STMicroelectronics N.V.

Good morning. Thank you, everyone, for joining our first quarter 2024 Financial Research Conference call. Seeing the call today is Jean-Marc Chéry, 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 and Financial Officer. Marco Cassis, President, Analog, Power and Discrete, MEMS and Censor Group, Head of ST Microelectronics Strategy, System Research and Application, 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 completion of this call. This call will include forward-looking statements that involve risk factors that would 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 result this morning and also in ST's most recent regulatory findings 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.

Thank you, Céline. 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 outlook range, driven by lower revenues in automotive and industrial, partially offset by higher revenues in personal electronics. Looking at our 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 50.9% to $513 million. On a sequential basis, net revenues decreased 19.1%. During the first quarter, Our customer order bookings remain 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 backlogs. On Q2 2024, our second quarter business outlook is for net revenues of about $3.2 million 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 Sansor was down 13.1%, mainly due to MEMS and imaging. Power and discrete products decreased 9.8%, mainly due to discrete. Microcontrollers revenues declined 34.4%, mainly due to general purpose microcontroller. Digital ICs and radio frequency products declined 2.1% due to a decrease in ADAS more than offsetting an increase in radio frequency communication. By head market, industrial declined more than 40%, personal electronics about 13%, CECP, so communication equipment and computer peripherals, about 10%, and automotive about 2%. Year over year, sales decreased 11.5% to OEMs and 30.8% 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%, CCP 15%, and automotive 14%. Excluding the impact of capacity reservation fees and 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 the 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 billion. 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 net financial position of $3.13 billion as of March 30th, 2024, reflect 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 QI. 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 adjustment related to electricity vehicle production decreased. We continue 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 controller that extend EV driving range increasing our current design wind pipeline. We also wound 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, drivetrain and chassis solution for a major truck maker. In HEDAS, our partner Mobileye has delivered first production candidate hardware and software of the IQ6 Lite to customers. the IQ6 light is already set to be installed in 46 million vehicles over the next few years. Our pipeline of design wins in smart mobility confirms the strength of our technology and product portfolio to successfully take advantage of the continued structural growth of this key market for STI. 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 FTM32 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 FDSOI 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 MEM sensor evaluation and development, connected closely with the STM32 microcontroller ecosystem. It supports our wide portfolio of MEM 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-bag based on Edge AI algorithm running on an STM32 microcontroller. We also announced a collaboration on the reference design for high-performance telecom and AI servers power supply with CompuWare, which 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, white 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-ending 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 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 the 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. Anyone who wishes to ask a question or make a comment may press star and 1 on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and 1 at this time. 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, you know, obviously we see the numbers coming down a little bit, but I wanted to try to break that up a little bit. And, you know, obviously there have been some headlines at 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.

I will take the question. Yes, in automotive, okay, compared to our, let's say, January expectation for the full year, we have acknowledged a decrease. Half of the decrease is related to electrical vehicle production decrease from an important customer. And half of the decrease in automotive is more related to what we say some inventory control and tunings from OEM, which are adapting themselves to make change between battery-based electrical vehicle, hybrid vehicle, and thermal combustion engine one. So 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 car makers, they change a bit between electrical cars hybrid car, and thermal combustion engine one.

Got it. Thank you. I appreciate the color. As my follow-up, obviously, you understand, again, numbers are coming down, and you mentioned that industrial weakness is expected to last into the second half. Maybe you can give us some of the assumptions that are underlying the back half ramp. 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? And then also big picture, how's your comfort level with where you expect your industrial customers inventory levels to be coming out of the second quarter? Thank you.

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. And industrial, we start to smoothly increase in Q3 and accelerated in Q4. Of course, we have a pretty good visibility on backlog in automotive, personal electronics and computer equipment and computer peripherals. 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 make us thinking that order will come back in Q2 for additional billing in Q3 smoothly and acceleration in Q4. The risk is unburdened in the range of what we have indicated. Thank you.

Thank you very much. Just next question, please.

