STMicroelectronics N.V. (STMPA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the STMicroelectronics First Quarter 2024 Earnings Release Conference Call and Live Webcast. I am Moira, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference has been recorded. The presentation will be followed by a Q&A session. [Operator Instructions] At this time, it's my pleasure to hand over to Celine Berthier, Group Vice President, Head of Investor Relations. Please go ahead.

Good morning. Thank you, everyone, for joining our first quarter 2024 financial results conference call. Hosting the call today is Jean-Marc Chery, 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 Financial Officer; Marco Cassis, President, Analog, Power and Discrete, MEMS and Sensors Group, Head of STMicroelectronics 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 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's 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. I'd now like to turn the call over to Jean-Marc, ST's President and CEO.

Thank you, Celine. 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 remained 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 backlog. On Q2 2024. Our second quarter business outlook is for net revenues of about $3.2 billion 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 million. Within this plan, we expect 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 2 product groups, split into 4 reportable segments. Therefore, from Q1 2024, we report revenues and operating income according to those 4 new reportable segments. In Q1 net revenues decreased about 18.4% year-over-year. Analog Products, MEMS and Sensors was down 13.1%, mainly due to MEMS and Imaging. Power & Discrete products decreased 9.8%, mainly due to Discrete. Microcontrollers revenues declined 34.4%, mainly due to general purpose microcontroller. Digital ICs and radiofrequency products declined 2.1% due to a decrease in ADAS, more than offsetting an increase in radiofrequency communications. By end market, Industrial declined more than 40%. Personal Electronics about 13%. CECPs or 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 & 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%, CECP 15% and Automotive 14%. Excluding the impact of capacity reservation fees and of a 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 midpoint 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 a net 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 $1.10. 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's net financial position of $3.13 billion as of March 30, 2024, reflects 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 Q1. In Automotive, we saw a slowdown in semiconductor demand compared to our January expectations. This was characterized by some reduction in backlog and reduced forecast from some of our customers, including adjustments related to electric 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 a top manufacturer of electric vehicles as well as with the maker of e-compressor controller that extend EV driving range, increasing our current design win pipeline. We also won 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 ADAS, our partner [indiscernible] has delivered [indiscernible] production candidate hardware and software of the [indiscernible] IQ 6 Lite to customers. The IQ 6 Lite 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 ST. In Industrial, during the quarter, the ongoing correction accelerated it is impacting all the main subsegments, both in consumer and in B2B industrial and is spread globally. In Industrial Embedded Processing solutions, in March, we held our flagship STM32 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 18-nanometer FD-SOI with embedded phase change memory to support next-generation embedded processing device. For developers using sensors for industrial applications, we introduced a new all-in-one tool for MEMS sensor evaluation and development, connected closely with STM32 microcontroller ecosystem. It supports our wide portfolio of MEMS sensors and include tools for embedding Edge AI in industrial [indiscernible]. We continued to develop momentum on Edge AI with increasing usage of our tools and solutions by customers. For example, we announced recently a [indiscernible] tire pressure monitoring system for [indiscernible] based on Edge AI algorithm running on an STM32 microcontroller. We also announced a collaboration on the [indiscernible] reference design for high-performance telecom and AI server power supply with [indiscernible] supplies high efficiency power solution for high-performance computing, AI, deep learning, cloud and other advanced applications [indiscernible] 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 up cycle 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 [indiscernible] front ailing modem solutions from a new player in the [indiscernible] EO 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 down 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 initiatives. To conclude, we continue to adapt our plans according to these asynchronous market dynamics with a down cycle in Industrial, a deceleration in Automotive and 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. [Operator Instructions] The first question is from Joshua Buchalter from TD Cowen.

I guess to start, obviously, we see the numbers coming down a little bit, but I wanted to try to break that up a little bit. And 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.

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 tuning from OEM, which are adapting themselves to mix change between battery-based electrical vehicles, hybrid vehicle and thermal combustion engine 1. So the decrease -- the deceleration phase means okay, what we have announced today in Automotive. As a takeaway, half is linked to an adjustment, okay, of the forecast because production decreased from one important customer. And the other one is more inventory control and mix adjustment because now it's well known that carmaker -- the change [indiscernible] between electrical car, hybrid car and thermal combustion engine 1.

