STMicroelectronics Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 12 speakers on the call.

Operator

Ladies and gentlemen, welcome to the STMicroelectronics Second Quarter 2024 Earnings Release Conference Call and Live Webcast. I am Majira, 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, Mayra, and good morning. Thank you, everyone, for joining our Q2 2024 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 Grandi, President of Finance, Purchasing, and Resilience and Chief Financial Officer and Marco Cassis, President, Analog Power and Discrete, MEMS and Sensors Group and Head of SDMI Core Electronics, Strategy, System Research and Applications and Innovation Office. These live webcast and presentation materials can be accessed on ST 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 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, Please limit yourself to one question and a brief follow-up. I'd now like to turn the call over to Jean Marc, ST President and CEO.

Speaker 2

Thank you, Celine. Good morning, everyone, and thank you for joining ST for our Q2 2024 Earnings conference call. Let me begin with some opening comments. Starting with Q2. 2nd quarter net revenues of $3,230,000,000 were above the midpoint of our business outlook range, driven by higher revenues in personal electronics, partially offset by lower than expected revenues in automotive.

Speaker 2

Gross margin of 40.1% was in line with expectation. On a year over year basis, Q2 net revenues decreased 25.3%, mainly driven by a decline in industrial and to a lesser extent in automotive. Gross margin decreased to 40.1% from 49%. Operating margin decreased to 11.6% from 26.5% and net income decreased 64.8 percent to $353,000,000 On a sequential basis, net revenues decreased 6.7%. For the first half of twenty twenty four, net revenues decreased 21.9% year over year to $6,700,000,000 mainly driven by a decrease in the microcontrollers and power and discrete segments.

Speaker 2

We reported gross margin of 40.9%, operating margin of 13.8% and net income of $865,000,000 During the quarter, contrary to our prior expectations, customer orders for industrial did not improve and automotive demand declined. For Q3 2024, our Q3 business outlook is for net revenues of about $3,250,000,000 at the midpoint, decreasing 26.7 percent year over year and increasing 0.6% sequentially. Gross margin is expected to be about 38%, impacted by about 350 basis points of unused capacity charges. For the full year 2024, overall, in Q2 customer order bookings did not materialize as expected. Therefore, we now anticipate a delayed recovery in industrial and a lower than expected increase in automotive revenues in the second half of the year versus the first half.

Speaker 2

We will now drive the company based on the plan for full year 2024 revenues in the range of $13,200,000,000 to $13,700,000,000 Within this plan, we expect a gross margin of about 40%. By segment, on a year over year basis, analog product MEMS and sensor was down 10%, mainly due to imaging. Power and discrete products decreased 24.4% with a decline both in power and in discrete products. Microcontrollers revenues declined 46%, mainly due to general purpose microcontrollers. And digital ICs and RF products declined 7.6% with a decrease in headas more than offsetting an increase in RF communications.

Speaker 2

By end market, industrial declined by more than 50%, automotive by about 15% and personal electronic by about 6%, while communication equipment computer peripheral increased by about 2%. Excluding the impact of the change in product mix in an engaged customer program, personnel electronics was up about 14%. Year over year, sales decreased 14.9% to OEMs and 43.7% to distribution. Overall, Q2 net revenues decreased 6.7% sequentially with a decline of 4.3% in analog products, MEMS and sensors, 8.8% in power and discrete products, 15.7% in microcontrollers, while digital ICs and RF products increased 8.6%. By end market, industrial was down about 17% sequentially, automotive down about 8% and personal electronics down about 5%, while the communication equipment and computer peripheral was up about 15%.

Speaker 2

Gross profit was $1,300,000,000 decreasing 38.9% year over year. Gross margin decreased to 40.1% compared to 49% in the same quarter last year. The decrease was mainly due to the combination of product mix and sales price and higher unused capacity charges. Operating margin was 11.6% compared to 26.5% in the year ago period. All reportable segments were down on a year over year basis with the main decline in microcontrollers and power and discrete.

Speaker 2

On a year over year basis, Q2 net income decreased 64.8% to $353,000,000 compared to $1,000,000,000 in the year ago quarter. Earnings per diluted share decreased 64.2 percent to $0.38 compared to $1.06 Net cash from operating activities decreased at $702,000,000 in Q2 versus $1,310,000

Speaker 3

in the year ago quarter.

