-source, differentiated business. Even our 28nm node is built different than our competition. We're a gate-first technology. They're a gate-last technology. Why is that important? When customers design on our platform, it's very difficult to design away from it. Now, the other end of that is if they've chosen a competitor's platform, right, it's hard for us to get into that business. But that's why we need to start early in this process and win on our platform. Now, that platform creates a moat around our business.
The capacity that's gonna go into China that I believe, by the way, is gonna take a very long time to become usable capacity. Having a checkbook, right, in either a warehouse or a factory to put tools in does not mean you're a foundry. And you could see, you know, as Intel tries to become a foundry, that it's a long haul to create all of the PDK, standard cells, libraries, foundational complex IP. It's a lot of work to create something that's a design environment that marries to a technology that can be actually manufactured. So this, the, you know, semiconductor manufacturing is not about getting a bunch of tools, getting them connected, running a high-purity clean room in your manufacturing partner. That's, like, the furthest from the truth it can be. So what does GF do? Keep differentiating.
If capacity does come on in China, it's going to be aligned probably most likely not to GF but to where the bigger market opportunity is, TSMC. That's the UMC play, is to be aligned with, with TSMC. And GF can continue to grow its business, making sure we're delivering real value to our customers on differentiated business. So it almost becomes isolated from the greater capacity that's put on. And then the last thing I'd tell you, as much as China wants to have, local-for-local capacity, fabless companies in China who wanna be global players need global-for-local. So they wanna be a, a local player with an international footprint. They need capacity to tell their customers, "Don't worry about geopolitical. I'm servicing you out of Singapore, the U.S., or Germany." And they're coming to GF.
So we may not be able to give the local-for-local, but we can give the global-for-local in the China story.
Interesting. Okay. Great. Maybe you could talk about the long-term supply agreements and, you know, how that's evolved over, you know, as we've sort of headed into a downturn. How do you. It seems like you've used those to give yourself some visibility. You know, how do you sort of make sure you're also using that to cement customer relationships going forward?
So the reason the LTAs became such a big deal, you have to go back to 2021. It wasn't so much just capacity reservation. It was about making the investments. Then if I go full circle to where we started today, this is why we have, at the end of 2024, 3 million wafers' worth of capacity, is because those LTAs were to go get the confidence to go make those investments to have that capability and with the customer's commitment to go use that. Okay, we go through a cycle. What are we going to do? We have to work together. How do we go make sure that we preserve the economic intent of those contracts but also create long-term win-wins for our customers?
I think one of the reasons you saw our business in this cycle have less amplitude to it is the nature of those relationships with our customers. We've used them now, in many cases, to offset near-term decrease in business with longer-term commitments for new design wins, for example. How do we make sure that this capacity gets put to good use? Now, we're in an environment where we are today, a cyclical downturn. Even in that environment, we signed a long-term agreement with Infineon in January. But I think for 2024, the rest of this year, you'll see probably less of those deals because now it's more, "How do we use the capacity we have?
We're not investing." And what customers will look to do is do more capacity reservation than, "Let me go and co-fund or find a way to create the right economics to add more capacity." So I think it's a better way of doing business because it creates certainty for GF and GF's customers in what we need going forward together.
Great. And so the last question for me, and then I'll turn it to the audience for any questions. You know, what are your priorities for 2024? Obviously, the cyclical recovery will, will or will not happen as, you know, you and I are thinking about it. But, you know, what are you trying to achieve? Where are you with, you know, are there customer relationships that can be can be bolstered? How do you build your pipeline of business for the next decade this year?
Yeah, you almost answered the question. The priorities for this year is, you know, continue to navigate as we've done in this downturn. You know, I talked about our performance of top line being down less than everybody else. We actually grew margin with underutilization. All that means is when we start to get this business back and utilization comes up, we have the ability to grow profitability. We're going to, in 2024, even though we're gonna spend, you know, a healthy amount of CapEx, we're going to between 2-3x times grow our free cash flow from the $320 million we did in 2023.
So it's really important that we demonstrate that the sustainability of this model, that when we're not investing in capacity, we're throwing off free cash flow, and we're doing it whether it's an upcycle or a downcycle. And then the where you make the business for the upturn is all the business you drive and win in the downturn.
Mm-hmm.
For us, that's not only sockets for 2025 and beyond. It's also creating those partnerships for the technologies that we're gonna develop that don't ramp for five years from now and staying very focused on that with our customer engagement and making sure the R&D dollars we spend reduce the R&D dollars our customers need to spend to do products with us.
All right. Very helpful. Over to you, Keith.