The next question is from Stefan Hoody from Odo. Please go ahead.

yes hello thank you very much for taking the question actually the the the question now is on on my side on the automotive uh you you've talked about deceleration but i i guess that you you mean decline in fact uh so can can you maybe specify it and also if you could um give us some um you know uh clarification on what you expect for for silicone carbide going forward you've talked about lower EV forecasts. What are you expecting for this year? Are you still targeting the same targets for 2025 and beyond? Thank you.

All we classify is 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, let's say, low bid single digit and clean from effect that we share with you. So capacity reservation fees and one really specific, let's say, 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, let's say for the year, automotive as computed and reported will decrease 5% clearly. And if we remove from the capacity reservation fee an inventory of one specific customer, it is a very slight growth, 1% to 2%. That's the reason why we classify it a deceleration and not a correction or not a decrease, which is the case clearly of Industrio. About Silicon Carbide, because you asked the question, we do believe that our revenues this year will grow. about 1.3 billion dollars so it's a it's a growth okay let's say about 150 200 million dollars compared to last year yes it is a slower growth when we compare 23 versus 22 which was basically 500 million us dollars 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, let's say, change, big change, okay, sometime from module to package or non-good die. So we have to adapt ourselves, okay, to this change. However, I would like to repeat that this doesn't change our views that ST will reach above $5 billion in 2030. And that, OK, we will have, of course, a growth in 2025 that will put us on this trajectory. And the growth in 2025 should be expected with a design award that we have about $500 million U.S. dollars.

Okay, thank you very much. And I've got a follow-up about the gross margin, actually. With such a strong decline in sales through the year, I would have expected a stronger impact on gross margin. Can you maybe give us the elements of the resistance of the gross margin and maybe specify also with the underutilization charges? Thank you.

Yeah, 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 gross margin that is likely below, let's say, the 41%, because... And this is impacted by a significant level of unsaturation charges because we will have around 230 basis points of unloading. When we look at the projection of the year, at this point, let's say, our expectation for the second half is to improve our gross margin in respect to the first half, 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 before. So we do expect it to be substantially similar to what happened in the first half, slightly improvement, maybe while in q in h1 we will be slightly below 41 percent in the second half we will be slightly above 41 percent and the level of unsaturation that is speaking in q2 will go down but remaining quite significant so there will be a sort of flatish gross margin in the range of 40 41 percent during the the

Okay, thank you very much.

Thank you very much, Stéphane. The next question, Maria.

The next question is from François Bovigny 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 if reported basis. Can you maybe give the color on the all the divisions what you 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 products and end markets Lorenzo maybe you can comment okay 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, let's say, the expectation will be to be around a decline of 10% for this, and where we will have a substantially holding in the analog products, FLECT-ish in the analog products. MEMS are suffering with some decline. And don't forget that here is where we account the imaging. And here there is this impact related to the module that was present in 2023, is not any longer present in 2024, and imaging is declining. when you take it out that this impact actually image is not the decline but as reported is declining so this sector analog product MEMS and sensor will decline in the range of 10 percent this is based on the expectation power and discrete power and discrete will be a lower decline we will be in the range of mid single digit for these for these areas in which the Bigger decline is on discrete part. Then we have the microcontroller. But here, microcontroller definitely is the area in which the general purpose are particularly impacted by the dynamic of the market of industry. So here, the decline will be significant, will be in the range of 30%, which is much more resilient on the microcontroller in automotive, but a significant decline for the microcontroller general purpose that are mainly addressing the demand the industrial market. Finally, the digitalized season RF. Well, here the decline will be also in this case in the range of 10%. I'm talking, of course, decline, the midpoint of our indication for the year. And here is in the range of around the 10%. Here, 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. So 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 area. This is more or less the dynamic that we see for the year in term of segment 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?

