Ladies and gentlemen, welcome to the STMicroelectronics Q2 2023 Earnings Results Conference Call and Live Webcast. I'm Moira, the Chorus Call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions]. At this time, it's my pleasure to hand over to, Celine Berthier, Group Vice President, Head of Investor Relations. Please go ahead, madam.

Thank you, Moira, and good morning. Thank you, everyone, for joining our second quarter 2023 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 Grandi, President of Finance, Purchasing, ERM and Resilience and Chief Financial Officer; and Marco Cassis, President of Analog, MEMS and Sensors Group and Head of STMicroelectronics’ Strategy, System Research and Applications, Innovation Office. The live webcast and presentation materials can be accessed on ST's Investor Relations website. The 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 or a full description of these risk factors. Also to ensure all participants have an opportunity to ask questions during the Q&A session. [Operator Instructions]. And now I’d like to turn the call over to Jean-Marc, ST’s President and CEO. Jean-Marc Chery: Thank you, Celine, and good morning, everyone, and thank you for joining ST for our Q2 2023 earnings conference call. In Q2, our balanced end-market approach, our broad product portfolio and strong customer relationships enable again a double-digit year-over-year growth. This performance came along with a year-over-year increase of our profitability. And as already anticipated, 2023 will be another year of progress towards our $20 billion plus revenue ambition and related financial model. Now, let's start with the financial highlights overview. Second quarter's net revenues of $4.33 billion came in above the midpoint of our business outlook range and Q2 gross margin of 49% was in-line with guidance. Q2 net revenues increased 12.7% year-over-year. The revenue performance continued to be driven by growth in Automotive and Industrial, partially offset by lower revenues in Personal Electronics. Looking at our year-over-year performance, gross margin increased to 49% from 47.4%. Operating margin increased to 26.5% from 26.2% and net income increased 15.5% to $1 billion. On the first half of 2023, net revenues increased 16.1% year-over-year to $8.57 billion, driven by growth in all product sub-groups except the Analog and MEMS sub-groups. We reported gross margin of 49.3%, operating margin of 27.4%, and net income of $2.05 billion. On Q3 2023, our third quarter business outlook at the midpoint is for net revenues of about $4.38 billion increasing 1.2% year-over-year and by 1.1% sequentially. Excluding the impact of the change in product mix in an engaged customer program in Personal Electronics, I mentioned in January, the Q3 revenue growth at the midpoint would be 3.5% year-over-year and 3.2% sequentially. Gross margin is expected to be about 47.5%. For the full year 2023, we will drive the Company based on a plan for revenues of $17.4 billion plus or minus $150 million. This represents a year-over-year growth of about 8%, and we now anticipate the gross margin to exceed 48% for the full year. Now, I will move to a detailed review of the second quarter. Net revenues increased 12.7% year-over-year. This performance was driven mainly by ADG, up 34.4%, and MDG up 13% on continued strength in Automotive and Industrial. AMS revenues decreased 15.7%, mainly reflecting lower revenues in Personal Electronics as expected. Year over year, sales increased 9.8% to OEMs and 18.3% to Distribution. On a sequential basis, net revenues increased 1.9% with ADG up 8.2%, MDG up 4.3% and IMS down 11.9%. Net revenues came in 110 basis points above the midpoint of our outlook, mainly due to Automotive. Gross profit was $2.12 billion, increasing 16.5% year-over-year. Gross margin increased to 49%, compared to 47.4% in the same quarter last year. The 160 basis points expansion was driven by product mix, favorable pricing, positive currency effect net of hedging, and partially offset by higher manufacturing costs. Year-over-year in the second quarter operating income increased 14.2% to $1.15 billion. In the quarter, net operating expenses include negative non-recurring non-cash items amounting to $34 million. Operating margin was 26.5%, increasing from 26.2% in Q2 2022. On a year-over-year basis, Q2 net income increased 15.5% to $1 billion compared to $867 million in the year ago quarter. Earnings per diluted share increased 15.2% to $1.06 compared to $0.92. Looking at our year-over-year sales performance by product group. ADG revenues increased 34.4% and double-digit growth in both Automotive and Power Discrete. AMS revenues decreased 15.7% with lower revenues in the three sub-groups. MDG revenue increased 13% with growth in Microcontrollers and RF communications. In terms of operating margin, two of three product groups delivered year-over-year improvement, ADG operating margin increased to 31.9% from 24.7%. MDG operating margin increased to 35.4% from 33.6% while AMS operating margin decreased to 14.8% from 24.1%. Net cash from operating activities increased 24.1% to $1.31 billion in Q2 versus $1.06 billion in the year-ago quarter. CapEx in the second quarter was $1.07 billion, compared to $809 million in the year-ago quarter. Free cash flow was $209 million compared to $230 million in the year-ago quarter. During the second quarter, ST paid $50 million of cash dividends to stockholders, and we executed an $86 million share buyback under our current share repurchase program. ST’s net financial position of $1.91 billion as of July 1, 2023, reflected total liquidity of $4.56 billion and total financial debt of $2.65 billion. Let me go through a recap of the main Q2 corporate and business highlights. We had two important announcements in Q2 related to our 300mm and Silicon Carbide strategic manufacturing programs. First, we announced the conclusion of the three-party agreement among the State of France, GlobalFoundries, and our Company, as approved by the European Commission. This relates to the new 300mm semiconductor