Speaker 2

Net CapEx in the 2nd quarter was $528,000,000 compared to $1,070,000,000

Speaker 3

in the year ago quarter.

Speaker 2

Free cash flow was $159,000,000 compared to $209,000,000 in the year ago quarter. Inventory at the end of the second quarter was $2,810,000,000 compared to $3,050,000,000 in

Speaker 3

the year ago quarter.

Speaker 2

Days sales of inventory at quarter end were 130 days compared to 122 days the previous quarter and 126 days in the year ago quarter. During the Q2, ST paid $73,000,000 of cash dividends to stockholders, and we executed an $88,000,000 share buyback completing our $1,040,000,000 share repurchase program launched in 2021. On June 21, 2024, ST announced the launch of a new share buyback plan totaling up to $1,100,000,000 to be executed within a 3 year period. ST's net financial position of $3,200,000,000 as of June 29, 2024, reflected total liquidity of $6,290,000,000 and total financial debt of $3,090,000,000 I will now go through a short update on some of our strategic focus areas. As mentioned, contrary to our prior expectation, we saw a decline in automotive demand during the quarter.

Speaker 2

This was characterized by some reduction in backlog already in Q2 and reduced forecasts from some of our customers, including adjustments related to electrical vehicle production decrease. And with inventory adjustments going along the supply chain. We continue to execute our strategy supporting car electrification during the quarter. We had multiple wins in power discrete with both silicon carbide and IGBT technologies for traction inverters at leading car manufacturers. We also won business with our automotive smart power technology for power domain control in new electrical and electronic architectures.

Speaker 2

We announced a long term silicon carbide supply agreement with Geely Auto for silicon carbide power devices in their battery for electrical vehicles. We have also established a joint lab to share knowledge and explore innovative solutions related to evolving automotive architectures. In car digitalization, we saw further momentum with our portfolio of automotive microcontrollers. This include wins with our later generation STLA MCUs in a body domain application with a leading European carmaker, as well as other MCU wins for battery management and HVAC systems. In automotive sensors, we introduced a 6 axis module that enables a cost effective solution for functional safety applications such as precise positioning in navigation systems and digitally stabilizing cameras, lidars and runners.

Speaker 2

Our design win activity in smart mobility highlights the robustness of our technology and product portfolio, positioning ST to leverage the structural growth of this key market. In industrial, during the quarter, the anticipated stabilization of demand did not materialize as expected and customer orders did not improve, in particular for general purpose microcontrollers. We continue to see weakness in the market for short cycle businesses such as power tools, residential solar, lighting and appliances and more resilience in longer cycle business such as energy storage, grid, electrical vehicle charging and process automation. This has resulted entering the second half in a weaker backlog than expected. In the short term, we are facing a longer and more pronounced correction in industrial than what we anticipated due to a progressive weakening of end demand, amplified by a severe inventory correction along the industrial market value chain.

Speaker 2

In this environment, we continue to work with our customers to design in our product of today and to invest in R and D to be the next generation of products. A good example is what we are doing to build on our leading position in industrial Ammonet Processing Solutions. ST was present at the Honeywell Ammonet World Show in Germany, where over 5,000 people visited our booth. There, we received a very positive customer feedback on the new products and solutions we announced shortly before, including low cost wireless and high performance microcontrollers, as well as new 64 bit microprocessors for industrial applications. We also announced an innovative smart sensor with edge AI processing for motion tracking industrial and robotics application.

Speaker 2

We also introduced the 1st embedded SIM in the industry to meet the incoming GSM A standard for eSIM IoT deployment. This simplifies the management of large numbers of connected devices in support of the proliferation of secure cloud connected autonomous things. Finally, we also continue to be momentum on edge AI enablement for our customers. In early June, the ST Edge AI suite came online, bringing together tools, software and knowledge to simplify and accelerate AGI application development. The suite supports both optimization and deployment of machine learning algorithm, starting from data collection to final deployment on hardware, streamlining the workflow for different tip of users.

Speaker 2

We are confident that our ongoing design in and development efforts with customers and distributors in the industrial sector will position ST to capitalize on the net market upcycle more effectively. In personnel electronics, communication equipment and computer peripherals, our engaged customer programs are running as expected. Moving now to manufacturing. In May, we announced a strategic update with the construction of a new high volume 200 millimeter silicon carbide manufacturing facility in Catania, Italy. This facility will make power devices and modules and will include both device manufacturing and testing and packaging.

