Ladies and gentlemen, welcome to the STMicroelectronics First Quarter 2024 Earnings Release Conference Call and Live Webcast. I am Moira, the Chorus Call operator. I would like to remind that, all participants will be in a listen-only mode and the conference has been recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Celine Berthier, Group Vice President, Head of Investor Relations. Please go ahead.

Thank you very much, Moira. Good morning. Thank you, everyone, for joining our first quarter 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 Grandi, President of Finance, Purchasing, ERM and Resilience, our Chief Financial Officer, Marco Cassis, President, Analog, Power & Discrete, MEMS and Sensors Group, Head of STMicroelectronics Strategy, System Research and Applications and Innovation Office. 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 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&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's President and CEO. Jean-Marc Chery: 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 $3.47 billion and gross margin of 41.7%, both came in below the midpoint of our business output range, driven by lower revenues in Automotive and Industrial, partially offset by higher revenues in Personal Electronics. Looking at overall, year-over-year performance, Q1 net revenues decreased 18.4%, gross margin at 41.7% was down from 49.7%. Operating margin decreased to 15.9% from 28.3%, and net income decreased 15.9% to $513 million. On a sequential basis, net revenues decreased 19.1%. During the first quarter, 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. Additionally, towards the end of the quarter, we started to see some reduction in Automotive backlog. On Q2 2024, our second quarter business outlook is for net revenues of about $3.2 billion 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. We will now drive the company based on a revised plan for full year 2024 revenues, in the range of $14 billion to $15 billion. 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 $2.5 billion, focusing on our strategic manufacturing initiatives. Now, I will move to a detailed review of the first quarter. Before commenting Q1 results, let me remind you that, starting in 2024, ST is organized in two product groups, split in four reportable segments. Therefore, from Q1 2024, we report revenues and operating income according to those four new reportable segments. In Q1, net revenues decreased about 18.4% year-over-year. Analog products, MEMS and sensors, was down 13.1%, mainly due to MEMS and energy. Power and discrete products decreased 9.8%, mainly due to discrete. Microcontrollers' revenues declined 34.4%, mainly due to general-purpose Microcontrollers. Digital ICs and Radio Frequency products declined 2.1%, due to a decrease in ADAS, more than offsetting in an increase in Radio Frequency communication. By end 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% 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. 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 a specific customer 2023 inventory replenishment effect, Automotive was down 8%. Gross profit was $1.44 billion, 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. All reportable segments were down on a year-over-year basis, with a main decline in MCU and power discrete. On a year-over-year basis, net income decreased 50.9% to $513 million from $1.04 billion and diluted earnings per share decreased 50.9% to $0.55 from $1.1. Net cash from operating activities decreased to $859 million in Q1, compared to $1.32 billion in the year ago quarter. First quarter net CapEx was $967 million, compared to $1.09 billion in the year ago quarter. Free cash flow was negative at $134 million, compared to positive $206 million in the year ago quarter. Inventory at the end of the first quarter was $2.69 billion, compared to $2.87 billion in the year-ago quarter. Days sales of inventory at quarter end was 122 days, compared to 104 days in the previous quarter and 122 days in the year-ago quarter. Cash dividends paid to stockholders in Q1 2024 totaled $48 million. In addition, ST executed share buybacks of $87 million as part of our current share repurchase program. ST's net financial position of $3.13 billion as of March 30, 2024, reflects total liquidity of $6.24 billion and total financial debts of $3.11 billion. 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 forecasts from some of our customers, including adjustments related to electric vehicle production decrease. We continued to execute our strategy supporting car electrification during the quarter. We had wins with our third-generation Silicon Carbide MOSFET technology for traction inverter at the top manufacturer of electric vehicles, as well as with the maker of e-compressor controllers that extend EV driving range, increasing our current design wind pipeline. We also won sockets with our smart fuses in new automotive architecture designs with multiple customers. In car digitalization, we saw further momentum with our portfolio of automotive microcontrollers. This included wins with our later generation Stellar MCUs in zonal control, [indiscernible] and chassis solution for a major truck maker. In ADAS, our partner Mobileye has delivered first production candidate hardware and software of the EyeQ6 Lite to customers. The EyeQ6 Lite is already set to be installed in 46 million vehicles over the next few years. Our pipeline of design wins in smart mobility confirmed the strength of our technology and product portfolio to successfully take advantage of the continued structural growth of this key market for ST. 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 is spread globally. In Industrial, embedded processing solutions. In March, we held our flagship STM32 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 80-nanometer FD-SOI with embedded phase change memory to support next-generation embedded processing devices. 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 includes tools for embedding edge AI in inertial modules. We continued to develop momentum on edge AI with increasing usage of our tools and solutions by customers. For example, we announced recently a sensorless tire pressure monitoring system for an e-bike [ph] based on edge AI algorithms running on an STM32 microcontroller. We also announced a collaboration on a reference design for high-performance telecom and AI servers power supply with Compuware, who supplies high-efficiency power solutions for high-performance computing, AI, deep learning, cloud and other advanced 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 edge AI, another opportunity around AI for ST, the new power architecture for AI servers. In power energy management applications, we had a broad range of design wins, including in data centers, renewable energy systems, wild goods and factory automation. Overall, we believe that the sustained 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 27th Annual Sustainability Report, highlighting our long-standing commitment in this area. We continue to make substantial progress towards our ambitious targets for carbon neutrality. In 2023, our Scope 1 and Scope 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 a key part of our strategy and we signed another significant agreement in Italy earlier this month. Now let's move to our second quarter 2024 financial outlook and our plans for the full year 2024. For Q2, we now expect net revenues to be about $3.2 billion at the midpoint, representing a year-over-year decrease of about 26% and a sequential decrease of about 7.6%. We revised on our plan for full year 2024 revenues to be in the range of $14 billion to $15 billion, 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 $2.5 billion 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. 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.

