STMicroelectronics N.V.

Good morning. Thank you, everyone, for joining our second quarter 2023 Financial Results Conference Call. Hosting the call today is Jean-Marc Chéry, Assistant 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. Marco Cassis, President of Analog, MEMS, and Censor Groups. and head of STMicroelectronics Strategy, System Research, and Application 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 completion of this call. This call will include forward-looking statements that involve risk factors that could cause ST's results to differ materially from attachments, expectations, and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the result 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 see you.

Thank you, Celine, and good morning, everyone. And thank you for joining ST for our Q2 2023 earnings conference call. In Q2, our balance and 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 toward our $20 billion plus revenue ambition and 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 output 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 subgroups except the analog and MEMS subgroups. We reported growth 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 QT revenue growth at the midpoint would be 3.5% year-over-year and 3.2% sequentially. Growth 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 midpoints 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, 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 went 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% on double-digit growth in both automotive and power displays. AMS revenues decreased 15.7% with lower revenues in the three subgroups. MDG revenues increased 13% with growth in microcontrollers and RF communications. In terms of operating margin, two of three product groups delivered their revenue 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 the $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 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 300-millimeter and silicon carbide strategic manufacturing programs. First, we announced the conclusion of the three-party agreement among the State of France, Global Fonderies, and our company. as approved by the European Commission. This relates to the new 300 mm Semiconductor Manufacturing Facility in Krol, transfers 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 FDSOI ecosystem. We will build more capacity for our European and global customers in advanced technologies and the 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 SHIB tax. In silicon carbide, we announced a joint venture with Sanan Optoelectronics for high-volume 200-millimeter silicon carbide device manufacturing in China. The joint venture will support the rising demand for ST silicon carbide devices in China for car electrification and industrial power and energy applications. Sanan will build separately a 200 mm silicon carbide substrate manufacturing facility to fulfill the GV's need. The combination of the 200 mm substrate facility to be built by Sanan with the front-end GV and ST's existing back-end facility in Shenzhen will enable ST to offer our Chinese customers a fully vertical integrated silicon carbide value chain. a significant competitive advantage in the silicon carbide landscape. The new John Venture silicon carbide farm 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 like also to mention a change in our executive committee. During the quarter, Aurelio Bellezza, President, Quality Manufacturing Technology and Supply Chain, and member of ST Executive Committee, announced his retirement from the company. Aurelio will remain Managing Director of the company's Italian subsidiary until the expiration of his mandate. Fabio Gualandris, ST Executive Vice President, Head of Backend Manufacturing and Technology, and deputy to Aurelio Bellezza, he's appointed president, quality manufacturing and technology. Upon my proposal, ST supervisory board approve the appointment of Fabio to the company executive committee. I would like to thank Aurelio 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 continue to increase the number of engagements. We are now working with 90 customers and 140 projects. Silicon carbide-based power systems for electrical vehicle traction and industrial drives are completed 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 one-bound gap semiconductors for aircraft electrification and decarbonization. This confirmed 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 HEDAS, we continue working closely with our longtime customer and partner, Mobileye. Their RQ6 product is now in production, and IQ Ultra at the HMD phase. Volumes of preview generation are ramping up. In May, we held our Hanwhaul STM32 Summit event for industrial customers in China, with 2,700 customers in person and a record breaking of 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 we'll bring the best-in-class computing power, power consumption, and cost of ownership for the application we target. One of the industrial application demos we built with a customer performs up to 75 times faster for AI workloads versus today, high performances MCUs. We will start to sample the STM32-N6 from September onwards. For developers, we are expanding our STM32-Kube AI software offering, including the launch of a collaboration with NVIDIA around the TAO, so train, adapt, optimize toolkit, now available. Edge AI is not only SCM32. We have the same approach for sensors with the release of a new toolkit and associated software for our intelligence MEMS sensor for activity recognition and anomaly detection directly in the sensor. Now, let's move to our third quarter 2023 financial outlook and our plan for the full year 2023. Wait a minute, please. For the first 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 2023 revenues at the midpoint would grow year over 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.

The first question is from Jerome Ramel from Exxon. Please go ahead.

Yeah, good morning. 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.

The dynamic for Q3 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%. MDG will slightly grow year over year, Q3 over Q4. It is linked to the fact that China will not start slower than expected. And IMS will decrease year over year by 31%. But also, This must be also corrected by the fact that we have this change in the product mix. Well, sequentially, if we look Q3 2023 versus Q2, IDG will continue to grow. I have to say a single digit. IMS will be basically flattish. MDG will slightly decrease again for the same reason, because in China we do not see the expected restart is slower than expected.