Speaker 2

In conjunction with the silicon carbide substrate manufacturing facility being prepared on the same site, these facilities will collectively form ST's silicon carbide compass. This development will fulfill our vision of a fully vertically integrated manufacturing hub for the mass production of silicon carbide devices, all within a single location. The program is projected to be €5,000,000,000 multiyear investment, including €2,000,000,000 supported provided by the state of Italy in the framework of the European Union CHIPS Act. During the quarter, we also announced the expansion of the existing multiyear 150 millimeter silicon carbide substrate wafer supply agreement with Secrista. Now let's move to our Q3 of 2024 financial outlook and our plans for the full year 2024.

Speaker 2

For Q3, we expect net revenues of about $3,250,000,000 at the midpoint, representing a year over year decline of 26.7 percent and a sequential growth of 0.6%. Q3 gross margin is expected to be about 38% at the midpoint, impacted by about 350 basis points of unused capacity charges. For 2024, entering the second half with our current Q3 year end backlog and with ongoing market dynamics, we have further revised our plan for 2020 4 revenues, which we now see in the range of $13,200,000,000 to $13,700,000,000 representing a decline of about 22% at the midpoint compared to 2023. Within this plan, we expect a gross margin of about 40% impacted about 2 70 basis points of unused capacity charges at the midpoint of our 2024 full year indication. To conclude, following an unprecedented ship shortage situation, the current semiconductor cycle is impacted by a number of factors.

Speaker 2

The desynchronization between the various end markets in term of demand normalization or weakening and inventory adjustments or corrections the available capacity moving from tension to excess and the non linear acceleration of structural trends towards sustainability in areas like renewable energies, electrification of mobility, high to repair and second end devices. This backdrop clearly affects the automotive and industrial end markets. As we have pointed to in our strategy, both of these markets are undergoing a deep transformation, also driven by a number of megatrends. This, coupled with the current cycle dynamics I have just mentioned is bringing both opportunities and challenges in the short, medium and longer term for ST and for our customer equally. In the short to medium term, we are working to best adapt our operating plans to this complex situation.

Speaker 2

We have already implemented measures and are adjusting them in response to the evolving situation. Medium to long term, we continue to be convinced that this transformation will provide the basis for our growth ambition. We will be hosting a Capital Markets Day on November 20 in Paris to provide an update. It will be an in person event and we will also webcast it live. Thank you and we are now ready to answer your questions.

Operator

We will now begin the question and answer session. The first question is from Jerome Rameela from BNP Paribas, Exane. Please go ahead.

Speaker 4

Yes. Good morning. One question, Jean Marc. You mentioned

Speaker 5

on the gross margin, the impact of the underlugging cost, but also a little bit of price. Could you update us on the pricing environment for, globally speaking, and specifically for industrial and automotive? Thank you.

Speaker 6

Thank you,

Speaker 2

Jerome. I will let Lorenzo comment at this point.

Speaker 7

Good morning, everybody, and good morning, Jerome. But in terms of price, I would say that it's consistent on what we have said also last quarter. We don't see at this stage, let's say, a significant difference in the price environment. Of course, it's different than last year. Now what we see is that there is some pressure on the pricing, but overall for the company, it remains at the low single digit.

Speaker 7

There is some difference between the market. It's higher, let's say, in industrial definitely, is higher, especially when we look at our product line of microcontrollers. We are more in the mid single digit. While when we look at the motive, it remains, let's say, the low single digit. There is no particular, as I said before, difference in respect to what we were expecting last quarter.

Speaker 5

Thank you. And maybe as

Speaker 4

a quick follow-up, Jean Marc, you said

Speaker 5

on the short term, is some overcapacity for the industry and for you. How are you addressing it and in terms of CapEx and maybe a ramp up of the different manufacturing sites you had in mind? Thank you. [SPEAKER JEAN FRANCOIS VAN

Speaker 2

BOXMEER:] We are adjusting the working hour of our manufacturing already in Q3 definitively and it will follow in Q4. That's the reason why we have after the revised down of our sales and operating plan, we have immediately adjusted this activity. And of course, we are cutting all the discretionary costs. And as I mentioned already, we have put the company on higher increase. This is a conjunctual measure.

Speaker 2

Now what is important for us is to focus to come back on the run rate of revenue we have last year.

