STMicroelectronics N.V.

Before starting this call, I am very pleased to announce the appointment of Jérôme Ramel as Executive Vice President, Corporate Development and Integrated External Communication. Jérôme has been associated with our company for many years as a recognized European semiconductor analyst. and has had 24 years of experience in senior roles in various finance institutions. He brings in-depth knowledge of the semiconductor industry and capital markets, which will be extremely beneficial to support the company in the way we interface with investors, analysts, and external stakeholders. I would now like to briefly turn the call over to Gérôme.

Thank you, Jean-Marc, and good morning. I'm very pleased to join ESTI and excited by this new challenge. So thank you, everyone, for joining our third quarter 2024 financial results conference call. Hosting the call today is Jean-Marc Chéry, ESTI president and chief executive officer. Joining Jean-Marc on the call today are Lorenzo Grandi, president and CFO, and Marco Cassis, President Analogue, Power and Discrete, MEMS and Censor Group, and Head of STMicro Strategy, System Research and Application and Innovation Office. This live webcast and presentation material 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 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 ESTI's most recent regulatory filing for a full description of this risk factor. 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. Now I'd like to turn the call over to Jean Marchery, ESTI president and CEO.

So thank you, Jérôme. Let me begin with some opening comments, starting with Q3. So third quarter net revenues of $3.25 billion were in line with the midpoint of our business outlook range. Compared to our expectations, revenues were higher in personal electronics, declined less in industrial, and were lower in automotive. Q3 gross margin of 37.8% was broadly in line with guidance. Q3 net revenues decreased 26.6% year-over-year, mainly driven by a decline in industrial and to a lesser extent in automotive. Looking at our year-over-year performance, Growth margin decreased to 37.8% from 47.6%. Operating margin decreased to 11.7% from 28%. And net income came in at $351 million. On a sequential basis, net revenues increased 0.6%. For the nine-month period, net revenues were down 23.5% year-over-year to $9.95 billion, decreasing across all reportable segments, and particularly in microcontrollers, which is impacted by the continuing weakness in the industrial market. We reported gross margin of 39.9%, operating margin of 13.1%, and net income of $1.22 billion. During the quarter, customer order bookings were slightly up versus Q2, but were below our expectations. This reflected a continuing delayed recovery in industrial and a further deterioration in automotive. As a result, we now anticipate Q4 2024 revenues at the low end of the range previously indicated and well below normal seasonality in Q1 2025. For Q4 2024, our first quarter business outlook is for net revenues of about $3.32 billion at the midpoint, declining year-over-year by 22.4% and increasing sequentially by 2.2%. Gross margin is expected to be about 38%. For the full year 2024, The midpoint of our Q4 guidance translates into full-year 2024 revenues of about $13.27 billion, representing a 23.2% decrease year-over-year at the low end of the range indicated in the previous quarter, with a gross margin slightly below that provided in that indication. For Q1 2025, based on our current customer order backlog and demand visibility, we anticipate a revenue decline between Q4 2024 and Q1 2025 well above normal seasonality. I would like to highlight that today we have also announced the launch of a new company-wide program to reshape our manufacturing footprint, accelerating our wafer fab capacity transition to 300 mm silicon and 200 mm silicon carbide, and resizing our global cost base. Now, I will move to a detailed review of the third quarter. My segment on a year-over-year basis. Analog products, MEMS and sensors was done 13.3%, mainly due to the decrease in imaging and in analog. Power and discrete products decreased 18.4%, With a decline in both power and discrete products, microcontrollers revenues declined 43.4%, mainly due to general purpose microcontrollers. Both power and discrete and general purpose microcontrollers revenue declines were largely driven by industrials. Digital ICs and radio frequency products declined 29.7%, mainly due to HEDAS and infotainment. By end market, industrial declined by more than 50%, automotive by about 18%, personal electronics by about 9%, and communication equipment and computer peripherals by about 5%. Your viewers, sales to OEM decreased 17.5% and by 45.4% to distribution. Overall, Q3 net revenues increased 0.6% sequentially, with an increase of 1.7% in analog products, MEMS and Samsung, 7.9% in power