Thank you. And maybe a question for Lorenzo on the OPEX. It probably came above expectation for Q2. How should we think about the OPEX for Q3 and maybe the second half of this year? Thank you.

In terms of OPEX, this quarter, last quarter in Q2, we were coming with a little bit higher level of OPEX. As we said, we had some one-time that were 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 postponed for administrative reasons. We were not in the position to recognize it. What will happen in Q3, next OPEX, including other income and expenses, will decline significantly in respect to Q2. We do expect the net OPEX in the range of $880 and $890 million 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 terms of OPEX. There will be some increase. Usually it's a quarter that is a little bit, in terms of seasonality, a more high level in terms of OPEX. operating expenses. I think at the end of the year, quarterly OPEX will be in the range between 910 or 930, something like that.

Thank you.

Next question, please. The next question is from Francois Bovigny from UBS. Please go ahead.

Thank you very much. I have two quick ones. The 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, you know, by far your peers in terms of growth rate. 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 this strong outperformance versus some of your peers? Texas is also growing like 20%, excluding silicon carbide as such. And I'm asking because, you know, the U.S. peers essentially, they're saying that they don't want to fill the industry with inventories, and they are managing basically this So is there a risk that you feel too much near the channel with inventories? Or, yes, that's why I'm asking the drivers behind this stronger performance. Thank you. And I have another one after.

No, I think there is a first reason fundamentally that we overperform our peers. Basically, two reasons. It's headass. Okay, do not forget that we partner with Mobileye. Mobileye is a leader worldwide of ADAS system. Now ADAS is more and more pervading the car industry, also driven by regulation. If you want to be a five-star NCAP, this kind of stuff, so you must embed some ADAS features. And ST is a partner of ADAS, and this is what I say in my script. The current generation of IDATs, mainly IQ4 and IQ3, are really ramping materially. And the second reason, I know we are focusing on silicon carbide, but versus Renesas and NXP, on top of that, we have, let's say, a richer portfolio, a larger portfolio on analog and microcontroller and MELS. Don't forget power. So IGBT, low-voltage MOSFET, high-voltage MOSFET, VI power. More and more, we are pervading VI power, 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 over-perform our peers. It is ADAS and performance. the remaining portfolio we have in power, including the VI power.

Right. Thank you, Jean-Marc. Very clear. And my follow-up question would be on IMS. I mean, I expected the share loss happening in the second half of the year, and I was a bit surprised on the Q2 year-over-year decline. And more importantly, the margins, you know, that decreased significantly, So I understand the top line, you have some kind of drop-through, but can you explain a bit more what's going on in IMS this quarter? And also margin bridge would be amazing. Thank you.

No, but IMS from a revenue, let's say, point of view, receives a serious hit by personal electronics overall in Q2. I have to say, you know that smartphones this year overall will decrease. But more important, the inventory correction in personal electronics is going on. We still continue in Q3 as well. On another side, IMS is also exposed to our design. And this rise in the computer verticals and computer peripherals 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. Well, about margin, maybe, Lorenzo, you can comment.

At the end, let's say, this impact on the margin is mainly due to the volume. It's 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's also impacted 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 activity 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. For the next question, please. The next question is from Alexander Peter from Societe Generale. Please go ahead.

Yes, good morning. Thank you for taking my question. My first question would be on inventory, which rose to 126 days. How would you qualify this level of inventory? Is it elevated and needs to be worked down in the second half, or is it no more reflecting usual seasonality for your business? And I have a follow-up. Thank you.

Lorenzo, I take this question, but 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 inventory is 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 depth apps that are more exposed to personal electronic and the consumer. This will bring unloading. And these unsaturation charges, and this 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 one of Q2 in terms of gross margin. And we finish the year off. In terms of inventory? In terms 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. Thank you for the follow-up question, Jean-Marc. Yeah, 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.

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 a changement of 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, okay, last year, are not yet digested. And this will continue in Q3. So we hope, okay, progressively moving forward, Q4 and Q1 next year, to see first inventory digested and to be exposed to the hand demand, so the B2C demand of a smartphone. So this is the scenario most likely we expect. Very clear. Thank you very much.

Thank you, Alex. Moira, next question, please. The next question is from Andrew Gardiner from CT. Please go ahead.