Speaker 7

If I may add, for Marc, in respect to the CapEx, we confirm that we are going to spend this year something the range of €2,500,000,000 that is and this is mainly addressing our conversion to, let's say, the 12 inches and the, let's say, silicon carbide. We have the plan, as we were mentioning before, about the campus to move rapidly our silicon carbide from the 150 millimeter to the 200 millimeter. These are the main, let's say, project that we have in this CapEx of 2.5 and these are confirmed.

Operator

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

Speaker 8

Thank you very much. My first question is on the industrial and microcontroller general purpose mainly. Obviously, it's sharply down and I think there is kind of this destocking happening. However, there is this, I mean, discussion on the market that maybe you would have much higher inventories that maybe 2 peers. When you listen to peers, I mean, Renaissance, Microchip and TI, they said they are through the worst and that they proactively or they did proactively manage inventories in the channel.

Speaker 8

So my question is like, I would explain why you saw a bit later than everybody else the industrial downturn and maybe why it's sharper in terms of downside. So my question is, do you what's your view on this comment that maybe you have higher inventory relative to peers that would expand this sharper decline? And more importantly, how it plays out for the rest of the year? How long this understocking would last for you? That would be my first question.

Speaker 2

Okay. Thank you. I will not comment the benchmark with our competitor. First of all, TIs have a different go to market approach with the distribution. And they have much more inventory in home.

Speaker 2

About microchip, I invite to check the number in detail. And for the other competitor, I will not comment. No, we let's say, first of all, okay, we have the widest product portfolio on microcontroller. And again, we are addressing all the regions of the world. And as I mentioned in my other speech, we are really addressing as well short cycle business and more long cycle business.

Speaker 2

On the short cycle business, in fact, the hand demand fluctuated a lot during the recent quarter for different reason. And the inventory is not only at our distribution channel and not only at EMS is in the value chain at System Maker and including at the end customer. So that's the reason why, first of all, it has taken much longer than the other, okay, to 1st absorb the excess of inventory at the end customer or system maker. And now yes, there is still, let's say, some excess of inventory at distributor and EMS. The point I would like to recall for this business.

Speaker 2

This business is a business which suffers the most during the shortage of semiconductor under the pressure of carmakers Tier 1 and big industrial working in the field of energy, power conversion and I have to say energy transportation, electrical vehicle charging. That's the furthest. That's the reason why when we allocated we started to allocate the capacity we have. I repeat, we negotiated with them warranted volume and non consumable order. So means up to March 2023, we ship according backlog they give to us, and this order were not cancellable.

Speaker 2

Most likely, we have assessed that already at this period of time, their end market were already on the, let's say, down cycle. And that is the reason why they have continued to accumulated inventory. So when we have completely removed this policy of non cancellable order, of course, we have just adopted a new policy and started to decrease our POP and so on and so forth. But it will take time. And it will take time, why?

Speaker 2

Because it is not only an inventory correction, it is also a real economical problem for this short cycle business. Now we see a different path for the long cycle business. I repeat, so Renewable Energy, what is related electrification of mobility, what is related charging station and so on. Here also in a certain extent, some inventory were present, but we expect that starting Q4, this will start to grow again. So the reason why ST has a profile a little bit longer in term of restart is related first to our wide exposure on general purpose micro and we have the widest portfolio.

Speaker 2

The fact that in 2022, 2023 up to March, we have nonconsolid order policy that increase inventory for sure that now we have to digest. Unfortunately, in 2024, this business has a problem of demand and demand. That's the reason why it take longer. For the rest, okay, we behave very similarly our competitor. And they have a similar profile in term of business recovery for this year.

Speaker 2

And for the benchmark, okay, be careful of the rumor.

Speaker 8

Right. Thank you, Jean Marc. And maybe my follow-up, if I may, on the automotive. You mentioned that it weakened. I mean, maybe you could explain a bit in details what exactly is happening in terms of automotive?

Speaker 8

And if you could remind us what you expect for Automotive Industrial for the full year, what your full year is based on for a GBP, it would be great. And I will leave it there. Thank you.

Speaker 2

On Automotive, there is, let's say, 3 points. The point number 1, let's classify on legacy. On legacy, starting in May, we have seen our main Tier 1, let's say, pulling out the consignment stock, less pieces, because you know the Tier 1 now, they came back with carmaker with 2 week call off. So they have a very short term visibility. And starting in May, they start for us to pull out from our consignment stock less pieces.