manufacturing facility in Crolles, France, first announced last July. This agreement will contribute to our $20 billion plus revenue ambition and related financial model, and will further reinforce the European and French FD-SOI ecosystem. We will build more capacity for our European and global customers in advanced technologies as they transition to digitalization and decarbonization. The total investment for this project is expected to be about 7.5 billion euros and will benefit from French State financial support up to about 2.9 billion euros, in-line with the objectives set out in the European Chips Act. In silicon carbide, we announced a joint venture with Sanan Optoelectronics for high-volume 200mm silicon carbide device manufacturing in China. The joint venture will support the rising demand for ST’s silicon carbide devices in China for car electrification and industrial power and energy applications. Sanan will build separately a 200mm silicon carbide substrate manufacturing facility to fulfill the JV’s need. The combination of the 200mm substrate facility to be built by Sanan with the front-end JV and ST’s existing back-end facility in Shenzhen will enable ST to offer our Chinese customers a fully vertically integrated silicon carbide value chain, a significant competitive advantage in the silicon carbide landscape. The new joint venture Silicon Carbide fab is targeting to start production in Q4 2025 and full build-out is anticipated in 2028. It is an important step to further scale our global silicon carbide manufacturing operations, coming in addition to our continuing significant investment in Italy and Singapore. It will be one of the key enablers of the opportunity we see to reach above $5 billion silicon carbide yearly revenues by 2030. In this corporate development overview, I would also like to mention a change in our Executive Committee. During the quarter, Orio Bellezza, President, Quality, Manufacturing, Technology and Supply Chain, and member of ST’s Executive Committee, announced his retirement from the Company. Orio, will remain Managing Director of the Company’s Italian subsidiary until the expiration of his mandate. Fabio Gualandris, ST’s Executive Vice President, Head of Back-End Manufacturing & Technology, and Deputy to Orio Bellezza, is appointed President, Quality, Manufacturing and Technology. Upon my proposal, ST’s Supervisory Board approved the appointment of Fabio to the Company’s Executive Committee. I would like to thank, Orio for his engagement in the numerous roles he has played at ST, and I wish, Fabio, all the best in his new role. I will now go through a short update on some of our strategic focus areas. In Silicon Carbide, we continued to increase the number of engagements, we are now working with 90 customers and 140 projects. Silicon Carbide-based power systems for EV traction and industrial drives are complemented by our industry-leading STGAP Galvanic Isolation Drivers, based on ST’s unique IP and advanced BCD technology. We announced an R&D collaboration with Airbus on wide bandgap semiconductors for aircraft electrification and decarbonization. This confirms ST’s leadership and the strength of our Silicon Carbide technology roadmap. In car digitalization, we saw continued design win momentum with our latest generation of automotive microcontrollers, called Stellar, across multiple applications. In parallel, in ADAS, we continue working closely with our long-time customer and partner Mobileye. Their EyeQ6 product is now in production, and EyeQ Ultra at the R&D phase. Volumes of previous generations are ramping up. In May, we held our annual STM32 Summit event for industrial customers in China, with 2,700 customers in person and a record-breaking 80,000 online. During the event, we made announcements related to edge AI, namely AI running on microcontrollers, microprocessors and sensors. We launched a new family of microprocessors for secure Industry 4.0 and edge AI to allow our developers to address higher performance applications. We also gave further details on the upcoming STM32N6 microcontroller. This is ST’s first MCU with our Neural Processing Unit hardware accelerator and will bring the best-in-class computing power, power consumption and cost of ownership for the applications we target. One of the industrial application demos we built with a customer performs up to 75 times faster for AI workloads versus today’s high performance MCUs. We will start to sample the STM32N6 from September onwards. For developers, we are expanding our STM32Cube.ai software offering, including the launch of a collaboration with Nvidia around the TAO (Train, Adapt, Optimize) toolkit, now available. Edge AI is not only STM32. We have the same approach for sensors, with the release of a new toolkit and associated software for our intelligent MEMS sensors for activity recognition and anomaly detection directly in the sensor. Now, let’s move to our third quarter 2023 financial outlook and our plans for the full year 2023. For the third quarter, at the midpoint, we expect net revenues to be about $4.38 billion, representing year-over-year and sequential growth of 1.2% and 1.1%, respectively. As anticipated in January, we are entering in H2 2023 with a significant change in product mix in an engaged customer program in Personal Electronics. Excluding this change, our Q3 ‘23 revenues at the midpoint would grow year-on-year by 3.5%, and sequentially by 3.2%. And based on our indication of $17.4 billion revenues for full year 2023, H2 2023 revenues would grow by about 6% compared both to H1 2023 and H2 2022. Q3 gross margin is expected to be about 47.5% at the midpoint, including about 150 basis points of unused capacity charges. For 2023, based on our visibility, we will drive the Company based on a plan for full year 2023 revenues of $17.4 billion, plus or minus $150 million. This represents growth of about 8% over 2022. The full year 2023 gross margin will exceed 48%. We confirm our 2023 CapEx plan of about $4 billion. Thank you, and we are now ready to answer your questions.

