STMicroelectronics Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 11 speakers on the call.

Operator

The conference must now 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.

Speaker 1

Thank you very much, Maile. Good morning. Thank you, everyone, for joining our Q1 2024 financial results conference call. Hosting the call today is Jean Marc Chery, ST's President and Chief Executive Officer. Joining Jean Marc on the call today are Lorenzo Grande, President of Finance, Purchasing and Resilience, our Chief and Financial Officer Marco Kessis, President, Analog Power and Discretements and Sensor Group, Head of STMicroelectronics Strategy, System Research and Application and Innovation Office.

Speaker 1

This live webcast and presentation materials can be accessed on ST's Investor Relations website. 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 ST's results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filings for a full description of these risk factors. Also to ensure all participants have an opportunity to ask questions during the Q and A session, I'd now like to turn the call over to Jean Marc, ST's President and CEO.

Speaker 2

Thank you, Celine. Good morning, everyone, and thank you for joining ST for our Q1 2024 earnings conference call. Let me begin with some opening comments. Starting with Q1. First quarter net revenues of $3,470,000,000 and gross margin of 41.7 percent, both came in below the midpoint of our business outlook range, driven by lower revenues in Automotive and Industrial, partially offset by higher revenues in Personal Electronics.

Speaker 2

Looking at our year over year performance. Q1 net revenues decreased 18.4%, Gross margin at 41.7 percent was down from 49.7%. Operating margin decreased to 15.9% from 28.3% and net income decreased 50.9 percent to $513,000,000 On a sequential basis, net revenues decreased 19.1%. During the Q1, our customer order bookings remained weak in industrial across all geographies and much lower than expected. This indicates that the industrial inventory correction will be stronger and last longer than anticipated in January.

Speaker 2

Additionally, towards the end of the quarter, we started to see some reduction in automotive backlog. On Q2 2024, our 2nd quarter business outlook is for net revenues of about $3,200,000,000 at the midpoint, declining year over year by 26% and sequentially by 7.6%. Gross margin is expected to be about 40%. For the full year 2024, compared with our January expectations, the market environment has further deteriorated with an even stronger inventory correction in industrial, slowing the expected growth in the second half of the year compared to our previous expectations. Automotive has entered a deceleration phase with demand slowing down compared to our January expectations.

Speaker 2

We will now drive the company based on the revised plan for full year 2024 revenues in the range of $14,000,000 to $15,000,000 Within this plan, we expect a gross margin in the low 40s. We plan to maintain our net CapEx plan for full year 2024 about $2,500,000,000 focusing on our strategic manufacturing initiatives. Now, I will move to a detailed review of the Q1. Before commenting Q1 results, let me remind you that starting in 2024, ST is organized in 2 product groups split in 4 reportable segments. Therefore, from Q1 twenty twenty four, we report revenues and operating income according to those 4 new reportable segments.

Speaker 2

In Q1, net revenues decreased about 18.4% year over year. Analog products, MEMS and sensor was down 13.1%, mainly due to MEMS and imaging. Power and Discrete products decreased 9.8%, mainly due to Discrete. Microcontrollers revenues declined 34.4%, mainly due to general purpose microcontroller. Digital ICs and radio frequency products declined 2.1% due to a decrease in ADAS more than offsetting an increase in radiofrequency communication.

Speaker 2

By head market, industrial declined more than 40%, Personal Electronics about 13%. CECP, so communication equipment and computer peripherals, about 10% and automotive about 2%. Year over year, sales decreased 11.5% to OEMs and 30.8 percent to distribution. On a sequential basis, Q1 net revenues came in 320 basis points below the midpoint of our outlook, mainly reflecting lower revenues in Automotive and Industrial, partially offset by higher revenues in Personal Electronics. Overall, Q1 net revenues decreased 19.1% sequentially, with a decline of 14.2% in analog products, MEMS and sensors, 15.1% in power and discrete, and 25.3% in Microcontrollers and 23.8% in Digital ICs and RF products.