Speaker 2

So as a consequence, they can sell some frame order. So already in Q2, we have been impacted about less revenue that the forecast that was based on our backlog, about $100,000,000 is point number 1. The point number 2, still on this legacy business and let's say usual application in the Automotive, they have declined their forecast for H2. So that's the reason why we have been obliged to revise down the forecast for Automotive legacy already impacted in Q2 about let's say $100,000,000 and let's say about $350,000,000 $400,000,000 for H2. The second point is the growth for what is related electrical vehicle.

Speaker 2

We will grow in H2 all of our components related to electrical vehicle, but less than forecasted. And you know why because the production of electrical vehicle in the world has been adjusted now below €13,000,000 of car. However, I could fear that H2 will be a growth driver for ST for all the components related to electrical vehicle, particularly for silicon carbide and particularly everywhere in China and also with our main customer. That's the reason why we confirm our silicon carbide revenue about $1,300,000,000 this year. Well, then the 3rd element is what we already mentioned.

Speaker 2

That is a little bit, let's say, increasing. You know that last year, one of our main customer for EDAS built a certain level of inventory. He is adjusting in Q3 a little bit more the inventory with us. So all in all, the automotive for ST will grow in H2, I have to say 4% versus H1, about $100,000,000 with the growth on electrical vehicle with silicon carbide, offset by the adjustment of the legacy from our Tier 1 and some inventory adjustment from our main customer in ADAS. So this is what we face in H2 and Automotive.

Speaker 8

Thank you, Jean Marc.

Speaker 1

Thank you very much. Next question, Mariana.

Operator

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

Speaker 4

Yes, hello, good morning. I have a question about your main customer and the Engage customer program. Can you give us some visibility on your expectations for the second half? There has been noise around better volumes for the smartphone and also some potential gain of content? So if

Speaker 5

you can clarify that for us. Thank you.

Speaker 2

You have already seen the impact in Q2 because in Q2 we exceed a bit of midpoint of our revenue guidance. Thanks to Personal Electronics and thanks to our main customer that has been offset as I just mentioned by Automotive. In Q3, we have a solid forecast for them. And now as usual, Q3 is the biggest quarter. But in Q4, we will have for the time being, we see a decrease versus Q3.

Speaker 2

But so far, now the plan they gave to us are stabilized. More about the content of semiconductor in ST, I repeat, 2nd half this year and first half next year is lowest point in term of content of ST in our main customer. Why? Because we have lost this famous optical module. But I confirm to you that starting H2 2025, the content of ST in our devices for our main customer will increase because we need some design.

Speaker 4

Okay. Thank you. And maybe a clarification on what you said earlier about the costs in the moment where you are now. Are you saying that you're going to limit the expansion of R and D and maybe cut a little bit SG and A going forward? Thank you.

Speaker 2

Today, on R and D, we don't cut our R and D programs, because all these programs are engaged and completely consistent with our strategy. I think we have already clean and disengage the product line we want to disengage, let's say, many years ago. So all the programs are strictly under control and executed under the decision of the executive committee. So now we continue to execute them. Of course, also I repeat that from the organization we have put in place early this year, we have already extracted some synergy and productivity that enable our capability to run this R and D program, minimizing or stopping any hiring.

Speaker 2

We just, let's say, focus on hiring on critical profile of expert. But on SG and A, of course, we have put it on a very strict control.

Speaker 1

The

Operator

Next question is from Sandeep Deshpande from JPMorgan. Please go ahead.

Speaker 9

Yes, hi. Thanks for letting me on. I'd like to actually go into, you've reduced your full year guidance by about 1,050,000,000 for the full year now again. How does that divide up into Automotive, Industrial? And you said in the quarter that you saw some weakness in the automotive market.

Speaker 9

Can you quantify how much weakness you saw and do you see that continuing into the current quarter?

Speaker 2

The Pareto of the variance between the two guidance, The famous $1,000,000,000 delta is about 40% automotive, 60% industrial. I repeat on automotive, already in Q2 about $100,000,000 The rest is on H2 and mainly on what we call legacy business and partially on the ADAS ASICs. Again, I repeat what is related to silicon carbide, okay, we'll go, but at a lower pace than what was expected. On industrial, which is about 60%, no impact on Q2. On Q2, we have done an execution consistent with our forecast.