Yeah, clearly, I compliment Lorenzo's point. Also, I repeat, so automotive, we see minus 5%. clean let's say one percent industrial minus 30 percent so for sure you can correlate now with what Lawrence said on general purpose microcontroller which is the most impacted by verticals but in a certain extent general purpose analog and power discrete as well For person electronics, clean from the famous module, we have no more. Basically, it will be slightly decreasing, minus 2, minus 3%, which is consistent with the overall market. And on CCP, it will be minus 4%, with a strong growth within our engaged customer program in the LEO satellite, which is offset by legacy we decided to disengage. So we see the perfect correlation, in fact, between products, so microcontroller, power, and general purpose analogues, versus the industrial and we also see as I have said in my script the 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 On the pricing front, I mean, you know, it's kind of a housekeeping question nowadays. Every quarter we want to have some color on the pricing given the level of demand and potential of capacity. Do you see any move here on the pricing front, maybe not for this quarter, but going forward, what is the dynamic that you see and how China is impacting the pricing in the market? Thank you very much.

I take the question, Jean-Marc. In terms of pricing, what can I say is that in Q1, we were saying entering in the quarter that we're expecting, let's say, something in the low single-digit price impact. Well, 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. uh the the 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 a still some price erosion let's say in the range of one 105 percent stability definitely stability in automotive where every negotiation has been already done but still some decline in a especially we continue to see some decline in dust and in our general purpose micro control. But we have taken this assumption that some erosion will continue over the next quarters without taking assumption that there will be significant drop. For the time being, we don't see this. We see that there is the normal discussion in terms of pricing with some erosion, of course, on the areas in which the demand is weaker and maybe 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 Shemama from Bank of America. Please go ahead.

good morning thank you so much for taking my question um just wanted about a second half i mean the last four quarters you've been effectively well below normal seasonality uh and your your second half guide is effectively seasonal versus the first half i appreciate look it's a difficult environment uh especially industrial you've got now a beginning of a downturn in automotive What's the risk, 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'm going to follow up. Thank you.

Well, 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 engaged customer program, both in person electronic and communication equipment. it is based also on automotive on the backlog of frame order we have okay which is the usual visibility we have one then the key question is clearly the industrial where today the backlog coverage is slightly below i have to say standard of backlog coverage as this period of time but again We know because there is two distortions, very short lead time from any, let's say, semiconductor supplier and distortion from inventory. It is clear that, again, the booking that we will enter in Q2 and Q3, billable for 2024 for industrial as well as third 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 said in January of about $1.9 billion. I guess you have already done the computation. This $1.9 billion, 1.3 is industrial, by the way, and 600 is automotive. And I said automotive, half is electrical car from one specific, And the other one is a big change, okay, and inventory correction. On industrial, okay, 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 B-Level on 2024, the risk is within the range we have provided.

Very, very clear.

Thank you very much.

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, let's say, we will continue this level of revenues. We will continue to have a significant level of unloading charges. We are planning the second half at 77% loading for our trucks as we will, let's say, to continue to keep under control 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.

And obviously, if industrial comes back to be better, your margins will be better. Very clear. Thank you so much for your call. 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 know, you had sort of articulated in the past that you felt like you were pretty well positioned to capture the platform for that particular business. 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 grant is coming a bit earlier than expected?

But it is clear that, first of all, this year, the $1.3 billion for silicon carbide MOSFET is growth. So we have to be satisfied with this growth. Yes, it's below our expectation. Why? Because mainly one customer classified the 2024 year as a transition. and expect okay 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 US dollar growth of silicon carbide we will execute next year.

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 back-end loaded, I appreciate that, but anything changed in your mind?

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 will be a unique opportunity to share the situation and to share the update.

Many thanks.

Okay, for you, Didier?

Yeah, thank you so much.

Thank you very much. So next question, Moira.

