STMicroelectronics N.V.

Thank you everyone for joining our second quarter 2024 Financial Results Conference call. Hosting the call today is Jean-Marc Chéri, ST's President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President of Finance, Purchasing, ERM and Resilience, Chief Financial Officer, and Marco Casiz, President, Analog Power and Discrete, Mems and Census Group, and Head of ST Microelectronics, Strategy, Systems Research and Applications, and Innovation Office. These live webcast and presentation materials can be accessed on ST 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-habit 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 would now like to turn the call over to Jean-Marc, ST President and CEO.

Thank you, Céline. Good morning, everyone, and thank you for joining ST for our Q2 2024 earnings conference call. Let me begin with some opening comments. Starting with Q2, second quarter net revenues of $3.23 billion were above the midpoint of our business outlook range, driven by higher revenues in personal electronics, partially offset by lower than expected revenues in automotive. Gross margin of .1% was in line with expectations. On a -over-year basis, Q2 net revenues decreased 25.3%, mainly driven by a decline in industrial and to a lesser extent in automotive. Gross margin decreased to .1% from 49%, operating margin decreased to .6% from 26.5%, and net income decreased .8% to $353 million. On a sequential basis, net revenues decreased 6.7%. For the first half of 2024, net revenues decreased .9% -over-year to $6.7 billion, mainly driven by a decrease in the microcontrollers, and power, and discrete segments. We reported gross margin of 40.9%, operating margin of 13.8%, and net income of $865 million. During the quarter, contrary to our prior expectations, customer orders for industrial did not improve and automotive demand declined. For Q3 2024, our third quarter business outlook is for net revenues of about $3.25 million at the midpoint, decreasing .7% -over-year and increasing .6% sequentially. Gross margin is expected to be about 38%, impacted by about 350 basis points of unused capacity charges. For the full year 2024, overall, In-Q2 customer order bookings did not materialize as expected. Therefore, we now anticipate a delayed recovery in industrial and a lower than expected increase in automotive revenues in the second half of the year versus the first half. We will now drive the company based on the plan for full year 2024 revenues in the range of $13.2 billion to $13.7 billion. Within this plan, we expect a gross margin of about 40%. By segment, on a -over-year basis, analog product, maps and sensor was down 10%, mainly due to imaging. Power and discrete products decreased 24.4%, with a decline both in power and in discrete products. Microcontrollers revenues declined 46%, mainly due to general purpose microcontrollers. And digital ICs and RF products declined 7.6%, with a decrease in head-ass, more than offsetting an increase in RF communications. By end market, industrial declined by more than 50%, automotive by about 15% and personal electronics by about 6%, while communication equipment and computer peripherals increased by about 2%. Excluding the impact of the change in product mix in an engaged customer program, personal electronics was up about 14%. -over-year, sales decreased .9% to OEMs and .7% to distribution. Overall, Q2 net revenues decreased .7% sequentially, with a decline of .3% in analog products, maps and sensors, .8% in power and discrete products, .7% in microcontrollers, while digital ICs and RF products increased 8.6%. By end market, industrial was down about 17% sequentially, automotive down about 8% and personal electronics down about 5%, while communication equipment and computer peripherals was up about 15%. Growth profit was $1.3 billion, decreasing .9% -over-year. Growth margin decreased to 40.1%, compared to 49% in the same quarter last year. The decrease was mainly due to the combination of product mix and sales price and higher unused capacity charges. Operating margin was 11.6%, compared to .5% in the year-ago period. All reportable segments were down on a -over-year basis, with a main decline in microcontrollers and power and discrete. On a -over-year basis, Q2 net income decreased .8% to $353 million, compared to $1 billion in the year-ago quarter. Earnings per diluted share decreased .2% to $0.38, compared to $1.06. Net cash from operating activities decreased at $702 million into $2, versus $1.31 billion in the year-ago quarter. Net capex in the second quarter was $528 million, compared to $1.07 billion in the year-ago quarter. Trichage law was $159 million, compared to $209 million in the year-ago quarter. Inventory at the end of the second quarter was $2.81 billion, compared to $3.05 billion in the year-ago quarter. Days, sales of inventory at QH were 130 days, compared to 122 days in the previous quarter and 126 days in the year-ago quarter. During the second quarter, ST paid $73 million of cash dividends to stockholders, and we executed an $88 million share buyback, completing our $1.04 billion share repurchase program launched in 2021. On June 21, 2024, ST announced the launch of a new share buyback plan totaling up to $1.1 billion to be executed within a three-year period. ST's net financial position of $3.2 billion as of June 29, 2024, reflected total liquidity of $6.29 billion and total financial debt of $3.09 billion. I will now go through a short update on some of our strategic focus areas. As mentioned, contrary to our prior expectations, we saw a decline in automotive demand during the quarter. This was characterized by some reduction in backlog already in Q2, and reduced forecasts from some of our customers, including adjustments related to electrical vehicle production decrease, and with inventory adjustments going along the supply chain. We continued to execute our strategy supporting car electrification during the quarter. We had multiple wins in power discrete with both silicon carbide and IGBT technologies for traction inverters at leading car manufacturers. We also won business with our automotive smart power technology for power domain control in new electrical and electronic architectures. We announced a long-term silicon carbide supply agreement with Gili Auto for silicon carbide power devices in their battery for electrical vehicles. We have also established a joint lab to share knowledge and explore innovative solutions related to evolving automotive