Speaker 2

Looking by end market, industrial was down 28% sequentially, personal electronics 21%, CECP 15% and automotive 14%. Excluding the impact of capacity reservation fees and specific customer 2020 3 inventory replenishment effect, automotive was down 8%. Gross profit was $1,440,000,000 decreasing 31.6% year over year. Gross margin of 41.7%, 60 basis points below the midpoints of ST guidance, decreased 800 basis points year over year, mainly due to the combination of sales price and product mix, unused capacity charges and reduced manufacturing efficiencies. Operating margin was 15.9% compared to 28.3% in the year ago period.

Speaker 2

All reportable segments were down on a year over year basis, with the main decline in MCU and Power Discrete. On a year over year basis, net income decreased 50.9 percent to $513,000,000 from $1,040,000,000 and diluted earnings per share decreased 50.9% to 0 point $55 from $1.1 Net cash from operating activities decreased to $859,000,000 in Q1 compared to $1,320,000,000 in the year ago quarter. 1st quarter net CapEx was $967,000,000 compared to $1,090,000 in the year ago quarter. Free cash flow was negative at $134,000,000 compared to positive $206,000,000 in the year ago quarter. Inventory at the end of the first quarter was $2,690,000,000 compared to $2,870,000,000 in the year ago quarter.

Speaker 2

Days' sales of inventory at quarter end was 122 days compared to 1 104 days in the previous quarter and 122 days in the year ago quarter. Cash dividends paid to stockholders in Q1 2024 totaled $48,000,000 In addition, ST executed share buybacks of $87,000,000 as part of a more current share repurchase program. ST net financial position of $3,130,000,000 as of March 30, 2024, reflect total liquidity of $6,240,000,000 and total financial debts of $3,111,000,000 I will now go through a short update on some of our strategic focus areas in Q1. In automotive, we saw a slowdown in semiconductor demand compared to our January expectations. This was characterized by some reduction in backlog and reduced forecast from some of our customers, including adjustment related to electric vehicle production decrease.

Speaker 2

We continue to execute our strategy supporting car electrification during the quarter. We had wins with our 3rd generation silicon carbine MOSFET technology for traction inverter at the top manufacturer of electric vehicles, as well as with the maker of eco pressure controller that extend EV driving range, increasing our current design win pipeline. We also won sockets with our smart fuses in new automotive architecture designs with multiple customers. In current digitalization, we saw further momentum with our portfolio of automotive microcontrollers. This included wins with our later generation STELLAR MCUs in zonal control, drivetrain and chassis solution for a major truck maker.

Speaker 2

In Headas, our partner MobileIron has delivered 1st production candidate hardware and software of the IQ6 Lite to customers. The IQ6 Lite is already set to be installed in 46,000,000 vehicles over the next few years. Our pipeline of design wins in smart mobility confirms the strength of our technology and product portfolio to successfully take advantage of the continued structural growth of the ski market for ski. In industrial, during the quarter, the ongoing correction accelerated. It is impacting all the main sub segments, both in consumer and in B2B industrial and in spread globally.

Speaker 2

In Industrial Embedded Processing Solutions, in March, we held our flagship FTX32 Summit event, which attracted an audience of over 5,000 developers around the world. Around this event, we announced new low cost wireless and high performance microcontrollers, as well as new devices in our 64 bit microprocessor family. We also announced an advanced process based on 18 nanometer MDSOI with embedded phase change memory to support next generation embedded processing device. For developers using sensors for industrial applications, we introduced a new all in one tool for MEMS sensor evaluation and development, connected closely with the STM32 microcontroller ecosystem. It supports our wide portfolio of MEMS sensors and include tools for embedding edge AI in inertial modules.

Speaker 2

We continued to develop momentum on edge AI with increasing usage of our tools and solution by customers. For example, we announced recently a sensorless tire pressure monitoring system for an eBake based on HRI algorithm running on an SCM32 microcontroller. We also announced a collaboration on the reference design for high performance telecom and AI service power supply with computer, who supplies high efficiency power solution for high performance computing, AI, deep learning, cloud and other advanced solutions applications. It uses ST Silicon Carbide, galvanic Isolation and microcontroller technologies. This is an important collaboration since it brings on top of our focus on AJI, another opportunity around AI for ST, the new power architecture for AI servers.