and discrete products, and 3.6% in microcontrollers, while digital ICs and radio frequency products decreased 17.4%. By end market, industrial was down about 12% sequentially, automotive flat, personal electronics up about 20%, and communication equipment and computer peripherals down about 8%. Growth profit was $1.23 billion, decreasing 41.8% year-over-year. Growth margin decreased to 37.8% compared to 47.6% in the same quarter last year. The decrease was mainly due to product mix and to a lesser extent to sales price and higher unused capacity charges. Operating margin was 11.7% compared to 28% in the year-ago period. On a year-over-year basis, Q3 net income decreased around 68% to $351 million. compared to $1.09 billion in the Euroco quarter. Earnings per diluted share decreased to $0.37 compared to $1.16. Debt cash from operating activities decreased to $723 million in Q3, versus $1.88 billion in the year-ago quarter. Net capex in the third quarter was $565 million compared to $1.15 billion in the year-ago quarter. Cash flow was $136 million compared to $707 million in the year-ago quarter. Inventory at the end of the third quarter was $2.88 billion compared to the $2.87 billion in the year-ago quarter. Days, sales of inventories at quarter end were 130 days, similar to the previous quarter, and up compared to the 114 days in the year-ago quarter. During the third quarter, ST paid $80 million of cash dividends to stockholders and were executed a $92 million share buyback under our current share repurchase program. ST's net financial position of $3.18 billion as of September 28, 2024 reflected total liquidity of $6.3 billion and a total financial debt of $3.12 billion. I will now go through a short update on some of our strategic focus areas. in automotive. We saw some further deterioration in customer backlog and order entry during the third quarter. In our view, this reflects a change in the plans of our customers with some shift from full battery electric to hybrid and from premium to economy vehicles, as well as that size and production at carmakers to control inventories. However, we do not anticipate significant change in the long-term electrical vehicle adoption by consumers, and we assume their concerns, residual value, charging stations, price, will gradually alleviate. During the quarter, we continued to execute our strategy on car electrification. We introduced our fourth generation of silicon carbide MOSFET technology. This brings new benchmarks in power efficiency, power density, and robustness, and is particularly optimized for traction inverters in electrical vehicles. We had multiple wins with both silicon carbide and silicon devices and modules for new traction inverter and onboard charger design. We also want additional business with our automotive smart power technologies for electrical vehicle battery and power management systems, as well as our smart fuse solutions. In car digitalization, we gained further traction with our portfolio of automotive microcontrollers. Our Stellar microcontroller was selected by a major European carmaker in a new platform for traction inverter and onboard charger management. Another significant Stellar win was with a Japanese tier 1 as part of an electrification platform design that integrates multiple functions in a single MCU. This approach is generally called X-in-1 and is an important trend for next generation of car architectures. A further win saw Stellar chosen for an active safety application in a new electrical vehicle platform from an emerging player. We also continue to have important design wins in traditional applications like braking, where we are the leader in smart power. In sensors, we had a number of wins with our automotive-grade motion maps for smart keys, telematics units, and for an innovative rotating car display. Our design wind activity here continues to position ST well to leverage the structural growth in this key market. In industry only, We are seeing continuing inventory correction at OEMs and along the value chain, preventing any significant recovery in semiconductor demand. In this context, we continue to work with customers to design in today's products while investing in R&D to create the next generation of solutions. We had design wins across a broad range of applications for our power and analog portfolio. This included a design win with silicon and silicon carbide products for a leading provider of power supply units for AI and server infrastructure. A fast growing application requiring very high power efficiency. In embedded processing, our STM32 microcontrollers continue to be the most familiar MCUs for developers. We have a recognized software ecosystem with over 1.2 million unique users, growing more than 30% year over year. And one of the fastest growing and most active microcontroller technical communities with over 500,000 unique