The next question is from Andrew Gardiner from Citi. 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?

uh you know and therefore so how is that therefore influencing the way you're framing the second half thank you well today overall uh we we have uh assisted that we have an excess of inventory in the channel distribution of about two months uh uh clearly uh the POS, okay, of the distributor will be the first key KPI that will start, okay, to decrease these two months of inventory. And with the visibility and the discussion we have with them, that these two months, okay, will be absorbed, okay, by Qtrip. and that by Q3 we will be in position to re-increase smoothly our POP and to accelerate in Q4. Unfortunately, that's the reason why in Q2 we cannot accelerate our POP and that's the reason why we continue to decrease in industrial. So this is the visibility we have today. So again, POS monitoring is very critical. Again, we are seeing some green spot that end customer and end application, some end application are coming back to growth. And sequentially, it will translate in POS increase. and start to translate in inventory decrease and for us, POP increase in Q3. So this is today the plan we have built, discussing with our customer. And also what is making us confident is that looking at some results of competition going straight to end customer, we have seen a restart. So means when the channel inventory will be absorbed, our POP will raise again.

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

Of course, this year we will have 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, let's say, that are definitely important, but if you want less critical that, let's say, the innovation and the introduction of the new products. So today, we do expect for the year compared to last year, a moderate increase in our expenses. We do not expect a decline, a moderate increase that we size between 2-2.5%. Consider also that I'm talking about 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, in 2024. Thank you very much.

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

The next question is from Sandeep Deshpande from JP Morgan. Please go ahead.

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 district markets?

I take this question, Sandip. 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 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. Let's say, for instance, in Q1, average company, considering that some areas like automotive, we have renegotiated now, there is no any longer price decline moving forward, or not so big. Let's say we have a model, something in the range of one or 1.5% price decline, and moving forward in Q3 and Q4, some still, let's say, 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 areas, I repeat, like microcontroller, in some geographies, yes, it's a little bit higher than the average of the company, definitely higher than the average of the company. And this has been embedded in our numbers.

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, you know, 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. And 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, let's say, discussion with the tiers one are done. So the price has been embedded in this dynamic. So we do not expect, it was not embedded at this stage, any renegotiation in terms of price for 2024. For what concern the impact of gross margin? Well, you have to not to forget that our gross margin more than on one time is helped by the capacity reservation fees. These are not disappeared this year in respect to last year. Yes, they are not high like it was last year they are declining in respect to last year still they are let's say giving a positive impact so this is also if you want also answering to your first point about pricing in automotive of course we have the capacity reservation fees still there you understand that there is no strong pressure here there is still let's say 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 we know we have already let's say the contract done yes this will will go down moving forward this year definitely still an element that is impacting positively our gross margin i would say in a meaningful way, there'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.

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

Lead time, in average, are below three months. It's very short now. It's very short. uh and and uh and taking into account the inventory level we have we are also capable okay to capture some spot turn business within the quarter quite easy uh charge uh front-end loading uh front-end loading to let's say q2 is is really the bottom line

with a significant impact in term of unloading charges. They will be in the range of 300 basis points on our gross margin in this quarter. So it's an important impact. Notwithstanding this, with this level of revenues, we see our inventory increase in terms of value because we were launching our production with a different expectation for the evolution of the second half. 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 FEB will increase, but not so much, it will remain the range of 77%, so similar to the one of Q1, if you want. more at the end we do expect that our inventory exiting our inventory with the 110 115 days that is a little bit higher in respect to our model if you want it but for our year like 2024 i think it's controlled it's the right level and you had a follower thank you and yeah i had a follow-up concerning china

all the fear around China ramping up capacity for 20 nodes and so on. What's your view and current visibility on Chinese customers? I see recently you signed some major silicon carbide deal with some car OEMs in China. So I'd just like to understand how you see the dynamics there. Thank you.

I think China is quite simple. China is no more a super booming 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 recipe is always the same, 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 an adequate strategy for our footprint, so of course with our Sanan agreement for silicon carbide, But more and more, we are developing activity with a Chinese foundry located in China for our microcontrollers, for our BCD and for our other power MOSFETs. So in such a situation, we have all the ingredients to compete in China because it is a key market for STI. And we believe, looking at the activity we have on design and development on our SCM32, and when we organize a summit, and when we see what we have in our pipeline, that SCM32 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.

Thank you.