We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Joshua Buchalter from TD Cowen. Please go ahead.

Hey, guys. Thank you for taking my question. Good morning. 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. Obviously, there have been some headlines that your lead silicon carbide customer, could you maybe spend a minute or two 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. Jean-Marc Chery: So, I will take the question. Yes, in Automotive, 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 make change between battery-based electrical vehicle, hybrid vehicle and thermal combustion engine one. The decrease, the deceleration phase means, what we have announced today in Automotive. As a takeaway, half is linked to an adjustment of the forecast because production decrease from one important customer and the other one is more inventory control and mix adjustment because now it's well known that carmakers, they change a bit between electrical car, hybrid car and thermal combustion engine one.

Got it. Thank you. I appreciate the color. As I follow up, obviously, you understand, again, numbers are coming down and you mentioned that industrial weakness is expected to last into the second half. Maybe you can give us sort of your -- some of the assumptions that are underlying the back half ramp, and firstly, there's some seasonality at your lead customer. Maybe you could help us give us some clues on how much of that is driving sort of the back half ramp? 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. Jean-Marc Chery: 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. Industrial, we start to smoothly increase in Q3 and accelerate 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 an 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 makes us think that order will come back in Q2 for additional billing in Q3 smoothly and acceleration in Q4. The risk is on the range of what we have indicated.

Thank you.