Speaker 2

The point is that in Q2, we didn't enter booking for industrial billable for 2024 at the expected level. So that's the reason why we have cut our forecast by about US600 million dollars And also, we have seen the POS of our distributor, let's say, decreasing. And taking into account the feedback they gave to us, we don't expect now to increase our POP in Q3. On contrary, we will continue to decrease the POP on Q3 on industrial to decrease our inventory at distribution level, but we expect our POP to increase in Q4. So this is the dynamic.

Speaker 2

So the takeaway is about 40% of the €1,000,000,000 automotive, already €100,000,000 in Q2 and about €600,000,000 for industrial. Why? Because okay, no order in Q2 and POS still decreasing in Q2. So postponing in Q4 the restart of the distribution POC.

Speaker 9

Understood. Thank you. And follow-up question is on automotive. We are hearing from many automotive companies that they are seeing weakness in the market. So do you think that the orders more than the revenue now you gave me this new revenue will continue to be weak in autos for the next few quarters?

Speaker 2

But we received from the Tier 1 what they say delivery forecast, okay. Now the delivery forecast they gave to us is encompassing, okay, all the adjustments. We have already seen in Q1 that has been a bit amplified in Q2. Now we have our backlog. We as I said, the Tier 1, they are working with 2 weeks call off from carmaker.

Speaker 2

Of course, this is something that we have to put under a strict scrutiny and we monitor with all of our customer the dynamic of the shipment and the order they put on us. On Electrical Vehicle, I think it's a different story. Here now, adjustment has been done. And we do believe that, okay, we will deliver about $1,300,000,000 on Siq. But yes, on automotive, the market is dynamic, it's more inventory adjustment.

Speaker 2

But according to some, let's say, analysts for the automotive industry, looks like the production of a vehicle is confirmed around 90,000,000 vehicle. Well, we do believe that if it is confirmed, the inventory adjustment is basically done. So the backlog we have in front of us is valuable. However, we have to monitor the situation on a very dynamic way.

Speaker 9

Thank you.

Speaker 1

Thank you, Sandeep. Next question please, Moira.

Operator

The next question is from Sebastian Stavlovitch from Kepler Cheuvreux. Please go ahead.

Speaker 10

Yes. Hello, everyone, and thanks for taking my question. On the OpEx for Q3 and 2024, how should we model the OpEx in the next two quarters? Are you expecting to have some benefit of some specific cost saving impact? Yes.

Speaker 10

The first question. Thank you.

Speaker 7

Yes. I answered about the OpEx. Well, in this

Speaker 5

as we were commenting

Speaker 7

before now, in this market environment, we will continue to have strict control of our expense. You see that in respect to our expectation in Q2, operating expenses that we consider net including other income and expenses came lower than we were expecting entering the quarter. This was also due to the fact that we were realizing the difficulties that we were facing for the second half. But for Q3, we do not we now estimate something in term of expenses between $905,000,000 915 $1,000,000 So means that we will continue to keep control. You know that during Q3, we have the positive impact of the seasonal vacation, especially in Europe that is helping us on this.

Speaker 7

When I look at the total year, I think that also thanks to the fact that other income and expenses should increase in respect to last year. So it means that this year, we expect something in the range of $150,000,000 positive. Our expenses overall in the year will slightly increase in respect to last year, a very modest increase in respect to last year.

Speaker 10

And for Q4, what do you see the OpEx?

Speaker 7

You can make the math at the end, and we will stay substantially flat. There will be some increase in respect to very mild, very mild on the very few percentage point. And over the year, you can model something similar to what was the net OpEx of 2023 with a very mild increase in respect to last year.

Speaker 10

And in terms of dynamics for Q3, where do you see your revenue trending in Q3 by division or by verticals to understand a little bit the different dynamic to bottom in your flattish, I would say, sequential revenue growth for the group? Thank

Speaker 2

you. I come back on the revenue after Lorenzo. But if you buy end market first, so compared to Q2 on Automotive, we expect to grow 4% sequentially. On Industrial, unfortunately, as I said, because of lack of visibility and weaker backlog, we continue to decrease minus 17%. Personal Electronics, we will grow 17%.

Speaker 2

This is seasonality effect and the engaged customer program we have with our main customer. And on communication equipment and computer or peripheral, we will decrease minus 8%. It's related to the legacy business. We are disengaging progressively. If we move to reportable segment, so Analog, MEMS and Sensor will be flattish, almost flattish, 0.2%.