architectures. In car digitalization, we saw further momentum with our portfolio of automotive microcontrollers. This includes wins with our later generation Stellar MCUs in a body domain application with a leading European carmaker, as well as other MCU wins for battery management and HVAC systems. In automotive sensors, we introduced a six-axis module that enables a cost-effective solution for functional safety applications, such as precise positioning in navigation systems, and digitally stabilizing cameras, line-ups, and runners. Our design win activity in smart mobility highlights the robustness of our technology and product portfolio, positioning ST to leverage the structural growth of this key market. In industry only, during the quarter, the anticipated stabilization of demand did not materialize as expected, and customer orders did not improve, in particular for general purpose microcontrollers. We continue to see weakness in the market for short-cycle businesses, such as power tools, residential solar, lighting and appliances, and more resilience in longer-cycle businesses, such as energy storage, grid, electrical vehicle charging, and process automation. This has resulted entering the second half in a weaker backlog than expected. In the short term, we are facing a longer and more pronounced correction in industry than what we anticipated, due to a progressive weakening of end demand, amplified by a severe inventory correction along the industrial market value chain. In this environment, we continue to work with our customers to design in our product of today, and to invest in R&D to build the next generation of products. A good example is what we are doing to build on our leading position in industrial embedded processing solutions. ST was presented at the Hadwell and Benard-Whorst show in Germany, where over 5,000 people visited our booth. There, we received very positive customer feedback on the new products and solutions we announced shortly before, including low-cost wireless and high-performance microcontrollers, as well as new 64-bit microprocessors for industrial applications. We also announced an innovative smart sensor with Edge AI processing for motion tracking in industrial and robotics applications. We also introduced the first embedded SIM in the industry to meet the incoming GSM-A standard for eSIM IoT deployment. This simplifies the management of large numbers of connected devices in support of the proliferation of secure cloud-connected autonomous things. Finally, we also continue to build momentum on Edge AI enablement for our customers. In early June, the ST Edge AI Suite came online, bringing together tools, software and knowledge to simplify and accelerate Edge AI application development. The suite supports both optimization and deployment of machine learning algorithms, starting from data collection to final deployment on hardware, streamlining the workflow for different types of users. We are confident that our ongoing design-in and development efforts with customers and distributors in the industrial sector will position ST to capitalize on the net market upcycle more effectively. In personnel electronics, communication equipment and computer peripherals, our engaged customer programs are running as expected. Moving now to manufacturing. In May, we announced a strategic update with the construction of a new high-volume 200 mm silicon carbide manufacturing facility in Catania, Italy. This facility will make power devices and modules and will include both device manufacturing and testing and packaging. In conjunction with the silicon carbide subtract manufacturing facility being prepared on the same site. These facilities will collectively form ST's Silicon Carbide Campus. This development will fulfill our vision of a fully vertically integrated manufacturing hub for the mass production of silicon carbide devices, all within a single location. The program is projected to be a 5 billion euro multi-year investment, including 2 billion euros supported by the state of Italy in the framework of the European Union Ships Act. During the quarter, we also announced the expansion of the existing multi-year 150 mm silicon carbide substrate wafer supply agreement with SICRISTA. Now, let's move to our third quarter of 2024 financial outlook and our plans for the full year 2024. For Q3, we expect net revenues of about 3.25 million dollars at the midpoint, representing a -over-year decline of .7% and a sequential growth of 0.6%. Q3 growth margin is expected to be about 38% at the midpoint, impacted by about 350 basis points of unused capacity charges. For 2024, entering the second half with our current Q3 and year-end backlog and with ongoing market dynamics, we have further revised our plan for 2024 revenues. Which we now see in the range of 13.2 billion dollars to 13.7 billion dollars, representing a decline of about 22% at the midpoint compared to 2023. Within this plan, we expect a growth margin of about 40%, impacted by about 270 basis points of unused capacity charges at the midpoint of our 2024 full year indication. To conclude, Following an unprecedented ship shortage situation, the current semiconductor cycle is impacted by a number of factors. The desynchronization between the values and markets in terms of demand normalization or weakening, and inventory adjustments or corrections, the available capacity moving from tension to excess, and the non-linear acceleration of structural trends towards sustainability in areas like renewable energies, electrification of mobility, right to repair and second-end devices. This backdrop clearly affects the automotive and industrial end markets. As we have pointed to in our strategy, both of these markets are undergoing a deep transformation, also driven by a number of megatrends. This, coupled with the current cycle dynamics I have just mentioned, is bringing both opportunities and challenges in the short, medium and longer term for ST and for our customers equally. In the short to medium term, we are working to best adapt our operating plans to this complex situation. We have already implemented measures and are adjusting them in response to the evolving situation. Medium to long term, we continue to be convinced that this transformation will provide the basis for our growth ambitions. We will be hosting a Capital Markets Day on November 20th in Paris to provide an update. It will be an in-person event and we will also webcast it live. Thank you and we are now ready to answer your questions.