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

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

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. So, can you maybe specify it? 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 target for 2025 and beyond? Thank you. Jean-Marc Chery: No, I mean, how we classify the deceleration. What we indicated in January, we say as computed, because we are not reporting the segment, the automotive overall was expected to grow low mid-single digit and clean from effect that we share with you. So, capacity reservation fees and one really specific inventory replenishment. In January, our expectation was to have automotive growing, let's say high single digit, really low double digit. But now, if I repeat the same view for the year, automotive, as computed and reported, will decrease 5% clearly. And if we remove from the capacity reservation fee and inventory of one specific customer, it is a very slight growth, 1% to 2%. That's the reason why we classify it deceleration and not a correction or a decrease, which is the case, clearly, of industrial. About silicon carbide, because you asked the question, we do believe that our revenues this year will go about $1.3 billion, so it's a growth about $150 million to $200 million compared to last year. Yes, it is a slower growth when we compare '23 versus '22, which was basically $500 million. But again, it is related to the fact that there is one specific important customer that adjusted their plan for the full year 2024. For the rest, we see some change, a big change sometime, from module to package or non-good die, so we have to adapt ourselves to this change. However, I would like to repeat that this doesn't change our view that ST will reach above $5 billion in 2030 and that we will have, of course, a growth in 2025 that will put us on this trajectory. The growth in 2025 should be expected with a design that we have about $500 million.

Okay, thank you very much. And I've got a follow-up about the growth margin, actually. With such a strong decline in sales through the year, I would have expected a stronger impact on growth margin. Can you maybe give us the elements of the resistance of the growth margin and maybe specify also with the underutilization charges? Thank you. A – Lorenzo Grandi: Yes, maybe I take this question. Good morning to everybody. You know, when we are exiting with the current visibility on Q2, on our guidance, we will exit the first half of the year with a growth margin that is likely below, the 41%. 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, our expectation for the second half is to improve our gross margin in respect to the first half but very slightly, because the level of unsaturation will remain quite significant. The second half will be impacted by more than 200 basis points of unsaturation charges, so similar to the one of Q1. We do expect it to be substantially similar to what happened in the first half, slightly improved, maybe while in H1, we will be slightly below 41%, 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. There will be a sort of flattish gross margin in the range of 40%-41% during the year.

Okay, thank you very much.

Thank you very much, Stephane. The next question, Moira?

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

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 all the divisions what to expect for the full year by end market and ideally by products as well, if that would be great to have the full year implied for each product and end market? Jean-Marc Chery: Lorenzo, maybe you can comment on this full year by reportable segment.

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, the expectation will be around a decline of 10% for this, where we will have substantially holding in the Analog products, flagship in the Analog products. MEMS are suffering with some decline. Don't forget that here is where we are counting imaging. 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, this impact, actually, image is not declining, but as reported, it is declining. This sector, Analog product MEMS and sensor will decline in the range of 10%, based on the expectation. 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. Here, microcontroller definitely is the area in which the general purpose are particularly impacted by the dynamic of the market of industry. 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. Finally, the digitalized season 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. Here is in the range of around 10%. The main impact is coming from a decline in the ADAS product, where you know that last year we had this replenishment of inventory in one particular customer. This year, these areas of our product, these products will decline, while on the other side, RF communication will increase our revenues but not enough in order to offset the decline on the other areas. This is more or less the dynamic that we see for the year in terms of segmented reporting.

Thank you. Industrial, just industrial and personal electronics. I mean, I guess it's MCU, industrial, roughly the same. Is that what we should look at? Jean-Marc Chery: Clearly, I complement Lorenzo's point. I repeat, automotive, we see minus 5%, clean, let's say, 1%. Industrial, minus 30%. For sure, you can correlate now [indiscernible] general-purpose Analog and power discrete as well. 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. 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. We see the perfect correlation, in fact, between products or microcontroller, power and general-purpose Analog versus Industrial. We also see, as I said in my script, as a correlation between the OEM decreasing much less than the distribution. So clearly, in industrial market, it is an inventory correction along the channel.

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 add some color on the pricing, given the level of demand and potential level of capacity. 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? Thank you very much. A – Jean-Marc Chery: I take the question, Lorenzo. In terms of pricing, what can I say is that in Q1, we were entering in the quarter that we're expecting, let's say, something in the low single digit pricing path. At the end, this is what happened. It was a slightly 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 the industrial, the price pressure is a little bit higher. But it still remains in this level. We have not seen a significant drop in pricing. 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, in the range of 1%-1.5%. Stability, definitely stability in automotive, where the renegotiation has been already done, but still some decline, especially we continue to see some decline in industry and in our general part of microcontrollers. But we have taken this assumption that some erosion will continue over the next quarters, without taking an assumption that there will be a 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.