Got it. I appreciate the color. As a 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 sort of your -- some of the assumptions that are underlying the back half ramp and 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 is your comfort level with where you expect your industrial customers' inventory levels to be coming out of the second quarter?

Well, 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 will start to smoothly increase in Q3 and accelerate in Q4. Of course, we have a pretty good visibility on backlog in Automotive, Personal Electronics and Computer Equipment and Computer Peripheral. We know that the visibility on Industrial is shorter because again, there is a important distraction related to inventory level, both at OEM level and in the channel. However, we see some, let's say, kind of green spot that makes us thinking that order will come back in Q2 for additional billings in Q3 smoothly and acceleration in Q4. The risk is embedded in the range of what we have indicated.

The next question is from Stephane Houri from ODDO.

Actually, the question now is on my side, on the Automotive, you've talked about deceleration, but I guess that you mean decline in fact. So can you maybe specify it? And also, if you could give us some clarification on what you expect for silicon 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?

We classify 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, a low mid-single digit and clean from effect that we share with you. So capacity reservation fees and one really specific, let's say, inventory [indiscernible] present. In January, okay, 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 has computed and reported will decrease 5% clearly. And if we remove from the capacity reversion fee and inventory of one specific customer, it is a very slight growth, 1% to 2%. That's the reason why we classify it as deceleration and not a correction or not a decrease, which is the case clearly of Industrial. About silicon carbide, because you asked a question, we do believe that our revenues this year will go about $1.3 billion. So it's a growth, let's say, about $150 million, $200 million compared to last year. Yes, it is a slower growth when we compare '23 versus '22 and which was basically USD 500 million. But 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, some time from module to package or [indiscernible] not good die. So we have to adapt ourself okay to this change. However, I would like to repeat that -- this doesn't change our view that it still will reach above $5 billion in 2030. And that, okay, we will have, of course, a growth in 2025 that will put us on this trajectory. And the course in 2025, should be expected with design award that we have about USD 500 million.

Okay. Okay. 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.

Yes. And maybe I take this question. When we are exiting the -- with the current visibility on Q2 on our guidance, we will exit the first half of the year with a gross margin that is slightly below, let's say, the 41%. Because -- and this is impacted by a significant level of [indiscernible] 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, we are -- our expectation for the second half is to improve our gross margin in respect to the first half about 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 of Q1. So we do expect that to be substantially similar to the -- what had happen in the first half, slight improvement. Maybe while in H1, we will be slightly below 41%. In the second half, we will be slightly above 41%. And the level of unsaturation that is peaking in Q2 will go down but remaining quite significant. So there will be a sort of flattish gross margin in the range of 40%, 41% during the year.

Next question is from Francois Bouvignies from UBS.

I just wanted to come back on the full year guidance. Jean-Marc, you talked about the Automotive will decrease 5% for this year on a reported basis. Can you maybe give the color on the other divisions, what you expect for the full year by end market and ideally by products as well [indiscernible] 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 segments. When we look at the Analog Product, MEMS and Sensors, these, let's say, the expectation to be around a decline of 10% for this and where we will have a substantially holding in the Analog Products, flattish in the Analog Products. MEMS are softening with some decline [indiscernible] then don't forget that here is where we account 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 this impact, actually Image is not a decline, but as reported is declining. So these sector, Analog Product, MEMS and Sensors will decline in the range of 10%. This is based on the expectations. Power & Discrete. Power & Discrete will be a lower decline. We will be in the range of mid-single digit for these areas. In which the bigger decline is on Discrete part. Then we have a microcontroller. Here, microcontroller definitely is the area in which the general [indiscernible] are particularly impacted by the dynamic of the market of Industrial. So here, the decline will be significant, will be in the range of 30%, with much more resilience on the microcontroller in Automotive, but a significant decline for the microcontroller general [indiscernible] that are mainly addressing the Industrial market. Finally, the digitalized season RF, here, the decline will be also in this case, in the range of 10%. I'm talking, of course, decline at the midpoint of our indication for the year. And here is in the range of around 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 that 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 areas. This is more or less a dynamic that we see for the year in terms of segment reporting.