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 a 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 or a comment may press star and 1 at this time. The first question is from Jerome Ramelle from BMP Paribas Exxon. Please go ahead.

Good morning. One question, you mentioned on the growth margin the impact of the underlodging cost but also the price. Could you update us on the pricing environment for, globally speaking, and specifically for industrial and automotive? Thank you.

Jerome, I will let Lorenzo comment

on this point. Good morning, good morning everybody, good morning Jerome. In terms of price, I would say that it is consistent with what we have said last quarter. We don't see at this stage a significant difference in the pricing environment. Of course, it is different than last year. Now, what we see is that there is some pressure on the pricing, but overall for the company it remains at the low single digit. There is some difference between the market. It is higher in the industry, definitely. It is higher especially when we look at our product line of microcontrollers. Here we are more in the mid single digit. While when we look at automotive, it remains at the low single digit. There is no particular, as I said before, difference in respect to what we were expecting last quarter.

Thank you. And maybe I have a quick follow-up. Jean-Marc, you said on the short term there is some overcapacity for the industry and for you. How are you addressing it in terms of CAPEX and maybe ramp up of the different manufacturing sites you had in mind? Thank you.

We are adjusting the working hour of our manufacturing already in Q3, definitely. It will follow in Q4. The reason why is that after the revised down of our sales and operating plan, we have immediately adjusted this activity. And of course we are cutting all the discretionary costs. And as I mentioned already, we have put the company on a hiring freeze. This is a conjectural measure. Now what is important for us is to focus, to come back on the run rate of revenue we had last year. If

I may add, Jean-Marc, in respect to the CAPEX, we confirm that we are going to spend something in the range of 2.5 billion. This is maybe addressing our conversion to the 12 inch and the silicon carbide. We have the plan, as we were mentioning before, about the campus to move rapidly our silicon carbide from the 150 mm to the 200 mm. These are the main projects that we have in this CAPEX of 2.5 and these are confirmed.

Thank you

very much, Yaron. Next question, please, Moreira. The next question is from Francois Bovigny from UBS. Please go ahead.

Thank you very much. My first question is on the industrial and microcontroller general purpose mainly. Obviously it's sharply down and I think there is kind of this distalking happening. However, there is this discussion on the market that maybe you would have much higher inventories that maybe to peers. When you listen to peers, I mean Renesas, Microchip and TI, they said they are through the worst and that they are proactively, or they did proactively manage inventories in the channel. So my question is, I would explain why you saw a bit later than everybody else the industrial downturn and maybe why it's sharper in terms of downside. So my question is, what's your view on this comment that maybe you have higher inventories that are relative to peers that would explain this sharper decline and more importantly how it plays out for the rest of the year, how long this understocking would last for you? That would be my first question.