We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Jérôme Ramel from Exane. Please go ahead. Jérôme Ramel: Yes, good morning, and thank you for taking my question. First question maybe, Jean-Marc, if you could help us to understand the dynamic per division for Q3 and the second half of this year? That would be the first question. Thank you. Jean-Marc Chery: The dynamic for Q3 is sequentially and year-over-year. I have to say that year-over-year, ADG and let's say will grow significantly. Let's say, well above 20%. Jérôme Ramel: Yes. Jean-Marc Chery: MDG will slightly grow year-over-year, Q3 over Q4, but it is linked okay, to the fact that China will not start slower than expected. Now in IMS will decrease year-over-year by 31%, but also this is must be also corrected by the fact that we have this change in the product mix. While sequentially, if we look Q3 2023 versus Q2, ADG will continue to grow, I have to say a single digit. IMS will be basically flattish. MDG will just slightly decrease again for the same reason because in China, we do not see the expected restart is slower than expected. Jérôme Ramel: Okay. Thank you. And maybe a question for, Lorenzo, on the OpEx, they probably came above expectation for Q2. How should we think about the OpEx for Q3 and maybe just on half of this year? Thank you.

In term of OpEx, this quarter -- last quarter in Q2, we were coming with a little bit higher level of OpEx. And as we said that we had some one time that we are not forecasted entering the quarter and actually the level of grants that we were expecting were not materializing due to the fact that they were a little bit postponing for administrative reason. We were not in the position to recognize. What it will happen in Q3 next OpEx including other income and expenses will decline a significantly, in respect to Q2. We do expect the net OpEx in the range of $880 million and $890 million for this quarter for Q3. This is the combination of seasonality. And let's say the fact that the level of other income and expenses will be significantly positive. Thanks to the fact that we will be in the position to recognize R&D grants. That was not the case in Q2. But for the year, I think we will position Q4 for sure in term of OpEx. There will be some increase. Usually, it's a quarter that is a little bit in term of seasonality, more high level of -- in term of operating expenses. I think at the end for the year the range -- quarterly OpEx will be in the range of between $910 million or $930 million something like that. Jérôme Ramel: Thank you.