Speaker 2

In power energy management applications, we had a broad range of design wins, including in data centers, renewable energy systems, white goods and factory automation. Overall, we believe that to sustain design in and development activity with our customers and distributors in industrial will enable ST to take advantage of the next market upcycle in an even stronger position. In personal electronics and computer peripherals, during Q1, all our engaged customer programs were running as expected in a market context of stabilization driven by AI. In communication equipment, we received awards for RF front end modem solutions from a new player in the EDO satellite market. Finally, I would like to mention that we have recently published our 7th Annual Sustainability Report, highlighting our long standing commitment in this area.

Speaker 2

We continue to make substantial progress towards our ambitious targets for carbon neutrality. In 2023, our Scope 1 and 2 greenhouse gas emissions were down 45% in absolute terms compared to 2018. And we source now 71% renewable energy, on track to reach our target of 100% by 2027. Long term power purchasing agreements are key part of our strategy and we signed another significant agreement in Italy earlier this month. Now let's move to our Q2 2024 financial outlook and our plans for the full year 2024.

Speaker 2

For Q2, we now expect net revenues to be about $3,200,000,000 at the midpoint, representing a year over year decrease of about 26% and a sequential decrease of about 7.6%. We realized on our plan for full year 2024 revenues to be in the range of $14,000,000,000 to 15,000,000,000 dollars representing a decline over 2023 of about 19% to 13%. This takes into consideration the accelerated inventory correction in industrial as well as a deceleration phase starting in automotive. We plan to maintain our plan to invest about $2,500,000,000 in net CapEx, focusing on our strategic manufacturing initiative. To conclude, we continue to adapt our plans according to this asynchronous market dynamics with a down cycle in industrial, a deceleration in automotive and a stabilization in personal electronics and computer peripherals.

Speaker 2

In parallel, we will continue to execute our strategic initiatives consistently with our established strategy and operating model. Thank you for your attention and we are now ready to answer your questions.

Speaker 3

So I guess to start, obviously, we see the numbers coming down a little bit. But I wanted to try to break that up a little bit. And obviously, there have been some headlines that your lead silicon carbide customer. Could you maybe spend a minute or 2 walking us through how much of the lowered outlook, in particular in auto is related to that lead customer and maybe update us on your silicon carbide outlook for 2024? Thank you.

Speaker 2

So I will take the question. Well, yes, in Automotive, okay, compared to our, let's say, January expectation for the full year, we have acknowledged a decrease. Half of the decrease is related to electrical vehicle production decrease from an important customer. And half of the decrease in automotive is more related to what we say some inventory control and tunings from OEM, which are adapting themselves to mix change between battery based electrical vehicle, hybrid vehicle and turbo combustion engine 1. So the decrease the deceleration phase means, okay, what we have announced today in automotive.

Speaker 2

As a takeaway, Alf is linked to an adjustment of the forecast because production decreased from one important customer. And the other one is more inventory control and mix adjustment, because now it's well known that carmaker, and the change of it between electrical car, hybrid car and thermal combustion engine 1.

Speaker 3

Got it. Thank you. I appreciate the color. As my follow-up, obviously you understand again numbers are coming down and you mentioned that industrial weakness is expected to last into the assumptions that are underlying the back half ramp? And firstly, there's some seasonality at your lead customer.

Speaker 3

Maybe you could help us give us some clues on how much of that is driving sort of the back half ramp? And then also big picture, how is your comfort level with where you expect your industrial customers' inventory levels to be coming out of the second quarter? Thank you.

Speaker 2

Well, overall, yes, we believe that Q2 is a bottom point. Within the range we have indicated, clearly, we expect a growth in H2. This growth will, let's say, overall enable ST to come back 2023 revenue run rate between Q4, 2024 and Q1. Automotive, let's say, will increase in H2. Personal electronics will increase in H2 related to our engaged customer program.

Speaker 2

And industrial, we start to smoothly increase in Q3 and accelerated in Q4. Of course, we have a pretty good visibility on backlog in automotive, personal electronics and computer equipment and computer peripheral. We know that the visibility on industrial is shorter, because again, there is important distortion related to inventory level, both at OEM level and in the channel. However, we see some, let's say, kind of green spot that make us thinking that order will come back in Q2 for additional billing in Q3 smoothly and acceleration in Q4. The risk is embedded in the range of what we have indicated.