Okay, thank you. I will not comment the benchmark with our competitor. First of all, TI has a different -to-market approach with the distribution and they have much more inventories in the home. About Microchip, I invite you to check the number in detail and for the other competitor, I will not comment. First of all, we have the widest product portfolio on microcontroller and again we are addressing all the regions of the world and as I mentioned in my speech, we are really addressing as well short-cycle business and more long-cycle business. On the short-cycle business, in fact, the hand demand fluctuated a lot during the recent quarter for different reasons and the inventory is not only at our distribution channel and not only at EMS. The inventory is in the value chain at SystemMaker and including at the end customer. So that's the reason why, first of all, it has taken much longer than the other to first absorb the excess of inventory at the end customer or SystemMaker and now, yes, there is still, let's say, some excess of inventory at distributor and EMS. The point I would like to recall for this business, this business is a business which suffers the most during the shortage of semiconductor under the pressure of car makers, tier 1, and big industrial working in the field of energy, power conversion and I have to say energy transportation, electrical vehicle charging. They suffer the most. That's the reason why, okay, when we allocated, we started to allocate the capacity we have, I repeat, we negotiated with them warranted volume and non-cancellable order. So means up to March 2023, we ship according backlog they give to us and this order were not considerable. Most likely, we have assessed that already at this period of time, their end market were already on, let's say, down cycle and that is the reason why they have continued to accumulate inventory. So when we have completely removed this policy of non-cancellable order, of course, we have just adopted a new policy and started to decrease our POP and so on and so forth. But it will take time and it will take time. Why? Because it is not only an inventory correction, it is also a real economical problem for this short cycle business. Now we see a different path for the long cycle business. I repeat, so renewable energy, what is related electrification of mobility, what is related charging station and so on. Here also in a certain extent, some inventory were present, but we expect that starting Q4, this will start to grow again. So the reason why ST has a profile a little bit longer in terms of restart is related first to our wide exposure on general purpose micro and we have the widest portfolio. The fact that in 2022, 2023 up to March, we have non-cancellable order policy that increase inventory for sure that now we have to digest. Unfortunately, in 2024, this business has a problem of demand and demand. That is the reason why it takes longer. For the rest, we behave very similarly our competitors and they have a similar profile in terms of business recovery for this year. For the benchmark, be careful of the rumour.

Thank you, Jean-Marc. Maybe my follow-up, if I may, is on the automotive. You mentioned that it weakened. Maybe you could explain a bit in details what exactly is happening in terms of automotive. If you could remind us what you expect for automotive industry for the full year, what your full year is based on for each division would be great. And I will leave it there. Thank you.

On automotive, there is let's say three points. The point number one, let's classify on legacy. On legacy, starting in May, we have seen our main tier one, let's say, pulling out the consignment stock less pieces because you know, the tier one now, they came back with carmaker with two week call off. So they have a very short-term visibility. And starting in May, they start for us to pull out from our consignment stock less pieces. So as a consequence, they can sell some frame order. So already in Q2, we have been impacted about less revenue that the forecast that was based on our backlog, about $100 million, is point number one. The point number two, still on this legacy business and let's say usual application in the automotive, they have declined their forecast for H2. So that's the reason why we have been obliged to revise down the forecast for automotive legacy already impacted in Q2 about, let's say, $100 million. And let's say about $350-400 million for H2. The second point is the growth for what is related electrical vehicles. We will grow in H2 all of our components related to electrical vehicles, but less than forecasted. And you know why? Because the production of electrical vehicles in the world has been adjusted now below 13 million of cars. However, I confirm that H2 will be a growth driver for ST, for all the components related to electrical vehicles, particularly for silicon carbide, and particularly everywhere in China and also with our main customers. That's the reason why we confirm our silicon carbide revenue about $1.3 billion this year. Then the third element is what we already mentioned that is a little bit, let's say, increasing. You know that last year one of our main customers for Edas built a certain level of inventory. He is adjusting in Q3 a little bit more the inventory with us. So all in all, the automotive for ST will grow in H2, I have to say 4% versus H1, about $100 million, with a growth on electrical vehicles with silicon carbide offset by the adjustment of the legacy from our tier 1 and some inventory adjustment from our main customer in Edas. So this is what we face in H2 on automotive. Thank you Jean-Marc.