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

Thank you very much. So, I have two quick ones. First one is on Automotive. I mean obviously very strong performance, 34% growth year-over-year. Now, if I look at the peers, I mean NXP is growing 9%, it's Automotive. Renesas is growing 3% year-over-year this quarter. So, you seem to outperform by far your peers in terms of growth rates. Now I understand that silicon carbide is a big growth driver, but even if I try to exclude silicon carbide from this growth, I get definitely more than 25% growth year-over-year anyway. So, I was just wondering, can you explain the strong outperformance versus some of your peers Texas is also growing like 20%, excluding silicon carbide as such, and I'm asking because the U.S. peers essentially they're saying that they don't want to feel the industry with inventories and they are managing basically this. So, is there a risk that you feel too much the channel with inventories? Or yes, that's why I'm asking the drivers behind the stronger performance? Thank you. And, I have another one after. Jean-Marc Chery: No, I think there is a first reason fundamentally that we over performed our peers, is basically tourism is head us. Do not forget that we partner with Mobileye. Mobileye is the leader worldwide of ADAS system. Now, ADAS is more and more perusing the car industry also driven by regulation. And if you want to be a faster in cap, this kind of stuff, so you must embed some other features. And ST as a partner of ADAS, and this is what I say in my script. The current generation of ADAS mainly [IQ4 and IQ3] (ph) are really ramping materially. More, and just second reason, I know we are focusing on silicon carbide, but versus Renesas and NXP. On top of that, we have let's say, richer portfolio, a larger portfolio on Analog and Microcontroller and MEMS. Don't forget POWER. So, IGBT, low-voltage MOSFET, high-voltage MOSFET, VIPower, more and more, we are perusing VIPower, which are very adapted device for the new architecture in this car. Our two competitors have not this kind of technology. So this is the two main reasons why we have over performed our peer. It is ADAS and the remaining portfolio we have in POWER, including the VIPower.

Thank you so much, very clear. And my follow-up question would be on IMS. I mean, I expected the share loss happening in the second half the year. And I was a bit surprise on the Q2 year-over-year decline. And more importantly, the margins that decrease significantly. So I understand the topline, you have some kind of drop through, but can you explain a bit more what's going on IMS this quarter? And also margin bridge would be amazing. Thank you. Jean-Marc Chery: No, I mean, IMS from a revenue, let's say, point of view, I receive a serious hit by Personal Electronics overall in Q2. I have to say, you know, that smartphone this year overall will decrease. But more important, the inventory correction in Personal Electronics is going on, will still continue in Q3 as well. On another side, IMS is also exposed to our design, and this drive is in the computer verticals and computer peripheral is also, let's say very weak. So, unfortunately, this is really the two main reasons at this stage of the, let's say, decrease -- significant decrease of IMS revenue year-over-year. But, about margin, maybe Lorenzo, you can comment.

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

Great. Thank you very much.

Thank you. Next question please.

The next question is from Aleksander Peterc from Société Générale. Please go ahead.

Yes, good morning. And thank you for taking my question. My first question will be on inventory which rose to 126 days. How would you qualify this level of inventory. Is it elevated or needs to be worked down in the second half or is it a normal and reflecting usual seasonality for your business? And I have a follow-up. Thank you. Jean-Marc Chery: Lorenzo, I’ll take this question. We judge this a little bit too high. It's true that in Q2, our inventory for seasonality is increasing. Anyway, let's say, at this stage, 126 days of inventories on a little bit on the high side. This is also the reason why in the second part of the year, as we have already anticipated Q3 and Q4, we will reduce our activity, our production activity, especially on that fabs that are more exposed to personal electronic and consumer. This will bring unloading and these unsaturation charges and these is visible in our gross margin this quarter where we are hit by 150 basis points of unloading in our guidance of 47.5. If you take it out this impact we are more or less similar to the Q1 or Q2 in terms of gross margin.