Industrial, just Industrial and Personal Electronics. I mean, I guess, [indiscernible] MCU, Industrial, roughly the same. That's what we should look at.

Clearly, I complement Lorenzo's point. And so I repeat. So Automotive, we see a minus 5% clean, let's say 1%, industrial, minus 30%. So for sure, you can correlate now what we anticipate on general purpose [indiscernible] which is the most impacted by MCU [indiscernible], but in a certain extent, General [indiscernible], Analog and Power & Discrete as well. For Personal Electronics, clean from the famous module, we have no more. Basically, it will be slightly decreasing, minus 2%, minus 3%, which is consistent, okay, with the overall market. And on CECP, okay, it will be minus 4%. With a strong growth within our [indiscernible] customer programming 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, Analog versus Industrial. And we also see, as I have said in my script, the correlation between the OEM decreasing much less than the distribution. So [indiscernible] industry-owned market, it is an inventory correction along the channel.

Great. And maybe my follow-up would be on the pricing front? I mean 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 overcapacity. 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?

I take the question Jean-Marc. In terms of pricing, what can you 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. But at the end, this is what happened was a slightly -- a few basis points higher than our expectation, not dramatically different than our expectation. Of course, with the different dynamics, because there is 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 Industrial, the price pressure is a little bit higher. But it will still remain in this level. We have not seen a significant drop in pricing. 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 still some price erosion, let's say, in the range of 1%, 1.5%. And stability -- definitely stability in Automotive, where the renegotiation has been already done. But still some decline in -- especially, we continue to see some decline in Industrial and in our general purpose microcontroller. But we have taken this assumption that some erosion will continue over the next quarters. Without taking assumption that there will be a significant drop. For the time being, we don't see this. We see that there is a normal discussion in terms of pricing with some erosion of course, on the areas in which the demand is weaker and maybe in some geographies in which the pressures are to be a little bit higher. But I repeat in our visibility today, we do not embed stronger price decline as we have no evidence for that in our discussion with the customers.

The next question is from Didier Scemama from Bank of America.

Just wondered about the second half. I mean, the last 4 quarters, you've been effectively well below normal seasonality, and your second half guide is effectively seasonal versus the first half. I appreciate, look, it's a difficult environment, especially Industrial, you've got now a beginning of a downturn in Automotive. What's the risk [indiscernible] that you are sandbagging a bit too much in 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've got a follow-up.

Well, basically, in the second half of 2024, in the middle of the range, we have indicated, but we expect to grow, I have to say about $1 billion or a little bit higher on that $1 billion. It is clear that part of this growth is related to backlog we have already, especially in [indiscernible] engage customer program both in Personal Electronics and communication equipment. It is based also on Automotive on the backlog of the [indiscernible] frame order we had, okay, which is the usual visibility we have. [indiscernible] the key question is clearly the Industrial where today, as the backlog coverage is slightly below, I have to say, standard of backlog coverage as [indiscernible] this period of time. But again, we know because there is 2 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, be label for 2024 for Industrial as well as [indiscernible] 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, okay, we have done this significantly set compares the midpoint of what we say in [indiscernible] of about $1.9 billion. I guess you have already done the computation. This $1.9 billion, $1.3 billion is Industrial by the way and $600 million is Automotive. And I said Automotive, half is electrical car from one specific. And the other one is a mix 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 billable in 2024, the risk is within the range we have provided.

Sorry, maybe I can add two words about the gross margin. But 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% vis-a-vis [indiscernible] 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, continue to keep under control at the level of our impact. But 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 a bit better, your margins will be better. 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 had sort of articulated in the past that you felt like you were pretty well positioned to capture the platform for that particular customer. 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 ramp is coming a bit earlier than expected?

