STMicroelectronics N.V.

Thank you, everyone, for joining our second quarter 2024 Financial Results Conference Call. Hosting 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, Chief Financial Officer, and Marco Cassis, President, Analog, Power and Discrete, MEMS and Census Group, and Head of STMicroelectronics, Strategy, System Research and Applications, and Innovation Office. These live webcasts and presentation materials can be accessed on the 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 harbor statement contained in the press release that was issued with the results this morning, and also in ST's most recent regulatory filings for a full description of these risk factors. Also, to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. And now I'd 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 40.1% was in line with expectation. On a year-over-year basis, Q2 net revenues decreased 25.3%, mainly driven by a decline in industrial and to a lesser extent in automotive. Growth margin decreased to 40.1% from 49%. Operating margin decreased to 11.6% from 26.5%. And net income decreased 64.8% to $353 million. On a sequential basis, net revenues decreased 6.7%. For the first half of 2024, net revenues decreased 21.9% year-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 26.7% year over year and increasing 0.6% 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-queue to customer order bookings did not materialize as expected. Therefore, we now anticipate a delayed recovery in industrials 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 year-over-year basis, Analog product maps and sensors 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 HEDAS, 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%. Year-over-year, sales decreased 14.9% to OEMs and 43.7% to distributions. Overall, Q2 net revenues decreased 6.7% sequentially, with a decline of 4.3% in analog products, MEMS and sensors, 8.8% in power and discrete products, 15.7% in microcontrollers, while digital ICs and RF products increased 8.6%. By end market, industrial was down about 17% sequentially, automotive down about eight percent and personal electronics down about five percent while communication equipment and computer peripheral was up about 15 percent gross profit was 1.3 billion dollar decreasing 38.9 percent year-over-year gross margin decreased to 40.1 percent 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 26.5% in the year-ago period. All reportable segments were down on a year-over-year basis with a main decline in microcontrollers and power and discrete. On a year-over-year basis, Q2 net income decreased 64.8% to $353 million compared to $1 billion in the year-ago quarter. Earnings per diluted share decreased 64.2% $0.38 compared to $1.06. Net cash from operating activities decreased at $702 million in Q2 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. Free cash flow 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 quarter end 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. Esty'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 expectation, 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 continue 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 Geely 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 introduce 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, liners, and runners. Our design wind 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, 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 industrial 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 present at the annual Embedded World 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 simplified 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 AGI 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 personal 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 substrate 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 multi-year investment, including €2 billion support provided 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 welfare supply agreement with secret stock now let's move to our third quarter 2024 financial outlook and our plans for the full year 2024 for q3 we expect net revenues of about 3.25 million dollar at the midpoint representing a year-over-year decline of 26.7 percent 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 to $13.7 billion, representing a decline of about 22% at the midpoint compared to 2023. Within this plan, we expect a gross margin of about 40%, impacted 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 various end 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-hand 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 ambition. 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 Ramel from BNP Paribas Exxon. Please go ahead.