Good morning, guys. Thank you for taking the question. Can I ask one on pricing, please? We covered this with first quarter results, but it'd 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 I do have a quick follow-up. Thank you.

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 47.5% in Q3, but it is impacted by the unused capacity. So, in fact, okay, in Q3, basically, without this unused capacity that we have decided by ourselves, Okay, to decrease the inventory level described by Lorenzo a few minutes ago, our gross margin is still ballpark at 49%. All the other effects, 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 Agrate 300mm FAB ramp a headwind in 3Q?

Agrate in Q3 has been included in the manufacturing efficiency as the 8-inch, which are, let's say, exposed to consumers.

But, Lorenzo, you... In Q3, it started to be, let's say, increasing, but it's not yet very significant. 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 detractors of our second half gross margin, okay? 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 is 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 $80 million, $90 million worth of impact. Earlier in the year, you told us it was going to be $500 million in the second half. And I admit, you broke up a little bit on my line in terms of when you were 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?

It's a bit less than anticipated, but it is still very material 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 the H2 2023 and H2 2022 impacted by this device is a multi-million dollar. Below the number I gave in April, yes, it's below, but it's multi-hundred million dollars. 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 on Q4, if you make the math at the midpoint, it's more important because if you compute our Q4 at the midpoint of $17.4 billion, it's a growth, H2, Q423 versus Q422 of 0.7%. Corrected by this module, the growth is 7%. So it's really material. But the impact, difference H2 to H2, is multi-hundred million dollars below the number I gave in April. Thank you very much.

Thank you, Andrew. Moira, next question, please. The next question is from Josh Buchalter from TD Cohen. Please go ahead.

Good morning. Thanks for taking my question. I wanted to ask about gross margin as well. So the guidance implies sort of a very modest decline from the third quarter to the fourth quarter. I think you previously called out three drivers of half over half decline, the startup costs under 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, the 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 points of temporary unused capacity charges. Then at the end, let's say the remaining 100 basis points of declining 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 of the year, and the main part of the ramp-up of the Agrate 300 millimeter. I would say these are the key ingredients for our dynamic of our gross margins.

Got it. Thank you. 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.

So the capacity at the full build out will be 10,000 wafers per week, 200 millimeter in 2028. The confidence level on 200 millimeter is very high because they have a process, we know very well, because this process is similar to our process of Norsetel. Never forget that we bought Norsetel from Sanat. And we know exactly our process, and we know that our equipment, which has been designed for 200 millimeters in North Sea, okay, do not represent any specialty difficulties, okay, to move 200 millimeters. Contrary, equipment which has been designed purposely only for 150 millimeters. 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.

So next question, please. Next question is from Lee Simpson from Morgan Stanley. Please go ahead.

Good morning, everyone, and thanks for squeezing me in. Just a couple of clarification questions, really. You mentioned at the top there OPEX, I think, ran about 880, 890 going into the second half. Just trying to maybe break out or clarify that. any changes in other income, particularly as we look at the startup costs on a gratis should be moving out of other income and into COGS. So are we allowing for that in that overall number? That's my first question. I've got a quick follow-up.

No, as I said before, let's say what we see in the third quarter in terms of expenses and net expenses is in the range of 880, 890. This is for the third quarter. A little bit higher will be in the next quarter, in Q4, in terms of expenses due to the seasonality. In terms 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 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, this will be the dynamic. In terms of other income and expenses this year, our expectation is to be overall in the year positive $70, $80 million, slightly above what was my indication entering the year. So it will be a little bit better in this respect. In terms of, yes, in terms of startup cost, these other income and expenses are impacted by the startup cost of... of a Grate 300, but this 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 wafer, 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 web will progressively improve in the course of next year.

Thank you very much. That'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 Northdale would have done prior inside Sanan. But it does seem to just gel a little awkwardly with your stated aim to verticalise 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.

The technology transfer, okay, I would like to be very clear. DGV 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 EDM, 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. is a transfer of a 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 this market will boom in the near future. And it's important for ST to address this market with a local production end-to-end. So from the bare wafer, epitaxy, wafer processing, wafer sort, assembly, and test. For assembly and test, of course, we will leverage our long-lasting GV 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 just set up a GV working at the foundry exclusively for us, and we will transfer production process, not IP, that will be processed for us and assembled in our factories.

Did I answer your question?

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

Thank you. So next question, please, Moira. The next question is from Didier Chemema 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 that? what are the new components of that H2 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 in 2024 is actually lower than the second half of this year? And I've got a follow-up. Thank you.