And we finished the year in term of inventory? Jean-Marc Chery: In term of inventory, yes, thank you. We will -- with this, let's say we think to bring down our inventory more in a range of 100, 110 days of inventory in respect to the 126.

Thank you for the follow-up.

Thank you for the follow-up questions. [indiscernible]. Yes, absolutely wonderful. My second question would be on smartphones. You talked about this already in your introductory remarks. there's a lack of recovery, let's call it this way so far. How would you qualify the market now? Do you see any evidence of any bottoming out of the smartphone market, particularly in China in the current quarter or is it too soon to call it? Thanks. Jean-Marc Chery: No, this is what I said. I think in terms of demand the data point we have looks like this year the market, okay, with the demand of smartphone will slightly decrease, I think, 1.5% or 2% with still the change in mix between the 4G and the 5G. The point is this industry is still paying last year strong decrease minus 9%. And of course, the inventory which has been built up last year are not yet digested and this will continue in Q3. [Indiscernible] up, okay, progressively moving forward Q4 and Q1 next year. to see first inventory digested and to be exposed to the head demand, to the B2C demand of a smartphone. So, this is the scenario most likely we expect.

Very clear. Thank you very much.

Thank you, Alek. Moira, next question please.

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

Good morning, guys. Thank you for taking the question. Can I ask one on pricing, please? We've covered this with first quarter results, but it would be great to have a real time update here with 2Q. Lorenzo, if I look at the gross margin guidance you've given particularly as you just highlighted adjusting for the underutilization charges, gross margins flat into 3Q and still remaining strong into 4Q. It suggests to me that there hasn't been much change in pricing, but if you can just walk us through some of the moving parts there? That would be helpful. And then I do have a quick follow-up. Thank you. Jean-Marc Chery: No, we absolutely see no significant pricing impact sequentially, Q3 versus Q2. Again, the gross margin dynamic we have, we will move clearly from 49% in Q2 to foresee 47.5% in Q3. But it is impacted by the reduced capacity. So, in fact, in Q3, basically, without this unused capacity that we have decided by ourselves okay, to decrease inventory level described by Lorenzo we need to go, our gross margin is still ballpark at 49%. All the other effect, okay, you know that our input parameter like the product mix, the pricing, the manufacturing efficiency, all these parameters offset each other. So now, Q3, okay, we don't see any significant impact on the pricing.

And just related to that quickly, how much is the [grant] (ph) 300 millimetre fab ramp a headwind in 3Q? Jean-Marc Chery: I can't tell you in Q3, okay, has been included in the manufacturing efficiency, okay, as the 8 inch which are, let's say, exposed to consumer. But Lorenzo, you want to comment?

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

Okay. And then sorry, just a quick clarification. Jean-Marc, you gave us the adjustment related to the product mix and the customer program in 3Q saying that instead of 1% year-on-year and quarter-on-quarter, it would be sort of low to mid 3% on both those sort of year-on-year and Q-on-Q. Rough math, that's sort of $18 million to $19 million worth of impact. Earlier in the year you told us it was going to be $500 million in the second half. Is there -- and I admit, you broke up a little bit on my line in terms of when you're talking about the full year impact, are you saying that sort of more of the impact is in 4Q or is it actually less than you previously anticipated? Jean-Marc Chery: It's a bit less than anticipated, but it is still very material. And because again, I repeat, this module we accepted to support our important customer. The revenue was really concentrated on H2 2022 and H1 2023 and basically disappear in, let's say, Q3 and Q4 2023. The difference between H2 2023 and H2 2022 impacted by this device is multi-$100 million. Below the number I gave in April, yes, it's below, but it's multi-$100 million. That's the reason why, okay, if you make the math, we have confirmed this number of significant change in the revenue dynamic H2 2023 versus H2 2022. And I have to say in Q4, if you make the math at the midpoint is more important because if you compute our Q4, at the midpoint of $17.4 billion. It's a grow H2 Q4 2023 versus Q4 2022 at 0.7%, corrected by this module, the growth is 7%. So, it's really material. But the impact difference H2 to H2 is multi-$100 million below the number I gave in April.