Speaker 2

On Power and Discrete, we'll increase 12.9%, driven by silicon carbide and wafer. Our MCUs in Q3 will slightly increase 1.3%, but general purpose will continue to decrease and offset by auto MCU and secure MCU. And on digital and radio frequency, it will decrease minus 17.8%, but mainly it is related to Head Ass, Okay. It is the destocking of our customer that was partially anticipated. So this is the 2 dynamic by end market and by reportable segments.

Speaker 7

As you can see, we are very precise this time.

Speaker 11

Exactly. Thank you.

Speaker 1

Is it okay for you, Sebastian?

Speaker 10

Yes, that's perfect. Thanks.

Speaker 1

Thank you very much. Next question, Majira, please.

Operator

The next question is from Didier Schemmama from BOF. Please go ahead.

Speaker 6

Thank you so much.

Speaker 11

A few things. First of all, Jean Marc, I mean, it feels to me like this is a downturn similar to what we saw at the turn of the last century. So it's a 2 year downturn. And I think the lesson we learned from that downturn is that it needed to be much more aggressive on costs. So two questions is, A, I know you've said you've sort of implemented a hiring freeze, etcetera, but what do you think about your CapEx?

Speaker 11

I know it's unchanged, but is that prudent at this stage to be spending that much money on CapEx and adding still capacity? And I would like to come back to a comment you made at a conference recently where you said you were thinking about upgrading your 6 inches and your 8 inches fabs to 300 millimeters Should you accelerate that transition given that those fabs, especially those in Europe, perhaps even in Singapore, are in direct competition with the CapEx being spent in China? So that's my first question, sort of the fiscal discipline being more aggressive into next year? And I've got a follow-up. Thank you.

Speaker 2

Well, it is clear that we are facing the strongest inventory correction certainly we ever face since a long time. However, I would like to say, do I like 2 or 3 points? Well, first of all, we continue to be convinced that even if Nokia is not completely linear or less smooth than expected, that the transformation that our 2 main markets, industrial and automotive, let's say, will provide really for ST the basis for our own growth ambition. Also supported by some specific and let's say initiative, every time we believe we can bring differentiation in the field of Personal Electronics or including in the field of server for AI with a power stage or later on in optical transceiver. So we have our mega trend there.

Speaker 2

Then we said that we are convinced that for us, our capability to continuously improve the fundamental value of the company is to convert our activity to 300 millimeter for silicon based technology. Of course, each time it is a trend that is mandatory. And to convert to 200 millimeter the silicon carbide 1. That's the reason why this year, we have confirmed the engaged CapEx and the engagement we have some supplier to go in this direction. Now, the third point for us as a priority is to assess the baseline and in order to understand at which speed we will come back to 2023 revenues.

Speaker 2

More than that, under the light of these three points, it is clear that the acceleration of the conversion respectively to 200 millimeter to 300 millimeter, Acceleration of the 150 to the 200 millimeter in silicon carbide. It's the best trade off to minimize our CapEx at the right level is what we are working on. It is what I said when I say we are adjusting ourselves in operating plan consistently with what we see. But I repeat, we are convinced that ST will come back on a growth trajectory. We are convinced that we must convert to 300 millimeter and 200 millimeter respectively.

Speaker 2

This is monetary. Of course, acknowledging the baseline is the dynamic of the market, we will decide which level of CapEx, okay, we have to cautiously spend, but maybe accelerating some conversion with all the implication linked to this conversion.

Speaker 11

Very good. Thank you. My second question is about geopolitics. So I think how you're thinking about the world we might enter into next year with sort of 10% tariffs on all products imported into the U. S?

Speaker 11

I mean, one of your competitors obviously is boasting about the sort of domestic U. S. Capacity, call it, geopolitically dependable. You've taken the sort of, I would argue, a small decision to partner with a local Chinese company to build your silicon carbide capacity over there, which I think is very differentiated versus your peers. But what are you thinking about the need to have maybe local capacity in the U.

Speaker 11

S, which you don't have at this stage? Or do you think that your automotive and industrial customer base is European enough to not warrant really the need to have capacity in the U. S?