Speaker 1

Thank you very much, Joce. Next question please, Moira.

Operator

The next question is from Stephane Houri from ODDO. Please go ahead.

Speaker 4

Yes. Hello. Thank you very much for taking the question. Actually, the question now is on my side on the Automotive. You've talked about deceleration, but I guess that you mean decline in fact.

Speaker 4

So can you maybe specify it? And also if you could give us some clarification on what you expect for silicon carbide going forward? You've talked about lower EV forecasts. What are you expecting for this year? Are you still targeting the same targets for 2025 and beyond?

Speaker 4

Thank you.

Speaker 2

I mean, all we classify What we indicated in January, we say as a computed, because we are not reporting the segment. The Automotive overall was expected to grow, let's say, low mid single digit and clean from effect that we share with you. So capacity reservation fees and one release specific, let's say, inventory replenishment. In January, okay, our expectation was to have automotive going, let's say, high single digit, really low double digit. But now if I repeat the same view, let's say for the year, Automotive, as computed and reported, will decrease 5%, clearly.

Speaker 2

And if we remove from the capacity and the merchant fee and inventory of 1 specific customer, it is a very slight growth, 1% to 2%. That's the reason why we classify it a deceleration and not a correction or a decrease, which is the case clearly of Industriyo. About Silicon Carbide because you asked the question. We do believe that our revenues this year will grow about $1,300,000,000 So it's a growth, let's say, about $150,000,000 $200,000,000 compared to last year. Yes, it is a slower growth when we compare 'twenty three versus 'twenty two, which was basically US500 million dollars But again, it is related to the fact that there is one specific important customer that adjusted their plan for the full year 2024.

Speaker 2

For the rest, we see some, let's say, change, big change, okay, sometime from module to package or non good die. Value. So we have to adapt our self to this change. However, I would like to repeat that this doesn't change our view that ST will reach above $5,000,000,000 in 2030. And that, okay, we will have, of course, a growth in 2025 that will put us on this trajectory.

Speaker 2

And the growth in 2025 should be expected with design awards that we have about US500 million dollars

Speaker 4

Okay. Okay. Thank you very much. And I've got a follow-up about the gross margin actually. With such a strong decline through declining sales through the year, I would have expected a stronger impact on gross margin.

Speaker 4

Can you maybe give us the elements of the resistance of the gross margin and maybe specify also with the underutilization charges? Thank you. Yes. Maybe I

Speaker 5

When we are exiting the When we are exiting the with the current visibility on Q2 on our guidance, we will exit the first half of the year with a gross margin that is likely below, let's say, 41% Because and this is impacted by a significant level of unsaturation charges because we will have around 230 basis points of unloading. When we look at the projection of the year, at this point, let's say, we are our expectation for the second half is to improve our gross margin in respect to the first half about very slightly, because at the level of insaturation will remain quite significant. The second half will be impacted by more than 200 basis points of unsaturation charges, so similar to the 1 of Q1. So we do expect it to be substantially similar to what it happened in the first half, slightly improvement. Maybe while in Q1, we will be slightly below 41%.

Speaker 5

In the second half, we will be slightly above 41%. And the level of unsaturation that is peaking in Q2 will go down, but remaining quite significant. So there will be a sort of flattish gross margin in the range of 40%, 41% during the year.

Speaker 4

Okay. Thank you very much.

Speaker 1

Thank you very much, Stefan. The next question we have.

Operator

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

Speaker 6

Thank you. I just wanted to come back on the full year guidance. Jean Marc, you talked about the automotive will decrease 5% this year on a reported basis. Can you maybe give the color on the all the divisions, what you expect for the full year by end markets and ideally by products as well, if that would be great to have the full year implied for each products and end markets?

Speaker 2

Lorenzo, maybe you can comment, okay, this full year by reportable segment.

Speaker 5

Okay. We can have a look at the full year, let's say, by reportable segment. As you know, these are the new reportable segment. When we look at the analog product MEMS and sensor, this, let's say, the expectation it will be to be around a decline of 10% for this and where we will have a substantially holding in the analog products, flattish in the analog products. MEMS are suffering with a little bit more with some decline.