Great. Thank you very much for your answers.

Thank you. Next question, please, Moira.

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

Good morning. Thank you so much for taking my question. I 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 industry, where you've got now a beginning of a downturn in automotive. What's the risk, really, Jean-Marc, that you are sandbagging a bit too much 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. Jean-Marc Chery: Basically, in the second half of 2024, in the middle of the range we have indicated, we expect to grow, I have to say, about $1 billion, a little bit higher than $1 billion. It is clear that part of this growth is related to backlog we have already, especially in the engaged customer program, both in personal electronics and communication equipment. It is based also on automotive, on the backlog of firm order we have, which is the usual visibility we have. But then the key question is clearly the industry, 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 two distortions, very short lead time from any semiconductor supplier and distortion from inventory. It is clear that, again, the booking that we will enter in Q2 and Q3, a billable for 2024 for industrial, as well as some 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 the midpoint of what we say generally of about $1.9 billion. I guess you have already done the computation. This $1.9 billion, $1.3 billion is Industrial, by the way, and $600 million is Automotive. I said automotive, half is an electrical car from one specific, and the other one is a big change and inventory correction. On industrial, again, having made this $1.3 billion 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.

Maybe I can add...

Very, very clear. Thank you very -- sorry, go ahead.

Maybe I can add two words about the gross margin. I think that at this stage, our visibility on the gross margin is that the second half in the range of 41%, slightly above 41%, this is a reasonable assumption considering the fact that for sure at this level, 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 continue to keep under control the level of our inventory. Well, 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.

Yes, and obviously, if industrial comes back a bit better, your margins will 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. And 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 million 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? Jean-Marc Chery: It is clear that, well, first of all, this year, the $1.3 billion for a silicon carbide MOSFET is a growth, so we have to be satisfied with this growth. Yes, it's below our expectation. Why? Because mainly one customer classifies the 2024 year as a transition and expects to come back to a growth trajectory, '25 and beyond. We will participate to this growth trajectory. And of course, it will contribute to the $500 million growth of silicon carbide we will execute next year.

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 billion of revenue, 50% gross margin, 30% operating margin? Is anything changed in that? Perhaps more backend loaded, I appreciate that, but anything change in your mind? Jean-Marc Chery: We have not changed our model. By the way, we expect this year to organize a Capital Market Day in November. The investor relation will communicate to you. And of course, it would be a unique opportunity to share the situation and to share the update.

Many thanks.

Okay for you, Didier?

Yes, thank you so much.

Thank you very much. So next question, Moira?

The next question is from Andrew Gardner from CT [ph]. Please go ahead.

Good morning, guys. Thank you very much for taking the question. I just 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? And therefore, how is that therefore influencing the way you're framing the second half? Thank you. Jean-Marc Chery: Well, today, overall, we have assessed that we have an excess of inventory in the channel distribution of about two months. Clearly, the POS of the distributor will be the first key API that will start to decrease this two months of inventory. And with the visibility and the discussion we have with them, is that these two months will be absorbed by Q2. And 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's the reason why we continue to decrease in industry. This is the visibility we have today. So again, POS monitoring is very critical. But again, we are seeing some green spots that end customer and end application, some end applications are coming back to growth. And sequentially, it will translate in POS increase and start to translate in inventory decrease and for us POP increase in Q3. This is today the plan we have built, discussing with our customers. 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 rise again.

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 update us in terms of the levels we should have in our model? Thank you.

Of course, this year we will have a control of our OpEx for which we will continue to protect for sure the innovation and the R&D. But we will prioritize other programs that are definitely important. But if you want less critical that 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 5%. Consider also that I'm talking about the net OpEx. Means that I'm including also the level of grants that are increasing this year in respect to last year. This is more or less what we see today for the evolution of our OpEx in the year 2024.