Thank you very much.

Thank you, Andrew. Moira, next question please. The next one is from Joshua Buchalter from TD Cowen. Please go ahead.

Good morning. Thanks for taking my questions. I wanted to ask about gross margin as well. So, the guidance implies sort of a very modest decline from third quarter to fourth quarter. I think you previously called out three drivers, half of half over half declines, the startup costs under your utilization charges and mix, it all seems like those should be peaking around the fourth quarter. Is that the right interpretation? And I guess is there any reason why the fourth quarter wouldn't sort of be the trough of gross margins as you see things right now assuming again stable market conditions? Thank you.

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

Got it. Thank you. Just want to follow up, I was hoping to ask about silicon carbide. Any color you could provide on the JV announcement in China in particular, how much capacity are you expecting to get out of that? And what's your confidence in being able to get enough volumes of 200 millimeter wafers from your partner there? Thank you. Jean-Marc Chery: So the capacity at the full buildout will be 10,000 wafer per week 200 millimeter in 2028. The confidence level on 200 millimeter is very high, because, okay, they have a process we know very well. Because this process is similar to our process of Norstel, never forget that we bought Norstel from Sanan. And we know exactly our process, and we know that our equipment, which has been designed for 200 millimeter in Norstel do not represent any specialty difficulties to move 200 millimeter contrary equipment, which has been designed purposely only for 150 millimeter. So now our confidence level is very high. So that's the reason why we have done this deal.

Thank you. I appreciate all that color.

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

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

Hey, good morning everyone. Thanks for squeezing me in. Just a couple of clarification questions really. You mentioned at the top there OpEx I think went about [$8.80, $8.90] (ph). Going into the second half. Just trying to maybe break out or clarify any changes in other income, particularly as we look at the startup costs on a Agrate should be moving out of other income and into COGS. But we are allowing for that in that overall number. That's my first question. I've got a quick follow-up.

As I said before, what we see in the third quarter in term of expenses and net expenses is in the range of [$880 million, $890 million] (ph). This is for the third quarter. A little bit higher, we will be in the next quarter in Q4 in terms of expenses due to the seasonality. In term of other income and expenses, in Q3, we will have a benefit coming from the R&D grants that were not, let's say, in the first two quarters of this year due to the fact that all not the conventions that we needed to have assigned were ready in order to be recognized were, let's say, there because the agreement was already done, but the point is that we needed to have the documentation as you can easily understand. And this will be done during this quarter. So, at the end of this will be the dynamic. In term of other income and expenses this year, our expectation is to be overall in the year positive $70 million, $80 million as slightly above what was my indication entering the year. So, it will be a little bit better in this respect. Yes, in term of startup cost, these other income and expense are impacted by the startup cost of Agrate 300, but these startup cost progressively will become a manufacturing cost, let's say. And here of course, there is on the other side the fact that we are going to start to produce wafers. So, it will not be a pure cost. It will be also contributing to our top-line this activity. For sure, at the beginning, the 300 millimeter will have an efficiency that is not at the best. This is clear. The manufacturing efficiency of this fab will progressively improve in the course of next year.

Great. Thank you very much. It’s quite clear. Jean-Marc, I think you were also very clear on some of the rationale around the Sanan JV, particularly as it sort of carries on from the design understanding or the work at least that Norstel would have done prior inside Sanan. But it does seem to just get a little awkwardly with your stated aim to verticalize supply, move more things internally for silicon carbide. And also, it stands out a little bit to me that you've involved yourself in a bit of a tech transfer. Admittedly, it brings in your back-end business quite nicely. But I wonder if you could just maybe talk through a little more broadly the rationale for this JV, particularly from that tech transfer risk and really as it works with your existing strategy for internalization? Thanks. Jean-Marc Chery: The technology transfer, okay. I would like to be very clear. This JV is a foundry, and this foundry will work exclusively for ST. So, it's exactly the same model that is still used, okay, of an EVM transferring technology to a foundry for its exclusivity usage. So this is this model, okay? Clearly, so there is absolutely no transfer of IP. There is no license, there is nothing. It's a transfer of manufacturing process in a foundry that will work exclusively for us to address vertically the Chinese market, which is booming. I know there is a common consensus that the electrical car in China, but as important, the related infrastructure, so loading charges, fast-charger loading charges in residential, then hold the power and energy related to the renewable energy, because of the strong decarbonization in China, all these markets will move in the near future. And it's important for ST to address this market with a local production end to end. So, from the wafer epitaxy, wafer processing, wafer sort, assembly and test. For assembly and test, of course, we will leverage our long lasting JV we have in Shenzhen, called STS, that will assemble and will test our product. So, the rationale is point number one, this market will be the fastest growth market in the field of electrification and decarbonization. We want to address locally this market, okay, end-to-end. So that's the reason why with this well-known partner Sanan, we have set up a JV working as a foundry exclusively for us. And we will transfer our production process, not IP that will be processed for us and assembled in our factories.