Speaker 5

And then don't forget that here is where we account the imaging. And here there is this impact related to the module that was present in 2023 is not any longer present in 2024 and Imaging is declining. When you take it out that this impact actually, Imaging is not declining, but as reported is declining. So sector, analog product MEMS and sensor will decline in the range of 10% based on the expectation. Power and Discrete.

Speaker 5

Power and Discrete will be a lower decline. We will be in the range of mid single digit for these areas, in which the bigger decline is on discrete part. Then we have the microcontroller. But here microcontroller definitely is the area in which the general purpose are particularly impacted by the dynamic of the market of industrial. So here, the decline will be significant, will be in the range of 30%, which much more resilient on the microcontroller in Automotive, but a significant decline for the microcontroller general purpose that are mainly addressing the industrial market.

Speaker 5

Finally, the digital ICs and RF, here the decline will be also in this case in the range of 10%. I'm talking of course decline, the midpoint of our indication for the year. And here is in the range of around 10%. Here the main impact is coming from a decline in the ADAS product that where you know that last year we had this replenishment of inventory in one particular customer. So this year, these areas of our product, these products will decline.

Speaker 5

While on the other side, RF communication will increase our revenues, but not enough in order to offset the decline on the other area. This is more or less the dynamic that we see for the year in term of segment reporting.

Speaker 6

Thank you. Industrial, just industrial and Personal Electronics, I mean, I guess, it seems to you industrial roughly the same. Is that what we should look at?

Speaker 2

Yes. Clearly, I complement Lorenzo's point. Also I repeat, so automotive we see minus 5% clean, let's say 1%. Industrial minus 30%. So for sure, you can correlate now with what Laurent said on general purpose, which is most impacted by the COVID-nineteen cost.

Speaker 2

But in a certain extent, general purpose and power discrete as well. More for personal electronics clean from the famous module, we have no more. Basically, it will be slightly decreasing, minus 2%, minus 3%, which is consistent with the overall market. And on the CECP, it will be minus 4%, with a strong growth within our engaged customer program in the LEO satellite, which is offset by legacy we decided to disengage. So we see the perfect correlation, in fact, between products, so microcontroller, power and general purpose and alloy versus industrial.

Speaker 2

And we also see, as I have said in my script, as a correlation between the OEM decreasing much less than the distribution. So more clearly, in industry owned market, it is an inventory correction along the channel.

Speaker 6

Great. Thank you very much. And maybe my follow-up would be on the pricing front. I mean, it's kind of a housekeeping question nowadays. Every quarter, we want to have some color on the pricing, given the level of demand and potential level capacity.

Speaker 6

Do you see any move here on the pricing front, maybe not for this quarter, but going forward, what's the dynamic that you see and how China is impacting the pricing in the market?

Speaker 5

I take the question, expecting, let's say, something in Q1, we were saying entering in the quarter that we're expecting, let's say, something in the low single digit price impact. But at the end, this is what it happened, was a slightly a few basis points higher than our expectation, not dramatically different than our expectation. Of course, with different dynamics because there are much more resilience in some areas, in some geography and in some final market, Automotive is more resilient, While for sure in some geographies like maybe Asia and Industrial, the price pressure is a little bit higher. But it still remain in this level. We have not seen a significant drop in pricing.

Speaker 5

The assumption that we have today the visibility, I would say, more than the assumption that we have today for the current quarter is that there is still some price erosion, let's say, in the range of 1%, 1.5% and stability, definitely stability in Automotive where the renegotiation has been already done, but still some decline in especially we continue to see some decline in industrial in our general purpose microcontroller. But we have taken this assumption that some erosion will continue over the next quarters without taking assumption that there will be significant drop. For the time being, we don't see this. We see that there is the normal discussion in terms of pricing with some erosion, of course, on the areas in which the demand is weaker and maybe in some geographies in which the pressures are to be a little bit higher. But I repeat, in our visibility today, we do not embed a stronger price decline as we have no evidence for that in our discussion with the customers.

Speaker 6

Great. Thank you very much for your answers.

Speaker 1

Thank you. Next question please, Maria.