Speaker 2

Well, at this stage, we the manufacturing strategy that is, let's say, we have adopt in order to take into account what you mentioned. So China for China, so it's on the execution. So again, I repeat that we are building an ecosystem in China, let's say, as independent as possible along the value chain. So for raw material, device wafer processing, wafer sort, assembly and test, but including application lab and design center. At this stage, we do believe that our European based or recognized countries really able for America in terms of location for manufacturing where ST is already implemented are good enough or adequate enough to support and face this decoupling.

Speaker 2

However, we are always, let's say, open for some partnership with a player in terms of manufacturing arrangements. On the model, we have in call with the GF of the model we have in Negrete with Stora Jazz. At this stage, there is nothing on the table. But this is a kind of model we are open. What I can confirm to you at this moment, we do not intend to build a fab from scratch in U.

Speaker 2

S. Why? Because ST, we have not the boundaries to do it. We have already project in our plate like the campus in Catania to continue call timely, to continue Agra timely, to continue the GV with Celine in China. We do not intend to build any infrastructure in U.

Speaker 2

S.

Speaker 11

Okay. Sorry. And just one quick one that's very helpful. I think you had floated the idea that M and A was back on the table. Any more update on that?

Speaker 2

We are working actively on the right target.

Speaker 5

Thank you.

Speaker 1

We have time for a very last question, Moira.

Operator

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

Speaker 6

Hey, guys. Good morning. Thanks for squeezing me in. For my first one, last quarter you were kind enough to give us details and I think you mentioned that there was 2 months of channel inventory that you wanted to get down and it was running above target. I know a lot of it's at EMS and OEMs, but would you mind updating us on maybe either where you feel like levels are at entering this quarter and with in particular the down 17% industrial guidance for the 3rd quarter?

Speaker 6

Does the rest of the year outlook assume that you get channel inventory back in line during the Q3? Thank you.

Speaker 7

Maybe I can take this question. During the Q2, when we look at the distribution evolution, we see that the POS were not improving. In general, we're not improving. We have seen some areas a little bit better, but in general, not improving. So at the end, through that, we were shipping less to distribution and this is feasible in the result, especially when we look at the industrial.

Speaker 7

But when we look at the level of inventory, when we look at the situation of the inventory, I would say that is similar to the one exiting Q1. So I would say that still we don't see significant improvement in this respect, especially because, let's say, POS is not improving. Probably, let's say, we will see some mild improvement in Q3. Our expectation is to start to see some more material improvement moving inside Q4. But for the time being, the situation of inventory remains, let's say, not particularly on the positive side on the improvement irrespective to the one that we left exiting Q1.

Speaker 7

But for what concern the inventory in our balance sheet, I can tell you that today you see we are in the range of 130 days. We'll be most likely in Q3 similar at the end of Q3. We do not expect strong improvement during this quarter, notwithstanding the unused and the level of production has been reduced, why we will start to see the benefit in Q4. In Q4, we expect, let's say, to decrease in the range of at least 10 days in average, 10 days in respect to where we stand today.

Speaker 6

Thank you for all the color there Lorenzo. For my follow-up, I wanted to ask about gross margins. So down like 200 basis points in the Q3 guidance, but I believe it implies that it needs to basically improve another 200 basis points in the 4th quarter. Anything with mix that we should be aware of? Or is that all just utilization rates coming back up that's in your assumption sort of for gross margin improvement in the Q4?

Speaker 6

Thank you.

Speaker 7

In the Q4, the main driver of the improvement of our gross margin in our model is mainly coming from the mix. Of course, we do not expect to have a significant positive impact in pricing. As you know, we are not modeling any improvement in the price environment. We do expect price more or less be stabilizing in the range of low single digit decline. There is a mix that is improving.

Speaker 7

There will be also the level of unloading. This quarter, in Q3, unloading is eating our gross margin by 3.50 basis points. It will remain material also in Q4, but declining in respect to the one off Q3. So these two components are the main one that make us modeling the Q4 as an improvement in respect to the current quarter, Q3. Moving back the year, let's say, close to 40%.

Speaker 6

Got it. Thank you, Lorenzo.

Speaker 1

Thank you very much. This was the last question.

Operator

That was the last question. I would like now to turn the conference back over to Ms. Berthier for closing remarks.

Speaker 1

I think this is ending our call for this quarter. Thank you very much all of you for being there and we remain at your disposal should you need any follow-up questions. Sorry for the one that didn't have time to ask a question there. Thank you very much.

Speaker 11

Thank you. Thank you.

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 2024
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