Yes, that was a great response. Thanks so much.

Thank you. So next question, please, Moira.

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

Thank you so much. Actually, I just wanted to go back to a question that was asked previously. Lorenzo, you said on the last earnings call that there would be 300 basis points of gross margin contraction H on H in the second half and of which 100 basis points is pricing pressure, 100 basis points is input cost and 100 basis points is underloading of the fab. So, can you reconcile what is the new -- what are the new components of that H2's gross margin? And then related to that, and again, the question was asked, but was not really answered. Is there a scenario where your first half gross margin 2024 actually lower than the second half of this year and I've got a follow-up. Thank you.

But in terms of dynamic of the gross margin, I would say that you see that our indication for the year is now let's say exceeding the 48% gross margin. That means that today, let's say, in terms of impact of pricing, we don't see any significant, let's say, impact. As we were saying before, let's say, also from market this was the dynamic we have seen in Q3 and Q2 moving forward. So at the end, I would say that as I was saying before, the second half of the year will be mainly impacted by two components, let's say, the first one is they are loading charges that this is clearly something that is driven by the fact that we wanted to control our inventory and here today the visibility is that this impact will be slightly above the 100 basis point. The remaining is mainly impacted by the impact of manufacturing efficiency and this impact of the $300 millimeter, mix price or the other substantially offset each other. So at the end, these are the main drivers that today visibility is giving to us. Jean-Marc Chery: Well, this is clearly the baseline, the solid baseline we have in our arena, so 48% it is what I communicated in April as well. And this is totally consistent with our trajectory to reach 50% gross margin associated with our $20 billion plus revenue ambition in 2025, 2027.

So, 48% is the baseline going forward. Interesting. I wondered if you could give us an update also on Agrate 300 millimeter ramp and on Catania, silicon carbide and what I mean by that is can you give us a sense of the timeline through which those fabs individually will contribute to gross margin positively. If that's the second half of next year or if it’s further out? Thank you. Jean-Marc Chery: So on silicon carbide, first of all, in Catania in Singapore, we are increasing continuously our capacity. And I repeat this year, okay, we will deliver about $1.2 billion revenue and we have the ambition to be at $2 billion in 2025. So, this is already contributing, let's say, to our operating margin, okay, because it's MOSFET. Never forget that the MOSFET and not the gross margin of ICU or digital IC. Okay, the internal supply, we target to have 40% internal supply more as a run rate, it will happen end of 2024 and will let's say significantly impact our cost starting 2025.

And for Agrate? Jean-Marc Chery: Then for Agrate. So for Agrate today, we are sticking with our plan. So, we have installed capacity basically about 1000 wafer per week, which is linked to the single of a kind tool we have installed. We have qualified our pathfinder technology. These are very similar than coal, which is a great news and we are starting the ramp up. Again, the objective from this 1000 wafer per week is to achieve by end of 2025 [indiscernible] of what we have targeted in association with [indiscernible].

We think that at the end already in the second part of next year, Agrate will start to contribute. Jean-Marc Chery: To the gross margin.