Operator

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

Speaker 7

Yes, good morning. Thank you so much for taking my question. Just wondered about the second half. I mean, the last four quarters, you've been effectively well below normal seasonality, and your second half guide is effectively seasonal versus the first half. I appreciate, look, it's a difficult environment, especially in the industry where you've got now a beginning of a downturn in automotive.

Speaker 7

What's the risk really Jean Marc that you are sandbagging a bit too much for the second half at this stage? And related to that, what's the risk also that your gross margin guidance for the second half is a bit too conservative? And I've got a follow-up. Thank you.

Speaker 2

Basically, in the second half of twenty twenty four, in the middle of the range we have indicated. But we expect to grow, I have to say, about $1,000,000,000 a little bit higher than $1,000,000,000 It is clear that part of this growth is related to backlog we have already, especially in engaged customer program, both in personal electronic and communication equipment. It is based also on automotive on the backlog of frame order we have, which is the usual visibility we have. More than the key question is clearly the industrial, where today the backlog coverage is slightly below, I have to say, standard of backlog coverage at this time. But again, we know because there is 2 distortion, very short lead time from any, let's say, semiconductor supplier and distortion from inventory.

Speaker 2

It is clear that, again, the booking that we will enter in Q2 and Q3 billable for 2024 for industrial as well as term business in Q4 will be important. At this stage, having made the reset that we share with you today, we consider the risk to the industrial that potentially would not materialize in H2 is within the range we have indicated. That's the reason why we have done this significant reset compared to midpoint of what we said in January of about $1,900,000,000 I guess you have already done the computation. This $1,900,000,000 $1,300,000,000 is industrial, by the way, and $600,000,000 is automotive. And I said automotive, Alf is electrical car from one specific.

Speaker 2

And the other one is a mix change and inventory correction. On Industrial, again, having made this $1,300,000,000 adjustment, now we do believe even if we have to continue to monitor very carefully the plan we have of booking billable of 2024, the risk is within the range we have provided.

Speaker 5

Maybe I cannot Sorry, maybe I cannot add 2 words about the gross margin. I think at this stage, our visibility on the gross margin is that the second half in the range of 41% slightly above 41%. These are reasonable assumption considering the fact that for sure at this level, let's say, we will continue this level of revenues. We will continue to have a significant level of unloading charges. We are planning the second half at 77% loading for our trucks as we will, let's say, to continue to keep under control at the level of our inventory.

Speaker 5

But there could be some opportunity maybe to do better. There could be, as usual, some risk if maybe the price pressure is higher than what we have embedded. But I think that at this level, this is a reasonable level in which the company should stay all over the year.

Speaker 7

And obviously, if industrial comes back a bit better, your margins be better. Very clear. Thank you so much for your color. I just have a quick question on your automotive business, Jean Marc. So one of your customers publicly disclosed that they're going to accelerate the introduction of lower priced electrical vehicles.

Speaker 7

I think you had sort of articulated in the past that you felt like you were pretty well positioned to capture the platform for that particular customer. So I wondered, A, is the $500,000,000 you just mentioned earlier in your script related to that? And then B, how do you feel about your position now that that ramp is coming a bit earlier than expected?

Speaker 2

It is clear that, well, first of all, this year, the $1,300,000,000 for silicon carbide MOSFET is growth. So we have to be satisfied with this growth. Yes, it's below our expectation. Why? Because mainly one customer classify the 2024 year as a transition and expect to come back to a growth trajectory, 2025 and beyond.

Speaker 2

We will participate to this growth trajectory. And of course, it will contribute to the US500 million dollars growth silicon carbide we will execute next year.

Speaker 7

Very well. Maybe final quick one, if I may. Any changes or any reason why we should not look at your 2025, 2027 financial ambition, €20,000,000,000 of revenue, 50 percent gross margin, 30% operating margin. Is anything changed in that perhaps more back end loaded? I appreciate that.

Speaker 7

But anything changed in your mind?

Speaker 2

We have not changed our model. By the way, we expect this year to organize the Capital Market Day in November. The Investor Relations will communicate to you. And of course, it will be a unique opportunity to share the situation and to share the update.

Speaker 7

Many thanks.

Speaker 1

Okay for you, Didi?

Speaker 7

Yes. Thank you so much.