Thank you very much. Next question Moira. The next question is from Stefan Houri from Odo. Please go ahead.

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

You have already seen the impact in Q2, because in Q2 we exceed a bit the midpoint of our revenue guidance. Thanks to Personnel Electronics and thanks to our main customer, that has been offset as I just mentioned by automotive. In Q3 we have a solid forecast for them, and now as usual Q3 is the biggest quarter. In Q4 we will have, for the time being, we see a decrease versus Q3. So far, now the plans they gave to us are stabilized. About the content of semiconductors in ST, I repeat, second half this year and first half next year is the lowest point in terms of content of ST in our main customer. Why? Because we have lost this famous optical module. But I confirm to you that starting H2 2025, the content of ST in our devices for our main customer will increase because we need some design.

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

Today on R&D we don't cut our R&D programs because all these programs are engaged and completely consistent with our strategy. At ST we have already cleaned and disengaged a product line we want to disengage many years ago. So all the programs are strictly under control and executed under the decision of the executive committee. So now we continue to execute them. Of course, also I repeat that from the organization we have put in place early this year, we have already extracted some synergy and productivity that enable our capability to run this R&D program, minimizing or stopping any hiring. We just focus some hiring on critical profile of experts. On SG&A of course we have put it on very strict control.

Ok, thank you very much.

Next question please Moïeva. Next question is from Sandeep Deshpande from JP Morgan. Please go ahead.

Hi, thanks for getting me on. I would like to actually go into, you have reduced your full year guidance by about 1.5 billion for the full year now again. How does that divide up into automotive, industrial and you said in the quarter that you saw some weakness in the automotive market. Can you quantify how much weakness you saw and do you see that continuing into the current quarter?

The Pareto of the variance between the two guidance, the famous $1 billion delta is about 40% automotive and 60% industrial. I repeat on automotive already in Q2 about $100 million. The rest is on H2 and mainly on what we call legacy business and partially on ADAS ASICS. Again I repeat what is related to silicon carbide will go but at a lower pace than what was expected. On industrial which is about 60%, no impact on Q2. On Q2 we have done an execution consistent with our forecast. The point is that in Q2 we didn't enter booking for industrial billable for 2024 at the expected level. So that the reason why we have cut our forecast by about $600 million. Also we have seen the POS of our distributor decreasing. Taking into account the feedback they gave to us, we don't expect now to increase our POP in Q3. On contrary we will continue to decrease the POP on Q3 on industrial to decrease our inventory at distribution level. But we expect our POP to increase in Q4. So this is the dynamic. The takeaway is about 40% of the $1 billion automotive already about $100 million in Q2. And about $600 million for industrial. Why? Because no order in Q2 and POS still decreasing in Q2. So postponing in Q4 the restart of the distribution POP.

Understood, thank you. The follow up question is on automotive. We are hearing from many automotive companies that they are seeing weakness in the market. So do you think that the order is more than the revenue now? Will continue to be weak in auto for the next few quarters?

We received from the tier 1 what they say delivery forecast. Now the delivery forecast they gave to us is encompassing all the adjustments. We have already seen in Q1 that has been a bit amplified in Q2. Now we have our backlog. As I said the tier 1 they are working with 2 weeks call off from carmaker. Of course this is something that we have to put under strict scrutiny. And we monitor with all our customers the dynamic of the treatment. And the order they put on us. On electrical vehicles I think it's a different story. Here now the adjustment has been done. And we do believe that we will deliver about $1.3 billion on SIC. But yes on automotive the market is dynamic. It's more an inventory adjustment. According to some analysts for the automotive industry. Looks like the production of a vehicle is confirmed around 90 million vehicles. We do believe that if it is confirmed the inventory adjustment is basically done. So the backlog we have in front of us is reliable. However we have to monitor the situation on a very dynamic way.

Thank you.

Thank

you

Sandeep. Next question please Moira. The next question is from Sebastian Kstavobic from Kepler. Please go ahead.

Hello everyone and thanks for taking my question. On the OPEX for Q3 and 2024. How should we model the OPEX in the next two quarters? Are you expecting to have some benefit of some specific cost saving impact? This is the first question. Thank you.