Thank you very much.

Thank you, Andrew. Another question, please, Moira.

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

Yes, hi. Thanks for letting me on. I have a question, firstly, 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 from pricing in the guidance at all? And what do you see in terms of the pricing environment at the moment in microcontrollers specifically, as well as in your discrete market?

I take this question, Sandeep. Yes, as I was saying before, we have some pricing impact in our indication of the year. For sure, there are, as I was saying before, different dynamics between the different markets that we serve. The most impacted in terms of pricing is microcontroller, definitely, industrial in general and microcontroller. Anyway, when we look overall at 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. And this is also partially explaining why we miss partially our gross margin midpoint guidance but not dramatically higher. Moving forward, we continue to expect some erosion, for instance, in Q1 average company, considering that some areas like automotive, we have a renegotiation now, there is no any longer price decline moving forward, or not so much here, not so big. 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 price decline. As I was saying before, in any case, at this stage, we don't see a huge impact on pricing, a very significant impact on pricing. For sure, in some area, I repeat, like microcontroller in some geographies, yes, is 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.

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 a correction this year, and then autos will see that next year in the pricing? Then following on that, I mean, on the gross margin, are there any one offs in your gross margin this year? I mean, clearly, you talked about the underutilization charge in the year, but there were some positives last year. Are there any positives being repeated this year, which is helping your gross margin at all? Thank you.

In terms of pricing, what can I say is that the main discussion with the Tiers 1 are done. The price has been embedded in this dynamic. We do not expect, it was not embedded at this stage, any renegotiation in terms of price for 2024. For what concerns the impact of gross margin, well, you have to not forget that our gross margin, more than on one time, is helped by the capacity reservation fees. These have 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 giving a positive impact. This is also, if you want, also answering to your first point about the pricing in automotive, of course, we have the capacity reservation fees still there. You understand that there is no strong pressure here. There is still, from our customer, the 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 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. It's still a positive impact.

Thank you.

Okay, so we have time for one last question.

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

Yes, good morning. Thank you for squeezing me in. Yes, quick two questions. The first one would be, where are the lead times currently, and what is the loading of your front-end fabs? And then I have a quick follow-up. Jean-Marc Chery: Lead time, on average, are below three months.

It's very short. Jean-Marc Chery: It's very short. And taking into account the inventory level we have, we are also capable to capture some spot-turn business within the quarter quite easily. Front-end loading, Lorenzo?

Front-end loading, Q2 is really the bottom, I would say, because in Q2 we see a front-end loading of 72% for our fabs, with a significant impact in terms 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 terms 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. We will continue to keep under control our inventory, so in the second part of the year, the unloading charges will continue to be material, and the level of saturation of our fabs 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 days, 115 days, that is a little bit higher in respect to our model, if you want, but for a year like 2024, I think it's controlled, it's the right level.

And you had a follow-up?

Thank you. Yes, I had a follow-up concerning China, all the fears around China ramping up capacity for 20 nodes and so on. What's your view and current visibility on Chinese customers? I think recently you find some major silicon carbide deal with some OEMs in China, so I'd just like to understand how you see the dynamics there? Thank you. Jean-Marc Chery: I think China is quite simple. China is no more a super moving market. It's a market with some growth, where clearly you have competitors pretty aggressive, but not including Chinese, believe me, American and Japanese as well. And here, the CECP is always the same, is to have the right features and performance of our device and the right quality and the right price. However, I repeat that we have engaged ourselves in adequate strategy for our footprint. Of course, with our Sanan agreement for silicon carbide, 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 MOSFET. In such a situation, we have all the ingredients to compete in China because it is a key market for ST. We believe, looking at the activity we have on design and development on our STM32, and when we organize a summit and when we see what we have in our pipeline, that ST will be a strong competitor in China for the future.

Thank you.

With this, I think we are at the end of the time, so this concludes our call. Jean-Marc Chery: Thank you.

Thank you.

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.