It's clear that on, 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 USD 500 million growth of silicon carbide we will execute next year.

Maybe a 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. Has 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 the Capital Market Day in November, the Investor Relations will communicate to you. And of course, it will be a unique opportunity to share the situation and to share the update.

The next question is from Andrew Gardiner from Citi.

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? And therefore, so how is that, therefore, influencing the value framing the second half?

Well, today, overall, we have assessed that we have an excess of inventory in the channel distribution of about 2 months. Clearly, the POS, okay, of the distributor will be the first key KPI that will start, okay, to decrease these 2 months of inventory. And with the visibility and the discussion we have with them, in that is these 2 months, okay, will be absorbed, okay, by Q3. And that's okay. By Q3, we will be in position to reincrease smoothly our POP and to accelerate in Q4. Well, unfortunately, that's the reason why in Q2, we cannot accelerate our POP, 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. But again, we are seeing some green spot that the end customer and applications -- some end applications are coming back to growth. And sequentially, okay, 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 customers and also what is making us confident is that looking at some results of competition going straight to end customers, we have seen a restart. So means when the channel inventory will be absorbed, our POP will rise again.

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?

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 than, 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 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.

The next question is from Sandeep Deshpande from JPMorgan.

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 discrete market?

I take this question, Sandeep. Yes, as I was saying before, we have embedded some pricing impact in our indication of the -- 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 digits, a little bit higher than what we were expecting, and this is also partially explaining why we missed 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 a renegotiation now, there is no any longer price decline moving forward or not so [indiscernible] and not so big. Let's say, we have a model, something in the range of 1%, 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 area, 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 these results being 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, I mean, that actually means that there is another price change next year in Autos given that the Industrial market, which uses similar chips, you're seeing a big 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?

In terms of pricing, what can I say is that the main let's say, discussion with the Tier 1 [indiscernible]. So the price has been embedded in this dynamic. So we do not expect, this was not embedded at this stage, any renegotiate in terms of price for 2024. What -- for what concern the impact of gross margin, well, you have 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, they're 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 know we have already, let's say, the contract done, yes. This will go down moving forward. This year, definitely it is still an element that is impacting positively our gross margin I would say, in a meaningful way, still a positive impact.

Okay. So we have time for one last question.

The last question is from Jerome Ramel from BNP Paribas.

Yes. Quick two questions. The first one would be, where are the lead times currently? And what is the loading of your front-end fabs. And then I have a quick follow-up.

Lead time with average of below 3 months, is very short. And taking into account the inventory level we have, we are also capable to capture some spot term business within the quarter quite easily. Front-end loading...

Front-end loading, let's say, Q2 is really the bottom, I would say, because in Q2, we see a front-loading of 72% for our fabs. With a significant impact in terms of loading 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. But 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, which continue to be material and the level of saturation of our fab will increase, but not so much. We will remain in the range of 77%. So similar to the one of Q1, if you want. At the end, we do expect that our inventory exiting -- our inventory [indiscernible] 115 days. That is a little bit higher in respect to our model, if you wanted, but for year like 2024, I think control is the right level.

Any other follow-up?

Yes. I had follow-up. Concerning China, all the fears around China ramping up capacity for [indiscernible] node and so on. What's your view and current visibility on Chinese customers? I assume recently, you signed some major silicon carbide deal with some car OEMs in China. So I just like to understand how you see the dynamics there?

Well, I think China is quite simple. China is no more 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 always the same, is to have the right features and performance of [indiscernible] and the high quality and the right price. However, okay, I repeat that we have engaged ourselves in adequate, I believe, strategy for our footprint. So of course, with our [indiscernible] agreement for silicon carbide. But more and more, we are developing activity with Chinese foundry located in China for our microcontroller for our BCD and for our other [indiscernible]. So in such a situation, we have all the ingredients to compete in China, because it is a key market for ST. And we believe, looking at the activity we have on designing and development on our STM32 and when we organize the summit and when we see what we have in our pipeline, that ST will be a strong competitor in China for the future.

With this, I see the end of the time. So this completes our call.

Thank you.

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