visitors each month and 40% year-over-year growth. This growth in STM32 adoption will position ST to capitalize effectively on the next industrial market upcycle. Additionally, we have over 50,000 active development projects on ST's artificial intelligence tools. This activity has been also boosted by our ST Edge AI suite that we were launching at the end of the last quarter. During Q3, we also announced a new strategic collaboration with Qualcomm Technologies for the next generation of industrial and consumer IoT solutions. Together, we will integrate Qualcomm's leading wireless connectivity technologies with our STM32 microcontroller ecosystem. We will start with a Wi-Fi Bluetooth thread combo system on the chip. Thanks to this, developers will enjoy seamless connectivity software integration into STM32 microcontrollers. Moving now to the other two end markets. Personal electronics was slightly better than expected and communication equipment and computer peripherals was in line with expectations for all our engaged customer programs. To conclude on this Q3 update, I would like to mention a new step in our company organization. Since the beginning of 2024, ST has made a significant change in the way it is structured and operates, including the reorganization of its product group. Since October 1st, 2024, Lorenzo Grandi, President and CFO, has taken additional responsibilities, with the perimeter now also covering supply chain, corporate development and integrated external communication, in addition to finance, global procurement, digital transformation and information technology, enterprise risk management and resilience. The company's executive committee remains unchanged and continues to report to me as president and CEO. Now, let's move to our fourth quarter 2024 financial outlook and our plans for the full year 2024. For Q4, we expect net revenues of about $3.32 billion at the midpoint, representing a year-over-year decline of 22.4% and a sequential growth of 2.2%. Q4 gross margin is expected to be about 38% at the midpoint, impacted by about 400 basis points of unused capacity charges. For 2024, our Q4 guidance at the midpoint translates into 2024 net revenues of about 13.27 billion dollars, This represents a decrease of about 23.2% year-over-year in the low end of the range indicated in the previous quarter. Within this guidance, we expect a gross margin of about 39.4%, impacting about 290 basis points of unused capacity charges at the midpoint of our 2024 full year indications. This $13.27 billion is in the low end of the revenue range indicated in the previous quarter. The difference compared with the midpoint of the range relates mainly to lower revenues in automotive and to a lesser extend lower revenues in industrials, partially offset by slightly better revenues in personal electronics. We confirmed our 2024 net capex plan of about $2.5 billion. For Q1 2025, at this time of the year, we usually do not comment two quarters a head. But based on our current customer backlog and order entry dynamics, we anticipate a revenue decline between Q4 2024 and Q1 2025 well above normal seasonality. Fair to say this also includes a significant lower number of calendar days in Q1 2025 versus Q4 2024, a 6% sequential decrease, which is the highest sequential decrease in the number of days in the last three years. Finally, Today, we have announced the launch of a new company-wide program to reshape our manufacturing footprint. We are accelerating our wafer fab 300 millimeter transition in Agraté and Kroll. In particular, in Agraté reaching a scale of about 4,000 wafer per week exiting 2026. In Catania, in Silicon Carbide, we will accelerate our transition to 200 millimeters. Moreover, we will resize our global cost base. This program should result in strengthening our capability to grow our revenue, but with an improved operating efficiencies, resulting in annual cost savings in the high triple-digit million-dollar range exiting 2027. To conclude, as I said last quarter, the current market cycle dynamics, coupled with the ongoing transformation of the automotive and industrial markets, are bringing both opportunities and challenges in the short, medium, and long term. And this is true for ST and for our customers equally. In the short to medium term, we are adapting our operating plans to this situation and we are launching our company-wide reshaping and resizing program while continuing to invest in innovation and in our strategic manufacturing initiatives. Major to long term, we continue to be convinced that this will provide the basis for our sustainable growth ambitions and for delivering value to our stakeholders. We look forward to updating you on our strategy at our Capital Markets Day on November 20th, either in person in Paris or via our live webcast. Thank you for your attention, and we are now ready to answer your questions.