Speaker 8

Thank you

Speaker 1

very much. So next question, Moira.

Operator

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

Speaker 8

Good morning, guys. Thank you very much for taking the question. I was interested in the point you're making, Jean Marc, on industrial and in particular into distribution inventory. You've given us an update in your prepared comments regarding where you sit on your own books, but where do you view things in the channel at the moment? How much further are you expecting things to decrease?

Speaker 8

And therefore, how is that therefore influencing the way you're framing the second half? Thank you.

Speaker 2

Well, today overall, we have asserted that we have an excess of inventory in the channel distribution of about 2 months. Clearly, the POS, okay, of the distributor will be the 1st key KPI that will start to decrease this 2 months of inventory. And with the visibility and the discussion we have with them, that these 2 months will be absorbed by Q3. And that by Q3, we will be in position to re increase smoothly our POP and to accelerate in Q4. Well, unfortunately, that's the reason why in Q2 we cannot accelerate our POP, that the reason why we continue to decrease in industrial.

Speaker 2

So this is the visibility we have today. So again, POS monitoring is very critical. But again, we are seeing some green spot that end customer and application, some end application are coming back to growth. And sequentially, it will translate in POS increase and start to translate in inventory decrease and forest POP increase in Q3. So this is today the plan we have built, discussing with our customer.

Speaker 2

And also what is making us confident is that looking at some results of competition going straight to end customer, we have seen a restart. So means when the channel inventory will be absorbed, our POP will raise again.

Speaker 8

Thank you, Jean Marc. Also perhaps one for you, Lorenzo, as we're coming through a slightly deeper trough in the cycle than anticipated, how are you managing the OpEx for the year? Can you just sort of update us in terms of the levels we should have in our model? Thank you.

Speaker 5

Of course, this year we will have control of our OpEx for which we will continue to protect for sure the innovation in the R and D, but we will prioritize other programs, let's say, that are definitely important. But if you want less critical that, let's say, the innovation and the introduction of the new products. So today, we do expect for the year compared to last year, a moderate increase in our expenses. We do not expect a decline, a moderate increase that we size between 2% to 2.5%. Consider also that I'm talking about Metopex means that I including also the level of grants that are increasing this year and in respect to last year.

Speaker 5

This is more or less what we see today for the evolution of our OpEx in the year in 2024.

Speaker 8

Thank you very much.

Speaker 1

Thank you, Andrew. Another question please, Moira.

Operator

The next question is from Sandeep Deshpande from JPMorgan. Please go ahead.

Speaker 9

Yes. Hi. Thanks for letting me on. I have a question firstly on in terms of your guidance, clearly, I mean, there has been inventory overhang in your supply chain and slowdown in the market. But is there any impact on pricing in the guidance at all?

Speaker 9

And what do you see in terms of the pricing environment at the moment in microcontroller specifically as well as in your discrete market?

Speaker 5

I take this question, Sandeep. Yes, as I was saying before, we have better some pricing impact in our indication of the year. For sure, there are, as I was saying different markets that we serve. The most impacted in term of pricing is microcontroller, definitely, industrial in general and microcontroller. Anyway, when we look overall, the dynamic, for instance, when I look at the dynamic of Q1, our price decrease was in the range of low single digit, a little bit higher than what we were expecting.

Speaker 5

And this is also partially explaining why we missed partially our gross margin midpoint guidance, but not dramatically higher. Moving forward, we continue to expect some erosion. Let's say, for instance, in Q1, average company, considering that some areas like Automotive, we have a renegotiated now, there is no any longer price decline moving forward or not so material, not so big. Let's say, we have a model as something in the range of 1% or 1.5% price decline. And moving forward in Q3 and Q4, some still, let's say, price decline.

Speaker 5

As I was saying before, in any case, at this stage, we don't see a huge impact on pricing, very significant impact on pricing. For sure, in some area, I repeat, like microcontroller in some geographies, yes, it's a little bit higher than the average of the company, definitely higher than the average of the company. And this has been embedded in our numbers.

Speaker 9

And I mean just following up on that question. I mean automotive as you said is not changing at all this year. I mean, you will negotiate new prices in December. Will that actually mean that there is another price change next year in autos, given that the industrial market, which uses similar chips is seeing a big correction this year, but then correction this year and then autos will see that next year in the pricing? And then following on that, I mean, on the gross margin, are there any one offs in your gross margin this year?