Yes I answer about the OPEX. As we were commenting before in this market environment. We will continue to have a strict control of our expenses. You see that in respect to our expectation in Q2. Operating expenses that I repeat we consider net including other income and expenses. Came lower than we were expecting entering the quarter. This was also due to the fact that we were realizing the difficulties that we were facing for the second half. For Q3 we now estimate something in terms of expenses between 900 and 5, 915 million dollars. This means that we will continue to keep control. You know that during Q3 we have the positive impact of the seasonal vacations especially in Europe. That is helping us on this. When I look at the total year I think that also thanks to the fact that other income and expenses should increase in respect to last year. This year we expect something in the range of 150 million dollars positive. Our expenses overall in the year will slightly increase in respect to last year. A very modest increase in respect to last year.

For Q4 what do you see in the OPEX?

You can make the math. At the end we will stay substantially flat. There will be some increase in respect to Q3. Very mild on the very few percentage point. And over the year you can model something similar to what was the net OPEX of 2023. With a very mild increase in respect to last year.

In terms of dynamics for Q3, where do you see your revenue trending in Q3 by divisions or by verticals? To understand a little bit the different dynamics to bottom in your flat-ish I would say. Thank you.

I will come back on the revenue after Lorenzo. If you buy at market first compared to Q2 on automotive we expect to grow 4% sequentially. On industrial unfortunately as I said because of lack of visibility and weaker backlog we continue to decrease minus 17%. Person electronics we will grow 17%. This is a seasonality effect and the engaged customer program we have with our main customer. And on communication equipment and computer peripherals we will decrease minus 8%. It's related to the legacy business we are disengaging progressively. If we move to reportable segment, so analog means and sensor will be flat-ish almost flat-ish 0.2%. Power and discrete will increase .9% driven by silicon carbide MOSFET. Our MCUs in Q3 will slightly increase .3% but general purpose will continue to decrease and offset by auto MCU and secure MCU. And on digital and radio frequency it will decrease minus .8% but mainly it is related to HEDAS. It is the destocking of our customer that was partially anticipated. So this is the two dynamics by end market and by reportable segment. We are very precise this time.

Exactly, thank you.

Is it okay for you Sébastien?

Yes, that's perfect, thanks.

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

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

Thank you so much. A few things. First of all, Jean-Marc, I mean it feels to me like this is a downturn similar to what we saw at the turn of the last century. So it's a two-year downturn and I think the lesson we learned from that downturn is that you need to be much more aggressive on costs. So two questions is A, I know you've said you've sort of implemented the hiring freeze, etc. But what do you think about your capex? I know it's unchanged, but is that prudent at this stage to be spending that much money on capex and adding capacity? And I would like to come back to a comment you made at a conference recently where you said you were thinking about upgrading your 6-inch and your 8-inch fabs to 300 mil. Should you accelerate that transition given that those fabs, especially those in Europe, perhaps even in Singapore, are in direct competition with the capex being spent in China? So that's my first question, sort of the physical discipline, being more aggressive into next year. And I've got a follow-up. Thank you.

Well, it is clear that we are facing, let's say, the strongest inventory correction certainly we ever faced since a long time. However, I would like to say, do I like two or three points? First of all, we continue to be convinced that even if it is not completely linear or less smooth than expected, that the transformation that our two main markets, industrial and automotive, let's say, will provide really for ST the basis for our growth ambition. Also, supported by some specific, let's say, initiative, every time we believe we can win differentiation in the field of personal electronics or including in the field of server for AI with a power stage or later on in an optical transceiver. So we have our megatrend there. Then we said that we are convinced that for us, our capability to continuously improve the fundamental value of the company is to convert our activity to 300 millimeter for silicon-based technology. Of course, each time it is a trend that is mandatory and to convert to 200 millimeter the silicon-carbon one. That is the reason why this year we have confirmed the engaged CAPEX and the engagement we have with some suppliers to go in this direction. Now, the third point for us as a priority is to assess the baseline and in order to understand at which speed we will come back to 2023 revenue. Well, then, under the light of these three points, it is clear that the acceleration of the conversion respectively to 200 millimeter to 300 millimeter, acceleration of the 150 to the 200 millimeter in silicon-carbon, is the best trade-off to minimize our CAPEX at the right level, is what we are working on. It is what I said when I said we are adjusting ourselves and operating life consistently with what we see. But I repeat, we are convinced that ST will come back on a growth trajectory. We are convinced that we must convert to 300 millimeter and 200 millimeter respectively. This is mandatory. Of course, acknowledging the baseline and the dynamic of the market, we will decide which level of CAPEX we have to cautiously spend, but maybe accelerating some conversion with all the implications linked to this conversion.