Very well. Just a quick follow-up, like quick one if I may. On the Sanan JV, I think the concern that everybody got is that the track record of Western companies, I've covered [indiscernible] in the past. Having JVs in China is not great, because number one, your cash is trapped in China. And number two, if something happens from an IP perspective, it's very difficult to actually get reimbursed, so at least to have some compensation. So, I think what sort of assurances did you get? Or can you give us that this is not going to end up badly for ST And ST shareholders? Jean-Marc Chery: First of all, so it will be a bit, let's say, straight. We have a JV in China since more than 30 years. [BCD] (ph), of assembly and test is basically certainly one of the most performing assembly and test plants in the world. There always perform at the right expectation. We never face any specific issue. They were very resilient during the COVID period. So, we have this experience. And then from the financial flow maybe, Lorenzo, you --

No, I mean, we are not so worried in the sense that as I said, as Jean-Marc was saying, let's say, we have the experience, so we know how to handle, we know how to not to fall in a situation in which we may have a problem in term of repatriating cash. It's 30 years that we work in China with the JV. To be honest today we don't have the -- we are not facing this kind of problem with this JV. I do think that we will be able to manage similarly with the some repeated, we have some experience that we work. We structure in a way that at the end is not creating a major risk in this respect. And also -- Jean-Marc Chery: [indiscernible].

It's not also major cost, but it's very bad.

Very clear. Thank you so much.

Thank you very much. And now we have time for one last question, Moira.

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

Yes, good morning. Thanks for taking my question. The first one is on Agrate again I mean, you have a pretty wide range of products and end markets applications you can address with that fab. Can you maybe give us a bit of an update what you are targeting initially for the ramp in the second half of this year, and then obviously more into next year when volumes are starting which kind of products, which kind of end markets? And then as a second question, not just one of your competitors has talked a bit more about gallium nitride in the first half of this year. There were a few others making comments as well. Can you just give us a bit of an update on your strategy and on your roadmap on the GaN side here and which end applications you think are the most interesting for ST? Thank you. Jean-Marc Chery: So, Agrate submission is a mix around Analog. Analog with either Analog with digital content to address let’s say personal electronics and computer and communication. This main advantage is to let's say structurally long-term volume, important volume. Of course, the short-term is a bit challenging, but structurally, this is what we want. And then as a complementary mission of Agrate is Analog for Automotive and Industrial. So at the end, we want our strategy is to build a Agrate capable to address basically the four verticals we had asked, in order to warranty a long-term sustainable and stable loading. So, first of course, we start with consumer and Personal Electronics because we go very fast in the qualification. You know that for Automotive, it's taken more time and it is followed by industry. So this is a mix of what the fab will manage. Analog, with digital content and or with more power content to address Automotive and Industrial.

And then for GaN? Jean-Marc Chery: And GaN, the GaN strategy. First of all, I would like to repeat, we strongly believe ST that the successful leader in the field of power energy are companies which are capable to control the wide portfolio of technology. Again from low-voltage high-voltage MOSFET, vertical integrated power, IGBT, GaN MOSFET and silicon carbide and module. So, this is our strategy. We started very fast on GaN, to address, let's say, the consumer market basically the fast charger of let's say, Personal Electronics and computer. And in order to go fast, we are using the technology of TSMC. And we have already, business linked to this technology, and customer, enabling a fast charger in the field of Personal Electronics. In parallel, we are developing GaN MOSFET to address both the power and energy market, for inverters. And this technology is in development into where we have set up an eight inch line and where we have a strategy to build in the future, our eight inch capability to address massively this market. Well, then last but not the least, we have two other blocks where we intend to play a role. It is to address radio frequency product. So with GaN power of this year, based on our technology, GaN on SiC that will be processed in Catania, And the latest one is what we call smart integrated GaN, where we mix a BCD driver with an advanced controller and GaN MOSFET. So, as a takeaway, we say, we started really very fast with TSMC Technology to address the consumer market with fast charger. Now in parallel, we are developing our technology to address the power of GaN MOSFET mainly to address inverter for industrial market. We complement this strategy with [Indiscernible] on our own technology. And then we merged this technology with BCD to develop what we call smart integrated GaN, which will be a very differentiated technology to address multiple industrial applications.

That’s very clear. Thank you, Jean-Marc.

And I think this concludes our call with the last question. Moira, are you aware?

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

Yes, please.

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.