Speaker 9

I mean, clearly, you talked about the underutilization charge in the year, but there were some positives last year. Are there be any positives being repeated this year, which is helping your

Speaker 7

gross margin at all? Thank you. Yes,

Speaker 5

terms of pricing, what can I say is that the main let's say, discussion with the Tier 1 are Avan? So the price has been embedded in this dynamic. So we do not expect this was not embedded at this stage any renegotiation in term of price for 2024. For what concern the impact of gross margin? Well, you have not to forget that our gross margin more than on one time is helped by the capacity reservation fees.

Speaker 5

These are not disappeared this year in respect to last year. Yes, they are not high like it was last year. They are declining in respect to last year. Still, they are, let's say, giving a positive impact. So this is also if you want also answering to your first point about pricing in Automotive, of course, we have the capacity reservation fee still there.

Speaker 5

You understand that there is no strong pressure here. There is still, let's say, from our customer, they're willing to secure the capacity to secure the availability of the parts. As we have said already in the past, this is an element that definitely we will see declining over the next year and the following years because we know we have already, let's say, the contract done. Yes, this will go down moving forward. This year definitely is still an element that is impacting positively our gross margin, I would say in a meaningful way, still a positive impact.

Speaker 1

Okay. So we have time for one last question.

Operator

The last question is from Jerome Ramel from BNP Paribas. Please go ahead.

Speaker 10

Yes, good morning. Thank you for squeezing me in. Quick two questions. The first one would be, where are the lead times currently and what is loading of your front end fabs? And then I have a quick follow-up.

Speaker 2

Lead time in average are below 3 months. It's very short, man. It's very short. And taking into account the inventory level we have, we are also capable to capture some spot term business within the quarter quite easily. Front end loading, Laurent?

Speaker 5

Front end loading, let's say Q2 is really the bottom line, I would say, because in Q2, we see a front end loading of 72% for our fabs with a significant impact in term of unloading charges. They will be in the range of 300 basis points on our gross margin in this quarter. So it's an important impact. Notwithstanding this, with this level of revenues, we see our inventory increase in term of value because we were launching our production with a different expectation for the evolution of the second half. Well, the number of days will increase.

Speaker 5

We will continue to keep under control our inventory. So in the 2nd part of the year, the unloading charges will continue to be material and the level of saturation of our fab will increase, but not so much. It will remain in the range of 77%. So similar to the one of Q1, if you want. At the end, we do expect that our inventory exiting, our inventory with 110, 1 15 days.

Speaker 5

That is a little bit higher in respect to our model if you want, but for a year like 2024, I think it's controlling the right level.

Speaker 1

And you had a follow-up?

Speaker 10

Thank you. And yes, I had a follow-up. Currently China, all the fear around China ramping up capacity for 20 nodes and so on, What's your view and current visibility on Chinese customers? I've seen recently you signed some major silicon carbide deal with some car OEMs in China. So just like to understand how you see the dynamic there.

Speaker 10

Thank you.

Speaker 2

Well, I think China is quite simple. China is no more super moving market. It's a market with some growth where clearly you have competitor pretty aggressive, but not including Chinese, believe me, American and Japanese as well. And here the recipe are always the same is to have the right features and performance of our own device and the high quality and the high price. However, okay, I repeat that we have engaged ourselves in adequate, I believe, strategy for our footprint.

Speaker 2

So of course, with our Sanal agreement for Silicon Carbine, But more and more, we are developing activity with Chinese Foundry located in China for our microcontrollers, for our BCD and for our other power moses. So in such situation, we have all the ingredients to be to compete in China because it is a key market for ST. And we believe looking at the activity we have on design in and development on our STM32 and when we organize the summit and when we see what we have in our pipeline that SD will be a strong competitor in China for the future.

Speaker 10

Thank you.

Speaker 1

With this, I think we are at the end of the time. So this will conclude our call.

Speaker 5

Thank you. Thank you. Thank you. Thank you.

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Earnings Conference Call
STMicroelectronics Q1 2024
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