Very clear, thank you. My second question is about geopolitics. So I think, how are you thinking about the world we might enter into next year with sort of 10% tariffs on all products imported into the US? I mean, one of your competitors is boasting about the domestic US capacity, called geopolitically dependable. You've taken the, I would argue, smart decision to partner with a local Chinese company to build your silicon-carbon capacity over there, which I think is very differentiated versus your peers. But what are you thinking about the need to have maybe local capacity also in the US, which you don't have at this stage? Or do you think that your automotive and industrial customer base is European enough to not warrant really the need to have capacity in the US?

At this stage, the manufacturing strategy that is, let's say, we have adopted in order to take into account what you mentioned. So China for China, so the execution. So again, I repeat that we are building an ecosystem in China, let's say as independent as possible, along the value chain, so from raw material, device wafer processing, wafer salt, assembly and test, but including application lab and design center. At this stage, we do believe that our European-based or recognized countries, readyable for America in terms of location for manufacturing, where ST is already implemented, are good enough or adequate enough to support and face this decoupling. However, we are always, let's say, open for some partnership with the player in terms of manufacturing arrangement on the model we have in crawl with the GF or the model we have in Agraté with Stoward Jazz. At this stage, there is no signal on the table, but this is the kind of model we are open. What I can confirm to you at this moment, we do not intend to build a fab from scratch in the US. Why? Because ST, we have not the bandwidth to do it. We have already project in our plate, like the campus in Catania, to continue crawl timely, to continue Agraté timely, to continue the GV with Stoward in China. We do not intend to build any infrastructure in the US.

Sorry, just one quick one that's pretty helpful. I think you had floated the idea that M&A was back on the table. Any more update on that?

We are working actively on the right target.

Thank

you.

We have time for a very last question, Moira.

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

Hey guys, good morning. Thanks for squeezing me in. For my first one, last quarter you were kind enough to give us details and I think you mentioned that there was two months of channel inventory that you wanted to get down and it was running above target. I know a lot of it is at EMS and OEMs, but would you mind updating us on maybe where you feel like levels are at entering this quarter and with in particular the down 17% industrial guidance for the third quarter. Does the rest of the year outlook assume that you get channel inventory back in line during the third quarter? Thank you.

Maybe I can take this question. During the second quarter, when we look at the distribution, evolution, we see that the POS were not improving. In general, we are not improving. We have seen some areas a little bit better, but in general not improving. So at the end, through that, we were shipping less to distribution and this is visible in the result, especially when we look at the industrial. But when we look at the level of inventory, when we look at the situation of inventory, I would say that is similar to the one exiting Q1. So I would say that still we don't see significant improvement in this respect, especially because let's say POS is not improving. Probably, let's say, we will see some mild improvement in Q3. Our expectation is to start to see some more material improvement moving inside Q4. But for the time being, the situation of inventory remains not particularly on the positive side, on the improvement in respect to the one that will have exiting Q1. But for what concern the inventory in our balance sheet, I can tell you that today, you see, we are in the range of 130 days. We will be most likely in Q3 similar at the end of Q3. We do not expect strong improvement during this quarter, notwithstanding the unused and the level of production has been reduced while we will start to see the benefit in Q4. In Q4, we expect to decrease in the range of least 10 days in average 10 days in respect to where we stand today.

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

In the fourth quarter, the main driver of the improvement of our gross margin in our model is mainly coming from the mix. Of course, we do not expect to have significant positive impact in pricing. As you know, we are not modeling any improvement in the price environment. We do expect price more or less destabilizing in the range of low single digit decline. There is a mix that is improving. There will be also the level of unloading. This quarter in Q3 unloading is hitting our gross margin by 350 basis points. It will remain a material also in Q4, but declining in respect to the one of Q3. So these two components are the main ones that make us modeling the Q4 as an improvement in respect to the current quarter. Moving back, they are, let's say, close to 40%.

Got it. Thank you, Lorenzo.

Thank you very much. This was the last question.

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

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