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, social market, this was the dynamic 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. The first one is the unloading charges. This is clearly something that is driven by the fact that we want 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 the manufacturing efficiency and this impact of the 300 millimeter. Mixed price or the other substantially upset each other. So at the end, these are the main drivers that today feasibility is giving to us.

This is clearly the baseline, the solid baseline we have in our hand. So 48%, it is what I communicated in April as well. And this is totally consistent with our trajectory to reach a 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 Agorate's 300-millimeter ramp and on Catania's silicon carbide. And what I mean by that is, could you give us a sense of the timeline through which those fabs, maybe individually, will contribute to gross margin positively if that's the second half of next year or if it's further out? Thank you.

So on silicon carbide, first of all, in Catania and Singapore, we are increasing continuously our capacity. I repeat, this year, 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, because it's MOSFET. Never forget that the MOSFET has not the gross margin of MCU or digital IC. The internal supply, we target to have 40% internal supply. At the run rate, it will happen end of 2024 and will significantly impact our cost starting 2025. And for Agraté? Then for Agraté. So for Agraté, today, we are sticking with our plan. So we have installed capacity basically about 1,000 wafer per week, which is linked to the single-of-a-kind tool we have installed. We have qualified our Pathfinder technology. Yields are very similar than crawl. which is great news, and we are starting the ramp-up. Again, the objective from this 1,000 wafer per week is to achieve by the end of 2025 the half-full build-off of what we have targeted in association with tower jets.

We think that at the end, already the second part of next year, Agrate will start to contribute. To the gross margin and the gross margin, not to be the trap.

Very well. And just a quick follow-up, like a quick one, if I may. On the Sanam JV, I mean, I think the concern that everybody's got is that the track record of Western companies, you know, I covered Alcatel-Lucent in the past, having JVs in China is not great because, number one, your cash is trapped in China, and number two, You know, if something happens from an IP perspective, it's very difficult to actually get, you know, reimbursed or at least to have some compensation. So I think, you know, 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?

First of all, sorry to be a bit, let's say, straight. We have a GV in China since more than 30 years. And ZGV, okay, of assembly and test, is basically certainly one of the most performing assembly and test plants in the world. They always perform at our 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, okay, you can comment.

We are not so worried in the sense that, as I said, as Jean-Marc was saying, let's say we have the experience. We know how to handle. We know how not to fall in a situation in which we may have a problem in terms of repatriating cash. It's 30 years that we work in China with a JV company. To be honest, today we are not facing this kind of problem with this JV. I do think that we will be able to manage similarly with the Sun. I repeat, we have some experience, we work, we structure in a way that at the end is not creating a major risk in this respect. And also not very much cost. It's not also major cost, let's say, to repatriate it.

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 Schaller from Deutsche Bank. Please go ahead.

Yeah, 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 ad markets applications you can address with that tab. 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.

So, Agrat Fab Mission is a mix around analog. Either analog with digital content to address, let's say, personal electronics and computer communication. This main advantage is to, let's say, structurally, long-term, have volume, important volume. Of course, okay, the short-term is a bit challenging, but structurally, okay, this is what we want. And then the complementary mission of Agrat is analog for automotive and industrial. So at the end, we want our strategy is to build Agrat capable to address basically the four verticals we address in order to warranty a long-term sustainable and stable loading. So first, of course, we start with a 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 industrial. So this is the mix of what the FAG will manage, analog with digital content, and or with more power content to address automotive and industrial.

And then for GAN?

GAN, the GAN strategy. First of all, I would like to repeat, we strongly believe, ST, that the successful leaders 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 modules. 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 TSNC. And we have already a business link to this technology. and to customer, enabling 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 in TOUR. where we have set up an 8-inch line and where we have a strategy to build in the future, okay, our 8-inch capability to address massively this market. Well, then last but not least, we have two other blocks where we intend to play a role. It is to address radio frequency product, so with RFGAN power amplifiers. 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 a GAN MOSFET. So as a takeaway, we say we started very fast with TSMC technology to address the consumer market with fast chargers. Now, in parallel, we are developing our technology to address the power GAN MOSFET, mainly to address inverter for industrial market. We complement this strategy with RF power amplifier on our own technology, and then we merge this technology with BCD to develop what we call smart integrated GAN, which will be a very efficient technology to address multiple industrial applications. That's very clear. Thank you, Jean-Marc.

And I think this concludes our call.